Could you survive if your paychecks stopped coming in?
If not, you're financially dependent on your job, but there's a growing movement
of people who want to break out of that routine.
The movement is known as FIRE:
Financial Independence, Retire Early.
The main strategy behind FIRE is, overall, pretty simple.
Spend a lot less than you earn and invest or save the rest in order to reach financial
independence and maybe even retire early.
But increasing your savings rate to the 50% or more that many FIRE practitioners recommend
is a lot easier said than done, and it may not be attainable for everyone.
However, research commissioned by TD Ameritrade found there are several habits many financially
independent people follow that most people can apply.
It boils down to three main ideas: minimize your expenses in a few key areas, grow your
wealth particularly through investments, and never stop learning.
First up: expenses.
Financially independent people spend less on housing.
About 17% of their budget goes to housing compared to the non-financially independent,
who spend almost a quarter of their budget on housing.
This one expense is often the biggest line item on a budget,
so cutting there can free up a lot of income.
Moving to a more affordable home, a different neighborhood, or even a different state are
all ways to save big on housing.
You might think the financially independent cut out all discretionary spending, but our
data show that they actually spend slightly more on the discretionary.
It's true FIRERs drastically lower their expenses, but they focus on reducing big-ticket
items like housing.
In fact, among those who are financially independent, two-thirds say independence isn't worth
it if they have to live like they're broke.
Another way to keep expenses under control is to avoid lifestyle inflation.
As we grow older and our income increases, we tend to live more expensively we move
out of a shared four-bedroom apartment into our own place or drive a nicer car.
But imagine if, at age 30, you found a way to make do with the same lower salary you
were earning in your early 20s.
You could save that extra income.
In addition to spending less, the financially independent invest more.
That extra money they save on housing they invest it
They also tend to start investing much earlier and often focus on tax-advantaged accounts.
In fact, 84% of the financially independent use accounts like 401(k)s and IRAs, which
offer tax benefits that can potentially allow money to compound more quickly.
This is one of the most crucial parts of FIRE.
The number of financially independent people investing far exceeds the non-financially
independent.
In fact, almost ALL of those surveyed are invested in the financial markets.
But the market doesn't always go up, so what happens to FIRE plans if the market turns
bearish?
Having a diverse portfolio with a mix of assets like stocks and bonds on top of a
safety net like a cash emergency fund can provide protection if the markets go sour.
Finally, the financially independent tend to seek advice and are self-directed learners.
According to our research, they are more likely to see a financial adviser
and take advantage of their brokerage's educational tools.
Learning about financial markets from trustworthy sources can help you make more informed and
confident decisions about how to make the most of your money.
No matter what your financial situation is, adopting habits to spend less and invest more
can help you pursue your financial goals.
Want to make more informed and confident decisions about your money?
TD Ameritrade is where smart investors get smarter.
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