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Increase your income
Reduce your spending
Invest the difference
Simple enough right? I think this is widely known as the ethos of FIRE. Focusing on just one or even two of the three will add unnecessary burden to your path to FIRE. Let's explain all three in the form of a checklist (who wants to read an essay..?) to evaluate the pitch and see if anything is missing...
#1 Increase Your Income
I think a lot of people will skip over this one in pursuit of much lower hanging fruit like reducing their grocery bill or switching to free banking but this would be a mistake - as a frugal person, that pains me to say but it's true. Income is just too important. The average income in 2017 was $45,600 - far too low to make substantial progress towards FIRE in Canada. One of the first things anybody new to FIRE should evaluate is their income situation. Here are some questions for the amateurs and seasoned vets alike:
- Are you being paid enough?
- What does www.glassdoor.ca say?
- Have you checked with competitors hiring ads?
- Could you ask your co-workers if they're okay with sharing salary?
- Could you ask co-workers who are quitting what they made?
- Is there additional training or education that would increase your income substantially?
- Do you know what your tax bracket is?
- Can you optimize your tax bracket with RRSP contributions?
- If you have children, can you and your spouse optimize your tax brackets to maximize CCB?
- Can you reduce the amount of taxes owed each pay cheque with your HR department since you're regularly contributing to an RRSP?
- If you have a group RRSP, is this done automatically for you?
- Are there other matching retirement programs at your company, such as company stock discounts?
- How many hours can you put in a week?
- Side hustles can be your main job (with overtime pay) or a side gig
- I work 50+ hours/week to increase my income another $20k/year
- Is your commute too long? (this cost should be factored into your overall pay)
#2 Reduce Your Spending
This is usually where people start but like I mentioned above, don't discount increasing your income. It is easily just as important as eliminating expenses. There are a bunch of easy wins in this list - take advantage to kick-start your path to FIRE:
- Money Management
- Have you created a budget?
- Are you anti-budget like me?
- How do you track your spending?
- Did you buy too much house? Can you move to a smaller location? Does it make sense to move even though it's too big?
- Are you sacrificing your commute for a cheaper home?
- Did you buy too much car? Can you sell it and purchase a smaller one?
- As a general rule we the FIRE community try to purchase used compacts (Honda Fit or Toyota Corolla) that are at least 5 years old with cash only. We never finance a car purchase!
- Can you walk or ride a bike to work if you moved your Housing?
- Is transit decent where you live?
- Are you foolishly following Nutritionism?
- Do you shop while hungry?
- Did you install the Flash Food app I suggested?
- Are you wasting your money on organic food?
- Are you wasting your money on non-GMO produce?
- Are you buying baby food in a jar or pouch instead of blending your own?
- Cell Phones and Plans
- Do you upgrade your phone plan every two years because you can?
- Have you realised you're actually just financing new phones to do so?
- Have you considered paying cash for your phone and switching to a prepaid plan like Public Mobile?
- Do you buy a high-quality phone case to protect your phone from falls for years to come?
- Do you pay whatsoever for banking?
- Do you have to leave a minimum amount just to have "free" banking?
- Do you pay commissions to buy ETFs?
- Do you pay anything over 0.5% for MERs?
- Do you churn credit cards?
- Besides churning, do you pay an annual fee for a credit card?
#3 Invest the Difference
Putting your money to work is the name of the game - creating a wealth-making machine that spits out toonies at your face twice a minute is a wonderful pleasure indeed. Be sure to choose low-cost index ETFs if you want to play it safe.
- Investing Philosophy
- Do you follow the market? Do you try to time it?
- Are you a buy and hold investor?
- Do you subscribe to investor groups or online memberships/cliques?
- What is your asset allocation?
- Have you considered alternative investments?
- Do you hold USD ETFs in your RRSP?
- Have you considered real-estate an investment option?
- Have you learned about the Dividend Tax Credit yet?
- Did you know cryptocurrency is a terrible idea?
As you can see, there is quite a lot to consider. I'm stilling working on some of these myself. Let me know in the comments below you have anything that should be added.
Tomorrow will be a short post, concerning the acronyms FF, FI, and FIRE and why it doesn't matter.
You can email me here: firstname.lastname@example.org
You can listen to me here: www.exploreficanada.ca