Financial Independence: Why I Pushed It Back Five Years
Last summer I thought I’d be financially free by 40. Reality – and unplanned expenses – set in this year and I’ve adjusted that ambitious projection by five years. I’m still on track to reach a net worth of $1 million by the time I turn 41, but financial independence will have to wait a few more years.
Related: Net worth update – 2014 midyear review
Remember, financial independence doesn’t necessarily mean retirement. It simply means the date your income from investments exceeds your day-to-day expenses so that you no longer have to rely on regular employment to meet your needs.
My initial projection was indeed ambitious – with us having a paid-off mortgage by 2020 and increasing the income withdrawn from our business by 100 percent (from $3,000 per month to $6,000).
But borrowing $35,000 to develop our basement meant we couldn’t continue our aggressive mortgage pay-down, and a four-year car loan has cut into our ability to save as much as we wanted.
That’s okay – on paper the original plan didn’t factor in these expenses, plus I hadn’t fleshed out exactly how I’d make those numbers work. Now I have a better idea, but unfortunately it’ll cost us five years. Here’s our financial freedom 45 plan:
Financial independence at 45
In late 2016, once we pay off the HELOC and car loan, we’ll have $27,000 per year to save toward our ‘findependence’ goal. With that amount, we’ll put $12,000 into my RRSP and $10,000 into our TFSAs, plus throw an extra $5,000 payment toward our mortgage.
Related: What are your financial goals for next year?
That pushes our mortgage freedom date back to January 1, 2025. At that time, our home should be worth $600,000 (using a conservative 3 percent annual growth rate), my RRSP should be worth $380,000, tax-free savings accounts should total in excess of $150,000, and the commuted value of my defined benefit pension will be roughly $310,000.
The key to paying our monthly expenses after financial independence will come from our business income. We currently withdraw $3,000 per month from our small business, which includes income earned from three websites, freelance writing, and from my fee-only financial planning business.
My original plan showed business income increasing to $6,000 per month in five years, but without any clear path to explain how to double revenue. And after losing my main freelancing gig at the Toronto Star, this goal seemed unrealistic.
But the fee-only planning service has gone better than anticipated – earning $10,000 in less than a year and expected to grow to $18,000 in year two as existing clients stay on and I continue to add one or two clients per month.
Related: A new fee-only financial planning service
After completing the CFP certification in two years I’ll have the opportunity to ramp up my efforts and potentially offer fee-only planning services full-time. At that point, between existing and new clients, the service could bring in roughly $36,000 per year.
My three blogs earn about the same – $36,000 per year – after expenses and so if I can maintain or increase that income then I’ll be able to meet my $6,000 per month goal for business income.
Our projected expenses haven’t changed. After the mortgage is paid off we could live comfortably on $36,000 per year, which leaves the additional $36,000 of income to go toward taxes, short-term savings, and retirement.
Final thoughts
A financial plan is just words on a page unless you commit to taking action. Even if your financial independence date seems like a moving target, it’ll become more precise the more you monitor and update projections based on your true reality.
Related: How to overcome financial inertia
While it’s disappointing to push financial independence back five years, it’s comforting to know that I’m zeroing in on a target date that’s based on reality and not a wild projection.
Robb, congrats on all of your extra income efforts. The fee-only business sounds like it is going smoothly. For me the financial independence date would be more important and relevant than reaching a specific net worth like $1M.
Hey Dan, thanks! The business is going well – we’ve established proof of concept and now we’ve just got to build up our client base. I’m sure we’ll see plenty of new inquiries once CRM2 takes hold and more people catch on to the fee-only, independent advice model.
I agree, a net worth milestone means nothing without some specific goals around income and expenses.
Geez man, well done! 🙂
Your blog is doing fantastic, another well done.
If (rather, when) you have a paid off home, that will put financial independence right around the corner given your other assets.
An RRSP into the mid-6 figures and your pension and your blog income and your side business, well, you’re really cooking with gas. Very well done. I keep saying that but I have nothing else to say 🙂
Mark
Thanks Mark! It’s a lot of work to maintain the blog, as you know, so it’s nice to see the payback. Hoping the time and effort invested pay off as anticipated, and at least give me the option to do what I want in the next 5-10 years.
Wow your blogs are doing great financially. Net worth of $1 million by age of 41 is still very impressive, I hope to do the same too. 🙂
Thanks Tawcan – good luck in your journey!
Just curious: do you contribute to RESPs for your child/ren or is that covered by someone else?
Hi Bet, yes we do contribute to RESPs for the kids. At 45, we’d still need to cover 3 years of contributions for our oldest and 6 more years for our youngest.
I just wasn’t sure if that was in your basic budget or not. We didn’t start RESPs until our mortgage was paid off, then put in $5000 a year per child to catch up the CESG which was easy to do with the money freed up by not paying the mortgage.
We’ve also noticed the costs of routine stuff for our children has grown significantly as they move through the school years. If everyone in the class except your child is going on the field trip that costs several hundred or renting/buying an instrument that costs several hundred, it adds up quickly if you try to keep them level with their peers.
We reached what could have been financial freedom a ways back but as the kids have grown older, what we want to have money for in the future has changed too, (we’re now planning to help them get through uni with minimal debt; to help them with sensible wedding costs; to help them get a start in these horribly unrealistic housing markets etc.) Because we’re much more conservative in our spending than others (even you) we have the warm fuzzy knowledge that we could manage a job loss etc if we had to, but we wouldn’t feel comfortable stepping away from our real jobs yet because of these shifting targets of what we want to have money for in the future.
I agree with BetCrooks. I can say that kids get somewhat more expensive in the teen years. Mine do sports and I easily spend $5K per year on their sports and travel (including flying). We have always been pretty good at the budget and even increasing mortgage payments with my raises as opposed to increasing spending but other things catch up.
In BC, baed on what my family needs and the cost of car, insurance, property taxes and maintaining the same life style with 2 kids, I could not do it with $36K before taxes. I would be eating canned food 🙁
Financial freedom by 41 is still amazing. I highly doubt I’ll be anywhere near that at that age.
I never thought about treating my blog as a side business and drawing money from my income. I’m new so my income has been relatively low but at least I’ve saved most of the income. Doesn’t help that my income is inconsistent but definitely something to think about.
Awesome post Robb! You have a great insight here. Financial independence can easily achieve by means of proper planning and consulting with a certified financial planner.
Very impressive plan! The only changes I see you making to your plan is to revise it to get you reaching FI sooner again!