For a naturally frugal person, the decision to pursue a lifestyle that embraces financial independence retire early (FIRE) tactics isn’t necessarily a tough choice. The hard part comes with figuring out what tactics to use as you start.
There are very few easy to digest guides as you adjust your savings rate to 25% or more in an effort to retire in your 30s or 40s. It’s a hindrance to that initial step to adopting FIRE strategies that one Reddit user wanted to put to the wayside. Over the past two months, Reddit commenter who uses the handle HappyAsianPanda has developed a flow chart that highlights an approach to how you can maneuver your money as you progress through your FIRE efforts.
The user, who wishes to remain anonymous, has sought feedback from the Financial Independence forum on Reddit, honing the flow chart through ten iterations. As you can see below, it starts with the very first step of setting a budget, and then progressively increases the complexity of the tactics you can take to strengthen your portfolio, adding 401k, health savings accounts (HSA), Roth IRAs and other investment vehicles to the mix.
The Reddit user, HappyAsianPanda, has developed a chart for those new to FIRE. It provides the best … [+]
The chart also describes when to pay down certain types of debt along your journey based on the interest rate, a common hang-up for those trying to decide to invest more or pay down loans.
It’s the result of the author’s own research, his experience with his FIRE journey, and feedback from those in the Reddit community. Therefore, it’s a flow chart based on what the average person should do and when. But it offers an interesting checklist to utilize, when first starting out.
The Idea Sparks From Experience
HappyAsianPanda decided to put the FIRE flow chart together after seeing a similar one in another Reddit feed focused on traditional personal finance strategies. He realized those that wanted to askew the typical savings strategy of 15% didn’t have a similar step-by-step tool to follow.
But it also stemmed from his efforts with FIRE. As an immigrant, he had to adapt to the language of U.S. personal finance. He, at times, struggled with even finding the right vocabulary for the tactics he sought to utilize. Then, once he started to capture some understanding of the tools, he realized many people he talked to didn’t have any clue about the FIRE strategies he sought to pursue.
“I got confused about backdoor Roth and mega backdoor Roth for a long time,” he said, as an example. “Once I found out that my work had a mega backdoor Roth, I asked a lot of my colleagues how they handled it. All the peers I looked up to didn’t even know what I was talking about.”
That’s why he turned to forums, like Reddit. The flow chart was a way for him to provide some clarity for those early – or even midway – in the process.
While the chart won’t answer every question for your own unique financial picture, specifically, it will provide someone with a general understanding of where in the process they might consider one tactic versus another.
If you’re choosing between two tactics that are right next to each other on the flow chart, then there’s less likelihood that you will go wrong with either move. But the flow chart provides an explanation of what the community would do, on average.
The Biggest Changes to the Flow Chart
This version of the flow chart, number 4.2, is the “final form,” says HappyAsianPanda.
Through the editing process, one of the biggest changes occurred with the inclusion of 529 accounts. Since HappyAsianPanda doesn’t have kids, he didn’t include it in the earliest version of the chart; he hadn’t much researched the tax-free way to build funds for a child’s college.
He also discovered why many within the community prefer investing in a HSA prior to maxing out a 401k due to tax advantages that the HSA has.
It’s also an example of where the flow chart might differ from one person’s experience. While, sure the HSA provides some tax advantages, it also makes it more difficult to access the funds, since they remain tax-free assuming you use them for qualified medical expenses only. But for those that might need to access the funds earlier – and have other plans in place for healthcare – then maxing out the 401k might make more sense.
It doesn’t take the entire decision process away, by any means, even if it serves as a map to contemplate your different options.
When You Don’t Know, It’s Best to Ask
The chart doesn’t discuss specific funds to invest in, nor does it provide an explanation of how to draw down funds once you’re ready to escape the workforce. The latter was something that HappyAsianPanda thought about trying to create, but “realized that it’s going to be different for each person.”
And that’s the real power of the chart. He didn’t know what to do, so he asked others. When he presented the chart to Reddit, the community provided helpful – for the most part – advice on how to tweak it.
It’s similar to anyone that wants to revamp the finances. If you have a question, the best thing to do is find someone to ask.
“Assume you know nothing” when you first start evaluating your finances for FIRE, says HappyAsianPanda.
“Keep asking questions as if you don’t know anything and always be happy to be proven wrong,” he added.