Retiring early, hitting the road to travel to your favorite places, and trying cuisines at different places, enjoying a carefree life where you don’t have to worry about work. A wish that everyone wants to fulfill, but only a few realize.
If you are thinking along these lines and want to retire early in life to fulfill all your wishes and tick off all the boxes on your bucket list, let me tell you, the road to achieving financial independence early is difficult but definitely possible.
In this blog, we will be learning about the FIRE movement- Financial Independence, Retire Early, a process that allows you to create enough wealth early in life to become financially independent.
What is Financial Independence?
Financial independence is a state where you have enough wealth to take care of your expenses and maintain your lifestyle without having to work or depend on employment. Most people target their retirement age to become financially independent, but you can become financially independent early in life if you practice strict financial discipline and aggressive investing.
Why does Financial Independence Matter?
Whether you want to retire early or not, becoming financially independent early should be your priority. It pays a rich dividend in terms of increased quality of life and greater mental peace. Over the past decade, jobs have evolved and so have the companies.
In good times, when the economy is doing well, companies are in expansion mode and hire aggressively to fill the gap. But, during uncertain times or when the economy performs poorly, companies tend to resort to huge layoffs to save costs. If you don’t plan for such events and save enough for the rainy day, it can cause havoc in your life.
Becoming financially free helps you overcome such situations and plan your future moves accordingly. Also, it helps you to take risks in life, which otherwise would not have been possible if you are living paycheck-to-paycheck life. It gives you the liberty to choose how to spend your time.
Achieving Financial Independence- FIRE
At first, becoming financially independent is not an overnight process. It requires aggressive savings for a long time, reducing expenses, and being financially disciplined to stay on the course.
Let us see how the concept of FIRE works.
The goal of FIRE is to save and invest aggressively over the period of 10 to 20 years to accumulate enough wealth to take care of all your expenses for the rest of life. It requires you to save and invest up to 50 to 75% of your income, drastically reducing expenses to the bare minimum, and looking for ways to increase income.
How to Calculate Your FIRE Number?
You must figure out two things correctly -your annual expenses and how much you need to save to survive the post-retirement phase of life to become financially independent and retire in your 30s or 40s. So, here come the two thumb rules of FIRE.
Rule of 25
The rule of 25 states that you must save at least 25 times your current annual expenses for retirement. For instance, if you have monthly expenses of Rs 50,000, which translates to Rs 6 lakh annually, you must have at least Rs 1.5 crore by the time you decide to retire.
But, given the high inflation and uncertainty at times, you should aim for a number greater than 25x your annual expenses to be in a safe position.
The second rule is about the withdrawal rate. How much should you withdraw from the retirement corpus post-retirement? As per the 4% rule, you should stick to the 4% withdrawal rate to ensure your retirement surplus outlasts your retirement phase. However, it is better to have a lower withdrawal rate ranging between 2.5 to 3% to be safe. It’s all about being prudent and reducing the risk of running out of money.
How much should you save?
Experts suggest investing at least 50% of your income to reach your goal, however, your goal to achieve financial freedom depends on the time left for your retirement. For instance, if you want to become financially independent within 10 years or less, your savings rate should be around 70% of your income.
You can use a retirement calculator to accurately calculate your retirement corpus and ideal saving rate.
The second question is -where you should invest your money. You should have a well-diversified portfolio of equity stocks and other capital assets to be able to outperform inflation by a large margin and create wealth. You should also consider investing in tax-saving investing options to enjoy the benefits of tax-free growth and compounding.
Types of FIRE Movement
There are five types of FIRE Movement that you can explore:
- Lean FI: It is about creating enough corpus to meet all your essential expenses like housing, food, and utilities. You must aim for Lean FI to create a basic financial safety net for your family and you.
- Regular FI: It can be related to traditional retirement where one saves enough to meet the expenses associated with current lifestyle.
- Fat FI: It is about having enough investment where you aim to have a higher standard of living post-retirement than your current lifestyle.
- Barista FI: It is a phrase used when you don’t have enough savings to be called financially independent but generate enough passive income to meet daily expenses and need a modest job to make up the difference.
- Costa FI: It is referred to as a point when you have saved enough money and then rely on compounding to reach your target corpus, without the need to invest anymore.
Becoming financially independent should be a goal of every individual as it offers greater financial flexibility and mental peace. The journey won’t be easy and can be emotionally draining as it requires you to forego your desires, cravings, and survive at a bare minimum, but is worth it over the long term.
So, what type of FIRE do you want to achieve?