To Boldly Go on a Five Year Mission

To Boldly Go...

When I became serious about financial independence, I decided to see what I could do in order to speed things along. I decided I'd try five years of restraint on my spending, to help fund the investing project.

This "five year mission" began with opting to cut back on travel spending. 

Travel had always been my spending vice, and I like to think that spending on experiences is more valuable than spending on stuff. So it formed a big part of my lifestyle inflation. 

I didn't want to suddenly switch to zero travel, but I needed to cut down on the long-haul trips. I decided to step down my trips, from long-haul to short-haul, and from international to domestic. This coincided with getting an electric car, making UK trips very cheap. It was also a good fit with my environmental values - I wanted to fly less.

It also coincided with the Covid pandemic happening within a year, which among its many effects did at least make it a whole lot easier to cut out spending on travel.

This led to some great trips in the British Isles. Cornwall, Inverness, the Isles of Scilly, the Isle of Man, Aberdeenshire, and various trips to the West Highlands. In particular we set about visiting the Hebrides, which we'd previously dabbled at, and so far I've been to Eigg, Rum, Canna, Muck, Mull, Staffa, Iona, Skye, Raasay, Coll, Tiree, Colonsay, Seil, Lismore, Kererra, and Easdale. 

This plan was also helped by the fact that we had a holiday home on the edge of the Lake District. Well, to start with. It was great as an overnight stop for the Scottish trips, but as a destination the overhead of travel to get there began adding up, as I was still working at the time. Eventually I took stock, decided that the other members of my family were using it less than they had been, and opted to sell it and throw the proceeds at the FI fund.

I eventually "threw everything including the kitchen sink" at investing. Money left outside, uninvested, became an opportunity cost. This served me well - we had some good investing years and the time in the market sped me to FI.

How Bad Was It?

It wasn't bad at all! I didn't miss flying. I enjoyed travelling on ferries. The destinations were every bit as rewarding as the places I used to visit. 

My other economies, on things like eating out, are good habits that I'll continue. My preference is for keeping cars for longer, generally spending less as I have seen the value of leaving a pound invested where it can quietly compound.

Now that I've reached my goal, some of these frugal habits are ingrained and won't easily change. My environmental concerns are unchanged, so I will continue to try to fly less. If there's a train or bus option, I'll strongly consider it. If there's a choice between closer or more distant trips, I'll err toward the closer. And I am dead set against jetting around for brief visits - a journey needs to be defrayed across more days in the destination, which fits with retirement and a preference for slower travel.

Your Five Year Mission

You could choose your own similar mission. Decide "it's only five years" and slash your lifestyle spending in pursuit of the goal.

Don't be so severe that you make yourself miserable - but you may be surprised at what you don't miss. If you are in a pattern of endless hastily-grabbed European city-breaks to stave off the burnout, you may find that you enjoy switching things down a few gears and going walking in Wales instead.

A downshift may permanently change some of your habits, or it may be a sacrifice that you end after "time's up". That's perfectly fine. You will have done your portfolio a lot of good. Those savings will remain invested, compounding. Throttling back on the saving regime may eventually be the right thing to do, and by doing your heavy saving early on you will have maximised your time in the market. 

Good luck whatever you choose to do. 

Want to read more of my ideas? I have a new book out - The Teen Wealth Challenge. Or other books here.

Or you may prefer my FIRE series for beginners.

Don't try to die with zero

Some people on the FIRE path discover the book Die With Zero and get derailed by it. This blog takes a look at the problem.

You're happily going along earning, trying to spend less than you earn, and investing your gap into productive assets to build up your financial freedom fund. Then you come across this cool book, Die With Zero by Bill Perkins. In it, you are told the book's central concept - don't waste your life at work, eat your assets so that you don't outlive them.

Okay, I'm simplifying a long book there, and it's true that there are lots of other ideas in there. But there are a couple of problems with this idea which I feel that I need to address.

One, you can't switch to eating your assets right now, because: risk! We need to play it cautious enough that you're very likely to build up an excess, because of the very real risk that we get one of the worse scenarios. The 4% rule will probably lead to you having an excess later on, but it may not. In about a tenth of cases it's just enough, and in about one in twenty cases you'll have to take extra measures to get to the end of your life without going broke. 

Two, Perkins doesn't have much of a sophisticated solution to the conundrum of giving yourself an income in later life. His solution is just to buy an annuity. Well, you see, annuity rates are terrible - at least if you're under the age of about 75. To earn enough to buy a big enough annuity to cover your living costs, you'll spend many more years at work than if you leave things invested in index tracker funds for drawdown and do things the FIRE way. 

I think his perspective on this may be influenced by the fact that he's multi-millionaire rich and a gambler. Ordinary people have to think a bit more about keeping food on the table and paying the electricity bill. Running out of money too early is a different thing if that only means being down to your last million.

Is there a solution?

Understandably, you want to have maximum bang for your buck. Is the cautious 4% rule approach leaving money on the table?

We spend most of our time working out our defences for those negative scenarios. We talk about mitigating sequence risk, and flexing our spending down.

Having already adequately covered that, what we need to do is give ourselves an overflow valve - a way to eat the excess if it does come.

I've talked about this previously in the Two Pot Stratagem, and I plan to go back to that idea again at some point and refine it further to take account of the help that your State Pension gives. But the basic idea is, cover your core spending by building a pot from which you withdraw at a very safe rate, and then allow yourself to go a little more wild with the second, "fun" pot. 

The key is to plan on burning through the fun pot before you get too old to enjoy it. In this way, my thinking is quite like Die With Zero - but critically not with your core spending pot.

The "before you get too old to enjoy it" part is tricky. In my case I am aiming at age 75, and trying to plan a suitable withdrawal rate to run the fun pot to zero by that time.

Secondly, there's the actual overflow valve. When your core pot shows an excess, as it almost inevitably will since you are being so cautious with your withdrawals from it, you should sweep the spare money into the fun pot to be spent. I do this by setting a Minimum Withdrawal Rate. If you think 3.5% is the ultrasafe level, it follows that when your core pot grows so much that it pushes your actual withdrawal rate down by a decent margin below 3.5%, say to 3%, that you should keep sweeping away any excess money which would reduce your actual withdrawal rate even further.

This sounds messy but really isn't. And the effect is to let you maintain your ultrasafe core spending pot, but eat through everything else, letting you spend all that you possibly can whilst remaining safe.

Want to read more of my ideas? I have a new book out - The Teen Wealth Challenge. Or other books here.

Or you may prefer my FIRE series for beginners.