Yearly financial checkup: A really important step towards financial independence!
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| Do a yearly financial check up! |
George Washington: “We must consult our means rather than our wishes.”
My wife and myself’s journey towards financial independence and freedom started way back in 2010 or so, when I discovered the whole FIRE (financial independence retire early) movement. Once I figured out we can retire early by reducing our yearly expenses and saving/investing, we finally had a goal we can actually achieve!
My discovery was a true ‘eureka’ moment that changed our lives. Rather than just wishing for early retirement, as it was simply a next-to-impossible task to accrue millions upon millions of dollars that we thought we needed for early retirement, we had a tangible and an achievable plan in place.
For those of you who have been following this blog (or any FIRE movement bloggers), it should be no surprise that the basics of the FIRE movement doesn’t change all that much. These are things like:
- Budgeting:
To figure out how much is coming in vs going out, so you can put aside as much as you possibly can to invest that money. The ultimate goal is to reduce your yearly expenses as low as you can, so you can shorten the amount of time needed to work.
Basic rule of thumb is to accrue at least 25 times your yearly expenses before retiring. It’s generally understood that if you withdraw roughly 4% of your money each year, your next egg should remain pretty much intact.
***Historically, index fund investing strategy has on average returned about 10% per year. Even if you withdraw 4% each year in retirement, you should still make money even accounting for rise in inflation, typically 3% or so, in most years. Remember though, that past performances are not indicative of future performances.
- Investing:
Investing in index funds as the most popular method of achieving FIRE. 401k is the most popular strategy for those of you that work for a company that offers one, although other strategies like the IRA/Roth IRA, or a regular brokerage accounts would work as well.
- Having an emergency fund:
Most FIRE movement crowd will have an emergency fund on hand (online savings account, money market account, or similar) to hedge against market volatility. The year 2022 is a great example of that, as we had to use some of our emergency fund when markets tanked.
I cannot stress enough how important an emergency fund is for anyone, especially those who are retired. It’s no fun when you see your nest egg drops by 20% or more, like it did in year 2022! This is why you need one so you won’t need to take money out when market drops like this.
In addition to all of these things above, one of the most important things to consider doing is an yearly financial checkup. The reasons for doing an yearly checkup are as follows:
- To see how far you have come:
It’s always important to see the fruits of your labor. Sometimes you have to stop and see how much you have accrued up to that point. What good is working hard, investing, budgeting, if you don’t stop and see how much you actually accomplished? Everyone needs an occasional pat on the back, so we can continue on.
Sit down at the end of the year, or the beginning of the year with your significant other (if applicable), to see how much your nest egg has grown. Savor the yearly dividend payouts from your investments which you know will make your nest egg grow even more, when it is reinvested!
2. Assess what has worked up to this point:
Review each of your investments to see how they’re doing. In a good year (not 2022) where market goes up, your rate of return should roughly match market indexes, like the S&P500 or NASDAQ. If you purchased S&P500 index fund (highly recommend it), and if the S&P500 market index went up by 10% for that year, then your index fund should do about the same.
*Note: For those of you interested in learning about index funds, simply Google “index fund strategy”. You’ll see several articles, including one about one of my favorite finance gurus, Warren Buffett, who famously bet on index funds to outperform actively managed funds in a ten year period, and won!
3. Change your investment strategy as needed:
In a down year like 2022, everyone’s portfolio took a hit, so it probably doesn’t make sense to change your investments. However, if your portfolio is not doing roughly 10% rate of return when the market is doing well, then you may want to buy less of that underperforming fund going forth, then buy more of something else that is performing well.
For example, at the beginning of my FIRE journey, I thought a target date fund was a great idea, as it changed the investment strategy for me as I age (more stocks early on, but more bonds as I get nearer my retirement target date). I later realized the rate of return compared to my other funds were lower but expenses were higher than my index funds.
This didn’t work for me, so I stopped buying these target date funds, then started purchasing more index funds and an actively managed fund that was doing even better than my index funds. Good rule: Don’t think what you bought initially is the right one. Adapt as needed, change your investments as needed.
With a typical 401k, you should have the option to change the amount you purchase (of an investment) on future contributions. *Note: I don’t recommend selling an underperforming fund to buy something else in a 401k, as this would introduce all kinds of fees and tax implications. If this is something you’re interested in doing, then please contact your 401k provider.
4. How is your budgeting going?
Even the greatest investing strategy in the world wouldn’t help if you’re living beyond your means. Remember, income is great if you can actually let that money make more money for you. You do that by spending less, so you can put aside that money for investing. You don’t want to be like a typical American and buy stuff you don’t need to keep up with everyone.
Practice minimalism, practice living frugally, figure out ways you can cut costs, and plan ahead so you can have a brighter future. Most of us won’t hit the lottery, have a rich uncle who’ll leave good chunk of inheritance, and/or your investments will magically hit the jackpot.
Rather than wishing for a brighter future, plan for one.
5. Practice gratitude:
By learning to appreciate what we do have today, we can live a more fulfilling and a happier lives. I’ve yet met a person who doesn’t appreciate the things they have right now, to be happy. Learn to appreciate the air around us, the rainfall, the snowfall, a flushing toilet, a roof over our heads, and food.
These things may be trivial to most, but it’s certainly not to me. I like to take the time to appreciate these things everyday…You should practice doing the same. The more you do, the better your outlook will be…
If you don’t like your current situation, you can change. Learn a new skill that pays better, get a new career, or try to do something that’ll improve your life. No one will do anything for you. You need to take the initiative to change.
In conclusion:
The journey of FIRE is long and arduous. You’re trying to do what others are not. While others are spending money to buy the latest gadgets, clothes, and/or going on exotic vacations, you’re not doing those things.
After awhile, you may lose your focus and start to deviate from your goal. This is normal for anyone. How I got through these tough times is my steadfastness towards achieving my goal of reaching financial independence.
By periodically checking my nest egg, including our yearly checkup/review, it kept me going. It made me proud to have come so far compared to just several years back. It really gave me the necessary motivation and forward momentum needed to continue my journey.
I encourage everyone to do the same. Review and be proud of your accomplishments yearly. Review and reassess your investments, but most of all, enjoy the journey. One way I did just that is by checking my nest egg at the end of the year to see how much it has grown, which investments did great, or which investments paid the highest dividend.
Don’t underestimate the power of seeing your nest egg growing each and every year! I wish everyone the best of luck in his/her journey of FIRE!
Thank you all for reading!
Jake
Wandering Money Pig
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