I discovered FIRE (financial independence retire early) back in 2011 thanks to Mr Money Mustache, a financial blogger who retired after nine whole years of work at the ripe age of 30.  The basic premise is this: you can afford to retire once your investments produce enough passive income to cover your expenses.  The number to shoot for is 25 times your annual expenses.  This number comes from a famous study in the 1990’s where researchers looked at historical performance of stock and bond portfolios and concluded that a 4% withdrawal would be enough to last for decades of retirement with a greater than 95% certainty.

So once you have enough money where 4% will cover your annual expenses, you can afford to retire.  For example, if $40,000 a year is enough, once you have $1,000,000 (4% of $1m is 40k), you never have to work again if you don’t want to! 

A million dollars, though.  That’s a lot.  That’s going to take forever to save up, isn’t it?  Actually, no.  You won’t have to save all that money up.  The stock market will do most of the heavy lifting.  Since I started investing, I’ve saved and invested roughly $350k.  The market did its thing, and now my net worth has grown to over $1.1 million.  That’s almost $700k that was made for me passively.  As time goes on and I continue saving part of every paycheck and investing it, that difference will continue growing thanks to the magic of compound interest.

How do I get started?

Well first, you have to know how much money you can save.  What is the gap between your income and your expenses?  Go through the last three months of spending and get a good idea of where your money goes.  Calculate an average monthly spending amount and subtract that from your monthly take-home income.  The difference (or gap) between what you make and what you spend is the savings gap. That is the amount you will look to save (and then invest) every month.  As you look at your spending, see if there are any areas where you can cut back. The more you can save, the faster you can reach FIRE. (In the resources tab of this website, you can download my money file. There are budgeting tools, investment calculators, and other tools.)

Next, you want to pay yourself first

There are certain types of expenses that will never not get paid.  Rent is an example.  It doesn’t matter how much money you have, when the first of the month rolls around, you must pay the landlord (or mortgage if you’re fancy like that) or you risk losing your home.  It’s a high enough priority that people tend to make it happen.  The successful future millionaire understands that financial freedom is just as important as the rent and acts accordingly.  Rent, bills, and food will always get paid because they are priority; prioritize paying yourself as well.  Set aside money automatically, every single paycheck.  It may not be much at first, but consistency is key.  Your rent must get paid, so must your freedom fund.  When I first started, I was only putting away $90 a month.  That’s not much, but from those humble beginnings, I was able to build something great.

Okay, I reviewed the budget, cut where I could, and have started setting some cash aside for retirement.  What now?

Now you open a Roth IRA.  This is a tax-advantaged retirement account.  You’ll pay taxes on the contributions, but it will grow tax free, and every dollar you pull in retirement from that account will be completely tax free, so when you retire, you won’t have to worry about taxes on your investment income in retirement.

Within the Roth IRA, you would invest in low-cost index funds such as Vanguard’s VTI (total stock market index fund), which has an annual fee of only 0.04% of assets. Compare that to the 1% usually charged by actively-managed mutual funds.

If you’re not convinced tax-free is a good thing, there was a recent news story about Peter Thiel, one of the co-founders of Paypal.  In 1999, when the company was still private, he put $1,700 worth of PayPal shares at $0.001/share into his Roth IRA.  That money has since grown to over $5 billion, all of which will be completely tax-free when he reaches age 59.5 in a few years. If he’d had it in a taxable account, the taxes would probably have been half of the $5 billion.

How can I open a Roth IRA?

Go to the website of Vanguard, Fidelity, Charles Schwab, or really any other brokerage or bank that offers retirement accounts.  You will need your bank account info, your employer information, and other stuff you should already know such as your birthday, social security number, and address.  It shouldn’t take more than 30 minutes to set it up.  I’ve helped people set it up on their phone in 15 min.  Transfer some money from your bank account once it’s set up and wait about a week for the money to settle (transfer).

Once the money deposits, you want to invest it.  Don’t just let it sit in cash, or you’ll be losing value due to inflation.  Look for a low cost S&P 500 or total market index fund.  Low cost means the expense ratio is 0.20% or less.  Vanguard’s Total Market Index Fund (mutual fund: VTSAX, ETF: VTI) has an expense ratio of only 0.04%, and Fidelity’s FZROX is even lower.  Do not have your money professionally managed.  It seems counterintuitive, but money managers tend to underperform a simple passive index fund.  Just put money into the index fund regularly, year after year.

For 2021, the maximum amount you can contribute to an IRA is $6,000.  If you’re over 50, you can contribute $7,000.  Double those figures if you’re married (one for you, one for your spouse).

If you have a 401K through work, contribute to that as well.  The limit for 2021 is $19,500 (or $25k if you’re over 50).  The investments you choose should follow the same rules as above.  A low-cost total market or S&P 500 index fund.

If you’re lucky enough to be able to max out both your retirement accounts, any extra money should be invested in a taxable brokerage.  You can buy the same funds here as you’ll be able to get in your Roth IRA.

The IRA and 401K are both tax-advantaged retirement accounts and under no circumstances should you invest in a taxable brokerage before you have maxed those two out.  That’s because a taxable brokerage gets taxed three times; once when you contribute (payroll and income taxes), once every year on interest and dividends, and once when you sell (capital gains).  With retirement accounts, you only get taxed once.

It will be slow going at first.  Very slow.  You will have contributed $10,000 and only see a gain of a few hundred dollars.  Or your investments may lose value temporarily and you end up with less money than you put in!  However, you must keep your focus on the long term.  Don’t pay attention to your portfolio balance, don’t sell (until you retire), and be patient.  Just contribute regularly and it will pay off over time.

Do this year after year, and eventually, you will be a millionaire! How fast you get there will depend on how much you can invest. Make as much money as you can and spend as little of it as you can. Those savings are the fuel that will light your FIRE (financial independence retire early).

See you when you get here.