It has been an interesting year so far for everyone. When I started this blog all bright eyed last year, I couldn’t have predicted that things could change so drastically.
In fact I haven’t written on this blog since March, just as lockdown was starting in the UK.
I hoped then that things would start to return to normal and even though lockdown has eased considerably, I wouldn’t consider wearing a mask to do the shopping normal.
I was hoping to have written more during lockdown but I think a combination of work and anxiety has probably prevented me from doing that.
The stock market has gone up but nowhere near the highs of February. It has been announced last week that we are officially in a recession and it is the worst on record, some might even call it a depression.
For me at least, it hasn’t been all doom and gloom.
I have been one of the lucky ones who has managed to keep their job and managed to work from home since March. Working from home is saving me nearly £500 a month in travel costs and allows me to see my family everyday.
For once, I have actually picked an industry to work in that has increased profits drastically during lockdown.
However, working from home when the children are at school is one thing. Working at home when your family is outside enjoying the sun and you are stuck in a hot room, behind a computer working, is something else.
This has got me thinking more and more about financial independence and how the falling stock market has affected my plans and everyone else’s, for early retirement.
To finally be in a position to say no to work today and go out and enjoy the sun with the family.
Even though working from home does allows you more freedom, it isn’t the true freedom you have when you are financially independent.
What I needed and was sorely lacking, was a proper plan for financial independence.
The 4% rule that I have talked about before still stands, but it still requires you to have 25 times your required salary saved before you can retire.
My target goal is £900,000 (£36,000 a year). My family and I could live quite comfortably on £3,000 a month (after tax) even more so once the mortgage is eventually paid off.
£900,000 is a lot of money and even with a decent salary and savings rate I am still looking at working until I am 48.
This is still considered early retirement by some but I would much rather be in my 30s than my 40s. I am nearly 33 so I have my work cut out if I want to reach my £900,000 goal before I hit 40.
The way I see it, there are several levels to everyone’s financial independence journey. Everyone’s starting level will be different and some people will get through levels quicker than others. Unfortunately, that is just life and life isn’t fair.
However, as long as there is a plan everyone at least has a chance to reach the last level (okay, I have probably been playing too many video games in lockdown).
So there are 10 levels to this game of financial independence. I will go through them all now but don’t worry about taking it all in.
A lot of the content I write from now on will fall into one of these levels.
The first step to achieving financial independence is working out where you at the moment in life and getting your financial house in order.
This includes calculating your net worth, starting a budget and making sure your finances are efficient.
Once you know where your money is going it is a lot easier to plan for the future.
Next up is to work out where you can trim some fat.
Small monthly expenses can creep up on you. Sure it might only be £5 a month here, £10 a month there but it soon adds up.
Are you paying for a gym membership that you never use? Are you subscribed to Netflix, Prime Video, Apple TV and Sky? How much TV are you really going to watch?
Check out my money saving tips.
Level 3 is all about building up that all important emergency fund. I recommend trying to build up at least £1,000 in your emergency fund. Ideally you should be looking at 3 to 6 months of expenses but we will get to that.
Your emergency fund is there to cover, well emergencies. This might be an unexpected car repair, washing machine failure, broken toilet anything that you weren’t expecting to having to pay for that month.
You may be wondering why I advocate building up a bit of an emergency fund before paying down more debt. Imagine if your washing machine breaks and you need to get a new one.
Without that emergency fund I am pretty sure that unexpected expense would good straight on your credit card, which would just add to the debt that you still need to pay off.
If you don’t have any non-mortgage debt this level might not apply to you.
If you have debt then your priority is to pay off your debt first before even thinking about financial independence. This isn’t just about credit card debt but also covers car loans and any other non-mortgage debt you are paying off.
The only non-mortgage debt I wouldn’t recommend paying off early is a UK student loan. UK student loans are deducted from your salary and have a fairly favourable interest rate.
If you aren’t earning a salary (e.g. you retired early) then you are exempt from paying off your student loan, in many cases it may even get written off completely.
Once you get to this level you are already in a better position than a lot of people.
Debt free (apart from mortgage) with a bit of an emergency fund and a view of early retirement in sight.
The next step is to work out how much you actually need to retire. This is your FI number and can be calculated using the 4% rule.
After cutting down your expenses in Level 2, you may even find that you don’t need as much as you think to retire.
With your FI number worked out, it is time to start building up your savings towards it. The first step is to have at least 1 years worth of expenses saved.
The easiest way to do this is to start saving as much as you can and learn how to invest it. The more you can save, the quicker you will manage to get to this milestone.
Having 1 year of expenses set aside can also ease a lot of anxiety people have about money. If you lost your job, you know you have enough money set aside to keep you a float until you find another one.
Unless you are already on a high 6 figure salary, it is going to take a while to save up what you need to retire early. In some cases, early retirement might still be 20 years away, not exactly early then.
We have two options here, drastically cut your expenses or increase your income. If you are on a modest salary then your expenses might already be as low as they can go and retirement is still a long way off.
You might be able to increase your income by getting a promotion or changing jobs, which will help but won’t move the needle as much as you might like.
To really put the pedal to the metal we need an income source that doesn’t have the same ceiling as your 9 to 5.
I am of course talking about starting a side hustle.
A lot of side hustles require quite a bit of work up front before it bears fruit, so it might be worth starting something that you are passionate about but has a good chance of bringing in an income in the future.
If you get to this level then FI might still be a way off but at least seems attainable.
If your side hustle from Level 7 is doing well you might even decide to do that full time rather than slog away at the 9 to 5. If your side hustle is earning you more than your day job, then I would definitely recommend focussing on it full time and scaling it even further.
You might even decide to start a second side hustle in your new found spare time. After all, two income streams is better than one. If you are investing wisely you should start to see your nest egg growing considerably.
This level is optional, as you might decide that paying the mortgage is an acceptable expense to keep given the low interest rate.
However, if you are planning on retiring early, not only can being mortgage free ease anxiety it also saves the worry of having to remortgage when you technically don’t have a salary.
Some banks aren’t keen on most of a person’s income being from investments, even if safer than your traditional job.
If you manage to get to Level 10 then congratulations you are finally financially independent.
The key here is making sure you protect your wealth and prepare yourself for the ups and downs that are sure to come in the future.
If you are fully reliant on your investment income, then you are going to want to make sure you protect your wealth and not be in the situation where you run out of money quicker than expected.
The last thing you will want to do is have to return to the workforce in your old age.
If you have invested your money wisely and you haven’t been unfortunate enough to go through multiple recessions, then you should actually have more money towards the end of your life than you did when you begun retirement.
In fact due to inflation and many years worth of returns it may well be into the multiple millions.
So what happens to all this money when you finally kick the bucket?
How do you go about passing on your wealth to your children or spouse without having to give too much of that hard earned money to the government. This is what we will cover in this bonus level.
Every great plan starts with a structure. These 11 levels are the structure for my financial independence plan and I will be filling out the details with all my blog posts going forward.
There is going to be a lot more content to come so don’t worry if you don’t know what level you are on or what you should be doing. I will cover all of this in my future posts.
Alex started Pursuit of FIRE in 2019 to try and help people reach financial independence. He has spent nearly a decade working as a software developer in the finance industry and now is looking towards early retirement so he can spend more time with his young family.