Independence means not relying on anyone or anything else; strong and able to survive alone; free. Sound pretty good? Let’s take it a step further and explore financial independence. That means you have the ability to pay all of your living expenses without having to work. Sounds even better! For people who achieve this financial independence, the income covering their ongoing living expenses usually comes from investment portfolio income and other business activities that they’re not “actively” managing. This is called “passive income” (ex. rental property, royalties from something you sell, etc).
Perhaps you’ve heard of the FIRE Movement (Financial Independence Retire Early), which became popular with millennials about 10 years ago. They saw their parents and grandparents working 40-45 years (some at the same company) in high pressure jobs, long hours, stressed and trying to save money to retire in their mid to late 60’s. But they noted that people may not make it to that age or work as long as they had hoped due to health or other issues. Some called this their “awakening” and adopted the FIRE Movement so they could “retire” while they were young and healthy. But “retire” may not mean leave the workforce. It may mean they do something different with less pay, less stress and more time to spend on other things. How do they do it? The common themes are saving between 40-50% of their income in their current jobs, investing aggressively and living on minimal expenses (ex. several roommates, no new clothes, minimal food budget, etc) and paying only for necessities. When they hit a certain pre-calculated threshold (what they think it will take to live on for many years after that), they “retire”.
The FIRE Movement isn’t for everyone, but there are 3 things we can all take from it and apply now to help us reach our own “retirement”, whatever and whenever that is.
1- Start saving as much as possible, as early as possible. Set up and maintain a rainy day and emergency fund. Enroll as soon as you are eligible and max out your contributions to a 401(k), IRA, HSA and other brokerage accounts and let the balances grow and compound.
2- Live on minimal expenses; don’t take on a lot of debt. Focus on your must-pays (rent, car, food, utilities) and get them as low as possible. Use cash and only buy what you can afford and really, really need.
3- Set a retirement goal. Think about your idea of retirement (traveling, working part time, volunteering, second career, etc), when that would begin and put together a plan to achieve it. Estimate your ongoing living expenses, how long you expect to live and what income streams you’ll need to cover it.
Whether planning for the future feels overwhelming or exciting, BrightDime is here to help!