according to Gerd Kommer, H/T MeineFinanzielleFreiheit (My Financial Freedom) from
Germany Austria – in both of these I sadly discovered that my German has degraded through disuse to below a sufficient standard to comprehend them freely1, so Google Translate was my friend. I am looking at financial independence from the other end of the telescope from My Financial Freedom (Google Translate version of MeineFinanzielleFreiheit). MFF is under 40, and assumes most readers are of a similar age, perhaps I do not have the optimism of youth and our Gerd is no spring chicken either, cynical old gits that we are.
Gerd had an interesting taxonomy of routes to financial freedom. I presume from the website that Gerd is what we would call an IFA, though my rotten German may mean I am missing some subtleties. Let us count the ways to financial freedom, with the soundtrack of Paul Simon’s Fifty ways to leave your lover (in this case The Man):
Financial Freedom method 1 – clever investing
Hmm, BTDT. This is the dream of every day-trader and spread-better, and while I avoided those particular pathologies, I was a get-rich-quicker in the halcyon days of the dot-com boom. Dividends, I don’t need no steenking dividends2, the aim was to buy and flip to a greater fool
Yup. Didn’t end well, because in the end I was that greater fool and ended up holding the baby. The existence of Warren Buffett probably proves that some people have hot hands and are good stockpickers, this is not widely spread in the population. If you want to make money from spread betting and trading, buy shares in IG Index. Most of us don’t have hot hands, and the odds are tough. Some of us have lukewarm hands, but the fat-tailed statistics of stock-market investing can be dangerous in that case. Those with lukewarm hands can do well to consolidate some of their gains into passive investments frequently, fiddling around the edges. The challenge is to recognise the presence of some ability but also of some mediocrity, and humans just aren’t wired to do that. I am sadly still at the stage where more knowledge seems to degrade confidence, the confidence high-water mark for me was in 1998…
FWIW I don’t believe markets are totally efficient, and if you have a long enough time horizon than I would consider valuations and CAPE a possible route to market timing, but most of us are in too much of a hurry at the start. Making money in the stock market is deeply rate-limited most of the time and depends on opportunities arising that you can’t control, so doing more is not a recipe for success, unlike in many other fields of endeavour. You don’t have to be condemned to the returns of passive investing. FireVLondon3and TEA show it can be done. I would suspect Monevator does better too. I have been happy with my own performance though it is poorer than theirs and it is shifting closer to passive because I am getting more lazy and passive, when you have enough you have enough. The gains in my AVCs/SIPP were enough to carry me the eight years to normal retirement age because I started in 20094, when the market was in a deep hole.
Round one to Gerd. He’s got a point. By all means try, with money you can afford to lose, to see if you’re the one with hot hands. It’s very unlikely to be you…
Financial Freedom method 2 – downshift
Took me a while to boil down Gerd’s incredulous take on the sort of whazzocks that say
regain control of your life – don’t exchange five days of work for two days of free time. In the books and financial blogs, a curious recipe mix is propagated to “breaking out of the hamster wheel”, “ending the treadmill of employee life”
I guess that’s me, Gerd. Oops, I even used this image on this post.
I checked out of the middle class in 2009 to escape the workplace 8 years early. It’s going fine, thanks for asking, bud. But I do have to acknowledge a lot of luck on my side, holding a decent job for 23 years and being close enough to normal retirement age for my savings and gains to bridge the gap to company pension, plus investing into a stock market that was flat on its back cheered me on. You can’t design for that sort of luck when you’re 20. So let’s call that a draw, Gerd.
Financial Freedom method 3 – start your own business
This is the classic way – the business owner captures a lot more of the value the business adds to the inputs than, say, shareholders. That’s why the long-term average returns on a diversified passive portfolio of stocks are at best around 5% p.a., which isn’t enough to live or die with unless you start off with a decent amount of capital5, which you usually save from working at your job for somebody else, in most cases. Run your own business and you can do a hell of a lot better than that, capturing the entire added value, less taxes and then selling the business as a going concern.
The downside, of course, is that the odds against you being one of the successes are terrible. It’s the same hot hands problem as method#1 but in a different dimension – few have the hot hands for business success, and a decent helping of luck helps too.
Financial Freedom method 4 – Frugalism
Originally popularised by Jacob from Early Retirement Extreme, although the current poster-child is Mr Money Mustache. It’s a variant of downshift, but usually adopted by those in the flush of youth and earning above average. When you are young and preferably single, you can screw your consumption down and put up with privations many can’t. But you will get older, and some of the ultra-frugal lifestyle may pall. Lock yourself into an ultra-frugal lifestyle too early and take advantage of that fact by not having to earn too much, and you may find your style cramped in mid and later life.
Both ERE and MMM worked high paying jobs, and frugality let them drive their savings rate up. If you can stick this for long enough you can retire early. A lot of personal finance blogs run along these lines (eg The Escape Artist), but if the writer is working in the City, then they have an income that is probably more than five times the average British wage. If you earn five times the average Brit but can run on the average outgoings, then you can probably get to early retirement in ten years6 rather than 35. There is more incentive to do that, because these jobs tend to be punishingly stressful.
Gerd is right in that most people don’t earn enough, but if you earn well over the norm then Gerd is wrong, this is a perfectly sensible way to do it. I had some of these advantages – I earned reasonably well and lived outside London so my costs were lower, and my employer contributed more to my pension than is usual now, so effectively my pay was worth more.
That’s a draw, Gerd.
Gerd is right for most people, you can’t get there from here
Whatever the drivers for FI, regrettably I am with Gerd that financial independence is an unattainable chimera for people earning average incomes. They’re unlikely to be able to reach FI/RE except in edge cases. It’s perfectly possible for MeineFinazielleFreiheit because he is a freelancer for an international service company, which puts him on a well above average wage I would imagine. I’d initially jumped to the conclusion that Dienstleistungsunternehmen meant a management consultancy rather than service industry, which is another sort of job like finance where going for FI/RE is almost mandatory because the stressful nature of the job burns people out early. Dictionaries and Wikipedia don’t support that interpretation, although oddly the sort of pictures Google Images comes up with do lean that way.
Gerd then goes on to ask an interesting question –
What makes some people value financial independence whereas it is generally a minority pursuit?
He refered to Holger Grethe’s article about financial freedom (Google Translate). He references Steven Reiss’s book Who am I?: 16 Basic Desires that Motivate Our Actions And Define Our Personalities which offered some insight, his taxonomy of 16 values of motivation is as follows:
- Acceptance, the desire for positive self-regard
- Curiosity, the desire for understanding
- Eating, the desire for food
- Family, the desire to raise children and spend time with siblings
- Honor, the desire for upright character
- Idealism, the desire for social justice
- Independence, the desire for self-reliance
- Order, the desire for structure
- Physical Activity, the desire for muscle exercise
- Power, the desire for influence or leadership
- Romance, the desire for beauty and sex
- Saving, the desire to collect
- Social Contact, the desire for peer companionship
- Status, the desire for respect based on social standing
- Tranquility, the desire for safety
- Vengeance, the desire to confront those who offend
I’d lump some of these under the same class of thing – 4 and 13 and possibly 14 look the same class of thing to me, 10 and 16 look related. Reiss excludes traits that he does not find some hint of in all the respondents, I wonder if excluding the tails of the distribution makes this limiting. But heck, a hypothesis doesn’t have to be perfect to be useful. Reiss’s thesis is that there is a different balance between these motivations across people, but those motivations are fairly immutable in any specific case. The curious child becomes a curious adult who becomes a curious old man. Satisfying these desires is transient, you have to keep on doing something to sate them. Holger Grethe riffs on this –
“Anyone seeking financial freedom or “early retirement” is very likely to save an above-average need for independence in connection with the urge to save money.”
Conversely, other needs are more important for most people
For some, the quest for power may play a bigger role:
“Power motivates to willpower, the need for achievement and how much you want to work on it … Power influences your propensity to be a leader and to give guidance to others.”
For others, it may be status thinking that outweighs the need for independence:
“Status is the need for social prestige because of wealth, titles, social class or good origin. The satisfaction of this need evokes feelings of self-importance and superiority, while non-gratification leads to feelings of insignificance and inferiority. “
Those who retire from working life to enjoy their financial freedom can neither give commands to others nor bask in the glow of their professional position.
This helped me understand some of the observations I couldn’t really make sense of. Monevator has an extended and insightful blog about the things you need to do to become financially independent, and he served me very well, yet he has no desire to retire, even though he could
I’m pretty much financially independent these days, by my own terms. I once wanted to retire early. But I tried doing no work and discovered it wasn’t for me – or at least not yet.
My expectation now is I’ll earn at least some money for the next 30 years.
I’m incapable of understanding that, other than in a theoretical and intellectual way. I think that if I’d been rich enough to avoid working when I left university I would have done just that. Let’s hear it from Reiss on power
Power is the basic desire for influence or leadership. It motivates willpower, the need for achievement, and hard work. It motivates us to seek to influence people, events, or the environment. Power motivates the desire to lead and to give advice. It has been said of some powerful personalities that they cannot stand to see somebody go in one direction without urging the person to go in a different direction.
I got on okay with work for 30 years, it was just something you did. I’ve led teams, given presentations at international meetings, that sort of thing, but it was a means to an end, it didn’t feed a deep desire within me. In Reiss’s nomenclature I have a weak basic desire for power. I would challenge his claim that these are immutable, however, earlier in life I probably had a stronger or at least normal desire for this7.
Until I grew sick of the way work was going – all the management bullshit, the performance management targets, the needing to justify one’s existence every quarter, began to really piss me off, and then something snapped.
Yesterday was not soon enough to get out of the workplace and I never, ever, wanted someone to be able to hold that gun to my head ever again. It took three years and much slog, but I made it in the end. I have never worked since. I have earned some money, generally hit and run jobs with no ongoing commitment. I have never needed that money, and I have not changed my lifestyle as a result of it, and in some cases I have given it away to people who needed it more. The above average need for independence is writ large in all that. And yet that did not apply for 30 years of my working life – I had no burning urge to retire earlier than the normal retirement age of my company pension.
Clearly the quest for power and the status thinking were either weak in me or they were destroyed in the split second that I realised that a manager was trying to improve his numbers at the expense of my future and realised I had no power. Or perhaps it was the quest for power, but in its inverted image. Reiss presents power from the subject’s perspective – Power, the desire for influence or leadership. Making people do your bidding gives a guy a rush. But there is a corollary for the object of that exerted power. I never wanted to be the underdog again.
I can therefore never use money I would earn from employment, because as soon as I build it into my lifestyle I become a prisoner of The Man again. No consumer shit tastes as good as financial freedom feels. It’s not like I live like an ascetic monk – I did buy the Naim 272 mentioned in that post, and I have been to Malta and the Orkneys this year in search of megalithic wonders. I could afford to go on more vacations. But I can do that from existing reserves, rather than new earnings, which would link me to The Man and his blasted hamster wheel again.
Not everyone who is financially independent can retire early
Skewed by my own experiences I assumed most people who reached financial independence would retire early, and this was supported by the common FI/RE8 acronym. Sure, five decades of living have taught me that there is much variation among individuals, but it puzzles me why somebody would go through all the privations of achieving financial independence if not to retire early, as TEA said, don’t just load the gun, pull the trigger.
Those who value influence and leadership (10), and those who get status from the work they do (14), and perhaps, in the case of men, the desire for peer companionship (13) may reach financial independence, but should reflect on whether they get something non-financial out of work that they might miss. The poster child for this is Jim SHMD, who appears to be working a job that bores him but delivers valuable side effects:
I really wasn’t looking forward to returning to the actual work that I do – but I was looking forward to catching up with the people there, both my co-workers and my customers.
I personally would be saddened if the best thing I felt I could do with my time was going to work, but that is because other motivations are higher – the curiosity (2) and independence (7). For me, independence and power are related – independence is the absence of people with power over me. However, that didn’t bother me for most of my working life, while I had enough bosses I thought were tossers I probably had more that I had some respect for. As management changed from values to processes I came to despise some later bosses and box-tickers rather than leaders, but that’s what metrics and performance management do to people, they turn good and mediocre people bad.
The boss that convinced me I needed to get out of that place was intelligent and an expert in his own field but while fine in calm waters became a psycho under pressure. You don’t hire engineers for their great way with people, I suppose. I would challenge Reiss’s immutability theory. Power and status (10 and 14) mattered more to me earlier in my career, but independence (7) became more important than these as I grew older. Drawing on Carl Jung’s observation that what is true in the morning of life doesn’t hold in the afternoon, my self-respect shifted from what I did more towards what I am.
Reiss’s positive description of 10, Power, the desire for influence or leadership, isn’t totally absent in me – I do take on things where I have skills that aren’t in other people, and therefore indirectly lead or at least define. I don’t generally volunteer in the pure form, I always want the ‘customer’ of the work to pay something, because this world has an endless supply of wouldn’t it be nice if requirements when the cost is zero. But if the project is interesting enough or I like the people enough, then the job doesn’t have to break even, that is a different expression of financial independence.
Reiss’s book is a fascinating read
It was available on Amazon Kindle Unlimited for cheaper 9 than on Kindle and it was an interesting read – Reiss considers his 16-point taxonomy a deconstruction of Maslow’s hierarchy of needs, which is often cited in the PF scene. I didn’t really expect to come across a reference to chakras, to wit:
Maslow’s pyramid is similar to Hindu scripture, specifically the Rig Veda, which refers to the chakras. This is a seven level energy system that maps to specific psychological characteristics.
Gosh… He makes some big claims
People are more or less motivated by the same basic desires throughout their adult life. Maslow’s idea of human development — that values and motives change as we mature — is mostly an invalid, romantic myth.
Well, that’s the idea of individual human progress through the lifecycle done for, then. Nevertheless the art of reading is to open the mind to new ideas that don’t necessarily square with one’s own. On this point, he found a 19th century Oxford professor of philosophy, George Ramsey, who delivered this wisdom in 1843:
“The same difference of feeling and dullness of imagination in men explain what often has been observed, that one half of mankind pass their lives in wondering at the pursuits of the other. Not being able either to feel or to fancy the pleasure derived from the other sources than their own, they consider the rest of the world as little better than fools, who follow empty baubles. They hug themselves as the only wise, while in truth they are only narrow-minded.”
That’s me ranting on about Calvinism then 😉 As a working hypothesis the quest for power and the status thinking isn’t a bad way of comprehending that working satisfies deep innate non-financial needs in some people, and it is likely that these people will appear ambitious, earn more than the average and be more likely to be in a position to get to financial independence.
They just shouldn’t retire early, in fact perhaps they shouldn’t retire at all. FI still improves the power balance with employers – I have never had the experience of not being a supplicant when applying for a job, and I stopped applying for jobs when I didn’t need the money. But it never harms your negotiating position when you can walk away without fear.
- Oddly enough after reviewing this and working through the Google translation which was a bit rough around the edges I was able to understand other articles in German reasonably freely, like this one wondering whether all PF blogs and their readers were under 40, not me guv ;) ↩
- These days if I add up all the dividends I have received since re-entering the stock market in 2009 they are about 14% of the current market valuation of my ISAs, dividends matter. The older Ermine is a very different animal to the youthful exuberant one. Dotcom flippers relied purely on the greater fool to buy the shares at a higher price, typical dotcom companies didn’t pay dividends, because they generally didn’t make any money. At least I didn’t buy boo.com or lastminute.com ↩
- FireVLondon is in Gerd’s category 3 not 4, his achievement in keeping a positive portfolio return is even more impressive given he didn’t work in finance! ↩
- I would really love to be able to say that I started in March 2009 because I am a frickin’ genius that monsters the market. In fact the reason was that it took that long for the financial crisis to crush The Firm’s bottom line that they introduced psycho management and ridiculous performance management metrics. I was desperate enough at the right time. I will claim being bright enough to read this and turn the sentiment into action. That was probably easier for me because I had no equity holdings that had plunged in value, so it seemed worth a punt. Success bred success, I learned to run towards fire and be fearful at times like now. If you want to learn what to do in the stock market, then start when it is down the toilet, not when it is high as a kite and everybody is saying how great it is. That’s a general rule for any asset class – equities, gold, bitcoin, housing. tulip bulbs. If it’s in the papers as a sure win, short it. ↩
- Let’s try the thought experiment. Using Monevator’s compound interest calculator and imagine our young fellow starting off saving a whole year’s worth of UK average wage at £20k that he somehow manages to not need to live off. After a 30 year working life of compounding at 5% in real terms without any platform costs or taxes he ends up with about £90k. A worthwhile improvement, but it’s not going to make you rich doing that as a one-off at the beginning of your working life, and subsequent savings have less time to compound. A successful business will compound much faster than 5%, and under certain circumstances can use other people’s money to scale up quicker. ↩
- 35÷5 is 7, but you are probably paying more tax earning >5x average salary than the average grunt ↩
- You don’t normally get to earn significantly more than the average with the traits of a weak desire for power, Reiss characterises that sort of individual After graduation from school, these individuals may continue to avoid hard work. They may have a tendency to underachieve their entire lives, not because they are incapable, but because they are motivated in different directions. ↩
- Financial Independence/Retire Early. Early retirement is in the name. ↩
- Kindle unlimited is best tackled on a hit and run basis – sign up and then immediately unsign up (so you don’t forget to unsubscribe). You are then a member of KU for a month for about £8, hit it for all that it’s worth. ↩