Becoming financially independent in France? It is a common question after COVID pandemic made us think more about what we want to do with our lives.
Unfortunately, there are some ‘influencers’ taking profit of the situation and selling ‘magic secrets’ packed as trainings which are leading many to disappointment, and sometimes losing money. In the other side, many believe that becoming financially Independent is only for high salaries or rich people.
We will be sharing our own understanding on this passionate topic. Let’s deep dive and go beyond the hype…
Table of Contents
What is being Financially Independent?
Being Financially Independent (FI) is ‘the status of having enough income or wealth sufficient to pay one’s living expenses for the rest of one’s life without having to be employed or dependent on others. Income earned without having to work a job is commonly referred to as passive income’ (source Wikipedia).
This definition opens many questions: How much is ‘sufficient’ wealth or income? Do I need millions? Not being dependent of a salary? is that really possible or a myth? Does it implies living a cheap and miserable life? Even if I become Financially Independent in France, would I get bored sitting around at home?
Let’s continue and try to tackle some of these questions.
How much do I need to become Financially Independent in France?
Do I need to be Rich to be considered Financially Independent (FI)? According to the ‘National Endowment for Financial Education’, 70% of lottery winners go bankrupt within a few years. So they were rich just for a while and not really FI.
Instead of being Rich, you need to be wealthy, which means having a significant net worth with liabilities less than your assets. A wealthy person, will normally have multiple investments, properties, income sources, and limited expenses.
The x25 rule
It means that you need to multiply 25 times your expected annual expenses. Say your annual expenses (housing, food, vacations, insurance, taxes, etc) is 50 000 €. Then 50 000€x25 = 1 250 000€. It means you will need 1,25M € net capital invested (excluding your home) to be able to stop working.
There are many FI (aka F.I.R.E = Financial Independence Retire Early) calculators. Here a very comprehensive one.
To finetune your FI number, you would need to ask yourself first why you want to become FI? What do you want to do after reaching that number? As you can imagine, the lower your expected annual expenses, the easier to reach your FI number.
Do not forget social security!
If you expect to live from your capital incomes (if >22k€), then you will need to pay the PUMA tax in France (6,5%). Paying this tax will grant you access to the social security system.
Financial Independence types
Your ‘nest’ or capital invested will generate dividends, rents, interest or simply grow over time. The level of income produced from it will define what kind or level of FI (aka F.I.R.E. : Financial Independent Retire Early) are you:
Barista
This is when you are not fully independent, but with a part-time simple job (like being a Barista) could be enough to cover the gap and have a simple life.
Lean
Being able to cover the basic living expenses like rent, food, health insurance, utilities. Reaching this level could help you taking risky decisions like changing job or city.
Coast
It is when you have already invested enough money that will enable a good retirement in the future (thanks to compound effect). This means that you are not obliged to keep saving and just need to wait till your investments grow.
Fat
It is when you can live a comfortable life from your investments, including more than basic living expenses like travels, eating out frequently, having a nice car, etc. Obviously, this FI type is the one requiring more capital invested.
A final point to consider, will be if you want to preserve your capital till the end of your life or if you expect to consume it progressively.
Is Financial Independence a myth?
Technically speaking, it is NOT a myth. It is possible to live from your capital. What is a myth is reaching FI quickly (unless you win the lottery). It takes time and requires to follow an strategy.
If you see an ‘influencer’ in a social media, sitting next to a pool or fancy car, saying that you can quickly become rich as him/her… most likely it is a scam or just selling a ‘training’ that you can get for free. This is a myth and you should stay away.
Becoming financially independent in France is a boring long term process. Based in our knowledge, for an average middle class employee, this process could take something from 5 to 20 years. It depends on your starting point, your savings rate, investment results, and luck.
Of course, there are special situations. Maybe you are a business owner and it happens that you just sold your business for a good deal of money. Then you can become FI immediately or faster.
Do I need to live a miserable cheap life to become Financially Independent?
Some people becomes obsessed with FI and will try saving every cent possible. Good news, is that you do not need to go through that. As a matter of fact, it will be counterproductive doing it as you will end up hating FI and your strategy will fall apart after few months (you will be tired of eating pasta after several weeks).
So the secret is to spend only on the things that really makes you happy, while cutting cost in others. As example, if you like eating out, then keep doing so but maybe take public transportation instead of owning a car (not required if you live in Paris for example).
You can read here more about managing your budget in France to get more ideas.
Steps to become Financially Independent in France
Discuss it with your couple
Have this conversation with your couple (if any). You both need to be aligned on reaching FI as you will need to drive to the same direction. Else, it could be a source of discussions (even divorce) at long term.
Remember: ‘It is not only about the destination, but about the trip’.
Maximize your saving rate
Maximize your saving rate. This means, making the gap of your Income vs your Expenses the max. as possible. This implies, either increasing your income, or reducing your expenses, or both.
A minimum saving rate will be 10%. Ideally you should be saving 20% of your income. Some are taking it to the extreme and reach up to 80%, but it comes with difficult decisions – like living with your parents ;).
No need to say that for low income families it could be hard even to save 1%, but it is still possible.
Pay yourself first
Pay yourself first and do it automatically. This means that once you receive your paycheck, you plan an automatic transfer to your investment account(s).
By doing this, you are not tempted to spend it elsewhere and you will follow your plan. There are too many temptations out there that could distract you from your goals.
Progressive and diversified investment
Progressive investment and diversify your asset allocation. Once you had paid your ‘bad debt’ (credit cards, car credit, etc.) and you have an ’emergency fund’ (min. 3 months of expenses saved in a ‘Livret A’), then, and only then, you are ready to start investing.
How to invest progressively? Many variables to consider, depending on your age, risk tolerance, financial knowledge, personal projects. But a simple and effective way would be to open a PEA and invest monthly in an ETF (like MSCI World – not an investment advice. Do you own research).
Others will prefer to buy real estate for renting, crowdfunding, private equity, assurance vie, etc. read more about Investing in France or contact us to discuss further on this topic.
Stick to the plan and wait
Thanks to compounding interest, you will start seeing results after 5 to 10 years. It means that as long as you re-invest the dividends and interests generated, it will generate an snow ball effect. You will start earning interests from original capital invested and previous interest.
The bucket strategy when Financially Independent
The bucket strategy makes sense once you have finished your accumulation phase. So let’s imagine that after 20 years of saving 30% of your income and invested in MSCI World ETF, you have reached you FI number (1,25M € in our previous example). According to the 4% rule, you may be able to live from your investments.
But, let’s be honest… will you be able to sleep at night if next day stock markets drops -40% (like during COVID crisis)? Similar situation could happen if you have 3 apartments rented and then 1 tenant stops paying the rent.
How to manage market volatility and unpredictable events affecting your assets? A good strategy could be to split your assets using a time-segmented buckets each with different time frame, risk profile and allocation (not a financial advice).
Here an example:
Credits: retireby40
Bucket 1
Equivalent of 2 years of expenses in Assets with low risk, low yield, but high availability such as your bank savings and checking accounts (Livret A, PEL, LDDS…) or bonds close to maturity.
By doing so, you do not care if stock markets drops as you can cover your expenses in short term, while giving time to the market to recover (and it will, as from previous crisis).
The important thing is that you will not panic selling your stocks at the button (or with 1 delayed tenant when renting).
Bucket 2
Assets with >2 but less than 5 years to maturity with medium risk. An example could be bonds, crowdfunding loans, dividends stocks, rentals, etc.
Bucket 3
> 5 years. Long term investments such as Growth stock, private equity, cryptos.
The idea is that you arbitrate across buckets when you consider the conditions are favorable. Imagine Stocks at ATH (All Time High). That would be a good moment to sell some and from bucket 3 and move that capital down to Bucket 2 by investing in bonds.
The asset allocation, duration and number of buckets depends on each individual situation. We recommend to get a Financial Advisor support to finetune your strategy. Contact us if need some recommendations on qualified Financial Advisors in France.
Becoming Financially Independent in France to do what?
For some, becoming financially independent in France means retiring early so they can have neverending holidays, watching Netflix, or just for being able to quit a miserable boss. If those are your motivations, probably you would need to re-think twice as most likely you will get bored after 6 months of sitting around doing nothing and feeling useless.
In the other hand, if you want to become financially independent because you want to be able to have the freedom to pursue your passion, working on what you want, with who you want, and being able to spending more time with family, then FI is for you.
You can reach FI to secure your retirement and keep working on your actual job, as long as it is what you love to do. Whatever your motivation is, bear in mind that you do not ‘retire from’, you ‘retire to’. You should have a concrete project to keep your days busy and feel useful after you quit your job.
Final thoughts
Planning and building your Financial Independence, is something that we all should be doing considering the fact that social security retirement system in becoming more and more unreliable. Even if you keep working till retirement age in France, will you get enough to cover your needs? What if you need extra health care?
In addition, for many private companies, the older you get the less wanted you become. Let’s face it! Finding a good paid job after your 50’s could become a challenge in France. This is another reason to become financially independent earlier than retirement age.
We personally like the freedom that comes with FI. By having your money working for you, and not the other way around, you get time to spend it on what you really care. You can freely decide on what to work, with whom, and when.
For all these reasons, you should take profit of all different investments opportunities in France and start preparing your Financial Independence as early as possible.
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Bon chance!
Disclaimer
Please remember that we are neither financial nor tax advisors. We are just sharing our best understanding based in our own experience. This blog is for educational purposes only. Do not make investment decisions solely based on what you read in this blog. What works for us, may not for you. Do your own research and look for professional service if required. Read our full disclaimer in the ‘about’ page.
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