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I just finished reading Out of The Rat Race – The Quest for Financial Freedom, by Eric Duneau. This book is about getting to Financial Freedom and be free to choose what you want to do with your valuable time.
The author of the book reached Financial Freedom in the United Kingdom by investing in Real Estate properties and renting them. He did that by only saving about 8% of his income. This is important because most other literature advises a much higher saving rate.
This book is quite interesting to read. It is very well written and contains a huge wealth of information on the money system in the world. It offers an alternative to the common idea of Financial Independence.
Stay tuned if you want to know why we cannot trust money and how a man became financially free while saving only 8% of his income.
Money cannot be trusted
The book starts with explaining the origin of money. It starts with the invention of gold and silver coins. Then, monks started accepting money to deposit safely in their temple. Finally, they started giving credit, but first without interest, backed by the fear of gold.
Once the fear of gold got lower, goldsmiths became bankers. But they wanted more profits than honest monks. And as such started asking interest from the loans. And soon, they realize that they could issue more money in the form of loans (banknotes) than they had available. This was the first time money was created out of thin air.
After this, some regulations started with Federal Banks regulating other banks. If the bank needs a reserve of 10% in money, they can still issue 9 times more money than they have in loans. It is not uncommon for 90% of the money to be credit money.
Over time, money stopped having a physical value. First, money itself was made of gold and silver and as such had value. Then, it was backed by gold. But soon, the value of money was much higher than the value of gold. And there was no more backing of money.
If you thought that money had any physical value, you need to think again. Today, most of the money is simply credit money. We cannot trust money. This is really well explained in the book.
Inflation, inflation, inflation
The origins of inflation in details in the book. And it also explains very well what inflation means for people. Even if you were to save some money today in a bank account, this money would not be worth the same in 10 years. In fact, it would be worth a lot less.
Inflation is the reason we need to invest in appreciating assets such as the stock market or real estate. And here, the author compares Real Estate Inflation to standard CPI Inflation. It is very interesting to see that the price of real estate is increasing much faster than standard inflation. This makes it more interesting to hold real estate assets since they will appreciate faster than standard inflation.
Now before the book jumps into the strategy for financial freedom, it starts with a few tips about the journey itself.
I believe this is really important and it is something that the book seems to agree on. Many people only focus on the goal and not on the journey to financial freedom. This is a journey where you will learn a lot and you will evolve as well.
It is important that you enjoy the journey. There is no point in making your life miserable during the journey just to reach a goal. You want the journey to feel enjoyable as well. If you feel your life cannot be comfortable if you save more than 20% of your salary, then do not save more! Make it a good goal and a good journey as well!
Bad Debt and Good Debt
After this part, we go into the heart of the author’s strategy: leverage! There are two kinds of debt: good debt and bad debt.
Bad Debt is debt on depreciating assets and with a high-interest rate. This is the case for most kinds of debt. Credit Card debt is probably the worst kind of debt. Then, you will find car loans and any other leasing. All these debts are making you a disservice. You would better have paid cash or bought something that was within your reach.
On the other hand, good debt can help your financial journey. Enter the world of mortgages. This is the main for the creation of free money by banks. Mortgage are big loans with generally low interest. And houses are an appreciating asset. This means that your debt will cover an asset whose value will increase over time. This can give you the opportunity to raise even more debt on your asset later on. Another good thing with real estate properties is that you can improve them to improve their prices.
Real Estate And Leverage
The author based its entire Financial Freedom strategy on Real Estate. The strategy is to buy a house and then acquire a new property every three years until you get three properties. At this point, you should get enough from the rents to be financially free.
His strategy is based on leveraging as much debt as possible. Maximum credit should be used to purchase each property. And when a house raises in value, the mortgage should be refinanced higher in order to have more money available for the next deals.
All his decisions for the purchase of a property are based on financial simulations. This is done to avoid decisions to be made using the emotional brain. Instead, using dashboards and simulations should yield the best results. He refined his techniques over time to only invest in very profitable properties.
Your Financial Freedom
Finally, the book covers the different kinds of financial freedom:
- Default: You continue the same lifestyle.
- Downgraded: You reduce your expenses compared to when you were working.
- Upgraded: You increase your expenses compared to when you were working.
These three different kinds are quite interesting. This is the first time I encountered them.
It is also important that the book notes that each financial freedom is different. Each person should choose his goal and his journey.
Although the book entirely focuses on Real Estate to reach Financial Freedom, a few sections are talking about the alternatives: stock market investing, startup investing or internet marketing. But it does not go into much detail for any of them.
What I Liked
I really liked the style of the book. The author did a really good job writing it. And it is very accessible to everybody. This is not a book for expert, it is a book for people who want to improve their finances. And for that, it is a success. Moreover, the author is not pedantic or arrogant and does not pretend he knows everything. On the contrary, he often says that he does not know everything. I think this makes him highly relatable.
Also, I liked a lot the first chapters explaining how money was created and how banks came to be. I completely agree that today we cannot trust money. With credit money and inflation, money has little real value. The book explains this very well.
The first part of the book really shows the need to invest money in order to reach financial independence. It explains really well the different ways to invest and how to compare them. The first part of the book was really good and a real pleasure to read.
The author is very analytical and makes complex computation in order to see where his finances are going. The book really explains this very well. He is using many financial ratios in order to assess the value of property investment. I think it is a great idea to rely on analytical simulators rather than using your emotional brain. He has a strong emphasis on passive income which is superior to regular income in that you do not have to work for it.
What I Did Not Like
There were a few things I did not like in this book, especially in the second part of the book that is heavily Real Estate focused.
The Real Estate examples he is using are very difficult to reproduce. They are very interesting investments and I think it is very difficult to reproduce them. One of the examples if an apartment for 220’000 pounds and rent of 1250 pounds per month. This is a price to rent ratio of 14.6. In large cities, this is almost impossible to find. In Switzerland, even rural areas have a price to rent ratio above 20. And is using 85% leverage as a minimum. In many countries, the minimum down payment is 20%. I think a lot of this strategy depends on luck. I would not base my finances on luck. Instead, I would rather use more dependable investments.
Moreover, the author uses every possible form of leverage. He is refinancing his mortgage several times. And he even takes a new mortgage on a debt-free home. At some point, he is even taking a reserve on a house so that he can take new money out of the mortgage and reinvest into a new property. For me, this is clearly taking the concept too far. I do not want to have to deal with this.
While I do not doubt that the author succeeded in the U.K. with this technique, I do not think this is possible everywhere. And I do not think real estate is the best way to reach Financial Independence for everybody. It could work for some people, but not for everybody. For me, managing properties is just much worse than what I do at my current work. I do not want to trade one for the other. And the author advises to not delegate anything, making this even more work instead of a real passive income.
I think that the author is a bit too conservative. The biggest instance of that is that he is advising people to keep working until you are Financially Independent, multiplied by Pi (3.14). For instance, my current FI Number if about 1.6 million. If I follow his advice, I should not retire until I have about 5 million CHF. I think this is too conservative. For me, a ratio of 1.5 or 1.61 (phi) makes sense for being conservative. However, a ratio of 3.14 does not make sense. But maybe I am taking his advice too literally.
The author is entirely against credit cards. For him, credit cards are bad debt. I completely agree with the fact that credit card debt is a very bad thing. But I do not agree that credit cards are a very bad thing. They can be a tool. They need to be free and they need to have some cash back. Once it is the case, they will help you on the road to financial independence.
While the author writes this in a very personal way, it misses some information about the author finances. At the beginning of the book, he is showing his financial dashboard. But it is filled with synthetic numbers. It would have been better if the numbers were the real one. For his real estate part, he shares the details of each of his property and his net worth but never along he is sharing things such as income and expenses.
About his financial dashboard, I would really have liked to see it in its entirety. It looks very interesting already. The author says there are many other components in its own dashboard. But there is no way of knowing what makes his personal dashboard.
It is probably a detail, but the author is using several UK-English words. Some of these I never heard before and I had to look for them to understand. For instance, a Government Gilt is a bond issued by the UK government. Another example that is used all over the book is Buy To Let. This is a very British phrase that means the purchase of a property to rent it out. I do not think it is a big deal, but it is a bit weird since generally finance books are all using the same vocabulary.
Overall, I think Out of The Rat Race is a good book. It offers an alternative way to reach Financial Freedom. Instead of focusing on the stock market and high savings rate, the author focuses solely on Real Estate Investing. He achieved Financial Freedom with a savings rate below 10%.
I really enjoyed the first part of the book. It really explains well the problems with money and the financial industry. This first part is really the best piece of content I have read about the money, inflation, banks and real estate.
However, I did not like the second part of the book so much. It is still well written and the content is good and well researched. However, the author solely focuses on Real Estate investing for rent. I do not believe this is reproducible in any country. The examples he is giving are highly profitable and even the mortgage conditions are profitable. I have never seen any conditions like this in Switzerland. And from what I know of the Real Estate Market in the U.S., it would be difficult to reproduce there as well.
Now, it is true that the author also invested in the stock market and in many startups. But still, the financial strategy that is advocating (four real estate properties) is only based on Real Estate, not on other instruments.
Moreover, I really think he is using too much leverage. I agree with the fact that some leverage is really good. And I completely agree that there is such a thing as good debt. But I really do not think we should push it so far as the author is doing. For me, this is too risky.
But it seems to work and I guess this is an interesting alternative route to become Financially Free. And it remains a very interesting read. I would have read it only for the first part of the book.
If you want more details, you can also take a look at the author personal website: In the Rat Race. It contains some of the financial simulations that the book talks about.
Have you read this book? What did you think of it?