Category Archives: Financial Independence

50% FI (Financial Independence) in 7 Years! – What it took to get here

net-worth-chart-2019

Today marks a significant milestone in my journey towards Financial Independence (FI). According to my calculations I have reached the halfway point of achieving this goal. This endeavour started almost exactly 7 years ago in June 2012. The purpose of this blog and my book is to document how I am striving to complete this task within 10 years.

Motivation

There are many factors which have motivated me to embark on this journey. I moved to the UK from a developing country which was facing a severe economic crisis and went on to study engineering at university. This was particularly tough due to the very high international student fees, living expenses involved and having to adjust to a new culture.

Uncertainty and job security in the workforce were other major factors. Money was always scarce when I had to work all throughout my studies which was not ideal. It was therefore no surprise that when I got my first professional job I thought I had made it. I was thinking in terms of income rather than net worth. This led to an episode of lifestyle inflation in my mid to late twenties. 

The Big Three – Housing, Transportation and Food

2007: £1,000 Debt

In order to get your finances on track you need to keep the big three (housing, transportation and food) under control. I did the opposite while working at that job. Moving from shared housing to my own rented flat greatly diminished my savings rate as I faced an explosion of monthly bills.

On the food front I was equally terrible; I never prepared my own work lunch, instead opting to buy costly unhealthy food every lunch break. Anything from burgers to fish & chips and kebabs. Life was good I thought.

I wasn’t done yet! As if all this was not enough I decided to embark on my next wasteful adventure: car ownership. At that time I lived in Manchester where commuting to work by bus was incredibly cheap. A bus pass which I used was something like £5 a month. I convinced myself that I needed to drive so did a lot of lessons and got my licence. Soon after I went car shopping. I barely did any research into this and quickly bought a used Peugeot 206 for £2,000 in 2009. 

This car turned out to be a real lemon. It was dangerous and very expensive to keep. I remember at least three times where the car left me stranded on the motorway due to major mechanical faults. One situation was the clutch snapping during heavy snowfall and the other was parts falling from underneath the car in the dark. Such breakdowns are often accompanied by other extra costs such as repair bills, recovery and using alternative transport. As a new driver, the insurance was ridiculous at over £1,200 a year.

Recession and plugging the hole

2010: £2,000 Debt

In the height of the global recession in 2010, along with many others, I had to leave my first job as the company was facing big financial problems. Obviously this was not good but it turned out to be the greatest thing to happen to my situation. Immediately I left Manchester to go and stay with my mother as I had managed to save exactly nothing in three years due to the above. In addition, I had maxed out my £2,000 credit card. I managed to get a new job soon after though so did not need to sleep on the floor for too long.

Seeing the light

2012: 0% FI

It was as if the reset button had been pressed. Realising that my previous lifestyle was unsustainable I moved back to shared accommodation and started to keep spending under control. I also started aggressively paying all of the credit card debt. However, I still did not have a good financial education and lacked long term thinking.

The only thing I was saving for was a car. When the Peugeot finally died I bought a used BMW.  This one final major mistake ensured that 5 years after starting my first job my net worth dipped back to zero. I consider this the beginning of the journey to Financial Independence as I have not made any drastic purchases since. The BMW was a nicer vehicle which i kept until it was written off in a crash in 2018. Again, after massive ownership costs (estimated £470 monthly over 6 years) there was nothing left to show for it. 

2014: 5.52% FI

In 2014 I came across Financial Independence by reading a few blogs; in particular Dividend Mantra and Mr Money Mustache. I did not need any convincing at all and hopped on to the movement. I learned about Vanguard investments and the Bogleheads, reading a few investing books such as The Millionaire Next Door and listening to several podcasts along the way.

2017: 25.87% FI

Going through all of Warren Buffett’s letters to Berkshire Shareholders and watching the live stream of the meetings on Yahoo Finance was fascinating, giving me access to the mind of the greatest investor in history. By applying these principles and living frugally, my net worth has been increasing exponentially.

Lessons learnt

July 2019: 50.04% FI

Car ownership is very expensive.  By only looking at the purchase price it is very easy to ignore the true cost of car ownership when making a purchase. It is more useful to look at total ownership at around £0.50 per mile. More detailed typical costs are provided by the RAC here.

I would recommend to avoid car ownership if you have access to other reliable means of transport. This is very difficult for me as I enjoy researching the latest cars, watching Top Gear and going for a Sunday drive. In future I will ensure that such a purchase is made from a position of strength and once all options have been thoroughly vetted.  Going car free has boosted my savings rate by more than 10% which can drastically reduce the time to FI.

Automation and consistency are critical to building wealth. I find it very useful to budget every month by estimating upcoming expenses as accurately as possible. Once done the projected amounts can be directed to investment accounts while aiming for a 50% plus savings rate. Tracking net worth is also a good motivator (see example chart above); it gives a snapshot of where you are in relation to the goals.

It takes a long time to see big gains. During the first few years of investing seriously little or even negative progress will be experienced. It is only at this point that the effects of compounding can be noticed. Giving up early is not an option.

Take advantage of market crashes. When the stock market is down it means prices are cheap. It is best to invest as much as possible during such times. If I look back 5 or 7 years ago I am astonished at how low prices were compare to today. Keep calm and do not sell.

Don’t get too excited in the good times. As stocks hit an all time high today (The S&P 500 closed at 2,995.82 points and the DOW at 26,966.00) it is tempting to claim to be an investing genius. However, we should aim to be rational and not start investing more now when there is irrational exuberance. Focus on the long game not day to day market movements.

Keep learning and building skills. I am amazed at how much knowledge is out there. Just pick up any good book to find out. Try out many new ideas; most will fail but you will learn a lot. I have picked up a lot of skills from running this site including SEO, Analytics, Adsense, graphic design, improved writing, web design and digital product creation. I did not know most of this stuff a few years ago. it may come a time when one is FI that such skills will be useful in a new occupation where you are self employed.

Avoid keeping up with the Joneses. It is tempting to acquire flashy material possessions (cars, houses, clothes etc.) to appear successful or impress people you don’t care about. This can backfire and you will be the one left to pick up the bill. Best thing is to obtain what you actually value and is affordable to you.

The point of Financial Independence is to open up more life options, not necessarily early retirement. I look forward to covering the next half of the journey. I know that this will not take as long and the gains will be ever bigger as the snowball keeps rolling bigger and faster.

 

 

 

 

How to give yourself a perpetual pay rise through index investing

Getting a pay rise is the ultimate dream for many workers. How can you get a pay rise without following the usual frustrating processes in the workplace. By taking a different perspective at building and maintaining an investment portfolio it is possible to take the initiative give yourself a pay rise. Even better this can be set up so that it happens perpetually, regardless of what your employer does.

Taking a personal initiative and interest are imperative. This realization came to me as I was sat in a work webinar Q&A session between management and employees.

The general theme was that employees were not happy, and to be honest they are completely powerless about most of the issues raised such as new graduates starting on higher pay than older ones, why pay rises are 2% when profit margins are far larger, who and how one gets a bonus etc.

All this on top of external factors which may affect the company due to the wider economy and a recent corporate takeover of the organisation by a larger competitor which has an unsavoury past. Hence it is important to have control of the situation.

Taking control

The process is not simple as all the traits of pursuing financial independence should be applied, mainly; patience, discipline, frugality and the appreciation that simple arithmetic works.

Like many, I used to wait around to get the bog-standard 2% or so annual pay rise which, at the whim of management, is often distributed with little regard to the employee’s performance. Depending on the industry, some will also get a bonus if they are lucky. This seems to be standard practice for a lot of companies.

At an early stage I realised that this was going to be the likely scenario in the workplace so I decided to take action. Having control over the growth of my net worth meant taking control of my finances, rather than relying on a manager at work using some esoteric means to determine my future.

Taking control meant living within my means, cutting back on unnecessary expenses like motoring, self-educating on business and finance, achieving a 50%+ savings rate and investing in the stock market. Obviously, this approach has not been easy – spending big always seems more attractive than saving.

Dividend growth and investment returns

With the annual growth of Global dividends currently running at 8.5% according to Janus Henderson, it is clear that by holding a sizeable investment portfolio you can grow your income substantially. I would rather have 8.5% than a paltry 2% any day. Coincidentally, this 8.5% growth is not too far off from the long term return of the stock market so we can use it to run a few scenarios:

Suppose you have two workers at the same company who make £40,000 each. Worker A has zero interest in investing or perceives it as “risky” while Worker B is well on their way to financial independence and has been diligently saving and investing for a number of years. Worker A assumes that their pension is secure and someone else’s problem to manage. Their company does not offer bonuses and Worker A is always complaining about how little his pay rises every year therefore feels powerless to do anything about it.

Worker B, however, is not worried at all as his personal financial hacks have unlocked additional income which is unrelated to his employment. Instead of frivolous spending and accumulation of liabilities, Worker B has built a diversified portfolio of stocks and shares, real assets. As an example Worker B has a portfolio of £250,000. Using the typical 8.5% return this means that the portfolio earns an additional £21,250 a year for Worker B, which would be tax-free when invested in an ISA account. As this figure is equivalent to net pay, the worker would need to earn a gross salary of about £26,500 to take home the same amount.

Impact of investment returns on salary

Adding this to their pay we find that Worker B theoretically earns £66,500; substantially more than Worker A and an impressive 66% on top of the standard salary (see above). This would occur at an ever increasing rate every year depending on savings rate. Now that is what I call a pay rise. It is also interesting to note that the investor would easily stealthily grow their income to such a state that they would be better off than other people above their pay grade or other higher paid professions.

These gains would actually be bigger if higher tax rates were considered but that calculation would be a bit complex to do for our example. Gains would vary and may be bigger or smaller depending on yearly market fluctuations but it is important to focus in the long term. When not withdrawn, the gains are unrealized and therefore reinvested to form an ever larger snowball.

Financial Independence – the journey is as important as the goal

This perspective shows that there are multiple benefits to striving for financial independence, even way before the goal is achieved. The greater the savings you have, the more the opportunities which appear to you. It is time to say no to zero or below inflation pay rises. I honestly no longer worry about pay rises or bonuses like I used to when considering the perpetual (and growing) impact an investment portfolio has.

Interesting reading:

How to react to a Bear Market and invest wisely

It has been a wild ride for all those heavily invested in stocks and shares. The past few months, culminating in a huge drop on Christmas Eve have been testing the nerve of diligent investors. With no sector industry spared, a lot stocks have dropped by over 20% from their all time peaks.

A Bear Market is defined as a condition where the stock market has fallen at least 20% and there is widespread negative sentiment around it. The past few weeks have definitely felt like this. When heading towards Financial Independence how should one react? Here are some tips on how to best handle a situation like this.

Do nothing

Sometimes the wisest thing to do in certain scenarios is absolutely nothing. This is certainly true in a volatile market situation.

When share prices are swinging up and down or dropping like a stone, the worst thing you can do is to sell your holdings.

I certainly had a close family member who was contemplating selling their shares recently and vowing to never invest again. Selling is clearly not the way to go so I tried talking the person out of it. Instead they should hold and do the next step.

Buy more shares

This will always be tricky for me as I always aim to have most of my funds invested in income generating assets such as low cost index funds. Therefore I can only take advantage of low stock prices with my latest income. If you have the funds available; buying shares at depressed prices will provide additional firepower when the market eventually bounces back, which it will.

Maintain a low information diet

Avoiding constantly checking the news is a good idea. Vanguard Investments’s Jack Bogle said you should rarely peek into your portfolio. Once you do after a very long time you will probably need a cardiologist when you find out how much is in there.

There is always something going on in the news, from trade wars, elections, interest rate hikes, military conflict, government debt piles, company profit warnings, taxes etc. You name it and someone always claims that it influenced a stock market move.

I must admit that I haven’t been able to fully commit to this step; instead I enjoy reading about business activities of interesting companies such as Tesla and Apple, along with all the FAANG super technology players. This often leads me to places such as the CNBC site or various business news Apps.

To try and resolve this, I previously deleted all the apps and bookmarks to various sites when prices were falling. However, when prices began shooting app I could not help but reinstall everything so that I could monitor what was going on.

I have not yet found a way around this as the information is easily available on our fingertips 24/7; but I am sure that with long term experience of different market conditions this will become a non issue. Fortunately, I have not had an urge to sell anything but have been eager to buy more.

Enhance your financial education

To best understand how the world economy works and how investor behaviour can be influenced it is useful to read a few books on investing and finance.

Top reads are A Random Walk Down Wall Street, The Millionaire Next Door and The Intelligent Investor. This activity should be able to fill your time by adding value, rather than being swayed by sensationalised headlines from Wall Street and City’s giant marketing machines.

Focus on the amount of units you own

A tip which I have found very useful is to not worry about the share prices or a net worth chart’s gyrations. These metrics, by nature fluctuate heavily particularly when you have a larger portfolio, so they are not a true reflection of where the real value is. Instead, track and focus on the quantity of units of stocks and shares that you own.

Tracking investment fund units

You will realise that you will pick up more units when prices are lower. This has the effect of boosting dividends over the long term. As shown above, there appears to be an exponential increase in the units within my portfolio, despite market swings and a largely similar savings rate.

Stay the course

The final tip is to not be worried and maintain investing according to your plan. This is where an Investment Policy Statement (IPS) would be crucial. When things seem edgy you can always refer to the document to remind you of your overall objectives.

The same strategy works even when investing during a bull market. I have covered how to invest in a rising market here. It is impossible to predict where the market will go; at the the time of writing the markets had been staging an impressive recovery from the December 24th lows when they dipped into Bear territory.

Interesting reading:

Going car free – The real cost of motoring

The real cost of car ownership is one of the trickiest expenses to determine. Unlike predictable expenses such as public transport, renting a place to live or food costs, it is impossible to accurately estimate the true cost of motoring. This can be a problem for financial independence planning because you need to be reasonably certain of what your expenses are. Previously, I tried to ignore this paradigm but the relentless rules of simple arithmetic will always come out on top.

This post is timely as I will be going into a period of being car free. This is involuntary as I had no intention of getting rid of my car until the reality of car ownership hit me with a bang. While driving from work a few weeks ago, I was involved in an incident with another vehicle at a mini-roundabout. This resulted in my car getting written off and getting sent off to the scrap heap for just £100. I was shocked at how quickly things can change; I purchased the car (a 2007 BMW 118d) 6.5 years ago for £9,500 which has virtually gone down the drain in an instant. The car’s value had depreciated substantially since so it would not be worth much anyway.

Options

This situation presents me with several options.

Option A: Normally I would attempt to immediately reinstate my previous position by getting a like for like replacement vehicle. Obviously, this is not as simple as it seems as it would mean acquiring a used 12 year old similar model with over 100,000 miles on the clock. This is very unwise due to the amount of potential problems with such a car. At least I knew what work had been done on my previous car.

Option B: Alternatively, I could follow a similar approach to how I purchased the previous car by looking for a 4 or 5 year old used vehicle. This would have a huge impact on my finances as the cost would be way in excess of my emergency fund. The shortfall could be made by borrowing extra funds which I would not do.  Alternatively, I could dip into my investments or other savings. This is unwise; a classic case of swapping assets (investments) for liabilities (car ownership and purchase), therefore would leave me a lot poorer in the long run.

Option C: This is really hard to take personally; car ownership is often associated with status and a sense of freedom, but going car free has to be a consideration. A few weeks ago this option was unimaginable but after doing an in-depth analysis of what it entirely cost me to run my previous car this is not such a crazy option. I had to ask myself of what my real needs of transport are and unreluctantly concluded that for me, car ownership had been a nice to have, a very costly one at that. Here is why.

The true cost of car ownership

Over this 6 year period, owning and running the car cost me a total of nearly £30,000 (US$40,000), which is around £4,500 (US$5,900) a year or £370 (US$480) monthly. Costs equated to 44 pence per mile over an average of 10,000 miles a year which could be used to calculate a reasonable estimate of a journey’s true cost. This is an astonishing amount as I had considered the car, from an era when diesels where still being promoted by the government, to be well made, fuel efficient and cheap to tax.

I listed all the line items of everything I remember spending on the car to reveal the harsh reality. Here is the result:

BMW 118d: Total Cost (£) Of Ownership 2012-2018

ProportionItem6.5 YearsYearlyMonthly
33.87%Purchase+supagard(depreciation)9,7501,500125
32.75%Fuel. 10k/y, 42mpg, 52L, 134p/L1,450121
10.16%Insurance45038
0.68%Road tax303
1.02%Breakdown cover454
1.13%MOT test504
2.26%Brakes – £300 / 30,000 miles1008
2.64%Tyres – £350 / 30,000 miles11710
0.90%Brake fluid service – £80 / 2 yrs403
2.26%Oil service & filters1008
6.95%Timing chain (N47) & clutch repair2,00030826
1.39%Oil filter housing  – after oil leak400625
0.69%Parking brake snap repair200313
2.26%Parking & tickets & tolls1008
1.04%Audio: head unit+tweeters300464
Overall Cost incl. depreciation28,7834,428369
Running costs (cash flow)19,0332,928244

*The above list seems very long but it is the truth of the minimum spend on the vehicle. The figures would be higher or lower for other vehicles and usage. If I had bought it new, costs would have been north of £500 a month which could easily be more than rental/ mortgage costs.

What next

Such figures don’t lie and I would ignore them at my own peril. Another possible option is to purchase an electric vehicle (EV) which has substantially lower running costs due to a simple design (electric motors have less than 20 moving parts) and does not emit harmful emissions.

However, EV  purchase costs are still high, even on the used market. Despite the high initial purchase cost, I have calculated that there would be huge savings over the same 6 year period by purchasing an electric one. For example, an EV bought for £14,000 would cost a total of £20,000 to run over 6 years compared to nearly £30,000 for a petrol or diesel car purchased for £10,000.

For now I will go car free for a while as I actually do not need one. Commuting to work would be by a 20 minute train ride plus less than half an hour’s walk. Other trips would be by train, tram, taxi, coach or bus. This is not a problem in London. For inaccessible locations or other uses I will use rental cars or vans when needed. I estimate that these alternatives combined will cost me a quarter when compared to car ownership and the proceeds will be invested or put towards an EV.

I expect that this will also boost my savings rate by over 6%, alleviate the stress of having a metal box sat on the driveway, avoid aimless trips, parking, roundabouts, traffic lights, schools, fines, endless maintenance, break ins, road rage, scratches and prevent me from sitting in or battling rush hour traffic while risking a crash.

I have already saved an unexpected initial £50 by cancelling my breakdown cover; this will be promptly invested into Vanguard index funds. The benefits are substantial as I have not even gone into the impact of opportunity cost, where the above costs would be invested wisely. If car travel is really needed I will consider going electric in future.

It is incredible how such the seemingly innocuous decision of whether to drive or not can have far reaching consequences on your personal finances and possibly on when (potentially years) or if you will achieve financial independence.

*The AA has a useful guide about car running costs here.

What do you think? Are these costs realistic for you? What are the pros and cons of owning a car?

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