Gyroscopic Investing

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.

stone wrote: The crazy thing is though that in some ways you become less financially free the further you go along that path. When in debt, you can just use any excess income to pay it down. You don't need to bother with how financial stuff works. My impression is that people with money waste more time over financial matters than people without

Pointedstick wrote: Right now I'm between phase 4 and 5 on your timeline. My net worth is between 6 and 8 years of expenses (depending on the year) and I'm working flat-out to raise that number. It will fall once I purchase a house, but I intend to buy it free and clear with cash, and the money saved on rent will be plowed right back into savings, just like I did when I paid off all my loans. I expect that living rent-free will be very liberating since it will dramatically cut down the mandatory monthly expenditures, which, in turn, enables greater flexibility in your required income level.

Pointedstick wrote: I did not, because I don't really understand interest-only mortgages, and my goal is to have as few monthly payments as possible. Taking on another loan is contrary to that goal.

I paid off my wife and my student loans that ranged from between 2.75% and 6.7% by selling shares of AAPL that have gained 50% in the last year. The numbers might say that was a foolish decision, but it was the right thing for us. And getting rid of those monthly loan payments freed up about $900 a month for making more investments in our permanent portfolios!

Pointedstick wrote: I don't disagree with your logic, but it's just a different way of thinking about the problem from the one we're using. Here's our thinking: if I rent for (say) $900 a month, it would take $354,400 in savings to pay that expense every month at a 3% SWR. If I were to buy a modest possibly fixer-upper house for $90,000, then I can eliminate that $900 per month expense for substantially less than the $354,400. In effect, I've removed the need for an extra 350 grand in savings without impacting my ability to live off investments. The "forced savings" in the house are irrelevant to me. I just want a place to live without monthly payments. If I can later sell the house when I move, well then that's just a nice bonus! 

Jake wrote: 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.

stone wrote: I can remembering hearing of a study that asked an extremely diverse bunch of people from all over the world how much money would be  "enough". It was typically 1.5x what they currently had irrespective of whether they were extremely wealthy or very poor.

AgAuMoney wrote: College has gotten phenomenally more expensive.  But I'm inclined to think there is much about your argument that is just an excuse or rationalization.  If you cannot afford it, don't go or choose a cheaper school.  Just like with anything you cannot afford -- do without or substitute something cheaper.

Pointedstick wrote: I paid off my wife and my student loans that ranged from between 2.75% and 6.7% by selling shares of AAPL that have gained 50% in the last year.

MediumTex wrote: How much did that set you back?

Paying off your wife AND your student loans is quite a feat!

AgAuMoney wrote:
College has gotten phenomenally more expensive.  But I'm inclined to think there is much about your argument that is just an excuse or rationalization.  If you cannot afford it, don't go or choose a cheaper school.  Just like with anything you cannot afford -- do without or substitute something cheaper.

Jake wrote: I still graduated debt free. Also, despite having done all that college time, I don't view college is a necessity. [...] the cost benefit these days looks very different to when I did it over 20 years ago.

Jake wrote:Also, despite having done all that college time, I don't view college is a necessity. It's treated as a right of passage for many families, but the cost benefit these days looks very different to when I did it over 20 years ago.

WildAboutHarry wrote:

Jake wrote:Also, despite having done all that college time, I don't view college is a necessity. It's treated as a right of passage for many families, but the cost benefit these days looks very different to when I did it over 20 years ago.

The book Shop Class as Soulcraft explores the "college is not a necessity" angle.  Not a bad read.

MediumTex wrote:

WildAboutHarry wrote: The book Shop Class as Soulcraft explores the "college is not a necessity" angle.  Not a bad read.

The paper that preceded the book is available online for free if anyone wants to check it out.

I used to read his paper at least once a year I found it so interesting and stimulating.  I haven't read the book.

Lone Wolf wrote:
I believe that this is the essay version that MT's referring to: http://www.thenewatlantis.com/publicati ... -soulcraft

I'll have to check it out.  Sounds like it'll be a very interesting read, although I'll be approaching it with a skeptical bias.  I think it'll be a very interesting read for me because on one hand, I get a natural thrill out of tinkering.  On the other hand, I find the "cubicle work" of software engineering to be an exceptionally fulfilling line of work, which sounds like it might cut against the thrust of this essay.