There are so many great US books and blogs about financial independence that you may want a guide to help you translate American into British.
I’ve done 2 versions: the short version and the long version.
Here’s the short version:
1. Ignore the healthcare stuff
2. Ignore the travel hacks
3. VTSAX => VRXXB
4. IRA => SIPP
5. 401k => workplace pension
What do you mean you want more than that?!? OK, next we have the longer version which includes some of the cultural differences that set the frame for FI seekers in the UK vs the USA:
The maths of financial independence
The same principles work everywhere: earn more, spend less, invest the difference wisely and know how much is enough.
And the basic maths of financial independence is the same…even when maths is spelt with an S. As a quick re-cap it takes about 17 or 18 years to go from broke to financially independent at a 50% savings rate. And if you manage an amazing 75% savings rate (I didn’t) it only takes 7 or 8 years.
This is based on a 4% withdrawal rate. In other words, you have enough not to work again when you have invested net worth >25x your annual spending. This means that every £1 you cut from your annual spending brings the “finish line” closer by £25.
The Safe Withdrawal Rate
The safe withdrawal rate in the UK is the same as in the USA.
Some people that say that UK shares support a lower withdrawal rate but this misses the basic point that you can invest in US shares from the UK or (better) a global low cost equities tracker fund. That’s safer than just investing in UK shares.
[Note: Here we’re talking about market risk…sadly, there is more political and taxation risk in the UK currently.]
A lot of US bloggers recommend VTSAX: the Vanguard Total Stockmarket Index Fund or VTI (the Vanguard Total Stockmarket ETF). Both include only American-listed stocks.
I’ve always thought this a bit strange. Even if you agree that America is the world’s powerhouse economy (I do) it’s riskier to put all your eggs in one (admittedly large) basket. The example of Japan from the 1980s provides a warning of how one country’s stockmarket can form a bubble that takes years to deflate.
Let’s split UK pensions into 3 types:
- The state pension
- Workplace pensions
- Personal pensions (including Self Invested Personal Pensions)
The state pension is what the Government will hopefully pay you. Many FIers are not relying on that (although it is worth considering making additional National Insurance contributions to get a full state pension).
In the UK, you can’t access a personal pension until you are 55 (57 from 2028). So, to be financially independent in the UK, there are 2 tests:
- Do you have invested net worth of, say, >25x your annual required spending?
- Do you have enough outside of your pension(s) to “bridge the gap” until you can access your pension?
Individual Savings Allowances (ISAs) allow you to invest in shares or bonds or cash and access your money at any time so they offer tax shielding with no “lock-up” restrictions
Saving for children
How do you save for children in the UK? Should you use a Junior ISA or a Junior SIPP?
Wrong question. Yes, tax shielding makes sense but a better question is: how do you teach children to save for themselves?
That means showing your children what saving and money management looks like through your own example. And them getting a paper-round / Saturday job when they are young. This might just be the most valuable education there is.
Housing is different in the UK. There simply isn’t the space there is in the USA…and that means residential land and housing are WAY more expensive.
This means you might have to
go extreme get creative. Here are 4 powerful property strategies to either crushing your rent or building wealth via property:
- Get lodgers
- Use maximum leverage, buy “doer uppers” and flip your way up the property ladder (risky but its what I did)
- Become a property guardian
- Geographic arbitrage
Geographic arbitrage is a made-up phrase for an old concept. Moving is not cheating. You shouldn’t be afraid to move somewhere good for earning in the accumulation phase of life (perhaps somewhere like London) and then move somewhere lower cost / sunnier (e.g. Portugal) later.
Cars are money incineration units. The bigger the car, the more money it burns…so buy smart. The more cars you have, the higher your burn rate…and
gas petrol is lot more expensive here.
So can you design your life around no car / one car in your household? This is made easier (or harder) by where you live (e.g. in the town or country) and by how your town is laid out.
Much of the USA is dominated by the car: roads that don’t cater for pedestrians and sprawling suburbs designed around cars.There are obviously many exceptions (its a big place) but large parts of the USA feel like hostile territory for walking and cycling.
One of the great glories of Europe are its towns and cities. I recently was in Edinburgh, a wonderfully “liveable” city. You could easily walk anywhere. It had trams, buses, bikes and a fast rail link to London. The architecture was classic, sometimes grand yet always human scale. I visited a beautiful apartment block where people kept bikes in the hallways.
I can’t emphasise enough that walking and cycling are not just cost-saving measures. They are quality of life UPGRADES.
The food rules are the same in the US and the UK. Good food is natural food: the things that our ancestors ate…not processed food made in factories.
American readers have told me that fresh veg is cheaper in the UK. Any vegetable served with butter or olive oil is ridiculously cheap, energy dense and healthy. Remember: processed foods and sugar are the enemies (not natural fats).
Fruit, eggs, fish and chicken are all very reasonably priced. And they’re basically giving rice away.
With a bit of planning, you can eat incredibly low cost if you put your mind to it. Here’s Ken & Mary from The Humble Penny on how their family of four live in London on £50 a week food budget.
Schools and college
One roadblock to financial independence in the UK is the desire to give kids a private education. Its natural to want the best for your child. But, for some high performing people, wanting the best for their child can turn into Dr Evil’s Mini-Me Syndrome. Better to give your child an elite private education for free.
My daughter has just gone away to university (college). So I’m very aware that the UK has moved towards student debt. Its fair enough to ask people to bear some of the cost of their education but the problem is that this normalises getting into debt.
And its just not true that having a degree will guarantee getting you a good job. The answer: avoid courses that don’t improve your value to employers, encourage students to live frugally and get a part-time job whilst at college.
Good news if you are in the UK!
To many outsiders, the US healthcare system seems
bonkers inefficient and costly. The UK and USA get comparable health outcomes (e.g. life expectancy) and yet the UK spends about 9% of GDP on healthcare compared to the USA which spends about 18% of GDP.
But many corporate employees in the UK have private health insurance and you may be afraid to lose that if you quit The Prison Camp. But for urgent and life-threatening conditions, the NHS is excellent. And for less urgent stuff, FIers always have the option to buy in private healthcare when needed.
Hospitals deal with sick-care not healthcare. To optimise health, start by looking at your own diet and exercise choices and eliminating unnecessary stress from your life. Anyone can get ill…but the right lifestyle choices tilt the playing field in your favour over the long term. Focus on what you can control.
The pressure of consumer culture is greater in the USA. In a lot of places there isn’t a lot going on other than work, shopping and TV adverts. As Bruce Springsteen put it: 57 Channels and Nothing On.
That has a 2 fold effect. On one hand, it makes for a more compelling push factor for pursuing financial independence so I guess you could say that’s helpful to pursuing FI. But on the other hand, it must sometimes make it harder to stick to The Path. We are social creatures and they say that you are the average of the 5 people that you spend most time around.
We can do it
The USA’s history over the last couple of hundred years is based on immigration and the search for freedom and prosperity. The American Dream is consistent with financial independence (even if it got hijacked by consumerism along the way). When in the USA, I’m struck by the can-do attitude, self-reliance and the idea of pulling yourself up by your bootstraps.
The UK has a different history and that included a class system that has thankfully now mostly been taken apart. But it left some unhelpful hangovers and these often form part of your money blueprint.
The Shopfloor mentality reflects a working class mindset where people traditionally struggled to put money aside and lived paycheque to paycheque. But its more than that: people may not aim high enough. They may fall into the trap of “knowing their place”. If you don’t know what I mean, go watch the classic film Educating Rita.
If you grew up middle class, you have been fed security your entire life. This will keep you from ending up in the gutter, but you’ll always be risk averse. Ed Latimore
Middle class people often play it safe. This can mean buying too much insurance. Or buying
expensive “safe” cars (eg Volvos & Audis). Or being too nervous to invest in shares. It can hold you back from letting go of a monthly salary and going freelance, interim or part-time. Remember: safety is an expensive illusion.
The aristocracy have historically given financial independence a bad rap in the UK. There is something inherently unfair about hereditary titles. The aristocracy were living off the spoils of wars fought by their ancestors (who no doubt did oppress the poor).
The class system left many Brits with an inbuilt suspicion of wealth. Our minds are still influenced by outdated images of factory workers and miners oppressed by evil toffs who look like
Jacob Rees-Mogg the old white guy on the Monopoly Board. Remember: cartoons are for kids.
Understand that ethical wealth creation is possible. If you secretly despise wealth, it will elude you. Naval Ravikant
A better mental model for today’s FIers would be entrepreneurs such as James Dyson or Bill Gates who have created value in the world via their work and then use that wealth to achieve freedom and make the world a better place.
Don’t underestimate the social and cultural factors that influence your money blueprint. As that old saying goes: whether you think you can or you can’t…you’re right either way. You will tend to live up (or down) to your belief.
For more on the differences between pursuing FI in the UK and USA: