Monday, April 16, 2012

How much freedom do I buy with each paycheck?

This was the question I asked myself over the weekend. Despite being in the woods, camping out, and having fun on a lake, I was still thinking about my financial situation.

After plugging in some future scenarios into excel, I achieved this chart.
The green line is the percentage of expenses that are covered by dividend investments (replotted against right side Y-axis for clarity)
The light blue line is the age at which, if reinvested, my dividend investments would pay me more then my current salary.
The purple line is the age at which my investment income is twice the amount that I currently need
The red line is the age at which my investments, if reinvested till that age, would cover my current expenses.
I had to take so many assumptions that it isn't worth the effort to try and explain all of them. Inflation and tax rate changes are not included.

The information in this chart is exciting.
  • The most important piece of information is that financial independence is achievable, with 21 more paychecks invested I could search for employment that makes me happy and not worry about what was going to happen. Assuming that my expenses stayed exactly the same and that the dividend/interest payments of the companies I am invested in stay the same. 
  • Investing and compound interest is very important and very powerful.
  • 10 paychecks invested will cover another 30% of my expenses plus it reduces my freedom point by 7 years.
  • 15 paychecks invested will cover another 45% of my expenses and reduce freedom point by 11 years
If only I had been investing this heavily when I was first hired....


  1. retiring at age 27?

  2. No, I am not planning on retiring at 27. There is too much risk built into my portfolio to solely depend on it. I would feel significantly more comfortable doing it at age 32 when the dividends were twice what I currently need. Right now, a lot of my investments are with mREITS which depend on the spread of mortgage interest rates but once the Fed raises the rates their dividend payments will drop, probably in 2013/14. So, I need more dividends to be coming from less risky (aka lower dividend interest payment) investments. However, at 27, based on the trend line, I could seek out employment that would be more interesting to me without worrying too much about having a steady paycheck for a few months.