Where Are We Now?

Wherein we reveal our personal financial details to the whole world

SignpostOur basic plan to achieve financial independence just has to do with income, spending, and the difference between the two. With that in mind, it’s time to lay out our own financial picture and see if we are on track to achieve our goals of financial independence and early retirement at 35.

Expenses

Looking back at the past year, our expenses for 2014 break down as follows:

2014 Actual Expenses

Category Monthly Average Comments
Housing $2800 HCOL area and we also incurred home purchase.
At at least we only live in the 3rd least affordable area in the country..
Travel $400 We’re happy to spend on travel, but are a little surprised that it  is our second largest expense
Health & Fitness $330 Getting knocked up is expensive; listen to your sex-ed teacher kids
Groceries $300 This is an expense we could probably lower
Transportation $160 Cars are expensive, bikes are cheap. We unfortunately used the former more than we needed to
Eating Out $110  This is another indulgence that adds up, but we enjoy, in moderation.
Pet Stuff $110 The posse expanded with a second non-human mammal added to the pack
Utilities $65 Nice weather makes utilities cheap
Internet $30
Misc $130  Random purchases that weren’t caught else where: baby preparations, home furnishings, bike stuff
2014 Average Monthly Spending ~$4,500  Yikes!

Our spending for the last year came in higher than we’d like, and not all of it is in areas that directly align with our values. Examining the expenses looking for places to cut (keeping in mind there is another human mouth to feed), we think we should be able cut our spending down to ~$4000/month with minimal work.

Even further reductions in spending are certainly possible and we will be exploring that. That is part of the reason this blog exists: to commit us to track our expenses regularly and continue optimizing them. Perhaps anyone reading this will have input on where to cut. We’ll be providing regular updates on our spending as the year goes by to see how we are doing, so stay tuned.

Income

2014 Average Monthly Income: $17,000

We can just come out and say we were incredibly lucky that this was ridiculously high. High income kind of washes away the sins of high spending, at least from a budgetary surplus perspective.

While it would be nice if our income continues to stay at this level or go higher, that is not a given. We’ll both be taking time off to spend time with The Little Man. There were also a few extra income generating avenues we exploited last year such as AirBnB that might be harder with a screaming baby in tow. We’ll keep looking for new options that we think are fun and rewarding (and hopefully profitable) and write about them as they come up.

There’s a surplus!

The bad news is that we spent like drunken sailors; the good news is the people paying us spent like they were even drunker. The net effect is that we are succeeding in spending less than we earn. You might be tempted to point out this is easy to do if your income is high enough, but not every body manages

By luck or skill, there was/is an average monthly surplus of ~$12,500 that can be used for the final step towards financial independence: increasing our accumulated savings until they are sufficient to meet our ongoing expenses indefinitely.

Required and Current Savings

What we need to do next is figure out now how much money we have to save in total in order to live off forever while supporting our current level of expenses, this is called a safe withdrawal rate. People like to argue about this a lot, and we’ll probably have more to say on that in another post (also check out this article if you are curious), but for now we’ll skip the hulaboo, play it safe and assume we need 30 times our annual spending invested in order to live off indefinitely (in reality we probably need much less). Using nice round numbers, this means we approximately need to save 1.5 million dollars.

Adding up all our bank accounts, stocks, 401ks, etc., our net worth is currently at ~$740,000. If we want continue playing it very safe, we wouldn’t count our home equity since it’s not very liquid (your house is a terrible investment) and say that we have currently have ~$630,000 in investable assets.

Where does that leave us

For simplification, if we assume the same monthly surplus (this is probably optimistic) and zero investment growth (this is ridiculously conservative) it would take slightly less than six years to reach our goal of being financially independent. That would be when we were 38 and 39 respectively. While that’s relatively a young age to be able to retire, the title of the blog is Freedom 35 not Freedom 38/39 (or say Retire By 40, a different blog altogether)..

Thankfully, the analysis so far has been overly simple and full of conservative assumptions, the biggest one being that we ignored any investment returns on our current savings. If we predict we can reach financial independence in six years based on assumptions that are far too conservative, then in real life we are fully confident of reaching our goal of financial Independence at 35 (hopefully afterwards this blog will be tracking our journey through early retirement…). In order to do that, we just have to do the following:

  1. Keep reducing our expenses
  2. Maintain or increase our income
  3. Invest the difference

Or perhaps we could just move somewhere else and retire today?…

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1 Response

  1. Ha — love the drunken sailor analogy, especially for your employers! We have for sure felt the same way, and have been somewhat absolved by high spending by higher incomes (nice problem to have!). Like you guys, we’re now working on trimming the expenses way down, both to save faster, and to ensure that our lifestyle is sustainable in ER.

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