Social Media are awash these days with this new trend called
FIRE (acronym for Financial Independence Retire Early) movement in many parts of the northern hemisphere.
The first part is a real gem, even if you have decided to ignore the second part and go the whole nine yards and retire at the right legal (stipulated) age.
Financial independence is something that can only be achieved with patience and discipline than knowing all the theories of investing etc.
The theories will not take you anywhere but patience and discipline will.
The best way to have the financial discipline is to first identify;
1. From where the money comes,
2. Where it goes.
Let’s assume that you land on your first job in the city, just after your high school at the age of 18.
This employment will pay
X amount every month as your remuneration,
Now, the source of income is known and how much amount would be is no secret too.
Let’s get into the second part now of identifying where it would finally end up.
To determine this, one needs to record all expenses for a couple of months and then only a proper budget can be prepared based on averages worked out on the collected data over a period of three or more month.
This is the very reason why I mentioned that patience and discipline are some of the cornerstones of your ultimate success.
The spending can be categorized into many subheadings,
1. Rent,
2. Food,
3. Clothing & Accessories,
4. Conveyance,
5. Obligatory & Emergencies,
6. Entertainment,
7. Medical,
8. Others.
Let’s say the total sum of all the above expenses amount is
Y. If the
X factor is greater than
Y, only then you would have a saving.
This amount remains as the saving can be called the
Z factor or real saving.
X > Y
X – Y = + Z
But if the Y factor is greater than X, then you will be in debt.
X < Y
X – Y = - Z
Here the Z factor will be a minus figure, which is a
RED FLAG situation.
If the situation is having a
–Z figure, then you need to constantly borrow funds and that would not a healthy sign.
Some of the Headings above are having a fixed amount and some others can be adjusted if closer scrutiny of the spending in the last few months is carried out.
The spending under headings such as Food, Clothing, Conveyances, entertainment & Others can be revisited and see where meaningful adjustments can be made to bridge the gap and bring Y figure at least equals to X or in other words to bring the Z factor equals to Zero in value.
X – Y = Z = 0
But having a
Z factor equals to Zero value is of no use anyone.
What one must try to do is to make the
Z factor have a positive number figure in the end.
This is one part of the discipline requires to achieve the first part of the
F.I.R.E. trend.
Let’s assume that you have managed to achieve a consistent Plus Z factor in your monthly balance sheet.
Once you identify this
+ Z factor clearly, what you need do it to ask your banker to transfer at least
75% of the Z factor amount to another account by way of a Standing Order every month.
If this figure can be somewhere around
10% of you
X factor, then it will be a very good effort.
The execution date of the standing order given should be synchronized with the date you will get your
X factor into your general account to avoid any banking mishaps and cancellation of the given standing order or roll into some form of debt.
This way you will not be touching the entire saving and leaving
25% of it to cover if any unforeseen spending that would drop from above and out of the blue.
The next part is the interesting part.
Initially, 75% of the Z factor may look like a very small and insignificant but a few months down the line, it would not be a bad and or insignificant amount with the accumulation of both funds received in and the interest accrued for the total sum.
However, one should be mindful of the fact that the interest rates paid by the banks are directly related to the country’s inflationary figures.
Therefore keeping money in banks and see it grows will only give you a pseudo satisfaction as the inflationary factors have already eaten into it and the real value of the sum saved is much lesser.
Because of this very fact, keeping money in banks in any form will not help you to achieve financial independence in the end.
It will only give you more liquidity.
Then how to achieve financial independence by saving?
No doubt the saving habit is the very first step in that long journey but putting these savings to earn more by beating the inflationary factors is the only way out.
There are a few good ways to do that.
1. Startup a business,
2. Invest in property,
3. Invest in Stocks are a few of those among many more such options.
However, to start up a business fresh from the scratch and or to invest in property may need large sums of money for someone who just landed in his or her first-ever real job.
My recommendation is to invest in the stock market by selecting good shares.
Even today, some fundamentally sound shares can be purchased for less than Rupees 20 a share.
The reason why shares instead of others are recommended is it requires less start-up capital and less monitoring too.
It is proven beyond any reasonable doubts that investing in fundamentally good shares are the best form of investment in any parts of the world, not necessarily in the northern hemisphere alone.
Putting money in good share can give you two forms of growth.
The first one is by receiving regular and consistent dividend payments and the other is by the share gaining more value over the years or capital gain.
One way of achieving success is to divert the dividend payments back into the market again so your portfolio will get bigger in size as well as in value over the years.
If this pattern is followed like a prayer, it will give you success.
Whenever you follow the ritual, there will be some the residual amount left in your bank accounts and that too would come very handy when it comes to liquidity.
Once you are settled into following this pattern, a few fine-tuning can be done to increase the gross effect.
One way is to increase the
Z factor.
You hardly have any control over your
X factor.
But some adjustments can be made wherever and whenever it is possible to bring down the
Y factor, whereby increase the
Z factor in the end, which is our main goal in the whole exercise.
To do that one needs to revisit regularly to the expenditure and see where adjustments can be made to increase the net gain.
1.
Rent, a. Move into a less expensive location without unduly compromising the convenience, safety, security & well being,
b. Downsizing,
2. Food,
a. Buy locally and seasonal food whenever possible,
b. Buy items with longer shelf life in big quantities when on promotional sales,
3. Clothing & Accessories,
a. Invest in lasting and quality ones,
b. Buy off seasonal items on promotional sales,
c. Stop Being Brand Loyal fanatic,
4. Conveyance,
a. Use of public transport,
b. Buy season tickets,
5. Obligatory & Emergencies,
6. Entertainment,
a. Watching a movie or a sports event on TV at home is much cheaper than going to the theatre or to the actual arena,
b. Cancel unwanted subscriptions,
c. Lending a book from the library is much cheaper than buying it outright,
7. Medical,
a. Shift to generic versions whenever possible then go for ones with a brand name and patents
8. Others.
a. Buy only essentials and durables,
i. Look for promotional sales to buy such items,
b. Do not hoard things but use up before the next shopping visit,
c. Go shopping with a List to avoid impulsively buying
d. Do not invest in things that you will only be using once or twice a year or even lesser than that,
e. Do it yourself than seeking professional services, whenever possible,
f. Associate more likeminded people,
i. This in no way to suggest that you ditch your friends but high spenders & Brand Slaves can easily detract you in your embarked journey,
Being frugal is one’s spending will not make anyone a fool but spending as if no tomorrow on useless things with your own and borrowed the money will surely get you there sooner than you think.
Regularly revisiting and checking your financial situation is a habit that has cultivated.
If the revisit can be done every month, that would be fabulous but even if it can be done in every three or six months too are not so bad choices either.
It all depends on how complicated your financial involvements are and keeping an easily accessible record is the best way.
Microsoft Excel is a great tool to use in this respect.
The target is to get your savings to create more wealth by beating the inflationary factors.
Since you already have a steady income (X factor) let your savings improve your passive income, while even when you are asleep.
One other key to success is to depend solely on X factor alone without touching your savings until you have reached your targeted level.
Another way to increase your X factor is to take up another side hustle.
If you are good in any subject, handicraft or anything that can be taught or sold to others at a fee during your free time is something to be considered.
In this digital age, your opportunities are as only limited to your imagination.
Further, as you get used to following the pattern ritualistically, you will get more confidence and once you have that level of confidence, you can easily increase the percentages mentioned in the diagram above.
75% of Z can easily be increased to 90% and 90% of withdrawal can be increased even up to 100%.
That too will significantly contribute to the overall savings picture in the end.
Let it grow to a level that you want it to grow on its own so that you can think of the second part of the F.I.R.E. and that is to Retire Early.
I think most people have misunderstood the second part of the movement.
Many think that this means to leave one’s employment abruptly, stay at home and live on your savings for the rest of your life.
Just assume that you have decided abruptly to leave your employment and stay at home full time.
Soon you will be bored with that choice too and that can lead to many other hidden issues.
What the Financial Independence will give you is the freedom of getting out of the Rat Race and pursues something else that you want to do.
I was in aviation and as everyone knows that is not only a very glamorous but extremely exciting field too to be in.
I loved my career and gave four decades of my time to aviation.
Retiring early was never an option for me, not because of my finances but I loved the work I did.
So I decided to walk the whole Nine Yards and retire.
I am sure there are many more like me who love their work but many others do not love their work but carry on doing it for various reasons and the most important thing is the worry about their finances if decided to call it a day abruptly.
Therefore getting financial independence early will give you so much more options in life such as;
1. Pursue another line of work that will give you more joy but lesser or even no income at all,
2. Work according to your schedules and terms,
3. Take a break whenever seems needed,
4. Travel and explore,
The list of thing one can do with having the Financial Independence is endless.
However, be mindful that getting from Zero to 100 figure will never be one straight line.
Having the patience and required discipline will help you to navigate and overcome the pitfalls and bumps in this not so straight line but enjoyable journey in the end.
The FIRE movement is not only for those who are 18 and in their employment but others too can reap benefits by following the path.
However, the younger one starts is far better than later in life.
This is not a Sprint but a Marathon.
