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It’s been a long time since I wrote about the general state of my financial affairs. A few readers have written to express concern that I’ve lost my way. I haven’t. If anything, I’m more devoted to this stuff than ever.
But as I wrote earlier this year, I’ve entered a different stage of money management. During the first two stages of personal finance (debt elimination and establishing a foundation), things happened quickly. They did not seem quick at the time, but they were.
Now I’m in the third stage of personal finance. Progress is steady, but there’s not a lot of scenery. Have no fear: I’m still on the road to financial freedom.
Starting with quick wins
When I started paying down debt, I achieved a lot of quick wins. I’d pay off one debt, and then nix another a few months later. Back then, time seemed to drag — no question — but in retrospect, my progress was constantly visible. Even if I wasn’t writing the final check for my computer loan in a particular month, I could see that my debt snowball had reduced the balance by a significant amount.
When I made frugal changes to my life, I could see the results immediately. Cut my television bill? Fifty bucks a month in my pocket! Cancel the magazine subscriptions? More money for me! And as I gradually weaned myself from bookstores and comic shops, my positive cash flow grew faster than I imagined possible.
By giving up certain things I had thought were necessities, I was able to find more money to throw at my debt, which just accelerated the entire process. As I say, progress seemed slow when I started, but I was actually reaching new landmarks all of the time.
The third stage of personal finance
Today I’m in a different place. I no longer reach significant milestones every month. It’s more difficult to find new ways to be frugal. That doesn’t mean I’m not making smart choices, that I’m not making progress. I am! It just means that the landmarks are spaced farther apart. Here are some of the things I’ve done (or continue to do):
- I’ve eliminated my debt.
- I’ve amassed a $20,000 emergency fund.
- I’m maxing out my retirement plans. (And I’ve begun to invest outside them.)
- Kris and I have accelerated our mortgage payments.
- I was able to purchase a used Mini Cooper with cash.
- This year I will earn more than I’ve ever earned in my life.
- And still, Kris and I continue our frugal ways.
All of these things are fantastic. I’m ecstatic to have turned my financial life around. Earlier this evening, Kris said, “You’re not even the same man you were five years ago. You’re like the new and improved J.D. I like it.”
She’s right.
I feel like I’ve reached a sort of financial nirvana. I’m not financially independent — but that doesn’t matter. I’ll get there. Meanwhile, I no longer experience the guilt of overspending. Though I do make the occasional financial mistake, I’m no longer in danger of overdrafting my bank account. I don’t incur late fees. I have enough money to indulge myself.
This feels good. This is what it’s like in the third stage of personal finance.
The road ahead
My journey isn’t over. My financial engine is humming smoothly. I’m ripping down the highway of life on the road to financial independence. There aren’t many landmarks to share right now, but I know there are many ahead.
More than that, there are new paths to explore. I’m eager to discover (and to share) tips for those who have mastered the basics of personal finance. How does one buy municipal bonds? Is real estate a practical investment for the average joe? What’s the best way for me to use my money to help others? What can we do to optimize our financial systems? How can we boost our incomes while remaining frugal? How can we keep our psychological weaknesses in check?
And at the end of it all, there’s financial independence. Will I ever reach this goal? If you had asked me five years ago, I would have said “never”. Now, though, I’m more optimistic. It may not happen this year. And it may not happen next. But I think I’ll get there before traditional retirement age.
It’s not my goal to gloat or to brag or to have you write, “Great work!” My goal is to show what can be done through hard work and perseverance. It’s true that we’re all different and that we all start from different places. But I sincerely believe that given enough time, nearly everyone can get rich slowly.
I am doing it, and so can you. I’ll be here to help you find the way.
This article is about Real-Life Wednesday, 2nd September 2009 (by J.D. Roth)
September 2nd, 2009 at 5:04 am
JD: You should put this somewhere that’s visible to everyone visiting the site for the first time. It explains exactly where you’re coming from and the value you bring to your readers.
Awesome.
September 2nd, 2009 at 5:12 am
Nice post JD!
The road to financial independence is a long one and the journey never really ends . . . keep on, keepin’ on!
September 2nd, 2009 at 5:12 am
J.D. This is a great summary of where you currently are in your journey to get rich slowly! I’m currently in the same stage as you are and put frankly … it’s boring lol. Once you get going and start making the right moves it’s just a matter of continuing to do that for years and years!
-Gen Y Investor
September 2nd, 2009 at 5:14 am
I love the comment your wife made, J.D. That’s true success.
To some extent I agree with the idea that financial freedom is available to all who are willing to work for it. While that optimistic take is generally my own, I see dark clouds that could imperil that dream for many of us (including you and me).
If the U.S. economic system (or even the U.S. political system!) fails, all hopes of financial freedom for a long, long time go out the window. People were openly talking about our financial “crisis” a few months back and now that stocks have gone up a few points that concern has been pushed to a back burner. I see that as a terrible mistake.
I believe that the crisis remains very much with us and that we all should be doing what we can to bring it to an end. Not just because it’s the right thing to do. Because our own hopes for financial freedom are imperiled by it. We do not live on an island. Our fates are intertwined. We should care not only about what happens to us individually but about what happens to us as a people as well.
Rob
September 2nd, 2009 at 5:27 am
Way to go, J.D. You are at an awesome point with your finances.
Lovely photos, by the way.
September 2nd, 2009 at 5:39 am
Very nice and uplifting article. Congratulations on your achievement! I’ll share my own small victory here. My wife and I have been following Dave Ramsey’s plan for the past year with some modifications. We have a $5K emergency fund, have been writing monthly budgets and are actively paying down debt. As a result of the debt paydown, we have two paid-for cars and only have student loans left until we are out of the debt hole. This has let us effectively live off of one income while we put “extra” towards debt repayment.
Last Thursday, she was laid off from her job. Most people who heard about it immediately said “OH MY GOD THAT’S AWFUL”, likely because they have the credit card debt, the car payment(s) and the mortgage(s). But secretly, it’s not a bad thing for us at all. It’s turned into something that’s more of a blessing. She got severance payments and will receive unemployment payments, too. Our kids will be able to spend more time with her at home. She’s using the time to launch some side businesses she’s been wanting to do for a while. She’s going to look for employment that matches her schedule — not the other way around.
This is after only a year of putting the effort into it. Had we not been putting the effort into it, we’d be in a mess — with the debt being a significant stress generator. Instead, it’s an opportunity for many good things to happen, and a glimpse of the future for us and our kids.
So for those waiting on the sidelines, I say get going today! There are lots of methods out there — the Ramsey one, the balanced spending formula and so on. Give them a try for a few months and see how it works out — and change what you need to to make it work for you. Or scrap it entirely and try something else. But you’ll never know until you try!
September 2nd, 2009 at 5:46 am
One particular reason this stage of personal finance can feel so slow is that even when you’re doing the right things (contributing regularly to an IRA, 401k, etc.), your account values aren’t necessarily reflecting it.
A friend of mine once shared what I thought to be a great piece of advice: When you compare brokerage statements from one period to another, look at how many shares you’re accumulating, not dollars. As long as you have confidence that the shares will eventually increase in value (which you should if they’re diversified funds/etfs), then you don’t need to worry.
September 2nd, 2009 at 5:47 am
JD, I am a longtime reader and very occasional commenter. Your story has been inspiring to me. I have been half-heartedly trying to get out of debt for some time, but a recent breakup has accelerated the need to buckle down. It’s great to hear your successes as well as your tips and hints!
I currently have 70k in debt, 25 on credit cards, 45 on a truck (courtesy of my ex and a testament to the folly of co-signing). After we broke up , he was able to finance a new truck for himself at 0% and leave me with the co-owned one. Thankfully, I have been able to sell my house (albeit for less than I paid for it 5 years ago) and move in with a friend, enabling me to pay down debt at approx 1k/month above minimum. But 70 months seems like such a loooong time…..my daily dose of GRS helps me stick with it!
September 2nd, 2009 at 5:50 am
Wow, those are the best photos I’ve ever seen. I didn’t even need to read the post!
You’re right - the “third stage” is a lot slower. It sometimes feels like your actions don’t make much of a difference - once you have a pretty good EF then saving another $1k for it doesn’t change things much.
It can be tough to stay motivated without the easy wins.
September 2nd, 2009 at 5:50 am
JD - awesome post, and like was mentioned above, this is an example of the value of your journey and your story - you can walk along side everyone improving their finances. You may be a step ahead or behind, but in general, people can try and get in step with your cadence.
I’m in a very similar situation to you right now. It’s not as fun or exhilarating to see a debt go away or to have some other big win. Do you think there is value in trying to, dare I say, fabricate a “big win?”
We’ve tried it - setting goals of net worth and then celebrating when we get there - but it feels like setting your clock ahead 5 minutes so you’re not late somewhere. You always know what time it REALLY is.
I’d love to hear your thoughts on that one…
September 2nd, 2009 at 5:54 am
Hi JD,
This is really great to see your progress. Something I’d like to see on this site is your experiences with running your small business. I think it’s important for readers to realize that many of the most financially successful people out there own their own companies and know how to take advantage of tax structures because of it. While you would have to state VERY strongly that it would not be for those who are still working their way out of debt, I would be interested to hear more about your business side of things. Are you registered as an LLC yet? Have you separated out your business income and personal income? I think this might be a good direction to take next. The “Graduate Course” of GRS, if you will
~Chris Gammell
http://chrisgammell.com
September 2nd, 2009 at 5:58 am
I really like this post, especially when I compare it to a recent post from one of your fellow financial bloggers. He purposely decided to account for his personal worth in a way that artificially put himself in the red by not counting his house as an asset, but by counting the mortgage as a debt. To me, this was such a blatant misrepresentation of his wealth meant to reassure his readers that yes, he was just like them, struggling. This is not true.
I don’t want to be placated with fake platitudes. I am happy to read about success. I want to know that delayed gratification works and is worth it, and brings it own joys. It makes me happy that I am on the same road.
Enjoy your success, and thank you for sharing it with us honestly. Hopefully we all get to the same place ourselves.
September 2nd, 2009 at 5:59 am
J.D. I’m glad for you and I hope you continue to write with the same insight in this third stage. I have had quite a few blessings so I have never really been in the first two stages in any serious manner. Although your frugal advice keeps me on my financial toes, I’ve been trying to make headway in the third stage for almost two years. I look forward to your research into real estate and other avenues of income.
And I second Rob’s concern, it will be hard to be financially free with outrageous taxes, unstable contracts, and rapid inflation which all loom dangerously close to the horizon.
September 2nd, 2009 at 5:59 am
That’s really great progress so far. If you are looking for new topics to write about, I would highly suggest that you write about running your small business now. Have you registered as an LLC or as a sole proprietorship? Is your tax structure different? I have often heard that the most financially successful people own their own business, and I can see why that is so. There are many tax incentives out there that can promote owning a small business as opposed to being an employee. I think the only thing to watch for would be that you strongly stress that it’s a VERY advanced topic and that it shouldn’t be considered until personal finances are under control. Perhaps it could be the “Graduate Course” of GRS. Looking forward to seeing more progress from you!
September 2nd, 2009 at 6:09 am
Very inspiring, JD. I’m looking forward to seeing you tackle these new financial paths. I’m still in debt elimination phase and will probably be here for a few years (thanks grad and law school), but reading your experience reminds me it’s possible to become debt free.
Keep on keeping on my man.
September 2nd, 2009 at 6:11 am
This is true but unfortunately, a great many people in this country just want to accumulate more and more that is new and newer. I work with people who shop almost every work day(and probably for bigger things on the weekend), are paying huge interest on their credit cards and complain about money every day and the impossibility of ever getting out of debt- and these are all people who make good salaries by most standards. People wonder how I can retire and seem to think I will be living in poverty- but we have no debt- no mortgage, no loans,college paid for our kids and pay our credit cards off every month. It is not just the mortgage crisis or loss of jobs- people can be incredibly wasteful with spending on unnecessary stuff.
September 2nd, 2009 at 6:24 am
Thanks for the post JD. As a new subscriber to the feed, I knew very little about your financial journey and where the backdrop that your posts came from.
I’ve been actively following a debt elimination and savings plan, and always get encouraged by the successes of others.
September 2nd, 2009 at 6:25 am
A house is not a liquid asset and, well, everyone needs a place to live. Thus, when companies that cater to high net worth individuals search for clients, they don’t include the personal residence in the net worth calculation.
And a mortgage is a debt. It falls on the liability side of the balance sheet.
September 2nd, 2009 at 6:33 am
Great post! Congrats! It sounds like you are doing very well. Making good choices inspires confidence.
September 2nd, 2009 at 6:37 am
Great post - and it does bear acknowledging. In spite of there being little scenery, there is progress. And the fact that you are delving into other topics proves that. Talking about bonds and investing would be almost totally irrelevant if there were still debt elimination issues on the table. And everyday that you keep up with the habits that got you this far is an achievement - just not one that requires daily updates! Keep it up and thanks for sharing it all.
September 2nd, 2009 at 6:43 am
JD, it’s great to hear an update about your journey. I feel like we’re going slow in the payoff stage and I dream about getting to where you are now. I can’t even imagine it. I’m sure soon I will look back and be amazed that I ever felt this way.
The photos are lovely, I hope you can use them again and again and again :-).
September 2nd, 2009 at 6:50 am
Congrats, JD! As someone who checks your blog daily, it’s always great to hear how you’re doing. Inspirational for all of us.
September 2nd, 2009 at 6:51 am
Heh. I’m enjoying the comments about the photos, though it’s an inside joke. A little background for those who don’t follow my twitter feed.
I have several sources for legal photos on GRS. One is commercially-licensed Flickr photos. Another is my own photos. And a third is photos I purchase iStockPhoto. These generally cost a buck for a low-res version like I use here.
Well, when I purchased these two photos, I didn’t pay attention to the cost. I just assumed they cost a buck like all of the photos I use. I was wrong. Each of the photos on this post cost 20 bucks a piece! Oops. That’s a mistake I won’t make again.
And it’s the reason some commenters are singling out the photos for praise.
September 2nd, 2009 at 6:55 am
JD,
I’m curious how you’ll define for yourself when you’ve reached “financial independence.” Do you envision a moment when you’ll be able to look at your finances and say, “Aha, I’m finally there”?
I’ve always thought of it as more of a journey than a destination - that no matter how much money or freedom I have, I’ll still want to seek improvement if for nothing more than personal satisfaction.
Is financial independence a continuum for you or is it an actual end point that you know you’ll reach and kick your feet back at?
Is all the hard work the journey or the destination?
September 2nd, 2009 at 6:56 am
Congrats JD! “I will earn more than I’ve ever earned in my life” and “We continue to live our frugal ways” is the Yin and Yang of it. The secret of long term wealth right there.
It’s so great to have a large community of readers to go on the journey together and keep each other honest.
I’m also curious to know what “financial independence” means to you? Mine is simply $3 million cash in the bank, excluding everything else so I can live off the interest income. Who knows when that will be, but hopefully not much past 42.
Your book deal alone could launch you past the millions in a heart beat!
Best
September 2nd, 2009 at 7:00 am
@#18 Ann: Liquid, not liquid, it really doesn’t matter. If half of his mortgage is paid off, he has equity in the home. That needs to be accounted for in order to get a fair assessment of his personal finances.
Pretending that money is not there is either dishonest or just plain stupid.
September 2nd, 2009 at 7:01 am
To echo others, the third stage can get a little, well, boring. When we were paying off debt, we had all of these mini successes. I was constantly learning something new about how to manage our money or how to be more frugal. It was a whole new world to me. But now that we’ve saved our EF and are debt-free, there aren’t as many milestones…it’s more about trucking along and sticking to the basics. And while it seemed to take forever to get here, in reality, it was only one year.
Of course I love where we are now…if I got laid-off tomorrow, I know we could live off of one salary for at least a year. We have options. I just have to look for ways to keep myself interested in our finances like I was when we were paying off debt.
September 2nd, 2009 at 7:09 am
@RB - Your comment reminds me of my parents. My mom said that when she was pregnant with me in 1966, she knew that she and my dad would be set for life just as soon he earned . . . $10,000 per year!!
Thinking about how we each define financial independence is interesting to me, too. How do we know we’ve achieved it? What does it feel like? Is it a set of conditions we’ve met, like able to live off the interest, or a hard number, like $10,000/year or $3 million in the bank? I think Tyler is asking the right questions that we each need to answer for ourselves.
@AD - One of the things that keeps us going is creating and reviewing a balance sheet monthly. It helps me track the real progress we make in reducing mortgage debt and increasing savings. I know I’ll breathe a little easier when we’ve got more saved than we owe on the house.
September 2nd, 2009 at 7:19 am
great article!
as for the photos, i’m really curious as to where the first photo was taken - anyone know? that photo makes me want to go there, wherever it is.
September 2nd, 2009 at 7:26 am
“A few readers have written to express concern that I’ve lost my way”
This is one of the keys, actually.
You have accountability to a swarming mass of people, which keeps you on track to Do The Right Thing.
This is huge. Why do so many single people struggle with their finances, even when they know better? They don’t have someone who will love them enough to hurt their feelings. Why do so many marriages struggle from money fights and money problems? Because both people aren’t on the same page to work together to overcome the problems.
September 2nd, 2009 at 7:27 am
I for one am currently hoping personal finance will some day become boring!
If the past year or so of snowballing is what “fun and excitement” are like, count me out!
September 2nd, 2009 at 7:34 am
Hi JD,
Am writing to you from Bangalore. Reached here via Trent’s site link. This post means a lot to me as I too am on the long & winding road to financial independence. I had to start late due to personal circumstances but better late than never, I feel. This post is very inspiring to me and I hope to write a similar one for my kids in my diary! Thank you very much!
Ravi
September 2nd, 2009 at 7:40 am
Thanks for the uplifting post J.D.!!! It has given me the strength to keep moving forward. I have been a quiet fan of yours for quite some time now, and this post has moved me enough to leave my first comment. I have been paying down debt for the last two years, eliminating all of our (my husband and I) credit card debt, and paid off one car. Once the second car is paid ($8k balance), we will only have student loan debt to tackle. We recently received a windfall of about $5k, and bought new furniture instead of applying it to the car loan. I felt HORRIBLE about this decision after making it, and became alarmed at how easy it was to start spending money again on “things” instead of concentrating on debt repayment. Your post has reminded me that it is possible to make mistakes along the way, as long as you learn from them and don’t forget the ultimate goal - financial freedom. Keep it coming J.D. - you do great work.
September 2nd, 2009 at 7:41 am
@Alexandra - Pretending that equity is the same as having money in the bank is one of the things that led so many people into foreclosure this last year. My home’s value (and therefore my equity) has fluctuated dramatically in the time I’ve owned it. I’ve never made or lost any money, though, because I haven’t sold it. Only when I sell will my equity turn into something of real value.
September 2nd, 2009 at 7:48 am
Long time lurker here, but my story has very much paralleled JD’s. Since Dec. 2004 we have paid off all debt except the mortgage. Now, most of our money goes into pre-determined savings (retirement, car repair, dream home, etc.), so there just isn’t much to do. I totally identify with the section where you describe how paying off debt seemed slow at the time, but there was always something happening. Now, there are just isn’t that much going on.
However, we are on track to pay off the house in the next six months… so I’m planning a mortgage burning party!
Anyway, I’m glad to hear about where you are now, it really resonates with those of us who have been reading a long time and are in similar positions.
September 2nd, 2009 at 7:50 am
@Tay (#33)
The beautiful thing about eliminating your debt is that then you can use your money to buy furniture — without feeling guilty. I’ve been wanting some nice furniture for years. I once almost bought the stuff on a credit card. I’m glad I didn’t. Now Kris and I are able to afford to purchase it with cash, something we’re in the process of doing. If I’d bought the furniture five years ago, I would have been in debt for months or years longer, and would have had to pay interest that entire time. Instead, the money has been earning interest for me as I’ve saved.
September 2nd, 2009 at 7:56 am
@Alexandra #26:
“Pretending that money is not there is either dishonest or just plain stupid.”
The house I live in sold for $633k in 2005, I paid $435k in 2006, and it has now declined in value to below $400k (based on comps sold in 2009). If the previous homeowner was still living there and counted his “wealth” as the difference between $633k (which was a correct value) and his current mortgage debt… I’d call THAT either dishonest or just plain stupid.
Counting some theoretical value of your house in your net worth is likely to lead to the “wealth effect”, which would potentially result in higher current spending levels - based on a flawed premise (because housing values can certainly fall much further than they have - although we homeowners can all pray they don’t).
Maybe counting equity as zero while simultaneously debiting the full mortgage from net worth, is a bit overdone (because surely the property would sell for some value even if the house burned down and turned out to be uninsured). Better to be conservative, so I support Ann’s view, if not “one of your fellow financial bloggers”.
September 2nd, 2009 at 8:00 am
I don’t think it’s a bad idea to consider your home in your net worth and your overall financial picture. I do it. It’s not too difficult to get a rough idea of its current value.
But I also think it’s very important to keep in mind that a house is illiquid, especially in markets like this. Keep it in mind as an asset, but don’t count on it as a certain source of money.
September 2nd, 2009 at 8:07 am
This is the best $40 blog post I’ve ever seen.
September 2nd, 2009 at 8:11 am
Another approach to looking at net worth is to calculate what I’ve heard called “invested net worth.” For that figure, you focus on only what you have invested. You ignore houses, cars, personal property, etc., and their associated debts (if any).
I’ve calculated both invested net worth and normal net worth for the last few years, and the differences between the two numbers are significant, but looking at both of them gives me a more complete picture of the whole thing.
@Mike #7 — Great suggestion for looking at shares rather than dollars. Thanks!
September 2nd, 2009 at 8:23 am
I can’t wait to be in the financial position you’re in. I’ll be debt free in 6 months or so, and then I can decide how to save and spend - it’ll be great. I can finally enjoy my 20s with a peace of mind vs. mindlessly spending and worrying about the future later on. I like these kinds of posts - they help keep me motivated.
September 2nd, 2009 at 8:45 am
Great inspiration. Good for you.
September 2nd, 2009 at 8:48 am
I enjoy seeing others success with debt as I stare at dollar signs. I have paid off the cars, credit cards, and student loans but still face the huge HELOC and house. Our struggle is to tackle debt, but still create a wonderful childhood for the kids. I don’t want to be so focused and miserly that we miss out on quality time with educational/fun family vacations, weekend getaways, and involvement in the community. We earn a great living but feel pressure to live like our coworkers with new cars, expensive vacations, and designer clothes. One coworked even complained about my 10 yr old 200K car. How could I drive such a thing, there is an image I should uphold. I do live like no one else… GRS helps to keep me grounded among like-minded savers.
September 2nd, 2009 at 8:52 am
I am in the first stage and sometimes the mileposts seem a lot further apart that they should. I found GRS in Novemer of ‘07 and it has given me a lift when I thought that I would never dig out of what seemed to me to be a hopeless quagmire. I just have to keep plugging away and I will make it. I want to thank you for giving me a much needed boost from time to time.
September 2nd, 2009 at 9:16 am
Congrats, J.D., it’s great to hear you’ve been able to stick to the path you’ve chosen. I’m curious to see some actual numbers (”Our net worth is now $X, and we’ve determined our financial freedom goal is when we hit $Y”), but I understand not wanting to alienate some of your readers.
Still, if you track your net worth, I think it’d be encouraging for us to be able to see the graph, even with the numbers removed for privacy. It might be inspiring for others to see the dips and bumps in your progress, to know that the occassional setback is normal and doesn’t have to derail your progress.
September 2nd, 2009 at 9:25 am
What an inspiring post.
I also love the picture with the guy and the car. Very appropriate for your blog, JD. Worth the $20…without a doubt.
Keep up the good work. I also read here for inspiration. I’ve never been in the kind of debt that many of here have been in, but have still found myself being exposed to new ideas, adjusting attitudes about savings/spending, and constantly learning.
September 2nd, 2009 at 9:44 am
Paul in cAshburn Says: “If the previous homeowner was still living there and counted his “wealth” as the difference between $633k (which was a correct value) and his current mortgage debt… I’d call THAT either dishonest or just plain stupid.”
Yeah, I’d agree, that’s stupid. Your net worth needs to account for all your assets and debts TODAY. That means you need to see what your assets are worth at the present moment to get an accurate picture of your worth.
You can get a pretty accurate estimate of what your house would sell for if you sold it today by looking at comps in your area. If you want to, you can even bump that value down by a couple of tens of thousands of dollars, just to be ultra-conservative. Subtract closing costs, lawyers fees, etc. But that house is still an asset, and needs to be counted as such (unless of course you owe more than the house is worth, in which case you need to account for that as well).
Linear Girl Says: “Pretending that equity is the same as having money in the bank is one of the things that led so many people into foreclosure this last year. My home’s value (and therefore my equity) has fluctuated dramatically in the time I’ve owned it. I’ve never made or lost any money, though, because I haven’t sold it. Only when I sell will my equity turn into something of real value.”
If we all excluded things that fluctuated in value from our net worth, then no one could count their stock investments as part of their net worth, since the values fluctuate with the markets. In your example 401Ks, RRSPs - well those don’t count because tomorrow they might be worth something different than today! Huh?
In your example, everything is also worthless because they are not sold yet? I guess the same can be said for all our stocks - they cannot be counted as part of our wealth because we haven’t sold them?
Sorry, this just isn’t how it works. All investments need to be accounted for when estimating net worth. If you want to value your home conservatively, that is a good idea. But to pretend that tens, or hundreds of thousands of dollars of equity doesn’t exist? That’s just silly.
September 2nd, 2009 at 9:44 am
We are in stage three too, and while we are happy to in Stage 3 (very happy) it is not as exciting as when we were paying off $55,000 in debt in 2007 or when we saved $50,000 in 2008 (including buying a car with cash from those savings). Stage three is slow and steady and the goals, at least for us, are not as immediate. I hope you post more about stage three since I need help keeping my slow and steady progress moving forward.
As to whether or not to count primary home in asset category, I think it is a personal choice, yes the “value” goes up and down but that is true of many investments including stocks. We include our primary home value in our assets and we track the ups and downs (usually just adjust once a year when we receive our final assessment) just like we track the ups and downs of our 401ks and IRAs. When the stock market tanked we didn’t really lose money in that we didn’t sell those investments and when its up we don’t really gain money because again we are not selling.
September 2nd, 2009 at 9:45 am
39. - lol
Still feel like we are in the flailing around stage, the what next after not focusing on paying off debt?
My usual perception is that our progress this year has been stagnant/painfully slow. But my husband reminds me that compared to this time last year we have changed from being in about 3K in debt to having about 2.5K in the black (not including mortage OR equity in house, retirement funds). OTOH our finances were “stress-tested” by some unexpected events this past year, so even not being in the red at this point is a kind of success.
I feel I have learned alot about finances during the past 3 years. In some ways at this point I feel like it is healthier for me to trust our instincts, trust the process, and focus on other aspects of our lives instead.
ps- I also agree that one should in general include both mortage AND equity of one’s house. Yes one needs a place to live, but it doesn’t have to be that house. For example know of someone who a few years ago sold their California home and moved to my town, who literally could have bought a block’s worth of homes (they didn’t; bought a very nice house and put the other 500K in the bank).
September 2nd, 2009 at 9:45 am
Well, I appreciate this post as well. I was doing all the right things according to GRS… but I’m wondering if the path I’ve chosen will pay off. I’m 28 years old, one month ago I had zero debt, 12k emergency fund and was contributing 12% of my salary to a Roth 401k with 5% employer matching. Then, I decided to go to law school… I’m in week number two. It’s great, I am enjoying the learning process and look forward to inreased future opportunities, but I already owe ~$19k. So my net worth has flipped inverted in one semester’s worth of classes. I anticipate a student loan burden around $120,000 by the end of my four years going part-time. I’m keeping my job and working during this time to limit the loans I need to take out, but 120 is still a massive amount. Do you think I should continue putting 12% into my Roth 401K or pay more towards my debt now? I thought due to the market levels that I would keep contributing to retirement savings even as I take on loans but I’m not sure that’s the right move…
September 2nd, 2009 at 9:45 am
Those are awesome achievements. My husband and I are working towards the first goal: debt elimination. We’re close to having our debt paid off. We’re also working on saving for a down payment on a house.
It’s great to see that people can achieve these goals. Five years isn’t really that much time in the over all scheme of things. My husband and I are trying to reach our down payment goal by next summer and pay off all of our debts within 1-2 years.
Keep up the good work-
Little House
September 2nd, 2009 at 9:51 am
Heh, my hubby and I were just having this same conversation yesterday. We were on a very long (16 hour) drive home from our vacation, the kids had fallen asleep, and I’d pulled up the spreadsheet on the laptop to do September’s budget. That ended up leading to a longer conversation about our long term financial plans. Having kids kind of stalled us at the end of stage 2, but as they get older I am returning to full-time work and we need to plan what to do as we finally move into the 3rd stage, with more income, more time, and the desire to pass on our values and passions to our kids.
September 2nd, 2009 at 10:05 am
@Jack — do you need to put in 12% to get 5%? If you want to keep up the contributions, then put in the minimum required for the maximum match.
Personally, looking at a “guaranteed loss” of the interest rate of the student loans over the loan term (10 years?) I’d look at suspending all the contributions to the 401k and just dump it all into avoiding taking on debt. You might also want to take a look at what the loan payments will be after graduation — which will take away from your ability to contribute to retirement in a meaningful way for a long time (assuming you pay minimums — maybe you plan on paying more — but at least know what the minimums will be)
I’d also suggest looking at other means to reduce your living expenses, too, that could help out tremendously.
I’m looking at this from the perspective of someone whose wife went to business school, we took out a pile of loans and they are still killing cash flow years later. We should have found a way to pay more out of pocket.
You might want to read “The Millionaire Next Door” to avoid falling into the traps that high-income earners do that prevent them from accumulating wealth — big houses, big cars, lots of bling — but not much wealth. Some of the examples and case studies are (IMHO) a bit dated, since the Internet did a number of things that make tracking investments much easier, and 401k’s become a lot more common, but the overall themes are still very valid today.
September 2nd, 2009 at 10:09 am
My husband and I are in Stage 3 as well, and I look forward to the new posts about what to do next.
Thanks for the inspiration, J.D.!
September 2nd, 2009 at 10:26 am
Might not be for about 10 years, but I will make it to stage 3 at some point in my life! Stories like this inspire me to get going on my finances - start saving, pay down my student loans, budget each month so I CAN do the first two things, and plan for the future.
September 2nd, 2009 at 10:27 am
Thanks for sharing, JD, this post is very inspiring.
I’m in stage 2 and it’s a bit of a slog trying to get that emergency fund up to a number I can feel safe with. I look forward to the milestones.
September 2nd, 2009 at 10:34 am
JD, Congrats on reaching financial nirvana (okay, not quite nirvana but on the road to it). Anyway, I would like to hear more about your goals. Now that you’ve entered a new stage, what are the goals? Increase your savings by X% over the next year, pay down your house in X years, etc.
September 2nd, 2009 at 10:39 am
Great post J.D., bravo. After eliminating my consumer debt, I kinda feel stalled. I’m working on nailing down the savings (emergency fund and such), but progress is much slower on that than anything. I find posts like this extremely inspiring, in that life isn’t *always* sacrificing wants for financial independence… You just have to pick and choose the most *important* wants.
Sadly, I still have some spending guilt, to a degree. I’ve decided to move forward and get a new tattoo, but I feel a bit bad since I’m not sure if any money will be left to go into savings. I’m not doing bad, but I don’t feel all that great when I decide to not sacrifice everything for savings. Did that for a while, and it kinda sucked. Thankfully, it paid for my MacBook when my other laptop decided life was too hard for it. So that was good in a way, but the time kinda…. Yeah, sucked. I’m always and forever striving to find that ideal balance.
September 2nd, 2009 at 10:41 am
I don’t know, from where I’m sitting you sound pretty financially independent to me. You’re your own boss. Have stacks in the bank. Debt free. Investing.
You’re in the upper percentiles when it comes to these things, JD. Keep on driving to your goals, but don’t forget to stop and smell the roses of where you are now.
September 2nd, 2009 at 10:49 am
JD,
I think one of the most difficult challenges after getting out of debt is staying focused on continued progress. It’s like being let out of a cage and wanting to just run for awhile and enjoy freedom. That’s fine if there are a few defined “splurges” that don’t put you right back where you came from. I’ve found unless I have constant short term goals to keep me on track, I have a tendency to stray from the path I should be on.
For example I’m training for a marathon that will be held the first of November. Before I scheduled the marathon I ran infrequently, no real schedule or purpose. If I missed a few days here and there I didn’t let it concern me. Sometimes I would go a couple of weeks without running at all. Now that I have the marathon on the horizon I know that every day I’m scheduled to run I have to complete the workout or I won’t be ready when the day arrives.
Somehow we have to find a way to view the latter days of our lives in the same perspective. Each day doing the little things that keep us on track, moving towards our goals and not losing sight of why we are running in the first place.
September 2nd, 2009 at 11:01 am
Terrific stuff, JD. Sharing my own little story, because I’ve used many of your techniques and also Dave Ramsey’s to get us closer to Financial Independence.
I am 36, my wife is 31. She is no longer working since we just gave birth to triplets and it made financial sense for her to stay home as my income was much higher than hers and daycare costs more than her net income.
When we got pregnant, we made a decision to pay off our modest mortgage on our modest home, which we did in May, three weeks before their birth.
Throughout our dating and marriage, we’ve owned and lived in double-family homes and so the rents over time have added up. We cashflow $800 a month on them and this will help get us to financial independence faster as each home gets paid off. We have three such homes that house two families each. We currently live in a fourth single family home that we inherited with a leftover mortgage, that I paid off as stated above.
I think the previous paragraph is an important step. We have many friends who live in the more upscale suburbs with large mortgages, and all the power to them. It is sometimes difficult to live in a home in the city where the average cost is a quarter of the suburbs. Additionally, living in a home below another family also was looked down upon by many of our friends. But we have a plan.
We made a conscious decision to live like no one else, so that someday we could have financial independence. A housing crash doesn’t bother me as long as there are still folks that need a place to rent.
We’ve used various frugality techniques to speed the process up, and I could write a whole post on that alone, but suffice it to say, it’s much of what JD preaches. In short, we are fortunate to be in a similar boat with JD as follows:
1. No non-Mortgage Debt - Sorry, we actually have a car payment on a mini-van that I had to buy in May because we had nothing that could hold three car seats.
2. $20,000 emergency fund
3. Primary Home paid off
4. $140,000 total mortgage debt on three other homes.
5. Not yet maximizing my 401k and Roth, but am contributing to company max. Also, I buy dividend-producing stocks for future income, and Bonds (not municipal)
6. Lost my wife’s income, but I will personally earn more than any single year of my life.
7. And yes, we still continue our frugal ways.
8. Three new Bambinos and as new parents, we have no idea what the costs may be yet.
Warm Regards,
- Charley
September 2nd, 2009 at 11:18 am
Good luck Charley and kudos on your financial success!!
September 2nd, 2009 at 11:23 am
JD, there’s a hint (just a hint!) in the post that you’ve come to the end of the rainbow.
This is when life should start gettting really interesting. You’re no longer constrained by debt or by raw survival, so you’re free to create and experiment in a way you never have.
We need to read all about this in the future.
Congratulations!
September 2nd, 2009 at 11:28 am
Jack - it is great you’re focusing on these details, but the most important thing for your financial future, now that you’ve already taken the gamble of borrowing for law school, is to study study study. Others may not be but I’m sure you’re well aware of the difference in job opportunities available for law grads who make law review (top 10%) versus those who do not in their first year of law school (and I don’t just mean in getting the huge salary jobs in Biglaw if thats not your bag [it wasn't mine], the mid-level pay jobs are having their pick of it in this hiring climate).
My peers that make $160K/year and who complain about a ‘crippling’ $150K in student loans are obviously just having spending issues. My peers that ‘only’ have $100k in loans but are begging for temp doc review work or who make $30K at a small slip & fall firm, on the other hand, are understandably hurting.
I wasn’t at the top of my class and eventually worked my way to a pay level that could handle and then conquer my loans, but I also graduated in a climate where firms were hiring, not firing like I see now. If you think keeping your current job is limiting your studying at all, I’d drop it for the first year of school (the one that really matters).
September 2nd, 2009 at 11:29 am
I’m looking forward to more “third phase” advice. So much of what’s available out there is about getting out of debt. Most tips on being frugal are things I’ve already done. Those things are out of the way, what do we do now?
September 2nd, 2009 at 11:30 am
Congrats on the mini cooper, I always remember reading that you wanted one but missed the post where you announced you’d actually purchased one. Smart idea buying it used. I wish I’d bought used instead of new 5 years ago, I would’ve saved a ton!
Some day I’ll buy a used BMW M5 E60, mafia black with all the goodies. And I’ll even have enough money left over to keep it washed and detailed and gassed up
September 2nd, 2009 at 11:43 am
@Rebecca #65 — Start by patting yourself on the back! And then join me in thinking there should be “more” for us third-stagers out there, but as a number of other commenters have said, all we have to do, really, is keep on keeping on, and there are only so many ways that can be said.
Maybe a thread on the forum devoted to third-stagers sharing thoughts and ideas?
September 2nd, 2009 at 12:31 pm
Congrats JD! Great post. I’m only in the second stage and it’s been a bit slow-going to increase my EF. I’m only at $2500, but reading that you’ve managed to set aside $20,000 is definitely inspiring. I was wondering if you would update us soon on your battle with “Stuff”. I, along with others I’m sure, struggle with this and reading your blog has been a great help. I’m curious how you’ve progressed since the last post when you decided to clean the workshop. Keep up the great work!
September 2nd, 2009 at 12:32 pm
Charles 61 - congratulations. That’s great to hear.
I go back and forth on what we’ll do once we move at some point. We’re hoping to pay off the mortgage in 5 years or so. We rent out our basement unit, and put that towards the principal.
I think your example, and JDs post, made me realize why real estate works well. If we put our money in bonds, we have to be really focused on the long term steadiness. Kids, job changes, all that can really challenge that. The Your Money or Your Life chart is nice for this, but the mandatory mortgage payment is about as mandatory as it gets.
September 2nd, 2009 at 12:34 pm
Truly inspirational…great job. You can certainly see the maturity in the post.
I never got into debt fortunately so I can’t speak to that, but you have your work cut out for you now. There is a great deal more to learn once you are out of debt. So many more options and decisions with different tax ramifications. Paying down debt is a singular mind focus, but building the wealth through savings is a different ball game. It isn’t as singular or simple, but it is where you can really reach independence.
September 2nd, 2009 at 1:16 pm
JD, thanks for th great post and update. I’m a third-stager too. My DH and I are hitting one of the markers (as I see it) along this path next month when are mortgage balance goes below 100K. Somehow, a five figure mortage vs. a 6 figure mortgage balance is a huge relief to me. The horizon is getting in sight.
September 2nd, 2009 at 1:28 pm
I think you are at a great stage, but kind of stalled. How about adventuring into the world of day trading with $2k? I would love to read about your experiences with that. I also think it would also be interesting if you and your wife combined accounts - having separate ones is the easy, cop-out, immature way (for your circumstances, there are ones where I think it would be better). It would be very interesting to hear about your experiences with that - no way would I let my husband blow $750/month on fun things! You don’t even know what she puts away for retirement! What about insurance? If one of you dies does the other get something? You both work, but maybe the person left alive would like the option to not work for a few years while they recover from grieving. Have you made wills? How do you pick car insurance? And no, I am not interested in online research and many links, I would like to hear personal stories if possible.
September 2nd, 2009 at 2:20 pm
I was able to purchase a used Mini Cooper with cash.
I’m about to buy a car in cash. I would like to put it all on a credit card first, just in case of any problems, but my credit card limit doesn’t go that far.
Is there another way to pay cash other than just writing a check?
September 2nd, 2009 at 2:27 pm
J.D.
I started reading your blog to get a little tune-up on frugality. I’m older than you but hoping to be able to retire a earlier than regular retirement age.
When I started reading this blog, you were in my rear view mirroe but I think you’re about to pass me! I’ll be interested to read your posts about investing and making your way towards financial independence.
Way to go.
September 2nd, 2009 at 3:09 pm
I’m with you except for the accelerated mortgage payments. We hope to move witihn the next two years. Nevertheless, a good position to be in!! woot
September 2nd, 2009 at 3:31 pm
@beforewisdom (#73):
Just pre-pay the difference between your credit limit and the price of the car to your credit card company. I did this recently with the schwab 2% cash back visa card buying an off-lease civic from a dealer.
I had negotiated aggressively, and the dealer didn’t want to accept the credit card, of course, but I asked to call the credit card issuer, and they relented.
September 2nd, 2009 at 3:32 pm
Congrats! Me, I’m stuck at the stage of trying to pay off credit cards and building an emergency fund, because right now whenever I’m just about to pay off a credit card, some unexpected bill like car repairs or medical bills puts me right back into debt. I feel like I’ll never get out of the cycle… but I know that others have done it, and you’ve shared your story, and I am still determined! Thanks!
September 2nd, 2009 at 4:02 pm
Congrats on the continued success!
I especially like how you talked about paying off your debts and the benefit of getting those quick wins early on. So many people completely discount the value of that psychological boost - but they also haven’t been through it.
September 2nd, 2009 at 4:21 pm
I am probably somewhere between stage 2 and 3 on my road to financial independence. May have taken a step back as I was just laid off, but I’m not certain. I’m going to try things on my own for a while and see if I can push myself to stage 3.
September 2nd, 2009 at 4:50 pm
Again you tease me with some third stage post. After much grief with investing, we are saving strictly in savings accounts. I’ve looked into municipal bonds and real estate but don’t think they would placate my aversion to any risk. I’m also concerned as #4 Rob Bennett regarding the state of our country’s economic and political system. Reading your posts regarding our deficit and news of a massive stockpiling of bullets makes me wonder if there is something more foreboding than one’s personal finance.
September 2nd, 2009 at 5:01 pm
@ Alexandra #26: According to the bank and the municipal government, I have just under $400k of equity in my home. However, I generally don’t include this in my net worth calculations because I need a place to live. If I need money, selling my home is the absolute last option. Moreover, I want to fall into the high net worth category one day, which, by definition, is comprised of individuals having investable assets (financial assets not including primary residence) in excess of US$1 million.
So, net worth calculations that exclude the primary residence is not unheard of.
Ah, no. It’s not dishonest (see my prior paragraphs). Also, just like saving money by automatically deducting it from my paycheck, this keeps me from spending recklessly–and, more importantly, keeps me motivated to save and invest. How many people in the US saw the value of their home rise, got HELOCs, and spent their paper wealth on luxe items they didn’t need?
BTW, you seem inordinately…upset by this topic. Why does it matter to you so much how other people calculate their net worth or judge their own financial situation?
September 2nd, 2009 at 6:06 pm
Financial freedom
1. depends on your definition of financial freedom
2. often depends on how you view debt how you manage appropriate leverage.
September 2nd, 2009 at 6:08 pm
home equity is worth no more than money buried in your back yard if you don’t plan on moving and you’re not using it to fund other income-producing assets
September 2nd, 2009 at 6:25 pm
Nice photos JD…and nice work!!
Staying focused when you’re no longer in the “danger zone” can be hard. This is a good reminder that the path to financial freedom - no matter how you define it - is often long and trying.
kds
September 2nd, 2009 at 6:48 pm
A very inspiring post, JD. Add me to the list of people who’d like to read more posts pertinent to this stage of the journey. I’m at the third stage too, and also a little bit lost. I think you get to a point where you just mill around trying to eke out a budget by finding cheaper pasta, instead of REALLY looking for ways to move forward on your wealth journey. This is where I am, and I’d love to be more inspired on this leg of the journey. Remember you didn’t name is blog Get Out Of Debt Slowly! Debt management tips are so useful to many but once we’ve got that sorted, we need help working out where to next?
September 2nd, 2009 at 6:51 pm
Yup, live beneath your means and you will meet your goal. Of course, you are completely rehabituating yourself to what is a splurge or indulgence.
I do predict an existential crisis. Once you are financially independent, money stops really meaning anything, and then you need to figure out who your are and what your purpose in life is, and of course, what’s the point of that pot of money? These are good problems to have!!
September 2nd, 2009 at 7:09 pm
One possible phase 4 is building enough enough reserves to be able to make changes in your life and take chances with new opportunities. Unfortunately, it’s very hard to make this kind of jump because it often requires breaking the mold that let you successfully handle phases 1, 2 & 3. It’s a totally new mindset.
September 2nd, 2009 at 8:40 pm
You asked about muni bonds. As I understand it the bonds themselves pay dividends quarterly/annualy. You may want to check both mutual and close end muni bond funds for your State. I came into some cash and put $25k into 5 of my States’ close end muni bond funds. They pay about $25/fund/month dividend which is tax free (both Fed & State) income that is reinvested every month. I figure when I retire I will just take the dividend to add to my monthly Social Security check.
Check http://www.etfconnect.com that list/explain all the close end funds.
What I’ve also learned is close end funds trade at a premium/discount to the NAV as opposed to Mutual funds that trade at the NAV. It appears that I got in at a time of discount so I have the added (and unexpected) bonus of my shares all now worth $30k. I also learned that if I sell the funds I DO have to pay capital gains tax.
So back to plan A…live off the tax free dividends.
Investing in real estate: your house is your home and if you pay it off/down you get some money…but you have to live somewhere. I got a bunch of(40+)REITS in my former 401k that I rolled over into a self directed IRA. I also have an ETF (VNQ) REITS pay high dividends and are down about 35%. Now might be a good time/way to really invest in real estate.
I think I’m at stage 4…retirement in sight…and socking away as much as possible….a year’s salary in emergency fund, a Roth IRA, I have credit card debt, but it at 0% interest…and will pay it off before it jacks-up. I’m finding that I have to “sweep” the extra money I keep finding in my checking account, into my savings account…that is new to me.
September 2nd, 2009 at 8:59 pm
Post idea:
I was just looking at my stock market performance (Scottrade provides a graph), and it reminded me of that thing Physics Diet that Mac uses… could you chart your stock portfolio over time on Physics Diet (as your “weight”) and see it even out into a general upward or downward trend?
September 2nd, 2009 at 9:51 pm
@Will:
I am about 95% sure that the first photo is of Hwy 40, west of Calgary, Alberta, Canada in Kananaskis Country.
http://en.wikipedia.org/wiki/Kananaskis,_Alberta
This stretch of highway has been featured in many car commercials and the surrounding area was used to film several movies including “Legends of the Fall” and “Brokeback Mountain”.
Seeing that photo made me homesick.
September 2nd, 2009 at 11:02 pm
Brilliant post. I’m lucky enough to have never been in debt, and having been so positively affected by books like The Richest Man in Babylon I doubt I ever will be. Nevertheless, this was very inspirational. Makes me even more excited to continue saving for travel.
September 3rd, 2009 at 4:01 am
A long road it is…but its good to always know at what point on the road you actually are.
Taking stock is important, especially in the beginning.
Great post
September 3rd, 2009 at 4:20 am
Thanks for the post and positive re-enforcement. I am way behind you, but making progress. I just paid off CC #2 on Monday. It took ~8 months to get rid of $11k. I decided to sell some stocks to get the CC #3 ($7k) paid off in a few weeks. Hopefully, a year from now we will be well underway to step 3.
September 3rd, 2009 at 6:16 am
@JD, you suck, you are worthless, you can do better…the only thing that you inspired me to do was to buy a Mini, then my wife said that it wasn’t a grown up car, so I had to buy something else, so I bought a new BMW yesterday…on credit. why would i take $50k out of my savings account when I can borrow it for .9%?
I don’t know about you, but Phase III seems to make me feel more broke all the time: since 75% of our income (yeah, I know, we use to save 90%, but have been stimulating the economy the best we can) is automatically invested or saved, it seems we are living pay check to pay check. Here’s hoping you feel the same.
Oh, by the way, well done and keeping driving forward…albeit in a non-grown up car ;o)
September 3rd, 2009 at 6:34 am
I guess I’m in the same place, except I just finished paying off the mortgage. (Not quite the serious step or serious pre-pay versus don’t pre-pay decision as it would be for many of you given my very low cost of living area)
Frankly, I threw all money that didn’t qualify for a 401K, ira, or HSA at the mortgage mainly just to give me another goal to strive for (because, like you say, there is a long stretch of few milestones between now and financial independence). Finished my last big goal by paying all cash to get my wife’s dream business started (without debt or the need for an income from her, this is also financially boring, though personally very exciting since the business can obviously be a big hit or fail.)
We don’t want to move. WE don’t care for fancy cars, just dependable ones. We don’t care much for stuff (clutter kills freedom almost as much as the need for income does).
There are lots of exciting things going on for us, many that will effect our bottom line greatly between my job opportunities, her business, our kids, etc. But there is currently already a surplus and we already have everything we truely want, so financially it is very boring. For personal finance, boring is good. I hated exciting. It is the ‘boring’ of our current financial situation that has enabled many of the other exciting things.
I do need a new goal. “Fully funded” college savings accounts seem to be a good one given that, given the rate of tuition inflation and the youth of my children, seems like one that can always be in sight but never reached
Of course, things could always change from boring to exciting until financial independence is reached, so that goal will always be strived for.
September 3rd, 2009 at 6:50 am
@Brian post #76
Thanks for the good idea!
September 3rd, 2009 at 8:32 am
I’m still in stage 1, alas. I never really had a stage 0, since I’ve never been a big spender. But student loans and a car payment are two big tickets. This post gives me hope, though. I’m 28, I’ve still got time.
September 3rd, 2009 at 9:59 am
JD
Thanks for the update (and the great photos!). Looking at other posts you’ve written on the topic of financial independence, it looks like your thinking on the subject has evolved. In July 2006 it was all about “getting out of the rat race” and having enough passive income (royalties or income from investments) to cover expenses.
Earlier this year, you talked about the concept of “having enough” as described in Your Money or Your Life, as well as a spiritual, values-based approach described by George Kinder, and the notion of financial independence as being another term for retirement. At the end of that post, you stated that you didn’t know what finanical independence meant to you, but that you “intend to stick to the path, working my way through this third stage of personal finance, hoping one day to reach that destination.”
This latest post suggests that you think of financial independence as “accelerated retirement,” where you’ve accumulated sufficient financial assets (and hopefully royalties from the book deal!) to live without working.
Like Tyler (#24) I’m curiuos about how you define this goal? Do you have a specific “freedom date” in mind? Have you estimated how much income you’ll need each year? Have you estimated how much you’ll need in the way of income-producing assets to generate that income? And have you estimated how much you’ll need to invest each year to build up those assets? I’d suggest that answering these questions is at the heart of “stage 3,” and once you define some goals in these areas you’ll be able to track you progress towards them, and make adjustments as needed.
Good luck!
JS
September 3rd, 2009 at 11:04 am
JD, thank you for this post. I am one of those people who has followed the basic advice (or at least I hope I have) - I have an emergency fund, have eliminated debt except the mortgage, maxed out the 401K, IRAs. I look forward to seeing more new ideas in the blog !
September 3rd, 2009 at 11:27 am
Thanks for the update. I’m in a similar position to you and look forward to you writing about your experiences so I can learn something and hopefully share my experiences too.
One thing that is particularly interesting to me is scaling back on working at some point to be more available to my kids or for other pursuits. I’m not there yet, but I’m trying to figure out a long-term plan on how to get there.