Alan Donegan: Rebel Business School Co-Founder, Rebel Entrepreneur podcast host, Rebel Finance School co-founder and Queen's award winner. Marvel movie fan fanatic, breakfast lover and financial independent traveller
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Katie and I started a new diet in lock down in 2020 given to us by a coach, we followed it to the letter, gave it our everything and after 12 days we had lost so much weight but I was falling asleep in the afternoons from no energy. The diet was literally stripping me of my vitality and energy and I was falling to pieces. katie wanted to press on, I couldn't take it and we argued.
Sometimes we all have the tendency to take things to the extreme when we find something we are passionate about. What does this all have to do with financial independence? Some people take it to the extreme when they find out about it, alienating the people around them and sacrificing happiness.
The biggest mistake people make when they first find out about financial independence
The biggest mistake people make when they first find out about financial independence (FI) is taking it too far. They push too hard on the savings, they take it too far on frugality and they force it on the people around them.
I was on a live stream this week talking about FI Chautauqua (a financial independence retreat) which is held in different inspiring locations around the world. It is not an in-expensive event, but when Katie and I went it changed our lives forever. At the start of the live stream I saw a comment that got me thinking.
The viewer said "isn't it anti-FI to spend so much money?"
The short answer is NO, it is not anti FI to spend money!
The FIRE principles are quite simple:
No-where in these principles does it say don't spend money.
That being said there is an simple mathematical equation that does state the higher you percentage savings rate the shorter your working life.
If you can save 50% of your salary then your working life is just 17 years! If you learnt about this at 20 years old and saved that much you could retire at 37 (you would beat me by 3 years!).
This is where people get really hell bent on saving at all costs. They stop spending anything they can to get their costs down as low as possible. They sacrifice their happiness or worse for a future.
If you think "I will be happy when I get to financial independence" then you are setting yourself up for failure. Happiness doesn't come from a number in a bank account. It is not a journey to happiness; happiness is not out there if only you can save enough or make enough. It is a journey of happiness.
Getting to financial independence can take a long time, decades even. If you are putting off happiness till the end of that journey then you are missing the entire point of financial independence; and you probably aren't going to follow through to get there.
Not going to weddings
There was a BBC piece done on financial independence a few years ago. The main stream media have a love hate relationship with FIRE. They love to use us to inspire people and offend people in equal measure because it sells newspapers and gets people to watch.
The BBC found a 20 something that had got the wrong end of the stick with FI. She had cut her spending, she had gone into extreme saver mode and wasn't spending anything at all. She was sacrificing her happiness today for some end point in the future.
The reason she got on the BBC is that she had said no to going to two destination weddings of her friends. She could afford them but her desire to not spend money overrode her desire to spend time with family and friends, to travel, to enjoy life.
She blamed FI and told the world she wasn't following the FI path because the cost was too great. She believed that the only way to get to FI was to sacrifice happiness and stop spending.
She completely missed the point of FI. FI is not a thing where you give up ever having fun, doing things or enjoying life for some future point in time where you are wealthy and can retire.
FI is about getting your finances straight so you CAN go to the weddings. So many people put that type of thing on a credit card and sacrifice their financial future for fun in the moment. The whole point of financial independence is to save and invest to have the freedom to do what you want to do; like going to friends wedding without having to go into debt to do it!
Why do humans have this self-destructive tendency to make everything binary? I either spend everything I have, go into debt but I am happy or I spend nothing and miserably work towards FI?
Binary means it is a 1 or a zero. Either I spend money and am happy (1) or I spend nothing and am FI (0).
I can hear Katie screaming now "IT'S NOT BINARY"
I know it is Anti-Donegan
This week we were chatting to someone after Rebel Finance School had finished and she was agonising what to do with her accommodation.
She said to us "I know I could rent out one of the rooms in my home and get money in that way and it would get me to financial independence quicker but I just don't want to share my space. I would just be MISERABLE!"
Then she said something that really got to me: "I know this is anti-Donegan but I just don't want to rent out room!"
I wanted to scream "Where in the Donegan rules does it say you have to rent out a room in your hose to make more money even if it makes you miserable?"
The opposite is actually true. We believe happiness is the most important thing. You might have to work a little longer, you might not get to FI as quickly if you don't rent out a room but that is ok! It is about making a conscious choice.
Sacrificing happiness for financial independence is stupid. You are sacrificing years of your life to get to a magic number that won't make you happy either.
You can be happy along the way and work towards financial independence. If you enjoy your job and don't need to rush to get to FI then don't rent the room out and be happy working away and making progress.
Making people feel guilty for spending
When people find out about FI they slash their spending. Which they should as most of it doesn't lead to happiness. But they also go too far and stop spending on things that do increase their quality of life and happiness.
That is why Katie and I talk about knowing the true cost of your purchase and spending in line with your values.
It is ok to buy an expensive new BMW if you realise that you will be working for an extra 5 years to pay for it and you LOVE cars and it brings you disproportionate joy. I have never said don't buy the car.
Buy the car. Have fun. Know the true cost; own it completely. Don't come complaining to me that life is too expensive and you can't retire if you chose to buy it knowing these two things. You can have anything you want in life if you are willing to pay the price up front and in full.
The problem is that most people don't have a clue about the true cost of car ownership or buying things on subscription. They just want it and they can afford it out of their monthly pay check so they just do it.
What does this have to do with making people feel guilty? In a huge number of cases (ours included) when we found out about FI we went around telling everyone, do you know what that is truly costing you? Do you know you are trading your freedom for that expensive car? Do you know you are really working for BMW not for yourself?
We went around alienating everyone and making them feel guilty about their purchases. This is not a way to happiness and having friends. In fact it is the opposite! We thought we were doing the best for our friends, stop spending, save and invest and be FI like us; but in reality our extremism put a lot of people off the idea in the early days.
We should be helping people spend in line with their values. If you know the cost of that expensive suit or dress, if you know how long extra you are going to work for it, if you know you could get it in the second hand shop for a tenth of the price but you still want it and are happy to pay the price then go for it!
Let's stop making people feel guilty for spending in line with your values. If you can afford it, you know the true cost and you want to then buy a fancy coffee, eat in a nice restaurant every now again and enjoy life.
It is a journey of happiness; not too happiness.
If that purchase doesn't increase your long term happiness then cut it out and save the money!
The true cost of weekly expenses
So how do you work out the true cost of a weekly expense? We have a simple equation for you called the rule of 752.
You take the amount you are spending on something and multiple it by 752 and this gives you the total you would have after 10 years if you invested it instead.
Let's have a little attack at expensive coffees. Let's say you had a coffee each day that cost you £3.50. So 7 coffees at £3.50 = £24.50 a week.
Then you take that weekly amount you spend and multiply it by 752. £24.50 multiplied by 752 = £18,424. If you took that money and invested it instead at a 7% return you would have £18,424 after 10 years!
Can you see how that small amount each week mounts up quickly? The question then becomes is that coffee worth that to you? Would you happily pay that? if it gives you that much happiness then pay it? If you could make it at home and get the same pleasure and save the money then do that!
Just realise the real cost of these little expenses and then work out if it gives you that amount of happiness or if you could get it another way!
Spending on things we can't afford
The problem comes when we want things we can't really afford. Car companies know that you can't really afford the $40-50,000 to buy a new car and that is why financing was created and they show you the price in monthly figures.
If you actually had to shell out that money; take the wheel barrow of cash to the dealer to buy the car would you do it? Or does it feel palatable because it is only $400 a month.
Buy now pay later has become an epidemic across the world with people buying shit they can't afford and paying high interest rates.
If you can't afford to buy it. If you are having to put it on a high interest rate (15%+) credit card or store card because that is the only way you can get it then you should not be buying it.
Lot's of people complain things are so expensive and then they put it on a store card that means that they end up paying back over double the cost of the item in the first place.
Car dealerships make more money out of the financing than they do out of the cars that they sell you. They sell you on the dream of the new car, the smell of leather seats, the power of a brand new engine and they tell you that they can help you afford it. They enslave you to finance plans that you can never get out of with balloon payments at the end and redemption fees.
Happiness is the goal
I remember being sat with Mr Money Mustache at Chautauqua in 2016 and he said something that has stuck with me ever since. He said "Happiness is the only logical pursuit"
Your happiness is the most important thing. Happiness is not going to come from increased expenditure. Happiness is not going to come from a higher savings rate. Happiness is not going to come from hitting a certain net-worth and becoming FI.
Happiness is something that comes through community, purpose, experiences, love and time to do what is important to you.
Today I feel happy. I woke up and went for a run. I hugged Katie in bed, I had a delicious coffee in a lovely little café in Puerto Vallarta and I wrote this article for you. I have love, creativity, purpose and health. My day has been full of the things that are most important to me.
The biggest mistakes people make when they start on the FIRE journey are:
I wrote this article to inspire you to look for happiness in your day to life. In the connections with the people around you, in the little moments, in the time and space you can buy yourself to have more happiness through financial education.
Don't fall for the trap and loose sight of the goal: Happiness.
It is also worth remembering that happiness doesn't have to cost the earth. A walk with someone you love, a picnic in the park, boardgames with the family. Happiness doesn't have to cost a lot of money and quite often there is unbelievable happiness is writing, creating, chatting and other completely free activities.
Avoid the #1 mistake people make when they find out about FI which is deferring happiness till they hit that number.
You can find happiness along the way. It is a journey of happiness not a journey to a financial amount.
Your challenge this week is to do something that makes you happy. Preferably something that doesn't cost the earth but will bring you outsized happiness. Maybe it is giving yourself the gift of an hour in a coffee shop reading, maybe going for a walk with a loved one or cooking a special meal. Your challenge is to make this a journey of happiness, not a journey to financial independence!
Let me know what you did or plan to do in the comments below!