The idea of financial independence is oh-so-tempting, and you’re just wondering if you can handle the heat of a FIRE budget. But is it really as hard as it seems? If you’re pursuing financial independence, setting up a FIRE budget is key to measure your savings rate, monitor your progress, and plan for the future.
“Retirement age” used to mean something—you had to be in your late 50s, at the young end, and probably more like 60+. It was a milestone marked by sheet cake and maybe a ‘thank you’ plaque, when, after serving diligently for decades, you could finally say farewell to the workplace.
Things are faster, now. We’ve got movies on demand, same-day deliveries and, for some, the option to retire much sooner. Yep, there’s a growing trend to take whatever measures are necessary in order to embody a sentiment commonly found on coffee mugs and throw pillows: ‘live each day to the fullest’ …
Save Your Cash, Master Your Time
And the trend has a name. It’s called FIRE, which is short for “financial independence/retire early,” and it boils down to the idea that age no longer dictates retirement. Money does. Save enough cash, and you become the master of your time (with the option to retire, if you want to).
People who seek FIRE, let’s call them FIREballs, retire in their forties, thirties and even in their twenties. Sounds pretty good, right?
Optimize Your Monthly Income
To achieve financial independence, you already know you need to save money—a lot of money. With FIRE, you’re saving enough cash to be decades ahead of your expenses—which requires not just saving, but investing (and maybe even a side hustle).
The math, if not the realization, of FIRE is pretty easy. Mr. Money Mustache sums it up:
“… take your annual spending, and multiply it by somewhere between 20 and 50 [years]. That’s your retirement number. If you use the number 25, you’re implicitly using a four percent Safe Withdrawal Rate, which is my own personal favorite number.”
The “Safe Withdrawal Rate” is the maximum rate at which you can spend your savings if you want it to last you for the rest of your life. Why four percent? Well, it’s calculated under some assumptions. Mr. Money Mustache explains:
“At the most basic level, you can think of it like this: imagine you have your ‘stash of retirement savings invested in stocks or other assets. They pay dividends and appreciate in price at a total rate of seven percent per year, before inflation. Inflation eats three percent on average, leaving you with four percent to spend reliably, forever.”
So, if you need $40,000 per year to live comfortably, multiply it by 25 and you’ll see that you need $1,000,000, assuming the four percent safe withdrawal rate, to say goodbye, forever, to your j-o-b.
How to Set Up a FIRE Budget
You know you want to taste that sweet freedom of waking up in the morning with total control over your day—but what do you need to do NOW to get there? Set up a monthly budget to plan your spending, increase your savings rate, and optimize your progress toward financial independence.
We are of course remarkably biased (with good reason) to recommend a zero-based budget like YNAB (shameless plug) to gain total control of your money and set yourself up for financial independence.
There are a few simple steps to set up a FIRE budget:
- Create a budget
- Make a list of your expenses
- Using the money you have now, make a plan for spending
- Increase your savings rate and confidently track your progress toward financial independence
Set Up a Financial Independence Category Group in Your Budget
If you’re pursuing FIRE, you might find it remarkably helpful to add a few line items to your budget. Create a Financial Independence Category Group and add the following categories (whichever categories apply for your situation):
- After Tax 401k
- Stock Investing
- Real Estate
As money flows in each month, you’ll assign the cash to your immediate and non-monthly expenses, and just as important—you’ll earmark dollars for specific FIRE-related savings. Whether you’re feeding your FIRE dreams with tangible assets or investment-related accounts, turn it into a reality with your budget.
See how Ivan uses his budget to cut 20% off his monthly spending overhead and track his FIRE progress.
How to Achieve FIRE
There are a million ways to save the million (or however many) bucks that you need, but they all boil down to:
Spending less cash will obviously help you save more, and if it’s a sustainable lifestyle for you, it also means that your savings goal can be lower. You won’t need as much cash to retire if you’re happy living on fewer dollars.
For example, if you cut your cable for life—a savings of about $100 per month—you could achieve financial independence on $30,000 less in savings. (That’s $100 multiplied by 12 months for a total of $1,200 saved per year. Then, multiply $1,200 by 25 years, and you get $30,000.)
In addition to full-time jobs, many FIREballs work part-time jobs or run their own businesses. They also seek passive income streams, like rental properties.
Is FIRE Worth It?
Only you can decide if FIRE would light you up. If you’re considering FIRE, what do you hope to gain? Your driving purpose behind striving for FIRE will help you focus on the prize, not the strain of a dramatically overhauling your life—cutting costs and working more—to hit your savings goal.
If you’re not sure, you can always give FIRE a test-drive. Try cutting back for a season, or picking up a second job. Maybe you’ll stick with it long enough to partially retire early. You could also try saving in short bursts, taking breaks to return to your ‘normal’. If you decide not to jump into FIRE with both feet, these temporary changes to your lifestyle will help you pad your retirement fund, even if you decide not to strive for an early retirement. Win-win.
Set up your budget today to crank up your savings rate and track your progress.