FIVE FIRE FAQs

There has been a lot of focus on the FIRE community from the media lately. And I get a ton of questions from people who have never heard about financial independence before.

So I thought a FAQ article was a good thing to post.

Why do you strive for FIRE? (Financial Independence, Retire Early)

I have reached a point in my life where I have realized that none external things is going to make me happier. If I can’t be satisfied with what I all ready have, then I will never be happy.

Because of that I end up with a lot more money than I need. And that gives me the opportunity  to reach for financial independence quiet early in life.

That is something I think I will appreciate more later in life.

What If you get hit by a car and die tomorrow?

This will take us back to the first question.

If we imagine that someday in the future I will declare myself as financial independent, that would be lovely. But. I’m not expecting that day where “I finally will be happy”.

Far from it. I will see it as an awesome opportunity to do more or less what I want. And I can’t see how that can harm me.

So I would be very sad if my last day will be tomorrow. But only because my life would come to an end, and not because I had money in my bank account that I didn’t spend.

Are you willing to mooch on your community because you won’t pay taxes?

The media loves to bring up the word “retirement”. And whenever people hear that word, we immediately think of a person who is laying in a hammock or playing petanque all day.

And that is not what I’m attending to do.

I love to do stuff. And I can’t imagine me going through a week where I don’t do something I enjoy, and not making some kind of money out of it. Maybe it won’t be much but I think I will keep working.

But let’s imagine that I manage to save enough to pull the plug from a full-time job at age 35 and NEVER EVER earning another dollar from manual labour. I would still be paying taxes from my investing. Which I gladly do.

What if everybody did like you? Then there won’t be no stock market you could benefit from.

And that is true. If everybody decided to only work on Saturdays and Sundays, and then do what they like on the weekdays. Mostly commuting by bike. And 80 % of their meals would be vegetarian.

Then yes, I think the modern way we see capitalism would have a hard time. But if everybody lived liked that, we would fix the environmental problem in no time, and I genuine believe that people would be happier.

And this is a price I’m willing to pay ten folded. If people read all of this and they think the whole point is for me to get rich (at all cost), they are misunderstanding the whole thing.

If we don’t take action about the environmental issues on our own, it looks like we won’t be here on planet earth for much longer.

What about kids, don’t you wanna have a family?

Sure I do. That is also one of the main reasons I’m doing this.

I keep hear friends and co-workers how tough it is to have kids. And I believe them. I love visiting my friends with kids. But it is just as big a relief to leave them again. Because it is awesome just to arrive home with some quiet time. But if you are a parent, you can’t just leave your kids.

It is more or less like a full-time job for the first 5 years of their lives, and from age 5-18 it will be more like a demanding part-time job.

And I can’t imagine how a full/part-time job (having kids) combined with a real full-time job is the most optimal to our wellbeing.

I think it is way better to give the kids the attention they need, without the stress a fulltime work can give to your child raising. Plus it can give myself some free time. Where I can do some work if I feel like it, or just let the day pass by as it suits me.

What If We Had Another 2008? (It will be fine)

As the avid reader might have read in my monthly FI updates. I write that I will reach my first big milestone of a 7 % withdrawal rate in about 3 years.

I calculate this very simple.

  1. I divide my yearly spending 110.000 DKK (17.000 $) with 0,07
  2. I look how big my portfolio is now.
  3. I subtract step one with step two. 1.600.000 – current portfolio.
  4. I divide the result from step three with the average amount I save in a year.

And that is how I end up with 3 years. Give or take.

I don’t calculate with any return on the investment. Just to make it more simple.

How would things look if the 2008 stock market started tomorrow?

Or what about if it happen the day that I would quite a fulltime job?

The picture below is how my portfolio would look like if I keep save and invest 24.000 DKK/month (4.000 $).

16.000 DKK of those money would be my own, and 8.000 DKK of them would be borrowed/leveraged.

From 1/1/2008 to 31/12/2010 I would end up with a 1.530.000 DKK (236.000 $) and with an annual return on investment of -3 %.

Even with a -40 % in 2008 I would have reached my first milestone of 7 % SWR on my annual spending.

What would happen if three years from now, where I’m likely to hit that milestone and the crash happens then?

In this scenario where we have the 2008 crash right where I’m “supposed” to hit my first milestone. The portfolio will crash. Just before I hit those 1.600.000 DKK the portfolio is going to tank. But as you can see. Even with 40 % reduction in my portfolio, I’m going to hit that number if I keep investing, and work for another 8-9 months or so.

And that isn’t too bad.

I mean. The 2008 crash was one of the worst we have seen in this century. Not that I’m saying it won’t happen again. What I’m saying here is that even with one of worst scenarios, we are only postponing our milestone with a couple of months.

It is going to be a bumpy right. But sit back and relax. It is just a matter of a couple of months. Or maybe a year or two. (If shit really hits the fan)

How Imperfection Can Change Our Life For the Better

For many years I saw myself as a perfectionist.

I wanted to do stuff better than the average joe. So I did my very best to do so.

While this can be good to some extend. It can one of the biggest procrastination issues. We all the know the feeling of how we would like to do something when the time is just right. It could be something like:

“Whenever I have achieved (Insert achievement), I will start a blog about it”

Or.

“When I have just gained a little more information about (insert a craft), then I will open my business of my dreams”

Or.

“When the (Insert investment) will hit that low. Then I will invest”

Or.

“When I have just saved (insert amount) $, I will go on that trip”

Or.

“I will say hi to that girl/boy when I have the perfect outfit on”

The truth is there will never be a perfect time to do anything. The most “perfect” time to execute on something, is this very day. Being a perfectionist is just an apology to postpone our dreams because of insecurity.

I deal with this myself. Writing on this blog is often terrifying. English is not my first language, and my vocabulary is far from perfect. But that doesn’t have to stop me, or you.

Trying to strive for imperfection can be a relieving feeling. The feeling of not have to do something perfect is awesome. It removes the inner voice in the head that says what we are doing is not good enough. Because that is what we are striving for. Things that aren’t perfect, but they are there. And they will do the job way better than something that doesn’t exist.

The Binary Mindset

Not that I’m a computer engineer, but what I do know is that computers operates in 0 and 1. Which mean either it does something, or it don’t.

This can be a healthy way to look at taking action.

To either do it. Or not.

Let’s imagine that you meet that cute person you have been thinking about the last month. And boom. Right next to you in the supermarket guess who is there? The cute person.

Now we want to take that binary mindset, and tell ourself to go from a 0 mode to a 1 mode. The trick is to forget the inner monkey mind who tells you all sort of weird things like you don’t have the right clothes on.

In this situation we could walk over to the person, and just say:

“Hi (Insert the person’s name)”

Now we have just went from the 0 to the 1, and our mission is accomplished.

The next time we hear this voice of doubt in our head. Acknowledge it. And then move on, and do something imperfect. Just do it. No matter how bad it is.

In fact. Try to do it bad. What our internal voice might think is bad, can probably do the job. And maybe even do a good job.

Perfection doesn’t exist.

Things can always be better.

Spending 60 minutes “perfecting” a 1 minute action doesn’t mean it will be 60 times better. 

Far from it.

Quantity Perfectionist

“This year I’m going to lose XX amount of kg, and I’m going to do it by eating well and run four times a week!”

Does that sentence sound familiar?

Way too often. We think that in order to do something, we need to take major action. Yes, taking huge steps toward our dreams will help us faster than small steps. But taking huge steps for a couple of months won’t take us anywhere.

That is where the perfectionist mindset about quantity comes in.

Let’s use me as an example. I could tell myself that in order for this blog to “succeed” I have to write at least 1000 words a day.

There is two reasons why this is bad for my progress on this blog:

  1. I’m setting myself a limit of 1000 words. Everyday I will sweat about those 1000 words. But whenever I hit that number. I will stop. “Man! Those 1000 words were hard to write. I better stop now”.
  2. When I don’t hit those 1000 words I’m going to feel bad. There is nothing wrong by setting ambitious daily goal. But going from 0 km/h to 200 km/h in no time. Is a bulletproof way of failing. And no one likes to “fail”.

What can we do instead?

Start being imperfect about what it takes. 

Instead of telling myself I need to write a 1000 words, I can say:

“Just write 50 words everyday, if you feel like more, do it. If not, don’t”.

If we imagine taking action as floor and a ceiling. If we make big ambitious daily goals. We are more likely to create a ceiling for ourself. But if we make small daily goals we create a floor.

By focusing on the floor (small daily goals) the ceiling becomes infinite. 

If I feel like writing 2000 words one day, good for me. But if I don’t feel like it the next day. I can just write my 50 words, clap myself on the shoulder and move on with a good gut feeling.

This can be applied to every area of our life.

If we want to eat healthier, we can just eat 1 piece of vegetable everyday. Forget about spending 30+ minutes everyday on shopping and cooking those salads. Maybe some days we will. And maybe it will be so life changing, that it doesn’t feel like a burden anymore. It is just a habit.

Or if we want to exercise more. Just run for 1 minute or take the stairs. Don’t even think about that you have to change to the sporty outfit. Just do a tiny thing. Maybe when we start to do so. It feels kind of nice, so that one day we feel like changing for to the sporty outfit and run for 30 minutes.

It can also be applied to investing and early retirement. Yes we would like to have +50 % savings rate. But just start with 5 %. That is what I did.

The beauty about taking small steps everyday is that we adapt. Running for 1 minute everyday ends up being super easy to do. Suddenly we will find ourselves running for 10 minutes, and that might end up being easy to.

Plus it is very rewarding to make progress everyday. Even small ones.

It will make us feel like doing more, instead of beating ourself up not accomplishing the big glamorous goals.

Almost 10 years down the road as an elite athlete I have seen a very clear pattern of the athletes who is world-class, and the ones who are not. And what the world-class athletes has is consistency.

We will do way better in any area of our lives by showing up at 95 % each day, rather than going 105 % when we kind of feel like it.

2# My Monthly Financial Independence Update

The Quick Takeaways

This month savings rate: 20 %

This month leverage: N/A

Rolling savings rate since February 2016: 56 %

Total value of portfolio: 540.000 DKK (84.000 $)

Years till I hit a 7 % SWR: 3.1 Years

% Change since last month: 3.2 %

So What The F*** Happen This Month

This month has been the third worst month according to my savings rate since I started this journey back in February 2016.

I have been away with the national rowing team for six weeks. First we were on a four-week training camp in Austria, and then we left for the world championships in Bulgaria for about two weeks.

Even though we did terrible at the world championships, I’m still grateful for the experience.

Because of the six weeks away from my day job, I ended up with almost no money this month. That is not moving me closer to my FI goal. But I do love rowing. So getting the opportunity to eat, train and rest for six weeks where I don’t have to pay for it, is even more awesome!

After my last update, I ended up buying more stocks and leveraged more than I wrote. So the comparison to last month is a bit off. In the future I will do all of my savings, borrowing and investing before I make this post. So I don’t end up doing other stuff than I what I have written here.

Due to the bad savings rate I’m not going to invest, or leverage anything this month.

I would like to have about 10 % in cash. As a buying opportunity if the market will crash (Which if think it will soon). I do not believe in market timing, and the only reason I’m not investing this month is because of the lack of my saving. It doesn’t make any sense to buy a low amount of shares, because of the fees it will cost me on the transaction.

I have invested this month though. I maxed out a tax-advantaged retirement account with 5100 DKK (800 $) with funds from my account where I borrow my money.

The money of that retirement account is not included in my networth. Because I won’t be ale to use those money until I hit the “cultural retirement age” of +65 years.

Hopefully I will have a better savings rate next month.

Comfort Is for Wimps

How many things have we purchased, done or said because we thought it was a comfortable thing to do?

I think that comfort is one of the biggest killers to a life we really have a deep desire to have. What we need to do is know what is a necessity and what is a comfort.

Let’s take an example.

Whenever I travel I see people with noise reduction headphones, a laptop, decompression socks and some sort of neck pillow (what the fuck is that anyway?!).

How many of these things is a necessity to our three-hour flight? Or are they just comfortable to bring with us?

What about the brand new car we have bought to drive the 10 km for work? Is that a necessity? Or couldn’t a 5.000 $ car done the job? Or what about biking that distance instead? Then we would save money, being healthier and we can skip that mandatory fitness membership, and spend that time by doing something that we really want to.

All the things that we really NEED is quiet easy to obtain in most part of the world. While the things we WANT can be quiet hard to get.

What about that carrier/car/house/flat/achievements we have this very day. They were once something that we only could dream of a couple of years ago.

And are we that much happier in this present moment than we were back then? I’m not.

We are doing all sort of things today that people in the 1900’s couldn’t even dream of. And do you think that we are happier today, than we were back then? I don’t think so.

What if we started to be grateful for those things that is easy to obtain here in life:

  • Living wherever we want
  • Wearing the clothes that we want
  • Eating the food that we like

Imagine that we would leave for a one month trip. How much would you pack? There is often some sort of human logic when we are going for a long trip, we need to pack a lot of stuff!

But what if we just packed:

  • another t-shirt
  • a shirt
  • two pairs of underwear
  • two pairs of socks
  • passport
  • phone
  • a charger for your phone
  • cash
  • toothbrush

At first that might seem intimidating. Because there is not much comfort in leaving your country with a lot less stuff than we initially would have packed.

I have not yet experienced to go with the minimum. Or what we would call the necessities. Without it felt more free.

What I thought would be inconvenient not to have, was actually awesome.

The feeling of being able to do things easier, and way simpler than ever thought possible is relieving. We can do so much more, with way less. 

So whenever we make our next trip/purchase/decision we should ask our self the following:

And if you chose the “No” route. Give yourself a clap on the shoulder. We have now made room in our wallets and mind to start being happy about the stuff we already have and what really matters.

The Power of Gratitude, and Small Things

I have been practicing an elite athlete routine for almost a decade now.

The most important takeaway I have from that decade is that everything is made through consistency.

Consistency trumps everything. Not one single thing is more powerful than consistency. 

I have always been a really impatient guy (And I still am to some extend). But when I realised the power of small actions every single day instead of searching for big leaps every once and while. My mindset changed.

I have six things I will do every single day. And these six things is so stupidly easy to do, that there is no excuse not to do them. If I really want it. I can do all six of them in less than 10 minutes.

At the moment the six things are these:

  1. Write 50 words on this blog
  2. Meditate for 1 minute
  3. Come up with 1 article topic for this blog
  4. Read 2 pages of a book
  5. Stretch for 1 minute
  6. Acknowledge 1 thing that you are grateful for

And I have a 7th one. But this one does not require me to do anything. I can check this off if I haven’t spent any money that day.

I’m doing this with a free app called Loop – Habit Tracker.

After I have installed the app, I can make some widgets to the starter screen, where I can check them off as I’m doing them.

The most powerful of them might also be the easiest one. It is the daily gratitude. If we don’t acknowledge the things we already have, we will never do it.

Happiness is not around the next corner, purchase, investment or traveled to. 

If we expect happiness to arrive when we final reach some imaginary milestone we will be in for a huge disappointment.

When we start to embrace the stuff we all ready have, and start to be thrilled about living in the most luxury time of man kind. Where more and more people have a decent place to live and a super market packed with organic foods within five minutes on a bike.

For a couple of years ago I stumbled across how fasting can be healthy for us humans. And until that day I think that I have had breakfast, lunch and dinner for 99 % of my life. Isnt that insane?! I never in my entire life had to miss a meal.

No matter how happy we are, there will be a person out there who has way less friends, less food, less stuff and less money, and still being happier than we are.

But if we start to practice a daily gratitude of that prosperous world the majority of people live in. We can be happier within seconds.

This is one of the main reasons why I don’t buy to many things. Because I know that 99 % of the time it will not serve how I feel.

Where I like to splurge is to buy a good friend a take-away pizza and a bottle of wine, and then have a conversation that sounds like this:

“You are the bomb!”, I will tell my friend with red wine teeth.

“No! You are the bomb!”, says my friend while he is pouring another glass of wine.

And this conversation will loop until the early morning.

That to me is happiness.

Cut the Period You Reach FIRE in Half, Book Review

I have never read a book from cover to cover before I turned 21 years.

But reading since then has change my life radical. Being able to learn from the best minds in this world is something I love. A book can be distilled knowledge from people who have researched a topic their entire life. And I’m able to learn that in 5-10 hours by reading their books.

I still find that astonishing.

This article will be a review of the book:

Life Cycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

Why this book?

Because it have made a huge difference on how I approach my investing. And it has been the reason why I might cut the period I reach FIRE in half the time.

If we just research a little about how to achieve financial independence. We learn that it is wise to buy stock index funds, in order to diversify. And if we want to diversify further, we can add bonds into the mix.

Now we have chosen our assets.

Is there another we can diversify aswell? YES!

We can diversify on time.

The stock market can be extremely volatile in single year. It can go 50 % up, but it can all so go 50 % down. If we start to look on longer time periods, like 5, 10, 15 or 30 + years, the stock market will become less and less volatile.

If we know that we want a million dollars to declare us self financially independent. With an allocation on stocks and bonds of 80 % stocks (800.000 $) and 20 % bonds (200.000 $). It would be way more ideal if would could loan the money upfront as young. And pay of the loan till the day we retire.

If a +50 % stock market crash happens early in our life, it wouldn’t be that catastrophic, because we will have time to rebounce. But if it happens when we are +50 years old. Then we are fucked.

When we are young, we don’t have that much money. So how can we get harder exposure to the stock market as young?

By leveraging.

The authors of Lifecycle Investing tested a leveraged strategy against a normal target date fund. This is where you pick a retirement date, and then the stock allocation ramp down from a 90 % stock allocation to 50 % when we retire. And they tested it against a fixed stock portfolio of 75 % stocks and 25 % bonds.

They tested it with different stocks and bond allocations to see if there was different scenarios where the traditional way would be better. With a stock allocation 200 % – 83 % (moving from a 200 % to 83 % stock allocation in retirement) we will have the same worst output as a 75 % stocks / 25 % bonds, but a median return there is 63 % higher, and in the 90th percentile it will be almost 100 % bigger returns. 

There are many more different allocations in the book.

But the biggest takeaway is even if we are really conservative about your retirement. It can still make sense to leverage early on.

Then the allocation would be like 200 % stocks moving to a 32 % stocks, and the rest would be bonds. By doing so we are likely to end up with 22 % more, than a traditional conservative allocation of 50 % stocks and 50 % bonds.

Lifecycle Investing will appeal to you, if you have bought into the idea of index investing to become financial independent, and want to take it a step further.

The worst enemy with this strategy will be our own psychology. When shit hits the fan, we need to stay calm, and follow our plan. And not everybody can handle that with a 200 % leveraged portfolio.

But if we think we handle the rollercoaster ride, we can diversify with time by leveraging as young. And reach our FIRE number earlier.

How Much Money Is Enough? Fuck the 4 % rule.

I often read blog posts on how people are retiring with 1.000.000 USD and then live off 40.000 USD/Year.

Put it another way. They stick to the 4 % rule.

There has been made a study called “The Trinity Study”. Which is often referred to in the FIRE community.

They took a close look on how much you can withdraw from a portfolio with different allocations to stocks and bonds.

I think the 4 % rule is ridiculous conservative. 

Take a look at the chart below from the trinity study:

This chart will tell us if you have a 1.000 $ portfolio and a 100 % stock allocation, and we withdraw 8 % of the initial amount (80 $), we have a 76 % chance of success.

76 % of every 30 year period between 1926-2009 would never run out of money.

That 76 % means that you NEVER EVER earn another dollar in your life.

So if we are 20 something years old spending a modest 15.000 $/year. (Which I do)

We could retire with as little as:

15.000 $ / 8 % = 187.500 $ 

And have a 76 % chance of NEVER running out of money if we NEVER earn another dime.

“But I don’t feel comfortable withdrawing 8 % of my portfolio”

All right. Then lets round it up to a withdrawal rate of 7 %.

Then we can retire with a 100 % stock portfolio of:

215.000 $ and have 87 % chance of NEVER running out of money.

If we make a 30 year Monte Carlo simulation with a portfolio of 215.000 $ and withdrawing 15.000 $/year annual*:

If we look at the chart above. We can be pessimistic and say that 1 out 10 times the portfolio will not survive.

We can also be positive and see that 1 out of 10 times we will end up 7.200.000 $. Or put it another way, more than 30 times you initial investment.

We could also only do average. And end up with 1.500.000 $.

And we have done this by laying in over hammock for 30 years.

If we however can manage to earn some money.

And I’m not talking about a huge amount of money.

Let’s just say that we start a business of doing something we like. We don’t want the business to be something we do everyday.

Let’s call it a “Fooling-around-company”.

What if we could make 5.000 $/ year with this company?

Then we only need to withdraw 10.000 $/year on our portfolio. This is how a 30 year Monte Carlo simulation look like if we only withdraw 10.000 $/year instead of 15.000 $/year*:

We have now gone from a 87 % success rate to a 96 % success rate.

And in 30 years you will at the 50th percentile end up with 2.400.000 $ instead of your 1.400.000 $

So by earning 150.000 $ over that 30 year period. (5.000 $/year x 30 years = 150.000 $)

We are likely to have another million on our account.

Or we could withdraw 4 % each year instead of withdrawing a fixed amount of 10.000 $/year. This means if the value of our portfolio goes up, our spending can go up.

Then the situation will look like this*:

After 30 years of withdrawing we are more likely to withdraw 16.000 $ /year. And if we are lucky it will be +30.000 $/year. (Adjusted for inflation)

So please. Be a bit skeptical whenever you read the we need 25 times our annual spending.

If we are willing to be a bit flexible, by doing so we can retire A LOT sooner.

* www.portfoliovisualizer.com/monte-carlo-simulation

1# My Monthly Financial Independence Update

I thought it would be fun to share how far I have come with my financial independence project. I have always enjoyed watching other people’s numbers. And here I am. About to do one myself.

I have never understood why personal finance should be a tabu. But I can feel there is a slight resistance in me. Telling me that I shouldn’t tell everyone about my finances.

But here it goes:

 

This is how my allocation looks like September 2018.

I have about 465.000 DKK (72.500 USD) invested in stock index funds. Where 125.000 DKK (19.500 USD) is money I have borrowed to a rate of 1%.

And 58.000 DKK (9.000 USD) in cash.

My first goal is to have a SWR on 7% on my 110.000 DKK/year budget. Which is about 1.600.000 DKK (250.000 USD).

523.000 DKK / 1.600.000 DKK = 32,6 %

If I continue the way that I save, invest and borrow. I will hit my 1.600.000 DKK in about 36 months from now.

This month savings rate was at about 78 %. Which is quiet high for me. I have a 3 year rolling savings rate of 58 %.

This month I have chosen “only” to invest 5.000 DKK and leverage it with another 5.000 DKK so in total 10.000 DKK (1.500 USD). Because I would like to have som surplus cash when the market is going to tumble.

Never hesitate to contact me if you have any questions.

Cheers

The Power of Spending Less

In a very long period of my life I thought that in order to become rich you need to earn a lot of money. When I started to study have the financial independent I found that this wasn’t the whole truth. The most important part to become financial independent is to spend less.

If we have two people. One is earning 500.000 $/year, the other make 50.000 $/year. If they both save 10 % each month they will have the same retirement date.

Because their 10 % is going to fund 90 % of expenses. It doesn’t matter what the amount is. The percentage is what we are looking for.

If we instead could live on 50 % of the income our situation will look like this:

Which is WAY BETTER!

“What about the rate of return then? That must be an important factor.”

Not really. That chart below is from the book Early Retirement Extreme.

It clearly shows us that when we can save +60% of our income, the rate of return is less important.

From the book “Early Retirement Extreme”

And if you have read my other article on How I’m Retiring in 5 Years or Less you can tell that I sometimes recommend people to leverage their investing. If we save and invest +60% of our salary, and we borrow the same amount to invest for. This means we hit our retirement number in half the time. And do some time diversification. If we have more money in the market early, they will make dividends, and they will have more time in the market to prove their performance.

The average savings rate here in europe is around 5 %*. And if we look at the chart above we will never be able to fund. Even if we have the same rate of return as some of the best investors in the world like Warren Buffet. He has averaged around 20 %/year. If we earn 50.000 $/year and we are saving the 5 % of our income and get a ROI on 20 %/year we will be able to retire in 25 years. While this seems like a relative short time period. We need to get the same ROI as the best investor in the world.

Yes you can be the next Warren Buffett. But I think you will have a higher chance of winning the lottery. If we instead save a large amount of money. And maybe leverage. We now have the odds with us.

* https://data.oecd.org/hha/household-savings.htm