How the hell do you get to achieve FI:RE? I mean, it’s a big damn thing to do – having enough money to never work again. Holy shit. Most people have to rely on the state to do that when they reach their late 60’s. But an enlightened and determined few do it sooner.
Planning for retirement is pretty complicated, planning for FI more so, because you are trying to do things in a none traditional way. This is not how everyone lives. Ask people about their financial plans and they will have some vague idea that you get a state pension at 65 or something, and maybe some means-tested benefits, and there is little point in saving for a pension because there won’t be one when they get there blah blah fucking blah. Sheeple. Ask someone who is into FI:RE, and they have a very different, purposeful plan.
Lets be clear, this is my VERY simple overview to get you started and give you some idea what to think about. You can use this plan as a guide to get start researching, but it also includes actionable steps and things you can do NOW. Someone (no idea who) once said that the best time to start saving is 20 years ago, the second best is today.
There will also be a more detailed plan at a later date, and I will update this post with a link that in the future, when I get to writing it…..
A few things to call out before we get started. Dave Ramseys Baby Steps. Genius. Used here extensively. Go take a look and maybe drink more of the cool-aid. It’s pretty much US focussed, but its a great start and the basis of what I did. Show Big Dave some love. Also, Harold Pollack, who chucked his vast financial knowledge on one index card. It was the first thing I ever saw on personal finance and how simple it could be. Again, American, so some of it doesn’t translate, but the ideas are sound.
I think that’s the stuff that is probably under Copywrite, so hopefully, they can’t sue me now (let’s see what happens there).
Final point, I am not a financial advisor. Financial advice is regulated in the UK, so I can’t do that. This is entirely my opinion, but also what I have done, so speaking from experience.
The most basic financial plan
Spend less than you make and invest the rest. That’s it.
Very wise, but not the most insightful bit of advice. Let’s flesh it out a little more than that……
9 step simple financial plan
1. Do a budget.
2. Service any debt while you get organised.
3. Make sure you are appropriately insured.
4. Get any free money from workplace pensions.
5. Save £1000 in an emergency fund.
6. Pays off debts, except the mortgage.
7. Save 6 months of expenses in an emergency fund.
8. Invest at least 15% of your income for FI.
9. Save and invest for the future.
Want to see me put my money where my mouth is? This is exactly how my finances are set up as of May 2020;
- I paid off all my debts except mortgage and a credit card I clear every month.
- I carry the appropriate insurance, which for me is building and contents for my home. That’s all I pay for.
- I have a fully-funded 8-month emergency fund, so more than I tell people to do.
- I have one workplace pension, where between my contributions and my employer match, I put in 20% of my income. If I swap jobs then I transfer the old pension to my SIPP and start again with the new employer pension.
- I overpay on my mortgage every month, and should save a decade of debt by doing so.
- I have one current account. My emergency fund is in it.
- I have one credit card. See 1 above for managing it.
- I have one SIPP (self-invested personal pension) with the lowest cost provider for my balance.
- My SIPP is all invested in low-cost vanguard passive funds. I pay nothing into it unless I change jobs (see 4 above).
- I have one ISA, all currently invested in low-cost vanguard passive funds. I pay in what I can, with a set amount every month.
- I own zero individual shares.
- I should be able to retire at 55 if I choose to. Bingo. 13 years before my state retirement age.
So I have done what it says on my tin. It took me several years to get things set up and organised to do this, and start on the way to my FI goals, but I really do practice what I preach as far as possible.
Let’s try and unpack those 9 steps a little more;
- Do a budget. There are a million ways to do this, but to get started get a notebook and write down where you spend money and how much. Simply, you need to know what you spend, because without knowing that, you really can’t get things under control. You also need to know where your money comes in, and if what you spend is less than what you make. If it isn’t, you need to get that addressed because the only way you hit FI is if you have some surplus money to do something with. Spend less or make more. I am afraid they are the only two ways to do it.
- Keep servicing debts. If you have debts, You HAVE to keep paying them, even if it’s just the minimum at this stage. Not paying debts leads to nasty men turning up to take your things, miserable times in courts and just general unhappiness. Yes, we want rid of them because debts are a pain in the ass. But firstly, let’s keep them under control and not take any more on.
- Think about insurance. I hate giving this advice because I hate insurance and mostly avoid it, but some people absolutely should have it. Life, income, and critical illness all need considering. Check what you get for free already – life insurance is often in employment contracts and pensions, so you MAY have some cover. I am absolutely not an insurance pro, but if you have a family that relies on you, you probably should get some.
- Get any free money from workplace pensions. Controversially I put this before the £1,000 emergency fund. But every week you don’t use at least the minimum employer match pension contribution, you are ignoring free money. Join your company pensions scheme, get the free money as early as possible. It benefits from being tax-free and compounds over decades to lots more. Just don’t argue and do it. More on pensions later.
- Save £1000 in an emergency fund. First REAL step forwards. If things go to shit, you need to be able to sort them out. Boiler breaks? Washing machine packs in? That’s what this money is for. This IS NOT an investment. It’s a saving for an emergency. Keep it somewhere simple like a current or savings account. It’s not for Christmas, holidays, nights out. EMERGENCY FUND. Prosecco is not an emergency (even though I keep a bottle of emergency Prosecco in the fridge…).
- Pay off debts. Except your mortgage, if you have one. Why do this first? Because any interest on the debt will probably outweigh the returns on investments. The maths says pay things off first. Your mortgage is probably (should be) very low-interest rate (true in May 2020), so there is no point spending extra on this. There are two ways that seem to be the favorite ways of ridding yourself of those debts in a planned manner. First, the debt snowball. In this method you pay the minimum on all debts, but pay more on the one with the smallest balance. Once you have paid off the smallest you take that money and add it to the next smallest and so on, until they are all gone. Like a snowball building up when you roll it around. The idea of this is psychological. You see the number of debts go down, so it feels good to be winning. The second method is the debt avalanche, where you make the minimum payments on everything, but focus the extra spending on the highest interest debt, then the next highest etc etc. This one is about maths. You are saving the most by paying off high-interest debt first. Either way works, I went with snowball because I like to feel good about my finances. One thing to add, if you have crisis debt, like something that is way overdue, in arrears or you are ignoring, then get that under control as a priority. You HAVE to face up to these and get them under control, because they will haunt you if you don’t.
- Save 6 months of expenses in an emergency fund. Again, EMERGENCY. This is for, hmmm, let’s make something crazy up, say, if some weird unheard of virus comes flying out of China devastating the entire world economy and you lose your job. This money is so you can still pay your bills. Lots of people look at this fund and get frustrated. It will likely be thousands of pounds. It’s doing nothing. Making nothing. Returning nothing. As you become financially literate, you will want it to be working for you. But then ask the people who had this money and lost their jobs in March or April 2020 how it felt to know they would not be in trouble for a long time? Its a lifeline. Again, keep it safe and accessible. Current, savings, cash ISA or NS&I are good places. At a push, some sort of bond account. See here for a great explanation of bonds (banker on fire blog). KEEP IT FOR BIG EMERGENCIES.
- Invest at least 15% of after-tax income for retirement. Sop the “15%” and “after-tax” are both debatable for lots of people. I know, 15% is a lot if you aren’t doing anything around investing already, and it’s a hit on your money. But this is the game-changer for the future. Personally, I still say throw this into pensions for people in the UK. Maximise your employer contribution – if you can push your amount up from step 4, and get a greater employer match do it. Get as much free as you can. The kicker with pensions is you can’t access it (in the UK) until 10 years before your state pension age. If you are going for the Retire Early part of FI:RE you are probably trying to get out earlier than that. If you are a late starter (ie 40+) its probably going to be hard to get out earlier than that anyway. But that is where step 9 comes in….
- Save and invest. OK, its two things, not one step so I could have rounded it up to 10, but you can do them both at the same time. And it’s my list, so I choose 9. Saving is for something in the near term, maybe three to five years away. The last thing you need is the stock market to crash and lose 50% of your money when it has no time to recover. So if you need the money soon, I say forgo growth for safety. Use the best savings account, cash ISA or similar you can. Investments are all about the longer-term. This is about putting money into something to give time to grow. And sorry, growth takes time. This is not getting rich quick. Its wealth building at the speed of life. Pension, stocks and shares ISA, LISA are all valid options in the UK (as of May 2020). Make use of free money, tax efficiency, and a LONG time.
So that’s my simple plan. And if you want to stop here and go and do it, or dive down the rabbit hole researching for yourself, great! I totally encourage you to learn about this stuff – lots of people have different opinions to me. This only relates to the UK and is relevant in May 2020 and is MY OPINION. But I think I am right.
Other key things to consider when you are doing this;
Push your savings rate. The more you save, the bigger your pot or the sooner you achieve the independence part of FI. I think saving should be slightly uncomfortable. Once you are past the big emergency fund stage, your monthly income should be fully allocated – pension, investment, bills savings for short term things like holidays or new bathrooms, and always some money to live life with. But it should all be allocated and the saving rate a slight challenge.
Obsess over fees. Two things will kill your investment returns. Inflation and fees. You can’t really do much about inflation, its just the way of the world that inflation exists. Fees you can take responsibility for. Advisor fees, platform fees, and fund fees. Watch them all. Closely.
Avoid individual stocks and shares. Lots of people will hate this advice. But here is the fact. You don’t know shit about what you are buying. And I don’t care how much you think you know, how much of your time you spending researching, You aren’t a pro, you don’t understand the analysis that goes behind large scale investing. The other party in the transaction knows more than you. You are always getting screwed – you’ve either missed most of the upside or are about to take the downside. You are too late or too early. I spent three days with a fund manager and I was fucking floored by what goes into their decisions. You may pick a winner. You will pick more losers.
Go for low cost, well-diversified, passive funds at the start. You may stay with these for the rest of your life. They are good. There are quite a few options, you should do a little research. I am 100% with Vanguard and three of their funds as of writing this.
Only add active funds if you are well educated and well researched into why a particular active fund offers something missing from your passive portfolio, if you understand the fund and its aims and it really adds something to your portfolio. As of yet, no one has convinced me to go for active funds. Many other people do.
Gold. and other precious metals, but mostly gold. It does nothing, makes nothing. Almost its entire value is because people like shiny metal. I don’t touch it. Others do, and people with vast research may convince you to. Your choice, I wouldn’t.
If someone is trying to tell you that you should invest in something you don’t understand, don’t! Complicated shit makes money for the people who create complicated shit. Don’t make money for other people, make it for you.
OK, so not such a short post. I thought that would be a lot easier and ended up a lot longer than I expected. But it’s my simple plan for people who are starting out. All the stuff about active and passive, gold and precious metals, bonds, I will maybe look at later. And I will see if I can find someone to balance my opinion so you can see an alternative approach. But I don’t think many people will argue much with the fundamentals of the first 9 steps.
Stick them on a post-it note or on your phone or something. As with the title of the blog, this is all about acting with purpose. Taking steps because it’s the right thing to do. Heading somewhere. Living on purpose.