This may all be new to you. You might be wondering, what is this FIRE thing and how do I achieve it?
There are two aspects to FIRE. The first is Financial Independence (FI) and the second is Retire Early (RE).
Financial Independence is about freedom. It’s about being empowered to say no to the things that you don’t want to do. It doesn’t mean that you have to quit your job, but it does mean if you hate your job you can quit any time you want.
Retiring Early is about not accepting the status quo of retiring when you’re 62. You can dramatically decrease the amount of time you have to work before retiring by increasing your savings rate.
How do I get started?
A lot of newcomers want to immediately talk about what to invest in. This is a fun and exciting topic. But talking about this at the very beginning of your journey isn’t going to help you achieve FIRE. The fact is, most people who reach FIRE quickly have very boring investment strategies.
So let’s forget about the market. Let’s forget about real estate. Don’t think about cryptocurrencies. Let’s instead focus on the most fundamental objective that has the greatest impact: your savings rate.
The reason most people don’t retire early is because they struggle to save money. Even worse, a lot of people have a high amount of debt. When you have debt then your savings rate is negative!
For financial independence, a good starting goal is saving 50% of your income. It doesn’t matter what you’re investing in if you’re not saving > 50% of your income. You won’t feel like you’re making any significant amount of progress until you’re saving at least half your income.
Step 1 – Maximize Your Savings Rate
There are two ways to increase your savings rate:
- Increase your income
- Decrease your spending
Let’s first focus on the second option: decreasing your spending. This is something that most people can do. It boils down to the basic principle of not spending money on things that don’t matter to you.
This is where tracking your expenses comes in handy. By tracking your expenses you can figure out exactly where your money is going.
I recommend signing up for a service called You Need a Budget (YNAB). This is a paid service that offers a 1 month free trial. You may find it ironic of a recommendation to spend money in order to help you save money, but this is money well worth spending.
Other free alternatives include:
Some people choose to automate tracking of expenses by connecting Mint to their bank and credit card accounts. Personally I do not like having this process automated.
I have an envelope that I store all physical receipts in. All digital receipts I store inside Dropbox. Every week my wife and I go through all our receipts and manually input them into YNAB. This forces us to evaluate our spending habits rather than having the whole process automated. It’s not very time consuming because it has become a habit.
Ultimately you need to do whatever works best for you. When you know exactly where your money is going you can begin to optimize your spending habits. Begin to ask yourself:
- What am I spending money on that isn’t bringing me joy?
- Do I have any paid subscriptions that I’m not even using?
- Is there a cheaper option I can use that offers the same quality of service?
Do not deprive yourself from joy or happiness. Instead, stop spending money on things that you really don’t care about. Easy wins are switching your internet or phone plans. Replacing cable with Netflix. Borrowing books from the library instead of buying brand new. There are some things we tend to spend money on with little thought that actually don’t provide any meaningful value to our lives.
Step 2 – Start Investing
Now that you’re saving a portion of your income, you need to put that money somewhere so that it starts working for you. Compound interest is truly an underestimated force behind wealth generation.
There is a huge variance of investing strategies in the FIRE community. Many people choose a hands off approach because they have other more important things to worry about than investing.
For those just getting started, I recommend signing up with M1 Finance. They offer a free service to invest in diversified assets using a concept called Pies. When it comes to investing, a primary goal should be to keep your expenses low. This allows compound interest to do its magic.
I’ve created a Pie consisting of a diversified blend of low cost ETFs that you can use: Balanced 100% Stocks Pie.
Conventional wisdom dictates that you should invest partly in bonds. Personally I do not hold any allocation of bonds. I invest only in stocks. Bonds provide safety and predictability in payments. They do not provide you exceptional returns. Think of your salary as a form of bond in that it provides you regular paychecks. Until your net worth far exceeds your annual salary, your best bet is to avoid adding bonds to your investment allocations. Even then you’re probably better off with alternatives like preferred stock.
If you’re set on real estate or an alternative investing strategy, you can go off and do that instead. The key is to invest in what you know. If know very little about investing, then invest everything into the Balanced 100% Stocks Pie.
Step 3 – Meet Others in the FIRE Community
The path to FIRE doesn’t have to be lonely. There are many others who want to escape the rat race just like you. At our meetups we talk about lots of other fun aspects of FIRE like increasing income and tax planning.
We have regular meetups around the San Francisco Bay Area that you’re welcome to attend to!