Another year has begun, bringing with it a wave of good intentions. Honestly, I am a little skeptical about the effectiveness of this kind of motivational boost people feel at the beginning of the year, which tends to be fueled more by false hopes than realistic goals. However, I do believe that the start of a year is a great time for reflection. It's a moment to look back at what has happened and think about what the future might hold.
One goal I want to set for myself this year, which I didn't get around to last year, is creating a long-term investment plan. A plan where I will surely need to understand where I see myself in the future, what I hope to achieve, and my personal philosophy on money. But more importantly, I want this journey to be guided by a fundamental conviction I have: what really matters is the freedom to forge my own path in life, without depending too much on other people (or things). In other words: financial independence.
Let me be clear: it's not that I feel particularly chained to an unwanted life, quite the contrary. But having a solid financial foundation in the future will undoubtedly continue to secure my freedom and open up more opportunities.
Well, well… That's not so different from what most people desire, my friend. Are you implying that you want to be rich?
I don't believe that being rich is necessarily the solution, and I don’t think that only rich people can have financial independence. However, whether we like it or not, money is very important, and the way we relate to it and manage it can significantly impact our lives (Mellers & Killingsworth, 2017).
While my relationship with money has evolved, my general attitude toward it has remained largely consistent. I believe that money is important, but it should primarily serve as a tool to enhance our lives. As the Stoics have taught us, wealth is neither inherently good nor bad, it’s how we use it that truly makes the difference.
So, what's the plan then? Depriving yourself of fun and pleasures today in order to enjoy a hypothetical and uncertain tomorrow without thinking about money? Is carpe-diem no longer in vogue?
I strongly believe in the wisdom of enjoying the present, of acting now rather than postponing, and not relying too much on an uncertain future or the perfect moment. But I also believe that a life worth living needs planning and clear goals, and for these goals to be achieved it is necessary to understand what is really important and follow a minimalist approach.
So… I will begin by rigorously monitoring my expenses, eliminating anything that isn’t essential or doesn’t contribute to my personal growth, maximizing savings, making wise investments, and carefully balancing them with the level of risk I'm comfortable taking over time. But before all this, I need a solid ISP.
Ok, after days of reading articles and watching videos, I know something more about stocks, bonds, ETFs, funds, and financial independence. Not even close enough to be able to explain these concepts to someone else, but enough to allow me to start creating my first ISP.
What the fuck is an ISP? Are you thinking of providing web access to ...
No, it is not an Internet Service Provider... ISP also stands for Investor Policy Statement: a detailed plan to manage your investments and not derail in times of desperation and emotional instability (PhysicianOnFIRE, 2016).
Interesting.. But why are you going to create a so called ISP? And above all, why are you making it public?
As I mentioned before, planning is very important to me, and a rough ISP is the first step to start investing and managing my money pragmatically and consciously.
I also strongly believe in the power of public commitment. Sharing your goals with others makes you feel more responsible about them. It also helps keep you motivated. Why? Because even if no one is really watching (or reading), in your mind, it feels like they are. This feeling makes you want to stay true to the image you have of yourself and stick to your goals.
So, let's begin!
My ISP is directly inspired by Mr RIP's, which is a bit dated and has changed a lot over the years but can be a good starting point (MrRIP, 2017). Mine will be adjusted according to my risk profile and my goals.
It will therefore initially be organized into three parts (I’ll think about asset allocation later on):
But first, let me make a list of terms I'll use with their descriptions:
- FI (Financial independence): A state where an individual has sufficient personal wealth to live without having to work actively for basic necessities.
- NW (Net Worth): Measure of an individual's financial health.
- WR (Withdraw Rate): Percentage of savings or investment portfolio that can be withdrawn annually after FI.
- SR (Saving Rate): Percentage of income that is saved or invested.
- FU (F*** You): The specific net worth that enables FI.
- Reach FI (NW >= FU) before age 42, i.e. before the year 2036.
- FU = 30x yearly expenses (desired WR = 3.33%).
- Once FI is reached, yearly expenses (thus FU) will be updated each year based on forecasts and actual spending.
- Reach 120% FU before age 45.
- Stay above 80% FU forever (after having reached FI).
- Hard Accumulation phase (NW < 100% FU):
- Keep SR >= 60% but be careful not to push too far.
- Stay in this phase until you reach FI.
- Self Sustainability phase (80% FU < NW < 120% FU):
- Probably worth decreasing SR according to income and lifestyle.
- Right time for any substantial changes in investments.
- If you fall below 80% go back to phase 1.
- Actual FI phase (NW >= 120% FU):
- Stop caring about having to earn money.
- It’s ok to withdraw from the principal if necessary.
- Make all work and income decisions as if the wage were 0.
- Remember to invest in yourself even before the markets.
- Invest in a diverse portfolio (primarily funds).
- Invest mainly in stocks (>60%), secondary in bonds.
- Tolerate high risks the younger you are.
- Avoid investing in specific sectors.
- Prefer Distributing over Accumulating ETFs given the same costs and tax conditions.
- During the accumulation phase, keep investing each month.
- Once every 6 months do a major rebalance between asset classes and within each class.
- Use this “major rebalance time” to review your ISP and eventually improve/change it.
- Keep 2-6 months of living expenses in cash while working (emergency fund).
- In case of an urgent need for cash in a bear market, sell bonds first.
Great, very simple for now. But this is just the first step! :)
Curious to know how much time you need to reach FI with your income and SR? Try https://networthify.com/calculator/earlyretirement.