"How to Achieve Financial Freedom: The 5 Stages of F.I.R.E"

Your Ultimate Guide to escape the Rat Race: Everything You Need to Know

Different life stages, different goals and needs but one thing for sure, we are all pursuing the same dream of financial freedom or F.I.R.E or Financial independence.

Be it you are an absolute beginners, intermediates or experts, realising where you stand is always the first step to success in the future.

Master money, financial security

We all want to think that financial freedom is the final destination and we will all get there eventually. However if we were to think this way, we would often be disappointed. Because It is not linear and each stage you're on, you'd faced different challenges. Getting over each stages successfully is where this article hopes to help you with and avoid disappointment.

Every great guide should start with an introductory paragraph. This is your opportunity to persuade your reader and let them know why this post will answer all their important questions. You can share why you are the ideal person to write this guide; write a personal anecdote about how you became an expert in the field; show your empathy with your reader regarding how hard it is to find accurate information; and/or stress the frequent mistakes people make that can be avoided.

Before writing your “how-to” or “best-of” post below, add one last sentence that sums up your paragraph and offers a polished transition to your guide.

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Jump to your favourite steps and move ahead.

Stage #1: Have $5,000 of emergency fund

Stage #2: Pay off all debts except mortgage.

Stage #3: Have 1 year of annual expense saved/invested

Stage #4: Having 5 years of expenses saved/ invested

Stage #5: Having 10 Years of expense saved/invested

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Stage #1: Have $5,000 of emergency fund

The first baby step to make progress in your finances. Have it in liquid cash for any emergency situations that relate to health, career and family.

This is your chance to check one box of the list. This is strongly recommended by Dave Ramsay, The Ramsay show.

Stage #2: Pay off all debts except mortgage.

Credit card debts, student loan debts. Debts shouldn't be normal. Debts cause financial stress and don't accept it as normal way of life.

Use a method called the "Debt snowball method" to get out of the zone. Essentially you list down all the debts that you have going on with the annual interest that's on it from the smallest amount to the highest. You then focus your effort to clear the small one and proceed to the next one.

Stage #3: Have 1 year of annual expenses saved

Since this is a big bulk of money, you can saved it in cash or investments. This is what I believe to be the real pivotal point where you go from short term survival mode to long term wealth building mode. This is what L Collins called it as "F YOU MONEY". This brings you to a position where if you don't really like your job, you have ample space to explore and enjoy your downtime without the stress of finding a new job as soon as possible. Typically, in your lifetime you will experience at least 3 jobs/career switch as times are moving fast now. Hence having 1 year of annual expense will give you the cushion that you need, to successfully make the transitions.

If these $1,000 is invested in the market

With the power of compounding interest and average market return of 10% a year, you can expect alot more. With $1,000 you will make $100 in return without you needing to do anything. Similarly a $100,000 investment with 10% returns will then make you $10,000. With that 10% returns continue, your $100,000 will essentially double to $200,000 in little over 7 years. That's the true power of compounding interest.

At stage 3, you will start to get the glimpse of how the wealthy get wealthier.

Stage 4: Having 5 years of expenses saved/ invested

This stage is what people call "Coast FI". Essentially where you have enough invested the market, even if you are investing anymore, the compounding will allow you to have enough retire by 65. If you are at this stage right now, congratulations. You have achieved more than most people in Singapore would achieve in their lifetime. The compounding effect in your portfolio will really be kicking in right now.

Say example your family expense if $100,000 and you have saved/invested $500,000 in the market, at a simple 10% return a year, you will be rewarded $50,000 a year. That's half of your annual expense.

When you get to this stage, you can start taking calculated risks in your life. It will allow you to start dreaming about where you want to be in 10 years.

Stage 5: Having 10 Year of expense saved/invested

Assuming your annual expense if $100,000, you will now have $1,000,000 in your portfolio. At 10% market return, your portfolio is generating $100,000 alone. Your blood, sweat and tears are going to how you want your family to be taken care of. The $100,000 can easily pay for house mortgage, food on the table and insurance. When you have 10 year of expense invested, it is essentially generating the same amount without the sweat, blood and tears. AKA passive income!

You should also be more careful at this stage as you would not want lifestyle inflation to pull you down. Earning more don't give you the luxury to spend more. You can congratulate yourself for getting yourself to this stage but don't lose focus.

Conclusion

The basic notion here is that once you achieve stage 6, you can retire from work if you choose to do so. Or you can pursue a different career if you didn't get to do so. Remember, it's never too late to start your Financial Freedom game.