Jan
2024
FIRE in your hands: the road to financial independence
DIY Investor
23 January 2024
The FIRE movement (The FIRE movement, America’s hottest new trend in personal finance) – those seeking to be Financially Independent, Retired Early – is growing apace in the States, and is gathering momentum here as an increasing number of savers and investors seek the liberation of financial independence by Hannah Barnaby
Clear expensive debt
Embarking upon an investment strategy whilst servicing expensive debt rarely makes sense; although it may not be possible to make any significant inroads into a mortgage, for those able to secure one, it usually makes sense to pay off credit cards or personal loans before putting money to work in the stock market. Credit cards and loans can attract high levels of interest, almost certainly higher than any investment returns that could realistically be expected.
Those on a mission to achieve financial freedom early may find it easier to recover (financially and psychologically) from making a bad investment decision with money they can afford to lose; the absence of debt may also mean that they are able to take advantage when the market offers opportunities after a correction.
Become an investor
Clearing debt is an important first step, and just having your finances in order and being in control of your income and outgoings can help suggest the next steps.
In order to maximise the amount of your income you are able to put to work, and hasten the journey, take some time to analyse your spending and make a conscious decision to cut back on anything that is superfluous. Changes to spending habits can make a significant difference in hastening your journey.
Then decide what kind of investor you are – are you happy and confident enough to spend time doing the research required to make individual investment decisions, would you prefer to let someone else do some of the heavy lifting by investing into pooled investment funds, or would you prefer to take advice – human or otherwise – and let someone else manage your money for you?
‘Do it Yourself, Do it With me, Do it For me – just don’t do nothing!’
Whatever your choice, there are plenty of options available, and you should always seek a tax efficient wrapper such as an ISA to protect your pot; by minimising the fees you pay, and maximising your investment horizon, the ‘miracle’ of compound interest can deliver a lusty tailwind to your investments.
Elsewhere on DIY Investor you will find plenty of information for those wishing to learn more – as we say Do it Yourself, Do it With me, Do it For me – just don’t do nothing!
On Muckle you will find information about the wide range of digital investment management platforms – robo advisors – and micro investing apps, which may deliver the ideal introduction to investing by serving up a diversified portfolio of investments tailored to your individual appetite for risk, with generally lower fees than other types of investment platforms.
It is important to get into a routine whereby investing becomes the norm, and the most convenient way is to set up a direct debit that transfers an amount of cash from your current account at the start of every month; in this way, the efforts you are making to secure your financial independence are psychologically given precedence over your non-essential discretionary spending.
No pain no gain
Little and often is rarely bad advice when embarking upon an investment strategy, and drip feeding your money in on a monthly basis can be an efficient way to iron out the peaks and troughs – volatility – that markets exhibit.
Known as pound-cost averaging, making a regular investment into, for example a stocks and shares ISA, means that you may buy fewer shares in a month when prices are high, and more when they fall; overall the price you pay for your investment will average out, whereas if you were to go in with a large lump sum, you would be much more vulnerable to a sudden fall should you time it badly.
‘The FIRE movement – ‘none of us is stronger than all of us’
Typically, investment platforms such as the retail brokers and robo advisors charge a fee based upon a proportion of the value of your investments which may reduce as a percentage as your pot grows; regular investing plans from brokers into individual shares or collective investments – funds – can help by keeping commission fees as low as possible, important when seeking to grow your wealth quickly.
If you are determined to speed up your pursuit of financial freedom you may consider setting yourself a challenge to increase your contribution month on month; watching your wealth grow increasingly quickly can make such a ‘no pain, no gain’ approach engaging and immersive.
However, by the very nature of stock market investing, there will be periods during which the investor is putting in the hard yards, yet seeing the value of their investments fall, so it is important to never lose sight of the fact that this is a long-term undertaking and there will be bumps in the road.
Education, education, education
The performance of your investments can make a very big difference in how long it takes you to reach your ultimate goal, and it may be difficult to achieve financial security without returns that outperform overall markets.
Somewhere on the risk/reward curve there will an investment type that delivers the performance that you seek without keeping you awake at night; finding quite where it sits is immeasurably simpler if you spend some time getting to grips with different investments and their attendant level of risk and potential return.
Whilst general levels of financial literacy are poor, there are plenty of sources of jargon-free information such as DIY Investor where users can learn the basics and inform their journey to financial freedom.
Education and confidence allows an investor to better understand the risk their investments are exposed to, possibly mitigate some of that risk, and potentially take on more risk with a part of your portfolio in pursuit of better returns
Not everyone may be comfortable taking a risk with their investments, but those prepared to take on greater capital risk by, for example, investing in smaller companies, can at least ensure that their level of knowledge allows them to go in with their eyes wide open.
Those considering taking on risk should consider not only their own risk-tolerance beforehand but also the importance of building a thoroughly diversified portfolio.
Finally, once you have made a commitment to achieving financial independence, remember, FIRE is a movement.
You are part of a growing number of people, with different levels of knowledge, in differing circumstances and with individual requirements, but each with the same desire; there will be people out there just like you – and social media makes it easy for you to interact with them and benefit from shared experience.
Someone will have the same level of student finance as you, and will be striving to achieve a similar sum; someone will have tried that broker you are considering, or will have signed up with that robo advisor, and will have an opinion on their customer service.
The FIRE movement – ‘none of us is stronger than all of us’
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