How would you respond if someone told you, “You’re FIRED”?
My response would be: Yessssss, congratulations to me!
No, no, it’s not what you think. FIRE nowadays has a different meaning (it’s short for “financial independence; retire early”). Gone are the days when getting “fired” means getting the pink slip; In the modern world, it signifies freedom – financial freedom to be more precise.
If you haven’t heard about the ‘FIRE movement‘ yet, then you’ve been missing out. But luckily, you came to the right place so let’s find out what this hype is all about and how you can achieve financial independence.
(Spoiler alert: You’re going to get light up!)
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Hello, FIRE
The FIRE movement, known as Financial Independence Retire Early, is a popular notion whereby anyone can quit work and live a more fulfilled life without financial worries.
Before I learned about FIRE, I was unconsciously on the path towards achieving it just by being intentional with my spending habits. I was glad to learn that I wasn’t the only odd ball who actually enjoys living a frugal, minimalist lifestyle.
In order to become “FIRE’d,” one must have accumulated a sizeable net worth that would spit out constant income enough to cover all expenses indefinitely. This would effectively render a traditional 9-5 job optional.
Here are four simple steps you can follow to calculate and reach your financial independence target (or FIT):
Step 1: Know your spending
First, figure out how much expenses you incur each month, then multiply that by 12 to get your annual spending. This is known as the annual living expenses (or ALE).
You can do this by tracking your expenses every month including all fixed and variable expenditures. (Note: Fixed expenses are costs that generally do not change such as rent and insurance premium; Variable expenses are costs that are controllable by you such as your grocery bills, entertainment, and the clothes you buy for your baby).
Step 2: Calculate your nest egg
Once you have your ALE, you can divide that by 0.04 which is also known as ‘the 4% rule,’ and BAM, you get your financial independence target (FIT).
To show you some practical examples, here is a projection of possible FIT amounts based on your spending needs. Notice that if you’re an extreme frugalist who spends below $3,000/month, then your financial independence target is just shy of $1 million.
This FIT, which is also your retirement investment portfolio, is your ultimate prize to reaching financial independence.
Okay, backtrack. What the heck is the 4% rule and why do you divide that by the ALE? (Entering… steps 3 & 4.)
Step 3: Invest in the long-term
The 4% rule is the general percentage that you can withdraw from your FIT and you’ll be able to outlive your portfolio without running out of money.
To understand where the 4% rule came from, I recommend reading the Trinity Study which aims at determining a safe withdraw rate from a stock retirement portfolio for when you hit that FIRE button.
The key here is that your FIT is actually a combination effort of your diligent savings over the years PLUS the accumulated investment effect. It’s important to note that even if you actively save money in your bank’s saving account, your nest egg will most likely be outpaced by inflation, meaning the 4% safe withdraw rate doesn’t apply if you don’t invest*.
“Compound interest is the 8th wonder of the world” – Albert Einstein
The most popular investment vehicle that is complementary to the 4% rule is a broad-based index fund like the S&P 500. This investment is known to yield an average of 7% in the long-run (e.g. 10 years) which is enough to cover the 4% withdraw rate plus inflation.
Check out the performance of the Vanguard S&P 500 ETF (exchange-traded fund) from 2009 – 2019 as an example.
Therefore, the key takeaway of how you can achieve FIRE is through accumulating savings diligently (and early on) so that this money can be invested and increase in value at an exponential rate of growth through compound interest.
Step 4 (The Final Step): Stay on track
Putting this all together, the formula to achieve financial independence is simply: FIT = ALE / 0.04 (or ALE = FIT x 0.04). This means that if you can pinpoint exactly how much you need in monthly expenses, then you can figure out your nest egg amount to become financially free.
This formula is also useful for keeping you on track in the event that your expenses change overtime. It can provide you a realistic update of how much you’ll need to enlarge your nest egg if you ever decide to spend more.
Therefore, the secret sauce to achieve FIRE in a rapid speed is to target a high savings rate. Most of the people who succeeded at reaching FIRE in their thirties or forties (yup, you read that right) normally save about 50% or more of their income.
Even if you don’t plan on reaching FIRE early (or you’re still sceptical of its viability), using this formula as a guide for your savings rate can still keep you on track.
On the other hand, if you are convinced by this method and are determined to reach FIRE someday, then the simple strategy you can implement today is to increase your income, decrease your spending, or better yet do both, then invest the difference.
(*There are numerous ways to invest your nest egg and they deserve a post of itself. Stay tune for various investment ideas, insights, and opportunities to be uncovered in this blog. Don’t forget to SHARE, comment, and subscribe.)
FIRE Without the “RE”
Although I completely resonate with the habits of FIRE enthusiasts, whose goals are to save money rigorously in the beginning years in order to retire ultra early, I’m not sure retiring early is my ultimate goal.
I understand the RE (retire early) is the most controversial part of FIRE and everyone has his or her own definition of early retirement. Though there is value in RE, I want to focus more on FI (financial independence).
Instead of retiring by age XX, I just want to have the optionof doing anything I want with my time while having a steady cash flow. Thekeyword here is ‘option.’ Having the option to do whatever I want is what givesme joy (and security).
In the present time, having the option to live comfortablywhile seeing my daughter grow would be the ultimate dream.
However modern lifestyle requires moms to go back to work immediately, because most of the time, one income is just not enough. Therefore most parents do not have the option of staying home to spend longer time with their baby or to fully become a stay-at-home parent.
Though I enjoy working a corporate job (at times), I certainly find that the current maternity leave is way too limited for the benefit of the society. I truly believe that newborns need the nurture and presence of their mothers during the first six months of life.
Therefore having option is really valuable, especially if as time goes, I want to spend longer time with my baby than originally planned. To achieve this, I would first need to establish a stable cash flow to ensure that I don’t have to worry about sustaining myself and my family through a paycheck.
That or we’ll have to tap into our savings account, which is not ideal.
So having the optionality to FI is such a breath of fresh air. This gives me hope that someday I will have that possibility to work as I wish or to take care of my baby without having to worry about money.
Achieving FI with A Baby
Achieving financial independence or FI is no small feat. It requires strong commitment to set achievable goals and then to be laser focused in achieving said goals.
Although increasing income is the hardest part of FI, reducing expense, on the other hand, is much more manageable. After all, the most important objective is to increase savings rate, which can be done by adjusting either side of the variables.
On one hand, I know that having a baby will affect our savings rate, but I’m not totally sold that it would strain our finances. To do this, I started to track my expenses and inventory to ensure that I’m not overspending on baby items.
My hypothesis was that if I could keep baby spending under control, I would have the joy of raising a child without having to derail my FI goal.
So far tracking all of the expenses have given me perspective in how much it costs to raise a baby. Furthermore, keeping track of the entire inventory I already have for the baby have resisted my urge to buy new things.
This is because seeing an actual list of inventory is overwhelming and it will make you think twice to add more to it.
With the baby expenses under control, the only thing I had to focus on was ensuring enough cash flow by continuing to look for work, invest, and possibly build a successful passive income stream (which is the reason why I started this blog – to explore those opportunities.).
In any case, having a baby tends to give parents newfound superpower. Once you embrace a sweet, fragile baby in your arms, you will forget all of the barriers to life and focus only on what matters.
As for me, I unlocked the superpower to stay laser focused on my goals while being sleep deprived. Such is the joy of parenting and I will stop at nothing to provide the best care for my Baby Bear.
Therefore, FI is truly the key to having more freedom, and freedom is always worth fighting for.
Have you heard about the FIRE movement? Do you value being financially independent and quit work early or do you prefer to work closer to standard retirement age? If you prefer the former, what can we do to accelerate FI?
FIRE up this PIN
