In this post, I am going to help you determine your FI number and share 4 simple steps I followed to achieve FI.
As you likely know by now, Financial Independence is the point where you have accumulated 25X your retirement budget in investments (combination of HAs, 401K\403, Pensions, IRAs, brokerage accounts, etc.). If you plan to retire on a $40K budget a year for example, you would need to accumulate $1M and would be able to safely withdraw 4% yearly of that $1M and still have your money last through retirement.
Still, it may seem daunting to reach $1M or more depending on your annual budget. Don’t fret. You don’t have to figure it out in one day. Slow and steady wins the race, and Secret Life of FI will show you how to achieve it in 15 years or less, which can land you a retirement 20 years or more earlier than the average American family.
4 Essential Steps to FI
There are myriad ways to save and invest those savings. Secret Life of FI covers these specifics in more depth and of course focuses on simple, accessible paths to FI.
This post covers 4 essentials to a solid wealth building foundation. The FI Family supercharged its savings rate following these steps, which started at 6% and ended at 80% after 10 years.
Read on below for a break down of each of the foundational pillars.
Get Married
Pay down Debt
Set a Modest Budget
Automate Investments
Part 1. Get Married
I am not the FI love doctor, so I can’t help you pick out a suitable spouse and financial life partner. If I could, I’d be running e-harmony for FIRE enthusiasts! Side hustle idea for any readers with an entrepreneurial mindset : ) I also certainly can’t offer any marriage counseling if you are paired up with a partner who does not share your financial values.
What I can share with conviction: I would not be financially independent today if I had not married Mrs. FI, the love of my life and glorious second earner in the FI family.
A two income household can mean more for your early retirement journey than budgeting, investment savvy, or any other wealth hack touted on the internet. While a single person budget’s is lower than two, there are few budgeting hacks that rival a two income household.
Even better, a two earner household also means two 401K/HSA investments (and company match!). The FI family doubled up on tax deferred 401k limits ($20,500 X 2) and company match benefits (6% x2) for years.
If the same amounts were contributed from a single earner, half of it would have been reduced by high income taxes as anything past $20,500 would have to go in a taxable brokerage.
Further, the earnings in the brokerage would have also been taxed, and would not have the benefits of a second company match in 401Ks and HSAs. What is better than free money (company match)? How about free money x2!
What else can I say about Mrs. FI, the love of my life? She can fill the room with her laughter and warmth . . . and fill the bank account with an extra income and company match.
Though you will miss out 2X company tax deferred match benefits, there are two alternatives to marriage.
The first is to pick up a roommate or two or three. Just like when you were in college, this can slice your expenses down to a fraction (maybe even to near zero), giving you signficantly more to invest.
The second alternative is house hacking. An example is buying a triplex and renting 2 of the units. If the mortgage rates are low and you can charge high enough rent, you could potentially live with zero expenses, hence the term house hacking.
The bottom line is average American expenses and average American wages are unlikely to lead to a path of a significant early retirement for a single person shelling out solo for his or her own expenses, unless you are an extreme budgeter.
Instead, find a way to share expenses through either marriage, roommates, or renting rooms/house hacking your property to others.
Part 2: Set a modest (not frugal) budget
Your mom probably once told you “a penny saved is a penny earned.” Mr. FI says “a penny saved and invested is MORE than a penny earned.”
Let me give a recent example. My toilet needed repaired recently. Rather than paying $200 to hire a professional, I made a 100% ROI by repairing it myself by consulting youtube and buying a $2 seal (and I am no handyman).
And if I invest that $200 that I 100% saved, it will earn a compounding 10% (average long term return of the total stock market). In short, that $200 invested in the total stock market grows to $890 in 15 years and will grow to over $10,000 in 40 years!
But you don’t want to wait 40 years to retire. You want to retire in 15 or less.
That will obviously mean finding larger expenses to cut but it does not mean a ramen budget. Mr. and Mrs. FI recommend you focus on the top 3 laid out in the Save Series: housing, cars, and food.
Mr. and Mrs. FI made modest (not frugal) decisions here and saved over $400K in 15 years. Just to make the math easy, if 100% invested the $400K+ would have grown to near $900K in 15 years! That’s 90% of a $1M FI goal just through modest budgeting.
To be clear, the FI Family is boringly average. The FIs have owned a middle class home since 2010, bought 2 brand new cars, took yearly vacations, had dinner out 2x month, consumed locally roasted coffee daily, never clipped coupons, and paid for satellite TV. These are the hallmarks of a comfortable and normal middle class lifestyle, not a frenzied FIRE money hoarder!
I go into the calculations and specific savings figures in my Save series, but will summarize the key budget decisions the FIs made below.
Food: The FIs saved $116K over 15 years, worth $243K invested.
- Groceries: Always buy generics, sales and in bulk.
- Meals out: Only 2X month plus special occasions. Never buy appetizers or drinks, which sell for con man prices.
Cars: The FIs saved $146K over 15 years, worth $255K invested.
- Dont buy more cars in number, space, or quality than you need. Don’t trade up . . . ever. Run it until it dies.
Housing: The FIs saved $185K over 15 years, worth $350K invested
- This topic is infinitely more complex, but in short, Mr. and Mrs. FI rented until they could purchase a home with 20% down, and they paid off their mortgage in full in less than 6 years.
Misc: Does Mr. FI cutting his own hair and purchasing everything with a credit card (and paying in full monthly) to collect points matter? Absolutely! $14K in savings over 15 years, or $32K invested, which would fund 5 years of Roth IRA contributions.
Part 3: Pay Down Debt
The FI Family prioritized debt elimination above after tax investment. Credit card debt was eliminated inside 3 months of marriage. The new Corolla was paid off in full in 3 years. The new Chevy Traverse paid in full in 2 years. The new $250K house owned debt free inside 6 years. A new house 3 years later was purchased debt free.
Many FIRE gurus recommend that you eliminate all except house debt, and instead invest any additional savings in retirement savings or a brokerage. This can be sound advice depending on your mortgage rate. However, I personally chose to eliminate house debt (twice) before starting a brokerage.
Make a mindful decision if you have the extra cash on hand (eliminate house debt or invest in a brokerage), but don’t lose sleep over it. Either option is a return on investment over spending it all or over parking it in the bank.
While a brokerage investment can yield an ROI higher than the mortgage rate on your house, it also comes with tax implications and risks that an early career person may not be ready for. Paying off debt is also risk free and can be done with with ZERO investment knowledge.
If you are looking for the top line return, then you should consider a brokerage over paying down your house debt, especially if you have a low rate on your mortgage and no PMI.
Part 4: Automate Investments
The FI family’s secret is simple. Automatic contributions and automatic yearly rate increases. For most of my 15 years of wealth accumulation, I never even checked my company 401K. It was set it and forget it.
- Since 2007, the FI have contributed enough to earn company 401K (6%) and HSA ($1750) match.
- Even better, the FIs signed up for automatic rate increases of 2% year.
- After any promotions, they bumped their 2% rate increase up to 5%
- Since 2018, 401k contribution were at IRS max ($19,500 each) for both Mr. and Mrs. FI.
- Since 2018, the FIs setup automated monthly IRA investments ($6000/yr) and maxed those out as well.
- Since 2021, the FIs started their first taxable brokerage accounts, also setup with automated monthly investments.
The specific holdings of the above accounts are the subject of a different article. What’s more important is that the the FIs put their money to work for them in the market, and used automation to ensure regular contributions.
Fees, specific stock tickers, market timing, etc. – none of these other consideration are even relevant if workers forget to even invest the money to begin with. Automated investments in both before tax (401K) and after tax (IRAs and brokerage accounts) will ensure you put your money to work for you and let it grow until you can retire.
So there you have it: 4 Steps to FI you too can follow with limited lifestyle impact, no investment knowledge, and no complicated tax or investment gimmicks.
There are no hacks to reaching financial independence. You too can join the Secret Life of FI and become work optional (or quit your overbearing job). With simple, mindful money moves you can retire early. Once you set it, you can forget it, and keep earning one day at a time until you can retire early and live the life you want.
Its simple. Follow these 4 steps: Marry your soulmate and join incomes, live a modest (not frugal) budget, pay off debt, and setup automatic investments. Do that, and you will be work optional (or can retire early) in less years than you think. I did it in 15 years and so can you!