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The 4% rule for financial independence

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The 4% rule for financial independence

Do you dream of financial independence? You can achieve it!

Have you ever heard of the FIRE Movement? It started in the USA and is now making its way to Europe. FIRE stands for Financially independent, retire early. People of the FIRE movement work/hustle to earn as much money as they can. They are frugal and spend as little as possible and invest the surplus. This way they can live off of their investments in the future without needing to work. Sounds impossible? It’s really not!

Fire

Playing with fire

Return of investment

If you put your money in low-fee investments, the average annual return is about 7-8% a year. Now of course this is on average. Some years it is less and some years it is more. In the FIRE movement the general rule is as follows: If you invest your money and on average you gain 7-8% in returns when you retire you take out of your investments 4% per year. This way you will never run out of money and even account for inflation (your money will grow).

So if you need let’s say 40.000 euro per year, you will need 40.000*25=1.000.000.

(4% of 1 million is 40.000)

One million! That is hard to save up before your actual retirement. This ofcourse depends on what you make and where you live.

But! There is a but! If you happen to only need 20.000 per year, you will need ‘just’ 500.000.

If you need less every month…

I can only speak for myself of course but if I pay of my house entirely, I can almost cut that in half again to live off of. Now i ‘only’ need 250.000. Especially since when I an not working for a boss anymore there is more time for home cooked meals, insourcing, repairing things myself and there is less of the fancy clothes bought just of wearing at the office, less fancy car and less gas because I don’t have to commute every day and I could go on.

free time

All the time in the world to cuddle this cutie pie!

Track your expenses

So I have tracked my expenses to the euro for the past 8(!) years already and I know how much I spent in any given month. So after I pay for the mortgage I usually spend between 600 and 1600 per month on groceries, internet, electricity and everything else combined. That to me is a pretty wide range still, but it’s something I can work with. If I pay off my house in full I will need somewhere between 800-1500 per month to live off.

If I want to retire early I will need:

800 per month = 9600 per year * 25 = 240.000

1500 per month = 18.000 per year * 25 =450.000

Hypothetically I start off with zero, and save 100 per month and have 8% per year return. How long do I need to work to retire?

With 240,000 euro’s I will need to work for 36 years to have saved enough for financial independence. With 450,000 euro’s I will need to work for 45 years to have saved enough to retire. That is 9 years longer!

Now let’s do the same but we save 500 per month starting at zero. With 240,000 euro’s I will need to work 18 years to have saved enough and withfor financial independence 450.000 about 25 years. Sounds a lot better already. And how about 1000 euro’s saved per month? Well 240.000 I need 12 years of work and 450,000 just 17,5 years.

So a person that starts at 20 years old can really retire in their early 30’s if they just live frugal and manage to save a lot. It can be done people! Also if you feel like working ans hustling for 15-25 years straight to then finally do what you love is not what you want? You can do a semi-retirement way before this and work part time and save just a little to non and make your savings more by investing.

What is important to you

Also if you feel like living frugal is not worth it? I really want you to think about what is important in live. Is it to impress people, is it to go to work every day for 45 years straight? Is it to raise your own kids and have some time for your hobbies, is it maybe some fast and expensive car to impress the ladies? Think about it and let the path to financial independence be your own path and not something somebody else expects you to do. Be clear on what makes you happy, what are your goals in life and what you want out of it. Take control of it yourself!

Happy Saving!

Elske

I am not a Financial advisor nor am I YOUR financial advisor. I am not a trained financial professional. This blog is for entertainment purposes only.

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