How To Budget For FIRE

Are you on a FIRE journey? Does your tool belt include a healthy budgeting habit? In this article we’ll discuss the top 3 reasons anyone aspiring to FIRE should live by a budget. But first…

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What Is FIRE?

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F.I.R.E. stands for “Financial Independence Retire Early.” The “FIRE Movement” is a growing number of individuals who don’t want to wait until traditional retirement years to be free from a 9-5 job. They typically aim to retire earlier by saving aggressively and investing from an early point in their careers.

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The rough rule of thumb for FIRE is you can “retire” once you can afford to live on 4% of your net worth. Want to live on $50,000 a year? You’ll need to reach a net worth of $1.25 million. Want to live on $100,000 a year? You’ll need $2.5 million.

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Not all FIRE members plan on retiring early. Many simply want the option to choose a lifestyle that works for them. This might mean early retirement. It also might mean working part time or spending their time volunteering on meaningful work that isn’t compensated.

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What Types of FIRE Are There?

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As FIRE has grown in popularity so too have its sub-types. Here are a few of the most popular:

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Coast FIRE

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Coast FIRE is when you have enough money set aside to retire normally without making any additional contributions. This frees you up to live on your full income as you don’t need to allocate any more to your retirement accounts.

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Lean FIRE

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Lean FIRE is when you reach FIRE at a lower draw rate than normal. Lean FIRE members prioritize a simpler lifestyle in order to quit their 9-5s early. The exact number for Lean FIRE is subjective but many classify this as a net worth of 750k to 1 million.

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Fat FIRE

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Fat FIRE is when you reach FIRE at a higher draw rate than normal. Fat FIRE members want the freedom to quit their 9-5 without giving up a more expensive lifestyle. Fat FIRE is subjective but many classify this as a net worth of 5 million or more.

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Is FIRE Right for Me?

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FIRE isn’t for everyone. At its heart financial independence takes a willingness to sacrifice your earlier years to be in a better financial situation in your later years. It’s delayed gratification… to the max. There are many good arguments to be made on both sides of this unorthodox approach. Here’s the cliff notes version of each:

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Live like no one else is willing to today so you can live like no one else can tomorrow. Put in the work now so you can reap the rewards later.

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Life is short and tomorrow isn’t guaranteed. Why optimize for an unknown future when you won’t be as young to enjoy it anyway?

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Each person gets to determine their own balance of prioritizing the present and the future. Personally I’ve always leaned a bit too much to the future and need to remember to enjoy the present. As I enter my mid 30s that’s changing a bit. Having young kids is a great way to live in the now. They are only this young for a short time. But I digress…

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For those of you who are heading toward FIRE… let’s talk about budgeting… and how it’s crucial to your journey.

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Why Everyone Aspiring to FIRE Should Budget

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#1 - Maximize Your Savings & Investment Rate

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In a zero based budget we start by giving every dollar a job. This means you make a plan for your money BEFORE you spend it.

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Reaching FIRE takes a relentless focus on maximizing your savings and investment rate. Budgeting helps you plan for that at the start of each month. You can set aside the money you want to invest so it won’t be touched as you are dollar cost averaging.

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A budget also helps you feel confident about the amount you are able to send to your brokerage at any given time. When you know you have all your other categories covered you can feel good about making those investments more frequently and predictably. Check out our top picks for budgeting apps!

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#2 - Fine Tune Today vs Tomorrow

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Sometimes we can get a little too tunnel visioned when we are aiming for FIRE. We often feel guilty or restricted from spending money along the way.

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Having a plan for your money frees you to spend without guilt. Since you already know you’ve allocated a good percentage towards investments for the month you can spend without the guilt.

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#3 - Build The Habits You’ll Need When You Reach FIRE

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Some day… you’re going to reach your FIRE number (we believe in you!). When you do, you’ll need to switch gears. Instead of saving, saving, saving, you’ll need to learn how to maintain a consistent lifestyle. Learning how to live by your budget is perfect for this.

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Not only will you be able to keep your burn rate in check, you’ll also be able to spend guilt free since you have a plan. The last thing you want once you’ve reached your goal is to not be able to enjoy it. Having a plan and the habits to enact that plan free you to enjoy your early retirement (however you choose to spend it).

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Wrapping Up

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FIRE isn’t for everyone. But if you are one of the few that truly hope to reach financial freedom… you’ll need every tool in your tool belt. Learn how to reduce your annual expenses and live below your means. Learn how to maximize your savings accounts and Roth IRA. Learn how to increase your income. And of course, learn how to make a plan for your cash flow with a budget you’ll actually use.

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Godspeed, you’ve got this!