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Striving for financial independence: Initial stage completed

by xyonent
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In late 2023, I took a major hit to our passive income and our household technically lost financial independence. Prior to that, we had been financially independent since 2012 when I left my job at banking.

My current goal is to regain financial independence by December 31, 2027. To achieve this, I need to replace the approximately $150,000 in passive income I lost by selling stocks and bonds to purchase a new home. This will bring my passive income back up to approximately $380,000 and eliminate the need to work.

After September 2024, our expenses will increase to approximately $280,000 per year after tax as our daughter begins attending a private Chinese immersion school. Therefore, assuming an effective tax rate of 20%, we would need total passive income of at least $350,000 per year to be financially independent.

Regaining financial independence while raising two kids in an expensive city is tough, but I Excited The joy of travelling. It’s similar to the excitement you feel when planning a great vacation.

The road to financial independence: Step 1

The first step to regaining financial independence is to feel financially secure again. Fundamentally, feeling abundant is important because it transcends any level of wealth. Some people make millions of dollars a year and still feel confined, while others make $50,000 a year and have more than enough money.

I violated the 30/30/3 home buying rule by not maintaining a 10% liquid cash buffer after the purchase. As a result, we were financially insecure for six months. It was an emotionally taxing time with heightened anxiety and stress.

However, thanks in part to an unexpected real estate capital distribution in early 2024, we were able to make significant property tax payments and meet the unexpected surge in capital requests.

To further increase liquidity, we cut our food, transportation, and entertainment budgets — for example, we canceled a $500 father’s night event to save money, and we cut all unnecessary subscription costs.

If I invested the $103,000 I made from real estate capital distributions in one-year Treasury bonds, I could generate $5,450 in passive income. However, I would invest in the S&P 500, individual tech stocks, and Fundrise Venture ProductsDuring a bull market, it’s important to press to capture as much of the upside as possible.

The remaining $10,000 is in a Fidelity Money Market Fund earning 5% to maintain liquidity for future capital calls and unexpected expenses. These measures have helped us feel more secure financially.

The road to financial independence: Step 2

The second step in regaining financial independence was deciding whether to sell or rent our old house.

I have decided to rent out my property due to my bullish outlook on the San Francisco real estate market due to the bull market in technology and artificial intelligence. And although I am reluctant to take on the responsibilities of a landlord, I believe this is the right decision financially. Plus, selling in the winter is the worst time of the year.

I ended up renting my old house to three tech professionals and one PhD student for $9,000/month starting February 1, 2024. I was aiming for $10,000/month but just couldn’t find the ideal tenants in time. I could have found a family in April, May, or June, but I wasn’t willing to give up another 2-4 months of rent.

Having a tenant has relieved us of the huge financial burden of paying off our large mortgage. After paying the mortgage and property taxes, Approximately $43,000 per yearAny unexpected expenses will reduce this net amount.

The optimal time to hold real estate is forever, just like owning the S&P 500. Unfortunately, many people run out of patience dealing with tenants and maintenance issues.

Latest estimated passive income: $275,000

After completing steps 1 and 2 towards financial independence, our passive income has recovered from $230,000 to about $275,000.Based on my current passive income, I am still about $75,000 short in total passive income to achieve financial independence.

To generate this additional $75,000 in total passive income, you would need to accumulate the following:

  • $1.5 million in capital at 5% return
  • $1,875,000 in capital at a 4% rate of return
  • $2.5 million capital, 3% return

Interest rates are currently high but are expected to eventually come down, and we are targeting $1,875,000 in new capital by the end of 2027. There is one big problem, though: Neither my wife nor I have a job.

The final step to regaining financial independence

The final step to achieving financial independence is the hardest yet because it requires so much new capital. Here’s how to save $1.875 million by the end of 2027:

1) Get a job

One way to accumulate the $1.875 million in new capital is to get a high-paying job in finance or technology. But finding a job that pays more than $868,000 a year after paying a 28% effective tax rate and saving 100% is hard, especially if you haven’t held such a job since 2012. So you probably won’t get a job at one of those unicorn companies.

If my wife and I did part-time consulting work, we could potentially generate $200,000-300,000 in active income that would at least make up the difference between my total passive income of $275,000 and my future after-tax expenses of $280,000.

2) Write another bestselling book

because Buy this and don’t buy that After my first book became a national bestseller, I was offered a two-book deal with Portfolio Penguin. Once I complete production on my second book this summer, I will receive my second publication advance. Once my book is published in spring 2025, I will receive my third advance. I will receive my fourth and final advance one year after my book is published. After that, I will begin writing my third book.

If I add up the hours I’ve spent writing my second traditional book, I’ll be making less than minimum wage. That said, I’m writing for the joy of writing, not the money. I’ll reinvest 100% of my book publishing advance into the S&P 500, private real estate funds, and government bonds to generate passive income.

Your second book would probably need to sell about 1 million copies to earn enough royalties to accumulate $1.875 million in new capital. I estimate there’s a 2% chance of this happening, but it’s still a chance. For reference, according to BookScan, less than 6.7% of books ever sell more than 10,000 copies.

3) Advance your business development deals with Financial Samurai

I don’t write many product review posts because I’m not focused on maximizing revenue on Financial Samurai. Instead, I like to share human interest stories related to personal finance because I find them more fun to write and read.

But to accumulate an additional $1,875,000 in capital, I need to become more business-minded online. Most of my peers are writing affiliate review posts or creating courses to monetize their brands and platforms. I would consider doing the same for products that I truly believe in, that I am invested in, and that I use myself.

If you give it a try, I estimate you could make an extra $50,000-100,000 a year online, then I’ll save 100% of my income and also invest in the S&P 500 and private real estate funds.

I still can’t believe that anyone can make money online, and this mindset comes from being a Gen Xer who clearly remembers the pre-internet era.

4) Getting lucky by doing nothing

95% of my net worth is tied up in risk assets, and if the bull market continues, another $1,875,000 could come out of nowhere.

At the same time, it is entirely possible that we could see another bear market like the one in 2022 that wipes out over $1.875 million of my net worth in just one year. Obstacles work.

For example, let’s say I get a part-time consulting job making $150,000 a year. Not bad, right? I work 20 hours a week and take home around $115,000 after taxes. Then the stock market drops 10%, and my hypothetical $3 million stock portfolio goes down by $300,000. What a waste of time!

I hate working and losing money on investments, so during bear markets Unemployed Because the return on my effort is low. Right now, the economy is good and taxes are relatively low, making the job more attractive.

Increasing net worth reduces motivation to work

Conversely, if your $3 million stock portfolio rises 10% to generate a $300,000 gain, why bother working for the $115,000 after-tax if you don’t love your job? This is an interesting conundrum that you’ll eventually have to ponder as you get older and wealthier.

I use the $3 million example because I retired in 2012 with a net worth of about $3 million. My net worth had finally recovered by that time, after enduring the turbulent times of the global financial crisis.

I remember clearly feeling very lucky that everything had gone back to normal. At that point, I decided the stress of work just wasn’t worth it anymore. It wasn’t fun anymore and the workplace politics were making me sick of it too.

Still, it’s not my nature to expect good things to happen without doing anything, so I plan to at least write the book and continue to write regular articles for Financial Samurai, as I have done since 2009. But going back to work full time in a bear market will be tough.

I’m looking forward to the new FI challenge.

Unlike my early 30s, when I was desperately trying to escape a terrible job, I don’t feel the same sense of desperation in my 40s. Instead, I’m excited to have challenging financial goals again.

In December 2024, I will have achieved my goal of being a full-time father to my two children for five years. This goal was the hardest and most important victory for me. Now, with both my children in school full-time, I will have time to focus on earning an income again.

During this process of regaining financial independence, I’m going to try to have as much fun as possible, which means only doing things that I enjoy in order to make money, but also always taking a step back and appreciating the present moment.

In a way, it feels like I’m playing with my family’s money. I felt the same way when I went to Berkeley part-time for my MBA. I already had the job I wanted, so grades didn’t matter as much, which made school more fun.

Hopefully the bull market will continue! Let’s see what the future holds.

Happy Independence Day!

Questions from readers

Where are you on your financial independence journey? Do you have a goal of how much you want to save by a certain date? How do you plan to reach your financial independence goal? If you are already financially independent, do you think the journey to financial independence is more fun than being financially independent?

Join 60,000+ others to accelerate your journey to financial freedom. Free Financial Samurai NewsletterYou can also sign up to receive emails as soon as posts are published. here.

“The Journey to Financial Independence” is an original post from Financial Samurai.

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