Last post I wrote about de-risking a move towards a more satisfying career by creating financial self-sufficiency.
I don't claim to be a guru when it comes to making money and I certainly don't know how to beat the stock market. I do, however, know something about quickly and efficiently create a situation where your "living" takes care of itself, leaving you free time to chase passion projects.
Since people's eyes glaze over when discussing money, I'll quickly describe the general strategy, then use myself as an example to illustrate how an average dude can follow the process.
The general idea is to invest as much as possible to reach a nest egg that provides enough income to cover your expenses and grow with inflation. There are two basic criteria needed to reach this:
(1) You must save roughly 25 times your annual expenses (i.e., $1,000,000 if you spend $40,000 per year).
(2) You must invest this money in indexed investments that guarantee average market returns (i.e., 70% stocks/30% bonds or something similar).
When you've accumulated 25X your annual expenses, the interest, dividends and capital appreciation of your investments is large enough to support your expenses AND match inflation (without the added help of additional work income or social security). This approach has been measured throughout history and shown to be reliable with very few exceptions. At this point, you can "retire" indefinitely.
There are many people who focus solely on financial independence and early retirement (e.g., Mr. Money Mustache). My goal, obviously, is not to retire, but rather to de-risk the next phase of my working life.
My Progress Towards Financial Independence
As I write this, I'm 35 years old. Not counting postdoctoral training, I've had a "big boy" job for a little over six years and I'm about 80% of the way to full financial independence (the point where I work only by choice). I live a normal life (no washing and reusing toilet paper) and I've never inherited a dime from anyone.
The School Years
I started out making something like 9 bucks an hour as a part-time student lab tech. After I graduated, I joined a lab full-time and received a massive raise to $13.02 a hour (Lest you think my memory is that good, I actually found a pay stub from back then the other day). This is $104 a day. I was rich: My main expenses were the $200 I paid each month for a tiny bedroom in a house for five other guys. For the first time in my life, my bank account started to climb.
This largesse abruptly ended when I began graduate school at the University of Florida. The interdisciplinary medical research program paid graduate students $18,500 a year, subsequently soaring to $21K by the time I'd graduated four years later. The hourly rate for the 60-70 hours a week I was working during that time is too unpleasant to calculate.
Looking back, my financial decisions were a mixed bag.
Things I did right:
- I'd saved a little money while working full-time.
- I graduated from college in three years instead of four. As a graduation gift, my parents gave me some money they'd set aside the fourth year. When I moved for grad school, I used those funds to buy a house and had roommates who paid the mortgage.
- I didn't borrow any additional money.
- I fathered no children and didn't waste a lot of money on dating.
Things I did wrong:
- I wasn't very frugal and spent basically everything I had. My rationale was that, since I was making so little, why bother saving whatever tiny amount I could squirrel away?
- Several bad purchases: I bought a new (albeit cheap) Toyota Corolla and got involved in triathlons, a relatively expensive sport.
I was 26 when I got my doctorate. My net worth was probably about 50K, most of it in the form of home equity. Not bad, but not great for someone who would otherwise be 4 years into a career.
In early 2007, I'd arranged a postdoc job at the University of Chicago through the Howard Hughes Medical Institute.
Although few people realize it, postdocs are possibly the most underpaid people on the planet. My starting salary was a staggering $39,000 and never went above $43,000 the three years I was there. Health benefits were included, as was a 5% salary contribution to my retirement accounts. Not great for a PhD, huh? Also, bear in mind I'd moved from low-cost Gainesville to a part of Chicago where a one-bedroom apartment was $1,000 a month.
During my time at U of C, I economized by taking roommates and, although I fell victim to a bit of lifestyle creep (I started dating and ate out far too much). Still, I'd managed to add another 10K or so to my bank balance by 2009.
The Bad Times
In 2009, my postdoc started to fall apart. Internally, I realized that I had no desire to be a professor and was stagnating in academia. Externally, the US economy was faltering badly; the real estate bubble was bursting and the University of Chicago had been caught with its pants around its ankles in the midst of several expensive construction projects. The University was desperate to shed jobs, and postdocs on yearly contracts were easy pickings. When the guy working next to me learned his contract woudl not be renewed it became clear that it was time for me to move on as well.
A rushed job search in a rapidly-deteriorating labor market netted me several offers, none of which could be considered great. The best of the lot was a position with a startup in the San Fran Bay Area. I packed up and drove across the country.
The new job paid me $60K, not a great deal more than I'd been making (again, I'd relocated to an even more expensive area). It turned out to be a bad move: Exactly six weeks later, I was let go and the company shuttered soon thereafter.
As one of America's newly-minted jobless, I took stock: My net worth was still about 60K, but more than half of that was tied up in the home I owned in Florida. Another 20K was held in retirement accounts, leaving me with only a modest sum to live on until I found a new job.
From there the situation continued to go down the shitter. I filed for unemployment and my employer contested it, meaning I wouldn't see a dime until things were sorted out. Back in Florida, my former roommates moved out as planned and I put the house up fr sale on what would be the worst real-estate market in the past hundred years. In the meantime I was paying the mortgage, taxes and insurance and utilities on an empty house.
The cold real estate market was offset only by the heat generated as I burned through my remaining cash. I frantically looked for a job, feeling the squeeze each month as my accounts dwindled.
As always, things eventually got better. Three months later, I got a job in the pharma industry back in Chicago. I won my unemployment battle and I sold my house (for exactly ($200 more than I'd paid for it). 2010 started on a high note, although I'd trimmed by net worth back to about 50K.
My new job offered a base salary of $75K plus a target bonus of 9% or so, along with health and decent retirement contributions (e.g., 401K match). This was the embodiment of what had I considered a "real job" when I was slogging through school. That said, the stress of abruptly losing a job had a profound effect on me that lingered. I had coasted back into Chicago on fumes, having spent virtually all the cash I could scrape together. The brush with destitution provided powerful motivation. It was in these bad times that my desire to rapidly achieve financial independence was born.
The problem was, I had a goal but no plan. I increased my savings rate to max out my 401K each year but didn't really do much beyond that. I continued living relatively frugally; interestingly, years of living like a grad student/postdoc had acclimated me to a relatively modest lifestyle. Even though I now had more money, my lifestyle never crept up to match. As a result, extra money started to pile up in my checking account.
The Goal Meets The Plan
In 2011, something happened to focus my efforts. I was on a modest Christmas vacation to Arizona when I discovered the concept of Financial Independence/Retire Early (FIRE) through the Mr Money Mustache Blog.
Using the 25X formula I mentioned at the beginning of this post, I calculated I was spending roughly 35-40K a year, meaining I would need to save between 875K and 1M bucks to make it happen. I'd ticked up my savings by then and had now amassed about 120K. A few quick calculations told me I could reach a point where I would be financially independent in about eight years if I continued to save, invest and - most importantly - control my spending.
Five Years on Cruise Control
It's been five short years since I decided to embark on this journey. At first, the process was very abstract. I'd liken it to being on a long car trip: no matter how fast you go, you're still many hours (or days) from your destination. Each time my patience was tested, I thought back to how close I'd come to losing everything with just a little bad luck.
On the savings side, I made some minor accommodations to my lifestyle, which drove my annual spending down to only 28-30K/year (essentially where I was as a postdoc). On the income side of the equation, I've experienced more professional success than I deserve. My salary has crept up each year with annual raises, plus one market adjustment and two promotions, putting me in a territory where I feel I'm overcompensated for what I do. This year I'll bring in 150K or so, give or take. Plenty generous, but certainly not crazy for a 35-year-old professional in a technical field.
With the help of a strong stock market, I think I can safely say I'm currently about 18 months from true financial independence. As the distance to the goal line grows shorter, I have to address the question of what exactly I want to do next.
One option is obviously to keep working. It's certainly a viable option; I certainly don't hate my job. On the other hand, life is short. I asked myself what I really wanted to do with the freedom. There are certainly a few once-in-a-lifetime things to tackle (I'd like to ride my bike from Oregon to San Diego, for example) but, without long-term goals, I'm afraid I'd just waste my time playing video games and binge-watching Netflix.
To brainstorm, I wrote out a list of other careers I found interesting:
(2) National Geographic Photographer
(3) Comic Book Artist
(4) Pro Runner
I'm too tall for (1), too slow/heavy for (4), too untalented for (2) and (3). That left writing, the only job on the list that I can probably do concurrently with a real job.
With the financial issue on track to be solved, I can devote myself to the various challenges associated with establishing a presence online and developing a readership (issues I admittedly know little about). There's no doubt it will take time to conquer these intermediate steps. So even though I'm still a working stiff, it's certainly not too early to get started.
Noah's Inner Monologue
Scribblings of a man who can barely operate an idiotproof website.