Having financial independence as a target should be a long
term goal for everyone.
term goal for everyone.
Achieving Financial Independent Early Retirement (F.I.R.E)
on the other hand makes the task even more difficult because we are competing
for time where it plays a big factor.
on the other hand makes the task even more difficult because we are competing
for time where it plays a big factor.
Long term readers of my blog know that I’d like to achieve F.I.R.E
sometime in the mid 30s from the start, and I’ve always make this as a personal
stretch goal which I will review each year.
sometime in the mid 30s from the start, and I’ve always make this as a personal
stretch goal which I will review each year.
I have always believed that there are 3 levers that will determine the outcome of my situation and that I
will need to achieve at least 2 out of
the 3 minimally in order to be successful.
will need to achieve at least 2 out of
the 3 minimally in order to be successful.
Before that, let’s go through what are those 3 levers first.
1st
Lever: Income Growth
Lever: Income Growth
Most of us grows our capital base by being an employee
working day job from 9 to 6.
working day job from 9 to 6.
The first salary base that we get from our first employment
plays a big part in the future compounding. If we start from a low base,
there’s a long way to play catch up at a later stage.
plays a big part in the future compounding. If we start from a low base,
there’s a long way to play catch up at a later stage.
Luck often plays a big part in determining that too but we
shouldn’t be dependent on what we cannot control.
shouldn’t be dependent on what we cannot control.
There is usually an annual increment exercise for most
multi-national companies, so employees should gradually see their income grow
higher over time. The growth “g” part is a critical factor like most valuation
methodology in investing so we need to play it smart. The “how” part is another
matter altogether.
multi-national companies, so employees should gradually see their income grow
higher over time. The growth “g” part is a critical factor like most valuation
methodology in investing so we need to play it smart. The “how” part is another
matter altogether.
We need to distinguish the difference between progression
and promotion.
and promotion.
Progression means you probably did okay and the company
survives another year so everyone in the company gets about 3-4% of increment
the following year.
survives another year so everyone in the company gets about 3-4% of increment
the following year.
Promotion, on the other hand, means you get a new
responsibility and are promoted to the next level, so your increment should be
higher than usual. The most common increase is about twice the amount of
progression minimally, or you can put 2x Progression growth in your excel
sheet. Promotion doesn’t come often and depends on many factors, but if you can
consistently do it, you’ll win the rat race within the company.
responsibility and are promoted to the next level, so your increment should be
higher than usual. The most common increase is about twice the amount of
progression minimally, or you can put 2x Progression growth in your excel
sheet. Promotion doesn’t come often and depends on many factors, but if you can
consistently do it, you’ll win the rat race within the company.
Jumping to another company immediately after your promotion
increase will probably give you the best ROI. I’ve seen a lot of people who do
this and many employers agree this pose a big risk to the company in terms of
losing talents.
increase will probably give you the best ROI. I’ve seen a lot of people who do
this and many employers agree this pose a big risk to the company in terms of
losing talents.
The best case scenario for a 10 year career in terms of ROI
would look like this:
would look like this:
Progression-Progression-Promotion-Jump-Progression-Progression-Promotion-Jump-Progression-Progression-Promotion.
Again, not everyone can do it well, but we’ll need to strive
for it and play our best poker card.
for it and play our best poker card.
2nd
Lever: Savings Rate
Lever: Savings Rate
While it may seem pretty obvious that we need to spend less
than what we earn, the reality is it is not easy to digest until we are
accustomed to seeing things differently.
than what we earn, the reality is it is not easy to digest until we are
accustomed to seeing things differently.
The higher the savings rate, the more likelihood you are
going to have excess funds at the end of the day.
going to have excess funds at the end of the day.
That is being straightforward.
The reality is you’d likely to start from a high base and
then gradually go down as you tend to start your own families, have children,
buy tons of milk and diapers, renovate your home and furniture appliances and
many more.
then gradually go down as you tend to start your own families, have children,
buy tons of milk and diapers, renovate your home and furniture appliances and
many more.
For someone who already started with a low base of savings
rate from the time they are single because he may be spending aggressively on
gadgets or other needs, he will have a difficult time adjusting his spending
pattern once the tough gets tougher.
rate from the time they are single because he may be spending aggressively on
gadgets or other needs, he will have a difficult time adjusting his spending
pattern once the tough gets tougher.
I’ll leave each reader to imagine what does good looks like
in this aspect but the general idea is the higher the better.
in this aspect but the general idea is the higher the better.
3rd
Lever: Compounding Returns Rate
Lever: Compounding Returns Rate
The final lever refers to our ability to use the excess
funds coming from the first and second lever and compound it over time.
funds coming from the first and second lever and compound it over time.
This usually comes in the form of investing, either through
bank deposits, equities, bonds, property or any asset class that generates
positive returns.
bank deposits, equities, bonds, property or any asset class that generates
positive returns.
In order to do this well, we will first need a few years to
build up our level of competencies in the area of interests where we think we
would excel most. The amount of experience and competencies accumulated over
the years will play a significant part in the compounding returns.
build up our level of competencies in the area of interests where we think we
would excel most. The amount of experience and competencies accumulated over
the years will play a significant part in the compounding returns.
The worst part of the deal is that compounding can quickly
go south and is definitely an accelerator to wealth destroyer.
go south and is definitely an accelerator to wealth destroyer.
2
Out Of 3 Levers To Succeed
Out Of 3 Levers To Succeed
Fortunately, the good news about this is you only need to be
good in 2 out of the 3 in order to achieve F.I.R.E.
good in 2 out of the 3 in order to achieve F.I.R.E.
Some of us may be good with our job but bad at churning out
returns through compounding or vice versa where we may be good at savings but
bad at increasing our income growth.
returns through compounding or vice versa where we may be good at savings but
bad at increasing our income growth.
Of course, achieving all 3 jackpot would be nice to have but
the idea is to try and achieve 2 out of the 3.
the idea is to try and achieve 2 out of the 3.
Let’s try to simulate a few scenarios with real numbers how
this can look like.
this can look like.
Assumption
Let’s assume John who currently earns a decent salary base
of $2,500 and he receives an annual wage supplement (AWS) because he works in
an MNC.
of $2,500 and he receives an annual wage supplement (AWS) because he works in
an MNC.
For simplicity purpose, let’s assume his annual salary base
is $2,500 x 13 = $32,500, without any variable being thrown in.
is $2,500 x 13 = $32,500, without any variable being thrown in.
John wants to retire early at the age of 40 and build up
sufficient wealth for his simple financial independence lifestyle.
sufficient wealth for his simple financial independence lifestyle.
John is also single and attractive looking.
Scenario 1
This scenario will focus on lever 1 and 2 where John lines
up a strong career path by earning a 10% CAGR over the next 15 years and is
extremely frugal with his spending. His savings rate appends a high rate of 80%
throughout as he continues to maintain his frugal lifestyle.
up a strong career path by earning a 10% CAGR over the next 15 years and is
extremely frugal with his spending. His savings rate appends a high rate of 80%
throughout as he continues to maintain his frugal lifestyle.
Unfortunately, John spends most of his time at work and
therefore do not have time to build up his competency in growing his money. His
money is mostly in fixed deposits over the long term.
therefore do not have time to build up his competency in growing his money. His
money is mostly in fixed deposits over the long term.
From the table above, you can see that the first and second
lever plays the big role in his networth while the investing returns are meagre
returns that play a supporting role behind the scene.
lever plays the big role in his networth while the investing returns are meagre
returns that play a supporting role behind the scene.
At the end of age 40, he would still possess a remarkable
$953,387 in his networth.
$953,387 in his networth.
Scenario 2
This second scenario will focus on the savings rate (2nd lever) and the compounding returns (3rd lever) where John is rather slow at climbing the corporate ladder but he lives a simple lifestyle and he builds up his competency in investing in the stock market.
He still gets his annual increment of about 3% per year while he saves almost 80% of his income from it. He uses the funds for investing and he managed to obtain a compounding return of 15% per annum.
At the end of the 40 years, he is still able to amass a networth of more than half a million and retire early because of his frugal lifestyle.
Scenario 3
The third scenario will focus on the income growth rate (2nd lever) and compounding returns (3rd lever) where John climbs up the corporate ladder and at the same time compounding fast on his returns. He is however spending rather heavily on entertainment and travel in order to relieve his stress from work.
He still saves 20% at the end of the day, and used the money to compound at an average of 15% per annum.
At the end of the 40 years, he is able to amass a networth of $953,387 and retire early.
Which Scenario Do I belong?
This is the first time I am doing this exercise so it’ll be interesting to see where do I end up.
This sharing is by no means a point for showing off but rather for academic purpose.
If I have to choose among the 3 scenarios, it will most likely resemble scenario 3 in my case.
I started my career at the age exactly 10 years ago, with a very decent salary base, and I managed to work on my income growth and climb up the corporate ladder. There were some difficult times but each progression and promotion was almost always a new challenge. I also had 3-4 jobs in my 10 year career so the trick was always to monitor the CAGR growth over the years.
Having a high capital base means a higher capital injection that I can put for my investment.
If I was to draw a flowchart, it’ll be like this:
Progression-Jump-Progression-Promotion-Jump-Progression-Promotion-Jump-Promotion-Progression-Promotion
My 10 year CAGR in terms of income growth is at 12.1%.
On the savings rate, I am a crazy saver when I was single, until I get married and have children and that’s when savings rate started going south. I probably saved about 80% for the first 4 years, 50% for the next 2 years, and then 20% for the last 4 years. This is probably my weakest lever at the moment.
On the investing front, I was fortunate to churn out a return of 17.8% in the stock market over the last 8 years. This helped to boost my networth significantly especially the last couple of years.
I still have a few more years in the corporate world (hopefully) in terms of energy level and then hopefully I will move on to improve my savings rate lever.
Final Thoughts
The maths are simple.
Crazy Income + Crazy savings rate + Crazy Compounding rate = Crazy F.I.R.E
This serves only as a means of exercise to illustrate that one doesn’t have to be strong in everything but focus his resource where he excels most.
If you are those who excels in your job, go for it because it can reward you tremendously and you can pick up other things at a later stage (or at the same time).
You just need to make sure that you are good in 2 out of the 3 and the maths will take care of itself.
There are many assumptions that I’ve purposely left out such as preparing for housing, wedding, parents allowance, this expense, that expense, etc. Two person in the same household could perhaps also accelerate F.I.R.E. This isn’t the purpose of this article.
What about you? Which scenario do you belong?
Curious to know your occupation..
Hi TFM
I'm working as a support function in accounting and finance 🙂
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God bless you sir, I will not stop telling the world about your kindness in my life, I am a single mum with kids to look after. My name is Emily Thomas and I am from Convention Center Drive, Miami Beach, FL . A couple of weeks ago My friend visited me and along our discussion she told me about EDWARD JONES FINANCE, that they can help me out of my financial situation, I never believed cause I have spend so much money on different loan lenders who did nothing other than running away with my money. I have been in a financial mess for the pass 7 months now, She advised I give it a try so I mailed him and explain all about my financial situation to him, he therefore took me through the loan process and gave me a loan of $390,000.00 at a very low interest rate of 2% and today I am a proud business owner and can now take good care of my kids, If you must contact any firm to get any amount of loan you need with a low interest rate of 2% and better repayment schedule, please contact EDWARD JONES FINANCE email:- {[email protected]} OR Text +1(307) 217-5388
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Nice post Brian, I really like this perspective with the scenario examples. So many people focus on the 'crazy FIRE' when there are other slow and steady routes if that's more your thing.
I'm most definitely in 1 and 3 – my savings rate is relatively low being the sole income earner of a relatively large family to support, but it's positive, so we're going in the right direction for financial independence at least!
Hi Frankie
We are in the same category!
Like you I am also the sole breadwinner and because of that savings are low
I have a feeling our circumstances are very close 🙂
Any recommanded some suggest about compounding invest? Wish to get some advise.
Hi Unknown
I think for as long as we can get decent returns in the long run at 8% it will make a big impact to our lives.
Hi, just wanted to point out that you need to factor in CPF. Dont think you can save 80% of your gross income.
If you include CPF as part of the savings, then you can't use a 15% compounding as you would need to average it down with the (up to) 4% you get on the CPF monies.
Not trying to shoot down your article, I enjoyed it. Just felt that the numbers could be more realistic.
Hi Anonymous
Thanks for your input.
I did think of that when I was computing but decide against it because it would complicate the numbers a bit.
But you are right, we need to deduct 20% off but add additional 17% from the employers portion and compound it at 2.5%, i think the numbers would make more sense, thanks.
Hi B,
Thanks for the nice write up and i do agree with you.
My saving was still zero 8 years ago. But i was lucky to go into investing in shares in 2010. I have accumulated about 200k so far and my investment has turned to half a million now. So i guess i belong to Scenario 3!
Hi Anonymous
Wow thats a very high return. Either you excel in all the 3 levers or you must really excel in at least 2 of them. I'm glad to find someone in the same category with mine.
Hi B,
I think there’s a computation error for the column under savings for scenario 3.
Hi Anonymous
Ah yes!! You are really sharp!
No wonder the numbers looks so high im starting to question, thanks for pointing out, I'll make the changes.
Hi Brian,
I like your article. 12% CAGR is a lot. Also do you include variable bonus in lever 1?
Just wondering, if you write all this about FIRE and how you gonna retire in mid 30s, suppose your employer do not know about this as if they know, it would not end so well? or maybe your employer is fine with it already 🙂
Hi Cheryl
I did not include the variable. If i did, I probably edge out a bit more higher.
To be frank, I think I'm fortunate to have such a high cagr when I seriously dont think im smart up there.
Must be blessed with good fortunes.
My boss actually knows about this and my plans and we are often open about it when we have our appraisal discussion. I understand where you are coming from it can be a bit ackward, but hopefully they will see it differently that i am coming from the perspective of sharing and they dont include personal with work 🙂
Hi B
Good post and realistic. I attained FIRE 5 years ago, and have accumulated a property portfolio of multiple rental properties and a stock portfolio with multi-7 digits, passive income prob $200+k per annum. All with a normal well paid but not C-suite job but 20+ years of Scenarios 1, 2 and 3 – all 3 levers! Took advantage of the AFC, Iraq Wars, SARS, GFC.
Still working at a busy well paid job but now doing it for the passion and love of the job and people. Missus left FT work some years back to take care of the kid.
Yes it’s possible to achieve FIRE young – but it’s all about deferred gratification and patient investing and being a good responsible employee. And value investing, not trading.
Hi Anonymous
Thanks for sharing.
It is precisely guys like you that shows us the way why it is all possible. You guys make the impossible possible and the dream comes true.
Hey B – thanks for the kind affirmation. Definitely achievable and financial emancipation feels so so great and you can live life fully and without fear of bosses! Haha.
Anonymous A
Hi B,
I was looking for the significance of John being attractive looking as I read the 3 scenarios. Lol 🙂
Hi Alcus
Haha you spotted it!
I just added for fun, in case somebody disputed I can say that he can get a sugar mummy with his attractive looking features. Lol
I am wondering if one should achieve only average for each of the 3 scenario..ie:work with 3% increment yearly, save ~20% pa & 5% yield pa on investment. What is his prospect of F.I + R.E?
EDWARD JONES FINANCE IS THE BEST PLACE TO GET A LOAN {[email protected]},
God bless you sir, I will not stop telling the world about your kindness in my life, I am a single mum with kids to look after. My name is Emily Thomas and I am from Convention Center Drive, Miami Beach, FL . A couple of weeks ago My friend visited me and along our discussion she told me about EDWARD JONES FINANCE, that they can help me out of my financial situation, I never believed cause I have spend so much money on different loan lenders who did nothing other than running away with my money. I have been in a financial mess for the pass 7 months now, She advised I give it a try so I mailed him and explain all about my financial situation to him, he therefore took me through the loan process and gave me a loan of $390,000.00 at a very low interest rate of 2% and today I am a proud business owner and can now take good care of my kids, If you must contact any firm to get any amount of loan you need with a low interest rate of 2% and better repayment schedule, please contact EDWARD JONES FINANCE email:- {[email protected]} OR Text +1(307) 217-5388
….
A well written article and I enjoyed reading it. I'm more on lever 2, but trying to hone my skills for lever 3.
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