One of the most important ideas which repeatedly emphasized here is the importance of setting long-term financial goals as precise as possible. The most prominent goal should be increasing your capital and achieve Financial Independence. That’s when work will be a matter of choice and not a necessity. When you’ll reach that state, when you’ll be able to buy your time- you won’t owe anyone anything. You’ll be able to take risks and choose your own path and pursue your own dreams: May it be starting your own business, become an entrepreneur or follow your childhood dreams. Without worrying about your livelihood, it will be more reachable than ever.
The movie “The Gambler” presented the Financially Independence point nicely. They called the money needed to reach that state of financial independence as “Fuck You Money”. They coined this phrase which basically has the same idea- make enough money so you can make a livelihood out of your savings (ideally- make a livelihood from the returns alone). That’s when you’ll be in a position where you don’t owe anyone- anything.
# How Can You Reach it?
In the original movie, John Goodman says buy a house, earn 3-5% from it each year and live out of that money. Well, that definition is a little blurry and not accurate. The attached video, which is a remake of the same scene, presenting a better idea:
- Don’t buy a house. Rent a house and “let the owner fix your toilet”.
- Invest 80% of your savings in the S&P500. Let the CEOs of these companies make money for you. Invest the other 20% in bonds- to reduce the risk.
- Instead of buying only the American index, buy a worldwide index, as MSCI World. That’s how you’ll spread your risk worldwide.
- Invest some of your capital on indexes of small stocks such as MSCI World Small Cap, which historically returns 2% more than the index of the big stocks.
- Withdraw 3% from your savings when you quit, not 4%. Withdrawing 4% might be good. Your portfolio might last 30 years on 95% of the cases, but you don’t want to take the risk of your portfolio reaching zero. With a withdraw rate of 3% each year, you’ll be able to live only from your return and keep the principle forever, even in the worst scenario.
- You don’t have to reach to $2.5 Million to retire. You can do that with $1.5 Million. If you decide to retire with this amount, you probably won’t be able to withdraw only 3% because that the latest household expenditure for 2018 shows the average annual expenditures for 2018 stands for $61,224, which is about 4% of $1.5 Million.
A link for the video with that great remake (PG13):https://www.iam-unchained.com/disclaimer/