I did some financial daydreaming after my net worth update last week. I took our current financial trajectory and projected out 10 years from now to see how that might look. I was surprised by what I found, and the exercise gave me the inspiration for a new objective – becoming financially free by 40.
When MoneySense editor Jonathan Chevreau coined the term, findependence, he described it as the point in time when the income from your investments and other sources surpasses the income you get from a single employer. Financial freedom doesn’t mean retirement; it’s more like a state of mind.
Related: My Fast Track To Financial Freedom
So when I circled January 1st, 2020 on my calendar, it wasn’t to highlight the day I’ll quit my job to lay around the house and do nothing.
That’s the date when our mortgage will be paid off and we’ll be earning enough from our business and investments so that I won’t need to remain at my day job – if I don’t want to – in order to pay our bills and save for the future.
Here’s how I plan to be financially free by 40:
Pay off our mortgage
The big elephant in the room is our $280,000 mortgage. How the heck are we going to pay that off in six years?
I’ve written before about how we’re paying an extra $1,100 per month on top of our regular mortgage payments. That alone has taken our amortization from 25 years down to about 14 years.
Last year I put a $5,000 lump sum payment onto the mortgage at the end of the year, and I plan to do the same this year. Assuming I continue to put an extra $5,000 down annually, that’ll reduce the mortgage amortization to 11.5 years. Hmm, still not soon enough.
I used this mortgage calculator to try different payment scenarios that would make us mortgage free by January 1st, 2020 – 99 months after our first mortgage payment in 2011.
To reach our goal, we’ll need to increase our monthly mortgage contributions by $500 per month, starting next year, and increase our annual lump sum payment from $5,000 to $10,000 by 2015. Not an easy feat, for sure.
Replace my income
Some people question our mortgage-killing strategy and say it would be smarter instead to use our extra cash flow to invest.
Related: Should You Pay Off Your Mortgage Early Or Invest?
The reason we’ve decided to make the mortgage a priority is because we want the income generated from our online business to eventually replace my employment income. For this to work, we need to eliminate our biggest expense – the mortgage.
With the mortgage paid off, we could live comfortably on $36,000 per year. Here’s how our expenses break down per month, adjusted modestly for inflation:
Home expenses
- Property taxes – $350
- Utilities – $290
- Phone/Cable/Internet – $160
- Insurance – $85
Daily living
- Groceries – $850
- Dining/Eating out – $250
- Clothes/Haircuts – $200
- Prescriptions – $35
- Spending money – $200
Transportation
- Gas – $115
- Insurance – $120
- Repairs/Registration – $25
Charity/Gifts
- Charity/Gifts – $125
Education savings
- RESP contributions – $200
We currently draw about $3,000 per month from our business (paid to my wife as dividends), so that could cover our day-to-day expenses if I quit my job.
Unfortunately, our list of expenses doesn’t include setting aside any money for saving, or any money for travel or other big ticket items that will surely come up. The list also fails to consider one very important item – taxes.
Related: Tax Considerations For Single Income Households
So the plan would then be for me to draw an additional $3,000 per month from our business. That would cover the following:
- Savings/Emergency fund – $1,000
- Tax Free Savings Account (investing) – $1,000
- Taxes – $1,000
Now I can’t just magically create $3,000 per month from thin air, but this is something I can work on over the next few years as the business evolves.
The web is constantly changing, so it’s tough to predict what our business will look like next year, let alone in six years. Don’t worry – we won’t put up a pay wall and charge a monthly subscription here.
Related: How To Prepare Yourself Financially Before Starting A Business
Our investments
Even with a mortgage-first focus, by the time I reach financial independence I’ll have built up a sizeable investment portfolio.
My RRSP will be worth about $225,000, assuming annual contributions of $15,000 per year and annual growth of 7 per cent. Left to grow, without any additional contributions, this portfolio could be worth $875,000 by the time I turn 60.
I’ll also have a defined benefit pension with 10 years of service and commuted value worth about $200,000.
There won’t be much in our tax free savings accounts, but they’ll become a priority once I’m no longer working full time. We’ll invest $12,000 per year in our TFSAs and build this portfolio up to be another income stream in retirement.
We’ll keep putting $200 per month away into our kids’ RESP account. By the time January 1st, 2020 rolls around, we’ll have about $30,000 in our RESP account, with plenty of time before our kids need the money for school.
Final thoughts
Reaching financial freedom by 40 would be an incredible achievement. I’ll admit this is a pretty big stretch goal, and I’ve made a lot of assumptions in this rudimentary plan.
I’ve assumed we won’t have any major expenses or life events that could derail these plans.
I’ve assumed my wife will continue to be healthy and able to handle her Multiple Sclerosis symptoms without expensive treatment or extended care.
I’ve also made the assumption that our online business will continue to grow and be stable enough to support our income requirements for many years.
It’s an ambitious target, but what’s life without something to strive toward? If we make it, we’ll reward ourselves with that month-long trip to Ireland and the UK in 2020 – which was one of our financial goals we set last year.
I want to be financially free so I can choose how to spend my time, so I can work on projects that I’m passionate about, and so that I can be around more for my family.
Wish us luck!
