In 2003 I started learning about personal finance in order to dig out of a crushing credit card debt situation. In 2004 I weathered a divorce that left me with just under half of that debt to pay off myself. My ex had used my name/SS# to apply for credit, without my knowledge, and the state said, "you were married, community property law, it's half yours, suck it up." So I did. I hit the books, started educating myself, and made sacrifices and got a better job. I now owe about $4.5k to one credit card, where I had owed 25k to three.

In 2005 I decided that 8 to 5 was not for me. I decided that my goal is to build up enough capital that it will generate a small annual stipend that will allow me a regular, if very frugal, income. When I am 45/46, I will get off my golden hamster wheel and "retire." Perhaps I'll start my own small business, go back to freelancing, or take a part-time "fun" job more about the enjoyment than the paycheck. If I want to do nothing, then I can live on the stipend alone and be very frugal and do nothing. I have seven years left to reach my goal.

Mini-goals:
1. Reduce my basic living expenses
2. Pay off debt, including mortgage
3. Increase my savings and investments

Sounds pretty straightforward. I have 7 years to find out if it works.

I'm going to use this journal as a double-check -- are things on track? What's working? What's not? If anyone has suggestions or comments, please post.

Here's what I owe:
Mortgage: fixed at 5.375%
Credit Card: 4,815. by my estimate, only $2,000 of that is left from pre-divorce debt.
Credit Union LOC: Roughly $2,450 (loan needed to repair house after storm)
Credit Union Educational LOC: roughly $7,200 (Master's degree - graduating in December '07)


Assets:
Car (paid off, still has another 100k miles on it easy)
Stocks & Mutual Funds
Money Market Acct. (tied to investment acct)
Building a little CD ladder w/ING direct
Savings Acct. (2)
Rollover/Traditional IRA
Variable Annuity (I was young & stupid, lesson learned.)
Limited partnership w/company I work for

My net worth, according to the numbers I have plugged in at www.networthiq.com, is around $270,000. (But that includes the tax value of my home, which may or may not be inflated)

Interesting way to handle the problem. Create a baseline lifestyle and live off investment income, then take work when/where you want to handle the rest. I sort of like it.

My first thoughts when looking at your situation is you have to get a handle of your numbers and figure out if seven years is a reasonable timeline. After all you have determine that in seven year if you can pay off all debts and still get a bit of nest egg to fund your baseline. Since you didn't post any details of income/spending/saving I don't know if you plan seems possible.

It won't entire apply to you, but if you check out my blog I have a series of posts called 'How much do you need to retire Part I to V' It will give you an idea on how to take your spending/savings and project it forward to determine if your goal is possible.

Best of luck,
CD

I'll check out your blog, Canadian, thanks for the tip!

I didn't include details on my "assets" column because I'm uncomfortable with that - I'm happy to report my debt numbers though, so I can report on how fast they go down! My income isn't 6-figure by a long shot, but it is the largest salary I've ever received and I am very comfortable. I can meet my own household expenses just fine out of my paycheck, but I have the added bonus of an SO, who contributes his share to the household finances.

Repayment:
I am paying the credit card first as it has the highest interest rate at 12.4% After that will be the Credit Union LOC (~10%) and then the education LOC (8%). (Line Of Credit)

I pay far above the minimum on that credit card every month. My personal minimum payment is $500 a month, but most months I am able to do some scrimping and saving and make the payment larger, usually $650 to $800, depending on other finances. In fact, in May I expect to pay $1300 to that card as some of the charges are due to a recent emergency. My "emergency" fund is in a Money market account, and I have to write a check for that. However, fewer places that service emergencies are taking checks, so I will put the charge on the card and then pay it with an emergency account check when the bill arrives (like for next month.) If I can keep up $800 a month OR MORE on this card, It will be paid off completely by the end of the year. The ensuing snowball will take out the regular LOC and the education LOC by the end of next year at the latest. That will leave me with a thousand dollars a month that will join with my regular $800 mortgage payment and get that paid off in record time.

I just did a little pencil-whipping on how fast my mortgage will be paid off at $1800 a month... It would be paid off in four years, give or take a month or three. (I don't own a big fancy house. I have a 1100 sqft bungalow in a working class neighborhood, and it's perfect for me and SO)

If I can keep up the fiscal discipline to continue paying off the debts and keep that snowball rolling right into my mortgage, I'll be completely, totally, debt-free by the end of 2011.

Savings:
My job does not offer a 401K, so in order to get a tax advantage, I make a point to fully fund my traditional IRA every year. That's $4000 a year. I have an equity index fund, a mid-cap growth fund, and a growth and investment fund from JP Morgan.

My job does offer me the chance to invest in company stock, as well as offering shares as part of bonuses. My holdings of company stock represents a very small % of my total stock holdings, so I'm not facing an Enron-type situation where I could lose everything. I invest a percentage of my gross salary every month, and counting bonuses, that has averaged $2000 a year. (Plus the added bonus of dollar cost averaging on the shares!) Returns on that have been in line with what I would expect from an index fund. I'm 100% vested, and quite pleased with the returns.

I put $2400 a year into my emergency fund - $100 every paycheck. I like to keep $5000 in the fund, but I'm trying to rebuild it right now. It's currently at $3000. My property was heavily damaged during a tornado, which wiped out my E-fund and forced me into getting a line of credit from my credit union to cover insurance deductables & repairs not covered. All windfall cash (eBay, garage sales, spare change, consignment checks, freelance gigs) is currently going to build this back up.

On top of all that, I got a raise at the beginning of this year. I calculated that the raise was going to net me an extra $145 every paycheck. Since I am already comfortable with last years' budget, I started an ING Direct account and automatically snap that $145 out of my checking account a day after my paycheck clears. I'm "saving my raise" so it doesn't vanish into the budget. That's $3480 more a year. That is going into CDs so I don't tie up that money long-term until I know what I want to do with it.

The bulk of my assets are in stocks and mutual funds. My mother and father both left modest life insurance policies for me and my sister. Thanks to their foresight, I have a nest egg that I'm growing. Learning about investing is a whole 'nuther issue, but I've done pretty well with solid, stable companies like GE and Unilever and Kimberly Clark. I buy and hold. I'm looking 10 or 20 years down the line for growth and profits, not 10 or 20 days.

Interesting way to handle the problem. Create a baseline lifestyle and live off investment income, then take work when/where you want to handle the rest. I sort of like it.

This reminds me of the Your Money or Your Life approach. Is that where you came up with the idea, Gnashcihck? Regardless, that's sort of what I'd like to do, too. But before I get there, I've got to pay off a lot of debt. One thing I've been meaning to do is calculate what my monthly expenses would be WITHOUT a mortgage. I know that paying off a mortgage isn't the best idea, and would take a lot of work, but the idea of being completely debt-free appeals to me. Think of the freedom!

I'm going to be following your journal with interest.

Yes, YMoYL was the first personal finance book I read, and a lot of the ideas from that book have stuck with me. I also study a lot of information about how to manage retirement funds since what I'm doing is essentially semi-retirement. I'm not ashamed to admit that I'm fundamentally lazy, and I don't want to work a full-time job for the rest of my life. Time is more important to me than money. I don't want my life to be a day-to-day drudge, which is what it feels like now. I want time to create, pursue hobbies, and have the freedom to do whatever I want.

I calculated my household expenses right after my divorce, when I was looking for a better job. I wanted to know, in order to negotiate for a decent salary. At the time, I was paying off a mountain of debt, a car payment, etc, and I needed at least $30,000 to do that and still buy groceries.

So JD, I guess you've given me my homework for this weekend! I'll get into quicken and find out what my monthly household expenses are right now, which of those expenses are "needs" and which are "wants," and project a couple of scenarios. I'll need one for post-mortgage, and/or after I quit working full time. (I know my biggest expense will become medical insurance) Another factor here is that I have an SO who pays his share of the bills, so I'd need to figure out my household expenses both including and excluding a roommate. (Always have to look at the worst-case scenario, right?)

It sounds like you are making great progress, Gnashchick. It's obvious you've thought things through and are taking a systematic approach. Way to go!

that is supercool!

I like your plan and I'm trying to do the same thing, actually--though I have one principal advantage and one principal disadvantage, which are pretty much the same: I'm 24. I have a lot more time to save up, but I also don't have anything like the assets you've got or even the amount of pay you're getting. I'm getting enough to max out a traditional IRA each year and enough to put back the same amount you are for your emergency fund (which, for me, is doubling as the springboard for a retirement fund; I'm using an ING direct Electric Orange for this purpose).

Alphagator, time is on your side here, you're right! Starting to save now is going to make a huge difference down the road. When I was 24 I was working for a temp agency doing "hit and run" graphic design for $8-10 an hour. Start small, grow steady, make compound interest and dollar cost averaging work for you.


OK I did my homework, and it was an eye-opening experience. My basic expenses have gone up. I spend less on day-to-day crap than I thought I did, and I spend WAY too much at the grocery store.

My basic - can't live without 'em are:
Utilities: Electric, water, garbage, land line phone.
Auto Insurance and fuel
Credit card
Education loan
Credit Union loan
Mortgage
Household expenses (maintenance)
IRA Contribution
Medical Expenses
Groceries/Pet food

Notice I put my IRA contribution in as basic expense. I think it's important. I put it in my basic budget because I plan to keep that contribution going even after I stop working full time.

I also created a "quality of life" (QoL) table for the extras:
Cell Phone
Cable TV/Internet
Online game subscription
Entertainment/Gifts
Memberships (Rec Center, hobby clubs)
Parking at work
Recreation (lake access sticker for boat, park/camping fees)
Subscriptions (magazines, music/video websites, security monitoring)

Just as an aside, I categorized some of my quicken categories as discretionary spending and then identified the unbudgeted emergency spending for the first quarter of 2007. I spend far less than I thought I did - and the majority of that spending was on clothing. I guess my "chick" is showing true. Major "emergency" spending was for a car repair (fuel & oil leak-$1500) the hospitalization for a beloved pet (who, alas, died of her illness $1500), and the replacement of a washing machine that finally gave out after 12 years of hard work ($385.)

Here's what surprised me. My basic household expenditures are running around $34,000 a year for two people. QoL spending s about $5000 on top of that. That was much higher than I thought it was, and I'm glad I did this little exercise. I can see where I'm blowing my budget, and will have more money for that debt snowball if I trim some fat. On the other hand, I'm pleased that my income is exceeding my outflow - Quicken says that so far for 2007, I'm in the black.

If I were debt-free right now, my basic expenses would be $24,000 a year on my own steam, and $15,500 assuming that my darling SO will be contributing. I know insuring myself will be a big deal, so I did a little internetting and picked an HSA-qualifying high-deductible plan from Blue Cross as my estimate for medical insurance. That was about $295 a month. I rounded it up to $300 just because I like round numbers. I have no idea what a policy like that will cost in 7 years. My inner pessimist says triple that.

I love your concept of "quality of living" expenses. I like the fact that these can be broken out from basic expenses *and* from other expenses (which I would term "superflous", or "compulsive", or "habitual", etc.). I might have to steal this concept for a future entry.

Feel free to steal it. I'm flattered that you think it's a good idea.

I pulled these out separately because if I were in dire straits, that would be the first thing to go. Some of those expenses, like the cell phone (edit: I just realized I left that off the list. I'll go back and add it) and security monitoring, I have contracts with. If I were to break the contracts, I'd have to pay a hefty fee so they'd be the last to go. Everything else could be limited or dropped out of the budget altogether. I don't really need Cable TV. I would whine a lot but I don't really need to play MMORPGs (I have plenty of RPG games I can play solo, or on someone else's server for free). If I'm hurting, I don't need DSL; I can blow the dust off the modem and go dial-up... etc.

For example, in order to pare down expenses, I stopped an expensive gym membership. I now go to the city recreation center for $15 a month. I get the same workout on the same equipment, but without the logos and high pressure to buy supplements and personal training sessions.

Next homework question: If I will need a bare minimum of $15,500 to meet my half of our basic household expenses, how much money will I need to have saved/grown in 7 years in order to see that kind of passive income?

What kind of investments provide a steady stream of income? My knowledge of investing is feeble, so I don't know all the esoteric ways of turning investments into cash, but for the average American consumer, I can think of three things: Interest income, dividend income, capital gains.

I'm not (yet) savvy enough about investing to try to make a steady income on dividends or capital gains. My practical side says that now is the time to get all of my financial papers in a row and hire an independent financial consultant who can educate me about how to do this. I'm sure there are investment "vehicles" that can help me achieve this goal, I just don't know what they are.

So, with that in mind, I'm going to set that aside for later, and look at plain old boring interest income. I have a money market account at 4.85% apr, and my ING account is currently giving me a 5.1% APR return on 1-year CDs. For the sake of round numbers, I'm going to use 5% in my calculations. I realize that interest income is volatile, and today's 5% rate may be next year's record low - or 2 years from now may be a 10-year high. With this in mind, how much cash will I need to generate $15,500 per year at 5% interest? Mind you - I'm not counting my IRA or Annuity, which I can't use until I'm 65 or older.

Simple quick answer: $312,000
Let's say, for round number's sake, that I have $100,000 of that right now.
That means that for the next 7 years, I have to save and/or grow $30,286 a year.

Ha! I think I need a beer... and the number to a great financial planner.

Sorry to put a dampener on things, but you need to take inflation and tax into account.

If inflation is running at 3% and you will be taxed at 20% then a $100,000 lump sum will generate at 5% interest will generate

100,000 * (0.05 * (1-0.2)-0.03) = 100,000*(0.04-0.03) = 1,000

This will maintain your capital and income in real terms, that is you'll always have the equivalent of $100,000 and if inflation, tax and interest rates stayed the same, you'd always have the equivalent of $1,000. Your tax rates will probably be lower especially if you don't have any other income, but inflation may be higher (the retail price index is currently running at 4.8% in the UK). You can also calculate in reverse:

15,500 / (interest rate * (1 - tax rate) - inflation rate) = lump sum required

In the UK, the tax on $15,500 income taking into account allowances and so on would be about 6.5%, a good measure of inflation is 4.8%, and I can get an interest rate of about 5.5% so to maintain capital I'd need a lump sum of

15,500 / (0.055*(1-0.065)-0.048) = $4,525,547

And that's precisely why I need a competent independent money manager.

(edit to add)

That $15,500 is not intended to be my sole income - it's just the basics. I will be bringing in other income sufficient to pay income tax, property tax, modest travel, and those quality of life items in my list above. My goal is to get that passive income set up so I can work part time or freelance without the fear of the wolf at the door.

I have freelanced in the past, so this is not new to me. I was also a dance and fitness instructor, and made custom dance costumes, props and performance jewelry. I also worked as a costumer on a handful of delightfully bad B-horror flicks. I've done this before, and I know how much I can expect to bring in over a year.