For a month ago I said yes to participate in two young boys school project about financial independence.
I said yes, because I know how important the youth is.
In every single rowing club I know, the future success of the clubs determines on how big (and good) of a youth department they have.
All of the rowing clubs who neglect the young ones, is slowly digging their own graves. As time past by, there will only be grumpy old men back at the club. And that is not to appealing to anyone (sorry old men).
FIRE and Kids
Sometimes I feel frustrated about that I never got introduced to FIRE as kid. I’m quite sure that I would have been mature enough to see the benefits of that lifestyle, and probably be financial independent at my current age.
That’s why I would like to give my knowledge about FIRE to as many kids as I can.
They should know from very early age that we are able to shape the life we want, and not what society expect from us.
And that the road to happiness is not filled with mindless consuming.
I told the two boys that I was willing to come a make a presentation about FIRE on their school if they wanted to.
If you read this as a kid, and think it would be fun for your school to hear about FIRE. I’m willing to come and tell about it. For free.
Feel free to contact me on: Loui@wannabewalden.com
Many say that they can predict the stock market. While others admit that they can’t and stick to a passively managed solution. (Hint: I’m one of the boring passive folks)
I can’t help it, I keep study how investments works. And no matter how much I study the most frequent answer is that a passively managed investment portfolio is the best solution for the mass.
The other day I learned that we can (kind of) predict the stock market.
There is a certain pattern that keeps showing up in the stock market.
Have you ever heard of the Francis Galton?
He was a super nerd borne in 1822. But he was a nice nerd!
Francis Galton was the man who build the foundation of statistics. Which we are going to talk about.
He invented a board, which later on ended up with the name The Galton Board. (I don’t think he came up with that original name him self)
He discovered that if we want to quantify almost everything. There is a certain trend, or a pattern. Which would look something like this:
This will later on be called “The Standard Deviation”.
That pattern will show up every time we want to measure something. If we want to quantify the average height of a person in this world the mean is likely going to be 1.70 m (Just a guess).
And far out on the left. There is likely to be 1 out of 10.000 which is going to have height of 1 m. And far out on the right, there will be a person who is also 1 out of 10.000. But that person has a height of 2.15 m.
Galton and The Stock Market
In this modern society, we are bombarded with information. There is so much information that we often don’t acknowledge how big of a privilege it is.
All of the statistics and research I can find on almost everything today. Is something that people in the 1920 could not even dream of.
The 4 % rule was is not something people knew about back in the days for example.
The cool thing about Galton’s finding. Is that we see the exact same pattern in the stock market. At ifa.com I have taken a 50 year period (600 months), and looked at the monthly return of a 100 % stock index portfolio. And this was the pattern that came up:
As we can see, it is the exact same pattern as Galton’s standard deviation.
Galton and My Portfolio
600 months, is a long period. So I thought it would be a fun experiment to see how my monthly returns would look like.
Will my monthly returns have the same bell curve?
After I read my first book called “A safe investment” I then bought my very first stock in August 2013. That book suggested that you bought 10-20 individual stocks, in different sectors and kept them forever.
Which I initially did. Later on I learned about how almost everyone is better served with index funds. So just before I graduated as a building constructor in November 2015, I sold all of my individual stocks and bought index funds instead.
From August 2013 to November 2015 I had individual Danish stocks, and from November 2015 til this date, I have had global diversified index funds.
From august 2013 to this day there have been 62 months. Only 1/10 of the 600 months I demonstrated from the IFA example.
But you know what ?!
My Galton curve ended up almost the same as the 600 month.
Which I was quiet stoked about.
As you probably can see. I have three months of +9% monthly returns, and I only had 2 months of -4 % or worse. If we believe in Galton’s theory there will be 3+ months of -9 %/month or worse ahead of me!
But what I do know that If I stay in a 100 % stock index portfolio, I will have approximately 1 %/month before costs on the long run.*
How To Predict the Stock Market With Galton
This means that we can predict the stock market. We know that the majority of monthly returns will end up in the middle. Which will be around -2 to +2 %.
But we also know that when we have a monthly period with is either a -20% or +20 % that it is most likely to be a 1 out of a 600 scenario. And according to the statistics is not going to happen again in our life time.
There will be periods where we will have more negative monthly returns (bear market) and there will be periods where we have more positive periods (bull markets).
But if we stay in the market, we know that this bell curve will show up.
So when a bear market shows up, just stay the course, and remind yourself that someday it will be more tilted to the right.
A Short Awesome Video on Galton and The Stock Market
But Coast FIRE is a bit different. And it is quit powerfull for many of the young fellaz out there trying to reach FIRE.
The power of compound interest is very big when we are able to save money as young. If we have a 7 % annual return, our money will double every 10th year or so. This means that if you have a 1000 $ it will double to 2000 $. From there it will double to 4000 $ and so on. If we have a good amount of money when we are 30 years old. That money can easily double 4-5 times.
Or said different. Our 1000 $ at age 30 can easily grow to 16.000-32.000 $ in our life time.
What Is Coast FIRE?
With Coast FIRE we take advantage of that compounding.
Let’s imagine that you read this in age 25 (no worries if you are older). If you can to get to 500.000 DKK (76.000 $) by the time you are 30 years old, you never have to worry about that retirements saving again. From there we won’t have to add another dollar for the rest of our lives to that account. Because it will compound into A LOT of money.
If we leave 500.000 DKK (76.000 $) in a stock index fund from 1976-2016 we would have ended up with about 13.000.000 DKK (2.000.000 $) (adjusted for taxes, inflation and fees)*. That amount at age 70 will roughly put us in the top 1 % wealthiest here in Denmark.
And that is Coast FIRE. Figuring out how much money you will have to save and invest, and them leave the entire portfolio until the day that you retire.
If we earn 20.000 DKK/month (3000 $) after taxes, and saving 50 % of that in able to reach Coast FIRE, we are only spending 10.000 DKK (1500 $) a month.
If we are able to reach 500.000 DKK (76.000 $) at age 30, we can from there go out and take a part-time job that pays us 10.000 DKK/month. Because that is what our spending is. And with peace in mind know that our financial situation is going to be great because of compound interest.
We can take up jobs that we find more enjoyable than the stressful corporate job. I could see myself as a rowing/crossfit trainer or having a small mason company. Because that is something that I enjoy.
But even if we do stuff that we love for 40 hour/week, that too will be an ignoring task. I love rowing for example, but after two months on a training camp, doing nothing but, eat, rest and train, I look forward to come home. But I still love rowing.
How to Reach Coast FIRE in Two Years
And I’m here to tell you that we can reach Coast FIRE in as little as two years. If you are between 20-30 years old when you read this. You will be able to become very rich and not spend 40-50 hours/week on a job.
Let’s imagine that you get inspired to reach FIRE. but the numbers you need to reach are to overwhelming, so you decide to go for Coast FIRE.
At this very stage, your portfolio is at 0 $, but you have burning desire.
Now we are saving 240.000 DKK/annual (36.000 $) instead of the 120.000 DKK. That means that we can hit our 500.000 DKK in as little as two years from now.
But Loui?! Then I would have 240.000 DKK (36.000 $) in debt.
Yes that is correct.
240.000 DKK (36.000 $) can seem like a big sum of money when you are young. But if we compare it to how much money they can compound into AND how much money we can earn in our entire life. That money is only a couple of percentages of our entire earning power.
If you read this, and decide to do it. You can have a full-time job for as little as two years for your WHOLE life. From there you only have to make 10.000 DKK/month, which is something that you could do part-time with jobs you actually like. Or you could work full-time a couple of months, and then travel to cheaper places where 7.000 DKK/month would make you live a royal person.
And that portfolio is going to grow. If we want to, we could start to withdraw from it down the road. Because it becomes big enough to finance everything on our budget, and retire at a traditional age with bit less money than 13.000.000 DKK (3.000.000 $).
As the avid reader might have read in my monthly FI updates. I write that I will reach my first big milestone of a 7 % withdrawal rate in about 3 years.
I calculate this very simple.
I divide my yearly spending 110.000 DKK (17.000 $) with 0,07
I look how big my portfolio is now.
I subtract step one with step two. 1.600.000 – current portfolio.
I divide the result from step three with the average amount I save in a year.
And that is how I end up with 3 years. Give or take.
I don’t calculate with any return on the investment. Just to make it more simple.
How would things look if the 2008 stock market started tomorrow?
Or what about if it happen the day that I would quite a fulltime job?
The picture below is how my portfolio would look like if I keep save and invest 24.000 DKK/month (4.000 $).
16.000 DKK of those money would be my own, and 8.000 DKK of them would be borrowed/leveraged.
From 1/1/2008 to 31/12/2010 I would end up with a 1.530.000 DKK (236.000 $) and with an annual return on investment of -3 %.
Even with a -40 % in 2008 I would have reached my first milestone of 7 % SWR on my annual spending.
What would happen if three years from now, where I’m likely to hit that milestone and the crash happens then?
In this scenario where we have the 2008 crash right where I’m “supposed” to hit my first milestone. The portfolio will crash. Just before I hit those 1.600.000 DKK the portfolio is going to tank. But as you can see. Even with 40 % reduction in my portfolio, I’m going to hit that number if I keep investing, and work for another 8-9 months or so.
And that isn’t too bad.
I mean. The 2008 crash was one of the worst we have seen in this century. Not that I’m saying it won’t happen again. What I’m saying here is that even with one of worst scenarios, we are only postponing our milestone with a couple of months.
It is going to be a bumpy right. But sit back and relax. It is just a matter of a couple of months. Or maybe a year or two. (If shit really hits the fan)
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.
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)