A guide to FIRE: Financial Independence, Retire Early 🌴

#1

Today, we wanted to dive into one of the coolest new trends in modern finance culture: early retirement. While there are lots of people looking to max out on everything: income, career attainment, possessions, there’s also an increasing number of people who want to check out of the system and do things their way ASAP.

If you’re one of those people, you might like to find out more about the Freetrade app.

Instead of running the rat-race, they save with savvy, plan their spending and ultimately speed up having enough savings and passive income for complete independence.

The concept is called FIRE (Financial Independence, Retire Early) - which is ironic since being fired is one of the main things you should avoid. :fire:

Everyone wants to retire. That’s why cops in action movies are always so pleased about being 2 days away from retirement. Speaking of which, why don’t cops just retire 2 days early? It would drastically improve cop mortality.

Of course, early retirement very rarely means actual retirement. Most people dynamic and energetic enough to retire early start doing freelance international consulting or running lucrative blogs about how to retire early.

But really, early retirement is much more achievable than people think. Especially if early means retiring at 50 rather than 28. Nothing’s guaranteed, but with some planning and patience, it can be a pretty attainable goal.

Here’s our guide:

Pay down debts (and don’t get new ones)

If you’re in debt, you’re someone else’s investment. In other words, you’re helping someone else’s financial dreams come true. And if that doesn’t horrify you, you’re not ready for this early retirement thing.

The one kind of debt you might be OK with is secure, low interest debt that allows you to get a return or make a saving. This includes a mortgage on a home or an investment property.

Save sustainably

We all know that skipping a piece of toast isn’t a magic swipe card to the 1%. You don’t need to interrogate each pound you spend as though it’s 1634 and a pound could buy a castle. That said, £6 for a slice of toast is insane.


Especially with weird vegetable butter

The point is: don’t save at the expense of all joy or happiness. Ten truly miserable years are not a good trade-off for financial independence (unless you’re hardcore). Life and time are your most finite and precious resources. And it’s very hard to keep that kind of discipline up, which makes it more likely you’ll give up.

However, it is worth asking yourself how much of your money has been truly well-spent.

A lot of our spending is driven by laziness or inertia or distracting ourselves from some other problem. If you measure what you got for your money against the effort it took to earn it, do the scales balance?

There are about a billion sites and forums on how to save money and we’re not going to compete with the best. But here are some easy tips:

  1. Find things that are awesome and free - friends, museums, glasses of water - can help.
  2. Buy your necessities in bulk when they’re in offer.
  3. Don’t rip yourself off through laziness - paying over the odds for an unrenewed phone contract is the classic example.

One Freetrader, Cardiff-based Ben Sheppard manages to save and invest 50% of his income each month. Another, Weenie, aims for 35-40%.

Challenger banks like Monzo make saving a lot easier by tracking and analyzing your spending. Maybe soon you’ll be able to opt into notifications like “You spent £200 on Deliveroo last month, seriously, learn to cook.”

Or useful filters for your spending categories like ‘life necessities’, ‘sensible discretionary spending’ and ‘no-one needs that many pairs of trainers’.

Then make your money work for you AKA Invest

Here’s the big step. Saving isn’t enough. Even if you saved ⅔ of your salary for 30 years (which is… difficult), you’re not going to be able to live on that for 30 years. Inflation alone will eat through the value of what you saved.

Investing can help you do two things:

  • Grow your savings above inflation
  • Turn your savings into income

Basically, investing gives your savings superpowers.

If you’re investing for the long-term, it’s definitely worth using an ISA. This will ensure all the growth and almost all the income from your investments is tax-free.

Firstly, let’s look at growth

The great thing about investing is that your best edge is time. Starting to invest while you’re young is like having a five lap headstart.

This is because of the power of compound growth.

We’ve written before about how compounding can grow even modest savings into big sums over time. The higher the rate of return and the longer the timespan, the more powerful compounding becomes. Most importantly, you want the rate of growth to be over inflation, or you’re just running to stand still.

The return you get on cash in a savings account is limited by whatever interest rate the bank pays. Those savings rate are currently around the 1.5-2.5% mark, depending on the account type you choose.

There are some savings accounts out there offering 5%, but these typically restrict the amount you can save and how long you can stay at that interest rate.

Historically, the long-term, average return on the world stock market has ranged between 7% and 10% depending on the particular market (US vs UK vs world) and whether dividends are reinvested.

Of course, that extra return comes with extra risk. But over the long-term, if you invest broadly and don’t put your eggs in one basket, the ebb and flow of stock market tends to flatten out into a general increase.

Again look at our compounding calculator to look how much you could grow your money by consistent saving and investing.

Income

Not only can investments grow in value, they also pay you direct income through dividends or other cash distributions.

A dividend is a slice of the profits made by the business. It’s like the business is paying you for your investment. Why not? You’re one of the owners!

The amount of income can vary a lot but the yield on dividend paying stocks is currently around 2-3% of the value of your shares. High yield stocks, like tobacco companies, can potentially offer more.

Check out our dividend post for more detail.

While you’re building up your pot, you could focus in growth stocks that reinvest their cash back into their business. These might have a better chance of high growth because all their profits are being reinvested. Then once you’ve can switch your investments to dividend paying stocks

Weenie, for instance, focuses the majority of her portfolio on low cost tracker funds, with the remainder in high dividend stocks and investment trusts. Once her capital is built up, she plans to move over to more dividend paying trusts and earn income.

Let’s play this out.

You earn slightly above the national average income of £35,000. With some discipline, let’s say you manage to save £5000/year across 30 years. That’s no mean feat - it’s £100/week - but it’s nowhere near impossible. Think of it as all your weekly coffees and a big night out.

This also assumes you won’t be able to increase your salary over the next 30 years, which you likely will! Because you’re awesome.

Looking back at the compound calculator, if you manage to hit a 7% average return each year, your pot will have increased to around £500,000.

If you transfer your investments to high dividend stocks, a 3% yield on that pot could give you a very reasonable £15,000/year or £288/week. Remember that’s income, not spending the pot itself. Plus, with an ISA, that income is tax-free.

If you’re happy to draw down the pot over time, you can add even more to your FIRE income. Just make sure you don’t live longer than you expect!

It’s not enough for Lambos and champagne everyday. But if you live frugally, it’s plenty for financial independence. It’s much more than the state pension!

And if you save extra as your salary grows, you could build up your pot much more and FIRE it up in luxury!


Now for 70 more years on this yacht

Let us know if you’re working towards early retirement and what are you planning to do once you get there?

Freetrade does not provide investment advice and individual investors should make their own decisions or seek independent advice. The value of investments can go up as well as down and you may receive back less than your original investment. Tax laws are subject to change and may vary in how they apply depending on the circumstances.

29 Likes
Introduce yourself :wave:
(Ryan) #2

Good read. Especially the fact that anyone is able to run an online business nowadays, which can generate passive income, means that FIRE is more achievable for people!

Although, in the short term it is probably better to try and get a higher paying job, and save/invest what you can :muscle:

4 Likes
(Big Boss) #3

As long as this FIRE ain’t linked to FYRE! :joy:

6 Likes
(Alex Sherwood) #4

Ja Rule was not involved in the making of this post :sunglasses:

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(Alex Suss) #5

Or just stop spending money and live a simple life. I am 26 and I have £78,000 invested in the market.

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#6

Interesting - although what I’ve observed anecdotally is that a lot of people with relatively high paying jobs don’t necessarily gain real wealth. Their spending just goes up to match their salaries.

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(Alex Suss) #7

I totally agree with what you just said, half the equation is spending habits. All I do is look for new dividend stocks to buy, a lot of people look for new junk to buy.

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(Alex Suss) #8

Also it depends on your attitude to life, I believe in saving money, investing money and compounding it into millions. Then it will go to my family and charities, the fun is playing the game rather than chasing material goods.

1 Like
(Alex Suss) #9

I am 50% Warren Buffett, 20% Charlie Munger, 20% Howard Marks and 10% Jack Bogle.

(#18 414) #10

Very well written as always

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(Ryan) #11

I agree with you on this, and this is why the middle class stay poor, as Robert Kiyosaki says.

As income/wealth increases you have to try and stay humble by maintaining the same level of expenses, rather than buying that bigger house or better car, and then reap the benefits of being able to retire early and gaining a higher level of financial independence. :pray:

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(Emma) #12

Who needs independence when they’re old? enjoy it while you’re young enough to have fun.
Dignitas doesn’t cost that much as a retirement option :grin:

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(Alex Suss) #13

The way to FIRE lies through compounding, when money is able to pull in more money. This grows exponentially throughout the years, the first few years are the hardest but the snowball just gets bigger and bigger. Buffett is a prime example of compounding for 80 years.

(Alex Suss) #14

Emma, some people get enjoyment outside of material things. Our time on this Earth is limited, it makes absolutely no sense to me to build sandcastles in the sand. Here is a great quote from the bhagavad gita…

“You have a right to perform your prescribed duties, but you are not entitled to the fruits of your actions. Never consider yourself to be the cause of the results of your activities, nor be attached to inaction.”

This means work, without the need for reward, as this brings on more and more desires, which can never be fulfilled.

#15

Make sure you have around £10k left after all your spending, as this is apparently the average cost for an assisted death: https://www.independent.co.uk/life-style/health-and-families/the-true-cost-how-the-uk-outsources-death-to-dignitas-a8073401.html

1 Like
(Ben Sheppard) #16

I think one important thing to remember is purchases that can have a great effect to your quality of life.

I drive a 44 mile round trip to work everyday, a journey that should take up 50 minutes of my day but due to congestions and stop start traffic normally takes around 2 hours.

I’ll be buying a nice new car that has adaptive cruise control which gives me one less stress in life.

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(Emma) #17

Seems the perfect place to build them to me :woman_shrugging:

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(Alex Suss) #18

It’s an analogy, it means to buy house after house, to gain more and more material things. When the tide comes in, your houses vanish for you.

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(Ryan) #19

Unless you’re buying house after house to rent out to tenants and produce cashflow, then that’ll make FIRE easier :wink:

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(Dave Smith) #20

Just put it on your credit card :smiley:

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