Gawd Dammit! Somewhere in my unintended break from writing I crossed over a major threshold. Oh yes, that’s right, I levelled up in the FI RPG.
My continued savings efforts have rewarded by an upgrade from Level 2: A Finance Barbarian, to Level 3: A Thrift Warrior. How awesome.
And what exactly is a thrift warrior?
You have replaced the financial head butts and the slinging fecal matter of the Financial Barbarian with an axe and some under garments (braving the financial winds naked is cold…). You are battering expenses steadily lower with more refined tools and building that financial nugget.
Shame, I’ll miss slinging fecal matter about.
Time to tool up.
As you’ll no doubt have noticed, I am still wearing my armour of frugality to provide protection from the Powers of Marketing and from the herd mentality of the Consumer Hordes. Hopefully it’s magical powers will prevent any unneccessary spending. In my left hand a copy of Smarter Investing, by Tim Hale, keeping me on the simple and effective investing path.
I have dropped the Berserker Axe of Financial Smiting and picked up a more refined Dagger of Financial Stabbery. Lovely stuff.
And yes, that’s a body in my backpack. Deal with it.
A Moving Target
I’ve been doing a fair bit of musing over what my Financial Independence target should actually be and what I want from this whole FI thing. You know, the kind of musing where you sit cross legged on top of your shed at 5am in the wind and rain and mutter to yourself, until the neighbour calls the authorities.
My target has changed somewhere along the way, and I’m not convinced I was even conscious of it at the time. It’s moved from having £625k in savings, which included my pension. To saving £250k outside my pension and having the mortgage fully paid off. Possibly not that far off the same thing, just a different way of looking at things.
A paid off mortgage would substantially reduce our outgoings. Mortgage payments dissapear and what was being paid against the mortage can be pummelled into savings instead.
No mortgage balance outstanding would be a substantial weight off the mind, essential when the mind in question is as tiny as mine.
On top of that, £250,000 in savings outside my pension would lovingly provide £833 a month at the faithful 4% assumption.
Which, with no mortgage to pay, would be more than enough. In truth it would cover living costs for both Mrs Z and I. And for just me it provides a chunk of prudence.
In the background to all this I’ll just keep on chucking 20%+ of my salary into my pension (including employers contributions) and when I hit the other two targets take stock on this.
Engage the Calculator
Some quick sums tell me this is possible in 6 years, no time at all. Those sums only allow for some small growth and don’t assume I have any increase in salary for the next 6 years. On top of that, my wizard like projections tell me that I’ll have a similar chunk in my pension. Another huge chunk of prudence in Mr Z’s vault.
Who knows, I could be done and dusted in 5 years. Before I’m 40 has a nice ring to it.
Everyone’s different, but a paid off mortgage, £250k in savings and nearly the same again in a pension would give me a warm fuzzy feeling. And, sweet dam, Mrs Z would have her own savings and pension too. It seems that saving is working.
Cover Yourself Up
£833 a month would be quite comfortable for just me alone, admittedly it wouldn’t allow for much extravagance. Not that we have much of that anyway. At a 3% withdrawal that would be £625 a month for me alone, a bit more bare bones but certainly doable with no mortgage or rent to pay.
It’s at that point I can start assessing if I want anymore, building up my life incrementally so to speak.
When you’re in the mindset of working for 40 years decisions tend to get made purely in the now. In isolation. Almost as if there is no choice for our future self but to carry on working.
As a little experiment let’s put ourselves in future Mr Z’s shoes. His house is paid off completely. His investments are providing him with enough money to exist on his current lifestyle. There’s no fancy car on loan wedged into that lifestyle. But it does allow for a holiday or two a year, a cheap gym membership, a pool membership and the odd coffee or meal out here or there.
From this situation any to increase expenditure needs to be supplemented with additional income or additional captial. The trade-off between free time and the so called luxuries is all too clear. And remember, those luxuries aren’t guaranteed to bring any additional happiness.
A fancy car might set you back £300 per month. Increasing outgoings by 36%! Blimeh. Would you really be willing to work just to afford the car payments (either through earning an extra £300 a month or saving an additional £90k to provide the income to cover it). Maybe the answer is yes, but at least it would be a considered answer.
You might decide that you have outgrown your current house and want to upgrade. You pick a larger fancier house and work out that a £200k mortgage ought to cover you. At 3.5% over 20 years that’s an additional £1,160 per month. Even if you’re earning a fair whack, that’s a good number of years of work to cover the cost.
Linking additional expenditure with time spent working is a useful exercise. Society doesn’t frame expenditure as building up incrementally. Rather the Hive Mind prefers to assume a fixed working life. Hey buddy, you’re working for 45 years and that’s that. So why not spend that payrise right now. It’s a game of diminishing returns, eventually the pain of spending more time in forced employment outweighs the happiness that the income can bring you. It’s a sliding scale and different for each individual.
If you strip your life back, reduce your expenditure and save hard you could find yourself with a simple lifestyle more than covered by investment income. And for less than you’d expect. Which is where I hope to be in 5-6 years time.
When I reach that point my plan is to take stock, maybe buy a plot of land somewhere and build my own house, and not buy a Mercedes. Each to his own.
Next stop, Level 4: The Hoarding Dwarf.