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Financial Independence

Basics of FIRE (Financial Independence and Early Retirement)

With all this traveling going on, we forgot to talk finance! This is a personal finance blog after all. Since we plan to reach financial independence after only 10 years in the workforce, we constantly need a little reminder to keep pushing. Our ultimate goal is to reach FIRE with roughly 25 times our yearly expenses in investments. Achieving this is no easy feat! There are a lot of steps and preparation involved. Going back to the basics of FI is a good way to remember why are we doing all of this.

Today, we are going back to basics and sharing the first steps of our financial journey. The basics of financial independence are not complicated; spend less than you earn, and save the rest. But there is a little more to it.

Here are the basic steps we are taking to reach our goal in this short timespan.

 

Basics of FI #1: the cutting

The first step we took once we knew we wanted to reach financial independence was to take a deep look at our spending and cut anything we could without affecting our lifestyle too much.

We live in Canada and during the cold winters we can only dream of summer but once it’s finally here, the terraces are so inviting. It’s so easy to go out, eat at some nice Tapas with some drinks but all of that cost money. We were spending hundreds of dollars on food but slowly cut down to a more reasonable budget, while keeping all the fun outings. We just go less often.

Here is the secret; if you go on a complete cash diet and stop buying coffees and eat only Ramen noodles to save money, it won’t last. You will give up and go right back to your old ways.

The better way to do it is to gradually cut things you truly don’t need.

 

basics of financial independence

 

We were paying for both a cable and a Netflix subscription. Why? Because we could.

However, could we watch thousands of hours of TV a month? Maybe, be that would just be unhealthy.

We decided to cut the cord and keep the cheapest option. Now, we can watch our shows on demand, ad-free, for a tenth of the price we were previously paying.

Another thing we were paying for was our gym memberships. We were rarely going, and where we would go, it was just for specific classes we enjoyed. Once we looked at our options, we saw that those same classes were accessible individually. Instead of keeping a monthly subscription, we started paying per visit and cut our gym expenses by half.

Finally, the other huge saver for us was the brown bag. We were eating out for lunch every day but it added up to hundreds of dollars each month. Instead, we started preparing ourselves a lunch 2 or 3 times per week and slowly increased every day of the week.

Moving progressively will be easier to keep up and allowed us to cut our yearly spending by half. Over the course of a few months, we were saving thousands! Once we saw a surplus in our budget, we felt comfortable moving forward to the next step in our plan to reach financial independence.

 

Basics of FI #2: the savings

Working your budget and cutting your expenses is amazing. We can literally feel a tingle when we see our spending drop but what really gets us smiling at the end of the day is saving the difference!

If you save $50 per month cutting your cable subscription but spend $60 on another pair of jeans you don’t need, you are not saving anything.

As we cut our spending, we make sure to save the difference.

The more we cut our spending, the more we can put aside and the same goes for our income. As our income grows, whether through promotions at work, new jobs, or side hustles, we always made sure to increase our savings rate accordingly.

The more we make, the more we put aside.

We shy away from lifestyle inflation and try to keep our needs minimal. The best tip we can give here is to continue living like a student for as long as possible. If you finish college and get your first real job, it’s not the time to go lease a brand new car or buy a new TV, it’s time to increase your savings rate. First to secure a healthy emergency fund, then to invest for our future goals.

Basics of FI

When I finished college and starting working in finance, I remember getting my first bonus and wanting to buy myself a new watch but instead, I did the wise move of investing it all. That money has now grown to almost double what I originally invested.

This definitively had the most impact on our journey. We started investing most of our money through index funds and always kept adding to it.

In general, our goal is to save up (and invest) over 25 times our annual expenses. To get there, we are aiming for a 50% savings rate (currently over 60%) and investing tools to grow our wealth.

 

Basics of FI #3: the investing

After the savings comes the fun part; investing. Once we had a few extra dollars laying around, we started investing in stocks. We wanted to save up for a down payment to buy our first home. Looking back, we took some unnecessary risks with money we could not afford to lose. We should have stuck to a high-interest savings account since this was a short-term goal. Investing should have been for our longer-term plans but everything ended up OK.

Another big investing mistake was to buy stocks without knowing anything about them and try to day trade. The very first year we started investing, we blindly bought stocks in hopes of good earnings announcements but we honestly did not even know what the companies were selling.

After a few months, we had one bad day where we lost $2,000 in a single day. After that, we stopped trading without research and put a halt on day trading altogether.

Now, we switched to index investing and focus on our long-term goals of early retirement.

Investing in low-fee index funds was, by far, our best financial decision. By diversifying our portfolio and keeping the fees to the bare minimum, we are able to maximize our return over the long-term.

We follow a fairly simple 3-fund approach as the base holdings in our portfolio. We invest through Vanguard, mainly into the Total Market Index fund, Canadian All Cap Index fund, and Total International Stock Index fund.

To see our exact holdings and asset allocation, you can read the latest installment of our Open Book series where we share our portfolios. We also share the reasoning behind each investment we make.

This is a crucial step in our investment process. You should always know why you are investing in a particular fund or stock. Know exactly what is your goal behind each investment.

Whether you are saving to retire early or just to be financially independent, the best advice we can give you is to start now. Compounding returns work like magic and are the best tool to build great fortunes. Even on average salaries.

As millennials, we have decades in front of us and our investing journey has barely begun. For example, if you simply stick your money into a savings account returning only 1%, your money will grow 10.46% over a 10-year span. A $1,000 investment would only grow to$1,104.62 over the next decade.

 

Reaching FI

Source: Get smarter about money

 

However, if you start investing in the stock market early on, investment returns of a total market index fund which tracks the entire US equities market has been much better. Historically, it has been averaging around 7% after inflation.

Over the same 10-year time-frame, the same $1,000 would have almost doubled to$1,967.15. This is where things get interesting!

 

plan to reach financial independence

Source: Get smarter about money

 

Now, in our case, not only did we start early, but we are constantly investing more. Consistency is the name of the game.

By automating our savings and investing we took the need to think about it out of the equation. We invest part of every paycheck and are simply forced to live only on what is left. You can check with your employer if they offer a savings plan such as a 401k.

Consistently investing in simple, diversified, funds with a long-term goal in mind is the key to reach financial independence. Once you get the basic steps down and get things rolling, you will see your wealth grow considerably over time with little to no effort.

 

Finally, the why

Never forget why you are doing all of this. For us, it is for the freedom. The freedom of doing the things we like when we want to. The freedom of working on projects we actually want to work on. And the liberty of living at the pace and place we wish to.

Once we reach financial independence, it does not mean we will retire and sit on the beach all day but at least we could. It will be an option for us.

If we want to travel for 6 months, we will.

If we want to work in a coffee shop and chitchat with clients all day, we will. That’s the freedom.

Hope this got your saving train going and we wish you the best of luck on your path to financial independence, Mr. and Mrs. Xyz.

 

 

2 replies on “Basics of FIRE (Financial Independence and Early Retirement)”

Even with weight loss, cutting everything is too hard. Cutting a few thigns, though, that can be done and sustained. I have been graduadly improving my eating, and spending habits slowly, and the dividends are starting to pay off. So, point one is dead on IMHO. In all fairness, we are bad at eating out. My wife and I work a lot of hours on our main jobs, and hers includes some significant traveling some times of the year. That is killer, and the less time we have, the more likely we are not to cook. Cutting our cable bill, though, that was huge. That’s about $100 a month, that went directly into some mutual funds. I noticed some spending habits cutting as we cut commercials. I don’t feel the need to buy as much, and end up spending more time with what I have. This is a good thing.

Yeah, we have noticed that cutting cable (switching to Netflix) not only saved us the monthly bill but also made us save on general consumption simply because of the absence of ads! This is so powerful!

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