Commitment

If you want to achieve financial freedom or financial independence, and you have a vision of achieving that, then you need to have a commitment to getting there. It can’t just be a wish. This commitment will involve time and money and will be reflected in your actions in working, saving and investing.

You will need to commit some time to this effort. It can take time to understand what your financial position and starting point is. What are your financial assets and liabilities? What is your annual income and expenditure? What changes do you expect in these? If necessary, you will need to improve your financial record keeping so you can answer these questions when you start and throughout your journey. You can use paper records as I did from the early 1980’s up until 1996 or you can use computer records as I have done since getting my first home PC in 1996. It will take commitment to continually maintain these records. You need enough information to know at any point where you are and where you are headed. This can help with spending and investing choices and can strengthen your commitment as you see progress being made.

You will need to commit time to learning about personal financial and investment matters. Finding this interesting will really help with this challenge, as so many people claim or say that this is boring. There is, however, nothing boring about being poor in your old age when you are less able to work to earn money. The money pages in the newspapers provided my starting point for this learning. I also read a select few books. Nowadays there are many blogs and other websites where one can also learn. Back in the 1980’s I avidly read the Telegraph money pages and sampled other papers and magazines occasionally. Nowadays there are a range of sources that I use: newspapers, magazines, newsletters, blogs, and websites.

You will need to bring your commitment to bear in the world of working and earning. Being committed to progressing in your chosen field and taking up opportunities and maximising earnings will all help. In my time I pursued further studies, I took up promotion and job opportunities, and later on I worked with an eye on maximising earnings. This should help both your career and your progress to financial independence. As you gain rises in pay, and bonuses, these should be allocated to additional savings ahead of additional consumption. In addition, you should seek to understand and probably to join any company pension in order to gain the company’s pension contribution. You can benefit from tax relief on your own contributions, and many companies will match your contributions. In an early role I contributed 7.5% of my salary (4.5% after tax relief) and gained a company contribution of 7.5%. In a later role I contributed 5% (3% after tax relief) and gained an additional 9.5% from my employer. Where these are defined contribution schemes then you can usually transfer these into a plan of your choice after you have left the relevant job.

You will need a strong commitment to saving money. Without spending less than they earn even the highest paid will not become financially independent before they draw their pension. In order to make good progress you need to look to save 20% of your take home pay. You need to pay yourself first, for instance by means of a direct debit from your bank account just after pay day. It is best to develop this habit early on before higher earnings translates straight into higher spending. I have heard people talk of saving what is left at the end of the month or year after their spending has been done, but that is not a commitment.

If you gain a financial windfall such as an inheritance, or an insurance pay-out, or a redundancy payment where you quickly get another job, then you should be committed to saving all or most of this money. If your inclination is always to spend pay rises, bonuses, and such windfalls on lifestyle improvements or additional consumption, e.g. houses, cars, holidays, then you probably lack the commitment required for early financial independence.

You will need a commitment to invest your savings in equities. This should maximise your long term returns as cash and bonds have generally returned less than equities. I have been mostly 80% or more invested in equities over the past thirty-three years and have benefited from compound growth of over 8% per annum.

These levels of commitment need to be sustained over the years and decades to get the required result. You need to be able to live a bit outside the consumer society to maintain your progress. This is all a bit prescriptive but this is the medicine I have found to be beneficial.