FIRE stands for Financial Independence and Retire Early. But wait! Before you click away from reading the ravings of a madman (Retire early?! That’s impossible!) hear me out! The FI and the RE are separate goals. Being financially independent means you’ve built up enough money to buy your family’s time for good, but that also means you get to decide how to spend it. Some choose to retire earlier (RE) than the norm, some choose to pursue a passion project or take a risk, and some don’t change a thing because they’re already milking life for all it’s worth.
Financial independence is when your family has saved up and invested (hopefully in Index Funds) 25 years of expenses calculated as if you were not working — let’s call that our “stable expenses.” We’re targeting 25 years of expenses because that translates to the ability to withdraw 4% (a safe withdrawal rate) each year from our investments as they grow over time.
Example: If you’ve figured out that your yearly expenses are $40,000 your target amount to have invested is $1,000,000 (40,000 * 25 = 1,000,000).
We need to know what our stable expenses are going to be. To figure out if and how this number might be different from what you’re currently spending, you should think about how your and your family’s lives might change once you’re financially independent. Housing, transportation, or food costs may change and it makes sense to take the opportunity to discuss what your family values. You may not know how much (or little) you’re currently spending in each area. If that’s the case, then you’ll want to start tracking your expenses so that you have a better understanding of how much and where you’re spending money.
Once we get an idea of how much we’re spending (and in what categories) and we know what that may look like in the future, we want to look next at where we could be saving money. We can do this by either planning ahead based on what we now know from tracking our tendencies, or by making intentional choices about how to spend slightly smarter.
Once we’ve done all the hard work of mapping out our spending, made some changes, and started to save, we want to put our money to work for us. The best places to do that are in Tax Advantaged accounts (like an IRA or 401k) with low cost/fee Index Funds. Don’t worry- we’ll break down the why and how of this in later posts.
That’s the whole story in a nutshell. Hopefully we can drill down together in our future conversations and help get you and your family on the way to your financial future sooner!
We hope this post was interesting or helpful in some way. We want to clarify that we’re not financial planners or experts so take everything you read here with a grain of kosher salt (that is to say a large one).
Also, just in case you’re not already tracking your expenses and net worth like you and I both know you probably should be, don’t worry- Here is a link to sign up for Personal Capital, that’s what we use and trust for our family. I love the clean displays, great calculators, planning tools, and the ability to easily categorize your transactions. You can even make your own categories- take that Mint! Plus, if you sign up with the link above, we’ll both get $20 in Amazon credit, so it’s a win-win-win!