Milestones to Financial Freedom

[BearBones]

Maybe you want to be the primary caretaker for your kids for a while.

Yep, and as with most things, if love it and do it well, this generally pays off too.

[Xan]

It's CEO Nwabudike Morgan, from the Alpha Centauri video game! Check out the video in my signature.

PS, have you noticed that Nwabudike Morgan is a dead ringer for Allen West?

[Pointedstick]

Wow, you're totally right!

[Tortoise]

I'd be interested to hear feedback on this recent podcast I did on milestones to financial freedom. You can hear the podcast here http://thevoluntarylife.com/TVL_E080_fi ... stones.mp3 and I've posted a summary of all the main points below from the accompanying blog post http://thevoluntarylife.blogspot.co.uk/ ... tones.html

This episode is a about the significant milestones along the way towards achieving financial freedom. In my opinion, reaching each of these milestones brings you closer to being financially free and it is useful to take a step back and consider what the steps along the way of your journey will be. Some milestones to consider are suggested:

Financial independence or "paying your own way", whereby you are sustaining yourself from your job or work income on a month to month basis. You are not living off parents, not living from significant subsidies from your family, not accumulating student debt and not accumulating credit card debt. It's important to note role how going to college significantly delays reaching this milestone and how many people do not achieve this milestone until they are in their 30s or later.

Achieving positive net worth, whereby your assets are greater than your liabilities. This is often what people mean when they talk about "getting out of debt" (although that is not exactly the same). It is important to be aware that consumer credit and mortgate debt can significantly hinder or delay you reaching this goal.

Making your first investment, for example by purchasing an income producing asset like shares or bonds.  The key distinction is that this is not just money you haven't used yet which you are putting aside until  you spend it, it is money you do not intend to ever spend. You are putting this money to work for you creating income. Although a lot of people consider purchasing a house with a mortgage as their first big investment, a property for your own use is really a consumption item.

Net worth surpasses annual expenses- in other words, your savings (assets) could keep you going for 1 year if you needed to. This means you have a significant safety buffer, but if you did have to use your savings it would mean that you consume your capital and you would be back to square 1.

Annual passive investment income becomes larger than your annual expenses: this is real financial freedom, as  you can now live off your passive income. For this to be sustainable it needs to take into account the effect of inflation, taxes etc. However, once you can sustainably live from your passive income, you are financially free.

This podcast and blog summary contains only my personal opinions, it does not constitute financial advice and I am not a financial advisor.

Do you think these are the relevant milestones? Any others you think are more important? Feedback welcome.

An additional financial milestone occurred to me today, and it would go before the last one in that list above: "Annual passive investment income becomes larger than your annual contributions."

Another way of expressing it might be "Graduating from the accumulation phase."

This milestone refers to the point at which the dominant source of growth of one's investments shifts from new contributions to compound growth. It's when one's investments really begin to "take off" and gather momentum.

For a typical PP investor, I suppose this would occur when new annual contributions are finally less than about 9.5% of the portfolio value. (If we assume an average 9.5% return for the PP.)

[Jake]

An additional financial milestone occurred to me today, and it would go before the last one in that list above: "Annual passive investment income becomes larger than your annual contributions."

Another way of expressing it might be "Graduating from the accumulation phase."

This milestone refers to the point at which the dominant source of growth of one's investments shifts from new contributions to compound growth. It's when one's investments really begin to "take off" and gather momentum.

For a typical PP investor, I suppose this would occur when new annual contributions are finally less than about 9.5% of the portfolio value. (If we assume an average 9.5% return for the PP.)

Very useful, thanks very much!

[Hobbery]

Jake, your show is outstanding.  I very recently became focused on my own financial freedom (last couple months, really).  Simultaneously, I'm trying to craft a small business over the internet.  AND, I'm obsessed with living consciously and being free... 

Your show fits my brain like a glove.  Especially your "Entrepreneurship" episodes.  Like Harry Browne's work, so much of your insight about crafting a profitable business actually spills over into forging a healthier, freer life. 

Your episode about friendships should be a staple for people who want to improve their lives.  Your episode about "Profit is Sanity" put into words, what some underlying part of my brain has been crying out while I go through the motions (but never lift off the ground) in my work. 

I listened to Mike Maloney's book on silver and I learned a great deal (because of you).  But like most big questions about "aiming my efforts", I always return to Harry Browne.  (safety, simplicity, and stability).  I'll be a total PP guy, and I'll feel just fine when silver shoots through the roof and I miss all those gains...

I'm also VERY interested in finding books with similar aims as "How I Found Freedom" and you've introduced me to more than one.

You're doing excellent work and it's reaching people.

[yankees60]

I wonder how many of us are engineers (I am too). It's sort of interesting how many engineer types are attracted to mastering money and adopting small government/libertarian ideals. The INTJ profile strikes again!

This has come up in various Topics in the Forum.

I lot of engineer types. A lot of INTJ's. So, many in the NT (Rational) family. As an ISTJ, I am in the SJ (Guardian) family.

https://keirsey.com/temperament/rational-overview/

Vinny

[Tortoise]

Bumping this gem of an old thread about reaching various financial milestones to financial freedom.

I was updating my net worth spreadsheet recently and noticed that my net worth (including home equity) is now about 25x my average annual expenses.

I can't retire yet under the 4% rule for various reasons -- my home equity doesn't generate passive income, I can't tap my tax-sheltered retirement accounts yet, etc. -- but it at least feels like an important psychological milestone for net worth to hit 25x annual expenses.

[Smith1776]

Congrats, Tortoise!

...And WOW this thread has history. I had no idea Jake (the OP) was actually a member of this forum.

[Mark Leavy]

Congrats Tortoise! A great milestone.

[yankees60]

Bumping this gem of an old thread about reaching various financial milestones to financial freedom.

I was updating my net worth spreadsheet recently and noticed that my net worth (including home equity) is now about 25x my average annual expenses.

I can't retire yet under the 4% rule for various reasons -- my home equity doesn't generate passive income, I can't tap my tax-sheltered retirement accounts yet, etc. -- but it at least feels like an important psychological milestone for net worth to hit 25x annual expenses.

Do you want to disclose what it is without home equity? Unless you are able to capture that equity then it's non-liquid and not something that you can use for your average annual expenses.

[Tortoise]

Agreed, Vinny. It's just a "psychological" milestone, I guess.

Excluding home equity, my liquid net worth is 19x annual expenses (10x in IRA/401k, 9x in taxable). So I'm not yet FI, but it's approaching more quickly than I thought it would.

[yankees60]

Agreed, Vinny. It's just a "psychological" milestone, I guess.

Excluding home equity, my liquid net worth is 19x annual expenses (10x in IRA/401k, 9x in taxable). So I'm not yet FI, but it's approaching more quickly than I thought it would.

At your age that is still quite impressive. Congratulations!

[Kriegsspiel]

That's cool man, good for you. I imagine you include your wife and kid expenses in there?

[Vil]

Well, Tortoise is to answer for himself, but personally I consider it fair to count family expenses too. If it was just me, I have already enough of assets generating passive income to declare myself financially free. I even keep my current well paid job (approx. 200K USD/year..) just for pursuing that goal, not that I really enjoy it .. But again - family life/kids change things dramatically - school expenses, vacations (abroad), etc. etc.
Hm, I start to feel I should read once again the notorious "Millionaire next door" and keep my/our expenses as low as possible (which is not the case... )

[I Shrugged]

Well, Tortoise is to answer for himself, but personally I consider it fair to count family expenses too. If it was just me, I have already enough of assets generating passive income to declare myself financially free. I even keep my current well paid job (approx. 200K USD/year..) just for pursuing that goal, not that I really enjoy it .. But again - family life/kids change things dramatically - school expenses, vacations (abroad), etc. etc.
Hm, I start to feel I should read once again the notorious "Millionaire next door" and keep my/our expenses as low as possible (which is not the case... )

I'll take the opposite position. If your job is okay, make some money and enjoy life. As long as you keep going on the long term goals.

[dualstow]

Well, Tortoise is to answer for himself, but personally I consider it fair to count family expenses too. If it was just me, I have already enough of assets generating passive income to declare myself financially free. I even keep my current well paid job (approx. 200K USD/year..) just for pursuing that goal
...

Pursuing the goal of what? Having enough capital to generate income which will cover the whole family's expenses?

[Tortoise]

Yeah, the expenses I calculate in my spreadsheet include my wife's and daughter's current expenses.

But the future is likely to bring significant new expenses like private school and college tuition, plus we'll start taking family vacations at some point, so the FI milestone is definitely a moving target and won't happen in the next few years.

I haven't yet read any books on achieving FI, but my initial impression is that FI is more like a spectrum than a clearly defined threshold; it depends rather heavily on your assumed expenses, many of which are adjustable and based on priorities and preferences. For example, I can probably think about achieving various ascending "levels" of FI:

• FI Level 1: 4% of liquid net worth covers annual expenses if I were to live really frugally (requires significant downgrade in lifestyle)
• FI Level 2: 4% of liquid net worth covers annual expenses if I were to live comfortably but forgo most luxuries
• FI Level 3: 4% of liquid net worth covers annual expenses if I were to live comfortably and indulge in occasional luxuries
• FI Level 4 (Fuck-You Money): 4% of liquid net worth covers annual expenses if I were to live comfortably and indulge in whatever luxuries I want

In that scheme, I suppose I already achieved FI Level 1 a while back and am now working toward Level 2.

[Smith1776]

I am currently in my final semester of school.

When I finish school I'll switch from part-time to full-time work again. For that first year or so I'm working though, I'm planning on staying with my folks so that I can do some serious moolah accumulation.

[Vil]

Pursuing the goal of what? Having enough capital to generate income which will cover the whole family's expenses?

Yep, that was my point (not necessarily evident from the way I am torturing the written English ..).
Actually, this is one of the arguments I commonly use vs my wife as she complains I work too much - its just I am doing it for my family, as if it was only about me, yeah I can already start spending my time trekking the mountains, etc.

[Vil]

For example, I can probably think about achieving various ascending "levels" of FI:
...
In that scheme, I suppose I already achieved FI Level 1 a while back and am now working toward Level 2.

That's really nice point of view and looks legit. It defines the 'input' and 'output', though its missing the great unknown - the context i.e. where you (plan to) live /where you (plan to) spend. Bulgarian villages are full with retirees from all over the EU - you may guess why and sure thing - you will be right (but still I think they're slightly surprised as cost of living here increased a lot in the last few decades).

[Tortoise]

I am currently in my final semester of school.

When I finish school I'll switch from part-time to full-time work again. For that first year or so I'm working though, I'm planning on staying with my folks so that I can do some serious moolah accumulation.

That's cool, congrats on approaching the academic finish line!

I bet it will feel great to see your account balances grow like crazy that first year or so while you're living with your folks rent-free.

[yankees60]

I am currently in my final semester of school.

When I finish school I'll switch from part-time to full-time work again. For that first year or so I'm working though, I'm planning on staying with my folks so that I can do some serious moolah accumulation.

You must be on EXCELLENT terms with your parents!

My mother was a nightmare for me.

When I was 20 years old and I told my father I was moving out his reaction was, "What have I done wrong!!??" I told him that he'd done nothing wrong, that it was a total clash of lifestyles.

Over the next two years I came and went a few times - living at home, living elsewhere.

Finally, one day, I was outside with my father and he said, "I noticed you and your mother don't get along so well." My thought was, "It took you so long to notice??!!" He then went on to say that he was willing to help me financially to live elsewhere! Quite a turnaround from his reaction two years earlier.

[dualstow]

Pursuing the goal of what? Having enough capital to generate income which will cover the whole family's expenses?

Yep, that was my point (not necessarily evident from the way I am torturing the written English ..).
..

Your English is fine, miles above my Bulgarian. I was pretty sure and just wanted to clarify.

[WiseOne]

Bumping this gem of an old thread about reaching various financial milestones to financial freedom.

I was updating my net worth spreadsheet recently and noticed that my net worth (including home equity) is now about 25x my average annual expenses.

I can't retire yet under the 4% rule for various reasons -- my home equity doesn't generate passive income, I can't tap my tax-sheltered retirement accounts yet, etc. -- but it at least feels like an important psychological milestone for net worth to hit 25x annual expenses.

That's a good milestone indeed, Tortoise!

What happens if you calculate your magic number in two parts? One number for age 70, when you're collecting Social Security and on Medicare, and another for "bridge" savings from retirement to age 70. Tyler has a handy chart for determining the safe spend-down rate for the bridge savings. If you're in your 50s or older, that will come out to be a smaller number than using the straight 4% rule.