Category Archives: Finance basics

How Patience and Consistency Can Make You Rich

Man and Clock

Eight and a half years! That is how long I have been on the journey to Financial Independence. The first couple of years were not very effective as I did not have the knowledge and targets to aim for to make the most of it. It can be frustrating at times but I have come to realise that patience and consistency are key to achieving substantial wealth.

At the start point in mid 2012, I effectively had negative net worth as I had blown all my life savings on a BMW. From a distance you would think that the car was an “asset” since it supposedly represents status, wealth and getting ahead in life. However, it turned out to be merely a mode of transport and a liability; worthless since its value depreciated heavily overtime, not to mention countless trips to the garage before eventually getting written off. As a replacement I got back to my senses and acquired a less costly Japanese make vehicle which seems to be the right decision.

55% rule

Fast forward to today, I am nearly 60% financially independent, with a net worth into six figures and growing, no liabilities and trying to avoid ruinous financial decisions as much as possible. Buying the BMW would barely make a dent now but it would still be unwise. It is amazing how a single decision can have a huge impact for years to come.

Central to the strategy is applying the 55% Rule. This is a personal rule where I aim to save an average of 55% of my net income every month. Preferably this amount is invested in low-cost index funds.

Once you aim for the 55% you can manage your life around this, considering optimising things like housing, transportation and food. I use 55% as I estimated that this is what is needed to achieve a base level of Financial Independence in a reasonable period of around 10 years. 

Patience and Consistency

Once you are comfortable with the 55% rule two virtues are required – patience and consistency.

Without patience you will not be disciplined enough to go through with plans and may end up being a victim of lifestyle inflation. Wealth building takes a hockey stick shape over the long term. After a long period of quiescence a sudden sharp increase in wealth is to be expected. This is also often observed in business where success occurs just as those involved are considering quitting. Never underestimate the impact of Compound Interest.

A good tip is to avoid checking your investment portfolio or progress too frequently. A watched pot never boils. A quarterly or annual check in should be enough.

Once you get that out of the way aim for saving and investing a decent amount on a regular basis. With consistency you can more easily make up for any lost opportunities and rectify problems automatically. As an example, working out several times a week while targeting different areas of the body is more likely to achieve results than doing it on and off every few months.

Systems vs goals

Having a good system in place is better than just having goals. James Clear explains this very comprehensively here. If you are goal oriented, once a milestone is achieved you may suddenly stop all the good work you have been doing rather than achieving greater things, especially considering that you would already have place yourself on a platform to achieve greater things.

A goal oriented individual will only be happy momentarily when goal is achieved. But what happens next? Is it not more satisfying to witness your systems and processes working as they should, leading you towards multiple levels of achievement, improvement, refinement and continual progression. Furthermore, systems can yield various good results, rather than the one that you initially envisioned.

Don’t fear the future

On a final note; you should not fear the future or pretend that it does not exist.

Time does not stop moving so you should never stop planning and putting the correct measures in place. I did the opposite when I first started working in the corporate world by completely ignoring my workplace pension during most of my twenties.

I thought that retirement was so very far away so decided to live for the moment. Now I regret this after estimating how much more the pension pot would be worth had I just signed up then. Fortunately now I look forward to making more than average pension contributions while taking advantage of top ups by the employer and government.

So rather than burying your head in the sand, it is useful to always plan for the long term, typically 5 to 10 years ahead since this time will come along anyway. Often sooner than you think!

Useful Resources

     

 

Key metrics to track for Personal Investors

It is important to track certain key metrics when working towards Financial Independence. Different types of metrics can be tracked including investment performance, personal goals and even macro-economic ones. Having an eye on key metrics is particularly useful in times such as today with ongoing events of civil unrest over social injustice, Coronavirus, trade wars and an uncertain economic outlook.

In this post I will outline the key metrics I have been tracking over the years. Without these, investing would feel like driving blind.

Stocks proportion rule

Historically stocks have been the best performing asset class for investors with a typical portfolio which also includes cash and bonds. It makes sense to maintain a minimum proportion of stocks in order to capture returns of the market in line with your personal risk level.

I prefer to set this level to 80%; this ensures that as long as I have this amount of stocks I do not have to worry about what is in the remaining 20%.

Stock proportion rule

Stock proportion rule

Other assets/ liabilities such as cars or real estate can also be included in this comparison.

Asset Liquidity Breakdown

Financial liquidity is the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Knowing how much of your portfolio is liquid is critical; a lot of people claim to be wealthy because the house they live in appears to be worth a lot.

However, the house is highly illiquid, requires maintenance, has many fees and taxes attached, has a price of ultimately what the other party is willing to pay, and is just somewhere to live. If the person has very few or no other assets, or has negative equity they are a long way from financial independence.

Liquidity Breakdown

Liquidity Breakdown

Property such as real estate, business assets and pensions which are to be accessed after many years are regarded as illiquid. Liquid assets can be stocks, shares and bonds in an investment portfolio held in an ISA (Individual Savings Account) and cash. Usually, such assets can be converted within a matter of days for use towards Financial Independence purposes.

You can also further breakdown the liquid portion to specific asset classes. This way, you can identify if the liquid assets are geared appropriately for desired long term returns by determining if the portfolio is too aggressive or conservative.

Liquid - asset classes

Liquid – asset classes

Financial Independence Goals

Tracking the overall goal towards Financial Independence is another important metric. The chart below shows how I do this.

Financial Independence - Goal tracker

Financial Independence – Goal tracker

The black line is the ultimate portfolio size to enable Financial Independence at 25 times  annual expenses. The red line shows historic progress. Current portfolio size is shown by the dotted line – once this crosses the black line the goal is achieved.

Achieving 75% (green line) of the goal is also a big milestone as one can easily find other ways to make additional income required or they can become more comfortable to transition to a different type of working such as self-employment.

The dashed grey line shows the current portfolio size plus property. If this crosses the grey line it shows that if the property is converted to the portfolio the goal can be achieved early.

Data and update frequency

To visualise these key metrics and others I regularly enter relevant data into a Google Sheets spreadsheet and have created charts which are updated automatically. This does not have to be an onerous process and only needs a few minutes of updating every month.

So far it has been incredibly helpful in keeping an eye on progress and providing much needed motivation. Definitely something for every series investor to consider.

 

Investing wisely during lockdown

Coronavirus investing

Lockdown will be a new experience for most if not all investors. Based in the UK, I have pretty much been housebound for over a week, apart from the occasional trip to the shop or for a walk. Fortunately, I am able to work from home so my productivity has not been impacted much. As the Coronavirus continues to wreak havoc across the World with increased intensity, here are my top tips for the Intelligent Investor.

Polish up you CV and Skills

It is no secret that, across the board, all types of companies, big and small, have been affected by the Coronavirus and are looking into different ways of mitigation. This may impact employees through reduced hours or pay, forced leave or redundancies.

In such times it is very wise for the employee to be prepared for the worst by getting their CV up to date, improving or learning new skills and have a Plan B. It may not be easy though as hiring may be scaled back or stopped in certain sectors.

Have a Low Information Diet

The worst thing about being stuck at home is that you will probably end up watching/ reading a lot of the news which ends up making you even more depressed. For investors, too much bad financial news may cause one to act irrationally.

Personally, I know a few people who were happy when the bull market was raging recently but are now either rushing to sell or hoping to stop investing when previous valuations are restored. Selling now will crystallize your losses forever. Instead, it is best to not check your portfolio frequently, stay the course and hold firm.

When I did my regular quarterly update my portfolio is down 18.33% so the net worth chart below looks bumpy. It may look like an entire year’s progress has been wiped out but it is a a good time to buy. My progress to Financial Independence has been scaled back but I will keep investing.

Net worth chart snapshot (to Q1 2020)

Net worth chart snapshot (to Q1 2020)

Keep buying stocks consistently

It is undeniable that Coronavirus is unlike anything investors have ever experienced. Even Warren Buffett said he had never seen such an event in his lifetime. The virus has touched every aspect of life from the housing market to visiting family. Unbelievable; even last month who would have ever thought that you would be never be able to move house or go to the local park.

The one thing to do now is to be consistent at buying stocks, preferably low cost index funds. This may be an opportunity of a lifetime for investors with a long term view, particularly if stock prices remain low for a prolonged period. When things recover, those who have been piling into the markets will reap the rewards.

Look out for the silver lining

It is also important to have a positive outlook. Not all bad things have to end up that way. If we get through this situation then there may be other opportunities to be had. You just have to be in the right place at the right time so it is worth thinking about any potential benefits in future.

A number of great businesses were born during scary recessions of the past including General Electric, Microsoft, IBM, Disney and FedEx. Necessity is the Mother of Invention.

You may be finally finding out in shock that your job or business can go at any moment. It is best to have some resilience. A level of Financial Independence can also help mitigate any financial hits.

Relevant posts:

Investing lessons from Warren Buffett’s letter to Berkshire Shareholders 2019 amid Coronavirus market panic 

Why I am Optimistic about future investment returns 

How to react to a Bear Market and invest wisely

Why volatility is an investor’s best friend and top insights from Warren Buffett’s 2017 letter 

Standoff and stocks selloff – Should Investors be worried 

How to avoid lifestyle inflation to achieve Financial Independence

House and bicycleHousing, Transportation and Food are the big three categories to control in order to maintain a relatively high savings rate. To achieve financial independence (FI), the most important thing is your savings rate as I explained in a previous post here.

A lot of people try to find investments or other means with a high return rate. However, this may turn out futile if the necessary capital available to invest is not substantial. Good returns do not have a big impact if you intend to be financially free at a young age, considering that the stock market typically returns nominally 10% a year.

I am in the process of looking for a new place to live in January 2020 and this has made me to seriously consider my lifestyle costs in future. When I moved to new places previously, I did not  do the math well, particularly for housing and transportation costs in relation to my new lifestyle. In a number of cases, this has resulted in me being worse of either financially, by quality of life or both.

For example, when I moved for my current job (from Cambridge to London outskirts) my salary went up by 13%. This seems great but I ended up living 11 miles from work compared to 4 miles previously. This seemingly innocuous change turned a simple 20 minute commute into a gruelling drive of over an hour in rush hour traffic.

The new job meant that I lost many hours a month plus cash due to the long commute and I was generally more tired. It felt like I had already been to work when I got to work.

Housing and Transportation

I see management of these two elements as being critical in propelling me towards financial independence at this stage. It is not wise to find a cheap place to live which is very far from work, costing time, an arm and a leg to get there. For this reason, I have decided to find a rental within walking distance of the office. Costs will be roughly the same as the previous place but the commute by car or train will be completely eliminated, resulting in cost savings and 7 hours a week freed each week. That would be effectively gaining an extra work week each month! 

55% savings rate

To be financially free by my target date I have estimated that at least an average 55% savings rate will be required. This has been over 53% so far. I will also need to maintain the progress made by maintaining my core living expenses or even better by reducing them. To do this it is important to know current and expected expenses which will guide the search for new accommodation.

Housing and Transportation to gross income ratio

People often wonder how much they should spend on housing in relation to their income. It will depend on what you can afford and what you value in life. I was a bit shocked when the estate agent said that I could afford a place which is my gross salary divided by 30. This would mean that 53% of net pay would go towards housing which is ridiculously high. Admittedly I would get a nicer place but my financial independence progress would drop to only 29% and future savings to 35%. Achieving freedom would become practically impossible, leading to many more years in the cubicle.

Housing and Transportation to gross income ratio

With these facts in mind how much should one allocate towards housing and transport. I have been tracking how much I spend on these two since 2007 as shown the the graph above. When I started my first job in 2007 I lived in shared accommodation with very low costs and a 20% spend. However, within a year I got a small pay rise and had a huge bout of lifestyle inflation by moving to my own studio flat.

Now with a hefty 30% expenditure I managed to save absolutely nothing after a three year period and remained with even more credit card debt while having a negative net worth.

Over the next few years I moved locations for new jobs and back to shared accommodation. This enabled me to pay off the credit card and start the fi journey in 2012.

The housing and transport expenditure proportion has been steadily decreasing due to some some pay rises and is expected to get back to near 20% when I move to the new place. I find this to be an acceptable amount to pay. It may mean sacrificing a little luxury but will not derail progress towards financial independence within a few years.

*It is also important to stick to a budget while tracking your other expenses as these will affect the overall picture.


In summary, to maintain a 55% savings rate I would need to spend roughly 20% of my gross income to housing and transport to achieve financial freedom within 3 years. This is based on my current level (52%) of expenses covered by passive income.


I have found this to be the most comfortable scenario for me in relation to my goals. Everyone’s situation will be different.

Geographic Arbitrage

As I am currently based in one of the most costly areas of the UK (South East), applying some Geographic Arbitrage almost anywhere would definitely have a positive impact. Quality of Life could be increased and Cost of Living reduced readily so this will definitely be on the cards soon. In fact I realise that I am already 70% FI for less costly parts of the country.

Also, renting a place rather than owning is beneficial as one would be far more flexible to take advantage of opportunities and overall expenditure on housing and transport would be far easier to limit.

Things look set to get more exciting in the next couple of years as the snowball keeps gathering speed and size, opening up more possibilities and options.