Frances Cook: The techniques to make financial independence more achievable

Once you know the tricks it's easier to build up a decent nest egg. Photo / File

OPINION:

When you first look into the FIRE movement (Financial Independence, Retire Early) the numbers look intimidatingly huge.

The idea is underpinned by two pieces of maths. The first is that you work out what your core yearly expenses are, and invest 25x that number.

Then you can live off 4 per cent of that nest egg, each year, for the rest of your life.

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It might sound simple, but that doesn't mean it's easy. Say you currently spend about $50,000 a year – that means you need a financial cushion of $1,250,000.

Huge. But don't tap out just yet.

Fortunately, if you scratch a little below the surface, you find that there are tricks to make it more achievable.

The first is that investing is key for this plan. The idea is not to dump all of your savings into a bank account, and then try to live off the interest for years.

The standard FIRE devotee will invest in shares through low cost index funds. This means their money will grow, doing some of the work for them.

Shares have traditionally doubled in value every 10 years. This means that if you invest your money as you go, they're doing some of the work for you.

You don't have to earn every dollar of that nest egg yourself. Frankly, on average wages, that would be truly difficult.

But your money can help you out, earning alongside you, and speeding up the journey considerably.

Here's the other trick. You actually don't need to build up the full amount in order to quit your job and never work another day in your life.

If something like this is a goal for you, then you're probably quite a motivated person who doesn't want to sit around watching TV all day anyway.

The goal might simply be financial independence, without the retire early side.

What would it take for you to have the funds to work less hours? Or change to a job that pays less, but is more enjoyable?

Saving up a nest egg that gives you an investment trickle of $20,000 a year might be enough to give you the independence to make your own choices, without having to worry about every dollar.

You still need to work, but you have space, breathing room, the ability to make decisions without money dictating the outcome.

To have $20,000 a year you would need a nest egg of $500,000, which again, is more achievable if you're investing it into growth assets like shares, and not having to earn every dollar of that yourself.

If you have a partner and you work towards this goal together, it becomes even more achievable once again.

It's still a big goal, but it's one that becomes more realistic when you're ready to think sideways for ways to achieve independence.

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