FI Building Blocks:
If we consider Financial Independence as a case to solve, then these four Building Blocks to FI (Earn, Budget, Protect and Invest) is the investigation strategy to solve bad financial habits. Earn is the first building block.
If you haven’t read it already, the article I wrote about ‘Reaching Financial Independence on Blues‘ will give you a taste of what could be achieved by mastering the Building Blocks to FI. I recommend reading that first before beginning here.
Some of the points I make may seem so obvious. However, I think money is not discussed openly enough. It is, after all, one of the last taboos. Talk about sex or even our medical conditions, but god forbid, don’t ever talk about your finances. I didn’t receive any education in school or at home about how money really works. As a result, broadly covering some of the basics ensures that everyone is on an even platform. Treat these blocks as an introduction. It will give you a taster before I go into some of the ideas in more detail.
By the way, I did not come up with these ideas myself. They have been part of the personal finance for a long time. I’ve just put them together in a way which makes sense to me. If you have a question, just leave a comment. I will answer every single one the best I can. I don’t claim to know everything, nor am I an expert, but I will try my best to explain to you what I know.
I hope the FI Building Blocks will give you a solid foundation to progress through some of my other posts as well exploring more writing from other personal finance blogs.
The Traditional Route
Earning money is absolutely fundamental. The traditional way to do this is to get yourself employed and earn a salary. This is a contract between yourself and your employer, whereby you sell your time and effort in exchange for money. To maximise your earning potential from this traditional source of income, you’ll need to demonstrate to your employer that you provide value far above how much it costs to employ you. It makes sense, doesn’t it?
If your wages are more than the value you produce, then either the organisation you’re working for is not being run properly. In which case, the company won’t last long and you’ll be out of a job. Likewise, if the organisation is being managed correctly, you’d soon be shown the exit if you don’t improve your performance. If you are just about providing value to the company, in effect do the minimum required and generally coasting along then don’t expect a pay rise anytime soon. Whereas, if you can demonstrate that the value you add exceeds the amount that is paid to you, then it is more likely that you will get the pay-rise you deserve. It seems so straightforward, but I remember seeing people expecting a pay rise just for turning up to work on time when I was working in sales and hospitality during University.
So how do you add value? It means to have a growth mindset with a strive for continual personal and professional development. It could mean building up your network to see how your skills can benefit others within the organisation and how others can assist you. It could also be about increasing your field of influence to show you are more than your job description, by taking on extra projects. It could even mean gaining extra qualifications to improve your skills and therefore your value to the organisation. It is about standing out from the crowd and being noticed for all the right reasons.
“No-one ever made a difference by being like everyone else.” – Movie: The Greatest Showman (2017)
Pay Rises in the Police
If you are in a sales role which pays commission then naturally, working hard to meet the sales targets and unlock some of these very lucrative sales bonuses is a no-brainer. There is no such thing as a commision in Policing or bonuses for locking away more criminals. We do however have lots of overtime, usually paid at enhanced rates depending on the department. In certain departments, this overtime can double or triple our take-home pay. However, this can come at a hefty price, which is family time. I hear of stories about marriages breaking down and families falling apart because work takes priority. This blog is about taking a moment to reassess and determine what you value most in life, so I am not advocating earning extra money at the expense of having a good work-life balance.
As a side note to any UK Police colleagues out there, we don’t actually give away half an hour of every overtime to the Queen herself. We do work the first half hour for free, but I’m not sure where the money saved goes.
In terms of pay rises, for Police Officers in the UK, they are different to how things usually work in the private sector. We are pretty much guaranteed at least one pay rise each year regardless of performance (it is possible to block the automatic move up the pay-scale, but it is difficult and I have not heard it happen). The first pay rise is based on how long you’ve been serving for and move up a pay scale each year until you reach the top for that particular rank. The second pay rise is an award usually to try and offset inflation. This effectively increases the entire pay-scale to keep up with inflation. The reality is that this second element of the pay rise rarely keeps up with inflation, but any increase is welcome. There are conversations currently being held at the strategic and national level to see how best to align performance and specialist skills with pay. However, for the time being, the situation with Police Officer pay is as I have described and is unlikely to change in the immediate future.
To fast-track your earnings as a Police Officer or in any job, getting promoted quickly will allow you to jump to higher bands of the pay-scale. Not only will your monthly earnings increase, but your pension pot will also increase much more quickly. Now, there are downsides to this. Regardless of what industry you work in, getting promoted quickly comes with it issues around credibility, competence and capacity. Firstly, are you a credible leader and respected by your colleagues. Secondly, are you really good enough to be performing at a higher level. I don’t say this to encourage a self-limiting belief, but for you to have an honest reflection about yourself. Sometimes we can be so focused on a goal that we forget to take a moment to look inward and we fail to recognise what others might see in ourselves. Finally, do you have the capacity both mentally and physically to fit in the extra responsibilities a more senior position requires? In addition, the role will most likely entail more stress, making more important decisions and carrying more risk. Do you have the time and how will the new role affect your other priories in life, such as family commitments. These are things which need to be considered.
Having a job which comes with benefits such as a pension definitely assists with achieving financial independence, particularly in your later years. Pensions are a big topic. It not only does it include employment pension schemes but also private and state pensions which I will talk about more in a future post. For now, make sure you understand the terms and benefits of your employer pension scheme in order to get the most out of it. There is so much free money to be gained when it comes to your pension. In the UK, any pension contribution you make is before income tax. There is an immediate gain because if you save money in your bank account, then this is after income tax and the government has already taken a good chunk of it. On top of that, unless you save the money in a tax efficient account, the government takes another cut of the interest you make just because they can. You are effectively giving money away!
In the Police and with many respectable organisations, your employer will also make a contribution towards your pension. Again, free money! I have spent time reading the details of my Police pension. It is something I recommend you do because there can be many benefits tucked away in there. If you are a Police officer and in a final salary or the less generous, but still very good defined pension scheme, then you’re in luck. For me, my employer contributes 21.3% of my annual pay towards my pension on top of my own minimum contributions to be a member of the scheme. I also make additional contributions on top not only because it reduces the tax I pay, but because it provides a generous defined benefit. The pension scheme I am part of not only provide for a pension for me in retirement, but also an ill-health pension should I need to be ill-health retired before their pension age, and pensions for my surviving wife, and/or children.
The point I am trying to make is that each pension scheme will offer different things. A lot of the time, it is not written in straightforward English and if you wanted to make additional contributions, there may be extra bureaucracy involved just to make the whole process arduous and off-putting. Call me a cynic, but I think it is made difficult and not obvious so that fewer people take advantage of it. After all, it is free money to you and no one likes to give away money, not least the government! Now, I fully appreciate everyone’s financial situation is different. Locking away money so it can’t be touched until your 60s in a pension may not be for everyone. However, if FI is something you are serious about, then understanding how pensions work is essential. If you can be a member of a generous pension scheme, then it will have a huge impact on how quickly you can reach financial independence. You just need to figure out how to have other sources of income (other than your job) until such time the pension kicks in. This is where the ‘Side Hustle” kicks in.
Pay only the taxes you owe, not a penny more
Strictly speaking, this is about minimising your expenses and I talk about this in the FI Building Block: Budget. However, as we are talking about employment income here, I think it is worth mentioning taxes. Make sure you are not paying more tax than you need with your hard earned money. If you’re a Police Officer in the UK, you are allowed to claim tax relief on your Police Federation subscriptions as well as a Flat Rate Expense Allowance. Together, these allowances are worth about £400 a year. You claim by writing a letter to the officer of HM Inspector of Taxes. No matter what job you’re in, be sure you that you are on the correct tax code. It is not in your employer’s interest to monitor this because the tax is on your money, not theirs. I personally find I need to correct my tax code every few years.
Business Interests (a.k.a. the ‘Side Hustle’)
If a promotion is not something you wish to pursue, then you could maximise your income through other business interests. The FI community in America has coined the term: ‘Side Hustle’. In effect, this means developing multiple income streams so that you are not entirely dependant on your main job. This is simply about not putting all your eggs in one basket: the art of income diversification.
It’s a sad fact that employees, that’s right, that’s most of the population who hold down a job, end up paying more tax than investors and businesses. There are regular stories about large multinational companies concealing their profits through complex company structures to pay only a token amount of tax. Whilst they may not doing anything illegal, rather than simply getting into a debate about fairness and morality, I like to think of ways I can shift my reliance on a job income to creating my own income. Starting your own business or learning how to invest can be one of the best ways to achieve financial independence. That’s because you get to keep more of the money you earn. If you do this on top of your normal job, then financial independence is within your reaches. Do you have any hobbies or other interests outside of work? Can you generate an income from this? Examples include photography, arts and crafts, writing and DIY. The goal is to eventually grow these business interests to a point where you become less reliant the salary your job provides.
With the rise in the ‘Gig’ Economy and new companies makes it much easier to make a side income (the likes of Fiverr, Uber, Deliveroo, Airbnb), the possibility to increase your earning has never been better.
If you feel the above would take too much of your time to set up and manage, then how about take in some lodgers to share your home with you. In the UK, we are allowed £7,500 worth of lodger income tax-free! That’s an incredible incentive, introduced to make sure we maximise the space we have because there is a shortage of homes being built over here. I’ve had lodgers for many years now. I will write about my experience in a future post, but the main point is that I recommend it as one of the ways to fast track your path to FI. Just remember that this may still be considered as a Business Interest and that you may still need to complete a tax return.
How about taking it a step further and invest in property? The rental income, if done correctly could provide you with a relatively passive form of income which could more than cover all your expenses and allow you to reach FI sooner. With the tax changes and increasing property prices, it has really dampened the potential rental yield (returns after costs). However, as ‘accidental landlords’ get scared and leave the market, it provides opportunities for professional investors to take their place if due diligence is done. This is definitely something which forms part of our strategy to reach FI.
As a Police Officer, and I suspect it is the same with many Government jobs, just make sure you read your company’s policy on Business Interests to ensure you are allowed to earn extra income. In Policing, we need to get approval to ensure that officers are not doing anything inappropriate and secondly that they do not become too distracted or tired to do their normal job.
- Get a job.
- Stand out from the crowd.
- Maximise your salary through sales commission, bonuses, overtime, pay rise or promotion.
- Understand your pension scheme and take advantage of the benefits.
- Don’t overpay your taxes.
- Diversify your income through other business interests (a.k.a the ‘Side Hustle’).
For the majority of us, we cannot reach financial independence without earning some money first. The only way around this is if you win the lottery, have a huge inheritance or lucky enough to have someone set up a massive trust fund for you to live off. I would argue that if you fall into any of those categories, that without being financially educated, all that money you have might not last as long as you think. Just a quick Google will bring up so many stories of lottery millionaires who have lost it all.
So there you are. Maximising your earnings is the first step to Financial Independence. Lets move onto the next and arguably the least favourite subject for many people: Budget.
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