Today’s guest post is written by Chrissy Kay. She blogs at Eat Sleep Breathe FI and podcasts at Explore FI Canada. Chrissy is passionate about sharing her FI* and personal finance knowledge. In this post, she lists some easy, actionable ways to get your FI journey started.
As many of you know, I’m not a huge fan of the FIRE movement (financial independence, retire early). However, she focuses on the FI part which is about freedom, security, and options—it does not have to include retirement! Now that’s something I can get behind.
Are you new to FI, and overwhelmed by everything you need to learn and do? I’ve been there, and I know that feeling. When it comes your finances, it can take some time to gain confidence, but all it really takes is four steps to financial independence.
Step 1: Calculate your FI number
Before you begin your FI journey, you’ll first need to figure out your FI number. This is the amount you’ll need in investments to become financially independent.
Your FI number is important because it gives you a target to aim for. It’ll help you track your progress and stay motivated. Thankfully, there’s an easy way to calculate it:
Your annual spending x 25 = Your FI number
- $40,000 annual spending x 25 = $1,000,000 FI number
- $60,000 annual spending x 25 = $1,500,000 FI number
- $80,000 annual spending x 25 = $2,000,000 FI number
It’s really that easy! To figure out your own FI number, follow the action plan below.
The 25x calculation is based on the 4% rule*, which states: if you withdraw 4% per year from your investments, you’re unlikely to run out of money. Mathematically, 25 is the inverse of 4%. So, the 25x calculation is how much you need invested to cover your annual living expenses—using a 4% withdrawal rate.
- Gather your last 12 months of bank and credit card statements
- Add up your spending
- Multiply that number by 25—that’s your FI number
Note: As you advance in your FI journey, you’ll learn there’s a little more nuance to the 25x calculation. Don’t worry about that for now. At this stage of the game, 25x your annual spending is a good-enough assumption.
Step 2: Save
Now that you have your FI number, it’s time to take your first steps towards it. One of the easiest ways to do that is by saving more money. There are plenty of options to accomplish this, but I’m going to focus on tactics that:
- Are relatively easy to implement
- Save enough money to actually make an impact
- Revisit recurring expenses every 1–2 years
- Cancel subscriptions you no longer need
- Negotiate with your current providers
- Ask for a discount for annual instead of monthly payments
- Shop around for better prices
- Increase insurance deductibles
- Remove extras from insurance policies (e.g. roadside assistance, which you may already get from a credit card)
- Cook at home as much as possible
- Pack a lunch for work
- Make a weekly meal plan
- Plan your menu around sale items
- Make a grocery list and stick to it
- Buy in bulk
- Eat less meat and dairy
- Eat more whole, unprocessed foods
- Work from home if possible
- Bike, walk or take public transit—even if it’s only once or twice a week
- Use a carsharing service instead of owning a car
- Carpool with a coworker
- If you work from home, write off a portion of your utilities
- Minimize energy use (switch to LEDs, hang dry laundry, seal drafts)
- Negotiate a lower rate when renewing your mortgage
- Go through the suggestions above and see how much you can save.
- For more money-saving ideas, see:
Step 3: Earn
Most personal finance experts agree—you can only get so far with frugality and saving. Often, earning more is the faster (or only) way to reach FI. This can be accomplished through passive or active means:
- Side hustles
- Getting a raise
- Working more
- Being promoted
- House hacking (hosting homestay students is my family’s favourite house hack/side hustle)
- See if you can earn more passive income by making your money work harder
- Think about the ways you can earn more active income, and start working towards them
- For more earning tips and resources, see:
Step 4: Invest
If you save and earn more, you’ll eventually notice something wonderful: a growing pile of extra money! But cash in a savings account won’t get you to FI. It’s time to invest that cash.
One of the FI community’s favourite ways to invest is through the stock market. Here are some popular investing options, starting with the simplest.
Tangerine index funds
While these funds have higher fees than other stock market investments, they’re quick and easy to use. You just need to open an account with Tangerine, deposit your money, then they’ll do the rest.
You won’t have to worry about rebalancing, minimum balances, or trading fees. Read Barry’s Tangerine investment funds review for more info.
Robo advisors help you invest in low-cost index ETFs and handle all the rebalancing for you. They’re just as easy to use as Tangerine funds, but are cheaper and offer more portfolio options. Some also include additional services, such as financial planning.
Read Barry’s robo advisor reviews to learn more about Canada’s top robo advisors.
While DIY investing requires the most time and knowledge, it’s the FI community’s favourite option. That’s because it’s low-cost, easy enough for most people to learn, and it offers a high level of control.
I recommend DIY investing in index ETFs through a discount brokerage like Questrade. To learn more about DIY investing, see the resources in my free FI School curriculum.
- Learn about each of the investing options.
- Pick the option which you feel most comfortable with.
- Get your money invested.
- Continue building your investing knowledge with these resources:
Summing it up
When starting your FI journey, it’s easy to feel overwhelmed. By breaking down the steps and starting with easier tasks, you’ll gain motivation and momentum. Before you know it, your FI journey will be well on its way!
I hope this article has given you some ideas to help you start working towards FI. When you’re ready to further expand your FI knowledge, check out the rest of FI School, my favourite books, and my favourite podcasts.
Let me know in the comments if you have any questions—I’m happy to help!