Thursday, March 19, 2015

Plans for Financial Independence

Most of those that visit my blog are working towards a specific end goal, I know I am.  That goal for the majority of us is financial independence.  Financial independence can mean different things to different people.  To me financial independence is the ability to have enough passive income coming in to cover your monthly expenses.  This opens up your options which is what we all want.  To not be a slave to the office because we have to.

Passive income can come from a variety of places such as rental real estate, interest on cash, you can set up target websites to profit from web traffic/advertising, write and sell an e-book, P2P lending, my personal favorite dividend growth investing, and many other possibilities.  There's plenty of other passive income opportunities with a varying degree of passivity.  Most passive income sources require a large amount of initial work and then you get to reap the rewards over time.  The reason that dividend growth investing resonates with me is that it provides a reliable source of income that will grow over time.  Some passive income sources, e-books for one, don't provide the important factor of growth.  They usually have an initially high income that tails off, but that's not the case with dividend growth investing.  If you select your companies properly they will continue to grow over the long term and you can reasonably expect your dividend checks to grow year in and year out like clockwork.

Anyways, back to the topic at hand.  After you've decided which one(s) you'll use and put in the hard work to spend less than you earn and invest the difference, eventually you'll reach that magical crossover point.  That's the point that your passive income is now higher than your expenses.  Congrats!  You're financially independent.

Of course now you have options.  You can flat out retire if you choose to do so.  Or you can continue to work at your current job or even decide to change career paths, possibly to something that is more rewarding to you emotionally even if the financial rewards aren't there.  You can go bum around on the beach 24/7 if that's what you want to do.  You can finally devote time to those hobbies you never got around to learning.  Spend a lot more time with family and friends.  As you can see the opportunities are essentially limited to your imagination.

I have two options as far as I'm concerned..  Option 1 has me working until I reach full financial independence, with plenty of margin of safety of course, and then retiring early.  At that point I'll continue to blog/write to earn a bit of extra income but replace a lot of my days with time with family and hobbies.  There's so many things that I want to learn and explore but unfortunately I just don't have time for right now.  Things like woodworking, digital photography, wilderness survival skills, a road trip around the United States, and the list could go on and on.

Option 2 is a bit different route but leads to the same result.  My other option would be to work until I've partially reached financial independence and then take a lower paying job that allows us to just continually reinvest the dividends we receive and save a little extra.  Obviously this route would take longer to reach financial independence but it would allow me to slow down the pace of life earlier.  I currently work a job where I'm constantly on the go and it requires me to be out of town, and away from family, for a couple weeks at a time.  I really enjoy the job but the schedule, or lack thereof, is what's the hardest part.  By switching careers and taking a lower paying job I could reclaim more of my time earlier but it would take a bit longer to become truly financially independent.

Based on my crossover point spreadsheet I'd still need to work another 9 years to reach my crossover point or 10 years to factor in a 15% margin of safety.  Although this calculator doesn't factor in being able to tap into my retirement accounts at all which there are ways to do that before your typical retirement age, but I'm not sure what kind of monthly cash flow I could expect to receive from those.  The calculator also doesn't factor in that I could most likely increase my income from my blog and writing on Seeking Alpha.  In 2014 I earned almost $1,400 and I know with more time dedicated to both of these I could ramp up my focus on both of these potential sources of income that could help make up some of the gap.  If in the meantime I could bump those numbers up to at least $2,500 this year I'd be more confident in my ability to generate income online and potentially hit a modified FI.  My wife also has no intentions of quitting her job forever barring the health and needs of our son.  With her continuing to work we would be much more secure financially.

Option 1 would be the quickest route to true financial independence.  One bonus with Option 1 is that it would allow us to pay off our mortgage which decreases the amount of monthly passive income we need by $900.  However, Option 2 would allow me to enjoy some of my post financial independence plans while still working away to finish up the last few years.  Obviously there's a lot of factors going into that decision and it's not one that I have a realistic option to make at this time if I still want to retire by 40.  There's still a long way for us to go until we can be within earshot of calling ourselves financially independent so if my goal of reaching it by 40 is still feasible, which I believe it is, then I have to keep to my current grindstone.  As I've gotten older and worked closer to my freedom and grown my family, I've started to lean more and more towards Option 2.  Time with my family and freedom to do what I want whenever I want without having to be ready to work at the drop of a hat has become more and more important to me.  It's funny how a small child can do that.

So I have some questions for all of you.

1. When do you project you will reach your crossover point?
2. What's your plan when you reach financial independence?
3. Which option do you think I should go for?


14 comments:

  1. I think the most sustainable path would be to work your day job, cut expenses, and try to increase your income (job, dividends, freelancing). The internet changes too much, so things could get volatile if you just plan to write for a living. I view online as a bonus.

    You should also try to be more tax-efficient in investing. Any dollar you put in your taxable account, is worth $1.30 in a tax-deferred. This could potentially accelerate your dividend crossover point, and reduce years to FI

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  2. 1. When do you project you will reach your crossover point?
    I should reach the crossover point late in 2017 - maybe early 2018. With no margin or accounting for taxes on dividends.

    2. What's your plan when you reach financial independence?
    My plan is to figure out some sort of part-time job that allows me to earn a bit of money and fund my children's college education. I don't plan to save for it, just earn enough to cover the cost. I'll be saving for them, but more as a down-payment on a house and/or a killer wedding present..

    3. Which option do you think I should go for?
    I'm all for a modified Option 2. Stick with the high-paying job as long as you can stomach it, but be ready to downshift. Like you said, earning enough to cover most of your expenses allows you to reinvest passive income (and let the dividends grow). At some point using this option you'll still be 100% Financially Independent! And you can really maximize time with your family.

    Good luck, man.

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  3. I like options 1 for you JC. Stick with what works. You've put yourself in this position to be where you are now. Sticking to it makes sense. It's a sure path if you keep option 1 but it takes time. Intensity defeats extensity. Why flutter from one shallow mine to shallow mine when you can mine one mine deeper and deeper. - 48 laws of power. If you change course which I have witness with some of my family and friends, it will slow you down or maybe even regrets. Ultimately, its your decision my friend. With our online community, you will have our support and I wish you reach the crossover point WITH a margin of safety. I know your family will make it. Much Love Tyler.

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  4. Stick with the known evil (option 1). It's only 9 years.

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  5. This post resonates a lot with me PIP! I'm not sure if you read about it, but I'm currently planning a RV trip of one year long with my little family. Just as you, I currently have a day job that brings some good money in. I could stick to it and retire maybe faster than the majority but not really early so to speak. However, this is not what I want... I want to be financially independent to spend more time doing what I like doing. It does include some work and dividend investing. But it also means more time with the family, more time for my couple and for myself! Goal of the trip is to come back and live from my own business and dividend. Working on that right now like never before and will continue while traveling as well. There are more options than what we're used to think of. Trust in yourself!! You are the only who knows which option really suits you! ;-)

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  6. Option 2. Life is short. If you need to experience new things, go for it. You will never regret having more time to do things that mean to you. You might pay less taxes too... Good luck!

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  7. Loved this article, thanks for sharing your thoughts. As hard as it is, I'd choose option 1 to try to get to FI as fast as possible with less risk. BUT, I don't have a family like you yet. I imagine these types of thoughts are constantly swimming around in your head now that you're a complete grown up! I'd say that's great and keep thinking about it over and over until you're sick of running the scenarios and you should arrive at the right conclusion. Sending positive thoughts your way!

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  8. Interesting points. I agree with Monsieur Dividends. If you dislike your current employment in any way, why not take a "partial" retirement and do something you love? In my opinion, humans aren't designed to sit around on the beach, anyways. The more you enjoy your work, the more you will enjoy your life - whether you've got $500,000 or $3 million is irrelevant to your long-term satisfaction with life!

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    Replies
    1. Note to readers: The "Dividend Growth Machine" above is not the same person as the "Dividend Growth Machine" over at Seeking Alpha (the latter being me).

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    2. My apologies for the confusion! I did not realize there were multiple writers under this name. Thanks DGM!

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  9. JC,

    I've tried both options and I prefer Option 2 immensely. I mean it's not even close. If you love your job, that's one thing. But if it's just a paycheck, I'd much prefer taking a slower, but more relaxing path to FI. Besides, getting the jump you already have means you'll hit full FI one day anyway. But I'd rather reach full FI at, say 45, and enjoy most of the ride than hit it at 40 and be miserable most of the way there. That's just my take. My life now is much like it'd be if I had $100,000 in dividend income coming in anyway, so I think it's the best of both worlds. It's unlikely you'll be doing nothing when you're FI anyway, so you could really speed up the timeline by doing something more enjoyable for less money.

    Best regards!

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  10. Hi JC --

    Family first, so Option 2 sounds like the way to go. That is, unless you can change the situation with Option 1 and cut out the travel and being away for extended periods of time.

    All the best!

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  11. Option 2 for me too. At some point I even wanted work part time in order to take care of my young kids. I plan to do so when my monthly dividend income equals my day job income (my salary isn't as high, so it's achievable :-))

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  12. hi JC,

    1) when I'm 40 or 45 so 14-19 years. It all depends on if I can get promoted or not and how long my body can hold up.

    2) I'm planning to travel to Asia and "teach English". I have always wanted to see Asia but never had the time or resources.

    3) I would choose option 2 if you're an optimist and option 1 if you're a pessimist. We all have different reasons for FI but mine is being able to work 40 hours a week without stressing how I'm going to pay my electric bill. I think we've all learned that there is no absolute truths in dividend investing. We make our best guess and go with it. Oil crash, ARCP accounting, interest rate hikes, etc. I say make no decision now. Get to that stage in your life and take a better look at yourself. You never know, option 2 timeline might become option 1.

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