THE SECRET TO FINANCIAL INDEPENDENCE
The secret to Financial Independence is just two words believe it or not.
They are HOW and MUCH.
I first got used to hearing them on a regular basis thirty years ago. I was working for the BBC and had a desk along with eight other people in a large office called Prod One. (It stood for production one).
One of the eight was a very talented musician turned broadcaster Al Read. As a quick side issue Al had been in a band called East of Eden who got right to the edge of the big time. Their greatest success was a tune called Jig a Jig (look it up on you tube) which was a bit of a pisser for Al as it was an instrumental and he was the lead singer.
I never asked him if he shared in the royalties from it as I thought it might be a sore subject…………………………..but thinking about it, he probably did.
But whether he did or he didn’t, it must have been a total nause for him at the time because at every gig the song that goes down a storm is the one he plays spare prick rather than singing.
Oh well, back to the plot. Al was a much in demand presenter and the management were for ever asking him to cover extra programs. He never asked when they were scheduled or what was expected of him.
His first question was always the same. HOW MUCH, as in how much was the fee.
When looking to achieve Financial Independence the secret really is HOW MUCH.
HOW MUCH capital can you save to get the process going? Obviously the more the better.
HOW MUCH can you earn on those savings as a reward for putting them at risk by investing them?
HOW MUCH time do you have on your side for compound interest to work it’s magic?
HOW MUCH are you going to pay in taxes, or if your investments are in a tax free wrapper like an ISA or a SIPP (as they should be) how much are you going to pay in fees?
All four elements are extremely important, as a few simple examples will demonstrate.
Saving money from taxed income is no easy trick unless you want to walk everywhere and live on rain water and mung beans.
However if we put our minds to it, it can be done to a greater or lesser extent. Indeed if we want to have the capital to invest and one day grow so we have financial independence, it has to.
To get FINANCIAL INDEPENDENCE with noughts on, all things being equal, the more you start with the better. But and its a big BUT time and rate of return are if anything more important than starting capital.
A very rough calculation using the rule of 72 ( where a capital sum doubles in the number of years you can divide 72 by the rate of interest you achieve) shows that if you started investing having saved £50k by the time you were (say) thirty and could achieve a 15%pa return, you could retire at sixty with £3.2 million.
However if you waited till you were (say) forty five before investing, your £50k would only have grown to £400k by the time you were sixty.
I know it seems a ridiculous differential, but the real magic of compound interest comes more and more the longer an investment runs.
Get your calculator out and play around with a few figures. You’ll very quickly find how critical time and rate of return are, also how important it is to be protected by a tax free wrapper, as the drain on your results would be horrendous if you had to pay tax on them.
Also do the sum factoring in an adviser’s fees as well as the fees charged by your brokers platform. Paying too much in fees is like driving your car with the hand brake on. Its worth taking time to assess what does an adviser bring to your party? Could you do as well without them and save their costs by making your own decisions?
Diyinvestor.net is a gold mine of useful information for a private investor who wants to invest for themselves, particularly one just starting out.
Have fun running different scenarios around, the bigger the starting sum, the longer the investment has to run and the lower the costs the better and the greater the likely hood of achieving financial independence with noughts on.
THE DIFFERENCE IN MY QUITE REALISTIC EXAMPLE, BETWEEN INVESTING THE SAME AMOUNT OF CAPITAL AT THE SAME RATE OF RETURN FOR THIRTY YEARS AS AGAINST FIFTEEN IS A STAGGERING TWO MILLION, EIGHT HUNDRED THOUSAND POUNDS.