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  • Doug W
  • September 08, 2020 12:28:55 AM
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A Little About Us

Ever feel like you are stuck in a loop? Wake up. Work. Earn. Spend. Repeat. Blue Sky Money is a personal finance blog aimed at helping people master their money, understand financial independence and achieve financial freedom. BlueSkyMoney.com covers ways to make money, spend less, invest better and a bunch of tools to help understand and improve your financial position. USA and UK focussed money blog for the FI movement, the FIRE movement and anyone who wants to get more control of their cash. Blue Sky Money is a money blog gives you the tools and midset to to equip you to get rich, get in control and win the money game.

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    Stages of Financial Independence – 8 Steps to Freedom

    As you pass through your life, you inevitably find yourself at different stages of financial independence. Some stages you might pass through quickly, some drag out for years, and still others you may never achieve. If you want to control your money life, you should be able to quickly recognize which stage of financial independence … Stages of Financial Independence – 8 Steps to Freedom Read More...

    As you pass through your life, you inevitably find yourself at different stages of financial independence. Some stages you might pass through quickly, some drag out for years, and still others you may never achieve.

    If you want to control your money life, you should be able to quickly recognize which stage of financial independence you are currently in. The opportunities and priorities in your life will change depending on which level you are currently at. Be intentional and you can move through to the higher levels.

    As ever, we are all different. What matters to you may be different to what matters to me. By understanding where you are at financially and where you are heading, you can make better decisions about the nexts steps fo your life.

    The 8 stages of Financial Independence

    The 8 stages of financial independence - Dependence, Survival, Solvency, Stability, Investing, Security, Independence, Freedom

    1st Stage – Financial Dependence

    There are only two certainties in life. Death and bills. Whilst your breathing, money is being spent on your behalf to buy clothes and food and shelter.

    A person who is financially dependent relies on others for their financial support.

    This means somebody else is paying your bills.

    Rely on others for financial support

    Dictionary.com

    So who’d be crazy enough to dedicate their money to keeping you warm and happy? Family, Government and Charity.

    Most commonly, its parents. You are born into this world with nothing. You are completely reliant on the kindness of others. They pay for everything you need. The clues in the definition – you are legally their dependents.

    As you get older, you realize your family doesn’t have a magic money tree. More than likely they work to pay your bills. At some stage, you will need to stand on your own two feet. Maybe even eventually support them.

    The government also provide a safety net for those who can’t rely on themselves. Social security payments, care for the elderly and state pensions. These are all examples of financial dependence. If you are relying on the government to support you, you are dependent.

    Lastly, charity may be there to support those who have no means of supporting themselves. Food banks, shelters etc.

    Whilst it’s wonderful that family, state and charity are there to catch those who can’t help themselves, it’s not sustainable. Financial dependence means somebody else is making a sacrifice for your benefits. You parents work to feed you, the government taxes people to support you, charities take from generous benefactors to five you support.

    As soon as you are able, you need to move beyond dependence on others. You need to earn an income.

    2nd Stage – Financial Survival

    Starting to earn an income is such a major milestone in a persons life. Sometimes, it’s not celebrated enough. It’s a key turning point in the stages of financial independence.

    Earning an income means you are doing something in exchange for money. But if you aren’t earning enough money to pay all you expenses, you are only financially surviving. Fighting to keep your head above water.

    Many people start earning an income that’s less than their expenses. That’s how to transition from financial dependence. It’s quite likely that for your first job, you continued to live with your family, or had income support from the government.

    When you are fully financially dependent, you are giving nothing in return. As an income earner, you have some cash to contribute towards your own survival.

    This is when people get Saturday jobs, or work nights whilst they study.

    It can also be where you are are earning but having to borrow to keep up with your expenses. This might be a deliberate plan, like taking a student loan to invest in your future. Or it may be because you can’t cover your expenses.

    You often switch dependence on family to relying on banks to fund your lifestyle. Unlike your family, when you take a loan the bank expects you to pay it back!

    Eventually, you are earning enough that you are no longer dependent on your family and society to support you. You’ve become financially solvent.

    3rd Stage – Financial Solvency

    When you are financially solvent you are able to pay your debts as they fall due. In other words, you can cover your expenses and debts as they fall due to you with the income you are earning.

    Solvency is the “ability to pay all legal debts.”

    Merriman-Webster

    For many, this will be their first full time job. By then you may have built up student loans or credit card that you need to pay off. But the money coming in means your able to get to the end of the month without having sunk into more debt.

    In essence, financial solvency means your income equals your expenses.

    For many in life, reaching financial solvency is the bare minimum to live without support from others. But as you earn more and take control of your finances, you may reach financial stability.

    4th Stage – Financial Stability

    Financial stability mean you have stepped beyond mere solvency. At the end of the month, you have more money than just enough to cover your bills

    You have become a saver!

    Saving is actually a passive act. It is the art of earning money and not spending it. To be at the forth stage of financial independence, you must have more income than your expenditure.

    Even if you are keeping only $1 more than you earned, you are financially stable. Like the old line from Charles Dickens Mr Micawber:

    Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

    Mr Micawber, Charles Dickens.

    There are choices available when you reach this milestone.

    A choice that many make is to spend more. In other words, they realise they have saved money so they up their consumption. That could be on new shoes, nicer wine or a bigger house. Sometimes known as money creep, your spending inflates to absorb all the money available.

    If you are suffering from money creep, bad news. You immediately drop out of stage 4 and move back down to stage 3. You are only financially solvent. Any disasters or surprise bills could tip you over until you are only surviving or maybe even dependent on others.

    There is an alternative. That is to not increase your spending to match your income. That means you keep hold of your money. You are saving.

    Many people in this stage use this opportunity to build up an awesome emergency fund. This gives them money to rely on in future, in case there is a surprise cost in the future. (And there are always surprise expenses – that’s life!)

    Building up an emergency fund of three months or more expenditure will protect you from a short-term loss of income (like losing your job) or from big costs.

    As time goes by in stage 4, you will start to build up your savings. You may even pay off debts that aren’t due until the future like overpaying a mortgage or paying down student loans. Your net worth will turn positive. You’re starting to really get control of your money.

    So, you’ve come this far. Why are you not rich? Because all the money you earn is from your hard work. The function is effort in, money out.

    The next stages of financial independence change this paradigm. You are not simply working to earn, your money is working for you.

    5th Stage – Financial Investing

    Once your emergency fund is in place, and you are consistently earning more than you are spending, it’s time to invest. This is the next of the stages of financial independence.

    Whilst saving is simply keeping money you earn, investing is using that money to make more money!

    In essence, a financial investor has started “buying” assets with the intention of earning a return over time.

    The return on your investments can be from interest, or dividends, or captial gains. Your money could be in a bank account or holding shares or bonds or fine wine or foreign currency or even Bitcoin. The key is that your intention is to keep money to make money.

    As time goes by, thanks in part to the magic of compound interest, you will find your net worth increase and even accelerate.

    Eventually, you will be financially secure.

    6th Stage – Financial Security

    You are financially secure when you can survive any planned or unexpected change in your financial circumstances.

    The state of being secure – free from danger, free from fear, free from the prospect of being laid off.

    Merriman-Webster

    Someone who is financially secure has a bunch of strategies available if there was an cut in their income or a big jump in their required expenditure:

    • Build up multiple streams of income able to generate passive and active cash
    • Hold insurance against the biggest risks to health, home and security.
    • Keep trained and marketable to future employers.
    • Have income and returns coming in from invested assets.
    • Limit future expenses by paying off costs today – like mortgages and car loans
    • Know options to reduce spending in an emergency situation.

    In essence, your financial investments cushion you from risk. The more money you have set aside, the more security you have. If you supplement this with insurance, then you are even better protected.

    You know with confidence that if you lose your job, you have the money to cover your lifestyle whilst you find another job.

    So, you may be wondering why financial security isn’t financial independence. The answer is simple – one of you strategies for financial security is to take another job. If you need to take a job, you are not financially independent.

    7th Stage – Financial Independence

    You are financially independent when you are able to cover all your future expenses from the asset you have invested today.

    For many, this is the dream – the greatest achievement in the stages of financial independence. That’s why it’s took it’s name from this stage.

    It is possible to use financial independence to retire early. But that is a choice. You could equally keep working, or change careers. With the stages of financial independence, the choice is entirely yours.

    The simple formula for financial independence is to multiply your annual expenses by 25. If you have invested assets above that number, you have achieved the stage of financial independence.

    As an example, Jay has annual expenses of $40,000. 25 multiplied by $40,000 equals $1,000,000. Provided Jay has invested assets of at least $1,000,000, he is financially independent.

    Good news for Jay. He just received a bonus from work and invested it. He’s now got $1,000,001 invested. He has reached the 7th stage of financial independence.

    Like any of the stages detailed here, it’s possible to fall back from stage 7. If change your spending patterns, or have bad insurance, it’s possible to lose financial independence status.

    So is Financial Independence the final stage of this money journey? Not quite. This isn’t the seven stages of financial independence. There is one more step. And that is financial freedom.

    8th Stage – Financial Freedom

    Financial Freedom is Financial Independence dialled up to the max. Not only are you able to cover your day-to-day living expenses from your assets, you have extra returns. This means you can choose to spend more, if you want.

    When you are financially free you have sufficient resources to choose the life you want to lead.

    In technical terms, any assets you hold beyond those needed to be financially independent are par of your freedom fund. You could spend all of that money today, and still be financially independent.

    Financial freedom is an insurance blanket protecting your financial independence. FI relies on assumptions about your future investment returns and your future expenses. Even the most cautious predictions of the future can prove to be wrong. Holding assets well in excess of the level needed for financial independence gives you more security to relax.

    An alternative way to calculate this is to see what higher level of expenditure you could have versus your current annual costs.

    Following the example of Jay that we started in Stage 7 – Financial Independence above. Jay has assets of $1,000,000 and annual expenses of $40,000. Using the simple financial independence calculation, Jay has 25 times his annual expenses so is financially free.

    Take your invested assets and divide by 25. This gives you an approximate estimate of how much you could spend each year.

    So, let’s say Jay has $1,500,000 in assets. $1,500,000 divided by 25 = $60,000. Therefore, Jay’s current life style costs $40,000 a year. But now Jay has a choice – he could spend $60,000 a year. That’s an extra $20,000 or 50% more than his current outgoings.

    This is financial freedom. Jay is earning enough return from his assets to be free to choose to do new, different, more expensive things.

    He is financially free!

    And you could be too.

    Stage 8 - Financial Freedom. Be as cool as this pineapple.

    What’s next for the stages of financial independence?

    The purpose of setting out a list of stages like this is not for academic fun. It’s to help you take charge of your finances.

    Be sure to determine which stages of financial independence you are currently at. If you are in the early stages, do everything you can to boost your income and control your expenditure.

    Later, make sure you are investing wisely for the long-term.

    And if you have reached stage seven or eight – you financially independent or financially free, congratulations! Enjoy your life.

    Remember, that just because you’ve reached a certain stage, that doesn’t mean you will stay there forever. You can continue to climb, or bad habits and bad circumstances can result in your falling back to earlier stages of financial indepednence.

    Now, if you’ve come this far, you may be hungry to progress further. If so, it’s time to learn the ten steps to financial freedom.


    The Apple Trees – Financial Independence Fairy Tales

    Stories can be powerful for illustrating the lessons of financial independence. In this series of stories, you will meet explore a familiar fairy tale world with remarkable characters and magic. There’s action, and drama, and love, and sometimes a happy ending. Enjoy these financial independence fairy tales. The Apple Trees by Doug Weller A Financial … The Apple Trees – Financial Independence Fairy Tales Read More...

    Stories can be powerful for illustrating the lessons of financial independence. In this series of stories, you will meet explore a familiar fairy tale world with remarkable characters and magic. There’s action, and drama, and love, and sometimes a happy ending. Enjoy these financial independence fairy tales.

    The Apple Trees by Doug Weller

    A Financial Independence Fairy Tale

    Once upon a time there lived two sisters, Annabel and Florence. Their mother had died when they were young, so they lived with their lonely father. The sister’s father was very poor. Every penny he earned got spent keeping his daughters happy but still the two sisters ended the day hungry.

    One day, Annabel and Florence climbed up a steep hill near their home. At the top of the hill, they found two apple trees. On the first apple tree hung a lone green apple. And, on the second tree hung a lone red apple. Both the green apple and the red apple looked delicious.

    “Dear Annabel, wouldn’t it be wonderful to eat these apples? I’m sure nobody would miss one red apple.” Annabel asked.

    “Dear Florence, I am just as hungry as you. But they the apples do not belong to us. I wish that they did,” Florence replied.

    The sister’s heard a noise from far below at the bottom of the hill, and watched as a hunched, old woman struggled uphill. The old woman had grey hair and each hand she carried a heavy bucket of water.

    Annabel and Florence rushed down the hill and asked if they could help. The old woman stopped and explained that she was carrying water from the stream nearby to water the two apple trees.

    Immediately, the sisters offered to help carry the buckets and the olde woman thanked them for their charitable offer. Annabel and Florence each took a full bucket of water and carried it uphill. 

    Once at the top of the hill, Annabel used her bucket to water the tree with the lone green apple, and Florence took the second bucket and watered the tree with the lone red apple.

    The old woman was very pleased.

    “You are both so kind to help me without any compensation,’ she said. “I too was young once, but now I struggle to carry those heavy buckets up the hill every day.”

    The old woman wanted to thank Annabel and Florence and so she made them a special offer.

    “Water my apple trees every day for the next four years. If you do as I ask I will return and give you more apples than you could eat for the rest of your lives.”

    The sisters were both very excited by this offer because they were so often hungry. But as they were eagerly about to agree, the old woman lifted her hand.

     “Before you say yes,” she said. “You must make a solemn promise. Do not eat a single apple from these trees until I return.”

    Annabel and Florence eagerly accepted the old woman’s offer. They promised to water the apple trees every day, and not to eat a single apple until the old woman returned.

    The old woman looked each sister in the eye.

    “We are agreed. I will see you in four years time. You can keep the buckets.” Then she plucked the lone green apple from one tree and the lone red apple from the other tree, and trudged away down the hill.

    The next morning, Annabel and Florence woke early. They each carried a bucket to the stream and filled it to the brim. Together, they crossed a rickety bridge and climbed the steep hill up to the apple trees.

    At the top of the hill, both sisters put their heavy buckets down.

    “That was hard work,” Annabel said. “But I suppose it should be hard work, if we are one day to get more apples than we could ever eat.”

    Florence agreed. “Working for the next four years will be difficult,” she said. “But all the effort will be worth it in the end.”

    “Dear Florence,” Annabel said. “I will water the tree that had the green apple because green is the colour of nature. And we are working with nature.”

    “Dear Annabel,” Florence replied, “I will water the tree that had the red apple because red is the colour of blood. And we are working so hard.”

    With both sister’s in agreement, they each watered their chosen apple tree.

    Time passed, and every day the two sisters filled their buckets in the stream, crossed the rickety bridge, climbed the steep hill, and then watered their apple trees.  Annabel always watered the tree that grew the green apple and Florence always watered the tree that grew the red apple.

    They watered the trees in autumn, when the leaves fell to the earth.

    They watered the trees in winter when the trees stood bare and covered in frost.

    They watered the trees in spring when the trees sprouted new blossom.

    And, they watered the trees in summer when the apple tree finally bore fruit.

    “Look,” Annabel said in excitement. She pointed up to the branches of her tree. There hung a delicious-looking green apple. Annabel was so hungry and very tempted to eat the apple. She reached up into the branches, about to pluck it from the tree. But then she remembered the old woman’s words, and left the apple where it was.

    When Florence arrived, she found a delicious-looking red apple hanging from her tree. She too was hungry and very tempted to eat the apple. She reached up into the branches, about to pluck kit from the tree, but Annabel interrupted her.

    “Dear Florence, don’t you remember what we agreed with the old woman ?” Annabel asked. “We promised not to eat the tree’s apples.” 

    “But I am so hungry, dear Annabel,” replied Florence. “And besides, nobody will miss one red apple.”

    So Florence plucked the red apple from the tree and ate it. The red apple was just as delicious as it had appeared, and Florence felt satisfied for the first time in weeks. Annabel stared at the green apple but managed to resist temptation because she had promised the old woman not to eat any apples.

    “Perhaps tomorrow,” she said, because although she was very hungry she knew she could wait at least one more day.

    The following morning, when Annabel and Florence came with their buckets of water to the apple trees, they saw that the green apple had fallen to the ground and it was now being eaten by the worms.

    Florence laughed at her sister.

    “Now do you wish you had eaten that green apple, Annabel?” she asked.

    “Yes, I do. I can’t help it. But I kept my promise so I do not regret it,” Annabel replied. 

    Every day, the two sisters continued to fill their buckets from the stream, cross the rickety bridge, climb the steep hill, catch their breath and water the two apple trees. 

    The seasons passed once again from Autumn, to Winter, to Spring and then back to Summer.

    One summer’s day, Annabel reached the top of the hill and found two delicious green apples hanging from her tree. She was still as hungry as ever and very tempted to eat the apples, but she remembered the words of the old woman so left both green apples on the branch.

    When Florence looked up into the branches of her tree, she found only one red apple hanging from it.

    “You have two green apples but I have only a lone red apple,” she said.  “I have worked every day for a year to keep this tree watered, and I am so hungry. Nobody will miss one red apple.”

    So Florence plucked the red apple from the tree and ate it. The red apple was just as delicious as it had appeared. Annabel looked up at the two green apples but decided to keep her promise to the old woman and left the two apples alone.

    “Perhaps tomorrow,” she said, because although she was very hungry she knew she could wait at least one more day.

    The following morning, when Annabel and Florence came to the apple trees, they saw that both of the green apples had fallen to the ground and were being eaten by worms.

    “Now do you wish you had eaten a green apple?” Florence asked.

    “Yes I do. But I cannot forget my promise to the old woman,” Annabel replied. 

    Another year passed, until one day Annabel climbed to the top of the hill to find four green apples hanging from her tree. On Florence’s tree, there was once again only a lone red apple. 

    “Your tree has four green apples on it,” Florence said, “and mine only has one red apple. We we have worked just as hard as each other. I feel so sad that I have tried so hard and have so little to show for it. The only way to cheer me up will be to fill my stomach. And besides, nobody will miss one red apple.”

    Florence plucked the red apple from the tree and ate it. The red apple was just as delicious as it had appeared. She then turned to her sister who was looking up at the other tree and laughed.

    “Dear Annabel, you are a fool. You are going to leave all four of those delicious green apples in the branches. Even though you know by tomorrow they will fall to the ground and get eaten by worms.”

    “Dear Florence, I wish I could eat those apples, but I cannot break my promise. Perhaps tomorrow.”

    But of course, the next day the green apples were being eaten by the worms.

    Another year passed. 

    Annabel found even more green apples hanging from her tree. And, once again, Florence found only one red apple and, once again, she couldn’t resist eating it.

    “Dear Annabel, it’s only one red apple!” Florence exclaimed. “As you have so many apples on your tree, surely you could eat one.”

    Annabel was sorely tempted. 

    “Perhaps tomorrow,” she said, because although she was very hungry she knew she could wait at least one more day.

    The next day, a great hurricane came to the whole region. The wind blew so powerfully that Annabel and Florence wished they could stay indoors, but they knew they had to water the apple trees. They fought against the wind as they filled their buckets in the stream. They fought against the wind as they crossed the rickety bridge They fought against the wind as the climbed the hill. 

    When they finally climbed to the top of the hill, they found that all of the green apples had blown to the ground and were being eaten by the worms.  

    “Ha! I am glad I ate my red apple ,” said Florence. “My stomach is full. And you have waster all your green apples.”

    Annabel looked at all the once-delicious green apples lying half-eaten on the ground and wept.

    Florence comforted her sister. 

    “In just one years time,” she said, “it will be four years since we started watering these stupid apple trees. The old woman will return, and she has promised to give us more apples that we could eat for the rest of our lives.”

    Annabel nodded sadly, and together the sisters walked home.

    One year passed from Autumn, to Winter, to Spring and to Summer.  The sisters climbed the steep hill to find the old woman had returned, just as she had promised.  

    “So,” she said. “Have you been taking care of my apple trees?”

    The old woman inspected the first tree. On the branches hung a vast crop of green apples. Thousands of apples, more than could ever be counted. 

    The old woman turned to Annabel.

    “You have worked hard every day for four years to keep this apple tree alive. As your reward, I gift this apple tree to you. Every year, it will give more and more fruit, because it is a magical apple tree. My dear, you will never be hungry again.”

    Annabel thanked the old woman.

    Now, the old woman turned to the other apple tree. The tree’s branches were twisted and thin. And on one branch hung a single red apple.

    The old woman turned to Florence.

    “Just like your sister, you have worked hard every day to keep this apple tree alive. You too shall be rewarded. I gift this apple tree to you.”

    But Florence was angered by the old woman’s offer.

    “You promised to give me a tree with more fruit than I could ever eat,” Florence shouted. “I worked just as hard as my sister, but the tree you have given me has never had more that one red apple. Why can’t I have a magical apple tree like my sister?”

    “But, yours is also a magical apple tree,” the old woman replied.

    Florence looked across from her tree to Annabel’s.

    “That cannot be true,” she said. “If this is a magical tree then why is it so withered, and why is theren only ever one red apple hanging from it?”

    The old woman shook her head.

    “Did you not promise me to leave the apples on their branches?” the old woman asked.

    “Yes, I  did, but I was so hungry and, after all, it was only one red apple,” Florence confessed. “What difference could one red apple make?”

    The old woman explained.

    “Every year, when you took the one red apple, there were no fallen apples. Each fallen apple feeds the soil. And in turn, the soil makes the tree grow stronger, bringing more apples the following year. Without any fallen apples, your tree grew weak. Thanks to your own greedy actions you have only ever grown one red apple.”

    With that, the old woman wished both sisters farewell. She plucked the single red apple from Florence’s tree, and left them.

    Florence turned to her sister.

    “Dear Annabel, I was a fool to eat those red apples. I understand now that I was greedy and left no fallen apples to feed the apple tree.”

    Annabel reached out her hand and plucked a green apple from her tree. She gave the green apple to her sister.

    “Dear Florence, I have more apples than I could possibly eat. I will share these apples with you. But you will also need to promise something for me in return.”

    “Dear Annabel. I would do anything in exchange for sharing your apples. What should I promise?”

    Annabel smiled.

    “Every day from now on, you will fill both buckets from the stream, and water both our apple trees.”

    And from that day, neither Annabel or Florence were ever hungry again. And whilst Florence had to continue to work hard each day to water the apple trees, Annabel lived happily ever after.

    The Apple Trees by Doug Weller - a Financial Independence Fairy Tale


    Financial Independence Flowchart – 100% easy method to follow your FIRE path

    Some people are readers. Others are visual learners. Here I’ve put together a Financial Independence Flowchart that I follow to assess my own status around financial freedom. The Financial Independence Flowchart How to use the Financial Independence Flowchart The flowchart infographic is intended to be super-easy to use. Simply start at Start Here and answer … Financial Independence Flowchart – 100% easy method to follow your FIRE path Read More...

    Some people are readers. Others are visual learners. Here I’ve put together a Financial Independence Flowchart that I follow to assess my own status around financial freedom.

    The Financial Independence Flowchart

    Financial Independence flowchart

    How to use the Financial Independence Flowchart

    The flowchart infographic is intended to be super-easy to use. Simply start at Start Here and answer the questions. Follow the arrows until you have your answers.

    Whatever the outcome, be sure to make sure you are enjoying your life.

    What is Financial Independence?

    To be financially independent (“FI”) you have sufficient assets invested to cover all of your annual expenses for the rest of your life.

    The financial independence flowchart walks you through the steps to determine whether you are FI yet, how long it will take you, and actions you can take if you are not yet meeting the definition of FI.

    The closer you are to Financial Independence, the more secure your financial position you will be and the more options are available to you

    Why doesn’t the Financial Indepenendec flowchart mention retiring early?

    For all the financial independence retire early supporters, aka FIRE, you will notice that there is no mention on the flowchart about retiring early.

    This is deliberate.

    There is no requirement or assumption that you will retire after reaching financial independence. That’s entirely a choice for you to make. Instead, I simply say Enjoy Your Life. For some, this will be giving up their jobs. Others will double down at work, knowing they have a safety net if circumstances change. Others will change the course of their careers.

    Financial Independence gives you choices. Not answers.

    How do I calculate my FI Formula target

    The basic formula is really straight-forward. Simply take your annual expenses and multiply by 25.

    Here’s a tool if you want to refine your calculation. If you’re unsure, just leave the safe withdrawal rate at 4%.

    If you need more help on calculating your financial independence formula, there’s more information by following the link.

    How do I Calculate my Saving Rate?

    The calculation for saving rate is simple – take the amount you save and divide by your gross income.

    Your saving rate is the headline amount you are able to save. It also tell you how much you are spending! Improving your saving rate means increasing your income or decreasing your spending.

    If you need more help, use this calculator:

    If you need more help, there’s more details on calculating your savings rate here.

    How do I calculate my time to reaching Financial Independence?

    For this, you really need a calculator as the formula is a little complicated to take account of compound interest. Your savings rate really matters. Without this knowledge, it’s difficult to follow the financial independence flowchart.

    The calculator above allows you to do the time to FI calculation using your saving rate.

    How do I reduce my spending?

    For most people on a financial independence journey, knowing how to control their spending is absolutely critical. Even if you want to be financially independent with a small fortune in the bank like Financial Samurai, you still need to understand what that you are spending on and be happy with that.

    To learn more about how to spend less, follow the link.

    How do I increase my income?

    Accelerating your path to financial independence is not just about cutting costs and frugality. In fact, there is no requirement to this. But that’s provided you have sufficient income instead. If you aren’t earning enough for your desired financial independence moment, you should look for options to increase and diversify your income.

    To discover how to earn more, follow the link.

    How do I improve my investment returns?

    Even masters of cost cutting, and people earning vast pots of cash still can’t be call financially independent if they have invested poorly. Your assets must make a great return over time if you are ever going to be able to live on them.

    To understand more about improving your total returns, follow the link.

    How do I refine my Safe Withdrawal Rate?

    Your Safe Withdrawal Rate (“SWR”) is the amount you can spend each year and safely not run out of money.

    The SWR is a prediction of the future. It is dependent on the total return you would expect from your investments, based on your asset allocation.

    Learn more about optimising and improving your Safe Withdrawal Rate here.

    What’s next?

    Now you’ve used the financial independence flowchart to trace your FI path, you probably want to know reasons why people get their Financial Independence calculation wrong.

    Let me know in the comments if there’s ways to improve the flowchart, or where you are at in the journey. I hope you’re enjoying your life!


    Mastering Your Emergency Fund – 101 to genius-level

    Emergency funds get you back in control of your money. Having a cash cushion protects you from bad news and surprises. Here, we will consider what an Emergency Fund is, how to build it, how to protect it and how it interacts with financial independence. This in-depth article will take you through all the key … Mastering Your Emergency Fund – 101 to genius-level Read More...

    Emergency funds get you back in control of your money. Having a cash cushion protects you from bad news and surprises.

    Here, we will consider what an Emergency Fund is, how to build it, how to protect it and how it interacts with financial independence. This in-depth article will take you through all the key information around emergency funds.

    But first, we need to consider why you need an emergency fund.

    Why build an Emergency Fund?

    An emergency fund’s purpose is to allow you to pay for unplanned expenses.

    There are only two certainties in life – death and bills.

    One of the things death and bills have in common is that they are, by nature, unpredictable. You can’t always plan them.

    That’s one of the reasons budgets and tracking expenses don’t always work. You can have the most detailed plan for life, and then a bolt from the blue occurs and knocks you off-course.

    Certain events are so unexpected that you would swear they were impossible.

    Some people call these black swan events. Nobody in the northern hemisphere imagined a black-swan event could occur. Until, that is, they travelled south and discovered thousands of them.

    Other bills you could predict will happen one day, but you can’t tell when. You know that one day you will need money for a new oven. But that could be in one week or ten years. You can’t predict it.

    There are a few different types of event that an emergency fund is there to cover.

    Events an Emergency Fund might cover

    Loss of Income

    You can lose your job in an instant. Companies go bankrupt. Scandals erupt. Pandemics reign. Plagues of frogs fall from the sky. It happens.

    An emergency fund is there to cover necessary expenses until you can replace your income.

    Predictable bill, unexpected timing

    Some expenses are regular. They come along every day, or week or month. I’m thinking things like food, electricity, water and so on. Other bills you can plan for and save for.

    If you need a new oven, you can plan that years in advance and have money saved ready to buy it. Unless, the oven breaks before you are ready.

    An oven breaking, the car engine grinding to a halt, the cat knocking the new flat screen TV. The costs to repair or replace these items might have been predictable, but the timing is anything but.

    An emergency fund is there to pay for predictable bills with unexpected timing.

    Unexpected emergency situation

    These are the unknown unkowns. Something completely out of the blue. You get sued. Your accused of a crime. You lock yourself out of the house. Use your imagination. You need to be ready.

    An emergency fund is there to pay for unexpected emergencies.

    Example of money emergencies

    • Medical bills
    • Vet or pet bills
    • Dental bills
    • Repairs of boiler, air conditioning, oven, television, laptop, refrigerator
    • Car repairs
    • Electrical, water, sewage or gas faults.
    • Legal issues – prosecution, being sued, needing to sue
    • Victim of crime: burglary, mugging, fraud
    • Unexpected tax bills
    • Excess on insurance
    • Damaged or lost property – lost wallet, glasses, phone.
    • Unplanned travel – sick relatives, surprise parties, wedding invitations
    • Gifts for surprise events like engagements, weddings, surprise parties and funerals

    Really, the list of unplanned expenses is endless. If it’s not spend you can predict or reasonably avoid, it’s an emergency.

    Other reasons to have an emergency fund

    Beyond self-insurance, there’s a few other reasons to carry an emergency fund.

    Peace of mind

    Don’t underestimate the mental wellbeing boost you can get from knowing you are prepared for unexpected financial risks. It can help you to sleep soundly at night

    Learning financial discipline

    An emergency fund may be the first time you have saved with a purpose. That’s a great thing. Saving is the cornerstone of all money mastery. Sometimes it can feel at little aimless. Now, you have a purpose. Save so you have a good pot of money for an unexpected event.

    Avoiding paying interest

    Paying interest is how bankers make their money. If you want to make yourself rich rather than bankers, building an emergency fund reduces the risk of you lining the bankers pockets.

    Helicopter flying to an emergency fund disaster

    What is an Emergency Fund?

    An emergency fund is money you can access fast if you need it for an unplanned event.

    Emergencies normally have the following characteristics:

    • An unexpected or unplanned event occurs – creating a problem.
    • Money is required urgently to fix the problem.

    The emergency fund is your money that you can access to fix the problem. It’s as simple as that.

    By now you may have realised, another word for emergency fund is savings!

    What is the difference between an Emergency Fund and Insurance?

    An Emergency Fund is personal insurance. It is your own back-up plan.

    A good question you may be asking is, why not just rely on insurance from third parties? Isn’t that what insurance is for afterall?

    Why you can’t just rely on third party insurance

    Third party insurance has deductibles / excesses

    Most insurance requires you to pay a share towards the insurance. This is generally a good thing. It makes you more cautious and careful in your activities if you know you might have to pay. It keeps your “skin-in-the-game” and actually keeps the cost of insurance premiums down.

    But, it means that in an emergency you will need to find some money. Paying excess insurance is a perfect example of why you need an emergency fund. This is how you will pay it.

    Third party insurance doesn’t cover all emergencies

    Insurance can be great for specific emergencies. If somebody drives into you car, that is normally covered.

    But even if you buy all the insurance add-ons there may be costs the insurer doesn’t cover.

    A perfect example of this are smallish amounts, below the amount of your deductible / excess. By definition, there’s no point claiming on your insurance because you aren’t covered. That’s where an emergency fund comes in!

    Third party insurers are out to make a profit

    Insurers are profit maximising businesses. They take on the risks from many people, and runs some complex maths to decide how much to charge those people. That maths always includes a profit margin.

    That means when you buy insurance you are paying more than your share of risk.

    Let’s say the chance of a boiler breaking down is 10% each year, and costs $500 to fix. That means the expected cost is $50 – that’s 10% of $500. An insurer will not charge you $50 to protect you. They will always charge you more. This protects their downside risk, plus all the overheads and marketing of running the business, and also gives them an expected profit. So, say they charge you $80. That means they are expecting a $10 profit from your contract.

    There’s nothing wrong with insurers making a profit. It’s a reward for running their business.

    For you, paying $80 every year may be much better than having a one-off $500. You need a boiler after all, and if you couldn’t afford one you would be in big trouble.

    That is, unless you have $500 available in your emergency fund. Rather than spend $80 each year, which is $800 over ten years, you have $500 in your emergency fund and save $300 over 10 years!

    Third party insurers don’t alway pay out

    A sad truth is that some honest insurance claims aren’t paid out. Insurers are experts at finding ways to not pay out on a claim. Either you filled in your details inaccurately, or the small print meaning is different to what you understood. You cannot rely on insurers to cover everything.

    So we’ve seen the downsides of third party insurers, but please don’t think this means you shouldn’t also have third party insurance. Emergency funds work together with insurance to ensure you are always covered in the event of an unplanned expense.

    Where Should I Keep My Emergency Fund?

    In order fix unexpected money emergencies, you want to have an emergency fund that is highly liquid, secure and not volatile:

    • Highly liquid
      • You need to be able to have instant access to the cash.
    • Secure
      • You need confidence that the money can’t be stolen or lost.
    • Stable – Non-volatile
      • You need confidence that the money will be worth what you need it to be worth.

    Let’s break down each of these qualities in a little more detail.

    Highly liquid

    You must be able to access the money you have saved in an emergency fund. If you can’t access the money quickly, that may be a real problem depending on the emergency.

    If you need to give days or weeks of notice to get hold of the money, it does not work as a true emergency fund. When someone is brought into the emergency room on a TV show, you don’t see the medics saying they will get to work in a few days after the funds have cleared.

    Emergency funds should be highly liquid.

    Secure

    Once you have built up your emergency fund, you need to be sure it stays secure. That is, it can’t be accidentally spent, or deliberately lost or stolen.

    For example, keeping your emergency fund as cash in your purse or wallet might seem like a great idea. Until you are mugged.

    Similarly, relying on credit cards might seem like a clever shortcut to building an emergency fund, until the bank cuts your line of credit.

    Emergency funds should be kept secure.

    Stable / Non-volatile

    Volatility means something changes unexpectedly. In money terms, your investment is volatile if it frequently changes in value.

    For example, if you owned shares in a company, the market value is liable to change minute-by-minute. Shares are volatile.

    Similarly, if you hold a money in a foreign currency, the exchange rate between the currencies will change day-to-do. Foreign currencies are volatile.

    Emergency funds should be kept as stable, non-volatile assets

    Comparing different places to keep your emergency fund

    Emergency Fund locationHighly-liquidSecurityStabilityScore
    Under the bedYesNoYes2/3
    SharesNoYesNo1/3
    Main Current accountYesNoYes2/3
    Gold barsYesNoNo2/3
    Credit cards / LoanYesNoYes2/3
    Premium bondsNoYesYes2/3
    Pension / 401kNoYesNo1/3
    Foreign currencyYesYesNo2/3
    Rely on a friend or loved oneNoNoNo0/3
    Rely on the governmentNoNoNo0/3
    Separate Current / Checking AccountYesYesYes3/3
    Instant Access Savings AccountYesYesYes3/3
    BondsNoYesNo1/3

    For most people, a separate current account or instant access savings account will be the best place to keep their emergency fund. These accounts meets the three tests of high liquidity, security and stability.

    Should I care about earning interest on my emergency fund money?

    You may have noticed a significant omission from the test of place to put the Emergency Fund. There is no test here about what yield or return might be expected to be from interest, dividends, or capital gains.

    This is because your emergency fund is not an investment. The purpose is not to make money from an emergency fund. The purpose is to prevent you losing money. It’s a form of insurance.

    If you can find a highly liquid, secure, non-volatile place to hold your emergency fund that ALSO pays you interest. Great. Go for it. But don’t decide only because of this. Don’t let the tail wag the dog.

    But what about inflation?

    The “cost” of holding your emergency fund in cash is that it will be eroded by inflation. This is the cost you pay for high-liquidity, security and stability. Again, earning interest to offset this would be an excellent idea.

    How much money should I keep in my Emergency Fund?

    By definition, you don’t know exactly what the emergency will be. All you know is that something will happen. So how do you decide how much to hold as an emergency fund?

    But we can do a little thinking on the subject by looking at the choice through a few different angles.

    First, if you needed the fund because you lost your job. In this scenario, the emergency fund would need to cover your necessary expenses until you have an income again.

    So here, the real question is how long it would take you to have an income again. Assuming you lost your income unexpectedly, it may be months before you can find a new job. If it’s the result of a wider recession or something like the Covid-19 pandemic, that time could stretch even further.

    You should look at your own industry and level to help understand how difficult finding a new job will be. Assume you are not the only one out of work.

    As a rule-of-thumb, I would suggest planning at least three months expenses. A more secure income protection would be twelve months.

    Note: You could also look for ways to spend less money to help with only necessary expenses.

    Second, if you have a planned expense but unexpected timing. Things like the oven breaking. Assuming you have no insurance, you should think of a bad-case scenario. How many unexpected spend could you handle at once. Could you handle the oven. Ok. And the dishwasher? Great. And a car repair. Getting tougher? And a broken window.

    Make the scenario gloomy but possible. How much would it cost if you added these all together. That’s your rainy day need.

    The standard recommendation is three to six months necessary expenses. A more prudent position would be twelve months.

    It’s worth noting that the longer your fund, the more time you will have to come up with alternatives. It gives you time to access locked up funds. It gives you time to access loan financing, or to retrain for a new job.

    Stairway to financial freedom

    How do I build up my Emergency Fund?

    If you have no savings at all, your emergency fund represents your first savings.

    You will need to save money or increase your income to build an emergency fund. This is not something you can borrow money to achieve.

    This post won’t go into detail on saving money or increasing your income. But here is the rule:

    Spend less than you earn.

    The following table illustrates how quickly you can build up a three month emergency fund for different levels of savings.

    % gross monthly income savedTime to 3 months saved (years)
    5%4.8
    10%2.3
    15%1.4
    20%1.0
    25%0.8
    30%0.6
    35%0.5
    40%0.4
    45%0.3
    50%0.3
    55%0.2
    60%0.2
    65%0.1
    70%0.1
    75%0.1
    80%0.1
    85%0.0
    90%0.0
    95%0.0
    100%0.0
    The higher your savings rate, the faster you will have your emergency fund in place.

    As you can see from the table, the more you are able to save from your gross income each month, the faster you will build up your emergency fund. Your gross income is your total income before taxes are deducted. Note: this table assumes no interest accumulated on the savings because we want this money highly liquid, secure and stable.

    For example, if you were able to save 30% of your total income, it would take 0.6 years or 7 months to have a three-month emergency fund in place. Any savings of 20% or more of gross income and you will have your emergency fund in place within a year.

    Understanding your savings rate is a wonderful thing for your money.

    Importantly, if you have to use your savings fund for an emergency, do it. Then continue to work to build up your fund. If you find yourself spending the emergency fund, but not on emergencies, then you aren’t really saving the money. You need to find a more effective way to save.

    Downsides of an Emergency Funds

    So far, I hope I’ve done a good job of convincing you that need a fund. You might be beginning to think you should keep all of your assets as an emergency fund.

    There are a couple downside to emergency funds which we should cover here.

    Your fund is not invested

    Your fund is not there to generate returns. It won’t make you rich. It’s protecting you from being poor. But this means, if you want to be rich, you don’t need an enormous emergency fund. Just enough to buy you time if things go wrong.

    Your fund is not paying off debt

    Your fund isn’t paying off any debts you have. That’s ok. In an emergency, you are liable to generate more debts, until the point where the banks won’t loan to you anymore. Or only at extortionate interest rates. But don’t have an enormous emergency fund at the expense of paying off high-interest debts.

    Climbing out of debt

    Emergency Fund as part of Financial Independence

    If you are on the journey towards financial independence there are some specific questions to consider around Emergency Funds.

    Should you include your Emergency Fund in your Financial Independence assets?

    I recommend you do not include your emergency fund in the calculation of your Financial Independence number.

    To recap, your FI number is the amount of investments you need to be able to live on them for the rest of your life. The classical calculation is your annual expense multiplied by 1/your safe withdrawal rate.

    Because your emergency fund either makes no return or a very low return, it will dilute your safe withdrawal rate.

    Advanced Emergency Funds

    As a beginner in finance, you just need to focus on building up an emergency fund and keeping it replenished.

    But as you build up other assets, you may choose to adjust your approach to your emergency fund.

    The fund assumes you have no other assets to draw upon. And ideally, you never have to draw on your emergency fund. Combined this implies that you may be better to invest more of your money in better returning assets like global, low-cost, index fund trackers. These are not quite as liquid and far more volatile than holding cash. But in return for these risks, the expected returns are far better.

    You may choose to have some of your investments as part of your “insurance policy” in the event of an emergency. This would mean potentially selling your investments at a loss. If you are prepared to trade this risk for the potential rewards, this is an option to consider.

    Alternatively, you may consider one of the “emergencies” your fund can cover is buying dips in the market. In other words, your emergency fund morphs into your cash pile awaiting good investment opportunities. It is a good idea to always have cash available to leap on opportunities. Here, you are trading current low returns on your cash for anticipated better returns for investing when others are selling.

    Short term liquidity can also be found in credit cards, lines of credit/HELOCs etc. This should be done with extreme caution. It is very easy to accidentally fall into debt and start paying interest if you use credit to fund emergencies.

    As I say, these are more advanced emergency fund strategies. Be sure to have a strong asset base before considering any of them. I’m always surprised that the more money someone has, the higher their unexpected emergency costs seem to be.

    Other resources to help you build up your emergency fund

    Here, I’ve gathered some key references to building your emergency fund from great thinkers around the web.

    Major unexpected expenses from MoneyCrashers.com

    TL;DR

    In summary, if you found this too long and didn’t read:

    • Build up an emergency fund of 3 to 12 months of necessary expenses.
    • Keep the emergency fund somewhere highly-liquid, secure, and stable – for example, a local currency instant access savings account.
    • If you save 20% of your income, it will take one year to have a three-month expenses emergency fund.
    • Replenish your emergency fund if it gets uses up.
    • Use third-party insurance to cover for major emergencies.

    What’s next?

    Once you have built up a secure emergency fund, you have a strong foundation to continue your journey towards mastering your money.

    You have proven you can save money and keep it saved.

    Now, don’t start spending more. Why not consider the ten building blocks of financial independence.


    UK Personal Finance Blog – awesome advice from newbie to genius level

    At Blue Sky Money, we write about personal finance topics across the USA and the UK. Why? Because I’m British, but I live in the USA, and I’m fascinated by all things money and financial independence related. This post keeps a running list of all the UK Personal Finance blogs I’m aware of exploring personal … UK Personal Finance Blog – awesome advice from newbie to genius level Read More...

    At Blue Sky Money, we write about personal finance topics across the USA and the UK. Why? Because I’m British, but I live in the USA, and I’m fascinated by all things money and financial independence related.

    This post keeps a running list of all the UK Personal Finance blogs I’m aware of exploring personal finance, financial independence, retiring early or on time. By the way, I mean blog to mean websites, videos, podcasts and even TikToks. I’m not fussy. And no, I don’t take any responsibility for the quality of the advice given!

    If you’d like your UK relevant personal finance or financial independence / FIRE blog featured here, feel free to get in touch with us.

    UK Personal Finance Blogs list

    First, here’s my top ten list of UK Finance Blog sites.

    REDDIT FIRE UK

    UK Personal Finance blogs

    Facebook – Financial Independence UK

    Playing With FIRE

    Monevator

    The Humble Penny

    Meaningful Money

    The Escape Artist

    Emma Drew

    MoneySavingExpert

    Alan Donegan

    The best Personal Finance / Financial Independence podcasts

    I find the financial independence podcasts so easy to consume. I first got hooked on an American one – ChooseFI – but have since become addicted to many. These are the podcasts with a UK connection that I’m aware of.

    Mad Fientist

    Money to the Masses

    Meaningful Money Podcast

    In Her Shoes

    Maven Money

    Money Hat Tip

    Informed Choice Radio

    Property Hub

    Let me know if there’s any more podcasts you’d add!

    Other Personal Finance and Financial Independence blogs

    Here, I track the other sites I’m aware of. No, this list isn’t pretty. But it’s functional and it does the job 🙂

    Money Bulldog

    MoneyBumper

    The FI Fox

    A life on purpose

    The Money Shed

    Savvy In Somerset

    Shifting Shares

    The Money Principle

    The P2P Millionaire

    The 7 Circles

    Skint Dad

    Maverick Money

    Lottery Earns

    Debt Camel

    Young Money Blog

    What next?

    Why not learn about the ten building blocks to financial freedom?


    Ten Building Blocks to Financial Independence

    Whisper it… You could achieve Financial Independence! Ten Steps to Financial Independence Follow these ten building blocks to learn how to achieve financial independence 1. Life’s Two Certainties 2. The Finance Dependence Formula 3. Know Your Net Assets 4. The Financial Independence Formula 5. Understand Savings Rate 6. Reduce Your Costs 7. Increase Your Income … Ten Building Blocks to Financial Independence Read More...

    Whisper it… You could achieve Financial Independence!

    Ten Building Blocks to Financial Independence

    Ten Steps to Financial Independence

    Follow these ten building blocks to learn how to achieve financial independence

    1. Life’s Two Certainties

    2. The Finance Dependence Formula

    3. Know Your Net Assets

    4. The Financial Independence Formula

    5. Understand Savings Rate

    6. Reduce Your Costs

    7. Increase Your Income

    8. Improve Investment Returns

    9. Securing Your Assets

    10. Own Your Financial Freedom


    Once you’ve explored the ten financial freedom building blocks, visit the blog ?


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