A younger family member recently asked for some financial advice. This is not unusual. Mr. RFL & I are both accountants, after all. During the call, we shared that I had recently started a personal finance blog to document our journey to financial independence and early retirement (“FI/RE” or “FIRE”). The response? Oh yeah, I’ve heard of the FIRE movement… but isn’t that only for people who make six-figures and spend nothing? I sighed. Noooooo!
The belief that only people making six-figures can achieve FIRE is a complete myth! You DO NOT need a high paying career to reach financial independence (“FI”). Furthermore, there have been several examples in the community of people who have done so.
The truth? NEARLY EVERYONE is capable of achieving financial independence. The path to get there may not always be easy, but it is ALWAYS worth it. I believe that most people use this myth as an excuse to avoid even trying.
While financial independence is attainable for most, the speed at which you can get there will depend on your personal situation and life goals. Whether or not you pursue early retirement is also a lifestyle decision. Most often the “RE” path appeals to people in careers they don’t love or that involve high stress/long hours, but that part is totally optional.
While we have not yet reached FI, we have already reached a level of financial freedom which has improved our life and allows us to make value-based decisions. I whole-heartedly believe that the pursuit of financial independence, whether or not that includes early retirement, is a worthwhile goal for everyone.
FIRE Guide: Back to the Basics
When I started RichFrugalLife.com, I intended to focus my writing on our FIRE journey and stick to intermediate personal finance topics relevant to our stage in the journey.
However, I’ve since realized that the financial literacy gap is way larger than I had thought. Some of the personal finance questions I received recently felt like no-brainers to me. But they weren’t actually that simple or obvious. Rather, I have the privilege of an above average level of financial literacy in a time when most people don’t.
There are so many misconceptions about money! Even college-educated millennials are entering the workforce with little to no financial literacy. It’s no surprise though since money is a taboo topic and personal finance is rarely taught in schools. We need to do a better job teaching children and young adults so they can make better decisions from the start, rather than trying to dig themselves out of holes later on.
This is what the FIRE Guide series is all about. I’ll occasionally add articles to this series to cover more introductory level topics. I hope these articles will help out our younger audience or folks just discovering FI or FIRE.
What is Financial Independence and the FIRE Movement?
If you’ve made it to my little corner of the internet, I’m guessing that you have already heard of the FIRE movement. Maybe you even have some interest in learning how you might achieve it.
FIRE is an acronym that stands for “Financial Independence, Retire Early”. The idea was first popularized in the early 90’s by Vicki Robin and Joe Dominguez in their book, Your Money or Your Life. However, the idea didn’t immediately catch on. The more recent resurgence of the FIRE movement has been fueled by personalities and blogs like Mr. Money Mustache, the Frugalwoods and Millennial Revolution. The growing popularity of the movement is likely due to a dissatisfaction with the status quo. The notion of working for 40 – 60 hours a week in a cubicle for 50 years is not appealing, especially when people are financially struggling while doing so. There is little time left to enjoy daily life. Waiting until retirement is also a gamble. The average lifespans have decreased in recent years, thanks to the current health crisis and obesity epidemic.
Repeat After Me: “Time is More Valuable than Money”
According to the Bureau of Labor Statistics, approximately 20% of people over 65 are still working and that number is expected to grow. Supporters of the FIRE movement recognize this and make lifestyle choices that allow them to reach FI well before the traditional retirement age.
Financial independence is the milestone whereby you no longer need a paycheck and can live off just your investments. At that point, you can cover your annual expenses with investment earnings and principal using a safe withdrawal rate. Work becomes optional, which means you can choose to retire, dial down at work or spend your time volunteering, pursuing a passion project or travelling the world. The choice is yours!
Proponents of the movement tend to embrace frugal living and/or add side hustles to earn more income in order to attain high savings rates (often 50% or more) which are invested. Low cost index funds are the most recommended investment vehicle in this community. While, a large portion also invest in real estate.
While the most famous FIRE personalities had high salaries and extraordinary savings rates, that is not a requirement for this journey. I’ll talk more about how you can pursue FI or FIRE on any salary. In Part 2 of this series, I’ll also demonstrate how this is possible for households making anywhere from $30,000 to $80,000. The scenarios may not be as extreme as you think.
I want to bust the myth that you need to be a high earner and/or crazy to achieve FIRE. A happier, healthier, and more fulfilled life is attainable by more people than realize it’s an option.
Simple steps you can take to reach financial independence without a six-figure salary:
1. Figure out your “why for FI”
It’s time to get a little introspective. Think about your life. How do you spend most of your time now? And how does that compare to what you’d like to be doing with your time? What are the people, places, things, and values that are most important to you?
It is true; you can’t have it all. But nearly everyone can optimize their life and have the things most important to them. Financial independence is the tool that can allow you to do this. It promotes a life of less stress and more security.
Additionally, FIRE is not just about the end goal. You will achieve the feeling and reality of financial freedom well before you reach your “FI Number.” Don’t worry too much about how far out your goal is, rather, enjoy the journey! There will be plenty of benefits along the way. With every additional dollar you make and save, you get one step closer to not needing a paycheck.
At some point before you reach your FI target, you will have enough “FU” money to, well, say “FU” to your corporate job. This can be especially meaningful if you are in a career that doesn’t align with your life goals. But even if you love your job now, knowing that you have this money takes a lot of pressure off and will help you reflect on your true wants. When you get to this point, you can take a career break, switch to a different job that pays less, completely change careers, or take a chance on entrepreneurship.
The important thing is to figure out why you want a change and what your ideal life looks like. Pursuing FIRE is not easy, but it is certainly achievable. We believe in a path to FI that allows you to enjoy the journey and doesn’t promote deprivation. But in order to do that, you will need to make some choices. The key is to know what you value and cut out the things that you don’t value.
2. Know where your money is going
If you do not know where your money is going, please figure it out. Regardless of where you are on your financial journey, it will be difficult to reach your goals without this knowledge. Once you know how much and where you spend your money, you can determine if you’re on track for retirement and make value-based decisions about where to spend more and where to spend less.
If you’ve never done this before, start by tracking your expenses for at least 2 – 4 months. A year is best, but a shorter time period can be less daunting and provide most of the information you need. Just don’t forget to add in the larger expenses that only come once or periodically during the year. If you love data like me, you’re probably already tracking this. Or maybe you could produce a years’ worth of expenses pretty quickly from bank and credit card statements. There is no need to track every penny for every day of your whole life. You just need to determine what your lifestyle costs you and periodically reassess.
Ideally, you should have or create a budget, but I’ll save that lecture for another day. I know budget is a polarizing word. However, a budget is just a way to track your actual spending compared to what you thought you’d spend. You can decide how detailed or strict you want to be. I love the feeling of beating the budget. At the same time, we’ll never say no to an experience or something we really want just because it’s not in the budget. Having a budget keeps you mindful of where your money is going – you then decide what to do with that information.
3. Increase your savings rate
The ability to reach financial independence before traditional retirement age, and how quickly you get there is highly dependent on your savings rate. This is an important distinction because it is not related to income. Your savings rate is derived from average spending levels and how much of what you earn is saved each year. The math is pretty simple once you’ve calculated your spending: Savings/ Income. The higher your savings rate, the faster you will reach financial independence.
Yes, having a higher income makes the journey a little easier. However, many people making six-figures experience lifestyle inflation and have abysmal savings rates. The advantages are found when you can increase your savings rate. For example, someone with $0 net worth making $100,000/year and saving only 10% of their income (or $10,000) per year will reach FI in 58 years. Meanwhile, someone making $60,000 and saving 25% of their income (or $15,000) per year will reach FI in only 35 years. That’s 23 years sooner than the high earner. Unless you are well down the path to financial independence, you likely could benefit from increasing your savings rate (I know we could).
There are two primary ways to increase your savings rate. The first is to reduce expenses and the second is to make more money (which will allow you to save more without reducing expenses). When possible, its best to employ a combination of these approaches.
Reduce spending
Whatever you are making and whatever you are saving now, I guarantee there are simple ways to increase your savings rate without feeling deprived.
We are in the process of doing this now… tweaking expenses each month to see where we can spend less without feeling it. I retired a few months ago, so we are down to one salary (though it is in the low six-figures). You’ll see our progress in the monthly expense reports on the blog. If we ever go too far and feel deprived by an expense we’ve cut out, we’ll simply add it back. No biggie. You can read more about my decision to quit a high paying job before reaching FI here and check out our latest monthly expense report here.
It’s difficult to achieve FI while saving only 10%, which is the rate historically recommended. However, you also don’t need to have a savings rate of 70% either. While it’s true that you won’t be retiring in your 30’s making $50,000 and only saving 20% of it, you will reach financial freedom and be able to retire before most people. In fact, many recent surveys show that the majority of Millennials don’t believe they will ever be able to retire. If you want to learn more about how savings rate can affect your timeline, check out Mr. Money Mustache’s article, The Shockingly Simple Math Behind Early Retirement.
It’s worth the journey, even if your path projects that you’ll only reach FI by age 55 or 60. Retiring then gives you at least 5-10 more years to live your life on your terms. Those 5-10 years also increase the chance you’ll be healthy enough to enjoy retirement.
If this seems overwhelming, just remember that any increase in your savings will speed up the journey. As you saw in our post on the latte factor, small recurring expenses add up to big amounts over time. Use the Latte Factor math to your advantage and feel good knowing that even cutting back $100 of expenses a month could get you $100,000 closer to financial independence. That small change could shave a couple years off your journey depending on your expenses.
Should you start with small reductions or make big cuts?
You can reduce your expenses in whatever way feels best to you. If taking baby steps feels less scary, then start with that. Try eliminating a couple small purchases, like buying fewer lattes or cancelling unused subscriptions. These small changes won’t take you all the way, but they are usually painless and will certainly add up. Additionally, this approach can provide an “early win” that will motivate you to continue on the journey and fuel larger changes.
If you’d rather want to put your focus in fewer places or haven’t quite tracked your expenses for long enough to know where everything is going, then start with the areas where you can make the largest impact. Take a look at the big three …housing, food and transportation. This is where the average household spends most of their money according to a recent BLS Study. You can check out how the average American household spent their budget last year here.
Make more money
Another way to reach financial independence faster is to earn additional income. You can do this by negotiating a raise or switching jobs in your primary profession, adopting a side hustle, or selling belongings that no longer “bring you joy” on a secondary market.
Know your market value
You should absolutely try to make more money at the job you’re already doing (provided you actually enjoy it). If you’re respectful and fact based, then the worst thing that will happen is that they say “no”. I recognize that this may be especially tough in the current market and that asking for more money is awkward and uncomfortable. I’ll admit, I was really terrible at promoting myself and asking to be paid what I was worth over my career. If the timing is bad, having a conversation now can at least establish firm goals to help you reach the next raise or promotion.
Learn the art of the side hustle
Another way to make more money is the side hustle, and there are so many to choose from! In evaluating a side hustle, you should consider the time it will take, potential earnings and your interest in the work. I haven’t spent much time pursuing side hustles, as they generally pay less than what I could make accounting and involve more time (which is what I’m trying to get more of). However, if you have a hobby or skillset that is interesting to you and marketable, then this may be a viable option for you.
One way that I’ve made a little extra money over the past few years, which has taken minimal effort and time, is selling our old clothes, baby gear, and furniture on the secondary market. While I’ve primarily used Poshmark and Facebook, there are tons of marketplace options available. We’ve made almost $6,000 in four years, all of which contributes to our savings. It feels good to reduce, reuse, and recycle movement. It feels even better making some extra money by doing so.
Now that you know it’s possible, are you interested in freeing yourself from financial worry by pursuing financial independence?
Ready to learn more? Check out Part 2 of the FIRE Guide series, which covers how to determine your FI Number and proves that you don’t need a six-figure income to achieve financial independence and retire early.
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