My wife hates the GPS.
For her, it’s both a challenge and a crutch. It’s a crutch in the sense that many people (like me) need it the second they step out of the house…
Need to check the mail? Let’s turn on Google Maps to get to the end of the driveway.
And people like me often put way too much faith in the GPS’ ability to always be right.
I’ll admit that I’ve driven down a one-way street, in the wrong direction, on more than one occasion, because that’s what the GPS told me to do. I’d probably drive straight into a lake if that’s what it said.
Source: The Office (US)
And for my wife, it’s also a challenge. You know that time estimate that the GPS gives you? Based on the current traffic conditions, it should take you this long to get to your destination?
For her, she can’t help but try to beat it. The whole time she’s driving, she’s thinking about how many minutes she could shave off the initial estimate.
Are you like that?
Retirement the game
Retirement is a lot like following a GPS.
You put in your destination — how much you’ll need to retire and when — and you’re told that you need to follow these directions over the next 40 years and you’ll get there.
Put a little in bonds. A little in property.
Give it a little gas and put some in stocks.
Follow the instructions and you’ll reach your goal.
But most financial advisors are going to base your retirement plans around what’s generally accepted. Retirement age is 65. Annual expenditures around $50,000 per person. More or less.
What if I told you that you could beat those numbers? That you could ‘speed’ during your working years and arrive at retirement five, 10, 20, even 25 years early?
It’s completely doable.
In fact, thousands of people are doing it around the world right now.
And to get there, they’re taking a shortcut — it’s called the FIRE method.
FIRE is a strategy for shaping your finances in a way that allows you to be independent and potentially retire early.
It’s part of a movement that follows a very specific, practical recipe for getting a hold of your finances and supercharging your journey to retirement.
‘”[FIRE] ultimately means that you can shape your life without taking money into consideration,” said Tanja Hester, a recent FIRE graduate and founder of the website Our Next Life.
‘Most of us have to consider our finances in nearly every decision we make, or maybe even make decisions solely based on money. But [with FIRE], we get the freedom not to be bossed around by what we earn or what we have saved.’
To put it practically, it means sorting out your finances and habits now…so that you don’t have to worry about any of it later.
And I like it because it puts the power of progress in the hands of the individual. Unlike other early-retirement plans, FIRE doesn’t require you to already have hefty savings or a high-paying job. Nor does it require you to take secondary or tertiary jobs to supplement your income.
Instead it focuses on refining your spending habits today into a lean, mean money-saving machine.
And your goal is quite concrete — build your wealth to 25 times your annual expenses. That’s what the movement defines as ‘independent’.
So, if you spend $50,000 per year, you’d need $1.25 million in the bank to be considered ‘independent’.
And according to the FIRE doctrine, it’s at that point that you gain the upper hand in your life, your job, and your decisions.
In other words, retiring early doesn’t always mean not working. Rather it means that you have sufficient reserves to take risks, have negotiating power and choose to do what you’d like to do.
Let’s say you’re 43 years old. You’re working in an accounting firm, and you’ve just built 25 times expenditures in savings. You now have the financial power to take a risk and ask for more vacation days, higher pay, better benefits.
Worst-case scenario? They say no and fire you.
No problem. You’ve got money in the bank. You could go for years without needing to earn another penny.
And if you’re financially savvy, you could live off the returns or dividends that your portfolio generates…meaning you’d never need to work another day in your life if you don’t want to.
(If your portfolio has a dividend yield of just 5%, that would generate $62,500 every year off a $1.25 million dollar portfolio. And 5% is conservative.)
But maybe your bosses say yes. Maybe they give you your vacation days…and your raise. The power is yours.
Recipe for success
I’m starting to sound a little ‘self-helpy’. So let’s get practical. What would you need to do to achieve success under the FIRE method?
- Time — Time is simply the difference between your income and expenses. Make a lot of money? Spend little? Your time to retirement will be significantly reduced.
- Expenses — This is trimming the fat off your monthly budget. Cut out a flat white today, retire two months earlier. With the power of compounding, this level of cause-and-effect is realistic.
- Income — This is simply the other side of the expense coin. If you don’t want to cut out that flat white, know that you’ll need additional income to reach your goal.
Most folks who do the FIRE method heavily focus on cutting their expenses.
They see it as a challenge…as speeding to beat the time estimate. And, frankly, some of these FIRE disciples are Lamborghinis in the world of cutting expenses.
The New Zealand Herald reports:
‘London accountant Barney Whiter, a married father-of-three from Farnham, Surrey, walked away from work at 43 by saving half his annual salary after tax.
‘He then invested all of it in low-risk stock market funds and shares, bringing in up to 12 per cent return every year for 19 years while also paying down his mortgage.
‘A big house, eating out, expensive holidays, new cars, cable TV and non-essential shopping were all banned so the Whiter family could stick to their £24,000-a-year ($48,000) budget for all spending.’
If you have a family of five, could you live under $50,000 a year?
It’s certainly possible. Mr Whiter proved it. But it raises the question — are you up to the task?
Is retiring decades earlier worth cutting out that flat white today? Or buying used over new?
It’s all part of carefully decided trade-offs…and if you’re capable, it could mean living the life you’ve always dreamed of much sooner than you thought.
Editor, Money Morning New Zealand
PS: A bite-sized experiment you could try is the 5:2 diet. Try spending money only two days a week. The other five, you can’t spend a penny. If you find this doable, then FIRE could be a good option for you!
PPS: Let me know what you think about FIRE. If you’ve tried it or know someone who has, I’d love to hear about it — [email protected]