You are probably asking to yourself so how does one achieve FIRE? The basic math behind FIRE is simple at its essence
“Spend less than you earn and invest the difference in low-fee investments like index funds”
Rule #1 (Finding your WHY)
I suggest being as specific as possible in figuring out your “why.”
The first step is to identify what you want to do in 5, 10, 20 years. Where you want to be geographically? What you want to do? What you want your family to look like? Once you know that, you can mold your money to match what you want. WHY do you want financially independent? I would write it down and if you have a family or a partner that you live with bring them in the conversation and get them on board.
Rule #2 (Tracking Expenses)
The second rule? Tracking your expenses. Check out your bank statements, credit card statements, online budgets, and make note of what exactly you’re spending money on and whether or not you NEED to make those purchases. As one of my golden spending rules before buying anything.
- The first one is always asking do I really “Need” this?
- Is there another way to get this same thing or satisfaction for less?
- Take the amount of times you purchase the item and find out the yearly cost and divide that into your yearly discretionary income to find out the percentage of it you spend on this item.
Most of us are shocked to realize how much we actually spend. After you’ve started tracking figure out how much your lifestyle costs per year. Look for what you might be able to cut out to shrink that number and then start working on increasing your savings rate. Those are the hardest parts of the journey and the rest is just a matter of waiting for the money to add up and compound.
The key is to spend more mindfully. Spending more mindfully means taking stock of the expenses that actually matter to you. Once you’ve conquered your spending, it’s time to look at your net income and compare. As I have noted before this will also be after all of your debts have been paid off and now all we are focusing on is saving and investing.
There are 10 core pillars of FIRE which I will explain in detail over the next couple of weeks
- Lowering your housing costs
- Driving used cars
- Cutting the cable
- Lowering your tax liability by maxing out your tax-deferred vehicles such as your 401k, 457, 403b, IRA, HSA, etc.
- Using cheaper cell phone service
- Use credit card rewards and smart financial habits to help fund your travel
- Cut your grocery bills
- Increase your income and consider adding multiple income streams
- Low-cost index fund investments
- The 4% rule: The ultimate equation behind achieving financial independence. (The 4% rule involves how much you can safely withdraw from your nest egg each year in order to make sure you still have enough money down the road.)
Like any other financial goal the math is easy and everything else requires resourcefulness, diligence, and patience. You can start your goal at any point and then move forward. How quickly you’ll reach your goal will depend on those three basic variables: income, spending, and time.