These days the internet is all abuzz over people dreaming of FIRE-ing their job. Just what are they talking about? FIRE stands for Financially Independent Retire Early. This clever acronym simply means that you have enough resources to no longer need your job. Some people develop a nest egg large enough to live off the interest. Some people own rental property or start a business of their own. Some people already love what they do so they continue despite the need to accrue more wealth. There are numerous methods but the basic explanation is that you are quite simply self sufficient without having to work for a paycheck.
How big of a nest egg is big enough? 25x? 30x?
Can you cut your expenses? Let’s say that your car payment is $400 a month. If you need your nest egg to make the car payment then you need appx 25x that amount so the interest can cover it. The math looks like this: $400 x 12 = $4800 annually. Now multiply that times 25 and you need a nest egg of $120,000 in order to keep that car payment. I don’t know about you but I’d much rather quit working sooner than to always have that car payment. Sure, your current car won’t last forever but I bet you can figure out a way to drive a cheaper car than $400/mo. What about cell phone, cable, cigarettes, coffee? What can you cut or reduce the cost of to shortcut your path to being financially independent?
Keep in mind that depending on your actual goal you may be able to get by with less than 25x or you may need more. If you literally plan to lay on the beach for the rest of your days, I would highly recommend a higher rate just in case the market takes a turn for the worse in the early years of living off your nest egg. I’ve read some blog posts that indicate the first 10 years are the most important. You survive those and your nest egg will have grown enough to handle anything the market has done in it’s past. That’s why I personally plan to work a part time job or resell items at the local flea market during those critical years. The less I pull from the nest egg, the more it has a chance to grow. Now, if the market returns about the 7% average during those years, I’ll be set and if it doesn’t then I may need to continue bringing in a small income to help out. Either way I’ll be able to only work when I want to doing what I want to and not have the normal worries of the working class.
If FIRE sounds like a new concept to you it’s really not. Over the years people have practiced minimalism, living within their means, etc. All of these things are related. Save as much as you can while you can so you don’t have to worry later. My Grandpa used to say “make hay while the sun shines”. That’s exactly what he did. He always lived on less than he made, paid cash for everything and had a side hustle too. We of course didn’t call it that back then, he was a farmer. He worked “every hour they’ll let me” for the railroad and then ran a 20 acre farm out of his home at night and on weekends. He did just that until he took ill at 55 years old. He soon recovered but never returned to work. He realized that he had amassed enough wealth to live out his days. He was in his 70s when he did pass and he never did worry about money for all those years. He did woodworking as a hobby and made some money on the side selling some of his work. Pretty interesting that he had this “new” concept of FIRE all figured out on his own.
My entire life going back as far as I can remember I’ve wanted to own a record store. No I don’t look or act anything like Leo (played by Tommy Chong) from That 70’s Show. I just simply love music and I can’t play a note. As a child in the 1980’s I remember the feeling of walking into that world of music and I wanted to live there. Sadly by the time that I was part of the working class those stores were pretty much gone. Not completely gone of course but the industry was well on it’s way to putting music into files instead of shiny black discs. As the resurgence of vinyl continues to grow my dream has become more a part of my daily life. To this day I frequent various shops throughout the year and even stopped at the one in Myrtle Beach (Kilgore Trouts) while on vacation this summer. Each of these stops make me yearn for the day when I retire from corporate America and can spend my days in the store.
Then while listening to a podcast on my daily commute this morning I came across an idea. That idea turned into an epiphany. The podcast mentioned that some people decide to retire early aka FIRE (Financially Independent Retire Early) and others decide to transition slowly. Their logic was that if you work even a few hours a week then you don’t need as large of a nest egg.
So follow this logic: Let’s say that you need to earn $40,000 a year in retirement. The 25x rule says that you need a nest egg of 1 Million dollars in order to live off of 4% of it. If you instead decide to work part time for say $10 an hour and 20 hours per week you can quit sooner. With that 20 hours per week you are earning $10,400 of new income annually and then only need $29,600 from your investments. $29,600 x 25 = $740,000 effectively reducing your required nest egg by $260k (26%) or several years of working at the job you want to leave.
That’s when the epiphany hit me. Why do I have to own the record store? Why take on all of that responsibility, taxes, etc? I could simply work at one doing what I love and get out of corporate America much sooner. Maybe I’ll buy the store when that owner retires and maybe I’ll learn that working in one isn’t as heavenly as I dream. Either way, I can make it happen much sooner. My two other passions are photography and helping animals so maybe I can take pictures of records or shelter animals. Or maybe volunteer at a shelter and start a small photography business. All of these things I simply don’t have time for while working at my current job. The great thing is that I can do those 3 things in almost any town so I can move to a better climate or closer to family.
Can you think of a way to shortcut your path to FIRE? I’d love to hear from you.
Why Saving Matters
I don’t know who said the phase “It’s not what you earn, it’s what you keep” first but they deserve a literary medal.
What does the phrase mean exactly?
If you currently make $50k a year and are in debt like the average consumer, what would happen if your income doubled? Would you suddenly payoff all your debt and become a powerful investor? Or would you spend twice what you do now and end up in an even worse position? Most of us would probably be ashamed to admit it but the latter is probably more likely. I don’t know why the human brain works this way but if you are comfortable with a $300/mo car payment, then $350 isn’t so bad. Fast forward 10-20 years and you are smiling while paying $600/mo. The same goes for everything you buy thus the cost of living people often mention.
Don’t Be Like Everyone Else
What’s the average person do when they get a raise? Spend it all? Maybe bump up their car payment to get into a nicer car?
If you are saving 10-20% of your income today and you received a big raise what would you do? Perhaps save 10-20% of it? I challenge you to save at least 50% of that raise since you didn’t have it yesterday. Continue with this method over your working career and you will end up with a very high saving percentage while never missing anything.
What Else Does “Keeping” Apply To?
It’s what you keep also applies to taxes. The more that you can save on taxes then the more you keep and the more you can invest. Don’t forget to treat that refund check like a bonus and save a large portion of it as well.
Can you think of other ways in which you can keep more of what you earn?