How to get to Financial Independence

Saving and Investing your Way to Financial Freedom

Financial independence is all the rage these days: articles, blog posts, and videos on the topic abound. It’s an age-old dream, but one that seems increasingly in reach as more and more people commit to trying to get there.

In last month’s progress report, I mentioned that my wife and I are pretty close to financial independence, just fifteen years after getting serious about personal finance, saving, and investing.

And people had questions.

Unfortunately there is no magic secret way to do this quickly and easily: it takes time and dedication. It’s not difficult, but it is hard.

There is only one main thing you need to worry about, as explained so eloquently by Mister Money Mustache in this blog post. Your saving rate, or how much of your income you don’t spend.

As well as paying attention to your saving rate, you also need to make sure you invest your savings in something sensible, avoid taxes where possible (and legal!), and maintain an emergency fund and enough insurance to keep you and your loved ones safe.

It’s probably a good idea to try to have some fun along the way too -don’t get so obsessed with saving that you make yourself miserable 😉

Triggers

There were three major events that changed my life by transforming my relationship with money: an inheritance, losing my job, and a natural disaster.

I’ve spoken and written about these before, so I won’t go into much detail, but basically I inherited some money when my grandmother died. Through a series of bad decisions and unfortunate events I then wasted most of it. That was my first wake up call: if I had had a better handle on my finances at the time I could have made much better use of my windfall.

Then in 2008 I lost my job at short notice. This was catastrophic at the time: my wife and I had no idea how we were going to pay the rent or get by. Fortunately I was able to get some part time work for a year and then find a job, but that was mainly luck. I vowed never to be in a similar situation again.

And in 2011 we had The Great Northeastern Japan Earthquake. I ended up evacuating with my family on the evening of the second day and going to stay with relatives in Kanazawa. That experience of just driving away and leaving everything behind had a profound effect on how I feel about material possessions.

The journey

The actual progress from broke and unemployed to financially independent and unemployed (my current contract ends in March, and I am not planning to look for a new job) is much more mundane and boring.

It went slowly, slowly, slowly, slowly, then in the last couple of years accelerated to disturbingly quick.

Basically we started investing, made some mistakes, continued investing, got better at it, then slowly increased the amount we were investing every month over time.

We made sure to fill our tax-advantaged accounts (NISA and iDeCo) before investing extra into taxable accounts. I also made sure I was paying into the UK state pension on a voluntary basis.

Our kids finished university and moved out, and we were able to invest more.

My salary went up and my wife’s business grew, so we were able to invest even more.

Eventually the amount we had invested became large enough that the investment growth started to dwarf the amount we were investing (or even, my annual salary).

The endgame

Now according to the 4% rule we have enough invested to allow us to retire, but we’re not quite ready to do that so we will continue saving and investing. I suspect we’ll see a correction at some point so I would like to put a little bit more away before making any permanent lifestyle changes.

Once we do retire we will have to figure out how to spend down our investments. Already I am getting the impression this will not be as simple as I first thought.

But it’s a good problem to have.

Having this kind of financial strength has made a big difference to our lives. Money has largely ceased to be a factor in decisions. If something is important, we can pay for it. Most monetary risks can be handled, and we don’t really have to worry about the future, at least financially.

Our investments should continue to grow even as we cut back on contributing, stop contributing altogether, and eventually begin to pull money out.

Lessons

And this only took 15 years or so. We were lucky in that we have two incomes, and our kids moved out and became (largely) independent.

But perhaps more important was that we slowly adopted a frugal lifestyle. We deliberately chose to spend less money on housing and cars (for example) than we could have.

So we got here much quicker than I expected (the rising stock market definitely helped). But it’s very much a case of saving as much as possible, for as long as it takes, and investing it in something sensible (like a global stock fund*).

If you are just starting out:

1. Save up some money as an emergency fund. Keep it in a separate bank account. Don’t touch it unless you need to.
2. Open an iDeCo or NISA account* and start investing some money every month. Don’t start off trying to invest too much.
3. Increase the amount you save/invest every month slowly until you are maxing out your tax-advantaged amounts.
4. Once you go over, continue increasing the amount you save: invest the excess in a taxable account (a 特定 tax-withholding account does your taxes for you).
5. Keep doing this until you feel you have enough money to do the things you want to.

Doing this, provided you don’t overdo it and make yourself miserable, will likely improve your life, reduce the number of problems you have, and ultimately make it easier for you to live the life you want. And that is regardless of whether you make it to financial independence or not. Financial stability probably makes more of a difference to most people.

It did for me.

If you need some help please join the forum and ask some questions. We also have a coaching service if you need more personalised advice.

* US citizens should not invest in Japanese mutual funds nor use iDeCo or tsumitate NISA accounts to invest. More info here.