With our FIRE number in mind we now have to get down to optimizing our savings to reach this goal. Here are my three of the easiest ways you can start increasing your monthly savings rate! Monthly Subscriptions With our digital lives it feels like there is a subscription for anything, tv shows or movies we live, monthly mystery boxes full everything from coffee to hot sauces, favorite music subscription service, or even your cable tv and cell phone packages. Almost always 100% of these items are WANTS not NEEDS, and it is often the easiest place to decrease your monthly expenses. Some examples would be: - Do you need multiple tv/movie streaming services? Netflix, Crave, Hulu, Amazon Prime. We decided to cut back to two (Netflix and Amazon prime) one and occasionally suspend and switch to a different one. - Can you reduce your cell phone plan? As almost anywhere we go now in life there is wifi, Do you need 12GB of data or will a 2-8GB plan cover your needs? This is especially true in 20 20 as many of us are working from home or staying at home due to COVID-19. - Do you need the cable tv? or the additional channels? We found when we sat back and looked at what we watched we only watched 2-4 actual shows on cable. We initially cut back our cable from the premium plan with all the channels to the bare minimum channels with the shows we watch on them. After a few months we also found out tha t the shows we watch are "free" using the tv channels app on our Apple TV (assume Android options exist). We fully cut our cable tv bill at a monthly savings of over $90/month, and best of all we still get to watch the exact same shows. Food & Household Items Something we all need to live FOOD! This also is an area that I believe many people can make small changes and save 5-25% without really changing their day to day eating habits. Small changes such as buying generic when there is no difference in quality, such as generic bleach for cleaning, canned goods such as beans or flour for baking. General household items such as a can opener often can be purchased for $3.00-$5.00 from a thrift/consignment store rather then brand new from mainstream stores for 4-8x the price. Clothing Clothing is another item which we all need to live, however in the past few years I have realized how much money can be spent by 1) Buying quality 2) Buying second hand (When possible). Things such as having 1-2 nice general purpose coats rather than a whole closet, or picking items that have more mix and match capabilities rather than a one off item which has limited uses. Not only does this prevent you have having the urban sprawl of closets but it ensures all things you have are able to be used. Buying second hand for seasonal items (coats, rain gear, sports items) often can save 30-80% off the original price for basically the same item, and this still includes getting name brand items. Hope this list is able to spark some ideas and helps you increase your savings rate to get to your FIRE goals!
Sorry for the tardiness of this post, life got away on me, and this project was put on the backburner. I am going to make it my goal for the remainder of the year to do a post at least every two weeks as I have lots of material I have collected over the past few years that I want to share. Assuming you have followed Step 1 and gathered all your financial information we will continue with creating and guiding your FIRE future. (If you have not please go back to Step 1 and get this information, you can click HERE) Now that we have identified our income/expenses from the past year (Average this over 3 years if possible.) we can now begin to calculate what YOUR FIRE number! There are two methods primary methods you will hear talked about in the FIRE world for doing this the 25 Times rule or the 4% rule, below are examples of both. On a high level your fire number is: (Annual Expenses) X 25 = Principal Fire Number 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 do you want to be to ensure your FIRE number is correct, in allowing you to safely withdrawal your annual earnings (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 and safely based on historical withdrawal rates) annually which will leave your principal investment untouched, along with room for growth with or better than inflation. Example: If you have a principal amount of $1,125,000 $1,125,000 x 4% = $45,000 If you have a principal amount of $1,875,000 $1,875,000 x 4% = $75,000 You may have noticed that they are the same? Why is that? 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; His original 1994 paper
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.
The first question I asked when I heard about fire is "How do I get started?" While this is a very key question it is not the most important, I feel the most important is; "Are you ready to do anything to make a change?" When I say anything, I mean it. "For most individuals this 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%." FIRE can be a massive disruption to some lives and is not for everyone. However I do believe everyone can benefit and improve their financial standing from the various techniques it provides. - 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 for me is the 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) -Cost of hike will almost always be less then going to a concert costing only gas which could be pooled or shared with others -Renting a movie at home $~5 instead of $15 (plus if you are like me popcorn/drink(~$15-20) It also does not mean eating only rice and beans and never having nice things. You need to reward yourself along the way. Three steps on the path... Step 1 - What do I have Step 2 - How do I save (and increase this savings amount?) Step 3 - Now that I am saving how do I continue grow my nest egg? Step 1 - What do I have? First step is to identify what income, liabilities, expenses, debt, assets, bank accounts, investment and track them all in one location. Go through your bank account and categorize each expense you made in the past 3 months. Tools such as Mint help to automate this but can be as simple as a spreadsheet. Excel, Google Spreadsheets or Mint.com(This is what I use) are great for this. You should end up with something like the following: Assets Debt Chequing Account: $2,000.00 Car Loan: $15,000 Mortgage: $393,000 Credit Card Balance: $825.00 / month Expenses Income Cell Phone: $115.00 / month Individual 1 - Salary: $60,000 / Year Car Loan: $389.57 / month Individual 2 - Salary: $60,000 / Year Groceries: $150.00 / month (average) Eating out: $325.00 / month (average) Investments Entertainment: $450.00 / month (average) 401k(RSP): $1,750 Gym Membership: $75.00 / month Gas(auto): $250.00 / month (average) Utilities: $350.00 / month (average) Mortgage Payment: $2,250.00 / month Health Insurance: $265.00 / month In the next post we will cover what to do with all this information you have gathered along with finding out about different paths of FIRE and which one might work for you, it may seem cumbersome but it is the most important step. It is also critical the above numbers you gather are accurate as future decisions will now be made off of this. If you cheat/lie/make up numbers, you are only going to hurt yourself and be setup for failure. Be real with yourself!