There is a movement underway of young people that want to cast of the shackles of the 9-5 and pursue a life that brings them real happiness and enjoyment. People who don’t want to wait until traditional retirement age to pull up stumps, but instead to make this happen in their 40’s, 30’s and sometimes even in their 20’s.
People have been pushing for early retirement for years, but the movement has now been given a name, FIRE. FIRE stands for Financial Independence/Retire Early. And this horde of hardcore savers is getting a lot of attention.
How It Works
The concept of FIRE is pretty simple. Spend less than you earn, invest the money to create enough of a passive income to cover your living expenses, and ‘retire’ young.
No wonder this movement is gaining momentum.
How Do You Do It?
If you want to create your own version of FIRE, there are a few key steps you need to follow.
First, you need to figure out how much income you need to live the way you want in the future. Yes, unfortunately, I’m talking about the ‘B’ word—you’ll need to do a budget. Think through the way you want to live and how much you’ll need for your spending.
Then, get clear on how much money you need to have invested to generate this level of income. The rule of thumb is that if you have a pool of investments (or portfolio) you should expect to generate an income of roughly 4% each year. This means that if you have a $1m portfolio you should be able to generate around $40,000 annually.
WARNING: this is a rough guide only and past returns don’t guarantee future returns, I was never here, this conversation never happened etc etc etc…
So if you run your numbers and figure out you need an annual income of $80k, you’re going to need an investment portfolio of around $2m ($2m*4% = $80k).
The next step is simple to understand but slightly more difficult to execute, which is to spend less than you earn. This allows you to save and invest to grow your portfolio to your target level. The more you save, the faster you’ll build your portfolio. Many of those that follow the FIRE approach are extreme savers.
The final step is to start investing. As I mentioned above, many of the FIRE followers use low cost but well performing ‘index’ funds. The key to investing is to have a good strategy and be consistent. To do this you’ll need to build your knowledge so you’re comfortable investing and know when to act and when not to.
HACK #1: The average Aussie pays over $21k in tax every year, so the more tax you can save the more you’ll have to save and invest. And then you need to invest tax smart. Getting smarter with your tax is a key way to build your money momentum faster.
A Word Of Warning...
I understand the appeal of retiring in your 30s, but be aware early retirement isn’t a quick fix. The road to financial independence takes hard work and for most people a decent whack of time.
FIRE is not so much about the traditional definition of retirement where you kick it on the beach doing nothing every day. Instead, it’s about creating financial freedom so you can pursue what makes you happy.
But don’t get caught up in the hype. You don’t need to wait for financial independence to do what makes you happy. You can do that now while you work towards financial independence.
I’m not a fan of sacrificing your youth cutting back on all the good things in life just so you can pull up sticks a few years earlier. Make sure you enjoy the path as well as the journey.
Need some help getting started? Here's 5 apps that can get your finances on track.
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