How to Get Out of the Rat Race: Your FIRE Starter Guide
Ever wish you could trade in your 8-to-5 job for a life of freedom: days filled with what you love rather than tasks and to-do lists? Millions of others wish that too. In fact, there are millions who are trying to get out of the rat race who are on the verge of FIRE. What’s FIRE, you might ask? Well, it’s ‘Financial Independence, Retire Early’. But first, what does financial independence even mean?
Great question. Think of it this way: it’s when your money makes enough for you that you can stop working so hard just to make more money. You know, that trap we often find ourselves in: working to earn those dollars so you can afford to spend them on ways to stop thinking about work. The struggle is real. But there is another way.
The way to escape the rat race to build the life you want is FIRE. It’s not just a thing for the super-rich. And it’s easier than you think, if you break it down into easy steps and have the right tools. I’ll break down the FIRE concept into easy-to-digest steps, tell you some of the do’s and don’ts I’ve learnt along the way, and help you figure out if FIRE is right for you.
To get started, what you need to do is figure out where you’re at financially. How much do you spend every month? How much are you saving? What kind of life do you want to live when you aren’t working full-time?
First, track your spending for a few months. How much are you spending on food? How much on entertainment, utilities, rent or mortgage? Add up all these expenses to get a better idea of what it costs you each month to live. Remember, every dollar counts. (For some ideas on more basic budgeting practices, check out my article here.)
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A good goal is to aim for $35,000 a year in total expenses. This will vary by person and by location. However, within the FIRE community, $35,000 has been found to be a pretty consistent and achievable goal. Depending on the current stage of your budget and your current living situation, this may or may not require some big changes. However, I never said committing to FIRE was for the faint of heart!
Next, figure out what your FIRE number is. Your FIRE number is the amount of money you’ll need invested so that you can live off of it without working again. For example, if you’re going for FatFIRE (more on that soon), you might be aiming for $100,000 a year to retire off of. While there are different ways of calculating this, the 4 percent rule is a good one to use to help ensure your early ‘retirement’ doesn’t run out of money. So, if you want to spend about $100,000 a year, divide that by 0.04 ($100,000 divided by 4%) and you’ll see that you need a nest-egg of about two and a half million dollars.
“Just $2.5 million; if I could do that, I wouldn’t need to read this article!” Well, that’s just one version of FIRE and the one which people typically dream of when they envision retirement. HOWEVER, commitment to FIRE is half just doing the math. Think back to your first job after college and how you were able to make the ends meet (after a while). The first half of FIRE is accepting that you can live off of less and just sticking to your plan (and allowing for a few splurges along the way).
Unless you’re already working in Finance or IT and doing it remotely out of Cleveland or Syracuse, “FatFIRE” might just mean regular retirement for you or might even be unrealistic altogether. So, let’s talk about some other types of FIRE. LeanFIRE is more commonly what people think of with FIRE and/or general retirement. To get you LeanFIRE number, use what you live off of now or, more specifically, what you’ll need to live off of in FIRE retirement. Good news, if you’re able to cut your pre-FIRE expenses to $35,000 a year then you already know what that number will be!
For myself though, I prefer to add in a buffer and make it $45,000. While there are a lot of hobbies and activities you can do that require little money, I assume at least $10,000 more in expenses. So, $45,000 divided by 4% (0.04) gives us $1,125,000. Ok, that’s a lot more achievable than $2.5 million! That said, we see that we would still have to technically be a millionaire before a person could retire so let’s keep going.
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CoastFIRE, BaristaFIRE, and CashflowFIRE are all very similar so I’m going to address them more or less together. CoastFIRE means working those high-paying highly-stressful careers until you’ve put away enough such that the growth of your investments will get you to your retirement number on autopilot. You can then focus on a career you may like a lot more but that may not pay as well; you just need to cover your expenses at this point of your plan. Let’s say you’ve put away $111,800 in investments after 15 years of work. If you’re comfortable using the historical average of an 8% return a year to figure out how much that will exponentially grow by, you’ll see that you’ll hit your $1,125,000 by 65.
If the Financial Independence part is more of your goal over Retiring Early, you’re now free from the weight of having to over-earn and have the flexibility to try a new career that may start you out at a lower salary but that you just may love a lot more.
BaristaFIRE is almost the same except that you’ve generally already hit your early retirement number and have retired from your career, but you still work a part-time or comparatively easier job as part of your retirement plan. That might look like saving/growing your investments to $825,000 then taking a 20 hour a week job at $12 an hour to get to your $45,000 a year. In that same vein, CashflowFIRE is like BaristaFIRE in that your focus is to live off of a disciplined budget long enough to have your investments bring in income, then supplement that income with other things. Sticking with the above examples, it might look like saving $400,000 then using the 4% rule ($16,000) to get to you partly to your hypothetical $35,000 in current expenses, but making up the other $19,000 with other ‘revenue streams’. Maybe your hobby-side-hustle is ready to scale up and bring in $7,000 a year; maybe also you take that barista gig or do some consulting in your field for the other $12,000.
It’s a lot easier said than done to “just monetize your hobby!” though. If it was that easy, everyone would do it, right? CashflowFIRE is the newest flavor of FIRE I’ve seen and my least favorite but if it’s your jam, go for it! (Maybe you’re good at “monetizing your hobbies”; if so, leave a Response below and maybe you’ll give another reader some good ideas!)
More and more people are wising up to the fact that there really is a better way. The average human lifespan over the life of our species has been about 40–45 years old; there’s no iron rule that we should expect to have to work until 62, or 67, (or 70, or even later). But this approach is something that takes time, which is why you need to start now. It starts with a thorough budget, honesty about what goals are most important to you, and follow-thru. Instead of spending every day like a hamster on a wheel, you’ll build the life you want until you have enough money to cover your expenses without having to work again.
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