Keep Calm. And FIRE.
My FIRE Journey
You can read more about my FIRE journey here.
What is FIRE?
FIRE is short for Financial Independence Retire Early. People also refer to it as Live Life on Your Own Terms; Financial Independence, Optional Retirement.
The basic premise behind FIRE is the ability to live life on your own terms without money being the major contributing factor. The thought behind this is quite profound because if you don't need to rely on money, you are suddenly able to lean in fully and make a difference in whatever you are doing. There is a certain social justice and environmental consciously that exist within this community like most segments where money is not a major worry.
FIRE is a philosophy and a way of living.
There are two broad stages of FIRE as you can immediately see from the name. The Financial Independence and the Retire Early component which can obviously be broken up even more but we won't for the sake of simplicity here.
Let's start with Retire Early first because that's important to define in this context. Retire Early doesn't necessarily mean leaving employment forever and living off the investments although it can. It just means that you have reach the point where you can do whatever you are passionate about without worrying about paying bills ever again. The early part can mean anytime before the standard retirement age and there are people on all points of the journey here, not just people retiring in their 30s or 40s like you see in the news. In fact there are many people part of the community who aren't necessarily on the journey but enjoys the investment/money discussions they may not get from anywhere else. Generally people who FIRE'd do go on to contributing a bit of time to the NFP organisation they are passionate about and other things that make the world a better place.
Financial Independence requires you to get yourself in the best habit, behaviour, position, decision to retire in the timeframe you want to. This is my favourite part about the whole journey. You can't reach RE without FI, at least not for long. You hear about this all the time with people (bad with money) winning the lottery. Without the intention, hard-work, habit and long term focus it just won't be possible. This stage involves attempting to save 25x your annual household expenses (without kids) to live off the rest of your life. This means that if your average annual household expense is $100k/year, you will need at least $2.5m. You can immediately see that reducing expenses and frugality may be an important starting point here. Now this is not where you become a miser but find a level that you are happy with before you work on the next part of the equation, income. The higher your savings rate, the faster you are able to do what you always dreamed of. Also the earlier you start, the more you are able to let the compound effect snowball which means you won't need to work as long.
The magic is in the dividend you receive and then reinvest back to continue growing the investible asset which will eventually yield the annual household expenses when you do decide to FIRE. It should be clear by now why you should consider FIRE for your life so I won't include a separate section just to answer this.
FIRE is a subject that has been made into a film, Playing with FIRE: The documentary to a mixed reception. Regardless of the community response, we can all agree that the film did it's job perfectly in getting the philosophy out there and started conversations with friends in a typically taboo subject.
To conclude, the community is a very supportive place of your every success that we even have our own way of congratulating you when you FIRE.
"Congratulations. Now go F*** yourself."
This is just a light hearted way of saying you lucky bastard.
Want to know your FIRE timeframe? Check out my FIRE Number Widget and Advanced FIRE Number Widget to calculate yours. The first one is a simple one that calculates when you can FIRE based on your expenses and the second one is based on your passive income or net worth target.
Types of FIRE
You will be pleased to know there isn't a set FIRE number that everyone goes for and it will be crazy if everyone had the same number anyway.
The types are generally broadly split into the actual passive income or a set Net Worth you are targeting. There are people that based their definitions on standard of living via geoarbitrage (living in a lower cost of living) i.e. I plan to FatFIRE on $40k/year when their definition is based on what FatFIRE is like in Thailand for example. I don't believe this is the right way to phrase your goal as it is confusing and subjective.
LeanFIRE - <=$40k/year
FIRE - $60-80k/year
FatFIRE - $80k+/year
Other Non-Standard types
CoastFIRE - Hitting a set Net Worth that does not require any additional contribution but will grow to your target retirement number within a certain period of time. Most reliant on compounding
FlamingoFIRE - Hitting half of your FIRE number and semi-retire
BaristaFIRE - find a part-time/casual job every so often to pay for traveling/living
ETF is short for Exchange Traded Fund which is a product managed vehicle used to track the composition of the index it was designed for. For example, VAS is a composition of the top 300 company stocks with a very similar proportion % of companies in each unit of the ETF as the ASX300. ETFs rose to prominence in the last decade is a testament to its low management fees, ease of access, can be completely hands-off if you wish, easily understood, diversification and trend of no/low brokerage fees.
ETF is basically the bread and the butter of everyone in the FIRE community. tt is your 9-5 job replacement income and it is an asset that you don't need to spend a significant amount of time trying to understand or "catch-up". In other words it can be completely passive which means you can earn income in your sleep while feeling very smug about being "part-owner" in 200 or more companies. To be completely serious, the passive nature of the earnings buys back time for you to do things that are more worthy of the rest of time you have in this life.
You can have more than one ETF in your portfolio as well. The allocations of your portfolio can be wildly different to people from other countries because in Australia we have franking credits and higher dividend yield on average (and other tax benefits). In Australia, people still like to keep a significant portion of their portfolio to the ASX index (up to 100%) when it makes up of ~2% of global equity. Don't worry about what other people are doing as we are all running our own race.
The general idea for some people is to FIRE in the shortest amount of time which requires cashflow to pay bills so people would use higher dividend yield to do this. Growth ETFs (lower dividend yield) have better average returns in general but it does require time to compound with less dividend being reinvested so it may take longer to reach the target number and you may need to sell down capital each year for living expenses. Given the volatility of stocks, in any one year you can be down 30% in one day which means you have significantly less to draw down from and the chance that stocks may never recover like Japan for example, it's no wonder people are purchasing the ASX index in droves. In the last 3-4 decades dividend yield have moved between 2-7% with a long term average of 4% which gives more stability and you can stress test on the lowest yield (2%) for your passive income for any one year. Usually the low yields are short lived and you can do reduce your expense for that period or you can consume the same amount knowing that you will use less money as you grow older.
(source: Market Index)
What is the best allocation for my portfolio
The most important and common question newbie ask. The best answer is always, it depends. It really does as much of it is centred around your risk tolerance and how comfortable you are to seeing significant day-to-day volatility.
My personal suggestion is just get in and buy 100% Australian index initially outside of super. This is the lowest risk you can take in terms of volatility and stability. The dividends also gives you the flexibility to FIRE earlier if you wish. Then you can take your time trying to understand other ETFs. I would say go 100% outside Australian equities inside your super as global equity performs better over long term even though it's more volatile. This allows you to get the diversification you need in your total portfolio without rebalancing % with so many different ETFs and make it truly passive.
For all other niche stocks/ETFs/asset classes I would have no more than 10% unless you are confident and have expertise on the asset.
Property is the only asset class I would personally take a significant allocation of due to my confidence with it, it's leverage, flexibility, use as income source in loans (i.e. dividends from shares aren't as valued as property income), and tax benefits. Please speak to your Accountant to determine the suitability of the various asset classes before you invest.
How to buy ETFs
Currently there are two main methods of doing so. The first way is direct for example, through Vanguard's platform. This is an option although the current management fees can be expensive for long term purchases. The second and most common way is through a broker (usually online). There are plenty here such as the bigger banks like nabtrade, commsec, etc and smaller guys like Self Wealth, Superhero, CMC, Pearler. Self Wealth is currently the most popular as they were one of the first big ones in Australia. I personally would wait for their new app and see how it looks as it seems to be going through a transition period. Pearler is an up and coming platform that is more targeting the FIRE community and the only one that offers an autoinvest function for complete hands-off if you wish. They also have the most responsive social media team out of the options. Finally, they also have partnerships with some ETF providers that makes it free brokerage if you hold for more than a year. At this point I would recommend going through them. Brokerage are generally between $9.95 and $20 depending on the broker although a custodian model (you don't own the share) like Superhero charge $5 per trade and $0 for any ETFs.
Strategies to reach FIRE
We all have something in our budget that we can eliminate and it may even be something that is invisible to us. Subscriptions are one of them and before you know it you can be spending on mystery gift baskets, meal deliveries, AFL memberships, book club membership etc when you can least afford it at the start. Unnecessary grocery items can also add up in which case you need to avoid certain aisles or get someone to keep you accountable.
The next order of priority is reducing expenses especially ones you can't avoid like internet, certain insurances, phone bills, energy bills, grocery items. There is always a cheaper brand that does it's function perfectly and/or identically to the more expensive product.
Finally you can replace expenses with something else that is either cheaper or free. For example, instead of going to a pub to buy a drink you can have pre-drinks at your place, instead of going to the arcade you can play steam games or board games that you already own with friends.
Track New Spending and Budget. Initially
This is an important part of the permanent expense reduction process because you are in transition and you may fall back to your old ways as certain actions can be automatic and feel right. When you are looking through your bills, ensure you ask yourself why it's more or less than you expected and how you can change it. It is easier than ever to monitor real time transactions that occurs on all account with apps like Frollo and WeMoney.
Eventually you will reach a point where you've nailed down the habit enough that the time it takes to track and monitor this is not worth the time invested which you could put to better use for the proceeding steps. I will say that it's still worth at least knowing your annual household expenses and savings rate as this gives you a quick gauge of how close you are to financial freedom.
The first part of this journey is investing in your education. Become an expert in your field. Your company may even contribute to your accreditation and masters which will make this easier. As a Economics/Finance graduate, I'm thinking about CA, CPA, CFA, AFSL, Certified Pricing Accreditation, etc and of course MBA. I highly recommend doing this step if you're single when you have time and most certainly before having kids.
The second part is the actual purchase of income producing assets. This can occur concurrently to the above for any money leftover (or even before if you having savings from working while at school). The earlier you start this, the more you can snowball and let compound interest work it's magic.
This follows nicely on from above. Once you get some work experience, accreditation and masters under your belt, this will dramatically increase your income.
The second stage is ensuring you don't get stuck with only CPI increases to your income because there is no real increase in income. If you like the workplace you should negotiate your salary in the lead up to your performance review to ensure you are hitting everything that you need to do to get the increase and ensure you are upfront in looking for it. Don't give your manager second chances. Some manager tries to get away by asking you to remain for next 12 months before they give it to you but this is a way for them to retain you a bit longer so they don't need to find someone else. If they want you enough, there will always be a budget for it as you may experience when you do finally quit. Once you have exhausted all options of getting the salary increase and/or promotion start setting up job alerts in LinkedIn and Seek and maybe reach out to some recruiters. If you are an analyst of some sort and have not switched jobs in the last 2-3 years, you will be very surprised to see what you are worth today (Apr 2021) in Sydney/Melbourne.
Keep calm. And FIRE.