The only stages of Financial Independence post you’ll need ever (except for all the other ones)

November 20, 2018 14 By Caveman

So this is the last in my initial triptych of posts about my finances (with a little diversion via the shadow of the valley of death). I’m warning you now it is an absolute beast. So grab a drink and found yourself somewhere comfortable to sit.

Money isn’t the focus of what I’m looking for, happiness is. But, I see good money management as a necessary, but not sufficient, condition to becoming happier. As I’ve said before the things I want from money are enablers to doing the things that will lead to greater happiness:removing fear, giving me courage, buying me time.

That’s a triptych in case you were wondering

After this post I genuinely intend not to write about money for quite a while. I’ve got a whole lot of other things that I want to write about.

But, for today, let’s stick with money and I’ll throw some numbers at you as well. I’ll give you my personal stages of Financial Independence model and then tell you where I am on my journey.

The only other things that I should say is that you really shouldn’t take this to be a suggestion for what you should do. I am not didactic about this stuff. This plan is all about what I need for my personal situation. If this triggers thoughts then lovely, but then do your own research, think it through for yourself and come up with your plan. Take charge of your life.

All sound good? Then let’s go.

My FIRE levels

I have four levels that I think about and two pre-stages. I know there are a whole bunch of FI hierarchies out there (like this one or this one) but none of them were quite right for me. Importantly a model that didn’t have numbers that were right for me in my circumstances was of no use. So, I adapted then to come up with one that suited my personal situation. They way I see it, if I blindly follow the models and rules of other people in the FIRE community then I’ve probably missed the point a little bit.

Level -1: Getting balanced

Level 0: Zero based FI

Level 1: Emergency FI

Level 2: Frugal FI

Level 3: Comfortable FI

Level 4: Luxury FI

Let me break those down.

Level -1: Getting balanced

This is making sure that you earn more than you spend. Or, if you prefer, spend less than you earn. That’s it. I think it’s the single most important step in taking control of your finances and for most people it’s also the hardest step.

I feel like earning more than you spend is the foundation of getting to Financial Independence. When you can do this you can start all of the other things that people talk about. Without it a lot of the other things don’t really make sense.

Get balanced – you know you want to

This has value as soon as you get there. It takes away stress as you realise that you can pay your bills when they come in. It also adds security as you realise that you can start to pay down your debt or build up some savings to deal with those unexpected, unpleasant things that come along.

If you spend more than you earn then you will get into debt and that debt will need to be paid back with interest. The thing that you will have spent your money on will cost you more than it need to. Ultimately you will be in a worse financial place that you were before. That’s obvious when you write it down but so much of society is designed to hide that from us.

The other very obvious thing that we don’t think about much as a society is that the only way to shift the dial on that balance is a) either to earn more, or b) to spend less. If you have any alternatives then please let me know.  I just don’t think that there are, so you have some clear choices to make to get yourself started on your journey. 

My university years were the only real period when I spent more than I earned. I worked both before I went to university and all of the way through, so my student loans and credit cards were not as bad as they might have been. I was also very lucky to miss tuition fees and have some support from my parents. Nonetheless, I still had to pay rent, and living costs (and, let’s be honest I spent a good chunk of it going out and having fun).  The inevitable consequence of that was that I spent more than I earned and I accumulated debt.

Level 0: Zero based FI

This is the point where I had ditched my consumer debt and had an emergency fund of £500.

So I didn’t owe anything to anyone except for a student loan. It’s a beautifully freeing place to be to not owe money. You can look the letters that have arrived and not worry about what’s inside them. You don’t have to worry about the debilitating impact of interest. You can look at your pay come in and know that it’s up you how you spend it– you don’t have a slice that is already someone else’s.

I’ve also put an emergency fund in there. £500 is not very much and clearly a larger emergency fund would be better. It’s a specific amount to me as it covers most of the regular minor disasters than regularly strike me. A fridge, or a washing machine breaking down. My car needing a tyre. A blocked drain. One or more of those things happen to me every year. I don’t know which one it will be but I know it’s going to happen so I want the money around to be able to pay for it.

Not much fun when one of those breaks down

The way I see it, that level of savings just means that I won’t get buffeted by the ordinary things that hit me. To be honest I have a lot more saved up than this now, but this is what I see as my minimum.

Again I’m very lucky. I got to this point aged 22 after my third paycheck from a full time job. I had put some money on credit cards through University and I had added to that to buy suits,shirts and shoes for my first job. But I then paid them off as soon as I could with my first paycheck. Since then I’ve always saved to buy things (including cars) and paid for them outright. In months 2 and 3 I put around £250 each month into a cash ISA (and then kept adding to it). I didn’t think of it as an emergency fund, I just knew that it was going to be important to save for the future.

Level 1: Emergency FI

No debt at all, a paid off home and a passive income of £500 a month.

OK. Plenty for people to disagree with here. This is the big step up and so it should be! This is my first step of real FI. Where I start to look around and see what it is that I’ve been working towards for so long.

Let me take the no debt bit first. In the first instance this was paying off my student loans. I was lucky in that my student loans weren’t huge so I overpaid and knocked them out by the time I was 25-26 years old. I don’t really remember precisely (‘cos I’m old) but I knew I didn’t want them for long.

But, a few years later, around the age of 29 we took out a mortgage which was something of a kicker to the whole debt free thing. Then, we moved and made the mortgage larger 5-6 years ago.  Now that was a scary amount of money to owe.

The paid off home is controversial with some FIRE bloggers (I’m looking at you Millennial Revolution) but remember this is about my happiness, which is not the same as optimising my returns. Knowing that whatever happens to me my wife and children will have a home has immense (non-monetary) value to me. I have aggressively been paying down my mortgage and knocked it on the head earlier this year. That felt just as good as I thought it would.

Yup, one of those, but without a mortgage

The passive income of £500 is based on covering our bare bones bills. Council tax, gas, electricity, water, very basic food, limited internet, second hand replacement clothes. That’s it. Could we survive on this? Yes. Would I want to live forever like this? No. Do I know that far, far too many families have no choice but to live on less than this all the time? Yes.

This level is important to me as it covers my doomsday scenario. Would my family and I be able to survive? I talked about removing fear before and this is where it happens. We will have food, light, shelter, heat,and clothing.

But I’m playing down how good it will actually be. Actually from our current spendy days we already have a house full of books, CDs, and DVDs.  Mobile phones that work well that we can change to pay as you go.  We have wardrobes full of clothes, a cupboard full of board games, and a kitchen full of gadgets. We have bikes in the garage and trainers in the hallway. We aren’t short of Stuff.

We live in the UK so we will have healthcare and my children will be educated. We have a public library within walking distance, and the beach and countryside a 30-45 minute bus ride away. We have friends in the area and family both near-ish and in London who we can get to easily.

That sounds like a pretty good life to me.

So £500 per month is £6,000 per year. If you take the 4% rule (and ignore how long we might need it for) that’s a stash of £150,000. Actually, for the UK, I’ve heard people say that a 3%-3.5% rule may be more appropriate but we can talk about that another time.

Level 2: Frugal FI

This is as in Emergency FI but it’s £1,000 per month not £500. I think that this would equate to what the FI community calls Lean FI. This is where things start to get more comfortable. We can add in some new clothes and have cover for new shoes and school uniform. We move to unlimited broadband. Meals become much more interesting. We have money to go and see friends and family on day trips occasionally rather than just asking them to see us.

£1,000 per month is £12,000 per year. With the 4% rule that’s a stash of £300,000.

Level 3: Comfortable FI

So here we’re up to £2,000 a month. At this stage we have a significant amount of wants as well as our needs. Mobile phones and gym subscriptions can come back in. Possibly a car as well. We can have a foreign holiday and maybe a couple of weekends away to visit family and friends around the UK. We can have a couple of meals out a year. Music/dance/rugby/whatever classes come back in for the kids (at least one or two).

I think that this is my equivalent of what most people think of when they talk about their FIRE number. This is the level of life where I would genuinely not feel like I was making much of a compromise. And so it should be. The median UK disposable household income (i.e. the amount of money that households have available after direct taxes such as Income Tax, National Insurance and Council Tax) in the UK is £27,310 (Source: ONS) per year which is around £2,275 a month. If you don’t have any rent or mortgage then £2,000 is a bucket,load. We would certainly need to continue to be careful with our money but it wouldn’t feel like every decision would be a compromise.

£2,000 per month is £24,000 per year. That’s a stash of £600,000.

Level 4: Luxury FI

At this point it’s all gravy baby. This is my version of what some call Fat FIRE. I can’t think of many wants that wouldn’t be able to be met. Multiple holidays if we want then, trips to the theatre and cinema. Coffees and meals out. Netflix. The car is definitely back. All that sort of spendy shizzle. Is this what I would actually do if I got here? Actually I suspect what I would do is save a lot of it and use it to go on more extended travel, or possibly study.

Here is an example of the sort of thing I still won’t be buying

However, I’m not sure that I would want to carry on working to get to this level as it would deliver me a lifestyle that I wasn’t actually too bothered about.

£3000 per month is £36,000 per year. That’s a stash of £900,000 – or not far off a cool million (which is what I think Retirement Investing Today had as the number for his family, although he has since punched through that).

Where am I and where do I want to get to?

It would be a whole other post to go the detail of where I am and this is already very, very long. But in summary, if you include my pension I’m somewhere between Frugal FI and Comfortable FI. If you don’t include my pension then I’m approaching Emergency FI.

Where do I want to get to? Well I think that I would want to pass Frugal FI in my non-pension accounts before deciding what I want to do so at the moment that’s my only goal. That’s a number of years away so I have plenty of time to think about where I go.

And that takes us to today. I’m not pretending that this is anything other than my model for what works for me as an individual. Other people will have different needs and wants so they will have different numbers. All I’m trying to do with this is clarify my own thinking.

So anyway, that’s it for now with the explicit money posts. Money isn’t the most important part of my journey but it is part of my journey. I also genuinely don’t think that I would start doing some of the other things, taking the small, very small, risks they entail if I didn’t have my finances straight.

Thoughts?

What does your journey look like?

Are my stages of FI mad?

Would you do anything differently?

Am I house obsessed?

Am I missing any tricks here?