How to Become Financially Independent and Retire Early in 10 Easy Steps
Most Americans haven’t saved enough to retire at the traditional age of 65. If you want to peace out of the workforce decades before that, you’ll need discipline and resourcefulness. (A high income doesn’t hurt either.)
Vicki Robin, co-author of the 1992 bestseller Your Money or Your Life, originated the path to FIRE—or financial independence, retire early. She and her co-author, Joe Dominguez, outlined steps that some young people like Bianca DiValerio and Lily He are following today in their quest for freedom from the 9-to-5 grind. The movement had been relatively confined to personal finance blogs and a Reddit group on financial independence, but it could burst into the mainstream this spring, with the release of the updated version of Your Money or Your Life.
Below are some key tenets of the FIRE movement, culled from Robin and some of her younger cohorts.
Calculate your net worth.
Your first step on the road to financial independence is to calculate where you currently stand. This means tallying your assets versus your liabilities to get a clear picture of your net worth. Robin advocates taking this one step further and figuring out how much money you’ve earned in your entire life, starting from your very first paycheck. This “clears the fog shrouding your past relationship with money,” she writes, and dispels any myths that you might tell yourself about your earning power.
Track every penny you spend.
In order to determine how much you can save, you have to first know how much you spend. A key FIRE discipline is tracking your spending down to the penny. Modern technology can help. Personal Capital, for example, is free web-based financial software that can link to your credit card and bank account and give you a detailed breakdown of your spending each month.
Figure out your real hourly wage.
Even if you’re not paid on an hourly basis, you probably know roughly how much you make an hour or a day. Forget this figure, Robin says, and instead calculate your pay based on your overall work experience—that is, build in the time you spend commuting and even the time you spend at the end of each day decompressing once you get home. Divide your paycheck by that total. You’ll need your “real hourly wage” for Step 4.
Question every spending decision.
When you work, you trade your “life energy” for money, Robin says. Take this framework and use it to evaluate prospective purposes. Let’s say you calculate your real hourly wage at $20. You’ve been eyeing a new pair of designer jeans that costs $200. Ask yourself whether they’re really worth 10 hours of your precious life energy, or whether you’d be better off banking the $200 bucks and rocking your existing wardrobe.
Find cheaper substitutions.
Done right, the FIRE path is not about deprivation. It’s about finding cheaper ways to satisfy your needs. Say you need a new suit for a business trip. How about visiting a local consignment store before going to the mall and picking out something new? Or maybe you’ve always wanted to go snorkeling in Bora Bora? Maximize credit card rewards points to score cheap—or even free—plane tickets.
Seek your tribe.
It’s hard to stay on the FIRE path if socializing always involves spending money. Befriend buddies who enjoy low-cost activities like hikes or picnics in the park. Or stay in and invite friends over to cook a meal over a bottle of wine instead of hitting up that fancy new joint in town.
Invest in low-cost index funds.
When it comes to building wealth, the simpler the investment, the better. Stick to low-cost index funds from Vanguard or Fidelity, which have expense ratios of well under 0.1%. Many FIRE devotees add income-generating real estate to their portfolios, either by buying an actual property or by purchasing the passive equivalent: a real estate investment trust, or REIT fund.
Map your “cross-over point.”
You’ll know you can call it quits when the total monthly income from your investments (measured by investment gains and dividends) exceeds your monthly expenses. Robin recommends making a chart for your wall that maps your monthly income and expenses, so you can visualize the moment when you reach what she calls the “cross-over point.”
Visualize a purpose.
So you’ve retired early. Now what? You’ve got another 40, 50 or 60 years of life to fill. Experts say it’s best to have some idea of what you’re going to do before you pull the plug on work, lest you get sucked into the vortex of too much free time. Think about a balance of passion projects—what you do on the weekends now can be a good guide—and some kind of community service.
Blog about it—or not.
These days it seems like you’re not really on the FIRE path if you’re not blogging about it. Some scribes enjoy helping others achieve what they’ve accomplished. But others would prefer to help out in real life. Sylvia Hall, 37, a lawyer on FIRE in Seattle, coaches friends of friends on money issues over coffee.