In my recent post “The Road To FI“, I got a few questions. Questions about how to stay focused on the long path to financial independence. Achieving a huge milestone like financial independence can sometimes seem overwhelming.
Don’t despair, Mr. Tako is here to help!
As any student of engineering will tell you, sometimes the best way to tackle a large problem is to divide the problem into a series of smaller problems. Solve all the smaller problems, and you’ve then solved the large problem.
Not only does this incremental approach lead to success, it also provides milestones and metrics that can be tracked!
The Power Of Positive And Small Successes
Financial independence is hard to achieve, but it CAN be done. It just takes work, a positive attitude, lots of savings, and a mindset to stick to your frugal guns over the years. It took me about 15 years.
Can you do something for 15 years without success? I highly doubt it. People just don’t work that way.
One of the best tips I can offer, is staying positive. When you break down the mountain into smaller milestones, start with some of the smallest ones. Yes, start small!
As you track and complete these easy milestones, use that success to stay positive. That positive energy will help sustain you when the milestones get tougher! Success will help build more success!
Tackling The Loans
How to break down that multi-million dollar mountain into something achievable? Well, I started with my debt first.
My first milestone was paying off my high-interest car loan. Check! That dumb mistake was finally taken care of!
Next, I paid off my student loans. Each loan was a separate milestone. Check! Once I was out of debt, there was a huge amount of psychological relief!
Suddenly my net worth was positive, and a bunch of the chains were off! So began my positive attitude about money!
Did I go out and party once I’d paid off debt? Travel the world in luxurious opulence? Nah, I stuck to my guns and kept saving. That’s when the real fun began…
I started investing in stocks, bonds, funds, and even preferred shares. Cash began flowing the other direction. Cash flowed ‘in’ instead of just ‘out’! How did I measure my success when stock prices bounced up and down over the years? I used dividend income.
Tackling The Bills.
To this day, I still look forward to each dividend check with glee. It’s proof positive that my investment is actually doing something. I try not to worry about market valuations or stock prices.
Market values will fluctuate wildly as a tiny portion of a company’s stock changes prices on a daily basis. It’s a poor way to value an entire business, and a poor way to evaluate your progress to financial independence. Dividends were my yardstick (or meter-stick if that’s your persuasion).
Once I had dividends coming in from investments, I started tackling my bills as ‘milestones’. Just like the loans I had to defeat, I had the following bills to vanquish:
- Cell Phone Bill
- Power Bill
- Water Bill
- Garbage Bill
- Internet Service
- Rent / Mortgage
Each one of those was a chain wrapped around me. I started with the smallest bill, which was my cell phone at the time, $20/month.
Once I took this mindset, having excessive monthly services seemed like a really bad idea. I actually ended up reducing my cell phone bill to a prepaid package. This brought my cell phone bill down to less than $9/month, where it has stayed for years.
How much does it take to ‘kill’ your cell phone bill for life? At a $9/month on a 3% rate of return, it takes just $3600. That’s it. After I saved that amount I never had to worry about my cell phone bill again. I had it covered.
Once I had tackled the cell phone bill, was I ever tempted to upgrade to the latest and greatest iDevice with supersized data plan? Hardly! I just got done throwing-off those chains. I wasn’t about to put them back on!
After the cell phone bill, I moved on to my next largest monthly bill, and then the next, and then the next.
With each victory I felt a sense of accomplishment, but also a feeling of security. That feeling of worry about paying the bills? It begins to go away. Once you don’t need to worry so much about ‘paying the bills’, life begins to seem a little easier…and a little easier helps while you vanquish the bigger bills.
The Large Bills
OK, so not all bills are going to be the little ones. Some bills are going to be big. According to the U.S. Bureau of Labor Statistics, about 50% of an average consumer’s income is spent on food and housing. In most cases, your largest bills will be Food and Rent (or mortgage).
I tackled paying these largest bills last. Mentally, I had all the successes with the smaller bills to help my confidence and perserverence. I needed all that positive energy built up to tackle the $800,000 needed to generate ‘mortgage’ dividends, and $200,000 for ‘food’ dividends (at 3% dividend yields).
Eight hundred thousand is still a pretty long slog, so I broke that down even further. It became a series of milestones called “Mortgage 25%“, and I had 4 of them. It still took years to get through each.
Thankfully, I had previous successes to keep me going!
Tracking Financial Milestones
Measurement is one of man’s best tools, and tracking financial progress along your milestones is important. There are many tools out there to help you track your finances. Many include ‘goal setting’ as a feature, but I’m not going to recommend any of them today!
Most personal finance blogs will recommend one because they want the affiliate income when you sign-up. I honestly think these tools do provide a lot of value, but I’m not one of their affiliates.
Instead, you can track milestones yourself with a simple spreadsheet. The result is going to be the same!
Need a spreadsheet, but don’t want to pay big bucks? I’m a fan of LibreOffice (and I’m not paid anything for recommending it).
Cars, Roofs And Depreciating Assets
So now we’ve got debt handled, dividend income coming in, and we’re tracking our financial progress. Easy street, now, right? What about replacing depreciating assets like cars?
For these irregular expenses, (like the purchase of a new car, or replacing the roof on our house) we don’t try to cover that with ‘dividend income’. Those are discretionary one-off purchases made very infrequently (every 10+ years). It would be suboptimal to generate dividend income for these expenses. If we did that, we’d just have to re-invest the cash for the remaining years! Instead, we’re letting capital appreciation take care of that one.
Let’s look at the math on it: If the stock market returns on average 7% (and inflation stays about 3%), we should have approximately 1% real capital appreciation in our portfolio per year. This is assuming 3% dividends for spending, of course.
With a portfolio of $2 million, that 1% amounts to a $20,000 annual portfolio growth via capital appreciation. That amount compounded for 10 years will be worth $211,336.69.
Is that amount sufficient to cover things like replacement cars, leaky roofs, and braces for the kids? We think so! Our expected annual depreciation for our home and car, amounts to $10,000. We should have sufficient funds when replacement time comes!
Yes, there’s going to be bad market years. The market will be down, and we’ll probably decide not to replace the roof that year. These expenses are discretionary, and we have control over the timing (sometimes even the amounts).
Maybe we’ll have to put off getting a new car some years, but that’s a tiny price to pay for freedom. Afterall, freedom is the best thing you’ll ever buy.