Gone are the days when retirement meant 60 years. Today, individuals are working to retire early. One way to achieve it is by using the FIRE method. FIRE stands for Financial Independence, Retire Early. In today’s article, we will discuss this method, so you can start your journey to retire early.
Who started the FIRE movement?
The FIRE concept is inspired by the book written in 1992 – Your Money or Your Life. The writers believed that financial freedom is not an idea but a way of life. The book also talked about seeking greater satisfaction from life outside the 9 to 5 job.
Though the book was published in the early 90s, it took more than a decade to adopt the FIRE method. Today, you will find many individuals using the FIRE method for early retirement and those who have successfully used it to retire early.
Before you go ahead, it is crucial to understand the meaning of the word – retire. Retire does not mean that you will stop working. Instead, you will work happily to do something you love doing.
Starting with the FIRE method to retire early
If you want to retire early, you must follow the below strategies. You will have to make some sacrifices today to have a better future tomorrow.
- Start saving a large part of your income – 50 to 70% is something you should target
- Show economic discipline
- Invest your savings in quality stocks and low-cost Index fund
Let us look at these three steps in detail:
Step 1 – Save your Monthly Income
For most people, savings are between 10 to 30%. If you want to retire early, you need to save aggressively, and it means that you need to save 50 to 70% of your income. Saving 50% of monthly income is impossible for most individuals as there are monthly expenses like rent, food, home loans, etc. Before you start working on this step, you must work hard to increase your income, so saving 50% becomes theoretically possible. Make job changes, reskill yourself or start a side hustle to get a boost in your income.
Step 2: Spend wisely
Start labeling your expenses as essential and discretionary, and learn the art of managing your expenses. The crucial part is to lower your spending wherever possible. You can do it in many ways – for example, you can use public transport, reduce your meals in expensive restaurants, etc.
Here is another thing you must focus on: Generating passive income. Passive income can be in form of interest from your corpus, rental income, stock dividends, etc. Creating the structure for passive income takes time. Hence, you must get started with it as early as possible. It will take years to build the system.
Step 3: Make investments
The last step in the FIRE method is to make investments. The FIRE principles state that early on in your life, you need to invest as much as possible. Unless you are not investing in high-return financial instruments, the chances are you won’t be able to retire early.
Keeping money in a savings account, fixed deposits, etc will not help you. You have to give your money the chance to grow. It is possible only through equity investment. You can use a mix of direct equity (quality stocks only) and low-cost ETFs. Mutual funds may not be excellent options since the investment cost (expense ratio) is high.
Even after knowing that equity investment is the way to success, most investors are unable to take that route. The reason is that equity investment is risky, and you can lower your risk by increasing your knowledge and giving time to understand the market. Again, most investors can’t do it. They have a 9 to 5 job and a family to give time to. With Jarvis Invest, anyone can invest in the equity market – with or without knowledge. It uses Artificial Intelligence to create your equity portfolio, and it regularly monitors your portfolio.
Important points to keep in mind before your start using the FIRE method
Keep the below points in mind before you start your journey towards financial freedom:
- Create emergency funds: Life is uncertain, and you must prepare for the uncertainties. You can prepare for unexpected turns by creating an emergency fund. Set aside three to nine months’ worth of your monthly expenses in emergency funds. It is in addition to your health and term insurance.
- Diversify your portfolio: If you are creating your portfolio on your own, make sure you are diversifying your investments. You need to have a mix of both equity and debt. Within equity, you need to have stocks from different categories. If you select Jarvis, it takes care of diversification, and you don’t have to worry about it.
- Regular review: You must review your portfolio regularly and monitor that returns are on the right track. If not, make the necessary changes.
Many people are uncomfortable with the sacrifices the FIRE method requires them to make in their present life. Financial Independence is not easy to achieve. Hence most people stay away from it. It is not for everyone – use this method only if you are comfortable doing what it demands. For your equity investment, use Jarvis, and simplify your journey.