This is the handbook I would have given myself 10 years ago – when I started my journey towards financial independence. Expect a very condensed and hands-on handbook with 8 simple levels:

It is still work in progress, my aim is to cover 1 level per month starting May 2022.

Basic
Level 0: Know where you are (inkl. my personal FIRE template)
Level 1: Install a system to manage your money

Optimising
Level 2: Reduce your costs
Level 3: Increase your income
Level 4: Save & Get rid of debt

Leverage
Level 5: Invest to earn money while you sleep
Level 6: Use your money to improve your life

Liberate
Level 7: Be financially free
Level 8: Be mentally free from money

I use 2 very simple methods to get a hint on where my net worth will be in X years:

1. Take a simple savings rate calculator and add:
   1. actual net worth as starting point
   2. monthly saving amount
   3. period
   4. yearly yield (I only use 4% which is considered on the safer side if the money in invested in a world portfolio)

2. Use google spreadsheets and use the trend-option in graphs. It will adapt after every new entry and show you very nicely where you should land. It is preconfigured in my personal FIRE template you can use for free:

The FIRE number is the net worth you need to have so that it (once invested) will support your expenses (until you die).

That means, once you reached that amount, you are financially free.

Here’s how you can calculate it

Yearly expenses * 25 = YOUR FIRE NUMBER

Example: Let’s assume your expenses are 50’000 per year = you will need 1’250’000 to be financially free. That means your FIRE number is 1’250’000.

Whats behind the multiplication with 25?

This simple function is based on the assumption, that you can safely take out 4% of your portfolio per year -> 100 / 25 = 4. And that again requires you to invest mostly in stocks, which did perform so good in the past 30+ years so that a take rate of 4% is considered “safe”.

Most people in the FIRE community follow this assumption since it has been widely stated and challenged with simulations. Even Vanguard wrote a paper on it I highly recommend you to read: Fuel for the F.I.R.E.: Updating the 4% rule for early retirees

Needles to say, this is just theoretical and includes some risks. Therefore most FIRE-people don’t retire the day they hit this number. Adding some buffer for unexpected expenses or a market crash in the early years of your retirement might let you sleep better at night.

What if you don’t have most of your net worth invested in stocks?

Then you simply have to define your own safe withdrawal rate which has to count in:

1. Your expenses
2. The expected yield of your portfolio
3. The volatility of your portfolio
4. Your life expectancy

Now you need to smash this into a spreadsheet and play around. Historic values might help you define what will work for you.

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The savings rate is the share of your income after you deducted all expenses:

1. Expenses = 6’000
2. Income = 10’000
3. Savings = 4’000
4. Savings rate = 40%

What is the savings rate for?

The savings rate is one of the most important performance indicator for financial freedom, its tells you if you are moving towards financial independence and if yes, how fast:

Emotions are the reason why many investors buy high and sell low. In order to avoid that I try to detach my emotions from investing.

The market is crashing in average every 12 years, so I should experience 7 crashes in my life and thought that having an action plan would be the way to go.

How do I know if there is a crash?

I have installed the mobile app called Stock Alarm (they let you setup 5 alarms for free) and set up 5 alarms. To keep it simple I take the all time high of VT as the starting-point which is 109 USD (5. November 2021) and defined the alarms like this:

1. 20% drawdown = 87.2 USD
2. 30% drawdown = 76.3 USD
3. 40% drawdown = 65.4 USD
4. 50% drawdown = 54.5 USD
5. 60% drawdown = 43.6 USD

Every time an alarm is triggered, I get a push notification and an e-mail.

The actions during the crash

After every alarm (same day) I shift the following amounts of non-stock assets to stocks:

1. 20% drawdown = 10% of non-stock assets
2. 30% drawdown = 15% of non-stock assets
3. 40% drawdown = 20% of non-stock assets
4. 50% drawdown = 25% of non-stock assets
5. 60% drawdown = 30% of non-stock assets

My target allocation looks like this:

• 80% Stocks
• 5% Bonds
• 5% Commodities
• 5% Real estate
• 5% Cash

Which means that I will reduce the other asset classes and eventually end at 100% stocks after the 5th alarm.

The actions after the crash

As soon as a new all-time high is more or less reached (-10%), I sell the stocks to rebalance back to my target allocation (only if needed since I invest every month, no rebalancing might be needed).

Log-book

What happened so far?

12. May 2022 | 16:03
I got the following alarm: “The price of Vanguard Group, Inc. – Vanguard Total World Stock ETF is below the $87.20 limit. The current price is $87.12 ( -$0.95, -1.07%). Notes: Ship 10%”

So I rebalanced accordingly and since my cash position was over 5% I simply just bought the stocks the same day for 10% of the value of my non-stock assets.

14. February to 20. March 2022
The global stock market crashed due to the pandemic. I hadn’t set up the alarms back then but made the same calculations on a note in my smartphone and bought 2x for 10% during the drawdown.

Most people I talked with about optimising their finances, didn’t know where they actually stand. Do you? If yes, you should be able to answer these questions precisely:

1. My assets are: ____________
2. My debt is: ____________
3. My income is: ____________
4. My expenses are: ____________

Based on these 4 numbers, you can state:

1. My net-worth is: ____________
2. My savings-rate is: ___ %
3. My FIRE number is: ____________
4. I will be financially free on the: DD/MM/YYYY
5. My net-worth in 10 years is projected at : ____________

If you have this numbers ready, you are a badass. If not, you can use my personal FIRE template and/or follow these steps:

1. How to calculate my assets?
2. How to calculate my debt?
3. How to calculate my income?
4. How to calculate my expenses?

Great, now you have the data ready to calculate some performance indicators. If you use my personal FIRE template, it will do it for you. Otherwise you have the steps here:

1. How to calculate my net worth?
2. How to calculate my savings rate?
3. How to calculate my FIRE number?
4. How to do simple net worth projections?

Now you have the overview and can ask yourself the following questions:

1. What are my dreams I can buy with money?
   Write down what and how much it will cost (early retirement (1’500’000), Tesla Model Y (60’000) / house (500’000) / watch (8’000) / etc.)
   
2. Is the projection of my net-worth in 10 years in-line with the dreams?: Yes / No
   Which dreams are possible? which aren’t?
   
3. Looking at my financial situation and the future achievement of my dreams, I feel: euphoric / happy / neutral / insecure / stressed / anxious?
   Write down the answer and why
   

You might wonder, what is this all about? Aren’t you here to get rich quick? You expected 10 hacks on how to half your expenses. Don’t worry there are more hacks than you need. The key element to financial optimisation is to know where you are today and where you want to go. That means, you need to know what you are optimising for!

If you like the situation you are in now, the projections of your net-worth is aligned with your dreams and you are euphoric or happy about your financial situation: Your financial management is good enough. Leave this blogpost instantly and focus on other things. You will waste your time.

If that is not the case, welcome to the club. Take the time to calculate your starting point and answer the questions above to have a first idea what you want to achieve. This will guide you in the next levels.

Defining income sounds easy, but it actually isn’t. Even wikipedia has a hard time to define it, since the meaning differs from the perspective (law, economics, etc.).

To keep it simple you can add up every income source you have, like:

1. Salaries
2. Pension plan contributions
3. Dividends
4. Rents from stuff or real estate rented out
5. Royalties
6. Profits from owned businesses
7. etc.

How to define the amount per Income source?

I take the value which is available to me, directly or indirectly. So if taxes or deductions are made which are not available to me, like unemployment insurance, I don’t count them in my income. To make it easy, use the amount which is credited in your bank account.

Be aware that it is relevant to know the “real” income of each source. The “real” income is what is left in your bank account after deducting every expense which is directly linked to the income source (which has not yet been paid when the income arrives in your bank account).

If your work contract states a salary of CHF 5’000 and you have direct deductions of CHF 500, CHF 1’000 income taxes and you need a car which costs CHF 500. You wouldn’t have these expenses without that job. If thats the case your real income is CHF 3’000.

Knowing the “real” income of each source will help you evaluate the value for you of each source. So don’t forget to add all expenses linked to the income sources as expenses and label them accordingly.

How to summarise and monitor my income?

I use a simple spreadsheet where I update the value of my income over time. You can create your own spreadsheet or use my personal FIRE template.