Becoming financial independence is simple but it is not an easy task. It takes years of planning and hard work to hit this simple yet challenging goal. We have always set a target of becoming financially independent sometime in our 40’s. On the About page, I provided a more specific timeline:
Through frugality, dividend stock investing, and other passive income streams, I am targeting to reach financial independence in 2025 or earlier (in my early 40’s). My wife and I want to become financially independent to gain more freedom and choices in life. When financially independent, I plan to continue working. My ultimate dream is to one day travel around the world and live in different countries for extended periods of time to learn about the local culture and explore the surrounding area.
In reality, we don’t have our hearts set to a specific year. Becoming financially independent sometime in our 40’s would be fantastic.
What if we were to aim to reach financial independence by 2025? Are we on track?
Let’s take a closer look at the two key elements on becoming financially independent – Expenses and Passive Income.
Controlling our expenses
Below are our historical expenses and our 2017 expenses so far.
|Total Core Spending||Core Spending per Month||Total Annual Spending||Total Spending per Month|
|2017 (after 5 months)||$15,267.47 ||$3,053.49||$19,224.14||$3,844.83|
|2017 (after 5 months, minus unexpected expenses)||$12,984.96||$2,596.99||$16,941.63||$3,388.33|
As you can see, our 2017 core monthly average has gone up quite a bit compared to the previous years. An extra of $600 per month in expenses is a bit concerning. However the $600 per month increase is due to a couple of unexpected major expenses and the purchase of a small green house. If we take out these expenses, our core monthly spending drops down from $3,053.49 to $2,596.99. At $2,596.99 per month core spending, this roughly aligns with the other years. Considering there are 7 more months in 2017, we are hopeful that we can lower our monthly core expenses.
When we are financially independent and not working, we expect our expenses to be lower. In our financial independence assumptions, we estimated our total expenses to be $38,640 per year, or $3,220 per month.
For conservative estimate, we will assume that $40,000 to $50,000 per year of passive income is needed to be financially independent. It is hard to estimate the exact amount since many things will change over the next 6- 16 years.
Controlling our expenses is critical. The lower the expenses, the easier and faster it is to achieve financial independence. This is why we track our expenses and review & analyze them on a regular basis.
Using dividend income to cover expenses
For this particular simulation, we will assume are we financial independent when dividend income can cover 100% of our annual expenses.
Below is our historical dividend income and the respective YOY growth rate.
|Dividend Income||% YOY Growth|
|2011|| $675.21 ||N/A|
|2012|| $2,484.37 ||267.94%|
|2013|| $5,456.20 ||119.62%|
|2014|| $8,362.30 ||53.26%|
|2015|| $10,318.02 ||23.39%|
|2016|| $12,559.74 ||21.73%|
One thing that jumped out right away is that our YOY growth rate is decreasing. This, however, is an expected behaviour.
As dividend income amount gets larger, it becomes more difficult to have a high YOY growth rate.
For example, going from $100 dividend income to $200 dividend income (a 100% YOY growth) requires $3,334 of fresh capital. This is assuming there is no organic dividend growth and a 3% dividend yield. Adding over $3,000 to an investment portfolio is a relatively easy task for most people.
Now consider going from $20,000 to $22,000 in dividend income (a 10% YOY growth). This requires $66,667 of fresh capital assuming there is no organic dividend growth and a 3% dividend yield. This is a much harder task because $66,667 is not a small lose change for most people.
With a decreasing YOY growth in mind, I ran a few different dividend income simulations.
Based on these simulations, we can hit ~$50,000 in dividend income somewhere between 2024 and 2028 (highlighted in green above). This roughly aligns with my 2025 estimate.
If $40,000 is needed to reach FI, then we can achieve FI somewhere between 2023 and 2025 (highlighted in yellow above). Again this roughly aligns with the 2025 FI estimate.
Overall, it’s comforting to know that we are on track with our goal of achieving FI in our 40’s. But we are using a lot of assumptions and estimates. Is it valid to use these YOY growth rates? Or should we use lower YOY growth rates?
Expediting our financial independence journey
Are there ways to expedite our financial independence journey? Absolutely! Here are a few ways we might be able to expedite our FI journey.
- Increase family income. Right now we are a single income family. Once both kids go to school, Mrs. T can spend more time on her businesses and bring in more income each month. This will allow us to add more money in our dividend portfolio each month.
- Reduce our expenses. This may mean cutting back on a few luxuries. Is this the right call? Hard to say. Looking at our past 5 year expenses, I think we have gotten our expenses mostly in control. Currently I am more on the side of finding the right personal balance between spending today and saving for the future rather than extreme saving.
- Move to a lower cost of living city or country. For example a smaller Canadian city, Taiwan, or South East Asia.
- Sell our house and use part of the proceeds to add dividend stocks to our dividend portfolio. We would then either relocate to a lower cost of living area or get a smaller house.
- Right now we plan to live off dividend income only. We do not plan to sell any stocks. We can expedite our FI journey if we were to sell a small portion of our portfolio each year and use the money in conjunction with dividend income.
- Create other passive income streams so we don’t have to rely 100% on dividend income to cover our expenses.
A closer look at our financial independence journey reveals that we are roughly on track with our timeline of becoming financially independent sometime in our 40’s. One key thing to keep in mind is that we are not set on our post-financial-independence plans.
Mrs. T and I continue to remind ourselves to be flexible. We need to be flexible and fluid with our future plans and goals. Things, plans, and people can all change. We need to be adoptable for these changes.
We may do a partial FI by relying on dividend income and work part time. Or we may prolong our FI journey by shifting our timeline to sometime in our early 50’s.
Whether we decide to expedite our financial independence journey or not that remains to be seen. For now we are thankful and grateful to be where we are financially, especially considering that our net worth grew by 34.4% in 2016.
For the most part, we have been setting our finances on auto pilot. We will continue doing all the things that we have been doing since our financial epiphany. We will practice being patient and enjoy our financial independence journey. 🙂