When it comes to financial independence, it is as much about the journey as it is about the destination. Considering the path you will take with your money throughout the years is vital to achieving financial independence. And taking this journey seriously can even allow you to retire earlier than you expected, as the FIRE movement proposes.
If you wish to create a plan that will not only give you financial independence, but also allow you to retire early in life, this article might help you. It will give you tips on how to start your journey towards financial independence. On top of that, you will learn about the Financial Independence, Retire Early movement, and how you can apply it to your financial life.
This might sound a lot like retiring, and it kind of is. Retirement is a great example of financial independence. However, there is one crucial difference between traditional retirement and financial independence: timing.
Benefits from Social Security can begin as early as age 62 or as late as age 70. Many people in the United States believe that the standard retirement age is between these two figures. But many people who wish to be financially independent would prefer to retire before reaching the age of 62. In fact, there is an entire movement centered on individuals who want to retire early – known as FIRE (Financial Independence, Retire Early).
The long-term objective of financial independence is to accumulate enough money that you will never have to work a full-time job again if you don't want to. In addition, it proposes that your wealth keeps you from stressing about major expenses. These expenses can go from house payments to your children’s education costs.
FIRE (Financial Independence, Retire Early) is a movement committed to an extreme savings and investment program that allows participants to retire considerably earlier than standard budgets and retirement plans would enable.
Practitioners of the FIRE movement may be able to quit their jobs and live entirely off modest withdrawals from their portfolios decades before the traditional retirement age of 65. They manage to do so by allocating up to 70% of their income to savings. Just keep in mind that FIRE isn't a foolproof strategy. Excessively high savings rates at the price of present quality of life should be addressed.
FIRE was inspired by Vicki Robin and Joe Dominguez's 1992 best-selling book Your Money or Your Life. Its fundamental idea was to compare expenses and time spent at work to hours of your life. Every expenditure is weighed against the amount of time spent at work in order to pay for it.
Once FIRE devotees retire at a young age, they make tiny withdrawals from their assets, generally about 3% to 4% yearly, to pay for their living costs. Depending on the amount of savings and the desired lifestyle, this can demand a high level of attention to costs. On top of that, the upkeep and reorganization of investments are vital.
There are various levels of intensity within the FIRE movement that determine the lifestyle that followers are able and willing to follow:
Fat FIRE: a person who lives a more conventional lifestyle and saves more for retirement than the average investor.
Lean FIRE: refers to a rigorous commitment to minimalist living and severe savings, demanding a far more restricted way of life.
Barista FIRE: People who have given up their typical 9-to-5 job but still work part-time to pay current expenditures that might otherwise deplete their retirement savings
Coast FIRE: This also applies to supporters who work part-time, but these devotees have enough money saved to cover their retirement and current living costs.
It is important to highlight that major variations on the stock market, a dip in interest rates, or a large economic crisis can affect the planned financial independence.
If you are a devoted FIRE movement follower, or if you just want to organize yourself to achieve financial independence before the age of 65, there are a few tips that can make your journey more effective. Financial independence takes a great deal of planning, diligence, discipline, and, in many cases, sacrifice. Here are some guidelines that might assist you in your journey towards financial independence:
To achieve financial independence, it might be smarter to start by setting financial priorities instead of financial goals. And yes, these are very different things. Setting financial goals is very simple, and many people do just that. For example, you can establish a goal of collecting $1 million in savings and assets before the age of 40 to become financially independent. However, unless you make achieving this goal your top priority, there's a high possibility you won't succeed.
Creating a documented strategy for reaching your financial objectives is an important part of prioritizing your financial goals. This will provide you with something to return to on a regular basis to ensure you stay on track. Every 12 to 18 months, evaluate your financial plan to track your success and make any required modifications.
You might already have heard that what matters is not how much money you make, but rather how much money you keep. Many people make loads of money, but they also spend a fortune. If they can’t hold and manage their spending, they'll never be able to attain true financial independence.
Managing your budget entails spending less than you earn. This may appear straightforward, yet many people struggle with it. Creating a good budget that predicts expenses lower than your income is the first step, then following the budget is the second. The bottom line is that you should spend far less than you earn in order to attain financial independence. Then, you should save and invest the surplus for long-term growth.
Investing for financial independence demands discipline and a long-term vision. This is easier said than done. You will eventually be confronted with immediate financial demands and crises, such as unforeseen medical costs or market fluctuations. Whenever these obstacles happen, it can become challenging to keep your discipline when investing.
Automating deposits to your investments can be a great way to keep following your financial independence plan. Picking investments that are less liquid is another way to keep from spending money supposed for your future.
High consumer debt is one of the most significant roadblocks to financial independence. Try to wait until you have the money to buy something, instead of using credit cards that will leave you in debt. Ultimately, it all comes down to knowing your priorities and the implications of your purchases. It's OK if you need a bigger house or if you want to get rid of your old automobile. But understand what each purchase means in terms of your wider financial independence aspirations.
It's always nice to save 15% on your shampoo or receive a few dollars off your groceries. But managing your large, recurrent costs offer the best chances for saving and pushing the needle toward your financial independence ambition. This includes things like housing, car payments, and insurance.
Trying to figure out how to better manage and minimize those expenditures will get you a lot closer to your financial independence goal than clipping a coupon for coffee beans. It's better to concentrate your efforts on the larger expenses in your monthly budget. This will make a greater impact on the timeframe for reaching financial independence.
You are being disciplined, making sacrifices, and saving a good amount of money to achieve your financial independence. Since you are doing all that, it would be a shame to put your money in a savings account that charges high maintenance fees and has low-interest rates.
Being smart with your investments can help you achieve your financial independence faster. For starters, have a diversified portfolio. Then, make smart decisions. Instead of a costly and low-yielding savings account, pick a high-yielding savings account. Online savings accounts, such as Ally, can offer interest rates up to 5%. Crypto-based savings accounts, such as Outlet Finance, are also a great option that can give you up to 9% APY. Explore all your options and choose the investments that will help you achieve financial independence faster instead of making you work for longer to pay for them.