In the famous Netflix documentary Get Smart with Money, financial educator and host of Maconomics Ross Mac mentions that he started investing at the age of 18 and now at 31, he is close to become financially free.
This means he doesn’t need to work to survive anymore. Sounds cool, eh?
Did you ever consider the possibility of pulling this off in your mid or late 30s, if not at 31 like Ross? First of all, Ross is not an odd-one out. There are a number of investors like him around the world who are pursuing a goal of becoming financial independent while they are still young.
This movement is known as FIRE or Financial independence and retire early (FIRE). It refers to a movement that propagates and encourages the habit of extreme saving and minimal expenditure in order to accumulate enough savings so that you can retire early.
The followers of this concept save and invest up to 70 percent of their income. And once the sufficient corpus is accumulated, they make sure not to spend more than 3-4 percent each year.
Key features of the FIRE
a. Followers of FIRE adhere to frugality, extreme saving and disciplined investing.
b. The goal of this philosophy is to become financially independent as early as possible so that one can take retirement long before the age of superannuation.
c. The FIRE followers save and invest up to 70 percent of their income.
d. Usually, FIRE followers withdraw 3-4 percent of their corpus to meet their expenses.
Now, if you — too — are impressed by this philosophy, then you must strive to achieve this as well. If you want to become financially independent at an early age, you need to follow these steps:
Rule of 25: Although the retirement corpus may differ from person to person and also differs based on your post-retirement lifestyle. But assuming that you plan to spend at the same pace after retirement as before retirement, youneed at least 25 times of your annual expenditure.
For instance, if your annual expenditure is ₹12 lakh then your retirement corpus that can allow you to become financially independent is ₹12 X 25 lakh = ₹300 lakh or ₹3 crore.
Expanding the revenue stream: Followers of this lifestyle make an extra effort to expand the scope of their revenue streams as much as possible. Either they do this by doing a side hustle, making investments in financial or real asset.
Finding the right assets: Investing early and investing right is the key to building a sizeable corpus so that one can become financially independent and retire early. For instance, investing in equity at a young age can fasten the pace of wealth creation vis-a-vis fixed income instruments.
So, creating a diversified portfolio is vital.
Careful planning: Becoming financially independent is a long-drawn process and entails a careful planning of how much to invest in which assets, and maintaining the investing discipline for as long as it is required. Additionally, achieving financial goals is always riddled with uncertainties on account of inflation and unanticipated events.
So, it is imperative to account for these unplanned expenses as well.
Be on fire: You need to be on fire, not literally though, in order to become financially independent early by spending quite less, and finding more ways to raise your income. In other words, reduce your spending and raise your earning.
Stay away from debt and credit cards: If you are pursuing FIRE then credit card expenses and raising too many loans is a strict no-no for you.
The idea behind FIRE is to spend less and invest 50-70 percent of your income into future investments instead of spending on credit and later pay interest on it, thus further reducing the scope of future investment.
Seek professional help: Finance is a tricky business. Although you may trick yourself into believing that you know it all but perhaps you don't know what exactly you don't know. So, it is highly recommended to seek a professional's advice to make a water-tight plan.