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FIRE, an acronym for “Financial Independence, Retire Early” is trending as a new financial lifestyle. In a nutshell, FIRE promotes extreme savings in your 20s, 30s, and 40s, with the goal of being able to live off passive income from the accumulated nest egg much earlier than typical retirement age. Some proponents suggest saving 70% of your income until you have collected 25x your annual salary, cutting your working years in half. Extreme saving is not a new idea, but the phrase has taken off in the last couple of years, creating a cult following online.
Putting aside additional savings to fund a “work optional” lifestyle is a fantastic idea in theory, but most Americans would find it quite difficult to only live on 30% of their income without making DRASTIC changes. If you are willing to downsize, live with roommates in a cheaper part of town, eat beans and rice, drive an old car/take the bus, and limit purchases, you could be successful at FIRE. However, this level of deprivation may cause unintended sacrifices that impact your social life and happiness.
Our take on FIRE is to find your happy medium. For example, you absolutely should increase your savings rate incrementally every year if you can afford to do so, but initially choose an amount that’s attainable. To help you get started, these are the questions we encourage clients to consider:
1) What is your current cash flow?
Do you have a firm grasp on how much you spend on monthly groceries? Going out to eat? Gifts at the holidays for friends and family? The key here is to consider all expenses, not just big-ticket fixed items like your car payment or mortgage. Once you have an idea of how much you are spending compared to household income, you can then evaluate your current savings rate.
2) Where can you cut back to increase your savings rate?
Can you meal prep on Sundays to avoid going out for lunch during the week? Can you stay in to watch a movie instead of going to a theater for date night? Are you willing to have a “no-spend” week? Some people use tracking software (our firm provides EMoney to our clients) to help set up electronic budgets to alert you when you are close to going over set categories of spending. Alternatively, can you bring in additional income via a side hustle? Can you work additional hours at work to qualify for overtime pay? Make an honest assessment to determine where you could potentially improve your cash flow on a monthly basis.
3) Are you debt-free, or leveraging debt appropriately?
A mortgage with a low-interest rate is an appropriate means of financing a lifestyle you want, while potentially building equity via real estate. If you still have student loans or credit card debt, though, your increased cash flow should go towards paying this off ASAP. Just make sure you have 3-6 months of living expenses built up in an easily accessible emergency savings account as well.
4) Outside of your emergency savings, are your accounts keeping pace with inflation?
Historically, inflation rates average around 3% annually. This means that your purchasing power decreases, as the cost of goods increases over time. Remember when you could buy a Coke bottle out of a vending machine for a dollar? Your parents or grandparents may even recall purchasing a soda for a quarter! That’s inflation at work. If you’re planning to retire early, this means you need to account for inflation over several decades. The best way to maintain your purchasing power is by investing excess savings in the stock and bond markets and taking advantage of compounding interest over time. A Financial Advisor can determine the best investment strategy for you.
5) Are your investments in a diversified portfolio in line with your risk tolerance?
Trying to time the market to buy and sell holdings is incredibly difficult to do. Diversification via broader index funds and investing consistently (to take advantage of pullbacks) has proven to be a more successful investment plan for most Americans. The concern with the FIRE movement is knowing how risky you can or should be with your asset allocation depending on your time horizon to retirement. For example, if you are closer to reaching your retirement goal, you don’t want 100% of your assets invested in the stock market. A comprehensive financial planner can help determine how much risk you should be taking on by looking at your finances holistically, and ensuring portfolios are rebalanced regularly according to your needs.
The road to early retirement is still a long one, so you’ll need to regularly evaluate your progress, reassess as needed, and don’t forget to acknowledge small victories!
Our advice is to push yourself to save more, without going to the extremes of the FIRE lifestyle. If you would like additional accountability, Trilogy offers progress checks through our Decision Coach process more frequently than annual reviews. And if you need a road map to help find your path to success, reach out with any questions here.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.
As someone who works directly with clients on helping them with their financial plans and investment decisions, it wouldn’t be too far off to think that I might not do too bad on my own personal investments. Well, truth be told, I have indeed made some high-return investments over the years. The funny thing about that is when I think about “the best investments I ever made”, they are not stocks, bonds, mutual funds, real estate, venture funds, or the like. The best investments that I have ever made came from investing in myself and/or my practice. The returns may be harder to quantify, but I would venture to guess that it has been exponential. Below are my top three “best investments I ever made”:
Going Back To School For An MBA
I’ve always been someone who wants to constantly improve, both as a person and as a professional. In an article that I had previously written, I discuss how an MBA prepared me for my career as a financial advisor. This was a both a huge gamble and a big-time winning investment for me, especially since I initially entered business school without a clear roadmap of where the advanced degree would take me. After going through the MBA program at USC’s Marshall School of Business, the greatest value I gained came from improving my qualitative skills, such as working with people, networking, effective communication, work ethic, and time management. While I already had these skills at a basic level, it wasn’t until after obtaining my MBA that I realized a deeper level of utilizing those qualitative skills in my career.
Hiring A Personal Trainer
Without our health, we will not be able to enjoy all of the great opportunities at our disposal today or in the future. Because of this fact, I strongly believe that hiring a personal trainer was one of my best investments. In this article, I draw several parallels between personal trainers and financial advisors, ultimately discussing the value that both can bring, respectively, to your health and finances.
Investing in my health by hiring a personal trainer is one of my best investments for several reasons:
Education
For most, it may not make sense to have a personal trainer for their entire life. However, the knowledge and education around the body, nutrition, exercises, etc. that you will gain from hiring a personal trainer will reap returns for the rest of your life. By being more aware and knowledgeable than you were before, you may miss out on potential future injuries or poor food choices that can lead to debilitating diseases.
Consistency
We are more likely to stick to certain regimens when we are simply told what to do. By being on a plan and schedule with my personal trainer, I did not have to worry about anything except for showing up and working hard. We were on a consistent regimen, and I saw results; in fact, I lost more than 15 pounds over the course of several months when I compared my heaviest to my lightest weight!
Decreased Future Medical Costs
By being consistently active and doing exercises that I would not normally do on my own, my personal trainer made sure that my comprehensive training program would benefit me in the realm of longevity. Because of that, I decrease my chances of needing to undergo major surgeries that someone who lives a sedentary life may have to undergo. This means less money spent on future medical needs and long-term care.
Spending Time To Imagine And Dream About The Future
Sometimes work, family, and social events take up all of our time. However, if we never stop and take time to plan, strategize, and dream, we will never accomplish our goals, let alone have something to work towards. While it may not seem like an investment, “spending time to imagine and dream about the future” may be the lowest-cost, highest-yielding investment there is.
In this article, I talk about planning ahead and setting financial goals. It is important to be proactive in planning for the future that you want. The key here is to write your goals down, break them into smaller goals, and find someone (or a community) that will hold you accountable. Your success lies heavily in setting “meaningful” goals. When you set goals that are meaningful, you will be much more likely to reach them.
For me personally, I’ve found that in those times that I dedicate to imagining and dreaming about the future, I’m able to create a reinvigorated excitement for what’s ahead. The return from spending time planning for your future should not be discounted. The yield is immeasurable, and all it costs is your time, creativity, and dedication.
The investments discussed above are not what you’d typically discuss with your financial advisor. However, I hope you were able to see how much of a return each of those items have provided me. With that said, if you are contemplating post-secondary education, different ways to invest in your health, how to map out your future goals, or anything else, please do not hesitate to get in touch. You can always call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com.
