Why you need a financial independence plan right now! (And so do I…)

Jan28
by TFS on January 28, 2014 at 9:18 am
Posted In: Financial Independence, Financial Independence Planning

 

The long path: Your Financial Independence Plan

The long path to Financial Independence

It’s been around a year since the concept of financial independence was introduced to me now, and although I latched onto it straight away – with it’s promise of a life without alarm clocks, bundles more free time to spend with loved ones, enjoying inexpensive but fun hobbies at my own leisure, and engaging in “work like” activities that I think will make the world a better place without having to worry about compensation – I still haven’t made a proper plan on how to reach financial independence yet. I’ve written a few posts with some really rather splendid spreadsheets about the basic maths of how to achieve financial independence, but I haven’t developed a proper (and realistic) savings plan and run the numbers for myself yet. We’ve optimised our lifestyle and are definitely spending less and saving more than we ever have, but to be honest I have no idea exactly what our savings percentage is right now!

So I am currently missing the key ingredient for any hair-brained scheme genius idea to work, which is, in case you hadn’t guessed by now, a plan. Without a proper financial independence plan I am missing out on the following benefits:

  1. Action:Ā Or more precisely, it forces me toĀ stop procrastination. It’s often been said a mediocre plan executed well is better than a genius plan executed poorly.
  2. Evaluation:Ā Decisive measurements can be taken to assess progress.
  3. Optimisation:Ā Tweaking the plan as new knowledge is acquired.
  4. Gratification:Ā of setting and hitting intermediate milestones.
  5. Motivation:Ā it’s a long path and without a proper plan I am much more likely to stray of course.
  6. Clarity:Ā I like knowing exactly where I stand. Having an overall picture of how well I am doing financially and in relation to the plan will be invaluable.
If you haven’t got a plan yet then like me, you need to make one! Now!

Information Overload

I could give you many reasons for procrastinating on this for so long, but I will give you just two. The first is that we were saving for a wedding for most of last year so the savings pot only started growing properly in October, and the second is that I have been reading up on so much new information it is kind of mind blowing at first. There are so many variables to take into account into a financial independence plan it really can be mind bogglingly overwhelming when you first dip your toe in water. Here are some of the high level topics and questions you will need to consider when planning and estimating your time to FIRE:

  • Spending less than you earn: What percentage of your earnings can you save? Can you make a realistic budget? (Make sure you don’t forget to budget in the “unknowns”)
  • Investing in the stock market: What % return will you estimate you’ll get? What is your asset allocation? How aggressive and risk averse are you?
  • Tax-advantaged retirement accounts: How much are you willing to put away into a pre-tax retirement account? (You cannot access this money until you are 55 in the UK)
  • Property/Real Estate: Can you hack the hassle of landlording? Is it (or will it be) the right time to buy when you have enough cash to put down?
  • Side business – Are you the sort of person to be able to set up a side business, keep it going along with your full time job, and still lead a happy life?
  • Tax – Learn the tax rules of the country you are in and how to use them to your advantage! (Please note this is not a question! šŸ™‚ )
  • Net Worth – What is your current Net-Worth? Can you give a good estimate of how it will go up (hopefully not down anyway!) each year?
  • Part-time work – Are you happy to do a bit of part time work once FI? (then your savings don’t have to be as large before you quit)
  • Children – Are you planning to have (more) kids soon, or if you already have them remember to extrapolate costs into your future budget as they generally become more expensive as they get older. Same with any other future potential costs you can attempt to forsee.

And that’s just the high level stuff! Within each category there is a lot of extra information to delve into.

Introducing the Financial Independence Planning Series

Seeing as I have spent nearly a whole year reading this stuff, I am going to be a good sport and condense all the good bits you need to know into a short(ish) article series which I am going to stamp with the rather sober name of the “Financial Independence Planning” series. Look, hey, this is kind of serious stuff so it deserves respect.
The list above should have given you a good idea of what we’ll cover already, but just to give you a sneak preview, here is the list of working titles I have planned for the series. If anyone has any other topics they’d like me to cover though, please do let me know!
Why You need a finanial independence plan right now! (And so do I) – What you are reading right now.
Building a finanial independenceĀ plan – Calculating Net Worth, Income, Expenses, Projecting estimates into the future. Setting Milestones.
Example Finanial IndependenceĀ Plan One – Achieving FIRE using tax advantaged accounts
Example Finanial IndependenceĀ Plan Two – Achieving FIRE using property
Example Finanial IndependenceĀ Plan Three – Achieving FIRE with business ventures
A more realistic Finanial IndependenceĀ plan – A mixture of all three above
Part time work and FI
Planning to pay no taxes whilst FI
Budgeting once FI
Until next time, start thinking about how your plan might look incorporating the above topics, and we’ll delve into them further posthaste!
TFS