I have achieved financial freedoooom!

After 12 years of saving and investing I have finally reached financial independence!

This means the passive income generated from my investment portfolio is enough to pay for all my current and future living expenses. It’s not about spending more money on things. It’s about spending more time on the things that money can’t buy!

In my first ever blog post I questioned if freedom 35 was even possible for me. After 851 more posts I now know!

Wow. This is unreal. I would like to thank everyone who has taken the time to read my blog, especially those who have been following me since the early days. You know who you are. 😉 I certainly wouldn’t be here today without all your support and encouragement. You guys rock! You have all done plenty. It means a lot. 😎

I will be sharing all my financial numbers below for transparency and accountability.

What’s my secret to financial independence?

Everyone’s path to financial freedom is unique. In my case I have to give credit to these 5 key reasons.

1. Adopt an abundance mindset instead of a scarcity mindset.

   I learned this from reading lots of self development books & watching motivational and introspective YouTube videos. I cannot emphasize enough how important it is to have a positive outlook and growth mentality. There are no problems in life. Only possibilities for growth.

   Rather than sitting on the sidelines because the markets may crash, I choose to invest anyway despite the risks because I focus on the potential gains rather than the losses.

2. Low interest rates.
   

   Nearly all of my financial strategies have thrived on cheap money. Low interest rates boost stock and real estate prices. Thank you, Bank of Canada! 🍁 Policy makers would rather devalue the currency than let financial markets crash. That’s why real interest rates are negative right now. This trend has created a great deal of moral hazard and social divide. And it appears interest rates will continue to stay low for a very long time.

   

3. Understand how to value investments.
   

   As an opponent of the Efficient Market Hypothesis I prefer to buy underpriced individual stocks rather than the entire market.

   Diversification is great for protecting wealth. But concentration is more effective for building wealth. 😉 By finding and buying undervalued assets I have made tremendous gains in stocks, farmland, and urban real estate.

4. Invest with other people’s money.

   Without borrowing any money to invest it would probably take me 36 years or longer to become financially independent. But leverage has allowed me to cut that time down to 12 years. Assets produce wealth. Leverage gives me the ability to grow my assets and multiply my wealth. As long as interest rates stay low leverage will continue to be instrumental in my financial plans. 🙂

5. Copy the best of what others have already figured out. 

   Financial success depends more on the methods and principles you practice than how hard you try. Good strategies create wealth. Great strategies create even more wealth. All the strategies I use have already been vetted and proven to work by highly successful people. I have gained invaluable knowledge by learning from these experts in their specific realms of the financial world:

   •Real estate (Graham Stephan)
   •Leverage (Robert Kiyosaki)
   •Risk management (Ray Dalio, James Rickards)
   •Macro economic trends (Peter Schiff, Raoul Pal)
   •Farmland (Jim Rogers)
   •Financial markets (Warren Buffett, Peter Lynch, Jeffrey Gundlach.)

   I’ve been shadowing these experts and others like them for years – reading their books, studying their next moves, watching their interviews. There’s no reason for me to reinvent the wheel. These smart individuals have already written the indispensable playbook to prosperity. They have generously shared their abundant wisdom with the world. I simply copied their mental models and behaviors.

Jump directly to….

• • My final NET WORTH update!
  • An overview of the last 12 years.
  • My current passive income and expenses.
  • Additional measures to consider.
  • Reader’s poll.

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Financial independence 2 years ahead of schedule

I was initially aiming to reach FI in 2022 when I turn 35. I was on track to realize this blog’s ultimate raison d’etre. But then something unexpected happened which forced me to change my plan. 😮

As you know earlier this year the stock market experienced a big sell-off, which gave me a major case of FOMO.😖 Not wanting to miss out on bargain prices I purchase over $100,000 worth of dividend stocks in March. My dividend yield on cost was over 6% on these new purchases. I still remember the excitement of buying TD Bank shares and see it jump nearly 18% the very next day.

Warren Buffett famously suggested to be “greedy when others are fearful.” So I followed his advice. I bought when others were selling, and I held when others were buying. As a result my passive income in 2020 soared by over $7,000/year – fast tracking my progress.

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Net worth update as of August 2020

Assets:
Cash = $21,000
Non-registered accounts:
—↳ Canadian stocks & bonds = $267,000
—↳.U.S. stocks = $159,000
—↳.European stocks = $19,000
Retirement (RRSP) = $166,000
Tax free savings account (TFSA) = $135,000
Peer-2-peer Lending = $36,000
Principal residence = $331,000 (assessed land value)
Rental property = $450,000 (2020 purchase price)
Total = $1,584,000

Liabilities:
Home mortgage = $181,000
Rental property mortgage = $312,000
Margin loan = $22,000
Total = $515,000

Net Worth:
Assets – Liabilities = $1,069,000

Here is a snapshot of all my stocks and bonds on August 10, 2020.

TFSA                                RRSP                                 Margin                              Cash

Altogether I have about $800,000 of liquid financial assets generating $30,380 of passive income. This represents a 3.8% annual rate of return in cash. The typical Canadian requires $756,000 to retire on, according to the Financial Post.

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My 12 year journey to financial independence

I’ve been privileged enough to pick up new income streams over the years. Today I am making 3 times as much total income as when my career first began!

Here are some details for context:

• 2008 – Graduated college. Started working full time as a graphic designer and tutoring part time. Living in my parent’s basement to save money.
• 2009 – Bought a condo & moved out on my own. Used my $13,000 savings as a down payment (94% leverage).
• 2010 – Aggressively saved 30% of my income to put into dividend growth stocks using 50% leverage.
• 2011 – Continued to save and invest while keeping an eye on my spending.
• 2012 – Gathered some savings to buy some farmland and used 87% leverage.
• 2013 – Bought some more farmland using 89% leverage. Rented my land to farmers. Cash flow negative.
• 2014 – Began doing some freelance graphic design work. Started to invest in mortgage securities which produce passive income. And began to exchange a small percentage of my salary for precious metals.
• 2015 – Focusing on growing a fixed income portfolio to balance out my heavy holdings in equity.
• 2016 – Started peer-2-peer lending. Income from dividends and interest reached $10,000/year.
• 2017 – Purchased some cryptocurrencies. Sold near the end of the year. Put profits into dividend stocks.
• 2018 – Continued to build up a diversified portfolio of uncorrelated assets.
• 2019 – Sold all farmland and realized a 268% return on investment. Proceeds to be received in early 2020.
• 2020 – Used $135,000 from selling the farm as a down payment for a rental apartment. Used 70% leverage. It’s cash flow positive. 🙂 Invested the remaining $120,000 cash into the stock market in March. Decided to stop freelance work. My financial assets have grown to 25x my annual expenses.

As you can see I do not mind using leverage when I believe the odds of profitability are high.

Current asset allocation

I have designed my portfolio to withstand future economic shocks. Here’s a pie chart of my holdings by asset class.

It’s important to be properly diversified. Most of my holdings such as stocks and real estate are inflation resistant so if there’s a major currency devaluation my purchasing power will be protected. All fiat currencies lose value over time. In ancient civilizations people used spices as currency. As the old saying goes: thyme is money. 😉

The road less traveled

As long time readers would know, I often disagree with widely accepted personal finance tenets. It’s hard to use traditional thinking to achieve extraordinary results. This is when having a hipster mentality can really pay off.
The financial markets have always rewarded investors for liking something before it was cool. 😎

That’s why I got into FAANG stocks (FB, AMZN, AAPL, NFLX, GOOG) pretty early. By the time the mainstream catches on to an idea it’s already too late to make outsized returns on it.

Vindication

I think “bad debt” doesn’t actually exist. I buy gold, bitcoin, and like to pick individual stocks instead of holding index funds. Plus I often try to time the markets. All these ideas fly in the face of mainstream financial advice.

Not surprisingly I have received my fair share of criticism over the years. Here are some Facebook comments regarding my writing.

You can read more of these comments here.

The most common financial sin I’m accused of committing is using too much debt to invest. But my debt-to-income ratio is at a comfortable 450% today, much lower than before. And in hindsight I’m convinced that aggressively growing my asset column even at the expense of borrowing money was the correct thing to do. Fortune sides with those who take calculated risks.

Using leverage simply makes practical sense. My average cost to borrow money has been below 3% annually. But my investments have generally returned 10% to 15% annually depending on the asset class. For example, here’s a look at my non-leveraged TD TFSA portfolio. It has earned 14.57% annualized ROI over the last 5 years – outperforming major stock market indexes. 😉

Borrowing to invest doesn’t have to be risky as I’ve written in the past. In fact within the first two paragraphs of this older blog post I explain how leverage can even reduce investment risk for earning high returns.

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My passive income and expenses

One advantage of blogging anonymously is I can share all my financial details without the risk of being stalked in real life. Here is a snapshot of my yearly passive income and budget. I will break down these line items in detail further below.

Annual income from passive investments:
Dividends = $19,044
Interest = $10,616
Net rental cash flow = $720
Total income = $30,380

Annual living expenses:
Mortgage payments = $9,490
Condo fees = $3,642
Utilities = $2,015
Groceries = $3,000
Transportation = $1,800
Property tax and home insurance = $1,793
Interest from margin debt = $330
Miscellaneous spending = $3,600
Buffer = $4,200
Total expense = $29,870

Annual surplus
Income – expense = $510

Breaking down my passive income

This is the nitty gritty on all my passive income sources.

Dividends = $19,044/year

My stock portfolio is worth about $600,000. It holds mostly dividend growth stocks. The average portfolio yield is 3.2%.

This is the bread and butter of my passive income strategy. I have been consistently borrowing money on margin to buy dividend stocks since 2010. I would typically buy $20,000 to $30,000 of new dividend growth stocks a year. But as mentioned earlier 2020 has been an anomaly.

Interest = $10,616

My fixed income portfolio holds about $140,000 worth of interest producing assets. These investments tend to produce the best results when held long term. That’s why I haven’t lost interest in them. 😎

• Bonds – I own a range of bonds from high yield to investment grade. Current bond portfolio is worth about $66,000.
  Annual income = $3,119
• MICs – Mortgage funds I’ve accumulated over the years. I have Antrim MIC units valued at $24,000 and a variety of public MICs valued at $14,500.
  Annual income = $3,020
• Lending Loop – I have a $36,400 invested in this P2P platform. The expected return is 12.3% net of fees.
  Annual income = $4,477
  

Net rental cash flow

I purchased a rental property earlier this year. I expect it to produce 15% annualized ROI over time. But the cash flow is not great right now only earning $720/year. Here is a summary.

Money coming in:
Rent = $1800
Total income: $1800

Money going out:
Mortgage = $1400
Strata fee = $185
Property tax = $120
Homeowner insurance = $35
Total expenses: $1740

Monthly cash flow = $60

So altogether I’m earning $30,380 from my investments. Income tax is negligible if I quit my job as I’ll explain later.

Breaking down my annual expenses

Here is my comprehensive spending budget. 🙂 The total cost comes to $29,870 per year.

Mortgage payments = $9,490

My mortgage interest rate is currently 1.62%. The monthly payment works out to $790.87 – which is very affordable. I bought my home in 2009 and tried to pay down the mortgage as slowly as possible. 🙂 This is why after 11 years of servicing my mortgage the balance is still 84% of the initial borrowed amount.

Condo fees = $3,642

Strata fees are $303.50 per month. This pays for my share of the building’s caretaker, management expenses, upkeep, and contingency reserve fund.

Utilities = $2,015

• Heating/electricity – My electric or hydro bill is around $40/month.
• Phone – I use Freedom mobile as my phone carrier. The plan I have is called Freedom 35 – funny enough. 😏 It’s $35 a month for unlimited calling/texting and 5GB of data. With tax and fees it’s around $39/month.
• Internet – My internet bill is $88.90/month.

Here are some typical transactions in my TD chequing account. From top to bottom: Part time job pay, government rental supplement, remaining rental income from tenant, full time job pay, condo fees, mortgage payment, bank fee rebate, bank fee, hydro bill.

Groceries = $3,000

I typically spend about $250 a month on groceries. This is in line with the average for the city of Vancouver. I visit discount produce markets where food is often 50% cheaper than large grocery chains.

Transportation = $1,800

I drive a 13 year old Toyota. The insurance is $1500/year. I use it mostly for shopping so I have put about 2,000 KM on it over the last year. It’s very cheap to operate and maintain. I always keep a pack of gum in the glove compartment. When people ask what kind I say it’s in mint condition. Here’s a photo of my car.

Property tax and home insurance = $1,793

My property tax is $1332/year after applying the home owner’s grant. My home insurance policy premium costs $461 a year and covers the basics.  It’s not much but it’s enough.

Interest from margin debt = $330

With roughly $22,000 of debt in my margin account I pay $27.50/month based on the current margin rates. It’s such a privilege to be able to borrow money at 1.5% these days.

Miscellaneous spending = $3,600

I budget $300 a month for eating out, clothes, books, toiletries, entertainment such as my Netflix subscription, and anything else that I may decide to spend money on. 🙂 Most of the time I don’t even spend all of the $300.

Buffer = $4,200

I like to have a buffer built into my budget in case I overspend in one of the other categories. This $350/month buffer should be adequate to catch any impulse purchases or small unexpected expenses. Any savings left over not used by the buffer will be rolled into my emergency fund.

Additional safety

Just having a strategic budget may not be enough to maintain financial independence. I already have a large buffer that represents 14% of my total spending. But what about emergencies and costly unforeseen expenses? This is where my 3 stage safety net comes in.

1. Emergency fund. I have $21,000 saved in cash – enough to cover 8 months of living expenses.
2. Precious metals. I have been accumulating physical gold and silver since 2012. This is my second line of financial defence. My collection is worth over $35,000 today which I could sell in pieces for immediate cash.
3. Pension funds. I hold funds through my current and past employer matching RRSP programs. These defined contribution plans have a combined value of $45,000 today – here’s one example. I do not include these funds in my net worth calculations because I can’t readily access the money. If I want to actually spend any of it I have to first transfer the funds to my financial institution and then make a withdrawal. I won’t use the money in these funds unless absolutely necessary.

So with these 3 levels of protection I feel confident that my financial freedom is safe and secure. 😀

What about taxes?

Canadians are taxed based on income, not wealth. If I don’t make any active income from work then my income tax for 2020 would be just $190 based purely on my passive income from investments.

The main reason for my low income tax rate is thanks to asset location planning. This strategy turns my $30K of passive income into less than $15K of taxable income.

• Dividends – The majority of my dividends are eligible for the Canada dividend tax credit. So they will have an effective tax rate of 0% if I don’t make any active income.
• Interest – All my interest producing assets like bonds and mortgage funds are either in my TFSA (tax free) or RRSP (tax deferred.)
• Rent – I can write off expenses related to my rental property. This lowers my taxable rental income to less than $10,000/year from what I actually collect in gross rent, which is $21,600/year.

But here’s the twist. Assuming I stop working entirely I would qualify for low income government assistance programs. At the end of the day I would actually pay negative taxes – and receive about $1,400 in net equalization transfers. 😮

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Additional measures to keep in mind

Becoming financially independent doesn’t mean I’m immune to black swan events and other financial risks. So how do I disaster proof my finances?

I use stress test scenarios to help me manage unpredictable risks. These are tools that define, quantify, and warn me of any dangers to my financial situation. I first introduced them in 2014 to help me sleep better at night. Right now all of my stress test risks are comfortably sitting in the greens. This means there is no immediate threat to my finances at this time.

I will revisit my stress tests once or twice a year to keep an eye on the various risk factors.

Future proofing my financial freedom

My fiancé and I have talked about moving in together in the near future. Luckily she is quite financially savvy. She bought a rental property several years ago. This was before we met. She recently sold per property and has six figures in savings today. She is frugal like myself. If we were to live together in my 2 bedroom condo we could combine our finances.

With our joint assets we could easily generate enough passive income to fund both our lives. This means she could retire immediately as well. I would be the primary money manager of our household, but we would make major decisions together.

Retire sooner vs later

For now my partner and I have both decided to continue working for another year and then revisit our options in 2021. I’m currently making about $70K a year from my full time job. Her income is around $50K a year.

Technically we could live off our passive incomes after she moves in with me, and then save 100% of our salaries! Just knowing that we can both afford to retire at any time and not have to worry about income ever again is the real win.

Family planning

We both want to become parents eventually, but no timeline or specifics have been discussed yet. An article from National Bank estimates it will cost $6,400 per year to raise a child in Canada – assuming no childcare costs. Luckily for low income households the government will provide about $7,000 a year of subsidies and tax credit per child until he or she becomes an adult. This government benefit will cover the entire cost of raising children. Woot!

Long term security

If I ever need additional spending money in the future I can liquidate my collection of silver and gold bullion in a pinch. I could also sell my investment property to unlock some capital. There is currently $135,000 of equity sitting in there. And if I don’t touch my work pension funds then in 20 years they should be worth over $120,000. That should be enough for Liquid Jr’s college tuition.

It’s reassuring to know I will have a lot of options to support a growing family. No matter what happens I will never have to rely on employment income ever again! And that to me is priceless. 😀

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What this milestone means for Freedom 35 Blog 

The name of this blog won’t change. But now that I’ve achieved my long term financial goal I want to try something new moving forward. If you want to help me out please take this poll to give me some ideas.

Taking a break

I’m going to take a break from blogging to gather my thoughts and make a transition with my finances.

I don’t know when I will return from hiatus. In the meantime you can come say hi to me on Twitter @Liquid_f35 or post a comment below. Feel free to subscribe via email if you haven’t already so you won’t miss any new blog posts when I come back.

Thanks for joining me on this incredible journey. Hope you all stay well and prosperous! 😀

Liquid