Hi friends! Today, I’ve got a special guest post from my friend and fellow personal finance blogger Bob Lai from Tawcan. He is a big part of the FIRE community, and in this post he’s going to share some of his wisdom about financial independence and early retirement! – JessicaWhat is FIRE? It stands for Financial Independence Retire Early, an acronym that you’ve probably come across if you’ve been reading personal finance blogs and articles in recent years. Jessica and I even discussed FIRE on her podcast.The basic concept of FIRE is having enough passive income to cover your expenses. You can retire early from your job and not have to worry about receiving a paycheque every two weeks.
The concept may sound easy and simple, but it takes years of planning, commitment and execution to achieve FIRE, and it’s all dependent on your current income, saving and spending.
Getting Started with FIRE
Step 1: Reduce Your Living Expenses
The first step toward FIRE is to reduce your living expenses. Are there expenses you can cut out? Are there expenses you can reduce? Track your expenses so you know how much you’re spending per month.
Then, categorize the different expenses so you can analyze any trends. Are you spending too much money eating out? Perhaps it’s because you’re buying a $10 lunch every day. Can you cut this expense out completely? If so, you can save over $2,500 each year. Perhaps you’re spending $200 on a cellphone plan and another $250 on internet and cable at home. Can you cut back on these monthly plans? Tracking your expenses to analyze them is the only way to determine methods to cut and optimize your expenses.
Unfortunately, you can only optimize your expenses so much. It’s an undeniable fact that you will spend money every month. Eventually, you get to a point where you can’t cut back any more without depriving yourself. This is where the next step comes in.
Step 2: Increase Your Income
The next step toward FIRE is to increase your income. Are you able to negotiate with your employer for a higher salary? If so, great! If not, are you able to increase your income by switching jobs? What about taking courses and getting certifications to increase your value?
Perhaps you should look into side hustles. For example, my wife and I both have our own side hustles. I have my portrait and wedding photography business, I have my personal finance blog that generates a small amount of income, my wife has her holistic healing practice, and we have our cookbook business.
For my wife and I, although we are both naturally frugal, we didn’t know much about personal finance when we got married in 2011. Our financial life turned for the better when my wife and I were given a book called The Secrets of the Millionaire Mind by T. Harv Eker. After we both read the book, we felt that the personal finance world had opened up to us. It was as if we just had a financial epiphany. We realized that we wanted to be financially independent one day, so we can work because we choose to, not because we have to.
Accelerate Your FIRE Journey
Step 3: Invest Wisely
While cutting expenses and increasing income are important steps, the next step toward FIRE, I believe, is the most important. It is about investing your savings in appreciating assets and having these appreciating assets generate passive income for you. You also want to track your net worth and analyze your net worth statements regularly (i.e. every month or every quarter). If your net worth is increasing, great! If your net worth is decreasing, figure out why and see if you can do anything about it.
Does this work?
For the past 7 years, we have used a budget system to track our expenses and incomes. We also track our net worth every quarter. By decreasing our expenses and increasing our overall household income, and putting savings into investments, we have managed to increase our net worth by over 250%. It’s pretty amazing what you can accomplish when you put your mind to it.
When it comes to investing, my wife and I have come a long way. When I was a bachelor living on my own, I managed to save a lot of money each month. But I was investing my savings in low-interest GICs and high MER mutual funds. In other words, the returns were poor. I could have done much better.
When my wife and I started learning more about investing, we realized GICs and mutual funds weren’t the way to go. So, we learned about DIY investing, tax efficiency, and various forms of investments. We moved away from mutual funds completely and stopped investing in GICs once they matured. That money was then invested in dividend-paying stocks and index ETFs. We decided to deploy a hybrid investing strategy where we would be able to capture the best of both dividend growth investing and index ETF investing.
Investing and creating passive income takes a long time. This is where you need to take advantage of the power of compound interest. If you start with $5,000 in principal and add $1,000 each year, at 8% annualized growth rate you will end up with $72,727.71 at the end of 20 years. This is a large amount of money considering you only contributed $25,000 in total. The $47,727.71 gained all came from compound interest. Therefore, it’s so crucial to start saving and investing early, so you can use time as your biggest ally.
By focusing on DIY investing and taking advantage of tax-advantaged accounts like the RRSP and the TFSA, in 7 years we have built up a portfolio that produces over $1,400 of dividend income per month so far in 2018. We also broke an all-time monthly dividend income milestone by receiving almost $1,700 in dividend income in June 2018. Combined with other passive income streams, we are on track to become financially independent in 5 to 10 years. We feel blessed and are very appreciative of how much we have accomplished since our financial epiphany.
FIRE Is a Marathon, Not a Sprint
Although the basics of FIRE are really easy and simple, it takes time to achieve this major financial milestone. It is very important to understand this important fact. We have come to the realization that we can’t build up our passive income all of a sudden. It takes time.
7 years into our FIRE journey, my wife and I have realized that it really comes down to finding the right balance between saving for the future and enjoying the present moment. We’ve realized that we should not try to save as much as possible only to end up depriving ourselves when we become FI. We also realized that we should not spend all our money just so we can enjoy ourselves now and worry about the future later.
It comes down to finding the right personal balance. And what this balance is may change ever so often. Sometimes we may feel that we need to save more and sometimes we may feel that we need to spend money to enjoy the present more. Shifting the balance is totally okay. The key is having the FIRE goal in sight to work towards.
To us, whether we retire early once we reach financial independence is not important. What’s important is that we will be free to decide what we want to do. Since we enjoy what we do, we can choose to continue working. We have the power to stop working without having to worry about our paycheques.
We are 7 years into our FIRE journey and probably have another 5 to 10 years before we reach the FI stage. Although 5 to 10 years might seem like a long time, we are okay not rushing it and spending time to enjoy the present moment, like spending a 12-day family vacation in Maui.
Because it’s not just about the destination. Getting there is actually most of the fun.
Enjoy your FIRE journey. The best time to start is NOW!