Based on the “Where are you?” post, you should now have a good idea of where you stand financially. If you have negative equity, never fear, a future blog post will explain the best ways to get into the black. If you have positive equity, well done you! Now its time to grow that wealth.
There are a few ways to do this, each of which I’ll take an in depth look at in separate posts. For now, lets take a bird’s eye view of each as well as a look at how to figure out where your money is going each month (spoiler, it’s time for financial statement number 2!).
Growing your revenues
For me, this is the single most important determiner of your progress towards financial independence. Its also the hardest to change.
So what do I mean by growing your revenues? I mean working to push up how much money is coming in every month. For most of us it’s a salary… and that’s it (I’m also guilty of this). While this is fine, if you’re currently spending less than you’re earning that means every incremental pound you earn can go straight to your savings. That’s a savings rate of 100% on the additional money you earn. Even if its only £200 a month, you’re saving an extra £2,400 a year! That money can then grow, becoming more money without you having to do anything (the miracle of investing and compound interest, coming up below).
Alright Art, I get the principle but where am I going to magic up £200 or more every month?
Good question fictional reader! The possibilities are endless (almost literally). Are you good at something but haven’t thought about monetising it? Try to get paid for doing it! Can you knit and give away your scarves and hats for free? Sell them! Are you interested in history and read lots of historical books? Set up a course on coursera or tutor teens. The big side benefit of this, is that psychological studies have shown that using a skill to make a concrete difference to the world around you (a tidy flat with a happy customer) has a big impact on your happiness. So get on it, you’ll not only have more cash but also probably be a little happier!
Not really that good at anything? One, that’s probably not true (is your flat tidy, start a tidying service where you charge people to tidy their stuff) but even if it is, you can still look to learn a skill or take a course that will increase your career prospects.
Career prospects, seems a weird thing to highlight when the point of this blog is to escape the rat race, I get it. However, here’s the key. Even if you start earning money every month from a side hustle (the ideas I discuss above) your primary earner is likely to remain your day job. That means that maximising what you earn from that role is key, even if you don’t see yourself doing it long term. In brief: lean into the role, to escape the role. That means if the boss asks for extra time to complete a task and you think it might boost your chances of a raise/promotion, then do it. I’m not saying work 18 hours a day every day to get to financial independence as soon as possible, that wouldn’t be very Zen. What I’m saying is that if you choose to do something, do it well. After all, you’re already spending your time doing it, so what’s the point of doing it badly? It’ll just make you feel bad for wasting your time and it will mean to take longer to reach your goal. If your job is really awful and you just can’t face putting in 100%, maybe its time to move jobs.
Cutting your expenses
Here we are dear reader, the section I am not good at (at all). I struggle with this, I admit. I’ve got far too used to nice things, to the extent that I don’t really appreciate those things. This is not a good place to be, I’ve ended up spending money just to stay still. Those of you who used to smoke (though this also applies to other habits when taken too far) will know what I mean, that point you reach where you’re smoking not because you enjoy it, but because you don’t want the feeling of not having smoked.
This avoidance of a negative is a bad cycle, and it applies to money just as easily. When you buy a game because you’re bored of the ones you have or can’t be bother to play the ones you haven’t yet played. When you have to buy from Waitrose as the food from Tesco just seems better (or more likely this just fits better into your self-image). The coffee from an expensive coffee shop you get everyday but don’t even notice any more.
The key here is that you’re not enjoying spending the money. You’re spending to stay where you are. There’s nothing wrong with spending money for enjoyment, in fact, I would encourage it. But spending money to try to fix things unrelated to money (stress, unhappiness, annoyance) doesn’t work and, worse, is taking you away from the freedom to control your own financial destiny.
So… stop it!
Have a look at what you spend money on. What makes you happy? If you’re anything like me, it’s the money you spend on others or with others. That gift you give where they’re so happy? Worth it! That £50 session in the pub where you had to be poured into the taxi after laughing yourself silly? Worth it!
The other stuff, the stuff I refer to above, cut it out. The “How” of cutting it out, we’ll get into in a future post, but, for now, just take a look at your spending over the past month in your account statement. If it wasn’t a basic survival expense (food, bills) or something you instantly remember (dinner with your SO), consider whether its something you really want to be spending on.
Savings
This is where the prior two points come together. Rising revenues plus reducing expenses equals more savings. Taking a look at our balance sheet again, the best thing about savings is that they’re a pure asset, there is no liability associated with them. As such, every pound you add to your savings is a pound that goes straight to your equity.
So lets a have a look at savings rates (a savings rate is the amount you save over the amount you earn post tax. So saving £25K of a £50K all in salary would be a savings rate of 50%).
All of these numbers will be based on an after tax £50K salary and will assume a 5% return on your savings every year (you may notice this is way above the interest rate you get on a savings account, more on how to achieve this below and in the next post). Another assumption is that you don’t get any raises through time and that your expenses remain a consistent portion of your income. So if you’re below this wage now, don’t worry, it’ll even out if you end up earning more.
If you save 10% (£5K) of your salary every year every year (assuming zero savings now), you would be able to retire with over £1 million in 50 or so years. This is the normal path people take. They work from ~20 to ~70 (by the time we’re ready to retire, this, at minimum will be the state pension age). You’re on this blog because you want to financial freedom! Let’s pump up that ratio.
If you start to cut out some of the pointless expenses each month and push up your ratio to 20% (£10K per year), you’ll have over £1 million in only 37 years! That means you’ve saved thirteen years of work just by buying less crap.
Alright, you’re feeling inspired now, you decide to get a cheaper car next time and cut out the fancy coffee and expensive lunches “al desco”, your ratio rises to 30%. You now only need to work for 29 years to get to £1 million! Another eight years down!
Ok, you decide to go all out, you’re managing your expenses right and left, you’re partner is all in. You rent a cheap one bed and take public transport, holiday in cheaper destinations and generally decide you can get by on only 50% of your salary. At a 50% savings rate, you could retire with £1 million after working for 22 years! That’s 28 years of less work.
This is the power of the savings rate. But wait, there’s more. What if you started a side hustle that brought in an extra £5K a year of after-tax income and that went straight to your savings? You’re down to 20 years of work. An amazing 30 years when you don’t need to do a job you hate. Isn’t that worth saving for?
This shows the magic of keeping revenues up and expenses down. A lot of the gains here are coming from returns on your savings, i.e. your money is making money without you doing anything. In fact, in the last example, the gains from the portfolio were over the yearly expenses in only the 13th year (and therefore that was technically the time when retirement was possible). Remember, all these examples assume zero savings at the start. If you already have savings, you can shave an extra few years of each of the above examples.
I hope you’re feeling as equally inspired as I did when I first started running the numbers! 20 years of work may seem a long time, but you’re buying yourself an extra 30 years of freedom. It’s a great trade.
So what’s next? At the start of these examples I said I was assuming a 5% per year interest rate. With saving account rates at 0.5% at the moment, how did I get there? That’s what’s coming up next time, my favourite topic: investing.
See you next time reader.