In the last article, we introduced the FIRE concept, what it means, why there are some inherent flaws in how it is portrayed, and finally began learning about the 7 steps for achieving Financial Independence Retire Early (FIRE) at any age or income level while maintaining a 9-5 job.
Now, let’s continue reviewing those 7 steps and go from there.
Create A Budget
Yeah I know budgeting can suck, but it is an essential step for achieving FIRE. Why? Because budgeting lays the foundation for how much passive income is needed to 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 riding in a car with your body sticking out the window and trying to shoot an arrow at a target that is also moving and swerving. It’s damn near impossible to do.
A budget forms the baseline of 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 data then so be it.
Why establish a plan and THEN create a budget? I chose the order of these steps for a reason. A plan is a living, flexible, and adaptable thing that can change as assumptions change. Creating a plan first forces you to think through what you really want and how to achieve 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. For example, let’s assume the mortgage is paid off by the start of retirement. But wait, taxes and homeowners’ insurance still have to be paid in retirement.
How to budget for this? Simple. Using the Rule of 72, let’s assume the annual taxes and insurance currently are $3,000 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.
Using the Rules of 72 shown below:
So,
72/3.22% = 24 years
It takes 24 years to double the expenses. Your taxes and insurance will cost $6,000 and $2,000 respectively at retirement in 24 years.
Can it be more or less? Possibly, but this at least gives you a rough estimate of what you’ll pay at retirement. You can adapt the budget and plan the closer you are to retirement.
Budgeting enables double-checking the work already done and can either reinforce the assumptions made or cause you to rethink your strategy. Budgets can also optimize both your assumptions and your financial health.
For example, let’s assume you thought you needed $4,000 a month to live on in retirement. The reason for this is because that is what you currently make, and you initially wanted your expenses in retirement to match your current lifestyle.
After some thought and taking inflation into account, you decide you want to do a lot of traveling. Like 4-star traveling around the world and all-inclusive resorts. Adding this into the budget, you now need $5,000 a month to live on. This is a HUGE adjustment that is better to know sooner rather than later.
This budget change causes you to adjust the nest egg needed to retire on. It’s better to know now when it can be compensated for rather than a year before retirement when you’re basically stuck with what you have.
Let’s say the opposite happened. After realizing that a big chunk of your current budget is student loan debt which will be paid off before retirement, you now realize you only need $3,200 a month to live on. This means you’ll be able to retire sooner! Just maintain the plan made and you’ll be able to retire a few years sooner than expected.
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 pay off your credit card? Add it to the budget. Want to enjoy your Starbuck’s Caramel Macchiato every day on the way to work? Add it to the budget. Want to take a nice vacation to the Bahamas every year? Add it into the budget.
The more prioritization happens, the more it will become apparent that budgets are empowering. Budgets provide clarity of purpose because you know where your money is going. It provides guard rails and direction. Guard rails aren’t limiting, they set you free! 😊
Budgets are also adaptable. Life happens and drives changes to the budget. That’s ok since a budget reflects your priorities and priorities can change from time to time. Awareness of priorities ensure tweaks to spending occur so that your hard-earned money goes towards what matters most to you.
What’s next after setting a budget?
Control Lifestyle
One of the most common mistakes and biggest detriments to achieving FIRE is lifestyle creep. What is lifestyle creep? This is when a person adds more expenses just because more money is earned.
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 Lexus when the 5-year-old Honda Accord works just fine for them. They want that 3,000 square foot home and private school for their kids when the 1,500 square foot home and public schools works great for them now.
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.
For example, let’s assume you just received a promotion at work worth 15% of their current salary and bonuses worth $10,000 a year. Typically, the average person will look for new ways to spend that money. Buy a boat, get a bigger home, or purchase a more expensive car. These things don’t necessarily make a person’s life better, it’s just more stuff to make payments on.
It’s like eating donuts every day for breakfast. Initially, they taste great, but you’ll feel like crap in the long run and ruin your health.
People who practice FIRE don’t eat the donuts; they stick to eating oatmeal. It may not taste great but it’s good for you and helps you more in the long run.
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.
The main goal for FIRE practitioners is paying down debt as quickly as possible while investing as much as possible.
There are several methods people use to accelerate debt payoff. Among these are the debt snowball, debt avalanche, or Cash Flow Index methods for structuring debt payments. I won’t go into detail on each one, but you can read here for more details.
Whatever method is chosen doesn’t matter. If you choose to completely payoff debts first before investing is fine as well. You can even split the focus between debt payoff and improving cashflow. The point is to just do it.
Wealth is an accumulation of the following equation:
Wealth = Cashflow – Lifestyle
In this section we talked about being disciplined to prevent lifestyle creep which is a great way to minimize expenses. Now let’s look at how to optimize cashflow.
Increase Cashflow
Cashflow is the lifeblood of any business. As my old accounting professor always preached, “Cash is King”. But is it also true for personal finance? You Bet It Is!!
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.
Cash is king because cash provides options down the road. For example, let’s say you wanted to invest in real estate property and put an offer on a house for asking price. Later, you found out you have a competing bid on the property. If you were to make an all-cash offer vs the competition which must get a mortgage, odds on you’ll get the house.
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!
What else can be done?
If you are married and both work, learn 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. Don’t fall victim to that.
When starting out, your net worth must double several times before hitting the magical $1M mark. Once you hit this mark, the Rule of 72 takes over and your money must double less frequently to achieve financial goals.
Don’t believe me? Plug in the numbers for yourself into the Rule of 72 equation above and try it out. It’s eye-opening!
One of the best ways to hitting that $1M mark quickly is to save 1 income and live off the other. It really speeds up the doubling process and let’s you get to the $1M years ahead of schedule.
If you really excel at your day job or have a hobby that you are good at, this could provide other income stream possibilities.
One option is freelancing or consulting. Leveraging the knowledge you already have is one of the best ways to provide extra cashflow.
I know a manager at my day job who has done consulting on the side for over 10 years. He recently retired after a 35-year career at my company. Because of this, he has created several income streams for retirement. Here is what he has: a pension, 401K, Roth IRA, social security, and is going to continue his consulting in retirement on a part-time basis because he enjoys it. That’s 5 different income streams! If the stock market tanks and ravages his 401K and Roth IRA, he still has the pension, social security, and his consulting gig to lean on. He’s set for life!
Freelancing can be a great way to earn extra income, and leverage both your work skills and work experience to do it. There is a plethora of websites like Fiverr that offers ways to setup freelancing gigs for people interested in expanding their income. You’d be surprised at the freelancing opportunities available for artists like photographers to technical people like computer programmers and app developers. The possibilities are literally endless.
The best part about freelancing gigs is that it usually mimics your day job skills or a hobby you’re good at so you could technically work a few hours each week during your day job which frees up your nights and weekends for other things. You can work on your own time, but I know several freelancers who sneak inside work while working their day job. It’s tricky but can be done.
Finally, another way to generate income is starting a side hustle. A side job or side hustle can be a great way to earn extra income while still working your 9-5. Side hustles don’t have to be a side business but can be. A side hustle can be as simple as being a Lyft driver on the weekends or working in the retail industry. Side hustles have a lot of benefits and can speed up the journey to FIRE.
A few years ago, my wife and I both worked in the retail industry on the side to pay down our children’s huge medical bills. I talk about my situation here, so I won’t go into detail. I will say the extra work paid off that debt years faster than relying on just my income only.
Think this is all B.S., think again. I have a friend from high school who over the years developed his photography skills. He takes amazing photos and I’m not just saying that because he’s a friend, he really is good. He started a side hustle several years ago which transitioned into a side business a few years ago and is now his sole source of income. He gets to travel the country, photographing landmarks while earning a great income AND writing the trips off on his taxes (business expenses, baby! Lol 😊).
Accelerate Savings
Finally, the final step to achieving FIRE is accelerating 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. Instead save as much as possible as fast as you can.
Developing extra income streams can be used to expedite the journey to FIRE. Want proof? Here’s an example.
Let’s assume a person earned $100,000 a year and puts 15% pre-tax into a 401K. After 30 years and assuming an 8% annual return, a person will accumulate approximately $1.7M.
Now assume expenses were streamlined and an extra $5,000 annually was found for investing. After 30 years and assuming an 8% annual return, a person will now accumulate approximately $2.27M. Nice!
Now assume a side hustle was started at Panda Express. I saw an hiring ad recently with a starting pay rate of $15/hour. Simple side job. No experience needed. Assume a person worked 20 hours / week for 50 weeks, the side hustle income is $15,000 annually that can be added to what is already being saved.
Add all 3 incomes together equates to $35,000 that can annually be saved for retirement. Do this for 30 years at 8% annual return and the retirement nest egg grows to $3.97M! Wow!
Better yet, let’s see how many years it takes to get to the magical $1M mark:
- Day job only = 24 years
- Day Job + Streamlined Expenses = 21 years
- Day Job + Streamlined Expenses + Side Hustle = 15 years
Having a side hustle shaved off 9 years to reach the $1M mark and added at least 1 extra doubling period. In fact, if the amount needed to retire was calculated to be $2M, retirement could be achieved after only 23 years!
Where To Go From Here?
Well, that is up to you. If interested in achieving FIRE and working a 9-5, it can happen no matter the income level or age started. I’m doing it and you can too. My story about the progress we are making will be for another time.
In the meantime, if working a job you don’t like makes you feel like a slave to the grind, I’m here to tell you it doesn’t have to be this way.
By following the 7 steps, FIRE can be achieved. It’s not easy but it is achievable. If I can do it so can you.
Until next time…….
Live The Life You Love, Want, and Deserve