Sunday 28 April 2013

The Wealth Inflexion Point

Our attitude to money is shaped by many factors, the most significant being perhaps our upbringing - the role models provided by our parents. We certainly try to teach our kids 'the value of money'.
But there also seems to be point in our lives when our relationship with money - our 'money paradigm', if you like - changes significantly.  We see money in a new way - a bit like looking through a telescope the 'wrong' way, and then the 'proper' way.

I like to think of this point as a Wealth Inflexion Point - a point beyond which the old 'paradigm' of your relationship with money changes. From that point wealth creation can truly begin. And probably not before.

When you have very little money it is difficult to imagine how you can become rich - it just seems so unobtainable. This is what I mean by looking down the 'wrong' end of the telescope.

For many years - probably the first third of my life - I had very little money. This did not stop me from doing a whole range of adventurous things that I look back on with pleasure, and slight disbelief (working in a Kibbutz by the Sea of Galilee, sailing across the Atlantic; being delivered by a yacht, penniless, to Dakar, Senegal; working in Mauritania; crossing the Sahara via Timbuktu; hitching across the US, etc.). But having pushed the 'adventure' button repeatedly (with little left financially to show for it), the time did come to think more about the future and how to spend the next two-thirds of my life.

Fortunately, I did have the habit of making some savings when I could, mainly to fund my adventures. So when it came to going back to school, I was not completely penniless. However, it was still a few years before I had a 'proper' job and some stability to be able to think about anything approaching a financial plan.

The 'usual' things then happened: girlfriend, wife, house, children: all - fortunately - accompanied by  relatively well-paid and interesting jobs.

I was (unknowingly) approaching the 'inflexion point' but had not yet reached it.

For me, the breakthrough was paying off our mortgage: that is a milestone in anyone's life and had been my short-term obsession. In the event it was actually an anti-climax because the question was then: what next?

My thinking was getting close to the crucial breakout point.

Almost without noticing it, our net income - what was left after normal expenditure - had been growing as our mortgage costs had fallen. What is more, our savings had started to yield a significant passive income.

The realisation finally ocurred: what would I do if I lost my job? What would we live on? A new paradigm was needed.

The wealth inflexion point was reached. I decided on a more ambitious financial plan: I needed to build up a portfolio of cash and investments that would provide an increasing 'passive' income stream that could - eventually - replace the income from my 'day job'. This meant pressing hard on the expenditure brake and accelerating the 'passive' income by becoming a DIY Income Investor.

This happened around 2002: ten years later I had stopped work early and was living on my passive income - with a few years to go before taking my pensions. With a typical UK male life expectancy of 85, that is the next third of my life paid for.

Actually I don't think of myself as 'wealthy' or 'rich' - although statistically we are a pretty highly ranked household - but rather financially free: able to do what we want (within reason), rather than what we have to do.  Of course, this means having financial resources but also health and a stable family environment. And sometimes you are wealthier that you realise: as Lao Tzu put it:

"If you realize that you have enough, you are truly rich.”

Unfortunately I don't think that there is a short-cut to this process - it is a process of self-realisation and it will be subtly different for everyone - but you can prepare the ground:
  • get a good job (I know, easier said than done) or create your own!
  • find a good life-partner (yes, I know - even harder) 
  • cut every aspect of your spending (then cut it again)
  • pay off all debts
  • increase your savings
  • learn to invest successfully

And be prepared for a life-enhancing experience.

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. Hi DIY,

    What are your views on the actual Capital required for FI. My aim is to use high yield shares and ETF's to buildup £400K, generate 6% yield, to give £2K per month.


    1. That's probably about right - assuming you don't have any other income but it will depend on your own circumstances. For example, as a home-owner with 2 kids, running two cars (!) and taking a nice 3-week cruise in the summer, this would be slightly generous.

      I would start from the other end - expenditure. Try to trim that as much as possible, then decide how much income you would need, add an achievable yield (as you have) and that gives you the capital required.

      But many people will be able to supplement this passive income with a pension or other income, such as a part-time job, so the capital amount can vary with individual circumstances

    2. I thought 4% was considered reasonable.
      52% chance of getting through 50 years at 6% a year and anything less than 100% equities decreases that chance. I also wouldn't bet on return being as good as the US has previously experienced.

  2. Good God, someone who knows what an inflexion point is. Well done that man.

  3. 6% is pushing it a little, but if you believe that the starting market PE makes a difference, then it is plausible. See

    1. Hi Anon

      The 6% referred to is - I believe - the yield on the investments, not a drawdown rate (My own portfolio yield is currently 5.6%.)

      Having said that, inflation makes it probable that you will have to dip into your capital over time. As you say, keeping this to under 4% a year means you should not run out of money.

      But the basic point is aim for a *yield* that covers your current expenditure.

  4. Interesting isn't it that at the very point one stops having to worry about money in one respect, one starts worrying about it in a different context.

    I too thought that killing off the mortgage would be a great event and found it an anti-climax.

    This next bit is not going to go down well with some, but...

    There's a lot of discontent in the UK at the moment about not being able to walk out of university into a great job and afford a first home and a family. Erm - you never could. It may be getting harder, but it's always been hard.

  5. -- "There's a lot of discontent in the UK at the moment about not being able to walk out of university into a great job and afford a first home and a family. Erm - you never could. It may be getting harder, but it's always been hard." --

    Well said! I graduated in 1984 and applied for jobs everywhere with no luck. Then worked in a factory for a year earning - with shiftwork - quite a lot for my age. Then a spell trying various things till I finally had success and got a job that I really wanted.