[with thanks to ThinkSaveRetire for the above image]
Don't Panic Mr Mainwaring! There is no FIRE, nor am I having flashbacks to my war-fighting days in the Royal Navy!
Don't Panic Mr Mainwaring! There is no FIRE, nor am I having flashbacks to my war-fighting days in the Royal Navy!
No, it's an acronym for something we've been quietly but determinedly working on for some time: Financial Independence [to] Retire Early.
We've made no secret of our desire to retire before reaching the current state pension entitlement age of 67 (and no doubt this age will creep out as the years go on). But the big question is when? I've been reading loads of FIRE-related websites, blogs and forums and learning a great deal. What I do know is that I wish I'd known all of this 20 years ago; had we started then we'd be 'FIRE' by now.
There are loads of people out there you have achieved FIRE. The most recent and closely linked to our own plans are Jay and Ju of Our Tour. They achieved FIRE in their early-40s and have just left UK for another long trip around Europe in their motorhome. Jay in particular has written some very useful articles on FIRE.
FIRE means different things to different people. For us, we want to have sufficient passive income so we can stop full-time working and split our time between living and travelling in the UK and travelling throughout Europe in our campervan. It's as simple as that really. The devil, as they say though, is in the detail. How do we get there as early as possible? The following are my thoughts on how we can achieve this and in no way constitute any form of financial advice!
Put simply, we need to have more passive income than we do regular outgoings, and a plan to sustain that over the rest of our lives. In order to get there we need to eliminate debts and have enough regular passive income to cover our expenses, plus build up a pile of money (cash and investments) to keep us going.
So where do you start? One really good place is to take a look at Pete Matthew's website - Meaningful Money. He puts the message across impartially, informatively and simply through a series of podcasts and videos. He covers the whole financial journey from Getting Started to Later Life. A recent podcast was particularly helpful as it reflected our current stage in the FIRE process: Retirement saving tips for late starters. I hope he won't mind me headlining the key messages in his podcast, which I'd like to use as a basis for writing about our plans and journey so far:
- Eliminate all debt.
- Increase your savings automatically. Every time you get a raise put it aside.
- Put your savings on autopilot.
- Make sure you save up at that standing order and direct debit on the day you get paid.
- Reduce your outgoings and be brutal.
- Free up some money, maybe buy and selling something and realizing the cash and putting that realized money to better use. Take a second job, why not? Plenty of opportunities to do that.
- Make sure you're maximizing pension contributions because of the free money and tax relief and from your employer if you are employed.
- And then finally, reduce the costs of your current investments and review them to make sure that they are ongoing suitable.
Eliminate all debt
Most of us have debt: credit cards, loans, mortgage. Most charge interest of various rates and, in my view, there's little point in putting money into savings before you've reduced or eliminated debt. Over the years, like most people, we've had credit cards and loans, plus the millstone mortgage around our necks!
The first thing we tackled was credit cards - only using them when absolutely necessary and always paying them off in full at the end of the month to avoid interest charges. We still have two credit cards: one that we use like a debit card and have set to automatically pay off in full each month (more about that later) and one - a Halifax Clarity Card - that we only use when abroad as it charges no fees for purchases or cash withdrawals.
Next we tackled our loans. We had two loans, one for a replacement kitchen and one for a car (an impulse buy that, knowing what I know now, I wouldn't repeat!). We had a regular, fixed repayment plan for these, but also channelled any extra money to pay these off early.
Finally that pesky mortgage! Once we had paid off the loans we started to redirect that money towards overpaying our mortgage, to reduce interest and pay off the capital early. In our case we moved to an offset mortgage, which allowed us to 'link' our savings and current accounts to our outstanding mortgage, which reduced the capital amount on which we were charged interest. Over the term of a mortgage this can reduce interest payments by hundreds if not thousands of pounds. It also means we should be able to pay off our mortgage several years early.
I keep our current account balance as high as possible for as long as possible by using a credit card like a debit card, setting this to pay off in full automatically. This means the maximum amount is available to offset our mortgage interest.
We also overpay as much as we can each month so we can pay off the mortgage as early as possible. With some mortgages you can only overpay up to 10% of the outstanding value, but with our offset one, we can overpay as much as we want with no penalty. In my mind, paying off the mortgage is the key that opens the door to early retirement.
Increase your savings automatically
Our savings are static at the moment as we redirect all we can to paying off our mortgage. But we're applying the same rule. If we get a pay rise or any additional income, we automatically use it to decrease our mortgage balance (and later to increase our savings). The same applies if you pay off a debt - redirect that old card or loan payment towards paying off the next debt or increasing savings.
Put your savings on autopilot and save up direct debits on the day they get paid
We have a number of direct debits that leave our account over the month across different dates. So if you checked your bank balance on a given day, it would look like you have money to spend, whereas in fact much of that will already be committed to future payments later in the month. So what I do is on pay day, as well as adding our salary to my current account balance spreadsheet, I also deduct the total sum of all the payments that are due to come out in the next month. That way I know from the beginning what we have left to spend. It's at this point that I also send our overpayment to the mortgage account so it's gone, I can't get to it and so can't spend it on anything else in the month.
I've also flipped this on it's head to maximise debt reduction/savings. What I do now is estimate a monthly spending budget to cover our food, fuel for cars and so on. Once I've 'ring fenced' this monthly budget from our current account balance, any remaining money is immediately transferred to the mortgage account. This has had a couple of interesting side effects: we've learnt to live on much less money than we thought we needed for day to day living, and our mortgage overpayments have dramatically increased. It doesn't always work out; some months we spend more than forecast (such as unplanned car repairs) but mostly we manage to stick to this. So by deducting all outgoings on the same day we get paid, we're not tempted to spend more than we can afford.
This might not work for everyone. You might be a 'I'm going to live for today' kind of person, so any extra money gets spent on something like a holiday, meal out or new gadget. That's fine, it's your choice and good on you. But we have different aims. But don't think we live a frugal life, sat in the dark and cold, huddled around a single candle at night to keep warm - even lighting it some nights! We allow ourselves some 'fun money' but keep this within budget. So instead of spending £100 on eating out and taxis, we'll buy good quality fresh ingredients and cook at home, with a decent bottle of wine (not at marked up restaurant prices!) - not only cheaper but better food!
Reduce your outgoings and be brutal!
Do you know what each direct debit or standing order is for? Honestly? Do you get value for money from them? Could you live without them?
I bet some of you have monthly gym memberships that you don't use, or subscriptions for magazines that you no longer read. If that's the case, stop them and redirect that money to your debts/savings.
Like everyone, we have a number of fixed outgoings that we have to pay. Some we have no control over, such as Council Tax. But others are well within our control to reduce. For example I've managed to reduce our outgoings quite a bit:
Swapped to a water meter: this has reduced our monthly water bill from £50 to £18 (saving £384 per year).
Reduced our phone and broadband bill. We were paying for a broadband package which was much more than we needed. We don't livestream movies or music and only download the occasional large file. So by dropping from a 76Mb to a 38Mb package we halved our broadband costs (saving over £400 per year). I'm looking at this again and will either haggle down the cost of our current package or drop again to a 17Mb package, which I think will still be fine for our internet usage. [update: I rang BT and negotiated our package down to a price less than the original deal - one short phone call saved us £132 per year]
We also changed our mobile packages to a much cheaper monthly tariff from GiffGaff - £7.50 per month each. We hardly ever use our monthly entitlement even though we use our mobile phones for all calls (using BT Smart Talk for free 0845 and weekend calls). So we've unplugged the landline, so that phone bill is zero. How many of you pay for landline calls yet don't use up your mobile monthly entitlement?
The next step is to review our gas and electricity provider and see if I can find a cheaper deal. All of this adds up to a significant saving; we still have the same services but pay less for them and all that extra money is redirected at - yes you've guessed - to paying off the mortgage.
Free up some money
We've sold stuff on e-Bay and been surprised at how much people will pay for items we might have given away or even taken to the tip.
Maximise pension contributions
This is one area we could have done better with hindsight. I have my Royal Navy pension which fully kicks in when I reach age 55 and this will be our main source of passive income when we retire. But Cathy doesn't have a personal pension and that's something we should have addressed many years ago. But if you can, maybe join your company pension scheme as this really is free money - your employer pays in and you also get tax relief.
Reduce the costs of your current investments
We're not currently investing any money but will do once our mortgage has been paid off. But we do have savings and I make sure I review the interest rates regularly. Most banks and building societies entice you in with a reasonable introductory interest rate, but drop this to almost nothing after 12 months, as they think you won't bother moving to something better. There's no loyalty on their part so why stick with them?
Marginal Gains
As a keen cyclist I follow the Marginal Gains concept applied by Dave Brailsford in the Sky team. Put simply, small improvements in a number of different areas can have a huge impact in overall performance. This can be applied to money too. I've talked about reducing your outgoings and all that helps. But there's a few other things we do that all add up:
I mentioned we use a credit card as a debit card to maintain our current account balance. It automatically pays off in full each month. This is a Tesco credit card and it earns us Clubcard points. We cash these points in for travel vouchers, so for every £10 of Tesco voucher, we convert this to £30 of travel vouchers. This more than covers our annual return crossing on Eurotunnel for our campervan trip to Europe, saving us in the region of £170.
Not long after we bought our house we had a card through the letterbox offering free cavity wall and loft insulation. I'm a bit of a cynic when it comes to these offers, but it turned out our utilities provider hadn't hit their government target for climate change efficiencies, so a bucket of money was available. We took it up and instantly felt the difference in the house - which meant we had the heating on for less time and were able to turn down the thermostat. Another saving.
We shop around for the best deals on food, rather than using one supermarket. We also have a food shopping list and tick off only those items we need to buy. The savings soon add up - all pushed to the mortgage account!
I commute about 1000 miles each month. Petrol is quite cheap at the moment but it's not always been that way (and no doubt will bounce upwards again). Rather than join the lemmings gunning their engines and overtaking everyone in front of them, I sit in the inside lane of the motorway, driving no more than 65mph, with the radio on and so save a lot on fuel costs - I reckon about £50 per month. I used to car share but then my sharer moved away; that was a great way to save on fuel, mileage and wear and tear, so if you have the opportunity do it.
We both read a lot. Books aren't cheap, although Kindle books are cheaper than hardcopies. We've signed up to a daily email that lists Kindle books we can download for free. Some are rubbish but others have been really good - hey it's free!
Another thing I plan to try in the future is buying prescription glasses online. The high street shops are a rip-off so buying online could save us hundreds of pounds.
Some will say all this saving and cutting back is too much. But we don't really notice it now. It really depends on what you want to do with the rest of your life and how badly you want to live your own particular dream. With planning, determination and a little sacrifice, anything is possible.
So what happens when we reach FIRE? We retire, that's what happens! That doesn't mean we'll never work again, but instead we can chose if, when and where we work and what we work at. The only reason to work again would be to top up our retirement fund. But we can also achieve this in other ways. For example, we've signed up as Trusted Housesitters, which allows us to live in other people's homes for free across Europe (in fact the world), in exchange for looking after their house and pets. We also plan to sign up to Workaway, exchanging our time and labour for food and accommodation (although we'll probably live in the van) - so free food. Both these options allow us to make our monthly budget stretch further, plus provide the occasional break from living 'on the road'.
What I have realised during our journey, though, is that it's necessary to adjust our expectations of what retirement will really be like. We'll have less money that's for sure; giving up work and living off a much smaller income is a risk, but what's the worst that can happen? I work on the basis that we can always make more money but we can't make more time.
I've heard others say that "Retirement is twice the fun on half the money!" Another: "Retirement: it's nice to get out of the rat race, but you have to learn to get along with less cheese." I think that's a pretty good description of what we think it'll be like.
So where are we one our FIRE journey? Currently we're working at paying off our mortgage. Once that's done we'll redirect that money to building up a fund of investments and cash savings. We need to build up our emergency cash fund and then do some research before investing. It's a strategy that's not without risk - we could very easily lose quite a bit of money - but we're looking to invest long term, which should help ride out future economic storms.
Now, I can hear you thinking, it's alright banging on about it, but WHEN are these 'dreamers' going to pack in work, load up the campervan and tootle off south towards the sunshine and easy life? That's a difficult question to answer as it depends on a number of things, when we achieve Financial Independence being the main one. We have a date range in mind and what I can say is it's several years away. But we're equally determined to ensure it's well before we hit state pension entitlement age.
So that's our plan and we're sticking to it. It's been hard at times, but mostly fun as we plan our future.
If you're interested in learning more about FIRE, here are some of the assets I've used. I hope you find them useful, provide inspiration and perhaps the jolt we sometimes need to break out and plan for something new and exciting:
Meaningful Money
Monevator
Think, Save, Retire
Smart Passive Income
The FIRE Starter
Sex Health Money Death - don't worry, the link's not a trap!
Simple Living in Suffolk
