Financial Independence - A worthy goal
Updated: Mar 26, 2021
Maybe it is the stage of life we find ourselves in. Us and a large cohort of our friends.
Those mostly carefree years in our 20's are a thing of the past; our 30's by and large the same. For most the stresses and practicalities of the 40's are our daily reality, and for a not-insignificant wodge of us the fabulous 50's are fast approaching (and in some cases, achieved!).
And so maybe it should come as no surprise that during one of our habitual trips to Paris recently, these 2 fateful words made an appearance not once, but during two separate conversations: Financial Independence.
And it got me thinking. Why is it that we don't hear more talk of finances and the need to put money aside for the eventual stepping away from formal work?
Especially during those golden years of our 20's and 30's, when even small amounts put aside have the power of compound interest blowing in the sails of their investment growth.
I recently came across another behavioural sciences concept which goes some way to explaining it: that of optimism bias.
As a general statement, we expect things to turn out better for us than not. This bias is found in every race, region and (perhaps surprisingly) wealth bracket.
One area in which this bias manifests itself is in our belief that in our personal lives our Future will be better than our past.
Research by the Nobel prize winner Angus Deaton, based on data collected from millions of individuals across almost every country on the planet, finds people are resolutely hopeful. They universally hold a steadfast but irrational belief that in their future they will be better off. He puts it this way: "I find a worldwide optimism about the future; in spite of repeated evidence to the contrary, people consistently but irrationally predict they will be better off five years from now".
And so when it comes to the question of saving for our financial independence, we make the (often unconscious) assumption that there will be time later for all that.
I rarely come across anyone, for example, who thinks they will be earning less in their 50's than in their 40's. But data for the UK from the Office for National Statistics shows that both median and mean salaries are higher for those in their 40's than for any other age group. The average salary starts slowly decreasing throughout the 50's, the rate of salary decrease accelerating into the 60's.
What's more, most people assume that they will continue to be able to work full-time throughout their 50's and 60's, and in fact for as long as they would like. But I charge you to look around your office and check how many workers remain who are in their late-50's or older. Whether it's redundancy, burn-out, illness or family responsibilities, we start dropping out of the full-time workforce like flies.
The statistics don't lie. It is just that we choose to ignore them, to our peril.
So what can we do to get ourselves on track? To close the gap between our good intentions and our unfortunately seldom-realised actions.
I personally like the idea of making small changes. Of doing just one little thing. Ideally a small thing that is continuous, that is forgotten about but continues to chug along cheerfully in the background, contributing over the long term to the change we would like to see.
So add a tiny bit more to your monthly pension contribution. Even better, sign up to your employer's pension matching scheme if they have one - it is (literally!) free money.
Or pay off a little more on your home loan. The compound interest effect of that over time could be large.
Maybe put a bit of cash in your ISA; maybe buy a cheap investment tracker fund.
But whatever you do, do it now. Time's a wastin', as they say.
Being optimistic is surely a good thing. Being an ostrich, head stuck in the sand, is assuredly not.
It turns out that, among even the most ambitious of our friends, they find themselves in their 40's or 50's and unexpectedly wanting to take some time for themselves; to slow down their lives; to be more than just their careers.
Financial Independence is a worthwhile goal - it is the ability to buy yourself more future freedom.
Make one small contribution towards that goal today.