Could you retire at 40?

It’s not often that retirement planning sets the world alight. However, the FIRE movement has gained a lot of media attention over the last few months. If you’ve not heard of it before, FIRE stands for Financial Independence Retire Early. The core idea is that you squirrel away as much money as possible until you have enough to live on for the rest of your life. While this is what most of us do when we save for a pension, members of the FIRE Movement are keen to get there at breakneck speed, often retiring in their thirties or forties.

As you might expect, this involves some disciplined saving and investing. The idea is simple, but the practice is hard. Very hard. In this post, I’ll explain some of the key principles of FIRE, and also point out a few of the pitfalls. This certainly isn’t for everyone.

1. Work out your goal

Before you even think about embracing FIRE, you need to get comfortable with a few sums. Proponents of the mainstream FIRE movement advise you need to build a fund that’s 25 times your annual living expenses. That’s your living expenses when you retire, rather than what you’re spending now.

Say you could live on £20,000 per year – certainly feasible for some people. This means you’d need to save £500,000.

Half a million quid might sound like a lot, but there’s no guarantee this is enough. The main challenge, I think, of pursuing FIRE is that it involves predicting the future: how long you’ll live, stock market performance, and what happens to inflation. If you knew this stuff, you’d already be rich.

This sum might be enough if you’re retiring only slightly earlier, perhaps late fifties. But if you retire at 40 and have a life expectancy of 90, you’d need to manage that savings pot very carefully. All sorts of things could happen during that half-century: runaway inflation, a worldwide depression, or massive changes to the tax system. Which brings me to my next point.

2 – Do some research

FIRE is absolutely not a set-it-and-forget-it process. You can’t just set up a direct debit then shout “I’m outta here” when you’re forty.

You’ve probably noticed that interest rates are abysmal right now. A Cash ISA certainly isn’t going to help you retire early. You must become an astute investor. The only way of getting a decent return on your investment is to take some risk, and not everybody is comfortable with risk.

You won’t get everything right, either – some investments will yield good results, others will go down the toilet. There are no certainties. You need to construct a robust portfolio and review it regularly. Of course, you can pay someone for financial advice or invest in an actively managed fund, but that’s going to take a chunk of your FIRE money.

It’s best to understand as much as possible yourself, and only pay for experts where absolutely necessary.  For instance, if you’re paying a 2% annual charge to invest your £500,000 pot, you sacrifice £10,000 every year.

There are plenty of FIRE books available, but they nearly all focus on the US. While the same principles apply, the tax systems and other financial structures are completely different. Here are my recommendations for those of us in the UK:

  • For a good introduction, get yourself a copy of Reset by David Sawyer.
  • To understand the science of building your retirement fund, there’s no better book than Abraham Okusanya’s Beyond the 4% Rule
  • And to get started with investing, buy How to Own the World by Andrew Craig

Yes, this is a lot of reading. But that’s vital if you want to achieve FIRE.

3 – Think about what you want

One of the many criticisms of the FIRE movement is that it encourages people to leave the workforce without thinking through what they want to do. It’s all about rejecting the yoke of employment and doing exactly what you please. For this reason, FIRE attracts libertarians who don’t want to answer to anyone. Isolation isn’t great for our social skills, and research shows that retirement can cause cognitive impairment. After a few years of watching Watercolour Challenge, you won’t be at your sharpest. Not great if your money runs out and you’re forced back to work.

Some FIRE proponents are focussed on the FI – Financial Independence. It’s all about having enough money to make choices. This could include working fewer hours, retraining for a different profession, or doing voluntary work in the community. One of the most famous examples is Mr Money Mustache, who retired from his job in software development at the age of 30. Since then, he’s pursued many projects, both income-generating and pro bono. His argument is that anyone can do the same by avoiding unnecessary expenditure, ditching possessions, and pursuing a more environmentally friendly way of life.

For a thoughtful blog post on the opportunity cost of FIRE, take a look at the Foxy Monkey blog.

Conclusion

FIRE is a seductive concept, but not a realistic one for all of us. After all, somebody needs to do all those jobs. To retire decades early, you need:

  • A well-paid job that doesn’t drive you completely mad
  • Modest outgoings, so you can save most of your income (this is much harder if you have dependents who won’t necessarily share your ideals)
  • Time to do a lot of research

Even if you don’t reach that optimistic goal, consider the benefits of a partial success. After all, retiring just a few years early is going to improve the quality of your life. Money doesn’t bring you happiness, but it gives you a lot more choices.

I’m giving a talk What I’ve Learned from My Experience as a FIREStarter in Brighton on 30th October 2019. Do come and join us.

Three tips for improving your business cash flow

Cash flow might sound like a scary accounting term, but it’s just the money coming in and going out of your business. If that money doesn’t keep flowing in, the outgoings keep us awake at night. Indeed, cash flow problems are the reason why most small businesses fail. This doesn’t need to happen to you, though.

In this post, I’ll share three tips for keeping the money flowing into your business.

1) Get Your Timing Right

Often, we tend to invoice in clumps. Rather than billing a client when the project finishes, we wait till the end of the month. Although this can be more efficient, it means the money comes in much later. Invoicing more frequently, e.g. weekly, or invoicing after every job gives you a steadier income stream.

I run a lot of workshops for a major client. Sometimes this involves 5-6 events per month, and I invoice after each event. This is extra admin for me (and them), but it reduces the risk of late payment. As a very large company, sometimes their finance system has a spasm and it takes several months for me to get paid. If it’s a few hundred pounds, I can cope; if it’s a few thousand, it’s very disruptive.

2) Implement a Late-Payment Policy

There are often good reasons for late payment, but in other cases your client is struggling with their own cash flow problems. As a small business, you can charge a fee and interest if payment isn’t made by your deadline. You might feel uncomfortable with implementing this policy. However, often it’s enough to simply state the policy on your invoice and be prepared to politely remind the client of its existence.

I’ve heard much evidence to suggest debtors prioritise invoices that include a late-payment policy.  You probably don’t need to send in the heavies.

Take a look at my blog post on How to Get Paid as a Freelancer or Small Business for suggested wording and details of the penalties you’re allowed to apply.

3) Part-invoice in advance or at milestones

Cash flow is particularly tricky with big projects. They can last months, then it’s at least another month before you see any money. If there are obvious milestones – points at which you deliver part of the agreed outcomes – you could invoice for the work completed so far. This also makes it easier to maintain momentum.

Perhaps you’ve spent a lot of money on materials for the project? It’s worth negotiating some upfront money from your client.

Advance or milestone payments improve your cash flow and also mitigate the risk of non-payment. If your client gets into financial trouble, at least you have some of the money. Negotiating these terms might feel awkward, but it’s a lot less awkward than chasing an unpaid invoice.

Conclusion

In summary, here’s how to keep the cash flowing in:

  • Create a continuous income stream by invoicing weekly or even daily
  • Devise a late-payment policy and implement it
  • Break down larger projects into smaller chunks and invoice throughout

As with anything, getting into a routine can help. Setting aside just 25 minutes a week could ensure the cash is flowing and that you’re not experiencing a blockage. Creating a cash flow system reduces stress and allows you to concentrate on what you do best.

Just because you can, doesn’t mean you should – the importance of outsourcing

I’m a financial coach and also a part-time martyr. There’s so much to do when running a business – email, marketing, web development, social media – and until recently I thought I had to do all of it myself. Some of these activities I actually enjoy, and some I’m reasonably good at; others, though, take ages and make me unhappy. Finally recognising my limits has given me a lot more headspace to work on the important stuff.

In this post, I’ll champion the importance of outsourcing and give you some ideas for freeing up your time. I’ll also share a great tip for finding the best freelancers.

Online Marketplaces

Although the internet has destroyed our attention span and made us all angry, it’s also now much easier to hire experts. Websites such as Fiverr, TaskRabbit, Upwork, and Peopleperhour offer a pool of freelancers around the world who can complete our least favourite tasks in a fraction of the time.

It’s important to acknowledge some ethical issues here. Some sites require freelancers to compete for jobs by doing spec work. The client potentially receives dozens of designs, then chooses the best. Those who are rejected receive no payment. While this is theoretically good for the client, it’s bound to impact upon quality. And, of course, it feels exploitative to many of us.

Here’s a better way of finding the best freelancers. In his book 80/20 Sales and Marketing, Perry Marshall suggests giving the same project to multiple freelancers. Pick something small and cheap – say, a social media image – and see what you get. This gives you the opportunity to assess speed and quality without spending too much money. You pick the winner and everyone gets paid. Then you know who to trust with a bigger project.

You don’t necessarily need to look online, either. There could be top people in your local area. I use a company called Stoats and Weasels for all my design work. Although I know how to use Adobe Photoshop and Illustrator, the results often look as though I was using the mouse with my nose.

What else could you outsource?

You’re probably already outsourcing some obvious activities, such as bookkeeping or completing your company accounts. What else could you outsource?

  • Creating spreadsheets (especially if they contain complicated formulas)
  • SEO (Search Engine Optimisation on your blog content)
  • Website maintenance (updating WordPress plugins, running backups)
  • Transcription (podcasts, interviews, meetings)
  • Routine data entry

If you’re regularly outsourcing the same tasks, it might be worth finding a virtual assistant. Some just cover basic admin tasks, but others specialise in more technical areas.

Paying someone else for stuff you could do yourself might feel counterintuitive. It’s particularly tough in the early days of building a business when money is tight. However, by outsourcing those time-consuming tasks, your hourly rate will soar. You’ll also have more energy and focus. You can’t put a price on that.

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