FIRE – What does it REALLY mean?

If you’ve been following along, you know that FIRE stands for “Financial Independence, Retire Early.” It’s fine to just throw the term around, and make cutesy FIRE-related puns like “I’m all FIREd up!” and…I’ll spare you the rest.

Honestly I’m MOST interested in the “FI” part of FIRE – having enough money to have flexibility in what I do every day. I want to be able to allow us the opportunity to decide what jobs we want to do, and how many hours we want to work, without money making the decision for us. For example, right now Hubs works in a higher paying job but doesn’t particularly enjoy it. I would love for him to have the flexibility to choose what he wants to do, instead of being tied to the boring job for the purposes of bringing home a larger paycheck.

But what does FIRE REALLY mean?

The definition of FIRE is as follows: Once you have saved 25 times your annual expenses, you are considered “Financially Independent”. In order to retire early while maintaining the same level of expense, you can simply withdraw 4% of the invested nest egg on an annual basis, and that amount will sustain you for the rest of your life.

The concept is explained very well in this Beginner’s Guide, written by the ChooseFI guys, Jonathan and Brad.

I recently completed the steps to determine how much my family would need to be financially independent. I wrote up some details so that if you are a FIRE newb like me, you may try it yourself! There are probably easier ways, but hey! This is my first rodeo. If you have suggestions for improvement, please leave me a comment.

  1. Figure out your true annual expenses.

This was harder than I thought it would be, in that you have to think REALLY long term. How much will I need over the next 20 years for things like replacement cars, home repairs, cost to send my kid to college, etc? I tried to include money for unknowns, which I hope gets me pretty close to my true expenses. Here are a couple of examples for home and car, which are my biggest expenses:

Your home: It is recommended by experts to save 1% of your home’s value per year to cover expenses. My home is valued around 270,000, which means I want to save about $2700 per year into my maintenance fund. By the time I have to replace the roof in 5 years, the money will be there. Let’s just say that right now, it’s not.

Cars, if you use them: We will never buy a new car again. The overhead cost is just too great. Plus, we’ve been navigating life for the past 7 years very successfully with no car payment. The answer for us has been to buy cars that are still in good condition, have low-ish mileage, that are under $10k. If we cannot pay outright, we focus our efforts to get rid of the small-ish debt as quickly as possible. So, I took a guess that we’d need a new-to-us car every 8 years or so, and factored in 10k for that over the span of 8 years. This means saving $1250 per year for a vehicle to allow me to buy it outright when the time comes.

Your numbers and line items will be different than mine, but hopefully you get the idea.

To easily calculate my estimated annual expenses, I opened a new budget in YNAB and entered the values in each category, which gave me a monthly amount between 5-6k. Then, I multiplied that by 12 to get my estimated annual expenses. You don’t need YNAB to do this of course. Free options include Google Sheets or good old fashioned pen and paper.

FIRE budget expenses
Paper budgets. Still possible!

2. Multiply your annual expenses by 25 to calculate your FIRE amount.

As mentioned in step one, I said my monthly expenses were between 5 and 6k. Let’s round down to $5k for easier maths. 5,000 x 12 months = $60,000 per year is my family’s annual expenses.

$60,000 x 25 = 1,500,000.

WOWZA. The first time seeing this number is a shocker. 1.5 million? That’s impossible! Especially when starting at the ripe old age of 42! How will I EVERRRRRRRRR!!!?????

Once I got over those feelings, I considered how much Hubs and I have saved already in our retirement funds, and what those could possibly be worth in the 10+ years it will take me to reach FI. That took a chunk out of the above number. As did my Hub’s pension from his current job. However, I still need to come up with a cool million. The other good news is, we’re going to keep contributing to our retirement savings and pension throughout the process, so that will continue to grow. Even more good news is, there are regular joes like me (and possibly you) who are achieving FIRE on a daily basis. It is actually possible. Disclaimer:  not without hard work and sacrifices.

STILL – How do I come up with a million dollars?

Well, I started by reading the ChooseFI article I linked above. You can learn the basics of some of the strategies that have been used by people who are now financially independent.  One of the most important ways is to reduce the amount of expenses you need to live. For example, what if I could get my $5k monthly expenses down to $4k?

4,000 x 12 = $48,000 annual expenses

48,000 x 25 = 1,200,000 needed for financial independence.

Still lots of cash, but also 300k less than what I needed when my expenses were higher.

What’s Next?

My first order of business is to get rid of debt. I’m working on that by budgeting the crap out of our lives and throwing as much as I can at debt. We  owe about $20,000 outside of our mortgage. My main tool to accomplish this is YNAB, combined with obsessive budgeting.

Second, I’m making strides to lower expenses by making sure I have the best rates on things like utilities, insurance, and mobile phones, and reducing discretionary spending on groceries and eating out. All of this should *hopefully* lower my annual expenses. I need to laser-focus on expenses over the coming months to ensure I haven’t forgotten anything.

Third, I’m listening to podcasts, reading articles and books, and trying new things to see what we can do to accelerate our income. How can we bring in extra funds to reach FI a bit sooner? Side Hustles are a thing!

If you’ve read this far, KUDOS to you! Feel free to give me your thoughts in the comments below. Happy FIRE-ing!


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