The No.1 Secret to Financial Independence (for any income levels)

The number 1 Secret to Financial Independence is not the Return of Investment (ROI), but the saving rate. In this video, I’m going to show you the reason behind it and the fact that families with different income levels can reach FI with exactly the same amount of years.

Saving rate is the number one factor to determine how long would you take to achieve financial independence in this video i’m going to show you the reason behind it and the fact that families with different income levels can achieve it with exactly the same amount of years hi my name is irene hit the like button if you want financial freedom where you would stop

Worrying about your work rent mortgages and bills i mean who doesn’t if you look at a person’s financial positions in a lifespan from being financial dependent to debt-free all the way up to financial abundance when can you tell you’re financially independent financial independence is the status of having enough income to pay the living expenses without having

To be employed or depend on others so the income here is definitely passive income it could be for your income return things like dividend or distributions or the price return the capital gain from your investments so how do i know how much will be enough for me to achieve fire four percent safe withdrawal rate seems to be the golden formula to determine the size

Of your portfolio that can generate enough total return to cover your annual expenses so to back calculate you need the size of your pot to be 25 times of your annual expenses but why four percent this four percent metric was created in the 1990s by a financial advisor william bengan who assumes the return of an investment is seven percent minus the three percent

Inflation of course the seven percent is based on the historical return of stock market and the past performance is never a guarantee of the future performance although the annualized return of s p 500 is about 10 gross return since inception of course you can plug this withdrawal rate to a smaller number just to be conservative which will give you a bigger size of

The pot that you need to build for example based on abs the average weekly household spending on goods and services is 1 425 that gives that around 75 000 per year so to follow the 4 rule for an average aussie family you will need 1.9 million invested to follow the three percent rule for example the family would need 2.5 million invested in the investing world we

All know that we need to take advantage of the compound interest and there are three elements in this formula the present value of your portfolio or your principal the rate of return of your investment and time or the frequency of your rate of return compounds and i talked about this formula in details in another video that time has the biggest impact to determine

The future value of your portfolio but people who are in the five community want to get out of the rat race as soon as possible can i go 5 by 80 it just doesn’t make sense right so we got limited time here but they’re always about the focus factor here shouldn’t be the rate of return of your investment but the saving rate let me explain when i firstly heard of

Fire movement i was a little bit doubtful with the concept of achieving fire with limited time because you think about it when can you start making money 22 as a fresh graduate and what is the average fire age 45 50 so you are taken away with the biggest weapon time and what else can you focus the return of the investment and of course you can do aggressive dollar

Cost averaging as much as you can but i never link the how much percentage of the expenses can be covered by the return of your investment so when i came across with this calculator called when can you retire by mr money massage this formula only focuses on one single factor that is the saving rate is the money that you invested divided by the brain home income

This formula is so simple it blew my mind by the way if you never heard of mr money massage he’s a canadian-born blogger who retired at age 30 as a software engineer in 2005. mr money massage has a big influence to the fire community here is his logic and how he did it by the time you are financially independent you want your pot to cook enough food which is the

Total return to cover your expenses remember we don’t want to touch the principle so our net worth never shrinks so we can just focus on the percentage the total return of the investment covers the expenses by the time your hour exceeds the expenses you did it you made it congratulations let’s play around with this calculator and the current annual income is the

Money that you bring home and the current annual savings is the amount of money that goes directly into investment to let the money work for you so it shouldn’t count the cash in the low interest rate saving account for example and this calculator is based on net return of investment roi five percent withdrawal rate four percent so let’s plug the number of annual

Brain home income here as a hundred thousand for example and you have thirty thousand invested every year which gives you the saving rate of 30 percent it will take 28 years to find in the beginning of the video that i mentioned families with different income levels can achieve fire with exactly the same amount of years well there’s an assumption here that is

You haven’t built up your portfolio yet because if your starting points are different that’s going to till the number of years a little bit say another family the annual brain home income is 50 000 and you manage to put 30 which is 15 000 into investment it will take exactly the same 28 years as well and for this family as an example if we increase our saving rate

By 10 the time to file reduced by 23 from 28 years to 21.6 years if we keep the same saving rate 30 to make sure that we take the same time 21.6 years we need to increase 3.8 more on the roi every year which means that you need to have a net return of eight point eight percent plus the three percent inflation which gives you the gross return eleven point eight

Percent to me that is a little bit too optimistic by the way the saving rates of different countries on this page is based on year 2008 which is a little out of date and let me give you the average number based on the year 2019 here and then you can see where you are at comparing your country’s average saving rate and how to increase saving rate a goal without

A plan is only a wish so without knowing your yearly expenses how can you draft a plan of attack when was the last time you review your yearly expenses things like insurance your house insurance your car insurance your private health insurance your life and tpd your everyday banking your mortgage package your super utility all of these can save you heaps if you

Dedicate a little bit time to do some research and shop around let alone the forgotten direct debit subscriptions earlier this year after my cfa exam i did a big housekeeping of the providers and save us a couple thousand on yearly basis everybody knows that your brain home income minus your expenses equals your savings and you put portion of your savings into

Your investments so to increase your saving rate you can increase your income level or cut your expenses well to increase your income level you can work harder take extra hours or take a more challenging role but a more challenging role normally means a more stressful role which possibly leads you to spend more or you can get a pay rise but during the pandemic or

Post pandemic i think it will be a little bit challenging on the other hand cutting expenses is relatively easier and it can almost bring you instant result that’s why a lot of people in the fire community they advocate to go frugal which i don’t fully agree and i don’t want to go down the path either and recently i’ve been reading marie condo’s books this is the

Second one that i’m reading the life-changing magic of tidying up well i think a couple takeaway points that can be applied to investing even to life she believes that tidying up a house is not about getting rid of stuff it’s about keeping the items that you really like in her words is keeping the items that really spark joy so if you think of your home if you’re

Surrounded by the things that you really enjoy you are living your dream life isn’t it you’re not only tidying up your house you’re tidying up your life you’re reflecting on yourself so by examining your expenses you may detect a couple of unhealthy spending habits or maybe even that can help you to define who you are what your life goals are and do you buy things

Because your friends are buying that you actually don’t need do you buy new clothes new cars to impress people around you who probably don’t care do you buy expensive clothes to make people think that you’re rich why would you care how other people think of you what makes you happy we can’t blame ourselves we’re all human beings shopping can produce a dopamine which

Is a neurotransmitter that can bring us instant pleasure and satisfaction but sadly this feeling doesn’t last long and also shopping can bring us instant gratification and who likes to seek instant gratification children you know what i’m talking about if you have one but the ability to hold the impulse now for a greater reward later is an essential skill that we

Need to help ourselves and our kids to unwire their brain to make smarter decisions same with investing money has time value the earlier that you invest and let the money work for you the bigger the value of your investment will be in the long run my whole point is cut the noises and only spend on the essential things and the things that you truly enjoy financial

Independence retiree is the goal for the people in the fire community and the saving rate is the number one factor to help you achieve it faster however be careful not to get burned because the fire concept or any concept shouldn’t be overpowering yourself and you don’t want to be in another race to get out of the rat race instead try to be kind to yourself eat

Healthy be mindful and try to enjoy the process for my husband and i we like the concept of the financial independence but we both like to work as well so by the time we reach our number we probably will keep working not for anybody else but for ourselves alright guys thanks so much for watching and i hope my video added some value to you because that’s always my

Goal my name is irene i see you next week bye

Transcribed from video
The No.1 Secret to Financial Independence (for any income levels) By Irene Zhu