What’s up boys and girls!
Hope everyone’s having a great week!
Freezing our fingers and toes off here in Old Sydney Town, never realized Winter could be so cold (it can, that’s why it is called “Winter”).
Following on from my previous post where I asked for questions from yourselves, there’s been quite a few responses (that’s a few more than I expected)!
For those of you who sent them through, thank you for doing so – I’m going through them now and there’s plenty of great questions and topics to cover.
However there’s a question from Bugzy about FIRE which really struck a nerve.
My friend Taser told me that u started answering questions re finance. Help pls
1. I have 400k in equity. 20k cash. Income of circa 70k net. How can i FIRE”
Wow, SUCH an intense question – seems like every 2nd man and his dog wants to FIRE (financially independent, retire early) these days.
My immediate response was something along the lines of – review your expenses, understand your risk tolerance, identify the most suitable asset class, stay committed etc.
But the more I thought about this question, the more I think it deserves a more fulfilling answer.
I wanted to really expand on these points because it’s something that I myself is looking to achieve.
So here’s a further 7 thoughts for Bugzy and the rest of us as to how to approach the FIRE path.
Don’t just talk about it.
The first thing to really grasp is your mental state of mind. In life, there are those who speak (I want to FIRE man!), and there are those who do (working 3 jobs concurrently).
Life very rarely rewards the speakers more than the doers and with FIRE, this is the same.
Sure, you can say you want to retire at 40 – but what have you done to do this?
If you are a talker more than a doer, then please – stop talking and just do.
Put your money where your mouth is – get that new job, heck get two new jobs, start a business, invest in real estate, shares, bonds whatever!
Be true to yourself – you talk so much about it, go and get it!
Calculate your FIRE number.
But a destination isn’t worth travelling to without understanding where the destination is. This means you must understand the number applicable to YOU before you embark on this road.
This number will of course vary from person to person, it could be $100k, $500k, $1m, $10m even $100m – all depends on your desired cost of living, expenses, projected income, and future growth of assets.
Don’t forget also the expenses of raising children (if you want them), medical bills as we age and ongoing support for family and friends.
You might also want some “play” money for travel and hobbies, as well as a donation fund for charitable causes.
All of this will eat into your final number.
There’s a well-known formula of the 4% rule in personal finance, which is defined from Investopedia as:
The 4 percent rule is a rule of thumb used to determine how much a retiree should withdraw from a retirement account each year. This rule seeks to provide a steady income stream to the retiree while also maintaining an account balance that keeps income flowing through retirement.
E.g. if your annual expenses equate to $50,000 p.a. then $1.25m in assets is the benchmark FIRE figure for you.
If you can get $1.25m in income generating assets to match your expenses – then hooray! You can FIRE.
BUT personally, I believe the 4% rule is a bit risky because it doesn’t factor in black swan events and unexpected expenses, and besides are you going to be expending $50k exactly each and every year?
No, personally I work off around 2.5%, so $2m in the above example.
I honestly think that a 2.5% withdrawal rate, although conservative is still a good figure to base it on, because well, just in case.
Income – Expenses = Savings.
There are countless books, guides, articles, journals, studies and research on “how to be rich” or “how to retire early”, but really – when you nut it all out. It’s actually very straightforward.
Earn more than you spend and invest the difference.
Seriously, all the other brouhaha is just dressed up versions of that simple statement.
This is especially true with FIRE participants and aspirants – look at that formula and determine your course of action.
A 6 year old would know mathematically that you would have to either increase income or decrease expenses in order for the remaining savings pie to grow.
The key though – is to invest those savings. No use stacking money under the mattress when it comes to FIRE (quite literally).
It’s all about risk.
“Guaranteed 20% returns!”, “Money for jam!”, “500% return in 3 months!”, “You can’t lose!”
All these catch-cries and promises of quick and easy steps to wealth – it’s enough to get anyone hot and bothered.
Faint voice of TV announcer in the next room.
“Welcome everyone to tonight’s game, where we have the might of Cristiano Ronaldo and his Portgual side taking on the resilient Moroccans in the second match of Group B…”
Wait, do you hear that guys? I think… yes I think it’s the sound of the World Cup siren and her alluring call.
Sorry guys – some things in life are worth waiting for, but some things in life are worth watching for.
So come back next time as I take you through the remaining points and also go a bit more in depth to Bugzy’s question with how I would approach it myself!
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