This month has been the third worst month according to my savings rate since I started this journey back in February 2016.
I have been away with the national rowing team for six weeks. First we were on a four-week training camp in Austria, and then we left for the world championships in Bulgaria for about two weeks.
Even though we did terrible at the world championships, I’m still grateful for the experience.
Because of the six weeks away from my day job, I ended up with almost no money this month. That is not moving me closer to my FI goal. But I do love rowing. So getting the opportunity to eat, train and rest for six weeks where I don’t have to pay for it, is even more awesome!
After my last update, I ended up buying more stocks and leveraged more than I wrote. So the comparison to last month is a bit off. In the future I will do all of my savings, borrowing and investing before I make this post. So I don’t end up doing other stuff than I what I have written here.
Due to the bad savings rate I’m not going to invest, or leverage anything this month.
I would like to have about 10 % in cash. As a buying opportunity if the market will crash (Which if think it will soon). I do not believe in market timing, and the only reason I’m not investing this month is because of the lack of my saving. It doesn’t make any sense to buy a low amount of shares, because of the fees it will cost me on the transaction.
I have invested this month though. I maxed out a tax-advantaged retirement account with 5100 DKK (800 $) with funds from my account where I borrow my money.
The money of that retirement account is not included in my networth. Because I won’t be ale to use those money until I hit the “cultural retirement age” of +65 years.
Hopefully I will have a better savings rate next month.
How many things have we purchased, done or said because we thought it was a comfortable thing to do?
I think that comfort is one of the biggest killers to a life we really have a deep desire to have. What we need to do is know what is a necessity and what is a comfort.
Let’s take an example.
Whenever I travel I see people with noise reduction headphones, a laptop, decompression socks and some sort of neck pillow (what the fuck is that anyway?!).
How many of these things is a necessity to our three-hour flight? Or are they just comfortable to bring with us?
What about the brand new car we have bought to drive the 10 km for work? Is that a necessity? Or couldn’t a 5.000 $ car done the job? Or what about biking that distance instead? Then we would save money, being healthier and we can skip that mandatory fitness membership, and spend that time by doing something that we really want to.
All the things that we really NEED is quiet easy to obtain in most part of the world. While the things we WANT can be quiet hard to get.
What about that carrier/car/house/flat/achievements we have this very day. They were once something that we only could dream of a couple of years ago.
And are we that much happier in this present moment than we were back then? I’m not.
We are doing all sort of things today that people in the 1900’s couldn’t even dream of. And do you think that we are happier today, than we were back then? I don’t think so.
What if we started to be grateful for those things that is easy to obtain here in life:
Living wherever we want
Wearing the clothes that we want
Eating the food that we like
Imagine that we would leave for a one month trip. How much would you pack? There is often some sort of human logic when we are going for a long trip, we need to pack a lot of stuff!
But what if we just packed:
two pairs of underwear
two pairs of socks
a charger for your phone
At first that might seem intimidating. Because there is not much comfort in leaving your country with a lot less stuff than we initially would have packed.
I have not yet experienced to go with the minimum. Or what we would call the necessities. Without it felt more free.
What I thought would be inconvenient not to have, was actually awesome.
The feeling of being able to do things easier, and way simpler than ever thought possible is relieving. We can do so much more, with way less.
So whenever we make our next trip/purchase/decision we should ask our self the following:
And if you chose the “No” route. Give yourself a clap on the shoulder. We have now made room in our wallets and mind to start being happy about the stuff we already have and what really matters.
I have been practicing an elite athlete routine for almost a decade now.
The most important takeaway I have from that decade is that everything is made through consistency.
Consistency trumps everything. Not one single thing is more powerful than consistency.
I have always been a really impatient guy (And I still am to some extend). But when I realised the power of small actions every single day instead of searching for big leaps every once and while. My mindset changed.
I have six things I will do every single day. And these six things is so stupidly easy to do, that there is no excuse not to do them. If I really want it. I can do all six of them in less than 10 minutes.
At the moment the six things are these:
Write 50 words on this blog
Meditate for 1 minute
Come up with 1 article topic for this blog
Read 2 pages of a book
Stretch for 1 minute
Acknowledge 1 thing that you are grateful for
And I have a 7th one. But this one does not require me to do anything. I can check this off if I haven’t spent any money that day.
After I have installed the app, I can make some widgets to the starter screen, where I can check them off as I’m doing them.
The most powerful of them might also be the easiest one. It is the daily gratitude. If we don’t acknowledge the things we already have, we will never do it.
Happiness is not around the next corner, purchase, investment or traveled to.
If we expect happiness to arrive when we final reach some imaginary milestone we will be in for a huge disappointment.
When we start to embrace the stuff we all ready have, and start to be thrilled about living in the most luxury time of man kind. Where more and more people have a decent place to live and a super market packed with organic foods within five minutes on a bike.
For a couple of years ago I stumbled across how fasting can be healthy for us humans. And until that day I think that I have had breakfast, lunch and dinner for 99 % of my life. Isnt that insane?! I never in my entire life had to miss a meal.
No matter how happy we are, there will be a person out there who has way less friends, less food, less stuff and less money, and still being happier than we are.
But if we start to practice a daily gratitude of that prosperous world the majority of people live in. We can be happier within seconds.
This is one of the main reasons why I don’t buy to many things. Because I know that 99 % of the time it will not serve how I feel.
Where I like to splurge is to buy a good friend a take-away pizza and a bottle of wine, and then have a conversation that sounds like this:
“You are the bomb!”, I will tell my friend with red wine teeth.
“No! You are the bomb!”, says my friend while he is pouring another glass of wine.
And this conversation will loop until the early morning.
I have never read a book from cover to cover before I turned 21 years.
But reading since then has change my life radical. Being able to learn from the best minds in this world is something I love. A book can be distilled knowledge from people who have researched a topic their entire life. And I’m able to learn that in 5-10 hours by reading their books.
Because it have made a huge difference on how I approach my investing. And it has been the reason why I might cut the period I reach FIRE in half the time.
If we just research a little about how to achieve financial independence. We learn that it is wise to buy stock index funds, in order to diversify. And if we want to diversify further, we can add bonds into the mix.
Now we have chosen our assets.
Is there another we can diversify aswell? YES!
We can diversify on time.
The stock market can be extremely volatile in single year. It can go 50 % up, but it can all so go 50 % down. If we start to look on longer time periods, like 5, 10, 15 or 30 + years, the stock market will become less and less volatile.
If we know that we want a million dollars to declare us self financially independent. With an allocation on stocks and bonds of 80 % stocks (800.000 $) and 20 % bonds (200.000 $). It would be way more ideal if would could loan the money upfront as young. And pay of the loan till the day we retire.
If a +50 % stock market crash happens early in our life, it wouldn’t be that catastrophic, because we will have time to rebounce. But if it happens when we are +50 years old. Then we are fucked.
When we are young, we don’t have that much money. So how can we get harder exposure to the stock market as young?
The authors of Lifecycle Investing tested a leveraged strategy against a normal target date fund. This is where you pick a retirement date, and then the stock allocation ramp down from a 90 % stock allocation to 50 % when we retire. And they tested it against a fixed stock portfolio of 75 % stocks and 25 % bonds.
They tested it with different stocks and bond allocations to see if there was different scenarios where the traditional way would be better. With a stock allocation 200 % – 83 % (moving from a 200 % to 83 % stock allocation in retirement) we will have the same worst output as a 75 % stocks / 25 % bonds, but a median return there is 63 % higher, and in the 90th percentile it will be almost 100 % bigger returns.
There are many more different allocations in the book.
But the biggest takeaway is even if we are really conservative about your retirement. It can still make sense to leverage early on.
Then the allocation would be like 200 % stocks moving to a 32 % stocks, and the rest would be bonds. By doing so we are likely to end up with 22 % more, than a traditional conservative allocation of 50 % stocks and 50 % bonds.
Lifecycle Investing will appeal to you, if you have bought into the idea of index investing to become financial independent, and want to take it a step further.
The worst enemy with this strategy will be our own psychology. When shit hits the fan, we need to stay calm, and follow our plan. And not everybody can handle that with a 200 % leveraged portfolio.
But if we think we handle the rollercoaster ride, we can diversify with time by leveraging as young. And reach our FIRE number earlier.
I thought it would be fun to share how far I have come with my financial independence project. I have always enjoyed watching other people’s numbers. And here I am. About to do one myself.
I have never understood why personal finance should be a tabu. But I can feel there is a slight resistance in me. Telling me that I shouldn’t tell everyone about my finances.
But here it goes:
This is how my allocation looks like September 2018.
I have about 465.000 DKK (72.500 USD) invested in stock index funds. Where 125.000 DKK (19.500 USD) is money I have borrowed to a rate of 1%.
And 58.000 DKK (9.000 USD) in cash.
My first goal is to have a SWR on 7% on my 110.000 DKK/year budget. Which is about 1.600.000 DKK (250.000 USD).
523.000 DKK / 1.600.000 DKK = 32,6 %
If I continue the way that I save, invest and borrow. I will hit my 1.600.000 DKK in about 36 months from now.
This month savings rate was at about 78 %. Which is quiet high for me. I have a 3 year rolling savings rate of 58 %.
This month I have chosen “only” to invest 5.000 DKK and leverage it with another 5.000 DKK so in total 10.000 DKK (1.500 USD). Because I would like to have som surplus cash when the market is going to tumble.
Never hesitate to contact me if you have any questions.
In a very long period of my life I thought that in order to become rich you need to earn a lot of money. When I started to study have the financial independent I found that this wasn’t the whole truth. The most important part to become financial independent is to spend less.
If we have two people. One is earning 500.000 $/year, the other make 50.000 $/year. If they both save 10 % each month they will have the same retirement date.
Because their 10 % is going to fund 90 % of expenses. It doesn’t matter what the amount is. The percentage is what we are looking for.
If we instead could live on 50 % of the income our situation will look like this:
Which is WAY BETTER!
“What about the rate of return then? That must be an important factor.”
It clearly shows us that when we can save +60% of our income, the rate of return is less important.
And if you have read my other article on How I’m Retiring in 5 Years or Less you can tell that I sometimes recommend people to leverage their investing. If we save and invest +60% of our salary, and we borrow the same amount to invest for. This means we hit our retirement number in half the time. And do some time diversification. If we have more money in the market early, they will make dividends, and they will have more time in the market to prove their performance.
The average savings rate here in europe is around 5 %*. And if we look at the chart above we will never be able to fund. Even if we have the same rate of return as some of the best investors in the world like Warren Buffet. He has averaged around 20 %/year. If we earn 50.000 $/year and we are saving the 5 % of our income and get a ROI on 20 %/year we will be able to retire in 25 years. While this seems like a relative short time period. We need to get the same ROI as the best investor in the world.
Yes you can be the next Warren Buffett. But I think you will have a higher chance of winning the lottery. If we instead save a large amount of money. And maybe leverage. We now have the odds with us.
Buying stuff if often something that we find convenient. But there is a difference between really wanting a thing, to really need it. becoming financially independent is more about how little you can live on rather than how much you make. So if you can spend as little as 1000 $/month, you can become financial independent extremely fast.
What we humans is good at is adapting. It is the best gift humans have been dealt, but it can also be the worst thing happening to us. No matter if it is a good or a bad thing we end up adapting to cruising back to happiness level we were at before an event happen to us.
Let’s say that everything is working out perfect out for us. We have no major problems in our life. One day a terrible thing happens to us. Our immediate response is to become sad/mad/angry/depressed. But as times passes by, we cruise back to the level of happiness we were at before the depressing event occurred to us. This is the good thing about adapting. We can lose a leg, but still be as happy when had both of our legs.
Another situation would be if we have an awesome life. Nothing seems to be disturbing us. One day we end up buying a lottery ticket when we went grocery shopping. This happen to be the lottery of a gazillion dollars. Now we are driving around in Lamborghini’s, owning mansions and we are never going to cook your own meal again. Even in this situation we will adapt. We will cruise back to the level of happiness before we won the lottery.
When we realize that chasing material things doesn’t equal to higher happiness. We can settle down. Focus and what actually does bring happiness. And do that.
Happiness is not tied up to money. There is a lot of people happier than we are, owning less stuff than we do. So why trade your expensive time for some money, and use them on stuff that doesn’t give you anything than a short boost. A couple of weeks from the purchase we will at the very same state before we bought it.
The modern system where we go to school, get an education and work for the rest of our lives is not mandatory. And it is time that we break this cycle. We should see our youth to trade your time for money, claim your eternal freedom back. By not spending that hard-earned money. Make your money work for you, and not the other way around.
We don’t have to spend our entire youth doing this. If I had the information I have today, I could have been financial independent before my 25th birthday. Never have to worrying about earning another dollar. And not through starting a huge company, and working my self to death. It would have been by being conscious about what I would spend my money on, saved and invested it.
Some people would call it extreme to work hard, save and invest for a couple of years, living frugal and focus on happiness itself. I call it extreme to buy shit that don’t make us happy, in order to work at a desk for their entire life.
Vilfredo Pareto was an Italian economist back in the early 1900.
He discovered that 20 % of the population owned 80 % of the wealth. (I think it was in Italy). People have later on applied this 80/20 principle to other stuff. Like 20 % of the carpet will get 80 % of the walking. Or 20 % of Nike’s shoes is giving 80 % of the revenue. This is some examples.
There is an 80/20 principle on personal finance.
80 % of our private economy is based on these subjects:
If we can manage to only spend 40-50 % of our take home pay on these three things. Then we are in good shape.
How to spend less on Housing
This is the most complicated of the three of them. It might all so be the most expensive one. The big dilemma is often to rent or to buy a home.
And if you ask me I will say rent, and here is 5 reason why.
Our money is better off in a stock index fund, than a mortgage
A house we live in is not an investment
It is way harder to move from there
We need to do the maintenance ourselves
We have no idea what the housing market will do
Some cities is harder to find a good place to rent. I live in Copenhagen, and it is super rare to find an awesome apartment, where the rent is not through the roof. But at the same time. It is not unusual to pay about 9.000 $/m2 for an apartment if we buy it. Which is insane!
I’m super fortunate to live in 50 m2 apartment I pay 500 $/month for which is super cheap here in Copenhagen. I have lived here for all most 10 years, and have no ambition off leaving anytime soon.
Let’s imagine that you are a humble person. Eager to retire early and live a more simple life. So you don’t want more space than me, about 50 m2. If you are placed in a costly city, an apartment like that would rent for 1000$/month.
A good round number.
Rent 1000 $/month
How to spend less on food
There is one obvious way to spend less on food and is to eat less out on restaurants. I think that we in general love good foods here in Denmark. And I’m no exception. I love good food, and there is good restaurants everywhere here in Copenhagen.
If I want to eat out, I often grab a pizza or a kebab. They cost about 5-10$. Being a weekly thing, it is not something that has a major influence in the budget.
The “not so obvious way” to save money on food is to fast.
Yes – you got that right. Not eating.
“But Loui?? I need to eat to survive?”
Take a look at this documentary on fasting. It is actually healthy not to eat once and a while.
I know that. The case is that people is only getting fatter. And there is a ton of health benefits in fasting. There is difference ways of doing it.
Is where you only eat 500 kcal for to non-consecutive days. And eat normal for the rest of week.
16 is referring to that you fast for 16 hours (including sleep) and eat for 8 hours. Every day. The normal way of doing this fasting protocol is to skip breakfast, and only eat lunch and dinner.
One meal a day. Is a bit tougher than the to others. But by doing this you can feast like king. Check this guy out. He is eating 4000 kcal every night. Feasting like a true king.
With eating less out on restaurants. Some occasional fasting. And eating the rest of your food at home. Spending more than 500$/person is a HUGE splurge to me.
So we will with budget with 500$/month for the food bill.
How to spend less on transport
I can’t count on my two hands how often I see people buying cars higher than their net worth. Which to me is insane. Buying a car is one of the worst investments you can ever do.
As a rule of thump never spend more than 2-4 % of your net worth on a vehicle. I know I’m not going to.
The most affordable and healthy way is to transport your self by bike. We can buy a second-hand bike for 200-300$. If you have to travel long distance go for public transportation. By biking we can also cut out the gym membership.
So let’s say we buy an awesome second-hand bike for 300 $, so the maintenance on it will be about 10 $/month. And because we don’t want to bike further than 15 km, we are going to take the train once and while which will be around 60 $/month.
Transport will then end up in monthly cost of 70 $.
We now look at total budget of:
Housing – 1000 $/month
Food – 500 $/month
Transportation – 70 $/month
In total 1570 $/month or about 19000 $/year
To be financial independent we need to have about 20-30 times our annual spending. It depends on how conservative we are. Which will be about:
380.000 $ – 570.000 $ in portfolio of stocks and bonds.
From here you will have every single basic cost covered. We can then take up 1-2 month of working, just to have some money we can do fun stuff with for the rest 11-12 months.
This budget is above is not very tough. It can be done so much more frugal if we want to. And if we are young, it can make sense to leverage into that savings.
Why should everyone try to become financial independent?
Whenever I tell people that I will retire in a couple of years they get excited. But whenever I tell them how I do it. They think it is to extreme.
You know what I think is extreme?
To work at the same desk for 30 + years of our lifes. People are getting more stressed by their work than ever before.
If we have the slightest form of ambition in our lifes, the “normal” way of showing that is often by:
Work 45 + hours/week in a job with a ton of responsibility
Get a big house
Brand new car
Couple of kids
Get some kind of expensive and time consuming hobby
And when we do those six things. We tie ourselves up for that demanding job, because we have a mortgage and car payment to pay. By obtaining all this stuff, we are not going to have time for our kids or our spouse. The only time we do have time for the family is the mandatory vacation in the summer and the winter.
Is this the life we want to live? Or is it just because that it seems to be the ideal dream for everyone?
The divorce rate has never been higher than it is today. So being in a relationship where everybody is working their ass off. Doesn’t seem to be the way to go if we want to stay together with our spouse.
I don’t think the six steps above is the best solution.
Here is the solution.
How to become financial independent
The media like to present rich people as someone who is having a successful businesses. Working 16 hours a day, 365 days a year. Earning + 1.000.000 $/year.
That is one way of doing it. But there is a way easier method.
Simplicity is powerfull but it can be very boring.
The traditional way of dealing with retirement is to:
Save 5-10 % of our pre tax salary
Work for 50 years
Enjoy the rest 15 years of our life when we are 70 years
Congratulation! We are now 70 years old and financial independent! (Not very admirable)
So what are we going to do instead?
Save a ton of money.
Saving + 50 % of our salary is the way to go if we want to achieve financial independence in the nearest future. By raising how much we save, also means that we can live on less. And will be able to be retire early faster.
The table below shows us how increasing our savings rate will cut off the time we have to work. Table credit: www.mrmoneymustache.com
Savings rate %
Years until retirement
But what are we going to do with all the money we have saved?
We invest it.
The table above is assuming that we get a 5 % annualized return on our investments. So we can invest in whatever that gives us that return.
What I suggest?
Stock index funds. As broadly diversified as possible.
If you ask me they are the most simple and easy way to invest our money.
Now you might thinking:
“But Loui, didn’t you write how to retire in less than 5 years?”
Yes I did. But I’m not going to tell you how to save 85 % of your takehome pay. There is a solution for that as well. But I’m going to warn you. It will only be for the risky people who can stomach the stock market going up and down.
Early retirement on steroids
This is only for a few people. With a burning desire to give the corporate day the middle finger as soon as possible. And it will make a lot of sense if we are between the age of 20-30 years.
What is the “steroids” for investing?
Leverage is where we borrow money to invest. People do this everyday with their houses. Often 20:1. (This means we pay down 5 % of the house payment, and borrow the rest 95 %)
We can do this with stock investments to. So whenever we buy for 100 $ we borrow another 100 $ to invest for. We then end up with 200 $ investment.
If we save 50 – 75 % of our takehome pay, and borrow the same amount. We have gone from retiring early in 7-17 years to retiring early in 4-9 years.
This method is not something I have invented myself. There is to Yale professors who had written a very informal book about this concept. It is called “Lifecycle Investing” . (Or visit them on there website for the book here, there is a lot of free videos on it)
Why leveraging short-term can make sense
Let’s say that we earn 4000 $/month and spend 1400$/month or 18000 $/annually on housing, food and transportation. And we decided that we wanted to quit our day job as fast as possible so we are aiming for an SWR of 7 %.
This means we need to hit:
18000 $ / 7 % = 260.000 $
And that we have a monthly savings rate of:
If we are conservative and say that we will not have any ROI on the money we are investing, we will hit that 260.000$ in 8.5 year.
But the power of financial independence lays not in how much we are making, but in how much we are saving! And this is where the power of leverage comes into the picture. If we leverage 2:1 that means for every 1 $ we are investing, we borrowing another 1$ and invest that as well.
Now we have reduced our working period from 8.5 years at the desk, to 4.25 years. Without any form of return on our investment.
This means that if you read this post as a 21-year-old, you could be retired by your 25th birthday.
Why leveraging long-term can make sense
Let’s imagine that we have read the text above and decided leveraging is not for us. And we do it the traditional way and dollar-cost-average into the stock market. Doing this from a young age means that we have very little money in the market when we are young, and a lot of money in the market when we are old.
If we invest 10.000 $/year, and get 7 % ROI + 2 % inflation from age 25 to age 65, this is how our wealth will increase:
2 % of our wealth is created between the age of 25-34. And an astonishing 64 % of our wealth is created between age 55-65. This also means that we are super exposed late in life, where we don’t have the time to make up for a bad period.
People often talks about bad years. But bad decades occur too. From 2000-2009 the S&P 500 made nearly no return for investors. And how do you think your portfolio would look, if you are expecting to make 64 % of your wealth late in life, and you end up with a decade like that?
If our take home pay is 4000 $/month, and we are able to save and invest the difference of 2600 $.
We are now saving 65 % of our salary. If we can borrow the same amount. Then we are saving 5200 $/month, and our retirement is 3-4 years away.
This is a super extreme way to deal with early retirement. And dealing with leveraged investments is only for educated people. But if we are willing to study this, our corporate lifes has never been looking better (AKA shorter)