The Secret of achieving FIRE

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Catchy title isn’t it ?

Its funny but since we have gone into an effective lockdown, I thought I would have way more time for research and writing up some of the draft ideas I wanted to explore … but the more time I seem to get, the less ‘busy’ I feel and everything just has that unhurried feel. I barely wear a watch now and really only put it on to charge it (it is solar powered).

I was looking at the parlance state of our investments, yes showing signs of recovery but none the less , considerably less than a few months ago. I had felt the big correction would be early next year and did not bank on a virus !   Ah well …. am I still F.I.R.E. …. oh yes !!

Fundamentally, How do you F.I.R.E. ?

There is but one secret and one alone ….

Spend less than you make

In essence what we are looking at can be summarised in the following:

Add your incomes together, subtract your outgoings and then save/invest what is left. Of course, if the ‘net’ is negative, you are eating your savings and investments rather than working them.

To make that positive margin work for you, you must save your money hard and invest with a plan. If you don’t do both of these, then irrespective of anything else you will not achieve FIRE let alone sustain it. If you don’t have the knowledge, the skill, the understanding of markets or what you are investing in, then let someone else do it for you. and just use low cost broad brush funds and trackers.

So what is really important can be summed up in four sections:

    1. Save Hard
    2. Have  a Plan
    3. Consider Side Hustles (for some they work out well)
    4. Have some key knowledge and understanding

Save hard

It is no good just saving a few quid (Dollars, Yen, Euro’s or whatever) every now and again. You need a definite plan and aim to save a proportion of your income. If need be, adjust your outgoings. You cannot do the ‘RE’ bit of ‘FIRE’ (i.e. Retire Early) by not saving hard and making the investments work for you.

      • Manage debt wisely – I do not subscribe to the ‘no debt’ brigade. The fact that for several years the only debt I have is my mortgage is a personal choice, but using debt to leverage can be effective (within reason). A good example is a car. If you can see a good growth prospect then having a loan to buy a car or take a credit agreement out so you can invest may well make sense despite the depreciation.

Note that I also just changed my views on even keeping my mortgage based on analysing the overall long term personal value (my previous article)

      • Taking a debt on a credit card to pay for a Caribbean Cruise is not good for FIRE goals (however much fun it may be). Pay your credit card off. I use a credit card as added insurance but also so I can manage cash flow out to a further 2 months without penalty. I do not use it as a loan facility, free money, or something that just gets added to my outgoings. Nor should you: the interest will kill your FIRE goals.
      • Save to buy things and try not to use credit. There may be perfectly good reasons to take credit for some things. For example a home renovation project where actual value is being created (as well as a nicer place to live), but buying a 7-series BMW on credit when you could buy a VW outright just makes no sense to me at all –  it is the balance of ‘need to have’ vs ‘would like to have’.
      • Plan to put money away regularly and apportion it to various investments. There are all sorts of savings vehicles: Personal Pension (SIPP), ISA, P2P, Real Estate Trusts etc etc. mix it up so monies goes into at least 2 or 3 of the vehicles so you spread both risk, tax status and the ability to draw against. Just be mindful of liquidity if you suddenly need money. Only an effective Cash investment (Bank Savings account or Cash ISA) is truly readily accessible. A pension cannot be touched until you are 55 (soon to be 57) and as Real Estate and P2P lenders could be very illiquid there can be a real issue in getting money out.

Give some thought to Portfolio Management: different vehicles make a coarse grain of a portfolio and the relative balance of risk, volatility, growth and yield matter collectively. If you don’t have the skills then don’t try – just simplify with cheap funds

Invest with a plan

It is very easy to pour money into a Pension, a Fund, some brokerage account. But unless you actually have a plan as to what you will invest in you are going no where except by luck. If you really don’t have the energy, time, patience or ability to really understand individual investments then don’t kid yourself and just pick a spectrum of trackers, broad world market funds and just drip money in. No-one beats the market forever, so whilst you will miss the 10-baggers, you will miss the 10-loosers as well.

      • Stop believing get rich, ‘look how successful I have been’ active managers who sell you a pipe dream. You only have to look at the likes of the Woodfords of this world to see what smoke & mirrors they sold then walked away with millions in ‘fees’. Not one of them has your interests at heart. Why has Bogle been so successful. He took away complexity and endless balancing and removed costs as a result. No one can indefinitely beat the market. The compounding effect of fee reduction can be enormous over a lifetime.

For example, take an initial 250K pot, grow at 4% pa for 25 years and compare a fee of 1% vs 0.5%. This yields 508K and 571K respectively. So 0.5% pa difference equates to an extra 63K (or 2.5k pa income using the magic ‘4%’ assumption).

Management Fees matter !

      • Don’t pay percentage based fees (except capped platform fees). There is no additional work in looking after a £500K portfolio than a £200K one, so why should you pay 2.5 times as much. Active private ‘wealth fund managers’ who will not agree a fixed fee or a capped one should be avoided (IMO).
      • Don’t think it is quick, smooth or painless … have a plan and work to it for 10, 20, 30, 40+ years. All this stuff about ‘retire by 40’ is ra-ra tosh and achievable only by a small few who both get lucky or sell their ‘side hustle’ ideas for a cash income (so not really retired). It is easy to see the current large correction as ‘massive’, but look over the past 50 years and you will see it is a blip – investing is a long term activity and profit (or loss) is only such when you actually sell anything.
      • Don’t waste vast amounts of time or energy on Side Hustles (see below) – you will end up hustling away and forgetting to live

Side Hustles

I have a pet niggle about claims of ‘side hustles’. There are FIRE protagonists and gurus who travel the world doing lifestyle blogs telling all and sundry about their early FIRE. Good luck to them, but they are affiliate funded and commercialise their sites. To me that is a job, an income stream. Personally a side hustle is icing on the cake at most, a cherry in most cases.

My wife is a seamstress as a serious hobby and has some very expensive kit. She does dress alterations and the like, and has just made hundreds of washbags and scrubs for our NHS staff during the Covid crisis (for free I hasten to add). The alterations she charges a little. Nothing commercial, but the money pays for her sewing gaggle weekends and shows etc and contributes to the maintenance of her machines … I see this as a genuine side hustle.

What gets me is the number of people seemingly believing they can make part of a living blogging away and writing about how they do stuff. It is cobblers. In short:

      • Don’t fall for the ‘side hustle’ illusion – It really annoys me the number of ‘gurus’ banging on about it – I bet you can now tell 🙂 Many monetise their sites, bang endless repetitive drivel out slickly marketed and pandering to dreams, the odd video from ‘Bangkok’ while on an endless ‘cheap’ holiday etc etc. While it works for them,, it works for a handful and that is it.
      • A side hustle is just that.. a bit of something on the side that is occasional. If it is very regular and even quasi-predictable, then it is income. If you start planning on seeing it and it suddenly goes away, then what then for your budget.
      • My personal view is a side hustle is maybe 5% of your income needs at most … the cherry on the cake … not the thick layer of cream it sits on.
      • If you spend lots of your free time on low value side hustles, then where is you life balance ? Get a sense of proportion. If your side hustle makes you 5% more income for 20 years you might retire 1 year earlier, but at what cost to enjoying life, family, friends, the the beautiful world.

Things you must understand

To achieve FIRE you can just drip money away into a variety of low cost broad funds and trackers and eventually see you have enough – its a plan that maximises your life and minimises doing hard financial research and work. Don’t get me wrong, this is the approach for the majority I am pretty sure. However, if you want to be a bit more active there are few things you really do need to understand (and I mean really understand):

    • Compounding – of all the things to understand, this is No 1 every time. If you really don’t get compounding and both how it works and why it matters then leave active investing alone. Compounding is about building future income streams and reduces your overall risks. A common fallacy is it about capital growth, and while mathematically true misses the point of having capital in the first place which is to provide an income. Compounding, in the FIRE context, in my opinion is about building future income streams.

Just think about it – what is it you need in 10, 20 years time … a higher inflation adjusted income. You should not care if that comes from a £100K generating £10K of income or £300K generating it. What matters is the income stream. Worrying about the capital pot is really a question about inheritance planning and passing wealth on. Neither of these topics have anything to do with FIRE.

FIRE is about income streams.

    • Bonds  –  Right now I don’t have any bonds as I am in a higher risk/growth phase. Longer term I will have as they are a natural hedge. The only thing I would say is the old adage that shares go down (market correction), Bonds go up and vice-versa is rather blurred now by the vast oceans of Quantitative Easing and almost Weimar Republic like printing of money. I am not at all sure there is as strong a counter-reaction now. In general though , they have a value in balancing and smoothing income streams.

It is perhaps somewhat unwise not to consider lower risk, lower volatility (and lower return) hedge’s like bonds. There is an old rule of thumb saying subtract your age from 90 and that is the percentage to invest in more risk, the rest in bonds. Personally, I am not sure I entirely agree but it is for us all to work out our own risk tolerance.

    • Dividends & Yields  – They can be different depending on the asset class and some have smoothing processes (like Investment Trusts) that aim to guarantee a growing inflation adjusted income. Just remember that people searching for  ‘Passive Income’ this year are in for a shock as so far almost a third of the main providers have declared a dividend hold to preserve cash. They may still get the income next year as a special, but no guarantees. I have seen some people publish their portfolio’s and they will loose up to half their income this year and maybe next as a result of the Covid-Correction.

You need to understand Dividends and Yields are variable and discretionary, and worse, that if they suddenly stop or reduce the capital values are very much affected as well: double whammy !

Don’t go putting all your store on a passive income stream would be my advice !

    • Different types of Risks –  Do you even know what ‘risk’ means ? No lesson on here right now as it is way too wide and deep a field, but don’t go thinking that risk, volatility and associated returns are the same thing. They are not. Higher risks tends to attract a premium both in price and return, but also have a nasty tendency to leverage (ie multiply) losses if they turn south. Slow and boring, with solid dividends (Covid aside), re-invested time and again proves a solid future income stream generator.

I wrote an article on this more than a year ago and may well update the slow & boring in light of recent events … doing just nicely so they are.

If in Doubt – again, a low cost tracker/global fund accumulator – you can’t beat the market all that often remember

    • Platform Fees and Fund Charges

The cost effect of buying and selling (There is a minimum really to reduce the effects to negligible and trading is a very emotional game): An investment with a bid/spread of 0.5%, transaction fee of £10 and purchase tax of 0.5% would need to rise 3% to break even if £1K was invested, 1.4% for £5K, 1.2% for £10K and so on. A spread of 2% would be 4.6%. 3% and 2.7% respectively … this affects target price, liquidity and entry/exit points.

The amount of money lost if frequent ‘trading’ is done can be shocking.

    • Tax Allowances – funny thing is I am always amazed at how little people realise what the UK tax allowances are and how to best utilize them. This I guess is the same whatever country you are in. Just for the current UK rates (2020/21)
      • Personal Allowance – £12,500
      • Dividend Allowance – £2,000
      • Interest Allowance – £1,000
      • Capital Gains Allowance – £12,300
        • This totals £27,800, so for a couple it is possible (if you set it all up) to have an income of £55.6K completely tax free !
        •  
      • Marriage Allowance – a UK anomaly and as my wife has a small pension below the threshold I will apply to get the £1,250 (10% of her allowance) transferred. Assuming I take money out of my SIPP with the 25% tax free element I can get another £1,667 completely tax free this year all for filling a form in.

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Just remember there is a flow to this:

Spend less than you make; Invest what is left over in different Streams …. nothing to it: