UK financial independence is not a New Years resolution. I am not one to make new years resolutions and despite the title that hasn’t changed. However, by coincidence I am at a point in my life where I have recently set some clear goals regarding my finances and I am forming a path to achieving them (I hope).
There is a growing movement in the US known as F.I.R.E, which stands for Financial Independence Retire early. The idea is simple; that saving a little more in the short term and investing that money can lead to being able to retire or become financially independent long before traditional retirement age. For those of us living in the UK financial independence is an equally exciting idea and realistic prospect, and may be easier than we think.
The secret of the Rich
It is the secret that the rich have known for a long time. Put your money to work and you wont need to work for your money. Or is it that people who realise this truth inevitably become rich?
Its a dog eat dog world
The truth is that life is tough and the world owes us nothing. Apart from a of our closest friends and family members no one really cares about us, most people only care about themselves. That goes for our people we work with, people we work for and the government. The message that we get from society collectively and the ideas that have become cultural norms are not in our own best interests.
- Our employers pay us as little as they can to keep us from leaving.
- The government takes as much as they can in tax and waste it.
- We are forced to take out pensions which end up being of little value.
- What ever is left we are encouraged to spend in its entirety on the things we need.
- Then borrow more money to spend of things we don’t need.
My dad was telling me the other day that through his 30 year career, there were several times when he got sick if it and thought about packing it in. Every time his employer came along and gave him just enough of a promotion to keep him enduring the hard work and long daily commute. To be honest, I don’t hold it against companies for doing this. They are in the business of making money and everything they can save they can either pass on to savings for customers to maximise their market share or pass of as profits to shareholders. The thing I have a problem with is that the societal norm is for us to give away our freedom.
Tax; pay what you should, don’t pay more
Most of us pay a huge amount of tax, especially if we are not rich. That may seem unfair and it is but that is a can of worms which I will open in another article.
The bottom line is, if you earn £30,000 per year you will probably pay a little over 20% in National insurance and income tax which will be taken before you even see it. When you spend what is left you pay an additional 20% in VAT and when you factor in duty on things like petrol, tobacco and now sugar, and council tax, you’re probably paying over 50% of your income in tax. I am not saying we shouldn’t pay our fair share of tax, we totally should. But we should be aware of what we pay and the ways we are entitled to pay less. What bothers me is that much of these details are not clear.
Pensions; done right can lead to uk financial independence
Our pensions also take money from us before we even see it for the most part. It is not a necessarily a bad thing. If it was left down to us, most people wouldn’t put money away for their retirement. But even with the tax incentives and employers contributions, the products that most pensions get invested in are terrible. The amount you will end up with at retirement is a shadow of what it could have been if you had invested in simpler cheaper investment products. I have a pension from my employer but they make it very difficult for me to see how much it is currently worth or have any say into how it is invested. That bothers me.
Keeping up with the Joneses
As we go through life we earn more money. So it should get easier and easier to invest more and more in ourselves. But it isn’t. Peer pressure, keeping up with the Joneses and our own distorted priorities make most of us spend all this extra taking on bigger and bigger liabilities like nicer cars or bigger houses or expensive holidays. To me this seems silly.
Work for 40 to 50 years, buy as big a house as you can ill-afford, stuff it full of crap, get promoted to your level of incompetence, and beat those pesky Jones’s at all costs.
From Monevator.com
Unnecessary Debt
It is made even sillier by the fact that as we earn more money banks are even more willing to lend us money so we can all this extra stuff. The truth is that in doing so we end up paying more and more for less and less in return.
Achieving UK Financial Independence
So people living in the UK financial independence is the same as for those in their USA or anywhere else in the world. Its about resisting these bad habits and growing a nest egg. Putting that nest egg to work. And getting it to the point where the income it generates is equal to what I need to live.
It doesn’t mean that I will then stop working and live a life of leisure. That would be expensive and the nest egg probably wouldn’t cover that anyway. What is mean is that I can work on what I want to work on. No one will be able to tell me what to do or where to be. Or when I can and can’t go on holiday.
The maths behind it is simple. There are simple and cheap investments that can conservatively return 5% a year and probably more. Therefore, if your net worth is in an investment like this, you can take out 4% of it each year without it going down. It may fluctuate in the short to medium term but in the long run this will be true.
So financial independence is when you net worth reaches 25 times you annual spending.
I am still relatively new to thinking about this in this way but I am already 41 years of age and I have saved and invested a bit over the years. So I have a bit of a nest egg already. But there is still a long way to go. But I hope to achieve UK financial independence this decade. Here on this blog and on my YouTube channel I plan to share my story with you. So thanks for reading and see you again soon.