Aged 38, I had saved enough money not to need to work again. “I’m retired”, I’ve said provocatively in the last couple of years, whilst still remaining cherub-faced (in certain, low-lit locales).
This doesn’t mean I’m going to stop working, but now I’m able to work on what I want, regardless of the income or outcome. I’ve become free.
I’ve thought about money a lot over the years, I think it’s because I’ve always associated wealth with freedom. This is more of a story of reduction of wants and needs than of gilded-silver-spoons or get-rich-quick. Simplicity over getting rich. It sounds smug, perhaps first-world-privilege, but that’s not my intention.
I’ve delayed or almost didn’t write this post because talking about money seems vulgar, or self-congratulatory, as does ‘thinking about it’ so much. But I so wish I’d known some of this earlier… and so, with my future children in mind, I wanted to condense what I’ve learned from others much wiser than me along the way – so that others can have a quicker, simpler ride. Like sex, not talking about it creates many more problems. Each birthday, I also write a letter to each of my godchildren (as well as giving them a book and a record), so this post can be the ‘all I’ve learned about money’ for them too.
The reason it’s important to talk about it is that the way most people treat, spend and think about money is – mostly – insane. Many peoples’ lives are dedicated to the pursuit of it, only to let it go on useless things that do not fulfil the expectation the moment they have it.
I’ve managed to reach financial independence without any big exit, 6-figure paying job, windfall, trust fund or 100x-returning investment, as well as a number years along the way not earning, or earning very little indeed. I know many people who’ve earned 5x+ more than I have over the years, but have nowhere near enough to ‘retire’.
I did grow up in a middle-class family with enough money, so I didn’t go into debt and had generous parents who acted as guarantors when I bought property, and offered a room in the family home as office space for a fledgling business, which certainly helped – but I make no apologies. I’ve been lucky, but I believe that it’s possible for most people to become financially independent earlier in life without these advantages. It shouldn’t be your only mission, but it’s doable. I made many mistakes along the way, which could have easily been avoided and could have got here far, far quicker if I’d known what I was doing, not spent money on building a house in the middle of nowhere, or been more focused. I wish someone had taught me all this at school instead of Latin or trigonometry. Instead I’ve had to learn from the great blogs and the FIRE movement, commentators and books.
So, without further ado… here’s my simple guide to financial independence:
How Much You Need
- Financial independence means you have 25x your yearly expenditure in savings, where a 4% interest rate provides enough for you to live.
- Financial independence is about freedom, much more than it is about money.
- Seek wealth, not money or status.
- Financial independence doesn’t mean not working, it means having the freedom to work on what you want, when you want, which means you enjoy work far more.
- You’ll get there quicker if you need less – it’s far, far easier (and rewarding) to reduce your expenditure, therefore needs, than to earn more.
- I can’t afford to be retired and buy large rounds of drinks, eat in expensive restaurants, fly business class or generally be extravagant. I am only retired if I’m frugal and sometimes less generous than I’d like to be… but it’s worth it.
- The above assumes I will never earn money ever again (or have the kids that might read this article)… but I should earn again unless I’m very unlucky. I could also inherit a bit, so perhaps I don’t need the wealth I have to cover me for ever, but it feels more reassuring that way.
- The secret to wealth is the beauty of compound interest, or as Einstein said “the 8th wonder of the world”.
- If your grandparents had invested $1k in the S&P in 1941 and left it, it would be worth $2.4m today. Seems that even regular people could have trust funds, if their forebears had been wise.
- Simply put, I wish I had invested more in the markets earlier and kept it there. In addition to sharing this post, I will put money aside for my kids in a tracker when they are born, with some yet-to-be-figured-out way of preventing them taking out too much, too soon.
What & When to Invest
- Over the last 80 years, the (US) market has returned about ~9% per year if you reinvested everything.
- Don’t bother trying to beat the market, just put your money into a low-fee tracker (e.g. Vanguard) – 80% of individuals and professionals never beat the market. Yup, all of those stock tips, financial journalists, companies, fund managers and city-types are mostly spending their lives making things worse than if they didn’t go into work each day. That is a mind-boggling thing to get your head around and speaks to the madness of modern approaches to money.
- Don’t bother using wealth managers, they rarely beat the market and charge fees which erode the compound interest – unless you’re like me, with no self-control and therefore you need to keep your portfolio away from trading in and out of foolish bets.
- The time taken to try to beat the market also doesn’t get factored in – think of all that opportunity cost of time and effort. For me I’ve spent thousands of hours loosing thousands of pounds as well as additional thousands of hours reading about the markets when I could have been walking in the countryside, or spending time with friends. I can’t ever get that time back – a reminder that time is way, way more valuable than money.
- The only exception is that occasionally you’ll notice a trend which might be worth a small punt. I noticed the iPhone 1 when I lived in San Francisco, but ignored it, Tesla when I moved there a second time, ignored that and Amazon for thirds, which I also ignored. A tracker WILL still catch these, so perhaps continue to ignore them… the time and energy it takes to try to catch these as well as getting them right, perhaps isn’t worth it.
- That being said, a small punt in something that can 10x increase or more or 1x decrease (e.g. going to 0) could be worth it, but never for more than 10% of your net worth. I bought £5k in bitcoin in 2014, which resulted in a small 6-figure exit. I’ve lost a few other similar punts.
- Generally, however, you’d be better just investing in a tracker, topping up when you can, then leaving it and going and doing something else. Ignore big market swings, hold your nerve, they have ALWAYS come back (so far).
How to Live
- Seek wealth, not Money or status. Wealth is assets that earn while you sleep. It’s not about renting your time. Thanks as ever to Naval for his excellent tweetstorm on getting ‘rich’.
- It is EXTRAORDINARY what people choose to spend their money on, given their financial situation. Perhaps they love going out to work each day, but many people are stuck in this crazy loop of earning to afford what they need to earn.
- When I stopped working so much, I realised many, perhaps even most of my expenditures were to try to mitigate the stress and lack of time I had: Deliveroo, Uber, restaurant meals, sandwiches, coffees, amazon prime etc.
- I applied the same frugality to my businesses – businesses don’t fail, they run out of money. My investors of my last business left us the founders with some money after they withdrew their cash, because we’d been so frugal.
- I always put business expenses on the business, but I never bought something I wouldn’t have bought personally just because it was a business expense.
- Regardless of all this, I’ve had amazing holidays, learned skills, adventured and so on. I don’t feel that I’ve hampered my fun and exploration by being miserly.
- I bought a cheap sports car last year. So far it’s cost me thousands in repairs and is currently sitting in a wet garage gathering rust. I love it, I can afford it without needing to work again, and probably needed to get it out of my system… it’s fun… but it’s probably a mistake and hasn’t brought me the pleasure that it has cost.
- I still have WAY too much stuff that is unnecessary. Now, whenever I need to buy anything, I try to leave it for a month and see if I still need it at the end. About 80% of things fall away.
- I’ve never bought ‘luxury’ items – clothes, watches etc. These seem to have the largest gulf between ‘value’ and ‘cost’.
- The last two cars I owned, I spent months looking for a good deal – both I sold for more than I bought them for – both with more than 15k extra miles on the clock.
- Subscriptions are a quiet destroyer of savings: Amazon Prime, Netflix, Spotify, phone contracts and so on. I do not leave ANY on monthly renewal. Always be optimising.
- I try to buy everything second hand: a phone for £150, not £1k, a tablet for £130 not £900 and so on. Not only that, it’s more environmentally friendly.
- Even now I have reached my ’number’ I still take the Megabus to London (£20 cheaper for an extra hour spent) and so on. My peers laugh at me or think I’m weird, but they’ve all got to have jobs. As the most quoted blogger in this blog Mr Money Moustache says, ‘Pizza Delivery is for Millionaires‘.
- It’s a lot of FUN to be frugal… build, cook, make things yourself.
- Many Financial independence advisors suggest you don’t buy property. That’s wise for a simple life… however… property has a few advantages: it can be leveraged, so if prices go up, you get leveraged increases. Borrow 100% of a properties value (as I have done twice – with thanks to family guarantors) and you get the raise in appreciation which has helped me reach my 25x number. This could go seriously wrong if property prices went down, so I recognise that I have done this at a ‘lucky time’. If we’d known property would keep appreciating, everyone would have done this, but it’s helped.
- Through Airbnb and House Swaps, I’ve managed to live for free, create a small passive income and take my friends on extravagant holidays, as well as gift my Kenya house to charity auctions and so on. When I’ve moved house, I’ve used Gumtree to find second hand, cheap, furniture. £3k mattresses for £100, £2k sofas for £50. I don’t have the furniture that I’d buy if money were no object, but it’s great. I bought a kitchen someone was throwing out for £100 – a whole kitchen – and a Rangemaster £3.5k cooker for £350. You can equip your life with whatever you need for a fraction of the cost, if you’re willing to dig around. Let other peoples’ madness enable your sanity.
- I’ve never remodelled a kitchen, or spent thousands renovating other than to bring things up to a liveable standard. I’d rather have the extra money for freedom, regardless of the shabby feel…
- I’ve always ’sweated’ any assets I’ve had – through Airbnb etc. It’s a hassle and I’ve suffered mocking from friends – I’ve had to clean houses, respond to guests, stay with people, go camping or book a place because people have booked my home, but it enabled me to save and have adventures. I’ve never owned anywhere that didn’t pay for itself, at least. I rented a camper van I had for a couple of summers, meaning it paid for itself. When staying at home for a night costs you £150/night, it somewhat puts things into perspective and is a gentle reminder how much our houses often cost us just to remain in. I think I appreciate mine a lot more as a result of understanding the opportunity cost.
- Anything big – a house, wardrobe and so on, takes more to fill, heat, clean, more to upkeep and so on. More money and stress and need to earn and so on. I would probably go smaller next time.
What to Work On Now You’re Free:
- Naval’s tweet storm again, this time expanded in a podcast.
- I try, as hard as I can, not to book things into my diary. Days with nothing in are – by far – the most productive and rewarding.
- I’m fascinated by building businesses and becoming a ‘Founder not a CEO’ so that’s my aim. Whilst these do take investments, which could mean that I slip below my 25x/4%, they should also produce an income, which will bring me back up again… unless they all go under, in which case I’ll need to delete this post and earn again.
- Giving money away – I’ve not quite got here yet, but I could definitely reduce expenditure further and give more away.
- Tim Ferriss’s ‘The 4 Hour Work Week’ has a section on what to do with your free time. An excellent book who’s title often misleads people into thinking that the aim is laziness, or avoidance. It could be called ‘How to Be Free’.
Some SimpleTom Takeaways
- I’ve only recently discovered ‘portfolio entrepreneurship’ and feel that I’ve ‘found myself’ 20 years after starting the entrepreneurial journey. Most entrepreneurs I know would love to know more about this, yet currently its benefits are hidden amongst the academic literature. There’s more posts to come here on how to use time and money to set things up, not to run things and is why most entrepreneurs are ‘trapped’ doing things they hate and aren’t good at (e.g. being a manager when they would rather be creating).
- Set up businesses and they should become sources of income too. If I can do 10x businesses over the next 10 years, some should survive to produce an income – especially as the growth rate of a small business should be bigger than the growth rate of a tracker fund, even with business failures.
- There’s a direct correlation between financial freedom and healthiness (both physical and emotional) in those that I know who’ve got there. Given people spend huge quantities of money buying time and health, that’s another price to factor in to working for money. Factor in the cost of stress, diet, sleeplessness and so on, that ‘cost of working’ ratchets up dramatically.
- I’d be fascinated to know about the correlation between people who work very hard for their income and their relationship status. Certainly, my ability to engage in a romantic relationship has changed dramatically without the pressures of work. Perhaps this is just me, but I never felt I had room to properly invest in dating or a relationship during my working years.
- Spending money on important things: a great accountant, who understands your needs. I treated this like a hire, going out and interviewing 20 people and so on. I spend 5x more on this than I could, but recently he saved me £60k on a property transaction, which 3 other accountants were claiming (falsely) that I needed to pay. Let me know if you want an intro… (in the UK).
- The opportunity cost of buying things is often HUGE. It would be interesting to ‘add up’ the emotional anxiety that comes with earning money to buy expensive things that you then worry about losing. Imagine if we could factor the true cost into the price of a good. That £50k BMW is probably going to cost you more like £150k in ‘freedom’ if all of the non-financial elements (time, distraction, the need to try to appreciate etc) are added in.
- Here’s an old post about still having luxuries in your life.
- Here’s what I do like to spend money on.
- There comes a point where the increase in your net wealth from compound interest is larger than the after-tax salary you earn each year. Yet most people spend <5% of their time managing this and 95% on their salaried job. That’s fine if you love it, foolish if you don’t.
- As freedom is such a joy, I go against some of the FIRE commentators suggestions to be as frugal as possible, in that I have a part time PA to deal with certain Airbnb issues and parts of my life that would mean I had to do more admin. My PA tends to pay for herself by helping me find cheaper vehicles, finding deals for my bills, cleaning issues and so on.
- I believe a balance between Tim Ferriss’s extreme optimisation and Naval (who values his time at $1k/hour) Vs Mr Money Moustache who does absolutely everything himself is my own personal sweet spot. I don’t get pleasure from some things (DIY) that he does… and would rather have the time to learn an instrument, read and spend time with others and so I spend small amounts of money to gain time away from things that I see as a hassle.
Getting to Financial Independence is the Beginning, not the End…
So, you get to freedom. Congratulations. What then?
All of your problems certainly don’t go away. Freedom too can be confusing to those that have stood on the treadmill for so long. You won’t get much sympathy, but the transition isn’t always simple. Nonetheless, there are wonders to be had. Community, time in nature, friends, with family, reading for fun, afternoon naps, seeking out beauty, learning new skills, spending time with partners (new or old), going on trips, embarking upon new relationships and so on. There’s many a challenge within these to keep you occupied, engaged and fully alive. It’s not easy, but then it would be a great shame if it was.
With financial freedom, my friends, life begins anew. I feel like I’m 40, but only just getting started…