Friday, September 28, 2012

Nuts and Bolts

Saying you want to be financially independent by forty is one thing.  Having a plan is another.

So, here is our plan:

  1. Pay off our home by January 1, 2014.  This is really where our family is different from the others on the block, and from some the other early-retirement/financial households.  The math almost always says to put your money into the market rather than to pay down low-interest, sometimes-but-not-always-deductible home debt.  It does in our case, too: we have a fixed 15 year mortgage at 4.25% and an index mutual fund will beat that most years.  But here is one area where our psyche wins over the spreadsheet.  I want the psychological freedom of having absolutely no debt.  To that end, we're making an extra payment to principle every month.  My gut says that once the home is paid off, my work performance may improve as I'd be willing to take more risks and to advocate interesting ideas, possibly making the psychological benefits financial ones, too.
  2. Continue to invest no less than 60% of our take home pay every month.  Now, much of that 60% is being 'invested' in the principle of our home every month.  But, once it's paid off in roughly 15 months, that money will simply shift to max out our 401k (not quite there yet) and then go to taxable accounts (yuk!), as we already max both Roth IRAs.  
  3. Find a second stream of income.  While my wife is in school pursuing a Ph.D., I'd like to find a way to get some income diversification.  The problem is, a traditional second job seems like it may lead to burnout: I'm steadily stressed from the office job.  I have some ideas on how I'd like to earn some side cash without punching another clock -- more on that in a future post.
  4. Dear Wife finding employment.  Towards the end of this 8-9 year plan, my wife will be working and I think that'll be the final push we need to get over the finish line, so to speak.
  5. Add at least $50k to liquid investments every year.  Assuming a 4% safe withdrawal rate (more on that later), and a $24k annual budget (with no mortgage), we would need $600k in investments, not counting our home.  That's a lot more than we have now: $190k.  We have roughly 8 years to hit the goal and, using a preposterously conservative assumption that our investments will not grow while we're building this nest egg, we would need need to add $50k every year for eight years. Some simple math on how to get there: max out a 401k every year ($17k), max out two Roth IRAs ($10k), and put $23k into taxable accounts.  
So, that's the plan.  I have to admit that I am fairly terrified by step five.  It's ambitious to say the least, but to get out of the rat race in the next eight years, that's the pace we have to keep.  

Our next post will give a better idea of where we are now: the monthly check in.

*The photo above was taken by Bludgeoner86, found in the Creative Commons section of Flickr.


  1. Just a thought, it may be worth maxing out the 401k now just because it's time you can't get back even if it leads to taking longer to pay off the house. I understand the psychological aspect of paying off the house though.
    It looks like you will only miss another year of maxing out though so it isn't that bad.

  2. You are right. The math says to max the 401k and invest those dollars rather than to pay down the 4.25% mortgage. We are financial wimps though, and started our financial journey in the Dave Ramsey camp, so sometimes we do things that aren't optimal from a hard dollars, bottom-line perspective.

  3. So I was looking for your Financial Independence Day proclamation and I think this is the closest I've come, can you message when exactly 40 is on the calendar? Love to add you to my list of FI Day, think Net Worth for FI people. Thanks.