There’s been a new big movement among millennials sharing their net worth and what their savings rate is. But what’s it all for? That’s FIRE, AKA Financial Independence / Retire Early. Financial independence is about people who want to quit their current jobs so they can pursue their passions without worrying about money. Now, this doesn’t exactly mean they stop working. Many people who already financially independent are working more hours than compared to before reaching financial independence — it’s just on stuff that they truly enjoy and care about.
If this sounds appealing to you, then great, because I was personally enticed right after I read my first FIRE article. My husband and I started to run numbers and figured out a strategy that would get us there. We are a year and a half into this and are on track to retire in less than 10 years, at the age of 34. We still currently both enjoy what we do, so when we do get to 34, we’ll reevaluate our situation and see if we want to retire or continue working.
Here’s our strategy.
1. Figure out your monthly expenses
This is truly the heart of financial independence. It’s not about how much you make, but how much you spend. For example, if you spend only $10,000 a year, then following the 25x rule, you will only need to have a $250,000 nest egg in order to retire. However, if you spend $100,000 a year, then you’ll need $2.5 million! That’s quite a difference! So, again, it’s not about how much you make, but really how much you spend.
For us, we tracked literally every single penny that was spent for a year to get as accurate as possible. We figured out we spend about $40,000 a year and will need $40,000 x 25, or $1 million. This method also helped us figure out our savings rate, which is the after-tax income minus the expenses divided by the after-tax income.
2. Invest in ETFs
Since we figured out how much we could save, we divided them into three categories: emergency fund, travel, and investments. We wanted to build up an emergency fund of six month’s worth of expenses, or 6 x $3,400, or $20,400.
Then, we knew we needed a separate fund just to take care of our travel bugs. So, we allocate $800 a month to that savings account and only touch it for travel-related expenses. Lastly, all the remaining money is pushed to an investment account. This is important in making sure that you have enough to sustain you for the rest of your life. We picked three low-cost Vanguard ETFs that get funded every single month. We allocate a certain percentage of this into those three ETFs to keep things simple. We invest in one high-yield dividend ETF, one for the S&P 500, and one international ETF. This keeps things diversified very well.
3. Max out your 401K
The other key thing to ensure you have enough money in retirement is to max out your 401K. Take full advantage of your employer’s matching 401K. With the help of the tax code (IRS Publication 590b) and a financial planner, you’ll be able to start withdrawing from your 401K before you turn 59 and a half. Be sure you understand how this works before moving forward. It’ll be best to start with withdrawing from your after-tax investments until you’ve got a good handle on how the 401K withdrawals work.
The combination of your 401K and investments in ETFs will make up the number that was calculated to achieve complete financial independence (25x your living expenses).
4. Keep yourself in check
This is probably the hardest part and the part that we need to consistently work on. We used to go shopping a lot, so we had to learn to cut down by finding free activities in our area. For example, we started to hike in nearby parks and spent more time at home working our new side hustles. We’ve also taken on some minimalist challenges and cleaned out our closets. We’re currently working towards not buying any new clothes.
We loved trying out new restaurants and were easily able to drop $100 a night for a nice dinner with drinks every weekend. But since we started on our FIRE journey, we’ve been cooking a lot more and learned some great recipes that have kept us from going out. We’ll still treat ourselves once or twice a week to a date night, but we are always cautious of where we go.
Lastly, we’ve just made little changes here and there to ensure that we’re on the right track. We have monthly reviews of our spending and talk about where we can cut back or where we’re ok spending a little more. It’s been a transition, but each day gets easier as we start getting used to a slightly new lifestyle. We were savers to begin with, but we’ve also set new goals to challenge ourselves and see where we can make some additional savings that will bring down our financial independence years to an earlier age.
How long will this take?
You can quickly plug in some numbers using Networthify, which is the one that Mr. Money Mustache recommends on “The Shockingly Simple Math Behind Early Retirement.” I recently came across Minafi’s “Interactive Guide to Early Retirement and Financial Independence,” which I find works better for me as I can really read through and digest the numbers in story form. Plus, it’s clearer than most calculators, and this is really tailored to FIRE. (I did some number crunching in Excel by myself and just confirmed the numbers using the two sites above and both came to roughly the same conclusion as my Excel calculations.)
Bottom line: This lifestyle isn’t for everyone, but I think there a definitely a few things here that everyone should do at the very minimum like tracking your expenses or investing. Anything you can do now will always benefit you in the long run.
The author prefers to remain anonymous.
Image via Unsplash