FIRE! Where is it burning?

in LeoFinance7 months ago (edited)

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I almost got you there, didn’t I? Vel, in this case it is not burning… What I mean more specifically is the FIRE movement. FIRE is the abbreviations of Financial Independence, Retire Early and it is a lifestyle movement where the goal is to ye... retire early with enough money to live of what you have collected. This FIRE movement actually became popular back in the 2010s, hence a very new lifestyle movement. I still got friends and family that do not understand what I talk about when I say that my goal is to retire early. In Norway, they look at me with a big question mark – it is like they got kicked in the head and the brain went dead. My mum gets angry, the government has indoctrinated in her brain that she shall retire when she is 70! Not a day before!

I might exaggerate a bit, but it is not far from the truth. Anyways, I like the thought of being able to retire early, for me I would put it more like; FIRWIW – Financial Independence, Retire When I Want. I mean you cannot just retire; you need to have a plan for what you are going to be doing when you retire. If you do not have a plan, I believe you will get bored or even worse; unhappy and you will eventually fall back to the life you had before FIRE. You need a plan that when you retire, you will never look back – you will never work for somebody else ever again. If you manage that I believe one could achieve happiness.

When are you financially free?

When you have decided that one of your goal in life is to get financial independent the next question should be: when am I financially free? There is no correct answer here, it depends really, in which lifestyle you want to live. Do you want a mansion with a 240 m² swimming pool and a car like Porsche you would probably need a bag full of money? On the other hand, you could buy a studio apartment or a Tiny House like the ones in the TV-show “Tiny House Nation”. Based on the latter you would probably not need a bag full of money, it really depends on what life you want to live. What could be your standard of expectations?

You have found your standard of expectations, now we need to do some quick math’s. No worries, we are talking about percentage calculations you learned in 5th grade - nothing scary about that. I will explain further down the line.

Introducing savings rate!

You probably understand that for mathematics to function you need numbers - in this case you only need one number, the number that will give you financial freedom. But before we dive into that number let us talk about “savings rate” – a common financial term within the banking industry.

Let us say we want a month off from work, I am talking about unpaid vacation. How long do we have to save to afford such a month? This is where the saving rate comes into play. Savings rate is basically the percentage of your salary that you save (scale of 1-100). E.g., you save 10% of your salary then you have a savings rate of 10, and if we save 10%, we need to save for 9 months to afford to take 1 month of vacation. If we, however, increase to 20% and at the same time reduce consumption to 80%, we must save 4 months to afford to take 1 month of vacation. As you understand, we have halved the time we need to save to afford one month of vacation. Vel, the reason why this calculation is so brilliant is that there are two factors that changes when savings are increased. When the rate of savings increases, the monthly consumption goes down at the same time. We need less money to live our lives!

Let us increase the saving rate. We now save 50% of the income every month. For how long do we need to save to finance a month of unpaid vacation? The answer is 1! Ye, I know, mind blowing (If you save 50%, you only use 50% and a monthly salary then lasts for 2 months). What if we saved 75% of our salary? Then we have "turned" the whole calculation and with a month's work, you can finance 3 months of unpaid vacation. If you manage to save 75% for three months, you can do whatever you want for the remaining 9 months of the year. Summer holidays just started in April, where is the champagne guys!?

Return on Investment (ROI)

Based on the above savings rate, whether you have 10% or 75%, the money needs to be invested in something that provides a return. As you might already figure it is not the amount saved to be used as financially independence, your ROI will grant you financial independence.
What is the return rate that you need? Many that have committed to the FIRE movement suggests the 4 % rule as a rough withdrawal guideline. This was the same suggestion as “the budgetary rule” of the Norwegian Government Pension Fund until 2017 when they changed it to 3%. It states that the maximum of 3% of the fund’s value should be allocated to the yearly government budget.
Based on a ROI of 4% you can find the answer of how much you need to save to get financially free:

  1. How much money do you need for a year of living? Find “the magical number” (E.g., In time of writing I need $25 000 USD a year)
  2. What the FIRE movement suggest is that you multiply “the magical number” with 25. Then you have calculated the amount you need to invest in something that gives 4% ROI or higher.
  3. So, if you want to join the FIRE movement you better start saving, or at least get started with a small amount of money each month.

I believe my “financial independence number” in time of writing would be approximately $625 000 USD. Based on the latter that is $25 000 USD a year and approximately $2100 a month. Which is manageable in a country like Norway.

Always pay yourself first!

Then what? When we are done with the quick math’s you only have one job: start saving money. Every month you would need to pay the biggest bill to yourself first; “Always pay yourself first” – which is a phrase commonly used by the FIRE movement.

What is your number or what do you need it to be in time of writing? Let me know! It is exciting to see how people differs! 😊

Note: For the coming posts I will touch different fields within finance but if the interest of FIRE is there, please let me know. It was what got me into finance in the first place. Leave a comment if you have any suggestions based on the latter.

Remember guys; “Keep calm and Save your Money”!
and when I reach my number of financial independence with my brother we would be like;

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Cheers
-olebulls

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if I have to be honest I don't agree with the idea of this movement at all, I agree that pensions are certainly too far away and no one really has time to enjoy their life, but those born with an entrepreneurial mentality never stop being so because that's what they are living for, in reality then having the possibility to retire immediately is really the worst because those who have never wanted to do shit lives on the shoulders of others and this is actually already happening, I sincerely aim at the financial independence that I allows you to create the companies I want, finance my ideas, realize the things I believe in, yes of course I also want to enjoy life but I have no intention of setting myself a goal or retiring myself.
beyond the opinions a nice post!

@ilpaso What a great point of view! Keep up that entrepreneurial spirit of yours! I admire your goals! I agree in your points, it is not ideal to just retire and then give nothing to the society. As I wrote you can't just retire early without any plans. In my case, if I "retire early" my plan is to really turn on the entrepreneurial spirit and find ways to help community so that it can prosper in a positive way. For me it's like when money it's not an issue anymore, I would feel more safe. Then, you can really go on and try and fail on your ideas, because you can, because your financially free :)

I came for the money and stayed for the dopamine detox.

Imo, the great thing about the FIRE trend (and its cousin minimalism) is how it demonstrates how little it actually takes to be happy. You don't need the fancy car, the expensive branding clothes (except for the walk-in closet with suits... Must. Have. It.). I really do notice the difference between now, where I can really appreciate simpler and cheaper things, and before when it was a neverending push for new heights that didn't produce any increase in happiness...

I wrote some of my own thought on the topic here on Leo earlier in a post titled Starting from nothing - the liberation and wealth that comes with financial minimalism. Even though I care less about the idea of retirement and living off dividends or whatever (I really want to work my whole life, not until 70 but until nobody wants me around anymore) but I do appreciate the liberating feeling of knowing that I'll be okey if things go south, and that I can take care of myself by myself if I really have to.

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@fredrikaa Based on your clothing style I knew you where gonna write that you need that walk-in closet!😉 Great, I will definitely read that post of yours!

I really support the latter in your comment, as I also wrote to @ilpaso the feeling of knowing that you will be okey even if things go south must be wonderful.

I believe that although we have all expressed ourselves differently, our goals as our actions show are not so distant, I am founding a new blockchain company x realestate, who knows maybe we can collaborate in the future!
@fredrikaa @olebulls

@ilpaso Would love to hear more of that!

That's pretty interesting, I actually never thought of a 50% saving rate as "work one month, then you get a month of unpaid vacation".

I'm very much into FIRE too ! I think there are a few caveats to that mentality, I see a lot of people who literally decide to sacrifice 10-15 years of their life to retire early by getting their saving rate as high as possible and basically stop going to restaurants and don't allow themselves to enjoy life because they are waiting for the next one. There is nothing wrong with being frugal but I would argue that the whole "sacrificial" mindset is something to be aware of and thread lightly around it.

So what is your plan when you FIRE ? I'm not sure what I'll do yet, there is the usual "travel, see friends, play all the video games, grow a garden" but assuming I retire at 35 I can't do that for 50 years haha. Also I think I like working a bit too much to completely stop working, so I might work part time in an NGO (like ocean cleanup) or teach programming. Activites that I love doing but that pay too little compared to what I could do elsewhere.

Are you trying to say that it's not worth living on spaghetti and oatmeal porridge so that one day, your kids can get extremely spoiled and then fight over what's left of your fortune when you're gone?

Haha, mr. legendary just made a supah awesome joke!

Great thoughts man! I am sure you figure out something awesomeness! You like working a bit much - only if you love what you do aight? :P

To be honest, me personally, the list is so long that I think I would need a own post for that! keywords for now: self-realization!

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