I've been bitten by the F.I.R.E. bug. If you've never heard the term before, it stands for Financial Independence, Retire Early. Do a quick Google search if you want to learn more. Anyway, the bug was bad enough, that I decided I needed to get all of my thoughts out of my brain, and written down somewhere. Hence, this blog.
Personal finance is something that has interested me for as long as I can remember. Though we took a lot of wrong turns getting there, I think we've finally figured out what's going to work for us. The outline below defines the steps we took, and are taking, to free us up to live the lives we want to live.
Becoming financial independent isn't rocket science, but it does take a lot of planning and perseverance. The two guidelines we try to live by are:
- Spend less than you earn
- Invest what's left over
Now for the specifics. None of my methods are original ideas. I've been heavily influenced by others in the personal finance realm (Robert Kiyosaki, Dave Ramsey, Mr. Money, Mustache, etc.). Here are the steps that worked for us, and the ones I recommend to everyone I know (Disclaimer - I'm not a legal financial advisor). In my opinion, anyone that follows these steps will be able to become financially independent over time. The amount of time it takes is totally dependent on you and your circumstances.
- Make a Budget
This is vital before you move forward. See my post on making a budget
- Start an Emergency Fund
This idea comes from Dave Ramsey. I think its essential when you are first starting out, or if you already have any kind of debt. Everyone needs a $1,000 emergency fund. It's for paying for things like car trouble, appliance repairs, etc. Things that have to be remedied in order for you to function day-to-day. The idea is that having this in place will prevent you from borrowing money when these unexpected events occur. Read more about saving a $1,000 emergency fund
- Get Out of Debt
Being in debt, for nearly anything, is going to seriously slow down your progress to becoming financially independent. First, debt lays claim on money you haven't even earned yet. Second, debt typically comes with a monthly interest price tag, which is working against you 24/7, even while you sleep.
There's a discussion to be had about whether it's ok to go into debt for a house, education, cars, etc. In my opinion, the only two that are justifiable are:
- A house
- An education
Read more about getting out of debt
Investing can be a real challenge. There are so many things invest in, and there's always risk involved. We've tried all kinds of investments, but the one that I have finally landed on that's simple, easy, and reliable is investing in index funds.
Read more about investing in index funds
I don't know if "optimize" is the best name for this step, but essentially the goal here is to increase the amount you can invest each month. This can be done two different ways - increase your income, or reduce your spending. Pretty simple, but there's some real power here. By definition, being financially independent means you have enough coming in each month from your assets to cover all of your expenses. If your expenses are really high, your income has to be even higher. If your spending is really low, your income can be pretty modest and still provide enough to keep you free from trading your time for dollars.
- Define Your Goals
Admittedly, defining your goals should probably be step one. From what I've observed though, when you're that early in the game and you're stressed out about just surviving day-to-day, it's hard to picture what your goals should be. Once you've passed about step 3, I think you feel a huge sense of relief as you take a look at the possibilities that lie before you. So, define and refine your goals often because your perspective will change a little bit every day.
Well, that about sums it up. The fun part is in the details. Hopefully, if you read through this entire post you had some questions about each of these steps. My plan is to elaborate on each one in detail. I image the details will change over time, too, so check back often for new ideas and suggestions if you feel like you are getting stuck or need some inspiration.