Hell, some of you are already there!
But maybe you’re new here. Maybe you’ve had a poke around, read my own journey to Financial Independence, checked out some saving or investing articles and decided, “OK, this is definitely for me, but where do I start?”
Or perhaps you’re sold on the idea, but the whole thing just confuses your spouse. Maybe they think it’s weird (or impossible) to save so much, or they dismiss the idea of never having to work again.
Well, today’s post is all about creating that starting point. That meeting ground if you will. So let’s lay the foundation of why and how we can jump on this FIRE train, take that journey together, and hop off at Freedomtown.
Introduction to FIRE – The Why
If you’re curious about this stuff, you probably already get this bit.
But the main reason to aim for Financial Independence is to get your life back. Here’s what I mean…
We spend a very large portion of our lives consumed by work. All day. All week. Almost all year.
And this goes on for a good 40-50 years.
Now, it wouldn’t be so bad if we all happen to drop into satisfying work that means something to us, with great conditions and co-workers, ample downtime to recharge and spend time on other things.
But for most of us, it’s just not like that. Even so, there’s much more to life than work, as this interesting article correctly concludes.
Thinking back to my late teens and early twenties, I noticed that, for the most part, work was something that people endured, not enjoyed. The need to make money to pay bills came before everything else.
And since we give up so much of our life and our energy for it, I struggled to accept that. In fact, I couldn’t. So I decided there had to be another way.
Introduction to FIRE – The How
The solution is to create your own freedom. You’ll do this by sensible living, saving and building wealth. Your freedom will be fully funded by creating an investment income stream.
And by doing this, you remove the power that money has over you, for the rest of your life.
You can still work, and you probably will. But it’ll be work that’s important to you. Work with meaning. Work that you want to get out of bed for. And work that is worth trading some of your precious time on this earth for!
Along my journey, I learned a lot and made a few mistakes too. But reaching FIRE has been the best thing I’ve ever done.
So to help spread the joy, I’ve broken down each important step into a simple plan, which you can read with your spouse, or pass on to a friend.
7 Steps to FIRE
Step 1 – Daydream
Forget everything else for a minute. Think about your life. Not your current life, but your life as a whole. From start to finish.
What do you want your life to be about?
How do you want to live?
How much time do you want to spend at work? And what type of work would you love to do, if you didn’t need the money?
What hobbies would you take up?
How much time would you dedicate to your health? What about being outside and doing physical activities?
Where does your family life fit in? Do you want to fit them in around work? Or would you rather place work after family time?
Spend time mapping out what your ideal life looks like for you. There’s no right answer. Whatever you feel is the most satisfying balance for your situation. You can always adjust it later, because we all learn as we go.
Hopefully you’ve just realised all the things you’d rather be doing other than working all the time. This is your motivation.
And if you’re still not sure, here’s a list of top 5 regrets people have at the end of their life. Wishing they worked more is not one of them!
Intuitively, we know this is true. The only difference is, some people take action and change their lives, but sadly, many don’t.
Hopefully you’re part of the first group. So let’s continue…
Step 2 – Find your starting point
Take stock of your finances as they are today. Firstly, your net worth.
Add up your assets. Subtract any debt you owe. That’s your current net worth.
Don’t worry about what it is. The fact that you’re doing this means your future is brighter than your past.
I’ll even let you include car values in that calculation, provided you’re open to selling and switching to a more reasonable car choice to create some cash.
Next is your cashflow.
Write down your current household income, after tax. That’s pretty easy. Now the hard part. Figure out where it all goes!
The best way to do this is by checking over your bank transactions over the last few months, and guesstimating for the rest of the year.
You’ll soon have a good estimate of your household spending, and you can start tracking it from today. Here’s ours for comparison.
Or if you want to make it a little more fun and convenient, try the TrackMySpend app from MoneySmart.
The difference between your household income and your spending, is your savings rate. This number is very important. In fact, where early retirement is concerned, it’s the number one factor to focus on.
Basically, the higher your savings rate, the sooner you’ll reach FIRE!
Step 3 – Start saving
Next, get a simple and possibly even automated savings habit in place. You can start small and build it up over time.
Whenever you get paid, setup an automatic transfer to divert some of your income to another account.
Think of your savings as non-negotiable payments into your freedom fund.
Your first job is to build yourself a cash cushion of at least $10,000-$20,000. Or whatever you’re comfortable with.
This will see you never have to go into debt for life’s little problems that crop up. Broken fridge. Vet bills. Car repairs (or replacement). Whatever it is, your cash cushion means you no longer have to worry.
If you’ve never experienced this, a cash cushion helps you sleep like a baby!
Even this basic level of financial strength makes life sweeter and your stress levels reduce dramatically. Financial security gives people a feeling of greater control over their lives, resulting in a boost to happiness.
Step 4(a) – Putting money to work
Once your cash cushion is built, it’s time for the fun part! Putting your money to work – also known as building wealth.
— The highest return will come from paying off any high interest debts you have. This includes credit cards, personal loans and car loans. Interest rates here are often well over 10% per annum, which is very destructive to your wealth.
As for things like Afterpay – just get rid of that nonsense and pay for things like a grown up. Because you’re better than that now! You’re not a broke millennial!
— Next, get comfortable with the sharemarket. I know, easier said than done. I used to think it was a casino too. But then I learned some important lessons, from some very knowledgeable people. So if I can do it, anyone can.
If you think the sharemarket is unpredictable and unreliable, look at this chart from the RBA (Reserve Bank of Australia)…
These are real returns, meaning after inflation. Australian shares have produced fantastic returns over the last few generations, producing a return of over 1,000 times your money in real terms.
And in terms of income, it’s probably the best known cashflow generator available to investors. Here are the dividends paid from Australian shares since 1979, excluding resources (courtesy of Peter Thornhill).
No income has been reinvested. This is one purchase of $100,000 over almost 40 years. Just like the other graph, not a perfectly straight line, but a very predictable trend over time.
Looks pretty reliable to me!
We’re simply banking on the economy continuing to grow and Australian companies making more money over the long term. Betting against that hasn’t made much sense in the past and I don’t think it makes any sense now.
So benefit by becoming an owner of Australian business to get your share of the future profits and dividends!
Step 4(b) – Investment plan
Because of our focus on growing dividends, most of our cash goes into a few low cost LICs, and also an Aussie index fund. This offers us diversification and reliable income while keeping things relatively simple.
— Next, open an online brokerage account. I use SelfWealth because it’s extremely low cost at $9.50 per trade, no matter the size. If you like, use my referral link and get 5 free trades (full disclosure: I’ll also receive free trades).
— Now start diverting some of your paycheck to your brokerage account automatically. Then, purchase your chosen investments every month or two, with a minimum of $1,000. Regular investing builds momentum and keeps your motivation high. Don’t worry about what the market is doing, just invest.
— You can reinvest your dividends for maximum automation. Set this up automatically by simply filling out the paperwork you get in the mail after buying your first parcel of shares.
— Use Sharesight to record your share purchases. This will keep track of all your dividend payments and franking credits for tax time. It’s completely free up up to 10 holdings, sign up here (full disclosure: if you choose a paid plan, this blog receives a commission at no extra cost to you).
Now you’ve gotten started and are making progress, it’s time for the next phase.
Step 5 – Optimise
Head back to your list of yearly expenses, and find a way to optimise every single one of them. Sure, it sounds as delicious as a Brussels sprout smoothie, but this is where the big progress is made.
Do it right, and you’ll bring your freedom forward by years! That was certainly true for us, and I bet it’ll be true for you.
For every $10 per week you spend, you need more than $10,000 of investments to cover it.
Don’t believe me?
$10 per week is $520 per year. To generate $520 per year in dividend income, you’ll need $13,000 of shares yielding 4%.
So yes, a few dollars here and there makes a difference of many thousands of dollars. Not only that, but lower spending means two things:
–1. You need less in investments to retire, so you can retire sooner.
–2. You now have a higher savings rate, meaning you’ll reach FIRE faster.
Here’s what else you can do…
By far the factor that changed our thinking was realising how good we have it in modern-day Australia, and realising how little humans need to be happy. This is hard to accept at first but it’s undeniably true.
Further, we now spend more time being productive and less time on mindless consumption, doing activities which are enjoyable yet cost little or nothing – which also ends up being much more satisfying.
For those that think spending less means less happiness, we’re really talking about priorities here.
We’re choosing the wealth of freedom and time, instead of the unfulfilling void of ever higher spending.
At the start, many of us aspire to the wealthy, high-status and spendy lifestyle. But the problem is that luxury and comfort is a poor indicator for happiness and life satisfaction.
Step 6 – Continue the process, switch to cruise mode and hit your target
By now, you’ve got a solid savings rate and you’re adding money to your investments regularly. And it’s all relatively effortless at this point.
Here, the best use of your time is to learn more about happiness and start slowly building the life you want to live.
Because you’re essentially free anyway, it’s just a matter of time. So you can start thinking like someone who is already Financially Independent.
Start researching any places you want to go. Skills you want to learn. Volunteer work you’re interested in. Or a business you might want to start.
We’ve come full circle now. Back to Step 1 and creating your future life. But now you’re even closer to making it happen.
The only negative stories I’ve heard from people who have retired young and not initially enjoyed it, are those who had zero plans and ended up wasting their days away doing nothing productive, which led them to become depressed for a while.
So begin planning what you’ll do from your position of Financial Independence. How will you live your best life doing things that are important to you?
And a few years down the track you’ll reach FIRE! There’s little left to do now but enjoy your life and new adventures. But don’t forget to…
Step 7 – Spread the love
Share your newfound life philosophy with your friends and family. Bring them along for the ride as you improve your lives together.
But watch their disbelief as you explain you only need to work and save solidly for 10 or 15 years to fund a lifetime of freedom.
And if they don’t believe you?
Well, show them. Be the example that it’s possible. Teach others how it works, and be someone they can look up to and come to for help.
For now you can interact with the other great like-minded folks who visit Strong Money and the many other Financial Independence blogs around the place.
Really, you can do this anytime. But due to the likely scepticism, you’ll probably have a bit more sway with some people when you actually quit your job 😉
Common questions and issues
Will this take a long time?
Like many good questions, it depends.
The basic goal here is to save and invest enough that your annual dividend income is higher than your spending.
Will a high income help? Sure. But only if you save it.
Is it necessary? No. Our own incomes were around the Australian median full-time wage.
Will being ultra frugal help? Yes.
Is it necessary? No. Provided you have a decent income and sensible living expenses, you should be able to save a healthy amount, without dumpster diving for dinner.
You get to decide on the right balance for you. But it’s very likely that most people can live happily on far less than they think.
Bringing this back to one factor that determines the outcome, it’s your savings rate. Want to speed up your FIRE journey? Simple. Just work out how to boost your savings rate. One little bit at a time.
OK, I get that. So how do I figure out how long it’s going to take ME?
This elegantly simple calculator will answer that.
Simply plug in your after-tax income, annual spending and how much your portfolio is going to spit out each year in retirement.
Play around with it and you’ll see for yourself how small changes in savings rate make a big difference in freedom!
Don’t get distracted by other ways to get rich. Often there’s can be a real urge to chase higher investment returns or other ways to speed up the process, like using leverage.
I know, because I felt it too. But the investment world is funny – especially the sharemarket. Larger amounts of effort and analysis doesn’t mean larger returns. Actually, the opposite is usually true!
So keep it simple and focus on what you can control. Keeping your living costs under control and sending your money off to work for you.
Your shares immediately start returning cash to you in the form of dividends, which you can use to buy more shares.
This income stream multiplies itself over time because you’re constantly adding new money to the pile. And that results in ever increasing dividends which you can use to grow your portfolio further.
It’s like a snowball rolling down a mountain, gaining momentum.
Sure, it starts off as a few tiny flakes. But those bring more flakes and it turns into a ball, which starts getting bigger. Eventually, the ball grows so large it’s an unstoppable force.
But instead of snow, it’s your investment income!
But my spouse is worried about me doing nothing all day? He/she thinks it’s ridiculous to stop working…
Firstly, what we’re really talking about here is building a strong financial foundation to live the best life you can. After that, whatever you do is completely optional.
And that’s the point – the choice.
You can work as much or as little as you want. Have as much family time as you want. As much busyness as you want.
Instead of being forced into an inflexible and demanding routine, with high stress and little free time, just because there’s bills to pay. Quite simply, it’s another way to live. And in my opinion, a better way to live.
You can choose more interesting work, with people you like and hours that suit you. You no longer have to put up with any office politics, or management bullshit.
But it’s not about doing nothing. It’s about having control over what you do.
So even if you continue working the same hours in the same job (unlikely) because you’d do it for free, you’ll do it with a strong sense of freedom. Because every day you wake up and go to work, you know that it’s completely optional, and you’re choosing it because it’s what brings you satisfaction.
All the while, having the financial backing to step away at any time you like, if you no longer enjoy it or you decide something else is more important.
It’s the ability to live free from the worry and restrictions that go hand-in-hand with money problems and mandatory full-time work.
What a great feeling to have!
Hopefully this post serves as a useful starting point for both newbies and spouses. And it brings those who ‘get it’ and those who ‘don’t get it’, closer together.
The concept of FIRE is simple enough. But given people generally find it hard to think long term and easily succumb to peer pressure, accomplishing this goal is not as easy as it seems.
Reaching Financial Independence takes patience. It takes dedication. And it takes discipline.
But in my view, it’s the ultimate life goal, and the best thing I’ve ever done. The feeling of freedom is hard to describe. Actually, 2 years in and it still feels like a dream.
I’ll leave you with one last comment, which I feel sums up what money itself is all about. And I feel like I’ve heard this before, but I’m not sure where, so I’m sorry to whoever I’m borrowing this from.
Those little chunks of money you have, in your wallet, in your bank, in your investment account – they’re not money at all. They’re little freedom tokens, which you can keep and redeem at any point in the future.
By spending all your tokens, you’re left with zero future freedom. But start building them up, and eventually, you’ll have enough freedom tokens to last the rest of your life.
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