Friday 24th May 2024

The 10 ‘Pillars’ of financial independence – part one

financial independence

There are 10 key ‘pillars’ to financial independence, says Mouthy blogger Finance Dee. In part one of a two-part blog, she explains the first five.

In my two previous blog posts, we discussed the basics of the financial independence retire early (FIRE) movement. So now it’s time to shift focus a little to discuss important and practical concepts that can help someone to achieve their FIRE goals.

The 10 Pillars of Financial Independence (FI) were developed by two Americans, Brad Barrett and Jonathan Mendosa from ChooseFI. The pillars are not designed to be a step-by-step process, but rather a framework to support people on their FIRE journey.

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Although the 10 pillars are targeted toward an American audience, I will be discussing these concepts from a British perspective.

1. Low-cost housing

In the book ‘Choose FI’ the authors talk about house hacking in order to reduce your largest monthly expense – housing costs. From an American perspective, this is the idea of buying a duplex or multiplex and living in one part of the multiplex and renting out the rest.

In the UK, we do not generally have multiplex properties, but we do have a great rent-a-room scheme. This scheme allows homeowners to rent a room out in their primary residence where the first £7,500 received in rent payments are tax-free.

If renting out a room in your house is not your thing, a good rule of thumb is to aim to keep monthly housing costs (rent or mortgage) between 30-35% of your net income – or less is even better!

2. Buy used cars

For any car fanatics out there, this may rub you the wrong way. But the sad reality is cars are one of the worst investments you can make as they depreciate at a rapid pace.

Brand new cars, in particular, give a poor return on investment as they depreciate on average by 15-35% in the first year alone, and up to 50% or more over three years according to the Money Advice Service.

Buying a used car does not mean driving a beaten-up banger – unless that’s what you prefer – but the aim is to let those who can truly afford to ‘throw money away’ on brand new cars to take that initial financial hit.

By buying a car that is four years old for instance, you can still benefit from a relatively new car but potentially save up to 50% of the original price.

3. Crush your grocery bill

I will admit we are very privileged in the UK when it comes to reasonably priced food – take it from someone who lived in the US for nearly a decade!

However, we can still work on ways to reduce our food bill here, such as shopping from a list, price matching between shops, and shopping in the evening to get those beloved yellow ticket items!

Needless to say, increasing home-cooked meals and reducing takeaways is another sure way to fatten your pockets.

4. Tax optimisation

In the UK, we have various investment vehicles which allow our money to grow without having to pay taxes.

Individual Savings Accounts (ISAs) and Self-Invested Personal Pensions (SIPPs) are tax wrappers all British adults have access to. Even kids can have a pension though, or a junior ISA (JISA). The younger you get started, the better.

For investors, understanding what capital gains and dividend taxes are and how to avoid them is an essential part of being able to optimise your investment income too.

5. Low-cost index fund investing

If there is one thing foundational to the FIRE movement, I would say it is low-cost index fund investing! The reasoning is that index funds are rarely outperformed by actively managed funds, yet they have much lower fees.

Investing is one of the most important aspects of the FIRE movement as it allows you to maximise your savings growth in a way that just isn’t possible in old-fashioned savings accounts.

Moreover, index fund investing means you do not need to spend lots of time researching individual companies to invest in. The fundamentals are already done for you and you get the ease of investing in hundreds or thousands of companies through one investment fund.

Next month I will be following up with the next five pillars so make sure to check back for part two.

Photo by Hamann La from Pexels

Finance Dee

Mouthy Blogger

Finance Dee is a British-Jamaican living in the SE of England. By day she's a research consultant and by night a finance YouTuber and FIRE blogger

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