Blogging is a great way for me to set goals and have motivation to stick to them. Sort of like keeping a journal, but a public one. (Kind of scary sometimes).
I already share our monthly Investment Assets which document the growth (or decline) of our investments from month to month. In the coming months, I will be sharing a lot more about my personal investment strategy as well.
I live by goal setting and this blog is all about achieving those goals and making better financial decisions.
Our big goals: Achieve a net worth of $1 million in less than 5 years and a $2 million net worth before I turn 40.
The First $1 Million
A million bucks is a nice round number and a major indicator of net worth progress. Don't get me wrong, it's definitely not enough to retire on at a young age. But I believe it is an important net worth goal for us because it's a psychological hurdle and halfway to our target net worth limit.
If we let our investments grow untouched, we should be able to double our portfolio with no new contributions in approximately 12 years. That's assuming a 6% compounded annual return.
As a psychological safety net, I believe we could cut our expenses to the bone and live off the proceeds from a $1 million portfolio for a few years without hurting our long-term financial picture.
By the rules of Moose Math, $1 million will generate a reliable annual income of $35,000 to $40,000 for life. This includes adjustments for cost of living increases all with a probability of success that is greater than 90%.
The $2 Million Limit
My wife and I are determined to give more to this world than what we take from it. As I get older and more mature in my thinking, I increasingly want to move towards a life where we give back by focusing on volunteering, work with people who are less fortunate than us, and try to make a real difference in the lives of others. I think personal satisfaction does not come from selfishness, but from sharing. This is inline with our personal and religious views.
We believe it is important not to accumulate wealth endlessly beyond our reasonable needs. Even with a moderate uptick in lifestyle, I can't see us spending more than $80,000 a year ever. Moose Math says a $2 million portfolio will reliably generate $70,000 to $80,000 a year for life—that's enough for us. We'll have plenty of personal freedom and a great lifestyle!
There's really no reason, aside from selfishness or hoarding, to pursue a personal net worth greater than a few million dollars (adjusted for inflation). Once we hit $2,000,000, excess income can be used to benefit others who matter to us.
We have no desire to get filthy rich. If we continue to both work full-time while maintaining current spending and savings rates, by the time we reach age 65 our net worth would easily be $20 million. We can't think of a responsible way to spend $750,000 per year on ourselves.
How We Are Going to Do It
Achieving a net worth of $1 million within 5 years won't be easy. But it's also not impossible. Here are the steps we will need to take to get there:
- Stay out of debt. This is the most important factor. Debt payments can easily suck up hundreds, if not thousands of dollars each month. By not having any consumer debt we can instead direct money to investing without impacting our lifestyle. With interest costs certain to go up in the future, this is more important than ever.
- Continue working good jobs. Both of our current jobs pay reasonably well, just putting us in the top third of household income in our province. Two full-time incomes naturally helps. Income is important, although it gets less important as our net worth grows and return on investment has a bigger impact on our net worth than new contributions.
- Continue renting. We made a fantastic move last year to sell our over-sized house (for basically no profit after costs) and begin renting. This was a tough decision as we were both raised in families who firmly believe in home ownership. However, after running the numbers we believe the odds are well in our favour: renting will make us better off financially than owning. So far, the investment return on our former home equity is enough to pay for years of rent!
- Optimize our housing. Renting gives us great flexibility to move at low cost. Sometime later this year we are going to downsize again. Our goal is to live in approximately 1000 sq.ft. of space with 2 bedrooms. While still larger than our personal needs, it allows some space for guests. Our all-in housing costs are currently around $1,900 a month. Hopefully we can get that down to around $1,600 - $1,700.
- Cut vehicle expenses. Aside from housing, vehicles are the next largest expense. Fortunately we don't have payments on our vehicles, but we do own two vehicles including a gas-guzzling truck (leftover from my construction days). We would like to get down to one fuel efficient vehicle. Hopefully we can find a place to live that will allow me to bike to work.
- Optimize for taxes. Taxes are real expenses that limit saving ability. We keep our income taxes low by using RRSPs, pensions, and finding other deductions wherever possible. We reduce sales tax expenses by purchasing used items we need from Craigslist and Kijiji wherever possible. We buy staple groceries, don't smoke, rarely buy liquor, and try to minimize driving as much as practical. If the circumstances are right, we may consider an investment loan to further reduce tax expenses.
- Move to minimalism. The older we get, the more we are realizing the value of streamlining our lives. This means having less stuff. The main focus of minimalist living is ensuring everything you have serves a genuine valuable purpose. So far we've done a great job of shrinking our closets, selling/giving away some furniture, simplifying our investments, and tossing/giving away knick-knacks and similar crap. I think we can still do better, shrink down our lives, and reduce our footprint even more. This saves us money, reduces stress, and reduces our impact on the environment.
- Reduce portfolio drawdowns. It's reasonable to believe we will see a major stock market correction sometime in the next few years. I use a trend investment strategy with stop orders to limit exposure to market crashes. While this can cost me in whipsaw trades and reduced return in up markets, it should protect our portfolio from big drawdowns.
By following this guideline, we should be able to bump up our savings rate without a negative impact on our lifestyle.
I believe in the importance of balance in decision making; we are not going to eat dried ramen and hot dogs to get rich, but we're also not going to regularly buy $10 drinks at a bar when a $2 drink at home or a friend's place is just as satisfying.
Are you setting goals for your finances? What are you doing to get there?
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