As I shared in my first post, I’ve reached a turning point in my life. Call it an epiphany, or an awakening, but it has become clear to me that I must take action to secure my financial independence. And this is the time to do it.
So, now what? What steps should I be taking next now that I’ve come to this realization? This is the question I’ve been struggling with recently, trying to create not only clear objectives, but also identifying the path that will get me there. I’ve spent a lot of time scouring the internet, and there is no shortage of people offering advice on how to do pretty much what I want to do. Unfortunately, many of these people are trying to sell me something, or are pitching things that just aren’t realistic for me in my situation. I was able to get a couple ideas from what I was able to find, but in the end, this is about me and what will work best with the resources I have at hand.
What I really needed to do was to define what financial independence meant to me. When I boiled it all down, what I really wanted was to be able to say that if something happened, and I found myself without a job, that I would still be able to provide for my family, without significant impact to our lifestyle. Now, by lifestyle, I don’t mean that we jet set around the world, drive expensive luxury vehicles, or even dine out frequently. I actually live a pretty modest life, where catching the latest episode of whatever my current favorite series is represents a special treat. My lifestyle, the thing that I want to protect, simply involves keeping the nice roof we have over our heads, in the nice community that we live in, with healthy food on our table, and the family and friends I currently have in life.
I know these things aren’t anything special, and most people probably value the same things, but what I’ve come to realize is how quickly people can lose these things. It takes nothing more than getting laid off, late in your career, before it can become very difficult to maintain some of the basic necessities in one’s life. That is why I want to secure my financial independence, so that the things I value most can be protected. What I needed to do next is determine what I needed income wise in order to do this.
When I first started putting some numbers down on paper, I started with looking at all our current expenses. I started with the big items, like the mortgage and car payments, student loans I’m still paying off, child care, etc. Then I got to smaller items, things like cell phone bills and cable tv. What I began to realize is that one might call our current budget a little bloated. We spend a lot of money on things we really don’t need, or too much on the things we do. In order to free up cash for investing, we were going to have to do some trimming to our expenses. I’ll talk more about this topic later, but within about two months, we were able to reduce our monthly expenses by over $200, and we’re still at work on this.
Getting back to my financial objective, after adding up all of the remaining essentials, I came up with a minimum number for the income I would need today to maintain my current lifestyle with little change. This is sort of the bare minimum, but the number I came up with was about $3,500 a month. I know that actually seems like a pretty achievable number, but there were two things that were now on my mind. First, I decided that if I was going to go through this exercise, that I needed to set my goals larger than just the minimum. And second, I knew this was not going to be achieved overnight, so I needed to look into the future and decide what my income needed to be then, when I needed it, not now.
I decided that my target date for achieving my objectives would be ten years. I’ll still be nowhere near retirement age at that time, which is the point. I want to secure my financial independence while I’m still young, so that I don’t have to worry about it in my later working years.
So using ten years as a timeframe, I added a little padding to my current number to allow for not just the basic expenses, but also some of the non-essentials, like leisure and entertainment. I also knew that retirement is still pretty far away for me, so I would need to continue to set aside money into an IRA for that phase in my life. And, I also needed to account for the amount that would be taken out for taxes (I used 25%). I added all of this up, to come up with needing a total of $7,000 per month to support my household. But I wasn’t done.
As I was sharing my numbers with others, one of the items that got pointed out to me was that I was missing factoring in for inflation. I guess that’s the benefit of knowing accountants.
Now just for the record, I’m not what you’d call very good at math, but, I do know that things cost more every year. So, if it takes $1,000 to cover my bills this year, it will cost $1,020 next year. If you take that out another nine years, you would need roughly $1,200 to cover what only costs $1,000 to cover today. I don’t want to get to the ten-year mark only to find out that I am 20% short on my cash flow. So that is why I had to add for inflation. And by the way, I didn’t even have to do the math myself, there are a lot of great tools on the internet that can do that calculation for you! Inflation Calculator
So taking my original number, and factoring for 10 years of inflation at 2% per year, which is what I am told is an apparently good estimation, I came up with a new total target monthly income of $8,500 (after rounding).
Things were becoming clearer for me now. My plan would take 10 years, and at the end I would need to be generating $8,500 in monthly income, from something other than my job, in order to consider myself financially secure. This is a big number, but at least I know what it is now.
So, my goals were set. In ten years, I want to have created for myself an income stream of $8,500 a month, separate from my job. Now that I know what my target is, my next step is to just figure out how to do it. More on that in my next post.
See you again next week!