What is F.I.R.E. (Financial Independence Retire Early)?

Maybe you’ve heard of F.I.R.E. (or FI) before but don’t really understand the concept or maybe this is your first time you’re seeing this blog title and you’re thinking how the hell does anyone retire early?! Well, actually, a lot of people do. Or at least they become financially independent so they no longer have to work. And hopefully one day I’ll be joining them.

So what is F.I.R.E. (or FI)? F.I.R.E. stands for Financial Independence Retire Early (or FI – Financial Independence, which seems to be the more go to acronym lately). This is a movement that many people have been doing long before the internet but has gained a lot of traction within the last 15 years with the increase of FI bloggers and access to information. The goal of FI is to reduce your spending, increase your savings rate and become financially independent well before the standard retirement age of 65 by living off the dividends earned through your investments. Sounds scary, no? As someone who didn’t really understand what a dividend was not that long ago I promise you it’s not as scary as it seems. Anyone can achieve FI – IF they are motivated enough.

Why Retire Early?

Well, most people who become financially independent don’t actually end up retiring early, which is why I think the acronym FI (Financial Independence) is more common now. Early retirement sounds great on paper but it’s actually really really really boring. Sure, the first couple months to a year might be nice, especially if you’re leaving a stressful, fast paced job ::flash forward to sipping Mai Tais on a beach:: But people need to feel like they’re contributing to society. And one too many Mai Tais leads to a bad hangover. We need goals to work towards, tasks to stay busy, socialization and community. We get a lot of this from our jobs. Many young adults who become financially independent go on to do things they are passionate about at their own speed without the added pressure of needing a job for income; they take lower paying jobs in a non-profit sector they truly care about, start their own business, switch careers, become stay-at-home parents, volunteer, or fully engulf themselves in their hobbies. It’s a chance to slow down and take a more mindful approach to life. It’s freedom.

Retired Early? Not Possible Unless You’re Making 6-Figures!

That’s exactly what I thought when I first stumbled across the FI movement. But that is, in fact, just not true. Many are teachers making less than $50K/year! But how?! It’s actually quite simple on paper: spend less than you earn, increase your savings and invest wisely. (Sidebar: wisely does not mean investing in your friend’s start-up or picking individual stocks because you really like the new CEO. Wisely means investing for the long haul in index funds, like Vanguard’s VTSAX fund. More on that later.) This all sounds simple, but it can be rather quite difficult for many. According to the Survey of Consumer Finances, which Uncle Sam conducts every three years, the average combined debt (student loans, credit cards, etc…) for someone 35 years or younger is $67,400 per person. One of their studies done in 2016 showed that total debt amount increased with an increased earning. Meaning – lifestyle creep is a real thing! In other words, people will push themselves further into debt trying to Keep Up With The Kardashians. The psychology behind staying true to a financial independent lifestyle is tricky. For some, like my boyfriend, it seems almost innate and intuitive. He’s a natural minimalist and does not fall victim to consumer marketing and societal pressures. For others, like myself, I had to (and still do) work hard to curb my consumer habits, redefine my personal values when it comes to spending money and planning for my future, and take the initiative to self-teach everything I know today when it comes to personal finances.

So Where’s the Proof This Works?

It’s a little vague to say spend less than you earn and invest more. But I promise you there is actual math to this. Have you heard of the Trinity Study or the 4% Rule? Didn’t think so. I hadn’t either. In a nutshell, the nicknamed Trinity Study was done by three professors at Trinity University on choosing a sustainable withdrawal rate for retirement. You’re welcome to read the actual study here. But I know many of you won’t (and I don’t blame you). I plan to apply my personal financial status to the study in a later post, but for now I will share a link to The Poor Swiss’s very easy-to-understand synopsis of the study. What I like about this blog post is the caution he throws out there when it comes to truly understanding the meaning of the study (still an amazing study, but definitely some caveats to consider when using it to govern the path to your financial freedom.) Side bonus: The Poor Swiss is working towards financial freedom in one of the top five most expensive countries to live in: Switzerland, in case you didn’t connect the dots.

But if you don’t want to jump over to another tab because you love keeping me company (thanks, I’m flattered) then here is a quick breakdown of how to apply the Trinity Study to your financial life. Figure out what your annual spend is. This includes EVERYTHING (rent, bills, clothing, food, entertainment, travel, etc…) You can use budget trackers like Mint.com (my personal favorite) or manually look back over your bank account(s) and track this yourself. Take your annual spend and multiple it by 25X (30X if you’re more conservative or plan to increase your annual spend in retirement, also known as Fat FI). For my visual friends, here you go:

I’ll give you a realistic example, if you spend $30,000 a year (that’s about my annual expense), multiple that by 25 for a total savings target of $750,000. Theoretically, according to the Trinity Study, once I hit that number I can quit my job, stop contributing to my savings and live off the dividends by withdrawing around 4%/year. I use the term theoretically because there are MANY factors to consider: Market fluctuations may affect my withdrawal rate, whether or not I’m still earning an income will affect how much I need/want to withdraw, how many years I need to withdraw money, how I’m invested (stocks vs. bonds), the list goes on and The Poor Swiss hits on some good points. If you don’t read the study, please go read his post at the very least! I also plan to dive deeper into this study in later posts.

How Do I Get Started on the Path to Financial Freedom?

Don’t worry, this is not the part where I up-sell you on some bullshit financial course. Gotta spend money to make money, right?! WRONG. Other than buying a few books on the topic because I was genuinely interested in reading them I haven’t dropped a dime on learning financial independence. In fact I moved my assets from Morgan Stanley to Vanguard so I could spend even less on paying someone to invest for me (more on that later). In addition to the information below, feel free to follow my blog for more information, insights, and hopefully inspiration to get you moving on your path to financial independence. I not only plan to share my personal journey but want to offer you all the tools and resources I’ve come across, like free FI calculators, free budget trackers, *free insight based on my experience, my favorite posts by other bloggers who’ve already achieved FI (or are close) and maybe a few good books to check out along the way.

Roadmap to Financial Independence:
  1. Understand your current net worth. Take all the money you currently have, subtract your debts and this is your net worth. If you have debt, face the music. What is that number? You’d be surprised how many people don’t know. Whether or not you choose to include your home is up to you, your financial framework on how you view housing (asset or debt) and your financial journey.
  2. Crunch the numbers and figure out your annual spend and what you need to retire (25-30X your annual spend). This is your investment goal that you will always refer to. However, don’t forget to re-evaluate every year (not for inflation – the Trinity Study incorporates that into their models) but for your annual spend. Have you fallen victim to lifestyle creep? Keep tabs on this an adjust your financial goals as needed.
  3. Sign up for a 401k through work if you have access, ESPECIALLY, if your employer will match your contributions. At the bare minimum contribute what they will match. If they match 5%, contribute that. This is FREE money. Some people will tell you to pay off your debts first before you invest. Personally, I feel that compounding interest is your best friend from here on out and you need to take advantage of it. Invest as much as you can that will still allow you to pay down your debts.
  4. Build an emergency savings. When I owned a car I personally liked having around $3,000 in emergency savings. If you don’t own a car or home you may only want to save around $1,000-1,500. Up to you. Word of advice: needing a new outfit for your birthday party celebration or a friend’s weekend trip to Cancun is NOT an emergency. Plan and save ahead of time for things, otherwise, do not buy. You’re better than that.
  5. Start paying off your debts and figure out your debt payoff date. You should have figured this out in step one but I think paying off debt deserves its own section as it’s essential to understand if you want financial freedom. How and when you pay off your debt is going to vary for everyone. If you have consumer debt or anything with a high interest rate, pay it off! And pay off more than the minimum balance due. Figure out when your debt will be paid off (know the month and year). I like Nerd Wallet’s Snowball Debt Calculator as you can adjust payment amounts to see how that affects your payoff date. If you have student loan debt like I do, then it’s up to you how want to go about paying that down. Personally, I pay the bare minimum every month because I have a low interest rate and low debt ($11,000 as of January 2020) and I did the math – I can make more investing than I would save on interest if I were to pay off my debt 6 years early (my payoff date is February 2026). Psychologically, this is more soothing to me. But for others getting that debt number to zero is more important. Do what works for you. However, if your interest rate is higher than 7-8% or whatever type of return you can get from the market I would focus on paying the debt down first before investing any more than the bare essential into a 401k.
  6. After your high interest rate debts or all of your debts are paid off, start a long term emergency savings. For some people this is 3 months of monthly spend (usually bare essentials like rent, commute costs, and food). For others this could be 12 months. Whatever it is, work towards it and keep it in a SEPARATE money market account where you can earn 1.5-2.5% interest to keep up with inflation. I personally use Vanguard.
  7. After you’ve paid off your debts, built up your short term and long term emergency savings, you can do several things (all which will vary depending on your income and financial goals). You can A: open up a Roth IRA and max it out ($6,000/year as of January 2020), B: max out your employer 401k ($19,500/year as of January 2020), C: open up an index fund investment account with a brokerage firm like Vanguard. I will go more into this in another post, or D: a combination of all of these. The decision will depend on when you plan to retire and how/when you want to withdraw money as well as your current income tax situation. Again, I plan to dive deeper into this in a later post. Whether you decide to go with option A, B, C or D – you can’t necessarily go wrong. So pick something!

Remember, financial independence is a personal journey. Your situation is unique so do not let others discourage you by either having achieved financial independence in a mere five years or by telling you that what you’re trying to do is impossible. It’s not! Figure out why you want to be financially independent, what you plan to do once you achieve FI (ESSENTIAL TO THIS LIFESTYLE), and just start saving!

*I am not a Financial Advisor. Any and all advice you read on this blog is purely circumstantial to my personal experience and situation. Like anything else, please do the research as it pertains to your specific situation.