How to get started on FIRE

How to get started on FIRE – The Journey begins

Getting started on the journey to Financial Independence Retire Early. Is relatively easy as it is all about lifestyle and goal settings.

Once you have set your goal and laid out the plan on how to get to that goal. You have to stick to the plan. In this article, I have tried to lay out a simple yet effective plan on how to get started on your journey towards FIRE.

To set your expectations on how to reach financial independence, it is NOT a sprint but a marathon. Sticking to the plan is easier said than done and going to take a long time. There is no get rich quick schemes. But if you do it right you can shortcut your way to financial independence and eventually retiring early.

1. When am I Financial Independence?

Before you can become financial independence you need to figure out how much it takes to become financial independence. In the FIRE community we use a specific rule called the 4% rule to determine how much we need of a nest egg to live off it. 

What is the 4% rule? 

The 4% rule is a super simple rule coming out of a study called Trinity Study. They tried to determine if you want to live off your investments for at least 30 years what would be a safe withdrawal percentage. Therefore, they tracked the performance of portfolios with different withdrawal percentages. It turned out that you can safely withdraw 4% in most market conditions. 

How to use the 4% rule?

If we want to be able to live off our portfolio and we are only allowed to withdraw 4% to avoid depleting the portfolio. We can use the 4% rule to calculate how much we need. To do this we calculate our annual expense times 25. This is the amount we need in our portfolio to be able to withdraw 4 % can live of it. 

Annual Expenses times 25

An example would be: If my monthly is 4000 USD per month I would multiple it by 12 to get the annual expense of 48,000 USD. If i take the annual expense of 48,000 USD multiple by 25 I will would need 1,200,000 USD in my portfolio so i can safely withdraw 4000 USD each month.

As mentioned in the beginning the journey towards Financial Independence does not happen over night. It takes years of dedication to the plan. However, you will be surprised how fast you can save up over an million USD.  

2. Why spend less to become financial Independent

It would be lying to ourselves if saying a million in an investment portfolio isn’t a huge amount of money. The FIRE community is very well known for its extreme saving habits. The reason people in the FIRE community try to optimize their spending is that it is one of the controllable in their life, and it has a direct impact on how much you can save up each month and how much you need to become financially independent.

Let me show you how big of an impact spending has on your required portfolio size:

Adding it all up

If you can permanently cut off 100$ each month you can take off 1,200 * 25 = 30,000 USD of your retirement saving goal.

Above are all the reasons why the FIRE community is trying extremely to lower their spending habits. If you want to retire earlier than everyone else, you have to adjust what you can control, which is your spending’s. If you need more ideas on how to save more, continue reading

3. You should save the most efficient way

Now you have become a saving ninja and have started to pile up cash from all the savings. The next FIRE community does is make money work for them through investing.

 The FIRE community is generally invest in the least risky way of investing by going through broad market index funds. Popular examples of index ETF Funds can be found in this article, where i’m also explaining what is an EFT. 

When reading on the various FIRE forums you rarely see them speculate into specific stocks, however, they are hunting dividends, therefore, if you are looking for single companies to invest in. They select solid companies which has paid out a dividend for a long consistent period such as Realty Income or Coca Cola. The reason dividend investing is popular among FIRE community is because the portfolio has to replace a monthly paid salary. One of the common payout frequencies from ETFs are quarterly, and therefore you have to spread out the payment during the months. People supplement with dividend paying companies so they get a payout in every month, rather than every quarter. If you are new to investing continue read here

4. Reach Financial Independence by earning more

The last part of the controllables and a way to get to Financial Independence as early as possible is to increase your income. Most people only has a single source of income, however, for the FIRE community they try to have a lot more income channels than their take home pay from their job.

If you have the capacity, and really want to take off years of investing you can consider getting a secondary income such as from a hobby, renting out your home or investing in real estate. 

Check below ideas for another income source! For other ideas continue read here

Invest in Real Estate

Alternative to stock and index fund investing, is purchase real estate and rent out those for a monthly income source

Continue on the journey until you reach your FIRE number. 

Above might sound extreme and how can you possibly save up that much money and cut down on all the spending while still living a good life?

Personally, the FIRE journey for me have taught me so much about my spending habits and I have learned to live for less, and able to live a even more satisfying life with less stuff and spending compared to before discovering FIRE. But I’m not as extreme as other people in the FIRE community, and i suggest you find your own path and start your own journey towards Financial Independence.