Everyone likes the idea of retiring early. But comparatively few people have the discipline necessary to make it happen. For many people, it's hard to move past the idea of living paycheck to paycheck, and when we do get our Christmas bonuses, most people's natural tendencies are to blow them on the next vacation.
In recent years, a new movement has been growing that is known as “FIRE.” FIRE stands for Financial Independence, Retire Early, and the idea behind it is to save large amounts of money during your working years so that you can retire early. The FIRE movement is becoming popular among Millenials in particular. Let’s take a closer look at how it works.
In order to even think about the possibility of retiring early, you need to have a detailed plan. Proponents of the FIRE movement have created two rules to govern savings plans: the “Rule of 25” and “The 4% Rule.” The Rule of 25 states that you should have 25 times your annual spending saved before you retire. For example, if your annual spending costs come to $60,000, you should multiply this number by 25 ($1,500,000) to determine the amount of savings you’ll need to retire.
The 4% rule states that once retired, people can withdraw 4% of their savings on an annual basis, although the amount might need to be adjusted for inflation. All of the numbers involved can be affected by outside factors, including additional investments, emergency savings, etc. We will discuss this further below.
In order to create a budget for yourself, you need to, first of all, determine your total household net monthly income. This number can vary, especially if one of the people contributing to the household budget doesn’t have a fixed salary. If you think the number might fluctuate a lot, you can earn on the side of caution by taking the lowest number of the last six months as a starting point. This way, any additional amounts can be considered extra.
Once you have a base number, it is recommended that you follow a distinct series of steps creating your budget:
- Set goals for yourself in order of priority. How many times do you want to eat out? Do you want to take a vacation? What major items do you need to buy?
- Put everything into categories: food, gas, bills, etc., and figure out how much money you spend on each category.
- Make sure that you don’t end up in the red at the end of the month.
Taking these steps and implementing them properly might seem overwhelming for many people. If you’re not sure how to make a FIRE plan work for you, there are professionals out there who can give you extra advice. Investing a small amount in professional services could end up making a big difference in your successful planning.
For many people, it can be hard to increase a fixed monthly salary. No matter how hard they work, many people only see the possibility of modest raises once every few years. Therefore, in order to increase the amount of money coming into your house, you might want to think about other ways that you can add to your monthly savings outside your regular job.
While this might have a shady sound to it, there are actually quite a few legit sides hustlesthat people are taking on to make extra money and put it into their retirement funds. Driving an Uber, writing or proofreading articles, or taking on other kinds of gig work can significantly pad up your monthly savings, especially over a period of time. If you’re not sure what type of side hustle you’d like to pursue, look around online. Also, think about what skills you have that might be useful to the community. And who knows? You might end up taking something on that you enjoy, and it won’t really feel like work. And you’ll be increasing your residual incomein the process.
The prospect of retiring early can seem particularly remote if you have outstanding debts. How can you possibly think of saving extra if you can’t even handle the money you owe now?
Believe it or not, there are actually several things that you can do to manage your debt more effectively:
- Start by paying more than the minimum on your monthly repayments. There’s nothing nicer than seeing your debt decrease at a faster rate than you initially expected. If you create your initial budget including a higher-than-required debt payment, the whole category could disappear within a few years, and you can add the money saved to your retirement fund.
- Create a “debt snowball” or a “debt avalanche.” These two contrasting ideas involve different strategies for getting rid of multiple types of debt. Debt snowballs involve allocating more money to larger debts than smaller ones, in order to balance out the amount that you owe to each. With a debt avalanche, you make minimum payments on all your debts and then channel extra money toward the debt with the highest APR.
While neither of these methods will have an immediate effect on your budget, it is important to think about debt repayment because without it, all your other efforts might be in vain. You don’t want to create what would otherwise be a wise savings plan and then continue to be strapped with loan repayments in the end because you neglected to properly target your debts.
If you have one or more debts with high interest, you might want to consider taking out a debt consolidation loan. While this idea might sound like just one more loan that will need to be paid off, it could be a wise move in terms of paying off debts with high-interest rates that may only continue to grow. Additionally, exploring alternatives such as a payday loan, which offers convenience and speed, could be worth considering in certain circumstances. Another measure that you should take to create a safeguard against potential losses is creating a diversified investment portfolio. If making investments is part of your plan, it would be wise to invest in different kinds of assets so that if one or more of them fall in value, the others will still remain intact and your overall loss won’t be too great. A diversified investment portfolio could include things such as stocks, bonds, and other securities. You can also purchase shares in different kinds of stocks so as to give yourself a balance. In addition, you might want to consider investing in precious metals as their value tends to fluctuate less. In this way, they are generally one of the more reliable types of investment. You can buy gold online, for example, quite easily. The idea behind creating a tax-efficient investment strategyis to make more of your investments in things that aren’t taxed very highly. Investing in certain kinds of assets, such as tax-managed funds or mutual bonds, is considered a wise investment because these things are subject to fewer taxes both at the federal and state levels.
If you’re not sure which assets are tax efficient and which aren’t, do some research on the subject or talk to a professional.
Obviously, none of the things outlined here are carved in stone. Every person’s situation is unique, so you should keep careful track of your savings and spending on a monthly basis, and adjust your plan accordingly. Just keep these rules in mind as a basic guideline, and you should stay on track.
If you are diligent about following your plan and manage to reach your goal of saving a certain amount every year, you should be able to retire early and enjoy many years of financial independence.