Financial independence? Could you survive if you stopped receiving a salary?
If not, you’re financially dependent on your job, but there’s a growing movement of people who want to break out of this routine.
This movement is known as F.I.R.E Financial Independence, Retire Early.
The main strategy behind FIRE is basically pretty simple.
Spend much less than you earn and invest or save the rest to achieve financial independence and maybe even retire earlier.
But increasing your savings rate to 50% or more, as recommended by many FIRE, is easier said than done and may not be achievable for everyone.
How can financial independence be maintained?
There are some habits that many financially independent people follow and that most people can apply.
Minimize your spending in some key areas, increase your wealth primarily through investments, and never stop learning.
Table of Content
- What is financial independence?
- How does financial independence improve the quality of life?
- What are the pitfalls of becoming financially independent?
- How can financial independence be achieved?
- 4% Rule
- TLDR
What is financial independence?
When it comes to regular retirement, the general idea is to save enough money throughout your working life so that you can stop working at age 60 and live off the amount you’ve saved.
this amount is often referred to as your “nest egg.” If you know your desired retirement age, you’ll know what your life expectancy is and how much you want to spend each year on your retirement.
Fire stands for financial independence, and early retirement. And it’s based on the principle that you can retire not because of your age, but of how much you save each year from your income.
Instead of going the traditional route of saving a little bit over your 50-year career, you save significantly more, invest significantly more over a 10- or 15-year period, and have the option to retire early.
You don’t have to be the badass monk living in a tent in the woods.
You just have to be a little less ridiculous than average.
These small choices make a big difference in terms of how much of your money you spend.
Retirement, according to the new definition, simply means having a choice.
It’s not so much about retiring as it is about having the freedom to no longer depend on a job to make money.
It’s really about thinking about the kind of life you want and seeing your money as a tool to make that vision a reality.
So when you talk about FIRE being something that allows them to have better control over their finances, that’s really a tempting proposition.
How does financial independence improve the quality of life?
It forced you to reconsider your relationship with spending.
Something as big as cooking at home, eating, is for many people the second or third biggest expense they have.
And even if you can only make a tiny dent in that budget, you can use that money to pay off debt or beef up investments.
When you figure out how these different systems work together, it becomes almost like a superpower.
When you are location independent, you are basically very flexible.
The less you earn, the harder life is, and that means it’s all the more valuable to make those changes.
It’s not just one size fits all. You can use your portfolio to cover some of your expenses,
for example, you can reduce the number of hours you work.
What are the pitfalls of becoming financially independent?
To make matters more complicated, true financial independence means being able to live off the returns on your investments and not having to draw on your capital to fund expenses
The market doesn’t always go up, so what happens to FIRE plans when the market moves down?
A diversified portfolio with a mix of assets, such as stocks and bonds, and a safety net, such as an emergency cash fund, can provide protection when markets deteriorate.
As we are now in a recession. personally been through on this FIRE journey, and if anything,
it has only proven that FIRE is the only way that makes sense because any strategy that relies on employment being stable simply does not work
How can financial independence be achieved?
Finally, financially independent people tend to seek advice and self-directed learning.
they are more likely to seek out a financial advisor and take advantage of their brokerage firm’s educational offerings.
By learning about the financial markets from trusted sources, you can make more informed and confident decisions about how to make the most of your money.
What do you do with this fair money?
Investing.
It turns out that if you do that for 7 to 10 years with most of your money, you have enough to live on just the dividends and the ongoing capital gains of that saved money forever.
I think the pandemic made people rethink their relationship with work.
Saving
You could save the extra income.
Financially independent people not only spend less but also invest more.
The extra money they save on housing, they invest.
They also tend to start investing much earlier and often focus on tax-advantaged accounts.
In fact, 84% of the financially independent use accounts such as 401(k)s and IRAs, which offer tax advantages that allow money to potentially grow faster.
This is one of the most important aspects of FIRE.
The number of financially independent people who invest far exceeds the number of non-financially independent people.
Studies show that almost all respondents are invested in the financial markets.
Expenses
Financially independent people spend less on housing.
Housing accounts for the largest portion of their budget,
while non-financially independent people spend almost a quarter of their budget on housing.
This one expense is often the largest item in the budget, so saving in this area can free up a lot of income.
Moving to a more affordable apartment, to another neighborhood,
or even to another state is one way to save on housing.
You might think that financially independent people cut all discretionary spending,
but they actually spend a little more on discretionary spending.
They cut spending drastically, but they focus on reducing big-ticket items like housing.
Another way to keep spending under control is to avoid lifestyle inflation.
As we get older and our income increases, we tend to live more expensively – moving out of a shared four-bedroom apartment into our own place or driving a nicer car.
4% Rule
Many followers of F.I.R.E instead followed other technics.
The 4% rule comes from a research paper known as the Trinity Study.
It has been proven that if someone withdraws only four percent annually from their investment portfolio.
they’re unlikely to deplete their capital over a 30-year period if investment returns cover the withdrawal requirement.
In other words: If you’re able to live on 4% of your investment portfolio, then your savings should be able to fund your retirement for at least 30 years.
many people try to limit their withdrawals to only 3% of their portfolio.
This approach is designed so that it could theoretically fund your retirement forever,
which is important for someone who wants to spend most of their life in retirement.
it’s pretty easy to figure out how much you need to save with this rule,
as you simply divide your desired retirement income by 3%.
the problem is that you need a much larger nest egg to keep from depleting your principal.
TLDR
Regardless of your financial situation, you can achieve your financial goals if you get into the habit of spending less and investing more.
This movement is not really about the money, but about a much larger social change.
The more people see this as a viable path, the harder it will be for employers to retain their employees, especially the most talented among them.
I think this movement has the potential to fundamentally change the way we see work,
and I am really excited to see what happens in the next few years.
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