Avoid This When Aiming For Financial Independence

#1 – Avoid The Wrong People And The Naysayers

If there’s one thing that we’ve experienced in all the years we’ve been targeting FI, it’s bad advice and negativity towards our goals from people who don’t share them. The fact of the matter is that most people – that’s those who have bought into societies way of life – do not understand financial independence and consider it impossible or even weird.

Most people consider money to be something that needs to be spent. If they earn £20k they’re broke; if they earn £60k they’re still broke. They will spend every penny that comes into their life and will expect you to do the same.

These high spenders often get their self-worth from displays of wealth, so must have the biggest and best furnished house, the most expensive cars, and the luxurious holidays. They will consider themselves more successful than you because they display more wealth than you do.

When you’re working hard and saving diligently towards FI you cannot be sucked into this toxic way of life where you always desire more than your friends and neighbours. If you’re not careful you will end up wanting what they have, which is short term gratification and very expensive bills.

The naysayers are potentially even worse; they will criticise your plans. Anybody who tries to build up a financial safety net might be told by naysayers, “you only live once” in an attempt to drag you down with them. If they get wind that you plan to retire early through FI, they’ll spout nonsense like, “you’ll have nothing to do, you’ll be bored.”

And then there are the people who don’t know what they’re talking about but believe they’re experts, unintentionally giving bad financial and life advice. It’s highly likely these people include your family and friends.

I’ve disliked a few jobs in my time but one of the early ones I hated came at a time when I didn’t have the life experience to know when to just quit. Society’s advice and what I was told was to suck it up – it might get better… and only quit after you’ve found another job first.

I endured this job for way too long – 5 months – and it was torture. I eventually decided to listen to my gut, I quit, and found another job straight away. The bad advice I was given was because these people had their own fears of not finding another job, so projected that fear on to me.

As with any goal, if you take advice from people make sure it’s from those who truly understand what it is you’re aiming for and ideally have done it themselves or are working towards the same goal. You wouldn’t take weight loss tips from a hippo, so don’t take money advice from somebody who’s broke.

#2 – Avoid Investment Fees And Taxes

As this is a video on financial independence, we’ll assume you’re focussed on your savings per month (SPMs). No doubt you’re investing as much as you can, and you have a good idea at what age you’ll hit FI should you continue at this savings rate.

That’s awesome, but make sure you understand the impact of fees and taxes which if left unchecked could hinder the ability of your investment pot to grow to its full potential.

Let us showcase an example of the different returns somebody could earn depending on how well they avoid high fees and taxes. Let’s assume that our investor will put aside £500 a month for 30 years.  A 7.7% return net of fees and taxes would produce a pot of £670k, which is £39k less than an 8% return.

So, it goes to show that seemingly small savings (of just 0.3 percentage points in this example) can have a huge impact on overall performance. We believe savings of at least this size are easily achievable for most investors.

Many investors pay way more than this in fees and taxes. They could be paying platform fees of 0.45%, fund fees of 1%-1.5%, trading fees of several pounds at a time, high bid-offer spreads of a few percent when buying small cap stocks, foreign exchange fees of 1.5%, dividend taxes, and capital gains tax.

Even those who think they have a firm hold on fees and taxes can probably still benefit from a portfolio spring cleaning. We talk extensively about how you can cut fees and taxes on this website and the MU YouTube channel, so if you’re new here consider checking out the rest of the site.

#3 – Avoid Life’s Big Unnecessary Expenses

We find that many people scrimp and save to the Nth degree on the small purchases but then undo all their hard work in one fell swoop when they buy one of life’s big but unnecessary expenses.

I’ve lost track of how many times I’ve heard someone say they need a car… and yet rather than buy a cheap used car, they go out and buy a brand new one on expensive finance, which is way more car than they actually need. Or when they do get a used car, they opt for a premium brand, which comes with premium car payments. Inevitably these people get in the new car cycle by upgrading every few years, and thus have a perpetual car payment until the end of time.

We just looked at an example, where an investor put aside £500 a month earning 8% and ended up with £709k. Instead, if our car enthusiast was only able to save £200 a month due to their unnecessary car payment, their investment pot would be worth just £284k; £425k less. If you want financial independence in order to retire early, that car could be forcing you to work several years or even decades longer than what you otherwise could have been.

Expensive weddings are another of life’s unnecessary big expenses. When the honeymoon is included, the average cost in the UK is £32,000. That alone is enough money to live on for an entire year and that’s ignoring the lost investment gains that money could have made if allowed to be invested over the years.

And that excessive cost doesn’t factor in the cost of divorce. According to the money advice service, the reality is that 42% of marriages now end in divorce, and the average cost of a divorce in the UK stands at around £14,600 in legal fees and lifestyle costs. Also, if there’s property involved and financial assets on the line, then the costs significantly increase.

If you’re unable to agree on a financial settlement and end up in court your wallet is in for a serious beating. The money advice service is stating ballpark numbers in the £10,000 to £15,000 range, and double that if it’s not all done and dusted after a few court appearances.

On your path to financial independence, it’s your prerogative what expenses you cut to achieve your goal. We are both animal lovers, so neither of us would want to do the following but it might be something you consider.

The average cost of a dog is around £21,000 over their lifetime. But some dogs, particularly large, pedigree breeds could set you back an eye-watering £33,000 each.

You may also want to avoid certain hobbies that are notorious for bleeding you dry. Hobbies like horse riding, go-karting, flying lessons, and skiing will set your financial independence plans back years.

Horse riding in parts of the South will apparently set you back £75 for a 45-minute lesson, and £45 in the North. Personally, we tend to think that if you earn the big bucks then a little bit of lifestyle creep may be okay. But if you’re on an average to low wage, then these should probably be avoided.

#4 – Avoid Mickey Mouse Courses

University fees are damn expensive in the UK, and normally you can only get student loans for your first degree, so it’s crucial to pick that degree wisely. One of the worst things you can do financially is waste years doing an expensive course that does not improve your employment prospects.

At the worst end there are the Mickey Mouse degrees, which is the term used to describe university degree courses regarded as worthless or irrelevant. But the presence of worthless courses is prevalent throughout the entire education system – from school, to college, to university and beyond.

Film studies, Media Studies and Drama have been ranked among the most “pointless degrees”, reported The London Economic. The study found Acting degrees were the top waste of time, followed by courses on Outdoor Adventure and Environment, and Office Skills.

One in four graduates now regret having gone to university, and nearly half of those surveyed now work in a job where they could have reached the same level through a trainee or apprenticeship scheme. Nearly two thirds of those who graduated with qualifications considered ‘pointless’ admitted their degree didn’t help them to secure their current job.

From a solely financial independence perspective, we would recommend training towards an industry that is towards the top of the league tables in terms of pay. This is a simple Google search away.

Money Saving Tips To Avoid

Financial independence folklore would have you believe that doing the following will leave you in a better financial position – but it’s not true.

#1 – “Pay Off Your Mortgage”

We’re all regularly told to pay down your mortgage as soon as possible but from a financial perspective this would be a terrible mistake to make in this age of super low interest rates. That’s because the interest rate on the mortgage is much cheaper than what is commonly earned in the stock market. Basically, if you could earn 8% in stocks but overpaying your mortgage could save you just 2%, it makes financial sense to invest excess money instead of making overpayments on the mortgage.

To avoid confusion, we want to spell this out clearly. We don’t think the average person should avoid paying down their mortgage, because for them the perceived risk is too high, and most people don’t have the financial discipline to not spend the money that was meant to be invested. The urge not to dip into those investments would be too strong for a typical person.

However, if you’re seeking financial independence, you’re going to have to take a few well-calculated risks and the maths is in your favour when you invest instead of paying down the mortgage.

In this post we looked at targeting specific LTV bands as a way of effectively earning a guaranteed return. As the market stands right now, the optimal LTV for your home is about 85% with any excess cash invested in stocks or rental property.

#2 – “Only Save For Retirement In A Pension”

Most people are encouraged to only save for retirement through a pension. There is no doubt about it that pensions are incredible retirement saving tools, especially for higher-rate taxpayers.

However, they have 2 major problems. Firstly, you can’t access the money until sometime in your fifties. We’re being deliberately ambiguous on the age because this is currently part of ongoing discussions at government level and is set to rise to 58, and probably even higher in the future. The inability to access your money in a pension is no good for somebody aiming for financial independence.

The second problem with pensions is that the government has the power to change the tax rates at any time, so who knows what these might be in the future. The way the world is headed who would be surprised if a future government decided to raid pensions somehow?

What we would suggest to anyone targeting FI would be to use a mix of investment vehicles. Stocks & Shares ISAs are fantastic as once the money is in the ISA it is never taxed again, and crucially it’s accessible at any age. Moreover, spread betting could be the most misunderstood investment vehicle out there. While the average person probably should give spread betting a wide berth due to the complexity, those seeking FI should absolutely consider it as part of their arsenal due to it being tax-free and having the ability to apply leverage. You might also consider buy-to-let property as a retirement vehicle.

To sum this point up, those seeking FI should absolutely use pensions to save for retirement – but at the same time also utilise all other weapons at your disposal. In most cases, you want to use accessible retirement savings to bridge the gap with pensions.

What else should a financial freedom fighter avoid? Join the conversation in the comments below.

Written by Andy

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