Too complicated, too expensive, reserved for the wealthy... What if everything you think you know about money is wrong? A data-driven demonstration, without jargon.
Too complicated, too expensive, reserved for the wealthy... What if everything you think you know about money is wrong? A data-driven demonstration, without jargon.
France has a lot going for it: a rich history, a cuisine envied worldwide, a unique art of living... But as soon as the word "money" is mentioned, the atmosphere changes. One can almost feel an awkwardness, as if discussing wealth or investment is in poor taste. An former president even declared that his enemy was "the world of finance." The mood.
This discomfort has very real consequences: millions of French people prefer to ignore the subject, or worse, blindly delegate it to an advisor without ever understanding what is done with their money. As a result, erroneous beliefs have taken root in people's minds, and they hinder action far more than they protect.
Good news: mindsets are evolving. More and more people are realizing that it is possible (and even desirable) to manage their own finances. It is time to deconstruct, once and for all, the preconceived ideas that hinder this empowerment.
When we talk about financial independence, the image that often comes to mind is someone sipping a cocktail on a beach, without schedules or constraints. A vague, almost unattainable dream, the true cost of which is hard to imagine. However, there is a very concrete way to calculate it.
This method is called the 25 times rule: you need to save 25 times your annual expenses to become financially independent. Once this capital is built up, you can consume 4% of it each year (100 divided by 25 equals 4).
Let’s take a concrete example. You aim for a passive income of 4,000 EUR per month, net of taxes. The formula is simple: monthly income x 12, divided by the withdrawal rate of 4%. This gives a gross amount of 1.2 million euros. Taking into account the flat tax of 30% on capital income, you actually need to aim for about 1.7 million euros net to achieve this goal without ever depleting your capital.
This figure may seem huge, but it turns a vague dream into a measurable goal. And a measurable goal can be planned.
This belief is hard to shake: investing is reserved for those who already have a large fortune. In fact, the opposite is true. The earlier you start, even with small amounts, the more you benefit from the most powerful mechanism in finance: compound interest.
The principle is simple to understand. You invest a capital, it generates interest, and this interest is reinvested, generating more interest in turn. Therefore, the initial capital keeps growing, and the growth accelerates over time.
An example speaks louder than all the explanations. If you invest 1,000 EUR today with an average return of 8% per year for 40 years, you will end up with about 21,724 EUR: your investment has been multiplied by 21. Now add 50 EUR every month, and the final capital rises to 177,158 EUR, for a total contribution of only 25,000 EUR. The rest, over 152,000 EUR, is the work of your money, not yours.
This mechanism works for all types of investments, regardless of the initial amount. Starting small especially helps to develop good habits before investing larger sums later on.
Before diving headfirst into investments, you must first know where you're going. It's impossible to aim for a goal that you haven't quantified. The first concrete task is to calculate your own "independence number," which corresponds exactly to your lifestyle.
The method follows the same logic as the previous example: start with the net monthly income you wish to receive once independent, multiply it by 12, and then divide by your chosen withdrawal rate.
You aim for a comfortable income: start with a realistic and net amount after taxesPreferably use a withdrawal rate of 3%, which is more conservative than 4%Add a safety margin to your target income to absorb unexpected eventsDivide the annual amount obtained by this rate to know the targeted capital
This number will become your guiding star. Every euro saved and invested brings you closer, and seeing it written down changes completely how one perceives the effort of saving on a daily basis.
Where does this famous 4% rate come from? It originates from a study conducted by three professors at a Texas university, who sought to determine the withdrawal rate that would allow one to live solely off their savings without ever depleting it.
To do this, they tested various allocations between stocks and bonds (100% stocks, 75/25, 50/50, 25/75, 100% bonds), relying on the actual performance of financial markets from 1929 to 1995, including inflation.
The results are telling: a balanced portfolio of 50% stocks and 50% bonds has a 100% probability of lasting 25 years of spending with a withdrawal rate of 4%. It is precisely this figure of 25 years (100 divided by 4) that gives its name to the 25 rule.
But beware, over a longer duration, the probability drops. To last 30 years with the same 100% security, one must lower their withdrawal rate to 3%. This is why the most conservative approaches recommend 3% rather than 4%, especially if financial independence is aimed for at a young age and must therefore last for several decades.
Nota bene: the withdrawal rate simply refers to the percentage of your capital that you allow yourself to "sell" each year to fund your lifestyle, without compromising the sustainability of the remaining capital.
Another persistent misconception is that financially independent individuals live exclusively off their rents or dividends, never touching their capital. In reality, this is very rare. The vast majority of people who claim to be financially independent actually sell a portion of their capital each year to fund their daily expenses.
This is not a problem in itself, as long as the right withdrawal rate has been calculated from the start, as explained earlier. Capital is precisely built to be consumed gradually, not to remain intact indefinitely.
This nuance changes a lot in the way one approaches investments: there is no need to focus solely on income-generating assets (rental real estate, dividend stocks) if the ultimate goal is to "draw" from a well-diversified overall capital. What matters is the strength and growth of the entire wealth, not just the income it distributes each month.
Many French people believe that you need to be an expert to properly manage your wealth: knowing the entire tax code, mastering financial markets, understanding every investment product... This is false. The simplest strategies are often the most effective.
This apparent complexity, however, benefits many people. A commission-based wealth management advisor has every interest in presenting you with sophisticated, hard-to-understand products rather than simple and inexpensive solutions. If the advice is free, it is often you, the client, who is the product.
These commissions have a real and quantifiable cost. A client working with a fee-based advisor (without conflicts of interest) typically shows an annual performance that is 1.7% higher than that of a client who went through a commission-based advisor. Over 40 years, with equal investment, the difference in final wealth can exceed 84%.
Nota bene: fees are a silent poison for your savings. Paying 2% in fees per year instead of less than 1% can represent, after 30 years, a loss of more than 40% on your final capital. It is not the performance of the markets that you control; it is the fees that you pay.
Once false beliefs are set aside, it is still necessary to know where to go. Having a clear direction and specific goals allows for making the right decisions, rather than following a trend or advice overheard in passing.
This course is personal: financial independence, real estate purchase, retirement planning... all goals are valid, as long as they truly resonate with you. Don't listen to what others expect from you; listen to what really matters to you.
Once the goal is set, everything organizes itself around it: the allocation of your savings between needs, wants, and investments, the choice of suitable placements, the gradual construction of a coherent asset allocation. Without a course, one navigates blindly. With a course, every financial decision becomes logical.
The greatest enemy of the investor is not the market, but himself. Our cognitive biases (fear, haste, procrastination) are a major obstacle on the road to financial independence. The best way to guard against this is to remove human decision-making from daily life by automating as much as possible.
In practical terms, this involves establishing a few simple habits once and for all:
Set up automatic transfers to your savings and investment accounts each monthImplement scheduled investments instead of waiting for "the right moment"Delegate time-consuming and non-value-added tasks, such as accountingBlock a fixed monthly appointment to track your budget, without spending more than an hour on it
Once this system is in place, you no longer need to rely on your motivation of the moment. Money goes to the right place at the right time, without you having to think about it or give in to the temptation to spend everything before investing.
The best time to start investing was yesterday. The second best time is today. No time machine will change your past, but your future is still entirely unwritten.
Warren Buffett's example is telling: at 47, his fortune was $67 million. Thirteen years later, it exceeded $3.8 billion. Today, it stands at over $140 billion. In other words, he built 99% of his wealth after turning 47. His own explanation can be summed up in one sentence: the most important thing to make money is time, not intelligence. You just need to be patient.
Financial independence is therefore neither a mirage nor a privilege reserved for a select few. It is a tangible goal that can be calculated, built step by step, and sustained over time, like a marathon rather than a sprint.
The next step is yours: calculate your own independence number, set your course, and start this month with an automatic transfer to your invested savings. It is this first action, however modest, that truly sets the machine in motion.
Author Audrey on 22 August 2023
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