In personal finance, The Good Old Days were actually The Bad Old Days.
In the Bad Old Days, before people knew about the concept of financial independence, there were financial advisers who acted as The Gatekeepers to investing.
People were more likely to “know their place”.
You had to speak to the man in a suit if you wanted to build wealth via a compounding machine.
The problem with financial adviser incentives
Those financial advisers made money when they sold product (first by commissions, then by annual % fees of funds under management).
To be fair, part of the reason they did this was because most people were unwilling to pay for truly independent financial advice charged on an hourly basis.
Those financial advisers, being human, not only needed to make a living, they wanted to make the best living possible for themselves and their families. Fair enough.
Follow the money
The problem is…it turns out that the business model that maximises profit is gathering assets under management and charging outrageously opaque % fee structures.
Pro-tip: if you can’t quantify your annual investing fees in actual £/$/€, there’s a good chance that you are being milked.
There was zero incentive for fund managers or financial advisers to teach frugality, shopping around or being cost-conscious. Quite the reverse. Why show the prisoners the route out of The Prison Camp?
The end result was that overheads + fund + adviser % fees were ridiculously high, the financial services industry won and the customers got screwed.
The Essential Innovation of Financial Independence
The Financial Independence movement told people they could invest their own money (without gatekeepers) using a low cost tracker fund. That was a good thing (and it still is).
But the essential innovation of the Financial Independence movement was to join the dots between the amount you saved and invested (rather than spent) and the time it would take you to get to financial freedom.
It gave us the concept of the 25x rule of thumb which says that you are financially free when you have invested net worth of 25x your annual spending. If you can cut your annual spending by £1,000…either on fund management fees or on groceries… then you bring the finish line for “enough” closer by £25,000. That’s quite the multiplier effect.
Financial independence showed us the trade-offs that were available. This knowledge gave us the ability to make choices. If you could dial up your savings rate to 50%, you could reach financial independence in less than 17 years.
And it gave us this graph of the relationship between % savings rate and time to financial independence:
This was the essential innovation that the financial services industry had not told us about.
The baggage that crept in along the way
But this essential innovation was not all that we got.
The internet unleashed an infotainment free-for-all and a thousand flowers bloomed.
As writers / bloggers / youtubers / others developed personal finance content, they each put their own spin on the concept of financial freedom.
Famously, Jacob from Early Retirement Extreme showed the path from hard core frugality to financial freedom. Then Mr Money Mustache joined the dots for us between riding a bike, saving the planet and getting rich in the process…what was not to like?
FI morphed into FIRE and became a cult *movement*. As tends to happen with cults, this then led to some of the followers competing to be the purest (aka most extreme) cult member.
Humans are always prone to take good ideas too far. We’ve all done it. There were several times on my own journey to financial independence where I went too extreme with the frugality and was penny wise, pound foolish.
Frugality (or efficiency if you prefer) was a good idea (still is). Environmentalism was a good idea (still is). Getting involved with a community was a good idea (still is).
But something went badly wrong as Soshul Justiss Aktivism + APOCALYPSE NOW! environmentalism + the preaching of extreme frugality (aimed at the plebs, not the Davos jetset obvs) converged. I could give you a million examples but how about this article from Project Syndicate:
This was a Spinal Tap moment as the cringe factor went up to 11.
At this point, I asked myself whether I had fallen into the same trap? I reviewed my own back catalogue of articles. I kept all the posts that were timeless and high quality (IMHO) up on the TEA blog. But some had not aged well and those went to The Great Recycling Bin In The Sky.
My learning points: 1) humans are prone to groupthink and no one is immune from this 2) email is a better format for *hot takez* on The Current Thing whilst still fresh. Most of this sort of thing ages badly.
So I made some changes.
The Escape Manual
I started to put technical material and investing posts onto The Escape Manual.
Example, I have now wrapped my head around the Lifetime Allowance Charge re UK pensions (55% on excess lump sum amounts).
I haven’t yet reached pension access age and am not in drawdown and so had been putting off writing an article about this. But I knew it was an issue for some of my clients / subscribers so I have now written a definitive article on it on The Escape Manual.
In an ideal world, if we had a proper choice, there would be ethical and high quality alternatives to regulated financial advice.
It would be lower cost than regulated financial advice – even though of comparable or higher quality. It would not push product. It would treat intelligent clients as grownups capable of making their own decisions. It would be a business (hence professional) but it would be a small business and an ethical business.
This is what I offer with The Escape Manual and my financial coaching.
What remains that is valuable?
The four pillars of financial independence remain timeless and unchanging, unaffected by the ever-changing fads and fashions of culture and politics.
1) Earn more;
2) Spend less;
3) Invest the difference wisely; and
4) Know how much is enough
Each of these takes a certain amount of learning, self-development and improvement. The mindset changes you will need vary by individual depending on circumstances and personality.
In the last few years I have seen enough of The Madness of Crowds (see books here and here) to make me sceptical about one-size-fits-all solutions, personality cults and quasi religious *movements*.
I have however been impressed (and sometimes amazed) by the personal transformations that I have seen with my own eyes and had reported back to me:
As a result, I am more confident than ever that we can improve our own situations and change things at the personal and local level.
Love to everyone…even Greta.
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