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Frequently asked questions about financial independence
What does the Financial Independence Retire Early movement stand for?
The Financial Independence Retire Early (FIRE) movement is a personal finance concept that advocates for young professionals to save a large amount of their income by living a frugal lifestyle, and use the excess cash to invest in assets such as the financial markets or real estate. The idea is that over time, these assets will compound in value up to a certain threshold that is determined by the person based on his/her lifestyle and retirement preferences. Once the person’s investments hit that threshold, they can then retire early and use their investment portfolio to fund their financial needs in retirement.
How to use a financial independence calculator?
Each person has a different financial independence number. To find your unique FIRE number, some of the main assumptions you need are your current age, your annual after-tax income, total annual expenses (to be safe, select the larger number of what you spend now versus what you expect to spend each year in retirement), net worth, your preferred asset allocations, and the projected rate of investment returns on the assets you choose to invest in. You can then enter these assumptions in the Hardbacon FIRE calculator which will then inform you the number of years you can retire in and how much money you will need to do so.
What amount do I need to achieve financial independence?
While each person’s idea of financial independence may be different, the FIRE movement can be applied by almost anyone looking to quit the workforce early and live a financially independent, self-sufficient life. While there is no rule that stipulates the exact amount you need to hit to be considered financially independent, a good rule of thumb on the amount you need to achieve financial independence is the amount you expect to spend each year in retirement multiplied by 25 (i.e., a 4% rate of withdrawal each year). This 4% is based on a study by researchers from Trinity University who concluded that with a 4% withdrawal rate, FIRE practitioners can achieve a 95% success rate over 30 years in terms of having adequate money in retirement. If you are extra cautious though, you may want to assume a lower rate of withdrawal for your calculations.
How can I plan for financial independence?
There are several steps that can get you closer to financial independence. At its core, the FIRE movement requires extreme discipline and frugality. As such, one of the main things you can do to improve your speed of obtaining financial independence is to save greater sums of money each month (either by cutting costs or by increasing your income). It also helps to have all your debts fully paid off. Additionally, you may want to make use of budgeting tools to help you track your expenses each month, and robo-advisors to help you automate your investment decisions and make long-term investments into the market at cost-effective prices.
Is financial independence worth it?
It is difficult to definitively say whether the FIRE movement is worth pursuing. Ultimately, it really depends on the person’s unique financial circumstances and profile, and there is also a bit of luck involved. For example, if a recession hits at the wrong time, your investment portfolio can take a hit and you may end up needing to go back to work to tide you over for the short term until the market recovers. However, if you are able to catch a good bull run in the markets, your portfolio may be able to withstand the short-term decline and you can continue living a life of financial independence. Additionally, your circumstances play a role too. If you are a homeowner with a fully paid-off mortgage, a short-term decline may not hit you as hard as it would for a homeowner with an active mortgage or a renter. Ultimately, it’s up to you to determine what level of risk you are okay with taking and what your unique circumstances are.
Why do FIRE bloggers tend to embrace index investing?
There are several reasons why FIRE practitioners like using ETFs to achieve their financial goals. ETFs are obviously easy to buy and with a few clicks of a button, you can entirely automate your purchases of specific ETFs each month. This saves substantial time each month when channeling savings into the market to build towards financial independence. The second reason is that ETFs tend to be low-cost investments where the cheapest index funds can have a Management Expense Ratio (MER) of 0.3% or under. Lastly, ETFs offer holistic exposure to certain sectors, assets and/or markets rather than concentrated exposure into a specific company or asset that then needs to be monitored more closely. This passive investing style is well-suited to the objective of financial independence which is to enjoy your retirement in the knowledge that markets have historically tended to move up over time.
What is passive income and how can I achieve financial independence with it?
Passive income is additional income that you make without being actively involved in the underlying activity. For example, once you buy a stock, you don’t have to worry about what the company does on a day-to-day basis. You can simply earn the dividend every period that it is paid out. Similarly, if you own a real estate property, you may have to be more involved in its maintenance, but it is likely not a full-time job. You can simply earn the rent that you charge from tenants each month. From a financial independence standpoint, passive income is tremendously valuable as it increases the amount that you can invest into the markets each month which accelerates your path to your FIRE number. It can also serve as a hedge against adverse market movements once you achieve your FIRE number and retire early.
How do I become financially independent in 5 years?
Becoming financially independent in 5 years is very much a possibility given the right circumstances and strategies, but it requires an extraordinary level of patience, discipline and perseverance. First, calculate the precise number for your annual expenses with which you can live comfortably. You may want to add a slight buffer to this amount just in case. Next, multiply that by 25. For example, if you feel that your annual expenses are $50,000 a year, then your FIRE number is $1.25M. To hit this number, you will need to save by living frugally and aggressively invest your excess savings into the market.
How to start a side hustle
A side hustle is a commercial activity that you do on top of your day job to earn some extra income each month. Side hustles don’t have to necessarily be a new venture. Some simple side hustles include selling or renting out your unused belongings, offering services online, or even taking paid surveys by companies looking to gather market research. The Internet has made myriad opportunities available. For freelancing services, you can use websites such as Upwork or Fiverr. To sell your belongings, you may choose to use websites such as Kijiji or eBay. And for taking surveys, a popular website is Swagbucks.
How to turn a hobby into a side hustle
When building a side hustle, one of the easiest ways to go about it is by monetizing something that you are already good at such as a hobby. If you have a hobby that can be marketed either online or in-person to other people, start there. This hobby can be anything from digital marketing to web development to creative writing to a whole range of other services that people and businesses require. You can also opt to sell products. Next, find a platform where you can market these services or products. Upwork and Fiverr are great for offering freelancing services while you may want to use an e-commerce platform like Shopify or Amazon if you are selling a product. The last step is to effectively market your offerings to customers and attract customers to create a sustainable business model from your side hustle.
How to retire early in Canada?
Being able to retire early is a pipe dream for many, but it is certainly within grasp if the right discipline is enforced. To be able to do so, you need to actively start planning today. This includes understanding your current level of income and your planned annual expense obligations in retirement. Next, determine what age you would ideally like to retire by realistically. Based on this, you can also determine the level of CPP pension payments and OAS payments you can expect to receive once you hit the stipulated retirement age in the country. Finally, once you have all this info, you can work backwards to find the amount you need to save and invest each month to retire early. You can also opt to use the Hardbacon Retirement Planning Calculator to automate these calculations for you.
Can being frugal make you rich?
Being frugal by itself is not likely to make you rich. This is because even if you manage to save a large portion of your income, part of this is eroded by inflationary pressures each year which mean that a dollar a year from now is worth less than the same dollar today. As such, FIRE practitioners advocate for frugality for a different reason. By being a spendthrift, practitioners can save more and more each month that is then invested into the markets where it can compound over time. This compounding is what helps make people rich rather than just the act of frugality alone.