FIRE: Financial Independence, Retire Early
Updated: Jan 15
Ever dream of quitting the gruelling nine-to-five and living by your own rules?
Do you want to drop the commute and live by your own schedule and from wherever you fancy?
The FIRE movement might be of interest
It might seem like a pipe dream, but a growing community of people (known as the FIRE movement) are committed to achieving what has to be the ultimate financial goal: "financial independence".
Achieving financial independence
So, what does achieving financial independence actually look like?
Beyond winning the lottery there are two main routes to financial independence – passive income and extreme saving.
The reality is that financial independence is more likely to be achieved if you combine the two.
It stands to reason that saving a significant portion of your income, and then investing those savings into assets which yield a strong rate of return, you will generate income from which you can start to pay your living expenses.
You will have achieved “financial independence” once you start to generate sufficient passive income to pay your living expenses, without supplementing it with income from employment.
It sounds simple enough, but how do you reach this glorious tipping point?
Proponents of the FIRE movement say that by saving up to 70% of your income, you can retire early and live off small withdrawals from the accumulated funds.
Let’s check the sums
Millennials, in particular, have embraced the FIRE movement with the aim of retiring well before the traditional retirement age of 65.
However, it seems pretty obvious that in order to save up to 70% of your income, you must first be earning a relatively high income through employment.
In the UK, according to the Office for National Statistics, the median salary for a full-time employee in April 2020 was £31,461. In the US, the median salary for a full-time worker in late 2020 was calculated as $51,168. A slightly higher median income from employment in the US, but not drastically different.
Using the UK as an example. The median full-time employee would be taking home £2,086.12 per month, after tax and assuming no other pre-tax contributions are made.
In order for the median UK employee to save 70%, they would need to tuck away £1,460.28 per month, leaving them £625.84 to pay their living expenses. Anybody who has paid rent and bills in the UK recently would probably scoff at that, writing it off as impossible. We'd definitely agree that it is improbable.
Therefore, to save 70% of your income on a monthly basis - stopping short of deploying extreme saving tactics that would significantly reduce your standard and quality of life - you would need to be earning well in excess of the median salary to hit that target.
However, not all is lost. 70% is certainly a steep target. But it wouldn’t be impossible to target saving 30-40%, if some luxuries were curtailed and you lived well within your means. 35% savings on the median income would equate to savings of £730.14 per month. This would quickly build, and over a twelve-month period led to accumulated savings of £8,761.70.
Now whether this is sufficient to put you on the path to financial independence depends on another part of the equation: your living expenses.
Financial independence is essentially an equation which generates a financial target
The equation is unique to you and your personal circumstances.
Family, mortgages, bills, credit cards, cars, a social life – these are all aspects of everyday life that subtract away from your path to financial independence.
The starting point for anybody looking to pursue financial independence is to understand this side of the equation. Start by making a list of your recurring expenses. Be conservative in your estimates - you need to set a realistic target which caters sufficiently for unforeseen expenses. Build in a buffer.
Key considerations for this part of the equation include your age, your current and future family circumstances and your expectations for life once you have achieved financial independence.
Once you’ve figured out how much you need to live the life you want, you can then start to think about how to get there (without employment income, of course)
Now, of course, being BullsEye Investors, we will encourage anybody who will listen to consider investing in the financial markets to grow their personal wealth.
But it isn’t just about growing your immediate wealth. Investing is also a great way to start generating passive income to cement your long term financial future.
Remember all that money you worked tirelessly to save? Well, if you start to invest it into the financial markets, earning passive income, it will continue to build. And build. And build.
In fact if you are patient and sensible in your approach, your passive income will start to compound and earn even more passive income.
If you can combine this investing approach alongside earning money from employment, saving more, investing more, compounding more, you will be surprised at how quickly your investment pot grows.
Assets that yield passive income
Here are a few examples of investable assets that you can use to generate a growing stream of passive income:
Buy-to-let property (rental income)
Earning interest on cryptocurrency deposits
Do your own research to understand each of these asset classes in greater detail and understand their yield profiles.
As with all things investing, these assets have positives and negatives depending on your circumstances, risk appetite and how much effort you are willing to put into managing them.
As well as investing in these assets for the potential upside market value appreciation, as a FIRE investor, you can use a mix and match selection of these investable assets to build your passive income empire.
Now that is a potent combination to grow your personal wealth!
Working backwards from your FIRE target, you can quickly do your sums to define your roadmap to financial independence.