Our plan for financial independence

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My interest in financial independence started when I was on maternity leave with my second child, who is now nearly two.

I was on statutory maternity leave and worried about how we would cover our costs. During sleepless nights feeding my baby I started listening to personal finance podcasts, such as Choose FI. I also read seminal financial independence text such as Vicki Robin’s Your Money or Your Life (affiliate link).

They helped me to optimise my budget to get us through the maternity leave period, but also gave me ideas for how we could manage our money once we had more coming in. Most importantly, the books I read made me think about what I really valued and how I could design my life around that.

I went back to work after 9 months and had a long commute – up to four hours a day and also travelled for days at a time. Having seen my eldest child grow up so much in her early years I was acutely aware of what I was missing. As the main breadwinner in the family I didn’t see an immediate alternative to working full time. I was, however, determined to figure out how I could work more flexibly in the future.

Due to Covid I now work from home, and this may continue even after the vaccine. This has been life changing for me. My relationship with my children has changed for the better and I could not go back to spending so much time away from them while they are so young.

So, I’ve started thinking through what we would need to do to be “work optional” in the next ten years and this is what I came up with.

It’s a stretch goal because we don’t currently have the income that we need to make it work, but it’s extremely motivating to have a target date in mind and to understand what our gap is, i.e. what extra money we would need to earn and invest to meet this goal.

Our plan is made up of five pillars, which I will talk through here.  I’d really appreciate any ideas or constructive criticism.  It’s not something I talk about off the internet, so any input would be welcome (within reason!).

A bit of context first…my partner and I are both 40 and have two children.  We work full time and together have a gross income of about £130,000.  We also have a rental property which we have more than 50% equity in.  We have a relatively high mortgage and high childcare costs, so need to live frugally in other areas to compensate.  For example, we rarely go on holidays or eat out, etc.  We’ve focussed the last few years on becoming financially stable, i.e. saving up an emergency fund of about 4-6 months’ costs and making sure we are living below our means.  While we are aiming for full financial independence, it’s a stretch goal for us and we may decide to reduce our hours instead.

Pillar 1: Investing in Stocks and Shares ISAs

Our previous financial plans have heavily relied on mortgage overpayments.

However, I am conscious though that there is a risk of losing out on our ISA allowances and the benefits of investment interest compounding over time.  

That is why our main goal at the moment is to max out each of our Stocks and Shares ISAs each year.  As the limit is £20k each, this means each investing £1667 a month.  This just isn’t possible right now, but in a little over a year when my boy qualifies for preschool funding then our childcare costs will be about £2000 lower so we will be able to invest the difference.

Right now, in a normal month I manage £1250 and am hoping to increase to the full £3200 once we have lower childcare costs.

My ISA is with Interactive Investor (see here for my honest review).  I like the interface, the market information, the range of funds available and the fact that you can do free regular investing in certain funds.

Our aim here is to max out mine for the first year, then max them both out for 9 years.  As we currently have £20,000 in mine, this will mean contributions of £440000 (including the existing £20,000). If we can assume an average growth of around 8% then we should have around £590,000 in 10 years’ time.  If we drew down 3.5% a year, that would give an income of £20,300 or £1690 a month.  

Even with our rental income, currently £1550 before tax and other costs, this would not be enough to cover our costs.  Therefore, we would either need to keep going and retire later or also pay off our residential mortgage while investing so that our monthly costs are reduced.

We could invest more over the ten years, but it would be taxable.  Our pension would not be accessible for another 7 years, so that’s why we are also…

Pillar 2: …Overpaying our mortgage 

We currently overpay our mortgage by £250 every month so that at the end of our 2-year term we will qualify for 60% loan-to-value ratio deals.  The other reason is that this will shorten the term so that, at the minimum, we know it will be paid off by the time we are 60.

Our new financial independence plan involves increasing our overpayments to £1450 in order to have paid it off in 10 years.  

This is the biggest stretch for us as while we know we will have more money for investing when we no longer have childcare costs, we do not currently have this extra £1200 a month for the mortgage overpayments.  This means we need to find ways of…

Pillar 3: …Earning additional income

Earning another £1200 a month is no small task and the biggest challenge in all of this.  I know it’s a stretch goal and the closer we can get to it, the closer to the 10 years we can retire.  Until we are maxing out our ISAs, anything we have spare will go in there, with this being our second priority.  So, this probably means for the next year or so we will focus on creating additional income streams and that it will be a while until they make us decent money (and until this will actually go on mortgage overpayments).

Our strategies for the additional £1200 of income are:

Income typeTarget amount per month – goal for the next year
My partner’s freelance work – he’s done this in the past but not consistently.  It would be great for him to build this up to give him more flexible work options in the future. £300
Me doing some extra “time for money” gigs such as market research, user testing, tutoring etc£100
Advertising and affiliate income from blog – I am not currently earning anything but my blog is new and I’m still learning to write good content and attract readers£500
Growing the gap between our income and expenses:  pay rise, finding new ways of saving money, doing things ourselves£100
Passive income earning through Etsy (currently working on some printables)£200

Pillar 3: Pensions

Our pensions between us are at about £80,000 which is far below where many say they should be at our age.  I’m conscious that if we do retire early we won’t be topping them up from 50 onwards and we are also going for quite a “Lean FIRE” so do still want to have a pot to draw from when we reach 57, or whenever we do retire.  

We will continue to pay at least 10% of our gross salaries into our pension, though I plan to put in 15% from next year onwards.  If we do that and assume 5% growth after inflation then we should have about £360,000 at age 50.  

The guys at Money Unshackled did a great YouTube video about how much you need in ISAs versus your pension if you choose to retire early.  If you subscribe to their mailing list you can get a spreadsheet showing your personalised amount based on your desired pension pot, estimated growth of investments and the age you’d like to retire.  The idea is that your private pension pot will continue to grow, even after you stop contributing to it.  So, over the gap between your retirement date and the day you can start withdrawing (usually 57) you can live off the amount you have in your ISA, while your pension grows to its full potential.

According to this breakdown, if our eventual desired pension pot is £1,000,000 we should have about £675,000 in pensions.  Although we would only have about £360,000 we would also have our rental property which we could pay off with the ISA meaning more than £500,000 of equity (and £320,000 still in the ISA) or sell.

This isn’t an exact science – who knows how the investments will actually grow. However the plan helps me because it matches my risk appetite which is pretty low and favours diversification.

Pillar 5: Wellbeing and enjoying the journey

I’m very conscious that I am doing this to have more freedom with my time in a few years.  However, none of this is guaranteed and I know it would be a mistake to live miserably for the next ten years (still in the prime of our lives) for the sake of a better future.

I hope most of the above will run on auto pilot once we’ve developed our additional income streams.  Then I’d like our extra energy to go into enjoying time with our still young children, learning new skills, making a positive impact and spending time outdoors in the beautiful country we live in (Scotland).  

This plan isn’t worth it if it isn’t enjoyable.  It takes too long for that.  If we are saving money through being more self sufficient, being creative or being more eco-friendly then it’s a win win situation. If we deprive ourselves of everything that brings us joy then we will regret straying from the norm and we won’t stay the course.  

I’m fortunate in that I also enjoy my day job and feel motivated to learn more and progress.  So although I would love to work on my own terms, if this plan does not work and we need to keep working longer, all is not lost.  At least we will be in a better position than we would have been if we had not stretched ourselves.

I’d love to hear from anybody else taking a similar approach – i.e. investing in ISAs, pensions, mortgage overpayments and rental property – and what tools you use to set your goals.

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