We had decided that we wanted to achieve financial independence. But where to start?
This is what we did.
1. Learn about financial independence.
Understand basic investment tools.
-Our goal is not to be professional investors and make a living with it. But it is important to understand enough to be able to decide with criteria where to put our money. In my case I started with the “basic guide of investment funds of Rankia”, it is free and it is a good introduction to the world of funds. I also read several posts explaining the difference between pension plans and investment funds, types of investment funds, etc.
You can also go to a library and look for generalist books on investment. It is about having a global idea of the options that exist and the benefits and risks of each one.
Read recognized bloggers in the world of financial independence.
To me, it was very important to complement the theory with stories of people who were in this path (some already reached FI). I started with the usual suspects (Mr Lyn fed me, he was far more advanced than me): Mr Money Mustache, JL Collins, Choose FI, etc. Also other bloggers who tell their story: Slowly Sipping Coffee, Frugal Woods, Making Sense of Cents etc.
It opened my eyes to see the great variety of profiles that exist in this community. If you are on the journey to financial independence, you share the goal with everyone on this same path: to stop working and cover your expenses with your investments. But how fast you want to get there and on what you decide to invest changes a lot depending on the person. That said, the majority in this community have a similar life philosophy and I took many ideas from them.
I have to admit that we started by absorbing information in English. Right now we are still discovering the Spanish community and we are delighted. In brief we will add a section with our favorite blogs but for now we want to tell you all the options and decide for yourself. From our point of view, the most important finance blog in Spain is Cazadividendos. It has a very active forum and a lot of content. If you want to take a look at more blogs on personal finance, I recommend you go through Firehub, an aggregator of European bloggers on financial independence. There is a list of bloggers and you can filter by language. If you are interested in the stock market in general, in Blogs and Markets you can find more blogs that talk about finance and investments.
2. Decide the investment strategy
Know how much you spend and on what.
To know your IF number, you have to know your total annual expenses. So, if you do not do it already, it’s important to start keeping a detailed account of your finances.
In our case it was something we were already doing, and simply we changed the way we used that information. Before we recorded income and expenses and we categorized them but we were not very critical with the number itself.
When we decided to pursue IF, we did a thorough review exercise. We reevaluated our expenses one by one, discussed them and analyzed where we could save. In addition, we made a monthly budget and future projections to establish the savings target.
Establish your risk profile.
To design your investment portfolio you have to assess what risk you are willing to assume. I am sure you know the rule of thumb: the more risk the greater the potential benefit. But unfortunable that is not tangible, we need to get more granular and detailed.
Start by evaluating the following variables:
- your personality: how much risk are you willing to take. Ask yourself concrete questions. If you have all your savings in equities and tomorrow the stock market falls by 5%, are you able to leave your savings there? What if 10% falls? 15%? Remember that the basic premise is that in the long term the stock market rises but we must be able to hold on and even grow our position when it falls.
- your age: the closer you are to retirement, the more conservative your portfolio should be. You have less time to support the volatility of the market, so you should be less exposed.
- your need for liquidity: it is different that you need that money in a few years that you can leave it there in the long term. A similar reasoning to that of age,:what matters is the investment horizon. If it is a long horizon, such as the savings for your children colleage (and they have just been born), then you can assume more risk. But if part of your savings will be needed in less than 5 or 10 years, you should have a more conservative portfolio.
3. Take action
Based on our history and our revised spending plan, we set our investment objective for 2018. In reality, we set two goals: one achievable and one aspirational. They are quite demanding but to us it works to feel streched. I think that by setting the two we greatly increase the chances of reaching the “reachable” (which in itself we believe is demanding) and possibly move forward towards the aspirational.
We designed our investment portfolio, deciding in what funds we want to put our money and how much % of the portfolio we want each fund to be. In addition, although the investment objective is global, we each got assigned half of the funds, so we have individual objectives. This is another trick that motivates me to save and invest, we have a chat with our targets and how far we are from them (individually). And I would say that I am not competitive, but if I see that Mr lyn takes me a lot of advantage, I put my batteries in. 😉
We opened investment accounts with different banks. To have our target portfolio we needed more than one broker (they were not all in one). In addition, we wanted to have several in case there is a problem in one of them: changing conditions, problems with the platform, etc.
The main brokers in Spain are BNP, Renta4, SelfBank and Bankinter. In addition, some funds allow you to invest directly with them without going through the brokers.
Our portfolio 2018:
By reflecting on our risk profile, we decided that we are starting a very long-term path, so we are going to invest everything in equities.
The market would classify us as a risky profile but we believe that by being in the game in the long term we reduce that risk a lot. Our premise is that what we invest will accumulate years and years until we reach financial independence. Except for big changes we should not need that money in the short or medium term.
On the other hand, we do not want to be very aware of the market or analyze companies. Our strategy is to buy and let it grow. Do not buy cheap and sell expensive. We want to be passive, investing every month and rebalancing our portfolio every year. So we decided to invest in funds and not pick stocks.
We diversify according to the following variables:
- Type of funds: 50% index funds and 50% funds value.
- Geographically: we do not have anything that is only Spanish market, our portfolio is linked to the future of the global economy. Our biggest position is in the S & P500 and in a Global index fund. Also, we have something in Japan, emerging countries and Europe.
- Type of companies: almost all our funds in which we have large positions are composed of large companies. But we have 20% in smaller companies.
* Prior to BNP’s announcement of the Vanguard fund commission changes, we had the S & P with Vanguard. When we announced the changes, we passed it to Amundi. We are currently in the process of opening an Renta4 account to transfer the True Value fund.