Alternative plans for FI and a new definition: Frugally Independent
I’m writing this post on the way home from work at 8:45pm on a Monday evening which is horribly ironic not just because this is a blog about attempting to work less. You see I also had a session pencilled in for writing up my CV tonight, so I can get it out there and see if I could alter my current plan in any significant way, which is simply to ride out my current job for another
five four years and then tell them where to stick it. It is almost like they knew this and set some really harsh deadlines at short notice to scupper my CV writing session! Maybe this is another reason why people work until they’re 65, they are so busy working they don’t get time to think about or do much else?! Anyway… I digress.
Is there an better plan for FI?
Guy from Early Retirement Guy wrote a few weeks ago asking for advice on his dilemma between cash or comfort; whether to take a possibly lucrative new job with potentially higher stress, or stick with the comfort of his current job that he can do with his eyes shut. This, along with tonnes of other stuff I’ve read and friends I’ve spoken with really got me thinking about other ways of achieving FI, and also what FI really means to me. I think, and if you’ve read from the beginning it should be fairly obvious, really all I want to do is free up some time, to pursue one or two admittedly aimless hobbies (golf), and a few rather more productive activities (trying my hand at the small scale business world, or “side hustling”, learning as much as possible in fields I don’t know about, volunteering for a cause I feel close to the heart of, etc…). It strikes me that FI is not really an all or nothing concept, although maybe the Internet Retirement Police (or even a new special branch… the Internet FI.B.I. perhaps?) may have something to say about that. We could argue about the pedantic details of these concepts and the definitions of specific terms all day, so rather than do that I just thought it would be easier to propose a new term:
“What does it mean?” I hear you all chant in unison!
Well it’s quite simple, it just means you have learned to live (well) below your means, and therefore do not need a high paying or even full time job to cover all your needs, and most likely all of your wants as well. You may also have built your skill-set around something you can trade your valuable time for a high hourly £££ rate, such as Wade at Destination Financial Wisdom. By avoiding lifestyle inflation and spending everything you earn (and then some) like the majority of people you already open yourself up to options. One of those options is to build a huge stash in quick time (say, 10 years), invest it all into index funds, then say goodbye to the rat race and live off the proceeds for the rest of your life. But I feel there are other options out there to the frugally independent, those who may not want to give up such a large amount of time up front before starting to get some of their time back. Delayed gratification is the cornerstone of achieving early FI, but if you can have the best of both worlds now then why the hell not? So here are a few alternate ideas of FI, or how to be Frugally Independent:
1. Freelance / Contractor work
2. Part time Work
3. Get a new job!
4. Save up 1/2/3 Years worth of expenses and go for broke setting up your own business
Out of these, I am currently seriously considering the top 3 right now, so let’s go through them in more detail.
Freelance / Contractor work
You can earn anywhere between £200-£500 per day contracting from what I can gather (maybe even more, but let’s be realistic here!). Let’s assume that due to my FI (Frugally Independent) nature I can live off of £14,000 a year, which is slightly more than my original target of £10k per year. While I still think this is doable, as mentioned I will keep it realistic (and as I am currently not hitting that, it would be a bit silly not to mention hypocritical to assume that figure!). Let’s also assume I still want to save a fairly decent chunk away for “proper retirement” per yea, say £3000 into an ISA and £4000 into a SIPP which equates to £5000 saved due to the tax benefits assuming a 20% tax rate. So my total net earnings would have to be £22,000. Pre tax earnings of £28k in normal employment gets me to roughly that figure, so I will work with that (There are some added tax breaks of working for yourself, but we’ll ignore those so it doesn’t get too messy. Let’s just say, this is the worst case scenario). If I can get a day rate of £200 a day, I would have to work 28000 / 200 = 140 days, which is 28 full 5 day weeks. So that means I would get 24 weeks off per year!!!!
This sounds very pleasant, but for extra rosie tinted spectacledness (totally a word, by the way) let’s try the upper reasonable limit on day rate which would be 28000 / 500 = 56 days = 11.2 weeks of work per year. This equates to over 40 weeks off per year. Where do I sign up please?! Before I get too excited, I must remember that there would be some negatives:
- Stress of not knowing where your next pay cheque is coming from near the end of each contract
- If economy hits a bad patch, you would be the first to go (although no one is really safe nowadays!)
- Might involve lot’s of commuting to different places as you can’t afford to be too picky
- Have to learn how to do your own taxes or hire an accountant
- There would be extra hours of “non payroll” work such as keeping a portfolio, constantly updating CVs, and emailing agents in response to new contract offers.
- No paid holiday (I would let out a huge guffaw in the face of anyone who said that to me, if in this situation!)
- No other benefits such as healthcare, or pension (we have NHS and I have calculated for money going away into the SIPP and ISA so no big deal here either I think)
Overall though, for somewhere between 24 and 40 weeks off per year, I think this looks like a pretty sweet deal if you could make it work anywhere near as I have assumed above. If there are any contractors out there wish to give their opinions… they would be most welcome!
Let’s not forget that at age 60, I might want to chuck the towel in completely, so I better check what my stash will have grown to. My total pot in the ISA would be £145,939.52 in real terms, and £243,228.64 in the SIPP*. These two together would give me an annual income of £15,566 pre tax which is £13,539.60 (with current tax rules). This should be more than enough for a 60 year old TFS who also happens to have paid off his mortgage by then!
*Assumes 4% real rate of return.
Part Time Work
We’ll use exactly the same assumptions as in the contracting example, but kind of reverse the calculation, as most part time work is much more rigid. Most companies like to see you for around 20 hours per week on a part time contract, which simply means that to get to £28k I would need to be earning 28000 / (52 x 20) = £26.92 per hour. Sounds quite high seeing as my current rate is £25.64 I don’t think it’s impossible, maybe even at my current company. The only hitch might be that employers still view full time employees as more valuable, which in the majority of cases is still perhaps true, but I think if you knew you had 4 days off per week you are also more likely to work harder in the times where you are at work. Persuading them that is the case is a different matter obviously! In my case, I think the only option here would be to persuade my current company to keep me on part time… I can’t imagine there are many web/software developer positions out there part time right now!
Again… if we have any part time readers who are making around this number and making their situation work, let us know what you do, and more importantly how you did it! (I know regular reader and commenter Living Cheap in London is already doing this, which is where I got the idea from, thanks LCIL!).
The upsides are obvious compared to the Freelance model, a regular, guaranteed wage, more job security, paid holiday and other benefits, while the major downside is that you still have to actually go to work every damn week, along with that if I could only swing this at my current place, I would still be wasting my life commuting.
Get a new Job
This might not make much sense to a lot of people but I currently spend around 13 hours per week commuting via train to my job. Simply by getting a more local job and biking or walking to work, I could cut out about 10 hours of commuting and hence get 10 hours of my life back, each and every week. This equates to 470 hours or 19.5 days per year (assuming 5 weeks paid holiday). While I would still be working a full time job, that is a significant amount of time to free up each week, and would allow me to supercharge my savings rate due to lower commuting costs and still earning a guaranteed full time wage. For those reasons this is still one of the front runners for me. The positives and negatives are similar to part-time work, but with the added bonus of hitting financial independence properly in a shorter time frame, while sacrificing more of your time in the near term.
What do you think?
As ER Guy asked for advice, I am going to do exactly the same (it’s one of the biggest and best benefits of having a blog so may as well ask as often as possible)! Getting the opinion of you lot out there really helps me, and I hope others reading, make their minds up on stuff like this. To be honest, I am completely open to all three options right now as they all have various positive and negative aspects.
One thing is for certain though, it is great to be frugally independent enough to have these options, and they all sound a lot better than keeping the status quo, so I am going to get back onto writing my CV as soon as I have posted this!