The Financial Independence (FI) movement can appear to be very US centric, having the largest community and most prominent bloggers and podcasters. The terminology used, retirement vehicles highlighted and strategies suggested are, not surprisingly, typically those available in America.
As an expat living in the US, but likely to be moving on next year, I’ve been conscious and interested in the broader international approach to Financial Independence.
What works in one country may not necessarily work in another one. Where you live can have a big impact on the approach you take and strategies you employ to save effectively, minimize tax, invest and build assets.
So what are the universal themes applicable wherever you live? What are some of the key differences to think about and consider when developing your plan of attack to reach Financial Independence?
The basics are the basics
No matter where you live, the principles underlying how you reach financial independence, are very similar.
Your savings rate is the foundation
If you are spending more than your income, you won’t ever gain financial freedom. You’ll likely need to work forever, getting increasingly into more debt. The lifestyle is unsustainable, so stop and start saving. Living paycheck-to-paycheck is a disaster and you need to escape the cycle now.
As a good rule of thumb, many in the Financial Independence community aim for a savings rate in excess of 40%.
Sure, any savings are good savings, but if you want to reach Financial Independence in a reasonable timeframe you will need to save more than 10%, which is already better than average.
There are plenty of calculators available to help you understand the correlation between savings rate and working years required until you can quit work. The basic premise though is that the more you save, the quicker the path to Financial Independence.
Live on less
Going hand-in-hand with increasing your savings rate is determining how much you really need to live on. Look closely on your spending habits and major expenses. Lowering these living expenses needs to be a focus and will allow you to hit a higher savings rate, while at the same time reducing the amount of money needed for the future.
This is the classic virtuous cycle. The more you can reduce costs, the more you can save and the less you need to live on and the smaller asset base you need to develop to reach financial independence.
As an aside, I’m a firm believer that living with less also has a number of non-financial benefits. In addition to having a lighter ecological footprint, it lets you reduce mental and physical clutter, simplify life and focus more on what matters.
Invest the rest
The international community is in agreement that in addition to actually saving money, you need to invest it, to accelerate the development of your asset base and ensure it grows at a faster rate than inflation. Especially in this low interest rate environoment, simply putting money into a savings account won’t be sufficient.
Get your financial life in order and organized
Be aware of lifestyle inflation and societal pressure to keep up with the Joneses. To the extent it has already happened, try to unwind and reverse those habits and ongoing expenses. Try and find an affordable and comfortable lifestyle you can commit to long-term, then ignore what everyone else is doing.
Pay off and eliminate debt. Also avoid taking on more unless the cost benefit results are clear. Debt isn’t always a bad choice and can be good leverage but use it wisely and consciously.
Set up systems to encourage good behaviour and avoid the temptation to spend. Pay yourself first and move your money to accounts or investments, before you can even touch it, by setting up automatic transfers.
Finally, prepare for the inevitable bumps in the road. At least until you have built significant assets, most in the Financial Independence community recommend establishing an emergency fund, where you can quickly access money. This will help you avoid borrowing or relying on credit cards when unexpected expenses occur. I’d also suggest insurance (health, life and property) to cover against catastrophic events.
Mindset is important
Reaching Financial Independence, especially at a young age, will require a different way of thinking and acting in a contrary way to most of society. You’ll be rejecting rampant consumerism, embracing a more frugal lifestyle, launching side-hustles and deep diving into personal finance topics.
The pursuit of Financial Independence is a big, audacious goal that will require sacrifice, self-discipline, research and commitment over an extended period. It is about making daily choices and optimizing. It requires patience and perseverence.
What gets measured gets done
Establish a budget, monitor your spending and track your progress. This will keep you on track and, as your assets, build provide motivation. It will help you spot opportunities for improvement, help you prioritize and realign.
Similar themes but different considerations
While the basics are common, the strategies to how individuals reach Financial Independence differ according to their personal circumstances, goals and timing.
The other layer which influences how one approaches the pursuit of Financial Independence is the environment in which you operate and live. Social security, tax rates, investment options, job security and labour laws, housing costs, health care and other factors can totally change the strategies you might employ to reach the goal of financial freedom.
Cost of Living
Where you live has a big impact on how much it costs to sustain a certain standard of living and cover key expenses including food, taxes, healthcare and housing.
As an example, one Cost of Living Index benchmarks country costs against the costs of living in New York City. To live in Switzerland for instance is estimated to cost 23% more than NYC, whereas to live in Spain is estimated to be 46% cheaper. Obviously there will be regional differences within countries too.
Higher cost of living areas also typically pay higher salaries. Having said that though, where you live and the associated costs of living can have a big impact on your ability to save towards Financial Independence.
The cost of property, relevant for both housing and investing, differs significantly by country and region. A more interesting metric for those pursuing Financial Independence is housing affordability, which also takes into account relative income levels.
A recent middle-income housing affordability study based on 2018 data, looked at 90 cities in major markets with more than 1 million residents. With affordabilty ranked by median house prices/median household income, the study found that that the United States had the most affordable housing market in aggregate of the countries studied. Things get tougher for those living in Canada, Singapore and the UK. The major markets of Australia, New Zealand and Hong Kong were considered severely unaffordable. Clearly the devil is in the detail with some of the least affordable cities including Hong Kong, Vancouver, Sydney, Melbourne, San Jose, Los Angeles, Auckland, San Francisco, Honolulu, London and Toronto. Unfortunately this study didn’t incorporate Europe or much of Asia.
With housing being a key expense to manage in the pursuit of Financial Independence, this suggests that those living in the US may have an advantage over other markets studied. This may also be why real estate investing features so heavily in many Financial Independnce strategies for those based in the America.
The cost of health care, now and in the future, is a key factor to consider for those pursuing Financial Independence, especially when leaving work and losing corporate sponsored or subsidized health care.
While the quality of care is high, I think this is one area where those pursuing Financial Independence in the US are at a disadvantage. According to OECD and National Health Expenditure data, on average, other wealthy countries spend about half as much on health as the US spends. Health spending per person in the U.S. was $10,224 in 2017, which was 28% higher than Switzerland, the next highest per capita spender. The comparable country average was only $5,280, with countries like Canada, Japan and the UK spending less than half that of the US. This spend ultimately trickles down to the end consumer, making health care increasingly unaffordable, even with insurance.
The Legatum Institute, a London-based think-tank, ranked 149 countries in numerous categories, including healthcare. This report looks at factors including health infrastructure, basic mental and physical health, and the availability of preventative care. Based on the latest report, the following countries were found to have the best healthcare – Singapore, Luxembourg, Japan, Switzerland, Qatar, Austria, Sweden, Norway, Hong Kong, UAE, Netherlands, Australia and Belgium. The UK ranked 26th and the United States 35th.
One thing to think about regardless of where you live is that the cost of health care appears to consistently outpace inflation. This will put increasing pressure on current systems, especially as populations age, so we’ll inevitably see these costs passed on to us in some form or another (higher taxes, higher insurance premiums, higher care costs). Whatever strategy you take when planning how much money you need for financial independence, this is one category which will be difficult to budget for, but I think it would be prudent to be relatively conservative with your estimates.
Retirement Vehicles and Tax Advantaged Accounts
The common wisdom in the Financial Independence community is to maximize retirement and tax advantaged accounts. In the US this typically incorporates any 401(k)-type employer plan offered, Roth and Traditional IRA acounts, 529 accounts and HSAs. There are also relatively well documented draw-down strategies available to follow and access your money before the mandated retirement age and before social security kicks in.
In other countries the answer isn’t as clear or some options may be mandated. In Australia for instance, it is compulsory for employees to contribute 9.5% of their income into a superannuation scheme (pension fund). As a result Australia, despite it’s relatively small population, has the 4th largest penion fund assets in the world. The challenge for those pursuing Financial Independence is that those funds can’t be accessed until age 60. Those pursuing FI in Australia instead look at dividend investing, franking credits and negative gearing property.
Most countries have some form of tax advantaged saving options. How flexible, secure and accessible these vehicles are will determine and heavily influence how they are utilized by those pursuing Financial Independence.
Again this is where I believe the US Financial Independence community has an advanage over those in other countries. The retail investment market in the US is the largest and most sophisticated globally. It has the most investment options for consumers, at the lowest fees. The US stock market also offers a relatively high level of diversification with most of the larger stocks (Apple, GE, Coca-Cola, Ford, Microsoft, Berkshire Hathaway etc.) earning more than than 50% of their revenue from overseas markets.
Those based in other countries are less advantaged in the wealth accumulation phase, with less investment options available, high management fees, local stock being less diversified, and currency fluctuation exposure.
As noted above, the cost of living can dramatically differ depending on where you live.
Moving to another country could totally change the target number or the timeframe to hit financial independence. What might be a 15 year journey where you currently live could be achieved in a much shorter time by moving to a lower cost of living city or country.
The math is simple. If you are able to work remotely for a similar income but find a location where it is cheaper to live, then the numbers change in your favour as you can accelerate savings and investments. Whether you do this part time or as permanent expat, you will have a higher disposal income, giving you the ability to reach your target end goal numbers quicker.
Likewise you might decide to “retire” earlier if you know that you will need to draw down less money to live day to day. The money needed to live a high quality life in, say, New York, Sydney or London is significantly higher than pretty much anywhere else in the world. That gap in cost of living becomes significant if you are prepared to move to any number of countries in Asia, South America and even some European locations.
In addition to the cost of living, moving to another may bring other advantages or disadvantages as noted above regarding health care, investment choices and tax optimization options.
When thinking about moving it is also worthwhile considering how things would work (or not) if you ever wanted to move back. You might find yourself priced out of that area and are likely to need to get a job again as your asset base is likely insufficient. I know some people wait until they are FI before moving somewhere cheaper, whereas others are confident that they either won’t return to their home base or are willing to adjust their lifestyle as needed if they do. This is personal finance so you need to find a way that works for you.
Same Same, But Different
So in summary, the basic principles and foundational elements of financial independence are very similar regardless of where you live – spend less, save more, invest the difference. The nuances come into effect when trying to put these concepts into practice because of each country’s relative advantages/disadvantages regarding the cost of living, social security, investment options and tax laws.
I’d love to hear from you about what you see as the unique benefits and challenges of where you live and how that influences how you approach the pursuit of financial independence.
Thanks for reading
Mr Simple Life