The Real Financial Independence Crossover Point

The crossover point of financial independence isn’t where you’ve been told.  Let me explain…

You see the crossover point where you are now considered financially independent and work is optional isn’t really the point that you think it is, instead it is just another financial milestone on the journey to financial independence…

The real crossover point of financial independence is much higher that point where your income equals your expenses.  So let’s say that you calculate that you need an even million for financial independence.  So if you have one million, and it was investing in such a way that it could provide you with a 5% yield (via a combination of bonds, stock dividends, real estate, etc), that would provide and income stream of about $50,000 a year.  For some of you 50k a year might not seem like a lot, but financial independence isn’t about a luxurious lifestyle, it’s basically the point where you can stop depending on earned income (your job) to survive at your current lifestyle.  So while 50k might not seem like enough, it’s past the point where you have to depend on a job to survive (at least most of us).

BusyOfficeMan

So why isn’t this the end of the story?

Because of market volatility and other unpredictable variables could move your “financial independence” point below what it is currently.  For example, let’s say that you have stock in a stalwart company you thought was rock solid, but it was ended up having some kinks in it’s armor, so that suddenly, the stock price decreases in value by 50% or even more, and as a result, it axes it’s dividend entirely.  Well, that puts you in a bind because suddenly you could have an income stream that is much lower than the 50k you thought you would have.

So what is a closer representation of my “financial independence “point?

Well, while there is no set in stone answer, I’m personally shooting for a number that is 50% higher than my “old” financial independence number.  So instead of 50k, I’m shooting for income stream of $75,000.  So for hypothetical nest egg amount, instead of 1 million,  I should shoot for 1.5 million, but since there is also taxes to consider I actually bumped my number up to cool 2 million dollar.

The point of this post is that you should overshoot your mathematical “financial independence” point just to have a cushion for variables that are not currently predictable.

Bests,

Don

 

 

Alternative Plans For Financial Independence

Is My Financial Independence Plan Flawed?

With respect to Financial Independence, I now realize that previously, I’ve put my entire financial independence strategy in just one well known plan.

My “Financial Independence Plan A” is pretty much your standard run-of-the-mill savings by frugal means and invest that savings like a fiend.  To be honest, so far Plan A is working for me, I’m doing about as well as can be expected in this economic environment.  While I’m not a millionaire yet, I’m on my way to achieving a net worth of a million in the next eight years following this path (fingers crossed).

But, what if something happens? What if Unemployment keeps rising and I get laid off? 

Getting laid off would severely affect my current employer paying income stream, and would be a serious blow to my investment strategy since eating and feeding my family would get in the way of investing (my family members are so inconsiderate that way, lol).

What if I get Madoffed?  Then I find myself much older and less inclined to want (or even able) to work as diligently?  Is having only one plan analogous to having all your eggs in one basket?

Alternative Plans for Financial Independence

I’m now pursuing at least two other paths for Financial Independence!

Financial Independence Plan B – “Side Job Income“:  Find a job (or create one via entrepreneurship) that in five years should pay at least a quarter of your current “primary job” salary earnings (or self-employed income).  Then take the entire income stream (minus taxes) and invest it in dividend stocks or decent bonds (perhaps municipal bonds – do this when and if the bond market comes back) with a decent yield that are still safe.

The advantages of Financial Independence Plan B are as follows:

  • In combination with Plan A, you should be able to save twice as much as you do if you are just using a Plan A.  This is a great accelerator to achieving Financial Independence!
  • The dividend stream should be invested back into your dividend investments, but alternatively (if you are willing to sacrifice slower growth), you can use a portion of that dividend stream for rewards such as vacations and other family/personal fun activities.  The family/personal fun activities provided by a dividend stream is the route that I am following as seen in the following articles:
  • If something happens to my primary job, I have this one to serve as a backup.  This second income source, dividend streams and the fact that I’m totally totally debt free means that I can get by without any real hardships.  However, my lifestyle (and especially my kids) would definitely have a dip in enjoyment since I would have to forgo vacations and they kids would have to stop playing sports and other fun and educational activities!

The primary disadvantage of Plan B is time.  You will have less time to spend watching TV, being with family, and leisure in general.

Financial Independence Plan C – “Being Smart about spending and saving money” – This is about getting the best deal on a product without doing something foolish like driving wasting gas money, while trying to save a dollar.  And about detecting and taking advantages of income making opportunities instead of giving away time, your work, and stuff away for free.  I will have a more detailed post about this in the future.

Both of my Plans B and C are evolving, so in the future, I’ll expand on each!

Do you have 2 or 3 alternative plans on becoming financially independent?  The beauty of such plans is that as long as they aren’t too expensive, anything goes since they aren’t necessary for you or your family’s livelihood.

Have a great weekend!

MR

Progress on Achieving Financial Independence – Swimming To Shore

After I paid off my house a few years ago, I wrote about the experience (via the post:  Stop Drowning in Debt, Start Swimming To Shore) using a swimming analogy.  In the swimming analogy, I compared “being in debt” as being similar to being underwater and swimming straight up to get desperately needed air.

In the under water analogy, there were no complex choices, you had to swim straight up on the quickest and shortest path to get the prized air.  Instinct practically took over so there was no thinking, just a constant and quick paddling to get to the surface.  Much like debt, it makes the decision very easy because every movement up was a direct contribution to your end goal which was to breathe or reduce your debt.

Once surfacing (or getting out of debt):

  • at first you catch your breath,
  • rest a bit,
  • then start looking where to go from there!

In a later post called (Getting Wealthy By Swimming to Shore), I wrote that I plotted a basic course to follow and that I started implementing my loose plan.

I’ve discovered that following that plan is hard because of so many other options that are out there once you get out of debt.  I’m constantly wondering about the direction that I should be swimming and if current path is the best…  I miss the days when every payment on debt was instant feedback on how my financial position has improved.  The wealth producing opportunities are not anywhere near as predictable making debt payments.

The feedback can be false depending on how you act on your investments.  For instance, 3 years ago I would have never guessed that gold would be as high as it is today.  In a unsure economic climate and the increased consumption from developing markets on a scarce resource, it makes sense that gold would rise as it has but it’s hard to see this sometimes because of all the variables involve.  To bad I didn’t buy any back then!

Interestingly (and not really related to the point of my article), I recently saw on TV that we can make gold out of lead.  The process requires massive amounts of energy that make it too expensive, but it is possible.

Achieving financial independence and my swimming analogy:

So I’ve plotted a course to follow that I will try to achieve financial independence, but it’s a tough course and I’m constantly making small adjustments.  I think as long as I don’t swim in circles or suddenly decide to swim the opposite way, I’ll be okay.  I have learned that my journey won’t be a straight path as it was with getting out of debt.

There will be times when I go backwards because of the currents or I’ll have to swim around obstacles (like stinging jellyfish).  I think the important point is to keep swimming, because after you stop swimming for too long, eventually you sink.

So in conclusion, it looks like I’m in for a long, hard swim until I develop a pace to swim/invest by…

MR

How Independent Are We Really?

What if

In my humble opinion, we are very dependent… on both public systems and businesses!

When I moved out of my parent’s house back when I was a teenager going to college, I thought that I was independent!  I felt like such a grown-up, making my way in the world, going to college to better myself.  Once I bought my first car and house, I had similar feelings.

Once I got my car and house paid off, I thought wow, I’m totally debt free, how independent I am.  I thought in 10 years, I’d totally be financially free, I’m such an independent guy!

Compared to most folks, I’m average, oh maybe I’m better with my finances than most (I’m so financially savvy), but similar in level of independence.

So I got the thinking, how independent am I, in the truest sense of the word?

Let’s pretend that the end of the world as we know it will happen in 2012 (hopefully not) and the world is destroyed, but many of us were still alive.  Barring some massive contamination of the earth, how independent would I be if there were no electricity, water or energy systems in place?  What if we were reduced to using manual tools and basic skills to survive?

I’m not going to discuss the transportation system, but everybody should realize that after a few years, those would begin to fall apart or get overgrown with vegetation.

Okay, so how would my family cope with the following concerns:

  • Water:  I would have to move immediately closer to a water source.  My house doesn’t have any pond or lake close by, and water would be a good thing to have!  Oh, I might stay in my house until the gas in my car runs out, but after than I would have to move closer to water!
  • Hopefully I can find a unoccupied house close to that water source above!
  • Food, pre-packaged food for me.  I don’t have a garden or even canned food that would last me longer than a week.  Ouch, I’m going hungry soon if I don’t figure out a food source.  Next year or whenever spring occurs, a garden would be top priority if I can find seeds!
  • I’ll miss wearing clothes (lol)!  Hopefully I can rummage though a clothing store of some sort, grabbing as much as I can!  if not then it’ll be deer skins for me (hopefully)
  • Candles“, how are they made again?  Those would be gone in the store too, light is a good thing, I’ll miss that at night!
  • Boy, I’m already missing seafood… and pizza, and McDonalds (lol)
  • I hope my shoes last a long time!  I better stock up on those too.
  • Paper, pencils, pens, erasers – Welcome to the new/old version of the internet.
  • I hope my bed lasts a long time!  I hate sleeping on the ground!  I better grab more blankets, the winters will be much colder.  Perhaps I should move south too…
  • I don’t hunt, but apparently, I will now have too.
  • Dirt is now my friend since I don’t have running water for a shower and I can’t clean the carpet without a vacuum cleaner.
  • Sniff, I miss my nicely groomed lawn (sort of, nawwww)…
  • I better find some decent knives and sharpening stones!

Okay, I can keep going on, but obviously I’m very depending on society and the marketplace to provide the majority of my needs!

What dependent are you?  What would it be like if you didn’t have electricity, running water, sewage (oh yeah, the world would stink again), and grocery/department stores to provide your needs?

-MR

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