The Wisest Investment You Might Ever Make

The Wisest Investment You Might Ever Make

Retirement planning generally focuses on working from your 20s and retiring in your 60s or later. That gives you 40-odd years to squirrel away 10% to 15% of your annual income to accumulate a sufficient nest egg to last the rest of your life.

Yet the reality is that many folks are only a minor emergency, such as needing new tires for the car, away from bankruptcy. Most live paycheck to paycheck.

In fact, a study by Northwestern Mutual found that:

  • 21% of Americans have nothing saving for the future
  • 33% of Baby Boomers only have between $0-$25,000 in retirement savings
  • 46% have done nothing to prepare for the possibility they could outlive savings

Building up a retirement savings that can last 20, 30, or 40 years is indeed a challenge.

But there’s a group that has redefined retirement planning by sacrificing today so they can have a better tomorrow…

The FIRE Movement

Financial Independence Retire Early (FIRE) folks realize that retirement planning is not like it was for past generations. Gone are pension plans and other benefits for loyal, long-term employees. 

FIRE champions push themselves to live frugally, saving up to half their income while young and retire in their 40s. Then the next 30 years their goal is capital preservation. And thereafter, is the time to consume their nest egg.

Not everyone in the FIRE movement group expects to quit working as midlife creeps in. Rather many hope to move on to an endeavor that they would gladly do without the paycheck… something that gives them the freedom to be themselves.

So what does the FIRE crowd recommend you do to achieve such a level of financial wherewithal?

Let’s start with…

How Much You Make

Go for the Bucks When You are Young

When you are young, say in your 20s and 30s and just starting out, go for the money rather than what you think is your passion. That way you’ll have enough put away to do what you love in your 40s, 50s, and beyond.

Besides, how many know what their true passion is at a young age?

By the time you hit 40 or 50, you’ll better appreciate the freedom that comes by deviating from the typical 9-5 work environment and be ready to move on to something you feel good about, even if there is little or no pay. 

That passion might allow you to live a more simplified lifestyle in a less expensive part of the U.S., or even in another country.  

Passive Income

FIRE advocates like money you earn regularly with little or no effort. Examples of passive income include rental real estate, dividend stocks, and bonds.

Suppose though that you don’t have much to invest right now? Here are two ideas to consider… 

You can start off with a small amount and take advantage of a company’s dividend reinvestment plan, better known as a DRIP.

DRIPs are programs that allow investors to use dividends to buy additional whole or fractional shares direct from a company. The minimum investment in most plans is $250 or less. Moreover, you bypass the broker and the associated commissions.

Another low-cost idea for generating passive income is to rent out rooms in your home to students or visitors to your community.

Airbnb is one source that gives you a platform that will help you generate thousands a year in passive income.

Now for the part that many financial gurus and large financial institutions tend to skip over…

How You Spend

Great saving habits are the cornerstone of FIRE movement followers. Some, however, take thriftiness to what may be considered an extreme.

For instance, they might dumpster dive for produce or other food products. Or drive around town the night before trash pickup looking for useable items. Those with creative cooking skills and tough palates scout highways for fresh road kill.

You might not be into digging through other people’s trash or preparing possum on the half-shell (armadillo). Although, sharing a car with your spouse and eating more meals at home may be more to your liking and can help you on your path to monetary freedom.

Avoid Inflating Your Standard of Living

Learning to live below your means can give you that extra money you need to save aggressively.

Still, many Americans are tempted to buy a fancier car or go on a spending spree when they receive a raise, bonus, or other boost in income.

Before falling into that trap, remember that the pleasures of driving a new $40,000+ SUV will soon disappear. While the satisfaction of successfully investing that $40,000 and watching it grow, will stick with you.

Pay off All Debt

The S&P 500 has averaged an approximate 10% return over the past 90 years. Although there’s no guarantee it’ll do the same down the road.

On the other hand, credit card interest can run 15% or higher. Interest rates for student loans, car loans, and home mortgages can be considerable lower.

However, you have to pay interest charges regularly… no matter what the stock market is doing.

So it doesn’t make much sense to invest stocks until you get those debts out of the way.

Two Possible Downsides to the Fire Plan

The first is that you’ll likely lose any group health insurance you have from your employer if you jump out of the workforce early. That means you’ll have to buy coverage or pay out of pocket for medical care. Another option is to go offshore if you need an expensive procedure.

The second is that your Social Security benefits will take a hit.

But as long as you had worked the 10-year minimum, you’ll be eligible for a benefit.

It’s not something I would count on in its present form anyway since the system is on shaky grounds and set to be broke by 2035 as indicated in its latest annual report. 

Of course you could fail to save enough and have to work longer than hoped. And you always have the option to decide the FIRE lifestyle is not for you. You may even be one of the lucky few who find a career you truly love while you’re in your 20’s or 30s.

The gigantic upside…

Leading the happiest, most satisfying life possible.

So are you willing to do what it takes to achieve that sort of financial freedom — your independence date — by the time you’re in your 40s or 50s?

A few simple habits, like turbo-charging your savings and chopping spending, may seem like a small price to pay — and it could be one of the wisest investments you’ll ever make.

To a richer life,

Nilus Mattive

— Nilus Mattive
Editor, The Rich Life Roadmap

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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