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Why Every Young Adult Should Start Pursuing FIRE

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Gen Z FIRE
This article was written by Early 20s Money

FIRE? What is That?

No, it is not an actual fire, and it certainly isn’t something to run away from! FIRE stands for:

Financial Independence — Retire Early

The first part is “financial independence“, or FI for short. FI (by definition) is based on numbers: you either have FI or you don’t. It is when your annual passive income is GREATER than your annual living expenses. If you achieve FI, you no longer need active income (ie. paid employment). Passive income is income that requires little effort to maintain over time after the initial trouble of setting it up. It earns you money even while you sleep! Some examples of passive income are:

  • Stocks that pay dividends
  • Bonds that pay interest
  • Owning rental properties
  • Receiving royalties
  • Owning a business that runs without you (ie. Creating a paid phone app available for download counts as passive. Your landscaping company in which you mow the lawns is NOT passive!)

The second part, “retire early“, is fairly self explanatory. Part of pursuing FIRE is based on being able to retire early. It is possible to achieve FI and not be retired, but it isn’t sustainable to be retired without achieving FI. How early is up to the person: to some an early retirement is at 50, to others it would be as young as 30! If you live to the age of 80, but retired at 30, then that gives you 50 years of retirement. Sounds unbelievable, right?

FIRE is more realistic than you think

Gen Z Money
If this is what comes to mind when you think of early retirement, and it requires a crap ton of money. However, that doesn’t NEED to be the case!

You must be thinking that you need to be CRAZY rich to achieve FIRE. However, this is not necessarily the case! FIRE (specifically the FI) part can be as realistic as you make it. It depends on so many things; the cost of your preferred lifestyle, the cost of living in your city/town, the cost of your family situation (caring for kids, aging parents), etc.

Lets say you and your family/future family would be able to live off a household income of, say $100k per year. Don’t go and tell me “wow that is too much / too little”, it is just a nice easy number to work with. You would need to have enough assets to generate $100k per year more or less, every single year. This would mean you would NEVER have to work again! You would have a consistent and modest household income without working full time.

Obviously there are many things to consider down the road such as inflation (ie. burgers used to cost 10 cents, now they cost a few dollars). I won’t lie, it is more complicated than I make it sound here. The good news is that there is an awesome online community of people pursuing FIRE and SO many resources to help you along the way. As a young adult in your early 20’s you also have one amazing benefit on your side.. TIME!  Who knows what you could accomplish down the road? As the Chinese proverb says:

“The best time to plant a tree was 20 years ago. The second best time is now.”

I think the problem is that when people think of early retirement, they picture tanning on the deck of a yacht in the Mediterranean. FIRE does not have to mean living a billionaire lifestyle… it is in fact much easier to achieve if you have more modest goals! Receiving a full time income without working full time frees you up to literally do whatever you’d like: travel to new places, volunteer for a cause you care about, take a hobby more seriously, spend time with friends and family, etc. The possibilities are endless!

How YOU can Start Pursuing FIRE Today!

If you are sold on the idea of pursuing FIRE, or at least more interested in it, there are some key things you can do to start specifically in your early 20’s. I’ll be honest, I think right now you are still too young to come up with “key numbers” such as the amount of passive income you’d like to live on, how much money you need saved, and so on. Your income is likely to grow significantly as you develop your career, and perhaps your lifestyle with it. It might benefit to wait a couple years to identify how much exactly you want to live off of in early retirement.  For the meantime, you can do these key things to put you on the right track for later on!

Form the Right Habits to Increase your Savings Rate

Gen Z Money
A nice little infographic I made a while back that clearly demonstrates how powerful your savings rate can be.

When you are a young adult who is trying to build wealth from scratch, the single most important thing is your savings rate. It is so important that I even wrote an article on why your savings rate is more important than ROI (with the nice infographic above to match)! Savings rate is simply what percentage of your income you are able to save. While you’ll find that article focuses on savings rate at a young age, having a high savings rate in general is crucial to FIRE. The higher your savings rate, the faster you accumulate wealth, and therefore the faster you achieve FIRE!

There are two ways to increase your savings rate. You can:

  1. Increase your income while keeping expenses the same. This means if you get a raise at work, you don’t increase your lifestyle to match!
  2. Reduce your expenses. This can be done by spending wisely, and avoiding these 5 ways young adults waste money over time.

Work on Reducing and Avoiding Debt

For those pursuing FIRE, debt is no bueno. Obviously debt is really difficult to avoid, if you pursued a higher education you most likely have student debt right now. Working on reducing this burden should be a big priority. If you are paying debt of any kind aggressively, your savings rate is likely to take a hit… that is okay! You will definitely thank yourself later.

There are some types of debt that totally are avoidable though. Credit card debt is 100% preventable and avoidable, and accumulating this type of debt should be the very last resort. There are likely better options if you need to borrow money! Another big example is car loans, they are also very avoidable. Instead of putting a $10000 down payment on a $35000 car, perhaps consider just buying a $10000 car!

Start Building Passive Income Streams

This is where you start turning your money into even more money! The least capital intensive (least expensive) way is to start investing your money. Stocks or ETF’s tend to provide great returns on average, much more than your savings account. Dividend stocks are amazing for this; you can re-invest the dividends now, and then withdraw the dividend income when you finally achieve FIRE. This is way more practical in your early 20’s than buying a rental property for example.

Summing it Up

I hope you learned a thing or two about FIRE and why you should pursue it. As I mentioned in the article, you are literally in the best position to start! You have so much time on your hands, and you never will have this much time again. So, what are you waiting for? Get out there, save some money, pay that debt, and make more money with the money you already have! By building these habits now, you will certainly reach a point one day where you will never stress or worry about money again in your life!

How to Calculate Retirement Costs for Anything

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How to calculate retirement costs

Not long ago I was looking over my expenses when I had a financial epiphany of sorts.  It was about the true retirement costs of my spending habits.

I recently wrote a post about how I’m going broke from eating out.  In that post I tried to quantify just how expensive my +$6,000 per year dining out habit really is, and this is what I came up with:  not only do I spend over $6,000 per year eating out, but maintaining that habit in retirement means that I need to boost retirement accounts by $150,000.

How to Calculate Retirement Costs for Anything

I don’t know how long you would need to work just to save $150,000, but saving that kind of dough would take me multiple years.  I don’t enjoy eating out so much that I’m willing to add a few additional YEARS to my working career just so that I can keep spending $6,000 per year in mediocre restaurants.

That is the dark side of the Personal Finance Multiplier Effect in action.

Running the Numbers

Figuring out how $6,000 per year requires $150,000 in investments savings is pretty simple.  There are two easy ways to calculate the true cost of something:

  1. Annual expense divided by .04
    • In my case I spend about six grand per year eating out, so that would be $6,000 / .04 = $150,0000.   Or,
  2. Annual expense multiplied by 25
    • Again, using my restaurant bill as the example, $6,000 x 25 = $150,000.

Using the Rule of 25 and the 4% Rule, this cheat sheet will help you figure out exactly how much money you’ll need to have saved and invested for your retirement:

How To Calculate Retirement Costs

It’s Mathemagical

Some of you might recognize that I’m using math from the 4% rule to come up with these numbers.

For those of you not familiar, the 4% rule is a way of estimating how much money you’ll need to save and invest for retirement so that you can maintain your lifestyle without running out of money.  To calculate that number, simply take your total annual expenses (housing, transportation, fast food, cable, cell phone, clothing, entertainment, etc.) and multiply that number by 25.

The number you get is how much you’ll need to save and invest.  In a nutshell, here’s how it works:   The stock market grows at an average rate of 7% per year while inflation grows at an average rate of 3% per year.

From that 7% investment growth you’ll be able to withdraw 4% to meet your annual expenses and leave 3% behind to keep up with inflation, meaning your nest egg should remain healthy throughout your retirement.  Take a look at this example:

How To Calculate Retirement Costs

Retirement Cost Examples

Based on math from the 4% Rule, also known as the Safe Withdrawal Rate, you will need to have $100,000 invested to support any habit or hobby that costs you $4,000 per year (or $333 per month, or $11 per day).

Here are some typical expenses people have that will significantly increase the amount of money they’ll need need to have saved for retirement.

How To Calculate Retirement Costs

Save More or Spend Less

These are some pretty general examples, but you can see that if you’ve got a hobby or expense that costs you $300 per month, then you’ll need to have $90,000 in your retirement account just to support that one single hobby.

When it comes to saving for retirement, there are two levers that you you can pull:

  1. Earn more money
  2. Cut expenses

The less you need to get by, the less you need to save up to retire.

Think Differently

I can here the boo birds already: “I’m not going cut all of my expenses only to live a life of boredom and/or destitution!”  My reply: Good for your – neither am I.

My goal for this post is to help you frame up future purchases a little bit differently so that you can be aware of the true costs of an item or service.  Even small purchases can quickly add up, requiring you to add years to your working career just so you can support your lifestyle of choice.

Or, You can retire earlier than you think.  You just need to start thinking differently.

how to calculate retirement costs

Run The Numbers

Before making your next purchase, or signing for that next loan, or joining that next subscription service take 10 seconds to figure out how much this new item will cost you per year, multiply that number by 25, and ask yourself if you’re willing to save that much money just to support whatever it is you’re buying.

And on the flip side, take a look at your expenses.  Don’t be like me and assume you know how much you’re spending.  Take 5 minutes to sign up for a free Personal Capital account today so that you can begin to track every penny you spend, cut unnecessary expenses from your budget, and cut unnecessary working years from your life.

Every $350 per month that you can eliminate from your budget reduces your ‘magic retirement number’ by $100,000.

How long will it take you to save $100,000?

How long would it take you to cut $350 from your budget?

Chime in!

Were you already aware of the true cost of some of your hobbies and habits? Was this a surprise to you?

GET PAID WELL FOR YOUR HARD WORK

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Get Paid Well For Your Hard Work

I’ve said before on this blog that my parents didn’t teach me about money.  I’ve told you that my mom and dad taught me how to be an honest, hardworking person, but that I didn’t learn much about money from them.  Well I was wrong and would officially like to take back that comment.

Blogging about my finances has forced me to think about them more than I otherwise would have, and the more I think about money, the more I refer back to things I’d learned from my folks.  So, obviously I was wrong.  They taught me a great deal about money – I just wasn’t aware of it at the time.

Today’s post is an example of that.  On one very ordinary afternoon while hanging drywall with my dad, he casually said something that might be the most valuable money lesson I’ve ever learned.

[Read more…] about GET PAID WELL FOR YOUR HARD WORK

Six Ways to Stay Patient and Motivated While Paying Down Debt

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Debt Sucks
This Camp FIRE Contributor article was written by Good Nelly

Debt Sucks

Paying down debt is one of the major criteria to reach financial independence. You can’t repay your entire debt overnight. You have to be patient. There will be times when your progress will be slow and you’ll have to stay motivated until you’ve repaid that last cent.

Debt sucks. Here are six ways you can stay patient and motivated while paying down debt.

Get Annoyed With Paying Interest

It is easy to make the minimum payments and continue doing it for 5 or 10 years. Next time you do so, have a look at your bill. Take note of how much you’re paying for the interest.  You’ll be shocked at the amount.

The faster you can repay your debts, the less you’ll pay in interest.  So don’t give up!  Saving money by paying off your debt fast is a good way to remain motivated as you pay off debt.

Remind Yourself of Your Goal Every Morning

Staying focused will help you maintain patience. Make it your primary focus to overcome debt problems.

Every day ask yourself and imagine “How my life will be after I repay the debt?”

By paying down debt, you’ll move one step forward to achieve financial independence.

Include Other Challenges Too

I don’t agree with the fact that you have to focus only on paying down debt, as you may lose patience.

My friend, Lisa, overcame this by focusing on de-cluttering her household along with reducing her debt amount.

Look for ways to enjoy life while paying off debt! For example, try focusing on eating healthy foods. You will see that by eating healthy food prepared at home, you’ll also save money.

To realize the joy of paying down debt, incorporate other challenges and improve your life from every aspect.

Check Your Progress Every Week

Create a vision board and write down your goals. Keep them right in front of your eyes and assess every weekend how far you’ve come in achieving your goals.

Every day, look at your goals and remind yourself about your target. You’ll see that you can achieve them much faster.

People who write down debt repayment goals are much more likely to be successful in paying them back.

If your goal is to repay a total of $50,000 in 3 years, then you’d have to repay $16,666 annually, and $1,388 every month. Every week, you need to apply $347 towards your debt.

That could become difficult, so remain patient and focus on your goals and track your progress.  If you do so, you’ll remain on the right track.

Try Out The Debt Snowball Method to Repay Bills

If you’re worried about how to stick to paying off debt, you can try out debt snowball method.  Here’s how to do it.

  • Start by listing your debts from the lowest outstanding balance to the highest one.
  • Focus your efforts on the debt with the smallest payoff balance and and pay a little extra on it as often as you can.
  • Make only minimum payments on all of your other debts.
  • Once you pay off at debt, apply all of your newly freed up money to the next smallest balance.
  • Keep doing this until all of your debts have been paid off.

The debt snowball method helps you stay motivated because once you repay a debt, the amount of money you now have available to pay on the next debt gets bigger.  This allows you to pay the next debt off faster.

You don’t have to struggle to remain patient since you’ll see your debts getting wiped out one by one!

Give Yourself a Treat

You deserve a treat when you achieve a goal, however small it might be. Do not wait for the end result to reward yourself.

When you celebrate your success, it gives you the motivation to repay the last debt account.

When you’re able to repay 50% of your debt amount, do a thing which you like. Make sure not to splurge too much. For example, plan on eating out, but set an amount beyond which you won’t spend. The idea is to cheat your budget and splurge a little!

Do not take this opportunity to plan a lavish vacation or buy a car and put yourself more into debt.

If at any point in time, you feel that your debt is unmanageable and you’re losing patience, you can enroll for debt counseling in Debt Consolidation Care or in any other non-profit organizations.

The counselors can guide you and offer solutions to combat debt problems and manage your financial life in a better way.

Celebrate your journey towards paying off debt and taking a step forward to becoming financially independent. You deserve an applause!

RECESSION PROOFING YOUR FINANCIAL PLAN TO ENSURE YOUR FIRE SURVIVES THE STORM

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Recession Proof Financial Plan

This article was written by Michael Dinich.

The new hot item on the internet today is trying to become financially independent.  It seems like I see one or two new blogs every day that promise their readers the path to financial independence and there is no shortage of web forums that are doing the same.

The appeal to reach FIRE is understandable. Those who want it, want to leave their employer at a young age and enjoy the good life while they are young enough and healthy enough to do so. Some dream of, and succeed in, traveling and spending their time on the beach drinking mai tais, and for the Lean FIRE crew, concurrently having some successful side gigs that pay the bills and allow for the freedom to pursue fun projects.

The problem is, of course, what happens if things go wrong? Are you really ready for FIRE?  For example, what if there is a recession or stock market downturn? What do the FIRE and Lean FIRE have in store for them at that time? What has the FIRE crew done to create a recession proof financial plan and lifestyle?

CREATE A RECESSION PROOF FINANCIAL PLAN

Now, the purpose of today’s post is not to convince you that there is some impending storm just offshore. The reality is, whether today, tomorrow, next week, next year, or one decade from now may bring a great recession (either one like we have seen, or even one bigger than what we’ve previously witnessed) or significant market downturn.

It happens. These downturns occur frequently enough that it’s prudent to prepare for them. By having a financial preparedness plan, you know that you can sleep comfortably at night and enjoy early retirement without worrying about being forced into making emotionally-charged decisions due to the economy.

Having worked in finance for nearly 20 years, I have learned that it’s not the recession or market downturn that necessarily does the damage, it’s the events surrounding the downturn. If we prepare for these events, we can minimize any catastrophic risk to the FIRE portfolio.

Let’s talk about what can go wrong.

RECESSION PROOF YOUR FAMILY

There’s nothing that can damage well laid out plans like the urgent need and care of family members. The result of what occurs after an emergency tends to correlate with the market. Money is one of the biggest issues that divide families and couples, and often leads to divorce.

These financial problems are near impossible to be dealt with in bad times, and the issues are compounded during a market downturn or recession, as companies cut hours, jobs and more. Even layoffs can cause issues for young families who are counting on every penny of their income.

It’s during this period that experts and not-so-experts are posting online, in blogs and in the news, that it’s a great opportunity to boost your portfolio! Stocks are on sale! It’s only temporary! The loss is on paper only!

But yet… it’s not.

It’s a real loss if there’s an emergency, and the only funds available are your investments, as they will never have the chance to recover. It’s not a popular choice in the best of times: lose your savings to save your child, but in good times, your savings would be enough to keep your family safe.  In a downturn, your savings may only be worth half of what they were. Are you prepared for that?

Talk Money To Me

Many children, including adult children, don’t turn to their parents to discuss finances. Many families are not comfortable discussing their true financial lives. That’s fine. Offer help in other ways:

  • Encourage them to meet with a fee-based financial advisor
  • Offer them a book or two that gives sound advice or resonated with you at one time, and share what you did to set goals ahead of your path to FIRE
  • Let your adult child know that you are on a path to FIRE and while you have provided for your own financial security they will be on their own

FIRE is a wonderful goal but leaving the workforce too soon doesn’t allow for much financial security, and we all need to take financial responsibility for ourselves. Easier said than done, I realize.

Are your children getting married? Have you discussed a prenuptial agreement? Did you know there’s post-nuptial agreements if they (or you) are already married? If it’s uncomfortable to discuss, tell your partner that the financial advisor recommended having one. It’s also prudent to consider with blended families as well.

Do your adult children have proper estate planning documents in place? Are conservator and guardianship documents in place for your grandchildren? Do they have an attorney (representative) who can make decisions about personal care (health) and property (non-health)?  Encourage them to do this. It would make a great gift: the gift of security.

RECESSION PROOF YOUR SIDE GIG

A side gig can be an excellent opportunity for someone on the path to reaching FIRE. Unfortunately, every small business owner or entrepreneur has a target on their back. It doesn’t matter if your blog is just turning a few dollars a month, if your rental property barely turned a profit, or that your small greenhouse is just that: small. Once you leave the labor force for the “good life”, perceptions about you change.

You see this when people win the lottery. All of a sudden, you are deemed to be wealthy, and it opens the door for others to prey on you. The stories are horrid and imaginative: from little Timmy’s wheelchair to the dog that fell down the well. (Facetiously speaking, of course.) Further, you could become the target of frivolous law suits because “you can afford it.”

When unemployment spikes, there tends to be an increase in these frivolous lawsuits and scams. Don’t let yourself be bullied into a corner. Spend a few moments and a few dollars by speaking to your CPAs, your attorneys and your accountants about how to protect your assets. Ensure you have adequate insurance on your home, your automobile, your profession (if applicable), and most of all, in liability.

Find out how to creditor proof your assets. There are a multitude of ways to insure and protect, keep in mind umbrella insurance is not designed to protect you in your side hustle: it will not cover and protect any issue. (Lyft and Uber drivers, take note) You need to discuss this with an insurance professional to ensure you are adequately insured and advised.

RECESSION PROOF YOUR PORTFOLIO

1952 called and it wants its investment advice back. Most financial planning that’s been done over the last several decades uses variations of Harry Markowitz modern portfolio theory. An academic debate about portfolio design and risk mitigation is well beyond the scope of this guest post.

However, I will touch on the subject briefly; the prevailing wisdom over the last several years has been to purchase a portfolio of various non-correlated assets to minimize risk. The simplest and most famous of such portfolios is probably an S&P 500 and bond blend, the cruel little joke about diversification is that often it drags down returns too much when times are good, and does not provide enough stability and safety when times are bad.

As an example, lets consider a $100,000 portfolio where$50,000 is invested in the S&P, and $50,000 is invested in bonds. Assuming the S&P goes up 10%, how did the bonds do for the portfolio? The bonds may only earn a few percent, meaning you lost out on decent returns on half of the portfolio.

Now let’s consider the S&P 500 falls 25%. The equities would lose $12,500.  Will the bonds appreciate enough in value during a market downturn to offset $12,500 of loss: the answer is sadly, no.

It’s time to reconsider bonds in a portfolio. Luckily, the financial services industry has evolved since 1952. We now have financial vehicles that serve as effective replacements to bonds in a portfolio.

Growth and Stability

There are many low-cost fixed indexed annuities, Modified Endowment Contracts (MECs), and variable annuities that provide bond-like stability to a portfolio while having a much greater upside potential then bonds. Whenever I speak about these vehicles, someone is always quick to point out that these vehicles will not get 100% of the market gain and that’s true.

We’re not trying to get 100% of the gains of the market. With an annuity we’re trying to beat the yield on bonds. As a bonds alternative, an asset that can make seven when the market does 10 could still be a viable option to a bond that offers no such upside potential.

Now I’m not going to try and convince you annuities or MECs are the greatest thing ever. A lot of the products offerings are lousy and there’s been some bad practices with some agents. However, an asset category that provides upside potential, downside risk management, and guaranteed income that exceeds what may be possible using the 4% rule is worth considering.

Recession Proof Financial Plan

CREATE A RECESSION PROOF FINANCIAL PLAN

Taking a few easy steps can ensure your FIRE survives the storms.

  • Prepare you family by getting them on their own path to FIRE and point them in the direction of knowledgeable professionals to ensure they have financial disaster plan.
  • Protect your assets and business by getting adequate insurance, and consult with professions about asset protection. Rethink your financial planning.
  • Conventional portfolio design was not intended to provide retirement income for someone retiring in their 40’s. Young retires need to more growth that what can be provided by bonds, and annuities may provide a bond alternative.

Chime in!

Are you prepared for the next recession or have you ever been an investor during a recession?  Do you have a recession proof financial plan?