Author Topic: What are the "Basic Steps" toward financial independence?  (Read 5278 times)

MitchCraft

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What are the "Basic Steps" toward financial independence?
« on: November 25, 2015, 06:46:04 PM »
Hey all, pretty new to the forums, but been a reader of the blog for maybe a year-ish.

I am trying to grasp the basic concepts of FIRE, so I can make a plan to achieve this.  First off, right now my partner and I's primary goal is paying off our credit card debt/student loans, which tally about $20k total between us.  We are in a weird transitional state of life with our income, as she recently quit her full time office job to work part time at a coffee shop, and I started my own business about a month ago, so no real idea how much money I will be making.  We have VERY low cost of living between the two of us.  In total, we can both live on about $1,000/month if this is just making minimum payments on CC debt (which we are doing now because income is LOW).  We live a very simple lifestyle in general, and paying off our debt will be an enormous weight off our shoulders when that happens. 

Since our focus now is solely paying off CC/student loan debt, that is where all of our energy is.  My question lies more around what would we do AFTER all the student loans/CC debt is paid off?? 

We are both admittedly ignorant of all things retirement and investing.  And to be honest, whenever I read about it on this blog and in these forums, I kind of glaze over it.  Basically I think I need a Mustachian guideline of what to do with our money assuming all debt is paid in full.  I need someone to kindly hold my hand down this learning pathway.

1. Cut down all unnecessary fancypants spending
2. Put all income towards our debt emergency
3. Once all debt is paid off, keep ridiculous luxury spending in check
4. Invest money in super savvy Mustachian money growing system???  <---- Part we need help on
5.....
6.....

Exflyboy

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Re: What are the "Basic Steps" toward financial independence?
« Reply #1 on: November 25, 2015, 07:01:02 PM »
You really need to go to the MMM site (click banner above) and start reading. This will not only give you all the steps it will tell you how you can calculate on average how long FI will take etc etc, plus a ton of money saving ideas.

The basic steps are..

1) Spend less than you make (means maximize income and minimize spending)
2) Get an emergency fund in place.
3) Pay off you debt emergency starting with the highest interest rate loans first. This usually means CCd's
4) Consider paying off the house only if the Mortgage interest rate is above about 5% (This is not a hard an fast rule and is subject to a lot of debate.
5) Stash most (all) of your savings in stock ETF's in tax advantaged accounts (401k's, IRA's) Max these out if possible.
6) Save even more in Stock ETF's in ROTH IRA's and then taxable accounts.
7) as you get to within a year or two of RE, move some of the Stock ETF's into Bonds and cash (75/20/5).. is a good balance for a long RE timeframe.
8) Keep saving and pray for a hard recession.. then save even more.

If you can make a 50% savings rate you can be done in about 17 years on average. Don't finance cars on the way, save up and pay cash.. NEVER lease!!!

Fix everything that needs fixing yourself.

arebelspy

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Re: What are the &quot;Basic Steps&quot; toward financial independence?
« Reply #2 on: November 25, 2015, 07:25:42 PM »

1. Cut down all unnecessary fancypants spending
2. Put all income towards our debt emergency
3. Once all debt is paid off, keep ridiculous luxury spending in check
4. Invest money in super savvy Mustachian money growing system???  <---- Part we need help on
5.....
6.....

For step 4, read all this and implement (it's super easy): http://jlcollinsnh.com/stock-series

Step 5: save up 25x your annual expenses
Step 6: FIRE!
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

mandy_2002

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Re: What are the "Basic Steps" toward financial independence?
« Reply #3 on: November 25, 2015, 10:03:14 PM »

1) Spend less than you make (means maximize income and minimize spending)
2) Get an emergency fund in place.

Just to highlight this little step that was added by EFB-have an emergency fund. So many good plans can be derailed by emergencies. I can't tell you whether this should be  $1000 or $5000, but have something stashed away so that if your tires give our or your heater needs replacement, you can deal with it.

seattlecyclone

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Re: What are the "Basic Steps" toward financial independence?
« Reply #4 on: November 25, 2015, 11:00:58 PM »
I would recommend paying off any credit card debt before building an emergency fund. If no emergency happens, you'll be better off without an emergency fund because you'll pay off your credit card faster and pay less interest on that loan. This much is obvious. What if an emergency does happen? Easy: you charge it to the credit card. Paying off your credit card slower to build an emergency fund so that you don't have to charge unexpected expenses to your credit card is no better than paying off the credit card and then charging some unexpected expenses to it if they do happen.

Once you've moved on from paying off your 15% credit card debt to your 6% student loans, you should probably have a small emergency fund. Paying off a lower-rate loan slower to avoid the need to take on higher rate debt is a much better idea than paying off a high-rate loan slowly to avoid taking on more high-rate debt.

marty998

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Re: What are the "Basic Steps" toward financial independence?
« Reply #5 on: November 26, 2015, 12:56:56 AM »
Work, Save, Invest.

Nuttin' to it

Kouhri

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Re: What are the "Basic Steps" toward financial independence?
« Reply #6 on: November 26, 2015, 04:04:04 AM »
... And to be honest, whenever I read about it on this blog and in these forums, I kind of glaze over it.  Basically I think I need a Mustachian guideline of what to do with our money assuming all debt is paid in full.  I need someone to kindly hold my hand down this learning pathway. ....

I wonder from this if maybe your just not ready to think about investing yet. Your current focus (as it should be) is digging yourself out of debt. There is really an amazing wealth of information on this site both in the blog and on the forums. If you manage to read through even a fraction of what's on here without "glazing over" you'll be at a great starting point. Personally I found going back to the blog posts on investing related stuff (which honestly went over my head the first time) really made the whole investing thing and FIRE mindset click. Maybe once your hair is no longer on fire the MMM FIRE thing will just make more sense? Anyway I'm rambling.

Don't worry. I'm sure if you can be badass enough to eliminate your  debt and give yourself a clean slate you'll be able to dig in and get educated about where to stash all this spare income you'll suddenly have. Good luck.

Cornbread OMalley

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Re: What are the "Basic Steps" toward financial independence?
« Reply #7 on: November 27, 2015, 07:54:40 PM »
MitchCraft, if you follow the advice that is currently on your thread you will do very well.

Faraday

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Re: What are the "Basic Steps" toward financial independence?
« Reply #8 on: November 27, 2015, 08:32:04 PM »
.....
4. Invest money in super savvy Mustachian money growing system???  <---- Part we need help on

https://www.bogleheads.org/forum/viewtopic.php?f=1&t=6211

Especially the part at the very bottom. Some things won't apply to you but in general, this is The Way.

MDM

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Re: What are the "Basic Steps" toward financial independence?
« Reply #9 on: November 28, 2015, 12:42:53 PM »
.....
4. Invest money in super savvy Mustachian money growing system???  <---- Part we need help on

https://www.bogleheads.org/forum/viewtopic.php?f=1&t=6211

Especially the part at the very bottom. Some things won't apply to you but in general, this is The Way.

No real quarrels with the Bogleheads list.  Below is an expanded version that accommodates a few "but what about ____?" questions.

In the lists below, thinking "first your 457 (if you have one), then your 401k and/or 403b" wherever "401k" appears is likely correct.   
Differences of a few tenths of a percent are not important when applicable for only a few years (in other words, these are guidelines not rules).   
   
WHAT   
0. Establish an emergency fund to your satisfaction   
1. Contribute to 401k up to any company match   
2. Pay off any debts with interest rates ~5% or more above the 10-year Treasury note yield.   
3. Max HSA    
4. Max Traditional IRA or Roth (or backdoor Roth) based on income level   
5. Max 401k (if 401k fees are lower than available in an IRA, or if you need the 401k deduction to be eligible for a tIRA, swap #4 and #5)   
6. Fund mega backdoor Roth if applicable   
7. Pay off any debts with interest rates ~3% or more above the 10-year Treasury note yield.   
8. Invest in a taxable account with any extra.   
   
WHY   
0. Give yourself at least enough buffer to avoid worries about bouncing checks   
1. Company match rates are likely the highest percent return you can get on your money   
2. When the guaranteed return is this high, take it.   
3. HSA funds are totally tax free when used for medical expenses, making the HSA better than either traditional or Roth IRAs.   
4. Rule of thumb: traditional if current marginal rate is 25% or higher; Roth if 10% or lower; flip a coin in between (or see   
   http://forum.mrmoneymustache.com/investor-alley/deciding-between-roth-and-traditional-ira-based-on-marginal-tax-rate/
   if you want even more details on that topic).  See also
   http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-overwhelming-student-loan-debt-how-would-you-get-started/msg868845/#msg868845
   and other posts in that thread about exceptions to the rule.
5. See #4 for choice of traditional or Roth for 401k   
6. Applicability depends on the rules for the specific 401k   
7. Again, take the risk-free return if high enough   
8. Because earnings, even if taxed, are beneficial   
   
The emergency fund is your "no risk" money.  You might consider one of these online banks: http://www.magnifymoney.com/blog/earning-interest/best-online-savings-accounts275921001   
      
If your 401k options are poor (i.e., high fund fees) you can check http://forum.mrmoneymustache.com/investor-alley/to-401k-or-not-to-401k-that-is-the-question-43459/ for some thoughts on "how high is too high?"   
   
See http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html for some data on historical returns.