Financial Independence in 7 Years!

What an idea we had in 2005: could our little tribe be financially free in 7 years! Feelings of crazyness, being excited yet a sense of daunt and dizzyness all at the same time.

As I update this in early 2014 we consider ourselves financially free. All those emotions followed us along the way on what has been a very bumpy rollercoster.  

Here is the story of how our little tribe ended up financially independent 7 years after the inital thoughts about or finances and what really made us happy. 

Finding Our Feet

Financial independence was never spoke of in our families our our up bringing. Both my wife and I had different but comfortable up bringing.

Me, my sister and mum getting on as a single parent family in the SE England Sussex countryside. We lived in a little cottage in an idyllic village surrounded by field where we ran free, collected tadpoles and rolled in the mud. We moved closer to family in a South Wales mining village surrounded by hard working families. Great times and fond memories. Money was tight but we did not want for anything.

I excelled through education culminating in an engineering degree from a prestigious red brick university. Fun times were had, reckless spending and childish, stupid and regrettable pranks. Did I actually learn anything? I certainly did not have a clear direction to my life, no mentor to knock some sense into me. I was just making it up as I went along.

My first "proper" job was a sea of figures, terms and diagrams. People dressed in suits jockeying for the top jobs. Still no direction. What is this career thing all about? Why does that manger make things so difficult for our department and what is the point of a deadline?

Time for a change of company. A bigger beast altogether. Even more dog eat dog, downsizing the workforce, appraisals and feedback. B- my son - must do better. It was all so serious and deadlines had to be met. 

These early experiences shaped me. The desire to run in the wilds. Knowing that I should respect  money and save for retirement. I had to get organised, grow up and be more responsible, tame the silliness but keep some of the fun.

Our Financial independence Story

 
Our Environment Shaped our thoughts

Our local environments have always shaped our thoughts and ideas. Fortunately we have lived in the countryside, villages, towns and mega cities. We have worked in numerous countries and cultures and visited ancient ruins and tropical beaches.

At the time In 2005 my then to be wife and I moved in together in the most expensive city in the world London.

We had bright lights, amazing attractions, comfortable houses and plenty of entertainment. Not forgetting the UK's status as a major transport hub for all those exciting getaways. What a great place to live right?

Especially when you have money. I had just paid off my student and car loans $30K. I was finally looking at a positive balance sheet for the first time in 10 years. Our living costs were reduced as we shared the bills. We had money to spend!

We were renting a modest one bedroom apartment in a Victorian house. It had a huge garden with a beautiful blossoming cherry tree. It was located in an affluent area with great restaurant's, pubs and shops.

Each weekend we would go out to try different cuisines. Visit sparking, thumping night clubs. Entertain our selves at the cinemas and have friends around for meals and drinks before hitting the tiles once more.

Frequently we would take cheap city breaks around Europe. Lots of income was spent and little was saved.

Thankfully we lived within our means and avoided all forms of debt. Our spending was controlled through a joint bank account and a budget.

Changing Direction

My wife and I sat down one cold dark February night in 2005 to consider our future. Sure we were having a great time but something was missing. We talked about family, where we wanted to live what type of life we wanted, family, kids and seeking some tranquillity in our lives.

We had both heard about downshifting. Perhaps we could work less and live more simply but we needed to get rich first! Let's invest.

We had no property to speak of so did not consider real estate investing. We had good jobs so did not see the need to setup our own business so for us the most natural place to start was the great casino of the stock market.

Unfortunately no one tells you how to invest. We subscribed to a few stock picking news letters and rolled the dice. The result was not pretty. Too much, too soon and on too few.

More Money than Sense

Bonus Time more money to invest and spend! We wanted to buy a house - house prices always go up right and we were missing out. Well that would have to wait as London housing was so expensive. Back to the stock market.

In London we were surrounded by stories of the ridiculous bonus culture of the city with everyone getting filthy rich. Warren Buffets latest stock winner. Google shares shooting to the moon. This  encouraged us to plough everything we had saved and we were earning back into shares. 

TFD Tribe Financial Disasters ensued. Penny shares promising the moon going to zero, the latest and greatest mutual fund idea languishing in the gutter. What was I doing wrong?

Fortunately Mrs C on the other hand had taken advice from a financial adviser and her savings were growing steadily.

The route to riches was through 10 bagger shares though. Instant riches. Bring it on. One was bound to hit the jackpot soon.....learn from my mistakes the next pick will be a winner. Oops!!

Hindsight

In hindsight I was lured by the financial press (magazines, newsletters and the mainstream financial media). It was a hard learned lesson. Luckily it was out of the way early in my saving and investment career :o) I stated to save more carefully from then on. Here is the TFD list of losses :o(

1. The penny stock miners - total loss in the region of £5,000
2. The New Technology Energy Stock £4,000
3. Buying Europe just as Europe goes down the pan £3,000
4. A consumer goods technology stock - wiped out £500
5. Green energy bio fuel stock - worth 1/100th of the purchase price another £500

Stock picking for 10 bagger gains gave way to mutual funds and large cap stocks who paid dividends.....

These dividends grew and grew. Slowly our modest passive income goals looked feasible, but how much did we need and what were we going to do with it?

In the Meantime - We must get on the property ladder quick!

We had amassed enough money for a deposit on a home by 2007. A home is a much better investment right?

We looked around and were perplexed by extremely high prices. Property was in a huge boom in London. We were looking at huge mortgages on what would have been a shoebox apartment.

This did not make sense to us as we could rent a much larger property (a house with a garden) at less than the interest payments on a mortgage. Additionally we did not have to spend money on decorating or repair costs, building insurance or expensive conversions let alone porter and leisure fees.

Renting it was, even though there was peer pressure to buy.

Please read on for the financial crisis and light on the other side
Aggressive saving and investing plans

With housing off the agenda for a while we started to save more aggressively.

I was saving 50% of my take home pay as was the wife. £3K a month. We thought we could save a bigger deposit and wait for the property bubble to burst. In the UK this tends to happen on a regular basis due to our fascination with housing.

Bang! Along came the financial crisis of 2007. I was sat in work watching indices tumble by hundreds of points. Talk of Financial Armageddon was across the mainstream media. Trillions of dollars were created out of thin air.

We were told don't worry this won't happen again. Move on nothing to see here.

Surely now housing will drop in price and we can buy? What we did not figure on was the extraordinary response to cut interest rates close to 0% and keep them there. Property prices remained strong and do to this day. Now in 2014 - a new boom is taking place in the UK thanks to low rates and a Right to Buy scheme.

What next

It was at this point our cash savings rapidly loosing purchasing power. In particular the £ was being devalued versus other currencies. It dropped from $2 per pound to $1.5 per pound due to all of the QE money printing the Bank of England undertook to stop the economy collapsing.

The £ which started at 1.6 to the Euro reached parity. What an inconvenience for trips to the continent.

So property out of the question. Our Cash was either loosing value or invested and lost. How could we get a positive return and any chance of getting ahead in life?

We went safe..We went for big dividend paying companies. At least being paid dividends each month is very satisfying. Over the course of the next few years we watched the income stream slowly grow but maintained a large chunk of savings in growth funds.

Things started to look up, terraced house in London here we come.

Ooops Lets get married and........ have kids

We were just married and bombshell number one happened the wife was pregnant. That quick!!!!!! 9 months later had our first daughter.

Here we were two professional people with no idea how to bring up a screaming baby. Why won't she stop crying or go to sleep when we want her to. Why is everything so difficult. You have no choice to learn and adapt and you do. Investing was ignored.

Second problem the 1 bed rented flat was too small for us and all of the baby stuff. We needed more space we needed a house.....should we buy?

Nope! house prices were still too high and the rental payments were low(ish). After searching around our rental costs increased from £850 per month for a 1-bed flat to £1200 per month for a 3-bed house. We had negotiated hard on the rent and had a good deal in our eyes.

If we had bought mortgage interest payments a similar property alone would have been higher than the rent and we would have had to sell our investments to pay for the deposit.  

It looked empty so we "needed" some furniture and storage? After being so careful on the choice of the rental property we were careful on this as well. Expenditures were being kept in check with our clear budget which we maintained and reviewed on a regular basis.

After all of this we actually found that we were still managing to save at the same rate....how this could be?

Well we started to become very frugal.

Mobile phone contracts were jettisoned for pay as you go a £120 to £20 per month = saving £100 per month. Restaurants were reduced from frequent to almost never and takeaways were replaced with healthier home cooked meals. All of the holidays on the plane stopped due to the challenges and logistics of a small child. Finally we received child benefit from the government. So overall we were not worse off.

How Much? You mush be kidding! Cut spending NOW

Here came the next shock. Child care costs.

Our local creche was £1300 per month - more than our rent!!! Yes we had access to some child care vouchers and child benefit but at best it reduced the overall cost by £250. We both had small pay rises but our savings rate still dropped.

We looked at other options to boost income and cut costs. Book and DVD purchases were reduced to minimum - we had a very good local library. We started to sell the books and DVDs that we no longer wanted to keep and invested the money for dividend income (every £ helps).

We re-negotiated our telephone land line costs. Heating was only used when required. All major electrical items were switched off at the plug when not in use. Surprisingly with these changes and the modest increase in dividends and salary we still managed to save £3K per month.

Now What?

So around that time in 2007 we really started - as most new parents do - to consider longer term planning. I pulled together all our savings and investments into a combined spreadsheet. We had all sorts of savings accounts. What was striking was how much we had saved over the 3 years from 2005. We were also getting a decent dividend income (£200 per month) without really taking it that seriously.

I started looking on the web for more investing ideas and stumbled across a few very interesting websites.

Firstly I subscribed to a newsletter based on commodities energy and infrastructure. With China booming I invested in several of the stocks it recommended. At the same time I stumbled on to the website Early Retirement Extreme. This was all about Jacob reaching financial independence very young. He was free do do what he wanted to do. Intrigued hows were spent reading how he had done it and how we could do it ourselves.

Instead of being tied to a 9-5 job to pay the bills could we get paid from our savings and work when we wanted?

Thankfully we were already working towards the "early retirement" idea without realising it. Our goal at the time was to "Save as much money as possible to buy a property outright and have some extra income". We were just not thinking further enough ahead, if we move here, only spend this etc. we can have the house and have no need for a job.

So the goal was changed to "Save as much as possible to buy a property outright and have enough passive income to work as we desired while not wasting money". I worked out a five year plan to get from where we were to where we want to be.

Boom! Baby number two

Then another surprise baby two on the way...... How could we ever consider early retirement and now the massive increase in costs of 2 infants in nursery - £2,600 per month. Here we actually worked out a good plan.

1. My wife had 6 months maternity leave full pay providing she went back after this period. We would reduce the number of hours of nursery to 2 days a week in this period. =  £1K Extra saving per month.

2. I would take over from my wife and look after both children full time. The parental leave from work was 6 months with some of it paid.

3. At the end of the parental pay I would stop working until we reached our goal in 2013.

As a result over the 12 month period we actually eliminated child care costs and saved more per month. Amazingly this and the increasing dividend payments have offset the loss of my income. My children have what I consider a better situation where they get to grow up in a well supported parental environment.......

It is perplexing that my professional salary does not cover the childcare costs so I have had to forsake my employment. In a time when productive people need to be helping the economy and paying taxes I am at home. Having resigned from my work to look after my two kids am I depriving a childminder of a chance to make a living. Strange world we live in. A strange policy \ setup in the UK.

So What did We Learn?

It took 5 years out of University to pay off all of the debt I had accumulated. A few years into our relationship my wife and I started adopting a rigorous saving routine. We cut any excessive unnecessary  expenditures. In doing this we saved on average £3K per month since 2007 = savings in the region of £252K. With a compounded return each year of around 8-10% which grew this number substantially.

We managed to do this in an excessively expensive city and a country with high taxation rates while starting a family. Yes our income is substantially above average but so is the cost of living in London. We were fortunate to be pushed into saving and investing by our circumstances.

What I want to convey was the the lack of initial knowledge \ guidance on the workings of finance we had. We had an inkling that saving was good and getting into debt was bad but really what did that mean?

Savings are productive to society and freedom for the individual. Debt used to "consume today, throw away tomorrow" has no long term benefit for the borrower, only to the lender. No permanent wealth generation is borne from this arrangement.

On a personal level one might consider:

a) an expensive car that takes 10 years to pay off and at 1.5 times the initial cost and after 10 years is scrapped.

compared to:

b) a cheap car that still gets you from A to B safely with the rest invested and paying you an income over the next ten years to buy a new car for free.

Society is setup for us to take on debt so we have to keep on going back to the trough and keep on the treadmill for some fancy paint or an extra room for guests.....

As a family we could have been more "extreme" - sell the car move to a two bed flat in a very cheap area and save a lot more each month. My wife stopped me right there. We are still in our 3-bed house with garden and managing to follow our plan.

At the time we knew no better and I am glad of the journey we went on and continue to follow. We are looking forward to using our hard found financial independence to work on projects or jobs that we consider are beneficial to the community - not just the bottom line.

We believe our equity will be there or thereabouts in 2013.  Early "retirement" will be one of many goals to be the best citizens we can be.

I sincerely hope the debates on sites like ERE, Mr Money Mustache in the US and A Good Day to Live in Europe (they are the trailblazers and entertaining too boot!) help counter some of the consumerist norms that can cause so much anguish that causes so many people to get in over their heads in debt. Hopefully these people will be the business owners of the future.

Peace, Prosperity and Happiness,

THE.CoNTeNDeR

* The idea of financial independence can be played around with in the financial planning spreadsheet.

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