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Financial Independence, what’s all the fuss about?!
To FI, or not to FI, that is the question! Imagine waking up each morning with the freedom and time to pursue your passions, travel the world, and spend quality time with your loved ones, with no boss to report too. Welcome to the world of financial independence, where all your dreams can become a reality! The first step towards Financial Independence is awareness of what’s possible and the ability to think outside of the status quo. With that said, congratulations for reaching this pivotal stage!
Understanding Financial Independence and Early Retirement
Financial independence refers to having the ability to cover your bills without needing to rely on a job. In other words, you have the freedom to not work! Count me in! Early retirement refers to financial independence but with the nuance that you choose to stop working. For many even though you achieve financial independence you may still choose to work perhaps by starting a business or working part-time! The underlying philosophy of the FIRE (Financial Independence Retire Early) movement is about taking control of your life and having the freedom to live your dreams rather than focusing purely on wealth and millionaire status. The FIRE community has a contrarian view on the traditional work 9 – 5 until your 65 and hope to retire while praying your health is in check to enjoy the retired life.
There are in fact many different versions of Financial Independence that can be achieved with their own nuances: Lean FIRE, Lean FI, Fat FIRE, Barista FIRE, Coast FIRE, and Slow FIRE. I know your head might be in a spin looking at this however the reality is they share many of the same elements! For me, when I understood the nuances it provided comfort in sticking to a financial independence game plan that aligned with my personal ambitions!
Financial Independence is exciting for a variety of reasons including the following:
- Escape the 9 – 5 grind!
- Have the time to pursue your dreams and passion
- Spend more time with loved one’s
- Take advantage of life’s many opportunities
- Have time and location independence
- Achieve financial abundance and transform your money mindset
Assessing Your Current Financial Situation
Before beginning your journey towards FIRE its essential to take account of your current financial situation to understand where you are starting from. I know this can be daunting for some however, taking ownership of your finances is the first step towards freedom. Understanding your financial situation will involve looking in detail at your income and expenses but also your assets including savings and investments as well as debt like student loans or a mortgage. I recommend entering all this information into a spreadsheet that can be updated routinely.
Identifying your financial goals and developing a financial plan to achieve your FIRE number
Having taken stock of your current financial situation it’s time to determine your financial goals to achieve FIRE! The best way to start is to calculate how much income you need to achieve your desired lifestyle with a +-10% range. In order to calculate how much income you need, you will need to focus your efforts on creating a realistic and detailed budget for your early retirement years.
By way of example, let’s say you calculate your monthly budget to be $50k per year or $4.1k per month. Using the 4 FIRE rule or 4% rule, your target FIRE number will be $50k / 4% = $1.25 Million. The logic behind the 4% rule is calculating how much you can withdraw from your retirement savings to sustain you throughout your freedom years indefinitely. This is not an exact science however see it instead as a useful barometer!
I can’t emphasize enough how pivotal calculating your FIRE number is because for the first time most likely, you can see a number to achieve your dreams, its tangible! The number might seem scary in the beginning however with careful planning, discipline, and the tips I am sharing with you in this blog, you will be a long way towards getting there!
Supercharging your Savings and establishing a Budgeting Process
Having locked down your financial plan, it’s time to focus on saving and budgeting which are the foundations towards achieving your FIRE ambitions. With that said, lets dive into how you can be a saving and budgeting pro to supercharge your journey!
In terms of savings, its first important to achieve stage 1 of financial independence which is having an emergency fund. This should be 3 to 6 months of living expenses saved. The idea behind this is to effectively buy yourself some breathing room!
A phrase I swear by is “what gets measured gets managed”. In the context of savings its good practice to calculate what savings you can afford and have this automatically going to a dedicated high yield savings account. This helps you 1) avoid the temptation to spend your savings and 2) easily track your savings progress. How much should you save of your salary? Well that is very subjective, however, the short answer is as much as you can comfortably afford and that will depend on your budget, so let’s discuss budgeting for a moment.
Budgeting might spur mixed emotions however I can assure you that it is essential for you achieving your dreams and doesn’t have to be difficult. Stage one of budgeting involves effectively identifying all your expenses and putting them into distinct categories such as housing, transport, food, entertainment etc. ideally for the past 3 months. Once you have these expenses clearly laid out in front of you, it’s then time to calculate what % of your money goes to each key category and determine whether this aligns with your life priorities. It is also important at this stage to take the opportunity to identify cut unnecessary spend. Finally calculate for each category your revised budget totals and calculate the difference between your budget and net income to ensure you are saving enough income. I would then highly recommend using a budgeting app, like Mint, to track your expenses monthly because its automated and easy! Trust me anything you can use to automate and helps your FIRE journey is a big win.
Emergency Fund – why you need one?
It is very important to as create an emergency fund as soon as possible which should be equal to at a minimum 3 months of emergency expense. Others feel more comfortable with 6 months covered; it is ultimately a personal preference. Having an emergency fund is essential to give you the necessary breathing space to enjoy life and should be a priority. This money should be easily accessible and ideally parked in an immediate access high yield savings account. Only after you have achieved your emergency fund threshold should you start adding to your core savings and investment positions. Ideally this emergency fund should never be touched. Finally, having an emergency fund gives you that psychological welfare, and space to achieve your other objectives.
Strategies and tools to help you achieve FIRE
So you’ve understood FIRE, its value and you’ve even calculated what your FIRE number is and how to supercharger your saving and become a master budgeter! However, there is one crucial element remaining to set you on your way to achieving FIRE…the tools and strategies that will allow you ultimately to maximize your income, a core component in reaching financial independence. The way I see it is there are 5 key strategies and tools to help:
1. Maximizing income and savings from your current or other employers
Savings from your job is an obvious one and effectively will be achieved from sticking to your budget. A good rule of thumb is to save 20% of your income, if you can achieve more than this great, if not, don’t sweat it but try and work your way up to this % as a minimum. In addition, focus on increasing your income at your current employer through promotions and not being afraid to move companies for higher pay for the same or a higher position. This strategy can be a lucrative way to earn significantly more and there are many studies proving the benefit of this approach and how people staying at the same company for years and years actually earn less!
2. Investing
Investing is key to achieving your FIRE number and a lot of people overcomplicate it. Investing in a S&P 500 ETF or World Index tracker fund is all you need to focus your attention on. By way of example the S&P 500 has achieved close to 12% return since its 1957 inception. When you combine this high return with the magic of compound interest you will be shocked and amazed at how quickly you are able to grow your savings. The real secret to success can be boiled down into three key elements 1) stay consistent with monthly investing no matter what the stock market is doing 2) invest as much as you can afford and 3) pick an ETF with low fees. To show you the power of stock market returns take the following example:
If you were to invest $500 a month, for 30 years, you will have assuming the historical S&P 500 return of 12% approximately $1 Million! The most amazing part is that your contribution of $500 a month over 30 years is only $180K therefore, the growth is $820K! And, that my friend is the power of consistency and compound growth.
3. Real Estate
Real estate is another incredible way to growth your wealth quickly which while not essential for achieving FIRE will undoubtedly give you a significant edge. I can’t think of a single wealthy person I have met who hasn’t had real estate feature as a part of their wealth journey in some form.
The secret here that a lot of people don’t talk about in terms of real estate’s wealth creation power is leverage and tax allowance. This goes beyond the obvious benefit and hope of capital growth of the property itself and cash flow which will fluctuate significantly based on your chosen market and strategy e.g. long-term rentals vs mid-term rentals vs short-term rentals. On the note of leverage, to illustrate this point most simply, if you buy a property for say $500K and pay a 20% deposit you will owe the bank initially $400K but not more. If the value of a property goes up by 10% in a year your equity will grow by $50K but the bank does not gain any share in this capital growth. Despite having only put up $100K in equity, you achieve a 50%(!) return on your investment…how? Leverage. In this specific example your leverage is 5X because $500k / your initial $100k investment is 5 times. Had you had the same growth on your $100k investment only you would gain $10k and not $50k i.e. $40k difference!
There are many real estate strategies that can help you towards your financial independence goals that I will discuss in more detail in a separate post.
4. Side Hustles
Who doesn’t want to make some extra income on the side?! Turn your passion into a side hustle, its that simple. Having a side hustle that allows you to earn some money, however, small can be empowering while also providing you with valuable extra funds to add to your savings and investment portfolio. Don’t underestimate the value of seemingly small extra dollars. $100 earned today can compound at a 12% growth rate to $2,675 in 30 years!
Of course with side hustles there are lots of nuances that can determine your success but the key is to start and make it happen. One important nuance to consider is whether you are trading your time for money or whether your side hustle can be independent of your time e.g. selling a digital product. While not essential, there is limitless growth associated with side hustles detached from one’s time so worth considering.
5. Tax Strategies
Last but by no means least as an effective tool to help you on your journey is tapping into tax strategies! I know this is not the most sexy topic, however, as a Finance Manager by professional and Chartered Accountant (CPA equivalent) it’s a topic dear to my heart. It is my goal to share with you all of the tactics that the rich benefit from that you can benefit from too! However, in this summary guide I will touch on the core principles. A lot of people like to avoid thinking about taxes and don’t realize the impact an inefficient tax strategy can have on your wealth especially over the medium to long-term. As a general principle, it is good to make your investments in a tax efficient way which depending on your circumstances will most likely include a 401K. This allows you to not only contribute your gross income i.e. you are not taxed on your contributions.
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