A Present To Yourself
If you like to receive presents, and let’s be honest – who doesn’t? then consider giving yourself the gift of long term planning. That simply means making a plan today that will pay off dividends for you later on. Your future self will thank you for this priceless gift that you have given him or her. And best of all, making this gift doesn’t cost you any money today. 🙂
Last month, Amazon.com founder Jeff Bezos surpassed Warren Buffett to become the 2nd richest person in the world! How did he do it? Maybe a letter he wrote to shareholders in 1997 can reveal some secrets. 😀 In it Jeff writes that we can’t realize our true potential as people or as companies unless we plan for the long term. “If everything you do needs to work on a 3-year time horizon, then you’re competing against a lot of people,” Bezos told Wired in 2011. “But if you’re willing to invest on a 7-year time horizon, you’re now competing against a fraction of those people, because very few are willing to do that.”
Year 7 of the 12 Year Journey
I started this blog in 2010 with a 12 year plan to reach financial independence. It’s now been 7 years and things are progressing very well. 🙂 Back in 2013, my net worth was only $200K. And my financial details looked like the following.
Assets:
Home = $252K
Farms = $325K
Liquid investments (Including Retirement Accounts) = $161K
Liabilities
Total debts = $535K
At that time I wrote about my plans and my course of action to reach financial freedom. Without a solid plan back then, I wouldn’t be where I am today. Developing a strategy years ago was the best present I could have given my current self.
Speaking of the present, we are now only 5 years away from 2022. My net worth is currently about $610K, and here is an update of my financial details today.
Assets:
Home = $270K
Farms = $436K
Liquid investments (Including Retirement Accounts) = $400K
Liabilities
Total debts = $495K
It appears I’m farther ahead that I initially planned for. This means I have to adjust my original plan made a few years ago. Not that I’m complaining. 😀 So here is my new revised plan for Freedom 35:
Step 1: Pay down $18K of debt per year. After 5 years my total debt should be $400K.
Step 2: Sell all farmland in 2022 for $436K. After agent fees and tax, I would keep $400K in my pocket.
Step 3: Use the $400K from selling farmland to pay off my $400K of debt. This would make me debt free.
Step 4: Re-balance my $400K liquid portfolio to earn $15,000 per year of dividend income.
Step 5: Live on passive income for the foreseeable future.
That’s pretty much it. 🙂 A $15,000 income from a $400,000 portfolio represents a sustainable 3.75% withdrawal rate.
Here is a look at my projected monthly expenses after I reach financial independence in 2022, assuming 2% annual inflation rate from today.
- 300 – strata fee
- 30 – gasoline for car
- 100 – car insurance
- 30 – home insurance
- 100 – property tax
- 70 – internet
- 40 – cell phone
- 300 – food
- 30 – electricity
- 250 – discretionary
Total monthly spending = $1,250
Discretionary spending will be clothing, entertainment, and other things like that. I won’t have to pay into the MSP healthcare system anymore because I wouldn’t be making enough income to be charged the monthly insurance premium. I also don’t have to move to a small city or change my lifestyle. I can stay in YVR. 🙂
However many things can happen over the next 5 years. In order for my freedom 35 plan to work, the following 2 criteria must be met.
- Interest rate increases slower than 1.25% per year over the next 5 years so I have enough time to pay down my debt.
- My farmland and liquid portfolio have to be worth at least their market value today in April 2017.
I can’t really control interest rates. But if they increase 1.25% a year, then by 2022 a typical mortgage would cost 9%. I highly doubt the Bank of Canada would go to such extreme measures given the debt load Canadians have today. So assuming rates won’t climb that high that fast, I should have no problem paying down $18,000 of debt a year. I also can’t control the value of my farmland.
But I can control to some extent what my stock portfolio will be worth in 2022. Since this is the only factor that I can change, I will be focused on maintaining and growing my liquid portfolio. 🙂
That’s my strategy for now. But if my living condition changes I will need to change my expectations accordingly. Jeff Bezos is correct. It’s rather difficult to achieve major goals by thinking one year at a time. I stand a much better chance with my 12 year plan. Thinking long term really does work. In any case I will continue to revise my plan as we approach 2022.
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Random Useless Fact:
A Gallup Poll shows that 56% of women in the U.S. with children would prefer to stay home over going to work.
I might have missed this in an old post but what’s your plan for after you flip the switch to financial freedom in terms of the types of assets you will hold? Mostly fixed income bond ETF’s or something a bit more positioned for growth going forward? Your numbers and assumptions are reasonable I’m just curious.
Depends on interest rates at the time. But probably a mix of dividend growth stocks and bond ETFs. Right now most bonds I have are BBB rated. But if the economy picks up steam then I will aim for the AA bonds or higher as they would provide the yield I need. Dividend stocks will always be an important part of my portfolio for as long as I live because they are a hedge against inflation. Bond ETFs should reduce volatility but they will probably be a lower percentage of my investments compared to stocks even when I’m FI.
Hi Liquid in your projected monthly budget what is your strata fee?
It is a HOA fee by another name.
9Volt nailed it. 🙂 It’s the cost of garbage, cleaning, hot water, and general building maintenance for my apartment.
Your steady progress towards your goals are admirable. However I don’t think your goal of living on $1,250 a month is anywhere near realistic, especially in YVR. Food, gas, home insurance, property tax, and electricity could all be doubled (either that or I’m getting a terrible deal!). Not only that, think of all of your unforeseen costs. A more realistic goal would be to use that income to supplement earnings or try to save at least double to have the option of retiring, although even then you’d be scraping the bottom of the barrel in YVR. The good news here is that savings always starts more slowly. Investment growth paired with no mortgage costs should really accelerate your savings rate.
I agree I feel it’s a bit unrealistic but I don’t think he’s going to be quitting his job, just able to live off the passive income if required. Life changes too so this plan will probably be completely different in a few years.
I just hope there isn’t going to be a huge market crash right before 2022 which would force many companies cut dividends lol. Although it’s been awhile since we’ve had a bear market so maybe we’re due for one soon.
Hi Rick. I think it depends on expectations. Other blogging friends of mine like Krystal, Brian, and Vanessa have shared their budgets before and they each spent about $12,000 a year, not counting their mortgage/rent. The numbers I’m using as estimated expenses are very reasonable for me, and only me. $200 to $300 a month for food is very normal for me and my friends. The cost of gas depends on how much I drive, but I’ve averaged $30/month since I started driving nearly 10 years ago so that’s why I’m using $30/month. It’s possible that it could double to $60/month. But I can’t think of any reason why it would. City council has to pass property tax increases and although you’re correct in that my property tax could potentially double in 5 years, it is highly unlikely given the municipal laws currently in place. I think when forecasting costs it’s important to keep things in perspective. 🙂 If I had a family of 5 then I would budget $1200 to $1500 for food instead. But at the moment the best decision I can make is to extrapolate my current standard of living as an individual. Also, YVR isn’t as… Read more »
What about taxes on your divis? You need to factor them in too.
Btw. I have pretty much an identical plan. At th end of 2021 I plan to have 500k € portfolio of stocks with an avg yield of 3%. After taxes and dividend increases in 2022 dividends would produce almost 1000€ a month for me. That amount would cover all my mandatory expenses with inflation.
It would still mean I would have to work but I could technically quit whenever I wanted.
That sounds similar to my plan. 🙂 In terms of taxes I won’t have to pay any noticeable amount because most of my income will come from eligible dividends which doesn’t get taxed until I make over $50,000 a year in dividend income. The interest income I make from fixed income investments will come from tax sheltered accounts.
Hey Freedom 35!
It would terrify me to step away from my employment with just $12,500 in passive income to support me, but I commend your focus on the goal as well as ability to live an extremely frugal lifestyle. I’ll be looking forward to you achieving your goal in the next 5 years!
Hi liquid, on the $1250/mth expenses (wow) I suppose it’s doable for a single person with no dependants based on where and how you live now. It appears though that it is bare bones, and you may likely find there is always something that side swipes you.
Your basic cost of living may not work for many folks, even us as a retired senior couple here in our modest detached property in Southern Ontario where the high cost of property tax & utilities eat up a large chunk of the monthly expenses.
At present we are as frugal as it gets, our month over month expenses excluding any holidays away or any fix & repair or capital purchases is just under $1700/mth. Due to having to take care of an elderly person in the family, we are on the road that means our gasoline bill for our 15 year old SUV is $220/mth.
When we add in the one-off’s, other & extra’s, it’s close to $1900/mth and I’m told that is a ‘low cost lifestyle’
Anyhow, good luck with the plan
Good for you John. $1900/mth is very low cost living for that part of Ontario. 🙂 I don’t have a lot of elderly family members around my life but maybe that’s something I should plan for over the next few decades.
Thanks Dividend Stacker. As Stephen mentioned above, I may still work after I reach financial freedom. But having the option to quit any time I want is my primary incentive. 🙂 Also, if I start a family in 5 years then my goal will need to change accordingly of course.
If farmland increases rapidly in price would you consider selling earlier? I really thought about selling my Ontario house this week because house prices are out of control right now and I could get at least $100,000 more than I paid for it a decade ago.
I paid $215,000 and I could probably sell for $340,000. I would have to start paying rent but I would have a lot of cash to invest with.
I think it might be a good idea to sell your home and rent. But I would caution that you first make certain that whatever you want to invest in will give you a higher return than the long term appreciation of your house. 😀 I agree that real estate prices are crazy out the wazoo right now. With stock markets near all time highs, what I want to know is what’s a better alternative? Naturally diversifying across multiple asset classes is my prefered way to invest, but I don’t have to tell you that. 🙂 In terms of my farmland, yes I will consider selling it if the price really takes off over the next year or two. I will also be more likely to sell it if I see a better investment opportunity elsewhere.
Maybe when the time comes you could sell the farmland and put it into a rental unit?
Yes, if the situation is right for buying a rental unit. Otherwise, I plan to just put the proceeds into real estate funds. At least that way I can stay within the same broad asset class, earn some good yield, and also be diversified. 🙂
Love your blog; long time follower and subscriber to your posts. One question I have is what are your plans on family planning. If you decide to have children how will this affect your financial game plan.
Thanks Mike. I have made different plans for family planning depending on how things unfold for me. If my wife comes into the marriage with a lot of her own money then we could be financially independent together in 5 years. But if she is poor, or have more debt than assets, then my financial goals will need to be pushed off for 5 or 10 more years. If we decide to have children, I want one of us to stay at home to take care of them. Which parent stays at home will probably depend on who makes less active income. Similar to investing in stocks, I plan to invest heavily in terms of time and resources into family planning. Maybe one of us will retire before the other one does.
Without a dream, there is nothing;
without a plan, it can only happen by chance;
Plan to realize your dreams or any other perceived impossibilities, and live a happy life. – Me.
Sounds like a poem worth quoting. 🙂
Hey Liquid,
It is realistic estimated expenses. We are family of 3 (including 3 years old boy), we just need $2000 per month to cover our basic needs (assumed no mortgage).
We just need less than $800 per month to cover our fixed expenses (Property tax, cable, internet, cellphones, utilities, etc). And for other expenses like food and gas, we just need around $1200.
Thus, I need $25 000 per year from my investments to reach financial freedom.
Cool. Thanks for sharing. Life can be quite affordable once the cost of housing is taken care of. Krystal who lives in YVR like me posted her budget today. It looks like she also spends $300 a month on food. And her monthly expenses (minus rent) are about $1200, similar to my projected costs after I reach FI.
It’s a great plan. My personal choice to early retirement was in real estate as an owner builder. Currently I work one third of a year and the rest of the year I live on the earnings from that. I detailed everything on my website
That’s a great system you have for yourself. It’s a practical and balanced alternative for people who don’t want to work all year round until they fully retire.
[…] first and second rules are straightforward. Billionaire Jeff Bezos recommends we think in 7 year terms to remain competitive. I suggest taking that up to 10 years just to be safe. 🙂 In terms of […]
Hi Liquid,
Great, well-thought out and reasonable plan with covering basic living expenses from investments to achieve total financial freedom!
This is more a theoretical question, but have you considered that if you were to quit your job (I am not sure if you are planning on it or not), all the extra free time you have may end up costing you more since you may feel bored and do activities/eat more, thus increasing your typical expenses? So, perhaps a “boredom” contingency may be a worthwhile addition? 🙂
I like theoretical questions. 🙂 Awhile back I wrote a post about the importance of understanding one’s self to financial freedom and touched on the concern you mentioned. Based on my personality, circumstances, and interests, my living expenses will not go up if I stopped working. I put my theory to test last year when I took a 1 month long vacation. I didn’t travel anywhere. I basically stayed home to read and watch TV shows and movies, and went out occasionally to the park or do errands like shop for food once a week. My food expenses went up a little, but my transportation costs decreased since I was no longer driving every day. Overall my living costs stayed the same. I think being an introvert helps. If I were someone else who needs to socialize in order to have fun and enjoy life then I would certainly need a “boredom” buffer haha.
[…] I update my financial freedom progress. The last time I fully inspected my finances was in 2017. During that update I calculated my net worth to be $610,000. I guess I should post another update soon to see if […]