The 6 steps to reach financial independence and retire early
If you want to reach financial independence and retire early, this website will be a useful guide. But this FIRE cheat sheet is your pocket guide.
As long as you follow the 6 steps below, you will make ginormous steps towards your financial independence.
- Live debt free. Get out of all unproductive debt. Unproductive debt is any debt that is not financing the purchase of assets that generate an income (investments). The rate of return on investment (ROI) shall be higher than the interest rate you pay on the loan (cost of capital) for debt to make financial sense.
- Save the heck out of your income. Hundreds of budgeting tools and techniques are available on the web, but they tend to overcomplicate it. To keep it simple, the only thing that matters is the maximum saving rate that you can achieve without falling into debt. Aim to save 50% or more of your income.
- Invest like a pro. Build a passive investment portfolio with low-cost broad funds, unless you want to be actively investing. With a passive portfolio, you’ll likely do better than most of the active investors out there.
For your portfolio buildings blocks 3 funds are sufficient: a total US stock market index such as the CRSP US Total Market Index, an international stock index like the FTSE Global All Cap ex US Index, and a bond index Bloomberg Barclays U.S. Aggregate Float Adjusted Index.
If you want to integrate social and environmental considerations, select responsible and sustainable passive funds that track broad market indexes.
Above all, stay the course through the ups and down of the stock market. Never divest when the market goes down. - Build your fortress of solitude. Keep on investing until your portfolio reaches 25-30x your annual expenses, then follow the 4% rule to withdraw what you need to sustain your lifestyle. Don’t be too dogmatic about this rule. You should try to reduce your annual spending when the stock market is down to make sure the portfolio lasts. On the other hand, if markets do well and you have extra money, still limit your withdrawal rate to 4%. If the portfolio ever exceeds 35x you annual expenses, you’d better donate the extra. Excess money can trap you into owning things that limit your life and wellbeing.
- Live a minimalist life. Don’t buy junk stuff that will clutter your life, the less you own the more free you will be.
- Avoid irresponsible choices. You bought your independence with hard work, now don’t give it away. Have a prenup if you want to get married, don’t start a business without a limited liability company, don’t take debt on yourself, don’t fall into the trap of trying to impress others with your wealth, or keep up with rich folks. The more money you have, the higher the pressure can be.
Keep this FIRE Cheat Sheet handy, this is all you have to do to reach Financial Independence and Retire Early. Now enjoy your free life!