Working Toward Financial Independence

For many Americans, the pandemic was a wake-up call to start getting serious about saving. But members of the Financial Independence/Retire Early (FIRE) movement have advocated the benefits of supercharged savings for years. Whether you’re planning for an earlier-than-expected retirement or just trying to get back your savings to pre-pandemic levels, basic tenets of the FIRE movement may provide some helpful guidance on how to achieve your goals.

The central tenet of FIRE is to save more than you spend. And FIRE advocates take this seriously. A typical FIRE recommendation is to save half of your net income and invest it in quality stocks and bonds. That’s a big leap from the standard 15% of your paycheck.

Once you start saving money, the next step toward financial independence is to invest. Thanks to inflation, money sitting in your savings account is going to be worth less next year than it is today. People who are striving for financial independence know this and they know that the only way to be financially free is to have their money earn more through investing.

Investing your money creates a snowball effect. Start with a small snowball of money and let it pick up more “snow” as it goes. This, in effect, is the power of compounding. Small consistent actions add up over time.

How much do you need to be financially independent?

The answer will vary by individual. However, if you are a proponent of FIRE, a widely accepted formula, based on market trends, says you can withdraw 4% of your nest egg every year and, on average over time, retain your principal. It assumes your cash is invested in a diversified portfolio. To put it another way, your nest egg needs to be about 25 times your annual expenses. So, if you can live on $40,000 a year, that means you’ll need $1 million in savings to reach financial independence.

Practical FIRE lessons

Putting such a rigorous savings program into practice can be tricky. Not everyone feels they can spare half their income to invest in stocks and bonds. And for low-income workers, a FIRE program may not be an option.

Yet there are some lessons from the movement that everyone can benefit from:

  • Plan to save at least six months’ worth of living expenses for an emergency fund.
  • Create a budget. Compare your expenses to net income, separating fixed expenses from discretionary purchases. Start making cuts to unnecessary spending to help reach your savings goals.
  • Max out your qualified retirement contributions.
  • Pay down all credit card debt.
  • Consider downsizing your home, refinancing at a lower rate or if renting, negotiating better lease terms.

The second half of the FIRE acronym – “retire early” – is optional. Many FIRE followers continue to work until a traditional retirement age. The choice gives them more leverage with employers. Whatever your dream, start saving for your financial independence now. Learn more about your retirement options, schedule a complimentary discovery call with one of our advisors today.

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