It feels good to actually get on with something and take the first few steps towards a new goal. It cements the feeling that you are ON the journey, actively doing something (anything) to make your new objective a reality. When you are new to FIRE it can be a bit daunting. So let’s look at 5 first steps you can take on your new FIRE journey in the next two hours:

Step 1: What’s your FI Number?

First things first, let’s calculate your Financial Independence (FI) number so you know what you’re aiming for. This is the amount of money you need in your investment accounts in order to generate enough passive income for you to live off (have a quick read of the ‘Start Here‘ post if you are totally new to FIRE).

At this stage in the game, your number doesn’t have to be set in stone. Think of it as an estimate which you will revisit and refine later. In fact you will likely play around with this number a lot as you read more!

To work out your FI number, you need to calculate the following: (Monthly Expenses x 12) x 25

e.g. $3,000 per month = $36,000 per year = $900,000 FI number

WAIT! That number is huge! How will I ever save that much? I know it’s a big number but don’t panic. It is attainable, and you might even be able to smash though that number altogether! For now, just have a little faith.

Step 2: Calculate your net worth

Now you know where you ideally want to be, you need to know where you are today. So Step 2 is to calculate your net worth. It provides a snap shot of your financial situation as of today and doing so will helps to tailor the FIRE journey to your circumstances.

It doesn’t matter at this stage whether your net worth is minus (i.e. you have more liabilities than assets), zero or is positive by thousands of dollars. What matters is that you know what it is.

Calculating your net worth is easy to do, use the MMG net worth tracker to help with a template. You can read more about your net worth and why it important here.

Get into the habit of updating your net worth statement once a month, or at least once a quarter. Tracking is a key motivation tool for your FIRE journey.

Step 3: Track your spending

To find a route to reaching your FI number, we next need to track spending.

To do this you need to make a spreadsheet (you can do this by hand if you are not tech savvy, though it will take a little longer!). Track everything you’ve spent over the past 30 days by reviewing your bank and credit card statements. Don’t cheat, write everything down. Note the date, where the spending happened (ie. the name of the shop) and then categorise each expense accordingly (i.e. travel, groceries, eating out / drinking, subscriptions etc.). Once this is all set out, add up a grand total AND a total for each category. This can be really eyeopening.

More than you thought? This tends to be the case, but for today knowing is progress.

Step 4: Build your budget

Now you know what you are spending, you can make a REAL budget that you can actually stick too. There’s no point (and I have tired many times before) in making an unrealistic budget – it just leads to failure and cash flow problems in the future.

Using your expenses tracker, calculate your total discretionary spending for the month and then add in your other expenses (e.g. rent / mortgage, loan repayments etc.). Hopefully when you total up your budget you have money left over from your salary which you can save and invest? If not then you need to take urgent action to cut spending to ensure you don’t spiral (further) into debt.

Spending more than you earn is a recipe for financial disaster, stop what you are doing immediately and take action now!

Now you know what you can save if nothing changes. Are you happy with this amount? A usual metric to look at to decide if you are saving enough, is your ‘savings rate‘. The higher you manage to get your savings rate, the quicker you can reach FI. Ideally you get this to 60%+ to really rocket charge your FIRE journey. Read more about savings rates in our blog post here and over at Mr Money Moustache.

Increase your savings rate by taking look through your expenses and make some easy cuts. Anything you can do to trim that discretionary spending will allow you to save and invest more and reach your FI number more quickly. The other lever you can pull is to increase your income some way, perhaps by starting a side hustle or even negotiating a raise at work.

After you have your budget set and know what you can save and invest each month, you can start getting your money to work for you on your FIRE journey so that one day you may be able to buy your freedom by reaching Financial Independence.

Step 5: Establish your FIRE journey milestones of achievement

The journey to FI is long and will take considerable effort. It’s important to set yourself small goals and to celebrate when you reach them:

• Rewards: these will be unique to you and you should set them in the way which you best respond. Some people like a fancy meal, others (like me!) might like an extended hiking trip or a cheap weekend away.
• Milestones: these could be set at reaching smaller goals such as a net worth increase of $X,000 with a bigger treat reserved for reaching $25k, $50k, $100k, $250k etc. However, when you are starting out, a major milestone is when you reach ZERO net worth – plan ahead and do something a little special to enjoy you enjoy the journey as much as the end goal. Take a look at JD Roth’s Six Stages of Financial Freedom for some ideas on what are the large milestones in the typical FIRE journey.

So in the space of a couple of hours you are ready to start your journey to FI. You know what you are aiming for, where you are now and you have the start of a plan of how you are going to get there. There are a tonne of things you can now do to supercharge your journey and get there more quickly. Start a side hustle, negotiate a raise at work, cut back your spending to increase your savings rate. Read around on this site and check out the Resources page.

Most importantly – GO DO, AND DO IT NOW.

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