The 4 key steps to achieving FIRE
In this post I want to cover the 4 key steps you need to think about when aspiring to achieve FIRE. These may seem pretty basic or obvious (particularly for those of you advanced FIRE people out there) but I intend to break them down and discuss them to give my perspective on them.
The 4 key steps are as follows:
Make more money
Spend less money
Optimally invest the difference
Know when you have enough
Make more money
When most people think of FIRE, they think of extreme saving and scrimping. What everyone forgets is that a more optimal way to reach your financial goals is to make more money.
Earning more money can come in a number of forms. The most straightforward of which is gaining a promotion or looking for a new 9-5 job that will pay you more.
Even before I was aware of FIRE, I have always been very ambitious in terms of gaining promotions and ensuring I am compensated fairly. This way of thinking has been driven into by my father who was very ambitious himself. My University lecturer also said something that stuck with me when studying for my masters degree. He essentially suggested that most employers will only pay you what they need to so that you stay with the company. To make more money he suggested that you need to move job every 3 to 4 years (employers will often pay more to attract prospective new employees). I have now been in the rat race for 7 years and had 2 jobs in this time - so far I think his observation has been quite accurate.
The problem in most work places is that unless you speak up, your employer will assume no significant action is needed. So really it is up to you to make them aware of your ambition and negotiate your salary as you progress your career. Most employers will also try to keep the salary discussion separate to the annual appraisal (this is done on purpose). I would suggest you are not shy in bringing up the subject.
At your annual appraisal, you should be prepared and list out all of the reasons why you should be promoted or why you feel your salary should be increased. Also keep up to date with the going market rate by speaking with recruitment consultants or checking job adverts that include salaries. If needed, provide them to your employer with examples of similar jobs to yours that are paying a higher salary. If you still don’t feel you are being fairly compensated, it is time to move on. If you are serious about FIRE, don’t fall for the “we offer better development and more interesting work than our competitors”. If the package is better, you have the skills and you feel your career path will benefit from a move then you should go for it.
There are other ways to earn more money but always remember that the most impactful way to earn more is to increase your primary source of income which is your 9-5. Don’t forget all of the additional benefits that come from your 9-5 which also increase your wealth such as:
Pension contributions
Share scheme
Car scheme (or equivalent cash allowance)
Annual appraisal bonus
You need to factor the full package into your decision making process.
Other than your primary source of income, there are other ways to increase your earnings such as starting a side hustle. There are too many side hustle examples to list here so I won’t cover them all. One example which is not really a side hustle but one that I benefit from is renting out a room in our house to a lodger. This has been an effective way of bringing in some additional income.
Spend less money
“We buy things we don’t need with money we don’t have to impress people we don’t like.” - Dave Ramsey
I don’t always agree with Dave Ramsey but on this occasion, he is absolutely right. Too many people are too concerned about what everyone thinks about and spend money on things that they probably don’t need to.
Some examples where I have been feeling some pressure recently are as follows:
Sharing a car with the Mrs (which is a pretty basic Hyundai i10) and not having our own (and potentially more luxurious) individual cars.
Expectations for our wedding.
Our parents and siblings (and partners) all have their own cars and find it strange that I don’t have my own car. Particularly because I have a relatively high paying job. If I had less discipline and gave in to the peer pressure, I may have opted for the option to pay for a car through my company’s car scheme. Instead, I opt to take the cash equivalent and use this money to save and invest more. I predominantly work from home and when I do travel for work it is all paid for by the company. Newcastle is also relatively well linked so I can walk to the closest metro stop within 15 minutes and I can take the train from the centre of Newcastle to anywhere I fancy - for example it takes about 1.5 hours to get to Edinburgh and about 3 hours to get to London. Otherwise, if we do use the car, the Mrs and I normally travel together. So what may appear as a significant inconvenience is actually pretty manageable. I sold my previous car in December 2020 and I haven’t missed it at all.
In terms of the expectations for our wedding (we got engaged earlier this year), this is not explicitly said but I can feel the pressure a little. My brother for example got married in 2021 and his wife wanted the most perfect fairy tail wedding. They had 300 guests at night for their wedding and was held in a converted barn which had amazing views overlooking the North Sea. They had a great time and they now have memories that will last a lifetime. However, this did not come without cost. I don’t really know what the costs were but I would not be surprised if it was around the £30,000 mark or more. The Mrs and I have spoken about our wedding plans and have the following learning points or questions we need to ask ourselves:
Do we really need to invite 300 people or can we just invite relatively close family and friends?
Does the wedding need to be a fairy tail wedding at the most luxurious venue? Really it’s the people and experience that will make the day memorable.
Let’s see how it plays out. We are currently in the scoping process (checking out different venues and discussing ideas). We will hopefully start planning in the Autumn.
Anyway, I need to stop rambling and get back to some more focussed discussion.
I think in terms of spending less money, you don’t need to be extremely frugal. The most important thing is identifying what you spend your money on and where you think you can optimise.
Some example questions to ask yourself:
Do you really need to drink/ eat out with your friends as often or can you spend time with them somewhere that you don’t need to spend as much money (e.g. your house)?
Do you really need to pay for both Netflix and Amazon Prime?
Do you really need to eat that takeaway or could you just be a bit more creative and cook yourself a nice tasting meal?
Do you really need to buy that sandwich during your lunch break at work or can you bring your own lunch in that you made at home?
Do you really need to do an activity on the weekend that costs money or can you do something that is for free (e.g. a hike up a mountain or a walk along the coast)?
Do you really need to drive to the supermarket or can you walk or take the bike?
Do you really need those branded clothes or could you still buy something that looks cool but isn’t branded?
Do you really need to buy your groceries from the most expensive supermarket or can you find cheaper deals?
Do you really need to take a taxi or can you just take public transport?
Everyone has a different view point so you need to decide what brings you most value. If that catch up over a beer with your friends on a Friday night brings you a lot of happiness, then you should prioritise it. First you need to focus on reducing those spending habits that are stopping you reaching your financial goals and bring you limited value.
Small things can make a big difference overtime.
Optimally invest the difference
So firstly, why do I say optimally? Well, this relates to which investments you select. Most people tend to overcomplicate investing and too many have the majority of their investments in individual stocks.
Investing should be as simple as having a bank account. If you feel competent enough to open and manage your own bank account, you should feel confident enough to manage your investments. Don’t let the financial services industry fearmonger you into thinking you need to pay for a financial advisor.
The SPIVA report demonstrates that it is statistically very difficult to do better than just investing in an index fund. For example, in the US only 25.9% of actively managed funds (i.e. professional investors) outperformed the S&P500 over a 5 year period. This reduces to 16.9% over a 10 year period. So really your main focus when selecting investments should be to keep it simple and just invest in an index fund.
I personally invest most of my money in a globally diversified index fund. The fund I use is called the FTSE Global All Cap Index Fund - Accumulation. This fund essentially just tracks all of the companies listed on the global stock market. It is weighted based on market cap (so the size of each company).
Don’t get me wrong, I still invest in individual stocks and actively managed funds (and even some crypto). But I am also conscious that there is a high chance that these investments do not “beat the market”.
I therefore use the “Core-Satellite” strategy (read more about it here) where I essentially have the bulk of my invested money in the global index fund I discussed above (“the core”) and then have some more speculative additional positions (“the satellites”).
Generally, I invest most of my money in stocks since my time horizon is long (since I am a young man who is at the start of his investing journey). I realise this means my portfolio will have more volatility and I will have to endure significant drawdowns but stocks will likely outperform other investment classes over the long term so it is something which I need to accept if I want to reach my goals.
Due to the likelihood of a recession increasing earlier this year, I have also been adding some allocation to government bonds. Government bonds predominantly provide the best hedge to stocks during major stock market crashes.
Know when you have enough
This is the most important part. What is the point in earning more, saving more and investing more if you do not know how much you need to accumulate?
Well fortunately you can work this out. You need to know how much you need to live the life you want to have. Everyone will have different ideas in their head in relation to the life they imagine.
Since financial independence is still quite far away for us (the Mrs and I), we still don’t have a perfect picture in our head about what we want our life to look like. One option is to travel the world but this would likely mean selling all of our stuff (including our house). Another option is to live a relatively simple life (similar to the life we live now) where we downsize our house and look to reduce our fixed expenses whilst continuing to spend money on things that bring us value. We need to remember that if we were financially independent and stopped working full-time, we would still need to fill our time doing something. At least it would be possible to choose what that “something” is. Maybe it is a part-time job where you socialise with others or maybe it means I can spend more time on my blog.
Since we don’t have a clear image in our head yet, our target at the moment is to build an investment pot that would be able to cover our current expenses (based on the 4% rule). You should read the blog post Mr Money Mustache wrote on the shockingly simple math behind early retirement.
To understand how much we spend currently (this is more difficult than it sounds), we have started tracking our spending each month (click for example from July 2022). We intend to keep tracking our spending each month to (1) understand where our money is going and how we can optimise (2) understand how much we need to live our current lifestyle.
Once we have been tracking our budget for a few years, this should give us confidence in our spending habits. I think without this understanding, it is difficult to know how much you need. If you don’t track your spending, you run the risk of severely over or under estimating how much you will need to fund your financial independence.
Everyone has different spending requirements to fund the lifestyle that they want so it is important to understand where you fit on this spectrum.
Thanks for reading. Let me know in the comments how you are getting on with following these steps and if you found this post useful.
