How I Am Achieving FIRE – Part II

From the last article, we discussed the good news my family is experiencing and started talking about our 7-step plan to FIRE in 10 years. Let’s finish the discussion on our 7-step plan.

Create A Budget

Remember how I previously said that some steps could be done in parallel? Well creating a budget is a step that can be done in parallel with making a plan.

As I have explained here, making a budget is crucial for understanding where you need to go on your financial journey.

A budget is not restricting. In fact, a budget is all about understanding what is important to you and making it a priority. Budgeting lays the foundation for how much passive income is needed to achieve FIRE.

How I Achieve FIRE

The main goal of FIRE is to produce enough passive income to cover living expenses. If you don’t know how much you will need to live on, how can FIRE be achieved? Without a budget, achieving FIRE will be like standing on a medicine ball on 1 foot, singing the Star-Spangled Banner, and rubbing both your head and patting your stomach all at the same time. It’s damn near impossible to do.

A budget forms the baseline for how much money is needed. It is the data that drives the process. If your promises, goals, and plan need to be altered to accommodate the new information then so be it.

Budgeting for the future is not as tough as it sounds. Using the Rule of 72, expenses can be estimated 10, 20, even 30 years into the future.

Here is how I used the Rule of 72 to set my retirement budget.

Let’s assume the annual homeowners’ taxes and insurance currently are $2,000 and $1,000 respectively. Using the CAGR historical inflation rate of 3.22% and an assumption that you are 24 years from retirement, we can estimate how much you’ll pay in the future.

72/3.22% = 24 years

It takes 24 years to double the expenses. Your homeowners’ taxes and insurance will cost $4,000 and $2,000 respectively at retirement in 24 years.

While this may not be entirely accurate, it at least gives a rough estimate of what is to be paid at retirement.  You can adapt the budget and plan the closer you are to retirement.

Setting a budget helped to provide a rough target for my retirement expenses. I used this rule to figure out how much I would spend on food, clothing, fuel, taxes, insurance, subscriptions, gym memberships, and even my vacation budget.

What I did was use my current spending rate and applied the historical inflation rate of 3.22% to each expense. In my case, I plan to be financially independent in roughly 10 years. Given that there should be a 50% inflationary increase to expenses after 12 years, I simply divided 10 by 12 to get a ratio of 0.833. Multiple 50% by 0.833 equals a 41.7% expense increase.

For example, my current food /clothing budget today is roughly $1000 / month. In 10 years, my expected food / clothing budget is approximately $1417 / month [1000 + (1000*.417)].

Do this for every expense you can conceive. I planned on having no mortgage but still need to pay for taxes and insurance. I will no longer have daycare to pay for but increased my medical budget a lot because, let’s face it, as we get older our body starts to break down. I will need to buy my own medical insurance until Medicare kicks in.

Add up the adjusted expenses and you have just created your retirement budget…. Congratulations! You have just accomplished something most people don’t do. You figured out what is important to you in retirement! 😊

Don’t forget to do annual checkups to ensure the budget aligns to your values and priorities. As you get closer to that magical age, the numbers will be honed in the closer you get to retirement.

This exercise is meant to be a north star to start on the journey. It provides guard rails and direction. Guard rails aren’t limiting, they set you free! 😊

Just because the word, “budget”, can sometimes fill people with anxiety and dread doesn’t mean it is limiting and constricting. This could not be farther from the truth.

In fact, budgeting is all about prioritizing what’s important to you and accounting for it. Want to start parasailing and take CrossFit classes? Add it to the budget. Want season tickets to the opera? Add it to the budget. Want to go on a hunting safari every year? Add it into the budget.

What next after setting a budget?

Control Lifestyle Expenses

Lifestyle creep…… one of the biggest hindrances to achieving financial independence.

People tend to want to spend what is made and modify lifestyles as more money is being made. They want to travel more and more luxuriously. They want a new Cadillac when the 7-year-old Honda Civic works just fine.

It’s the “Keeping Up With The Jones’s” mentality that can suffocate a person’s financial future and relegate them to a life of working their ass off just to get by.

How are we fighting the urges now that my wife is going back to work?

It starts with our values and priorities. We value experiences not stuff. We don’t want a 4,000 square foot home when our current home is just fine. We love our neighbors and neighborhood. We love the fact my kids can walk to school, and it is safe enough for them to go to the park by themselves (but we don’t let them … yet! 😊). IMO, a person cannot put a price on that.

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We are big picture thinkers. While we would love to renovate the kitchen, it has been put on hold until her student loans are paid off and the emergency fund is built back up to 6-month levels.

In fact, we are at our peak of expenses right now. We have daycare to provide for, student loans to pay off, and retirement to beef up.

We have learned how to think like the wealthy. Most people, when they want something, will either put it on credit card and pay a ton of interest or save forever and then spend it all.

The wealthy don’t think that way. When the wealthy want something, they buy a cash-flowing asset that generates enough residual income to buy what they want.

In our case, we are going to buy rental property and use the profit to pay for a kitchen renovation.

It’s a slightly different way of thinking but boy is it a game changer!

This falls in line with people who practice FIRE. People who practice FIRE don’t practice lifestyle creep. Instead, they work to control and minimize expenses so that more money goes to saving and investing. The more invested, the faster financial independence is achieved.

What’s next after lifestyle creep is kept in check?

Increase Cashflow

Ask any CFO, cash is the lifeblood of businesses. It is also true with the journey to financial freedom.

Wealth is an accumulation of the following equation:

Wealth = Cashflow – Lifestyle

Previously, we talked about controlling lifestyle expenses. Now, let’s talk about how to maximize cashflow.

How I Achieve FIRE-5

If done right, cashflow can be theoretically limitless and be sourced from several income streams. In fact, many personal finance experts recommend you should have at least 6 different streams supplying your retirement.

Why is that? Because putting all your eggs in one basket incurs a lot of risk. Having multiple streams of income helps to minimize risk and maximize cashflow.

While the stock market is one of the best ways to grow your nest egg, it is also at times very volatile. The stock market can have wild fluctuations as large as 50%.

Investing in other income streams can smooth out these fluctuations so you don’t live and die based on the S&P 500 index results.

There are several ways to improve cashflow and diversify income streams.

For starters, you can excel at your current career. If you work hard and excel, you’ll get noticed. The more you are noticed, the more likely it is to get higher pay bumps. Even if you don’t like your job, excelling at it is one of the best ways to optimize cash flow because you’ll get paid well!

I’ve been working on a new assignment at work that is getting me a lot of good exposure. Through the grapevine, I’ve heard I have a good chance at a promotion in the coming months…. keep your fingers crossed! Lol 😊

What else are we doing to maximize cashflow?

Since we both now work, our plan is to live off 1 income and invest the other income. What normally happens with 2 income families is they suffer from lifestyle creep then end up depending on both incomes just to survive. We won’t fall victim to that.

The good news with living off a single income for 15 years is that we have become quite good at it.  As they say, necessity is the mother of innovation! Lol 😊

While we there are things we both have wanted for awhile, we have decided to wait and build our wealth the right way.

We have not only invested in our 401K’s but also have invested in whole life and indexed universal life (IUL) policies. The goal of doing this is to play defense and create stable, tax-free income streams in retirement.

As I stated above, we also plan to purchase rental property in a few years to further diversify our income streams.

Our goal is to have enough passive income to cover our basic living expenses in retirement.

Between our 401k’s, Roth IRA’s, social security, pension, IUL’s, annuity, and rental property, we will have enough passive income to do just that. Plus, we have diversified into enough different types of income streams to offset any dips in the stock market.

When I retire, I don’t want to stress out wondering if I can only afford to eat bologna and crackers in retirement. I plan to eat surf ‘n’ turf! Lol 😊

How do we plan to get to FIRE in the next 10 years? Well, that is the last step…..

Accelerate Savings

Making a lot of money is great but if it comes at the expense of lifestyle creep, it damages the ability to reach financial independence.

All the work we have done so far is to achieve financial independence retire early (FIRE) in the next 10 years.

The fastest way to reaching that goal is to accelerate savings to the point where wealth is built up enough so that compound interest can take over to make it the rest of the way.

One of the keys to achieving financial independence is the savings rate. The more you save the faster FIRE is achieved.

Want proof?

Financial Mentor’s Todd Tresidder published a book that I am currently reading, “How Much Money Do I Need To Retire” that has been eye -opening. In one of the chapters of the book, he talks about the only 2 numbers that really matter in measuring financial independence: percentage of income saved and net investment return (rate of return on investment minus inflation rate).

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The years to FIRE for each savings rate if starting out with no money previously accumulated is shown below:

  • 10% Savings Rate = 42 years
  • 20% Savings Rate = 32 years
  • 40% Savings Rate = 21 years
  • 50% Savings Rate = 17 years
  • 60% Savings Rate = 14 years
  • 70% Savings Rate = 10 years
  • 80% Savings Rate = 7 years

The beauty of the savings rate is it includes all company matching 401K dollars.

For example, because of our past financial situation for the last 10 years, I was only able to save 5% towards our 401K. However, my employer matched 90 cents on every dollar up to 5% plus gave me an additional 3%. Doing the math looks like this:

5% + 4.5% + 3% = 13.5%

At that rate, it would take about 38 years to retire.

With my wife now working, in 3 years we will be investing 100% of her salary plus the 13.5% already invested. Our savings rate will jump from 13.5% of gross salary to at least 50% of our salaries. This is a conservative worst-case estimate. If all goes well in 3 years, we should be saving 70% of our salaries. Either way, this is a HUGE jump for us!

At the high-end rate, we’ll be able to retire in 10 years easily. We already have some retirement money accumulated so this gives us a buffer or margin of safety in case the savings estimates are off.

Sounds good doesn’t it? I know from my perspective it sure feels good.

Mind you, we aren’t working in management at a big company, don’t own a company, and haven’t inherited a ton of money from a long-lost rich uncle. We are 2 normal, middle-class people who have gone through some of the same ups and downs that other people go through.

Want to learn more about our story? Click here.

If we can achieve FIRE in 10 years, you can too!

Now What?

There you have it. Our 7-step plan to achieve FIRE in the next 10 years. What do you think? Seem far-fetched? Improbable? Realistic? I’d love to hear your comments here.

Achieving FIRE

Let me tell you I’ve done my homework. I’ve looked at this from a lot of different angles to put our plan together and then simplified it to help you out.

What I’ve realized is it is less about planning FOR retirement and more about planning for the life you want to live IN retirement.

Plans can change as a person progresses through life and that’s ok. If it helps, create a bucket list. I don’t care if you are 25 or 55, thinking about the life you want to live helps to plan for the future. Plans can be adapted throughout your life to suit any changing aspirations.

It’s better to plan for the life you want to live than have life do the planning for you.

Food for thought…… until next time.

Live The Life You Love, Want, And Deserve.