Saturday 15 September 2018

What we do




Financial independence (FI) is a state in which a household has sufficient wealth to make income from any form of employment optional. People in the FI community typically own assets that generate passive income, e.g. stocks that pay dividend or real estate that generates rental income. 

For now our focus is on stocks, but this is a personal choice and others are doing fine with real estate. I suck at timing the stock market and at predicting which stocks will outperform. Turns out most people do!





Low-cost ETFs
The good news is there is no need to do either, simply invest in a low-cost exchange traded fund (ETF) every month. The Vanguard fund VWRL holds over 3000 companies worldwide and in my opinion is one of the best choices if you live in the Netherlands, especially considering the fact you can purchase VWRL for free every month if you use DeGiro as your broker. To acquire these assets people safe a significant portion of their monthly income, typically aiming for a savings rate of at least 30%. 

Needless to say that the higher your savings rate the shorter the journey to FI. This is even more true than you might intuitively think; it is a double edged sword, if you safe more you spend less so the amount you need to retire also goes down.


From wealth accumulation to wealth protection
Above is all the essential background information to build a plan for the wealth accumulation phase, the strength is in the simplicity! Once you start living of your assets, you enter the wealth protection phase, meaning the main goal is not to accumulate more assets but to be as sure as one can be that you don’t run out of money before you run out of life. 

A widely used rule of thumb is the 4% rule of thumb, implying you can spend an inflation-adjusted 4% of your initial portfolio value every year without ever running out of money. The other way around, you should save up 25x your anticipated yearly expenses in retirement. Your exact safe withdrawal rate will depend on your personal circumstances and there are great tools to crunch the numbers. For people in the accumulation phase of the journey, the 4% rule of thumb is all you need. 


It helps to set a concrete goal and nicely reveals that while many people would guestimate you need millions to retire, in fact you “only” need €600.000 when your monthly expenses would be €2000. Such FI number is achievable if you save €500 a month for 30 years and invest in VWRL, assuming a ROI of just over 7% which is realistic looking at historical returns. 


You'll have more chance to make it to FI compared to someone ignorantly spending all his money every month, guaranteed! Start when you are 20 and you are done at 50! If you want to save less per month you’ll have to start earlier or arrive at FI later. If you wish to be there faster you’ll have to increase your savings rate, unfortunately I can’t change the math for you.


That’s all folks!

Don’t spend all your money and invest what is left to generate passive income to support your future life. That’s how simple the basic principle is. All other posts on this blog are discussing nothing more than the details.

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