The road to Financial Independence, Retire Early (FIRE), is anything but a straight line. It’s more like a really good movie… you’ll laugh, cry, get angry, frustrated, be overjoyed and a host of other strong emotions. At the end, you’ll be left with a sense of true fulfillment. So much so, you may even cry tears of joy…or maybe that was just me. Lol.
Starting on the Road to Financial Independence
I started on the road to FIRE back in 2009. Back then I was separated with two young kids, 3 ½ & 5. By the end of the year, the divorce was finalized. I walked away with the kids, the house and over $254,000 of marital debt. The debt was broken down into two buckets: ~$122,000 home loan and ~$132,000 on a HELOC. We didn’t have any other kind of debt.
When I look back, I don’t think it really sunk in…all that debt. After all, I had a temp job that might turn permanent (it never did). I thought I could find other employment, grow my career and make more money. That didn’t happen either – at least not for many years.
Fast forward to today. When I look at my financial situation, I am truly amazed at all I have accomplished.
Not only have I achieved financial independence but am very close to claiming early retirement.
As of this writing, the only debt I carry is a small mortgage ($90,500) for my home and one consolidated mortgage ($205,000) for my rental properties (5 single family homes).
From $254,000 of Debt to Financial Independence and a Net Worth of $1,013,000
It took 10 years to become an overnight success. I like saying it that way because often times we look at successful people and think, “Well, it’s easy for them, they are rich or famous”. Saying things like that (out loud or to yourself) is an automatic excuse to not be the best version of yourself.
As a kid, Jim Carrey’s parents lost their home and moved their family into their van. Jim dropped out of high school to get a job and help make ends meet. Jay Leno worked two jobs and disciplined himself to live on one paycheck, saving the other. Steve Harvey slept in his car for 3 years before finally catching a break in his career. We all know Oprah’s story.
I could go on and on listing people who have started with nothing, but never let their current situation define who they are. They each had a vision for what their lives would look like. That vision propelled them forward to who they are today.
That is my story, except for the famous part. Here is what I did to change my situation.
Laying the Foundation for Financial Independence
It started with self-education. I read a lot of books about real estate, money management, and self-help. I took notes as I would read each book, taking away little nuggets of information that I could apply in my own life.
Managing money is more than recording what was spent that month. That is only the tip of the iceberg. It’s just as much an emotional journey as it is learning the mechanics of handling your money.
So the first thing I had to do was make a conscious decision that I was going to proactively manage my money and life.
Taking Responsibility for My Situation
The very first time I calculated my net worth, I was terrified. I didn’t want to know exactly how badly I had screwed up. I had to muster up the courage to be honest enough before putting numbers to paper.
You can’t fix what you don’t acknowledge. I reminded myself that this is just a point in time. No matter what the numbers are, I have the power to change it.
So I calculated my net worth. By January 2010, I had approximately $441,300 in assets (although the housing market collapse made it difficult to determine the actual value of my home) and over $254,000 of debt. That’s a net worth of about $187,300, and most of it came from the house. It was your typical house wealthy, cash poor situation.
I decided to consolidate the mortgage and HELOC into a 30 year fixed loan of about $259,000. For me, this would be best because 1) the HELOC had an adjustable rate and 2) I could change the title to list only my name as the owner. This would make things easier when it came time to sell the house.
A Major Mindset Change Made a Huge Difference
Negative talk can be a killer of dreams and goals. Every time I caught myself using phrases like “I’ll try…” or “I can’t” I would immediately stop, then start the sentence again with “I will…” or “I can”. This one mindset hack made a huge difference in the way I live my life.
It was as if suddenly I discovered a strength within me that I didn’t even know I had. My vision for my life became more solidified. I paid more attention to my words. “Try” gave me an automatic out. “Will” made a commitment to follow through.
I also adopted a morning routine, where I read inspirational quotes or parts out of books. My two favorites are Our Deepest Fear from A Return to Love: Reflections on the Principles of A Course in Miracles by Marianne Williamson and the Get in the Arena speech by Theodore Roosevelt.
Starting with a Life Vision and Making a Master Plan
Some people use a vision board, others use S.M.A.R.T. goals. While I don’t have a “board” I do have an overarching vision for my life.
My vision: To never again be in a position where I was dependent on someone else, i.e. a paycheck.
I wanted to live a life where if I had a job, great, but if I didn’t I could still pay my bills and sleep at night, worry free.
All of my goals support that life vision.
Creating S.M.A.R.T. Goals to Support My Vision
Each time I make S.M.A.R.T. goals, I ask myself, “Does this goal support the vision I have for my life?” Thinking back at the first time I wrote down my goals, I have to laugh a little.
I made a list of things to accomplish for the year, keeping in mind my vision…and accomplished all of it…in 4 months. I was shocked. So I added more goals to the list and again accomplished that in record time.
What that taught me was I was thinking too small and had strength I never tapped into. Suddenly, I wondered what else I could accomplish and follow through on. It was as if I tapped into my hidden superpower. My goals got bigger and bolder.
I added things like:
- building and keeping an emergency fund
- paying off my primary mortgage and rental property loan
- living debt free
- building passive income streams
- increasing retirement investments
- creating a blog
- writing a book (not started)
- downsizing & lowering expenses
- etc
Taking the First Step by Tracking Spending
Step 1 to creating my vision for my life started with learning to track and control my spending. In the beginning, when I made my first budget, it looked nothing like it does today. I thought I had an idea of where my money was going but in reality I had no idea. The truth is NO ONE likes to budget, not even me, but knowing where my money was going gave me control and power beyond measure.
Building a fulfilling, independent life is like peeling an onion, pull one layer at a time. I started with recording my spending and income, creating categories that reflected my life as it stood. I didn’t really do much except get comfortable learning to track my money on a daily basis. Money coming in and going out.
At the end of each month, I would analyze my spending, determining where I could do better. I turned budgeting into a game, playing against myself. I would pick a category and see if I could spend less than the previous month. For example, If I spent $500 in groceries one month, I would challenge myself to spend $450 the next month. I would tweak my spreadsheet each time until I was comfortable.
Paying Myself First
From 2009 to 2012, it was tough to pay myself first. Temp jobs don’t pay the best. But I knew I needed to make this a priority.
Each of my temp jobs had a 401k option (no matching) that I would sign up for. At the end of each temp job, I would roll the 401k into an IRA (3 temp jobs, totaling about $25,000). It was the discipline I needed. Paying myself first, before getting my pay, tricked my mind into thinking I make less.
Any “extra” money I made, (i.e. tax refunds, garage sales, baby sitting, dog walking, cooking) went right into my emergency fund until 2014 when I got a full time job.
When my pay went up, I was careful to not allow lifestyle creep and instead opted to split my paycheck into two accounts: checking (standard monthly expenses) and investment account.
Today, all extra money is invested in mutual funds or Roth IRA. (Side note: kids can have an IRA too.)
An Emergency Fund is Critical
Between the end of 2009 and the 2nd quarter of 2014, I was in and out of temp jobs, with 22 non-consecutive months of unemployment.
So when I worked I fed the emergency fund. That emergency fund along with odds and ends jobs, child support and unemployment were life savers for the months I didn’t have a job.
In a way, an emergency fund is like purchasing insurance. You don’t know when you are going to need it but it’s there when you do. Just like keeping your resume up-to-date even though you have a “permanent” job. Permanent doesn’t have the same connotation it once did with past generations.
We need to always have a plan B ready to go when the unexpected happens – and it will happen.
For example, at one point my car broke down and I needed to replace it unexpectedly. Between the trade-in, garage sales and some cash from my emergency fund, I was able to get a second hand car with no loan. I like to call my replacement car the “no loan” car, because I was able to do just that.
Downsizing to Reduce Expenses
In 2012, I was finally able to sell the house for $395,000 and move into a smaller one in a great neighborhood. It was as if everything turned around overnight.
I paid off the old mortgage, which included the HELOC and I put about 50% down on the new smaller house, which I bought for $235,000. I financed the remaining purchase price balance of $120,000, with a 15-year, 2.875% fixed loan ($800/month) and opened a new HELOC (Home Equity Line of Credit).
The idea was to keep monthly expenses low by downsizing.
At this point, I had about $15,000 in an emergency fund, $65,000 in an IRA, almost $10,000 in a 401k and about $26,000 in mutual funds. I also had equity in my new home that was easily accessible via the HELOC. Not a lot of liquidity but the only debt I had was my new home loan of $120,000.
Moving Forward with Passive Income Plans aka Don’t Put All Your Eggs in One Income Basket
After finalizing home loan documents, I asked to be pre-approved for a loan to purchase rental properties. At this point in time, no financial institution would give me a loan because I only had temp employment and child support. Oddly enough, they consider child support as secured income, just like a permanent job.
In 2013, the branch manager went to bat for me and convinced the mortgage manager to take a chance. I was pre-approved to purchase my first rental property, using my primary home as leverage.
Remember my ultimate vision of never relying on anyone ever again? Creating multiple income streams, is my step 2. This is critical to achieving financial independence. It’s like the secret ingredient that is not on the recipe. Sure saving is important… but then what? Investing and stretching those dollars is just as important.
If temp jobs and unemployment taught me anything, that was to have multiple streams of income to protect myself. If I lost one income, the others would still be there. I would no longer be vulnerable.
In addition to a (small but mighty) 401k, a mutual fund, and a fully funded emergency fund, I decided to invest in real estate. This is where that HELOC and pre-approved loan comes in handy.
Purchasing My First Rental Property
I registered an LLC and began looking at potential rental properties. These were single family homes in a neighborhood that was public transportation friendly and not far from the downtown area.
Armed with my LLC, HELOC and pre-approved loan, I purchased my first rental property for $67,500, using the HELOC as cash. Then I would turn around and get a loan for 80% of the purchase price and aggressively pay off the HELOC balance.
Purchasing Additional Rentals
In 2014, I went back to the bank and showed them my new tax returns with the rental property now on it. With the new income stream, I was able to secure another pre-approved loan for a larger amount. I purchased two more rental properties ($52,000 and $64,000). Again opening loans for 80% of the purchase price for each property while paying off the remaining HELOC balance.
In 2015, I purchased two more rental properties ($60,000 and $60,100) using the same technique (showing tax returns with 3 rentals and a permanent job).
At this point, four of the rental properties had their own loans. The last one was still on my HELOC. I shopped around for a better loan rate, consolidated the 5 properties under one $246,000 loan (15 year/7yr term at 4% fixed ($1,842/month). This mortgage refinancing strategy gave me a savings of $660/month or $7,900/annually since the separate loans were each between 4.75% and 5.15% (totaling $2,500/month).
Paying my bills on time and keeping my debt-to-income ratio low kept my credit score in excellent standing, which got me a competitive interest rate.
Now I do want to take a moment and point out that all of these properties were in need of repairs. That meant that I needed to think about setting aside cash to cover the additional expense. Because I am not flipping homes but holding for the long term, I felt comfortable doing that. Short term expense but over time the rental income would cover it.
Building Up Cash Investments as Other Income Streams
After 5 rental properties in 3 years, I decided to take a break and turned my attention back to building up my cash investments. I regrouped and went back to my vision, to never again be in a position where I was dependent on someone else, i.e. a paycheck.
The FIRE Movement and Stages of Retirement
When I think about the FIRE movement and traditional retirement, income streams fall into 3 categories: Financial Independence, Early Retirement, and Retirement.
Financial Independence
I achieved financial independence when I was no longer dependent on 1 income stream (i.e. paycheck). Over the years, because I consistently and aggressively paid myself first before paying my bills, I was able to build up multiple income streams. Financial independence means I’ll be in good shape for 6 months or longer if I lose my job.
At this level, my checklist looks something like this:
- Master the art of controlling spending (& expenses)
- All non-mortgage debt paid in full
- Emergency fund is 100% funded (and separate from monthly savings & checking)
- Able to go 3+ months without a paycheck (without accruing debt)
- A solid start to building 3-5 passive income streams
Early Retirement
Early Retirement, for me, is when I no longer need a full time permanent job and work when I want to. Long breaks between full-time jobs are not only possible but assured, or I can take a part-time job. My early retirement checklist looks like this:
- Master the art of controlling spending (& expenses)
- All non-mortgage debt paid in full
- Emergency fund is 100% funded (and separate from monthly savings & checking)
- Cash on hand to cover one-off large expenses (separate from emergency fund)
- Able to go 12+ months without a paycheck (without accruing debt)
- Access 3 or more passive income streams that cover 75% – 100% of monthly expenses. This will include rental properties, mutual funds, and a cash account (separate from emergency fund to float through market downturns)
Retirement
Retirement or traditional retirement is the age at which I have access to social security. Once I have achieved early retirement, traditional retirement will be fairly easy. Adding passive income streams will help pay for medical expenses (since I don’t know what my health will look like, I budget high). To know when I am ready for retirement my checklist looks something like this:
- Mastered the art of controlling spending (& expenses)
- All non-mortgage debt paid in full
- Emergency fund is 100% funded (and separate from monthly savings & checking)
- Cash on hand to cover one-off large expenses
- Able to go without a paycheck (without accruing debt)
- Access to 5 or more passive income streams that cover more than 100% of monthly expenses. This will include rental properties, mutual funds (within a 401k and Roth), a health savings account (HSA), Social Security, and a pension (if you are one of the lucky ones).
Reaching Financial Independence
I believe that we all have our own definitions of when we have achieved financial freedom because freedom means different things to different people. And our definitions are based on our own personal experiences and the cost of our needs.
For me, I hit a turning point and no longer wanted to feel that dependence on anyone but myself and made that my priority with every decision in my life.
My definition of financial independence is based on my own experience with unemployment and temp jobs, while raising 2 amazing kids with no family in the area for support. For me, financial security and being able to stand on my own two feet is critical to a stress free life. It’s what pulled me forward to do so much in a short period of time.
Where I’m at Today
Today, I have achieved financial independence and am close to early retirement. I worked very hard to achieve these goals by keeping sight (daily) of my overall life vision. It was by no means easy, and there were times when I was afraid. And there were setbacks and failures, but those were just opportunities to learn and do better. These setbacks made me stronger and able to handle more. I never let any of that keep me from moving forward.
I hope my story inspired you in some way. Don’t let fear tell you what you can or can’t do. We are all capable of so much more. Grab your slice and make it a big one!
Pie Lady FI has 10 years’ experience through her personal FIRE (Financial Independence Retire Early) journey. Her financial “couch potato” watershed moment was when she realized she had $254,000 of debt. Ten years later, she achieved financial “rock star” status, having obtained Financial Independence (FI). To learn more about Pie Lady FI, visit her blog at ThePieceOfthePie.com
