FIRE stands for Financial Independence Retire Early and is a movement that capitalizes on setting aside as much money as possible to be independent. Independent of work or income.
Starting with FIRE
The beginning is often not the hardest. The difficulty comes in the fact that you have to consistently stick with it for years. This requires a lot of focus and determination. We at Investing Guides would know!
People who live according to the FIRE principle aim to invest at least 50% of their income every year. You can live to pay off your mortgage asap and enjoy every day as if it may be your last. Or, you could choose to invest as much as you can with the aim of being able to stop working earlier.
There is no right way to live, other than to listen to yourself. But, if you want FIRE, you will have to follow several investing principles.
When will I be financially independent?
There is no set point in time when someone is financially independent. It depends on the wishes you have and the possibility to put money aside.
For example, if you live humble and minimalistic, you may need a much lower amount to reach FIRE status. On the other extreme, if you develop a luxurious lifestyle and hold yourself to high standards, you would need a different amount.
Below, however, we explain the principle so you may apply it to your personal situation.
Example calculation Financial Independence Retire Early
As a rule of thumb, you quickly need 15 times an annual salary to be truly financially independent (FIRE). Below is an example that explains this.
Suppose your income is 5.000 USD net (after-tax) per year. You set aside 50% of this (2.500 USD) every year. Then after 20 years, you would have 15 times your annual salary worth 75.000 USD.
Over the last 100 years, investing yielded an average return of 7%, which we will use here as an expected return. If 1% is deducted from this for taxes and 2% for inflation, then 4% remains. This is realistic in year-on-year change.
Based on the above calculation, you would receive 4% of 75.000 USD, which equates to 3.000 USD. With this, you will soon have more than you currently spend in a year and you can absorb disappointing years.
Not sure where to go next? Check out further terms to continue your investing journey!