You keep yammering on about this FIRE, what the hell is it and why do you want it? Are you some sort of closet pyromaniac?
I’ve been bleating on about why I started this blog and why FIRE is a major motivation of mine. So, it would probably be a good idea to tell you what FIRE actually stands for, as I assure you it has nothing to do with my obsession of burning things (I save that for when we go camping).
FIRE stands for Financial Independence, Retirement Early. Let’s look at those separately.
- Financial Independence – financial independence can loosely be defined as having a passive income that is large enough to cover your day to day expenses. You no longer need to work as the income you earn from your investments are large enough to live off of, forever.
- Retirement Early – due to financial independence, you no longer need to work and can officially “retire”. I use retire loosely because a lot of people have differing opinions on what retirement actually is.
Financial independence and early retirement are almost the same thing, in my opinion. You don’t retire until you have enough money to live off of forever, and you can’t be financially independent without enough money to live off of, forever.
If anything I would consider financial independence as having enough passive income to live off of, but still choosing if and when to work without any financial pressure to do so. Any work you do take on is strictly voluntary (not unpaid, you just choose to work, likely because you enjoy it) rather than having to work to get by. Whereas retirement, to me, means you don’t work whatsoever.
Essentially, they’re very similar and in neither situation do you have to work. One chooses to do so as and when they please and the other does not. You might have a different opinion on what retirement stands for, which is fine, but in terms of separating the two statements, that’s about as much of a difference as I can fathom!
Well that sounds bloody brilliant but I’m only earning an average salary, surely only people earning a ton of money can retire early, right?
Not so fast. Anybody can reach an early retirement if they set their mind to it, they just have to make sure they are saving a certain % of what they are earning. Whether you are earning $100,000 or $50,000, if you both save the same % of your income, you will both reach retirement at the same time! Admittedly the lower your income, the more you will have to restrict your spending, but it is certainly doable even on average salaries. There is actually a community called LeanFIRE for this, where households have annual expenses under $40,000 and aim for financial independence.
I see, well then…the journey to an early retirement must be full of unnecessary sacrifices, I want to enjoy my life!
If anything, I’m a huge advocate for enjoying life. We live in the heart of one of the most beautiful (but expensive) cities in the world, own a vehicle, go on vacations regularly, have a pet dog and generally enjoy all of life’s offerings. By all intents and purposes we are having a great time, but we are fully aware of the implications of every expense we incur and how they hold us back in reaching an early retirement. We like to plan our finances and set ourselves SMART goals in order to reach that Big, Hairy Audacious Goal of an early retirement.
Reaching an early retirement is all about making sacrifices that don’t significantly affect the quality of life you are happy with. Sure, you have to compromise and you definitely have to be adaptable, but along the way you will learn that all the crap you spent money on in the past isn’t really bringing you that happiness you blindly strive for, and a few adjustments to your life could shave a significant amount of time off of your retirement age.
Hm, I’m not so sure. What kind of “compromises” are you talking about?
If you follow the various guides throughout this blog, beginning with Budgeting, you will learn all about how to make compromises in order to reach that goal of early retirement.
Every person is different when it comes to compromise. What might seem like a reasonable compromise to one person may be a complete no go for another. The key is to find a balance that you (and your partner) are happy with. The more flexible you are, the more years you can shave off retirement. Give and take!
I’ll be writing various “How much does it really cost”? articles to highlight just how much money you are spending on things you could compromise on if you really tried. You might be quite astonished at how much you are spending on frivolous things that could be put to work on allowing you to retire early.
Okay, okay so let’s assume I can make some compromises and save a bit more money, how does it all add up to retirement though?
Well, from the money you save from effectively budgeting and compromising on certain expenses, you should be able to increase your savings rate to a higher rate. Increasing your savings from 10% of take home salary to 30% of salary can cut your retirement from 35 years to 21 years. At 40% you’re talking about 17 years to retirement.
By gum! Is it really that simple?
Well, I never said it was simple. Increasing your savings to that kind of rate will take a lot of discipline and hard work. You would either have to reduce your spending or increase your income significantly (or both).
You would then have to learn about index investing to put your savings to good use. There’s no point in saving all that money without getting a return from it. The earlier you start investing, the longer the period you will have of compounding interest and the earlier you can retire.
Okay, I’m sold. Where do I begin?
You can begin by budgeting your money, you must then learn ways to either increase your savings or decrease your expenses and finally, you must invest all your savings into a passive income producing portfolio. This could include real estate or it could not (personally I’m leaning towards no real estate, but that could just be because I live in the third most expensive real estate city in the world) .I’m going to be creating a series for each step of the way, so be sure to check them out if you are really interested in joining the FIRE community.