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.
