#163 | How to get started toward financial freedom

August 22, 2022

Episode Summary:

 

In this episode we rewind three years of episodes and start with the basics. Where do you begin if you want to improve your finances or pursue financial independence? We discuss the mindset, skills, and actions needed to start your journey.

Episode Notes:

 

We’re now 162 episodes into this passion project called Friends on FIRE, and we’ve covered a lot! But if you’re just being introduced to the idea of FIRE or Financial Independence Retire Early, some of our advice might seem a bit overwhelming or confusing. So we’re going to simplify the steps you need to get started.


  • Know your why. Any goal needs inspiration. Visualize what you want in life and keep that as your purpose to help you through the hard times.
  • Get your partner on board. If your partner isn’t on the journey with you, or worse, moving in an opposite direction, it’s much harder to get started toward financial freedom. So get them on the same page and know this could take years!
  • Track your expenses. What a critical piece of the puzzle. How do you know how much you need to retire if you don’t know how much you spend? Spoiler: it’s impossible.
  • Track your net worth. Knowing what you have allows you to know how much time you can buy back, aka when you can retire or achieve financial independence. Tracking expenses without tracking net worth is like heading on a road trip with a broken fuel gauge.
  • Cut your expenses. Once you know how much you spend, start cutting it. Cut it back to the bone, just until you begin to feel the discomfort. You don’t need to live in squalor, but if you have ambitious goals, you need to take dramatic steps. Start to save as much as you can. Some tips: groceries, cell phone, eating out, home services/DIY, etc.
  • Invest your excess. This can get complicated, so we’re going to simplify this: just put it all in the market. This comes with risk, and you could lose money, but over time the market has consistently delivered if you diversify. The FIRE community loves VTSAX, an all-stock market ETF. We encourage you to learn about investing and start to make decisions based on your goals and risk appetite, but in the meantime, VTSAX is a reasonable place to start.
  • Calculate your 4%. Financial independence just means that you have enough money to cover your expenses for the rest of your life. An easy way to calculate this, which factors in investment growth over time, is the 4% rule. Take your spending and multiply by 25, and that’s your goal number. Then, you can withdraw 4% of that a year and be ok.
  • Set your target. Set an aggressive time target to keep you motivated. Think you can retire and 55? Make it 50, and we bet you’ll find yourself ready at 45. But if you don’t set a time, you’ll probably just keep kicking the can down the road.
  • Take advantage of company benefits and savings programs. Every company is different, but whatever yours offers, consider signing up. 401k, HSA, deferred compensation, stock purchase plans, etc. These can be lucrative and help you on your journey.
  • Do your own taxes. Taxes are a huge component of your financial picture, so why outsource them into a black box? Understanding how your money is taxed will help you make better decisions in the future, so buy TurboTax and do it yourself.
  • Start living some of the changes you want to make in retirement. Lastly, don’t wait for some magical time in your life to start doing the things that make you happy. Start them now. You might not be able to do as much or as many, but you’ll start living that future life. Perhaps you’ll learn it isn’t what you thought, or perhaps you’ll refine it over time, and your later life will be that much better. Start now, though.

Top 3 takeaways:

  1. Understand your why. Set a vision for your life and a time you want to reach it.
  2. Track your expenses and net worth. What gets measured gets better!
  3. Don’t wait. Don’t wait to start working on your finances. Don’t wait to start doing the activities that make you happy.

 

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