FI/RE is the acronym for Financially Independent, Retire Early. FI/RE is a movement that propagates extreme frugality, a high savings rate and investment.
The main aim is to be financially independent in the quickest time possible (while in your 30s) while enjoying the power or flexibility to choose whether to continue working or not.
FI/RE focuses on the following:
• Controlling the outcome of your financial future
• Creating and implementing comprehensive financial plans
• Preventing unnecessary expenditure
• Practising delayed gratification
• Exchanging costly expenses for comparably cheaper ones. For example, eating home-cooked meals rather than eating out; entertaining at home rather than going out; purchasing a second-hand car instead of a new one.
• Cherishing what you have instead of craving for what you don’t.
• Enjoying the experience of saving for your financial independence.
It’s all about leading your dream life, not the life dictated by society.
FI/RE advocates still buy things and they hang out with friends. The only difference is that they look for cheaper ways of doing it without destroying the pleasure.
The money saved is put into assets (investments) that make up their wealth until such time the passive income from those assets can finance their desired “retirement” lifestyle.
Some find the FI/RE way daunting, or next to impossible to do. The core methods of extreme savings/living frugally may not be everyone’s cup of tea.
1. Understand what financial independence means to you
Decide whether you want or need to continue working. Figure out your life objectives, values and what inspires you to achieve financial independence and early retirement.
Define and visualise your life after financial independence. Disliking your job is not a reason for early retirement.
2. Decide on your ‘FI/RE number’
Figure out how much you need (your net worth) to be financially independent. As a rule-of-thumb, once the total value is 25 times your annual expenses, you have attained financial independence.
Consult a financial advisor if figures or number-crunching are not your thing.
3. Get your debt down to zero
FI/RE requires sped up wealth-building, thus having debts is a big hurdle. Debts usually carry higher interest than most investment assets. Use whatever excess funds you have to clear off debts first especially credit card debts.
4. Save, save, save
Extraordinary savings ie a 40%-60% savings rate is what you should strive for. By saving at such a high rate, FI/RE proponents aim to retire early and live off small withdrawals from accumulated funds.
For many people, especially those in the lower-income range, this is simply not workable. However, some FI/RE advocates say the 40%-60% is just a number to point out the importance of high savings and living frugally if you want to achieve FI/RE status in roughly 10 years.
Newbies can start saving at 20% or a more rate comfortable. But, there must be progression. Even a 1% increment is good.
The priority is financial independence. Achieving FI is not an automatic reason for RE. You may still work after FI if you enjoy working. However, working now becomes a choice, not a necessity.
5. Live simply
Frugality in FI/RE’s books is not about being cheap. Rather it’s about spending with intention and on things that matter. Sacrifices/delayed gratification/minimalism is at the core of FI/RE.
Simple living involves various voluntary measures to simplify your way of life. For instance, decreasing your belongings or improving self-sufficiency. Being happy with what you already have, and buying only what you need and not want is a form of minimalism.
Simple living differs from forced poverty because it is a voluntary way of life.
6. Seek opportunities to increase your income
You need to find ways to increase your investable fund whether it’s a side hustle, a part-time job or freelancing.
7. Invest the money saved
Don’t put all your money into savings and fixed deposits. There are other investments that give you better returns over the long term. Invest in low-fee investments such as an index fund, rental properties and passive income streams.
Get help from a financial advisor if you aren’t comfortable managing it. Many get confused with the myriad of investments out there.
Would FI/RE work for you? That depends on many factors but the two most important are:
• how much you earn
• how much you save
It is essential to have enough earnings to save while still fulfilling your primary needs. Ultimately, the decision to pursue FI/RE lies with you.
As there are many variables involved with each individual having their own specific circumstances, it’s often best to seek the advice of a financial advisor to help in your decision-making.
This article first appeared in https://mypf.my
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