Have you heard of the FIRE movement? Don’t worry if you haven’t. We explain it clearly in this article so you can understand it and decide whether it works for you.
FIRE stands for ‘Financial Independence, Retire Early.’ This movement involves saving more aggressively than traditional budgets and retirement plans advocate. The goal is to retire earlier than usual, before the typical retirement age range of 65-70. There are various ways that participants reach this goal.
What does it take to reach this goal? Generally, an early retirement requires saving and investing 50-75% or more per year. Such strict practices mean living off no more than half of your income, which requires discipline.
Here’s a realistic process:
First, choose your FIRE number. The FIRE number is 25 times your annual expenses. Next, understand the 4% rule. The idea of this rule is that once you reach your FIRE number goal, you should be able to withdraw only 4 percent of that total in the first year of retirement and live comfortably since 4% of that fire number equals your annual expenses. After the first year, you can withdraw 4% adjusted for inflation.
Here’s an example:
Let’s say your annual expenses are $50,000. 50k times 25 is $1,250,000. Once you reach that 1.25 million dollar goal, you can take 50k out the first year of your retirement. Then, if inflation is 2% your 2nd year of retirement, you can spend $51,000 the 2nd year of your retirement. The math is $50,000 (4% number) x 0.02 (inflation rate as a decimal) = $1,000 to account for inflation. Then, $50,000 + $1,000 = $51,000 (the 2nd year amount accounted for inflation).
Start An Emergency Fund
An emergency fund gives you readily available money to retrieve when necessary. Avoid using this fund for anything other than emergencies. Maintaining these reserves prepares you for unexpected costs.
Pay Off Debt
Debt can quickly erode hard-earned dollars, especially if it has a high interest rate. Thus, it is better to pay debt off sooner rather than later. The general idea is that if your debt interest rate is higher than your investment rate, it is better to pay off debt before investing.
Make Wise Investment Choices
Read books about investing from pros like Warren Buffet and Benjamin Graham. Do your research about the following financial topics:
- What is investing?
- What are the different types of investing?
- What are the risks of each investment type?
- What are the steps to investing?
- What is a budget? How do you start and maintain a budget?
If you are not well-off, learn about the wealthy. Read books about their life stories. Even if you do not follow in their footsteps, try to understand how they think. You can learn from anyone, including people with whom you disagree. Learn from their mistakes. Have integrity and never compromise because this eventually leads to ruin.
Choose A FIRE Option
Next, choose one of the following FIRE options explained below:
Fat Fire
This variation allows for saving more than most while keeping a 9-5 job. If you want to save and invest aggressively without reducing your cost of living, this option might be for you.
Lean Fire
People who choose this option live a minimalist lifestyle, save aggressively, and often live on 25k or less annually. You might choose this method if you are okay with making significant sacrifices and living a restricted lifestyle to reach your goals.
Barista Fire
This variation also involves a minimalist lifestyle, using part-time earnings and savings to reach their goals. If you prioritize a work-life balance, this plan might be for you.
What are your thoughts about this movement and its practices? Do you have anything to add? Let us know in the comment section below!
Until Next Time!
– The Free Play Lotto Team!
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