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.

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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’!

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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.

So how do I do it?

Smart investors are able to reach FI by investing in assets such as a stock market ETF, REIT and real estate such as residential and commercial properties. 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;

  1. Educate yourself – Review your knowledge, values and goals.
  2. Make a budget – Track your expenses and needs.
  3. Reduce your expenses – Be mindful with your expenses (but still have fun!).
  4. Create a savings 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!
  5. Boost your income – Make more from your job, and start a side hustle (or four…)
  6. Pay off any debt – If you have any debt other than a home loan or mortgage, consider a debt consolidation or debt consolidation loan to secure a lower interest rate to help you knock over your debts using either the Debt Snowball or the Debt Avalanche techniques.
  7. Invest your savings – Start investing your capital to get rich slowly.
  8. Manage your portfolio – ‘Stoke your FIRE’, regularly add more ‘fuel’ as per your investment strategies to reach fi. Don’t forget to periodically go back to step 1 and work your way down the list again, looking for improvements each time!
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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

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