Small Successes On The Road

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.  

After I had my wake up call in 2001, I changed my whole mindset.  Instead of being a wage-slave, I changed who I was.  I read hundreds of investing books.  I decided to be the master of my own life.  

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!

Luxury Resort
Luxury travel next? No! While the Hilton Moorea Resort may look beautiful, it’s a luxury resort! We need freedom before luxury.

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
  • Food
  • 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!

iDevice chains
The iDevice: Just another financial chain around your neck.

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!  

Measuring progress can help you stay on track.  As the old saying goes, “What gets measured, gets done!

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!

Time for a new car
Depreciating Assets: Even though we try to buy well, eventually cars will need to be replaced and homes will need major repairs. This car still looks new.  She’s good for another 10 years.

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.


[Image Credit: Flick1, Flickr2, Flickr3, Flickr4]

14 thoughts on “Small Successes On The Road

  • April 26, 2016 at 11:33 AM

    Awesome post. I love the way you tackled each one of your bills with dividends. Truly a weight off of your shoulders and a great incentive to keep recurring bills minimal or non-existent. I think that if more people understood the lifetime cost of recurring bills, like their cell phone, they’d be much more critical when signing up for a service.

    • April 26, 2016 at 12:51 PM

      So true! It’s all about having a different mindset!

  • April 26, 2016 at 12:42 PM

    I like that you tackled your bills one by one. I’ve been doing that over and over with each bill and trimming the fat and you really don’t even notice. My cable and Internet is $65/mo (taxes included) and I don’t feel like we’re “missing out” on anything important. I do that with all the other bills as well (utilities, cell phone, etc), and it really does make a difference.

    Tracking for me is probably the most critical – I’m a Quicken guy and look at that stupid software religiously trying to figure out ways to cut needless costs and increase savings and investments.

    One success seems to lead to another!!

    — Jim

  • April 26, 2016 at 1:49 PM

    I’m also tackling it from the dividend perspective. Not necessarily as to how many dividends tackle bills tough. I am trying to push dividends each year. This year’s goal is to increase dividends to $1000 annually in the after tax brokerage account.

  • April 26, 2016 at 1:59 PM

    I’m a big believer in using the small wins method to achieve bigger goals. I love how you broke each part of your journey down to small, manageable parts. Breaking things down to smaller parts can make any big goal feel much more achievable!

  • April 26, 2016 at 3:32 PM

    Wow you must have been reading my mind, I’ve been feeling a bit down about how long this path is and finding it tough to stay motivated. Love that concept where you break down the bills. We are trying to eliminate our owner occupied mortgage and then I’ve worked out our investment property income will pay for food and utilities once we’ve paid off that mortgage. I had a light bulb go off when I read your sentence about using capital appreciation for irregular expenses like cars as I was wondering how to factor that in. Thanks – you’ve made my day!

  • April 27, 2016 at 6:40 AM

    I took many of the steps you did when I began on my FIRE path approximately 2 years ago. I sold my car when I moved to Manhattan, got rid of any subscriptions or recurring expenses that were unnecessary, got rid of the personal cell phone and only use work cell phone, cooked more, took control of my investments, maxed out all tax advantaged accounts, etc. It seems like the milestones come far and few between, but once I look back to where I was one or two years ago, it brings a great feeling of accomplishment.

  • April 27, 2016 at 3:50 PM

    We also use passive income milestones to track our progress. Can it cover the utilities? Mortgage? Earn the same as a minimum wage job? Cover all expenses? It gives me small achievable goals and shows progress.

  • April 28, 2016 at 3:53 PM

    I have always believed that you can’t one dollar won’t exist without a cent (not literally speaking). This is similar with what you said about small wins to achieve bigger goals. I believe that small wins when added overtime can create something big.

    I like reading how people achieve financial freedom, pay off debt, among others. Reading stories like this just gives me new perspective in matters like debt, financial freedom, investments, among others. When I was in debt, what I did was I took saving as a priority before paying all my debt. Fortunately, I was able to pay off all my $40K of debt and saved $70K, at the same time, in just 2.5 years.

  • April 29, 2016 at 2:26 AM

    Great post yet again, Tako San! While I did not have such a structured route to FI, your approach shows just how easily can one tie passive income to living expenses, item by item. For me, I was always a diligent saver and index fund investor. One year, while Looking at year-end Vanguard statements, I noticed that my dividend and interest income crossed $15,000. Hey, that covers almost half my expenses I thought. Then, I discovered the world of DGI investing and now have a portfolio that generates $41k in dividends. Not as high as $48k that you get but your portfolio size is much bigger. I do worry about dividend cuts but then I take 2008-09 Great Recesssion period as a guide where the S&P 500 companies collectively cut about 25% of dividends. Some cut more, some retained, some like McDonalds even increased dividends during the period. Talk about a recession-proof business like MCD! So, using S&P aggregate dividend cut as a worse case scenario, if we can live on 75% of the dividends generated, I think our portfolio will have ‘escape velocity’ or reaches ‘too big to fail’ status as another blogger calls it. Do you follow a similar strategy?

    • April 29, 2016 at 10:41 AM

      Yeah, I guess you could say we have a similar strategy, although I never worked it out as a percentage. We look to dividends to cover 100% of our “regular living expenses”, but then look to capital appreciation for the “irregular expenses” (about $10k as I mentioned in the article) This amounts to 80% dividends and 20% capital appreciation. This is optimal from a transaction fee perspective as well. We don’t need to ‘trade’ for regular expenses, just the special cases.

  • April 30, 2016 at 2:48 AM

    This is a really great way of looking at it! And I so agree about the spreadsheets. I have dozens of them, with different spreadsheets covering different scenarios! I have also taken to projecting different costs into the future, and then projecting income streams and working out when the two intersect 🙂 I guess I am an FI nerd, but it helps me stay on track.

  • August 13, 2016 at 1:45 PM

    This mindset is fantastic and one I never heard before.


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