How to Achieve Financial Independence to Retire Early (FIRE)

What is Financial Independence?

Many people think they know what it means to be financially independent – but I’m here to tell you that there’s more than meets the eye.

Financial independence is a point in time where a person has enough savings and income to live without financial worry.

It is about earning enough to never need to work again with the freedom that brings.

Financial Independence can be achieved by saving money and investing wisely, but also by reducing expenses and living below one’s means.

How to Achieve Your Financial Independence?

Achieving financial independence requires discipline, hard work, and commitment.  This is an extremely broad question.  Just about every article in the “To Money” category on our site talks about something you may need to do to get to financial independence.  A basic overview includes:

Once you have more money coming in than going out, you are on the path to financial independence. 

How Much Money Do You Need for Financial Freedom? Do you know your FIRE Number?

Your FIRE number is the amount of money you estimate that it will take to achieve Financial Independence and Retire Early.  This number is variable as it depends on where you plan on living, how old you are when you retire, and your lifestyle expectations. You can get a snapshot of what your current expenses are then work with those numbers to figure out what your FIRE number would be right now.

How long will it take to achieve my FIRE number?

Here is another variable where the estimate depends on how much you currently have, what your FIRE number is, how much money can save each month, and how well your investments perform.

What are the Best Investments for Retirement or Financial Independence?

Stocks, Mutual Funds, Index Funds, Bonds, Gold, Real Estate…which investment choice works best. It’s all an opinion.  Over the past 10 years, stocks and Real Estate have done very well. 

This does not mean that the good times will continue.  The University of Michigan consumer sentiment survey for September 2021 showed that just 29% of respondents felt that now was a good time to buy a home.  This is the lowest level in 40 years.  The same is true for stocks.  An October 2021 poll by Bankrate found that more than half the experts surveyed expect the stock market to drop more than 10% in the next year.

What does this mean for your investments going forward?

In short, very little.  If your time horizon is long, short-term movements in overall stock markets should not mean too much. However, if you believe stocks are overpriced this can make it harder to find stocks that you believe are a good value. When investing if I can’t find stocks or funds that I believe are undervalued or poised for growth I either don’t invest.  Currently, I’m looking closely at companies that I believe have strong balance sheets.

Warren Buffet’s Berkshire Hathaway is sitting on a mountain of cash right now, they are waiting to be able to buy companies cheap when they believe they have become undervalued.  I don’t see a problem with this strategy as long as you realize that when you or a company you own holds cash, they are losing out to inflation.

I normally like to keep around 10 to 15% of my stock trading account in cash.  Right now, that number is at 25%.  Yes, I am losing to inflation but it’s a price that right now I am willing to pay.  Often when I want to go long a stock, I will sell its put option but that is a story for a different article.

In Conclusion

If you want to reach your financial goals you will need to make more money than you spend, stay out of bad types of debt, and earn extra money where you can.  It is not a bad idea to plan out your FIRE number so that you can have a goal to shoot towards.  It’s good to break your goal down into smaller chunks and think about how much net worth you what to have built up within 10, 15, or 20 years.  Save and invest well, keep at it, and your financial picture will continue to improve.  These are the best ways to move toward achieving Financial Independence so you can Retire Early.

References

Royal, J. (2021, October 5). Survey: Majority Of Experts Believe A Stock Market Correction Is Likely Within The Next Year | Bankrate. Survey: Majority Of Experts Believe A Stock Market Correction Is Likely Within The Next Year | Bankrate. https://www.bankrate.com/investing/market-mavens-survey-stock-market-correction-october-2021/.

Yadoo, Jordan. (2021, September 17). Bloomberg – Americans Haven’t Been This Down on Housing Market Since 1982. https://www.bloomberg.com/news/articles/2021-09-17/americans-haven-t-been-this-down-on-housing-market-since-1982.

 

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