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Getting started with FIRE! - Part 1

Updated: Jun 24


The first question always asked about FIRE is "How do I get started?"


Well, are your ready to do anything to make a change?


When I say anything, I mean it. FIRE takes some sacrifices.



The first step to FIRE is to change your mindset. Really figure out what your goal is, and realize there's a difference between NEED and WANT. Be prepared to say no to things that you want. Realize that you're making some sacrifices now, but you'll reap the rewards later.


FIRE is not for everyone, however there are many FIRE techniques that can benefit anyone. Even if you don't want to commit to the whole nine yards, you can still improve your financial situation in small ways. It all adds up!


Some everyday choices that can impact your financial situation:


- Instead of buying a new car, could you buy a used one?

- Instead of eating out three nights a week, could you eat out once every two weeks?

- Instead of going out to a concert, could you go for a hike?

- Instead of checking out that new movie, could you wait until it can be watched at home?

- Do you NEED that new cell phone, or is your current one still working (Could it be fixed)?


If you could answer yes to the above you are ahead of the game! FIRE is understanding that you are willing to make sacrifices for a better life overall.


The FIRE answer for the above questions:

-Buying a used car three years old will save you on average 30-60% of the cost of a new car

-Eating out once every two weeks instead of three nights a week will save you ~$180 ($30/Person/Meal)

-The cost of a hike will always be less than going to a concert. You'll pay for gas and snacks, where concert tickets can run $100 or more per ticket!

-Renting a movie at home $~5 instead of $15 (plus if you are like me popcorn/drink(~$15-20)


Making different financial choices in your everyday life, even small ones, adds up. And why am I telling you this? Because at it's core, the idea of FIRE is to setup an investment principal which will later provide enough income to cover your living expenses. Once your living expenses are covered, guess what? You can spend your time living, instead of working.


"For most individuals [FIRE] consists of gathering approximately 20-25x their annual expenses in investment principal which allows for a 3-4% annual withdrawal plus room for the initial principal to grow off average market gains of 4-8%."


This sounds like a lot, but you can start to contribute to your investment principal today. If you make different financial decisions, like the ones above, you'll soon have money that you would have otherwise spent, that you can contribute to your principal.

There are three steps to start down the road of Financial Independence (FI):


Step 1 - What do I have?

Step 2 - What is my FIRE number?

Step 3 - How do I get to my FIRE number?



Step 1 - What do I have?


The first step is to get a clear picture of your current situation. List what assets, liabilities, income and expenses that you have. This includes your house, car, mortgage, loans, credit cards, bank accounts, investments accounts, etc.


List all of your sources of income, and all of your expenses. The best way to do this is to go through your bank account and credit cards and categorize each deposit and purchase you made in the past 12 months (the further back you go, the clearer the picture). Lots of banks will allow you to download transactions into spreadsheet files, or programs like Mint.com can help to automate this.


You should end up with something like this:

(These are not my actual numbers, just examples).


Assets

Chequing Account $2,000

Savings Account $10,000

RRSP/401K $12,000

Stocks/Investments $10,000

Liabilities

Car Loan $15,000

Mortgage $375,000

Credit Card $750


Income

Person 1 Salary - $60,000 / yr

Person 2 Salary - $60,000 / yr

Dividends $600 / yr


Expenses

Cell Phone: $115.00 / month

Car Loan: $389.57 / month

Groceries: $150.00 / month (average)

Eating out: $325.00 / month (average)

Entertainment: $450.00 / month (average)

Gym Membership: $75.00 / month

Car (gas/insurance): $250.00 / month (average)

Utilities: $350.00 / month (average)

Mortgage Payment: $2,250.00 / month

Health Insurance: $265.00 / month


It may seem cumbersome to gather all of this data, but it is the most important step. It is critical that the numbers you gather are accurate. If you cheat/lie/make up numbers, you are only going to hurt yourself. Be real with yourself! Even if the numbers don't paint a pretty picture, this is your starting point. You're trying to improve, which is the main thing. This information will be the foundation to choosing your FIRE strategy.


Read about Step 2 HERE.


Read about Step 3 HERE.




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