Our path to FIRE

Alright, here we go! Finally, a blog post explaining what this blog is all about after only a year starting it. That makes sense, doesn't it? Nope

Here's the true story of what happened in that Summer of 2020. Thanks to a colleague of mine, the magical world of FIRE was brought to my attention. Next thing I knew I was down the rabbit hole of multiple blogs and videos. What this showed me was that it was possible to generate a solid income without too much effort. So solid, in fact, that it would make me financially independent. This would mean that I wouldn't need anyone else to generate this income. This independence could in turn grant the option to retire early.

And so we have come full circle to FIRE: Financial Independence, Retire Early!

I know what you're thinking. It sounds like one of those snake oil investment gurus trying to sell a 'get rich quick'-scheme. However, this experience was quite different.

The boring silver bullet

'So, what is this magical solution?', I hear you ask. Well, it's quite simple and boring: Investments. I'm not talking about trading company stocks as a day job. Not only does that take a lot of time, but it's also risky. What I'll be using are index trackers, also known as ETFs. I'll be going more in-depth on this topic in a future blog but here is a basic explanation. what you invest in with an ETF is an entire index. An index is nothing more than a list of companies with a number reflecting their value. They are usually limited to companies within in certain a market. A famous example is the Dow Jones which is based on 30 big companies in the U.S. Investing in an ETFs will result in your investments following the trend of that market. There are ETFs for all kinds of markets. They range from very specific markets all the way up to the entire world economy.

The great thing about investing in ETFs is that over long periods of time markets have always increased in value. Of course, it's not as simple as invest your money in an ETF and you're set for life. The downside of ETFs is that they have a "low" return. This means that, to be able to become financially independent through ETFs, you will need to have a big pool of money to cover your day-to-day costs.

To generate this big pool of money we are going to use two things: Compound interest and Time. Compound interest means that you get interest on your interest.

I'll give you an example to explain what I'm talking about. You have a savings account with 10% interest every year. You deposit €100,- when you open your account. After the first year you will receive €10,- and you'll have €110,- in your account After the second year you will receive €11,- and you'll have €121,- in your account That €1,- extra the 2nd year was your compounding interest. It was earned on interest you gained the previous year. If we take this up to 10 years you get the following:

As you can see, the initial value has more than doubled within eight years without actually putting in extra money. Now this would've happened without compounding interest but at a lot slower pace, because without compounding interest it would've taken exactly 10 years to reach 200 euros. Adding more time greatly increases the power of compounding interest since it grows exponentially.

So basically the "silver bullet" comes down to patience and dedication.

Setting a timeline

So how much money would I actually need to retire? Of course, we all have different incomes and expenses. And to make things worse, there is also inflation to keep into account. So what I need right now might not be enough in 10 years. You can calculate all these values for yourself based on historic averages but it will always be an estimation. I made these calculations in the past and, although it gave an idea of what we need, it didn't really help us much. What is more important is your savings rate. Simply put, this is the percentage of your income you use for investments.

The great thing about savings rate is that it doesn't focus on investing but also your expenses. Because changing your lifestyle and spending less has a more profound impact on your savings rate. Based on your savings rate you can calculate how fast you can retire. You can read more about savings rate on Mr money mustache his blog on the math of early retirement

Determining our savings rate for our goals

Now then how does all this apply for my situation? It's actually quite simple. My goal is for our household to be financially independent when I'm 45 years old. All we need to do determine what savings rate we would need to maintain to get there.

For this we'll be using the calculator mentioned in Mr Money Mustache's blog. I fill in our annual income and set the annual savings to zero since it's not necessary to determine a goal savings rate. Seeing as our portfolio is not big enough to be of influence I set it on zero as well. What results is a graph where the number of years until possible retirement are correlated against savings rate. I have 13 years to go until I'm 45 years old. If we can manage a savings rate of 58% then we will achieve our goal in 13.2 years. With a savings rate of 60% this will even reach it in 12.4 years. More than half a year before our desired date! A savings rate of 60% is massive and will be quite a challenge to achieve. It will take both a lot of work to increase our income and reducing our costs of living.

I will soon post a retrospective on 2021 where I will cover my first investments in ETFs and my household's average savings rate of 2021.

So long and thanks for all the reads - Mr Sound