March 28, 2020
After last week’s post and thinking about the current health crisis, it’s easy to feel down.
We get concerned about the state of the world and, understandably, worry about the future.
But it’s time to bring some optimism back. We need some positivity to lighten our spirits!
So, in this two-part series I’ll share why I believe Financial Independence has actually become easier to achieve over time and how I came to that conclusion.
Then, in part two I’ll explain why I think we can expect this to continue, and possibly even accelerate. Alright, let’s get started!
If you follow mainstream media, you’ll often hear that people are struggling.
And they don’t mean poor people. Instead, these ‘battlers’ are firmly middle-class Australians getting squeezed by the ‘spiralling’ cost of living and numerous other pressures.
And all this is happening while the rich people grin and cackle, gently caressing piles of hundred dollar notes on their oversized marble desk in the home office of their waterfront mansion, which was purchased with just a portion of last year’s bonus cheque!
…Or something like that!
Well, there’s great news. This ‘big squeeze’ is not really true.
Of course, things aren’t perfect. Yes, there are a million finer points we could debate. But the broader truth is, becoming financially independent is more possible than ever before.
And it’s a trend I don’t see stopping. Here’s the thinking behind my optimism…
We can see (hopefully), throughout this blog how it’s totally possible for most middle-income Aussies to retire early.
With the only real requirement being to design an enjoyable lifestyle where costs don’t blow out, and religiously tucking away chunks of savings into sensible long term investments.
But doesn’t this make you wonder? How is this even possible in the first place? Why haven’t tons of people been doing this for decades? And why does it seem like all of a sudden it’s now totally doable for a large group of people (the FI community)?
Now, there have long been cases of those with wealth retiring from business to focus on other things. But here, I’m talking about the masses… the middle class.
Since I have plenty of time on my hands, I often wonder such things on a lazy weekday morning. And I’m a simple guy, so let’s break this down in simple terms 🙂
By the way, I’m no expert in economics or history, so forgive me for any inaccuracies. But I believe the broad principles and core message to be true.
Basically, because our standard of living has increased so much over the last 100 years.
What does this actually mean though?
Well, the portion of our income used to pay for genuine essentials has gotten smaller and smaller over time, as I outline in this post.
Put another way, our incomes have continued to increase faster than inflation, decade after decade. This is often brushed-off or overlooked – sometimes even denied! More on this soon.
Combine this with the increasing power of technology to create efficiencies, making things cheaper overall to grow, manufacture and ship.
Another reason, locally, is that Australia actually has the highest minimum wage in the world. Plus, we have other great systems in place like a healthcare system that our American friends can only dream of!
Yes, houses are expensive in some areas. But renting or other locations are a workaround. Home ownership is a choice, it’s not mandatory. We’re owed nothing. It sounds cliche, but the right mindset is critical.
On this point, unfortunately 9/10 isn’t good enough for some people. Instead, they’ll focus on the one thing not in their favour to ‘prove’ why FI isn’t possible for them.
It should be clear to most observers that as a nation, our wealth and living standards has kept climbing over many, many decades. Over hundreds of years in fact.
You see this every day. The computers we use. The cars we drive. We can afford extended international travel, near-limitless restaurant food, regular beauty treatments, new kitchens, and the list goes on.
And we barely even bat an eyelid at this stuff. Because it’s normal now. But it wasn’t always this way. If you doubt this for a second, ask the older generations!
Capitalism, despite its issues, has played a pivotal role in this outcome. Our semi-regulated, mostly free-enterprise system has generally brought many wonderful innovations and created massive wealth, employment and increasing luxury for the countries who adopt it.
Humans have an almost insatiable urge to make progress and improve their lot in life. And capitalism tends to help that happen due to the in-built incentives for profit.
We are incentivised to create new things. To solve problems. To do more with less. Because, if others in the economy find our work valuable, we’re financially rewarded for that.
Of course, there’s a lot more to life than profit, and non-paid work is incredibly important (if not more so). But here we’re talking about the system as it relates to incomes, wealth and FI.
The ongoing investment of capital into new projects and technology has created huge innovations and efficiencies, creating much more output per person over time.
This is most evident as trade, capitalism and technological advancements took off.
See below, the history of world GDP per capita. The second image shows which countries have prospered the most. It’s clear that western countries like Australia have absolutely blossomed.
Innovations and efficiencies allow companies to earn more profit from the same amount of customers. Yet, customers increase over time too thanks to population growth.
In turn, companies can afford to pay higher wages while creating wealth for owners. This boosts the income and prosperity in society.
Efficiency is key in all of this. Each incremental improvement creates higher profits and/or lower costs in real terms.
This value-creation leads to large portions of people with more disposable income than before. And, over time, consumer-driven economies were born.
In case you missed it, incomes have been growing faster than living costs for over 100 years. I did a deep dive into this topic in a previous post: The Real Cost of Living – An Inconvenient Truth.
As part of that article, I used the following from Australian Bureau of Statistics (ABS) to illustrate my point. In 1966, the average Aussie full-time wage was around $60 per week. See here.
Fast forward to 2016, and the average Aussie full-time wage was $1,533 per week. See here. That means the average Aussie wage grew by 6.7% per annum.
According to the RBA Inflation Calculator, the average rate of inflation over that 50 year period was 5.2% per annum.
Clearly, even if you’re not into numbers, this shows wages have outpaced inflation comfortably for the last 50 years.
Interestingly, if wages only grew with inflation, this $60 per week would be $758 in 2016. But the actual full-time wage is now double that!
This means we have twice as much income now, even after adjusting for inflation.
Logically, this should translate into a comfortable 50% savings rate. But unfortunately, it doesn’t work like that. Because our desires and tastes keep expanding to match our income.
This could be true. But the median full-time income is actually very similar to the average, sitting at $1,500 per week in 2018. See here under ‘Distribution Of Earnings For All Employees’.
And for completeness, let’s now look at minimum wages to see how they stack up.
The federal minimum wage in 1966 was $38 per week in Australia. See here.
By 2016, the minimum wage had grown to $672. That’s a growth rate of 5.9% per annum. Again, that’s ahead of inflation of 5.2%, but not by quite as much as median or average wages.
Thanks to compounding, even a minimum wage earner now has 42% more income, after inflation, than the equivalent worker 50 years ago.
Most people think inflation is much higher than what is reported.
That’s because our human bias tends to focus intensely on stuff which gets more expensive, while playing down or ignoring things that have gotten cheaper.
According to the Reserve Bank’s own paper, the inflation figures typically overstate what households actually experience. The CPI inflation figures are actually conservative for several reasons.
— Because it’s a fixed basket, as prices change they assume our behaviour stays the same. But when we optimise our spending as prices change, by shopping around or substituting items, we actually experience much lower inflation than is assumed.
— It also ignores online shopping, and the absolute bonanza of lower cost products available to us, compared to what’s available in traditional retail stores.
— The basket is adjusted every few years to become more relevant. As households adopt newer products, services and generally fancier stuff, it’s then included in the prices they track. These are lifestyle increases, so this ends up overstating actual living cost increases.
— The basket doesn’t properly adjust for quality. On average, the quality of the goods and services we buy tends to increase over time, come with more features etc. This also tends to overstate inflation.
So, I think the inflation figures are actually pretty generous. They account for our increasingly affluent lifestyles, yet our incomes have still outstripped these costs handsomely.
Now I’ll let the RBA’s paper speak for a minute on the topic…
“Over time, individuals may not compare the cost of achieving the same standard of living, but rather that of a ‘reasonable’ standard of living.
Real consumption per person has risen substantially over time, indicating that living standards have increased.”
“What is a reasonable standard of living has also increased, as households have become accustomed
to consuming more goods and services and those of a higher quality.
As a result, perceived increases in the cost of living may partly reflect the cost of attaining a higher standard of living for many households.
There is also evidence that individuals’ perceptions about their wellbeing are formed not purely in absolute terms, but partly by comparing themselves with those around them – colloquially termed ‘keeping up with the Joneses'”
The truth is, there’s no shortage of income here. The real challenge is resisting the ever-increasing amount of temptations.
Even in the recent sluggish decade after the GFC, wages have continued to grow faster than this overstated inflation figure. Not only that, but wealth per person has also continued to grow…
The average person on the street would probably dismiss these charts and angrily tell you where to shove them! But that’s because they’re caught up playing the comparison game and focusing on what people further up the wealth/income ladder have.
So even with a less-than-exciting economy, and despite the inevitable bumps in the road, wealth and real income per person have continued to increase steadily over time.
If you’ve been paying attention, I’ve used some of these snippets before. And I’ll probably use them again in the future.
That’s because this shit is important! And it amazes me how many people don’t realise the affluence and incomes we have available compared to the past. Just because it feels normal, doesn’t make it any less incredible!
Over time, the wealth-generating machine that is the global economy has given us more and more income over the years. And, as we can see, this has easily exceeded inflation over time.
The benefits are even more pronounced for people and households who make an actual effort to save and be more efficient (that’s you and me). We’re the ones who tend to get the most from this system.
We benefit twice over because we then invest our surplus cash into productive companies. And this takes on a life of its own, creating wealth and providing us with another source of increasing income over time.
I’m not saying our economic machine works great for everyone. There are always exceptions.
Building wealth and retiring early will prove unattainable for a certain portion of the population.
The sad fact is, many Aussies live week-to-week, with their earnings going out just as fast as it comes in. This is clear with the current workplace shutdowns in the economy and endless queues outside Centrelink.
The incredible part is the numerous interviews of previously employed people sharing their sudden job loss in the last few days. And, amazingly, they proceed to explain that, as of right now, they have ZERO ability to pay next week’s rent or to buy food for their family!?!?
Now, I don’t want to be insensitive. Some people have genuinely tough life circumstances. But sadly, often this week-to-week living is middle-class Aussies who have unwittingly accumulated poor financial habits.
Hopefully you can see the overall trend here, and where my optimism comes from.
Over time, our economic machine continues to generate more income and increasing affluence per person.
That’s why I say Financial Independence is getting easier, on average, with every year that passes.
For most of us, we’ve never had the opportunity that we have today. Even since I began my journey over 10 years ago, things are easier today (coronavirus aside).
Wages have continued to rise in real terms, and the underlying cost of living isn’t increasing by very much at all. A good amount of it, if we’re honest, is optional extras in a modern-day wealthy country.
As the years go on, this extra income gives us a growing surplus to build a strong financial base for ourselves. And that helps underpin a free and happy life.
Next week, I’ll cover why I think this is likely to continue, and possibly even accelerate over the next 10-20 years. Thanks for reading!