Book Review: How To Achieve Financial Independence & Retire Early (F.I.R.E) by J.D. Roth
4 Key takeaways from this workbook on building wealth
In today’s world where there are a lot of finance and self-help books, this particular book stood out to me because of how simple and applicable it is. Before diving into the tips and tricks of it, JD Roth shares his emotional story of how he went years without savings and investments and hit rock bottom in life before finding the inner strength to pick himself up and become a financial maverick. It was quite impressive, to say the least.
One of the first things he said that hit me was the fact that we all have our scripts that subconsciously control how we see the world and how we respond to things. There’s a script for almost everything in our lives, especially money. There are no two identical scripts, everyone has their own distinct view shaped by their experiences and knowledge. However, no script is 100% correct, and revising our mental maps is stressful that’s why most people stick to their perceptions and beliefs even when they know there are better perspectives.
Being flexible enough to change your mental script whenever superior knowledge or insight challenges it is a key trait for success in life. This applies to finances as well. There’s no one-size-fits-all path to financial freedom, but there are guides and the author really tried to provide enough context to help the lessons sink.
Here are some key points from the book.
1. Personal profit is the key to financial freedom.
Think of your savings as profit. Profit powers wealth. The book advises you to refer to your savings rate as your personal profit margin. If you have no profit margin, you’ll never retire. Think of your financial life and system as a business. It will help your commitment and diligence to financial intelligence. Financial Independence and Retiring Early (FIRE) is more dependent on how much you save and invest than how much you earn. However, increasing your earnings and then increasing your savings and investment rate fast-tracks the journey to FIRE. Nothing else matters if your income doesn’t exceed your expenses. High income, savings, and investments will help you escape the rat race of capitalism.
For financial independence, you need to increase your profit margin and you do this by reducing your spending, saving more, and most importantly, increasing your income.
Ways To Increasing Your Income:
a. Build skills, gain knowledge, and education — Education has an insane impact on your income. The education premium is real. The more you learn the more you earn. Some degrees provide better financial returns than others.
b. Increase the quality and quantity of your work — You can do this by putting in more hours and improving your domain knowledge base or by getting a second job.
c. Learn how to market yourself — Your employer will want to pay you as minimally as possible and you want to earn as much as possible, so negotiate your way into a healthy balance. You can increase your lifetime earnings by negotiating. You must not be too scared to ask for what you are sure your input is worth. Your income will receive a drastic uplift if you know how to negotiate. Research the earnings of your specific job role. This is even more important when you’re young because once you increase your current salary, it starts a ripple effect for the many years of your career to follow. It is like compound interest.
2. The Wealth Snowball
When you spend less and earn more, your personal profit grows, and as it grows you create a wealth snowball. A wealth snowball is the mass of money that comes when your investment profit grows through the power of compounding. Compounding is when your money earns interest over a long period of time. When you earn returns not only on your principal but also on your interests. Compounding is wealth snowballing in action. According to the author, the amount you invest for the future is more important than the returns you will earn on that money.
Some things to note when building your wealth snowball
- Always have an emergency fund that covers at least one month of expenses
- Eliminate high-interest debt.
3. The 7 Stages Of Financial Freedom
This was my favourite takeaway from the book. Financial freedom is a long journey so it's important that you know the different milestones and landmarks on the way. Here they are.
1. Financial dependence — when you rely on others for financial support. You break free from this state when you start earning personal profit.
2. Solvency — the ability to meet your financial commitment on your own, your income is greater than your expenses and you’re not taking in debt.
3. Stability — Here you have emergency funds, have good /little to no debt, and continue to earn a personal profit (savings from regular income).
4 Agency — Here you have the freedom to work and live the way you want. you can’t retire yet but you’ve eliminated all debt and you have enough money in the bank and emergency funds that you can quit your job without worrying about suffering a fallout.
These first 4 stages are about surviving. The remaining three phases move from surviving to thriving. Money is no longer a safety net but a tool to enable you to build the life you want for yourself and your family.
5. Security — You have financial security when your investment income — your wealth snowball can cover your basic needs. Meaning- you have enough saved and invested to cover your meager existence for the rest of your life. Even if you never work again, you have enough to cover your simple housing, basic food and clothing, and insurance. This is regarded as LEAN FIRE — you have enough to live a lean life,
6. Independence — This is the stage we all envision when we think of Financial Independence. Here your investment income can cover your standard of living both now and in the future. You can afford the basics and you can afford some comforts too. You have enough.
7. Abundance — Here you have enough and then SOME MORE. Your passive income from all sources will not only fund your current lifestyle indefinitely but also grant you the freedom to do almost anything you want in the future within reason. The world is your Oyster. This is known as FAT FIRE. Now you don’t have to ask yourself ‘if you can afford something.’
There’s so much knowledge in the book, that I struggled while deciding what to share in this review and what to omit. In order not to dump too much info on you, I’ll end this review with another thought-provoking insight; the traps on your way to FIRE.
4. Traps On Your Way To Financial Independence
In the book, 7 traps were discussed, here are 3 of them, to give you an idea.
The Circumstances Trap
Many people aspire to retire early but a lot of people have bad mindsets that situations or circumstances are too unique for knowledge on financial independence cannot help them.
The truth is you build the bars of your prison. You must accept your situation as it is and then build from there. Use what you have to do what you can.
The Box Trap
The belief that there is no way out of the box trap (also known as the sunk cost fallacy). The box trap/ sunk cost fallacy — is the false belief that every decision/ expense made in the past must be factored in while making new decisions. E.g. just because you’ve paid for something or spent money on something means you must follow that path by force. The box trap often follows people when they need to make big life decisions. Your judgment is clouded by past costs when you need to make decisions about the future.
The Catastrophe Trap
This is the fear that all your savings and FIRE Work will be burnt up in an emergency and a catastrophe, health crisis, or stock market crash. And when things go wrong, people with this fear end up making huge financial mistakes. For example — when markets plummet, most people rush to sell out of fear that it will not rise again.
The secret to curing this fear is to understand that good things will happen and to plan and prepare for the bad times as well. If you resist the urge to panic, history has shown that you will get it back and more. Hope for the best, prepare for the worst, create your wealth snowball
At the end of the day, you’re not after money just for money’s sake. It’s for what it can get you. You want freedom, fulfillment, happiness, and a rich life. Money is a means to an end. It’s a tool. The relationship between money and happiness isn’t linear. One of the rewards of financial independence is that you have enough time to build a rich life. A rich life is built with your values and purposes, relationships.
You must prioritize elements of a rich life, even while you’re on your way to financial independence. Otherwise, you’ll get stuck in the fog of work and you won’t make and execute long-term plans.
Books recommended by the author:
- The Simple Path to Wealth by J.L. Collins,
- Anything You Want by Derek Sivers
- Stocks for the long run by Jeremy Siegel
- The Next Door Millionaire by Thomas J. Stanley
- The Automatic Millionaire by David Bach
