If you live the philosophy of this site, you will become rich.
Slowly but surely, the years will pass by, the cash will roll in and one day you will realise that you have become surprisingly wealthy. Rich enough to buy a Ferrari and annoy your neighbours – only by then, you will not want to do that.
Many people will say its impossible. I say scepticism is healthy, but you owe it to yourself to check the logic. The arithmetic of financial independence is surprisingly simple – as illustrated below. Even if you hate maths, keep reading – this shit is important.
Most of us, however, don’t change our behaviour because of something we saw in a spreadsheet, we change behaviour because we saw it work for someone else that we can relate to or because something feels right and connects with us at an emotional level.
You can find an emotional connection with a person, a film, a book or even with a song. Bizarrely, I found such a reaction in response to a song from a Glaswegian 1980s pop outfit called Deacon Blue. I know it sounds lame. I know its untrendy…but the truth is that I love the song.
The song is Dignity from their 1987 album Raintown. The album cover shows a grim vision of gloomy skies, a northern European post-industrial skyline and a general air of funk. Yet this unprepossessing backdrop reveals an uplifting story of hope, working class nobility and a non-obvious path to financial independence.
Here is The Escape Artist’s interpretation of the song. This may or may not reflect what Deacon Blue had in mind when they wrote it.
Dignity tells the story of a working class Scottish guy (think donkey jackets, workboots and grim council estates) brought up poor, hard working but with limited horizons. After school he does not take on student debt and spend 3 years of his life missing lectures and eating vodka jelly. Instead, aged 16, he takes a job with the local council where he mows grass verges and picks up litter. It may not be a glamorous job but it is real.
Unusually, he does not complain about his job, politicians or the state of the world. Nor does he leave angry comments on internet articles about personal finance, realising that it is far more productive to focus on what he can control: his own thoughts and actions. He works hard and does not skive off, take sickies or spend his days on Facetweeter.
He takes his own lunch to work and is mocked for being tight…by children and (ironically) by his colleagues who are equally poorly paid. Note to reader – choose your friends, and others that you surround yourself with, carefully.
He reads books (free) from the library and learns to think for himself. His horizons start to expand. He is conscious of his own role in improving his local environment. He screens out advertising and the pressures of consumer society, lives frugally and saves half of his after-tax salary.
He invests each month in Vanguard equity index tracker funds. These fluctuate in value over the years. When the market crashes, he does not panic or sell out, he sticks to his £ / $ cost averaging programme and gets more shares for his money. Over time he achieves 5% per annum real (inflation adjusted) returns (the lyrics are not explicit on this point but its a fair enough assumption for now).
At the age of 36 our hero has reached financial independence. He has a portfolio worth 25x his annual spending. At this point, he buys a small second-hand boat and sails it down the West Coast of Scotland, stopping frequently at ports to enjoy the sight of watching everyone else having to go to work. Personally, I would have borrowed or rented the boat rather than tie up capital but, hey, each to their own.
He sails the boat south past Lands End, hugs the Atlantic coast of France and Spain and then through the Mediterranean to a beautiful Greek island. There he lives a life of frugal but upscale bohemia in glorious sunshine, spending his days on the beach reading John Maynard Keynes, Viz and the occasional self-help book. Evenings are spent drinking firewater with the locals and no doubt getting off with the occasional posh gap year traveller “finding herself”. If you are a middle aged guy working a cubicle to fund your daughter’s gap year, you might want to think about that…
Someone once said that the best revenge is a life well lived. The song implies a majestic but unspoken “fuck you” to those that mocked our hero during those years of grey Scottish drizzle.
I commend this 1980s guitar-based rock gem to all those considering a journey to financial independence. The good news is that most of the readers of this blog will not have to work for a municipal council for 20 years in order to reach financial independence.
Appendix I : The lyrics of Dignity
There’s a man I meet walks up our street
He’s a worker for the council
Has been twenty years
And he takes no lip off nobody
And litter off the gutter
Puts it in a bag And never thinks to mutter
And he packs his lunch in a sunblest bag
The children call him Bogie
He never lets on But I know ’cause he once told me
He let me know a secret about the money in his kitty
He’s gonna buy a dinghy
Gonna call her Dignity
And I’ll sail her up the west coast
Through villages and towns
I’ll be on my holidays
They’ll be doing their rounds
They’ll ask me how I got her, I’ll say I saved my money
They’ll say isn’t she pretty, that ship called Dignity
And I’m telling this story In a faraway scene
Sipping down raki
And reading Maynard Keynes
And I’m thinking about home and all that means
And a place in the winter for Dignity
And I’ll sail her up the west coast
Through villages and towns
I’ll be on my holidays
They’ll be doing their rounds
They’ll ask me how I got her
I’ll say I saved my money
They’ll say isn’t she pretty that ship called Dignity
And I’m thinking about home
And I’m thinking about faith
And I’m thinking about work
And I’m thinking about how good it would be
To be here some day
On a ship called Dignity
A ship called Dignity, That ship.
Appendix II : The maths of Dignity
Here comes the science bit.
Below is a spreadsheet which illustrates a 17 year path to financial independence for our man. The maths is simple. He “just” needs to save 50% of his after tax salary.
As our hero is a low earner, the absolute amounts are small and you don’t need to tell me it would be tough to live that budget. But have some perspective. Our ancestors survived worse: sabre-tooth tigers, plagues and wars. The readership of this blog has a typical income way higher than the numbers illustrated. That makes things easier, although the temptations of lifestyle inflation tend to grow with increasing income.
Must be an 80s kid, UK FI thing to like this song. I too took from the lyrics a similar meaning many years ago.
Just came by the blog via the Mad Fientist comment section and reading through the entire site at the minute. Great work
“the lyrics are not explicit on this point but its a fair enough assumption for now” – Brilliant 🙂
I love finding FI based themes in things I would have not thought of before. Being a 90s child, my favourite frugality/anti consumerism/FI based dance song is “Freed from desire” by Gala. The lyrics took on a whole new meaning last time I heard it!
I’ve been reading IT material non-stop for the past month so I decided to have a short (like 2 hours) change of pace and read through some of your articles again, and hopefully scrape off some investment knowledge rust in doing so.
Something that caught my eye in this article is the mention of a 5% inflation adjusted return. Only because I recall somebody in the comments of a Monevator article mentioned he was planning for a safety withdrawal of 3% on his investments when he achieves FI. Is this wise or overkill? I know MMM advocates 4%, but then he’s in a different market.
Well, time’s up. Back to the wonderful world of 0s and 1s.
Hi TT, I hope it’s not rude for me to jump in and give an opinion on this…
I think (and if I’m wrong then I look forward to being corrected, before I act on this misconception!) you might be confusing the average annual return with the safe withdrawal rate. The two are somewhat related – since both relate to return on money invested in the market – but not the same.
If you put £100k into an index tracking fund and leave it alone, you might be able to reasonably assume that over twenty years it will average 5% growth a year; some years it might go down 2%, but other years it might go up 15%.
However, imagine instead that you’re starting the same twenty year period with £100k invested which you plan to draw an income from. If you withdraw 5% a year, the unevenness of the returns means you’re highly likely to run out of money before the twenty years is up, even though “on average” you should be able to withdraw 5% a year forever. To take an extremely implausible but simple example,suppose the first year the market drops 95%, and in the following 19 years it gains 23.3% year in, year out like clockwork – which I think averages out at 5% a year over the 20 years. In year 1 you say “aha, 5% average return so I’ll withdraw 5%”, which means at the end of year 1 your pot is empty – you took 5% out and the other 95% disappeared in the drop in value. So that’s it, and you never get a chance to benefit from the growth over the next 19 years.
(It’s a silly example but I hope it makes the point. If you said “4% safe withdrawal rate” in this situation, you’d still only have £1k left at the end of year 1, and you’d run out of money in year 2 anyway. Safe withdrawal rates are statistically derived, and if you really experienced a 95% drop in the market in no realistic safe withdrawal would save you.)
The reason the safe withdrawal rate is less than the average expected annual return is to reduce the chances of this unevenness of returns causing you to run out of money. We can – and people do – argue about what is a safe withdrawal rate for any given market, but I think there’s little disagreement that the safe withdrawal rate will always be less than the average expected annual return.
I hope this helps!
PS Safe withdrawal rate calculations are also – I think – usually done on the basis that you will always mechanically withdraw an inflation-adjusted 4% (or whatever) of your initial pot every year without any regard for how well your investments have performed. If you have any slack in your finances once you’re FI, you can try to earn more/spend less if the market is doing badly, and that would improve your chances of not running out of money. But that is based on reading around and daydreaming about being FI, not experience…
Thanks for the reply 🙂
I can see now why it looks like I was confusing the two given my wording.
I understand why MMM recommends 4% SWR because of the average 5% return after adjusting for inflation and a 1% safety buffer. I was just asking if that guy in the comments of Monevator had the right of it by planning on a 3% SWR for a 2% buffer. Or is it a bit of both, with maybe 4-5% SWR during the bull and 2-3% during the bear?
I understand I am coming off as a neophyte, and I realise I have a long way to go (like 20 years) before I have to worry about the minutiae of sustaining an early retirement stash, but I was just curious.
Thanks again for the reply.
Steve – great answer. I haven’t reperformed your maths but the principles are exactly as you say.
TT – note that MMM recommends 4% as a minimum SWR. He would also emphasise the safety margin from being able to adjust spending and earn via a side-hustle even after retirement. Other people take a more conservative view but be careful of paying too much attention to pessimists. A safe withdrawal rate is a bit like beauty….it is in the eye of the beholder. My views on this are in How Much is Enough?
Coming (very) late to the party – but this song inspired me on my path to FI. Especially when I was driving down (or sat in the traffic on) the M1 on a dark, grey Monday morning. Turn it up loud, sing along and imagine that one day it would be me.
And now it is 🙂
Apart from the sailing bit as I get seasick 😉
Welcome to the party!
I’d like to imagine the children called him Bogie because they saw him reading “Common Sense on Mutual Funds” one lunch break (from the library, of course) and caught an imperfect glimpse of the title page…
Nice post – I always liked this song for the same reasons you pointed out. The guy made a choice and through hard work and sacrifice achieved his dreams. I’m about to drop my resignation letter today (I’m 46). My trusty spreadsheet indicated I hit FI a few years ago but I wanted a bit more of a buffer. I was going to hang on until the New Year ( for the accrued leave and paid Bank Holiday’s) but I’m tired of being managed by a stream of emails about tasks that I don’t really care about.
How is it going, two and a half years in?
Hi, Im a 23 year old using your website / blog so first of all thank you for sharing your knowledge.
A question that I have for the escape artist is, if you were now in your early twenties with no debt, with the knowledge that you now have, what would be your plan to achieve FI?
I left the above comment on a different article before coming across this.
Great article and even better song!
Just finding this article now…I like the idea! And yes, none of us is perfect, sometimes we make mistakes, say things in the heat of the moment, but we could all do with being more like the hero of this song.