Editor’s note: This is a guest post by my good friend Pauline from InvestmentZen.com. Pauline has been financially independent for several years now and is my inspiration when it comes to non-traditional investments (I’ve never told Pauline that but it is true). Hope you’d enjoy her blog post and it will make you think about your financial independence.
The quest to financial independence is not always as straightforward as it seems. You know you need to save up enough money to live off your investments forever, which usually boils down to 25 years worth of expenses, using a 4% safe withdrawal rate. So it should be work, work, work, save, save, save, and try to get there as soon as possible, right?
Not exactly. Let me tell you my story. I left the rat race at 29 to live life on my own terms. At the time, my freelancing income had surpassed my day job income, but part of my net worth was stuck in assets that did not generate a good enough income. I had bought a property that was barely cash flow positive, and technically, the downpayment was not getting any returns. So while part of my money was on the markets, I was unable to consider a 4% withdrawal rate for the whole thing.
I realised I had two options:
- Keep throwing every penny into investments and tighten the belt in the meanwhile
- Enjoy the safety net my savings provided and try to do things my way
I chose the latter, mostly because just investing in low cost index funds through a robo-advisor, while a promise of solid returns, seemed pretty dull. I was young, time was on my side, and most importantly, not afraid of risk. I had failed before and bounced back. Resilience is one of the best qualities you can have.
One of the decisions that could have thrown me back quite a bit in my quest to reach financial independence was buying a house cash. I used to think buying a place on credit, and investing instead of paying off the mortgage was the key to building wealth fast. It was. Good debt and leverage can get you there quicker.
But I relocated to Guatemala to enjoy a sunny climate at a low cost, and as a recently debarked foreigner was unable to secure credit from the bank. I could have gone the normal way, and rented a place for $500 a month, although the idea, after living in my own home in the UK, of going back to having a landlord on top, for as friendly as they might be, was dreadful. So I took a good chunk of my savings and sunk them into a little house by a gorgeous lake.
Proof in picture:
OK, let’s stop dreaming and go back to my point. I deliberately chose to postpone wealth growth so I could live happily by the lake. Turns out, I later built a few units, started renting them, and the run down little house has turned into a cash machine that covers my expenses while I am there. The house itself probably appreciated as well. But it is not money I can safely withdraw every month to live off.
And you know what? I am ready to do it all over again. I have my eyes on a gorgeous house in the South of France that I could afford to rent forever with the proceeds from my investment portfolio. But I am choosing to buy it, putting down a huge down payment (that I am foregoing any return on) and paying a similar amount monthly to pay the rest via owner financing for the next 20 years.
A cool way to avoid the bank; but not such a smart move financially. My reasoning is that being French, I will probably enjoy having a nice six bedroom in Provence to welcome my family and friends in summer during retirement, and I would want that paid off. I don’t want to be kicked out as an old lady because the landlord is selling. And while I am just 35 and healthy, you never know what can happen in the future, so I feel more comfortable getting lower returns for the sake of safety.
I get that it seems counter-intuitive considering my previous statement about risk and all. But when you start planning for a better financial future, it is like getting in shape. The key is slow and steady. Eyes on the prize, and try not to get too side-tracked for the next decade or two. If you go in a straight line however, chances are you’ll drop out, like you would with a too drastic diet. I may have lost a few years by buying a house cash, but being truly at home is priceless.