As you can read on numerous website of DGI’s, they all want to be financial independent. But what does that mean? In the Pollie dictionary it means that I do not have to work for a boss no more, and that I can life of my passive income from my Vrijheid Fonds.
A couple of months ago a colleague came to me and started to ask a lot of questions about investing. He knows I invest and he wanted some advice. He just inherited a sum of money and did not want it to sit in his savings account (with the interests rate nowadays). After a few minutes he asked me the question: “why do you invest?”
Yes finally a great question!
I told him I invest to reach Financial Independence (FI). “You want to reach what..?” was his direct reaction. So I explained what FI in my dictionary means. After thinking for a few seconds, he looked at me and said,
I looked at him back and I told him that I would show him that it in fact is possible. And everybody can do it, independent of the height of your salary. I could have told him great stories I have read in books or in blog posts. But I decided to do it another way. He knows I’m a numbers freak, so I told him that I will do some calculations and we would discus it the next day with a cup of coffee.
So the next day we sat down with some coffee and I first asked him, if he wants to reach FI? And very quickly he responded, “Of course, doesn’t everybody?”
Okay, if you want to stop working way before your retirement age, the most important thing:
Do not spend every Euro you are earning.
It is that simple! To reach FI it is important to have a great saving rate. Your saving rate is the rate of money of your salary that you put in your broker or savings account the minute you get paid. After this bombshell I told him, that if he is serious about reaching FI, he has to start paying himself first (see old blog post here).
He thought about it for a while, and he realized he had to change some things in his finances. I will not be easy to save some of his salary he told then. There are always bills to pay, trips to take with the kids etc. I looked him straight in the eyes and told him that yes it is hard but it can be done! Just believe in yourself and do it!
Okay he got the idea and was really warming up to it. But then he asked what a good saving rate should be. Finally the question I was waiting for and did some home work on the night before.
I first told him that Google taught me that the average saving rate of the Dutch was approx. 10%. With this saving rate it will take about 52 years to reach FI. This is not very motivating, isn’t it!
But lets see what happens if you increase your saving rate.
So if you save, say 50% of your income, you can retire in approx. 17 years!
That’s more he liked it.
To calculate the number of years I had to make two important assumptions. First if you want to life of your passive income, it is important to keep your passive income-generating portfolio intact while withdrawing money from it. I took the safe approach here and used a 4% withdrawal rate. Second I assumed that you will earn 5% investment returns with on your portfolio. With these two assumptions I made an excel-sheet and showed the number to him.
He took this excel sheet home and after a few days he told me he was wrong. It is possible to reach FI. And the better investment returns you get, the sooner FI will come!
But it takes discipline and some hard work. He smiled at me and thanked me.
When he walked away he said:
“To reach FI is hard, but the rewards are great!”
What a nice feeling to pass along the knowledge!
Let the knowledge snowball role!