Woohoo!! The FIRE movement is here – we are saved!! Or are we? Its amazing to me that in the 10 years I have been on this journey, how clear it is that FIRE means different things to different people. Its very definition is as personal as defining what success is.
How can that be? Most FIRE bloggers will tell you, including me, that the key to early retirement is to 1) control your spending and 2) invest the rest. Seems straightforward.
Before we get to the fun part, lets chat a little bit about controling spending.
A single person with no kids living at home has a very different budget and list of needs than a married couple with two kids a dog and mortgage. Needs for one will be different than the needs of the other.
That does not mean, “no more fun“. on the contrary it means fun within reason. When my kids ask me if we can do or buy something, I say “sure we can do that… but how important is that to you? What are you willing to give up to get x?”
[bctt tweet=”We can afford anything… but our pie is only so big… its a matter of how we want to slice it up.” username=”PieLadyFI”]
So get yourself a budget and start slicing up your pie to the sizes that will make you most happy.
Oh and if that pie is not big enough… go for a raise, promotion with a raise or start a side hustle. The options are endless. Its a matter of determining what are your needs vs wants.
What is Your Number?
Suze Orman touts that to have a secure retirement we all need $5MIL! Is she right? If your lifestyle includes multiple high end homes and luxurious vacations or you have very high medical bills, then maybe she is right.
Or maybe you are a single person without kids (which are super expensive) and only need $2k a month to live on. To generate that, one would need about $500,000 invested in mutual funds that generate between 6-8% ROI (using the 4% withdrawal rate rule of thumb).
Then again, maybe you are the kind of person that needs to work and really enjoys it (like me). In that case, early retirement would include a paycheck income stream that may even cover the monthly expenses, allowing investments to continue to grow.
Or maybe you take a part time job just for the health insurance benefits and cover the rest with the passive income streams built up (All FIRE disciples know to never put all your faith in one income but rather to build up 3-5 passive income streams to ward off risk).
There are all kinds of combinations of what financial independence looks like and its all very personal. What is important is that it matches your definition of financial independence.
A word about investments
Like I said, FIRE people never have all their income coming from one basket. Just like defining your version of financial independence, determining the right investments is also very personal. We need to factor in interests, risk tolerance and timeline to name jut a few factors. There are literally dozens of ways to generate income streams.
Here are just a few popular ones…
Investing here could be in the form of rental properties or flipping homes. Maybe you dont have an interest in spending your nights or weekends looking at potential investments but have an interest in diversifying your portfolio with real estate… in that case REITs (Real Estate Investment Trusts) might be your best bet. REITs invest in Commercial and Residential types of properties. There are lots of options and some even pay dividends… They give you the best of both worlds.
The coveted Index Fund (aka FU Money)
Most FIRE people love, love, love the index fund. When I go to FIRE conferences it invariably comes up in conversation. Yet, I cant believe how many people I talk to (non-FIRE people) that have no idea what that is. Yikes!!! Index funds are a great way to instantly diversify in the stock market. Market goes down? You only lose when you sell… so if you don't need that money for a minimum of 5 years then you can ride out most any recession.
401k, IRA, Roth IRA
These are 2 ways to strategically stretch your dollars by investing mighty pre-tax dollars into 401k and/or IRA accounts. Remember with 401k and IRA's all withdrawals are subject to income tax… whatever bracket you fall into that year… so plan ahead and plan accordingly.
Roth IRAs leverage post-tax dollars but all interest is tax free. Betweem these two types of accounts (taxed and nontaxed at time of withdrawal) you should be able to control what tax bracket you will fall into. Be sure to leverage cash funds and other accounts as needed.
Health Savings Account
The well known TRIPLE THREAT to not paying taxes. Funded with pre-tax dollars. Withdrawals are not taxed. AND any interest accrued is not taxed at time of withdrawal. Ok you caught me, this is not an income stream BUT you can fund it every year and use it for large medical expenses. Just saying. 🙂
Should I buy a home?
J. Money just recently wrote a series of posts as he struggled with the same question. Homeownership is not for everyone.
If you decide to be a renter then the benefits are no responsibility for the home you live in beyond respecting someone else's property. As long as you invest what you don't pay in a mortgage, property taxes, insurance, maintenance and upkeep, etc… and invest the savings then I say why not.
Homeownership has its priledges
If you decide to be a homeowner then you own your house and are free to make any changes you like. Bonus, as you pay off the mortgage, equity is gained in the house, which can be leveraged.
The best of both worlds? Maybe.
I read one story about a guy who bought a house (fixer upper) and lived in it for 2 consecutive years while fixing it up. After two years he rented out the house and bought a sencond house… . Again lived in it for 2 consecutive years while fixing it up. He repeated the process for 5 houses or 10 years.
The tax code says that if you live in a house for 2 consecutive years within a 10 year period, (i.e. proof that it was your primary residence) you can sell said house and not pay tax on the profit (sale price – purchase price).
But I digress. My point is, financial independence can be achieved a multitude of ways. It really is that easy. Its just a matter of which way do you want to go about it?
The Psychology of Money
If its so easy, why are 60% of Americans ONE paycheck away from homelessness?
Think about that for a moment. People that I have worked with to get their own financial house in order send me names of people that they want me to call and help. The thing is I (as a general policy) never call people and ask them if they want my help. Awkward! But I don't have a problem with folks reaching out to me.
At the end of the day, just like a weight loss diet, most people think that I will put them on a money diet and all the fun they have today will be prohibited – until the money budget fun ban has been lifted.
This could not be further from the truth. Well, its not the whole truth anyway. I have had a budget for 10 years and have more freedom today than I have ever had without one. I spend with confidence and know that my money goes to the things that are truly important… that is what a budget can do for you too.
There will be setbacks and failures. Each time I went through one was an opportunity to learn to do better. Stuff happens … to everyone. What separates the winners from everyone else is how you take failure. Are you going to get up and try again or lay there?
There is no better time that today to start your journey. Literally.