A few years ago, we were pounding away on the treadmill of life. It was repetitive and sometimes monotonous, but we’d made our choice. We were going to drop our hard earned cash into different financial ‘pots’ each month and stick to a plan.
Sometimes these ‘pots’ didn’t seem to grow (or empty, depending on the pot!) with as much speed as we would have liked. But slowly and eventually… they all got to where they needed to be and we could quit our full-time jobs, rent out our house and start travelling with our two kids.
We came up with our plan over six years ago. And to put it into action we slurped up all of the information and advice we could about where we needed to put our money to make it work for us in the long term.
These were our essential financial ‘pots’…
Long term investments (Stocks and Shares ISAs) x 2
One for each of us. UK Stocks and Shares ISAs allow you to put in up to £20,000 per tax year and that money grows tax free over time. You can also withdraw money from an ISA without paying tax on drawdowns. We treated these as our long term pensions (you can also do a SIPP, a private pension which allows you to put away even more money with tax relief, but we chose not to).
The advantages for us are:
a) we have built them up to a value where they’ll grow tax free to be a healthy sized pension pot for us when we want to access them
b) we can still add to them now, which we continue to do each month
c) we can access them whatever age we want (another key reason why we chose not to do SIPPs. I already have a pension built up through my workplaces and with a SIPP you have to wait until pension age to access your money)
d) we’re in control of where we invest our money through our ISAs. We like index funds, like a lot of the FIRE community do.
Travel buffer
We needed a solid travel buffer, filled with enough cash so that we could plan and book locations, flights, accommodation etc, in advance and not feel the pinch on our day to day money. This way, we keep track of what we’re spending in the travel buffer but replenish it as we earn our income (more on where that income comes from later). With flights and longer accommodations costing quite a chunk depending on where in the world you go, we ended up aiming for a £20k travel buffer.
Emergency fund
We also wanted to save a healthy emergency fund for life in general, and not necessarily linked to our upcoming travels. Sometimes it seems like the emergency fund and travel buffer are the same pot. But with the emergency fund, we wanted to mentally be prepared to use it and lose it if we had a genuine emergency (motorhome breaking down, serious illnesses, extreme travel issues, etc), whereas the travel buffer will be replenished over time.
I set a figure initially for the emergency fund (and travel buffer) but about half way to our goals, I ended up doubling those numbers! As costs were rising, food was getting more expensive and fuel prices were increasing, I wanted to sleep easier at night knowing we definitely wouldn’t run out of one of these funds! Similar to the travel buffer, we set a target of £20k for our emergency fund. We just had to save a bit harder to reach these goals!
Cash machine – the income
A long time ago we decided that the only way we could travel full time, worldschool and home educate our kids, and do what we wanted to do, was to create a ‘cash machine’. This is essentially a system which would generate cash for us each month and act as an income. This could have come from having a massive investment pot which we could draw down from each month, without eating away at the principle, or from having a reliable income each month. So we went down the rental market route. Luckily my husband has experience in that area, so we could jump in without feeling too lost. Our challenge became – how quickly could we purchase and pay off the mortgages for a couple of houses so we could make clear, pure cash each month? Easy enough, right?!
Pay down debt
This is the one financial ‘pot’ which needed to be depleted rather than filled up! For us, this was the debt accrued when buying properties to rent out (to create the ‘cash machine’). We had to throw a lot of our earned income at this. Just as compound interest works in our favour in our Stocks and Shares ISAs, it also works against us with mortgages and debt. We wanted to target this debt as quickly and aggressively as possible. A huge chunk of our income from our jobs went towards paying this down, and as soon as our first rental property was paid off, we redirected that cash income to paying off the next house.
It felt like a very long process! And each month the kids would tick off the next repayment on a target pay-off date chart we made at home. But the months slowly went by and eventually we paid off the last payment for all of our property debt! Which means that the income is purely for our travels and adventures now.
Kids ISAs
One thing which we also wanted to do in the background, was add to the kids savings. Let’s face it, they have much longer than us to see the benefits of compound interest! And they can afford to go into the riskiest funds (e.g. 100% equity shares in index funds), as they have time to weather the markets.
We put a small amount away for them each month (it started at around £60 per month per child from their birth and has increased now to around £90 per month). They also save a big part of any birthday and Christmas money they are given by their family. And it has added up!
Watching their pots grow over the years has been extremely eye opening. It validated why investing for long term growth in index funds is pretty awesome when you have the time to let it grow. And we didn’t need to put in hundreds a month. Although it would have been nice to use the money we saved for them (especially in those tighter financial months!) it is part of our long term strategy…. If our kids have enough saved by themselves for a deposit on a house, to buy a car or to put towards a wedding, etc, it takes a little bit of the financial strain off us in the future!
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