I started tracking my net worth in October 2010. At the time I was 25 years old, had been working full-time for two years, was a homeowner, and had a net worth of $46,000. At that time, I didn’t know the term Financial Independence (FI) and I’m pretty sure the idea of having enough money to be self-sustaining would have seemed impossible.
Over the last 10 years I have become fluent in the teachings of the FI community and am well on my way to reaching FI myself. During these years I’ve moved across the country, took in my teenage niece, received my law degree, been promoted multiple times, and acquired two rental properties. My goals have shifted dramatically over time, yet my method of staying motivated has remained the same.
I stay motivated by having a documented S.M.A.R.T. plan and focusing my daily attention on accomplishing the plan’s next milestone. As a reminder, S.M.A.R.T. stands for Specific, Measurable, Achievable, Relevant, and Timely. For me, the idea of working towards something for a decade or more was daunting. In the abstract it is hard for anyone to understand that random purchases or small lifestyle change could dramatically reshape one’s future. By focusing on upcoming milestones that are 1-12 months away, suddenly the thing you are chasing becomes more “real” and your actions have consequences!
An especially powerful motivator for me is paying off debts and achieving specific net worth or stock portfolio milestones. For example, when my either of these key indicators approached $100,000, $250,000, or $500,000, each time it felt like rounding 3rd base and running home for a score. After each milestone I felt rejuvenated, and after a brief rest, I was ready to tackle another goal.
Paying off debt is also motivating. For me, debt includes actual loans but also other large monthly obligations that have a definitive end point. For both I know how long until they are paid off and I eagerly look forward to it! Currently I’m down to a 401k loan (used for Law School) and a student loan, both of which are on five-year repayment periods. I also have two other non-loan monthly obligations that motivate me. First, I have are my wife’s grad school payments, which are a significant amount of money each month, but will end on September 2021. Second, we save $1,000 per month towards my niece’s college fund. Our target of $60,000 for this fund will be achieved on August 2023.
Beyond these major milestones, to stay on track it helps to celebrate even the smaller things that happen on a regular basis that contribute to your net worth. For me this include getting an extra paycheck, maxing out my 401k or IRA for the year, or getting a tax refund, bonus, or annual raise. For these events, put the extra money towards investments or debt instead of buying something special. Doing so will help you progress in your FI journey, but more importantly, it will help keep you motivated and give you a boost of confidence.
Our Financial Independence Plan
Everyone’s path to FI is unique. Everyone has different goals, income, age, family situations, risk tolerance, and values. For our family, I’m aiming to have $1.7m net worth to consider ourselves “FI”. This would provide $51,000 a year at a 3% withdrawal rate. Both my wife and I have high pressure jobs and work hard. After we become FI, I presume we will still work, but it will no longer be essential! Our daily activities will likely pivot to focusing on what we love, rather than trying to maximize our earning potential. For me, that might include going into public service or starting a small legal practice. For my wife, it may include opening her own non-public school or becoming a consultant. Honestly, I don’t know, but our goal is to be free to pursue whatever we want, without financial risk.
Our plan for Financial Independence is based around the following goals:
- Contributing the legal maximum to all available tax advantaged retirement accounts
- Leveraging 15-year mortgage notes to accelerate our principle payments
- Refinancing into 5-year private student loans to quickly pay them off and limit our interest rate
- Owning rental properties (two currently)
- Avoiding lifestyle inflation, using a budget, and tracking our monthly spending
- Limit taxes to the full extent of the law, including using a Roth IRA Conversion Ladder
- Maximize our earning potential
- Automate everything possible!
Pretty simple, right? So is staying healthy … in the abstract … the hard part is the execution and staying on track, especially in the long-term! Marching towards FI is the equivalent of eating right, hitting the gym, and being consistent for many years.
Our plan has remained relatively constant over the last decade and each milestone has been rewarding and helped keep our motivation. Fortunately, as we’ve amassed more in investments and increased our earning power progress has become easier to come by over time. For example, here were a few key milestone dates for our net worth:
- November 2008: Started working
- July 2013: $100,000
- July 2016: $250,000
- October 2017: $500,000
- 2021?: $1,000,000
The 2021 date for hitting a cool million is speculative, and with COVID-19, who knows. But the point is that the compound returns are very real and powerful, and I fully expect the next million will take a lot less than 13 years.
Our Timeline to Financial Independence
We expect to reach FI status by the end of 2025. I cannot believe how quickly this could be approaching, assuming things go according to plan. Below is they year by year portfolio that we expect will get us there. The retirement account presumes a 7% annual return along with a $62,000 investment of new capital each year.
Below are the key milestones for the next 5.5 years that are essential to reaching FI in 2025:
- September 2021: Final payment for wife’s doctorate program
- December 2022: Final payment for 401k loan (currently $24,500 balance)
- July 2023: Niece turns 18, which means no more lawyer fees for ongoing legal custody battle. This is currently several thousands of dollars each month, on average
- August 2023: Reach savings goal for my niece’s college fund.
- Annually: Maximum contribution to two 401k, backdoor Roth IRA, and one HSA, which is $65,500/year, including employer contributions (22.5% of income)
- Annually: Redirecting bonus for adding to cash reserves, which is $6,000/year (2% of income)
So far, I haven’t talked a lot yet about real estate and how this fits into our future. To be honest, this is because it’s role in our FI journey is currently an open question. I used to view real estate as essential to our plan, but investing more into this area seems unwise right now after a 10 year bull run for the US real estate market. My hesitancy is compounded by the ongoing COVID-19 pandemic, which makes everything challenging at the moment. For now, I’m content to have two properties that each help contribute to our net worth each year.
Starting in 2023, most of our non-mortgage monthly obligations come to an end (lawyers, grad school, niece’s college) so this would be the best time for us to expand our real estate holdings. Alternatively, I could also see my spouse and I actively flipping properties as a side hustle even after reaching FI. We enjoyed fixing up our two current properties that we purchased as foreclosures and required a lot of work. Why not doing again, once we have the time?
My wife and I are very fortunate to be high income earners who are financially secure, have good jobs, a nice home, and plenty of assets. I acknowledge we were privileged growing up, coming from upper-middle class families that provided consistent support and opportunities. Not everyone reading this post will be as fortunate. But beyond these factors that were outside of our control, other things such as hard work, investing in our education, and taking calculated risks were also critically important.
One of the quotes that my father recited many times growing up was the serenity prayer, which says, “God, grant me the serenity to accept the things I cannot change, courage to change the things I can, and wisdom to know the difference.” I think these words are powerful and I’ve come back to them many times over the years. I have embraced this mantra and doing so has allowed me to not let obstacles or frustrations permanently drag me down. Instead, I’ve consciously redirected my attention to other matters for which I could influence or control.
No one comes into life on a level playing field. Everyone has baggage, obstacles, and shortcomings. By embracing what you can change, and accepting the things you cannot, you maximize your potential in all areas of life. This is as true in financial matters as it is in marriage and politics. As you develop and execute your FI plan, focus your attention on the things that are within your control, such as working hard, advancing yourself, and being strategic with your limited resources.