Like most problems, once you acknowledge how poor you are and formulate a logical plan to change your circumstances it becomes quite satisfying and even enjoyable to make the necessary changes.
You can liken it to climbing a mountain which can seem daunting at first, but once you drag yourself from the comforting warmth of the car and into the cold air and get going it becomes more rewarding.
It may start with a long slog along a muddy track as you cut out the coffees and bought lunches, pay off the frivolous debts and trim away other needless expenses. And it may seem that the mountain itself is getting bigger as you get closer. But the fresh air and motion is already doing you good.
That process is not just cutting out a couple of bought coffees. It is cutting out the phenomenal waste has crept into nearly every aspect of modern life.
This also led to some depressing moments such as wondering why I had a giant fridge freezer, burning electricity 24 hours a day to chill a bunch of stuff I would never eat; or why my wife insisted on buying half a dozen different kinds of expensive soap for what is essentially the same task.
Most of it is quite fun. Taking a tent and stove for (less frequent) weekends away hiking paid for itself in the first trip. Cooking every meal for myself is far better than the best take away. Walking or cycling short distances cuts off thousands of miles a year in petrol and wear on the car.
Soon enough the wastefulness of society as a whole started to irritate me. I have even become a bit of an accidental environmentalist. Why on earth do supermarkets feel the need to wrap everything in layers of plastic? Why do we ship hundreds of tons of tat from China only to ship it back for recycling when it breaks? Why do shops have electric doors when people are quite capable of pushing doors open themselves?
However I can’t control those things.
What I can control is my own spending and saving, and as you do so, like climbing a mountain, the view opens up and the experience becomes pleasant.
One of the nicest things is learning the joys of self-restraint and deferred pleasure. One of my weaknesses is beer on a Friday afternoon. Straight from work and into the closest pub is my style and it can take real effort to resist the temptation. Resisting it however is rewarded with being up bright and early on Saturday morning, at least equally enjoyable. Another vice I had when I cut out take aways was to think that this somehow justified eating big expensive steaks or lamb chops because it was cheaper than a take away or a meal out. I still like these treats but I do now view them as treats. Pork chops, minced beef and sausages are significantly cheaper and having a really good steak less often makes you appreciate it all the more.
When you realise that you can live on a tiny fraction of your current income and that every pound saved today represents a lifelong income stream of a few pence that should grow over time, then it becomes an obsession. When you see every £2 of coffee as not merely £2 but 8p a year off your pension. 8p a year might not sound very exciting to someone dreaming of a lavish retirement, but over a lifetime this adds up. £2 per day 5 days a week over a 40 year working life is £20,800. That yields £832 at 4%, which is enough to live on for a month. Simply cutting out buying a cup of coffee from a cafe on your way to work can equate to a years comfortable retirement. When added to dozens of other wasteful expenses this soon mounts up.
These sort of savings have a brilliant double whammy effect. Firstly they mean you can save a huge proportion of your income. I aim to save 2/3rds of my after tax earnings and though I don’t always achieve this I usually get close and occasionally even exceed it. Secondly as you live in this way you realise that you can live on a fraction of what you previously thought you needed.
The combination of these two factors brings the goal of financial independence closer by orders of magnitude. By a very simple rule of thumb if you save 2/3 of your income and live on the remaining 1/3rd you can retire after only 12.5 years of work on your current income, even without any capital growth of your investments.
Without rent or a mortgage this is very attainable. However nearly everyone will at some point require a house. So I’m going to back peddle a bit. In the last post I said that I didn’t like property as an investment, which is still true as compared with other investments however a home is not simply another investment. It is a highly leveraged investment that gives an immediate utility which is disproportionate to the outlay.
Once you pay off your mortgage you no longer have that expense. Essentially once you put down the deposit you are renting your house from your future self. For this reason I permit the largest share of the mortgage to fall into the savings category.
This can make for hideously complicated arithmetic but a perfectly valid way to do it if possible is to divide the savings portion 50/50 between mortgage and other investments. This doubles your working life to 25 years which is, conveniently the typical length of a mortgage. It also means that your mortgage should equal 1/3rd of your income, which is about the average.
A 25 year working life to achieve a modest level of financial freedom may not sound like a great thing to most people but it is the reality of it. At least the hyper cautious reality of it. Compounding your returns can help significantly, but should be offset against inflation. If you do get capital growth, and historically people have, then it can come forward significantly. A windfall like an inheritance or profit on a house sale can knock a few years off. However a few months of unemployment or a major unforseen expense can cancel those out.
The real point is to get going on it. Within 2 years I have arrested the cycle of ever growing outgoings and started to build a minute but growing stream of income. As I refer back to the scribbled notes from last January I can see that things have improved. I am off the muddy track and slowly gaining altitude.
I may never reach the goals I have set for myself and I certainly do wish, in the time honoured fashion of middle aged men, that I had done this when I was 20. None the less it I am glad I am doing it now. It is enjoyable, it is healthy and fulfilling and it gives me a sense of purpose. It is also, for reasons I will explain in a future post important on a social and political level.
AJS from PH 