Hey everyone, Happy Sunday!
It’s been a while, and I apologize for not writing here more. I have been bouncing to a bunch of different things lately and have been learning a lot of new things. I have a bunch of articles in the drafts that just need some polishing, so look out for those. I will try to post at least one article a week that brings you lots of value. Today I’m going to share what I’ve learned from a community/movement called FIRE, and my take on their principles to long-term wealth building.
Back in November of 2020, I got really into this movement called FIRE. FIRE stands for Financial Independence & Retiring Early. I was fascinated by how people were retiring in their 30s and 40s and made me realize that most people could realistically make the changes in their lives to do it too. What I found was a lot of the same advice, to save as much as possible, and invest the extra money into diversified index funds. The path to retirement can be easily represented by a simple equation.
Investment(principal) X Yearly Return(usually calculated at a conservative 4%) > Yearly Expenses
If you can make this equation true, then you have the option to retire, or even better, choose a more fulfilling job, or start a business, etc. For the sake of simplicity, I’m going to use the word ‘retire’ to mean any of these things.
You can use this equation to find out how much they need to invest to retire. If you assume a conservative 4% yearly return, you can multiply your yearly expense by 25, and that gives you the amount you need to be invested to live off the returns forever. For example, if you spend $50k per year, you would need $1.25 million to retire. If you can live off of $20k that number decreases to $500k invested.
A Closer Look At The FIRE Equation
You can only really control two parts of the equation, your investment, and your yearly expenses, you can’t control how the market performs.
Increasing Your Investment
There are two ways you can increase how much you invest.
- Try to earn more money
- Save more of your money
You could try to earn more money by, asking for a raise, switching jobs, or starting a side hustle/business. I think all three of these are great options, but each comes with some level of risk or an extra time commitment.
You could try saving more of your money to give yourself more money to work with. I think this is the better option for a couple of reasons.
First, it doesn’t take much extra time or effort to cut back on your expenses, what it does take is humility, courage, and a little extra effort. Driving a less expensive economy car, or living in a cheaper apartment, or cooking your food, are changes that aren’t hard to make, but you can’t be scared of what people are going to think.
Second, the more you save, the less expensive your lifestyle is; therefore, you don’t need as big of an investment to retire.
That’s what makes saving so powerful! Let’s imagine a scenario:
Random person: makes $30k/year
Yearly Expenses: $28k/year
Saver
Using our formula, they would need $700k invested to retire. Let’s see what happens if they can decrease his spending to $24k/year.
He now needs $600k invested and has an extra $4000 to invest.
Earner
Let’s take the same person and they decide to leave their expenses the same and chase a higher salary.
Salary: $34k/year
Expenses: $28k/year
In this scenario, they got a 13% raise, and they have the same amount of leftover money as in the first scenario. However, they have to invest $100k more than if they chose to save.
I didn’t write this to tell you not to go out and try to earn more, but to emphasize the importance of saving your money first, and optimizing your spending. By optimizing your spending, I mean that you are getting the most long-term happiness out of each dollar spent. You can still drive a fancy car, or wear a Rolex, or whatever it may be, but I hope you are doing it because you are truly passionate about it. Not to impress someone else.
Also, you can certainly do both, earn more, and save more. I would encourage it, I just think people don’t realize how powerful saving can be.
Decrease Your Living Expense
I pretty much covered why I think decreasing your expenses is an important first step to financial freedom, so I will touch on a few ways you could try reducing your expenses. I’ll give you actionable tips for saving on the top three spending categories: Housing, Transportation, and Food. But first, a general tip.
Track Your Spending
Tracking my spending has been important for me to see where I can improve.
There are a lot of apps out there for it, but I personally use Mint. You can connect all of your financial accounts to it and track your net worth as well as spending. It’s very easy to use once everything is set up, and they even do giveaways sometimes.
Housing
How can you decrease your housing expense? Here are a few ideas I thought of if you’re renting…
- Live with multiple roommates, rent will be cheaper and can be divided among the group.
- Downgrade to a cheaper apartment.
And if you’re an owner…
- Consider renting or Airbnbing out vacant rooms.
- Â Maybe you can refinance your mortgage to a lower interest rate.
Transportation
I’m personally a big fan of my Prius, even though I have had problems with it in the past. I can get close to 50 mpg on the highway, but average close to 40 mpg on city roads. For context, the best-selling vehicle in the US is the Ford F-150 which gets up to 25 mpg on the highway, and that’s on the newest model. I am getting double that, so I am effectively paying half of what they are for gas.
Here’s another way you can save on gas: It’s an app called GetUpside. It’s a cashback app that allows you to get around 10 cents off per gallon at select locations. You’ll also get an extra 15 cents/gallon off for the first time you use the app when you use my link. It’s pretty easy to use, you just click claim offer, upload your receipt to the app afterward, and you get cashback. Use this link to sign up https://upside.app.link/ELI9299 or download the app and put in my referral code ELI9299.
Food
Food is the third highest expense for people behind housing and transportation. The average monthly food bill in the US is $342.11 for one person. It only takes a little extra effort to make your own food, and pick the right foods. By cooking for yourself and shopping at the right stores, I believe you could spend as little as $150/month depending on where you live.
If you want to cut down on your food expense, the first thing you have to cut out is going out to eat or ordering delivery. Eliminating these two habits alone will cut some people’s food expenses in half. I am not telling you not to eat out ever again. If getting dinner with friends is something you look forward to every week, of course, you shouldn’t ditch them to save a few dollars. There is always an alternative though, you could eat at home before and get a small appetizer at the restaurant. The point is to look at each spending decision and consider if the benefit is worth the extra dollars spent.
What foods can I cook myself? Here are a couple of things I make for each meal.
Breakfast– Eggs on toast w/ cheese, oatmeal(cinnamon+brown sugar), greek yogurt.
Lunch– Sandwiches(PB&J, Turkey&Cheese), Salad(Spring Mix w/ sunflower seeds and shredded carrots, choice of dressing), fruits(apple, banana)
Dinner– Lasagna, Stir Fry, Spaghetti and Meatballs
Snacks– Popcorn, Protein Bars, Protein Shake
These dinners are especially good because they can be made in bulk. Also, I prefer to buy in bulk. For example, I buy plain rolled oats for my oatmeal and mix in my sugar and cinnamon.
Where To Shop?
I’m a big fan of stores like Lidl, Aldi, and Costco. You can see prices close to 30% lower than average at these stores. I must say though if you’re 20 years old and shopping at Costco you’ve really got it figured out. Since I am only shopping for myself, I choose Lidl, and I haven’t done much research about how they compare with each other. I just know that they are all good choices.
Here’s a picture of me at Lidl after shopping there for the first time from my Instagram.
Final Thoughts
Wow! That was a lot to cover, and I went pretty in-depth in each category, so if you can take away anything from this, let it be this.
A lot of people spend their money on things that don’t last or don’t make them happy long-term. The truth is, humans are adaptable, and we return to a baseline level of happiness regardless of our circumstances. So, a new car, or new clothes might make you feel ecstatic at first, but that feeling will likely fade within a couple of weeks.
Focus on what makes you happy! Don’t buy stuff to impress people because that won’t make you happy long term. When you change your mindset about money and start thinking about your decisions in this way, you can make a huge difference in your life.
So, now that you have some ways to save, take that extra money, and invest it. Your future self will thank you.
I hope that you found this valuable, and can apply some of this to your own life. If you liked this or thought someone else might like it, share it on social media, or send it to someone.
Finally, I want to hear from you! Join the Discord, it’s where the community and I will be hanging out. I’ll see you there!
