Glossary
FI = Financial Independence
FIRE = Financial Independence (Retire Early)
*Disclaimer, I am not a trained financial wizard, but I do like math and love to nerd out on this kind of stuff.
Have you ever wondered how much you really need to retire or to be financially independent? The way we approach our own savings and investment strategy should be totally unique to us. Everyone has different comfort levels when it comes to security, stability and risk and your strategy needs to make sense for you and your family.
In the #ficommunity, Financial Independence can be defined as the point at which you are no longer reliant on a job. There can be many versions of FI, but for the sake of this post, I will stick to the basic formula and expand more in a future post on these levels if there's interest. The idea when you achieve FI or FIRE is that you are no longer working in a traditional job nor are reliant on any income that is not passive to cover your life expenses.
How to Achieve FI
Reduce Expenses
The lower your annual expenses, the lower your FI number. What can you do to tighten up your routine spending habits? Start by looking at the big 3 to make the largest impact: housing, transportation and groceries.
Save Money
Save whatever you can and make that your #1 priority when you plan your expenses on a monthly basis! First, ensure you have an emergency fund of 3-6 months depending on your job stability and demand for your line of work. Next, make smart investments and take advantage of tax breaks that can be realized by depositing money in your RRSP or 401K.
Invest Wisely
Do your due diligence by researching and talking with professionals. Professionals can be found for whatever area you plan to invest in: real estate, stock, business capital, etc.
Many FI blogs/podcasts talk about the beauty and savings of investing in Index Funds. I personally do not invest in that type of fund but A LOT of people do, and many members of the FIRE community claim they make an above average return.
House Hack
This can get fun and creative. For a while, my husband and I rented out our spare room on the bottom floor of our 3 story townhouse to perfect strangers on Airbnb. It was hardly any work (other than communication and turning over the room) and we were earning over $1k/month by only renting 10-15 nights a month April - September. Although we met a ton of interesting people from around the world, eventually we grew tired of it, but it was a lot fun for the first couple years.
I've heard of folks in their 20's who rent an entire home, but rent out the rooms in the house for enough to cover their own rent. Others rent out their homes while they are vacationing somewhere less expensive and turn a profit on their vacations.
You can get a home with a basement suite and rent that out as a mortgage helper. Some people buy duplexes or triplexes to live in one side and rent out the other to cover their own mortgage costs.
The possibilities are endless!! Have fun with it and if you have figured something out that I haven't mentioned here, please do drop me a line to let me know.
Passive Income
Think of passive income as covering off expenses. The more you have covered off, the lower your FI number can be. Keep in mind your passive income should be a reliable income source like rental income, dividends or a steady side hustle like royalties or an ebook with steady sales (etcetera).
The Formula
Your Annual Expenses x 25 = FI(RE) Number
The variables in calculating this number are:
your annual rate of return on investments, which 7-8% is average for a stock portfolio or index funds
the safe withdrawal rate (SWR), FIRE seekers tend to use 3-4%
the rate of inflation which is generally estimated at 2-3%
Here are some good calculators you can use to help you find your own FI:
MadFientist.com's functional spreadsheet (*note, sign up required)
These are all great calculators for their own reasons. I use the Mr Money Mustache one for simplicity sake, but if you're just starting out you might want to play around with all of them, especially the Mad Fientist's.
I like to base my FI number off my current running total annual expense, not my future planned expenses. That way I stay motivated to reduce my expenses, knowing this will get me there faster. For example, I know my mortgage should be paid off in about 10-12 years, but I am not banking on that now, I am focusing on paying down my mortgage so that my lower FI number becomes reality.
If you don't have a lot of time to read up on the whole premise of the FIRE movement, I suggest watching this movie, called Playing with Fire (not the one about firefighters!). If you choose to watch this, just know they are very extreme in how much of their life shifted. I took a lesser dramatic approach on my path to FIRE because I want to enjoy the ride to the fullest. That said, there were some SIGNIFICANT changes we made in doing so and I'm so glad I found some tricks to improve my savings rate, yet not sacrifice the lifestyle we enjoy.