Rounding it up
The FIRE method, or “Financial Independence, Retire Early” can help plan your finances and curb your spending so you can stop working as early as your 40s.
The first step is to start planning for retirement by investing — compound interest, anyone?
Of course, keep your expenses low and save every penny; you should try to put upwards of 75% of your income into high-interest accounts.
It helps to boost your current income, be it through a second job or side hustle. Putting in those extra hours now can make a huge difference down the line.
Once you begin working a 9-5, there are few things you look forward to more than retirement. Seriously, who wouldn’t rather be sitting at a beach than a desk? But while many of us live with the harsh reality of not being able to kick back until our late 60s or 70s, wouldn’t it be kinda nice to squash this complacency and retire early? We think so.
We understand that early retirement is subjective. For some, handing in your notice by age 40 is an accomplishment. For others, baking a cake with “I quit” written in pink fondant icing at 50 is early. Whatever your retirement goal, we’d like to welcome in what financial experts dub “The FIRE method.” And no, we don’t mean building something up so much that it ends in complete chaos and mayhem — we’re looking at you Fyre Festival. What we do mean is following a guide to breed financial independence and a life well-lived for early retirement.
While “FIRE” can be a very aggressive feat, it does offer some valuable advice on how to retire early. So if you want to become financially secure long before the average retirement age, follow along and read what it’s all about.
What is the FIRE method?
Financial Independence, Retire Early, or “FIRE” is a way to plan out your finances and reign in your spending habits so that you can stop working as early as your 40s. People that use this method try to save a large portion of their income — upwards of 75% — so they can retire before their 40th birthday.
Sound crazy? Well, instead of spending a lot of money now, when you use the FIRE method, you invest your income wisely so you don’t have to work down the line. That way, you can start making enough passive income to live for 60 or even 70 years without a paycheque.
Okay, okay, we get it - quitting your job forever by the age of 40 might seem completely unrealistic right now, but it is possible, especially if you use the FIRE method to budget your money.
As you can probably imagine, FIRE isn’t something you just do on a whim. To make it work, you have to be serious about managing your money. Dedication is critical here and without some serious devotion, you won’t have enough set aside for retirement. Remember, we’re talking about saving up enough money for the rest of your life — not for that new PS5.
"FIRE isn’t something you just do on a whim. To make it work, you have to be serious about managing your money."
How to use the FIRE method to retire early
If wrapping up your career in your 40s sounds like an ideal way to live your life, then the FIRE method is probably your best bet. So here it is, in all its glory. This is what you can do to help plan for your future:
1. Start planning for retirement with investing
The very first step to gaining financial independence by the age of 40 is to start planning early. Unfortunately, money doesn’t grow on trees. But you know where it does grow? In investments. Do this early, and wisely.
In fact, the FIRE method is all about being able to live off of passive income, which is money you make without working. However, passive income isn’t free. It involves a whole lot of savings and investing now so you can reap the rewards down the line.
Now, this only works because of the power of compound interest. What exactly is compound interest, you might ask? When money is put into an account that accrues compound interest, it grows in value based on how much is in the account (the principle) and how much the account makes in interest each year.
Compound interest is basically a way to have your money work for you. The more money you have, the more you’ll earn for keeping it in a high-interest savings account, retirement account, or in stocks and mutual funds.
Ultimately, this is the easiest way to passively grow your savings without having to work. When you start planning for retirement now, you put most, if not all of your savings into interest-bearing accounts year after year until they start to increase in value on their own.
Doing so means your money can work for you while you relax or see the world. Or both.
The trick with capitalizing on the power of compound interest is to start early. The sooner you start putting your money away from retirement, the longer it has to grow in value and the more you’ll have when you clock out for good.
"Unfortunately, money doesn’t grow on trees. But you know where it does grow? In investments. Do this early, and wisely."
2. Keep expenses low
Still with us here? Great. The second thing you need to know about the FIRE method is that you should keep your expenses at an absolute minimum. The less you spend now, the more you’ll have for your work-free years.
This all sounds great, we know. But, if you’re struggling to see how you can cut down on your spending, you’ll be happy to hear that this isn’t an impossible task.
First, you’ll need to pay off any of your debts. If you want to retire early, interest rates on credit cards and loans are going to quickly eat away at your savings, which means you’ll need to work for way longer than you really want to.
If you have debt, don’t worry. Our ultimate budget template will help you wipe away your debt faster.
In reality, a whole lot of budgeting when you have debt comes down to figuring out the best balance between loan repayment and your regular expenses. Thankfully, your KOHO account can also help you reach your budgeting and savings goals.
The KOHO app makes it easy to budget and track your spending to reduce your monthly living expenses. KOHO’s lack of hidden fees also helps to eliminate unnecessary expenses over the years.
Oh, and by pre-loading money onto a KOHO card, it’s easier to manage your spending and limit it only to what you truly need. With your KOHO prepaid Mastercard card, you can’t possibly spend more than what you have. Seriously, try to — you can’t!
Using a prepaid Mastercard also helps redirect money that would normally be spent on shopping or the latest fusion restaurant into your retirement and investment accounts. With all the great savings you can get by using your KOHO account’s great budgeting tools, it’ll help you retire sooner, rather than later.
3. Find ways to boost your income
If you want to retire early, maximizing your income while you’re still working is critical. Having money makes it easier to passively accumulate more, thanks to the power of compound interest.
Try to find ways to boost your income right now. This might involve working a second job or starting a new side hustle. There’s no one-size-fits-all solution here. What’s important is finding ways to make extra income that works best in your life.
Working more right now might sound like a bummer. However, while the goal of FIRE is to retire early, this is impossible to do without working quite a lot in the meantime. Putting in those extra hours now can make a huge difference down the line, so it’s well worth the hustle when you’re young.
"The less you spend now, the more you’ll have for your work-free years."
4. Save every penny
Achieving early retirement is all about saving. If you want to follow the FIRE method, you should be trying to put upwards of 75% of your income into high-interest accounts, stocks, and mutual funds, rather than the newest smartwatch.
Of course, living off of only 25-50% of your income might seem impossible right now. The good news is that everyone has to start somewhere, so the fact that you’re even thinking about retirement right now is a solid first step.
Successfully reaching early retirement is all about making saving and investing a regular part of your life.
A good way to turn saving into a habit is to start investing your spare change. Sure, a few dollars here and there might not sound like a lot, but when you earn cash back and put away RoundUps on every purchase you make with your KOHO card, it starts to add up. Increasing your cash back percentage with a KOHO Extra account can also help maximize the amount that you save on your daily purchases.
Once you have that added cash in your pocket, it’s time to start capitalizing on high-interest savings and retirement accounts. Canadians have access to plenty of great interest-bearing accounts, many of which also offer tax breaks, so they’re a great place to start.
The key here is to save as much as possible. Many of the best high-interest savings accounts have maximum contribution limits, so aim to reach those investment ceilings each year. Open multiple savings and retirement accounts and try to max them out each year. This will allow you to get the biggest return on your investment and reach financial independence earlier.
The FIRE method is about being smart with your money
If you don’t want to spend the rest of your life working, then the FIRE method is a solid start to becoming financially independent so you can retire early. Retiring early means you need to have a fairly large income right now, but the principles of FIRE are useful for anyone looking to make super smart decisions with their money, regardless of salary.
Many of KOHO’s benefits, such as cash back on every purchase, RoundUps, and our prepaid Mastercard card allow people to increase their savings. Whether you’re looking to retire earlier, create a decent nest egg for the future, or quickly build a slush fund, the principles of FIRE can make a big difference.
Gaby Pilson is a writer, educator, travel guide, and lover of all things personal finance. She’s passionate about helping people feel empowered to take control of their financial lives by making investing, budgeting, and money-saving resources accessible to everyone.