The decision to live a life centered around financial independence and retire early (FIRE) strategies isn't always a difficult one for someone who is naturally frugal. Choosing your strategy at the outset is the challenging part.
As you increase your savings rate to 25% or greater in an effort to retire in your 30s or 40s, there aren't many simple guides available. It prevents one Reddit member from taking the first step toward implementing FIRE techniques, which he had intended to do. Over the past two months, HappyAsianPanda, a Reddit member, has created a flow chart that illustrates a strategy for managing your money as you advance in your FIRE activities.
The user, who prefers to stay anonymous, improved the flow chart over ten revisions after seeking input from Reddit's Financial Independence community. As you can see from the chart below, it begins with the very basic step of creating a budget, and then gradually gets more complicated as you throw in 401(k), health savings accounts (HSA), Roth IRAs, and other investment vehicles.
The chart also addresses a major problem for people attempting to decide whether to increase their investments or pay down debt: when to pay off specific forms of debt throughout your journey based on the interest rate.
The author's own research, his personal FIRE journey, and input from the Reddit community all went into creating it. The flow chart is therefore based on what the typical individual should do and when. However, it provides a useful checklist to use when just getting started.
The Inspiration Comes From Experience
The FIRE flow chart was created by HappyAsianPanda after seeing a similar one on a Reddit page devoted to conventional personal finance techniques. He discovered that those who wanted to deviate from the conventional 15% savings method lacked a comparable step-by-step guide.
However, it also resulted from his work with FIRE. He had to learn the language of American personal finance because he was an immigrant. At times, he had trouble even coming up with the correct words to describe the strategies he was trying to use. He soon discovered that many of the people he spoke to had no idea of the FIRE methods he was trying to follow once he had begun to gain some understanding of the tools.
He gave the example, "I was confused by backdoor Roth and giant backdoor Roth for a long time. I questioned many of my coworkers about how they handled it after learning that my place of employment had a massive backdoor Roth. All of the peers I admired didn't even understand what I was referring to.
He resorted to forums like Reddit because of this. He used the flowchart to help individuals who were just starting out or in the middle of the procedure by offering some clarification.
While the chart won't exactly address all of your personal financial questions, it will provide someone a basic idea of when they might want to weigh one strategy against another.
There is less chance of making a mistake with any move if you are picking between two methods that are next to one other on the flow chart. However, the flowchart explains what the community would typically do.
The Flow Chart's Major Modifications
The "ultimate form" of the flow chart, according to HappyAsianPanda, is version 4.2.
One of the main modifications made during the editing process was the addition of 529 accounts. HappyAsianPanda didn't include it in the initial draft of the chart since he doesn't have children and wasn't well-versed in the tax-free method of saving for a child's college.
He also learned that because the HSA provides tax benefits, many people in the neighborhood invest in it before maxing out their 401(k)s.
It serves as an illustration of how the flow chart and one person's experience can diverge. While it's true that the HSA offers some tax benefits, it also makes it more challenging to access the funds because they continue to be tax-free as long as you utilize them solely for approved medical costs. However, for individuals who may need to use the money sooner and who already have other healthcare coverage in place, maxing out the 401k may make more sense.
By no means does it eliminate the need to consider all of your options, even if it does act as a road map.
Ask away!
The chart doesn't go into detail about specific investments to make, nor does it explain how to access money if you're ready to leave your job. HappyAsianPanda considered attempting to produce the latter but "realized that it's going to be different for each person."
And there is the chart's true strength. He sought advice from others because he was unsure what to do. The community on Reddit offered useful tips on how to improve the chart when he posted it there.
It is comparable to everyone who wishes to make changes to their budget. The best course of action is to find someone to ask a question to.
When you initially begin analyzing your finances for FIRE, HappyAsianPanda advises, "assume you know nothing."
He said, "Keep questioning like you don't know anything and always be pleased to be proven wrong."