In this article, I want to share my plan on how to achieve Financial Independence in 11 steps.
You will be surprised by how trivial the steps can be. But I’m not trying to mister obvious. but if you follow below steps and keep persistence you are almost guaranteed to become Financial Independence without sacrificing your life quality.
Let’ s jump right into the steps, as that is why you are here 😀
1. Get out of debt
I’m a bit advocate of staying out of debt. Even though debt can get you a better lifestyle here and now with the latest phone or bigger car. You have to keep in mind it is going to lengthen when you can retire.
Let me point out that debt here is not meant to mortgage debt. Get out debt is Credit card, bank loans and student loans. The reason being those loans has a much higher interest rate. If you have debt then read my article about the debt snowball to quickly get out of debt.
People are considering why not just invest the extra cash in an 7% yielding index fond compared to lower the debt? The answer in short is: paying off a loan with 4% interest is a guarantee return of 4% compared to a non guaranteed 7% return from the index fond.
When you have started to invest a large portion of your income every month, and you are on track towards your FIRE goal. I would consider putting more towards your house payment.
2. Be in control of your money
We are in a consumerism world where the idea is to earn more and then spend more. This cause people to be living from paycheck to paycheck. I believe the whole reason why the FIRE movement has started and is growing momentum is that people are getting sick and tired of living paycheck to paycheck.
People are living these fancy lifestyles that in reality, they cannot afford.
If you want to achieve FIRE, you have to be in control of your money spending habits.
Instead of Earn More and Spend More FIRE people try to Earn More and Spend Less. After all FIRE people tend to have a saving rate of 30-60% of their salary. If they are not in control and aware of their money they would never be able to achieve saving rates like that.
In order to get in control of your money. My suggestions are to enable yourself to track your money. It can either be by laying out a budget or re-organize your bank accounts into multiple specific goal accounts with auto transfer on the following day after your paycheck arrives.
Personally, I do not follow a strict budget simply because I find it too hard and time-consuming. However, I have organized my bank account into Salary, Saving for a house, Saving for Car, Tax, Investment and so on.
The day after I receive my salary, it is going to transfer all the money arrived from my salary to the different accounts. By this way, I only have a very small amount available for the spending each month. This is basically a budget on autopilot. If I each month run out of money on the account I know I’m overspending.
This essentially works for me, the budget might be working for you. Try it out!
3. Lower your housing cost
Whether you are renting or owning the house you live in. One of the biggest expenses families has are their housing cost. If you want to fast track your way to Financial Independence Retire Early (FIRE), you should consider ways to lower your housing cost.
When looking for a home you consider if your current house is too big for your family and if the location is a high priced location compared to your needs.
I have seen FIRE people going extreme to live in Tiny Houses to achieve FIRE in record time. However, I believe and suggest to find a location your family can see themselves living for many years and is fit and proper for your families needs. Personally, I could not live in a tiny house even if it meant I could save 80% of my salary.
But if you can find a way to live for just $100 less each month, you can cut up to $30,000 of your retirement number. See step 11 for more on how to calculate it. Therefore, it is highly suggested to find ways to cut cost.
Take an example: if your house cost e.g. $2500 each month, maybe consuming 60% of your salary and you want to achieve FIRE. You go find a neat house fitting your family and let’s say you could drop it down to 35% of your salary. Moving from your new house to the old, mean your retirement number are lowered from $750,000 to only $487,500, which is a difference of $262,500!
4. Stick to used cars and you own outright
One of earth biggest money wasters, and for many a necessity to get through life is cars! When I was living in Denmark, no way I could survive without a car.
But the biggest mistake I did was buying a too-expensive brand new car. Matter in fact I didn’t even consider buying a used car. When I got the car I was delighted and happy about it, however, after a month? the shiny new feeling goes away. It just becomes your day to day vehicle taking you from A to B.
I know for some people the big vroom is a must, but consider next time you look for a new car.
Go look for a used car.
Why buy a used car and not a brand new one? The simple reason is as soon the car leaves the shop it already lost 20% of its value, and it keeps dropping. If you buy a good lasting car brand like Toyota the car will last for a decade, so buying a used Toyota will not be any risk.
The next point is to buy the car in cash. Avoid obtaining a new loan to finance the car. Essentially if you need a loan to get the car. The car is too expensive. Remember step 1 was to get out of debt!
5. Use rewards credit cards
This one is special, but it really surprised me how much money you can save using a credit card effectively. Basically rewards credit cards will give you cashback or travel points when you are using the card. This is a way for your family to travel the world for Free* and get money back from all your everyday purchases.
If you are following or ever stumbled upon Dave Ramsay, you would know Credit Card is the evil of this world, and there is nothing as free cash or rewards.
However, the FIRE community is different. Because we are very focused, we avoid debt and are in control of our money. We will not have the troubles as Dave Ramsays community has.
The number 1 rule with a credit card is ALWAYS paying the balance at the end of the month. NEVER obtain debt! Only spend what you can payback. Every month you have to pay the money you spend without question.
If you can do that, then a credit card is a money saver.
6. Cut Restaurant visits and grocery costs
Besides housing, the food category is where families spend a lot of money. Every family is likely to be able to save money if they could limit their restaurant visits to bi-weekly or once a month. If you can cook your own food at home, you can save a ton of money. however, another place to save is your grocery shopping.
I’m not telling you to stop buying food altogether, however, when we go grocery shopping people tend to grab a lot they actually do not need. So if you really want to save money, try to plan your visits and consider buying once a week in bulk instead of daily.
I’m a big coffee drinker and I used to buy Starbucks nearly every day. If you save $30 each month, you need $9000 dollar less in retirement or if you invested those $30 for 20 years at 7% interest, they would grow to over $16000. Quite wild.
7. Ditch cable and subscriptions
Peoples are watching more and more TV in the form of cable or subscription-based streaming services like Netflix, and I’m no different. I have Netflix, and I actually watch a great deal of it.
However, I have made cuts here and there. One day I was looking at my bills and realised that I paid for 3 or 4 apps on my android device every month, and it turned out I actually didn’t use two of them anymore.
I decided to cut them off, and I immediately gained back $20 of my salary every month I can use for something more meaning full. After reading this article, I challenge you to go through your subscription bills and cable service to see if you are actually using it. If you actually use it, then great keep it else cut it.
Suppose you are more extreme and want to achieve FIRE quicker. I suggest cut it all and go read a book or take a walk instead of watching TV or what other subscriptions you got.
8. Take advantage of tax-deferred accounts
Before you start investing any of your money, consider if your country of living got a tax-deferred account to invest through.
The United States got a variety of options like 401k, Roth 401k etc. Denmark got another like Stock saving account with a lower tax bracket and in Hong Kong, if you voluntary pay to retirement fund you do not have to pay tax on that.
Make sure to use them before you investing in any other accounts.
9. Increase your income
The majority of the steps until now has been about saving money. However, for FIRE people if they want to achieve a saving rate of 60+%, most have to increase their income.
When you are thinking about the income you probably think how can I increase my salary, it is not in my control.
But salary is only 1 income source, and I have dedicated a whole section of my blog on how to earn more money. I hope to expand with ideas on how to start a side hustle. I have several other income sources to contribute to my own FIRE Journey. Maybe an idea was e-commerce, or take a second job.
10. Invest with low-cost index funds
When trying to achieve FIRE, there is a simple approach to investing. Most people find the approach super boring, but slow always win the race. It is all about receiving enough dividends to cover your costs and the way is to be doing below:
FIRE Community is investing in low-cost index funds or exchange-traded funds and focuses on divided yield.
I have a section on my blog about investing for FIRE, where I’m explaining all the ways and terminologies about investing and what other FIRE focused investors look for when investing their hard-earned money. I really like investing mindset because it is very low risk and diversified approach.
It is closely tied into step 11, about the 4% rule. Where your investment portfolio has to cover your living expenses.
11. Define your own version of the 4% rule
We have now been through 10 steps on how to get to FIRE quicker, but without knowing your FIRE number and having a plan all 10 steps are hard to follow.
The 4% rule is a proven rule saying how much you can safely withdraw from your portfolio during retirement of 30 years without depleting it.
The FIRE community is using this rule to determine how much money they have to have saved up / invested in order to cover their living expenses for their early retirement. I have a whole article dedicated to explaining how much do I need for FIRE
But I want you to think a bit about this number. Because I see many FIRE people living very frugally so their FIRE number is very low, and after achieving FIRE they cannot cover their expenses when their lifestyle catch up to reality. So when you are calculating your FIRE number (Take your annual expenses times 25. This is the number you have to save up in investments to live by the 4% rule). I suggest selecting an amount you find comfortable for living.