Monday, 20 May 2013

Save Hard by Earning More

To gain financial independence or early retirement in the soonest possible time then Saving Hard and Investing Wisely are must do’s.  On the Saving Hard front there are two main routes that we can follow with early retirement coming sooner if both are applied with vigour.  The first is what we talk about regularly including frugal living, opting out of consumerism and watching the small spends because they can quickly add up to big spends to name but three.  This is nothing more than cutting our costs to free up cash for Investing Wisely and is something we can all do by refusing to act like a victim and then simply applying some discipline.

The second is potentially a little more difficult to achieve but equally valid and involves Earning More while increasing your costs to earn that extra by as little as possible.  There are many ways to do this but some options might include maximising your current career to gain promotion, retraining into a new career, taking whatever overtime is offered (if you are lucky enough to be offered overtime), starting a small business, developing a side income or simply starting to sell some of that consumerist tat that you bought before it becomes worthless.

Personally, up until now I've followed the maximise my career to gain promotion option but am starting to now consider some of the other options as financial independence approaches.  Some of the techniques I’ve used to get to my current position have included:

  • Looking around and ensuring I have stayed in the top 10% of my peers in terms of delivery.  Where I'm a little slower than others on some tasks it’s meant I have to work a bit longer and where I’m not as smart as someone else it’s meant some self learning or further education.  Both ways have meant more hours invested in my career than most of my peers.
  • I've never asked for a pay rise for something I am about to do unless it is of course offered.  Instead I always do the job and then ask for the pay rise.  The advantage of this method is that if they then say no I already have the skills on the CV to move to another organisation where they will recognise and pay for these new skills.
  • I'm prepared to commute to maximise earnings.  This one is a little controversial but I look at it from the perspective of maximising my free cash after all costs which includes commuting costs.  More free cash means more savings.
  • I'm very flexible.  If the toilet needs cleaning to ensure that project succeeds then I clean the toilet.
  • I'm always on the lookout for that door that is partially open even if it means a bit of extra effort in the short term.  This is because you never know where it leaves and on at least 2 occasions it has led to more stable earnings for me.

One of the big effects of the above list is that today my work time takes up a lot of time.  I currently leave home at around 0600 and rarely return before 2000 Monday to Friday.  So it’s hard work but living these rules has also meant I can maximise my earnings.  Let me put some scale on that statement.  Since graduating from University in 1995 my salary has increased by more than 5 times.  Of course it’s not quite as good as it sounds because over that period of time inflation has eroded the value of the £, but even after inflation it’s still a healthy 3 and a bit times.  Increasing earnings by more than 3 times while cutting living costs since 2007 through frugality and opting out of consumerism has really added up with my Saving Hard now adding up to around 60% of Gross (before tax) Earnings.

It all sounds great.  Earn More and that More can go straight into Investing Wisely for Early Retirement.  Unfortunately it’s not quite that simple as something is still standing in your way.  That something is called HMRC (HM Revenue & Customs) and depending on how much extra you are now earning they’ll likely want either 32%, 42%, 62% or 47% of that More in the form of tax and national insurance.  Just as we do with our investments it’s now your job to avoid (as opposed to evade which is illegal) as much of that tax as possible.

As regular readers will know I'm the first person to try to go DIY, however with Tolley’s Income Tax, Corporation Tax, Capital Gains Tax and Inheritance Tax Guides combined now running to well over 11,000 pages, sometimes it’s just worth admitting defeat, saying I'm not an expert and finding an accountant you can trust to help minimise that tax burden.  Remember small amounts can matter by the time it has had time to compound over many years.

My own personal example was a few years ago finding myself without work in what I thought was Austerity Britain (and now know as Financial Repression Britain) and deciding to relocate to another country in the hope of a better future for my family.  I took advice prior to departing and upon returning to the UK (which is another story in itself) which I now know saved me a lot of tax that I would otherwise have been forced to pay due to intricacies in tax laws I had no idea about even after significant research.  Sure you have to pay for that advice but it might just save you a lot of tax that is better invested for that Early Retirement.

As always DYOR.


  1. BeatTheSeasons21 May 2013 at 14:45

    Interesting article. I'm sure many people will disagree and prefer to spend a little less time working/commuting each day, even if it means working for another few years in total.

    Personally I ask myself what I would do if I didn't have to work, and find I have already done/am doing many of those things. I'm talking about activities like spending time with friends and family, travelling and enjoying the outdoors. If I worked like you then I'd spend virtually no time doing those things, which would make me very unhappy in the short-term, far more unhappy than the simple fact of being obliged to work.

    Regarding tax, once you earn £41,450 your marginal tax rate is only 2% (NI) if you stick the extra earnings into your SIPP to avoid higher rate tax. If your employer runs a 'salary exchange' system then they might agree to pay it directly into that account - in this case they would save the employer's 13.8% national insurance as well, some of which they might even share with you. Hence you could receive up to £11,380 for every £10,000 you earn above the higher rate threshold.

    1. I suppose the essential point of all this is how much you enjoy your work and/or how stressful you find it (including commuting).

      Many years back, I remember reading Fritz Schumakers 'Small is Beautiful' and a follow-up 'Good Work' after which I decided to stop doing what I did not particularly find rewarding (although it was well paid) and engage in starting up my own business - never looked back.

      I like the quote from Thoreau
      “I went to the woods because I wished to live deliberately
      I wanted to live deep and suck out all the marrow of life
      to put to rout all that was not life,
      and not, when I had come to die, discover that I had not lived.”

    2. Hi BTS

      As always thanks for the valued comment. To be honest I'd be disappointed if many people didn't disagree. I've never suggested that people should follow exactly what I do as we're all built differently. In this type of post I simply try and show what I'm doing and not doing. Readers can then do their own research, make up their own minds and maybe adopt some ideas. What I particularly value is when readers like yourself then respond with what they are and are not doing. This then gives me something to think about and learn from.

      Thanks for the salary sacrifice example. I've mentioned it in a couple of posts and certainly take advantage of it. Without it I'd never get to a 60% gross savings rate. That said I don't sacrifice 100% of savings as I'll be retired well before 55 so will need funds besides pension and governments have a habit of changing the rules regularly adding risk to name but two.


    3. Hi John

      Thanks for the quote. Certainly some food for thought. I quite often focus on planning for the jam tomorrow as with compound interest it's always much bigger than the jam today. Even though it's morbid thought I do need to sometimes think that tomorrow will one day not arrive and so need to remember the today/tomorrow balance.


  2. Fairly good analytical article, always enjoy reading such texts - a great help when investing.

  3. You have rightly pointed out two of the most effective ways to be financially independent. One is save money where you can and the other is earn more and try using all possible options. Yes finance management is the only thing we should master, we resort to home loan because we are unable to manage ourselves, more we learn to manage ourselves less would be our debts and less is our dependence on external sources like home loan, mortgage. Thanks for the post.