In recent years a movement known as FIRE (which stands for “Financial Independence, Retire Early”) has been gaining popularity, particularly with the millennials generation. People pursuing the FIRE movement aim to live frugally and save up enough money to build an investment portfolio that allows them to quit their 9-5 jobs and live on passive income such as dividends and interest.
Quit your 9-5 job before age 65
In past generations, people worked until retirement age (typically 65 years old) and then they can travel the world or pursue other hobbies. FIRE participants want to quit their 9-5 job before age 65 and retire in their 30’s, 40’s, or 50’s. They want to be able to travel and do the things they love while they are still young and energetic.
Types of passive income
There are many types of passive income that can help achieve FIRE, including:
- Dividends
- Interest
- Royalty
- Rental
Let’s talk about each one of these.
Dividend income
Anybody can open up a brokerage account such as Robinhood, WeBull or TD Ameritrade. An online application typically takes 10-15 minutes, then you can buy and sell stocks, bonds, or other securities. When you buy a stock, you become a shareholder of the company. Some stocks use all or part of their earnings and pay cash dividends to their shareholders usually monthly or quarterly.
Dividend income is passive income because once you buy the stock, you don’t have to do anything else to receive the dividends.
Interest income
When you buy a bond from a company or government (such as a Treasury bill or T-bill), you earn interest income. A bond means you are loaning money to the company or government, and in return you get interest income plus your investment back at the bond’s maturity date.
Interest income is passive income because once you buy the bond, you don’t have to do anything else to receive the interest.
Royalty income
You earn royalty income when you create something of value to other people. For example, in 2015 I self-published more than 10 eBooks on Amazon, and every month I get paid royalty income from Amazon (even to this day) whenever someone downloads my eBook or orders a paper copy of my book. Musicians publish their music and when it gets sold, they receive royalty income.
Rental income
You can buy a house, condo, or apartment and rent it out to collect rental income. You can have long-term tenants or short-term tenants like AirBnB. Another great thing about rental income is while you’re collecting rent to help you pay off your mortgage, usually your property will appreciate in value.
So how much money do you need to quit your 9-5 job?
Many people want to know how much they need to quit their jobs and live comfortably. This depends on the individual’s lifestyle. Start with calculating how much your monthly expenses are. The higher your expenses are, the more passive income you will need.
For example, if you live in the suburbs where the real estate is cheaper, your rent/mortgage will be lower than someone living in downtown New York. If you are willing to ride a bicycle and take public transit, you will need less money than someone who wants to own a fancy car. You will need more money if you want to dine out, travel, and buy Starbucks everyday.
2 examples of how much money you need to quit your job
Example 1
For someone who lives frugally and needs only $2,000 a month to live, multiply $2,000 by 12 months to get annual expenses. This will give you $24,000 per year. Assuming you own stocks and bonds that pay you dividends and interest of 3% per year, dividing $24,000 by 3% gives you $800,000. Another words, you need an investment portfolio of $800,000 at 3% dividend/interest rate to provide you with $2,000 per month to live on.
Example 2
For someone who wants to live in a nicer part of the city and drive a fancy car, they may need $6,000 a month. Multiply $6,000 by 12 months to get $72,000 per year. Assuming your portfolio gives you dividends and interest of 3%, dividing $72,000 by 3% means you need $2,400,000.
Are you currently pursuing the FIRE movement or know someone who is? If you are, I wish you all the best!
Disclaimer: This article is for educational purposes only, and is not personal financial advice. Any securities mentioned are for illustration purposes only, and is not a recommendation to buy or sell. Please consult a professional advisor to help you assess your specific situation. The author takes no responsibility for losses by individuals implementing strategies in this article.
Calvin K. Lee Author 