Monday, July 15, 2024

The Grind Back To Financial Independence: Early Stages Complete

The Grind Back To Financial Independence: Early Stages Complete

In the second half of 2023, I significantly impacted our passive income, causing our household to technically lose its financial independence. Prior to this, we had been financially independent since 2012, when I left my banking job.

My goal now is to regain financial independence by December 31, 2027. To achieve this, I need to restore the ~$150,000 in passive income we lost by selling stocks and bonds to buy our new home. This will bring our passive income back to ~$380,000, allowing us to avoid needing to work.

Starting in September 2024, our expenses will increase to approximately $280,000 a year after taxes as our daughter attends an independent Mandarin immersion school. Consequently, with an assumed 20% effective tax rate, we require at least $350,000 a year in gross passive income for financial independence.

Although the challenge of regaining financial independence while raising two kids in an expensive city is daunting, I’m excited for the journey. It’s similar to the excitement you feel when making plans before going on a great vacation.

The Journey Back To Financial Independence: Stage One

The first step towards regaining financial independence is to feel financially secure again. Fundamentally, feeling rich is important given it transcends all levels of wealth. There are people who make millions a year who feel constrained, and people who make $50,000 a year and have more than enough.

I violated my 30/30/3 home-buying rule by not maintaining a 10% liquid cash buffer after purchase. As a result, we felt financially insecure for six months. It was a mentally taxing time with heightened anxiety and stress.

However, partially thanks to a surprise real estate capital distribution in early 2024, we were able to pay our hefty property tax bills and meet a flood of unexpected capital calls. Hooray for consistent investing!

To further boost liquidity, we’ve cut down our food, transportation, and entertainment budget. For example, I skipped a $500 dad’s night out event to save money, and we eliminated all unnecessary subscription expenses.

Having $103,000 from the real estate capital distribution can generate $5,450 in passive income if invested in a one-year Treasury bond. However, I decided to invest $93,000 in the S&P 500, individual tech stocks, and in Fundrise’s venture product. When it’s a bull market, it’s important to press to capture as much upside as possible.

The remaining $10,000 is earning 5% in a Fidelity money market fund, maintaining liquidity for upcoming capital calls and any surprise expenses. All these actions have made us feel more financially secure.

The Journey Back To Financial Independence: Stage Two

The second step toward regaining financial independence was deciding whether to sell or rent out our old home.

Given my bullish outlook on the San Francisco real estate market due to the strength and upside in technology and artificial intelligence, I chose to rent out the property. Despite my reluctance to take on another landlord responsibility, I believe this is the right financial decision. Besides, selling during the winter is the worst time of the year to sell.

I ended up renting out my old home for $9,000 a month starting February 1, 2024. Although I aimed for $10,000 a month, I couldn’t find the ideal tenants in time. I might have found a single unit family in April, May, or June, but I wasn’t willing to forgo an additional 2-4 months of rent.

Securing tenants brought tremendous financial relief given our hefty mortgage. After mortgage and property taxes, we will net about $43,000 a year. Any unexpected expenses will reduce this net figure.

Just like with owning the S&P 500, the best duration to hold real estate is forever. Unfortunately, many of us run out of patience dealing with tenants and maintenance issues.

In retrospect, if I sold in the spring of 2024, it would have been good timing, because the bidding wars came back with a vengeance.

Latest Estimated Passive Income: $275,000

After completing stage one and stage two of my grind back to financial independence, our passive income has rebounded from $230,000 to ~$275,000. Based on our current passive income, we are still ~$75,000 in gross passive income short of achieving financial independence.

To generate this additional $75,000 in gross passive income, we would need to accumulate:

  • $1,500,000 in capital at a 5% rate of return
  • $1,875,000 in capital at a 4% rate of return
  • $2,500,000 in capital at a 3% rate of return

With interest rates currently high but expected to eventually decrease, targeting $1,875,000 in new capital by the end of 2027 is the goal. However, there’s just one big problem: both my wife and I don’t have jobs!

Financial Samurai 2024 - 2025 passive income streams and his journey back to financial independence

The Final Stage Of Getting Back To Financial Independence

The final stage to achieve financial independence is by far the hardest since so much new capital is required. Here’s how I could potentially accumulate $1,875,000 by the end of 2027.

1) Get a Job

One way to accumulate $1,875,000 in new capital is to get a high-paying job in finance or tech. However, finding a $868,000+ a year job and saving 100% after paying a 28% effective tax rate is challenging, especially if you haven’t had one since 2012. So, that unicorn job likely won’t happen.

If my wife and I do part-time consulting, we might be able to earn $200,000 – $300,000 in active income. This income would at least cover the shortfall between our $275,000 in gross passive income and our $280,000 in upcoming after-tax expenses. But it wouldn’t be enough to accumulate our target capital amount in three years.

2) Write Another Bestselling Book

Because Buy This Not That became a national bestseller, I was offered a subsequent two-book deal by Portfolio Penguin. Once I finalize my second book for production this summer, I will receive my second installment of the book advance. Once the book is out in Spring 2025, I’ll get my third installment. One year after the book launch, I’ll get my fourth and final installment. Then it’s off to writing my third book.

After tallying up the hours I’ve spent writing and editing my second traditional book, I will make less than minimum wage. That said, I write for the joy of writing, not for the money. I will reinvest 100% of my book advance installments in the S&P 500, private real estate funds, and Treasury bonds for passive income.

My second book would probably need to sell around 1 million copies to earn enough royalties to accumulate $1,875,000 in new capital. I assign a 2% probability of this occuring. But that still means there’s a chance! For context, BookScan says less than 6.7 percent of all books sell more than 10,000 copies.

3) Do More Business Development Deals on Financial Samurai

I don’t write many product review posts because I’m not focused on making maximum money on Financial Samurai. Instead, I like to share human interest stories that relate to personal finance because they are more fun to write and read.

However, to accumulate $1,875,000 in additional capital, I should be more business-oriented online. Most of my peers write affiliate review posts and create courses to monetize their brand and platform. I will consider doing the same for products I truly believe in, invest in, or use myself.

If I try, I estimate I could make an additional $50,000 – $100,000 / year online. I’ll then save and invest 100% of the income into the S&P 500 and private real estate funds as well. I expect runs and property prices to increase as mortgage rates decline.

To this day, I can’t believe everybody can make money online. This perspective comes from being a Gen Xer who clearly remembers the days before the internet.

4) Do Nothing And Get Lucky

95% of my net worth is tied to risk assets. If the bull market continues, an additional $1,875,000 could come out of nowhere. My moonshot is investing in artificial intelligence companies with 10% of my investable capital. My precious moonshot was investing in Tesla in 2016.

At the same time, we could easily experience another 2022-like bear market, wiping away $1,875,000 or more of my net worth in just one year. This large absolute dollar swing in net worth, up or down, is actually a disincentive to work.

Let’s say I get a part-time consulting job for $150,000 a year. Not bad, right? I could put in 20 hours a week and take home about $115,000 after taxes. Then let’s say the stock market corrects by 10%, bringing a hypothetical $3 million stock portfolio down by $300,000. Dang, what a waste of time working!

I hate working and then losing money in my investments. As a result, during bear markets, I like to work less because my Return On Effort is lower. Times are good right now and taxes are relatively low, which makes work more appealing.

A larger net worth reduces your motivation to work

On the flip side, when a $3 million stock portfolio is up 10% and returns $300,000, why bother working for $115,000 after taxes unless you love your job? As you get older and wealthier, this is an interesting conundrum you may eventually need to ponder.

I use $3 million as an example because I retired with a net worth of about $3 million back in 2012. After enduring some treacherous years during the global financial crisis, my net worth finally recovered by then.

I distinctly remember feeling incredibly lucky that everything bounced back. At that point, I figured the stress of work wasn’t worth it anymore. I was no longer having fun and work politics were also bumming me out.

All the same, it’s not in my nature to do nothing and hope for good things to happen. So, I’ll at least work on my book and continue writing on Financial Samurai regularly as I have since 2009. But going back to work full-time is going to be tough in a bear market.

Going To Have Fun With My New FI Challenge

Unlike in my early 30s, when I was desperate to escape my dreadful job, I don’t feel the same desperation in my 40s. Instead, I feel excited to have a reach financial goal again.

Come December 2024, I will have achieved my goal of being a full-time father to both of my kids for five years. This goal has been my hardest and most significant triumph. Now, full-time school for both kids will free up time to focus on earning again.

During this process of regaining financial independence, I’m going to try and have as much fun as possible. This means only doing things I enjoy to make money. This also means constantly taking a step back and appreciating the moment.

In a way, I feel like I’m playing with the house’s money. The feeling is similar when I went to Berkeley part-time for my MBA. I already had the job that I wanted, so school became more enjoyable given grades no longer mattered as much.

Here’s hoping the bull market will continue! Let’s see what the future holds.

Happy Independence Day!

Reader Questions

What stage are you in your financial independence journey? Do you have a set dollar amount you’re targeting to accumulate by a certain date? How do you plan to achieve your FI goals? If you are already FI, do you believe the journey to FI is actually more fun than being FI?

Diversify Into Private Real Estate

Invest in real estate more passively and check out Fundrise. The firm manages $3.5 billion+ in private real estate funds that predominantly invests in the Sunbelt region where valuations are lower and yields are higher. It focuses on residential and industrial commercial real estate. 

My investments in private real estate years ago are paying off today. They are also what helped me get liquid this year. After I had children in 2017, I no longer wanted to manage as many rental properties. 


Fundrise is a longtime sponsor of Financial Samurai and Financial Samurai is an investor in Fundrise.

To expedite your journey to financial freedom, join over 60,000 others and subscribe to the free Financial Samurai newsletter.

The Journey Back To Financial Independence is a Financial Samurai original post.

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