The Most Efficient Path To FIRE
There are many paths to FIRE, yet in my opinion, there are more efficient paths than others. I have found that the more efficient the approach I take the more effective and faster my progress to FIRE is. Now I get it maybe your goal is not to retire early. Yet financial independence is for everyone! This way you at least have the option of retiring early if you so choose to. Financial independence gives you simply the freedom of choice. Let’s talk about the most efficient path to FIRE.
I have found that the more efficient the approach I take the more effective and faster my progress to FIRE is.
When I think about an efficient path to FI/FIRE I think about the definition.
“achieving maximum productivity with minimum wasted effort or expense.”
I am not dogmatic about anyone’s approach to FIRE. That is not what this post is about. This post is simply my opinion on the most efficient path or steps taken. The path with the least wasted effort with the best results for most people. I wanted to create this as an easy-to-see approach for new followers to the FIRE movement. Think of Dave Ramsey’s Baby Steps but for the FI/FIRE folks.
Check out M1 Finance for their efficient fractional investing that lets you own great companies even if you only have 10$.
I truly believe the pursuit of financial independence is for everyone. The retirement early part is optional. This path allowed me to go from lost and unsure if I could ever retire to being able to hit FIRE in less than 10 years!
Budget And Emergency Fund
You can’t get off on the right foot if you have no idea where all your income goes to. Trust me I’m not one to say everyone should budget forever. Yet you must use a budget in the beginning so you can track your income and your expenses. If calling it a cash flow sheet sounds better go for it.
Need an easy-to-use budget? Well here is a post I did on budgets that includes a free template check it out here.
The purpose of this is to see where your income goes every month. After you know where the money goes now you know what your cash flow is. Your cash flow is the leftover money you have after all expenses. At this point, you can also start to look at cutting some expenses and increasing that cash flow.
Or what I like to say is grow the “gap”. The gap is the difference between your expenses and income. The larger the gap the more cash flow you have. The more cash flow you have the more flexibility you have in life.
By the way, I love using Personal Capital to track my investments and I am sure you will too!
After that, it’s time to start funding that emergency fund with the cash flow. How much should you have is really up to you. Many people recommend 3-6 months of cash in a high-interest savings account. Others will say you should have a full 12 months. I like to open this up as we are missing a few things here.
Types Of Emergency Funds
There are two types of emergency funds.
- Bare Bones
- Fully Funded
Bare Bones is just enough cash to cover must-haves. To me, that is shelter, water, electricity, food, and a vehicle. Fully Funded is going to cover all your normal day-to-day living. It’s important to understand that bare-bones or fully-funded emergency funds have nothing to do with the number of months it covers and everything to do with what it covers.
Make sure you create an emergency fund large enough to help you sleep at night. Once the emergency fund is in place now you can start to tackle that high-interest debt. Let’s discuss debt now that the budget and emergency fund are covered.
Pay Down High-Interest Debt
We all know we should pay down debt. I have seen some people super against debt and will tell you all your cash flow should go toward debt. Others say take on as much debt as you can to leverage your way to financial freedom. Who the hell is right in this scenario?
The arguable truth is neither of these mindsets is right nor wrong depending on the individual’s situation.
Debt can be both a tool and a dagger in disguise. If misused it will stab you and make you bleed out. If used properly it can aid you in life. For me, I’m in the see what the math says camp. You see I have learned letting emotions guide my finances usually ends in the least efficient path. You either let fear guide you and you make poor choices or you let greed guide you and you make poor choices. Not all of these choices end in you failing the test. Sometimes it just gives you the passing grade of a C. I want everyone to get that A+ on their financial plan!
I want everyone to get that A+ on their financial plan!
High-interest debt to me is classified as anything with a 7% or higher rate. To me, if your debt has a 7% rate or higher it’s worth paying it down vs investing that cash flow. If it is lower than 7% to me I make the regular payments and invest the rest. But why the “dafuq” would you not pay down that debt as fast as possible? Let’s look into that exact question next.
Let Low-Interest Debt Ride
My over-simplified answer is the math says so! The average return of the market over the last 100 years is 10%. Basic math shows us that 10% is greater than 6%. My strategy is to build more freedom, less risk, and more opportunities. This strategy by nature gets me to follow the math and that leads me to more freedom, less risk, and more opportunities.
This strategy by nature gets me to follow the math and that leads me to more freedom, less risk, and more opportunities
Invest For Freedom
Finally, you invest your cash flow for freedom. What I mean by investing is utilizing investment vehicles like a 401K, TSP, Roth IRA, IRA, 403 (b), SEP IRA, Taxable account, Solo 401K and you get the idea. Utilize the tax-efficient accounts first after which utilize a taxable account. I see no reason to use a taxable account first. People use a taxable account first only when they let emotions guide their finances the math shows tax-efficient accounts win.
I see no reason to use a taxable account first. People use a taxable account first only when they let emotions guide their finances the math shows tax-efficient accounts win.
There are many asset allocations and strategies you can utilize at this point. I believe the most efficient method is one that is Simple, Fun, and Profitable. I like the phrase keep it stupid simple or KISS. We use that phrase often in the Marine Corps. Don’t overcomplicate a strategy as the result will be more resistance and less efficiency.
I like to use the J.L. Collins method of the total stock market. Yes, I love and think using VTSAX is the efficient path to investing in your freedom. Check out his book Simple Path To Wealth.
The sooner you start investing the faster you will create freedom. Time + Investing = Wealth is the simple formula for how to become a millionaire. Simple does not mean easy though.
Time + Investing = Wealth
This is because of the power of compounding. It’s a wild thing and works on your side to help you achieve freedom with your time, money, and energy.
Final Thoughts
There are many roads to Dublin yet some paths are quicker with fewer bumps in the road. To me, this is the most efficient path to FIRE. I wish I had this simple path in my early 20s I would have well over a million in liquid assets at this point in my life. My opinion is I let math guide me as it gives me more opportunities and freedom while being efficient and effective.
Choose your path wisely on the journey to FIRE. What are your path and takeaways?
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