Planning for Financial Independence

Jk920

Hi, I'm currently 26 and I will be making some changes to my financial planning such as utilising a LISA which I only recently found out about and also increasing my pension to £500 per month. After, I'll also be looking to invest in S&S ISA.



Realistically, when do people who are financially independent have more than £40-50k stashed away? I have a quite a bit in savings at the moment but I know it will be gone when I buy a house and in the future I also want to work towards FI but it seems I will be starting from scratch. Do I start building a small fund for it now on the side or do people pursue it after paying off their mortgage? Can someone please let me know how they started building towards it in their 20s?



I see many people who have a house, their mortgage paid off, and a lot of money in the bank plus a lot in pension too.

Alistair31

Diversify. Don’t put everything into a house. Don’t put everything into cash savings. Don’t put everything in pensions or other long term savings.

Do all of the above in proportion, relative to your stage of life.

Novice_investor101

I'm 37, I saved in cash to buy a house when I was 31. No easy feat when paying rent as well. I managed to accrue £50k through saving, inheritance & an injury payout which was all gone bar £5k when I bought a doer-upper house & had done it up. The remaining £5k was my emergency fund so I didn't spend it.

Since then I've put more money into work on the house, but I save up for it, put more money into my emergency fund so it has 12 months of living expenses in it, started a stocks & shares Isa & LISA & max out my pension contributions & free share save scheme. I now invest a total of £920 a month into these of which £520 is "free" money - ie matched pension from my employer, tax relief, LISA bonus & free shares.

I paid a 25% deposit on my house & now have a LTV of 45% & less than £60k to pay off - I overpay it a little but focus on investing as I feel it's a waste of money paying a mortgage off at 2% interest when I can get some real growth by investing &, tbh, I don't see my house as "wealth" - it's where I live, so I can't just sell it & go on a cruise. With investments I can just sell it & go on a cruise.
Waiting til I've paid the mortgage off to start investing would mean I'd be starting too late & miss a huge amount of time in the market.

Prism

Financial independence is achieved when basically you don't need to work anymore (unless you want to) while still being able to live your desired lifestyle. For most people it takes a good while to get there. I wouldn't worry about a fixed number just yet and that number is different for everybody. As per your example some people will have 50k by their early 20's and others much later. That is typically split across things like pensions, ISA's, LISA's, and property.

I started in my 20's mainly with my personal pension (now a SIPP). If I had been paid a work pension I would have used that but have never worked for a company which paid towards one. I still have a mortgage and am in no rush to pay it off. Its a slow process but mostly about living within your means and saving/investing what you can.

Alexland

Getting into a financially secure position, and reaching independence by retirement, requires the careful balancing of a number of competing objectives in your 20s and 30s. In particular, the ‘big ticket’ items of property saving and making regular pension contributions need to run in parallel.

Building your career to give an above average income, being tax efficient and controlling spending are all very helpful. Having children has caused us a slow-down in accumulation rate from increased cost and reduced income.

We were fortunate in that we both bought properties in our 20s, my wife upgraded during the financial crisis and then we put all that money together to buy a big family home in our 30s. Getting advantageous prices for property transactions has really helped. Sometimes it felt like we were buying at yesterday's cheaper prices and selling at tomorrow's higher prices. Still unsure how we did such good deals! Like Prism we are in no hurry to pay back our remaining 20% mortgage balance as there are better ways to invest the money for tax efficiency and likely higher return.

We are now spending the remaining part of our 30s making good use of our annual ISA and pension allowances. Our net worth (assets minus liabilities) is already over a million but that is mostly tied up in the house and pensions so I probably still have around 20 years work ahead - sigh.

Alex

MaxiRobriguez

I'm 31 and have roughly £300k in net assets.

I was lucky enough ten years ago to receive a lump sum from my parents to act as a deposit on what'd be a small house that needed doing up, now all paid back but at the time a giant helping hand that probably cut 3-4 years of saving hard.

Bought it in an area which I thought would make it easier to sell on in future and/or rent out depending on circumstances as was in a job with a high possibility of relocation. Lived fairly frugally in that place for six years and overpaid a wedge off the mortgage (perhaps would have been more aggressive on equity investing if I could I have that time again), eventually remortgaging to free up some cash to fund a new house which we're still in. My previous house got rented out for two years before I sold it in spring last year. The rental income for two years yielded about 6%, and waiting an extra couple of years before selling added another 10% in capital appreciation almost. The bulk of this money is now sat in an offset mortgage on our current property, which covers pretty much the total of what we owe on this house, and we're doing so as we're wanting to move up the ladder again so we're semi-protecting capital at the moment especially given upcoming events - you may have noticed the 'we' - there's now a Mrs Maxi.

Immediately upon work joined the salary sacrifice pension scheme too and have continued to increase my sacrifices to the point whereby now sacrificing about 20% of income. I'm in the higher rate tax band so makes sense to do so, but it's taken time to get to this position as my starting salary was £23k. My pension portfolio is almost 100% equities, I carry a small cash holding to take advantage of buy the dip type scenarios when they appear, and to act as a hedge. Has worked nicely for the past year or so.

I also have a small Stocks and Shares ISA which I've only just started funding from the excess money in the offset mortgage. I'm trying my luck at investing in individual company shares. It's a small proportion of my overall net assets.

At 21 then I had £105k debt, £105k asset, no pension, no other investments student loan to pay off, earning £23k.
At 26 I had roughly £60k debt, £110k asset, £15k in pension, no other investments, still paying student loan off, earning £35k.
At 31 I have roughly, £10k debt, £240k asset, £60k in pension, £20k S+S ISA, student loan paid off, earning £60k.

On current trajectory I anticipate I'll be financially independent and able to retire at 55. This sees me to around £800k in my pension pot and £300k in the S+S ISA after modest annual 3-4% gains. I would then use drawdown to manage my income myself. There's pencilled in expenses, like writing off student loans for what is likely to be two children and putting down deposits for their houses. If I didn't have this for a consideration then I'd probably reach FI before 55.

Hope that helps. It's relatively specific but what has worked for me is maintaining a frugality whilst peers frittered away money on rubbish, whilst taking advantage of cheap borrowing, tax breaks etc. The first few years were difficult but since getting to £60k salary about 12 months ago the growth is showing, most noticeably in the pension pot, which has quadrupled in five years, which is mostly the salary sacrifice rather than any meaningful gains as the sum five years ago was quite small. Put in other words, I contribute currently, 2% of the portfolio value every month in additional money. If I could do that in alpha gains then I'd quit my job and go work in the city.

Save a lot, invest wisely, take advantage of tax breaks and you'll get there, just remember to factor in big life events and what could be a 40+ year retirement.

Sea_Shell

Do you have or are you planning to have children?

That is one of the biggest factors IMO as to achieving FIRE.

Not only while they're young, but when they need the bank of mum and dad when they're young adults.

Our FIRE sort of just happened, as we've always been savers with relatively well paid jobs. But we really got out teeth into saving once we'd paid off the mortgage 13 years ago!!

Just remember, life is what happens to you while you're busy making other plans!!

kangoora

3 of the biggest thing to have an effect on FI.

1. Get your income up quickly to a high level. It's impossible to save for FI on minimum wage. The more disposable income you have increases your chance for FI if you also follow point 2. below.
2. As your income rises don't increase your spending to match. By all means treat yourself to some extra luxuries but also increase your saving levels. This has 2 effects, you are reducing the amount of money you need to live on so you can retire on a lower income and also increases how quickly you can get the capital needed to achieve that lower income.
3. Have rich parents who pop their clogs early - not recommended as a retirement strategy

Finally, have some fun along the way. If you are miserable and penny pinching for 30 years to retire early and then carry on being miserable and penny pinching in retirement then you are going to have a s**t life.

Alexland

kangoora wrote: »

Finally, have some fun along the way. If you are miserable and penny pinching for 30 years to retire early and then carry on being miserable and penny pinching in retirement then you are going to have a s**t life.

That's if you find penny pinching miserable - we are fortunate in that we both enjoy the challenge of getting a good deal and are happy to shape our lifestyle around that. Even our first dates were paid mystery shopping assignments! We still go on holiday a few times a year but just don't waste money. Our toddler son enjoys helping me list things we don't need anymore on ebay and taking them to the post office.

Alex

Frogstar

I discovered the idea of FIRE a few years into my work life, so the order I did things in reflects when I found out about it.

I naturally tend towards saving anyway, so I was just living at home saving for a house deposit - because everyone has to buy a property right? It's just the done thing.

Having bought a cheap place (for London), I figured may as well overpay on the mortgage. It's going to be re-mortgaged in a few years, and I was trying to get the LTV for a better rate when we did.

Having managed that, I was back to asking myself where to put the savings now? Carry on with the mortgage or what? And reading about at that time is when I came across FIRE.

Since then it's predominantly been a SIPP, and a S&S ISA and just letting the mortgage run its course. So I've done a bit of all the things you mention - basically these things can take a bit of time.

bostonerimus

Financial independence comes when you have enough money to support yourself for the rest of your life...a friend of mine calls it "FU money"...ie you can tell your employer to get lost.

The amount you need will vary depending on how much you spend relative to your pot and whether spending down your pot is included. I think most people would need several 100ks up to 1M to be comfortable. If you have a DB pension it could be less.

To become FI I saved at least 50% of my income in retirement and regular accounts invested in low cost index tracker funds. I paid off the mortgage on my home and a rental flat and I was lucky enough to have a final job that had a DB pension. So now my income needs are covered by rent and DB pension and I don't have to touch my other investments. When my state pensions start they will be invested so that I can leave money to my heirs and hope that they will also become FI.