Disclaimer: I am not a financial planner at all, just someone who loves reading about and talking about financial planning. While I have researched the topics discussed on this blog for my own personal goals, please do not use this information as your sole source of financial advice. I highly recommend consulting an amazing financial planner who does not serve to gain financially from providing advice. A planner can help you with your unique situation to achieve your financial goals.
Six Steps To Start Your FIRE Journey
Are you on the FIRE bandwagon and ready to achieve financial independence and retire early? Great choice! In this post, I’ll be discussing five preliminary, but essential steps you need to take to get started on your path to FIRE.
To start yourself on a path to achieve financial independence, we’ll go through the following simplified steps:
- Figure Out Your Spending
- Reduce Your Spending with a Budget
- Set Your Financial Independence Goal
- Boost Your Income to Speed Up The Process
- Invest to Grow Your Wealth
- Stay on Course Until You Hit Your Goal
And finally…live your financially independent dolce vita
The road to FIRE can be challenging, but no less challenging than being stuck at a desk in a job you’re not thrilled about for 30+ years. With dedication, perseverance and some creativity, you can achieve financial independence and retire early.
So what are you waiting for? Let’s dive in and get started on your FIRE journey!
1. Assess Current Financial Situation
Before you embark on your journey towards financial independence and early retirement, it is essential to assess your current financial situation. You can’t plan for the future if you don’t know where you stand now. It’s like driving without a map or compass, you’ll end up lost and confused.
To assess your financial situation, you need to take a good hard look at your income, expenses, debts, and savings. Start by asking yourself the following questions:
- How much do I earn?
- What are my regular expenses?
- Which of my expenses are discretionary (i.e. purchases not essential to my basic needs)?
- Do I have any debts? If so, what is the interest rate being charged on these debts?
- How much money have I saved so far? Where is this money saved?
Think of it as taking an X-ray of your financial health. The X-ray will show you what’s working well and what needs improvement. It’s like going to the doctor for a check-up, and sometimes you might need to make some lifestyle changes to improve your health.
It’s the same with your finances. Once you know where you stand, you can make informed decisions about your future. You can identify areas where you can cut back on expenses, pay off debts, and increase your savings.
Remember, the goal is not to judge yourself or feel guilty about your financial situation. It’s about taking control of your finances and creating a plan that will help you achieve your goals.
Along those lines, be honest with yourself when answering the above questions and filling in the expenses you’ve incurred. Don’t underestimate your expenses or overestimate your income. The more accurate your assessment is, the better your financial plan will be. I’ve been assessing monthly expenses for years using various templates and charts. If you’ve yet to do this exercise, you’re in for a surprise! It’s easy to guess what you spend on certain luxuries, but tally it up in writing and it quickly becomes a reality check. For example, you think you dine out once a week for roughly $50? Add up all those snacks on the way into work, $7 soy lattes, lunches with your workmates, dinners with friends, late-night pizza delivery and the dreaded UberEats or DoorDash tabs and you’ll likely find you are off by a huge factor.
So, download a money tracking app, get out a no. 2 pencil and paper (plus a calculator – do they still make those?) or use a financial planning spreadsheet (click for a FREE tool you can customize, just click “use template” in the upper right hand corner) and let’s get to work. Starting with the next month, record all of your expenses from bank account debits, online bill payments, credit cards and cash transactions. Do this month over month and put in everything. Don’t shy away from entries because they are “not typical” as you’ll see once you do this planning every month that these “occasional” or “unusual” expenses have a tendency to add up.
2. Create a Budget and Reduce Expenses
That last step was a doozy, but you did it and now you have an accurate picture of your financial health. Next, based on your month to month assessment, you need to create a budget and reduce expenses. Yes, I know, it sounds boring, but stick with me, it’s important!
There are only two ways to increase your financial wealth – acquire / make more money or reduce your expenses. While there are many expenses in your daily life that are required for your basic needs (shelter, food, medical care), there are so many others that can slow your path to financial independence. This doesn’t mean you can’t splurge on a great meal out or a spa treatment, but you need to realize that any discretionary expenses take away from your goal of financial independence, taking longer to get to retirement.
Think of your finances like a garden. You need to water and nurture your plants (income), but you also need to weed out the bad stuff (expenses). If you have too many weeds, your plants won’t grow properly. Same goes for your finances – if you have too many unnecessary expenses, you won’t have enough money to grow your wealth.
It’s not fun to live paycheque to paycheque, right? I’ve done it, I’d rather have a financial safety net and less stress. My first mission when I started paying close attention was to have enough of a safety net that I was not living paycheque to paycheque (i.e. my expenses were less than my income). Once that was achieved, my second mission was to save enough to gain financial runway so I could take mini-retirement – a year off work. Mission accomplished as you’re now reading this blog post which I wrote from an apartment steps from the beach in Puglia, Italy. All of this was achieved by having a budget and sticking to it.
To do this, you first need to take a hard look at your expenses. Do you really need that expensive gym membership or is there a cheaper way to stay healthy? Can you make your own coffee instead of buying it every morning? Do you use that subscription service enough to make it worth the expense? Can you live without cable TV? Every little bit counts! Once you’ve identified areas where you can cut back, make a plan to reduce your spending.
Next, create a monthly budget. Yes, I said it before, but it’s worth repeating. A budget doesn’t have to be restrictive or complicated. Just figure out how much money you have coming in each month, and allocate it towards your expenses and savings goals. Use the assessment of your current financial situation you completed in the last step to set a realistic goal for each item. Stick to your budget as best you can, but don’t beat yourself up if you slip up every once in a while. To download a FREE expense tracking template with budget planner, use this link and click the “use template” button.
Remember, the key to financial independence is to live below your means (i.e. expenses < income). This doesn’t mean you have to give up all the things you love, but it does mean you need to be mindful of your spending. By creating a budget and reducing unnecessary expenses, you’ll be well on your way to achieving your financial goals.
3. Figure Out How Much Money You Need to Be Financially Independent
Now that you’ve assessed your financial situation and created a budget you can stick to which reduces unnecessary expenses, you should have a very clear picture of how much money you need to live your current lifestyle each year. I stress “current” because if you are young (say in your 20s or 30s) and plan to live your life like a regular young person would, chances are your cost of living will increase over time. You may want to have children, buy a home, level up from your daily bus commute, stay in more luxurious hotels than the hostel bunk beds you are used to, etc. Or not, you do you, my friend.
We all know that life happens and you can’t be certain of the path you’ll take, but using your current financial landscape, you can predict how much money you need to achieve financial independence and maintain your current lifestyle without needing to work. The idea here is you will replace the active income you have from working at your job(s) with passive income from your investments.
The most commonly referenced figure to estimate how much you need for retirement is the 4% rule or rule of 25. The 4% rule is attributed to financial advisor William Bengen who wrote a paper in the early 1990s stating a retiree can safely withdraw 4% of their investment portfolio which would be sustainable for roughly 30 years. Using this initial hypothesis, three professors at Trinity University ran all kinds of tests on various withdrawal rates over 30 years with various types of investment portfolios (stock % versus bond %). They too found that in over 95% of cases, the 4% withdrawal rate is safe and sustainable for a retiree. They’ve since updated their study and in a 2011 version concluded that in most cases the 4% rule is still a pretty good estimate. You can take a look at all the details yourself, but for the purposes of setting you up on your FIRE journey, let’s just assume the tried and tested 4% will work.
What does this 4% thing mean for you? This means that you can estimate how much you need to have invested by dividing the amount of money you need to live your current lifestyle by 4%. Or, let’s make it easier and multiply the amount of money you need by 25 (also called the rule of 25).
So, if I live off of a $50,000 per year budget, then to be completely financially independent, I need $50,000 x 25 = $1,250,000 invested. That’s a huge chunk of change, obviously, but remember this assumes you will stop receiving income completely with the exception of your investment income. If you have a side hustle, continue to work part-time, are freelancing or have other sources of passive income, you can reduce the amount you need each year by this income and that reduces your overall FI goal.
Plus, you’ll quickly see as you start investing all your extra cash that compound interest works in your favour dramatically. Use a compound interest calculator like this one to see how a modest investment can grow exponentially over time without you having to do anything!
4. Boost Your Income Through Side Hustles or Career Advancement
Above we talked about reducing expenses, one way to increase your monetary wealth. The second way is to increase your income. Assuming you don’t have a lottery win or large inheritance coming your way, there are two ways to make more money: side hustles and career advancement.
First, let’s talk about side hustles. These are jobs or businesses you can do outside of your regular work hours. They can be anything from selling handmade crafts on Etsy to driving for Uber. The great thing about side hustles is that you can choose something you’re passionate about and turn it into a profitable venture. Plus, they’re a great way to diversify your income streams.
If you’re not sure where to start, think about your hobbies and interests. Do you enjoy writing? You could start a freelance writing business. Do you love animals? You could offer pet-sitting or dog-walking services. The possibilities are endless! The podcasts and blogs talking about side hustle opportunities are equally endless. Here are a few you may enjoy:
Now, let’s move on to career advancement. This involves taking steps to improve your skills and climb the career ladder. This could mean pursuing further education or training, networking with colleagues and industry professionals, or seeking out new job opportunities.
If you think of your career as a journey, then you should be considering continuous movement forward, acquiring new skills and experiences along the way. This should also include promotions and increased salary over time. Don’t be afraid to take risks and try new things. Remember, the more you invest in yourself, the more valuable you become to employers. If you are ready for your next role or looking to advance, consult my post on making a career change.
In conclusion, increasing your income is a crucial step towards achieving financial independence and freeing up your time. Whether you choose to pursue side hustles or focus on career advancement, or both, the key is to stay motivated and keep pushing yourself towards your goals. So, what are you waiting for? Start exploring your options today!
5. Invest Those Dollars Wisely
So, you’ve decided to take control of your financial future and retire early. Congratulations! But, before you start counting down the days until you can sip margaritas on a beach, it’s important to understand how to invest wisely.
Investing wisely is like building a house. You need a strong foundation to support the structure. In this case, your foundation is a solid understanding of investment options. Bonds, stocks, mutual funds, index funds, ETFs – the list goes on.
So where do you start if you have zero knowledge about the investment tools listed? You could do some research online, read books or consult a financial planner or advisor to get the information you need. I have found that there is a ton of financial advice out there for the taking, but the route you choose will be dependent on (a) investments you understand, (b) investments you are comfortable with from a risk perspective, and (c) investments that fit your investment goals.
If you are looking to achieve that coveted financial independence we’ve been speaking about then your investment goals are likely longer term and let’s assume you are planning to build an investment portfolio keeping any major savings withdrawals (e.g. for a house or car or wedding) separate.
Advice on how to invest your hard-earned cash is outside the scope of this blog. I have my opinions, but many others have experimented and determined the best paths to a healthy investment portfolio. Take a look at my post on the Best Books to Build Wealth and Achieve Financial Freedom where I discuss which books have the most practical advice for investments.
Commonly, FIRE movement followers advocate for index funds and ETFs that invest in the entire stock market. These funds tend to have incredibly low rates and fees versus managed funds led by managers who are attempting to predict the stock market, and in the majority of cases, failing (true story).
The research on the former approach (low-fee ETFs and index funds) is well-documented and several FIRE proponents have used it to secure financial freedom. This approach also serves to diversify your portfolio. Since you do not hold all your investments in one industry or company, there’s no risk that a company will go bankrupt and take your money with it.
Regardless of the investment strategies you choose, the key is to leverage any extra money you can save and put it to work invested in a financial tool. Over time, with compound interest, it will grow.
While you are learning about investment tools, you should also try to understand tax implications. What? Gross! Nobody likes to spend their time thinking about taxes, right? I’m here to tell you that you need to understand them, at least the basics. I consult accountants and tax consultants now, but learned how to do my taxes on paper (gasp!) when I was 16 and it has helped me understand financial investments ever since.
The tax basics you’ll need to support wise investment include your country’s tax brackets and tax rates, plus how they treat various types of investments. For example, are dividends taxed the same as capital gains? Is there a credit for investing in certain accounts (e.g. investment in your RRSP is tax-deductible in Canada so you can use an RRSP investment to reduce the amount of tax you pay).
Once you are an investor, set a schedule to monitor your investments. Don’t review your accounts every day as markets fluctuate regularly, but you may want to set a quarterly or 6 month time frame to review and adjust as needed. It also doesn’t hurt to keep an eye on market trends by signing up for newsletters or reviewing sites like Yahoo Finance on occasion to understand what’s happening.
You don’t need to be a financial advisor or economist to make money through investments. While the process takes time and effort, it’s worth it in the long run to make progress towards achieving financial independence.
6. Stay Motivated and Keep Learning
Woot Woot! You’ve taken the first step towards financial independence and early retirement. But how do you stay motivated and focused on the goal when life gets in the way? And what do you do when the economy is in a downturn and your investments appear to plummet? Or an unexpected major expense arises? Here are some tips to keep you on track, navigate challenges and help you reach your ultimate goal.
As mentioned, achieving financial independence so you can retire early or free up your time to use as you choose, takes time, effort and persistence.
Celebrate Your Wins: It’s essential to celebrate your small victories along the way. Did you hit your budget or savings goal this month? Great! Treat yourself to a small reward, like a movie night or a dinner out. Recognizing the progress you’ve made will keep you motivated and excited about the future.
Surround Yourself with Champions: Not everyone will get on board with your new approach to your finances. Keep in mind for years the status quo was that you worked hard in a job until you were ready for retirement in your 60s. You are attempting to turn that status quo on its head, so you will likely get some push back. The good news is you are not alone in your thinking, there is a huge FIRE movement community to support you so surround yourself with people who share your goals and are supportive of your journey. Join online communities, read blogs or books, and attend workshops or seminars to help you stay motivated and on track.
Visualize Your Future: Imagine how it will feel to have financial freedom. I’m not a big proponent of vision boards, but if that works for you, go for it. Mental visualization of what your life looks like and how you spend your days can be quite motivating. Take some time to consider what your dolce vita looks like so you can get a good picture of where you will end up and keep on moving towards your goals.
Take Baby Steps: The journey to financial independence and early retirement can be a long one. Break your goal down into manageable steps and celebrate each milestone. Take small actions each day that will move you towards your ultimate goal, and don’t get discouraged by setbacks or slow progress. If you need to divert some of your surplus savings to fund an important purchase, that’s totally fine. Just make sure you understand how that will impact your financial independence goal. If the purchase is important enough to you, then you must be comfortable with the additional time it will take to get to total independence.
Keep Learning and Adjusting to Stay the Course: Stay educated about personal finance and investing to build your knowledge and confidence. Read blogs, books, and attend seminars to learn from experts in the field. The more you know, the better equipped you are to make informed decisions about your money and investments. When the market takes a downturn, which is bound to happen, your gut reaction may be to sell all your investments so you don’t lose any more money. If you’ve done your research you will know this is the worst thing you can do. Avoid selling your investments when they are down in value. Learn how to adjust the investments to respond to an economic downturn and know that the market always recovers and often quite quickly. Stay the course by keeping your financial independence goal in mind. You got this!
Conclusion: Start Your FIRE Journey Today
Congratulations! You’ve made it to the end of this informative article on how to get started towards joining the financial independence retire early (FIRE) movement. By now, you should have a good understanding of the steps needed to achieve your financial goals and live the life you’ve always dreamed of.
It may seem daunting at first, but achieving financial independence is definitely possible with the right mindset and strategies. So what are you waiting for? Start your FIRE journey today and take control of your financial future!