Financial Independence Retire Early also known as FIRE is a lifestyle movement where people save a large part of their income intending to retire early. This movement is growing rapidly and is especially gaining popularity among millennials. In this blog, we want to give you 5 financial independence retire early tips that may help you to reach FIRE.
How does financial independence retire early work?
The FIRE movement suggests saving a minimum of 50% of their income. Ideally, it’s advised to save 75%, which is a huge amount. The money saved is then invested and used for early retirement.
The commitment to retire early is quite high in the FIRE movement. Expenses are kept extremely low and people have a frugal lifestyle. In addition, income is increased as well. The higher the income and the lower the expenses are, the faster you can reach financial freedom. The biggest key to financial independence is to spend money wisely and invest when you can.
If you want to know more about the Financial Independence Retire Early movement in general, you can read more about it in this previous blog article that we published.
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When should you start with financial independence retire early?
Tip 1: start as early as possible
To reach FIRE it helps to start as young as possible. The sooner you start with FIRE, the sooner you will achieve it. When you develop a conservative mindset about money at a young age, you will highly likely use this mindset in all of your follow-up choices in life. You basically are taking baby-steps towards FIRE. All the small steps you take are unconsciously influenced by the will to reach FIRE and you will certainly achieve it.
We’ve always been conservative, and most of the big expenses we’ve made have mostly been with the idea of making more money out of it. Over time this way of spending money has become a habit for us and it helped us a lot in reaching financial independence.
How to stay motivated for FIRE?
Tip 2: save a higher percentage of your income
We saved most of our income before we reached FIRE. People often said to us that we should enjoy the money we earned and that we only live once. They simply thought we were saving too much…
We realized that many people save because of financial insecurities that can occur in their life. They are saving for their emergency fund or to finance things like a vacation. For us, this was completely different.
We noticed that it is difficult to stay motivated to save money when the percentage you save is relatively low (<50%), and your savings amount is not growing fast enough to invest your money.
We can tell you for sure that the number of pleasure moments that you get from spending your money doesn’t diminish by saving for a larger goal that is within reach – FIRE.
It is much easier to stay motivated if you save a higher percentage of your income because many more investment opportunities are available, and that’s where you can make the big steps towards FIRE.
How to invest in assets
Tip 3: invest in opportunities you have control over that have two potential money-making components
It is obvious that investments differ from each other and we can’t give you direct investment advice because there are too many investment opportunities to choose from.
Besides that, it is often not so important what kind of investment you make but how you obtain the investment.
Many FIRE supporters put a lot of their money into ETFs and they hope that the index will increase in value over time. (ETFs are also known as exchange-traded funds and are basically a basket of securities that tracks an underlying index).
It’s important to understand that ETFs contain more than one product and they can be affected by volatility. Therefore, the future value of ETFs is uncertain.
It’s very personal how someone can deal with this uncertainty, but I would find it difficult if my investment was suddenly worth 50% less. Especially in a situation where I almost reached FIRE. Unfortunately, such valuation drops happen to ETFs.
Unlike ETFs, we like to invest in opportunities that contain two potential money-making components. The first component is the possibility that the initial value of the investment increases and the second one is the passive income component.
You can reap the benefits of these two money-making components when you for example invest in a rental property or an eCommerce business.
Another important aspect to consider is the amount of control that you can have over your investments. Bluntly a rental property is pretty simple and straightforward. You can actually see the property and own it. There is no middleman involved after you have made your investment.
You buy a house and you rent it out, you can meet and choose tenants, etc etc. Compare this with ETF’s. Do you have any influence on the securities that are part of the ETF?
We provide more information about how to invest in rental property in this blog post.
What is your passive income
Tip 4: track your current expenses as a reference
This is the minimum net amount of money you need as an income each month to pay for your (living) expenses. In the FIRE movement, this is known as the FI number, and online you can find financial independence retire early calculators that make it easier to define your passive income amount.
It may sound easy to define your passive income amount. We actually found it very hard to decide how much money we would need every month. We experienced that there are many factors that play a role in defining this amount. This is due to the many uncertainties that arise when you have reached FIRE.
What are you going to do in your life when you can retire early? Probably your life would look completely different, without an office job ;). Are you going to spend more time with your family? Maybe you want to travel full-time? Any of these situations require a different spending pattern and it all depends on what you want.
It’s difficult to determine what your spending pattern will be in your situation. One way to get more information about it is to track your current expenses for a few months and determine how much your ideal passive income should be by altering the amount to your new (retired) life.
Why do you want to achieve financial independence retire early
Tip 5: get a clear vision of your ideal lifestyle
It is important to realize that your goal is NEVER achieving financial freedom. Financial freedom is not a goal in itself, but a means to facilitate a higher goal in life. Your goal should cover your dreams in life and financial independence retire early is a way to enable your dreams.
Maybe you want to spend more time with your family or like to travel more often?
Ask yourself the questions
- Is there a dark hole where you fall in when you reach FIRE?
- What do you want to do next?
Asking yourself these questions will structure your mindset and help you to reach FIRE! If you want to read more about setting your goal, you can check out this blog article about the Power of the Big Hairy Audacious Goal.
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