The F.I.R.E retirement plan, is it is a good plan or the equivalent to “throwing it on a number” at a Vegas casino?
A personal finance trend called F.I.R.E. is gaining ground among some young investors. F.I.R.E. stands for “Financial Independence Retire Early.” Some young investors believe that by following this method, they can retire by the age of 30. In other words, they go to college for 4 years, work for 8 years, and then live off their “savings” for the next 70 years. They believe that they can do this by investing 75% of their annual income while cutting down drastically on the day to day expenses.
Can this work? As the saying goes, “If something sounds too good to be true, it probably is”.
Tried and true solid budgeting is the only true way to guarantee a good retirement
Budgeting and saving for retirement is definitely an area where “slow and steady wins the race.” Or does it?
Imagine that you are a young adult, and you just graduated from college. You are ready to enter the working world. You got your first job paying $35,000/year. So how should you budget your money?
Here is an example of a budget using traditional budgeting. Assume you are earning $35,000 per year and sharing a two-bedroom apartment with 1 roommate, which is realistic for a single person.
The first step in creating a budget is to take out taxes. You can use your actual paystub or you can use a general estimate of 25% (US estimate). This is an overestimate, but in this area it is better to overestimate rather than underestimate. At the end of the year, this extra amount can be a pleasant surprise.
Now that you have your starting number, you can then get a general idea from the other numbers. Before you even rent a place, you need to determine how much you can afford to pay in rent. Doing it the other way around, renting a place and then determining your budget, never works.
Rent is your biggest expense
Rent (your housing) will always be your biggest expense. General, traditional, guidelines say to keep this value at 25% of your money after the taxes are taken out. Don’t ever go higher than 30%.
Rest of the budget
Of all of the budget plans that I have seen over the years, I like the ones from Crown Financial Ministries, a Christian organization that provides free financial help to people.
Crown offers free budget worksheets you can download here on their site.
- Spending Budget Guides
- Budget Worksheets
- Estimated Budget
There are different spending guides for different situations. A single person is definitely going to have different financial needs than a family with 4 children. Here is a detailed example our single person living with a roommate.
I have worked through a budget example for a single person living in a 2 bedroom apartment with a roommate earning $35,000/year.
- Gross Salary: $35,000
- Taxes: $8,750
- Salary after taxes: $26,250
- Budget Start Amount: $2187
- Housing: $546 25%
- Electricity/Gas/Water: $60 3%
- Food: $175 6%
- Transportation: $204 9%
- Health Insurance: $250 12%
- Clothing: $150 7%
- Health/Wellness/Medicine: $100 5%
- Entertainment: $200 9%
- Miscellaneous: $130 6%
- SUB-TOTAL: $1815 83%
With that realistic budget, you still have 17% leftover. Did you take out any student loans for college?
Student Loan Payments: $218 10%
SUB-TOTAL 2: $2033 93%
Left from the $2187 start: $154 7%
Rainy Day Fund: $77 3.5%
Left for Retirement Fund: $77 3.5%
But what if you were earning $75,000 per year, and created a budget as though you were earning $35,000 per year? What would you do with that other $40k per year? Would you pay off your student loans early? Would you save it for a rainy day? Would you put it away for retirement?
A mistake that a lot of people make is when they get a raise or higher income they increase their spending. The larger your rainy day fund is the more flexibility you have. Instead of having to buy a car on a loan, you can pay for it in cash upfront. Not only would you save money by not having to pay interest on a loan, but you can also negotiate the price down with cash upfront on the sale.
I think that for the majority of people, the F.I.R.E. retirement plan is a fool’s dream, but with realistic budgeting, most people can learn to live within their budget and begin their financial independence and future retirement savings.
And even have a little bit left over to have a fun vacation at that Vegas casino!