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
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
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:
- 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!
- 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!
Early 20’s Money is a personal finance blog for young adults in their early 20’s. It is the ultimate resource for all young people out there looking to improve their financial situation. Topics covered include ways to save money, ways to spend more wisely, how to invest, as well as all the other things they should’ve taught you in high school!