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How To Set Yourself On FIRE—5 Steps To Build Your F-You Fund

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How To Achieve The FIRE Lifestyle

The thing about the personal finance (PF) community is that we love our acronyms. 

But there’s one, in particular, that’s a juicy carrot for most of us frugal folks: FIRE. 

FIRE stands for “financial independence, retire early.” For many of us, FIRE is the finish line. That’s because retirement isn’t actually a magical age—you don’t have to toil away for The Man until you’re old and gray. 

Nope. If you have enough money in the right places, you can retire at age 40 and move to Thailand, or anywhere else that you want.

People achieve FIRE with a deceptively simple formula: save more, earn more, and invest aggressively. 

And I do mean aggressively: FIRE’d individuals save 50% or more of their monthly income to retire early. 

FIRE  doesn’t mean you have to retire from your job, either. It just means you have more options in life. You live a life where money doesn’t dictate what you do, where you live, or how your daily schedule runs. 

To put it bluntly, FIRE gives you enough money to say “F-you” to anything that doesn’t serve you. FIRE’d people don’t need to work for money, although many choose to continue working for funsies. 

“But that sounds absolutely insane, Kenzi,” you might think, “How in the world do I retire forever at age 40?” 

I’m glad you asked. There’s a formula FIRE folks use to set goals, adjust their money habits, and eventually retire early. 

To save enough for retirement, you need 25 times your annual expenses in investments. That’s a really general rule of thumb, but this should allow you to withdraw 4% of your wealth every year, ensuring you (hopefully) never run out of money. The point is to bulk up your investments so much that you’re living off the dividends and not touching the principal. 

5 steps to achieve FIRE

But you’ve got to get your shiz together to see juicy dividends in the first place. Here’s the deceptively simple path to achieve FIRE.

1. Do some math

FIRE requires knowing your finances better than your mother-in-law knows your business. That means tracking:

  • Debts
  • Income
  • Assets
  • Monthly and annual expenses

Remember, money is a tool. Do some math to see how you can put this tool to better use. I guarantee you’re bleeding money somewhere—for me, it was a crazy-as-hell $1,000 grocery cost for two people. 

Dang!

Once you get an idea of your assets (income) and liabilities (expenses), you can calculate the amount of money needed for FIRE. 

So, calculate your yearly expenses and multiply that by 25. That will tell you how much cash you need to save. For example, if you spend $65,000 a year (look at you, moneybags), you need $1.6 million in investments. 

And yes, I know that’s a ton of money. 

But you’re making a plan to hit that goal over a number of years. Many people spend 10 – 15 years pursuing FIRE. Depending on how long you feel like waiting for FIRE, calculate a savings rate. If your household earns $100,000 a year and saves 60%, you’ll reach $1.6 million in about 26 years. 

If that sounds like a long time and a lot of work, don’t worry. There are a few ways FIRE peeps speed up their retirement dates. 

2. Cut your expenses

You’ve calculated your income and liabilities as they are today. But you have the power to adjust your habits, and that means lowering your FIRE number.

By cutting expenses, you’ll free up extra cash to not only pursue FIRE more quickly, but reduce the amount of money needed to retire in the first place. 

That might mean:

  • Buying only used cars. Or walking or riding a bike everywhere. 
  • Cutting your housing costs. I moved across town to save $400 a month on my apartment rent. Yes, it was a questionable apartment complex, but that extra $400 a month meant getting debt-free a year faster. 
  • Cooking cheaper food. I switched to eating whole foods and cheap bulk grains, like rice, to save on groceries. 
  • Cutting any expenses that you don’t care about. That includes streaming services, subscription boxes, and fast fashion. 
  • Reducing your tax liability. You can do this by contributing more to your 401k (cough cough investing cough cough) and a Health Savings Account (HSA).

This isn’t about living like a hermit (unless that’s your thing). Cut expenses that don’t serve you. FIRE is about spending money where it matters, not hoarding every little cent. 

3. Increase your income

You’ll likely free up some cash when you cut expenses. But that’s just one side of the coin. You also want to boost your income to reach FIRE faster.

And I’m a living example of how powerful this can be. 

I went from earning $40,000/year to $65,000/year by taking a new job. Y’all. That extra $15,000 went straight to our debt load. We didn’t increase our lifestyle at all, putting that money instead toward our debt. 

That’s the goal here. Even with a good salary, it takes years to achieve FIRE. You want as big a salary as possible to achieve your goals faster. 

So ask for that raise, take a promotion, get a certification, or take on a side hustle. In this case, more money means less problems. 

4. Invest

Once you’ve cut costs and start earning more, it’s time to put that money to work. If you have debt, use that money to get out of debt first. 

I’m happily out of debt today (after years of work, I should add), and that means I can now invest a huge chunk of my income. 

FIRE’d folks love investing in low-cost index funds. These often give conservative returns, but they can be more predictable than other investment options. Index funds also have lower fees, so you keep more of your money. 

(I’m not an investment pro, though, so do what’s best for you, and maybe read up on it a bit before you hit the ground running!)

Stuff as much money as you can into these investments every month. Make sure you reinvest the dividends so the money grows more quickly. 

5. Track your net worth

From this point on, it’s all lather, rinse, repeat. Your net worth will slowly grow with time. As your investments grow in worth, your overall net worth will increase, too. Track where you are. Look at your budget at least once a month to track your FIRE progress. 

The bottom line

I know this all sounds freakin’ impossible, but it’s doable. Even if you don’t retire early, pursuing FIRE will leave you much better off than when you started. 

FIRE sounded impossible to me back in 2015. While I’m not sure what the future holds, today I’m a debt-free, self-employed homeowner, and it’s all because I set myself on fire. Not literally, but you get the point.

Everyone’s life is different, but I don’t think you’ll regret eliminating debt and living free of money worries. Adjust your lifestyle and expenses accordingly, but try to save as much money as possible. That will only pour gasoline on your FIRE.

And once the fire starts burning, it’s pretty tough to put it out.

Contributor’s opinions are their own. Always do your own due diligence before investing.

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