Give me a place to stand, and I shall move the Earth with it
Personal finance can be incredibly complicated with you want it to. Around the world, billions of people wrestle daily with managing their money. It can feel like an intractable problem. But using the Three Levers we work out how to solve any money dilemma.
The Three Levers
- Earn more
- Save more
- Invest more (or better)
How do the Three Levers work?
I think that personal finance boils down to two equations:
Expenses + Savings = Income
Income tomorrow = Earnings tomorrow + Yesterday’s Savings plus return
Now we can see how pulling the Three Levers helps us:
- Earn more: Our income increases, we have more money to spend and save
- Save more: We have more income to spend and save tomorrow
- Invest more (better): We get a better return, so we have more money to spend and save tomorrow
Pulling the levers
It’s possible to pull down hard on all the levers. It’s also possible to pull down on none of them.
The extent you pull on them depends on what you want to achieve and what you’re comfortable doing.
Pulling down the earning lever means working harder, longer hours, gaining skills, getting a profession, moving jobs or developing multiple sources of income.
Saving more means cutting spending, embracing elements of frugality or going without some of the finer things in life.
Financial Independence and the Three Levers
If you want to be Financial Independent or Retire Early (FIRE) you have to pull hard on at least two of the levers, arguably all three. You need to earn a good income, save a lot of it and invest it wisely.
That’s what I did. I found a well-paid profession (accounting) and worked hard, moved jobs and gained skills to get paid more. I saved most of my money. Usually around 60-80% of my net salary. I invested wisely, well over half of my “money” is in low-cost index-tracking funds that have generated a return of over 10% per year over the last 5 years.
Why FIRE isn’t for everyone
It follows that FIRE isn’t for everyone.
If you have a low-paid job and are unable or unwilling to earn more then FIRE will be difficult.
[At this point, I want to be a bit controversial and say that most people, in the UK at least, can earn more money. If you are earning minimum wage, in many cases, you are doing that by choice. Pretty much any skill or profession you can think of can be gained for free. Programming – loads of excellent free courses online. Accountancy – free courses and some places will even pay you. Building, plumbing, carpentry, electricians – you can study at your local college and often for free. For a more forthright take, go over to The Escape Artist and find out why earning more is not cheating]
If you like fancy things and jetting around the world, again, it’s more difficult.
If you don’t want to take a risk with your savings and you want to hold everything in cash, again, it will be more difficult.
Implicitly, FIRE won’t be suitable for people stuck in a low-wage job, like having lots of stuff and don’t want to invest in the stock market.
Of course, it’s possible to pull down on the levers a little less – instead of turning it up to “11!” many people in the FIRE community do. Lots of people take early retirement in their 50s and 60s, escaping the rat race a few years early.
Finding the balance
You have to do what’s right for you. Yanking down a lever that doesn’t want to be there and it will yearn to go back up. If you aren’t a frugal type, there’s nothing wrong with that. Instead, if your financial goal demands it, you will have to pull the other levers hard. Some people don’t want the stress or hassle of a high-paid, high-pressure job. Again, that’s fine. But you have to “cut your cloth” accordingly.
These things change over time too. Career-driven 20-year-olds may mellow in their 30s, feeling the work/life balance trade-off is not worth it. Likewise, empty nesters in their 40s and 50s might feel more comfortable spending less. The right call for you will vary as your life changes.
A word on criticisms of FIRE
The most common criticism of FIRE I see is: “If you earn the average or below average wage, don’t save much and don’t trust the stock market then FIRE is completely unreasonable.”
No shit Sherlock!
But for my face, love handles and awkward manner I’d be as handsome as George Clooney.
Questions to ask yourself
It’s a question we stop asking ourselves after we turn about 15 and instead think about drinking alcohol and having sex all the time: What do you want to achieve in life? How much money and when do you need it to achieve those things?
Then turn to the Three Levers, which ones will I pull to get there?
- Do you want to earn more money? If so, are you willing to learn new skills, change careers, move jobs or location, work in a more stressful or longer-hours environment?
- Can you earn less money and still meet your goals? Is work too much, too stressful? Can your other levers take the slack? Would working part-time or flexi-hours be a better suit for you?
- Can you save more? Do you spend money on things that don’t bring you joy? What hobbies or pastimes bring you the most happiness? Which ones the least? Can you cut back in any areas?
- Are you scrimping too much? Do you chafe under frugality? Are you punishing yourself by going without things that you truly enjoy? Are there small expenditures that would dramatically improve your life?
- Can you take more risk? Are you comfortable tying up money for longer, in riskier assets?
- Are you investing too much? Do the ups and downs of the stock market stress you out? Do you check your portfolio every day? Would you be happier, and still achieve your goals, in low-risk investments?
There is ‘no one size fits all’. Be intentional about how much you pull on the Three Levers.
All the best,
Young FI Guy