The Milestones on my way towards FIRE

During my research into the FIRE Movement I found many different methods people suggested to track progress on the way to financial independence. One method which I really connected with, I have been using to plan and track my progress towards FI.

In my last post I covered how I created and follow a budget. One of the final comments I made was that I have reached a point of financial security where I have more than one year’s expenses saved/ invested. This is actually one of the milestones I am going to touch on in this article.

I would like to reiterate that I did not create this method, rather I discovered it during my research into the FIRE movement.

The 7 Milestones: What are they?

1) Clarity – Know how much you spend

This first Milestone is really designed to help you get an understanding of your Spending and saving habits by tracking your expenses and maybe even budgeting if you are up for it. This sets the foundation for the rest of the milestones.

The objective of this stage is to accurately calculate your Monthly expenses which will be used for the remaining steps.

*if you decide to budget, you should consider including all your expenses. The expenses should be broken down, even if only at a basic level to Needs and Wants [see "My First Steps Towards FIRE" for more on budgeting]

Once you have a strong understanding your spending habits and savings position you are ready to plan for the Second Milestone.

2) Self-sufficiency.

The second milestone is to become Self-sufficient. What does it mean to be self-sufficient? In simple terms spend less than you earn.

Being self-sufficient is being able to cover the essential expenses of your life with your take home salary. These include all your cost of living such as rent, food and insurances Etc.

If you currently have an income which covers these costs then you are already Self-sufficient (Congratulations).

If you have calculated your monthly expenses and it is higher than your take home income then you have some work to do. Places to start include:

• Reducing your needed expenses such as finding a cheaper place to rent or assessing your Utility providers to see if other suppliers may be offering more competitive rates.

• Cutting back on the unnecessary expenses such as eating out and buying coffee out every morning instead of making it at home.

• Cancelling old and un-used subscriptions and memberships.

• Another option may be finding a side hustle to increase your take home income. (Understandably for people already working full time this may be difficult and time consuming. But for the record, I am a big fan of using this step once you have reduced all the other expenses.)

Once you get to a position where your Income can comfortably cover your Main living expenses on a regular basis, you have become self-sufficient.

3) Breathing room

Once you are Self-sufficient you are now in a position to begin saving your first Nest Egg. A Nest Egg is a sum of money that has been saved specifically with a purpose in mind. This nest egg is dedicated to reaching a level of financial independence where you have ‘breathing room’ in case a sudden loss of income or emergency expense such as Car repair or hospital visit.

Many people in the FIRE movement agree that this is one of the key starting points for savings when working towards FIRE. However there are differing opinions over how much breathing room is needed. I found that on majority of forums and blogs, people suggested aiming for a nest egg of 3 to 6 months expenses.

Use the same number from your budgets monthly expenses and multiply it by the amount of ‘breathing room’ you want. (In months)

I personally felt that I wanted more breathing room which for me meant having a minimum of 6 months savings as a starting point. If for some reason I could not work, then having 6 months of my expenses covered really would put my mind to ease.

On the other hand some people I have discussed this with said they felt 3 months was sufficient and they had very good reasons for targeting that number as well. Some of these reasons included;

• Having a strong level of job security,

• The ability to work remotely, &

• One person who had started saving later in life and wanted to speed things up a little for themselves by not having to save the extra few months to start with. For him, hitting the mile stone earlier meant he could continue to the next stages sooner.

In reality there is no right or wrong between the two options. However you do need to be completely honest with yourself about your expenses and set a clear goal for your savings.

4) Stability

Step 4 is actually very similar to Step 3 with one added element. Once you have saved enough to be able to cover 6 months of expenses, your next milestone is to continue growing your Nest Egg to have 12 months’ worth of expenses through savings/investments. The key difference in this stage is that now that you have some breathing room in your savings, you can start putting your money to work for you, through investing.

Once you have reached 12 months of expenses saved through cash, investment or otherwise, you have reached a stable level of financial independence. [Well Done]

Some online forums discuss the idea of starting to invest your funds as early as possible (Way back in step 2 if you have the funds for it). There were several reason why I waited to begin investing my funds which included my age, my risk profile and the fact that I had a mortgage to consider. Everyone may draw their own line as to how much risk they are willing to take. Finally if you are someone with little or even no Prior financial commitments such as a mortgage, then you may be in a position to take larger risks at an earlier stage. This is up to you individually.

5) Last level of saving

Following on from the last few milestones, the next step is the last big step for hard savings. The goal of this stage is to have 2 years of expenses in savings/investments. During this stage you should be making regular contributions to your investment portfolio. Your Folio should be focused on income producing assets with the ability to re-invest dividends back into the market to start gaining the benefit of compounding interest.

Let's take a look at some numbers for a moment. If you have a monthly expense bill of $3,000 and you are able to achieve this level of financial independence you are looking at having $72,000 worth of savings. That’s a very impressive sum of money to have at your disposal.

6) Hitting your FIRE number

Now the hard work and heavy lifting is done its time to sit back and let the magic that is compounding interest really take its toll.

You should still be making regular contributions to your investment portfolio however the snowball should really be gaining some speed by now. At this stage you should be able to feel the financial stresses of your old life reducing as you work towards your FIRE number. (For those who are not familiar, at a very basic level, your FIRE number will be approximately around 25 times your yearly expenses)

Once you wealth has reached your target number then you are done. You have made it.

7) FIRE:

There is a general rule of Thumb discussed in the FIRE community online which talks about the 4 % rule.

This is the idea that your investments should be making at a minimum (after inflation) a rate of return of 4% which can be withdrawn to fund your early retirement indefinitely.

What an amazing concept that is. For the rest of your time you should be able to live off your nest egg and put your time towards things you love doing, whatever that may be.

Final Thoughts

I do have some issues with the above list of milestones which I think it’s important to consider if you choose to follow a similar planning pathway.

First, these milestones do not allow for growth of expenses as you get older, and as you may have more responsibilities. One example of this may be if you plan to start a family at any stage in the future. Are you currently single or in a committed relationship?

If you only base this on your first calculation of expenses when you are 18 then you may fall short in the end once your life is built.

How do I deal with these concerns;

a) I build some fat into my calculations for future expenses growth.

b) Every time I hit a milestone I go back over the last few steps and check that nothing has changed. If nothing has then great.

If I have had my expenses grow due to unforeseen reasons, then I recalculate and see how far back it sets me and continue from there.

Second, with these milestones it is almost impossible to put together a specific time line for how long each stage should take. Everyone will be different so it’s important to keep your goals in mind and be comfortable if things change to be able to adapt the plan without losing focus of the end game.

Personally I am still working through this list and if you have read my First posts you will know I still have some way to go. However I do really connect with these steps and have found it very helpful to break my big lifetime goal into more digestible pieces.

If this is something you have tried or if you are using a different method, leave a comment or get in touch, I would love to hear your thoughts

I also have a Calculator to help work through these Steps that I would be happy to share if you are interested.