That’s the ultimate question, isn’t it? 😛
For most of us who are intensely saving our incomes and then investing those savings, it’s all about achieving that holy grail: Financial Independence
When you reach that stage, there isn’t a need to trade time for money anymore. You are free to walk away from that mundane job and pursue your own interests (whether they are making money or not) at your own pace and time.
Since I am currently not working now, I was wondering if it’s possible for the Mrs to also stop working?
Or in other words, can we increase our passive income and reduce our expenses to achieve financial independence at this point in time?
To find out, I performed this mental exercise:
Increasing passive income
With a net worth of $500,000, we could sell and liquidate everything to pay down all the debts and then put this half a million dollars in high-yielding stocks like REITs. Assuming a 6% yield, we will be able to receive $30,000 of annual income.
It’s a simple strategy but one that doesn’t seem like the best use of resources. $30,000 is a decent amount but we would then have to pay for rental forever which could easily set us back by $10,000 every year.
Considering that we could leverage on a cheap home loan with an interest rate below 2% right now, I really don’t think we should redeem it.
A better strategy would be to rent out the two other rooms to generate rental income of $1,500 every month. Even after accounting for expenses like agent fees and higher utilities, the annual net rental income should still amount to $15,000, more than enough to cover the monthly mortgage payments.
Settling all our other liabilities, we would be left with about $250,000, which is also coincidentally roughly the same amount as our most recent passive income update. But instead of receiving only about $9,000 of annual dividends or interests, we would need to take more risks and be more aggressive to generate higher income. A 6% yield (not impossible) would generate $15,000 of dividends if every dollar is invested.
So in total, it’s $30,000 of income which is the same as the simple strategy. However, there’s a tangible difference in the expense part. Instead of paying rental forever, using the better strategy only requires me paying the monthly mortgage for about another 28 years.
Since we have established that we could increase the passive income to $30,000, our expenses would need to be within this amount in order for us to retire now. With a monthly budget of $2,500, there’s some belt-tightening to be done.
Let’s start with the fixed expenses.
As the study loans would be repaid, that would be a $100 savings. We would probably have to reduce the parental allowances to $300 and since there’s no more income tax, that’s more than $150 saved. In the end, we should be able to reduce the fixed expenses every month from $1,885 to $1,450.
That leaves us with $1,050 in variable expenses each month. Since about $250 is needed for transport and utilities, an amount of $800 has to be split between food, groceries and other categories. Both of us should be able to get by quite well on $15/day for food although that could mean a decent restaurant meal only once every two weeks.
With $300 left, that’s probably just enough buffer for clothes, gifts, wedding invites and entertainment. No travelling then. 😕
So, theoretically, it’s possible for us to retire today at the age of 29. With a shelter, nutritious food and basic utilities like electricity and internet all paid for by passive income. That’s really quite amazing, isn’t it? 🙂
Nonetheless, the above is just an illustration and there’s some good reasons why we ain’t giving up on earning money yet. And a lot of that has got to do with the assumptions built in:
- We will stay healthy
- We will not have children
- We are comfortable with sharing our flat with strangers
- We can sleep well being totally invested and with little margin of safety
- We will enjoy such a lifestyle
Obviously, even though financial independence is a priority, it isn’t worth it for us to sacrifice everything to pursue it.
But that said, you could argue that it doesn’t really take much to improve the above scenario by miles. Maybe instead of renting rooms out, we could downsize it to a 3-room flat to free up more cash for investments? And maybe working part-time for 15 hours every week to bring in a couple more thousands every month?
So there’s a good chance that at this point in time, we aren’t really that dependent on our full-time jobs anymore. 😛
Anyway, in case you’re thinking that the theoretical picture that I painted is nothing short of living in poverty, let me remind you that there’s a lot of people (including Singaporeans) in this world who dreams wishfully of such a scenario happening in their lives.