‘We don’t do frugal’: Seeking financial independence

The Humbug and Fagin blog – www.seekingfinancialindependence.com -is all about our quest for Financial Independence.

Neither of us does frugal, so we each need to make a small (well size matters, so not that small) fortune.

Our idea is simple, but not easy; we intend to use the stock market as our piggy bank and make as much money as possible, as quickly as possible without taking stupid risks.

We disagree about the best way of doing this. Humbug believes the best route is to aggressively invest in funds, riding medium term momentum. Fagin operates by ‘picking the markets pocket’ scalping individual shares.

To keep us honest, all reported under the heading of the Great British Trade Off , here in our blog and on Twitter at Humbug&Fagin@BritishTradeOff.

First of all, is it possible to define financial independence? No, I don’t think it is. Because obviously its different strokes for different folks.

A billionaire’s financial independence will likely be very different to mine; mind you one could argue that a billionaire is likely to be financially independent simply because he is a billionaire.

For me the definition is, never ever having to work for any one else ever again unless I choose to. Further, its having sufficient capital so that when its conservatively invested it still provides me with more income than I need to live on, at my chosen standard of living.

On top of that, the return should be such that there is surplus income for further re-investment to earn still more income in the future.

For extra security I also want to own a low risk but still highly profitable and cash generative ‘life style’ business to protect me from both investment risk and inflation.

I believe that there are a number of keys to achieving these objectives.

They are easy…………………………but not simple. This step-by-step approach to financial independence sets out my thinking.

KEY ONE: Income is income and wealth is wealth. Don’t confuse them.

Most people think that having a high paying job is the same as being wealthy. Yes, for sure someone who earns a lot of money could be wealthy, But surprisingly, more often than not, they’re not.

The Americans have a brilliant expression for people like this – ‘big hat no cattle’!

Anyone who wants to be wealthy and have financial independence has to get their head and their wallet in the right place. They need a clear vision of what they want and how they plan to get there.

First of all, when the money starts rolling in a good chunk needs to be saved and invested wisely.

Its fatal to get the trappings of wealth, till you’ve got the wealth.

‘Its fatal to get the trappings of wealth, till you’ve got the wealth’

The fine house, the garage full of nice cars, the hand made clothes, the 40ft boat, the trophy wife and the high maintenance that goes with her, the expensive watch, the children at private school and a social life of lavish entertaining if they are taken on before you really can afford them will mean that you never ever achieve financial independence.

If you really do want the peace of mind and security of being wealthy, rather than just appearing to be, you have to postpone these extravagances and temptations until you actually are.

Before you take on a new liability, have in your mind that you’re not financially secure and you do not have financial independence until such time as your money is working for you, not you working for your money. So do you need this whatever it is and should you be committing to it?

Never forget that the wealthy invest in assets,  the poor spend their money on liabilities.

KEY TWO: You must have surplus money to invest in the first place.

Earning a high salary or owning a profitable business never hurts when your trying to make yourself financially independent, but they’re only part of the equation.

You have to structure your life (certainly in the early years) to first of all save as much of that high income as you possibly can without screwing yourself into the ground. Then you have to invest those savings into income producing assets.

See what I mean about simple, but not easy?

‘you can’t be a capitalist without capital can you?’

To begin with its a mind game, once you get your head around the benefits of deferring  the gratification for a few years it gets easier.

There are a few things that have to lock together. Unless your vision of financial independence is an extremely frugal one, you need a worthwhile amount of capital to generate the the unearned income to make it possible.

So, you need to be a capitalist and you can’t be a capitalist without capital can you?

Because of the way compounding works, the more money you have invested early in the sequence the better.

Saving and investing as much as you can in the first few years of earning good money  creates greater wealth than saving and investing larger amounts later; amazing but true.

KEY THREE: Compound interest is your new best friend.

The three main income producing asset classes for all of us, are owning a business (or business’s) of our own, investment property and stocks and shares.

Getting market beating investment returns are vital; earning 12% pa from a mix of the above three is completely realistic and could likely be bettered by a canny investor.

Wealth and financial independence can be achieved over a working lifetime with a combination of aggressive saving early on and those better than average returns.

‘generate some serious wealth for yourself and achieve financial independence with noughts on’

Because of the way that compounding causes the results to accelerate in the later years of a sequence, it’s really important to start saving and investing as soon as you can.

In round figures an annual return of 12% doubles your capital every six years.

To state the obvious, by year six £50k of investments will have doubled to £100k, so far so good. But after compounding up for another twenty four years the capital has now grown to £1.6m.

Go round another six years and the initial £50k has grown to £3.2m. Interesting is it not, that’s the sort of figure that gets my full attention.

Sure I know its easier said than done to save £50k from taxed income. But if your a high earner and you put your mind to it, it can be done.

If you do it once, what about doing it another couple of times in quick succession? Do that and over time you’ll generate some serious wealth for yourself and achieve financial independence with noughts on.

Simple, yes………………… But not easy!