Introduction to FI

FI or FIRE stands for Financial Independence/Financial Independence Retire Early.

The concept is spending less and saving more, investing the savings to create income to live on in the future.

One of the original bloggers in this space is Mr Money Mustache, in his post Shockingly Simple Math Behind Early Retirement he explains how easy it can be by spending less and investing to retire in under 10 years.

50% savings rate is the target for most FI people.

This seems huge compared to the 10% most average people save. Though it can be done by cutting a lot of the waste and unnecessary crap out of our first world lives.

Cost cutting ideas:

  • Cooking at home
  • Packing lunches for work
  • Buying cheap used cars opposed to loan or leasing new
  • Buying or renting affordable houses instead of million dollar mansions
  • Biking occasionally instead of driving car
  • Swapping Netflix for Foxtel
  • Optimizing mobile phone plans
  • Travel hacking holidays with points

The most common way the FI community invests is thru Index Funds.

Which is a fund that tracks a particular index such as Australian Stock Exchange 300 ( top 300 companies on the ASX) or S&P 500 (top 500 companies in the USA).

Some reasons why Index Investing is popular –

  • Management fees – which are extremely low (0.25%-0.03%) compared to active managers at (1%). This is because indexing doesn’t require a huge team of expert stock pickers to pick the next best stock, they simply follow the index they are tracking buying little pieces of all the companies inside it.
  • Diversified –  The index may hold 100’s or even 1000’s of companies reducing the risk of any one company going bankrupt.
  • Simple –  don’t need expert skills to pick the next big thing, can just buy and hold riding the index you are tracking long term growth upwards.

Indexing outperforming Active Management –

It has been proven that just simply tracking a diversified index can outperform active stock pickers when taking into account fees (not only do the stock pickers have to beat the index but they have to beat it by enough to cover their fees.) here is a link to Warren Buffett’s well known challenge to stock pickers to beat the S&P500 over 10 years.

In Australia there is other options for investments such as LICs (Listed Investment Company) which are similar in cost to Index Funds but use some what “passive” active management.

Some of the well known ones are long term buy and hold for Dividend Growth Investing opposed to trying to beat the index. Links to some LICs AFI & ARGO.

Depending on your strategy once your investments reach a either “4% rule” or dividend income meets your expenses you are at FI and could RE (Retire Early).

The 4% rule is a rough rule of thumb, based on a trinity study to see how long a portfolio would last without running out of money. More info can be found here. There are some potential issues with this option but I believe it does help give you a good starting point. More info here

More reading on FI can be found at links below –

Bogleheads Australia

Barefoot Investor

Aussie Firebug

Strong Money Australia

Vanguard Australia

USA based content

ChooseFI

Jim Collins Stock Series

Mr Money Mustache

Millennial Revolution

Share your favourite FI content in the comments below.

 

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