We can only escape so far. We can only be so free. There is a point where we can no longer be free-er. Most times our own attitudes and fears are trapping ourselves. The environment most of us live in contributes to that as well.
I haven’t been feeling great these few days as I have taken 2 weeks off work and I know the team isn’t coping too well with other people being off sick and stuff. Imagine this, away on annual leave, but not getting peace along with it knowing you are contributing to part of the problem (not really, it’s the problem with the system i think). I think it is important to learn that live goes on with or without you. You are never the centre of the universe you thought you are. On the journey I realise there are many things other side of work that is worth valuing and spending time on (family, friends). On the other hand, the act of going to work gives me structure in daily life and new experiences.
A needless anxiety I shouldn’t be suffering. I need hasten my plan to build more of the plants to fuel this freedom.
How often do you have to get out there a quick monumental decision that changes relations. To be brutally honest or tell a white lie? To break up or make up?
Humans enjoy their comfort zones. They build set out bricks and fill up the cement, erect walls to build their own comfort zones, shielding themselves from the ‘outside world’. And when some sesmic event dawns upon them, it tears down the walls and forces them to face the cold hard truth. No man is an island.
My wall came down when I had to decide whether ‘To Fly or Not’ to see my grandpa upon hearing his passing. His last journey with us and I hesitated. Foolish Foolish me. My wall was ten floors high and I have been snuggling in it for the past few weeks. Everyone else was moving quickly, booking flights, settling leave, and I was thinking maybe I could get away with not going, paralysed by fear of settling leave, fear of not completing some leftover tasks, of being frowned upon.
The fear and anxiety is a very typical symptom of modern society. Just see the number of people who turn up to their GPs requiring anxiolytics, antidepressants. There’s always a feeling that someone else owns us. Your boss, your job, clients, the government, your relationship. Sometimes, it is just too much for a person to handle, or sometimes you are just oblivious to it.
Freedom comes from never having to answer to anyone else but yourself. Even then, you are trapped within yourself unfortunate. True freedom may perhaps bring chaos and unruliness rather than order in this world. And Financial freedom opens will open alot more doors to you, giving you the option of saying ‘No’. When you have a choice between working and spending time with a sick relative, you will less of a dilemma.
The causal saver might be saving for the next purchase; a car, a sunny holiday destination, a house, the latest electronic device. But item after item where does that end? Let me provide you with a new goal, saving for your Independence!
The single most powerful measure of how you are doing financially and best indicator of how far off you are to financial independence: Your Savings Rate.
Savings Rate: (Annual Savings*/Annual Income) x 100%
Simply, if say you are spending more than what you are earning, i.e. more than 100% of your income, you will never be able to retire and will technically be in debt.
On the other hand if you are spending only a tiny proportion of what you are earning, for example, 40% as an example, you are still financial dependent on your income but have shown that you can survive on much less than what you earn and you are a net saver (SR = 60%).
Now the magic starts here. If…If somehow your annual spending is zero, you are technically no longer dependent on your income to live and you can retire right away, continue living your free life. If you are one of the lucky few like me, this happened when you were a kid.
The reality is all of us are somewhere on the spectrum of savings rate. We earn and spend a proportion of our income (hopefully less than our income) and save the rest. Now the interesting thing is, the amount that we stash away each year can earn some money on itself (savings interests,CD interest, Bond yields, rental yields, stock dividends, investment yields, etc). As we save more each year, this income from savings can snowball year on year into something significant and if it approaches the level of our annual spending, we can be less reliant on working to earn an income to live. If it breaches the threshold of our annual spending, we are officially financially independent and can rely on this passive income to live.
4% Withdrawal Rule – you will be withdrawing within 4% of your entire stash to meet you annual spending during the decumulation phase (retirement)
Your savings are invested to generate a growth of 5% annual return.
Your stash is meant to last forever.
Someone really clever (?MMM) came up with the graph above which shows if you are able to achieve an annual Savings Rate of 64% with the above assumptions, you will be able to retire in 10.9 years time. The following table shows the number of years it take to achieve FI with the corresponding savings rate.
Years To FI
What I like about the savings rate is it is universal to everyone from the ‘rich’ to the ‘poor’. It applies equally to the high flier who brings in an annual income of £1,000,000 vs the poor city worker who only earns £20,000. Even if you earn an infinite amount of zeros, if your SR is 10%, the reality is you still have to work up to 51 years to become independent. Conversely, if you can achieve a high Savings Rate (70%) on any salary, you will be achieve FI in 8.5 years!
Another note about the savings rate is that it includes the element of relative frugality to the equation. It implies that if you can survive on a lot less that what you earn, you will get to financial independence a lot quicker. Most people put a lot of focus on increasing your pay/income, but it works a lot faster if we can reduce our spendings relative to our income.
It is still worth taking a step back and realise this is just a model with arbitrary numbers. It might not be the perfect model (is anything perfect?) but it gives us the encouragement that mathematically the concept is sound and achievable. We just have to take action and use this as basis of our grounding principles to FI.
How? How? How? I have decided I want achieve the fabled dream of being independent from all financial worries, but how do I get there?
To be honest, there are many many personal finance blogs out there describing the different ways or the technicalities of gaining FI much better than I can but the 2 main principles distilled down to its essence are:
Building a passive income
Wait. Whaat?! This sounds uninspiring. I thought there was a bigger secret to it all. But in fact once you can build a large enough passive income to satisfy your spendings, surprise surprise, you will have arrived at FI, a land where you can shout out loud ‘I think I am going take a long holiday and travel around the world for a year,’ Or ‘I am going to try my hand at baking/cooking full time’ Or ‘I quit, you f***ing prick!’ to you boss. And know that you have a plan; a solid escape plan that will keep sustaining your daily life. You live to do what you want to. How is this not the dream of everyone alive?
Financial Independence is an age old concept in a twenty first century lingo. In simple terms, it is what it basically says on the tin, being independent financially. In modern society, this equates to being able to afford the things you buy using currency as a trade. This implies you have enough financial reserve (ie income, savings) to satisfy your bills, meals, a roof over your head. The outcome of not having this is well summed up by Mr Micawber in Charles Dicken’s David Copperfield.
‘Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
-Wilkins Micawber in David Copperfield (Charles Dickens)
The reality is it is not as simple as that. Happiness does not simply come with Financial Independence but not having financial independence will make being happy pretty difficult or a false sense of security. Here is an article by theescapeartist on The Prison Camp illustrating how modern society has taken over people’s life and made us into a bunch of misfits trying to fit into the ‘well, that’s what just what everyone does it’ mentality. I picture it as a giant factory with conveyor belts, and society just traps you in there, making you a banker, lawyer, pilot, doctor because the economy/society needs these roles; selling you the latest TV, Driverless Car, Phones with a fancy contactless paywave function because they are a necessity of modern life. Hence the Prison Camp which never ends till you die.
Now true Financial Independence is freedom from all these struggles. It is waking up in the morning and have the freedom to chose whatever you want to do for the day and not have to worry about getting food or a roof over your head for the night. It allows you to take a step back and liberates your mind and body from the stresses modern society is feeding you with.
I believe this is an universal experience for everyone on the conveyor belt and can relate to. I hope to share my journey of growing my FIREplant, and anything that is worth learning along the way.