Milestones on The Path

SH2019

Have you ever been for a long hike in the mountains?

Imagine the scene. You are at the start of The Path. The air is clean, you are surrounded by the beauty of nature.

You have a long days hiking in front of you but its do-able: you know that other people have done it before.

Its a marked trail with milestones that show the distance to your destination so you can quietly take satisfaction from your progress during the day. And, as a reward at the end of the day, you will get a hearty meal, a drink (or three) and a warm bed.

That sounds pretty good to me. The challenge is part of the attraction…so you don’t cry like a spoilt toddler when it rains or when the slope gets a bit steep.

No, you have to experience the rough to appreciate the smooth. And so a bit of effort makes the meal at the end of the day even more of a prize. Without the challenge of the weather / distance / altitude, have you really earned the food & drinks & the comfy bed?

Now please hold that hiking image (its really a mental model) in your mind because we’ll be coming back to it shortly.

In the meantime, I want to correct a common error about financial independence. And that’s the assumption that it’s binary. This binary thinking appears in a couple of forms (both of which are horseshit):

  1. Firstly, its only success if you get to full financial independence and then retire never to work again. Anything else is failure.
  2. Secondly, life pursuing financial independence is all sacrifice and deprivation as you wade through the lowland swamps of saving…and then its all unicorns and flowers as you enter the sunlit uplands of financial independence.

Of course, no one spells it out in those terms but, if you look at many media articles, blogposts and comment threads, you can see the misrepresentations binary thinking. In their worldview, you’re either retired or you’re not…just like you’re either pregnant or you’re not.

In computers, binary means something is either zero or one. There is nothing in between, no nuance. No room for concepts like working part time. No working flexibly as an interim or a contractor or starting your own lifestyle business. No gap years for grown ups. No such thing as career change. No working because it can provide meaning and purpose. Binary thinking is for computers, idiots and (some) journalists.

Financial independence is like life: you should be enjoying the journey not just the destination. And you will have more fun along the way if you celebrate the milestones as you progress along The Path.

So a more sensible way to look at your journey towards financial independence is to think of it like a long hike in the mountains. Yes, the destination matters…but so does the journey. And the whole point is for there to be some effort and challenge involved.

Maybe you’ll choose a shorter trail or a different destination? That’s fine. Maybe you’ll get lost along the way sometimes: its all part of the process. So it is with financial independence.

A journey of a thousand miles may seem impossibly long so it helps to break it up into stages. So its encouraging when you are on a hike to see milestones showing how far you have come. You can see and celebrate the progress as you get closer to your personal destination.

For several years, I’ve had an unfinished draft post on my computer titled “Milestones on The Path”. But I was recently reading the excellent new Choose FI book which contains a summary of the milestones of FI which I’ve stolen adapted below (the bad taste jokes are mine):

1. Getting to Zero

“Normal” for most people means having debt from credit cards/ car loans/ student loans and consumer debt. To get to zero net worth means paying this off…or at least having savings and investments greater than your debts.

A big chunk of the population owes more than they own..and on expensive consumer debt to boot. I’m gonna be honest: that’s a disaster.

My credit card company wrote to me last week telling me that their interest rate is now 22.9%. I pay my balance in full automatically each month because paying 22.9% interest is like being raped in The Prison Camp showers. Without soap.

THIS IS AN EMERGENCY!!!. If you are in this situation, let’s not waste time arguing whose fault it is – it’s your responsibility. You shouldn’t be spending on anything other than rice & beans and work expenses. In the immortal words of Fergie:

If you ain’t got no money, take your broke ass home

You need to dig your way out of this hole and if that means getting help and living like Jacob Lund Fisker‘s younger (and more frugal) brother for a while, then so be it.

2. Emergency fund

Having an emergency fund of 3-6m living expenses in cash in an instant access bank account is solid advice for most people. It protects you from most common causes of financial stress (car breaking down, boiler needing replacement). Having an emergency fund can be the difference between inconvenience and disaster.

The lower your monthly expenses and the higher your savings rate, the quicker it is to save this emergency fund. At the risk of stating the obvious, at a 50% savings rate it only takes you 3 months to get an emergency fund of 3 months expenses.

Once you’ve eliminated the expensive debt and have an emergency fund you can start investing so your money works for you; earning passive income even whilst you sleep.

3. Hitting six figures

If you have invested net worth of £100,000 and a burn rate of £20,000 per year then you have 5 years of runway. Not only can you take a gap year, you can also afford to retrain and move jobs / careers / countries.

This is sometimes known as “Fuck You Money”. With this, you have a lot of power to control your own life. This is good for you and its good for your ethics.

Imagine you work as a chef at a Venezualan-themed restaurant. When your Boss asks you to put ground-up puppies into the burgers (for that authentic taste of communism) you can now afford to politely say no.

4. Halfway there

This is when your assets (your invested net worth) reach 12.5x your annual spending. While this is half the amount that the 25x rule of thumb suggests, your journey to FI is likely more than half done.

That’s because after about 6 or 7 years, the J curve of compound interest starts to kick up and from here on your investment returns contribute meaningfully to the heavy lifting previously being done solely by saving hard.

5. Getting close

Imagine that your portfolio reaches 25x the annual spending required to cover all your essential (non-discretionary) spending like food, utilities, housing costs etc. This excludes “fun money” spending on restaurants, going out, holidays etc. At this point, you probably couldn’t maintain your current lifestyle but you could stop working without having to worry about going hungry or having a roof over your head.

Now imagine another milestone: your portfolio reaches 20x your annual total spending (including the fun money spending). You could cover your total cost of living by drawing down say 5% of your portfolio annually.

Dangerous heresy? No, its just a thought experiment to illustrate the non-binary nature of FI. While less safe than a 4% withdrawal rate, this gives you roughly an 80% chance of maintaining your spending without running out of money based on historical data. You could leave your job at this point if you were willing / able to be flexible with your spending and / or part time work.

6. Financial independence

The next milestone is when your portfolio reaches 25x your entire annual spending which is, for practical purposes, a good enough definition of how much is enough.

This doesn’t guarantee safety because there are no guarantees in investing or in life. But in the Trinity Study, portfolio success was defined as not running out of money within a 30 year retirement period. And, under that definition, with a 75% US equities : 25% US bonds portfolio and 4% inflation adjusted withdrawals, the portfolio success rate was 100%.

[Side note: It’s bizarre when people say: “yeah but the safe withdrawal rate in [the UK / insert country name here] is lower”. Errrr…you do know you’re allowed to just buy a global tracker fund, right?]

With some flexibility in spending or willingness to work to earn some extra income from time to time you can now declare yourself fully financially independent if you want. Watch out for One More Year Syndrome which may mean you end up at milestone #7…

7. Financial independence with cushion

Achieving a portfolio of 33x your annual spending would equate to a 3% annual withdrawal rate. Achieving FI with a cushion or extra safety margin (on top of that already provided by the ability to be flexible) allows for a feeling of abundance rather than scarcity.

Just be aware that for some people, no amount of money will be enough to get that feeling of abundance. Some people need to do the work to re-wire their brain away from a fear-based mindset. This takes some time and effort but its absolutely possible. I know this because I’ve done it myself.

Its not binary!

So, to sum up, when The Escape Artist says that Financial Independence is for Everyone, I mean that everyone can use the tools, techniques and mindset of FI to go some or all of the way along this path.

If I went around the internet complaining saying that running is only valid if you run a full 26 mile marathon in under 3 hours, then everyone would (rightly) think I’d gone mad. Is Usain Bolt not a “real” runner? What about those that just do a 5k Parkrun once a week? Would it be right to dismiss running for them? No, of course not!

Similarly, if someone chooses the FI mindset just long enough to get out of debt and build an emergency fund, that’s fine by me. If they get themselves and their family more money and more freedom but choose not to go the distance to full financial independence, that is not failure. There is no failure.

This seems so obvious that I have to question the motives of those people attacking financial independence because not everyone can get to full-fat FI by say 40 (something The Escape Artist himself “failed” to achieve). It’s almost as if they don’t want everyone to see The Matrix that is consumerism.🤔

When everyone has at least heard of the concept of financial independence and knows where to find the free information provided by blogs, podcasts etc then anyone and everyone will be able to get better with money. Anyone in reasonable health could get out of debt, build an emergency fund and start investing.

And, given the general financial clownery that currently surrounds us, that would be a huge win for our society and our environment.


meetup

Edinburgh Meet Up : Friday 23 August.

6pm – 11pm at The Shakespeare Pub, 65 Lothian Road, Edinburgh EH1.

Come along for drinks and chat…meet other people interested in Financial Independence.

All welcome!

 


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Financial Coaching

 


34 comments

  1. I’m a mountaineer and enjoy climbing big mountains. People assume it’s all about reaching the summit. The summits are nice, but it’s really about the climb, the journey, the struggle. The summit is a cherry on top.

  2. ladyaurora · · Reply

    Super duper again. TEA has my mind set.
    Edinburgh 😲,Waiting for a Manchester meet up!
    I’m FI but chose to work part-time. I’ve been goal oriented all my life. Now I’m FI I’m a bit lost as to what to do next.?🤔

  3. Sensible stuff TEA, your comment ‘paying 22.9% interest is like being raped in The Prison Camp showers. Without soap.’ is classic made me laugh out loud…..cheers

  4. Lincoln · · Reply

    :). relatable. in India everyone discusses if 4% withdrawal rate is safe. you’ll hear things like the trinity study does not represent Indian stocks, our stock market is not mature and endless other comments.

    Sometimes I feel like smacking the people and telling them they’re missing the bus. Start on the journey and then worry about what is a safe rate. At least get that compounding machine running for you. even if the safe rate of withdrawal is 8%. It’s much easier to get to that number with a fund that’s capable of supporting a 4% rate with compounding doing the heavy lifting

    Thanks again for a wonderful article. I think the milestone philosophy helps. Especially from getting worn out. Also allows you to stop and celebrate success which helps in motivation.

    1. matthewaedmondson · · Reply

      Manchester meetup please! I reckon I’m halfway there and feel the compounding kicking in

      1. Kristian · · Reply

        It’s a great feeling when you have a good month and your investments grow as much as your contributions 🙂

        Definitely up for a Manchester meet up!

        1. I’m in Manchester too! would be interested in getting a FI MCR going

      2. We now have a Manchester meetup post running on the Financial Independence UK Facebook group:

        https://www.facebook.com/groups/FinancialIndependenceUK/

    2. Thank you Lincoln, this is such a good point that you make.

      Why would anyone who is near the start of their FI journey worry about the exact level of the safe withdrawal rate? Something that is unknowable!

      Suggestion: Once you know the 25x rule of thumb, there is nothing more to be done on the SWR until stage 5. Reading detailed blogposts and studies about it before then is wasting your precious time.

  5. I like the analogy of the mountain trek particularly as I work as a part-time mountain leader and am presently in the Alps leading a group around Mont Blanc. For me FI is about choosing what I want to work on that aligns with my values more then hitting 25x expenditure by a certain date. I left relatively well paid IT contracting 10 year ago to do work that aligned with my values and I found more purposeful – developing renewable energy projects and occasional outdoor leadership. I would be closer to the 25x FI stage by now if I hadn’t left IT, but I would have developed so much less personally that the extra years of (meaningful) work ahead are worth the career change.

    1. 👆Yes! I love this approach to life 👏

  6. I love love this analogy. Like Damoto I am a walk leader. I have used walking as a metaphor for life’s challenges – what look like difficult tasks, have a clear goal in mind, break the task down into managable chunks, tick achievements off along the way – and remember it starts, progresses and ends with one step. Consistency is the key, lots of little steps / £1s.
    I wish I’d started earlier, but am on the journey now! And am going to work toward and celebrate by 6 figures, half way there and getting there.
    Thanks for the posts, just discovered you and getting more motivated.
    But the rape joke made me wince. Not good.

  7. Aiming for FI with no plans for timescale have meant the I can take months off working with the arrival of a baby. Money is a great tool in that it makes options available to you and I have colleagues who are also new parents who just can’t afford to stay at home for any length of time.

  8. Grandpa is talking · · Reply

    Trinity study 100% success after 30 years? I seem to remember there were four failures, so close to 100% might be a better way of putting it. A small point perhaps but it stands out in the otherwise excellent article.

    1. Nope, like I said: 100% for 75% equities : 25% bonds 🙂

  9. chadfrugalfinance · · Reply

    Another great article that gets the mindset aspect down well.

    For me, there was an extra milestone in that (potentially long) gap between the step 2 (emergency fund) and step 3 (3 figures). Step 2.5 was realising that over a year, my independent income covered 1 month of expenses.

    Some dividends come quarterly, some annually or semi annually, and I get a cheeky wink of interest every month from a small bit of P2P. This was rolling in nicely, not getting any attention, but I started tracking it 7 or so months ago and this was a lovely surprise. Ok, it’s very variable month to month… but add all those odd amounts up and more than a month’s expense were covered. My October was in the bag and I didn’t have to lift a finger!

    I’d recommend folk look out for Step 2.5 – there may be 11 more months to go, but getting one covered feels great.

  10. chadfrugalfinance · · Reply

    Sorry to spam the comment thread, but there’s another aspect in there worth drawing out, that you highlight with step 1. In a way, people are using different currencies and calling it the same thing.

    When people spend £s, if they use credit (i.e. go into debt) that they don’t pay off, they really pay with a currency that has an exchange rate of £1.229 to £1. The prison shower pound (questionable, but let’s roll with it) actually means you pay £122.90 for an item priced at £100. People don’t even realise it.

    Of course, paid with straight up sterling, that £100 is £100. We might even cheekily hypothesise a third currency going under the name ‘Pound Sterling’ – One where your £100 is partially composed of interest, patiently waiting for the price to drop and a few of those pounds sneak by into your account by way of cashbacks etc. Ultimately, using this £, you only pay maybe £80 to get £100 of stuff.

    Maybe nonsense, maybe an interesting way to think of things.

  11. Ken Adkin · · Reply

    Just adding my support for a Manchester (or nearby) meet-up.

    1. Jeez! What’s going on in Manchester? Clearly not enough FI-based meetups! 🙂 Any FI bloggers based in Manchester wanna help organise this??

      1. Am not a blogger but happy to help

      2. ladyaurora · · Reply

        Yes I will help. I’ve been considering starting one up.

    2. Hi Ken
      Me too – how to get it off the ground – are you a FB member of Financial Independence UK ? We could organise ourselves on there it is a closed group
      KittyD

      1. Great idea KittyD

        Best thing for Manchester people to do is join the FB UK group where you can post publicly (& swap private messages). Then agree a date that works for 2 or 3 of you from Manchester. Then publicise! You get more attendees by giving people plenty of notice (e.g. more than 1 month) and then plenty of reminders. I’m happy to help you / give it a shout out on the blog

        1. steven o'toole · ·

          Love the blog

          Another from Manchester 🙂

  12. Manchester FI meet up

    first steps….everyone who’s showing an interest on here………is to join
    facebooks financial Independance UK group

    Lady aurora….joined.

  13. Weenie organised the last Manchester meet up we had

    1. Fu Mon Chu – great, why don’t you email her?

      We now have a Manchester meetup post running on the Financial Independence UK Facebook group:

      https://www.facebook.com/groups/FinancialIndependenceUK/

  14. I’m interested in a Manchester meet up, but I’ve avoided Facebook so far and don’t want to have to sign up to it now. Maybe tweet details too?

    1. ladyaurora · · Reply

      Ok Brian. Perhaps when the meet-up gets organised TEA might allow us to post the details on this site

      1. YES I will absolutely publicise a Manchester meetup including via Twitter! But, for this to work, the Mancunians have to get themselves over to the FI UK Facebook group to organise a date and venue first!

  15. […] TEA has a few posts, including this on the milestones on the path to FI (39) […]

  16. If you read Rad Reads (based on your writing style I think you’d enjoy it), Khe has a fantastic way of summing it up: “If you enjoy the process, it’s play. If you only enjoy the outcome, it’s work”

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