Two invisible inflection points of the financial independence journey (2 down, 1 to go)

I am around 3 years in to my journey towards personal financial independence, so I write this as someone who is not a newbie, but also senses a fairly long way to go. I’m looking at various ways to speed this up by tweaking the levers around E, S & I – Earn, Save & Invest, as so crisply put in this article (not by me).

Looking back at the last three years and looking ahead at the next, let’s say, 10, I propose there are 4 key stages in the journey towards financial independence. I believe that I have gone through probably the first two of these.

I propose that the first an the last key stages are the beginning an end. Everything in the middle is the journey. The middle two are key stages in that journey that will happen but may not be noticed. They are / will be significant making them what I’d call invisible inflection points.

Stage 1: Start – you have to start somewhere. Get a plan. Work out your incomings, outgoings and your savings. Try to increase your incomings and reduce your outgoings over time. This will gradually lead to an increase in your net worth. Live your plan.

Stage 2 (the first invisible inflection point): Embrace the chains of habit – once you’ve been ‘living your plan’ for a number of weeks / months, this will just become part of your habit. I think it took about 3 months for my budget plan / savings forecase to become foundational guidance for how much I managed to save each month and fundamendally change my lifestyle from one of perpetual consumerism, to seriously journeying towards FI. In the words of, I think Peter Drucker, ‘what gets measured, gets managed’ and it’s really true with personal finance – you need a plan to measure yourself against and track progress. Falling behind will motivate you to address this and leading ahead means it’s all good (but maybe adjust the plan)! If you don’t have a plan, forget it.

This is an inflection point because it marks a shift between a ‘consumer’ lifestyle to a self-perpetuating ‘saving’ lifestyle. This doesn’t happen at the start, it happens a little way along the journey, when the effort required to follow the plan doesn’t get in your way of doing so anymore. You can comfortably deny buying yourself that new iPhone X (which I definitely would have done bought had it come out in 2010) in favour of keeping the £999.

“The chains of habit are too light to be felt until they are too heavy to be broken” – Warren Buffet

Stage 3 (the second inflection point): Reaching Escape velocity – if Stage 2 was about your lifestyle and new approach to saving becoming a ‘self-perpetuating’ good news story, Stage 3 is about your returns on savings/investments reaching a point that they become ‘self-sustaining’, that is that they can comfortably pay for your lifestyle without reducing in value.

The consensus seems to be if the value of 4% of your investments is enough for you to live off, provided they are invested appropriately (i.e. a mix of stocks, other income producing assets), so long as you don’t inflate your lifestyle the value of your investments over time are unlikely to reduce. Hence, they are self-sustaining. You have reached escape velocity. You could be financially independent. Yeahh. Note: I’m a fair bit of a way off that yet.

Stage 4: Finish – different to ‘Escape velocity’ for two reasons. The exact moment escape velocity is reached is invisible and technically incalculable as the future values are not known. 4% is a conservative estimate, but you could set this at 8% if you were feeling particularly optimistic and notionally achieve escape velocity earlier.

The second reason is that even after achieving escape velocity you may not decide to conclude the journey towards financial independence. You might

How many stages have you been through? It would be interesting to hear some thoughts from people who are further through the journey than I. If you’re less than 3 years in or haven’t started yet, hopefully this gives you some motivation!

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