Before we even start our financial journey, I believe the most important thing that we need to define is why are we embarking on this journey in the first place. Without a set goal/mission statement, you are setting up yourself for failure in this journey. It is like going on a journey to the depth of the mountain with a piece of map (budgeting/planning) but without taking a compass (the ‘why‘) with you. Given the arduous journey you are about to embark, without the compass you needed to re-calibrate yourself and put yourself in the right path when you get sidetracked along the way, it would be easy to get lost along the way before you even realise it.
Now, the formula is quite simple:
- Understand the level of sustainable income required to sustain your lifestyle
- Work towards the required level of capital required to produce that income to be financially independent (most common method is by applying the rule of 4%). To get there faster, you can do this by improving your savings rate and/or earnings and letting the power of compounding do its magic – I am not going to rewrite this part as there are already a lot of resources on this topic. Read this blog here for more information (this blog has certainly influenced me in a big way!)
- Review your journey regularly, optimise your processes, rinse and repeat along the way
That’s it! Let’s now start with the most important bit first…
Find Your Why
Everyone whom I have talked to who embarked on this journey have varying reasons and motives of why they started this journey in the first place. I want to travel the world… I want to spend more time with my kids/family… I have enough of the 9-5 rat race… (click here to find mine)
Whatever it is, I would recommend you to dig deep and write this down in a piece of paper. Ideally, a diary would works best. Display your mission statement, bold and loud, on the very first page while diarising your journey. More importantly, do not let it sit hidden in your cupboard collecting dust, make an effort to regularly review it on a weekly basis or at the very least on a monthly basis. The point of this exercise is to have a point of reference whenever you feel lost or when the going gets tough – I believe this is popularly known as ‘affirmation’ exercise in the self-help world. Personally, whenever I am about to get distracted or faced an unexpected hurdle from reaching my set goals, referring back to my mission statements allowed me to dig deep within to find that motivation to set me back in the right course by remembering what I am fighting for every single time.
Define Your Goal
Now that you already have a map and a compass with you, you are ready to set your travel plan. This is where you need to start defining achievable short-term goals and long-term goals. Start small with your short-term goals and begin with the end in mind for your long-term goals. I think one of the biggest misconceptions with all of this FIRE/FIOR movement is that you have to pinch every single bloody penny that you earn. Yes, if you can increase your savings rate or earn more, you would get to your destination much faster. But, whatever it is, make sure you are taking the sustainable route.
What I mean by this?
Probably one of the classic advise in the community is to cut out unnecessary spending such as cutting down on takeaway coffees or stop having your smashed avo’ (fancy brunch at your local hipster joint for you non-Australian readers) every weekend – most likely followed up by calculation on the effect of your finances if you compound those spending instead having it returning ‘x%’ over ‘y’ amount of years. Now, there is nothing wrong at all with those kind of advice and in fact mathematically, it makes a lot of sense.
However, in making lifestyle adjustments, do not do things that completely take the joy out of life or soon you would feel so miserable that you might just pull the plug and quit the journey altogether. Rather, you should always think big picture stuff. Focus on the big items!
Do you really need to rent that fancy studio apartment? Or buy that new car while drowning yourself in further debt? Or take that personal unsecured loans to splurge on a luxurious European gateway?… Ok I’ll stop here. I guess you get the picture by now!
There are a lot of big item tickets that you could definitely trim from your list and it would make a huge difference comparing to cutting those coffees/brunches completely from your life. Spending to live a life you can enjoy is not a sin, but unnecessary spending is what you should avoid at all costs.
Now this might seem like a chore, but I can’t stress enough the importance of tracking your spending and review them from time to time. These days and age, you really have no excuse of not doing this given that you can pretty much link your debit/credit card, including your bank accounts, to an application without the need for manual data entry and most would have algorithms smart enough to automatically recognise and categorise your regular spending accordingly. I personally use an app called PocketBook which is a cloud based platform and I can access it via my computer/phone anytime so that I can track my spending on a real-time basis and it’s FREE!
Once you get this out of the way and start to understand yourself better, it is now time to start defining your long-term goals.
Set Your Destination
Long term: Eliminate waste/spending I did not need
You know where you wanted to go and there are multiple paths to get to your destination. One of the routes happen to be the shortest but has the roughest terrain to which you are not equipped to tackle. Do NOT even entertain this idea. Always choose the most sustainable route and do not be afraid to alter your route along the way if required/possible, after all you have not forgotten to bring your map and compass with you, which already put you in a decent situation to succeed. Think of the short-term goals you defined earlier to be subset of goals with a mission to reach a bigger long term goals. This is probably the most sustainable way to do so.
Long term: Minimise waste/spending I did not need
- Take time to cook my own meal (not only cheaper, but much healthier too!)
- Minimise redundant spending (having Netflix/Stan/Foxtel accounts at the same time – do you really have the time to watch them all? Stick what you actually make the most out of!)
- Don’t be afraid to spend on quality products for necessity you can’t do without (for example work shoes, don’t hesitate to spend a bit more for a pair of shoe that will last for a long time. e.g. spending A$300 lasting few years vs spending A$100 lasting 6 months)
- you get the pictures now… I hope?
Now that you have done all your trip preparations (or as much as you can), it’s time to take the first step, no matter how small your step is, as long as you keep moving forward, that is all that matter. This journey is not a sprint, rather a marathon (as cliche as it sounds). Good luck!