How to Gain the Financial Independence Necessary to Retire Early
December 30, 2019
Every day, the FIRE movement gains traction as it works to financially emancipate citizens from their day jobs, side hustles, and overtime work. For those unfamiliar, FIRE is an acronym that can be broken up into two parts: financial independence and retire early. For some, gaining financial independence allows them to retire early. Today, we talk about this movement in the context of those thinking about expediting their retirement and how to use ideas of the fire movement to achieve this goal.
What is financial independence?
Put shortly, financial independence is a person’s ability to cover their living expenses whether or not they have an income. This means your savings, assets, and investments are enough that you can live off of them without needing a consistent stream of income to cover payments. For this reason, financial independence means working is optional.
How do I begin?
Achieving financial independence begins with taking stock of your present financial situation. Begin by answering these queries:
- What is your net worth? — Your net worth can be a great temperature check on your financial health. What is the value of all your assets considering your debt? Are you at a positive or negative net worth? You’ll want to know where you’re starting to get a better picture of how to get to where you’d like to be.
- How much do you spend monthly? Weekly? Yearly? — Consider auditing your spending on a daily, weekly, monthly, and yearly basis. If you aren’t already, track your spending and use this information to inform predictions of how much money you’ll need regularly to become financially independent.
- What do you intend to do once you reach FI? — As mentioned previously, a keystone of financial independence is the liberty to decide whether you want to work or not. If you decide to work simply because you enjoy the work that you do, that’s fantastic, too! This is something to consider simply because it could increase the amount of income and could play into your planning for the money you spend. With this in mind, will you be including this extra money when you conceptualize your spending?
- What do you hope to do in retirement? — Consider whether or not your retirement hobbies, travel, etc will cost money. Be sure to include this in your planning.
- What year do you hope to retire? — “Early retirement” looks different to everyone. Retirement age can be a personal choice and so too is your “early” retirement age. How much earlier do you hope to retire? Deciding to retire in your 30s would look a lot different financially than in your 50s. The biggest difference is how much you’d need to have saved to cover your day to day expenses considering the period in time you hope to have working be a choice rather than a necessity.
By answering these questions, you’ll be able to start thinking about the goals you’d like to set in order to reach FIRE. One challenge many face with this venture is reconciling with cutting their spending in order to reach fire sooner. Some times, it’s a matter of making more money, and some times it’s a matter of simply spending less. The decision is up to you and is, often, based on what is most feasible.
However you decide to reach financial independence, it’s always a good idea to start as early as you can. Careful planning and budgeting will help illuminate what is most feasible in terms of reaching financial independence—and doing this will help you get one step closer to the retirement of your dreams.
Looking to get serious about your financial security?
Take a look at our tips on emergency funding basics. Don’t let unforeseeable expenses keep you from being financially prepared.
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