The 4 levels of Financial Independence Retire Early (FIRE) NO ONE HAS TOLD YOU ABOUT!

The 4 levels of Financial Independence Retire Early (FIRE) NO ONE HAS TOLD YOU ABOUT!

If you’re new to the concept of financial independence you might have heard of the four percent rule or the general theory that you have this big pot of money and savings and investments and you live off about four to five percent of the total amount that is invested every single year and that’s your income that replaces your wage well did you know there’s actually

Four stages of fire financial independence retire early you probably haven’t heard these definitions before but there’s one particular definition that i think is going to change your life if you’re interested in truly retiring before 65 or 67 depending on what the government say is at that time so in today’s video especially i need you to have a pen and paper

I’m going to share with you a formula that will allow you and i think absolutely surprise you of how easily or perhaps less time to actually achieve financial independence than you probably had realized before hi there welcome back to the mammoth channel my name is jennifer so let’s dive in financial independence retire early the fire community got a couple of

Videos on this concept and i’m sure that you’ve heard it if you’ve been around money videos investing videos before the whole concept is basically instead of relying on retiring perhaps a state pension you actually create an option where you can retire earlier than the state age because you built up a source that automatically pays you passive income in the

Background now that effectively means you don’t have to exchange your time for money so you don’t have to go out and work you don’t have to do a job the money keeps coming in every single month for you to live off now the fire definition excites people no end particularly those who feel stuck and trapped in their nine-to-five job now i came across fire a couple

Of years ago and for our family it’s been one of the critical events that allowed us really to see that we weren’t just simply having to work for 40 50 years we could actually be in control of how money comes into our life now if you follow my channel for a long time you might have found me through my many investing videos we invest every single month a certain

Percentage of our income because we’re working towards that sweet spot of financial independence through our investments however on the flip side we have actually created financial independence through our side hustles so if you’ve followed a couple of my videos i share where this content my channels my products my services i do this on the side of my day job and

This particular venture for us as a family as a business now makes probably about three times my day job salary so i really don’t need the day job as long as i wanted to keep making content it’s pretty much a semi-passive income i record videos i create products but i can be paid multiple times for it so achieving financial independence the traditional way through

The fire community is basically a numbers game i’ve shared videos about this in the past but essentially what it boils down to is you take your living amount per month that you need to pay the bills eat survive on you take that monthly amount times it by 12 to get your yearly amount and then that number typically people say you multiply it by 25 is your total

Fire number so that large number that is the amount you need to have an investment account ideally or something that’s giving you quite a decent rate of return and the hope is with it being 25 times your yearly amount and the whole point is that every single year drawing about 45 of your pot size then we’ll keep auto topping up and you can live indefinitely off

That money as a result now there’s various ways that you can manipulate to hit that number you can change the rate of return you get with your investments although nothing is guaranteed of course but some people might make it as a multiple times 20 might make it multiple times 27 your total amount and also how you achieve it is purely based on how efficient you

Are with your money so the first level is really the one that could be achieved the quickest by a lot of people and that’s called lean fire so obviously it makes a lot of sense by the terminology that is to retire well before the age of 60 but the goal is to be as small as possible with your yearly and your monthly outgoings you’re going to hit that fire number

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Quicker because obviously the amount that you’re spending is as small as possible now it all goes into also how much you’re saving of the income that’s coming in so to achieve lean fire we’re really thinking about what’s the minimum amount that we need truly to just survive to hit fire so that could be it’s generally your mortgage payment you might even have

Paid off your mortgage it’s not a factor could it be basic food and water and petrol could be basic basic things that you do as a family there might even not be anything included for activities but simply what is the minimum amount that we need to be okay we’re going to have no fun we’re not going to do anything else we’re not going to save anything we’re just

Going to survive pay the bills and have food and basic luxuries in our life and that concept as i say has driven a huge amount of frugality people wanting to have the smallest budget possible basically end up throwing money at their investments whilst living off relatively small amounts but then achieving fire because a lifestyle has driven it far quicker than

Perhaps they would have otherwise now the definition lean fire then comes from what is the average american family actually spending so if you’re saying lean then it’s really that you’re spending less than sixty thousand dollars a year they typically say over in america here it’s probably more in line with your spending less than maybe 20 even 15 000 pounds

In the uk but of course that’s very dependent on the area you’re living in how many people that you’re actually feeding and looking after and such like i remember in the uk as well we have quite a wide spread of different living situations with values so london perhaps a living cost could be four or five times greater than perhaps living up here in scotland so

Achieving lean fire might also mean that you make some choices about where you want to live you might move so it’s far cheaper and you can survive off your investments quicker so the second level of financial independence is then just simply fire we’ve had lean fire we’re now just talking about straight up normal fire f ire financial independence retire early now

The true definition of it it started from america the culture and so achieving fire would really be assuming your living expenses are about the same as a typical us family so if we make that into the uk let’s say the average kind of middle of the road family might need about twenty five thousand pounds in the physical take home pay to survive in buchanan obviously

That varies in the country but let’s go with this example so twenty five thousand pounds times by twenty five means that you would then need an investment size to achieve fire of about 625 000 pounds then that’s assuming of course you’re getting probably between a six and seven percent year on year growth and you’re withdrawing about four to five percent of that

Pot to then live as your income now in that particular definition of fire it’s going to assume quite a comfortable lifestyle it might not be a lot of luxuries in there such as a lot of travel a lot of expensive items but it would be keeping a roof over your head basic essentials and also some extra activities so roughly those numbers of course are based on where

You live but that’s a true definition of fire based on what the u.s standards are now the third level of fire that i want to share with you is called fat fire so we’ve had lean fire guess what fat fire is well this is actually what is the most expensive lifestyle that you would want to lead to then achieve retirement so the whole point being if we left our jobs

What kind of luxury lifestyle would suit us best so that would then be not just the average amount of money that you need but also travel perhaps new cars perhaps a bigger home perhaps doing a lot more things with your daily life a really luxurious version what would be the number that we would need to then achieve that same philosophy yearly amount times about

25. now for individual people this will look completely different for everyone and fat fire is sometimes encouraged because i’ll tell you why you always add and then this buffer of life developing you also have a lot more wiggle room if the stock market then goes up and down with lean fire and normal fire you’re assuming seven percent six or seven percent year

On year growth as a minimum with fat fire we could even assume that there might be four or five percent year growth because we’ve got this bigger buffer with all these luxuries included then we could live off far less we could actually survive quite comfortably and actually we want to make sure that the retirement is as comfortable as possible so we’ve got a lot

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More wiggle room maybe one or two months you might not go travel because you haven’t had the returns you’d like and so far fire actually would then allow a lot more security compared to lean fire where it’s very much tight to the bone and then traditional fire with a fat fire portfolio has that been your goal of course it’s going to probably take you slightly

Longer to achieve that true millionaire or billionaire lifestyle might be actually what you put in your master plan for it it might well be well actually we want to travel four months out of the year or want the kids to go to private education or whatever it is you really built it what is the best version of life that you would want if you were to retire from

Your nine-to-five job now the next concept the fourth level of financial independence this is the one i want you to get a notepad and paper about it is the most important concept that nobody is teaching you about about financial independence and the term is called coast financial independence your cost financial independence number is the one thing that actually

Will allow you to see you’re going to hit financial independence far quicker than you ever realize now cost financial independence that number is actually the point in time that you hit in your investments where you can effectively stop paying into them leave a certain amount of time and then you will be able to retire with the pot of money that you need to then

Live off down the line so effectively what i mean is it’s a commitment to pay into your investments for a certain number of years you’re then going to stop at one point that’s your cost number and then your investments are going to keep on going without you doing anything else to them and then when you choose to retire after a certain number of years the money

Will be there that you need to have financial independence it’s a huge great concept that actually people work so hard to get to a financial independence number so the whole point being rather than waiting and really saving hard hard hard you’re going to make a prejudgment about when you would like to retire as a fixed point in time and then how much actually an

Investment do you need to put in place and when could you actually stop investing before that retirement age now i strongly believe cost financial independence this number is the most important concept that nobody is teaching about because there’s too many 15 16 17 year olds who are frightened to retire because they do not have the calculations in the background

They don’t have that pot of money sitting there because nobody taught them about saving or investing or putting into a pension my purpose for this video is to teach you the concept teach you the math and you will have that knowledge so please make sure share it with someone share this video with someone so that they can get this calculation that will allow them

To see that they can set up their retirement whenever they choose completely based on their efforts and their own workings with their money now the reason it’s a little bit tricky you might involve actually using a calculator or a laptop to do this is because it’s not just simply a multiple times 25 as we talked about it’s actually got your age and when you want

To retire in the equation yep i know this is where we get tricky it’s using a little bit of exponential knowledge in there as well and that’s why i would say actually use a computer use google and i’ll explain why so your cost financial independence number is equal to your maximum amount and investments that you need to achieve fire so that’s 25 times your yearly

Amount then we’re going to multiply it by one plus the amount of interest you assume you’re going to get as a decimal place so for example that next part of the equation could be that you have one plus 0.07 which would be seven percent year on year growth if you were seeing a ten percent year in year growth on average it would be one plus 0.1 so let me go over that

Again it’s your financial independence total large number 25 times your yearly amount multiplied by this next part one plus a decimal place version of your yearly growth that you’re averaging then the last part is all of that last part is then to the power of the number of years you are away from retiring okay so i might have lost you i’m going to obviously add

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A little graphic down below to break it down so for example if you want to retire in 10 years or 15 you would then put that to the power of your bracket so i’ll say i’m going to explain the equation down below it’s engineering me i told you it was a little bit technical but i’m going to show you how to calculate it on google enemy so as promised i’m on the laptop

And i’m going to show you how to do this calculations i’m going to use google you could obviously use a scientific calculator and such for me it’s easier to use google though so as i said the equation for quasify your number the amount of money that you need in your account to then leave for a number of years before you retire to grow to that magic factor number

This is where we’re going to use compound interest reverse engineer so we need to work out to the power value to the negative part of something to work back so let’s do the bulk of the calculations in google so for example one plus 0.07 that’s the bracket bit that we need to work out so 1.07 to the power to the negative then the number of years we want to leave

And that’s the bit i’m going to work out because the working at your financial independence number is super easy it’s 25 times a year the amount so let’s do that first part so 1.07 to the power and let’s say we’re going to leave it 10 years okay so the negative 10. and there it is in the calculator okay so actually it brings up a calculator for us so i’ll talk

You through that again it’s the first part in the bracket so 1.07 it becomes it’s then to the power so it’s an exponential we’re using negative exponential because we want to reverse engineer and the number of years is then the exponential component in this so in our case that works at a 0.5 so therefore we then times it by our financial independence number so

Let’s do times we’re going to put bracket it’s 25 times 24 000 pounds because that then is the amount of money our financial independence number and we’ll hit equals and there you go so the amount to achieve cost fire is actually the point when we hit 305 000 pounds roughly so 305.009 so let’s do it again but this time we actually want to leave it just five

Years to return so obviously the amount of money we need is going to be larger because it’s much sooner so in that equation still using google let’s now make that to the power minus five instead so it’s going to give us some sort of 0.71 now that effect means we need 71 of our total fire number so we do that times by and then let’s do our final number in the

Bracket so 25 times 24 000 pounds okay we then equals so you’re going to need closer actually to 427 000 pounds and then you can stop putting money in and leave it five years and you’ll be able to retire so that’s the concept how far along then after i stopped paying into this will i achieve fire so the whole premise of these four levels is you get to decide

Especially with course financial independence you get to decide the lifestyle you want to retire with how much you’ve been wanting investments to support that based on what you think it should be how much you’re going to withdraw how much flexibility do you want in that number for stock market crashes or for life to maybe happen and then ultimately when do you

Actually want to retire by rather than just waiting for some event to happen oh now i can retire actually putting a little bit of thought and process behind it so i really hope today’s video has given you a lot of food for thought particularly this concept financial independence i think it’s thrown about without people really understanding what is involved my

Goal today although i give you a lot of complex math you’re going to break it i know you’re going to solve it for your family and make a huge difference so thank you so much for watching i’ll see you very soon

Transcribed from video
The 4 levels of Financial Independence Retire Early (FIRE) NO ONE HAS TOLD YOU ABOUT! By MamaFurFur