Working towards financial independence is based on increasing income, reducing expenses and investing wisely. The base is simple, but depending on your personal situation the decisions to achieve it can be very complex.
Optimising for one of them have has an impact on the others. Furthermore, timing is also an important factor: present rewards versus future rewards.
If you find a job with less salary but with better career opportunities you will have less income now but maybe you are increasing your future income. If this job is in a city with higher cost of living then this is another factor to consider. It is all base on estimations of course which makes all the more difficult. Maybe you find out later that that job didn´t have so much better career oportunities after all…
Starting up a side business increases your expenses but it can greatly increase your income in the future and make it worth. Or maybe learning new skills makes it worth it.
Where are we in each of the three pillars of financial independence as we start our journey?
We are regular people. We don’t earn millions, we don’t spend less than €100 per month and we don’t invest better than Warren Buffett.
We do try to improve each of the three factors and learn as much as we can.
Before discovering that being financially independent was possible, we thought that we had to work more than 45 years. So back in the day we optimised or careers for the long term and invested time and money in education.
The result is that our income comes almost exclusively from our jobs. We keep thinking in terms of professional career and we don’t see ourselves changing that even in short of mid term.
We try to cut expenses as much as possible without feeling deprived. I think that the feeling of deprivation makes you spend more in the long run to make up for it.
Right now, because we work in different cities we spend more on trips that we would if we were working in the same city. But we place a lot of value on this and we don’t regret spending on it.
We value things for their utility to us. We are not car fanatics so we don’t spend on buying a new car, all the cars we have ever had have been used and old.
However, travelling or having a drink with her friends is something that we value on a personal level and we are not going to stop doing. We know perfectly that this expenses add up and that we would save a lot more if we didn’t do it… but we make this decision conciously.
Some things that help us reduce expenses are the following:
- Not comparing ourselves with the next person. Not buying things to show off.
- Avoiding money black holes. Those things that you buy once and then need to spend more on them all the time.
- Optimizing the main expenses: housing, transport and food. These are the categories in which we spend the most so making an effort to optimize them has a big impact on our overall expenses.
- Doing what we can with the other expenses: services, entertainment, etc. When somebody tries a very strict diet finds himself unable to continue on the fourth day, he may stop completely. It would have been much better to do a less strict diet for a whole month. We think of expenses in the same way. We don’t want to place our lifes on hold until we achieve FI. I try to cut as much as I can and don’t get discouraged if I mess up something once in a while. The important thing is being constant and try to recover the next month.
We are newbies but we are trying to read and learn as much as possible. As of today we feel comfortable with the following principles:
- Invest all the money we don’t need in the short term. We have very little cash in our accounts. We think that it would be very rare that any expense would arise that we can’t cover with our credit cards (deferring it one month interest-free) and the cash we have in our accounts.
- 100% stocks. We have a mix of index funds or value funds. We don’t have a single cent in retirement plans or fixed term deposits. Although we are thinking about changing this, we don’t see that many great benefits for us in doing it in the Spanish/European system.
- We don’t place that much importance to rebalancing. We have an “ideal” portfolio that we would like to have and we have assigned the different funds to each of us. For example, first we define an ideal portfolio for a specific quantity split in 4 funds equally weighted: A, B, C and D. I get assigned A and B. I start to contribute to them in any way I want. I can do it in equal parts each month or I can do only fund A in the first 5 months and then start with fund B. This motivates us and make us “compete” to see who gets to the specified amount first. It is another incentive to not have money sitting in our accounts. One of the reasons why we are not stressed about balancing is that our monthly savings are still a relatively large percentage of our net worth. As time goes by, I guess we will place more importance to this. In Spain, trasfers between funds are tax free and we only pay taxes if we withdraw. So we will be able to rebalance tax free.