I began my financial independence (FI) path by listening to podcasts, reading online articles, and talking about it with co-workers. I was overwhelmed with information and it made me feel like I wasn’t doing the things that I was supposed to be doing. I quickly got lost in the details and after a couple of months, I realized that I still couldn’t visualize what my path to FI looked like.
I WAS LOST
It was very stressful and that is the exact opposite of how someone should feel when they are on their path to FIRE. They should feel excited and in control of every step in building their path to a financially independent future.
To remedy this situation and create my path to FI I decided that I needed to put all of my thoughts down on paper. I started to organize the information that I had found and put it into a single black composition graph ruled notebook. I quickly realized that the information that I was gathering would not only be useful to myself but also useful for anyone else that wanted to create their path to FI. That is when I decided to create a website with all of the information from my little black notebook.
As the website was being built I realized that there needed to be some information on how someone should put all of this information together to create their path to FI. That thought led to me writing this article and the development of one of the greatest Excel files you will ever use. The construction of your personalized path to FIRE is comprised of 3 basic steps:
- Develop general knowledge needed for the tools to build your path to FI.
- Determine current financials
- Set FI goal by utilizing the “How Much Will I Have When I Retire” worksheet
Developing knowledge
People learn in many different ways. You can be a visual learner who prefers to work with graphs, charts, videos, images, or written text. You can be an auditory learner who prefers group brainstorming, vocal instructions, reading aloud, and having conversations with tutors or peers. You can be a kinesthetic learner which requires physical activity and external stimulation to better understand the topic. You can be a logical learner who has to classify and group information together to better understand it and create procedures for future use after coming up with a solution for a problem.
Being an engineer I tend to fall more in the logical category. I have to understand the bigger picture along with the logic, reasoning, and systems behind the smaller concepts to fully learn something. This website is built to model that logic. Each section will provide you with the logic, reasoning, and systems that I used to build my path to FI. If you take the time to read and understand the smaller concepts then you can put them together to build your unique path to FI. You may not learn the same way that I do and I recommend you figure out your method of learning so that you can tailor the information that I give you to help you the most.
The knowledge that you will need to develop to build your path to FI includes paying off debt, living frugal, investing, and general knowledge terminology. Head over to Build Your Foundation Here article for a detailed explanation of how those four categories will help you develop the building blocks required for you to begin your FI journey.
Determine Current Financials
In our everyday lives, we use different metrics like cell phone battery life, amount of food in our pantry, or gas in our fuel tank to monitor how things are progressing or regressing. These metrics give us something to look at and allows us to decide whether we need to take action and fix the situation or stay on the path. The three big metrics that you need to monitor are your expenditures, savings rate, and net worth.
Expenditures can be one of the easiest things to control with a little discipline. Controlling your expenditures has multiple benefits. It can not only provide you with more money to invest, but it also has the side benefit of giving you some free time back that you didn’t have before. By reading through the Living Quarters – Living Frugal section you will see multiple easy ways to decrease your expenditures.
The definition of being financially independent is when your expenditures are 4% of your total assets. Therefore by lowering your monthly expenditures you ultimately don’t need as much money to become FI. To take a deeper dive into expenditures and what your expenditures may look like when you retire check out this article!
To determine your monthly expenditures and monitor them I recommend using Personal Capital. Personal Capital ties all of your finances together including mortgage, credit cards, vehicle loans, bank accounts, and retirement accounts. They will send you weekly e-mails indicating your spending habits for the week and let you know how your investments and net worth have changed.
The next piece to this financial puzzle is your savings rate. Your savings rate can mathematically determine how many years it will take for you to become FI. There was an article written by Mr. Money Moustache (MMM) in 2012 that correlates your savings rate to the years it takes for you to become financially independent. It can be found here.
I’m going to go off on a little tangent here but I think it is worth the read.
BEWARE, you will find many articles from people who were in the FIRE community and got out because they felt like they were in a never-ending rat race to save as much of your income as possible (savings rate) and retire as early as possible. They say that they would feel guilty for purchasing something for fun and that it was looked down on to purchase anything that wasn’t necessary.
Your savings rate should be used as a tool, not a bragging point!
Our entire lives we have been programmed to be better than everyone else; whether it’s in academics with grades, sports with trophies and medals, or your job with money. Don’t get suckered into the idea that getting to FI is a race. And don’t use your personal savings rate as a metric to compare you to someone else.
OK. Back to working on YOUR path to FI.
Your savings rate is a good tool to use to determine whether you will be able to retire early. According to Dave Ramsay and other financial advisors if you invest 15% of your pre-tax dollars you should be able to retire by the age of 67 without any issues. Anything above that threshold will get you to FI sooner, depending on when you start investing. If you want to figure out what your savings rate is head on over to the Engineering Toolbox to download an Excel file where you can plug in your information.
As you start to head towards your FI goal you should monitor your expenditures and your savings rate. If you feel that you are stressed out because you are living paycheck to paycheck, then you are probably investing too much and need to cut your savings rate back a little. If you are not enjoying life because you refuse to spend any money on anything non-essential, then you need to re-adjust your spending habits. Your mental health is more important than anything financial you are going to do. If there is something that is stressing you out then look for a solution to fix it.
The last piece to this financial puzzle is your net worth. Net worth is defined as your assets minus your liabilities. It provides a snapshot of your current financial situation and is used to monitor your progress towards FI.
Some examples of liabilities (debts) are mortgages, credit card balances, car loans, student loans, and medical debt.
Some examples of assets are checking and savings accounts, stocks, bonds, real estate value, the market value of vehicles, mutual funds, ETF’s, et al. While equity in your house is considered an asset and should count towards your total net worth, I do not recommend including it when determining your progress towards FI. Fundamentally, the reason behind this is that you will always need a place to live. The only way to obtain the equity in your house is to sell your current residence and purchase one of lesser value. The difference could then count towards your FI number.
To track your net worth you will need to gather all of your financial information and perform some simple math to add all of your liabilities and subtract them from your assets. The great part about the 21st century is that the internet has provided us quick and easy access to all of our accounts. To save yourself time from signing in every time to check your net worth you can simply enter your information once into Personal Capital and it will automatically pull the data from all of the websites to provide your up-to-date net worth.
Setting Your Personalized FI Goals
I am a naturally frugal person so the concept of FI was very intriguing to me. So, convincing me that the FIRE community was the place I should be wasn’t very difficult. But what I found out very quickly was that there are a lot of REALLY smart people who know many details about the information I “thought” I needed to know. What it led to was my mind going in too many directions and the inability to determine where I should be putting my money.
I thought to myself, “should I increase my 401k until it is maxed out over a several-year period or should I be putting some money in an after-tax account so I can touch it before I’m 60. Or, does it even matter because I don’t know when I will be able to retire?!?!”
VERY FRUSTRATING
So what I did was create an Excel spreadsheet to help with my thoughts and plans. This Excel spreadsheet is designed to help decide where you should be putting your money to be able to retire when you want. There is also a pdf that accompanies the Excel sheet that will walk you through filling it out labeled “How Much Will I Have When I Retire Walkthrough”. You can download it along with other great tools to help you with your FI journey from the Engineering Toolbox.
As you work through this Excel worksheet try answering these questions:
- How close am I currently to FI?
- If I’m going to retire before age 60 do I have enough money in after-tax accounts to live on before I have access to my full retirement funds?
- What is the likelihood that I will run out of money in retirement?
- At what age can I retire?
- Can I retire without Social Security benefits?
- If you were able to bring in more money through a side hustle how much sooner can you reach FI by investing the extra money?
I designed the worksheet to help me become less confused about what I should be doing with my money. When you use the walkthrough sheet along with the Excel worksheet you will be coming up with all kinds of goals for yourself. I recommend that you write those goals down and try to accomplish one of them a week. What I guarantee is that after a month or two you will not only feel more at ease by knowing that you developed a great future yourself but also have pride in the fact that you built your path on your own. If you have online access to all of your accounts it only takes about 10-15 minutes of your time to fill out the Excel sheet. So, hop on over to the Engineering toolbox now and start filling it out!
In Summary
The first time that you start to create your path to FIRE can be overwhelming. I know that it was the case for me anyway. The #1 reason I started this website was to help myself get all of my thoughts in order and build my path to FI. What I quickly found out is that I didn’t have all of the knowledge necessary to build my path. I would then research the specific topic and write down the information in my black book. Once enough research was complete I would use the information in that black book to write an article and publish it on this website.
I believe one of the greatest tools I designed when developing my path to FI is the “How Much Money Will I Have When I Retire” Excel worksheet. It was able to point me on the right path and it can do the same thing for you. It will also provide you a sense of confidence that what you are doing is correct and that you will have a secure financial future. So don’t wait! Download and fill it out now!
As you step yourself through other parts of this website you will find multiple references to other Excel sheets and tables that will help you build a strong foundation and will also help shape your path to FIRE. They all can be found in the Engineering Toolbox along with a short explanation of each of them.
Take away:
- Develop the knowledge needed for the tools to build your path to FI.
- Find out your current FI status.
- Set your Goal and stick to it.
- Don’t get caught with analysis paralysis!
