Categories: Health & HappinessInvesting & Saving

What is Financial Independence?

I wanted to be rich. When I was a teenager I would get resentful that my dad had used his degrees from both Oxford and Cambridge to dedicate his life to trying to cure spinal injury rather than make loads of money. “Why would he do that?” I thought, imagine how much ‘better’ life would be if he spent his life getting rich. My mum would tell me “we have enough for everything we need and more importantly we are rich in love”. I’m sure you can imagine my reaction. I was also in denial. Being motivated by money was a dirty little secret. You can’t waltz into your job interview at Goldman Sachs and say the only reason you’re applying is because they offer the highest salary. Instead you need to tell them some rubbish about how you’re absolutely passionate about exchange traded foreign exchange derivatives. I didn’t go into Goldman Sachs, I took it a step further and actually started a company comparing exchange traded products because someone told me it would be a good way to make lots of money quickly – I had absolutely no idea what they were and to this day my knowledge is still pretty hazy. Somehow I convinced myself and everyone else that I was doing it for more than just money. “I’m creating jobs for my friends”, “we’re making the marketplace safer for normal investors” and “we’re making the financial services more transparent”. Those may all be true, but they’re a symptom and not the cause. I was chasing money for money’s sake and didn’t even realise it but luckily that changed about a year ago. I took a step back and did some true introspection.

Me - "Do I want to be rich?"
My Soul - "Yes."
Me - "Why?"
My Soul - "To buy loads of cool stuff!"
Me - "Like what?"
My Soul - "Umm, a new iPhone every other year."
Me - "Ok well that is £350 a year, what else?"
My Soul - "A nice flat in London."
Me - "Ok well that’s £12,000 a year, what else?"

Plenty more soul searching later I realised I don’t actually want to be rich, I really just want to be financially free. I want enough money that I never have to worry about money, or even think about it, ever again. Financial Independence. Sounds pretty good eh? So how much money do you need?.

“I wanna be a billionaire so freakin’ bad Buy all of the things I never had” – Travie McCoy – Billionaire

Well you don’t need to be a billionaire. A billion pounds is a huge amount of money, 1,000 million. If you were to live for another hundred years you would have to spend £10 million a year, or £27,397 a day just to get through it. Every day you would have to spend more than the average Londoner earns a year. But even that’s not the full story, let’s say you stuck your billion in an savings account and earnt a rubbish 2% per year. Now you need to spend an extra 20 million a year just to cover the accrued interest. So £82,191 a day. Spending that much money would be a job in itself! No wonder the richest people on the world give away so much money, charity is pretty much the only thing you can spend that amount of money on. You don’t even need to be a millionaire. The maths is pretty simple. Calculate how much money you need a year to cover all of the expenses you want. Times it by 25* and that’s your number. You simply invest your money in stock and bonds, withdraw your ‘expenses’ each year, raising the amount you withdraw with inflation. Voilà, financial independence and never-ending cash. My number is £875,000. I spend around £35,000 a year and don’t need or want to spend anymore. I don’t watch my spending, that’s just what it costs to cover everything. I live in one of the “coolest” parts (Dalston) of the most expensive city in the world. I live in a new build with a gym and concierge in the building. I eat out at least once a day, have a cleaner and holiday abroad every couple of months. If you are the average person earning £25,000 a year in London. Then to replicate your take home salary of £14,402.72 you need to have saved £360,068. One of my business partners was recently upset with me because he couldn’t understand why I wasn’t too concerned that one of our businesses was shrinking: “What is going on with you? Do you no longer care about money?” I still care about money, but I no longer care about making as much money as possible. I have a very achievable financial independence goal which means that even with falling profits and hard times ahead, I don’t need to worry. After all this time I should probably just have listened to my mum. Let me leave you with the story of the Mexican fisherman.

An American businessman was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large fish. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.The Mexican replied, “only a little while. The American then asked why didn’t he stay out longer and catch more fish? The Mexican said he had enough to support his family’s immediate needs. The American then asked, “but what do you do with the rest of your time?” The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siestas with my wife, Maria, stroll into the village each evening where I sip wine, and play guitar with my amigos. I have a full and busy life.” The American replied, “I have an MBA from Harvard and can help you. If you spend more time fishing then with the proceeds you can buy a bigger boat. With the profit from the bigger boat, you could buy several more boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you could sell directly to the processor, and open your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually New York City, where you will run your expanding enterprise.” The Mexican fisherman asked, “But, how long will this all take?” To which the American replied, “15 – 20 years.” “But what then?” Asked the Mexican. The American laughed and said, “That’s the best part. When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions!” “Millions – then what?” The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siestas with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

Based on the Trinity Study’s 4% safe withdrawal rule. I think that it is a very conservative requirement for financial independence as it assumes:
- You will never receive anymore money (no state pensions, salaries, inheritance, profitable hobbies)
- The amount you spend stays the same. In reality most people spend less as they age.
- You just invest in stocks and bonds and nothing higher yielding (such as my current favourite investment – P2P lending).