Everyone starts from vastly different places. Whether you’re over your head in debt, or well on your way to reaching Financial Independence it’s important to understand where you’re at on your financial journey.
Over the years, you will save and your investments will grow. You’ll continue to progress through various stages. Everyone has their own journey with different incomes and expenses.
The “Baby Steps”
Dave Ramsey is very well known for his 7 Baby Steps. His advice is often referred to as a solid place to start. And we agree with that – mostly.
The baby steps are a great place to gain some financial knowledge, get your debt under control and build a solid foundation.
Baby Step #1
Save a “starter” emergency fund. Dave recommends $1,000 for this step.
We suggest at least $3,000 or one month’s worth of expenses, whichever is greater.
Baby Step #2
Pay off all of your debt (except your home). Dave recommends using the Debt Snowball method, which suggests paying the smallest debts first and building up a “snowball” to pay off the next debt(s). From a mathematical standpoint, this is poor advice.
We suggest using the avalanche method, which means paying off the highest interest rate loan first.
We go over this more in Chapter 8 of our FIRE Guide.
Baby Step #3
Once you’ve tackled all of your debt in Baby Step #2, work on building up 3-6 months’ worth of expenses in a fully-funded emergency fund.
We go into a lot more detail and share our thoughts on this in Chapter 7 of our FIRE Guide.
Baby Step #4
Invest 15% of your income for retirement.
This is where some people will argue that you should be investing a lot more than 15%, and we agree. You will earn a lot more on your investments than you will “lose” compared to your mortgage rate.
Baby Step #5
Save for your Children’s College Fund
That is if you have/are planning to have children. And this one is totally optional because not everyone feels this is a necessity.
We started a 529 plan and we don’t even have children yet.
Baby Step #6
Pay off your Mortgage
What a weight off your shoulders, having a paid-off house!
That sounds wonderful, but we’re choosing to invest more instead of pay down our mortgage because mathematically it makes more sense.
Baby Step #7
Build Wealth & Give
The “legacy” step, is intended to set up your inheritances and allow you to give generously. We see this essentially as being Financially Independent.
How to Calculate Your Net Worth
Assets – Liabilities = Net Worth
A very basic example of calculating net worth:
Let’s say you have 50k in retirement accounts, a house worth 150k, and 25k in the bank. That means your assets total 225k.
If you have a mortgage balance remaining of 75k and an auto loan of 10k your liabilities total 85k:
225k – 85k = 140k Net Worth
You can also use a spreadsheet or online resources to track your net worth. We use a free online resource, Empower to track our net worth.
Check out how you compare in net worth to your age group.
The “FIRE” Milestones – Upgraded Baby Steps
Because the journey to FIRE can several years or for most, decades, it’s nice to be able to hit goals along the way. Joel over at FI180 has a list that he calls The Milestones of FI
Please keep in mind that if you’re just starting out, you likely aren’t at any of these milestones, and it might be several years before you are. But remember they’re just milestones to work towards!
Coast FI
The total amount invested in your retirement accounts would grow from interest alone, to allow you to reach FI at normal retirement age (65). This implies you wouldn’t have to contribute to them ever again, but still have a sound retirement.
*This one isn’t in Joel’s milestones, but is another term frequently thrown around the FIRE community*
We reached this milestone when we were both just 24.
>>> Read more about CoastFI
FU Money
If you would be able to survive for a year or two without your job, this is you!
This stage gives you the flexibility to only work at a job you enjoy. (You could quite literally say FU to a toxic work environment, if presented one)
>>> Read more about FU Money
Half FI
Divide your FI number by 2 – If you have that much saved, you’re in this phase!
Lean FI
This phase involves being able to cover all of your necessary expenses (food, shelter, utilities, etc) indefinitely.
>>> Read more about Lean FI
Flex FI
You’re in this phase if you’ve saved 20 X your annual expenses. You’re almost there!
FI
You’ve reached financial independence with 25 X your annual expenses saved. Congratulations! Based on the 4% rule, the odds are in your favor for retiring and living happily ever after.
>>> Read more about normal FI
Fat FI
Want to keep going? At this level, you’ve achieved 30 X+ your annual expenses or more! You have the flexibility to cover all of your wants and needs. Your lower withdrawal rate gives you an excellent change for success.
Everyone starts from vastly different places. Whether you’re in over your head in debt, or well on your way to reaching Financial Independence it’s important to understand where you’re at on your financial journey.
Over the years, you will save and your investments will grow. You’ll continue to progress through various stages. Everyone has their own journey with different incomes and expenses.
>>> Read more about Fat FI
Want to See Your FIRE Progress?
Check out the FIRE Calculator we built here!