If you’re like any of the Aussies with FIRE on the mind (in short: swapping extravagant lifestyles for frugal, intentional living and investing) – the biggest question for you is… how? The answer, simply, is following the six steps to ensuring your financial independence and early retirement.
Whatever demographic you fall into, DINK, SINKS, a big brood of kiddos, single parents, young, old and all those in between, these steps don’t discriminate.
Whatever your final income number (let’s say, a passive annual income of $50,000 generated from an asset base of $1,250,000 comprising of rent, dividends, super, interest… or a mix of all, assuming you’re withdrawing between 3-4% of its value), this methodology has been tried-and-tested across the globe. And while that big scary number feels so far away, remember the beauty of compounding.
The sooner you start, the sooner you hand over the baton for your investments to carry the load later on.
I really love this concept and feel it’s so under-rated. We feel we can’t start because we don’t have the tenacity to go the whole hog. But we forget that we don’t have to.
Here’s the logic in short: get rid of your debts (as a big, big priority), keep the costs of living as low as possible for your situation and then use that extra cashflow to invest in safe, low-risk investment vehicles (a fancy term for things that carry and return your cash in good markets).
The key is to simplify. Everything. Not just your money, but your life.
Basically, figure out what brings you joy and security? Spend on that.
What interests you and curates the world you want to live in? Invest in that.
This ensures you’re putting your money to good use, both on a day-to-day spending level and a long-term investing level. Thousands of Australians have done this and are on their way to reaching their financial independence goal. Don’t discount how achievable it is for you, too. Here’s how.
Step one: It’s and et’s… they commit, budget and execute.
They not only make the decision to hit financial independence, but they create their budget (a plan) and execute it.
They look at the different types of FIRE, like leanFIRE (with a lower passive income, think <$50,000 per annum, which maybe they’re supplementing with a part-time job, working six months out of the year, or a profitable side hustle that cashflows part of their lifestyle), fatFIRE ($50,000>, up to a number that only you can decide, because hey, it’s your retirement, and you can either work some of it, or none of it, or spend big or small), and everything in between.
They map out their process, learn how to invest (which is part confidence, part expertise and part trial-and-error, not in that order) and ensure they have cash to do this with.
They look at their personal risk profile around investing, like whether they’re okay with the hands-on nature of property, the short-term volatility of shares, the delayed gratification of superannuation or the slow burn of trusts and term deposits, and they understand their income and outgoing numbers intricately.
While it’s great to start now (and look, why not?), they also appreciate the power of research and learning, so they’re not anxious to get amongst it immediately for fear of missing out. The reality is, this is a perceived threat. Any time is right to invest, as long as it’s the right time for you.
Step two: Bye bye debt, you sucker.
With a plan, comes action.
Get onto that toxic debt, friends. Seriously, it’s bad. So bad and unnecessary. Be it credit card debt, car loans, personal debt (like owing friends or family money, even if there’s no interest charged), AfterPay, ZipPay, the whole shebang. The interest charged (or the mental burden of owing) is like a weight you can, and should, throw off the side of the boat of your life as soon as possible.
It’ll hinder you from accessing the good debt of building wealth, like business loans, home loans or even capital for debt recycling. Truth bomb: there’s nothing good about owing on a personal level.
The argument of strengthening your credit score is negligible… I mean, does it really? One or two unexpected defaults due to a change of circumstances, or a late pay-check and you’re in the red again, marked as an unpredictable candidate, undoing all of that hard work to establish a strong score.
Step three: They get intimate with a high savings rate (and look at ways of boosting their income).
Get ready for some initial sticker shock.
FIRE proponents save at least 30% of their after-tax income on a regular basis. And if they can’t find the money to do this from their current income, or by minimising expenses, they find ways to boost their income to save at least 30% of that after-tax.
It’s a fundamental, potentially inconvenient truth to accept: you’ve got to normalise saving.
You have to locate, and keep, disposable cash. The more that can be saved to be put to work (so you don’t have to), the better. At a minimum, 30% looks like $25,000 (before tax) from an average before tax wage of $84,968. And the more you can squirrel away, the faster you’ll bring forward that magic early retirement number.
Step four: They lower their risk ratio with a strong emergency fund stashed up.
The unexpected is both expensive and unavoidable.
At least one years’ worth of annual expenses are a safety buffer that keeps your head above water when everything goes to pot. Putting together a “life happens” nest egg protects you from the terrifying reality of poverty after job loss, major repairs, becoming sick, crystallizing a loss, and above all, the dangerous debt trap.
Being tax, or growth smart with where this is kept – like an offset or redraw facility, or high-interest savings account or term deposit, could be a very clever move as it gives it not only a home, but a job to do.
Step five: They focus on building multiple income streams.
They shift from chasing income in the traditional way, like employment or business ownership. If it requires an exchange of their time for the money, it’s too active of an income strategy. Instead, they seek ways to bring in money while they sleep: passively.
Some passive income streams include share dividends, rental yield, interest from a bond or term deposit or creating something that pays ongoing royalties or ad revenue.
Diversification may be a good strategy to ensure that your income isn’t totally affected when one stream goes through hardship (many investments generally don’t perform in a vacuum; when some do well, others won’t, and vice versa), but this isn’t completely necessary. Some income streams within the same asset class can still be wildly different. Diversification can still be achieved for the same investment type.
Step six: See you never negative net worth, hello positive net worth.
Finally, the magic happens.
Any assets (what is owned) now exceeds any liabilities (what is owed).
And compounding can carry the rest of the load. Hooray!