Catching FIRE 3 – Fast FI 5 Years to Financial Freedom

Fast FI: Achieve Financial Freedom in 5 Years or Less

In this article, I’ll walk you through part three of a three part ultimate guide to financial freedom.

I plan to discuss Fast FI (Fast Financial Independence). This is the third path to financial freedom and it focuses on growing your income and turning it passive fast, which means under 5 years to FI.

In my previous articles, I discussed the concepts of 1) Frugal FI and 2) The Way of Wealth. These two paradigms both lead to financial freedom through different paths.

In Article 1 of our Catching FIRE series, The Ultimate Guide to Financial Freedom – Frugal FI, I discuss the path to financial freedom based on adopting a mindset of financial freedom founded on happiness and personal growth, not stuff. By focusing on growing your skillset and cutting costs you can reduce your costs significantly, while keeping your income steady.

This allows you to drive up your savings rate and lower the bar to achieve financial independence at an accelerated rate. This path isn’t for everyone, but the important take away is that a key variable in your speed to financial freedom is your savings rate, or the spread between your income and expenses.

Article 2 of this series, The Way of Wealth, takes the opposite tack and adopts a mindset of growth and abundance. Although cutting costs has a limit, growing your wealth does not. You are capable of creating a near infinite amount of value in the world.

By creating value for other people that they’re willing to pay for, you grow wealth. If you’re willing to learn how to hustle, develop good money habits, increase your knowledge to grow income, and ultimately invest for passive cash flow then you can achieve truly astounding levels of wealth in all areas of your life.

Ultimately, this path leads to financial freedom and leaving a legacy for future generations. By focusing on growing your income, not only cutting expenses, you can utilize the 10 Principles of Abundance to move through the 6 Stages of Wealth and make your dent on the world.

Those short summaries outline the two different paths we covered in part 1 and part 2 of this series.

This article will take parts of the Way of Wealth, Frugal FI and our Fast FI methodology of high return investing to show you how to significantly increase your rate of wealth accumulation and achieve financial freedom in 5 years or less.

Strap yourselves in because we’re about to cut your time to retire in half.

Buying Financial Freedom

The goal of this article is to show you how you can mix and match the Frugal FI, Way to Wealth, and Fast FI strategies to accelerate your path to financial independence.

To achieve this, let’s build out a few different scenarios to early retirement and examine the strategies that beat a 5 year retirement goal. This let’s you understand the range of options that are available for you to achieve Fast FI (Fast Financial Freedom).

Savings Rate + Income + Investment Return = Length to Retirement

The simple path to retire early is to focus on three things: 1) Increase your return. 2) Increase your income. 3) Increase your savings rate (aka cutting costs).

However, even with an average income if you’re able to achieve a high return on your money mixed with a Frugal FI lifestyle you can achieve financial freedom early in life.

The average income for a college graduate is currently: $55,260. Let’s use those numbers and start from $0 net worth to run through different scenarios in order to beat a 5 year early retirement plan.

A resource to help run your own numbers is this Years to Retire Calculator by networthify.com: Years to Retire Calculator.

Average Joe’s Path to Financial Freedom

First, as a benchmark, let’s take the average Joe’s financial freedom journey.

For Average Joe, I’ll use all the averages from the U.S. census data: 1) Average income of a college graduate. 2) The average annual raise. 3) The average savings rate. 4) The average return of index fund investing over the last 5 years. 5) The average 1.94 children. You get the idea.

Specifically, I’m going to use the cross-over point when Average Joe’s income from investing exceeds his expenses. You should calculate a conservative estimate for yourself. The classic 4% rule estimates a withdrawal rate of 4% of your total net worth assuming a conservative 6% return on your money.

However, when you earn a higher-than-average return on your money, simply deduct 2% from your average passive return to get a more conservative number.

The result of this dismal approach of the average American is 37 years to retire. That means the average college graduate would graduate at around 58 years old.

Eck.

We can blow that out of the water.

Below I summarize Average Joe’s path to retirement (aka financial freedom) versus other financial decisions he could have made with the same income.

Figure 1: Four Paths for Average Joe

For fun, I took Mr Money Mustache (famous FIRE blogger) and pitted his journey to financial freedom up against the other paths I discuss in this article. I used his average expenses as a cap for our FIRE examples so I could put them on the same scale.

Since Average Joe is modeled after the average American with a college degree, I didn’t cap his spending because the average American doesn’t cap their spending as their income rises.

Frugal FI Joe: Average Earner

Frugal FI Joe takes the same averages as Average Joe, but models a dedicated saver. That means he pinches every penny and sets a $35,000/yr expense cap on his lifestyle expenses. Everything above that goes to savings and investing. This is similar to what Mr. Money Mustache and other Frugal FI practitioners have been able to accomplish.

The cap on spending and a Frugal FI paradigm allows them to massively increase their savings rate and shorten their time to retirement.

Frugal FI Joe begins with just above a stellar 30% savings rate, and this increases as his income increases because he avoids the creep of increasing lifestyle expenses as income grows by capping his expenses. He’s following the Frugal FI path to wealth.

Our Frugal FI persepctive was the first article in our Catching FIRE series which you can find here.

High Returns: Fast FI Joe & Real Estate Joe

The other two options I included in the above table were the estimated return our average income Joe can get from either real estate or small business investing.

The biggest difference here is the return the investor makes on the different types of investing.

Fast FI Joe earns 32% from passive small business investing based on our Fast FI philosophy, and Real Estate Joe earns 20% based on the BRRR method of real estate investing (Buy, Renovate, Refinance, Rent).

With small business investing his investments pay for his lifestyle and early retirement 2 years earlier than with real estate investing (see Figure 2 below).

However, over the long-term as the money compounds these differences grow much larger.