I was 26 and we had just loaded up on debt to buy our family home. Despite a daunting mortgage payment, I was determined to start investing. I had been introduced to the wonders of the stock market for long term wealth creation by a now out-of-print book from the Motley Fool (for similar inspiration I would now recommend The Simple Path to Wealth by J L Collins).
The book laid out the case for investing in low-cost index trackers beautifully and off to the bank I went to setup my first monthly automated investment. I am very grateful to my past self for that day. 14 years later we had paid off our mortgage and were financially independent.
Choosing the correct path
I knew I was on the right track when the bank’s adviser flatly told me that they did not offer index trackers and tried to steer me towards their (much more expensive) active funds. They were a bit taken aback when I flourished the details of the bank’s index tracker I wanted to invest in. The meeting didn’t last long after that. They said I would have to apply online for an index tracker; I’m guessing there was no commission for selling passive tracking funds.
Since then I have been aware that fund charges have a big impact on returns; just how much impact they have, over the long term, is still shocking.
Recently I got the chance to move my retirement savings into investments with lower fund charges (from 0.27% down to 0.10%) and I wanted to find out exactly how much this move would save me. I already knew that fund charges mattered – a lot! I still wasn’t prepared for just how much money gets eaten by even seemingly small charges.
To keep things simple we will compare funds with the same starting amount ($250k), the same rate of return (7%), over the same number of years (20 years).
Check out these shocking numbers …
2% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $663,320
Total lost to charges = $304,090
1% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $801,785
Total lost to charges = $165,625
0.5% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $880,904
Total lost to charges = $86,506
0.25% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $923,201
Total lost to charges = $44,209
0.1% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $949,495
Total lost to charges = $17,915
0.05% fund charges
$250,000 – 7% return – 20 years
Resulting amount = $958,424
Total lost to charges = $8,986
You could save $100,000s
Moving from an actively managed fund (many have charges in excess of 1%) to a well priced passive fund (with < 0.1% charge) could save you the price of an apartment in the mountains over 20 years.
I almost couldn’t bring myself to add in the amounts for a 2% fund charge, but then I did a quick search for some active funds, and there are plenty out there that will charge you 2% per annum plus take 5% up front as well!
Seven years ago I made a decision that would exponentially improve my life. This single decision lead to better health, more energy, increased fitness, it lessened my impact upon the world, and increased our wealth significantly: I decided to cycle my 15-mile commute.
I’ve made a lot of changes since stepping onto the path to Financial Independence seven years ago: embracing minimalism, cutting out the waste, understanding happiness, learning about investing in assets, and much more besides. Each change has had a significant positive impact upon my life but that one decision stands above them all.
That first commute was an adventure. I cycled in on my old mountain bike. Not sure of the route, I had to explore my way into the city. I found a wonderful cycle path, that ran through the countryside next to a railway cut, taking me most of the way in. It took me over 2 hours to find my way to work and I loved every second of it.
Finding Freedom
About a month later I bought my first road bike and fell deeper in love with cycling. It took me back to my childhood. We used to cycle everywhere as children, just like they do in the Goonies or ET. As a group of friends we would cycle to the local town to buy sweets, go to the outdoor swimming pool, or visit family. We were out all day long. No mobile phones in those days, just a coin in our pockets for emergencies. Our parents had no clue where we were. We had such freedom.
Back on a bike and the feeling of freedom came flooding back. I perfected my route and I got stronger and faster on the road bike. I loved my time in nature at each end of the day. My cycle commute became the highlight of my day. Slowly I connected with nature. The seasons felt closer: fresh Spring mornings filled with birdsong became hot bright Summer evenings in shorts and T-shirt, colourful Autumn tree-lined paths turned into treacherous ice-covered challenges as the Winter cold penetrated through layers and bit into bone.
Sometimes I would find myself laughing out loud as waterfall like deluges soaked me to the skin. Other-times I just wished to be home as I climbed the long hills in a stinging hailstorm. Whatever the weather, I learned to appreciate being outside and the shelter of home.
Enjoy the Journey
I learned the journey was more important than the time it took. My route ended up being chosen for maximum pleasure and beauty even though it was significantly longer than the direct route.
The contrast between the joy of cycling and the life-sapping frustration of being stuck in lines of traffic, polluting the world, getting unfit, and separated from the world in an air-conditioned bubble (on my way to spend the day in an air-conditioned bubble) was stark.
I sold my car and cycle commuted all year round. Loving every minute, even in the dark of Winter. I got fitter than I had ever been and stronger with each passing day. I became happier. Over the last seven years I have covered over 9000 miles on my bike. I have shared wonderful moments in the world with family and friends and explored beautiful new places on my doorstep. Time exploring the world on my bike has given me some of the most joyful, exhilarating, and fulfilling moments of my life.
Happier and Wealthier
Not only did this change in habits massively improve each day, it also increased our wealth. By removing monthly car finance payments, insurance costs, fuel costs, maintenance and tax payments we could increase our savings by an additional 15% of income. This change alone brought Financial Independence 5 years closer and increased our wealth by more than $100k so far (which is now invested and compounding).
Where the true value is
With that connection to nature something else crept in. Slowly but surely I fell back in love with the world. I noticed the beauty surrounding me more and more. Each day began to feel like a vacation. The true value in the world, in its trees and birdsong, in the seasons and the ever-changing light became clear. The things we had been chasing, with conspicuous consumption, pointless trinkets in comparison. Buying increasingly expensive things had no lasting effect on happiness whereas getting outside every day always brings joy.
Finally I realised that as far as I can cycle is my garden. The world is all mine and all yours if you want.
There are a set of core ideas that help anyone heading for financial independence and early retirement. I thought it would be useful to gather these into a single list. These are the 9 pillars of FIRE:
There is one single number that tells you how far away from financial independence you are: that number is your savings rate as a percentage of your net income.
At a 10% savings rate you will need to work for 51 years to reach retirement.
With a 50% savings rate this reduces to 17 years.
Whereas a 75% savings rate will see you financially independent in just 7 years!
The more you save, the less you spend, so the smaller the FI pot you need and the time taken to reach financial independence drops exponentially.
This one isn’t for everyone but I found it incredibly useful to write down all my spending in a note on my phone. It gives a moment to reflect on how you truly feel about that spending. Integrity will kick in quickly and automatically reduce any spending that doesn’t make you happy or give you value.
If you’ve worked out your real hourly wage (after taxes and any spending related to the job have been deducted) then any spending can be quickly converted into the number of hours it cost you.
Ultimately the exercise of tracking gives you a deep understanding of what you value. As an additional benefit you’ll know exactly how much you spend each year which helps define your target FI pot.
Once you begin to increase your savings rate you’ll need somewhere to invest your FI pot.
Different FIRE proponents have different strategies and use a wide range of investments: from real estate to peer-to-peer lending, from stock-picking dividend-yielding shares or building a tech-focused growth-share portfolio to buying slices of government debt in the form of bonds.
At the core of a lot of strategies though are simple tax-efficient investments into low-management-charge index tracking funds.
More on why it is a good idea to choose good value passive tracking funds here: Fund charges matter
Safe Withdrawal Rate
To reach financial independence, and live off the money we have saved and invested, we’re going to need to know how much we can safely withdraw each year from our investments.
Luckily there have been numerous studies into how much can be safely withdrawn from a share (or share & bond) based pot.
The most famous of these studies, the Trinity Study, looked at different retirement dates over a 70 year period (1925 to 1995). The study worked out the worst-case scenario that would ensure a retiree didn’t run out of money over a 30-year period (taking into account market returns and inflation rates).
Based on US data this historical worst-case scenario ended up yielding a safe-withdrawal-rate of 4% (this is the withdrawal in the first year and withdrawals are increased with inflation (CPI) in each subsequent year).
Arguments can be made for lower safe-withdrawal-rates of, for example 3%. For those invested in markets outside of the US, history produces different SWRs.
Part of the process of getting to financial independence is working out the SWR you feel comfortable with and this then gives you your target FI pot:
An understanding of the difference between true assets and liabilities can greatly help someone heading for financial independence.
The most useful definition of a true asset is anything that puts money into your pocket. A liability is anything that takes money out of your pocket.
By these definitions your home (even when the mortgage is paid off) is a liability rather than a true asset. This is an important distinction because it can help you reduce the ongoing cost of the liabilities in your life (especially your home and cars as they can be expensive to buy and have high running costs).
Living in a smaller house than you can afford and reducing the miles you drive are two of the biggest wins on the journey to FI.
You can also look to build or buy true assets in the form of businesses you create, art you make and sell (books, paintings, photos, craft, music, software …), and investments you make (shares, bonds, investment property, peer-to-peer lending, venture capital …).
When you start to evaluate the true value you get from purchases a strange thing happens. You begin to appreciate the simple things in your life much much more.
The essence of frugality is the full enjoyment and appreciation for everything in your life.
For example: every time you pull on your walking boots you appreciate the feeling of their warmth, their weight, and you notice the frisson of excitement at the beginning of a new adventure in the world.
“To be frugal means to have a high joy-to-stuff ratio.”
This is in direct opposition to the continual chase for more that characterises conspicuous consumption. People don’t stop for long enough to enjoy what they already have before looking ahead at the next thing to buy.
There is a feeling of having enough that is hard to describe. You end up feeling like the richest person in the world. Full of incredible gratitude and appreciation. You have an ever-present feeling of underlying peace and joy.
Enjoying everything that is Free
Taking frugality further you notice that the most fulfilling ways you spend your time are totally free. You begin to feel gratitude for the abundance surrounding you in this beautiful world.
Activities that are totally free often bring the most joy:
As the sun streams through your bedroom window early in the morning you can’t wait to get out into the world. Spending time playing games with the children. Reading another inspiring book or blog. Having time to chat with your partner on a walk. Learning. Creating. Listening to music. Time with family and friends.
The most valuable experiences in life are totally free. And enjoying free things is the fastest route to freedom.
Frugality, the full enjoyment of everything in your life, and the realisation that the best things in life really are free, seem to lead to a degree of minimalism.
Ownership works both ways. When you own something it also takes up space in your mind and puts demands upon you: to maintain it, or replace it, insure it, or clean it, or buy extra things for it, etc.
In a small way everything you own, owns a little bit of you.
So be careful before letting any new object into your life.
Things can be tricky and time-consuming to get rid of as well.
When you realise there are things that you have bought that didn’t give you value in proportion to the hours you had to work to buy them, then you begin to clear them from your home.
There is an incredible feeling of lightening as each item that gives you no value or joy is either sold or recycled.
Life becomes easier, smoother, and happier the fewer objects you have in your life. The things that remain are often high-quality high-value things that are a pleasure to use; things that genuinely improve your life.
The fewer objects you own in your life the more freedom you have to enjoy the world.
We’re all ultimately seeking happiness. Most of our decisions in life stem from the belief that our actions will bring us more happiness.
Bringing science into the mix and looking into what truly brings happiness into a life, we can find a much better route than working longer and longer hours to earn more and more money, that is then given straight over to others for things and experiences that do not make us happier.
An 80-year Harvard study found that the quality of people’s relationships was the most important factor in their happiness and their long-term health.
The following seven simple things also have a large impact on happiness:
A cycle ride or hike with family and friends can hit every single one of these happiness triggers (and is completely free): achievement of a goal, enjoying the moment, bonding, exercise, leisure, being in nature, and even building affection towards each other.
Each of the pillars is an idea that helps you gain your freedom. Brought together into your life they will lead to a happier, more fulfilled, and more balanced life and ultimately to financial independence and, if you choose, to early retirement.
When I started on the path to financial independence I had one goal: to retire early (FIRE). I didn’t realise at the time there would be a sequence of other benefits along the way. These are the milestones of FIRE.
The day you decide to head towards financial independence you reach the first milestone:
A chain reaction begins that leads you to evaluate all the things you’ve previously bought and simplify your life – clearing out anything that no longer provides fulfilment.
The word frugality gets a bad rap. People think frugality means lack or self-denial. One of the surprises I found is that the path to FI is nothing like that at all. You only need to cut out the waste: the spending that gives you no pleasure, no value, and no fulfilment.
Life gets better as you focus your days on the things that truly give you pleasure (and these are often free).
The things and experiences that remain in your life are the very best, the most fulfilling, the most exhilarating, the most valuable, and the most satisfying – and each and every one of them is fully appreciated and fully enjoyed.
2. Debt freedom
As you reduce spending the amount you can save each month increases dramatically.
You can use this money to pay off any non-mortgage debts.
You will also look at purchases in a different way. No longer will that new car be only $500 per month (representative 25% APR – terms and conditions apply). It will be $40,000 and if you don’t have that in cash, or you don’t fancy spending all that cash on a car, you won’t buy it.
At this point I realised I could have all the important features of a new car in a pre-owned car bought for $4000 in cash. With the added benefit of not being so precious about it – so attached – less owned by the object.
When you take on debt you become a slave to your past self’s decisions. They got the pleasure of the purchase and you’re left working for years to pay for it.
Debt freedom gives the first peace-of-mind milestone. You will feel a deep calm settle within you.
With no more debt payments your savings will accelerate. The snowball of your wealth will start to grow bigger and roll faster.
3. One month’s grace
Next up, you’ll soon have one month’s spending saved up. Seeing your FI fund grow provides the motivation to look for additional efficiency improvements and cut ever more waste from your spending.
Every $1 you cut from your annual spending reduces the FI fund you need by $25 or $33 (depending on the safe withdrawal rate you choose). Small improvements make a big difference.
4. One year’s grace
Now you’ve got options. Reaching the point where you have a whole year’s spending covered gives you additional peace of mind. All those common fears begin to fade as you have bought yourself plenty of time to change direction, change career, or start something new.
5. Mortgage freedom
Congratulations you’ve just cleared one of your biggest expenses and given yourself additional options. You could rent out your house for additional income while you travel the world. You could downsize to a smaller house if you wanted to, giving you another safety net.
Every time you pay off some of your mortgage it is equivalent to saving at the mortgage interest rate tax-free. When you overpay you reduce both the remaining time and the total amount you’ll have to repay.
In some places it makes financial sense to rent rather than buy. If this is your situation you also benefit from the freedom to easily move to a better value area or country to lower your annual spending.
6. The plateau
At some point on your FI journey you will have almost fully-optimised your spending (there is always room for improvement, but with diminishing returns).
Life is good but you’re not financially independent yet. You have to keep heading to work, selling your time for money, while your FI pot grows.
You are becoming wealthy. There may be no externally visible sign that this is the case – but it is true nonetheless.
It is best to put your focus elsewhere for this bit. Build the lifestyle you would like to live post FI:
Focus on learning, creative pursuits, improving skills, health, fitness, exploring the beautiful world, and spending time with those you love.
The plateau can be a few years long. Stay the course. This is what it feels like to become rich enough.
7. Ten to Twenty year’s grace
One day you find you have ten to twenty years annual spending invested!
You’re still not FI, but this feels very good. This is FU money. You will begin to live life on your terms. Personally important things take precedence.
8. Base FI
At some point on the way to an FI pot of 25x annual spending (4% safe withdrawal rate) to 33x annual spending (3% safe withdrawal rate), you will realise that you’ve reached what we’ll call Base FI.
Base FI is the point where all your core spending (on water, food, shelter, heating, energy) is completely covered for life by the passive income from your FI pot.
Beyond this point, you will be adding each of the good things from your current lifestyle back into your post-early-retirement lifestyle.
It’s like a TV game show:
“Now you’ve won …”
one-book-per-month for life
music streaming
movie-streaming
the car
one week’s vacation per year
a month of travelling
…
All covered for life by the passive income from your FI funds.
9. Part-time option
There is a point where you can choose to reduce your hours and begin to work part-time. While this will impact how long it takes to reach financial independence, it gives a possible cross-over route into retiring early. You gain additional free time in your life. You get to trial some of your post FIRE plans.
10. FI (current lifestyle)
This is it. The big one. You know the lifestyle that you love, the one that includes all the things you value, all the things that provide fulfilment. You can now live that way for the rest of your life, without ever swapping your time for money again.
You can choose how you spend the rest of your life. You can choose creative projects without the need for them to generate income.
You have bought yourself freedom.
You might decide to retire early as soon as you hit your number, but even if you continue to work towards some of the levels beyond, everything will have changed. Once you reach FI, you are completely free in your mind.
11. FI+ (safety margin)
After reaching 25x annual spending invested in your FI investments (based on a 4% safe withdrawal rate) you might want to carry on and aim for 33x (3% safe withdrawal rate).
Any extra invested savings give you a safety margin. A way of handling changes in the future. These additional savings can mitigate the sequence-of-return risk coming from a bad first decade of stock market performance or high inflation.
Each month you go beyond FI into FI+ builds your financial strength.
12. FIRE
You have retired early. You have built financial independence and now you are free.
At this point you get to choose what to do with the rest of your life:
You could travel the world, or learn guitar, be more present for your family, or begin to teach something you love, finish the house, or build something new, sail away into the open ocean, or climb a mountain, go diving on a reef, or learn to paint, you could become fluent in a foreign language, or focus on your fitness, you could start a business, or spend more time on your hobbies, you could volunteer, or plant some trees, you could create art, or write a book, take award winning photos, or learn to fly …
Or you could do all of these things and more.
The choice is yours but you now have the conn.
Through hard work and discipline you’ve stepped off the well-worn path and into the unknown.
A snowball of increasing wealth came from the simple concept that money is equivalent to hours of life.
This idea made us pay attention to the fulfilment, value, and happiness we were getting from the things and experiences we spent our money (hours of life) on.
We cut out all the waste. Our spending reduced massively with no reduction (actually an increase) in happiness.
Somewhere in the back of my mind an additional improvement was being mulled over.
How to deal with the temptations that still arise as FI funds increase:
Wish lists of things that could be bought, shiny new things seen in friends houses, expensive vacations, the lure of a Tesla, etc.
A new way of thinking about spending
When we make a decision to purchase something we rarely think about the other things we are saying no to. The same is often true with how we spend our time.
We often see a thing, decide we want it, and if we have enough credit go ahead and buy it.
We very rarely compare very different things when making purchasing decisions.
The way to deal with this is to rank everything in your life that you have spent money on or could spend money on. Also include the things in your life that cost no money at all.
All the best things are free
This exercise was enlightening and an instant cure for those creeping temptations. I found that at the top of my list, the most fulfilling ways I spend my time, were activities that are completely free (and a few that are nearly free) …
Time with family and friends
Time outside
Walking and hiking
Cycling (~$100 per year for maintenance | $2500 FI pot required to cover this for life)
Note: The FI (financial independence) pots above are based on the 4% safe withdrawal rate. 25x the annual cost. If you’re using a 3% safe withdrawal rate this would be ~ 33x the annual cost.
Where spending is worth it
When it came to the activities that actually cost a bit more the list was full of experiences rather than things (not surprisingly). Again the things at the top of the list in terms of fulfilment were lower cost than some of the bigger ticket items further down the list (especially any new car or a larger form of shelter).
There are things in this list that bring so much joy into our lives that I’m willing to ensure our FI pot can fund them for life. I’m willing to put the time in now, to earn the extra money, so that we can include them in our post retirement lifestyle (for example trips to the mountains for Skiing with family and friends).
These activities provide so much more fulfilment than those tempting things further down the list. They make it easy to say no to the temptations that will not provide anywhere near as much pleasure.
We could have Skiing trips for life for less than a bigger house or a new car would cost and these would provide much more joy.
Obviously each of these trade-offs is personal. Ranking the things in your life makes it easy to see what you are happy to spend on and what is of little value to you.
Working out the FI pots is enlightening
Part of this exercise involves working out the FI pot required to include a given experience or thing in your life post early retirement.
For example a $1000 vacation per year is going to require $25,000 invested in your FI pot to cover for life at a 4% safe withdrawal rate (SWR) or ~$33,000 at a 3% safe withdrawal rate (SWR).
Running costs for a home (even after the mortgage is paid off) of $6000 per year needs $150,000 invested at 4% SWR or ~$198,000 invested at 3% SWR.
Key things I learned
I learned a lot doing this simple exercise:
Enjoying free things is the best route to freedom
Time spent in flow creating things is both free and rewarding
The difference between free activities and those that cost any money per year is huge in terms of the FI pot you need to fund them for life
The amount you spend on shelter and transport has the most significant impact on your time to Financial Independence (housing and new cars are over-priced due to the widespread use of debt for their purchase and they have significant ongoing running costs)
The ongoing running cost of a home requires a significant FI pot to fund for life (even after you’ve paid off your mortgage). It is worth seeking ways to reduce this as much as possible.
One-off purchases of high-quality high-value things (second-hand where possible) is okay if they give you a lot of pleasure or functionality (Bicycles | Speakers | Walking Boots | iPhone | Kindle | etc.)
Pay attention to the FI pot required to fund any service you regularly pay for (e.g. Film and Music streaming services)
Buying an asset that provides pleasure, pays for itself, and provides passive income is a triple win
All the best things are free
So there you have it. Rank all the experiences and things in your life. It will become clear which you value highly.
It will be clear in your mind what you want to include in your post FIRE lifestyle.
This exercise will also give you a series of FI milestones. The first will be when your FI passive income covers your physiological needs (water, food, shelter, heat, light, etc.).
Beyond that you will be adding each good thing from your current working lifestyle back into your FIRE lifestyle. Each fully covered by passive income.
You may find that a huge number of the good things in your life would be included right now.
“Wealth is a measure of a person’s ability to survive so many days forward”
R Buckminster Fuller
When your answer to the question: “How many days can you survive without earning another cent?” is “Forever” then you are rich enough, financially independent, truly wealthy.
True wealth is built by not spending the money you earn, but investing it into assets instead. True wealth comes from realising that the best things in life really are free.
When you have healthy food, warm dry shelter, clean water, fresh air and you appreciate these things then time with family and friends and time in nature become more important than buying more trinkets.
Interestingly people get confused between high income and wealth.
Watching a show the other day titled: “How wealthy are you?” it jumped out at me that they answered this question by discussing the income levels of different jobs. Income isn’t wealth.
Wealth is more important than income
The $100k earner who spends it all and has debts for their fleet of high end cars and expensive house is less wealthy than the $50k earner who manages to save 50% of what they earn by living in a smaller house and cycling their commute.
One looks wealthy but isn’t. One is on their way to being truly wealthy but doesn’t necessarily look it. It’s what you keep that matters.
The high income high spender may not be able to keep their lifestyle going for even a month without having to head back out and earn more money. It’s a life lived on a knife edge.
It won’t be long before the truly wealthy saver who is heading for FI realises they could last 20+ years without earning another cent and that is truly life changing.
Instant benefits on the path to FI
There are instant benefits to starting on the path to FI as well and life begins to improve immediately as you switch from spender to saver.
“Paradoxically, what keeps the consumer society going is the fact that trying to find yourself through things doesn’t work: The ego satisfaction is short-lived and so you keep looking for more, keep buying, keep consuming.”
It is a wonderful feeling to no longer be owned by your things. To have just what you need, the things that provide genuine happiness, and nothing more.
Having fewer things frees up time, that would otherwise be spent maintaining them, to head out and explore the world.
To appreciate the true value that lies under the blue skies, in the valleys, by the oceans, amongst the mountains, in the forests, and on the beaches of the world.
To be truly wealthy is to take pleasure in the simplest things as well as the occasional luxury. To appreciate the flow of clean cold water into your glass in the morning. To be present to the beauty of new blooms in Springtime.
To realise a cycle ride provides as much fulfilment and enjoyment as a ride in a supercar. A kayak as much pleasure as a super-yacht.
Buy assets not liabilities
The truly wealthy understand the difference between assets and liabilities. Where middle class high spenders like to appear wealthy by loading up on liabilities (things that take their money from them) the truly wealthy, the rich enough, invest their money into assets (shares, property, bonds, and businesses that provide them with passive income).
Don’t judge a book by it’s cover has never been truer. The cyclist dressed in scruffy clothes might be a multi-millionaire. The man driving the latest SUV might be heavily in debt.
I’ve felt the thrill of a new car purchase, of having nice things, but it is short lived and cannot compare with the peace that comes from stepping out of the game of conspicuous consumption and building true wealth instead.
Living in enough house
A nice home is nice to have but it isn’t a true asset (it will take money from you even when you’ve paid off the mortgage) so make sure you fully appreciate the house you have and don’t tie up all your money putting a roof over your head.
When you have enough house and you’ve made it beautiful, be happy there. Don’t be tempted to keep moving to bigger and bigger houses just because the bank will give you the mortgage to buy them.
Some end up spending their whole lives working to pay for their shelter and could end up paying almost double the purchase price thanks to the interest on a 25 or 30 year mortgage.
If you do end up buying a house rather than renting, aim to pay off the mortgage as fast as you can. It’s a fantastic feeling to remove one of your largest expenses forever.
How wealthy are you?
No matter how much you earn, your wealth will be determined by how much you save and by how much you need to fund your lifestyle.
It is possible to live a dream lifestyle on far less than most people think by just cutting out the waste and everything good gets to stay.
So for those heading towards financial independence your wealth number is far more important than your income:
How many days, weeks, months or years could you go without earning any more money from a job?
Aim to increase this number today by spending a little less and saving a little more. It won’t be long before you become truly wealthy 🙂
Your journey to financial independence (FI) is a personal thing. Â You get to choose how much you spend, how much you save, and therefore how long it will take to reach FI.
You decide what you spend your money on. Â This means everything good gets to stay.
Live better while spending less
During the last 5 years I have increased my savings rate to over 75% of income.
Over that time life has felt more full of abundance, more satisfying, and more fulfilling with each passing year.
The strange thing is that the changes made to reduce spending aren’t very noticeable from the outside looking in. Â Our lifestyle looks the same as it did before we started making improvements.
We still live in a beautiful house, we still travel and appreciate the beauty of the world, we have nice things, we can listen to all the music in the world, we eat delicious healthy food, we can enjoy an evening by the fire with family and friends, we read the latest books, watch the latest movies, and the children have more than enough toys and books and games.
Keep your money by cutting out the waste
You do not have to give up anything of value while you massively increase your savings rate.
I find it hard to remember what I was wasting all my money on before I started to pay attention.
However, if you’re looking for places you can make improvements to your spending, the following are good candidates (cut anything that doesn’t give you fulfillment in proportion to the hours of life energy spent):
Anything bought using debt (including leasing)
Anything you buy as a habit
Any daily spending (work lunches, coffees, travel expenses)
Always buying the latest: phone / car / fashion / gadgets / etc.
Buying too many: cars / houses / clothes / shoes / bags / watches / etc.
Letting big purchases just get bigger and more expensive (houses, house improvements, cars, TVs, home cinema, yachts, helicopters, islands, etc.)
The biggest improvements
Make sure on the big purchases that you pay for only those features that actually enhance your life.
For example, pretty much any car can carry you and your family in air-conditioned comfort at an incredible 70 mph while you listen to your favorite music, podcast, or even learn a new language. Â But how much extra lasting happiness do you get by adding mood lighting or reversing cameras.
Look to buy second-hand to maximize what you’re getting for your money.
The biggest improvements come from cutting out the daily waste on things like travelling to work and how much you spend on lunch there, and from finding better options for the big purchases (maximum value, minimum spend).
Another improvement is to never go into a store (apart from for food). Â I still feel the urge to buy something when surrounded by shiny new things in a store. Â If you don’t go in, there is no temptation to buy.
When surrounded by the abundance at home I rarely feel the need to add anything else.
Another thing happened that I wasn’t expecting. The focus on my spending lead me to appreciate, enjoy, and use the things I had more.
Rather than constantly thinking about the next thing. I found myself feeling deep gratitude for all the things we already have.
Increase your financial strength
It’s an incredible feeling to bring your spending in line with what truly gives you fulfillment.
You’ll have a strong sense of integrity in the way you’re spending your money and living your life.
Since you’re only cutting out the waste, the things that don’t make you happy, your life will feel full of abundance.
The average cost of gym membership is $50 a month. This works out as $600 per year. $6000 per decade.
Another way of looking at any regular expense, is to work out how much you would have to save to cover that expense forever from your FI fund (at the 4% safe withdrawal rate).
This helps put spending in perspective. In this case gym membership for life needs invested savings of $15,000.
Based on average take home pay in the US of ~$50k someone would need to work for an additional 3.6 months, saving everything they earned, to cover gym membership.
This might sound like a good deal or they might prefer to take the time instead and retire ~1/3 of a year earlier.
How much do you need to cover this for life
Working out the extra savings you’d need, to cover anything you regularly spend money on, is a great way to discover the things that are genuinely fulfilling (the things you’re happy to work for):
FI Fund Required = Annual Spending x 25
Increase your financial strength
Basically it comes down to a different way of answering the question:
“When can I afford this?”
Your financial strength increases as you move through the following list of answers:
I have just enough spare credit on my card to buy this thing
I could buy it on finance and can afford the monthly payment
I have a deposit and I can fund the rest with finance
I can buy it cash from savings
I have cleared all non-mortgage debt and can buy it cash
I have cleared all my debt (including mortgages) and can buy it cash
I am FI and this spending is covered by my passive income
The world is your gym
Getting back to gym membership. If you get fulfillment from your gym membership, it feels worth the cost, then it gets to stay.
I personally would rather spend my time hiking on mountain trails, out on my road bike or running, swimming in lakes, kayaking in the ocean, lifting weights at home, or climbing (which are all pretty much free).
If you want to use the world as your gym there are plenty of ways to burn calories whilst spending no money at all.
Doing push-ups, sit-ups, pull-ups, yoga, weights at home, and just walking, running, or cycling in the fresh air are all you need to stay fit.
Calories burned by exercise
As you can see from the list below one of the best ways is simply running up some stairs:
Calories burned for 45 minutes of exercise (average weight):
The path to financial independence (FI) often leads gently to a degree of minimalism.
I have noticed that as my desire for more disappeared, I started to re-evaluate all of the things that I had bought in the past.
Things cost more than money
One of the benefits of paying more attention to spending, was the realisation that, quite often, buying things actually made me less happy.
A build up of anticipation, a short thrill on purchase, followed fairly quickly by the inevitable buyers remorse.
People spend a significant proportion of their lives thinking about the next thing they are going to buy:
Researching, browsing, planning, shopping.
Some things demand regular attention:
Cleaning
Repairing
Storing
Keeping warm
Keeping dry
Finding
Charging up
Filling up
Emptying
Protecting
Insuring
Upgrading
Replacing
You could lose years of your precious life, just to looking after objects.
Free your mind
More than anything each thing takes up some space in your mind.
You can end up caring too much about keeping the thing and keeping it in good condition.
Things clutter up your mind as much as your house.
Things lead to more things
Lots of things lead to the purchase of yet more things (especially houses and cars).
Before long you could find yourself looking for a bigger house (or external storage) to store all of your extra things!
Freeing up space in your life
For at least a couple of years we have been doing sweeps of the house and things are either sold, given away, given to charity, recycled, or thrown away.
This process makes you realise how hard you have to work to get rid of things.
Which makes you all the more careful about letting anything new into your life.
Things really have to justify their place in our home by adding a lot of value and fulfillment to our life.
I’m always amazed that there is still anything left to come out of the house but it keeps piling up in our clearing warehouses (under the stairs or in the attic) before finally going to a new home.
Pausing before letting any new thing into your life
It feels good to pare back the things you own to those that truly enhance your life.
The exercise also strengthens the habit of pausing before letting any new item into your life.
Some things get to stay
Minimalism could be taken to an extreme but what we’re really after here is the perfect balance:
We’re looking for enough.
Some things get to stay:
All of our outdoor gear gets to stay. Â As we’ve had incredible adventures thanks to this stuff. Â These things easily justify their place in our life.
Likewise, the family bikes, the camera, the Sonos speakers, our iPhones … and of course the books, all get to stay 🙂
Buying high quality when you do buy
When you decide that a thing is truly worthwhile. Â That you’ll get a lot of use from it and it will add a lot of value to your life. Â It is often worth buying the highest quality you can.
Cooking equipment, coats, walking boots, tools, are all examples where it is worth buying high quality items and keeping them for a long time.
Store things in the second-hand market
We now always look to buy things second-hand to start with.
These days: people buy, barely use, and then discard things for the latest model.
There are always incredible, good-as-new things, on offer for a fraction of the original price.
I have used this technique to buy a barely used Digital SLR camera for a sixth of it’s original price.
Looking back at the changes I’ve made since stepping onto the FI path.  Buying second-hand is one change that has made a big positive difference.
You end up with a high quality lifestyle for a fraction of the price.
Rather than storing things you’re not using in your garage or attic. Â Simply sell it and you can always buy something similar later if you find you need it.
Anything that hasn’t been used for 6 months is a good candidate to sell.
When you store your things in the second-hand market you don’t have to worry about them at all.
Someone else takes care of keeping them in good condition, keeping them warm and dry, and storing them.
We bought a campervan once, had an incredible year of family adventures, then sold it for a small profit that meant it paid for its running costs. Â But that’s a story for another day.
Having what you use and nothing more
There is something incredible about having just what you use and nothing more.
There is freedom in having enough.
Give yourself the gift of time by clearing out your clutter.
Less time being owned by your things. Â More time and space for living.
A simple step to take today …
Look around your house for anything that hasn’t been used in 6 months.
The Trinity Study has worked out that the safe withdrawal rate from a US share and bond based pot is 4% per year (inflation-adjusted).
This works out as a pot that is 25 times your yearly expenses. Â Save that up (plus a bit for added confidence) and you’re free.
What is the Safe Withdrawal Rate?
The Safe Withdrawal Rate (SWR) is the rate that you can withdraw from your portfolio every year that ensures you have a high probability of never running out of money.
The 4% refers to the portion of the portfolio withdrawn during the first year.
It is assumed that the amount withdrawn in subsequent years will increase with the consumer price index (CPI) to keep up with the cost of living.
The 4% rule is based on historical worst case scenarios.
What about my 70+ year retirement?
The study assumed that the portfolio needed to last 30 years.
What if you’re planning on retiring at age 30 with the potential for a 70+ year retirement.
The good news is that a 3.5% safe withdrawal rate would, historically, see you through.
“Notably, it appears that the safe withdrawal rate does not decline further as the time horizon extends beyond 40-45 years … the 3.5% effectively forms a safe withdrawal rate floor” – Michael Kitces
The key thing is the sequence of real returns. Â If you have a good first decade then you would be able to increase the SWR after that.
You can use the Shiller PE ratio to give you an indication of the likely market performance over the next 10 years.
I am still using the 4% SWR for the reasons I outline below. Â When you look into it you may choose 3.5% or lower.
A case can be made for a 3% SWR (and is here) especially for those invested in markets outside the US.
There is even an argument for a ~1.8% SWR made here based on prevailing annuity rates.
One of your missions on the road to financial independence will be to determine the safe withdrawal rate you feel happy with. Â The 4% rule gives you an initial target to aim for.
What size pot will I need?
As you reduce your spending and increase your savings rate on the route to becoming Rich Enough, you will get to the point where you’ll know how much you spend in a given year.
It is likely to smooth out and be quite consistent.
Your target pot will become clear.
Feeling safe with the safe withdrawal rate
Since the path to FI involves being aware of your spending, you will benefit from:
Knowing where spending could be further reduced (without any reduction in happiness) if required during the critical first decade of retirement
Having the energy and time to earn more money or create assets that increase passive income
The fact that inflation has less of an effect on low spenders
Being debt and mortgage free so that interest rates do not effect your spending
The fact that lower spending is very tax efficient
How can I feel even safer than that?
You can simply save a bigger pot than you need.
My personal approach has been:
To have a cash fund covering the first few years of early retirement mitigating some sequence of return risk (the risk of market corrections during the first decade of retirement)
To have an FI early retirement fund and a separate normal retirement fund that I do not include when calculating my SWR (this will be left to grow until normal retirement age)
We have income that comes from investment properties alongside the passive income from the FI pot (diversifying across asset classes protects your FI cash flow)
Our yearly spending, while lower than average, has plenty of room for reduction if required
I do not include any Social Security / State Pension in my FI calculations
I do not include our ability to downsize to a smaller house in my FI calculations
I do not include any inheritance in my FI calculations
Discovering your target
As you focus your spending on only those things that truly give you fulfillment, you will discover your annual spending target.
This leads you to the pot size that needs to be saved and invested.
It can build up surprisingly quickly and surprisingly easily as you Grow Rich Enough 🙂
