While there are MANY finance websites out there that go to much further detail about the topics you will read on this website; my goal is not to focus only on finance but also to create a more holistic lifestyle that develops healthy daily frugal habits. Those frugal habits will allow you to take that extra money and accelerate your timeline to FI. In order to accomplish this you have to understand how to make the most out of the money that you earn.
Money is NOT the goal; it is simply the vessel which allows you to become financially independent.
The very definition of becoming financially independent is to have enough income to pay one’s living expenses for the rest of one’s life. That includes income from passive income and taking money out of savings. That amount of money can vary depending on the lifestyle you want to live and can maintain.
The length of the path to get to that point is all self-defined. You have the ability to shorten or lengthen that with the daily frugal habits that you create and the ways that you invest. One of the biggest advantages about the investing method proposed in the FIRE community is that it is simple. A focus on low-cost index funds and taking advantage of tax advantage accounts is the recommended fast track path to guaranteed financial independence.
According to the Survey of Consumer Finance only 55% of Americans invest in the stock market (including work retirement accounts). That number has increased from 22% in 1989 and is largely contributed to workplace retirement (401k) accounts and the rising popularity of index and mutual funds.
This section is what I like to call the meat and potatoes of your financial well-being. It will cover the necessary building blocks required to help you construct your personalized path to FI and can be broken down in to several categories:
- Building an Emergency Fund
- Paying off Debt
- Building Wealth
- Penthouse Finances
Building an Emergency Fund
In this section you will find out the importance of developing an emergency fund to cover 6 months of living expenses, in case your main source of income dries up. Life is full of unexpected twists and turns, from car accidents, identity theft, or (more recently) a worldwide pandemic which puts you on a stay at home order. According to CNN only 40% of Americans can support a $1,000 emergency payment and bankrate.com claims that only 18% of people believe they can live for 6 months on their savings and 28% don’t have any sort of emergency savings.
The topics that are covered in this section are:
__ Determine monthly fixed expenses (mortgage, insurance, utilities, property taxes, vehicle maintenance, groceries) and monthly variable expenses (eating out, tobacco/alcohol, hobbies, magazines/books, donations).
__ Develop a budget that lowers your monthly expenses (live more frugal).
__ Get Life Insurance NOW if your family can’t make the financial payments if you died
__ Draw up a will
__ Use the extra money to save 6 months of fixed living expenses and save in a Money Market Account
Click Building Your Emergency Fund to learn how easy it is to build an emergency fund and when you should and shouldn’t use your fund.
Pay off Debt
In this section we will evaluate the option of consolidating credit cards or student loans to reduce the amount of monthly interest paid.
The concept of using money that you were paying on a recently paid off loan to accelerate the payments on another loan is called the snowball method. Dave Ramsay suggests that you pay the lowest balance loans off first to give you a feel good effect on getting loans paid down faster. I personally prefer paying off the highest interest rate first as it is more efficient and the total amount paid will be a lot less!
The online snowball calculator that I recommend can be found at http://www.whatsthecost.com/snowball.aspx . What I really like about this website is that you can choose to pay off your debt lowest interest first versus lowest balance first and it will tell you what the difference in overall amount paid would be!
Click here to learn the details!
Building Wealth
This section is where you build your living quarters and define how you should be handling your money. You will find out how long it will take you to get to FI with your current savings rate and then what it would take to get there if you put your money in the right wallets.
The topics that will be covered in this section are:
__ Use the “How Much Will I Have When I Retire” excel file to determine when you will reach FI and how much you need to save in each Wallet
__ Setup your traditional 401K savings and put enough money in there to at least get your company match. The exact amount can be determined with the same Excel file written above.
__ Open a traditional IRA account through an investment firm (Vanguard, TD Ameritrade, etc.) and set up automatic monthly withdrawals (based on the same Excel worksheet)
__ Open up an investment account through the same investment firm and set up automatic monthly withdrawals (based on the Excel worksheet)
__ Save up to pay cash for all future large expenses (vehicles, boats, ATV’s, vacations, etc.)
Click here to learn the details!
Penthouse Living
Once you have constructed your personalized path to FI there are some things that can take your financial performance to the next level. These last few items complete your financial living quarters and should only be done after the previously mentioned items have been reviewed and completed.
The topics that will be covered are:
__ Utilize a 529 or Coverdale savings plan for kids college expense
__ Use extra money to accelerate your mortgage payments
__ Donate to the less fortunate
__ Utilize travel reward credit cards
__ Develop a side hustle to increase your income
__ Live with less stress because you are one of the few who have their financial life planned!
Summary
The financial world can be very complex but the items listed above will give you a simplified version of that world so that you can be successful.
When I first started hearing all of the concepts of FI it was very appealing and my wife and I liked the concept. But when it came down to what I’m exactly supposed to be doing, there was nothing personalized. I developed the method above so that you don’t have to go through the same struggle as I did.
View and print off these financial building blocks by going to the Engineering Toolbox section.
Take Away Points
- Investing is SIMPLE
- Living a more frugal lifestyle allows you to invest your money to get to FI earlier
- Four categories make up living FIRE
- Develop an Emergency Fund
- Pay Off Debt
- Build Wealth
- Penthouse Living
- This method (along with the worksheets) gives you a personalized path to FI
