If you read traditional financial independence/retire early (FIRE) bloggers, many of them reached their goals by simply pairing a high savings rate with a standard portfolio of stocks and bonds. There’s nothing wrong with that. It works, and anyone can replicate it.
But my wife and I follow a different path to FIRE. You do need a stable financial floor—but that’s just the beginning.
Laying the Financial Floor
To put it simply, nobody wants to starve on the street. You need a roof over your head, food on the table, and to pay bills to survive. That requires some form of reliable income.
Employment benefits such as health insurance and retirement benefits also help. You can pay for them on your own, of course, but again, that takes income.
A financial floor goes beyond basic survival, however. When you feel unstable or uncertain financially, when you don’t have a sense of security, you don’t feel comfortable taking risks.
And as any investor will tell you, no risks usually mean low rewards or returns.
Blowing Open the Ceiling
As I’ve discussed, my wife has a stable job with great benefits. She doesn’t earn a high salary—as a school counselor, she earns roughly what a teacher does. But as an international educator, she gets fantastic benefits, including full health insurance for the family, free furnished housing, and paid flights home to the U.S. every year.
We can (and do) live on her modest salary and benefits. That requires some discipline on our part, as we don’t live the jet-setting lifestyle of many of our friends. But it also frees us to take risks we might not otherwise consider, and those risks remove our financial ceiling.
Removing the ceiling in your career
When you work for yourself, there’s no limit on how much you can earn. You can start a business that can eventually earn many millions of dollars each year. Or, if entrepreneurship isn’t your thing, you can change careers to combine your passions with a high salary. That career change might require you to get additional certifications or a new degree or start over at the bottom of a new ladder.
You can do all this if you have a stable financial floor.
And no, that doesn’t require you to be married. You can lay a financial floor with a steady part-time job, or by living with your parents to cut your expenses to a few hundred dollars a month, or some other creative strategy. You simply need security in order to make your first move toward removing the ceiling on your income.
If launching a business appeals to you but your financial floor requires your current full-time job, consider starting as a side hustle. Build your business part-time until you feel confident enough to remove the safety rails of your job.
Removing the ceiling in your investments
You can earn huge returns on real estate investments, whether you invest actively by buying properties yourself or investing passively in real estate syndications.
And despite what the gurus might tell you, all real estate investments come with real risk.
I personally no longer invest actively. Today, I invest passively in real estate every month as a form of dollar-cost averaging across many different real estate syndications. These investments typically target returns in the 15% to 30% range.
We vet deals every month as an investment club, with a lot of experienced investors reviewing them together. That reduces risk, as does the fact we can each invest $5,000 instead of the usual $50,000 to $100,000. But it doesn’t eliminate the risk entirely.
Someone without a solid financial floor probably wouldn’t feel comfortable investing anything at all, knowing they could lose money they really can’t afford to. While I have yet to lose money on a real estate syndication, I know it will happen, given that I invest in a new one every single month.
The bottom line is that I can afford to pursue 15% to 30% returns on my investments because I’m comfortable with the risk. And I’m only comfortable with the risk because I have a solid floor beneath my feet.
Other real estate pursuits
The same logic applies to any real estate investment strategy, from flipping houses to becoming a landlord to wholesaling to land investing and beyond.
I lost money on my first few rental properties. For that matter, last week, I was interviewing an expert flipper with hundreds of deals under his belt. I asked him about his losses, and he replied that he aims for a win ratio of 90% to 95%. In other words, even he sometimes loses money on deals, and he’s been doing this for decades.
You can’t remove risk entirely from your investments. You can only reduce it with knowledge and skill. And to take risks, you need the security of knowing you can afford to take losses sometimes.
Slow and Steady Isn’t the Only Path to FIRE
Working a day job and investing your savings in index funds is one way to reach financial independence. But it’s not the only way.
Small businesses don’t typically grow by a steady 5% to 10% a year. They plod along with little results and then have a breakthrough year with 300% growth. Then, they often hover there for a while before they break through to the next level up.
In some years, they could lose money. Again, risk is real.
But when you untether your earnings potential from your working hours and a salary, you blow the lid off your income ceiling. There’s no limit to how much you can earn.
The same goes for your investments when you feel comfortable investing in equity. I’ve seen passive real estate syndications pay 124% annualized returns to their investors upon exit. Treasury bonds don’t pay those kinds of returns.
When you play it safe by necessity, you accept a ceiling on your earnings. Break through the ceiling by establishing a stable floor.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.