Four Steps to Supercharge Your Path to Financial Independence
Getting to FI is a bit easier than you may think
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All of this financial freedom stuff sounds great but….
Is it all really possible? How do I actually get to FI.
I was listening to a podcast the other day (if I had a dime for every time I said that I would have already achieved FI) and the hosts brought up these four strategies that you can use in sequence to achieve financial freedom. When I heard these four I couldn’t believe it. I felt like they had been reading my inner thoughts. They puts words to what I have been trying to implement in my life. Quite frankly, there are a lot of similarities to the Financial Freedom Framework that I discuss here in my newsletter and these four strategies.
Let’s break them down…
Spend Less and Save More.
Get rid of debt, minimize your spending (aka lower your expenses) and maximize your savings. Quite simple.
When you lower the amount of money you owe each month, you naturally will have more money in your pocket for other things (i.e. investing). This also sets up strong habits for later in life when you do reach FI. When you have low expenses living Financially Free (i.e., if you never wanted to work again) is more sustainable long term.
This step comes first in this supercharge FI list because it is really difficult to invest when you’re in debt. It is also hard to sustain the FI lifestyle if your expenses are extremely high. Also, having a high savings rate compared relatively to what you make will allow you to reach FI sooner. Imagine if you can save half of your salary each month—if not more—and then invest that and you money will then work for you, earning interest while you sleep.
Increase your Income.
When you increase your income and most importantly maintain or lower your expenses you have more money in your pocket to put towards your FI dreams. All of the extra income you earn will go towards your savings, your retirement account or investments.
This increased income can come from a few different areas; it can come from your traditional w2 job or perhaps a side hustle. The idea is to increases the money coming in and put it towards investments. You can max out your contribution to a traditional 401k/403b up to $19,500 (in 2021) and a Roth account up to $6,000 (unless you are over 50 then you can contribute $7,000). You can also save that money and put it toward real estate or your own trading account, if you’re savvy with stocks/mutual funds.
One caveat: you don’t have to make a lot of money to reach FI! If you complete step 1 and 3 that will still enable you to reach FI. A higher income is just icing on the cake and will make things a tiny bit easier.
Invest.
Now that you have enough savings and income you can invest this money and see it grow. Investing can be done in the traditional sense, within the stock market. It could also be in the non-traditional sense in real estate or other endeavors.
Most traditional FIRE seekers will invest in ETFs in the stock market or high dividend yield ETFs. My personal preference is real estate but I do dabble with ETFs. The idea is to grow your money through compound interest. Just letting your money sit in a savings account in the bank won’t do much for you. Invest and watch it GROW.
Scale
The book Rich Dad Poor Dad talks about this and it is a great book, I highly recommend. Essentially the way the tax system works is, those who work for others pay the highest in taxes (i.e. us over here laboring away in our w2 jobs). If you are self employed or you are an “Investor” you pay the least money in taxes.
When you reach the point of Scale you have achieved a high savings rate, lowered your monthly expenses, increased your income—which has allowed you to invest more—and you’ve converted your income to this investor/self-employed quadrant then you are on your way towards SCALE. Your money is compounding and working for you, rather than you exchanging time for money.
Interesting right? I love it. I don’t want you to get stuck on doing these in a sequence though. I think there are a lot of different ways to to approach your path to financial freedom. I think this path is a fundamental strategy to get their and gives some key tips to achieve it quicker than you may have first expected.
Let me know in the comments what you think and what strategies you want to use in order to achieve FI.
Until next time,
Amanda
Please note: I am not a financial planner/advisor etc., my newsletter is for entertainment purposes only. Please consult a professional financial advisor or lawyer before taking any action. Thank you.
Hey Amanda. Perhaps worthy of noting is the objective to increase passive income to support your lifestyle. Another concept is what realm of FIRE are you driving for, lean vs FAT FIRE. The only way to retire young (like MMM) is to have a mother load of investments/assets or to have a very lean lifestyle. One thing that I look at as a risk for young FIRE folks is health and health insurance and inflation. The concept of lean FIRE is understandable when you are in your 30’s, but they don’t acknowledge the potential and inevitable health decline in your 40’s, 50’s and beyond.
This chart puts a value on the type of FIRE. https://www.google.com/search?sxsrf=AOaemvJKxKQua-AtygyH7c7QjaWATZivgg:1632844574567&source=univ&tbm=isch&q=FAT+FIRE+diagram&hl=en-us&client=safari&fir=PyYEo6dC66h2bM%252CIa9M8txnV1jnYM%252C_%253Bwc0DdfNCzk_-tM%252C9ZmfN4oPR2imyM%252C_%253BVK7ZhZNVBmYZGM%252Cfs0Gh9x_tVwQaM%252C_%253BkvwaDozc7WzoQM%252C9-cxD9TorQy-DM%252C_%253BU8e_Wp2al5znmM%252CNFgSAwmGSRdnyM%252C_%253BX0ZDcDnwtB-Q2M%252CajlmnyTcubOQyM%252C_%253BPWqHIcF5i7DxgM%252ClIsibmFiV5mBHM%252C_%253Bl-Zcmoafib_FXM%252ClIsibmFiV5mBHM%252C_&usg=AI4_-kRrhb8qa119_bZ8BnXf4_QJn3KttA&sa=X&ved=2ahUKEwjW7NuGhKLzAhXuRt8KHWemCkUQ7Al6BAgIEEs&biw=375&bih=628&dpr=2#imgrc=XzZ6Y3r2qEz27M
Be well!