Weekend Reading – How to reach financial independence edition
Are you doing what it takes to leave your job – if that is your financial independence goal?
Well, some folks have figured out the simple secret to financial independence and I will share one particular story today in this weekend reading edition.
First up, my updated post from the last week while I was travelling about Scotland:
How to reach financial independence
Reaching financial independence isn’t complex.
There really are no secrets. There are no shortcuts.
You do not need to be a financial whiz or premium stockpicker – although that could help!
No, how to reach your personal financial independence target boils down to two major things:
1. Save and increase your savings rate for investing over time, and
2. Invest your money wisely.
Your saving rate
When you use this handy calculator (free by the way) from networthify.com you can easily see how your savings rate (when it increases over time) can a be signifcant enabler to wealth-building and therefore financial independence.
In a snapshot you can see when you can retire based on any current estimated values like annual savings and annual expenses.
The reality is – any person that wants to retire or semi-retire early is not average. You’re going to have to do some unaverage or unconventional things – such as being intentional with your spending, increasing your savings rate over time, and growing the gap between income and spending over time for investing purposes.
Investing the difference
Investing your money creates a snowball effect – the power of compounding can start working for you…
(I personally started with just $25 per month a few decades ago. That money has compounded and snowballed away to a much higher level over time.)
This makes the process of getting started; saving in small, consistent ways essential to achieve financial independence.
Investing doesn’t need to be complicated nor time-consuming.
Some investors may seek out real estate. Some investors might use strictly low-cost indexed funds. Still others, might use a mix of real estate, individual stocks, alternative investments and more to realize their financial independence goal.
The punchline is, regardless how you invest, consistent investing at a modest to high savings rate for investing should yield significant wealth creation over time.
Investing helps you turn your current money into more, future money.
How much do you need to become financially independent?
Ha. One of my favourite questions with one of my favourite personal finance answers: “it depends”.
Yes, you can follow a decent rule of thumb (the 4% rule) but that’s just a guideline and for the most part, that rule doesn’t serve early retirees very much good anyhow.
I believe if you want to know how much you need for retirement, you really need to figure out how much you want to spend, with some margin of safety built-in.
This makes a good (but conservative) target to strive for: The Crossover Point.
I believe once your income derived/earned solely by your investments comes close to or ideally at least matches your expenses, I believe most folks can retire since they are financially independent.
At any Crossover Point, you no longer need to work to cover your expenses. Your investments do all the work for you. You can live off the money earned by your investments as you wish, almost in perpetuity.
How much do we need to become financially independent?
I try and keep things somewhat private but also transparent to the extent possible on this site since I want to pay my experiences forward as much as possible. This way, you can learn from me and in many respects I also learn from you!
I’ll link to some case studies below in a bit but when it comes to our FI path, I’ve already hinted at what that looks like.
In a nutshell, we figure once we can earn close to $30,000 per year from a few key accounts (namely taxable account(s) and TFSAs x2) that money flowing from our investments in addition to slow, methodical RRSP withdrawals in our 50s and 60s should provide cash for life.
Here are some planned key / basic expenses in semi-retirement:
|Key expenses||Monthly||Annually||Semi-retirement comments ~ end of 2024??|
|Mortgage||$2,240||$26,880||We anticipate the mortgage “dead” before the end of 2024.|
|Groceries/food||$800||$9,600||Although can vary month-to-month!|
|Home maintenance/expenses||$700||$8,400||Represents 1% home value per year, increasing by inflation.|
|Home property taxes||$500||$6,000||Ottawa is not cheap, increasing by inflation or more.|
|Home utilities + internet/TV/cell phones, subscriptions, etc.||$400||$4,800|
|Transportation – x1 car (gas, maintenance, licensing)||$150||$1,800||May or may not own a car long-term!|
|Insurance, including term life||$250||$3,000||Term life ends in 2030, will self-insure after that without life insurance.|
|Totals with Mortgage||$5,140||$61,680|
|Totals without Mortgage||$2,900||$34,800||As you can see, once the debt is gone, we’ll be in a much better place for financial independence!|
Add in other spending/miscellaneous spending to the tune of $1,000 per month and that’s our budget for any early retirement without any debt on the books: our basics spend is about $4,000-$4,500 per month.
Part-time work or occassion work should pick up the extras in life.
Notes: subscribers to this site know for well over a decade now, we invest this way:
1. We invest in many Canadian dividend paying stocks for passive income. We hold these stocks in our taxable account and TFSAs. Again, our goal is to earn about $30k per year from just these accounts.
2. We use our RRSP accounts to invest in mainly a couple of low-cost, U.S.-listed Exchange Traded Funds (ETFs) along with some U.S. blue chip stocks.
We’re confident that if we keep investing this way (something I coined our “hybrid investing” approach well over ten years ago now), we should be able to realize our financial independence dreams.
To realize FI in the coming years we’ll do the following until the end of 2024:
- Max out TFSAs every year.
- Max out RRSPs every year.
- Build our cash wedge/emergency fund to cover 1-years’ worth of expenses.
Here are some articles to gauge how much you might want to save and invest for to realize your early retirement goals:
Weekend Reading – How to reach financial independence edition summary
Looking at your bank account today, I know you might be thinking it’s impossible for you to save $500,000 or $750,000 or more for any early retirement.
The reality is, you don’t need to save that much if you start saving early, and often, and remain invested since your financial behaviour coupled with the power of time will deliver much of ingredients for any financial independence success for you.
Reference: The Behavior Gap
I hope you continue to follow this site to see where my wife and I will end up in a few years, how we’re (hopefully) making more good financial decisions than not over time (by usually just staying invested), while enjoying some experiences like travel along the way.
More Weekend Reading – How to reach financial independence edition articles
Congratulations to fellow blogger and friend, Liquid, from Freedom 35 Blog. He recently wrote:
“Today is the first day of the rest of my life. I have been working at various 9 to 5 jobs for the last 14 years. But no more. June 28th was officially my final day at work. 🙂”
It was interesting to read about his personal path to financial independence.
“About half of my investments are in real estate. I have 2 investment condos. Both are cash flow positive. The remaining ~50% contains stocks, bonds, cryptocurrencies, etc.”
And on his debt load now that full-time work is done:
“Associated with these investments are loans. My total mortgage balance and margin debt outstanding is $650,000. This means the equity I have in my investments is worth $1,350,000.”
Again, no one-size fits all…
Henry Mah cited some content on my site saying dividends are very important but not magical.
I always enjoy Dale’s Sunday Reads from CTCI, including some insights about what higher interest rate hikes by our Bank of Canada might mean…
Curious about the shortest and longest bear markets on record? A Wealth of Common Sense has the data.
Further curious about the average savings by age in Canada? Well, GenY Money has the stats.
Finally, I enjoyed Bob’s roundup from the PF community this week on Tawcan.
Have a great weekend!