Saving doesn’t create Financial Freedom
Saving alone is no longer enough to achieve financial freedom in today’s world, which is why strategies like investing in real estate have become essential. However, this realization opened up my mind to the idea that the traditional path of going to college, getting a job, working for 40 years, and retiring at 65 is not the only way to live life.
A few years ago, I attended a personal finance conference and discovered the FIRE Movement. This discovery was like a paradigm shift for me, just like when I was a child. For the first time, I realized that the financial freedom story my mom had told me could become a reality, with some strategic adjustments. I learned that there was a clear path to achieving financial independence and that some people have already retired in their 20s through the FIRE Movement.
In this article, we will explore what the FIRE Movement is and its origins, discuss whether it aligns with your goals, explain the different types of FIRE, provide steps to achieving financial independence, show how to expedite the journey through investing in real estate syndications, and much more.
What is FIRE?
To begin with, let’s cover the basics. The term FIRE stands for Financial Independence Retire Early. Unlike the traditional approach of working for over 40 years and then retiring in your 60s, the FIRE Movement presents an achievable path to attaining financial freedom, where you accumulate sufficient wealth to sustain your lifestyle and living expenses without relying on work for income.
Once you have enough passive income to support your chosen way of life, you achieve financial freedom, and working becomes optional rather than mandatory.
On a side note, many who have achieved FIRE continue to work on their terms, leading to an alternative definition of FIRE: Financial Independence Recreational Employment.
Find my FIRE number
How long does it take to achieve FIRE?
The initial step in embarking on the FIRE Movement toward financial independence and early retirement is to assess your current situation and define your goals. This can be done by determining your FIRE number, which is the total value of your savings and invested assets needed to generate returns or passive income that will cover all your expenses.
Calculate Your FIRE Number using the Rule of 25 To figure out your FIRE number, start by evaluating your current expenses. Analyze your expenses over the past year and make sure they are similar to your expected expenses in the upcoming year.
To estimate your FIRE number, multiply your annual expenses by 25.
FIRE Number = Annual Expenses x 25
For instance, if your annual expenses are $60,000, your FIRE number would be $1.5 million.
FIRE Number = $60,000 x 25 = $1,500,000
History of the term FIRE:
The term FIRE originated from the book Your Money or Your Life, published in 1992 by Joe Dominguez and Vicki Robin, which presented the concept of financial independence and encouraged readers to align their lifestyle with their values. The book highlighted the idea of trading time for money and introduced the concept of passive income to achieve financial freedom.
However, it wasn’t until after the Great Recession that the FIRE Movement gained momentum as people became disillusioned with the traditional path to retirement. The story of Mr. Money Mustache, who retired at 30 by saving and investing intentionally, and other blogs, books, and stories contributed to the growth of the movement.
What does FIRE get you?
One of the main benefits of achieving financial independence and retiring early is gaining back your time, allowing you to spend it with your family, pursue hobbies, and travel. It also grants you location independence, freeing you from being tied to a specific location due to work requirements.
Financial independence also provides security, ensuring that you have enough savings to sustain your lifestyle indefinitely, even in the face of unexpected events such as job loss or inflation. Pursuing financial independence also encourages you to be intentional with your spending, helping you discover what truly brings you fulfillment and joy.
Finally, achieving financial independence provides you with the freedom to pursue your passions and start new ventures without the fear of losing your primary source of income. Overall, the FIRE Movement offers an alternative approach to living life intentionally and designing a meaningful life based on your values and goals.
An example of Achieving FIRE early:
Imagine you and your spouse have a combined income of $175,000 per year, but your annual expenses are $60,000. To achieve Financial Independence and Retire Early (FIRE) based on the rule of 25,you’ll need $1.5 million.
Initially, you could only save $50,000 per year, which would take you 30 years to reach your FIRE number. However, after identifying areas where you can cut back expenses, you realize you can save $75,000 per year, reducing your FIRE journey to 20 years. If you were to live on your spouse’s income and save your entire $100,000 income, you could achieve FIRE in 15 years.
Retirement accounts, like Roth IRAs and 401(k)s, can help accelerate your wealth creation through compound interest and tax benefits. Investing in real estate, specifically through syndication, could also be a way to boost your wealth creation through strong returns, compounding, and tax benefits.
By combining strategies such as lowering expenses, maximizing savings, and leveraging tax-advantaged accounts and real estate investments, you can dramatically reduce the time it takes to achieve FIRE.
Strategies to Achieve FIRE:
Achieving FIRE is a flexible and adaptable journey, and with discipline and creativity, you can accelerate your progress towards financial freedom faster than you might expect.
Fire Strategy #1: Reduce Expenses
Begin by analyzing your expenses over the last three months and identifying which ones are necessary and which ones can be eliminated. Even reducing your expenses by just 10% annually can have a significant impact on your timeline to achieve FIRE.
Fire Strategy #2: Increase Income
Another way to accelerate your progress is by increasing your income, such as asking for a raise or taking on a side hustle. Consider starting an Etsy store, doing web design work on weekends, or working part-time at a local business. Essentially any means of cash flow will increase your income, providing a greater opportunity to achieve FIRE.
Investing wisely can also add momentum to your FIRE plan. However, it’s essential to note that not all investments are equal. While some come with higher potential returns but also higher risk, others offer more conservative returns with lower risk. Finding an investment with relatively low risk and high returns can significantly boost your path to FIRE.
Remember, investing knowledge is often the most significant risk. To reduce your risk, invest time in learning about specific investment strategies, understanding how they work, and connecting with key players in that investment world. By doing so, you will fully comprehend your investment and have more control over your financial future.
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