Breaking down your path to FIRE

You've recently come across this new term known as "financial independence retire early" and you're hooked. Not needing to work while still having the money to support your life indefinitely?

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In your quest to find out more you inevitably dig up the various communities who are also walking the same path, and you eagerly consume all the information they have to share. But soon enough you feel somewhat overwhelmed.

You know you need to set a budget... but how do you do that?

You know you need to build an emergency fund... but how much should that be?

You know you need to pay down your debt... but how do you get it under control?

And so on and so forth.

You try your best to follow the advice being shared by others, but ultimately everyone's situation will have their own unique flavour. You quickly realise you're going to need to take the information being shared and add your own ingredients in order to make it fit for you.

But there's so much involved, you just don't know how to stay on top of it all.

First: Define financial independence for yourself

Do enough reading on the internet and you'll eventually find the following:

$1 million invested into the S&P500 will allow you to safely withdraw $40,000 spending money for your first year of retirement. If the withdrawal amount is adjusted for inflation each year your money should last roughly 30 years before running out completely.

The above is known as the 4% safe withdrawal rate and is used as "the example" when it comes to explaining FIRE.

But this isn't very good because the number is going to be different for everyone based on a multitude of factors.

A person who only wants to spend their days playing MMORPGs will probably need a number that is much, much lower.

A couple with three young kids and an aging parent to take care of is likely going to need something higher.

So I find that using a figure to define financial independence is a bad place to start. A really bad place in fact, because you tend to get attached to whatever figure you decide upon which restricts your future adaptability.

A better place to start, in my opinion, is listing out a short set of definitions that if achieved would mean you're financially independent.

Here's an example:

  1. Be completely debt free, including the mortgage

  2. Be able to handle a three year bear market without concerns

  3. Be able to take the family on holiday abroad once a year

  4. Have a house-deposit ready for each of my kids

  5. Be able to take care of my aging parents needs

  6. Be able to spend the majority of my time how I want

Notice how there isn't any specific amount of money being mentioned here; instead you've got a set of conditions that in a way define why you want financial independence.

You don't want the list to be overly long because that's going to cause problems with focus, yet you don't want the list to be too short because you're going to need real reasons to keep going when times get tough.

Next: Set the current priority

As the definitions you set for financial independence are likely going to be quite "big picture" it's normal for them all to progress in parallel, or somewhat parallel.

Even if you're not trying you'll find that every now and again some of the definitions will have slightly moved forward, provided you're not just wasting your time completely.

So there's no point taking the entire list and giving each item a priority number or rank; even if you did the order would likely change over time.

Instead, take just one of those definitions and make it the current priority.

This is the definition that you will actively be trying to push forward in the near term by setting objectives and actions, and regularly reviewing the effectiveness of those actions. All of your energy and focus goes towards making progress on that one definition.

Let's set an example current priority: Be completely debt free, including the mortgage

With the current priority set we can now start to get more specific on what needs to be done.

Next: Set a milestone

As already mentioned, most definitions you decide upon for your financial independence are going to be rather large. Paying down all of your debt including your mortgage is something that could literally take decades.

So you need to set milestones to break it up into consumable chunks and to trigger a progress review.

Using the example we chose - Be completely debt free, including the mortgage - let's think about what this really means.

Debt encompasses many things: Student loan, credit card debt, car finance, mortgage, furniture finance, and many more.

Some of these may be considered "good debt" but that doesn't matter - the definition we've set for our financial independence is to be free of all debt.

But what if our total debt is something like £220,000?

We have £150,000 left on the mortgage, £50,000 in student loans, £10,000 on the car, £5,000 on credit cards, £3,000 on the sofa, and another £2,000 on some sort of personal loan.

If we really do focus just on this debt, none of our other definitions are going to get a chance to be actively pushed forward any time soon. Which is why we need to set a milestone within this definition so that there is a good place for us to re-assess our current priority (more on this later).

Here's an example milestone: Reduce our overall debt by 10% down to £198,000, and reduce our monthly debt payments from £2,000 down to £1,500.

What we have now is a definition to focus on and also a milestone to hit. It's starting to get clearer how we're going to achieve the definition but we still need to figure out exactly what we need to do.

Next: Set an objective with a deadline

The milestone is a sort of "line in the sand" to tell you that you've taken a significant step forward towards your goal.

But even if you've set a milestone you need to specify exactly what you're going to do to reach it. You can't just plug away at your debt month after month and expect to get there.

Well, theoretically you could but it probably wouldn't be as effective as setting a clear objective with some deadline to it.

Continuing with the example that we've been building up we know that we're in a bunch of debt from various sources. To hit the milestone we could decide on the following objective:

Pay off the credit card and sofa debt in full within the next 6 months while maintaining the minimum monthly payments on all other debt.

An objective gives us a clear focus with some specific details on what needs to be achieved. This is different to a milestone which, while good for helping gauge overall progress, can sometimes lack the detailed specifics.

And the deadline is a clear moment in time where we review the objective to decide if it has been achieved or not. It's where we have to be really honest with ourselves and figure out if we're actually putting in the work to hit our biggest goals.

Completing the objective may not necessarily mean we hit the milestone that we've set, but doing so should definitely put us in a better position compared to before.

Next: Set quantifiable actions

With the objective decided on we now need to set quantifiable actions that will drive what we do with our money in the near future.

Let's lay it out:

The objective is to pay off the £5,000 credit card debt in full and also the £3,000 remaining on the sofa, within the next 6 months.

Let's ignore the interest to keep the math easy, but you should get the point through these workings.

The credit card costs us a minimum of £150 a month, while the sofa costs £100 a month. Since our total monthly debt payments is £2,000 a month (mortgage, car etc) we can deduce that we need to pay £1,750 each month towards our other debts at a minimum.

So here are our quantifiable actions:

1. Pay the minimum £1,750 each month towards the mortgage, car, student loan and personal loan.

2. Pay £833.33 each month towards the credit card debt.

3. Pay £500 each month towards the sofa debt.

Each month we must set aside the above amount of money to pay those debts and if we do that then we will successfully clear our debt for both credit card and sofa in 6 months while also maintaining my minimal commitments towards the other debts.

There are two key points when setting actions.

First is that the number of actions are kept low as we want to simplify things as much as possible; keeping things simple means it will be much easier to stay focused. My opinion is that you should not set more than 5 actions for an objective.

The second is that the actions we set need to be "good", meaning that we can consistently follow through with them and if we do so then they will clearly achieve the objective.

As an example of setting "bad" actions:

Let's say we set an action to pay £500 per month towards the credit card debt. This would only repay £3,000 out of the total £5,000 after 6 months. We also set a second action to pay all of our bonuses towards the credit card debt. But since we cannot guarantee we'll get a bonus or enough money from the bonus, it is unclear if we would achieve the objective.

Therefore, these are bad actions.

Next: Review on deadline day

Since we set deadlines for our objectives there will come a point in time where we must do a review. We're trying to answer one simple question:

"Did we achieve the objective?"

If we set good actions and actually followed them, then the answer should be "yes".

If the answer ends up being "no" it means either:

  1. We didn't follow our actions

  2. We followed our actions but we set bad actions

In such a scenario we need to be honest with ourselves on whether or not we really want to be reaching towards financial independence in the way we've planned out.

We may decide that we do, but not at the same breakneck speed that everyone else out there seems (or claims) to be doing so. That's completely ok.

Just go back to defining what "financial independence" really means to us and set more appropriate objectives.

Let's say all of our definitions and current priority were indeed correct, and we simply didn't hit our objective due to the actions. Then what we've simply got to do is continue working on the same objective by setting new actions and a new deadline.

We finish the current job at hand before moving onto something else.

Eventually we'll get to a point where we can say "yes" to hitting our objective.

This is a mini-win moment for our journey. We're still far from the finish line but we've earned a well-deserved fist bump.

What next?

Next: Go up a level and review

Having completed one of our objectives we're almost certainly in a better position than we were before. But like I said earlier, this doesn't necessarily mean we've hit our milestone; so we "go up a level" and review.

Here's a reminder of the milestone: Reduce our overall debt by 10% down to £198,000, and reduce our monthly debt payments from £2,000 down to £1,500.

And here's a reminder of the objective: Pay off the credit card and sofa debt in full within the next 6 months while maintaining the minimum monthly payments on all other debt.

The total debt for the credit card and sofa was £8,000 and their combined minimum monthly payments were £250.

Having completed the objective we now have a total of £212,000 in debt (maybe a bit less since we were also making other debt payments) and a monthly payment of £1,750.

Therefore we have not reached our milestone yet.

This means we're still working on the same milestone and need to set a new objective with actions that focus us on getting closer.

It may take a few objectives but sooner or later, as long as we're achieving those objectives, we will reach the milestone.

At that point we "go up a level" again, and review our current priority.

Based on our new and improved circumstances, is being "completely debt free, including the mortgage" still the definition we want to focus on the most, or do we now want to put our energy into one of the other definitions and push that forward?

This is a question that only you can answer, but whichever definition you decide to make the current priority you go through the same process by setting milestones, objectives, and actions in order to make tangible and measurable progress.

Final Scribbles

Human beings are proven to be really bad at multi-tasking. Let's face it, we turn the music volume down so that we can see better when we're driving through an unfamiliar location...

So it's no wonder that when we're faced with huge goals, financial independence being one of them, we feel overwhelmed.

It's because we try to do it all at once, which doesn't work.

Using this method of breaking things down we start to make a little more sense of where we need to channel our energy.

It forces us to get very clear on what we want so that we can make strategic decisions.

Those decisions may be difficult at times (or even all the time) but will ultimately have huge payoffs in the long run.

A journey of a thousand miles begins with a single step. But before that, you need to know which direction that single step needs to be in.


Don't wait for some magical number before you start "living". Life is full of surprises and you'll never be able to plan it perfectly. If you're doing sensible things with your money you'll eventually reach your goal. So start living now. The longer you wait, the less time you'll have. Money can be made, but time cannot. You are the barrier to the life you want to live, not a 4% safe withdrawal rate.

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