The FIRE (financial independence, retire early) movement has gained increased exposure over the years as more and more people become drawn to the idea of having enough money to grant them the freedom to spend their time as they wish, without being at the mercy of a paycheck and employer.
But the movement also has a reputation for being overwhelming and even intimidating since many followers often take extreme measures to save 50% to 70% of their income each year to reach that goal. By comparison, financial professionals typically recommend that you save 15% of your income each year in order to retire by the traditional age of 65.
While every person certainly has their own unique journey to retiring early, there are, however, a few common pointers that can apply to any FIRE beginner. Below, Select received four tips from Michael Powers, a CFP and founder of Manuka Financial, which specializes in helping people retire early.
1. Make sure you’ve covered your financial bases first
One of the most important steps to take — even if you aren’t actually pursuing FIRE — is to make sure you have some of the financial basics down: Have an emergency fund in place to help you cover surprise expenses (medical bills, car or home repair, etc.) without taking on additional debt. You should have any high-interest credit card debt paid off, along with having the ability to continue making monthly payments toward any loan debt like student loans or a mortgage.
Those who are pursuing FIRE may find that they’ll need to save and invest as much as 70% of their annual income to reach their goals. According to Powers, taking a look at your financial picture as a whole can help you get clear on where you are right now and where you need to be.
“Try to learn more and strengthen your own financial position,” he says. “Make sure you have an emergency fund and you’re able to keep paying down high-interest debt. And, look at your assets, liabilities, income and expenses so you can really focus on improving your financial plan holistically.”
If you haven’t already been keeping track of your expenses or have no idea what your financial starting point looks like, using a budgeting app like Mint or You Need A Budget (YNAB) can help you fill in some of those gaps. They connect to your bank accounts, credit cards, loans and investment accounts, automatically tracking every dollar so you know exactly where your money goes.
Once you have an exact idea of how much money you bring in, how much gets spent and how much gets saved or invested, you can start to think about areas where it might be best to reduce spending — or to increase your income — to start making FIRE a reality.
2. Determine your why
“One of the biggest things you should focus on in the earlier stage of your FIRE journey is determining your why,” Powers explains. “Why do you want to achieve early retirement? Is it for flexibility? Is it to have more time with family? Is it to travel? Is it do something completely different outside of what you’re currently doing?”
Sure, thinking about your goals can be an impactful way to stay motivated throughout your journey, but these goals may actually change the FIRE strategies you implement. Powers also asserts that when thinking about why you want to achieve FIRE, you may find that the goals you want to achieve can actually become a reality sooner than you thought possible — without having to spend many, many years saving every dollar and feeling like you’re making a lot of upfront sacrifices.
“As an example, if you’re pursuing FIRE because you want to have flexibility while your kids are still young, maybe you’re able to make some adjustments in your budget to be able to work part-time now,” Powers says. “Or, maybe you can transition into a less demanding job that doesn’t require you to work long hours. Determine if there are other actions you can take in the shorter term that can get you to that same objective.”
3. Identify your needs vs. wants
The FIRE movement has traditionally been associated with an extremely low spending rate and an aggressive saving and investing rate. For many people, this is much easier said than done since there are many gray areas of life where it’s not so easy to say “no” to spending money for the sake of saving. This realization can leave many people feeling exhausted and even isolated.
But Powers asserts that over the years, the movement has made room for a bit more balance — and balance can still lead to achieving your goals.
“I think the people I’ve seen who have been successful at this are people who are able to easily identify needs versus wants so they can focus their spending around the things that drive happiness and joy in their own lives,” Powers explains.
In his book, I Will Teach You To Be Rich, Ramit Sethi explains this concept of conscious spending, which asserts that it is possible to spend as much as you’d like on the things that make you happy as long as you mercilessly cut spending on the things you don’t care about. Doing this will allow you to create your version of a “rich life.” This same idea applies here.
Saying no to everything — including the things that bring you happiness — may set you up to feel miserable during your FIRE journey, and in extreme instances, it may even cause you to lose close connections with people you love. But creating space to allow for spending on the things that drive happiness, whether it’s coffee from your favorite shop or that annual family vacation, you maintain your joy and stay motivated to retire early.
4. Figure out where you should be saving and investing your money
There are many different savings and investment vehicles you can use to put away money for retirement, and they all have different tax implications, contribution limits and distribution rules. This is where a financial planner can definitely lend a hand to make sure you’re saving and growing your money in the right places.
For example, some people prefer being hands-on with their investments, setting up brokerage accounts at the big-name firms like Fidelity or Charles Schwab. Those who rather be more hands-off can have a robo-advisor like Wealthfront or Betterment set up their portfolio for them, based on their risk tolerance, time horizon and investing goals. A financial planner can help guide you to the best approach and strategy. For many newbies, that may mean starting off by putting your money in index funds, for example. Index investing allows you to put money in the largest U.S. companies with low fees and minimal risk.
When it comes to specific tax-advantaged retirement funds, a financial planner can help you make a decision based on when it is best for you to foot a tax bill: right now, based on your current income, or in the future, based on your future income. This can help you decide between a Roth or traditional IRA.
A financial planner can also help you with other aspects of your financial life that play a part in your FIRE journey, such as how much house you can afford, how to pay your kid’s college education or how to fund your own advanced degrees while staying on track for FIRE.
To start, you might consider checking to see if your employer offers free financial planning services as a company benefit. If this is not an option for you, you can use a tool like Zoe Financial to get matched to a financial planner that specializes in the areas you’re most concerned about.
Bottom line
While there are many obvious appealing elements of the FIRE journey, it can also be an overwhelming and intimidating movement. Covering your financial bases and getting clear on your goals are two important steps to take when beginning to pursue this journey for yourself.
From there, it’ll be easier to set up your spending in a way where you create balance instead of just restriction. And, along the way, leaning on a professional can help you plan out the best method for saving and growing your money.
