Middle Class Path to Financial Independence

5 Steps to FIRE

middle class path to FIRE

So many personal finance experts scoff at F.I./R.E (Financial Independence / Retire Early). They see it as an option only for those ultra frugal people who also have high incomes. Well, that’s simply not true! I make a middle class income and I am on the path to reach FI in about 10 years. So how is this possible?

Welcome to the FIRE Community

The beautiful thing about the FIRE community is that it is so supportive. We know people scoff at us because retiring or reaching financial independence at 30, 40 or even 50 is not mainstream. The heavy hitters in this world like Vicki Robin, JD Roth, Pete Adeney, Jonathan Mendosa and Brad Barrett have brought more people into the fold and showed us that life doesn’t have to be all about working 9-5.

Many folks in the FIRE community don’t love the word “Retire,” because we see FIRE as a way to live a more purposeful life. I wrote in my Why Fire post that I live by my why, which is that I want to make an impact without worrying about an income. Your moments, your minutes are worth more than handing your time and energy over to someone else in exchange for money.

Here’s my 5 steps to FIRE, more on each below:

  1. Get out of debt
  2. Budget
  3. Save Half of Your Income (or as much as you can!)
  4. Calculate Your FIRE Number
  5. Keep Grinding Until You Get There!

Step 1 – Get Out of Debt

Let’s forget about mortgages for a moment, I’ll get to that after laying the groundwork. I know all of the Dave Ramsey Debt Snowball followers will hate this approach but in order to save money, you need to pay off your debt that carries the highest interest rate first. Make a list of all of your debt from highest interest rate to lowest and attack the highest interest rate debt first. Usually that is credit cards, then student loans, car loans, then mortgages.

Mortgages are last intentionally. While I believe you should pay more than your minimum mortgage payment, this debt usually carries a lower interest rate and taking 10, 15, or 20 years to pay off your mortgage keeps you out of the investment market for too long. Focus on the high interest debt! I can’t say it enough. When you are “back to broke” celebrate, because you have reached one of the hardest steps in your pursuit of FIRE!

If you rent, great! People in the FIRE community debate greatly over buying versus renting and neither is the “right choice.” Everyone has their own needs, perspective and life path that needs to work for them. So buy or rent, do whatever works best for you. If you do rent or you are looking to sell your house, then you in a fantastic position to take advantage of geoarbitrage or house hacking. These two life hacks can greatly decrease how many years it takes you to reach FIRE!

Step 2 – Budget!

I can’t stress this enough: if you don’t know where your money is going, you can’t put it in the right places! Write. it. down. OR track it on an app. There’s tons of free budget apps out there like Mint and Personal Capital. Or if you are a paper and pencil type of person like me, here are some of my faves:

  • Clever Fox Budget Planner – Love the layout!! This is probably my favorite. It really makes everything so easy to follow.
  • Limitless Mindset Budget Planner – Similar to Clever Fox but it is spiral bound (I’m a sucker for spiral bound notebooks) and has cash envelopes to help you manage your budgeted money.
  • GoGirl Budget Planner – Similar layout to Clever Fox but with a more feminine feel. Super great budget layout!

Step 3 – Save Half of Your Income

Once you have mastered your budget, now it’s time to cut expenses, save money, and invest! Look up frugal grocery shopping tips, get rid of cable, take a serious look a frivolous spending; do everything you can to reduce how much you spend. But, it’s all about value! Spend your money on what matters to you. I really value getting high quality food for my pets, but I have no interest in Starbucks, so I save by making coffee at home. Take a close look at what you value and slash expenses on everything else, or as Ramit Sethi says “Spend lavishly on the things you love, and cut costs mercilessly on the things you don’t.

Live with Purpose

If you can’t save half, focus on what you can save. Not everyone can or wants to achieve FIRE in 10 years, and that’s totally okay! Remember, this is all about buying back as much time as you can, but that does not mean you should miss out on the life you are living today.

One of the quickest ways to save yourself money is putting as much money as possible in to your employer’s pre-tax retirement account. I maxed my 410k contribution and saved myself nearly $400 a month in taxes alone. If you don’t have a 401k from your employer, then you can open a Roth IRA and invest $6000 per year (in 2020). Two of the most popular funds are Fidelity Zero Fee Total Market Index Fund and Vanguard Total Stock Market Index Fund.

The goal in this step is to cut expenses and put that money in investment accounts. This is the bread and butter of the FIRE approach. I personally have a 401k and a Roth IRA through Fidelity and really like their customer service and easy to use website and app. It doesn’t hurt that they also have Zero Fee Funds that help you keep more of your money. When I am able to save a little more, I plan to open up a brokerage account through them as well. But, do your research and find whichever company seems like it is the best fit for you. No matter which company you go with the approach is the same: pre-tax 401k, then Roth IRA, then brokerage.

Step 4 – Calculate Your FIRE Number

The concept of FIRE is built on The Trinity Study’s 4% rule. The 4% rule has a 100% success rate for a 100% stock investment for 15-20 years and a 91-99% success rate for 25-35 years. If you can live off of 3% of your portfolio, that success rate is 100% across the board. Basically, you need 25 times your annual expenses (not your annual income, what you need to live off of!) in investments. So if I need $30,000 for my annual expenses then 25 times that is $750,000 in my retirement account. That number sounds insane, but with the magic of compound interest and an average return rate of 8%, that number becomes waayy more achievable.

I like the simplicity of Mr. Money Mustache’s Time to Financial Independence Calculator, but if you want to take your calculation up a notch, try out Millennial Money’s Early Retirement Calculator.

Step 5 – Keep Grinding Until You Get There!

Now that you are out of debt, tracking your budget and expenses, saving and investing as much as you can, and have calculated your FIRE number, you have to grind it out until you get there. FIRE is not a get rich quick scheme. It is built on a real, researched methodology. So it is going to take time to reach FIRE. While you are on your pursuit of FIRE, take the time to educate yourself on all of the ins and outs and pro tips. A few of my favorite are house hacking (wish I knew about this before buying a house!), credit card travel rewards points, and listening to all of the incredible FIRE podcasts like ChooseFi, MadFientist, and Fairer Cents just to name a few. The FIRE community is a wonderful place to call home, so settle in and make the best of this journey.

Disclosure: Advice given in this post are for education and entertainment purposes only. Please consult a financial professional for further advice. Bear in mind that some of the links in this post are affiliate links and if you go through them to make a purchase I will earn a commission. Keep in mind that I link these companies and their products because of their quality and not because of the commission I receive from your purchases. The decision is yours, and whether or not you decide to buy something is completely up to you.

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