$24k Net to "Structural Financial Independence" and the Test Drive I Took in January

One thing that never ceased in my absence from blogging over the past year is my efforts toward getting myself to the point where passive income sources could sustain me. That is, my annual household budget funded without working.

I keep track of all of that stuff and plan my strategies for getting there with the aid of several spreadsheets I've built. Basically, I have them set up to show me where I am now versus where I would be if I were to cash out of everything that is a) not already in my dividend income portfolio (excluding retirement accounts and real estate), and then b) move all of the resulting funds into that portfolio and plug it in.

This gives me a running tally on where my assets stand in terms of their value versus their yield potential, such that I can pursue non-income investments while still aiming for a passive income goal.

To bring it all down to a simple bottom line, the spreadsheet culminates in the net amount I need to earn from work each week, assuming I've moved everything into my income portfolio. When that number reaches zero or goes negative, it means I have hit what I call "structural financial independence," the point at which I am positioned to flip that switch and make it happen, even if I have not.

At that point, radically changing my financial life (my entire life, really) becomes "when I want to" rather than "when I can afford it."

As of this morning (while I type here and use my blog to procrastinate a bit before I do my weekly business and personal accounting...), I am $24.3k net away from hitting that "zero point" (precisely, as of this moment it would flip to -$1.68 per week that I would need to earn). The source of this income will be my business; thus, achieving structural financial independence later this year is practically a fait accompli as my existing book of business is worth far more.

I doubt that I'll drop everything and stop working once I reach this point. There's still a lot of things I can and should do to make my passive income machine robust, and continuing to operate my business is the best source of income with which to do that.

However, it will become optional rather than necessary, and the metric by which I decide how to use my time will change dramatically: it will be about what I'd enjoy doing more, rather than what I need to do.

Keeping track of everything as I have has made it possible to see the light at the end of the tunnel and know where I stand in relation to it, and as such, I took advantage of that knowledge and went off the path early this year for a little bit of play: in late December and into the middle of January, I was in Brazil.

Hanging out on the island of Ilha Grande, Brazil

One of the general outline, "fuzzy" goals I have for my financial independence is to stop putting up with winter. I hate the cold, I hate the snow, I hate the ice. I hate the added danger they bring to everyday activities. I get zapped by static electricity all the time. I can't keep the skin on my hands from drying out to the point that it cracks and bleeds. The endless gray days just suck the life out of me.

Fuck winter. Bottom line: Fuck. Winter.

So, knowing that I'm reaching the point where I can ease back on the work throttle a bit, I did. Last summer a friend invited me along on this approximately three week trip, so I jumped at the chance. It was the first time I've gone overseas in a non-military capacity (other than Canada and Mexico, that is), giving me the opportunity and the necessity to get my passport, finally.

And so a bit more than a month ago, there I was, in the southern hemisphere, experiencing summer in January. I was also there secure and relaxed in the knowledge that everything was paid for, that my affairs were continuing to run and fund themselves without me needing to be at work or looking in on them every single day, and that I had earned it. I finally experienced a dream, escaping from winter, and I was able to enjoy doing it, to be there basically without worries about how to sustain it.

And then something more happened, something that I haven't experienced in decades: I lost track of time. I'd find myself forgetting what day of the week it was, and other than where the sun was in the sky, not entirely sure of what time of day it was. Where I was and what I was experiencing began to take on a feeling of stretching out forever, and it was awesome!

This is the best of what I could have hoped for with this little test, that I could break away from work, not financially, but mentally. For a number of years I've been worried that when I get to this point that I'd be so addicted to working that I wouldn't be able to let myself stop. I'm aware of a "workaholic" tendency within myself, but I feel like this little test went so well that I may just be a bit over-pessimistic about that topic, and maybe it's just a case of not knowing myself as well as I think I do. Now, I think I'm going to do just fine.

And I think that very soon, not only will I be working if I choose to, but I'll also be cold if I choose to... :)

Budgeting for Peace of Mind and Resiliency with 70/20/10

Bitcoin and virtually all other cryptos remain in a murderous decline today, with coinmarketcap.com showing that only three are in the green over the past 24 hours (yesterday there were just two).

I realized it is a good day to reiterate something I tell interested parties often, especially at times like these: for every dollar you put toward investments, put two toward your debts.

Why do that? I'll explain (strap in, this is a long one).

I've been using a budgeting strategy for nearly two decades now that was inspired by the book, The Richest Man in Babylon by G.S. Clason. I've been using it all of these years because, frankly, it works.

I blogged about it here years ago, too, though upon review of that post this morning I discovered that the flow chart I had created to illustrate how it all works became lost forever on an image hosting site I once used. No matter, it's easy enough to recreate (and retain a copy of on my hard drive, this time...).

First, the basics:

The budget prescription given in the book breaks one's income down three ways by percentages. Wages and "windfalls" (tips, money you find on the ground, prizes, etc.) are all part of your income, and for most people will start out as their sole source. 70% of this goes to your living expenses, 20% to your debts, and 10% into investments.

From there, I customized things a bit, which this flowchart illustrates:

(click to enlarge)

Clason's original work recommended a strict adherence to these categories; basically, once funds entered one of the three categories, they and all funds subsequently generated by them stayed in that category. Living was strictly that, the maintenance of one's day-to-day life. Debt repayments were strictly confined to that category, and the income generated by investments was to be retained and compounded.

It would be perfectly fine to do things as such, but the reasons I don't are these:

1) Debt payments essentially have two components, a required monthly minimum (most of the time) and a discretionary additional payment on the principal balance. I think the required monthly servicing should be part of one's "living" expenses, because:

• this will make them less comfortable to carry, and
• this gives the 20% debt category far more impact as it's then entirely additional payments on principal

2) Compounding dividends and interest is a great thing, but any amount of passive income can improve one's life now. For most people the 10% put into those investments will have far more impact on their growth than reinvestment of the income they produce, and the additional funds to apply to debt will have a greater impact still. That said...

3) Combining points 1 and 2, the amount that debts cost an individual in terms of their minimum obligation have a huge impact on the sum total of their required income, such that eliminating the debts and their corresponding required minimum payments will typically propel someone toward financial independence (no longer needing to work for money) faster than investment growth usually will, so this ought to have a greater priority.

Therefore, as you can see by my flowchart, I have my budget set up in this way, with my passive income redirected back to the "top" of the chart so that it may filter down through the three categories (as such, there is some compounding of my passive income, but it's not prioritized). This both makes life more comfortable now, and it moves me closer to not having any debts faster while still building assets.

That leaves just two other tweaks to the system, one of which was actually suggest by Clason: if you have no debts, the 20% allocated to them could be broken up between the living and investment category as you see fit. When I get that far, I plan to just dedicate all of it to investments; since I'm feeding the income they produce back into the budget anyway, I figure that doing so will grow the living category with the resulting additional passive income plenty enough to keep me happy, so why not?

The other tweak is that when I do have a capital gain from my investments, I reinvest the full net amount of it, typically into something offering a higher yield than what the gain resulted from (one exception to this are those rare occasions where cashing something out and eliminating a debt with the proceeds could yield greater over-all cash flow, which was the case when I sold some REIT shares this past spring and then nuked my student loans in one go).

I have my investments spread out over lots of different asset classes, markets, and industries, far too many to list here without it becoming a blog post of its own. Among all of the options out there, I think dividend stocks are the easiest to access. Costs in the form of commissions can greatly hamper initial efforts and the resulting yields, which is why I recommend using Robinhood for this. Robinhood offers commission free purchasing and the interface is a smart phone app. Not having to pay investing commissions is huge, because it makes small purchases reasonable to do and profitable (you can literally buy just one share of something and not have your future capital gains and yields killed by commission expense), and it puts this avenue for generating passive income within easy reach of anyone.

Edit 28 January 2021: DO NOT USE ROBINHOOD, THEY ARE A CAPTIVE BROKERAGE OF ENTRENCHED "ELITES" AND HELP THEM MANIPULATE MARKETS AGAINST RETAIL TRADERS

Lastly, depending on your spending habits and inclination to frugality, the constant input of 70% of your income into the living category can result in a hefty balance building up within it. You could just let it do so and take comfort in it as a "cushion" against uncertainty, but past a certain point it might come to represent some missed opportunity just sitting there as "idle cash." What I do is set a limit on how much I allow this category to build up, which for me is five months of living expenses (five months is the typical duration of the slow season in the work that I do). When the balance of that category exceeds five months of my budget, I put the surplus toward debt, as getting rid of them removes their payments from my budget, thus shrinking the sum total of five months of living expenses, creating more surpluses...

This has become a long one. So to sum up then, this is what I have been doing for nearly twenty years now, and it works. My liabilities are shrinking, my assets are growing (and my net worth is positive, something that's unfortunately becoming increasingly rare these days), my passive income is also growing, and most importantly, the amount of money I need to earn from working is rapidly approaching zero.

And these severe down days in the crypto market, or any market, not that big of a deal. In fact, when one's affairs are arranged like this, these events take on the appearance of opportunity rather than calamity...

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One more time, here's my referral link to Robinhood, where you can buy stocks with zero commission cost, and by signing up both you and I get a free share of a randomly chosen stock: Robinhood, the easiest, cheapest way I know of to build passive income from stocks

Edit 28 January 2021: DO NOT USE ROBINHOOD, THEY ARE A CAPTIVE BROKERAGE OF ENTRENCHED "ELITES" AND HELP THEM MANIPULATE MARKETS AGAINST RETAIL TRADERS



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