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Financial Independence / Retire Early (FIRE)

By on Sep 10, 2016 in Education, Personal Finance, Savings | 0 comments

Financial independence and retiring early is commonly abbreviated as the acronym FIRE. If you’re an avid reader of this blog, you’re very likely trying to strive for each of these. But how would you define financial independence? How would you define retiring early? At what age is early?  Financial independence could mean a lot of things to different people. For the sake of this article we will define it as the amount needed to live off of a yearly safe withdrawal rate of 4%. For example, if you have $1,000,000 in index funds and withdrawal 4% each year, you’ll have $40,000 to live on and cover your expenses for the year. Depending on your cost of living, you may be able to live off of $40,000 a year, especially if you own your home outright and do not have any debts. That comes to $3,333 a month. With housing and transportation as the most expensive costs, if those two debts are paid off (mortgage and no auto loan), living off of $3,333 a month is plenty for most people. The idea is to adjust this number up or down with your savings amount and how comfortable you are with living off of that amount.  Retiring early is defined in this blog as retiring before the standard age of 65. Those who are looking to retire early have done so in their 50s, 40s, and even 30s. If you have done really well for yourself then it is possible to retire in your 20s as well.  The million dollar (literally) question is, how do you save up $1,000,000 to retire on? It depends on how much you make and how much you...

Emergency Savings = 6 Months of Living Expenses

By on Sep 26, 2010 in Savings | 0 comments

I want my emergency savings to last me at least 6 months of living expenses if I lose my job or am unable to work. I calculated it by adding my rent, eating. and living expenses. Of course if I do lose my job, I will cut down on living expenses, but I wanted to have some sort of buffer to give me more room to breathe. My Emergency Savings or I sometimes like to call it my Rainy Day Fund. I calculated it this way: I took my recurring expenses which I calculated earlier and multiplied it by 6 months. This gave me a total of $8,078.58. Then I gave it a bit of a buffer in case of unexpected expenses and just rounded it up to $10,000. That should give me more than enough buffer. Who knows what can happen. Getting new tires, for example, can run more than $500 and that is a possibility so I figured that around $2k of room to breathe will make me feel better. My current emergency savings is at: $6,500. I am $3,500 short of hitting my goal. I plan to hit $10,000 by the end of this year: Dec. 31, 2010. That gives me 3 months to save about $1,166 a month. Updates will be up soon. How much are you saving for your Emergency Savings (aka Rainy Day...

Savings Plan for the Next 5 Years

By on Jun 1, 2010 in Personal Finance, Savings | 0 comments

Prioritizing is important when involving your finances. Your next paycheck and either go towards that new $600 watch you want or to pay off some credit card debt. The logical thing to do is to put that money towards the debt and don’t incur any more debt. The main problem is some people choose to ignore their issues or act on impulsive emotions. Here is some simple math to help you get from sinking underwater: Expenses < Income In other words, keep your expenses less than the money you take home. Spend less than you make. Live below your means. Only spend what you have. Whatever you want to call it, it’s simple math. Now if you do this properly, it should give you a good amount of money to save each month. The question is what do you save for and why do you need to save. Depending on where you are in your life and what you want to achieve, it can be different for many people. But here are some examples: Saving up for a down payment on a house Saving for a rainy day — unexpected medical expenses, emergencies, loss of job, etc Saving for retirement Saving for children’s education Saving for a big purchase — car, boat, ring, etc. Saving for a wedding Those are some of the more common reasons to save. Now some of these things in the list don’t apply to me — I don’t have children and not looking to marry soon. I do have a plan for the next 5 years and buckets on where my money should go. This list is prioritized and once the first bucket is full, I’ll move on and fill up the next bucket. I may decide to fill up each bucket at the same time, but it’s important to get that first bucket full before continuing on. Here are my 5 buckets: $10,000 saved in a high-interest yielding liquid account to act as my “6-month emergency fund” Max of $4,000 each year in my Roth IRA $200,000 down payment for a house Max of $16,500 put into my 401(k) every year Put $10,000 a year towards long term investments – stocks/bonds/mutual funds If you add that up, I’m aiming to save $362,500 in 5 years. I need to be making a million dollars a year to save that much, right? Well yeah something like that. But since I already have some money in each of these buckets, I can still get by with what I’m making. Usually, maxing out your 401(k) would go after maxing out your Roth IRA, but I’m looking to buy a house in the next 5 years so I have shifted that up the priority ladder. Also note that I am in California so a typical 20% down payment on a million dollar house would be $200,000. For my first home, I may only need half that down payment for a smaller house, but I like to aim high. Your list might be different. Sit down and prioritize what you want in life and stick to the plan. Save a little bit each month make that amount consistent. What you will see is the total amount compounding as you keep working towards your...