The maths of financial independence is simple: build a portfolio of 25x of your annual expenditure and you’re done. So, if you spend £20,000 p.a. then you will need a nest egg of £500,000 in an investment portfolio. Each £1 of annual expenditure increases the size of your retirement portfolio by £25 – this makes it important to know what your expenditure is.
Here’s what I would tell myself if I was 10 years younger (i.e. 22) and just starting out:
1) Earn more money
FIRE is definitely easier to achieve for people who are on higher incomes than it is for minimum wage workers. That’s how the world works. However, financial independence can be achieved on all incomes.
Your first job is likely to pay low wages. Your focus needs to be on improving your career prospects – as this will lead to the biggest return on investment you could make. Forget investing in the stock market, forget bitcoin, forget P2P. You need to earn more and you need to aim high!
Your best investment to make is in your education and skills, skills, skills. You need to develop skills, which can increase your salary. This might mean taking industry exams and passing additional professional qualifications. You should be happy to pay for these qualifications/exams/study-materials etc as they will have a direct impact on your income. I think the future is bright for anything to do with technology, programming and AI – you might want to consider to reinvent yourself and change careers completely.
About 6 years ago, when I came to the UK, I had zero industry knowledge or qualifications in the financial planning sector. I started as a receptionist in a small Independent Financial Advisor (IFA) office and was earning circa £15,000 p.a. After investing c£2,000 on exams to acquire new qualifications and a job change I was making £30,000 p.a. two years later.
It cost me £2,000 to increase my salary by £15,000. That is a fantastic return on investment! You can’t expect that from the stock market. I didn’t stop there as I aimed higher and have managed to substantially increase my salary over the next couple of years to just over £50,000 p.a. This, in Central London, is relatively comfortable but far from luxurious.
You can do it too. In fact, you can do far better than me as I feel that after hitting my £50K salary I’ve become complacent and stopped learning and hustling – I’ve only taken two exams in the last three years and failed both.
It makes sense to allow an amount for education and skill development in your monthly budget. It could be £50 or £100 per month set aside for online courses, learning to program or to host impactful PowerPoint presentations etc – the world is your oyster.
Also, think about joining clubs that can help you develop professional skills – this could potentially be the cheapest option to start with.
2) Don’t overspend
The biggest thing you can do is fight lifestyle inflation. Avoid the temptation to increase your spending every time you get a raise or a bonus. Fight the temptation for as long as you can. You should aim to spend the same amount as you always have. You don’t need to buy expensive junk, clothes or toys. Try the supermarket branded items and see if they taste any different from the more expensive alternatives. Stop buying expensive clothes when there are budget options.
Transportation is insanely expensive in the UK and you need to minimize these costs. I have colleagues who pay £5,000 p.a. for the privilege of riding a crowded train for an hour twice a day to get to work and back home. Not only are they £5,000 out of pocket but they also spend circa 8.8 hours a week commuting (254 working days p.a. minus 25 days of annual leave means 229 working days where people commute for 2 hours – 2 x 229 = 458 hours p.a. = 8.8 hours p.w.). That time and money could be used in a way to obtain further skills and knowledge, which could massively increase earning prospects.
Depending on your job, you could look into how many days per week you could work remotely from home. You should also consider walking or cycling to work as these are the cheapest ways to get around. I’ve been walking to work for the majority of the last 6 years. I used to drive a lot when I was backpacking in Australia. Since 2014 I’ve driven exactly on two occasions. Now I am somewhat scared of getting behind the wheel as it’s been so long.
Don’t spend too much on haircuts. I have a friend who went to get a haircut in a fancy part of London. They made him comfortable, offered coffee and snacks and cut his hair. Then they billed him £120. Wowzer! He never went back to that salon.
The most I’ve ever paid for a haircut is £35, which is mad when I think about it. Now I get it cut for £10 and it looks exactly the same.
There are many other areas where you can reduce your costs. You get the point – don’t spend more than you need to. However, don’t forget to enjoy your life and your youth – you will never get it back. You are allowed to treat yourself. Invest in experiences!
I mean I backpacked in Australia. It was a horrendous decision financially, but a fantastic one in terms of experiences, stories and adventures. Go have some fun!
3) Learn to cook
I challenge you to buy a cookbook and make every single recipe in it. What do you have to lose? You will learn to make (hopefully) tasty food and get to eat it. It’s also a great project you could do with your partner or housemates. Some recipes will turn out great, others will be a disaster, however, you will improve with time. You will also discover a few things which work for you and will continue to make the dishes over and over again. I am no master chef, but I am able to make the world’s best waffles, pancakes and tofu nuggets.
Cooking at home is much cheaper than eating out at cafes/restaurants and you will be able to take lunch to work. These savings will add up.
4) Avoid bad debt
There’s good debt and there’s bad debt. An example of good debt is a mortgage for your home or a loan to expand business operations. Bad debt includes credit card debt, hire purchase agreements and payday loans.
Student debt can end up in either category – you need to weigh up the cost of a university degree with the future employment prospects. For example, I think it’s OK to spend say £30K on a degree and fund it with loans if you can realistically earn £50K+ p.a. a few years from graduating. Don’t spend big money on a Mickey Mouse degree. Racking up a load of debt and not having a viable career is a sure way to the poorhouse.
I’m fortunate that I don’t have any debt and didn’t have to pay any tuition fees at university (I had to keep my grades above a certain threshold to qualify for “free” education). In all fairness, I don’t think I have ever needed to use my academic degree knowledge at work… five years of study and two degrees which I didn’t care for. I’m glad it didn’t cost me any money but I will never get my five years of youth back.
5) Save your money
Now that you’re earning nicely and have more coming in than going out each month, you can start to save some money. First of all, you need to build up an emergency fund of at least 3 months’ worth of living expenditure. Then build up a cash reserve for upcoming big-ticket items. I have linked to my previous posts about these two topics.
Set up standing orders to automatically transfer money into your savings on a recurring schedule. Many finance gurus call this paying yourself first. You will quickly get used to living on what remains in your bank account. This will help you stay on track and keep saving on auto-pilot.
6) Start investing
Albert Einstein reportedly said “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Investing is all about compound investment growth i.e. growth on previously achieved growth and repeat.
Saving is a long term game. It’s a marathon, not a sprint. The younger you are when you start investing the more years of compound growth you achieve. I wish I started investing earlier – I would be in a much better position financially. Circa ten years ago was when we got out of the previous financial crisis and it would have been such a good time to start my investment journey.
Consider investing in passive index funds (trackers) to keep your costs low. Don’t do anything fancier than that, unless you have too much money. Stay away from stock options, futures contracts, CFDs etc. It’s possible to trade anything successfully, but if you’re just starting out, do not attempt trading anything other than passive index funds. Keep learning and reading about investing – things will get easier.
As always, this article is not financial advice. Your capital is at risk when you make investments – you can end up with less than you started with. Seek financial advice if you don’t know what to do in your circumstances.
Now go get cracking!