In the spirit of candor, I am presenting our financial goals and our progress towards those goals.
My hope is that you will help keep us accountable, and on track. We’re open to suggestions–indeed, asking for them–as we begin this journey towards greater freedom.
Our first and main goal: financial independence
Before the details, it’s helpful to state our goals. First, we would like to become (more or less) financially independent. We would love to be at a place where we don’t have to depend fully upon our jobs for our income, and, in fact, we’re shooting to be at a place where we don’t have to depend upon them at all. In short, we’re hoping to get to a place where our passive income–the money made by our savings and investments–covers most or all of our expenses without depleting the capital.
In fact, that goal is what drew me into the online community and encouraged me to jump back into personal finances–and write about it. I ran across a news story about someone I know who reached financial independence, and then I ran off across the blog-world reading about how hundreds of people have done it–many of whom did so from even more modest beginnings than ours. My wife and I would both love more freedom to pursue other passions without a constant focus upon our day jobs.
Isn’t that a crazy goal?
I have recently been convicted/convinced that big, audacious goals make for a better life anyway. But actually, no, the goal isn’t unreal at all: there are lots of examples of how to get there, and the shockingly simple math behind it. This is a goal that’s reachable for the majority of Americans. (Not all, at least today, but far more than most Americans imagine, and far more than a majority.)
The short of it is this: you can save up 25 times your annual expenses in investments and you should then be able to live off of your investments without ever running out of capital. I have long been skeptical of the markets and market wisdom, so I whipped out my years’ worth of world-class economics and finance training and dug into the studies only to find that…it’s true.
Here’s the simple equation:
(Your withdrawal rate) x (Your Net Worth) = income required per year
It’s that simple. Some folks take income required and divide by twelve, to get the passive income per month, but I figure you can do that on your own.
The best part is: there’s no need to live in fear. If things change, we will adjust. Maybe we will pick up another job, shift our expenses, take on a renter, or make other adjustments. If a depression hits, we will cease withdrawing our investments at the same rate, you can be sure. Maybe we would even live with relatives to save on housing costs; who knows. The point is: you can be reasonably secure to extremely secure, depending upon how much you save up.
For us, the goal isn’t to be as conservative as possible or retire off to the Caribbean and never work again. Instead, we want the opposite: to do things we enjoy even more, focusing more upon the things we love, and enjoying more of the power to say no. We’ll still make money, but it won’t be much of our motivation any longer, which will free us up to do even greater things. Maybe we’ll retain our normal jobs, or maybe we’ll shift them somewhat; we have no idea yet. So our goal is audacious, but frankly, less audacious than many in the early retirement community.
What’s our specific goal?
We would like to have flexibility, but will continue making some income, especially early on. So I have set a goal for us to accumulate enough so that we can withdraw 5% per year of our investments (not the super-safe 4%) and cover our expenses. We know that 4% per year is the standard rule, because it’s very, very safe, but we aim to continue making some income–just because we like it–after we’re independent, so we’re aiming for 5%. We could even aim as high as 6%, and may well adjust our goals if it appears we’ll be making enough income to pay most of our expenses even after we’re independent. For now, we don’t know where we’ll be, or what we’ll be doing, exactly, so I will aim for a safe 5%.*
So there you have it. We’re aiming for a net worth that allows us to take 5% per year and cover our annual expenses. In other words, we’re attempting to accumulate about 20 times our annual expenses.
As you may observe, we’re hoping to save that, so the less we live on, the more we save and the less we need to save–every dollar we shave off of expenses counts twice! So this blog will focus, in part, on lowering expenses, as that’s a key part of our journey. It’s something that everyone can benefit from, whether you’re an aspiring millionaire (not us) or a low-income family.
How are we doing on financial independence?
We’re just beginning! We have been, like most people, planning for some eventual retirement someday, so our savings goals have largely been temporary. We saved up a fully-funded emergency fund, finally, and then began saving for a house down payment. Beyond that, we budget well, but have little additional savings; in fact, we’ve only recently reached the down payment goal.
Here’s us: our expenses versus our passive income potential. You’ll notice the green line is our passive income potential, and it’s just barely edging upwards right now. (Currently, any upwards motion in it is a win.) Expenses are orange-ish, and you can see that that’s where we’re making major progress. We blasted expenses down one month then edged them down a little more, and I’m eager to compute them up for March and see if we were able to knock them down a little more still. We’re especially excited to knock off expenses, because every dollar we save there is another dollar we save and many dollars we won’t need to save because we’re running on lower costs.
You’ll notice that we didn’t chart income: right now, it exceeds our expenses (though not by much), but it’s highly variable for the time being. It seemed to add more noise, so rather than chart it, we’re omitting it, but I suspect we’ll add it to a future chart.
For those who want more detail, we’re roughly 1/6 of the way to our goal of passive income potential = expenses. That’s not bad for a start, and we’re eager to see that amount climb quickly as we drop our expenses a little more.
Speaking of expenses, we’re looking to reduce our largest expense….
What about that other goal, home ownership?
Our second goal is home ownership. Right now, rent is by far our largest expense and that will likely continue. Quite simply, housing where we live, work, and have friends is expensive. We like the benefits of home ownership, and we have realized through renting that basically every rental is a debt agreement, albeit a shorter-term one. House prices where we live have increased tremendously (doubled over the past four years), and we would like to lock in lower housing costs and eventually reduce them altogether (once we pay off a mortgage). We’ll post more on that later. For now, you need to know that we have enough saved for a down payment and would avoid taking on large payments or large mortgages. Our goal is to find something simple, on a reasonable note (15 years – so paying less interest) that would reduce our rent costs.
We are looking at houses already so that we’ll know the market well enough once we decided to buy. I know there are varying opinions on home ownership, especially among the financial independence community, but for us it makes sense and it also allows us to significantly reduce our housing costs and keep them from skyrocketing further or moving away. We may even take on a renter (we have some ideas in that regard) to further defray our costs, something we cannot do while renting.
Where do we hope to go from here?
This is the beginning. We would like to track our financial progress–and share it as well. So, for the first time, I began tracking our net worth, i.e., the total value of everything we have, including our savings.
Sure, I have figured it up a few times over the years, especially when it was extremely negative (due to student loans); it was a powerful motivator back then. But this is the first time we’ve tracked our net worth month by month. I’ve never been obsessed with money or even that interested in it, or piling it up; to us, it’s merely a means by which we do the things we aim to do in life. But it’s something we have goals around, especially lately, as we have awakened to the possibility that it’s something we could build in order to do more of the things we love in life.
It has been helpful already. We noticed immediately that we kept a large share–too large of a share–of our funds as cash in one form or another, when really, we could afford to safely invest a greater proportion. That change has already been made, and hopefully, it will help us achieve our goals more quickly.
This is also the first time we have calculated “passive income potential,” or, the ability of our savings to generate money for us. Right now, they’re not able to generate much, but at least we’ve saved enough to have a green line on the chart, and one that’s moving in the right direction. Now it’s just a matter of time until the green line (passive income) and the orange line (expenses) meet…
I would update you on the progress, too — and will with our next post — but this is our first such post, and first time tracking, so for now, there’s little to update. But I would love to hear any suggestions/tips/advice any of you have for how to do this and what to include…
What about you? Have you begun tracking your financial goals? What else should we include, or do differently?
*There are many details and assumptions here, which the finance nerd in me wants to leap into, but for your sake, I omitted the details (estimated rate of return, estimated inflation, and so on) and will instead say that we made very reasonable assumptions, particularly given our investments, and will remain flexible. Though I would enjoy discussing some/any of those assumptions.