What better topic to choose from as our inaugural post than defining, and diving into what it means to pursue Financial Independence, and Retiring Early (FIRE). Why does FIRE have us fired up as a couple? Well any thing that is important in the Military has an acronym right? Not a good answer, so let’s proceed. Before we get into the nitty gritty details, let’s start off with the basics first. So what is FIRE?
Financial Independence is the self-realization that you have the freedom to choose what you want out of life. It stems from the understanding that you’re only bound by the financial shackles you create. To become financially independent you must first understand what your financial shackles are, and quantify them into cold hard numbers. You become financially independent when your assets (pension/investments/business income) equals twenty-five times (25X) your yearly expense.
Often times society has this preconceived notion that retiring early can only be accomplished by the über rich. Many people associate the word “retirement” with someone of retirement age (60’s). They also believe you must have an obscene amount of money saved up before you can actually retire early…boy are they wrong! Retiring early is simply the choice to stop trading your time for money. It’s about refusing to continue grinding away on the hamster wheel of a W-2 job. You can only make this choice comfortably once you achieve the feat of financial independence.
THE CHOICE – Purposefully making financial independence your goal
You’re probably thinking all of this sounds fine and dandy, but how can it actually be achieved? As stated, the main factor prohibiting you from achieving financial independence are the financial shackles you’re bound by. Everyone’s shackles are different, as said in the Bible “For where your treasure is, there your heart will be also” (Matthew 6:21). Is where you’re putting your money each month where your heart is? Do you value having the latest gadgets, biggest house on the block, and eating at expensive restaurants? Or do you value having the freedom to choose what you do with each day left on this earth?
Financial Independence is about shifting your focus to where your heart is. Once mentally there, you’ll also need to start pooling your treasure towards achieving that goal. Upon achieving financial independence you’ll be able to pursue the interests, and passions your heart desires. To do this you must first determine what type of lifestyle you want to have (budget). Finally, formulate a plan to save enough money to sustain that lifestyle.
THE SOLUTION – The math behind FIRE
In 1998, three professors of finance from Trinity University published a study concerning “Choosing a withdrawal rate that is sustainable“. They determined that it’s safe to pull out four percent of your portfolio over a long period of time. For example, let’s just say that Mrs. Dollarman & I require $6,500 per month flowing into our bank accounts to enjoy our life comfortably. This should be more than enough to put food on the table, have a nice home, and travel. In order to become financially independent we’ll need to amass enough assets to cover our expenses. Here’s how the math from the Trinity University study looks like:
$6,500 per month equates to $78,000 a year. $78,000 per year X 25 = $1,950,000 total investments needed to be financially independent ($78,000 equals 4% of total).Trinity Study aka “Retirement Spending: Choosing a Sustainable Withdrawal Rate,” by Philip L. Cooley, Carl M. Hubbard, and Daniel T. Walz
THE PLAN – How to achieve financial independence?
As you can see, the assets needed to break free of your shackles is directly proportional to your lifestyle. Determining how much you’ll need each month is the most important part of this equation. It’s something only you can determine; where your heart is. Some of the tools available to help direct where your treasure lies are tax & income optimization, frugality, and investing.
There’s a wealth of information on these “tools” that we’ll be sharing to help you achieve this seemingly insurmountable goal. Mrs. Dollaman & I made many mistakes in the past because we weren’t armed with this knowledge early on. If we had started this journey a decade ago we could’ve been just a few years off from achieving financial independence. Knowing what we know now, we’re pumped to begin this long arduous journey towards Marching To FIRE.