Financial Independence Retire Early (FIRE) for beginners

Financial Independence, Retire… Eventually?

Captain FI is a personal finance, investing and lifestyle educational blog aimed at helping you achieve Financial Independence.

Financial Independence occurs when your investments generate passive income that exceeds your cost of living.

Financial Independence gives you the choice to direct your time and energy into the things that you truly value, rather than the things that don’t (like working that 9 to 5 grind…). It’s about working out what you value the most, and empowering you to have the freedom of choice. This uses the core principles of mindfulness, efficiency and minimalism.

Captainfi pilot
Don’t be afraid to break out of formation with regular 9-to-5’ers – take your first steps towards Financial Independence by reviewing your personal goals and values.

The why of Financial Independence

You might have heard that money can’t buy you happiness and to some extent that is true. Whilst money cant buy hapiness per se, money can help you avoid a lot of things you find unpleasant (which might be working long hours or living away from your family).

I personally believe happiness is a result of Good Health, Good relationships and Good Wealth. This means having your needs fulfilled in accordance with Maslow’s Hierarchy of needs – first the essentials like shelter and food are taken care of, then relationships and finally self actualisation through creative endeavours and passion projects.

Reaching FI means you have more time and are statistically more likely to take the risk of starting these highly rewarding and satisfying creative endeavours and passion projects. Check out how I am achieving happiness through financial independence.

Achieving Financial Independence is a goal for many. FIRE has traditionally stood for Financial Independence Retire Early, but for the ever growing FIRE community this term has also come to encompass:

  • Financial Independence: Reduced Effort 
  • Financial Independence: Redirect Employment
  • Financial Independence: Recreation Enjoyment
  • Financial Independence: Retire… Eventually

Financial Independence Reduced Effort

Being financially independent means you don’t need to work, but many professionals and career minded individuals may still want to work. Having financial independence will allow you greater flexibility to work the hours that suit you, when it suits you. Some people choose to have a 5 day weekend – and if your boss doesn’t like it, well…. There is a reason it is almost universally referred to as ‘F U money’!

Captainfi financial independence

Financial Independence Redirect Employment

Being financially independent means you have options to branch out into a new career field, commence a course of study or start a business without the worry or time constraint of having to earn a wage. 

For many, the opportunity to redirect their energy into new forms of employment is incredibly satisfying, and has led to the creation of many successful businesses. Businesses which in turn, produce more income and which can eventually be put on autopilot.

Financial Independence Recreation Enjoyment

Who doesn’t like holidays? Well being financially independent means you can go on holiday… forever! After getting FIRE’d, many individuals, couples and families have taken extended vacations, travelling very cheaply by taking advantage of Travel Hacks (such as credit card sign up bonus frequent flyer miles) and leveraging ‘Geographic Arbitrage’ to stretch their dollars further. 

Geographic Arbitrage means taking your investment income from a strong economy into a weaker economy so that you can get more value; for example many Americans and Australians choose to retire in South East Asia, where the cost of living is very low and they can have a higher standard of living.

But financial Independence doesn’t mean you have to pack up and go; many of those who reach FIRE choose to spend their time in their community, with their friends and family, playing sport, volunteering with local organisations and exploring new ways to have fun.

Financial Independence Retire Eventually

Quitting your job is not for everyone. But the numbers don’t lie, and when your passive income from investing exceeds your cost of living expenses, you don’t need to work anymore. You have reached FI. Its a huge jump, and not something everyone is ready to go for straight away. If this sounds like you, financial independence will give you the option to retire eventually, when you are ready. 

As a side bonus, the longer you work when you are already Financially Independent, the larger your portfolio will grow. This gives you a greater cushion, reducing your risk and giving you more passive income. This can be a very insidious goal, raising the question “when is enough, enough” and lead to analysis paralysis, delay and hesitation.

How can I reach Financial Independence?

Smart investors are able to reach FI by investing in profitable assets such as a stock market ETFs and LICs, REITs and real estate such as residential and commercial properties, and profitable business. You can own these directly, or through your government retirement account (superannuation, 401K, IRA etc)

Warren Buffet champions the power of a stock market ETF, due its market index strategy, simplicity and the powerful impact of compounding over time.

Check out our articles on Financial independence, and follow through our simple process for creating wealth.

The very first place to start though is an introspection – make some time to quietly reflect on your journey so far, and plan time to work through these steps;

  1. Spark your FIRE – Review your knowledge, values and goals. What motivates you? Why are you embarking on this financial independence journey? If you don’t know or don’t understand motivation, its going to be a lot harder on your FIRE journey.
  2. Make a budget – Track your expenses against your needs, goals and wants to establish your cash flow requirements.
  3. Create a buffer – Save an emergency buffer! This is critical in dealing with lifes ups and downs, and you should aim for at least $2000 balance before even considering spending on any non essentials! Try selling old household items on Gumtree or Facebook Marketplace, or picking up a side hustle like dog walking, baby sitting or even handyman work like mowing lawns!
  4. Dip a toe – Become an investor and get some skin in the game! By investing a small amount (try a diversified index fund ETF to start) you will learn valuable lessons and starting your snowball will be a powerful motivator. I started out with a very small share purchase!
  5. Reduce your expenses – Be mindful with your living expenses (but still have fun!). Try cutting them back by 5% every month until you reach your target budget. You can use all of the tips, tricks and strategies posted on this site to slash your cost of living – everything from plant based grocery shopping right through to negotiating a better deal on your phone plan or even your mortgage.
  6. Boost your income – Make more from your job by negotiating a higher salary or promotion, and think about doubling down on that side hustle!
  7. Pay off bad debt – If you have any debt other than a home loan or mortgage (eg a credit card, car or personal loan), consider a debt consolidation or debt consolidation loan to secure a lower interest rate to help you knock over your debt quicker. Use either the Debt Snowball or the Debt Avalanche techniques – the Debt snowball is great for beginners, and the debt Avalanche is great for more analytical people. Some people choose to pay off their home loan as well for peace of mind, but my preference is to use debt recycling to make that home loan tax deductible by using it for investing!
  8. Boost your Buffer – Boost your emergency fund. This is a very personal choice and depends on your personal circumstances such as family situation, cost of living and security of employment. A Great start is 6 months of living costs. This is your ‘FU’ money and gives you the confidence to know your worth – heck, it might even let you take a leap of faith into that higher paying job you have always dreamed about!
  9. Get serious about Investing – Now that you are debt free, its time to get serious about investing so that you can get rich slowly! You can go as hard or as chilled as you like – for example with a 50% savings (investing rate) it will take you 17 years to reach Financial Independence, but by boosting this to a 75% savings rate you can slash 10 years from your working career and become financially independent in only 7 short years! Of course, you can go even harder than this but you will need to engage some serious frugality muscles! You will need to ‘Regularly add more ‘fuel’ to your FIRE investments as per your ongoing investment strategy. I personally add to my investments every single time I get paid – I make sure to pay myself first! Find the strategy that works best for you, but time and time again we have seen that a regular investment strategy is the smartest thing to do – its not about timing the market, its about time in the market!
  10. Further your Education – You want to try and consume as much information as possible and seek as many critiques of your investment plan as possible. This might sound overwhelming, but it should be fun. Start with this blog and the Captains reading list – slowly work your way through the books, and don’t forget to check out some of the other awesome personal finance and investing blogs around. Don’t forget to periodically go back to step 1 and work your way down the list again, looking for improvements each time!
start investing
Ready…Set… GET FI!

Your FI number

Your FI number is simply the amount of investments you will need to produce an income that covers your cost of living. We will cover more on this later, but as a sneak peak this is found by multiplying your annual living expenses by 25. This is based on the internationally recognised ‘4% rule’, which gives a 95% chance (statistically over a 30 year period) that your portfolio will survive all economic downturns and continue to provide your passive retirement income, adjusted for inflation. 

You don’t have to be investing purely in stock market ETFs, and a huge number of smart investors have been able to reach FI using investment strategies based either purely in property, or a combination of investing in property and stock market ETFs.

Having a large cash buffer (such as a year or more living expenses) is an important part of this. Extra sources of income such as active income from part time, contract work and side hustle’s, or passive income from alternative investments, projects and other businesses can be really helpful in managing your cash flow and keeping a healthy buffer. This ensures you keep your main investments topped up over the long term, maintain a good financial independence margin, and ideally even continue over time investing in more stock market ETFs.

In Australia, we have a unique two-stage retirement system thanks to Superannuation. Superannuation is our tax sheltered retirement investment accounts, similar to a 401K, Roth or IRA. You only pay 15% on money that goes into super, and its earnings are only taxed at 15% within the fund. It sounds great, but the catch is you can’t access it until you reach ‘preservation age’ which ranges from 55 to 60 depending on when you were born, and what type of job your employed to do.

Everyone chasing FI should consider tucking some extra cash into their retirement accounts (super, 401K, IRA) if they haven’t already. The Tax benefits and time it has to grow and compound means that by the time you reach preservation age, you should have a tidy investment ready to fund the rest of your retirement. In Australia, you can currently make a yearly concessional (pre-tax) contribution of up to $15,000 into your super without incurring any tax penalties.

Thats not to say you should neglect your FI portfolio, as you still need to live off something between when you retire early, and when you can access your retirement funds. The trick is to find the balance that gives you the best possible chance of success and earliest retirement.

CaptainFI

Get Financial Independence!

You May Also Like

Leave a Reply

Your email address will not be published. Required fields are marked *