Financial independence… this concept has been discussed on so many blogs that I rarely write about it here. I’ve been working on my own crusade to reach financial independence since I entered the workforce back in 2003. I previously dedicated an entire blog to the topic, had some good fun and made some money with it. Then, I decided to concentrate on my dividend investing blog thinking investors wanted to read about…. Investing!
But it seems that I was wrong. I have discovered gradually that not only are you interested in my views on the stock market, but also about my personal goals and struggles. This is why I decided to share a little bit more with you today. I think my own view of financial independence differs from so many others. The concept remains the same, but my way to achieve it is rarely discussed on blogs out there today.
My Definition of Financial Independence (FI)
Before I start rambling on about my goals, I think it’s crucial to define what FI means to me. I have a pretty short definition of FI: being able to do whatever I want, whenever I want without having to worry about money. Obviously, I mean doing reasonable things and not entertaining ultra-rich hobbies such as sport fishing or taking my private jet to play poker over the weekend in Vegas and to return to my Hawaii mansion on Monday morning ;-).
But for me, FI means that I have the freedom to live my life as I want without having to work for someone. I actually intend to work all my life, but I would rather do it for me instead of working for the man.
My Situation Today
As you read this article, I’m about 50 days away from leaving my ordinary life to go on a one year road trip. But I’m not doing this because I won the lottery, I simply took a sabbatical year from work to leave. However, I can say that I am in a good financial situation for someone who is 34 and has 3 children (believe me, I love my children more than anything else, and being a father of 3 so young definitely reduces the opportunities to save! hahaha!). Here’s my balance sheet:
RRSP account: $65,000
RESP account: $11,0000
Defined pension plan: $90,000
Freefall (my RV): $45,000
Total asset: $576,000
House equity line of credit: $237,000
Personal line of credit: $17,000
RV loan: $45,000
Total Liabilities: $353,000
NET WORTH: $223,000
I consider this pretty good, and it could be much better too. Let’s just say I’m very far away from FI with such a balance sheet! This is why I had to sit down and work on some ways to reach FI. So far, I’ve found 4 different ways. Here they are:
Scenario #1 The Classic Long Road
I’m one of the lucky employees that still has a defined contribution pension plan. This type of retirement plan offered by very few employers puts all the responsibility of the cash flow on the employer’s shoulders. There is an amount taken from my paycheck which is bonified by my employer. For each year worked, I earn the right to retire with an annuity equal to 2% of my 5 best years average salary. In other words, at the age of 65, I’ll retire with 70% of my salary. This income is guaranteed by my employer and it good as long as I live.
You can calculate roughly $80,000 in today’s dollar. This will probably be more as I should continue to see my salary increase over time (I’m only 34 after all!). If I am willing to wait patiently in my office, pay down my mortgage, I’ll be able to retire without any money worries. However, I don’t like waiting that much!
Scenario #2 The Hard Worker
When I started my career, I was happy to know that scenario #1 existed, but wanted to retire earlier. The idea was to work harder and get more promotions, salary increases and bonuses in order to put money aside on top of my employer’s retirement plan.
The idea was to be able to save an additional $5,000 per year in my retirement account and reach the sum of $400,000 at the age of 55. At the age of 55, I would show 32 years of work for my employer. Therefore, I would be entitled at the age of 65 to receive 64% of my salary. Between the age of 65 and 55, I could use the $400,000 to cover my lifestyle and become financially independant 10 years faster simply by working harder.
While retiring at 55 is great, I’m looking to see if there is something better!
Scenario #3 The Frugal Investor
I have learned about those super young retirees, or FIRE adept. Those who achieved financial independence at a young age by saving an incredible portion of their income. Guys like Bert & Lanny over at the Dividend Diplomats, Tyler at Dividend Hustler, Dividend Growth Investor, Jason previously from Dividend Mantra, Mr Money Mustache and Joe from Retire by 40 all have savings rates beyond my imagination. When I am able to save 15-20% of my income, I feel like a king. These guys are/were able to save near (and sometimes over) 50% of their income. If I were to follow their lead, I would probably be able to reach FI another 10 years earlier… therefore at the age of 45. To be honest, I’m trying very hard to manage my expenses, but I find it very hard to live with a monthly budget under $6,000. I expect this will change during my road trip. We will be living a more minimalist life and hopefully I’ll be able to cut down my spending when we come back. However, so far, being a frugal investor isn’t a real scenario for me. This sounds more like torture than anything else!
Scenario #4 Creating Income to Reach FI
I have read a lot of things about FI lately. But it all comes down to the same thing; live way below your means and save money to retire early. I get it, and it works. I mean, obviously, if I live miserably with $2,000 per month and save the extra $4,000 per month, I’ll be rich in no time…. But I would still live a miserable life.
As I mentioned, I work constantly on reducing my expenses. So far, I have been able to reduce my lifestyle (yeah I know, $6K/month is a lot, but it used to be a lot more 😉 ). Then, I thought “what if I could keep up this lifestyle and simply earn more?”. With about 12 months of hard work, I was able to increase my online income by 50%. The extra money is currently going to fund my road trip, but I didn’t spend more money because I made more. I simply used it carefully.
I intend to work even harder when I leave (hey! What do you want me to do at night in my RV?). At the moment, I will be able to leave for a year without any salary and will live with a $3,500/month budget. I’m not too far away from the $6,000/month I need to live comfortably at home. In fact, if I work hard on one side and cut a few expenses, I could reach FI pretty fast. Therefore, if I can continue to work very hard, which I enjoy, and my online venture keeps increasing, I will reach financial freedom by the time I come back home…. Before the age of 36!
Wow… that would be the perfect balance; not being restrained and still reaching FI at a very young age. By combining, frugal living, and most importantly a side income, you could reach financial independence without having a pile of cash put aside. Instead of working to build a $500K or $1,000,000 portfolio paying dividends, what if you create your own dividend paying machine with your own talent? My websites currently generate $3,500 per month of free cash flow. If it was a dividend paying portfolio, it would need to worth around $1,000,000 generating a 4.2% yield.
Now I’m asking you, what is easier to reach? A million dollar portfolio or a side income generating $3,500/month?
Dividend Growth Investor
Thank you for the great article and mention Mike. I think that the value of income in retirement planning is tremendous. So earning enough on the side to bridge the gap could be worth hundreds of thousands in your case.
It would be interesting to see a breakdown of your monthly budget. Perhaps taxes and mortgages are your biggest ticket items? I constantly read stories how housing is so expensive in Canada ( and so are taxes). On the other hand, I thought your wife doesn’t work, does she?
I have found success in trying to focus on things I can control. I cannot control whether KO will do well after I buy it or it would crash and burn. But I can control my savings, what I invest in, the valuation at which to invest, how much expense I pay ( tax and commission), ensuring diversification, and how long I hold on to the investment.
This is a very good idea to post about my budget. In fact, my biggest expenses are related to being a family of 5 relying on a single income (me!). My two older children (soon 9 and 11 year old) eat like adults. Therefore, it is very hard to eat proper food and not spend $1,300 per month on that.
While I make a low 6 figures income, almost 50% of it is gone in taxes (provincial, federal, parental taxes and unemployment financing). I’m seriously thinking of selling my house when I come back too. It’s a big money hole!
Ben at Sure Dividend
Very interesting article. It shows there are multiple ways to financial independence. It all depends on what your skill set is.
you said it right: it depends on each people skills. Some are very good at savings, other are creatives and can do lots of things without money, and others are best at working harder to generate more income.
In fact, all solutions are good, as long as you reach FI 😀
Interesting thoughts Mike, I definitely agree with your explanation of FI. Good points on different ways to achieve FI.
I hope to create my own way and reach it by the time I finish my road trip! We are all taking different paths to reach the same goal. The best part is that once you have set your way, you will reach it!
Kudos for being so open on numbers and thoughts!
Your definition of FI is the same as mine. Be free to do what you want!
As a family, we are somewhere between scenario 2 and scenario 3. The frugal life style is slowly entering our family, yet adjusted to our needs and wants. We do not want to feel like we are giving up too much now. We still do restaurants, even with our 2 kids joining is. For us, frugal is an accelerator,with limits.
scenario 4 looks to be the sweetspot when you have the right skillset to do.
ll the best on the roadtrip and may you return FI!
Over the past 12 months, we have seriously reduced our lifestyle. When we come back, we will have to attack “fixed expenses” such as our house! At the same time, I’m like you, I will not stop doing activities for the sake of being frugal.
Thanks for sharing Mike.
I like all the scenarios but like 4 the best. Side hustle which generates income equal to a Million dollar portfolio. Your income from businesses online is doing awesome. Keep at it and hopefully it’ll generate more and more and you’ll be set. Your focus is your reality.
Only you know whats best but at the end of the day, as long as your happy and having a good time with the family; that’s all that matters. Life’s short so do it your way.
Cheers my friend.
you are right; life is short. We might as well fully enjoy it!
My thought is building a side-income is easy in the short term, but building one that’s as long lasting and self-sustaining as a portfolio of dividend paying stocks? That’s bloody difficult. I’ve had a number of side projects over the years that yielded $3-5k/month but none of them had any staying power. They’d do well for a few years, but eventually they’d start to fall apart, despite time and effort being poured in. My vote goes to the portfolio.
how about creating that extra source of income and invest it all the proceed into a dividend portfolio? I think that if you work full time on your project, they will keep growing… especially if you already have the ability to create small money making machine generating 3,5K-5K per month.
Frugal investor with hard working spirit will get us to the destination a lot faster and easier than others. I am truly enjoying the journey. Frugality does not mean sacrificing the quality of life but enhancing it by appreciating what’s more important.
Thanks for the post!
Having a plan is what matters. I think all paths are good as long as you follow one. Good luck with yours!
Dividend Family Guy
My budget is close to yours DivGuy. Kids (5 of my own) are expensive. My wife doesn’t work so she can take care of them thus reducing our income * 2. On the flip side they are awesome and make me laugh everyday. I think having multiple income streams is the way to go. Dividends and your sites. Just have enough diversity if one stream drops you don’t have to go back to serving the man!
Cheers and I look forward to hearing more about your budgeting.
I wouldn’t trade my kids for anything in the world. In fact, I spend most of my weekends playing with them 🙂
I’m working on an article about my budget, I think it will be interesting.
Nice post and nice blog too. I’ll go for the investor type with owning a profitable company on the side to fund the investments.
Hey Asset Blogger!
thx for stopping by!
Probably the hardest profile in term of work load, but also the fastest to reach FI 😀
Thanks for Information about Four Different Ways to Achieve Financial Independence . Your Article is impressive and very informative. I am now regular visitor of your website and bookmarked it.