Our household’s financial independence was technically lost in the second half of 2023 due to my major impact on our passive income. We had been self-sufficient financially since I quit my banking career in 2012. My current objective is to become financially independent again by December 31, 2027. My goal is to recover the approximately $150,000 in lost passive income from selling our equities and bonds to pay for our new house. With this, we will be able to avoid working because our passive income will return to approximately $380,000.
income we lost when we sold our bonds and equities to pay for our new house. This will restore our passive income to about $380,000, which will free us from working. Starting in September 2024, our expenses will grow to around $280,000 a year after taxes as our daughter joins an independent Mandarin immersion school. Therefore, in order to achieve financial independence, we need at least $350,000 in gross passive income year, assuming an effective tax rate of 20%. I’m looking forward to the adventure, despite the enormous challenge of recovering financial freedom while parenting two children in an expensive city. It’s kind of like the anticipation you get before leaving on an amazing vacation.
Step One on the Road Back To Financial Independence
My 30/30/3 home-buying guideline was broken because I failed to keep a 10% liquid cash cushion after the purchase. We had financial insecurity as a result for six months. It was a cognitively hard period marked by elevated tension and worry. But we were able to pay our high property tax obligations and meet a flurry of unforeseen capital requests, in part because of a surprise real estate capital payout in early 2024. Cheers to steady investment!
We’ve reduced our spending on meals, transportation, and entertainment in order to increase liquidity even more. For instance, we cut out on all pointless membership costs, and I declined a $500 dad’s night out event in order to save money. $106,000 from the real estate capital dividend can be used to purchase a one-year Treasury bond that will yield $5,450 in passive income. Still, I made the decision to put $93,000 into Fundrise’s venture product, individual tech stocks, and the S&P 500. In a bull market, it’s critical to push for as much upside as you can.
The remaining $10,000 is invested in a Fidelity money market fund, yielding a 5% return, to preserve liquidity for impending capital calls and unforeseen costs. We feel more financially secure now that we have taken all of these steps.
Step Two of the Return to Financial Independence Journey
Selecting whether to sell or rent out our previous house was the second step toward becoming financially independent again.
I decided to rent out the property because I was optimistic about the San Francisco real estate market because of the advancements and potential of artificial intelligence and technology. Even though I’m not excited about taking on another landlord role, I think this is the best financial move. Furthermore, the winter months are the worst times of year to sell. In the end, I rented out my previous house beginning on February 1, 2024, for $9,000 a month. I set a monthly goal of $10,000, but I was unable to find the right tenants in time. In April, May, or June, I might have found a single unit household, but I wasn’t prepared to pay an extra two to four months of rent.
Getting tenants relieved us financially, especially with our large mortgage. We will make roughly $43,000 annually after paying our mortgage and property taxes. Any unforeseen costs will be subtracted from this net amount. The ideal length of time to retain real estate is indefinitely, much like with S&P 500 ownership. Regretfully, a lot of us lose patience when it comes to tenants and maintenance problems.
Looking back, it would have been a wise decision for me to sell in the spring of 2024, as the bidding wars returned with a vengeance. That being said, I think spring 2025 will be just as strong, if not greater, for real estate due to the Fed’s anticipated rate decrease and the expected decline in mortgage rates.
Current Passive Income Estimate: $275,000.
Following my successful completion of phases one and two of my journey towards financial freedom, our passive income has increased from $230,000 to approximately $275,000. We are still around $75,000 in gross passive income short of becoming financially independent based on our existing passive income.
In order for us to produce an extra $75,000 in gross passive income, we would have to accrue: $1,500,000 in initial investment with a 5% yield $1,875,000 in capital with a yield of 4% $2,500,000 in capital with a return of 3%
The objective is to raise $1,875,000 in fresh capital by the end of 2027, given the high interest rates that are now in place but are predicted to decline over time. But there’s one major issue: neither my spouse nor I have a job!
The Last Phase of Regaining Financial Independence
Due to the significant amount of additional capital needed, the last stage of financial independence is by far the hardest. This is how, by the end of 2027, I might be able to accumulate $1,875,000. 1) Find Employment
Getting a high-paying position in IT or finance is one method to amass $1,875,000 in fresh cash. But it’s hard to find a job that pays $868,000 or more a year and save 100% after paying an effective tax rate of 28%, particularly if you haven’t had one since 2012. Thus,the unicorn job is unlikely to materialize.
My spouse and I may potentially make between $200,000 and $300,000 in active income if we engage in part-time consultancy. This revenue would, at the very least, make up the difference between our gross passive income of $275,000 and our anticipated after-tax expenses of $280,000. However, it wouldn’t be sufficient to reach our three-year capital target.
2)Act Indifferently And Be Fortunate
Risky assets account for 95% of my net worth. Should the bull market persist, an extra $1,875,000 might appear out of nowhere. Investing 10% of my investable capital in artificial intelligence firms is my moonshot. My previous big score came from a 2016 Tesla investment that enabled me to purchase my most recent home.
Simultaneously, it is possible that we will see another bad market similar to that of 2022, which would wipe off at least $1,875,000 of my net worth in a single year. Working is actually discouraged by this significant absolute dollar change in net worth, either up or down.
Assume I land a $150,000-per-year part-time consulting job. Not too terrible, huh? After taxes, I could work 20 hours a week and make roughly $115,000. Let us then assume a 10% correction in the stock market, which would result in a $300,000 decline in a hypothetical $3 million stock portfolio. What a waste of time at work.
I detest going to work and then having my investments lose money. Because of this, I choose to put in less labor during down markets because my return on effort is lower. Now that things are going well and taxes are comparatively low, working is more tempting.
A higher net worth deters you from working as hard.
Conversely, unless you absolutely love what you do, why labor for $115,000 after taxes when your $3 million stock portfolio is up 10% and returns $300,000? This is an interesting dilemma that you may someday have to consider as you get older and wealthy. I use $3 million as an example since, in 2012, I was able to retire with a net worth of roughly $3 million. By then my net worth had fully recovered from those dangerous years of the global financial crisis.
I very clearly recall thinking how fortunate I was that everything turned out okay. I concluded at that time that the strain of job was no longer worth it. Politics at work were also getting to me; I was no longer enjoying myself.
Nevertheless, doing nothing and waiting for nice things to come is not how I tend to be. I will therefore continue to write as I have since 2009 and at least work on my book. However, returning to the workforce full-time during a downturn will be difficult. Following Donald Trump’s abortive attempt to assassinate himself, my odds of succeeding have increased by doing nothing. The likelihood that a Donald Trump administration will enhance your financial situation is higher. In general, the stock market favors fewer regulation and taxation. Trump, meanwhile, gained his wealth in commercial real estate, so he has the ability to propose legislation to support the industry.
I’m Going To Enjoy This New FI Challenge
I don’t have the same desperation in my 40s as I had in my early 30s to leave my horrible work. Instead, I feel excited to have a reach financial goal again.
By December 2024, I will have fulfilled my dream of spending five years as my children’s full-time father. The hardest victory I’ve had was achieving this goal. Both children may now focus on earning again because they are enrolled in full-time education. I’m going to make an effort to enjoy myself as much as I can while I work toward financial independence again. To earn money, I must limit my activities to those I enjoy. This also entails continually stepping back and enjoying the present.