The other day I wanted to try another way of tracking my progress to financial independence – one that would break down the “boring bit in the middle” in more digestible pieces.
Instead of looking at the difference between my current versus my goal net worth, I plotted out which of my living costs I could already cover with the money I had saved and invested.
This felt more meaningful than looking at my overall net worth because that includes retirement savings and house equity, neither of which really help to cover our costs right now (at least, not until the house is paid off).
Breaking down each part of our FI number
I looked at each of our bills (our mortgage, our energy bill, our food spending etc) and figured out how much I’d need in investments to cover it from the expected income of those investments, based on the 4% rule.
For example, our energy bill is £280 a month (or £3360 a year). Based on the 4% rule, I then multiplied this by 25 to get a figure for how much we would probably need in investments to be able to pay that energy bill forever: £84,000.
It’s the same methodology that people use to get their FI number, except instead of multiplying annual living expenses by 25, I broke the living costs into each component.
And the breakdown looked something like this:
| Bill/spending area | Monthly cost (£) | Annual cost (£) | How much I’d need invested to cover it through passive income (£) |
| Mortgage | 2000 | 24,000 | 600,000 |
| Energy | 280 | 3360 | 84,000 |
| Food bill | 750 | 9000 | 225,000 |
| Council tax | 300 | 3600 | 90,000 |
| Family gym and swimming | 250 | 3000 | 75,000 |
| Internet | 50 | 600 | 15,000 |
| Car tax | – | 200 | 5000 |
| Phone bill | 10 | 120 | 3000 |
I was happy to see that we have some of these covered, either in investments or from the income from our rental properly, but not the bigger ones such as our house and council tax.
Here’s our stock take:
| Bill/spending area | How much I’d need invested to cover it through passive income (£) | Can we cover it? |
| Mortgage | 600,000 | Nope! We don’t have anywhere near this invested outside our pensions, but are overpaying on our mortgage and have about £375k left to pay. |
| Energy | 84,000 | Yes |
| Food bill | 225,000 | Kind of. Not in our investments but this matches our equity in our rental property and the monthly profit is around our food bill. |
| Council tax | 90,000 | No – this is the next bill we are saving for |
| Family gym and swimming | 75,000 | No! And we are cancelling this membership now that we see the huge impact this has. |
| Internet | 15,000 | Yes |
| Car tax | 5000 | Yes |
| Phone bill | 3000 | Yes |
So what?
Seeing our progress against each element of our living costs made me realise a few things.
Firstly, it was crazy to see how much we’d need to have invested to cover the house – almost twice what we still need to pay off on the principal. I realise that investments will probably compound at a higher rate than the interest saved from overpaying our mortgage, but for me it reinforced our strategy of overpaying as a route to financial freedom, alongside our investment strategy.
Secondly, I realise how much our “lifestyle inflation” was adding to our FI timelines. If we were expecting our family gym membership to be part of our post-FI lifestyle, we would need to have another £75,000 to cover it, which would probably delay our journey by at least a year or two. I realised that we really don’t value this as much as we are spending on it and we certainly don’t need it to be fit and healthy. My partner is also a member of a bodybuilding gym that costs only £10 a month and most of the exercise I do is running outside. The main benefit of the gym is the kids’ swimming classes which are in small groups, so we’ve decided to cancel our membership in the next few months, once our youngest is more confident in the pool.
Thirdly, it made me worry less about one-off spending that we get a lot of pleasure from. Of course, constant treats and indulgences add up, but it is the regular-like-clockwork bills and commitments that really shape and throw your path to FI, not that item that will help you kickstart a new hobby you love. It did give us the impetus to look again at our monthly commitments and cancel a few subscriptions. I also moved an old pension to an option with lower management fees (better late than never!) as well as my kids’ Junior ISAs, for the same reason.
And lastly, it was another reminder that this is a marathon and not a sprint. Even saving up enough in our pre-retirement investments to cover our energy bill will probably take us another few years. I feel we are on the right path and I am so thankful that we are able to cover any of our costs with sources of passive income, but we are a very long way off from being financially independent.
So what do we do next?
It’s tempting to sack it off, be grateful for the level of financial security that we have, and think less about tomorrow. My take on it is: we are not going to be financially independent for a long time, but we have a few options available to us:
- Option One: We could take advantage of the security we have to make lifestyle changes that could make us happier, like working fewer hours or taking a risk and doing something more entrepreneurial/flexible; or
- Option Two: We could rapidly accelerate our journey by looking for higher paid jobs, doubling down on side hustles etc; or
- Option Three: We can continue on the same path, continuing to save and invest, but also enjoying our free time, being content and avoiding putting added pressure on us.
For the last year or so I had been leaning towards the first option, but as you’ll see from my last post on quitting and unquitting, I’ve realised that the amount of money I need to take risks with our income is much higher than I thought, and there are other assurances I’d want to get in place.
Option two – rapid acceleration – bothers me because I don’t want to spend all of the free time I have on this FI project, missing out on being with my children when they most want to play with me. Nor do I want to do a job that is more stressful, involves more travel or doesn’t give me the flexibility I have now.
Option three feels like the right one for us, but with incremental tweaks to speed us up a bit. For example:
- trying to increase our savings rate by 1% a month
- cutting out spending that isn’t worth adding years to our journey, like that big gym bill
- building up my value in the job market – but only moving on if I am confident I’ll enjoy the new job more
- being frugal in ways that I find fun, or that are better for the environment, like doing DIY jobs ourselves rather than outsourcing them, learning to cook cheap, healthy vegetarian meals, selling our old items online…
- prioritising health (my newfound running hobby) and family time, and then only working on extra income generating projects in the time left if I enjoy them and can build skills I value.
Why does it take so long to be an adult?
Earlier today my five-year-old son asked me why it took so long to be an adult. I wanted to tell him not to wish his life away and that it can be fun to be a child and to enjoy these years.
Then I realised I probably needed to hear the same thing. I’ve been thinking “why is it taking so long to be financially independent?” and I’m not fully appreciating everything that is great about now. While I’m saving and investing to have more options in the future, I can also do plenty of the things that I associate with “freedom” now, like being able to work from home and walk my kids to and from school, learning about things that interest me, getting fitter and stronger through running etc.
So this is our plan for this year. We’ll be tracking our progress, including our savings rate, and trying to improve our saving skills and our spending decisions so we can tick off the council tax. At the same time, I’ll be careful not to wish our lives away and will try to help our son to do the same!
Leave a Reply