Investing as an indie hacker — here's a step-by-step plan

If I were to guess one thing that you value as a solo founder, it would be freedom.

Behind most of our efforts as solo founders, is the pursuit of freedom - having control over our time and control of our lives.

Freedom means different things to different makers. For me, it’s about having control over my time. The precondition for this control is being financially free.

Building for freedom

One of my motivators to keep hacking is to create a product that brings value into people’s lives and have this translate into revenue, ultimately helping me attain the ocarina of freedom. I haven’t gotten there yet!

While I have this goal in mind, I’m aware that product revenue is rarely evergreen. It has a peak and it has a tail. Naturally, the revenue also isn’t completely passive. This means that my plan for financial freedom has to extend beyond this income.

I’ve worked at an asset manager for the last 3 years, and I’ve given the topic of personal finance quite a lot of thought.

A few months ago, I built Simfolio to share the tools that are helping me accurately plan for my financial future.

I believe that other makers can benefit from the knowledge I’ve acquired in the past few years. My strategy can be summarised as follows:

1. Know your number

How wealthy is wealthy enough? Everyone has a different number.

Some people have an idea of the approximate balance that they would need to be financially free. Some rules of thumb like the 4% rule are a good way to understand exactly how much you need, given your annual expenses.

The rule suggests that you can keep withdrawing 4% of your savings every year without running out of money for at least 30 years.

It works like this: If your monthly expenses are $5,000; they would be $60,000 annually. You would need savings of $60,000*25 = $1,500,000 to cover your expenses for 30 years without running out of money.

Some critics rightly suggest that the 4% model is based on an outdated model, with an assumed inflation rate and an assumed portfolio of bonds and stocks.

I built Simfolio, in part, to help with this problem. The app helps you calculate your retirement number based on your expenses, your unique portfolio, and a variable inflation rate; all without having to know the maths.

2. Invest early and frequently

A common mistake I hear from people getting started investing is that they invest a small lump sum, forget about it, and hope that it will become a mountain of wealth in the future. It often doesn’t work that way.

Just like we need to consistently invest time into making good products, we need to do the same with money to see a good mountain of wealth.

If you’ve been fortunate enough to see significant recurring revenues from your product, this is a good opportunity to invest money monthly.

A sure way to see benefits from investing is having time in the market, and being a consistent investor.

A key reason why I built Simfolio, was to help me see my future net worth given my monthly additions into different accounts. In truth, my founding question was: “When will I become a millionaire?”, and the app helped me answer that question.

3. Increase your investments when you can

This is not the most obvious thing, but if you keep investing $1,000 every month for 5 years; over those 5 years, due to inflation, the real value that you are investing is decreasing. If inflation is 5%, in year 2, you are contributing 5% less than you did the previous year in real terms.

To combat this, increase your investments when you can. I do this annually. You can factor this increase into your future net worth calculations! Of course, if the complexity of this makes you nervous, this is something I’ve built into Simfolio.

4. Structure your finances for financial freedom

For the general investor, I find that these recommendations, and doing them in their laid out order is a winning strategy (out of many other strategies).

a) Pay off your debt

Given that debt often has a guaranteed interest rate that’s higher than what most investments can offer, it's often recommended to pay it off first before prioritising any of the other steps.

b) Create an emergency fund

This is money that you should save for when life goes wrong. When it rains, it tends to pour. This should ideally be 3-6 months of your expenses - in a low-risk account. The last thing you want to do when a distressing event occurs is to take on debt, or withdraw from an investment (especially during a bear market)

c) Take advantage of tax-advantaged investment vehicles

Different countries have different regulations for tax-advantaged accounts; but this is straightforward - any opportunity to pay less tax is one you should look into! These can come in the form of IRAs, 401ks, retirement annuities, pension funds or special tax-free accounts.

Take advantage!

d) Discretionary investments - think Robin Hood

Once you’ve done the above three, you can take advantage of discretionary investment opportunities. I tend to invest into ETFs that track markets that active fund managers and retail investors alike struggle to beat.

When I'm feeling saucy, I pick stocks that I like (which is usually an emotional decision backed by very little research)

e) High risk, fun, investments (optional)

The risk-return tradeoff is an investment principle that indicates that the higher the risk, the higher the potential reward. I'm not a big believer in telling people to put all of their life savings into crypto or the next big thing, given the risks associated.

However, I'm also not a big fan of telling people to completely stay away from high-risk opportunities. I personally use <5% of my wealth to invest in speculative, high-risk investments.

I would suggest getting the basics (A-D) correct before moving into this space. I would consider some stocks as being in this high risk zone.

Don't forget the basics

Ofcourse, all of the above are strengthened by good financial behaviour. As makers, we're on the right track by finding ways to increase our income. This is well complemented by living below our means and investing as much we you can.

If you know your number, you should have a good idea of how much you need to invest every month, and you should be on a good track to be financially free!

That being said, all the best on your investment journey!