[This is a guest post by FI Fighter. Let me know how you guys like this one - I've been heavily into this "retire early" stuff lately, and perhaps we'll make a series out of this :)]
Later on this year, I turn 30. That’s right, the dreaded THREE, ZERO… but it’s not what you think.
For one, I’m not freaking out and wondering where my best years went. Secondly, I have no intentions of trying to fight back time or YOLOing it up for one final hurrah. Lastly, I’ve never been more optimistic about life and absolutely can’t wait to turn 30!
The truth of the matter is, I’ve been trying to engineer my own Shawshank jailbreak for awhile now, and next year (2015), a year in which I’ll still be 30, is when I anticipate escaping prison… for good.
Precursor to Early FI
The thought of early financial independence first crossed my mind around Thanksgiving of 2011. I was living in Newport Beach at the time, and was just blown away with how unfrgual some of the people living there were. In particular, I knew a co-worker, slightly older than me, that would only drive luxury German automobiles. This guy even had a “backup” VW minivan, in addition to a pair of BMWs.
On the surface this guy looked like he had it made! A good paying job, married with a kid, owned his own residence, and had all the flashy toys everyone dreams about when they are broke and in college.
Unfortunately, everything comes with a price. As it pertained to my co-worker, it was easy for me to look pass all the bling, and focus in on a much crueler reality… the ravages of hard work.
To support his lavish lifestyle, this guy had to grind it out at work every day. He regularly worked ten hour days, sometimes more. Often times he would even come in on the weekends. Because of all that, he suffered the consequences. He wasn’t yet 30 at the time, and had more grey hair than most 40 year olds! His eyes were always bloodshot, and he just didn’t seem all that happy.
Even though I hadn’t yet started the journey to early FI when I first met him, I think subconsciously data points such as this were what ultimately drove me towards that direction.
After reading Jacob Fisker’s Early Retirement Extreme book I was hooked, and fully on board with the whole early retirement concept. [Editor's Note: This is the same Jacob from the blog, Early Retirement Extreme, which has a cult following, similar to Mr. Money Mustache).
In 2012, I started the year off with $0 in passive income. Up to that point, all I had invested in were retirement accounts (401k and Roth IRA). Since I now knew that I wanted to escape the dreaded 9-5, I decided to dedicate all my efforts towards ramping up my passive income production.
By year’s end, I was able to purchase my first rental property, and I built up a dividend portfolio worth slightly more than $60,000. It wasn’t easy, and I had to make my fair share of sacrifices along the way to make that possible. Thanks to a few pay raises and large signing bonuses from jumping around different companies, my earned income did receive a nice shot in the arm to help make things easier.
Also, I would say that I was mostly frugal during that first year (I indulge a bit more these days), saving between 60-70% of my earned income. It was tough, but I have no regrets since it helped me build up that initial foundation.
When it came to expenses, I simply cut back on the things I didn’t absolutely need. No more gym membership - I played basketball after work with co-workers instead. I ate lunch at the company cafeteria where the food was subsidized. I shopped at Costco and bought everything in bulk. I resisted the flash of Orange County and kept on driving my beater car that had close to 100k miles on it. To save on rent, I lived with three other roommates. Miraculously I was able to work out a deal with the landlord to live in a condo five minutes from Newport Beach, all for just $700/month.
When you cut out the excess, the stash starts to grow and snowball. It’s a wonderful feeling, and seeing the incremental progress being made only motivated me further.
At the conclusion of 2012, I was receiving close to $100/month in dividends, and the rental was bringing in an additional $400/month.
2013: The Grind
I purchased three more rental properties in 2013 and went full steam ahead with real estate investing. In the process, I liquidated my entire dividend portfolio to have enough funds to close on my second rental property. Over time, I studied up on out-of-state investing, and eventually expanded outside of my local market. The cash flow numbers were just better elsewhere, so I said, “why not?”
My net cash flow at year’s end was about $1500/month. Ironically, that was the number I was originally shooting for when I made my declaration to start the journey to early FI back in 2012.
When I first began, my initial target retirement age was 37.5. Every year, I’ve been trying to reel that number in more and more… Since I’m now 29, and the end game has been revised to 30, there’s not much more I can do to reel in the end date. :)
2014: The Conservator [Present Day]
For this year, my plans are to acquire two additional properties to try and bring up the net cash flow to $3000/month by the end of the year. Also, my plans are to rebuild cash reserves so that I have a decent sized safety net in place prior to checking out of the cube for good.
I’ll also have those retirement accounts available as backup, but I don’t anticipate ever needing them. If all goes to plan, I’ll be able to donate all retirement funds to charity, many, many years down the road.
If I can get to $3000/month in net cash flow by the start of 2015, I’ll feel pretty confident that I can pull off early retirement at 30 in 2015.
Breaking it all Down
My original thinking was that early FI would be about a ten year plan. Initially, I thought I would get there primarily through the use of dividend investing and real estate investing.
As mentioned above, I was able to win two rental properties in the Bay Area in 2012. By no means was I trying to time the market or anything, but now that hindsight is 20/20 I can clearly see that I was fortunate to be able to win near the bottom of the Great Recession. Even more potent was the fact that I invested in an extremely volatile housing market, one that has surged tremendously in the two years since. Each of my Bay Area properties has appreciated over $100,000, and I still have a lot of equity tied up in both.
Without getting into too many details, I have about $240,000 in equity sitting in the first home. The second rental holds about $160,000. Altogether, that gives me $400,000 of ammo to play with.
If I can achieve my $3000/month passive income target by the end of 2014, roughly $2300 of that will be due to my other rentals. The first two properties in the Bay Area would contribute about $700/month in passive income.
By selling both those properties, I can then proceed to do a 1031 exchange, and use the proceeds to invest in real estate in a much cheaper (better cash flow) market. By doing a 1031, I’ll be able to capture all the appreciation without subject to any tax penalties.
I’ll still have to pay agent commission, closing costs, etc., but to keep things simple let’s say I’m left with $300,000 to work with once the dust settles. If I can find a market to generate 12% cash-on-cash returns, that would give me $36,000/year in net passive income, or $3000/month. Adding back the $2300 from my properties, I would be closing in on over $5000/month in net passive income.
Long story short, this is what would condense my ten year plan into four years. If the market continues to hold up, this would be my checkmate… End game, achieved.
How My Plan Really Works
Since my journey to early FI might only span four years (2012-2015), you’re probably wondering, “why not just keep playing the game for a little longer?” “Why not build up a stronger safety net?” Or perhaps you think I’m crazy and out of my mind…
The truth is, I’m really just THAT burned out with the corporate work environment and want nothing more to do with it. I believe I can do THIS because my primary focus has never been about amassing a substantial amount of wealth in my lifetime. No, my end game has always been, and always will be about Point Z.
I simply want my freedom. My philosophy on life is somewhat different than the mainstream… I don’t need status, or power. I don’t need to live in an expensive city so that I can reassure myself that I’ve “made it” in life. Frankly, I would rather live in a cheaper country (Thailand, Philippines, etc.) then to live in San Francisco and have to spend all day working to support my $5000/month rent.
What’s the point of living in a wonderful city if you never have any free time to enjoy it? Isn’t the whole point of living in an expensive city to earn more money? Once you’ve taken care of your finances, why not live someplace else where your dollar goes a lot farther? If you’re willing to do that, you’ll be able to get away with needing even less passive income.
Further, I don’t need to own my own home. Never have, probably never will. I’d rather be able to fit all my belongings in a suitcase and travel the world, in search of adventure. I aspire to be a polymath, and I think that being able to do whatever I want, whenever I want, would be the greatest gift of all. When I stop to think about it, I haven’t owned my own time since I was 5 years old. I’ve been following orders ever since…
[Editor’s Note: I had to look up what the heck a “polymath” is, haha… Here’s the answer from Wikipedia: “A polymath is a person whose expertise spans a significant number of different subject areas; such a person is known to draw on complex bodies of knowledge to solve specific problems.”]
When the clock stops, and my life registers all zeros, I’d like to have a film reel worth re-watching. If you told me to sit down and re-witness the last seven years or so (since I started working full time), I would seriously just want to fast-forward it, go to sleep, or even cry. There have been some great memories, don’t get me wrong, but the majority of that movie would take place in a run-down, dilapidated old lab. No thanks! Those mundane memories will probably still be giving me nightmares thirty years from now…
Swinging for the Fences
Many people grind it out all their lives, so they can retire at 65 and finally have free time to themselves. Sadly, a lot of these people end up not knowing what to do with it. They’ve become institutionalized. They are so used to following orders that they no longer know how to think for themselves.
I don’t want to become one of those people. I want to embrace life and give it my best shot. I want to be finished with the nose-to-the-grindstone lifestyle while I still have my health and energy intact to actually go out and do something worthwhile.
I’m a bit more of a risk taker than most. I think that’s probably because I want out of the rat race so darn bad. That, and in my mind, it’s better to take a chance now, while I’m still relatively young, than to risk it all later, when I’ll have too much to lose.
Besides, what’s the worst that could happen? I fall flat on my face, lose everything, and have to hit the reboot button? Next thing you know, I’m back in the rat race… just like everyone else… Ultimately, time will tell. But I only get one shot at this Game of Life… I think I’ll take my chances.
“You want to know how I did it? This is how I did it, Anton. I never saved anything for the swim back.” (Gattaca, 1997)
FI Fighter is an early financial independence seeker who aims to get there by 30. This day will arrive when the passive income and semi-passive income streams bring in more each month than is needed to pay bills. Let the journey continue!
[Photo cred: kalyan02]