When you think of retirement you probably think of someone in their late 60s. A retired person has saved his whole life and has a huge pension fund. This way of retiring is the social norm and is used by plenty of people. A norm that we all know well, but it is certainly not the only way to retire. There are lots of other ways to prepare for your retirement and to retire at a young age! One option is to go for FIRE: Financial Independence Retire Early.
What is financial independence retire early?
Financial Independence Retire Early or FIRE is a movement that can make investments through extreme savings. FIRE supporters can retire earlier than most retirement plans offer.
Financial Independence Retire Early is a rapidly growing movement of people, usually in their 30s and 40s. Especially in the tech scene where people are earning high salaries at a relatively young age, this movement is very popular (source).
How to financial independence retire early
The first step in FIRE is to identify want you to want. Where do you want to be in 10 years? Do you want to move to another location? Sail across the world? Be financially free? Or maybe you want to travel full-time.
Write down your big hairy audacious goal and discuss them with your partner.
The next question is how can you achieve your goals and have enough money to enjoy a financially independent life as you want it.
The philosophy of FIRE is to save as much money as you can. Many FIRE supporters are saving a minimum of 70% of their income and plenty of people are saving 90% or more. We suggest to at least save 50% of your net income to become financially independent in the long run.
Achieving FIRE is easier when you start at a young age. Changing your current lifestyle is a big part of this. But as you will experience, getting into the groove of saving more money is quite a fun challenge. It will change the way you look at your money and change your life!
Cutting expenses means cutting expenses for real. You need to change your mindset to do this thoroughly. First, make a list of all your expenses and write down every dollar you spend per month. Is that dollar directly contributing towards your goal?
Question yourself what you really need to spend money on. You can basically boil every spending down to 3 main items, food, shelter, and transportation. Use that list to start questioning your lifestyle.
Probably that big house is nice. But do you really need it to be that big? Do you need a BMW to commute to work or can you drive a smaller car, go by bike or catch a ride? And what about all those fancy dinners, are they necessary? If you have so much debt for your house, why don’t rent a small house close to work so you can save on your housing and transportation expenses?
There are so many reasons why cutting expenses is way more interesting than raising your income. For example; every dollar that you earn from working is taxed heavily before it is in your bank account (income tax) and then spending that dollar it’s taxed again (VAT). You basically have to work for 2 dollars to spend 1 dollar, which is not very interesting and super expensive money, right?
Do I have to give up all the fun things in life when doing FIRE?
No of course not! It’s questionable if driving a big BMW is really fun and worth the extra money you have to pay for it. In my opinion, it’s not worth it to drive such a car. I have friends that buy big and expensive cars and that have expensive houses.
I personally get more fun and satisfaction from outperforming the materialistic system and still having a great life.
For me it would definitely be the other way around: I would miss my freedom and my independence when I had to pay (and work hard) for all this luxury.
For me, the luxury is knowing that I can afford things I don’t want or need.
As a couple, we are following the FIRE philosophy for years now, even before the term FIRE existed (or at least I haven’t heard about it).
We currently save 100% of our income where we work for. We put 100% of our income in real estate and it enables us to invest in a rental property without a loan.
To create a passive income we rent out these houses, which we use to save extra. This approach gives us complete freedom. We do not need our day jobs to pay the bills, which is great. Tips on real estate investing are in the articles using the double win factor in your financial choices and in create assets to reduce financial risk
Is becoming FIRE really possible?
The feasibility of FIRE depends on how and when you want to retire. A nice calculator is Networthify. You can put in your income and savings in the Networthify calculator to see how many years you need before you can retire.
It’s very personal when you can retire and it depends on how conservative you are, but when you really want to become financially independent you have to take big steps.
- Be realistic about how old you are going to be because you would probably not going to be 120 years of age. So you do not have to save for that
- Cut your most costly expenses first. Get rid of your debt within 1 or 2 years. When you have too much debt, sell your house and rent something small. Or buy/change your house that you can partially rent it out to break even
- Start young and save a minimum of 70% of your income, try to stretch your saving to a maximum for instance by working with a weekly budget or create money-making assets
- Don’t be afraid that you miss any luxury when downscaling. Knowing that you can afford the luxury is better than actually having the luxury 😉