Here we are, with the third and final step in creating your FIRE plan.
Just to recap, Step 1 was to figure out what you have now - what's your current situation? You can read about it HERE.
Step 2 was to determine your FIRE number. This is the amount of principal that you would need in order to cover your annual living expenses. Read about it HERE.
Now, let's jump into Step 3.
Step 3 - How do I get to my FIRE number?
You've figured out what you have - you know your assets and liabilities, and you're aware of your income and expenses. You also know what your FIRE number is.
In step 3, you figure out your plan. How do you get to that FIRE number? The cool thing is, that there are many different strategies that you can chose to get you to your FIRE sweet spot. This is where you pick and chose what you want your FIRE journey to look like. What are your goals in terms of future lifestyle?
Remember, your FIRE number is based on your current living situation. It takes into account what you have now and how you're living now. Think about how you want to live down the road. Do you still have a job, or do you want to be completely retired. Do you live in the same house, and have the same hobbies? The answer to these questions will determine if your FIRE plan changes, or if the principal number stays the same.
From our example, we determined that the annual expenses are $55,500 and the FIRE number is $1,387,500. (Numbers are not our actual numbers, just an example). So, how do we get there?
First, we know that income is $120,000 per year. Already, if we take our income less expenses, we're left with $64,500 each year that's not being spent. Now, realistically, we know that besides the expenses listed, there may be things like home repairs or vacations, so we're going to take an additional $10,000 for expenses like that, leaving us with $54,500 per year. This amount will be invested in our principal.
Using a simple interest calculator, we can see that if we keep investing the same amount each year, and assume a 4% return, we will achieve our principal balance within 17 years https://tinyurl.com/npthdu7c.
Now, these numbers may seem huge and out of reach, but this is where planning comes in.
Can you reduce your annual expenses? If we cut our annual expenses to $50,000, reducing our principal to $1,250,000, and saving $70,000 per year, we would attain it in 12 years instead.
If the numbers still seem huge and unattainable, let's think smaller. If you could reduce your monthly expenses by $250 (or $3,000 annually) using the same 4% interest, that would turn into $37,000 within 10 years.
Instead of reducing expenses, you can also increase your income. Is there anything you could do on the side to earn an extra $250 per month?
This is where FIRE gets interesting. There are so many different options to reduce your spending, or increase your income. It may seem like a tall order, but every small financial change will have a big impact down the road. Think about the daily coffee, or the takeout meals, or the monthly subscriptions you're paying for. If you didn't spend that money, what would that add up to over time? How much would you be able to add to your principal if you saved the money instead?
We'll discuss more strategies that can help get you to your FIRE number, but hopefully this has been a good overview of how to figure out your FIRE number, and how to start thinking of ways to get there.
Don't forget, every little bit helps.