by Special Guest1
Financial Freedom for Interim Executives
While our blog shares plenty of content about finding your next interim assignment; opinion and comment about working practice; news and events that interims and clients will be interested in; we don’t often talk about long term goals such as retirement and financial independence.
Redressing this discrepancy we have a guest post from The Escape Artist, sharing an interesting insight into financial independence and how interims are ideally suited to this aim.
The Secrets To Financial Independence
I quit my corporate job aged 43 when I realised I probably had enough to never have to work again.
Most people assume that this is impossible unless you are a lottery winner, successful entrepreneur or hedge fund manager. But I did it as an accountant with an office job (and 3 children!). I now write a blog about financial independence where I share the secrets.
Financial independence does not mean that you never work again: it just means that you have enough so that work becomes your choice. So you only need do work that you enjoy and find meaningful.
Is Financial Independence A Realistic Goal?
The evidence is clear that continuing to work into our later years in interesting and challenging roles is great for our health and happiness as well as our wealth. That’s why in my coaching, I talk about financial freedom rather than early retirement.
Interim executives enjoy a huge advantage over full time employees. That is because “permanent” jobs come with a huge and hidden cost: full time permanent employment makes many people either demotivated and unhappy, or complacent and less creative.
Many full time employees are unhappy because they are bored and lack variety in their life. They may not like their jobs but feel trapped by the need to meet the bills. When you think about our evolutionary history as nomadic hunter-gatherers, being a full time permanent employee is in many ways an unnatural state.
Being an interim means being able to adapt regularly to new situations and new challenges. If you are an interim executive, you will have good problem solving skills. I think of achieving financial independence as just another problem to be solved. In this case, the challenge is accumulating enough wealth to be set for life.
The most important thing is to realise that financial independence is possible. Once you realise this, it’s a bit like eating an elephant. Yes, it’s a big job but it’s possible if you take it one bite at a time.
Why Interims Are Suited To FI
Interims tend not to be complacent. Interims realise that they’re perceived as being only as good as their last role. They understand how important it is to develop a network of resourcing professionals, former clients, friends and contacts to help them land their next role.
At a minimum, interims need savings to be able to fund their lifestyle in the inevitable periods between suitable projects becoming available. So interims are probably much less prone to the sort of living from paycheque to paycheque behaviour that many full time employees indulge in. Whether it’s building wealth or building relationships that may lead to future roles, I encourage people to think long term and “dig a well before they are thirsty”.
To get to financial independence, you have to maximise your earnings, minimise your expenses and invest the difference wisely. As an interim executive you are probably already way ahead of most of the population in terms of your earning ability, your attitude and focus on earning more.
One key to maximising earnings is avoiding long unpaid periods between projects by having a strong network and using the right external resources. The other is maximising your remuneration by project…either by increasing your day rate, demonstrating value so clients retain you for longer, getting paid by performance or some combination thereof.
I’m going to assume that you have the earning side under control. But if you are like the great majority of people, you will be spending far more than necessary. I use a range of tools to buy less and get what I do buy much cheaper than most other people. I never borrow money to fund spending and I always look for the most efficient solution.
Attitudes to Spending and Investing
Most people waste vast amounts of money on debt interest, pointless consumer spending, poor investments and status goods. There are lots of reasons why we do this, encouraged by the advertising and marketing industries.
We all have a money blueprint in our minds that we developed growing up. We were taught attitudes by parents, other family, teachers, advertisers and bosses. Some of these attitudes are true, but on examination many turn out to be half-truths or just plain wrong.
One example is the belief that many people have, that more spending always brings more happiness. But academic studies show that, above a certain level, additional spending brings no additional happiness. For me though, academic studies were not enough to change the way I thought about money, I had to experience and live through the process of reducing my spending whilst becoming happier at the same time to believe it.
Most people don’t realise but, by itself, earning a lot is never going to be enough to get to financial freedom. You also have to save hard and invest the surplus wisely in wealth generating assets (such as equities or property) that compound in value over time.
With interest rates close to zero on cash and high quality bonds, most people are not going to be able to build enough wealth by saving cash alone. One of the foundations of financial independence is learning to think long term and accept the inevitable volatility of equity markets along the way. For the long term builder of wealth, equity market crashes and panics are rich sources of opportunity. They allow us to buy assets cheaply.
Unfortunately, many people are paying far too much in fees and expenses on their pension plans, ISAs and other investment vehicles. The best way to avoid this is to take charge and manage your own investments.
I have always managed my own portfolio during my career and was obviously helped in doing so by spending 22 years working in finance. But investing can be made simple enough for anyone to manage their own portfolio. For high performing interim executives it should be straightforward.
Since becoming financially independent, I’ve coached people to invest more effectively (and without paying high fees) and to benefit from the power of compounding over time. The sooner you start this, the longer and the harder your money will work for you.
There is an old saying that says there are two types of people in the world: those that understand compound interest and those that don’t. Those that understand it, earn it. Those that don’t, pay it. Imagine how great it would feel for most people to have no mortgage payments to meet. I still remember the day when, aged 32, I went into the bank and paid off my mortgage.
How long does FI take?
The time it takes to get to financial independence is a function of your savings rate and the return you achieve on your investments.
To see how powerful the saving rate is, let’s look at a few examples of the time it takes to get to financial independence. For these purposes I assume a zero starting net worth, no state pension, 5% per year real investment returns and a safe withdrawal rate in retirement of 4%.
If you save 20% of your earnings, it takes 52 years to reach financial independence. If you save 40%, it takes 25 years. But if you can get your savings rate up to 60% (as many people pursuing FI do) it takes only 14 years to get to a point where you never have to work again.
You can experiment with these assumptions and see how long it will take you to get to financial freedom using this spreadsheet calculator.
Most people find these numbers hard to grasp because they have been brought up to believe that it’s natural to spend everything they earn and more. We are told we need to save 10 or 15% for our retirement but that is not enough: its just locking us into never being free.
Because most people have never heard of the concept of financial independence or they don’t think it’s possible for them, they never get started. So, because they believe that more spending brings more happiness, whenever their income goes up they just spend more.
When I worked full time, there were plenty of people around me that earned much more than I did but are still forced to work because they fell victim to lifestyle inflation and spent whatever they earned.
Interim executives are in a great starting position to get to financial independence. You probably already have an independent mindset: thinking and acting as if you are Finance Director or CFO of your own life. Getting to financial independence is a natural progression in many ways.
Financial independence will allow you to be even more selective about the roles you take on and to choose work with great people on projects that are meaningful to you. So not only will you have financial security for yourself and your family but it could be great for your career as well.
The author retired from a career in financial services having achieved financial independence at the age of 43. He is now sharing his experience and expertise with others through his website theescapeartist.me and one to one coaching.