This post is sponsored by Lexington Law.
While doing F.I.R.E research, I found little about what it would actually look like to retire early with a family. Moreover, lots of mixed reviews of what to actually lower your annual expenses to in order to achieve financial independence so you can retire early. Some people said to live off of $10,000 a year; others said $20,000. Basically it all came down to whether you were doing Lean F.I.R.E vs regular F.I.R.E., vs Fat F.I.R.E which you can read more about here.
Calculating what we'd need to achieve financial independence and retire early:
We are a family of three in a city with a slightly above average cost of living. Both my husband and I are entrepreneurs so our income is highly variable. I decided to use a FIRE calculator based on our current net worth and play with the numbers to see what we'd need to drop our annual living expenses too in order to reach fire in 10 years (I'd be 39, my husband would be 46).
If we drop our annual living expenses as a family of 3 to $40,000 we could do it in 9 years! If we drop it down to a total of $20,000 a year, we could retire in THREE years! Honestly, when I saw that number, my excitement levels shot through the roof! Who wouldn't want to achieve financial independence in just three years for their family?!
One thing about me: I love to work, but I hate feeling like I HAVE to work. When working feels like my choice, I'm excited, creativity flows, and I just feel great. But when I feel like work is something I “have to” do, instead of “get to” my enthusiasm wanes.
I decided to look at what it would look like to live off $40,000 a year and then $20,000 a year as a family of three. My hope is that you can see what is possible for your budget in this example.
Before we jump into what it would look like to live on $20k vs. $40k as a family of 3 to retire early…
I want to thank the sponsor of this post: credit repair leaders, Lexington Law. They are actually sponsoring this entire early retirement series on the blog! They are committed to their clients and helping educate people about healthy financial choices.
A strong financial foundation is the first step towards overall financial health, including financial independence. Personally, I think that starts with an emergency fund, then cleaning up your credit score and getting out of debt (check out these debt repayment strategies here). A low credit score can seriously cost you (read how here). A good first step towards financial health is understanding what is going on with your finances. Start by pulling your credit reports and looking for any errors. If you notice any inaccuracies, give Lexington Law firm a call by clicking here. They’re generously offering free credit report consultations!
Our current pre-FIRE monthly spending as a family of three:
Let's do a quick rundown of what our current finances look like a month as a family of 3:
- Housing & Utilities: $3,300
- Home care (pool, lawn, cleaning people): $400
- Food: $650
- Internet: $60
- Extras (Credit monitoring, Netflix, etc): $60
- Cell phone: $0 (yep, we are still on the family plan)
- Insurances: $450
- Car payment: $400
- Gas: $80
So we spend about $5,400 a month currently on what some could say are “needs,” but I'll be talking about why they aren't necessarily “needs” in this post!
NOTEWORTHY: we actually spend more than this a month, since it doesn't take into account miscellaneous shopping, travel, and other things we do. Either way, it's a far cry from the $3,333 we are going to need to cut this down too.
Now here's the thing about our current expenses before I get any pushback:
We spend A LOT on housing compared to the average person. We both work from home, so we are here 24/7. Our house is our entire life; we really don't leave it very often. For us, we look at it as a cost savings since we don't rent office space. It's also part of our mental health care, since mood is so drastically impacted by our environment. We don't want to sit in a depressing home all day. Our productivity and profits would drop. Trust me, we've done it, and we both suffered.
Next, I'll be the first to admit, our food budget completely shocked me. I guess it's been a while since I checked in on it (honestly, I took a backseat to our finances during pregnancy and this first year of our daughter's life; I opted for easy over financially responsible).
Lastly, my husbands car payment:
So my husband, bless his heart, is a recovering over spender. He really just didn't think about his finances before we started dating and was in close to $10,000 of debt, but still spending money on getting shoe shines and multiple newspapers a day (Yes, like physical copies of The New York Times, New York Post, etc.), and buying coffee for tons of people. He made a rookie mistake when getting his first car lease (he's from New York so his first car was owned and then he didn't have a car in the city), and took a low monthly payment without considering the mileage. Long story short, he went seriously over his mileage which led to this vicious cycle over the last few years of continuing to lease in order to offset the penalties from the overage. We used to joke he was driving a “Kia-Bentley” based off his monthly payment. Fortunately, his lease ends in less than a year so this is something we can actually reduce.
Other noteworthy things:
We currently have an emergency fund with one year's worth of living expenses and we max out our IRA contributions annually. You can learn more about different types of retirement accounts you can set up from my friends at Lexington Law here.
What it would look like to live off $40,000 a year to achieve F.I.R.E. in 10 years
If our annual expenses need to drop to $40,000 a year, that would mean a maximum spending of $3,333.33 each month. Which is pretty shocking, because that's basically what we pay in housing (including mortgage payment & utilities). So I can tell you right out the gate, some big adjustments would need to happen.
Housing & Utilities: $2,000
In order to do FIRE, we'd 100% need to move since our housing & utilities match the number we would be living off of to begin with. This is actually doable, we really could find a cheaper place to live.
With all of this said, if I were to attempt this:
We did just buy our house less than a year ago, so we wouldn't sell it because we'd take a hit most likely with real estate fees. Instead, we would rent it. The rental market is hot where we live. It's why we bought and actually lowered our monthly cost of living. We were priced out of the rental market for the type of place we were living in and wanted. I fully believe we could match, and probably even get a few hundred extra dollars each month by renting our home and moving somewhere cheaper.
Home care: $0
Not going to lie, a little part of me cries inside at the thought of getting rid of our home care team and having to do it ourselves. While this feels like a loss, the reality is, since we'd have to move to achieve FIRE, we may not even have a lawn or pool to take care of so this number is actually easier to part with. I decided to outsource things like cleaning, lawn, and pool maintenance for a few reasons:
1) Our current housing/utilities with this number factored in matched our old rent, so we were already used to spending that much a month on our home situation
2) I make more in an hour than we pay out for these services, so by freeing up that time to work, we are still coming out ahead financially
3) If you're thinking, “well you could clean at night” you're absolutely right, I could; which is why this number is now $0. However, I'm tired from working all day and have a baby so it was worth the chance to have some “me” time. We hired cleaning people when I was 6 months pregnant, and our pool/lawn people six months into homeownership so these aren't luxuries we've had for years, but felt important to us at this stage of our life.
I'm cutting our food budget by more than half here which may sound shocking to some people, but is actually totally doable. Before we got pregnant, we used to only spend $200 or $250 max on food each month! I know it's doable and will just take better meal planning on my end so we don't eat out as much or have as much waste.
Assuming this would stay the same and it's a need since we both need it for work.
This is miscellaneous expenses like subscriptions to tv or music streaming. Or it could be using a credit monitoring service like The Lex OnTrack Identity Theft Protection tool, which monitors and protects your identity from theft with $1 million in identity theft insurance. It works to help catch fraud on your accounts and works with you to rectify the situation. I could cut this down, but honestly, these bring me joy and peace of mind, so I'm leaving them at $40,000 as a personal preference on my priorities.
Cell phone: $0 (yep, we are still on the family plan)
Fingers crossed we never get kicked off of this.
I'm just going to assume that our insurance plans stay the same (or close enough to it that we'll adjust accordingly). With that said, I'll be doing a post on how FIRE works with health insurance since it is kind of complicated.
Car payment: $0
I dropped the car payment to $0 since if we really are going to do FIRE we would need to get smarter and more intentional about where our money is going. With my husband's lease ending in a year, we could take a few thousand from our savings to buy a cheap used car. Yes, that may extend the time until reaching FIRE, but I gave us a year buffer in this example anyway so it should work, especially when you factor in how quickly we'd recoup the savings not spending money on a lease.
I left this as is since I don't see it changing and it's not a crazy amount.
Grand Total: Is it possible to live off $40,000 a year as a family of 3 to achieve F.I.R.E. in 10 years?
This actually only puts us at $3,100 a month, so we'd still have a $200 buffer; which I'd want. So yes, it is possible to live off of $40,000 a year as a family of three to achieve F.I.R.E. in 10 years. We would 100% need to move and set our current home up as a rental property. Like I said, I think we could even make at least $6,000 extra a year by renting our home.
I fully believe in living below our means. Even with how expensive as our current monthly expenses are, we are still below our means. The $200 buffer, I know will come in handy for unexpected health costs, food costs, and whatever else inevitably comes up in life.
However, doing FIRE at this rate, I don't know that I would actually do it honestly. While it's doable, FIRE at this rate, would mean we are retiring in 10 years. Meaning that's 10 years of living (and working) uncomfortably – and we want another child. Both my husband and I are far more productive (and better parents) when we are in a good mood… meaning we have space. We have lived out of 900 square feet with both of us working from home for 5 years… we know we can do it. But that was before a baby and a dog. A lot of the cheaper rentals don't allow dogs, so we'd have to get rid of him too.
With FIRE Lean (retiring in 3 years), I would consider living uncomfortably though. I can suck it up for 3 years of discomfort, but 10 is too long in my opinion. So let's look at the numbers for Lean F.I.R.E.
What it would look like to live off $20,000 a year as a family of three to achieve Lean F.I.R.E. in 3 years
In order to do FIRE Lean we'd have to drop down to $20,000 a year in annual expenses for our family. Lean F.I.R.E. typically recommends each adult lives off of $10,000 a year. So this is extra lean since we have a baby. Monthly this would mean spending $1,666.67. An even further cry from the previous example, since now the entire budget I had done for housing, equals a monthly expense! PHEW, this will be interesting friends!
Housing & Utilities: $1,000
Initially I tried coming up with this number using the 50/20/30 guideline (what I used in the previous example) which would mean we'd cap our housing to $833 a month. I went on Zillow and tried to find properties to rent for between $200-800 a month in my COUNTY (there was nothing in my city, so I had to look at the entire county) and got a whopping 16 results! Three of which were for empty lots… so I guess we could construct something there?
I don't live in a small county either, we have over 1.4 million residents with nearly 2,000 square miles of land. But like I said, it's not the cheapest area to live in.
In other words: we'd need to straight up move or we would need to go full stereotypical millennial and take up van life or move back in with family. Personally, I'd rather we buy or rent a 2-3 bedroom RV or van that we trick out and live in for a few years over moving in with family or to an area we don't love. This way we can at least see the world, and park it in places that feel like we have a good amount of space as our “yard.” Granted, buying or renting an RV would put a bit of a wrench in the plan since we'd need to set aside money upfront. I quickly looked into getting an RV or trick out a van and it wasn't cheap…
Home care: $0
Not going to happen on this budget; but not a loss since we'd likely move into a van anyway.
We'd have to cut our food budget even less than the previous example. I think we could make $350 work, since we have in the past. If we had a hankering for eating out, it would only be fast food though at this rate otherwise everything would be prepared in bulk at home. Think lots of pasta, one pot meals, etc. We don't really eat meat so this isn't too hard to make work; it just can get boring after a while. But again, we did live off of this for about 4 years.
We really can't compromise on internet. Without it, we wouldn't earn a living!
Extras (Credit monitoring, tv, music, etc): $0
At this rate, I'd have to get rid of every “nice to have.” It'll be strictly library books and movies for entertainment and boardgames we already own. Maybe friends will let us invite ourselves over to watch our favorite shows and the latest movies?
Cell phone: $0 (yep, we are still on the family plan)
Pray this never changes!
This number is only for car insurance. At this cost of living, I'd honestly have to get creative with health insurance. Health insurance is the biggest barrier for most looking to achieve FIRE. It's such a big topic, that I'm actually doing a full post on it later this month, so make sure to join my newsletter below so you don't miss it!
Car payment: $o
We would either own a car outright or have to live out of our it and this would become our housing expense.
If we are living out of our car, this may go up. But let's pretend it doesn't for simplicity.
Grand Total: Is it possible to live off $20,000 a year as a family of 3 to achieve F.I.R.E. in 10 years?
This would make our monthly spending $1,640; leaving us with very little wiggle room for error since our original budget was $1,666.67.
Is this actually possible? Yes, however this would require some upfront planning and expenses to actually achieve. We would need to figure out our living situation. Honestly, van life has always piqued my interest so I think I could do it. Growing up, we didn't live out of a van per se, but we would go on very long road trips and stay in our van during those. As a kid, I loved it. We had a huge bed in the back, it was cozy, we'd visit so many amazing spots in nature. I could see myself doing that with our daughter since I lived like that until about the age of 4.
Planning for FIRE as a family of three:
Before we'd actually be able to achieve F.I.R.E. as a family of three, we would need to do some planning. Things like renting our home, finding a van or a new place to live, etc.
Use this checklist to help you and your family achieve financial independence and early retirement:
- Stacked emergency fund
- Credit history of clear of negative items or credit consultation set up with Lexington Law
- Debt repaid – check out these debt repayment strategies here
- New budget planned
- Found new housing
- Taken care of old housing
- New meal plans that support new food budget
- Cancelled memberships and subscriptions
- Found lower cost transportation or health alternatives
I'm a believer in easing into major lifestyle changes like this too. Meaning I wouldn't drop our food budget this low overnight. I'd start by finding a cost effective meal plan for lunches, then dinners, then breakfast. This way when we officially started our FIRE journey, I wouldn't feel as overwhelmed or like a failure when I inevitably blow the budget with some failed meal attempts. I look at lifestyle changes like this as one step forward, two steps back; it's easier to ease into one thing at a time so you're more likely to stick with it for the long haul. It's sort of like my philosophy with paying off debt: you stack your emergency fund before you start tackling your debt. This way if something unexpected comes up, it doesn't derail your financial progress to the point of giving up.
What about all the expenses related to having kids??
Obviously childcare that isn't free is out of the question in these examples. We would make use of free local events, community hours at nonprofits, the library, and parks for fun. As far as how quickly kids grow and the constant need for new clothes, diapers, etc. we would have to factor in transitioning to cloth diapers in our upfront budget. I always bought clothes a little too big for my daughter anyway, so I'm not worried about clothing expenses.
In the first year, we only bought her two pairs of pajamas outside of my initial clothing haul (most of which she still wears). The trick I found is to shop for bamboo clothing. It's very stretchy; she still fits in her 3-6 month bamboo onesies and she's over a year! If/when we need to buy new clothing, we'd focus on sales, hand-me downs, and thrift stores. But honestly, I only spent $150 on her entire first year's wardrobe, so I'm not overly concerned about this. We also already have her feeding gear (bibs, kids plates/cups/cutlery). At this point, I don't anticipate too many more big expenses; but I'm a first time mom so who knows!