My Path to FI

Personal Reflection
Written By Felix Tin

Disclaimer: The following is not financial advice, and purely for education and entertainment. If you are interested in applying any of these concepts to your own financial situation, be sure to seek the help of a financial advisor first.

Today we’re going to have a bit of a finance lesson, so buckle up! Just kidding -- in fact, hopefully it will be the opposite of an economics lecture. For many, finance stops at making sure you’ve got enough to cover dinner as you’re paying. But I’m here to tell you it doesn't need to be complicated to start getting into a good financial state with a plan for the future. If you do a few simple things, it can actually propel you to a place where you need to worry about it less and less.

So what is FI? FI stands for Financial Independence. Quite simply it’s where you’re not tied to your 9-5 to make ends meet, and you have the flexibility to choose to spend your time on things that don’t generate income. You may have heard of the FIRE movement -- Financial Independence Retire Early. Well, I decided my emphasis was very much on the FI part. Although retiring early sounds fantastic, I’m not ready to hang up my work boots forever. Who knows, I may choose to, but at this point I’m more interested in the freedom and power that FI provides. For me, these points are really the key. Choosing to pursue FI enables the whole point of this blog -- to give me the financial footing where I feel comfortable exploring other things that I find more meaningful or interesting, more aligned with my values, and to live a life on my own terms. Some of the things I end up pursuing may indeed seem like “work” and that’s where the RE part of FIRE feels a bit extreme.

So to get this out of the way - where am I at in my FI journey? I won’t divulge too many details, but let’s just say I’m pretty sure I’m at least close enough that I feel like the ROI of taking some time to pursue alternate interests will be well worth it. Well, what does “close enough” mean? Read on....by the way this is a super deep topic, so view this as a primer to a few concepts that really helped me along my FI journey.

Optimize Your Savings Rate

First up, this sounds pretty basic: spend less than you make! Why is this important? Well it allows you to slowly build your cushion over time. If you keep spending your paycheque as soon as it comes in, you’re basically living paycheque to paycheque, and this puts you in a really precarious position. Apart from having to react to potentially unforeseen circumstances like a organizational restructuring or sudden job loss, this is literally the opposite of FI -- in fact it’s CFD (Complete Financial Dependence) on your current job. You absolutely need it to provide the basics to live on.

To start shifting towards FI, you basically have 2 levers to play with: cutting your spending, or increasing your income. The further you push both, the faster you will save. I’m not here to tout any get-rich-quick schemes, so the easiest to focus on is the former -- cutting your spending. Increasing your income might require more time (overtime, side hustles, etc) or an investment in new skills (promotions, career change, etc) and this may take longer or may not be as easy to predict. I like focusing first on spending since this is completely in your circle of control.

When I think about spending, one of the best ways to optimize is to authentically know what makes you happy and prioritize your spending on those things, while minimizing spending on everything else. For example, I’ve come to realize that food is an area where we won’t skimp on quality, because I know that tasty nutritious food makes my family happier!

Track Everything

As the saying goes, you can’t improve what you don’t measure. This applies 100% to your financial health as well -- after all, how do you know what you’re spending your hard-earned cash on if you’re not keeping tabs? The good news is there are many ways to do this, from manual-entry spreadsheets to 3rd party financial data aggregation platforms. You can easily search for some templates online to get started.

For my own needs, I use a combination of:

Mint for transaction tracking and budgeting

Wealthica for net worth tracking (FYI made for Canadians)

Google Sheets for more complex FI scenario modelling

The combination of these tools helps me get a clear picture of how I’m doing in optimizing my savings rate, and how I’m doing in terms of hitting my FI goals. There's definitely lots out there so take the time to find the right tools for your own situation.

Invest Early and Often

Do you remember step 1, optimizing your savings rate? Although that will still put you ahead of a large chunk of the population that just spends what they earn, investing is really what puts the rest of the trip on autopilot. I know -- investing can be scary and feel like gambling. But the reality is that it’s the only way to actually grow your net worth. Even if you follow step one and have a fantastic savings rate, the cash you’re putting away (even in a high interest savings account) is slowly decreasing in buying power due to a force called inflation. Your $100 today will buy less stuff over time, because inflation ensures that things get more expensive over time. So if your savings isn’t at a minimum keeping up with inflation, your wealth is actually decreasing!

Ok, so if that’s the case, how does investing help? If you invest in the right things, your money will grow over time and has the best chance of beating inflation and generating real wealth. And it doesn’t have to be difficult. Many financial institutions offer accounts that let you divert a set amount from every paycheque and they’ll invest it for you. And don’t forget to take advantage of free money -- look out for employer investment matching programs, stock purchase programs and the like. They may not seem like much but they do add up over time!

The Power of Compounding Interest

Compounding interest is the simple fact that when you invest in an asset that appreciates at a positive growth rate over a long period of time, the interest you earn gets added back to what you’ve already invested and also earns interest. This is really the key to building wealth — and to take advantage of it the earlier you start, the more exponential that advantage becomes.

As an example, if I could sock away $100 every month at a 5% annual interest rate, by the end of the first year, I'll have $1200. But at the end of 10 years, I'll have saved up $15,093.47. If I had stuffed $100 every month in my sock drawer instead, I'd have a stinky $12,000. Compounding basically netted me an extra $3K for not doing much but investing it in an appreciating asset. If you can afford to put away more for longer periods of time, the numbers really do start adding up pretty quickly!

Here's another example — if I had a lump sum of $100,000 today to invest at the same 5% interest annually, and I didn't invest another dollar into that, after 15 years that investment would have more than doubled to $207,892.82! Additionally you should also think of this in context of Howard's post on frugality. Let's say you follow the consumption herd and as soon as you hit a big earning mark, you go out and buy a luxury car for $100K to make sure everyone knows you're a big fish now. Well not only have you spent that money on a depreciating asset, you're losing out on the opportunity cost of turning that $100K into much more in the future. You've actually bought a $200K car if you factor in the opportunity cost in your car purchase! But hey, at least you can fit right in at the private golf club? I guess I’ll never know…

Buy the Entire Market, Cheaply

OK — this is the part where I need to emphasize again that this is not financial advice, but this is the path I've taken on my journey to financial independence.

I'm sure like everyone else, you get inundated with investment advice and Uncle Steve's latest flash-in-the-pan hot stock pick. Sure, it's super sexy to get on that roller coaster ride with everyone else and throw some cash at those trending meme stocks, but you have to really think of those as buying lottery tickets. Instead of Uncle Steve or anyone else's advice, why not just follow the world's most successful investor — Warren Buffett. Through Berkshire Hathaway, Buffett and his partner in crime Charlie Munger have consistently outperformed everyone else in history — but I'm not here to tell you to invest like them. I'm here to pass on the wisdom of the Sage of Omaha himself. Buffett says "Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees." He goes on to suggest that the majority of non-professional investors should just buy a broad market index fund like one that tracks the entire S&P 500.

So basically the greatest investor of all time is telling normal plebs like us to just buy an S&P 500 index fund early and often and just let it do it's thing. By doing so you'll have handily beaten a ton professional investors and other investment products. Many others have written about this as their go-to investment vehicle and even broken down the numbers, so here's some handy links if you are curious:

So yes, this style of investing can be boring, but for those of us that don't really want to think about investments, you can put this on autopilot pretty easily. In fact, my bet is most of us don't really want to think about our investments, so this should check most of the boxes. In my own portfolio historically I'd say 80-90% are in broad-based index funds. I do like to set aside some "play money" for satiating that desire to buy the latest hot cryptocurrency or stock, but I have the mindset that I'm ok treating that portion like buying lottery tickets.

Be Patient, Be Long Term-ed

This is the toughest part, as it's easy to get emotional with the ups and downs of the equities markets. Yes — things go up and down all the time short term, but the long term trend has always been up and to the right.

You might be tempted to time the market or listen to the constant news about an impending crash or bull market. The problem is all of the financial news can cause you to act in an irrational manner, getting away from the steady plan of constantly adding to your investments over time. One thing to note on market timing is that while it is tempting, research has shown that unless you're spot on (which is truly impossible even if you're a pro) you're going to miss out on most of the nominal returns. And back to the point of spending time the way you want to... do you want to spend your days pouring over technical analyses trying to predict the market ups and downs? And do you even have a hope to forecast this accurately if career professionals who have dedicated their lives to this can't time the market with any precision? I think not.

My tip: don’t watch the stock market daily or even regularly — this can quickly get obsessive and even make you anxious! This is the complete opposite of the nirvana state we're all trying to get to. Just build the plan that works for you, trust in the plan, and put it on autopilot as much as possible.

When to Stop

How do you know you have enough? This is a great question that many in the FIRE community answer with a pretty simple concept: the 4% rule. In a nutshell, you're at FI when 4% of your net worth can cover your anticipated annual expenses.

Here's a simple example: if my annual expenses are $40,000, I could consider myself at FI if my net worth hits $1,000,000 since every year I can withdraw 4% of that to cover my expenses, and the rest of my principle that stays invested will continue to grow and cover my future years’ withdrawals. The key here is to know your annual expenses or what they might be in the future, and also know your net worth. Remember that time earlier in this post where we talked about tracking and measuring both of these?

There's tons of debate in the FIRE community about how accurate 4% really is — is it more forgiving at 4.5%? Or is it too risky based on early retirees expecting to be out of the workforce for longer? Despite the debate and conversation, most agree that it's a good milestone to shoot for and gives the average person an easy way to think about how much you might need to hit your FI mark. If you're curious to dig deeper, here are some resources that have really helped me understand it better:

OK Now What

I know I just threw some big concepts at you, and if you're not investing already this can seem daunting. But if you take anything away, it's to secure your future by saving and investing responsibly right away. Talk to a fee-only financial planner (one that isn't compensated by selling you financial products, like the ones that work for banks) to start building out your own plan. I've outlined my path, but also know that there are lots of other options out there that make good investments that have historical data to back up their performance — real estate for example.

I continue to track and add nuance to my own FI plan as I learn more about my own expenses and new investment vehicles. But one thing is for certain, it's an important tool to get to freedom when you're not depending on someone else for a paycheque. And the closer you get to FI, the more confidently you can live life on your own terms. Best of luck in your own financial journey!

Felix Tin
Previous

3 Key Lessons from “How to Design a Life”
Next

Frugality = Freedom