Everyone has an opinion on savings rates. Some say, just save three percent and work your way up to 10 percent or 15 percent, which usually means a one-percent annual increase done automatically if you know to check the box on your 401K form.
I believe everyone should know the following: how much they want to save and how long they want to take to save that amount.
You don’t need to follow some industry standard or the advice of so-called experts. The formula for building wealth is simple: spend less than you earn, save the difference, and invest it.
The more you save the more you’ll have to invest. And if you are passionate and focused about your financial goals you will find a way to increase your income and continuously look for ways to lower your expenses.
Most people are saving for a house, or retirement or both. This is usually a long passive 30-year journey because that is the only option most of us have ever seen. Eight months ago, I was saving for a home and eventually a nice retirement. I was saving between eight and 10 percent of my earnings. Then I was introduced to FIRE.
FIRE is an acronym floating around the financial underground and it stands for: Financial Independence, Retire Early. A fire was lit in me after reading and truly contemplating the idea of being financially independent before turning 65. The idea of retiring before 65 is virtually unheard of. They keep pushing back the age of social security and getting everyone used to the idea that social security probably will cease to exist. Even Suze Orman, who gives amazing financial advice, is now advising everyone to retire at 72.
Sorry, Suze! I’m really not trying to hear that.
Anyway, back to my new pursuit of FIRE. I was intrigued but I had to ask myself, “What does financial independence look like?” It looks like whatever you need to comfortably pay all of your monthly bills. If your mortgage/rent, car, food, gas/electric and insurance costs $2500 per month then you would multiply that by 12 ($2500 x 12) and you will need $30,000 a year to retire. Then you multiply that by 25 ($30,000 x 25) and you will need $750,000 to be financially independent and retire early if you desire to do so.
There is one catch: You won’t be able to do the RETIRE portion of FIRE if you don’t step on the savings gas. If you are only saving 5-10 percent of your income, it will take the normal 25 to 35 years to reach financial independence and be ready to retire. But if you double or triple your savings rate to 30, 40 or 50 percent, you get to take decades off your retirement age for all your efforts.
Depending on how quickly you’re able to grasp and how aggressively you execute your plan to become financially independent and retire early will determine if you get to leave your office years ahead of schedule.
I’ve done the math for myself and I’m not saving enough. It will take me approximately eight years to reach financial independence if I can reach a 43.5% savings rate as quickly as possible for no less than six and half of the eight years. And if I’m able to somehow save 50% or more, it will take even less time.
In 2016, my savings rate was around 17%. This year my savings rate was 28%. With just small increases made to my automatic deductions, I will have a 30% savings rate in 2018. This will be my max savings rate until I’ve paid my credit card in full or I’m able to increase my income. However, my goal is to find a way to hit 44% as quickly as possible before the end of next year and then let compound interest and dividends do the rest of the heavy lifting.
Do you want to get off the 30-year government plan and be on FIRE? Get busy saving!