29 May 2022

OPINION: Carlow people! Want to know how to set 'fire' to your finances and retire early?

The Liam Croke Column

How to set ‘fire’ to your finances and retire early - Liam Croke Column

How to set ‘fire’ to your finances and retire early - Liam Croke Column

Did you know, if you save 5% of your annual income, you will have to work for the next 66 years before you’ve saved enough money to allow you stop working?

Did you know, if you saved 65% of your annual income each year for the next 10, you could retire from work permanently?

There are those who know exactly that, and who save those amounts and are part of a community known as FIRE i.e. Financial Independence Retire Early.

The basic premise behind the concept is, achieving a state where you have enough resources to live off, that allow you to stop working, if that’s what you choose to do.

The amount of money you’ve saved, is enough to meet your outgoings and you don’t therefore have to rely on traditional sources of income any more i.e. earned income from employment.

People who buy into this concept, adopt a seriously frugal lifestyle so they can retire in their 30s, 40s and 50s, and they do so for a number of reasons i.e. they want to travel, pursue different projects, be activate when they’re physically able to etc.

There are lots of reasons why someone would like to achieve FIRE, and too many to mention here, but the most popular reason I’ve discovered is people don’t like that daily grind of work and all the hours it takes from them.

Any FIRE enthusiast will tell you, the key to success isn’t earning more - although it helps - the critical ingredient to achieving that state of FIRE is spending as little of your income as possible - that’s the big sacrifice that’s required. The lower their expenses, the more they can save and invest, the quicker it will grow and the faster they can reach financial independence. And most people pursuing FIRE focus on “the big three”: housing, transportation (inclusive of loan repayments) and food.

So, how do you figure out what your FIRE number is?

You have to do some number crunching.

The key multiple that you need to focus on is 25 times the amount you’ll spend each year. Once you’ve got that, and you withdraw 4% per year, you should never run out of money.

So, if you think you’ll need €2,500 per month, then you need to accumulate a fund of €750,000.

But maybe you continue to work, and you earn €1,200 per month, now your target fund becomes €390,000.

There isn’t a one-size-fits all number with FIRE either.

There is a Lean FIRE where the individual lives on a very small amount each year, typically less than €35,000. And there are the Barista FIREs who are not quite there in the savings department but need a part time job to make ends meet, and then there are the Fat FIRE’s who aim to accrue enough savings to generate an annual income in excess of €90,000.

Regardless of what category, they fit into, the key to why they achieve FIRE is because they are very disciplined, and goal-orientated. They don’t focus on what they have to sacrifice right now i.e. less holidays, less eating out, driving an old car etc. Instead, they get focused on the outcome and the positive things the sacrifices they are making now will give them in the future.

There’s no doubt that if you want to save 50% or 60% of your salary, the idea of cutting back on expenses will seem a big, if not impossible task. Depending on where you live, whether you have rent or mortgage repayments, how much you earn etc. will influence how much you can save, and it mightn’t be very much and nowhere near what’s required.

So maybe you’re not and never will be a member of the FIRE club, because you don’t meet their membership criteria, but there are other clubs you could be a member of, and they’ll let you in, and maybe the name of the club is Fire…ish

One of the conditions of entry into this club, is you have to look at reducing your expenses and save more each month. And you’re also going to always avoid high interest debt.

And while membership doesn’t state you have to watch every cent you spend each month, you need to have an idea of what you’re spending your money on because you need to be able to identify where you can find those extra euros that can be applied to savings.

I think the chances are good you’ll find expenses that can be classified as low hanging fruit i.e. you can reduce that particular expenditure very easily without it having much impact on your quality of life. And start with your largest expenditures before you start cutting back on the daily lattes.

You may not be able to go from saving 5% to 50% of your income overnight, but you might target saving 20% of your income. And if you’re able to reduce your outgoings and or increase your income and use the savings to boost the amount you save by, it means you’ll be able to retire 15 years earlier, for every extra 10% you save.

If you can adopt the mindset that you’re cutting back to have more, you’ll be able to make those small changes quite easily which will propel your finances forward giving you options you thought you’d never have in the future.

I think if we adopt some of the FIRE principles to our own finances our financial lives would improve no end. And pursuing a state of financial independence is an objective, I think we all should have, the speed at which we get there and the choices we make along the way are up to us.
Twitter: @liam_croke
Linkedin: liamcroke
Facebook: liam.croke.96

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