I read something outrageous today. Ridiculous to the point of being a parody.
“Or, in FIRE terms, £139,500 needed to be financially independent (using the 25x rule).”
Not a further £139,500 was needed. No, this was the full amount.
This assertion suggested that with little more than the cost of a fully-loaded Tesla X to their name, a person could lead a sustainable Financially Independent existence. Within commuting distance of London.
I snorted my drink. A decidedly unpleasant experience as sticky caffeinated carbonated liquid flooded my sinuses. Leaving me choking, coughing, laughing, and outraged in equal measure.
My elder son glanced up from his iPad. Observed that I looked uncomfortable. Then his attention was once more drawn to the siren song of the YouTube vortex.
Once my breathing returned to normal, I read the article again. There had been a few caveats, but none that fundamentally shifted the needle on that bold statement in the eyes of the casual reader.
The lapsed financial planner within me died a little on the inside.
I imagined seeing Pete Matthew’s face going pale in horror.
A little bit of vomit rising in the former Mr YFG’s mouth.
In the author’s defence, their proposed lifestyle sustaining amount of just over £15 per day would provide a life of relative luxury, when compared to the £8 to £10 per day that a Universal Credit recipient currently subsists upon.
Survivable. However, I think my son’s description aptly summarises the existence: uncomfortable.
Should those numbers prove to be undercooked, they would need to consume the vast majority of that small nest egg before they too became eligible for those social security benefits.
Long before that point, they would likely have returned to the workforce. Possibly as soon as the first major “life happens” financial event occurs. A case of basic survival. Adapt or die.
Expect the unexpected
One thing the coronavirus pandemic has shown us is that the unexpected occurs. Often at inconvenient times. With some obvious impacts, and many more knock-on effects.
For example, commentators are starting to discuss the likely persistence of remote working once the pandemic lockdown concludes, and the corresponding decline of commercial real estate demand. The German Labor Minister plans to enshrine in law the right for employees to work remotely. The CEO of Barclays, employer of 70,000 people who are currently working from home, predicted that now that employers have successfully made the adjustment “large offices may be a thing of the past”.
This outcome may be applauded by a generation of workers who have recently learned that remote working provides increased flexibility and an improved work-life balance. Yet it would be decried by bar owners, dry cleaners, gym membership managers, landlords, and sandwich shop proprietors operating out of Central Business Districts the world over.
Remote working was an existing trend that had been slowly gaining traction for at least twenty years. Therefore this outcome should surprise few. Yet the speed with which that change has occurred this year will be dizzying to many and financially ruinous to some.
Will things play out as predicted? Maybe. Maybe not.
Not long ago the financial world was getting all excited about the potential stock market IPOs of loss-making businesses like Airbnb, Uber, and WeWork. Home runs all. Certainties to generate vast wealth for investors.
A combination of bad business, bad luck, bad management, and bad timing proceeded to cruel the dreams of investors in all three businesses.
Some of these events were predictable.
Others were unexpected.
A global pandemic brought the world’s economy to an abrupt halt. The sort of spectacular deceleration I haven’t experienced since the time my (then toddler) son unexpectedly applied the rental car hand brake as we attempted to traverse the diabolical Almondsbury Interchange outside of Bristol.
Unexpected in the sense of Willem de Vlamingh discovering that proverbial black swans actually existed on the other side of the world. Those birds had provided the textbook case study of an absurd impossibility for over a millennium. Suddenly, they were real.
Which raises some interesting questions about those flying pigs which society swiftly substituted for black swans, when referring to implausible events. Could they too exist? A rare and exotic breed, bordering on fantasy, like a thirty-something sustainably retiring near London on just £15 per day.
Imagine what happens if that intrepid FIRE seeker were to lose their wallet containing £100.
Do they not eat for the next 7 days, until their financial reality once more aligns to their forecasting spreadsheet?
Or, do they drop back to skeleton rations? Reduce their outgoings to just £10 per day for the next 20 days to absorb the loss?
Or, do they ignore the loss and carry on as normal? Risk jeopardising those carefully laid plans, by outspending the “safe” withdrawal rate that all their FIRE calculations had been based upon.
This simple scenario illustrates just how fragile that existence would be. Uncomfortable indeed, for a week or a month.
Now consider the implications of a rise in the rate of council tax or VAT, as broke governments scramble for more income. A sustained recurring reduction to that £15, as opposed to a one-off.
Perhaps Brexit results in the loss of double taxation treaties, or the imposition of a withholding tax on British folks investing overseas .
Both are possible outcomes, that are well outside the control of the FIRE seeker.
Simple changes, with potentially material impacts when the margin for error is so vanishingly small.
After the Global Financial Crisis, armchair experts possessing 20/20 hindsight found it easy to point at large corporates like banks and insurers, knowingly proclaiming that they should have stress-tested their balance sheets and capital adequacy.
Quantify risk exposure.
The resiliency of cashflows.
The ability to honour their obligations.
Withstand the unexpected.
Survive as a going concern.
Some more conservative commentators even dared to suggest that these war games should take into account not just a single event, but a confluence of concurrent calamities occurring all at once!
Regulators now do conduct periodic stress tests on large financial institutions.
Attempting to identify emerging problems early.
Allowing root cause analysis to occur.
Corrective actions to be taken.
Protecting creditors, customers, employees, and shareholders.
The pandemic lockdown has ably demonstrated how precarious our financial existence often is.
In good times it is easy to become complacent. To believe that our carefully mapped out plans will resemble a journey down the yellow brick road towards the attainment of our wildest dreams.
At times like the present, we relearn the lesson that reality resembles a game of snakes and ladders. When measured over the long term we appear to make slow and steady progress towards our goals. However, as we experience the journey it can often feel more like riding a roller coaster.
Our sense of being in control is often transitory and to some extent a delusion.
Fortune plays more of a role than our egos are comfortable to admit.
Like financial institutions, we too should stress tests on our personal finances.
War game how various scenarios may impact us. How would we respond? How would things play out?
Consider some of the following scenarios.
What would be the impact of losing your job? A minor inconvenience, or an unmitigated disaster?
Now imagine you were unable to find another one.
For a week.
Would this represent a speed bump, or propel you into personal bankruptcy?
Perhaps one of your tenants falls on hard times and is unable to pay the rent. How long can you afford to cover the cost of the mortgage?
Now imagine the large employer in your town relocates operations, and all your properties experience void periods simultaneously. What do you do?
How would you meet your financial obligations, in a market suddenly containing lots of sellers and no buyers?
Maybe you rely upon dividend income to finance your lifestyle. What happens if a change in government policy changes the game significantly. Temporarily banning dividend distributions, or punitively taxing them. How will you pay your utility bills and buy groceries?
What happens if you suffer an accident or debilitating long term illness?
How about if your spouse or one of your children does? Requiring your full-time care and attention for an extended period of time?
Some of these scenarios can be insured against.
Others might be mitigated via restructuring our affairs or selling assets to address cashflow issues. Assuming that at the moment you need to refinance or sell, there are counter-parties who are both willing and able to do business with you.
A few may represent the permanent and irrecoverable destruction of our plans. Requiring a new priorities and more realistic goals.
Nobody likes to think about what might go wrong. However, it is much easier to deal with an unexpected crisis when we have already done the thinking ahead of time. This provides a rough script to follow in the moment.
The existence of contingency plans help to avoid panic and making stupid mistakes while under stress.
Most workplaces do business continuity planning and disaster recovery testing. You should too.
Mutually assured destruction
Finally, consider a scenario that few of us would like to think about, yet nearly half of us will experience at some point: divorce.
Perhaps your spouse meets somebody else. Or you catch them playing away.
Maybe they realise they are gay and no longer want to live a lie.
It could be something as simple as the relationship has run out of steam. The couple has grown apart. No longer sharing common goals, interests, or aligned plans for the future.
Whatever the cause, wargaming this scenario is likely to prove eye-opening.
What would your finances look like after an amicable split? An even distribution of communal assets?
Would your new circumstances require a change in where your primary source of income originates?
A formerly dual-income household becoming a single income household is an adjustment. Somebody who was previously living on passive income generated by an investment portfolio that has suddenly halved in size may be in for a rude shock.
Do you still own the property you live in? Or will you find yourself house hunting, either as a prospective tenant or a future homeowner?
How does your current age impact your ability to obtain a mortgage? Do you have enough working years remaining to repay what you may wish to borrow? That may be a decision your lender makes for you!
Next, ask yourself how your answers may change should the divorce be on less than friendly terms.
Perhaps you returned home to find your suitcase packed next to the front door.
Or a bonfire of your possessions raging in the front yard.
Restraining orders and ravenous snarling pitbull lawyers.
“War of the Roses” levels of animosity.
The need to punish resulting in a Pyrrhic victory or mutually assured destruction.
What if you got cleaned up by the courts, or felt the need to completely start over?
New residence. New furniture. New wardrobe. New life. New you.
Where does the money come from?
What would you be left with afterwards?
If everything goes right all of the time, then these war games amount to nothing more than challenging thought experiments.
Our plans would successfully deliver our hopes and dreams with a minimum of fuss. That yellow brick road really would provide the direct route to our desired outcome. The happy path.
However, it has been my experience that “life happens” events do frequently occur. We seldom can predict exactly what they will be, but it is a reasonably safe assumption that something will crop up. Often.
My contingency fund provides a shock absorber for the small stuff. Smoothing the ride, and shielding me from the noise.
It is my contingency plans that have made the difference for the big things. Arrived at via conducting war games like these.
A series of “
IF [this] THEN [that]” exercises.
Independent events in simple cases.
More complicated cases require considering interrelated events. To understand knock-on impacts, like falling dominos. To avoid everything collapsing, like a house of cards.
When things go spectacularly wrong, it is often the result of a chain reaction of events that are each triggered by another. Therefore it is important to understand what risks we are exposed to, how they are related, and what we will do should one (or more) of them occur.
Our plans need to have resiliency and redundancy baked in, to ensure they are not fragile.
Otherwise, we end up uncomfortable.
- Andrews, E. (2018), ‘5 Famous Pyrrhic Victories’, History.com
- BBC (2020), ‘Barclays boss: Big offices ‘may be a thing of the past’‘
- Bond, S. and Bullock, N. (2019), ‘Uber’s spluttering IPO: where might the blame lie?’, Financial Times
- Deutsche Welle (2020), ‘German labor minister calls for right to work from home‘
- Gov.uk (2020), ‘Universal Credit‘
- Klebnikov, S. (2019), ‘Here’s Everything To Know About Airbnb’s 2020 IPO—Which Could Be Nontraditional’, Forbes
- Matthew, P. (2020), ‘Work with Pete‘, Meaningful Money
- Midolo, E. (2020), ‘Don’t blame coronavirus for WeWork’s collapse, blame WeWork’, Wired
- Western Australian Museum (2020), ‘Voyages of Grand Discovery‘
- Tesla (2020), ‘New and used electric cars‘
- Twentieth Century Fox (1990), ‘The War of the Roses‘