Debt, Investing, Personal Finance Blog, Retirement, Saving

Set Yourself on FIRE

Aim at Nothing?Not to be taken literally, ‘Setting Yourself on FIRE,’ is your financial plan to become Financially Independent, and Retire Early.  In order to do that, you have to have some form of a plan in place that helps you reach your goals.  “If you aim at nothing, you’ll hit it every time.”  That is one of my favorite quotes from the legendary Zig Ziglar.

The Joneses are broke for this very reason… poor planning, no specific goals, and flying by the seat of your pants provides you with absolutely no direction for the future and a lifetime of aimless wandering.

So, if you don’t know where you’re going, any road will do… otherwise, you can use the plan I suggest here and be on your own way to financial independence ;-):

 

Stage 1: Decide to be a Black Sheep

Stage 2: Break the Cycle

Stage 3: Pay-off All Debt Except Mortgage

Stage 4: Max-out Retirement Savings

Stage 5: Stoke the FIRE

Stage 6: You’re FIREd!

 

Many of these stages warrant their own future posts, and some will have several, but here are the basics of what they each mean:

  • Stage 1: Decide to be a Black Sheep

This is your foundation… We talked about this in the last post (Keeping Up With the Joneses? No Thanks…), and about what the typical American household looks like: mountains of debt, a vicious cycle of consumerism, a lack of emergency savings, a severe lack of retirement investments, no budget, and terrible money management.  First and foremost, you’ll have to decide that living a life like this is not what’s best for you and your future.

Buying a gym membership and not working out won’t make you healthier or help you loose weight! The same is true if you just read about other people who have been down (or are on) the path to financial independence and don’t act on their advice yourself.  Don’t plan on suckling the tit of the government to get you through your golden years.  It has to be important enough to you that you “own” the decision. And, once you decide that, it will cause you to take action that moves you in the right direction.

  • Stage 2: Break the Cycle

When you are living paycheck to paycheck, and stuck in a cycle of debt accumulation and credit card usage, one minor setback can cause a major disaster and wreak havoc on your finances.  The first major stage in financial independence is to break the paycheck to paycheck cycle.  The only way you can do that is to spend less than you earn.  Otherwise, your cycle will be infinite.

Ironically, making more money does not automatically cause this to happen.  I have seen just as many high-income earners that live paycheck to paycheck as I have lower income earners.  The problem is that an increase in salary, for most people, means: a newer car, a bigger house, new clothes, gadgets, more expensive vacations, etc. etc.  It doesn’t stop until you purposefully BREAK the cycle.

In this stage, you will be building your emergency fund by budgeting several months into the future, and accounting for all of your expenses.  Providing yourself with a cushion for hard times is essential.  Here you ‘save for a rainy day’ because it IS going to rain at some point.  See: How to Budget Like a Boss

  • Stage 3: Pay-off all debt except Mortgage

In Stage 3, you will pay off all credit cards, student loans, your uncle Earl, and anyone else you owe (other than your mortgage).  Paying off revolving credit card debt is one of the best ‘investments’ you can make.  If your credit card charges 15%, just by paying it off, you will get a better return on your money than you can in most other places.  If you’ve ever heard of the power of compound interest, you should know that all of this power is going directly to your debtors.  You want to be on the ‘other side’ of the power of compound interest… the side where it works for YOU.

If you have student loans, see if you can get a better rate at SoFi.  It takes two minutes.  In Stage 3, you’ll knock this out too… The goal here is to be completely debt-free except for your mortgage.

  • Stage 4: Max out Retirement savings

Once you are past step 3, you’ll max out your retirement savings.  Depending on what type of plan your employer offers, or what you are eligible to contribute to, the maximum will vary.  You can get the most recent limits on contributions and benefits directly from this IRS page. We’ll talk about how much you need for retirement later (see: How Much Do I Need to Retire?), but it is important to know that the more expensive your lifestyle is, the longer you will need to work to reach “your number.”

  • Stage 5: Stoke the FIRE

In case you aren’t familiar with the term, “FIRE” stands for Financial Independence and Retiring Early.  This is where you really put the accelerator on early retirement.  In this Stage, you will pay-off your mortgage early, maximize investments beyond your retirement accounts, start adding passive income, real estate/rental properties, etc.

  • Stage 6: You’re FIRE’d!

When you invest your money, something crazy happens… your money starts earning money too! I like to think that I have a massive army of dead presidents that do nothing except recruit more of themselves for my family’s future needs and comfort!

It gets even better…  earnings on those earnings start earning their own money and that goes on… and on… and on.  That’s the power of compound interest (see: Invest Early, Retire Earlier – The Power of Compound Interest)! As soon as these earnings are enough to pay for your living expenses, while leaving enough of the gains invested each year to keep up with inflation, you are ready to officially declare yourself FIREd!

 

** Questions for you: Which stage are you on? Which stage has been the most gratifying for you and why? Let the Black Sheep family know in the comments section!

 

2 thoughts on “Set Yourself on FIRE

  1. I like the quote and that you really should have a more focused plan for your future and finances. Early on, I didn’t have a lot of focus but I did just save automatically every month and it’s turned out really good. Over 20 years later its hard believe what I have due to compounding etc. With this latest bull market, my accounts have really gone up a lot. My advice is to pick good funds and save automatically every month/ paycheck. Max out your IRA/ 401K if possible especially early on. Don’t over think it. No guarantees of course, but in 10 or 20 years you will likely be surprised at how much you have.

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