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The Stages Of Financial Independence

A lot of folk say that financial independence doesn’t follow a linear path. That the stages of financial independence change.

I disagree, because actually, if you look at common themes in people’s finances across the spectrum, the trends are clear.

Personal finance is of course, always personal, but the “stage” we find ourselves in at any point in our life is often one of only five others. This starts at being completely dependent on others and ends at being completely financially independent from anyone.

Everything in between is where you make your money mojo.

Bear in mind, some people never move out of the first couple of stages, or sit comfortably somewhere in the middle anticipating a traditional retirement at 65. Some people get to the later stages, but fall back after major life catastrophes, and a small handful reach the holy-grail state of eternal passive income and are financially set for life.

Whatever your current stage, it’s not too late to progress it. Once you understand where you sit, the reality sinks in and you can start looking at where you want to be, moving out of the stage that doesn’t suit and into one that looks a bit better on you. Here are the stages of financial independence, from dependence to abundance, surviving to thriving.

Stage 0 – Dependence

Baby, you were born this way. This is what I’d call the newborn state, where your basic existence is funded by others – their financial generosity feeds you, clothes you, keeps you warm and well and covers your everyday needs. This is usually your parents, or carer – but shockingly, adults also fall into this category. It’s called debt; a lifestyle funded entirely by creditors, where you spend more than you earn and your income (if any) barely touches the repayments. If that life line was cut off, you’d sink.

Stage 1 – Solvency

The next in the stages of financial independence is called solvency, where you’re up-to-date on your bills and meeting your financial obligations as and when they come in. You don’t depend on handouts or credit, you’re not creating anymore debt with your lifestyle choices and by all accounts, you’re earning some sort of profit through your income – you’ve got some disposable cash. If you’re actively paying down debt – even if it’s a minimum repayment – you are paying down your bills so you are considered solvent (amazing work – this is the first step to building real, lifelong wealth).

Stage 2 – Stability

Stability is achieved once you’ve hit some basic financial goals – like being personally debt-free. Note that this is debt outside of that which is typically considered to have growth potential, like a mortgage, a business loan or student debt (this is still a priority to pay off but not as urgent as consumer debt). And if you’ve got some basic savings to cover an unexpected event, as well as continuing to support yourself with your income, you’re stable.

Stage 3 – Agency

You’re completely debt free! Congratulations. This is one of the most important stages of financial independence. You’ve paid off all debt, including a principle mortgage and you’ve got enough FU Money in the bank to walk away from anything at any time (my advice is to have this in your arsenal, anyway). You’re a free agent, not tied to anyone or any workplace entity to dictate your decisions. This is the last stage in the “surviving” category – from here, it’s all about building wealth. In my humble opinion, you can (and should) start this building wealth ASAP. It’s never too early to start investing.

Stage 4 – Security

So you’ve been diligently investing in a broad range of asset classes and now, your passive investment income (income you do not actively work for) covers a basic standard of living. Simple food, keeping that roof over your head (either rent, or because you’ve paid off your mortgage like in the third stage of financial independence – covers basic fixtures, repairs and annual home and contents). Maybe also medical expenses, new clothes when the old ones tatter, the bus fare to town. Not much more, but you could do this indefinitely.

Stage 5 – Independence

Those magical words – financial independence. This is where the standard of living you’ve become accustomed to, and those creature comforts you love, are both serviced by your investment income. You don’t need to work if you don’t want to. You’re living well above the poverty line in a modest and comfortable but fulfilling way. As you’ve probably been investing for a while, this way of life is not new and something you’ve grown happily accustomed to.

Stage 6 – Abundance

Although I write a lot about financial independence – financial abundance is really the goal with money, at least for us. Your passive income pays for everything, and then some… you can travel, build a passion business (with no expectation or need for it to become profitable), you can give wealth away to others, you can make guilt-free luxury purchases… the list is endless. You’re earning far more than you need so a huge chunk of that income is disposable. Ah-mazing!

How young can we achieve this? According to a U.S. LIMRA Secure Retirement Institute study, less than 1% of people will achieve retirement before the age of 54. Closer to home (ABS research), 8% will achieve it between the ages of 45-49 years, with presumably a smaller percentage any younger. Hopefully, though, that’s changing.

So where do you sit in all of these stages of financial independence? Where would you like to be? What would best reflect your financial goals? I’d love to hear about them.

In the vein of sharing (and because we all love a little nosey into someone else’s stage), hubster and I are getting closer and closer to Stage 4. With the compounding benefits of our investments (that lovely interest on the principal sum as well as the accumulated interest already earned), will hopefully reach Stage 6 within the next decade.

Now, wouldn’t that be a nice place to exit stage left?

June 25, 2019/0 Comments/by Michelle

Financial Independence

FIRE Burning, Retire Early: Saving Half A Million In 8 Years

My Financial Independence, Retire Early (FIRE) journey began when I was a little girl. I would look at people working until they were in their 70’s, mostly when they didn’t want to, and feel so bleak about my own working future.

Still, everywhere I turned, working was a necessity, because there was no other alternative. Even more strangely, working until old age was just something that was expected.

This I didn’t understand… surely there were more interesting ways to collectively spend our precious time? And why would we choose to work until we could barely stand anymore?

It wasn’t until I was in the workforce myself many years later that these feelings became particularly profound.

Despite my earnest excitement to be earning a full-time wage (9.5% superannuation! Annual leave!), I couldn’t shake the thought that working until 70 was now the bottom-line of my life.

Sure, I might get lucky and always enjoy my roles – and in a hopeful economy, the income would be consistent and well worth what I spent on my university degree.

Still, I’d be in it for the long-haul because that was just what humans had to do at this point in history.

To be honest, it really grated at me. I felt hopeless for a while.

Then I found FIRE, and I symbolically danced around it like the early homosapiens did a million years ago.

FIRE stands for Financial Independence, Retire Early; a term encompassing a whole community of people who were architecting amazing lives without the need for exchanging their time for a steady income.

This was the money-savvy elite; the personal finance prefects, who saved aggressively and invested it with as much fervour. In mere years, they had created income streams that were entirely passive.

Passive income, retire early def: “Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.” – Wikipedia.

In many cases, this passive income replaced (and sometimes exceeded) their day-to-day pay check.

It was through anything from share market dividends, rental yield, retirement fund payouts, interest payments from bonds and term deposits and even ad revenue or royalties from content.

Whether it was one, two, or all – the underlying outcome was the same:

Work was optional.

I’d always been okay with my money. I saved when I could, I stayed away from toxic personal debt and tried to live within my income bracket – but this was going to require a lot more dedication. I was committed and started straightaway.

Over the last 8 years, my husband I have saved over half a million Aussie dollars combined, pouring our earnings into investments that will buy our retire early “work freedom” decades before we otherwise could.

Now, we routinely invest 75% (or more) of our incomes each month into a very strategic investment portfolio across property, shares and stocks, superannuation, commodities and bonds.

We’ve seen some awesome returns so far and it’s spurred us to keep going.

Our (conservative) calculations show that we should be completely financially independent from our jobs at some point within the next decade.

These calculations take into account inflation (of which our investment returns should easily exceed) and any taxation implications. They also factor in the average cost of having and raising a child. We are trying to cover every base.

This isn’t by any means a definitive list, but it gives you a snapshot of the principles behind how we do what we do.

Live for the income you earn, not the income you want.

It’s money management 101, but it bears repeating – especially in this day and age.

While it’s never been more normal to self-deprecate and and laugh at our own misgivings, we’re also living in an age of total social fabrication. The Keeping Up With The Joneses mentality has transcended our immediate neighbourly boundaries and landed smack bang into our virtual ones.

We see highly-stylised lifestyle snapshots for people living in all corners of the globe. It looks effortless and abundant and we struggle to discern between what is product placement and what is truth.

Marketers are insidious; they find us anywhere and everywhere and will stop at nothing to make cart checkouts easier, fuller and more recurring. Loan providers are predatory and advantageous.

But we also have a responsibility to start spending more dutifully, too. When a 2018 survey of household comfort found that 1 in 10 Australian households overspent their income each month (with less than $1000 in savings to accommodate the shortfall), it was obvious where a lot of the culpability was lying.

Get to know every dollar coming in, and be ruthless in every dollar going out. Use a budget to account for important, non-negotiable costs, and eliminate anything that’s draining your money.

When income does rise, be careful not to inflate your lifestyle costs to go with it. My income varies as a small business, but my expenses do not. That means extra profit goes straight into investments. As for any loss? It barely touches the sides of my cost of living.

For those new to the retire early lifestyle, it might be easier to start with a very conservative savings rate of 10%. When this starts to become habitual (and easier), ramp it up.

Want to retire early? Have less in order to do more.

Being thoughtful, intentional and premeditated in the way you allow material things to come into your life is a very important pillar of financial independence. Granted, not everyone who subscribes to the FIRE methodology is a minimalist – but I think the most successful ones are.

The name of the game is personal abundance: finding joy in experiences over objects, and using the space created by decluttering to make way for more enriching pursuits.

For me, cutting out the consumer noise led to a greater appreciation for so much more beyond the stuff.

Not only did I make money in what I could sell, but I save so much in only buying what I need, when I need it.

I do not allow marketers to incessantly bombard me, I never kill time by meandering around the shops, and when I identify something I do need to buy, I compare widely and pay using cash for discounts (I also use cash-back apps).

If it’s true that we overspend or impulse buy because we’re overwhelmed, time-poor and exhausted, then it stands to reason that eliminating or streamlining these triggers will do us a world of personal and financial good.

Start investing, and then do not stop.

Generally speaking, the average return of the sharemarket is about 7% (this has been even despite major economical dips and world events).

Other investments can do equally well (if not amazingly well) but are typically a little more dependent on other factors (for example, geography and uniqueness in the case of property).

I won’t list these all here because there’s no one-size-fits-all approach to investing – but, if you invest sensibly with the goal to make long-term return, the outcome will rarely be bad.

Long-term return really is that which is focused on growth (growing in value over time), and providing cashflow that exceeds the rate of inflation. Savings accounts don’t always do this – and sometimes you can even go backwards with your money “invested” through the bank.

Investing in high-growth investment vehicles with a moderate amount of risk is where a lot of retire early proponents carve their path. It’s certainly where we’re carving ours.

We learnt how to invest ourselves by reading widely, attending talks, speaking to financial professionals, and a little trial and error. It’s completely possible to invest well on your own (just like it’s completely possible to invest well with expert help).

It depends on the person and situation.

Our investment portfolio is a mix of property, shares (mainly Australian and US exchange-traded funds but some individual companies and classes), superannuation, and a few others. They’re in liquid and non-liquid vehicles – meaning we could pull out money in some without much hassle, and others with a lot.

But, we don’t really plan on doing that. Why? Because these investments are going to provide the brunt of our income one day.

In the future, we’re keen to start investing seed capital in startups, which represents a much higher risk. This is because I believe people and ideas drive successful shareholder returns, and I want to be at the forefront of finding great investments this way.

I also like having diversity across the type of investments we have (this makes it easier to weather the storm during market fluctuations).

Ultimately, how and where you invest is up to you. But start ASAP. I talk about this on my Instagram sometimes; how people often wait for ‘market drops’ and ‘share sales’. This is great if you can buy on sale (in fact, it’s my favourite time to buy), but if you haven’t yet invested… you probably don’t know what shares on sale look like.

And you won’t until you’ve had some time in the market, observing how it works. The best thing to do is to start.

Build an emergency fund that keeps you afloat.

Although savings accounts aren’t always great for investing potential, there’s certainly a place for them – at least in our journey.

In FIRE (and in everyday life), cashflow is so important. In particular, having access to money stored away that prevents you from reaching for lines of credit or putting yourself in compromising financial positions can make or break your efforts.

We call ours our ‘S*!# Happens’ account, and it makes up about six to eight months worth of our combined yearly expenses. We use it to cover unexpected bills and curveballs we didn’t anticipate, as well as act as a buffer in case one of us can’t work for a period of time.

The reason cashflow is important is because it keeps you liquid without penalty.

While it’s important to have some liquid investment assets, there’s no guarantee the market will be performing well when you want to draw them. Plus, there’s that pesky capital gains tax that might apply to the sale.

Having access to cold, hard cash bulletproofs you against the unexpected, and it keeps you afloat when you need it the most. It’s very powerful for your wallet and your sanity, and a high-interest savings account (with no withdrawal penalties) can at least earn you a little while it sits there.

We employ our savings to offset the interest applied to our principal mortgage, which for us far surpasses the return of a savings account, but it depends on your unique situation.

We invest first, save second, pay routine expenses third and spend last – this is a good formula to follow when it comes to saving your own emergency fund.

If you’re in debt, think about swapping out the investing part with paying down debt until you’re ready for that step.

Live to give.

This one is worth mentioning because it’s the right thing to do upon amassing more wealth.

When you start to get better with money, think about how you can better the lives of others with your changes. After all, the secret to living is giving.

Not only can it be super tax-effective, but it a core pillar of how many retire early followers plan to contribute to the world in absence of their work (should they choose not to work on anything).

The amazing thing about FIRE is that people don’t have to have great money stories to start doing it.

In fact, some of the FIRE followers who adopted the FIRE principles didn’t do it to retire early – but to speed up their journey away from stagnant debt. They did it to become more financially free. Often, just like us, they were everyday earners.

We’re not expecting a major inheritance or paying for everyday expenses with a trust fund.

While we earn good incomes, they are still commensurate with that of those expected in a major capital city. We have higher expenses for that reason, too.

We chuckle at times about how when we reach complete FIRE, we might choose we aren’t ready to retire early at all.

I enjoy running my business and he finds his work very rewarding – but that’s the amazing thing about the Financial Independence, Retire Early movement.

When something is based on opportunity, it’s hard not to start thinking about what you could do with all of the new open doors.

March 9, 2019/2 Comments/by Michelle

Financial Independence

We Didn’t Start The FIRE: Our Journey To Financial Independence

To start off our financial independence story, I’m going to take you back to a smaller version of me.

Still as curly-haired, still as gappy-toothed, but much less wrangled by the world. I would read books widely and voraciously (thanks for making reading such a big part of our lives, Mum), and had a particular penchant for books about magic, mystery and grown-up women kicking ass.

On the latter side of things, this usually came in the form of stories of young women entering the workforce for the first time.

They were well-educated, worldly, ambitious, strong-minded and unafraid to take risks and meet challenges head-on. Mostly, they were university grads, working an internship in a fabulous company – climbing up the career ladder to success, perhaps falling in love en route, wowing their boss, befriending the “uncool” colleague, and sparring with a major competitor (always female… why?!).

I wanted to be her. Not her, as a person, but what she represented. I wanted more than anything to work. I was hungry for professional grandeur. I was a diligent student, I enjoyed learning, I enjoyed the routine and the discipline and as someone who, despite a rebellious streak, tends to want to please people inherently – working was the perfect environment.

So, I studied hard, thought long about what I wanted to do, and eventually got my degree with a number of other voluntary professional achievements that would bolster my graduate applications.

As I turned out, I wouldn’t need to apply for much. I was offered a job with an events company right before I finished Uni – which was hell on earth, and I left within the month. Imagine being thrown to the wolves with zero training to organise a huge national conference, and then being asked two weeks into the job why no-one was signed on as a speaker yet. I bowed out pretty in a pretty undignified way from that gig.

Enter stage left the little voice in the back of my head: “Imagine having to feel that anxious for forty years?”

Be quiet, I told it. That’s not a good example, it wasn’t the right job. You don’t even want to work in events. That’s not what you studied. It was a stop-gap.

Next, a job as an editor that came after a writing internship. Difficult work, difficult people (that’s high-fashun for you) but rewarding. And there’s that little voice again: “Wow, I can’t believe you have to work this hard for forty years.” Again, I silenced it. Not a good example, remember – I won’t be here much longer. I’m cutting my teeth writing and I’ll overlook everything else for now.

Then, a dream job. Amazing boss, a revolutionary startup in the technology sector, an opportunity to build a team and solve a genuine problem to improve the lives of other people.

And what a ride it was for the next two years (I often credit this job to most things I know about leadership, growing ideas, communicating well and pivoting well from bad or stressful situations). Follow that by a few different roles within another startup, all with great learning experiences and relationships of its own.

But still that voice. “People die at 70, you know? Like, the time you’re supposed to retire. People die. You never know. Crazy that we all just accept that, right?”

Yeah. Right. Actually, yeah! Right! Cue emotional breakdowns in my living room at 10pm at night if I wasn’t too exhausted by the workday, sobbing into my husband’s arms. To me, there was just no other option. You work. You work. You work, says the robot. You must work until you’re old. And I didn’t like it, nor understand it. Something about it turned my stomach.

As a little bit of background, my husband and I had been good with money up to this point. This is not a typical story of being terrible with it, living with the silent marriage-ruiner; unsecured and personal debt, and making bad financial decisions.

Since we’d been together, we’d be saving routinely and often. By the stage of said emotional breakdowns, we had just moved into the home that we had bought in Sydney’s inner-west fringe (with a 20% deposit) during the peak of the property market in 2017, we were salary sacrificing for super, we had a nice little share portfolio ticking away, we had paid for our second-hand, but very nice Mazda CX7 in cash and were also about to cash-flow our new kitchen, and some of our wedding.

So my concerns weren’t about having enough money. In fact, it’s never really been about money at all.

Rather, it was the emotional weight of the longevity of work. It was the unknown of my future – what would happen to me, or my husband, my family, or even children we might have? Why wouldn’t we want to maximise our time and the hours in our day to enjoy the things we loved, now, rather than wait until “the golden years” later?

No-one could anticipate where we’d all be – and considering the known statistics on how people’s health and energy deteriorates by that age, being dependent on something external and out of my control to get there felt just so… illogical. But to my knowledge, there was no other way – and so I emotionally, and begrudgingly, just accepted it for many years. We had been saving and investing – but for a retirement we believed was out of reach for many decades yet.

When I first found out about FIRE (Financial Independence Retire Early), I remember the warmth in my body, radiating and heating upwards from my toes to my head. It was Mr. Money Mustache’s blog and it was a passing recommendation made to me from one of the smartest people I know; an old colleague, and now (along with his wife) a good friend.

I remember reading his words, his maths, his reasoning, and just… everything clicked. The rest of that day (sorry old boss) I got my hands of every piece of material I could about him. Every podcast, every interview, every TED talk, every everything. And that was Pandora’s Box. It was the tip of the iceberg in terms of what the financial independence, retire early community was putting out there. There were bloggers! Women! Like me! My age! My income! Doing it (or already having done it).

FIRE opened up a world of possibility that defied the typical ideas of working for the exchange of time for money. It gave people, like me, a sense of control and financial empowerment. It gave people a tangible timeline, it allowed them to find abundance in simple things, to shake off the consumerist coat they were sweating in, and find joy in their daily work – knowing it wasn’t going to be forever.

For many, it allowed them (as they wound down to their financial independence date) the opportunity to volunteer, travel and work to completely better the life or someone else, without fear of lack of a paycheck. It allowed them to spend more and more time with their children, enjoying the little developmental things their children did that they otherwise never would have been around to notice; or relish in those important final days in a parent’s, or a friend’s, life.

Some people decided to keep working. Some had the flexibility to take time off to search for a job they had always wanted to do, but had never had the time to apply or network for. Others started their business, knowing it might not be profitable for a year or even more, and not worried about that in the slightest. Some filled their days gardening, turning a hobby into something they could monetise, or even not at all. But that beautiful notion of choice is inherent in all of these.

And something I have come to believe that every human fundamentally deserves. Because sure, we technically can do all of those things outside of a full-time job. But when you factor in the commute, the energy-sapping day, the after-school routine, the random life admin you only have time for outside of office hours and weekends… how much time do you really have? Not opportunistically. Not “make it a priority and just do it if you’re that unfulfilled”… how much time do we really have?

In 2018, I started my copywriting and communications business, Wordy and Smith. And to say that starting a business is the best thing I’ve ever done in my career would be an understatement. It is absolutely incredible. I love my work, I love how I have total control of my time, who I work with and what I earn. But that little voice you read of earlier? Still there. Loud and clear.

So it’s also incredible in another way. It proved to me that I was on the right track, and that my feelings and discontent with work were valid. That I don’t want to be spending my time working, beyond another decade at the most – but at least I can really enjoy the journey to get me there.

How does my husband factor into all of this? He’s not quite as emotional as I am, but this is certainly something he’s excited for. Did I get him onto the financial independence bandwagon? Yep. Did he teach me a lot about money management on the way, though? You bet he did. We complement each other in a lot of ways, and we’re now completely dedicated to this journey. He might have taken a little longer than me to come around, but what matters is he’s here now – and he’s really excited for the future of being financially free (he even has a few business ideas he’s mapping out).

We didn’t start the FIRE, but you know what they say, FIRE always spreads with a spark.

Hopefully this is yours. Welcome to our journey to complete financial independence.

February 27, 2019/2 Comments/by Michelle