The only stages of Financial Independence post you’ll need ever (except for all the other ones)
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.
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.
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.
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.
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.
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?
Thanks for sharing, it’s very interesting to read other people’s stages or milestones to FI and I agree that someone else’s can never quite apply to your own journey. That said, I’ve never really thought about my own stages – I’m just aiming for the final goal of FIRE, most likely something a bit better than lean FIRE.
In fact, if I used your stages, then I would never make it past Level 0: Zero based FI! I don’t own my own home and my FI number includes potential rent I’ll could end up paying into my old age. I know, how very contrarian in these FIRE circles!
My emergency fund hovers around the 3-month mark and I’d like to increase that to a year at some point but would rather invest my cash right now so it’s only getting topped up bit by bit (and of course, it occasionally gets used for emergencies).
The passive income I get from investments is only around £250 a month, but if I included my matched betting income and my rental income (neither of which are passive), then the total would cover most of my living expenses though not all.
With the markets currently in turmoil and it looking like my numbers are going backwards instead of forwards, it feels like my journey is getting tougher and longer but I shall plod on regardless and persevere!
I definitely see my plan as idiosyncratic to me. They are interlinked with my ideas of what will make me happy (or in this case less scared). When I started to think about it I realised that I had this £1000, £2000, £3000 per month model in my mind it then refined out into what I wrote down. The specific stages will be wrong for most other people but it may trigger some thoughts that turn into something useful.
The other thing for me with having stages is that it gives me intermediate goals to try to hit. I’m with you on the plodding on so without the multiple stages I think it could all feel a bit unachievable to me. The years of working towards FIRE are often underplayed as so many people writing about FIRE have either quit their jobs or only start writing about it towards the end of their journey!
That’s a cool approach – People tend to fall into two camps on retaining mortgages.
I think if you start including pensions age is more important – a 52 year old could take a radical different approach to a 30 year old.
Yes I know that the mortgage thing isn’t right from a numbers perspective. But for me it’s what owning a house outright buys me beyond that house itself.
Also completely agree on the pension age point. I think this is where my rules of thumb are less useful than a spreadsheet! There is an optimisation to be done between ISAs, Pensions, and mortgage (if you have one) to find the right balance that gets you where you want to be quickest. I’ve not done that systematically.
Well thought out approach Caveman, thanks for sharing. Is fascinating how the bulk of the principles are the same, yet everyone has there own unique take on the implementation details.
An interesting follow up would be how (and when) you’d tap into your various holdings. Pensions are age restricted, the tax advantages of ISAs compound alongside the investments, and so on.
Thanks indeedably. You’re right on the varied implementation. I’ve taking elements from a whole range of places and then mixed them up and added in my own ideas and needs. It’s leads to a singular solution but given that everyone’s circumstances are different I think everyone has the right to a bespoke plan!
Yes I thought about this a bit in my reply to Ms ZiYou. I completely agree that there’s an optimisation point between ISAs, Pensions, and mortgage depending on age. And, thinking about it more there is space for non-tax protected savings and investments there as well. There are reasons I haven’t done that which are mostly around the the uncertainty of whether we will send out children to private school (a whole other debate on multiple levels there). When that has resolved either way I think that bit of the fog will lift.
Great post Caveman! I never really thought of it in terms of stages. At least not the way you do. I have a different model focusing on ‘bridging’ years from early retirement to full pension age (68 where I live)
– Classic bridge – Enough money to bridge early retirement until full pension. All savings depleted by the time I reach 68.
– (Sus)pension bridge – Savings only partially depleted. Some money left to supplement my somewhat modest pension.
– Endless bridge – Passive income exceeds expenses. No depletion of savings.
I like your idea of bridges to pension. It’s something that we don’t talk about in the FIRE community as much as we ought – in part because so much of the oxygen is taken up by those who retire in their early 30s (or are trying to). For most of the rest of us our pensions are a critical part of our planning.
Of your idea I think that I’m looking at your (sus)pension bridge (great name for it!). I would want to shape my income from quitting my full time job not just based on my pension, and non-pension, savings. But also on any side-hustle income after I quit work, when my wife wants to stop work, whether my children will have left home, how physically active I think I will be and so on. The thing that I want to be careful to avoid is the idea that things will continue in the same way forever.
Interesting post Caveman.
I guess I’d find myself in step -1 or 0.
Are these stages on your journey? At what point do you pull the trigger? Or are you classifying FI as a whole?
I find where you put your home ownership really interesting in this. I totally get the importance of owning outright, I personally plan to keep trading up on properties for a bit, and reduce my LTV as possible, but factor in mortgage payments to most of my calculations. What about a home as an asset and/or as an earner?
I think your level 1 Lean FI would struggle with one major thing; entropy. Houses require upkeep, otherwise they fall down. Machines around the house break. Even a second hand washing machine at £100 is taking a big dent out of that £500/month – see how many people visit Brighthouse! I think you could survive on £500/month for a few years, but after that the temptation to go searching for a cash injection would be strong. If your boiler broke would you draw out of your FI pot to cover it and shorten/ reduce income down the line?
Hi Shrink,
Lots of really good points. On when I pull the trigger I think it is probably around “Comfortable FI”. The point of the stages for me is to a) give me a sense of progress, and b) to equate to my levels of feeling secure.
That latter point is where my Level 1 “Emergency FI” comes in. I totally agree that £500 per month doesn’t really work for the long term, but I feel that it could keep me and my family at a survival level for a substantial period of time if we had to. It covers my baseline security. When I hit it I wouldn’t look to pull the trigger. I see level 2 “Frugal FI” as more of what people think of as Lean FI – precisely for the reasons that you rightly raise. My Emergency FI would have no flex in it at all.
On the house I see it as an asset. Or, more precisely, I see it as the route to not have the regular outgoing of rent or mortgage. Not having either of those to factor into an FI stash psychologically reduces how much needs to be saved (although I am very aware that the cash is instead tied up in the house – as I say it’e emotional, not logical!)
Your stages are very comparable to mine, definitely not mad. I’m still not sure whether I’m actively shooting for fatFI or not, but I’ll see. I’m 25, and have some years left to think of my ultimate goal.
That question of where I want to end up is, in part, why I have these levels. Each time I get past another stage it is time for me to evaluate where I’m at. With something that takes as long as FIRE I think it’s really important to keep checking in on your end goal so I think you’re very sensible to take some time to work out where you want to end up!
It’s a funny one with the mortgage.
On that definition I’m no where near fi but from a net worth pov (about half a mill) I’m half way there or a third if you don’t count home equity as a i have a pretty decent sum in my pension (potentially too much really,)
I choose at the moment to live in a largish house and my mortgage is large in number ; 280k following a divorce 4 years ago or so. In reality this is 60% ltv and just over 3x my salary and only 2.5 times my partner and I. The area I’ve been lacking is non pension savings (I’ve always kept about 30k or so but never tried to increase this) . I’m now addressing that now having had a couple of years of fun following the divorce which was needed from a mental health pov. I travelled and did everything I wanted to do without regard for cost (bar no debt) it was wonderful to be able to do that when needed and I feel very fortunate that I was able to do this when most people lose their house and have to start from scratch.
I’ve realised now I need much more liquidity so am reducing expenses and my goal is six figures in non pension savings and investments (outside of an emergency fund) by end next year. I have this now including an emergency fund but will need to replace my car end of next year having disposed of a stupid lease next December. We’re also planning on trying for children this year which I am both excited and absolutely terrified at being responsible for another human being (I can barely look after myself) but ultimately I know if I don’t I will regret it. I still don’t feel like I can afford children which is just stupid. I’ve no idea how people cope on normal salaries
So ultimately at the moment i am just paying the standard amount off the mortgage every month and am pouring everything into investments.
Hi FBA. Yes I realise that the mortgage goal is a bit quirky. For me the idea of debt has always made me feel uncomfortable. I really don’t like the thought that someone had that power over me. In particular I don’t like the thought of being homeless (or more than me, my family being homeless). So, even though I know that there are financially more prudent things to do with the money, I’ve always priortised knocking it on the head.
I know what you mean about the balance between pension and non-pension savings. It the problem with having rules of thumb for my finances. I was told from a young age that you should put as much as possible into your pension as people don’t save enough. That’s true but it’s not the whole story. If I had access to my pension pot today I would be thinking much more seriously about when I might pull the trigger than I am now.
You sound like you’ve done things in the right order though. I’ve always thought that gap years were bit wasted in 18 year old. I know a divorce won’t have been the most pleasant way to have decided to go travelling but as you say you don’t regret doing it.
I’ll also just say that it will be a rare parent that feels ready to look after another human. From my own perspective it was the most scary and most amazing thing I’ve done. From the money side as long as you can feed them and clothe them then, again for me, I’ve found the cliche that the most valuable thing you can give your child is your time to true. Good luck!