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This blog is 2/4 of our FIRE- financial independence, retire early mini-series brought to you by Kate Cambell, founder of How to Money (HTM).

If the concept of Financial Independence Retire Early (FIRE) caught your interest in part 1 of our FIRE miniseries, then today I’m going to break down what you need to be financially independent, the steps to FIRE and staying motivated along the journey.

What Do You Need to Be Financially Independent?

To reach financial independence your investment portfolio needs to generate enough capital growth and income to cover your living costs and regular expenses every year. This is commonly done by utilising a range of different investment options including stocks, ETFs, property, managed funds and bonds, to build your investment portfolio over time. The important thing to realise if you’re looking to reach FIRE, is that leaving all of your money under the bed just isn’t going to cut it, because inflation will ensure that your cash has much less purchasing power in years to come.

Breaking Down the 4% Rule

A common line of thought in the FIRE community is that you need to build up your portfolio, so that you can live off 4% of the balance of your investments per year indefinitely (usually excluding your primary place of residence). This is commonly referred to as your safe withdrawal rate (SWR) which was developed in the Trinity Study (please note your SWR will differ slightly between countries and the asset classes you are investing in).

Let’s break this down – if your investment portfolio is worth $1M, you could withdraw $40,000 from it every year to live on, if your SWR was 4%. If you are looking to retire on $100,000 a year, then your investment portfolio would need to be around $2.5M to sustain that.

Steps Along The Journey to FIRE

  1. Understand your current financial picture by writing down all your current assets and liabilities.
  2. Get out of consumer debt as soon as possible, by actively working on paying it down every month.
  3. Build an emergency fund to cover 3-6 months of living expenses in the event you are hit with unforeseen life events that affect you financially.
  4. Create your new FIRE worthy budget by reducing your expenses, and focusing on putting a greater % of your income into your savings and investment accounts.
  5. Reduce your expenses and slow your quest for materialistic items, by making considered decisions based on value, time and happiness.
  6. Start a side hustle, take on extras shifts or up-skill yourself to increase your income, so you can put more money towards your FIRE goal.
  7. Fun Money – the point at which your investment portfolio contains enough money that you would be completely fine for a few years if you left full-time work to start a business or go travelling.
  8. Part-Time FI – the point at which your investment portfolio contains enough money that you would be completely fine to leave full-time work, and work part-time or build a business.
  9. Financial Freedom and Beyond – the point at which your investment portfolio contains enough money that you can live off your investments indefinitely and completely live life on your own terms, without being beholden to a paycheck.

Staying Motivated Along The Way to FI

It goes without saying that you can’t pull $1M from out of your hat, and it’s something that needs to be planned and actioned over 10-30 years. People in the FIRE community start working towards financial independence at all ages, and the time frame to achieving their goals differs between everybody. It’s important while working towards FIRE that you balance your life, and don’t neglect your family, friends, hobbies and personal goals. Yes, you may approach your life differently now, but it shouldn’t take away from the best parts of life.

A good exercise to examine your priorities is by writing down a list of the 10 things you value the most and another list of the 10 things you spend the most money on, and then see whether they align. Working towards FIRE makes you consider everything you spend and whether it brings joy and value to your life. The possibilities are endless once you reach financial independence!

In part 3 of our FIRE miniseries, we’ll be dispelling some of the common myths about the FIRE movement.

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Kate is the Founder of How To Money (HTM). Kate created HTM to help young Australians start talking about personal finance, and share the resources she finds along her financial education journey. Kate started her own journey a few years back and now works in the finance industry, while completing her undergraduate degree.