If you are doing it right, investing should be very simple.
This is the third post in the series on beginning your personal journey to Financial Independence.
Did you read JL Collins’ The Simple Path to Wealth? This was your homework for Step 2: Learn. It is my favorite easy introduction to money and investing because the author doesn’t overcomplicate it. You learn what you need to know to get started and leave the fluff and hocus pocus behind. I highly recommend it.
So, to catch us up…
- In the Intro post, we learned what FIRE is.
- In Step 1: Think, you discovered your personal relationship with money and set a few money goals for yourself
- In Step 2: Learn, you read The Simple Path to Wealth
Now, in Step 3: Track, we will uncover your financial starting point.
Step 3: Track
- Objective: Find your starting point; take stock of your financial life to date and determine whether or not you are ready to begin investing
- Time: If you have never tracked your spending, you should track every penny for at least a week or two, the longer the better
Your Starting Point
To track progress, you need a starting point. Put a stake in the ground. Where are you now in terms of your financial life?
- Do you have any debt?… credit cards, student loans, car loans, mortgages, store cards, HELOC; If so, do you know how much? Don’t just guess And what type of debt? No debt is ideal, but some types of debt are much better than others.
- How much do you spend? Spending is CRITICAL. Again guesses are not helpful
- How much have you saved? Do you have an emergency fund? If you lost your job, could you pay your essential expenses for at least several months?
- What is your current Net Worth? This is not just a question for rich business owners! You need to know your net worth and make the goal of growing your net worth central to EVERY money decision you make… from latte purchases to property purchases. Every financial decision is a value judgment. What do you want more… the latte now or would you prefer the financial freedom that money will bring you later?
To review, the central tenant of FIRE is to invest (wisely) as much money as possible until that money can support you. In the simplest scenario, this is done by “growing the gap”… the gap between what you earn and what you spend. You can increase your earnings (supercharging your career, side hustles, start a business, investing in property, etc.) or you can decrease your spending (move to a lower cost of living area, move to a smaller apartment, save of transport costs, etc.) or better yet, do both!
Now you have money to save and invest. Use ‘the gap’ to, in order of priority:
- Eliminate debt
- Create an emergency fund
Embarking on FIRE is a long term journey. It is vital that you have a method of tracking your progress primarily to keep you motivated when the inevitable lure of consumerism and ‘keeping up with the Joneses’ rears its ugly head.
Short-term goals like eliminating debt or creating an emergency fund are vital. But once you have achieved those you need a long-term goal. How do you see your FI journey playing out? Ultimately, how will you produce the income that will support you… rental properties, dividend investing, side hustles, working as a digital nomad so that you are free to travel? I prefer the plain vanilla solution… good old fashioned Full Financial Independence.
FI is defined as saving and investing 25 times your estimated annual expenses. With that amount invested in ultra-low-cost, broad-market equities like Vanguard’s VTSAX the chances are excellent that you could live off a 4% annual withdrawal (inflation-adjusted) forever. No, not for 25 years. Forever.
For example, if your estimated total monthly living expenses (all-in including rent or mortgage, taxes, insurance, bills, food, entertainment, etc.) were $2,000 then your annual expenses would be $24,000 ($2,000 times 12 months). $24,000 times 25 (the magic FI number) equals $600,000. As soon as your investment portfolio reaches $600,000 then you have achieved FI. Obviously, the trick is estimating your future expenses and taking into account unforeseen expenses.
Tools to Track Your Progress
Track your debt, your expenses, and your Net Worth.
You can choose to track your expenses and progress any way you like (paper, Google Sheet or the Mint app), but I prefer to keep it simple. And, for me, Personal Capital does this quite elegantly. In a matter of minutes, you can set up a free account, link your bank accounts, credit card accounts, investment accounts if you have them and other assets (property) and liabilities (home loans, car loans). Their Dashboard is phenomenal and their Retirement Planner is fantastic!
I suggest you link all your accounts, assets and liabilities so that you have the complete picture. At the very least, you need to link whatever accounts you use to pay your usual expenses so that in a matter of weeks you have a solid idea of how much money you spend.
- Personal Capital – For me, this is THE BEST tool for tracking your entire financial life (debt, income, cash flow, expenses, net worth, portfolio, cash accounts, etc). It is free, easy to use and has an excellent visual dashboard. It also has THE BEST retirement planner tool I have found to date. Once you have added all your accounts, it uses the popular Monte Carlo method to help you easily calculate your personal success rate, that is, the probability that your money will last until you pass on. You can do multiple What-If scenarios. You can even add one-off expenses like college tuition, vacations, buying a house, etc.
- Mad FIentist FI Lab 2.0 – This handy online calculator was built by Brandon at Mad FIentist. Anyone can use this free calculator to track their progress to Financial Independence. Plugin a few numbers and it will estimate your FI date and tell you how many years and months until you reach FI.
Try not to judge yourself harshly or compare yourself to others. Everyone has a different financial starting point. Every journey is different. The only objective is to do better today than you did yesterday… make progress to the financial goal(s) you set in Step 1: Think. Take it day by day, week by week. Find motivation. Get your family on board.
Think about what Financial Freedom could mean to you and your family.
You can do this!
- Continue Reading this blog series with the next post titled, Start Your FIRE Journey – Step 4: Invest
Summary of FI Resources:
- Think: Your Money or Your Life, Vicki Robin
- Debt: How to Get Out of Debt, Get Rich Slowly
- Budgeting/Spending/Emergency Fund:
- Podcasts & Blogs:
Questions, Comments, Feedback…
- Leave your questions and comments in the Comments section
- I am not an expert or a financial advisor but I’ve made enough mistakes over my decades of investing to know the basics of what to do and what not to do
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- Getting Started Investing
- Financial Independence
- Retire Early, or
- Living Abroad
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Thanks for reading. If you haven’t already done so, commit to an investment strategy today! And please reach out if you need any help.