Hi HENRYs, you have watched the Instagram ads, the TikTok shorts and the Youtube videos on this elusive concept called Financial Independence and Retire Early (FIRE). You scratch your head in wonder as to how can people achieve FIRE when you are unable to do so despite making 5x the average paycheck in your city.
This post will try to help you answer your queries and provide a roadmap for you to achieve FIRE faster and capitalize on that sweat blood and tears which has given you the high income you deserve! This is not the one article to address all your questions but hopefully this gives you some roadmap and there will be future posts to address any questions you may have.
TLDR – Here are the five key steps:
- Financial Goals Definition: Know your FIRE number – how much do you need to walkaway from your job?
- Income Optimization: How do you optimize your income from your day job and create secondary income streams from side hustles?
- Investment Decisions: How do you build up your investment portfolio so that your money works for you even when you sleep?
- Expenses management: How do you keep track of your expenses while still leading a lifestyle suitable for your role?
- Tax Optimization: Do you have the most efficient tax structure (yes US IRS & UK HMRC, I am looking at you) How can you minimize your taxes?
Financial Goals Definition
Desired Cash Flow: What is your desired cash flow on an annual basis? If you want to fully retire, this can be the entirety of your expenses with abit of buffer. If you would like to pursue a more interesting role with a lower income, this can be a percentage of your expenses. Knowing how much cash flow you would like to generate passively is critical to planning your FIRE journey.
Withdrawal Rate: Withdrawal rate is a percentage number which suggests that if you drawdown your principle sum at a conservative number, your principle would be able to generate sufficient returns to sustain your entire retirement life. The internet has somewhat settled on a withdrawal rate of 4% as the advisable withdrawal rate.
As such many FIRE practitioners have found their FIRE milestone as a portfolio large enough to sustain their desired cash flow amount with inflation adjusted withdrawals equal to 4% of the portfolio’s initial value—the so-called 4% rule.
FIRE Number: If you have read any FIRE blog (eg Mr Money Mustache), you would know that the FIRE number is what everybody obsesses over. Essentially the FIRE number is the Desired Cash Flow amount divided by the Withdrawal Rate.
If you desire to generate $240,000 cash flow passively a year ($20,000 a month) and you have a relatively conservative withdrawal rate of 3% (more conservative than most), then your FIRE number would be $240,000 / 0.03 = $8m.
This means that if you invest $8m in the stock market and draw down 3% a year, your portfolio should be able to sustain you for the rest of your life – so start racking up your $8m nest egg!
Income Optimization
So we need to make more money and there are two ways to achieve this, i) make more money at your day job, and ii) start a side hustle.
Day Job: It is not my place to advise you as to how to make more money at your already high earning day jobs, but two methods have helped me gain a bigger bonus, get promoted faster and generally increase my ROI on my day job.
The first is networking, both internally and externally. Building a bigger network will allow you to participate in more projects and have more opportunities for development within the organization or finding a new role within the market. Don’t shy away from networking opportunities and always follow up with an email and introduction call to any new contacts you have made.
The second is building a book of business. In most high earning roles, the rainmaker is paid the most. Understand how your company functions and where does the revenue come from, would you be able to bring in new clients and contribute to the revenue growth. If you have a portable book of business where you can command some influence over the revenue numbers, your company will have to remunerate you accordingly.
Start a Side Hustle: I get it, playing the political game to try and milk a bigger bonus in your day job is easier said than done. Fortunately, we have an alternative way to increase our cash pool by starting a side hustle. As a busy Henry, starting a side hustle is not always easy, so we have given you a list of ideas to consider:
- Consulting Services: Offer your expertise to businesses or individuals in your industry on a freelance basis.
- Online Courses and Webinars: Create and sell courses or conduct webinars on subjects you’re knowledgeable about.
- Real Estate Investing: Purchase rental properties or invest in real estate crowdfunding platforms.
- E-commerce Business: Start an online store selling products that align with your interests or expertise.
- Freelance Writing or Content Creation: Write articles, blog posts, or create video content for platforms that pay for high-quality material.
- Digital Marketing Services: Provide digital marketing services such as SEO, social media management, or PPC advertising or affiliate marketing (assuming you have a strong online followership)
Investment Decisions: Building up your investment portfolio
I can’t profess to say I make better investment decisions than you, especially if your day job involves finance, investment and everything in between. But if you are a Henry, you probably will face some compliance restriction on stocks trading and hopefully our advise below would help you overcome your compliance restrictions and start building an investment portfolio with a simple core-satellite strategy.
Core Fundamentals: Your portfolio should be made up of a core fundamental diversified basket of shares, ideally an ETF of sorts. What ETF you would like to deploy into (eg. S&P vs Global World etc) that would be quite a personal choice. In general, I recommend low cost index funds (eg. From Vanguard) or the UCITS equivalent domiciled in Ireland if you are not based in the US. My personal favorite is CSPX, but please do your own due diligence and this is not financial advise.
Satellite Bets: Depending on risk profile, this can be some moonshot bets (eg. Crypto, memecoins, gamestock, all bets are off) or this can be single ticker stocks which you believe in (eg. FAANG, Tesla, Disney etc). There is a time and space to delve deeper into this, but this is not the forum.
What is critical here is to decide how much cash do you want to dedicate towards building your core fundamentals and how much can you afford to do satellite bets. I recommend building a strong core fundamental first before going for the satellite bets.
Automation: One of the ways to easily build up your core fundamental is to automate your investment. I used to automatically credit 50% of my paycheck into my brokerage account and to automatically purchase the corresponding amount of S&P 500 shares on a monthly basis. This allowed me to quickly build up a base of S&P 500 shares which rewarded me handsomely in the bull run.
Real Estate: (Controversial advise warning) many FIRE bloggers do not talk much about Real Estate, but I truly believe that having multiple properties for rental income is a great way to gain financial independence especially for high cost of living cities. If you are a young HENRY, I would also recommend you looking for a place to purchase as soon as possible including liquidating your stock portfolio if needed to make that initial deposit.
Expenses management
Beyond income maximizing, expenses minimizing is also highly important on the road to financial independence. Many FIRE bloggers recommend lifestyles of extreme frugality which allows one to reach your FIRE number earlier, but we are also aware that Henrys have stressful jobs and letting your hair down is important for mental health even if it comes with a hefty price tag. As such, we have a few strategies to allow Henrys to enjoy a good quality of life without compromising on the wallet spend.
Corporate Expense Account: Get approval for a corporate expense account, typically available if you are in a client facing role which also allows you to bring in more business and accelerate your cash accumulation efforts.
Track your personal spending: Keep track of your personal spending through the various apps available in the market. Limit your spending to a reasonable amount and always invest your money first before spending your money.
Mile hacking: For the big ticket items like holidays, hotel stays, business class tickets, explore the world of mile hacking. There are various lifehacks available to allow you to enjoy the modern luxuries of life without the hefty price tag – more on this later in my elaboration articles.
Tax Optimization
Lastly, tax optimization to reduce your tax burden. This is highly important but also very localized and tailored to individual situations and the jurisdiction you are in. Feel free to reach out to me if you would like to have a detailed discussion, but I am happy to provide a short list of ideas for Henrys based in US and UK. This are just illusory ideas and Henrys are advised to approach a tax advisor for more tailored and specific advise.
Some ideas to reduce your income tax burden in the US:
- Maximize Retirement Contributions: Contribute to 401(k), 403(b), or traditional IRA accounts to reduce taxable income.
- Utilize Health Savings Accounts (HSAs): Contribute to an HSA if you have a high-deductible health plan; contributions are tax-deductible and grow tax-free.
- Invest in Tax-Advantaged Accounts: Utilize Roth IRA accounts where contributions are made post-tax, but withdrawals in retirement are tax-free.
- Claim Deductions and Credits: Take advantage of deductions such as mortgage interest, charitable donations, and student loan interest; Or utilize tax credits such as the Child Tax Credit, Earned Income Tax Credit, and education credits.
- Consider Tax-Loss Harvesting: Offset capital gains by selling investments at a loss to reduce taxable income from investments.
- Utilize 529 Plans: Contribute to state-sponsored 529 education savings plans to grow contributions tax-free when used for qualified education expenses.
- Gifting: Use the annual gift exclusion to transfer wealth without incurring federal gift taxes.
Some ideas to reduce your income tax burden in the UK:
- Maximize Pension Contributions: Contribute to personal or workplace pensions to benefit from tax relief on contributions.
- Utilize Individual Savings Accounts (ISAs): Invest in ISAs where income and gains are tax-free up to the annual allowance.
- Take Advantage of Personal Allowance: Ensure you utilize your personal allowance, which is the amount of income you can earn tax-free.
- Use Marriage Allowance: Transfer unused personal allowance between spouses to reduce overall tax liability.
- Invest in Venture Capital Schemes: Invest in schemes like the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) for income tax relief.
- Utilize Capital Gains Tax Allowance: Make use of the annual capital gains tax allowance by selling investments strategically.
- Gift Aid Donations: Donate to charities under the Gift Aid scheme to allow the charity to reclaim basic rate tax, while higher rate taxpayers can claim additional relief.
- Tax-Free Childcare: Use the Tax-Free Childcare scheme to pay for childcare costs and receive a government top-up.