Investing for Financial Freedom That Actually Worked for our Family

I used to think investing for financial freedom meant saving and investing 50% of my income every month just to retire early someday. But over the years, I realized that wasn’t true.

When my wife Anna and I started pursuing FIRE (Financial Independence Retire Early) more than five years ago, we were a family of three saving and investing 50-60% of our income because we thought that was the only way to reach financial freedom.

Today, we’re about to become a family of five — and our approach looks very different.

There were months when we invested very little, sometimes almost nothing at all. But what mattered far more was where we invested our money and how we structured our investments over time.

That completely changed how we think about investing for financial freedom.

You Don’t Need a 50% Savings Rate to Invest for Financial Freedom

The Traditional FIRE Investing Approach

Regardless of your situation, you will have to save and invest 50% of your income to ever retire early. That is called your savings rate and it’s big in the FIRE community. It still remains one of the core principles of FIRE (Financial Independence, Retire Early), including yours and mine.

Because for early retirement, you need to be able living off of the passive income you’ve created from your investments. That means your investments should generate at least 1.000 in passive income a month, but mostly more, especially if that income should support a family.

Passive income is income you earn without actively working for it every day. You may still spend a few hours each year managing your investments or filing taxes, but your money does most of the work.

But here’s what we learned over time through investing for financial freedom ourselves: you do not have to maintain a perfect 50% savings rate forever.

The Investing for Financial Freedom Strategy We Use Today

It’s more important where you invest your money than always achieving a 50% savings rate.

And it’s even more important how you invest your money.

So first: What is your investment of choice? Index Funds or ETFs (Exchange-Traded Funds)? Or mutual funds and individual stocks? Because some investments offer poor long-term returns, especially when paired with high fees or active management.

Now, this became one of the biggest lessons in our journey toward investing for financial freedom: some Index Funds consistently outperform others over long periods of time. And that difference compounds massively.

If your investment portfolio generates a 20% return rate and more over years (as it was for us) than if it generates only 7% return. That’s how our investment portfolio outperformed others and doubled in value over 5 years, even if those others were investing more money.

If you want to learn how your investment portfolio can outperform others too (just by choosing specific Index Funds) and terms like mutual funds or financial advisors are new to you, you may want to read The 7 Best SAFE Index Funds For Financial Independence.

The second important question to ask is: Have I chosen a robo-advisor or a money manager that takes care of investing my money? Or, am I doing it by myself through an automatic investment plan? Because, some investing strategies (consistent, continuous investing) outperform others (stock picking), especially over the long-term. Here’s how.

Why Consistent Investing Matters More Than a High Savings Rate

Should You Use a Robo-Advisor or Manage Investments Yourself?

We know many many people who used to invest with a robo-advisor or a money manager that takes care of investing their money. All of them are not doing that anymore. Because the result of that form of active investing was always gaining poor and even negative returns. So, it actually didn’t matter that they invested a lot of money if that money is gone or had almost no growth at all.

What those people do now is practice passive investing through an automatic investment plan by themselves. Because, this is one of the investing strategies that is not only the easiest (once you have chosen your investments). It also outperforms others like stock picking or investing using robo-advisors, especially over the long-term.

For us, that became one of the biggest lessons about investing for financial freedom: simple and consistent often beats complicated.

Is Market Timing Really the Best Investing Strategy?

• Trying to pick the right stocks is like trying to find a needle in a haystack. It almost never works.
• Time in the market always beats trying to time the market.

You may be successful one or two times, or even more, at picking stocks or market timing. But when you add up all of your returns and calculate your average (!) rate of return, what is it? Is it over 10 %? Maybe even over 15 % or 20%? I bet it’s not. But if it is, you should consider changing careers and become a professional trader.

Because than, you would have even outperformed the investing legend Warren Buffet. His company Berkshire Hathaway has delivered compounded annual gains of almost 20% from 1965 to 2023.

So, my question is: Why do you (still) try to outperform the market? Why do you not simply buy the market? And, let compound interest multiply your money over and over again with no effort on your side? Just through passive investing. That is exactly what stock Index Funds or stock ETFs (Exchange-Traded Funds) does (and what we used to double our investment portfolio in 5 years).

That’s why our approach to investing for financial freedom became much simpler over time: buy strong Index Funds consistently and let compound interest do the heavy lifting.

Your ETF or Index Fund Matters More Than Most People Think

Everyone who pursue to achieve early retirement and financial independence quickly understands the importance of making the “right” investments. But actually, there is no such thing.

The only thing that matters is that your investments are appropriate to your goal. What is your goal for your money? What should your money buy? If it should buy your freedom so you can retire early (and gain control over your time) than there is truly one “right” investment.

The Investment Strategy That Worked Best for Our FIRE Journey

• low-cost investing so that you don’t pay more than 0,5% in commission fees (ideally max. 0,1%)
• good return rates, on average (!), of around 10 % over the long-term – when looking back at history (ideally track record of the last around 30 years at least)
• Portfolio diversification within your investment portfolio (not focusing on one asset class like only investing into the stock market or one country/region or one sector).
• exclude working with a money manager or financial advisor (in most cases) as you can control your investments best, not others.
• easy to understand so you know who invented it, how big is it’s volume, what’s the track record over history (average return rate), what’s the expense ratio (fees) and more.

That exclude some investment options like mutual funds and individual stocks. Because those not only offer poor portfolio diversification but also lower returns (over the long-term) and come at high-costs. If you’re interested in learning more, we’ve put together The 7 Best SAFE Index Funds For Financial Independence.

How Investing for Financial Freedom Changed for Our Family

First of all, I started to invest with purpose and with a plan behind, questioning my retirement planning since being on a FIRE journey. Before pursuing financial independence and early retirement I just did what everyone else was doing. I modestly invested for my retirement. Very modestly (compared to my income). And I had chosen the wrong types of investments and didn’t practice passive investing.

Once I started my own FIRE journey, I educated myself in the financial world. I learned how to wisely invest my money so I can build long-term wealth for my family and craft my own retirement planning. I learned about the power of compound interest and a lot about the stock market and the economies overall. And, I learned about the importance of the right asset allocation meaning to spread my investments over different asset classes like real estate and stock ETFs.

And even if I wrote my master thesis about crypto currencies and learned one thing or two about investing strategies, there is no comparison to what I know today.

You see, over time, investing for financial freedom became less about chasing early retirement as fast as possible — and more about building a life with greater flexibility and control over our time.

I have put a part of the knowledge I’ve learned into these blog post:

• The Market’s Singular Direction: Upwards – A Historical Perspective
• Decoding Market Growth: Key Drivers Behind The Market’s Upward Trend

There are many podcasts I’ve listened to, many books I’ve read but one stood out and is known as the one book to learn about investing for financial independence:

• The Simple Path to Wealth: Your road map to financial independence and a rich, free life

How This Investing Approach Made FIRE Feel More Realistic

This investing approach of slow and steady investing took the pressure off. We are primarily focusing on how and where we invest our money instead of always trying to achieve a 50 % savings rate and investment rate (every month or year no matter what).

We learned that it doesn’t matter if we go through months of investing next to nothing. Because our average savings rate and investment rate is still high. Overall, we focus on saving more money to then investing more money, consistently and continuously, into our Index Funds and ETFs (Exchange-Traded Funds) of choice with high returns. Passive investing became just another money habit for us.

We just love saving our money to then invest it into assets so we can build long-term wealth and ultimately buy our freedom (and get control over our time). That’s what investing for financial freedom means to us now.

Because actually, we don’t truly want to retire early or ever retire at all. I believe there are many misconceptions about early retirement.

Most people in the FIRE community are known as the least retired persons ever. My wife and I can relate to that very well. We simply want to get control over our life time, choosing the kind of work we’re doing and when we work. Getting a passive income supporting our family allows us to pursue that dream life.

Recently, we started to seriously consider semi-retirement for our family as a concept that represents our ideal lifestyle. You craft your own journey towards FIRE (Financial Independence, Retire Early). You decide over your retirement planning. The way to get there doesn’t really matter. It just matters that you get there eventually.

If you want to learn more, read How Early Retirement Works vs Semi Retirement: Your Options and Semi Retirement: How To Semi Retire In 5-10 Years.

As we wrap up, I hope this post has given you a fresh perspective on how to strategically invest to achieve financial freedom without the pressure of maintaining an unrelenting 50% savings rate. Remember, it’s not just about how much you save, but how and where you invest that truly transforms your journey towards F.I.R.E. – Financial Independence, Retire Early. If this approach resonated with you, don’t miss out on future insights and strategies to help you craft your personalized path to financial freedom.

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In our next blog post we talk about the advantage of getting ahead on your budget through building a buffer.

Title image source: Imagine Buddy on Unsplash