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Sunday, April 30, 2017

The FI Cake – Or How to Make Interim Goals

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?

Comments

11 Responses to “The FI Cake – Or How to Make Interim Goals”
  1. Jon_Snow says:

    950k is my next goal. Close enough to a million, which has always been the “number” that every retirement calculator suggests is more than adequate. Our portfolio sits at around 850k now… so yes I have nice, juicy interim goal – I need to save another 100k and then I am DONE.

    I would need some excellent investment returns to pull this off by next year, but who knows?

  2. Kestra says:

    I don’t really have specific goals as I find it easy enough to save money and FI is just a background goal at this point. I focus more on doing random (and not too expensive) things when I want to, so that the road to FI is enjoyable.
    But I like your idea of investments paying off different things. Right now my food bill is covered by my investments.

  3. Jacq says:

    I thought you weren’t crazy about this idea when I suggested it a few months ago. :-) I didn’t really start thinking that way myself until the goal posts were a bit closer. But it really is a hugely motivating method.

    Another thing I’ve done is sort of split things out between wants and needs and look at financing things that way. So someone could break things down and try to cover your needs for life in one tranche (food, clothes, shelter, health), then add on wants after that. I think that would help people to carefully consider what wants they really want in their life and how much they cost over time. Like if you considered that you’d have to save up $30k to pay for a lifetime of cable – is it worth it? For some people it is – or it might help them think of alternative ways to get it. Or you might think – hey, I don’t mind working another year or two to save $75k to pay for a couple of nice little holidays every year for the rest of my life. Then every day that you go to work that year you tell yourself “Today I’m working to go on a lifetime of holidays.”

    Plus generally it’s just fun to play these little mind experiments / bake FI mini-muffins. :-P

  4. Sheryl says:

    In the example of your cell phone bill being too easy a goal / too thin a layer, why not add the easy things in with like expenses? Lump cell phones in with other telecommunication expenses?

    I’d been thinking about using this method since I first read about it, and I think in the beginning for me, it will be smaller items (cell phone) that I save the layer for, and then as I see the results (and earn interest), aim for higher expenses to be covered.

  5. Lambert Cook says:

    My next FI layer is to be able to have enough cash flow coming in from stocks / rentals in order for my wife to stay home from work to raise our children after we have the next one.

    Goal, to generate $2,000 a month in cash flow. So far, am at around $1,200. Getting that last $800 a month is proving to be a challenge for me, as currently I am working on paying down debt instead of investing and using dividends to pay down debt.

    Reasoning for this is that $10K in debt = $325 a month payment where as 10,000 at 4% = 400 $33.33 a month cash flow. Just makes more sense.

    My next goal after this one is achieved, is to have enough cash flow to replace my income so that I can retire at 45. So it’s a 10 year goal, but one that is worth working towards.

  6. mochimac says:

    Mmmm.. cake.

    I like mind experiments like that, like “How little can I live on?”

    Trying it out for a month lets me see what I can and cannot do, and if it’s realistic.

    Or trying to reach a portfolio that returns about $30,000 a year. All that requires capital, and it’s nice to have specific-to-you goals to set which help you go beyond just “clear my debt”, because once it’s done… what else is left!?

  7. deegee says:

    When I was planning my ER budget in 2007-2008, I had only 2 layers. The first was to cover my expenses and the second was the cushion, or surplus, over and above my annual expenses which I could use to cover any unexpected expenses or, preferably, to reinvest. I did not want to simply generate enough investment income to cover my expenses. The cushion, when reinvested (which happens most of the time), is also a partial inflation guard, as reinvested investment income will itself generate investment income through compounding.

  8. Tim Stobbs says:

    @Jacq,

    No I wasn’t thrilled with the idea initially as I didn’t realize at the time I disliked the small layers, so hence the idea to just make a thicker one. Yearly goals seem like over kill hence the idea of going out further to three years.

    @mochimac,

    Yes cake…damn your Gravatar picture…every time I see it I want something sweet. So you can partly blame yourself for the cake reference. *grin*

    Tim

  9. Jacq says:

    I think focusing on the yearly time frame is more common once you get close to the end. And then of course, it goes nicely with the “one more year” phenomenon, which is rampant in the ER world – or at least common enough that it has it’s own acronym “OMY”. :-)

  10. Jacq says:

    Interesting that Bengen wrote a paper recently with the title – Baking a Withdrawal Plan ‘Layer Cake':
    http://www.retailinvestor.org/pdf/Bengen2.pdf

  11. We’ve been doing this for the last year. We’ll get to the first goal this week, and the next one may take another 2 years. I don’t think a 1-year goal is too small if it’s something that really pushes you to do more. It also depends on how far out you want the reward to be. We haven’t reached any major milestones like paying off the mortgage so it helps to have smaller things to focus on.

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