How to start Financial Independence Retire Early (FIRE)

I’m travelling again this week around the country. After chatting to a few friends on my trip, they’ve been asking me how to start achieving financial independence. It all seems super complex, and they keep asking for tips on hot stocks. Since we know it isn’t about speculating to become wealthy, but rather earnings and investing, I thought I’d put together a quick guide.

If you get involved in the financial independence space you’ll constantly bump into individuals that have already achieved FIRE or are well on their way. But what about those just starting out? How do you start your journey to Financial Independence Retire Early (FIRE). It can get overwhelming when people already have millions of $ invested, are already financially independent, or have an 80% savings rate. It seems like an insurmountable task to achieve FIRE.

But actually, you might get lost in the details, when financial independence as a concept is quite straightforward. When you have passive income greater than expenses. Again, this will seem like an incredible target when you look at the figures required to make that work.

What I wanted to detail in this post though, is the journey and how simply it starts. It’s easy to earn $100k of growth per year off a portfolio, once you’ve got a million USD. That’s just investment growth and income. At $100k per annum that could probably quickly match or exceed your income. Even at $40k of income from the $1m portfolio, you’re earning that passively, low tax and relatively easily compared to another $40k of net income for most folks.

But how do you get to a million USD? You need to get $500k first and double it with compounding over 7 years at 10%.

To get $500k? Well $250k first and then let it double over 7 years at 10%.

So it all starts with the first $100k. You can break that down even further into 10x $10k contributions.

Let’s start your journey to Financial Independence Retire Early (FIRE)

So how do you start investing and compounding?

So in order to get to the million USD, we need to accumulate that first $100k. Every $100k will generate $4k for us per year and double every decade at the long-run historical average of 7% per annum.

To accumulate $100k, we need two factors to improve:

• Income needs to be higher
• Save and invest your income post expenses.

Increase your income to start financial independence

Let’s look at income first. Income is the start to Financial Independence Retire Early. To achieve financial independence (at least in my experience) you need to earn well. The higher your income, the simpler it will be to build capital. Even after covering taxes and your ordinary expenses.

I see a lot of commentary in the FIRE community about cutting expenses to the bone to achieve FIRE faster. I would suggest, rather than focus on the expenses and cut down everything, rather just manage the main categories (housing, food, transport, insurance). Don’t sweat the small stuff too much. Focus on the income. Double your income through additional education, promotions and career changes. That is far more beneficial to achieving independence especially in the first 20 years of your career. If you earn $200k per annum, rather than $100k, you’re now saving an additional $70k (at 30% tax rate) than before. That’ll accelerate your FIRE journey far quicker than cutting out all meat from your budget or something similar.

This is doubly-important if your wages are quite low. I personally think it is too difficult to achieve FIRE off a low salary. If your job doesn’t pay well, then you’ll need to find side work. Or buy/sell property or websites or other projects that let you earn capital above your income. Without the high income and capital coming in, focusing on reducing expenses will be a difficult experience.

So focus on improving your income, get the higher education, get the career change, and work on those side projects. Everything to grow your capital base and income for investing.

Invest the income to start financial independence

Now if you have the income coming in and are building up a lot of capital we can concern ourselves on investing.

If you haven’t achieved the high income, or your capital balance is below $200k, go back up to the previous step. No point worrying about achieving a 10% return and compounding when you have no capital to compound.

So, if you have $100k of capital or more to deploy, what are the initial steps?

Well it depends. I have two schools of thought on this. The one is to achieve a theoretical FI goal through net worth and the other is to generate investment income that covers your actual expenses.

Theoretical FI, net worth > 25x expenses

The theoretical FI is the simplest. It achieves FI by net worth x 4% being greater than expenses, the 25x rule, etc. In this case you just go for the quick and dirty index funds. You keep buying the broadest, cheapest, equity ETF or index fund. Buy it and collect your 2% dividend and re-invest. Keep doing this till you hit your first $1m. It is simple, and you can focus on growing the income. You’ll be doing this investment for a decade or two in any case. Once you go past the 4% > expenses level, then you can start to make some more changes and move onto the more complex FIRE blogs.

Alternative of income > expenses

The alternative method is a different take on the simple 25x rule. It’s a longer-term income generation strategy and it works on a multiple streams of income idea. Although your tax rate will be higher, the basic premise is this – your job is just one of the forms of income generation available to you. If you want to become wealthy, and if you want to diversify your sources of wealth, it makes sense to build up income from multiple sources.

Here, I don’t really care what your net worth is. You’re ignoring the 4% rule for the most part and instead looking at income (passive) > expenses and then re-investing all additional income (from job and any excess) into building it to multiples of your expenses.

Under this situation a diversified portfolio would generate an equal portion from equities, fixed income, property, websites/alternatives and your active income (job or self-employment). Under this scenario we’re targeting to generate 20% from each of those 5 income categories. While it may seem complex, it just means that each month we’re purchasing a portion of equities (index), bonds/prefs, REITs/RE, website/alternative and your job.

Due to yields being lower in equities than the others, you’ll still naturally put the majority of your capital into equities and thereby receive the benefit of growth equities. What you’re also achieving is a higher income from the other assets. What that let’s you achieve is that once your income from multiple sources exceeds your job by a multiple factor you’ll be confident to truly assess whether your job is the best use of your time. It is now just a small factor of your overall income and you really want it to be providing maximum value.

If you were a business would you keep that stream of income, your job, or would you go into a new line that may provide a greater ROI? Of course, perhaps the job gives you something far beyond income.