Getting Started with FIRE! - Part 3
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.
Still alive! I think...
What a crazy few months? Life has been very busy the past few months, but I did want to put a post out that I will be getting back to regular updates shortly. So many interesting things to talk about lately, Bitcoin, US Election, Gamestop Stocks to name a few. Excited for what the future brings!
Supercharge your Savings!
For many of us, reaching our FIRE goals means saving money. Any money saved in one area of our lives, is money that can be contributed to our FIRE principal. It can be hard sometimes to know where to find savings. Here are three things in your life that you can evaluate to find some savings: Monthly Subscriptions It feels like nowadays, there is a subscription for everything. TV shows and movies, music, software, books, cable tv, cell phones, gift boxes full of snacks or dog toys...the list can be endless. Make a list of the subscriptions that you're currently paying for. Review the list and carefully consider if you really NEED the subscription, or not. Kicking back with a favorite show, or having your favorite music at your fingertips is awesome, so we're not saying cancel them all. Just consider carefully are you getting your money's worth for the monthly subscription? Streaming Services Netflix, Crave, Hulu, Amazon Prime, Brit Box, HBO, Disney +, Apple, the list is endless. Do you need them all? Which ones do you watch the most? We have an Apple subscription, as well as Amazon Prime and Netflix. We used to have Crave and Disney+ as well, but cancelled them because we realized we really were only watching one or two shows on each. This saved us $21/mo, $252/yr. Cable TV Television subscriptions can be pricey! We used to pay around $100/mo for our cable service. We had the same realization. Between our streaming services, and free platforms like YouTube, we really weren't watching that much TV. There are only so many hours in a day... We cancelled our cable, and saved $100/mo, $1200/yr. Many cable providers have apps that allow you to watch the latest episodes of a show for free - we take advantage of this to catch up on the few "must watch" tv shows we have. Cell Phones There may be ways to optimize your cell phone plan. We used to pay for a pretty high monthly data plan, but realized that we were using WiFi the majority of the time. We downgraded our plan to fit our needs, and saved $20/mo, $240/yr. Books/Audiobooks/Magazines We had an active subscription for audiobooks through Audible. However, we were simply not using it, and there were many unused credits sitting in the account. We canceled the subscription, saving $15/mo, $180/yr. Many libraries have programs where you can borrow audio or e-books for free, and we also found that podcasts were a great free alternative to audiobooks. Forgotten Subscriptions Have you ever signed up for a free trial and forgotten to cancel it? We're definitely guilty. Be sure to review your credit card and bank statements and cancel subscriptions that you're absolutely not using. Savings Summary Our total savings on subscriptions: $156/mo, $1,872/yr. Have a look at your own subscriptions to see if you can find savings. Groceries Something we all need to live is food (totally surprising, I know). This also is an area where we can make small changes and save 5-25% without really changing our day to day habits. Lots of pantry staples can be switched out for generics, or can be purchased in bulk. Buying pantry stock items when they're on sale is also a great idea. If you're going to use the item anyways, you may as well pay less! Generic Switches There are lots of generic food items where the quality is the same as the brand name - canned vegetables, sauces, pasta and rice are a few items that come to mind. That being said, there are a couple of things that I just won't buy generic because I like the original (generic chocolate hazelnut spread just isn't Nutella). As in anything FIRE, find your sweet spot. If there's a type of food you love, then get the brand name. Switch to generic where it makes sense for you. Here are the cost savings from purchasing the generic instead of brand name version of a few of our pantry essentials (prices from our local store): Sparkling Water - $1 per box Black Beans - $1.20 per can Butter - $0.90 per block Peanut Butter - $1.70 per jar Ice Cream - $2.70 per container Rice $1.80 per bag Total Savings $9.30 This is not an exhaustive list, but you get the point. Many generic food products are available for a lower price. Now imagine saving $1 or more for each item that you're buying. Over a year of grocery shopping, that can really add up. Sales and Savings When things are on sale, stock up! I mean, buy a few, but not more than what you're actually going to use. We eat lots of pasta, so when pasta goes on sale (3 for $5), you can bet I'll be buying about six boxes. Think about what you use most often when cooking, and look for when it's on sale, and take the opportunity to grab a few extras. Another great place to save is on more expensive items, like meats, cheeses and cleaning products. Our store will sometimes have specials where they sell frozen chickens for a good price, so I'll buy two, as they can be used to make different meals. Cleaning products like laundry detergents or dish soap, same thing. If there's a special on, I'll buy two or three bottles at the cheaper price. Keep an eye out for what's on special, and if it's something you'll be using anyways, consider stocking up to take advantage of the savings. But again, be mindful of what your sweet spot is. You don't need a year's worth of supplies, but if you have room to store one or two, and you'll use it anyways, go ahead and take advantage of the savings. Clothing Clothing is another item which we all need, however in the past few years I have realized how much money can be saved by being more mindful of what items are being purchased, and by buying higher quality items. In lots of cases, quality is going to be better than quantity. In the past, I loved buying cheap, fast fashion items thinking that I was saving money. A $20 pair of shoes seems much better than a $50 one up front. What I didn't realize, was that I was having to replace the cheap shoes pretty often as they got worn out, and the more expensive shoes lasted way longer in comparison. In the long run, the cheap shoes were actually costing me more! When purchasing clothing, also consider if an item will have multiple uses. Can you pair a sweater with many different outfits, or is it only going to work with that one pair of pants and shoes? If the item is not going to be multi purpose, maybe reconsider. Perhaps the money can be better spent on a more versatile item, or perhaps the money doesn't need to be spent at all? Hopefully this list is able to spark some ideas where you can look for savings. Remember, you should still enjoy yourself. Saving doesn't mean cut back on everything, it means evaluate where you can get the most bang for your buck.
Getting Started with FIRE! - Part 2
Sorry for the tardiness of this post, life got away on me, and this project was put on the backburner. Assuming you have followed Step 1 and gathered all your financial information we will continue with Step 2 and Step 3. (If you need to go back to Step 1 and get this information, you can click HERE) Step 2 - What is my FIRE number? The second step is to determine your FIRE number. What investment principal will you need in order to generate enough income to cover your living expenses? There are two primary methods you will hear talked about in the FIRE world for determining the required principal, the 25 Times Rule or the 4% Rule. There's an example for each below. Using the 25 Times Rule: Take your annual expenses, and multiply by 25 to get your required principal balance. Example: If your annual expenses are $45,000 $45,000 x 25 = $1,125,000 If your annual expenses are $75,000 $75,000 x 25 = $1,875,000 You might be thinking...Why 25? 25 is the generally accepted multiplier which determines how aggressive or conservative you need to be to ensure your FIRE number is correct. 25 times allows you to safely withdraw your annual amounts (excluding taxes!) while maintaining your principal investment. The 4% Rule also known as the "Bengen Rule" simply means that you can take 4% out of your portfolio (excluding taxes) annually which will leave your principal investment untouched, and will also allow for growth that is at least inflation. This is based on historical statistics, and points to a 4% withdrawal being the sweet spot. Example: If you have a principal amount of $1,125,000 $1,125,000 x 4% = $45,000 available to be withdrawn annually. If you have a principal amount of $1,875,000 $1,875,000 x 4% = $75,000 available to be withdrawn annually. You may have noticed that the 25 Times Rule and the 4% Rule provided the same numbers. We get the 25x Rule from the 4% Rule because if you multiply 4% of something by 25, you will get 100% of the original value. To find out more about William P. Bengen check out these links; https://en.wikipedia.org/wiki/William_Bengen His original 1994 paper So...take your expense numbers from Step 1, and do the calculation. What principal will you need to reach, in order to cover your current annual expenses? From the example numbers used in step 1, the annual expenses came to $55,434 (we'll round to $55,500). This means that a principal balance of $1,387,500 would be needed to provide enough income to cover those annual expenses. That seems like a HUGE number. In step 3, we'll figure out how to get to principal balance, this FIRE number. Click HERE for Step 3
Types of FIRE - Create the future you want!
Create the future you want. FIRE is all about spending more time on hobbies, volunteering, teaching, travelling! Do what makes you happy! FIRE has different meanings to everyone. Over time, the concept has evolved, there are several types of FIRE philosophies. FIRE is not a one-size fits all solution. It can be customized to suit your situation so that you can achieve your dreams. Some Common FIRE Philosophies that exist: LeanFIRE is a minimalist philosophy. The aim is to generate around $25,000 - $35,000 of annual investment income. This is enough income to maintain a minimalist lifestyle, without taking a job or investing further. BaristaFIRE is a step between CoastFIRE and LeanFIRE. You have a growing investment nest egg but it is not generating enough to maintain your desired lifestyle. Investment earnings are often supplemented by a part-time job, hence the Barista moniker. This is a great way to test the waters of early retirement, not having to work full-time. This is a happy medium of earning from investments as well as part-time work. CoastFIRE is when there is enough of a principal investment that the investment can coast along, earning enough over time to achieve your desired principal value at retirment age. CoastFIRE involves parking the principal investment amount and not drawing from it until retirement. This is a comfortable place, knowing that your retirement will be taken care of without having to make additional investments. FatFIRE is the ability to retire early without making any significant changes. FatFIRE involves having a large invested principal, that can provide annual revenues to furnish a very comfortable lifestyle. Generally, only high net worth individuals fall into this category. It is important to follow the FIRE philosophy that will best align with your desired goals and lifestyle. A minimalist lifestyle is more attainable, and a more lavish one will require additional investments and other sources of revenue. Whether you want enough to travel each year, or you're happy to just have your living expenses covered each month, there's a FIRE philosophy for every situation.
Getting started with FIRE! - Part 1
The first question always asked about FIRE is "How do I get started?" Well, are your ready to do anything to make a change? When I say anything, I mean it. FIRE takes some sacrifices. The first step to FIRE is to change your mindset. Really figure out what your goal is, and realize there's a difference between NEED and WANT. Be prepared to say no to things that you want. Realize that you're making some sacrifices now, but you'll reap the rewards later. FIRE is not for everyone, however there are many FIRE techniques that can benefit anyone. Even if you don't want to commit to the whole nine yards, you can still improve your financial situation in small ways. It all adds up! Some everyday choices that can impact your financial situation: - Instead of buying a new car, could you buy a used one? - Instead of eating out three nights a week, could you eat out once every two weeks? - Instead of going out to a concert, could you go for a hike? - Instead of checking out that new movie, could you wait until it can be watched at home? - Do you NEED that new cell phone, or is your current one still working (Could it be fixed)? If you could answer yes to the above you are ahead of the game! FIRE is understanding that you are willing to make sacrifices for a better life overall. The FIRE answer for the above questions: -Buying a used car three years old will save you on average 30-60% of the cost of a new car -Eating out once every two weeks instead of three nights a week will save you ~$180 ($30/Person/Meal) -The cost of a hike will always be less than going to a concert. You'll pay for gas and snacks, where concert tickets can run $100 or more per ticket! -Renting a movie at home $~5 instead of $15 (plus if you are like me popcorn/drink(~$15-20) Making different financial choices in your everyday life, even small ones, adds up. And why am I telling you this? Because at it's core, the idea of FIRE is to setup an investment principal which will later provide enough income to cover your living expenses. Once your living expenses are covered, guess what? You can spend your time living, instead of working. "For most individuals [FIRE] consists of gathering approximately 20-25x their annual expenses in investment principal which allows for a 3-4% annual withdrawal plus room for the initial principal to grow off average market gains of 4-8%." This sounds like a lot, but you can start to contribute to your investment principal today. If you make different financial decisions, like the ones above, you'll soon have money that you would have otherwise spent, that you can contribute to your principal. There are three steps to start down the road of Financial Independence (FI): Step 1 - What do I have? Step 2 - What is my FIRE number? Step 3 - How do I get to my FIRE number? Step 1 - What do I have? The first step is to get a clear picture of your current situation. List what assets, liabilities, income and expenses that you have. This includes your house, car, mortgage, loans, credit cards, bank accounts, investments accounts, etc. List all of your sources of income, and all of your expenses. The best way to do this is to go through your bank account and credit cards and categorize each deposit and purchase you made in the past 12 months (the further back you go, the clearer the picture). Lots of banks will allow you to download transactions into spreadsheet files, or programs like Mint.com can help to automate this. You should end up with something like this: (These are not my actual numbers, just examples). Assets Chequing Account $2,000 Savings Account $10,000 RRSP/401K $12,000 Stocks/Investments $10,000 Liabilities Car Loan $15,000 Mortgage $375,000 Credit Card $750 Income Person 1 Salary - $60,000 / yr Person 2 Salary - $60,000 / yr Dividends $600 / yr Expenses Cell Phone: $115.00 / month Car Loan: $389.57 / month Groceries: $150.00 / month (average) Eating out: $325.00 / month (average) Entertainment: $450.00 / month (average) Gym Membership: $75.00 / month Car (gas/insurance): $250.00 / month (average) Utilities: $350.00 / month (average) Mortgage Payment: $2,250.00 / month Health Insurance: $265.00 / month It may seem cumbersome to gather all of this data, but it is the most important step. It is critical that the numbers you gather are accurate. If you cheat/lie/make up numbers, you are only going to hurt yourself. Be real with yourself! Even if the numbers don't paint a pretty picture, this is your starting point. You're trying to improve, which is the main thing. This information will be the foundation to choosing your FIRE strategy. Read about Step 2 HERE. Read about Step 3 HERE.