If you grew up in Britain in the 80s, you’d know that back then cycling was not much more popular amongst the general public than leprosy. Cycling was for kids, the French and people that could not afford a car.
Back then, the idea of a British team winning the Tour de France or dominating Olympic cycling seemed about as likely as Scotland winning the football World Cup.
This underlines what an amazing achievement it was that Great Britain won the most cycling medals at the 2008 and 2012 Olympics and that the British-based Sky team won the Tour de France in 2012 and 2013.
How was this possible? Why not ask Dave Brailsford, the manager that led first Team GB and then Sky Cycling? When asked to explain his secret Dave Brailsford described his approach as The Aggregation of Marginal Gains. Check out this interview with him where he explains this.
Its hard to convey the power of The Aggregation of Marginal Gains via media soundbites. Journalists often asked Brailsford about the example of using the riders own pillow from home when staying in a hotel during a race to sleep better and gain an edge. The implication was: Pull the other one, Dave. I mean really…how is that supposed to win you a gold medal?
The answer of course is that on its own it won’t. The magic is in the aggregation of many such gains.
Can you see the analogy with financial independence here? For years I failed to fully join the dots between frugality tips (the pillow) and financial independence (winning the Tour de France). To me, frugality tips always sounded a bit lame. Most seemed trivially small. I used to wonder why people that brought in their own lunch into work in those Tupperware containers even bothered. I couldn’t see how this could lead to financial independence.
This may be why many of us instinctively recoil at frugality tips. If The Escape Artist were to wag his pointy finger and bossily tell you to save money on your central heating bill by turning down your thermostat by 1C, you might reply saying something like:
What is this frugality nonsense that The Escape Artist is spouting? Just by turning down the thermostat I will not save enough to retire! Screw him and his preachy frugality!
Does he not realise I am a successful middle class adult? Am I not Vice-President of Strategic Change Management and Biscuit Procurement at Mega-Corp? These frugality tips are not befitting of my status…in fact, I’m going to take my jumper off, walk around the house in my Speedos, open some windows and turn up the central heating…because I’m worth it!
I can understand that reaction and even have some sympathy with it. I don’t like being told what to do either. Its also true that, on its own, turning down the thermostat is not going to get you to FI. But it will save you money. It is a single step on a long journey.
Its not about the thermostat. Its about changing your entire operating system to unleash the aggregation of marginal gains. Every day we face hundreds of decisions. Because thinking about all these would slow us down too much, we follow habits using crude short cuts based on the following: What is the quickest or easiest way? What is the most convenient? What seems most comfortable?
If we want to get to FI, we need to replace that default setting with a new operating system that is based on: what is optimal given my FI objective? is this spending really necessary?, how can I use my creativity instead of paying money to solve problems? what will challenge and strengthen me?
Initially the benefits accumulate in a linear way…so if you turn down the thermostat, your spending falls and your net worth grows by say £1 a day. But then as you aggregate multiple gains over time, something amazing starts to happen. The benefits stop growing linearly like this: 1…2…3…4…5…6…7. and they start to grow exponentially like this: 1…2…4…8…16…32…64…
Here’s how the aggregation of marginal gains works:
1. If you do not start, you will not finish
If you decide at the outset that the task is too big then you may never start. A ladder does not climb itself…we all have to start at the bottom and work up. Its not particularly hard to get to the top of a ladder…left foot, right foot etc….unless you don’t start climbing, in which case it is fucking impossible.
You can start by focussing on getting your income up or your expenses down. Better still, combine both. It doesn’t matter exactly where you start…what matters is whether you start.
2. Repeat after me…repetition works
Much of what we do repeats every day. So we choose a temperature setting for the central heating and then leave it there…every day. You only have to turn it down once and you are then saving money on every day of winter.
If you drive a car every day, replacing your SUV with a more fuel efficient car will save you money every day. Look for decisions whose consequences repeat day after day, week after week, year after year. Changing these has a huge multiplier effect.
Imagine you are spending a fortune on cars. You can slash depreciation costs by buying used cars rather than new. You can stop buying SUV clownmobiles and get a small car. You could pay cash rather than borrow using consumer finance. You can haggle when buying. You get top dollar auctioning your old car on the internet. You choose a diesel car that does 50+ mpg. You pump up the tyres to get maximum fuel efficiency. You take those golf bats out of the boot. You optimise your mpg by hyper-miling. Oh and you remember that you have legs.
You have now accumulated a set of car habits that embed frugality and are consistent with your goal of FI.
If you save £100 when you are 21 and invest it so it compounds at 10% per year, when you are 50 it will be worth £1,586. You can’t do these sums in your head because on the African savannah our ancestors spent their time hunting and showing off to potential mates rather than retirement planning.
The formula for this is FV = PV *(1+r)^n where FV = future value, PV = present value, r = interest rate and n = number of years invested.
Think of yourself as CEO of your own business. Cutting costs is great but you cant ignore revenue. The path to FI is not just about spending less. Its also about creating new sources of value, new skills, new ideas and new sources of income.
Some ideas help you reduce spending, other ideas boost your income by monetising skills you have or creating micro-businesses. Because interest rates are so low, even small alternative income streams are more valuable than you might think. If you have a baby business that delivers you £2,000 every year, you would need a cash balance of £200,000 to replace that income at a 1% interest rate.
6. Spin-off benefits
At the risk of sounding like a crazy Zen Buddist, everything in life is connected. Improvements lead to positive benefits in apparently unrelated parts of your life.
So you might cut down on doughnuts to save money but end up losing weight and looking better. This might get you better promotions / pay rises at work that earn you more money. As a result you might become more optimistic. As a result, people might enjoy being around you more, so you do better at work…and so it goes on.
These spin-off benefits are impossible to predict in advance. But they are real and they will come.
If you look at a graph of exponential growth it looks like nothing much happens for the first few years. This is why saving initially feels boring. But the early years have to be gone through. The future always arrives and compounding always works its magic.
As the slope of the curve starts to pick up, you start to get some validation that the strategy is working. By the time you have overcome your initial scepticism, the graph has pointed skywards and it is hard to keep up with how quickly your net worth and knowledge are growing. Its not been easy for me to realise this myself….let alone to convey to others how this feels to live through.
But here is the best analogy I’ve been able to come up with so far. The path to FI is like the progress of a space rocket.
Imagine your net worth as the rocket. Before you can earn anything you have to learn, finish school and get a job. In the same way, there are hundreds of actions and decisions to be taken just to build the rocket and get it to the landing site…even before launch.
It then takes a huge amount of energy and effort to raise the rocket even an inch off the ground.
We have to spend less than we earn and that does not come easily. There are huge forces of gravity, mass and inertia that need to be overcome even to get the rocket to the height of a tree.
But once the rocket achieves lift off, it starts to accelerate faster and faster. As it gains altitude, the air gets thinner, the resistance decreases and the rocket gains ever more momentum.
Eventually the rocket escapes the atmosphere and Earth’s gravitational pull – effortlessly cruising in space at incredible speeds with no further effort required.
This is your Financial Independence moment.