Posted by Tim Stobbs on February 27, 2013
So after last week’s post regarding not having an interim goal until full financial independence I started thinking a bit more about financial independence (FI) and realized something important: it can be broken up in phases or layers.
The classic example of this is to consider each of your major bills and celebrate as you get enough savings to be financial independent for each bill. So if your power, water and natural gas bills are $2250 per year in total, when you have saved about $56,250 (I’m using the 4% safe withdrawal rate), then you FI for just those bills. Yes the separation is purely artificial, but it can be useful to create interim goals on your way to full financial independence. The term for this, in classic motivational theory, is a success spiral (yes, it is official I read too much ).
Also after you start stacking up those layers you end up with your FI cake. So in my case, I have the mortgage paid off which is the base of my FI cake. Then depending on how I stack those next layers I could break it down bill by bill, yet in some cases those layers are going to be so thin that a 3D printer would have problems laying them down. Case in point we only spend like $264/year for both cell phones, which would require about $6600 to fill that FI layer. Since I can save about $4000/month, that level of granularity is getting a bit ridiculous.
So now I have a Goldilocks problem, I don’t want too thin of a mattress (or layer) and the interim goal feels too easy, too thick of a layer and it feels too hard. Where’s the middle ground? Well to work that out I started a bit backwards, on our basic spending of $24,000 a year, how much of that can be covered by the profits from our small businesses? A rough number of that would be $10,000/year, so that leaves $14,000/year to fill in. So how much savings to I need to roughly generate that level of income…$350,000 (or $14,000/0.04). Given I’m already around $200,000 saved, that means I need to save another $150,000 which at my current savings rate is just over three years.
Thus in a puff of smoke and some magic words I have a new savings goal: get my investment net worth to $350,000 in three years or Jan 1, 2016. Is it artificial? Why yes it is. Is it contrived? Of course. Who care as long as it works for me!
So that folks is the point of your FI cake: motivation. Make your layers any size you want, add pink or purple icing for all I care. As long as it works for you…do it. The point is to turn a huge problem (saving for your retirement) into smaller more near term goals, which you can see the end to and do something about. Long term goals are a bitch to meet without smaller sub goals (think how many people you know say they want to write a novel, but never do it).
So what is your next FI layer? Or do you use interim goals?