In order for us to quit being forced to trade our lives for money, we first must create large enough income streams to sustain us.
Our spending for last month was $3,619.31. This was a pretty typical month. Extrapolate last month out for the year and you get an annual expenditure of $43,431.72. A lot of money….
One main step to achieving financial independence will be decreasing the amount we spend. Of the $3,600/month we are currently spending, we can rid ourselves of at least some of it. In the next year we will pay off Mrs. Bluegrass Dividends student loan, along with the mortgage insurance requirement on our house. This will decrease our monthly budget by $218.94. Or $2,627.28 per year. Putting our new number at $40,804.44. Still a lot of money….
The main expense we will need to be liberated from will be our mortgage itself. The principle and interest portion of our loan are $662.51/month. We just recently passed 24 years to go on the amortization. We have paid two years ahead so far, and will eventually need to really attack this debt. Not having the P+I payment on our house would decrease our spending to $32,854.32.
We are also paying $181.98/month for things like internet/phone which we don’t have to have, but are nice. Also, we are saving close to $300/month for our next car. These expenses are not essential, though some may consider them to be. But, I will still assume we are paying them post FIRE.
With debt pay down our expenses equal $32,854.32/year. I would like to replace this income with a balance of rental income and stock/bond investments. One thing I’m still debating is the percentage of income needed from each. More experience with investing in both will likely clear up the murkiness in that decision. For now I’ll assume a 50/50 split in earnings from stocks/bonds and rental cash flow.
Our rental property is currently bringing in $760/month, with a mortgage payment of 413.65. Of the $346.35 that remains we are putting $200/month in investments and leaving the remainder for future maintenance expenses. Only time will tell if the $146.35/month is the proper amount to allocate. If it proves to be to little, we will easily be able to move cash from the investment account the rental income is going into.
To achieve 50% of our income from rental properties, we would need cash flow of $1,368.93/month. This could be done by having 7 mortgaged properties similar to the house we already hold. Rental increases, which yield a better cash flow for each investment would make the $200/month per rental a more conservative number and allow for some inflation.
One main consideration for us is; whether to pay off each mortgage, leverage each rental or do some combination there of. The principle and interest of the property we own is $304.37/month. With this gone, our cash flow would be $500/month on one property. Meaning we would need three paid off properties versus seven leveraged homes. A purchase price of $74,000/house would mean a total of $222,000 tied up in equity. The leveraged method would require $103,600 plus any cash paid down on the mortgages over time.
The paid off homes offer less risk in terms of carrying costs for empty homes. However, the leveraged homes tie up less capital to achieve the same cash flow. Also, having 7 properties versus only 3, a vacancy would have less of an impact on cash flow.
I feel the best path for us would be to have at least one property paid for. This would yield $500/month, leading us to need approximately four more leveraged properties. The total capital needed to achieve this would be $133,200. This number will change as properties go up/down in value, and is certainly a moving target. However, it is a strong ballpark figure I can use in terms of planning for the future.
The magic number for stock/bond income is $16,427.16 per year. How much money do I need to have invested to reach this goal? There are several approaches to figuring out this total. The two approaches I have looked at the closest are dividend income and the 4% rule.
For dividend income, we would simply invest until our forward 12 month dividend cash flow from stocks would equal what I need to live off of. It would be prudent for me to invest in ETF’s as opposed to individual stocks. I do not believe I could consistently beat the market, so why not just ride the markets coat tails. Vanguard’s high dividend yield ETF VYM currently yields 2.89%. This would mean we would need $568,413.84 to reach our magic number for income.
The 4% rule simply states that you are financially free when you can live off of 4% of your investments. This method would put our magic number at $410,679. A much lower number than if we simply lived off of dividend yield.
Living off dividends is the more conservative method of the two. Also, the rate of dividend raises is generally higher than inflation. This would give us a nice raise each year going forward. The major downside to this approach for me is the time frame it would take to reach this milestone.
The $157,734.84 gap between the two approaches is substantial. Depending on how the market performs, the dividend method would mean working 3-5 years longer to become financially free. I would consider myself free to do as I choose at the lower $410,679. After all, we will not be retiring outright when we reach financial freedom. We will still have income of some form for many years after. Just how much is to be determined.
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The current goals to FIRE are to own 5 rental properties similar to the one we currently own, with one completely paid off. Also, we will need $410,679 in investments in stocks/bonds.
We currently have invested a total of $73,827.24 in stocks/bonds and $15,654.56 in real estate. For a total cash investment of $89,481.80, this does not account for any appreciation for the rental property simply the money we have put in.
The total capital required to reach this point from where we are is $336,841.76 in stocks/bonds and $117,545.44 in down payments/equity payments for rental properties. The grand total of cash left to invest for us to be considered financially free is $454,387.20.
This of course does not include paying off our mortgage which currently stands at $127,999.16. The loan was originally $147,537. Meaning we have paid down $19,537.84 or 13.24% . Overall, we are $582,386.36 away from being financially independent.
We are 15.77% of the way to our goal.
We still have a long way to go. I am extremely encouraged that we have gotten as far as we have in such a short time frame. At the current rate we are progressing we should make quick work of knocking out the steps left to accomplish. By quick I mean 10-15 years, depending on how the market performs and how fast inflation raises our current number.
Being financially free at 40-45 years old would be an amazing accomplishment for the two of us!