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Why You Should Play with FIRE

Blog | Citrine Capital

Anyone searching for investment advice is undoubtedly confronted with many choices of service providers operating under titles such as certified financial planner, financial consultant, registered investment advisor, stockbroker, and insurance agent.

Why You Should Play with FIRE

Ryan Cole

By Ryan Sterling Cole

A growing contingent of millennials and Gen Xers are stashing away between 40 to 80 percent of their take-home pay to join the FIRE movement. Their goal is to reach financial independence and free themselves from their corporate nine to five’s, allowing them to travel, raise families and work on their own terms. The lucky ones are reaching Financial Independence, Retire Early (FIRE) in as little as five to 10 years by working hard to increase their earning while simultaneously living a lifestyle of frugality.

Although I don’t recommend retiring from work altogether, there is tremendous value in optimizing your financial picture to build wealth quickly and move toward financial independence. Below are a few of the benefits.

The power of that FU money

When you save a high percentage of your income and invest it wisely you quickly begin building wealth. With increased wealth comes increased freedom and flexibility in the workplace. For example, when you first begin your professional career you probably have nothing saved, and you most likely have a lot of student debt. So, when your boss asks you to come in on Saturday you respond with a resounding: “Yes! I’ll definitely come into the office to file those TPS reports on Saturday morning!” You can’t afford to lose your job, so “yes” is the only option.

 Fast forward a few years. Now your debt is paid off and you even have six months’ worth of living expenses saved, which you can fall back on if you lose (or quit) your job. You now have a bit more freedom and flexibility when your boss asks you to take on an uninspiring project. Because you have some cash stashed you respond with: “I will sacrifice my Saturday because I know this is important, but my family is also very important to me, so I can’t make this a habit.”

 Now let’s take it a step further. Let’s assume you’ve been living frugally and stashing away that extra cash. In fact, you’ve stashed enough away to reach financial independence (generally considered 25x your annual spending rate in the FIRE community). You no longer need the income, so you tell your boss, “I can’t come in Saturdays as weekends are precious time for me and my family, furthermore, filing TPS reports isn’t a good use of my time. I suggest we give this task to Ivan the intern.” With any luck, sticking to your principles and providing your unbiased opinions will get you fast tracked to upper management. But no worries if not, because you’ve got that FU money in your back pocket. You now have the freedom to find a better employer. Better yet, work for yourself or pursue other passions.

 Aligning your spending with your values

As our incomes increase our spending tends to increase right along with it. We gradually begin eating out more, buying more luxurious cars, remodeling our homes, and shopping at the fancy grocery stores with the perfectly-polished, blemish-free fruits. This is called lifestyle creep, and it can push your financial independence date back to never if you don’t keep it in check, which is why monitoring your expenses can prove tremendously valuable over time. 

The key is to make sure your spending aligns with your values. When you examine your expenses, you may find yourself asking questions such as, “do these beautiful fruits from the fancy grocery store really taste any better?” and “should we go ahead with remodeling the kitchen and bathrooms or should we stash that cash in the markets, watch it grow, and retire five years earlier?”

Now, I’m not suggesting you should start eating ramen for lunch and rice and beans for dinner, but there’s tremendous benefit in tracking your expenses, considering your values in your spending choices (and habits), learning to live within your means and being just a bit smarter than the Joneses. I’ve seen clients cut over $4,000 per month of their spending – $4,000/month saved, and assuming an 8 percent return over time if invested in the markets, equates to $2,379,472 in just 20 years.  

Learning to be tax savvy

Examining savings is especially important for high-income earners because every dollar earned begins to be taxed at close to a 50 percent rate (and above 50 percent in some states). When we reach these higher brackets, a dollar saved is equal to two dollars earned (and subsequently taxed at a 50 percent rate), which is why you need to learn to maximize your tax picture to reach FIRE.

The good news is that you get to keep both of your earned dollars (and hopefully many more of them) if you put them in tax deferred savings vehicles such as a 401(k).*

As an example, let’s say you decide you want to purchase that sexy new $70,000 Tesla. To pay for that Tesla, you actually need to earn around $140,000 (assuming you’re in the top tax bracket and living in a high tax state such as California). If you finance your Tesla for $1,000 per month over a six-year period, you actually need to earn $2,000 per month (before tax) to make those car payments. If you instead put the $2,000 per month of earnings into tax deferred accounts then you have the full $140,000 saved, and in twenty years that $140,000 will be worth just under $700,000 (assuming 8 percent interest).

Learning to be tax savvy has tremendous benefits, and there are all sorts of programs and strategies available to save huge amounts of money on taxes. Finding these and taking advantage of them will lead to substantial increases in financial freedom and the ability to retire years, if not an entire decade, earlier. 

Retirement optional

Perhaps the best part of becoming financial independent: retirement is completely optional. Most of us enjoy providing value, building things and making an impact, which is why most of those who reach financial independence don’t sit around sipping mai tais on the beach in between rounds of golf. However, these folks now have the ability to choose a lifestyle and work that energizes them, even if it doesn’t pay well. This could include working for charitable causes, traveling and/or building things you’re truly passionate about.

Stash that cash!

Even if you love your job and plan on working until you’re 80 there are a host of benefits to practicing the key tenants of the FIRE movement. Saving aggressively in your 20s, 30s and 40s combined with tax savviness can lead to tremendous wealth creation. And with the creation of wealth comes the ability to choose where, how, if and when you work, which is why you should begin playing with FIRE. 

*These dollars may be taxed when you withdraw them however, with a bit of tax savviness, the income tax at withdrawal can be significantly reduced or even eliminated altogether.

Ryan Sterling Cole is a Private Wealth Advisor at Citrine Capital. He founded Citrine Capital to help Gen X and Gen Y professionals make prudent financial decisions for themselves and those who depend on them. Ryan is a Certified Financial Planner™ Professional.