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A good daydream for normal people involves winning the lottery or scoring a lifetime pass to the Maldives. Good, normal thoughts. Mine used to be daydreaming that I was the only person left in the world because that meant I could now go into any restaurant and eat for free. No joke, that was my to-go daydream in middle school -_-
At age 13, the KFC on Taraval street was the first place I wanted to be after being left behind in the Rapture. Even back in those school days, I was a pig.
(Valerie I hope you’re reading this and I hope you’re laughing.)
But more common with me lately has been a daydream of outperforming the market, which is probably just as insane. Just think about when income, in the long run, could become irrelevant compared to growth. When your income doesn’t have to come from working anymore – holy moly, wouldn’t that be a beautiful sight?
We don’t learn the same things and it’s clear we do not process the information the same way, at all. He is going towards alternatives forms of investing and I stick with my Boglehead derivatives. Then we come together and merge minds. That’s what we’ve been doing with our spare time when we have the time. We discuss, inquire, and explain what we learned to each other.
It’s a very slow process as you can imagine, but we both learn better this way. Plus we have a while to go until we hit that FI point (formula below). There’s no “yolo” here yet. We are trying to use both our personalities to our advantage as a partnership because much about investing is understanding self. The natural brief is if we can teach each other in a sufficient way that means we have absorbed it correctly and that’s the first step.
Our real point for fatFIRE is safety as we’re naturally careful. Food isn’t as costly as a flight or hotel stay but it is indeed all I (mostly) need to be happy. What did I want to do with the rest of my fatty FI time? Take the kiddies to ballet? Go back for more pole dancing fitness lessons? What’s oddball fun that requires a brain so I don’t turn into soup?
Less beach sand and campouts; more being in bed with all the time in the world, surrounded by take-out food and digging back into Security Analysis with hubby (which was basically what I did this entire weekend.) Throw a few hours of deep life passion projects in there and that’s the recipe for a great day.
The reason for fatter financial independence is to have that margin of safety. It doesn’t mean we use it to live it up. Not into that, it’s really against this particular oddball’s programming, to be frank.
Here’s a random equation my Hippo came up with, it’s not anything complicated. Just solving for what returns to aim or salary or starting amount (ie money baby :P).
r1 = Passive Returns
r2 = Active Returns
S = Salary (After Tax; Before Expenses)
MB = Money Baby (Investable Portfolio)
r2MB = r1MB + S
S = r2MB – r1MB
S = (r2 – r1) MB
MB = S / (r2 – r1)
All 4 solve for the same things basically.
A Typical Example
MB = S / (r2 – r1)
$2,500,000 = $100,000 / 0.10 – 0.06
After decades of diligent saving and maybe some luck with a rich, dead uncle, you’re ready to hang up your day job. So let’s say you dedicate time to managing part of your portfolio and do the homework to generate a higher return rather than staying at a job you hate grinding away.
A typical household or individual making a salary of $100,000 annually will need a minimum of investable $2,500,000 assets returning at an annual average of 4% more to make it “worth it” enough to let go of the day gig. You would need to generate an extra 4% in returns to make up for the $100k salary with a 2.5mil money baby. If the S&P 500 did 6% then you aim for 4% on top of that. If one can do that then it makes sense to give up the day job and start hooking bigger fish.
An easy scenario above, no-brainer, but life isn’t easy. What impacts your numbers will be a huge component of other things like your initial capital (money baby) and income level. Then you have to figure out if assumed effort into managing your own portfolio would yield higher returns that could beat the market. That is not an easy feat for us peasants without a crystal ball or decent diligence.
Then you have to neglect the fact that, without a job, you will not have health insurance and that will always be another wild card in the deck. Lastly, you would also have to assume your expenses will be the same. That’s hard to say. Perhaps without a job, it’s possible to move to a lower cost of living area and geoarbitrage your savings that way.
In a nutshell, the formulas are not perfect. There are various factors that will impact this formula that goes beyond just math. Income is not the only reason why people choose to work. Some people find meaning in their work and would never give it up. Some people hate their soul-sucking job and would live happier, longer lives without one. That is up to the individual. Portfolio returns are never guaranteed. We are all trying to figure out at what level do those diminishing returns make it worth it.
Besides that, according to the math, the rich indeed get richer. That’s one reason why Warren Buffett doesn’t beat the market anymore. Imagine his position in any value stock would immediately flood it and there’s very little value right now for his gargantuan sum. Compounding is powerful. Put strong returns and the two together and most of everything that trips us up today becomes irrelevant. That’s why I stress when frugality stops being fun and money isn’t a problem to let go of the small things.
Top $ Resources That I Use
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The Frugal Gene’s Budget is a free Google budget sheet that we opened up for the everybody to use. The password for our freebies is PFNerds. All you need is a Gmail account and then follow the instructions on the template.