At the end of 2020 I turned 29. As my thirties approach and I come closer to my ideal financial independence age of 40, I’m spending more time looking at my investments. Lockdown is helping with that as well!
What does it mean to me to be financially independent?
Let me first explain how I’m defining financial independence because it’s different for everyone. I’m not taking the only eat tinned tuna for a decade and live in a tent approach. Life’s too short and I don’t hate work that much! Actually, I’m fortunate to have a good job.
Instead, what I’d like by 40 is to have the freedom to have a choice over how much salaried work I do versus activities like running my investments, doing freelance writing, possibly running a business, while also enjoying life and having control over my time.
To get to that stage I’m looking at first I’d like to meet the following criteria:
- Pensions worth at least £400,000 (can include work pensions)
- Property worth at least £100,000 (excluding mortgage liabilities)
- Must have at least £20,000 of cash
- Investments should be generating £10,000 p/a income (dividends, property)
- Must still be in a position to make £30,000 p/a (if needed), ie freelance or consulting etc…
- Expenses should not be exceeding 2/3rds of my monthly income
This will be very challenging, so if I have a net worth in excess of £750,000 that would also be fine. The stretch goal is a nice round number of £1m, but to do that I’d need some major luck. Or rapidly increase my salary.
The role of dividends
Compounding and dividends have a role to play in this, although of course compounding will likely play a much bigger part further down the line. The benefits take time to accrue. However, if I start to build the snowball and have a decent investment portfolio by 40 then I’ll be happy.
The role of dividends then is important and was previously a really strong focus for me. Yield was one of my primary investing criteria. Now less so. 2020 showed the issues with income investing as companies slashed their shareholder payouts to conserve cash.
Now dividends will be a smaller criterion in my overall investment decision-making process. I’m keeping my holdings in Persimmon and Legal General, but increasingly will add more growth and AIM-listed shares. My portfolio I expect over the next two years will cover quite a few different investing styles, which I hope will help drive returns.
Getting cash for investments
To max my ISA each year would require putting in around £1,666 per month. That’s quite a lot of money for a middling earner like me. One of the key planks therefore of my plan to become financially independent then is to keep working on increasing my salary (snore I know) but being realistic this is still my main income and will be for the foreseeable future. Being able to add cash and maximise by ISA allowance year in year out, while also adding to my SIPP is vital to the plan for financial independence. So cash really does once again prove it is king. Without cash the plan falls apart.
This is why I’ll also look to set up a part-time business to increase the cash flow I have to invest in shares.
Historically I’ve been very focused on income investing as earlier mentioned, now though I want to add more growth, as well as overseas shares and ETFs. As such, I anticipate dividing my portfolio as follows over the next few years.
- Investment Trusts (25% of value & 4-7 holdings)
- Direct Investments (40% of value & 15-25 holdings)
- Investment Funds (15% of value & 4 holdings) – focus these more around growth
- ETFs/index trackers (15% of value and 3-6 holdings)
- Bonds (5%)
Shares I’m looking at for growth
These are some of the growth shares I’ll be digging into in the coming weeks as I look to add more growth shares to my investing portfolio.
|Polar Capital (already hold some)||Abcam||Wynnstay|
|AB Dynamics||Alliance Pharma||MacFarlane|
|Begbies Traynor||Gamma Communications||Ergomed|
|Hollywood Bowl||Judges Scientific||K3 Capital|
|Driver Group||Concurrent Tech||Horizonte Minerals|
It’s quite a long list but I am in the process of narrowing it down. I might even share the results of my findings in a future blog. I plan to look into the valuation, debt levels, how they shape up compared to competitors and a little bit more besides.
My plan then to retire at 40, is to diversify my income streams to raise cash for investing. I’ll then put that cash to work in my stocks & shares ISAs and in my SIPP. There’s a long way to go financially, but I think consistency, working hard, reinvesting dividends and thoroughly researching investments gives me a fighting chance to gain financial independence in line with the criteria I’ve set myself.
At the end of the day, it may take to 50 to become comfortable enough with my investments and savings to retire from salaried work, if I wish to. However, I’m setting myself the goal of 40 to really focus my mind and make sure I consistently do what I need to do month in, month out.
You can see my latest holdings at the time of writing here.
If you like this article please do share on social media and follow me @sharewatch100 on Twitter.