A Guide To The F.I.R.E Method

For most people, work is the vessel by which they are going to fund their retirement. For some, this may mean working until they are in their sixth or seventh decade. Whereas for other people, it could mean working until they are 30.

This early retirement age is thanks to a recent method known as Financial Independence Retirement Early or F.I.R.E for short. By achieving financial independence at an early age, individuals can choose to quit work and travel or live a life of leisure.

While early retirement sounds like a dream, it’s important to note that F.I.R.E is achieved through strict financial practices pertaining to budgeting, saving, and investing. This process isn’t easy, however, it can provide financial independence at a much younger age.

Defining F.I.R.E

At its core, F.I.R.E is a premise that promotes both saving and investing aggressively. By approaching these concepts with an aggressive mindset, individuals are essentially laying the platform to enjoy an earlier retirement. This is important when you consider that having enough money to live on is often a top requirement for retirees.

With a goal of gaining financial independence, F.I.R.E is all about becoming work optional at an earlier age. While many people of bygone eras have been content with working until their 60s and 70s, today’s generation wants more control over a valuable resource- time.

As such, F.I.R.E is achieved once enough money has been saved to both funds and support your lifestyle. Depending on how aggressive your saving and investing strategies are, F.I.R.E may occur within 10-15 years. Providing you with the freedom to make work optional and pursuing your dreams non-negotiable.

Different Stages of F.I.R.E

Like any savings and investment strategy, achieving F.I.R.E doesn’t occur overnight. Instead, the process is broken into different stages. In fact, by breaking the process down, progress can be assessed more efficiently and effectively.

Stage one of F.I.R.E is what is known as solvency. This essentially means reaching a stage where you can pay for yourself using bad debt such as credit cards. The next stage, stage two, is stability. Stability is achieved when you don’t have debt.

Moving on, stage three revolves around agency, meaning that you have enough money in savings to be more selective about working arrangements. Stage four is labeled security as during this phase, any investment incomes actually cover the cost of basic needs.

From there, the strategy moves on to stage four, which is commonly referred to as independence. This basically means that any investment income can now cover costs related to standards of living.

The final stage is abundance. Aptly named, abundance is achieved when income levels start to fund additional goals. These goals might relate to putting a pool in your home’s backyard or jetting around the world for 12 months at a time.

How To Embrace the F.I.R.E Method?

While the F.I.R.E method undoubtedly produces rewards, a strict process needs to be followed. This process begins with tracking and then cutting expenses. By taking control of your expenses, you can see when and where you are spending money.

Having this overview makes it easier to determine where you can make cost cutting changes. This is important because in order to adhere to the F.I.R.E method, it’s recommended that individuals save at least 50% of their income.

Additionally, it’s advised that individuals adhering to this method only make small yearly withdrawals from savings accounts. These withdrawals should be limited to 3 to 4%, a practice that also helps you build an emergency fund should circumstances change.

Another step in adhering to the F.I.R.E method is to work out your ‘financial independence’ number. This number is typically 25 times your expenses. For an accurate result, make sure to include expenses pertaining to the household, meals, healthcare, and transport.

A key component of the F.I.R.E method is investment. This is because investment strategies make sure that your money is working hard for you, rather than sitting passively in an account.

When approaching investment options, it's an opportunity to invest a high portion of your income into creating a diversified portfolio. By investing in an array of high-interest accounts, stocks or mutual funds you increase your chance of making money.

The Allure Of Retirement

Retirement is often the main goal for many workers. At the end of the day, all anyone wants is the time and money needed to enjoy life and all it has to offer. By making some sacrifices along the way, the F.I.R.E method ensures that this pinnacle can be reached earlier than ever before.

Rather than waiting for the traditional retirement age to come around, individuals can take their future into their own hands. While the idea of waving goodbye to large portions of your income in order to invest and save might sound hard, the end result definitely justifies the means. This is because the F.I.R.E method affords you the time and money to live life.