Welcome to Everything About Wealth podcast 3, Strategies for Financial Independence.
On this Denny and I discussed the FIRE movement. The FIRE movement is becoming more popular among millennials. For those of you that haven't heard about the FIRE movement, FIRE stands for Financial Independence, Retire Early. For those of you who may already be in your fifties or sixties, it means Financial Independence, Retire Comfortably. It is all about building a stable and reliable retirement.
The FIRE movement principles originated from the book, Your Money or Your Life, written in the 1990’s by Vicki Robin and Joe Dominguez. We recently came across the updated version of the book from 2018 with new material for our current time with tips and strategies on how to manage money and find more ways to live the life that you desire. We thought the strategies discussed in the book were so important that we wanted to share them with you on the podcast. Of course, we encourage everyone to listen or read the book in addition to listening to our podcast. There was a wealth of information and some of which we won’t be able to touch on due to time.
For now, we will discuss the top six strategies that stood out to us.
First and foremost, I want to review the definition of financial independence. Financial independence as defined in the book is having enough passive income to pay for your living expenses without having to work a full-time job. This can be achieved through investments, businesses that don’t require daily involvement, or savings. Now, this doesn’t mean you shouldn’t work. There are some people out there that enjoy working their full-time job such as those who work at schools, non-profit associations, volunteering, engineering, etc. You can still do those things, but have additional income covering expenses as a back-up plan. Remember, financial independence means you can live without working a full-time job, it doesn’t mean you have to quit one.
The book really helps readers change their relationship with money. For many of us, since we were young kids becoming a consumer is a future career, we all spend money to keep up with who has the best-looking car, biggest houses or brand clothing. From the tv commercials, magazines and now social media marketing we are all encouraged to live a life that revolves around spending money, not earning it. Money becomes an emotional connection with our lives when, it should be only transactional. Purchases should be based more on logic than emotion. Meaning we should consider what we are buying – is the purchase or item a want or need?
Vicki Robin recommends considering the “life energy” we use to work for money and spend it. You should think about how every dollar that we spend takes a certain amount of our life energy. Evaluate the cost of an item and the amount of life energy it took to earn it. For example, if you want to purchase a piece of clothing, think of how much work (per hour) it took for you to earn the amount of money it’s going to take to spend it. Is it worth it?
Sometimes we get caught in a vicious cycle of working for money, spending money, which leads to no money. Which means what? You must go back to work for forty or more hours to replenish your bank account. And in most cases, the cycle starts again. If it’s not the cycle you wish to live in, consider what your relationship with money is. Are you working for money or is your money working for you?
Vicki Robbins mentions some ways to live the FIRE movement sooner with lifestyle changes. A couple of strategies are:Moving into a smaller home.Sharing a car or using public transit.Moving from city to suburban area.Renting unused space in your home, i.e. Airbnb, roommate.Living off 50% of your income and investing the other 50%To have a better idea of how you would like to implement these changes, we strongly recommend developing a financial plan. A financial plan is similar to a business plan but with your money. Like a business plan, you want to include details on your financial goals, the amount of money you will need to save or invest on a weekly or monthly basis to reach your goals, and maybe even ideas on how to increase your income with new businesses, investments, or side gigs.
Investments
Some of the strategies are easier than others but it is recommended to work on the ones that are within immediate reach. For example, living off 50% of your income and investing the other 50% may be difficult for some people. Everyone lives a different lifestyle and we aren’t here to tell anyone how they should live their lives. It depends on how fast you want to move into financial independence and retire early. Obviously if you have higher expenses than other people due to lifestyle choices, demographics, it could take you longer to reach your goal than someone that lives in a more affordable area like Florida. It will also depend on the amount of debt you have accumulated.
The best way to implement this strategy is finding out the percent of expenses you can cut and start saving for an investment. It’s not a race so you don’t need to save thousands of dollars overnight. Develop your funds slowly over time. After you start growing your nest egg you can begin to concentrate on ways to increase your income. You can do this with side jobs or part-time businesses. Because of the internet, there are so many businesses you can start at your finger-tips. Investing in the stock market is good, however, it is not good to have all your eggs in one basket.
A great way to earn income is to partner with someone else on a real estate investment property. You don’t need to have all the funds as about 85% of deals are joint ventures. This means more than one person or investment group provides funds to make the investment possible. This had been restricted to wealth people, but recently the government has allowed the average Joe and Jane to take advantage of these investment opportunities. This allows investors to start earning income faster and at the same time to reduce risk. They can do this by working with people who have experience and education that the investor may not have and may not have the time or desire to obtain. Other investments to consider earning additional income are bonds, stocks, notes, CD, mutual funds, and a whole lot more that we don’t have time to write about.
With bonds you basically lend your company money. With stocks you invest in the stock market and own a piece of a company. A CD or Certificate of Deposit is when the bank holds your money and you earn a small return. In this case, the bank makes a lot of money with your money, not you. Lastly, are notes which is basically loaning people money on a real estate property. So, when you buy a property it comes with a mortgage in the form of a note, also known as a promise to pay back, which allows the investor to earn interest and have the protection of owning the property in case the buyer doesn’t pay. And many more.
We recommend you educate yourself about different investment opportunities you feel comfortable investing in. You don’t have to be experts in all types of finance or investments. As Vicki Robbins says, “become knowledgeable and sophisticated enough to free yourself from fear or diversion.”
Debts
Another strategy from the book is to pay-off debt. We would clarify that you should pay off bad debt because not all debt is bad. I know it’s sounds strange but stay with us. There are two types of debt good and bad. We will explain in more detail.
Bad debt is debt that requires you to make money out of your bank account with no return of your money to make payments, i.e. credit cards, houses, car loans, etc. And then you have good debt which is used to acquire assets that will generate additional income into your bank account, i.e. rental property, businesses, etc. In our opinion, debt used to create opportunities to earn income is good and worth taking on if the return makes sense.
For other types of unnecessary debt like credit cards or car loans, develop a plan to pay those off so you can start saving more money to put toward items to help you achieve financial independence.
Budgeting
A 2019 article stated a study found that 46% Americans don't have enough money to cover a $400 expense that may come up for a car repair or a medical bill. We were shocked the percentage was so high. To decrease your risk of falling into this category, we recommend you track your budget on a monthly basis. Tracking your budget helps you understand the amount of money coming in and going out of your bank account so you can slowly reduce unnecessary expenses.
We haven’t always done monthly budgets, but we learned quickly the importance of reviewing our spending habits after we had a disagreement on how much we spent eating out. Well, it came to find out that we had spent close to $800 eating out in a particular month which was WAY over our monthly budget of $300. This was a humbling experience as we thought we had spent less. We learned if you don’t track you don’t know. Now, we ensure we stay on budget by tracking our expenses and of course, ensuring we eat in more. Spending $800 on monthly eating out does not fit within our current lifestyle. Maybe in the future when we become billionaires, $800 will fit within the budget at that point.
Your financial plan should determine the amount of income you need to pay for expenses and in addition, we recommend including a 10%- 20% savings for emergencies, so you aren’t left wondering where additional funds will come from. As we all know, life is full of surprises.
Other Tips
To ensure you stay on track with your financial goals, Vicki Robbins mentions being involved in FIRE Accountability Groups. Accountability groups help hold us accountable to our goals, as distractions can cause us to stray away from our goals. A good way to prevent this from happening is attending monthly accountability groups. A FIRE accountability is a group of individuals that comes together to discuss their goals, current progress, and help each other accomplish goals. We have both been a part of real estate groups that have helped us gain insight on new ideas or ways to invest that allowed us to accomplish more in less time. You can create groups with friends, co-workers or start a new group on meetup.com. Remember to focus on your values and base your financial plans around that.
Well that’s a quick summary of our podcast about FIRE movement. We recommend listening to the podcast to hear more details of some the strategies we couldn’t cover or go into more detail on the blog. See link below. Also check out our other podcast on our blog that covers financing, private investments, and more.
Books Mentioned on the Podcast Your Money or Your Life by Vicki Robin and Joe Dominguez
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