Every month, I post detailed reports on my progress towards financial independence. In each post I’ll talk about what went right and what went wrong and try to articulate my life goals as they evolve. I post real numbers simply because it’s more interesting.
- After tax salary: $5,541
- 401(k) contribution: $1,753
- Dividends and interest: $110
- Rent $1,375
- Phone $25
- Utilities $60
- Bars + Restaurants $359
- Groceries + Pharmacy $262
- Transportation $85
- Business related $183
- Health $91
- Gifts $413
- ATM $0
- Vacation $0
- Home $0
- Other $0
- Savings rate: 61%
- Average trailing 12-month expenses: $2,780
- 12-month SWR: 9.89%
- Cash: $71K
- CD: $20K
- Investments: $145K
- Retirement: $116K
This month didn’t go as well as I had hoped. I failed to meet all three of my goals for November:
- Spend no more than $200 on restaurants and bars (I’ve already spent about $50)
- Secure contracting job for $95/hour
- Find five real estate properties and do a cash flow analysis on each
The only one that I came close to was securing a contracting job. I had a meeting with my first potential client and made a verbal agreement do about 10-20 hours of contracting at $100/hour. I’m hoping to actually start coding in December, but I won’t be devastated if it doesn’t work out. It’s more of a proof of concept that I can easily secure contracting work if I was to ever quit my day job. Speaking of which, I spent a few hours yesterday more concretely defining my 4-year life plan. Here’s the table I used to formulate my plan:
These were the inputs for the table:
I wanted to see how much non-investment income I’d need to break even with my current expenses and a fixed lifestyle of $48,000 a year (conservatively high). For example, if I had a net worth of $600,000, a 4% withdrawal rate would give me $24,000 of income per year. Since my current spending is about $34,000, I would need $12,000 of contracting work (after taxes) to completely cover my expenses. If my expenses rose to $48,000 a year, I would need another $24,000 of contracting work – not too overwhelming.
While striving for financial independence, it’s easy to get discouraged when you see 5+ year timelines. Doing this analysis made me realize that I can lop off a few years if I’m comfortable quitting my job before my passive investment income completely covers my expenses. I had become obsessed with the idea of sitting back and letting my investments do all the work, but when I actually try to imagine myself in that post-FI situation, I’m still writing code every day, learning new technologies and dabbling in small business ventures, hopefully creating some wealth as a by-product.
We’re very fortunate to live in a time that with a little hustle you can make money on the side without constraining yourself with full-time employment. My ideal situation would not to be contracting, but to be working on my own product business. The low income requirements broaden the space of potential apps or businesses that I could work on. Since my goal is to generate a measly $800/month, I could create apps that others wouldn’t take the time to create.
Additionally, I could always fall back to freelancing. Using the numbers from the table above, if I needed $9,500 a year to meet my expenses, I would only need to secure 126 hours of freelance work if I charged $75/hour. If I could find 20 hours of work per week, I could be done with my work for the entire year in 7 weeks. A $100/hour rate would only require 120 hours or five 20-hour weeks.
It’s worth it to note that my net worth projections above are all dependent on a 5% growth rate in the market over the next few years, something that may not actually pan out. We may have another -30% year as in 2008 and my plans will be delayed, but we may have a few more gangbuster years like 2009 and 2010 (26% and 15% respectively) and I could get there earlier, who knows.
To bolster my confidence a bit, I used FIRECalc to see how spending $24,000 off of a principal of $600,000 would have performed over 111 possible 30-year periods. Unfortunately, the simulation failed in some cases:
“Here is how your portfolio would have fared in each of the 111 cycles. The lowest and highest portfolio balance throughout your retirement was $-240,592 to $3,407,685, with an average of $1,058,935. For our purposes, failure means the portfolio was depleted before the end of the 30 years. FIRECalc found that 6 cycles failed, for a success rate of 94.6%.”
The engineer in me wants a success rate of 100%, so I lowered spending down to $20,000, which resulted in ending with $144,114 to $3,769,915, with an average of $1,386,634.
So there you have it. My official goal is to reach $600,000 in net worth, quit my job, withdraw $20,000 per year from my investment account and start my own product or freelance business to cover the rest of my expenses. My current $33,000/year lifestyle would then require $13,000/year in non-passive income. If I inflated my lifestyle ~50% up to $48,000/year, I would require $28,000 in non-passive income. If the market returns 0% for the next few years, I’ll get there in four years. If it returns 5.5%, I can get there in three.
It feels great to have a clear and simple financial goal.