Where did our wealth come from ? Part three

The aim of this third post is to draw deeper insights into how we achieved FIRE. So far we have established that the majority (approx two thirds) was derived from retained earnings, and one third from investment returns. This seems to tell you what we did but not really how we did it, i.e. what did we do differently than the average person/family to enable us to retire so much earlier. When I first conceived this post I intended to perform some kind of benchmarking analysis. For example, the average person earning X, spending Y, .... and compare this against our earning A, spending B, .... ; to try and build a bridge spanning the 27 year gap between our early retirement versus conventional (let’s say 65 years). Maybe I will still do this one day, but I can’t be bothered right now – sorry! Instead I am just going to try and list out the key things we did differently from most other people, and then try to judge which of these differences really made a difference. I hope this will be more useful and insightful than just stopping at the usual message: save more / spend less (although that actually is the crux of it!)

What did we do differently ?

Flying start (new car, no debt, no HECS)

Double Income No Kids until 30’s

Property Investment and accelerated loan repayment

Overseas “Expat” for 12 years

Carless decade

Frugal spending

High salary / career progression

Which differences really made a difference ?

To varying extents, all of the above strategies helped us reach FF in fast time. Some of them probably saved a year or two of work, others maybe cut a decade or even more. Some of them are also inter-related. Let’s go through them one by one...

·        Flying start (new car, no debt, no HECS) : This certainly was a boost, partly down to part-time work and saving while studying at Uni, and partly generous parents who wanted to pay off my Uni fees. I guess it’s not a silver bullet, but probably a year or two of head start versus the average person with a car loan / HECS debt.

·        Double Income No Kids until 30’s : I used to think this was a huge factor, but so far after 3 years of parenthood, I’m starting to wonder if the kid factor is not such a massive financial drain as what I had feared (perhaps its still too early to say). Also, I personally wouldn’t advocate making this life decision based on economics. For us, it took quite some years before we felt ready and excited to have kids, and there were periods when we questioned whether we would have them at all. The biological clock certainly played a role as a forcing mechanism and we are both extremely glad to have two wonderful children. Having said all of that, I think financially it is far more optimal to be DINKs and save/invest the surplus in your 20’s. I guesstimate this can be worth 5-10 years versus a couple who have kids in their early 20’s, and resultant impact on earnings (career break / slowdown) and expenses (childcare, kids costs, etc). Again, to reiterate I wouldn’t advocate deferring kids for financial reasons. If you know you want kids and are ready and eager to have them, then go ahead and do it !

·        Property Investment and accelerated loan repayment : I think the key factor is the last part. Our serial property investment was an effective forced saving mechanism. We didn’t overleverage. I feel our investment performance was neutral. We didn’t pick great properties but we didn’t pick lemons either. We had a good run overall with tenants over the years. It probably helped us get there a bit faster but I honestly don’t feel it made a huge difference versus if we had stuck it in index ETF’s and not used any leverage over all the years.

·        Overseas “Expat” for 12 years : The first seven of those years were on a traditional multinational company expatriate package, with lots of generous allowances and equalisations. This was a big income boost and enabled us to increase savings substantially. Not all expats capture the benefit, many spend or travel it away. In our case, I think we enjoyed ourselves but also tried to make the most of the financial opportunity. Aside from the salary aspects, there are factors like being a tax non resident of Australia. I think we didn’t capture this opportunity nearly as much as we might have in hindsight. In particular, with investment more in shares than property to capture greater benefit. As per the kids factor, I think key life decisions such as this, i.e. where do I choose to live, should be made holistically and not just based on economics. The opportunity to live abroad for us brought many positives to travel and experience different cultures, and the fact we could get ahead financially was the icing on the cake. I guess this helped us quite a bit, perhaps a 3 years short cut, off the top of my head.

·        Carless decade : We were lucky to live in big cities with excellent public transport systems (i.e. not places like Oz, US, where it’s hard to live without a car). Car’s are a financial drain and living without one for 10 years must’ve saved us a fair amount. Again it’s not a silver bullet, but would’ve contributed perhaps a year or two of avoided work.

Just a process check, adding up the above I get roughly 12 years worth of avoided work. We reached FF approx 27 years earlier than conventional retirement age, so that leaves another 15 years to account for. And that brings us to the two generic early retirement “must dos” – earn more / spend less.

·        Frugal spending : I’m unsure whether we are really frugal people, but let’s go with the description nonetheless. As I’ve mentioned, we have never been in the habit of budgeting or tracking expenses. But definitely I would consider myself tight with money and someone who likes to bargain hunt, I’m sure I inherited that from my folks. Some of this has inevitably rubbed off on Mrs FFA too after hanging around with me for so long! We are not materialistic people and spend little on clothes or brands. The purse strings have certainly loosened a lot over the years, and definitely we have accumulated our fair share of useless “stuff” and made some stupid impulse purchases just like nearly everyone else does. That was a bit of a ramble but to cut to the chase I would estimate from a NW accumulation perspective, these “frugal” tendencies carved at least some 2-5 years of work versus the average. But don’t forget a lower spending level has the double whammy effect of faster NW growth AND lower NW required for FF. The latter is a much more substantial effect in our case. Our typical annual spend of $30-40k (including two kids) is far below the numbers I see for “comfortable retirement” which are of the order of $55k (and that’s for a couple without kids). If one’s spending is 40% lower than the average, then one can also accumulate 40% less in retirement funds. That is a huge shortcut; decade(s).

·        High salary / career progression : Without going into details, my salary has been above average and career progression relatively good/fast. I had a good run for 18 years. Benchmarking against an average income, I expect this is a big factor driving our early FF. It’s also the reason we managed to achieve such a high savings rate of approx 80%, which was more about high earning than extreme saving. I guess this was worth at least 10 years, probably more.

Summary

This post identified seven things we did differently from the average person and attempted to guesstimate how many years each of these factors contributed towards earlier FF. In our case, a successful career, an extended period as DINKs, and frugal spending are the key factors. As I have stated in earlier posts, increased earning and reduced spending are both very important but if I had to pick one I would target sustainable spending reduction as the most critical driver of FF (due to the double whammy and controllability). I hope this gives you some insight and ideas on how to plan your own path to FF.