Everyone has a number they need to hit before they reach financial independence. My current number is big. Like massively big! Like $3,000,000 massively huge big! I’m at a point in my savings where many people in the FI community could live comfortably using the 4% rule. I’m not even close to being able to support my current level of spending.
My current liquid assets ($862,000) get me roughly 27% of the way there. If I were to sell the two pieces of vacant land I own, I’m at roughly 37% of the way there. Sell my house on top of that, and I’m over 50% of the way there…and homeless. There’s no way around it, that is definitely not ideal, but it’s not dire straights either.
While the idea of only being a quarter of the way to Fi is sometimes a kick in the gut, I’ve found that understanding that there are alternative paths can be really enlightening. Exploring these paths is really helpful when I get anxious or overwhelmed by my big ass number.
We are high spenders, but not extravagant spenders. We don’t spend on frivolous things like new cars, a huge house, or new designer clothes. For the most part, we take modest vacations that don’t require air travel. We almost always eat at home, tend to buy only things that we need and when we do, hardly ever pay full retail.
However, private school for 3 kids, a large mortgage, two cars (old and paid off), two dogs, an addiction to snowboarding…well you get the picture. Our lives aren’t cheap no matter how you slice it.
While I’m relatively comfortable with our spending and my income levels, I enjoy exploring alternate paths that tweak one or both sides of the equation. There are two main paths that I run through on a regular basis. To be completely honest, I waver all the time on which path is the best for my family. There is also a third option that would likely work in conjunction with either of the main paths.
Path 1: Keep my spending where it is and work for another 10 years. Sigh, a little bit of me died inside as I wrote that.
Path 2: Reduce my spending as much as possible, and cut that time in half or even more.
Path 3: Add an additional income stream that will continue after I leave my full time job. This is a bit of a wild card, and it’s impact will vary depending on how sizable it is.
Consider too, that none of these are mutually exclusive. I can use all three in a number of combinations to vary the end results for getting to my number. It’s a constant puzzle that runs through my head.
Should I cash out, move to a palapa in Nicaragua and surf all day? I bet I could do that within a couple of years if the markets don’t take a huge dump.
Should I pull my kids out of private school and send them to the neighborhood school, which isn’t great from all reports?
Should I bust my ass at work and try to get another lucrative promotion then grin and bear it for another 10 years and retire in luxury?
There is no easy answer, but let’s explore each path in little more detail.
Path 1: This is pretty straight forward. Assuming I keep my spending relatively stable and continue to invest all of my savings, it’s essentially a waiting game. While market fluctuations will have an impact on timing, it’s a somewhat predictable path. While not exciting or exceptionally fulfilling, it’s a solid path. I’m in line to get a 20% raise in 2018, and 2019, so it has the potential to be a very lucrative path.
The biggest risk to this plan is if I lose my job. I’m a very high earner right now (top 4% of U.S. in 2017), and if I were to lose my job, there’s no guarantee that I will be able to slot into a similar income any time soon, maybe ever. This is especially true if it were to happen during an economic downturn that produces a lot of qualified candidates competing for jobs. Throw in the likelihood of a market crash happening concurrently and this path is far from a given. Did I mention the mental and physical health effects of full-time employment for another 10 years?
Path 2: While somewhat straightforward, reducing my spending by significant amounts is far from easy. My biggest expenses are my housing and my kids’ education. With these expenses, I’m still on track to save 50%+ of my income on 2017. 2018 and 2019 will likely be in the 60%+ range if all goes according to plan.
My housing costs are high, $2,600 a month payments on a $368,000 primary mortgage (3.75% interest rate) and a $500 a month payment on a personal loan with a balance of $41,000 (0% interest rate). Of that $2,600, $1,875 of goes towards Principal and Interest, and the rest is put into escrow for taxes and insurance. Now this sounds ridiculous to many people, but we are not talking a McMansion here, we have five people and two dogs in a 2,100 sq ft free-standing home. Housing is just really expensive in Seattle.
I can’t work remotely, so I’m not planning on leveraging geo arbitrage by moving out of the area until I’m financially independent at the very soonest. I could move into a crappy neighborhood, or much farther away from my job, or downsize to an apartment, but all of these come with a significant negative impact to our quality of life, which means they aren’t going to happen. I’ve discussed in detail whether or not I should accelerate my mortgage payoffs here. Right now, that doesn’t seem to make a lot of sense financially.
Investment balance needed to cover my primary mortgage using the 4% rule: $562,500
There is a little relief in sight with the personal loan balance being rather low. While the interest rate is 0%, I am planning to pay this down faster than required, out of respect for the lender, who is a family member that is incurring an opportunity cost by letting me tie up their money. My goal is to be done with this in 3-4 years. This loan was taken out to help us qualify for our current loan. We needed to do this because we put a non contingent offer in on our current house while we still were living in our old house. HUGE mistake, more on that terrible decision in a later post.
Investment balance needed to cover personal loan payment via the 4% rule: $150,000, moves to $0 after 4 years…W00T!
Education costs are roughly $30,000 a year between the three kids. A grandparent has graciously offered to pay for almost half of that, which is a huge help. However, kid number three is rapidly approaching a much higher tuition bracket, so costs will go up by another $13,000 in two years assuming we don’t make any changes.
Investment balance needed to cover via the 4% rule starting in 2019: $750,000
Total investment balance needed to cover housing and education expenses via 4% rule: $1,462,500
Here’s where it gets really interesting. If I were to pay off my personal loan and my mortgage, I’d reduce my end number by $712,000, taking it down to $2,288,000.
After paying those off, suppose I teach the kids what it’s like to ride the bus to the local public school. I’d reduce the end number by another $750,000, which takes it all the way down to $1,538,000.
My current net worth according to Personal Capital is $1,473,486. The difference between these two numbers is only $64,514. If the market stays flat, I’ll very likely close that gap in Q1 of 2018!
I’ve also mapped an alternate path to paying off my mortgage super quickly, making this an achievable path if I were to prioritize it. If I sold my two pieces of vacant land (other not so great financial decisions…maybe I should steer clear of real estate, ha!), I could probably clear $235,000 after capital gains and realtor fees. Throwing that at my mortgage would bring my balance down to $135,000. I could knock that out in 18 months if I threw every dollar of post tax investment income at it. If I then turned my focus towards the personal loan I could easily squash that sucker in 6 months.
Wow, that’s paints a very different path now doesn’t it?
So, I’ve now outlined an alternative path that could get me to my number in 3 years instead of 10. Yes, it’s a different number and would require some significant life changes, which I’m not at all convinced I will make, but it’s pretty cool to know I have that flexibility available. This is a great way to challenge yourself and your life choices to make sure they align with your priorities.
What are your alternate paths?