FIRE stands for Financial Independence, Retire Early. The plan promotes early retirement by promoting extreme savings and investment. Following the program allows individuals to “retire early.”
Search the Internet, and you will find proponents and distractors in equal measure. I believe it gets a bad rap because “early retirement” sounds lazy too many people.
Far too many people live beyond their means. Crippling credit card debt and overextending on home equity can have devastating results. Learning about FIRE and following its principles can offer a way out of being a slave to debt.
Those who follow the program can theoretically retire early. But it’s more about aggressively reducing spending and increasing savings. Doing so allows individuals to save much more and faster than traditional budgets.
This can be complicated. So, today let’s start by focusing on the two basics rules of FIRE.
- The Rule of 25
- The 4% Rule
The Rule of 25 aids in calculating how much money you will need to have in retirement. You might think this is 25 of your income. But it is, in fact, 25 times your expenses.
It can be easier to see this as an example. You need to calculate all of your expenses—Rent, Groceries, Subscriptions, Car Payments, Cell Phone Bills, Utilities, etc.
For example, if your expenses are $30,000 a year, you would multiply this by 25. The result is $750,000. This is a common approach in traditional financial management. This may sound impossible, but this is where the 4% comes into play. It is the action plan.
The 4% Rule is based on two assumptions.
- Your Stock Portfolio will grow at 7% Annually
- The average rate of inflation will remain at 3%
This means you can safely take 4% of your growth while leaving 3% to keep up with inflation. Since you are only spending the average incremental increase, you should never run out of money.
Of course, these results are not guaranteed. Then again, no future investment is guaranteed. The only guarantee is “failure” if you fail to plan.
Let’s first look at our example above.
Investment Needed to Match Spending in the Future
| Amount Invested | Available Per Day | Available Per Month | Available Per Year |
|---|---|---|---|
|
$75,000 |
$82 |
$2,500 |
$30,000 |
Depending on where you are at right now, saving anything may feel impossible. Don’t let that discourage you. Start where you are. Don’t focus on what you “don’t make” but perhaps consider where you can save. In other articles, we will bring you more ideas to do just that.
Within the Money Matters section, we will be bringing you various savings and money-saving tips. We will discuss FIRE as well as many other ways for you to become the guardian of your own future.
4 Examples, High to Low
| Amount Invested | Available Per Day | Available Per Month | Available Per Year |
|---|---|---|---|
|
$5,000,000 |
$548 |
$16,667 |
$200,000 |
|
$2,500,000 |
$274 |
$8,333 |
$100,000 |
|
$1,000,000 |
$110 |
$3,333 |
$40.000 |
|
$250,000 |
$27 |
$833 |
$10,000 |
Depending on where you are at right now, saving any amount may seem impossible. $250,000 is a lot of money. However, could you live off $10,000 a year? Most people could not.
But don’t let this discourage you. Start where you are. Don’t focus on what you “don’t make.” Perhaps consider areas where you can save. In other articles, we will bring you more ideas to do just that.
For now, if these numbers have you thinking, then you are on the right track. Don’t worry about trying to retire before your 30. But, consider this information a call to action and a way forward.
Within the Money Matters section, we will be bringing you various savings and money-saving tips. We will discuss FIRE as well as many other ways for you to become the guardian of your own future.