Start the countdown. My days of working for someone else are numbered. In the next 3,650 days (or less), I will achieve financial freedom.
No, I’m not planning to win the lottery or inherit a large sum of money. What I did was break down what it means to be financially free and reverse engineer what it would take to get there. I’ll walk you through that process here.
Personal finance is a full contact sport and you’re going to have to get your hands dirty to succeed at it. That means staying organized, keeping tabs on your cash flow, and measuring the things you want to optimize. Let’s get started.
What does financial freedom mean?
Financial freedom is the a state of being able to live your life without having to depend on income from a job.
For most people, that simply means investing in appreciating or cash flowing assets that can eventually accumulate to the point of replacing your salary. It’s financial peace of mind; freedom from worrying about where your next dollar is coming from. And it’s a goal many people strive for.
I tend to think of financial freedom as less a point to be reached and more like a continuum. At the bottom, you cover the basic necessities: lodging, food, water, clothing, and basic transportation. After you achieve that level, the next level of financial independence encompasses small luxuries such as eating out occasionally, taking a vacation here and there, driving a nicer car, and maybe upgrading to a larger home. This is the level that most people strive for.
But it doesn’t stop there. As you work your way up the continuum, you achieve the ability to buy and experience even more. Culminating at the level of being able to do whatever you want whenever you want, our individual desires in financial freedom fall somewhere along this spectrum. Where you fall on the scale is up to you.
I personally want to get about 75% of the way up the spectrum. I don’t need gold plated toilets or diamond encrusted sneakers. What I really want to accumulate is experiences. I want geographical independence (so I can work from anywhere), meaningful work, strong relationships, and to live with an adventurous spirit. But I’d also like to have some luxury items like a nice car, the ability to fly more comfortably (no more claustrophobic economy seats and smelly neighbors!), and plenty to donate to causes I care about.
Ten years?! That’s such a long time!
Financial independence is a long-term goal. This is not and never will be a blog focused on how to get rich quickly. As Grant Cardone says “I don’t want to get rich quick. I want to get rich for sure.” If you approach your financial plan from a long-term perspective, you’ll find yourself well equipped to handle the ups and downs involved with getting to financial freedom.
How can I get there?
Pontificating on what you could buy if become financial independent is useless without a well thought out plan followed by massive action by you. I will walk you through the process I used to reverse engineer my ten year timeline. This method is borrowed from the Tony Robbins bestseller Money: Master the Game. Let’s walk through an example of this exercise below.
1. Identify your current assets
How much have you saved already? What assets will you bring to the table when you begin your financial freedom journey?
Add up the balances you have in your investment accounts and savings, but exclude your 401k. We don’t include that because you won’t be able to access it without penalty before you turn 59 1/2. Include all your savings accounts, businesses you own, stocks, bonds, real estate, anything you own that appreciates or cash flows.
Include columns for both the balance and the annualized yield you receive on each pool of capital. Your savings accounts, for example, should yield something like 0.05% to 2.05% annually. For anything you own which does not produce cash flow, simply put a zero in that cell.
|Assets||Balance||Yield||Annual Cash Flow|
|Personal Savings Account||$10,000||2.05%||$205|
|Real Estate Investment 1||$50,000||7.00%||$3,500|
|Real Estate Investment 2||$50,000||9.00%||$4,500|
|Total / Weighted Average||$135,700||7.67%||$10,409|
This analysis will assume that you convert your current holdings over to a new portfolio, so what’s important here is the balance you are bringing over. I included the annual and monthly cash flows so you could get an idea of what kind of income you’re already generating with your investments.
2. Build your ideal budget
This is the fun part. Think about the life you want to have when you can throw your hands up triumphantly and proclaim “I am financially independent!”
Think about the kind of house you’d like to own. The type of car you’d like to drive. Consider the kinds of trips you’d like to take. The experiences you’d like to have. But also don’t forget to account for the mundane things like utilities, your cell phone plan, car insurance, property taxes, and the like. Those boring things add up!
Feel free to get a little crazy with it. You want that Wheels Up subscription? Add it! You want to drive a Lamborghini? Add it! I don’t make this suggestion to get you to consider a completely unrealistic lifestyle, but even including these seemingly outlandish things will still lead to a minimum net worth requirement much lower than you might expect.
Tony Robbins found this out himself. In the book, he talks about walking people at his seminars through this process and how people will guess they’ll need $25 million in the bank to achieve the life they dream about. When you work through the math, the actual numbers come out to a fraction of what they expected. It’s truly eye opening.
Let’s build our dream budget. Remember, all numbers here are monthly, not annual. We will annualize later.
|Property Taxes (2)||$2,751|
|Home Insurance (3)||$525|
|Cell Phone (4)||$140|
|Health Insurance (5)||$787|
|Disability Insurance (6)||$53|
|Auto and Transport|
|Auto Insurance (7)||$225|
|Car Payment and Gas||$400|
|Wheels Up Subscription (8)||$9,050|
(1) Assumes a 30 year fixed rate mortgage on a $1.5mm house at 5%
(2) Assumes current property taxes on a $1.5mm house in New York, NY to be conservative. Living almost anywhere else, you’d have much lower property taxes
(3) From Zillow’s estimate of home insurance costs
(4) Two line family plan with T-Mobile. Ignores phone lease assuming outright purchase of device
(5) From the WebMD Insurance Cost Calculator
(6) Estimate from the Freelancers Union
(7) CarInsurance.com estimate of New Jersey car insurance (to be conservative)
(8) Why not? Let’s get crazy with this. Wheels Up currently costs $8,500 annually plus flight credits. We assume buying an outlandish $100,000 in flight credits per year
So that gives us $34,149 total monthly expenses. Now, let’s build the portfolio that will fund those expenses.
3. Construct a portfolio
To fund our dream lifestyle, we are going to need some seriously cash flowing assets. I personally prefer assets which produce regular cash flows over those that primarily focus on appreciation because of the psychological benefit of receiving that deposit every month or quarter. The day to may machinations of the market also have much less significance when you are holding for the long term and diversified into illiquid assets.
The items I put into this model portfolio are heavily influenced by my personal investment criteria, risk tolerances, and liquidity preferences. Your individual model portfolio will vary but definitely spend the time to build one you’d be comfortable with.
Focus on your own investor psychology. If you’re the kind of person who watches markets like a hawk and makes snap decisions to sell holdings, focus on adding more illiquid investments into the portfolio. If you are a strict buy and hold investor who sleeps well at night knowing you could access your capital at any time, stick to highly liquid investments.
Contrary to the existing assets we laid out in step 1, we will think of the model portfolio in terms of percentages, not dollar amounts. This is because the cash flow projection assumes you’ll allocate each incremental dollar according to your asset allocation plan. This is obviously an oversimplification, but it makes the math much easier.
Here’s the portfolio I’ve put together.
|Asset Allocation||Allocation||Tax Rate||Yield|
|RE - Debt||10.0%||45.0%||9.00%|
|RE - Industrial||2.5%||23.8%||8.00%|
|RE - Multifamily||20.0%||23.8%||9.00%|
|RE - Self Storage||7.5%||23.8%||6.00%|
|RE - Senior Housing||10.0%||23.8%||8.00%|
|VC / PE||7.5%||23.8%||0.00%|
|Other Business Interests||10.0%||21.0%||40.00%|
Again, in an effort to simplify our analysis, we have made some important assumptions here.
- Assumed yields remain constant
- Public equities, venture capital, private equity, and alternatives investments are held for the requisite amount of time necessary to get long-term capital gains tax treatment
- All dividends are qualified dividends, meaning they will be charged capital gains tax rates
- Real estate debt investments are typically taxed at regular income tax rates
- Income from real estate equity investments is taxed at full long-term capital gains rates, ignoring depreciation. In reality, real estate equity investments take advantage of depreciation to lower the taxable income and will likely pay a much lower effective tax rate
- Other Business Interests (businesses you actively own and manage) are assumed to have the maximum corporate tax rate of 21% and a cash on cash yield of 40%. In reality, since you can purchase a business with only 10% down and finance at still low rates, the realized cash on cash return of a well-run business investment can dwarf our 40% assumption. We just wanted to be conservative.
We’ve completed laying the groundwork for our financial future. Now, let’s take a look at how we can project out our financial future and put a date on our financial freedom!
4. Project out your future cash flows
The amount of assets you currently have and their subsequent cash flows will likely not be the only source of your nest egg. I suggest setting aside a set amount every month. This is the “pay yourself first” strategy promoted by basically every passive income blogger out there and that’s because it works.
Many jobs offer employees an annual bonus. In finance, this bonus can be a significant portion of your overall compensation. To the extent you are planning to get bonuses through your job, factor that in as well. This analysis assumes you’ll be putting your bonus right back into your financial freedom effort.
I will assume that I contribute $2,000 per month into my investing plan and $200,000 annually from a bonus. Both numbers are in line with what I have been able to save in the past, and should be indicative of what can be achieved going forward.
I know these are big numbers. Not everyone has a high income job or receives a large bonus every year. And that’s okay! Build your plan around your individual financial situation. It may just take a little longer to get there, but you will get there if you stay disciplined and consistently follow your plan. Keep in mind that my figures are only that way because I absolutely prioritize my savings over my consumption. I actively work to minimize my discretionary expenses in order to maximize my savings. I’m not saying you have to follow that with your own self-imposed austerity, but it’s not about how much you make, it’s about how much you keep!
How long will it take me?
I’ve built a handy spreadsheet for you to run your own numbers and figure out how long it will take you to achieve financial independence! Click the link below and try for yourself.
REMEMBER: I am not a licensed financial adviser and I am simply explaining the processes I’ve found to work for me. Please consult your financial adviser, lawyer, or CPA before making any significant changes to your financial plan.