We started this blog to document the path to FIND freedom in real-time. The stress of modern life with the endless work and obligations is wearing on me and my family. We are incredibly fortunate to be in a position to have the possibility of change and escape from the chronic stress of working life. As kids we often get the question of what we want to be when we grow up, I now know my answer; the answer is free. Like the English gentlemen of old, I want to be free to have the time to pursue my interests and ideas in leisure and be beholden to no one.
Here is our multi-part strategy to achieve and maintain some level of freedom.
1. Own our home
We are aggressively paying off our mortgage, in 2018 we paid off nearly one-third of our entire mortgage. Owning a home is important to our family. Most of our hobbies and activities are done at home. We have done significant work on our house to make it feel more livable. Home payments are our largest expense, to be able to be free but to have some security our strategy must include no debt.
We are at the point where we are ready to write the last check to completely pay off the mortgage. We prioritized this even over other investment options because the idea of owning our home was the most tangible long term goal. We wrote in our second post:
2018 Living on the tips goals
Making tough choices like this is part of life. You have to decide what is important to you and decide what you are going to prioritize. We use the statement, “We choose to do A even over B” as a way determining what strategy to follow.
Saying we choose to pay off our mortgage even over investing in an index fund makes it our strategy. There is no question that we made this choice for us. We understand that there are trade offs, we weighed the trade offs and we made a choice.
There were two things that happened towards the end of 2017 that convinced us to modify our strategy and accelerate paying off the house. First, the long-term rise in the stock market seemed a little played out; second, the tax law was changing so that the standard deduction basically assumes that you have mortgage interest. I’ve overly simplified this and the reality is a little bit more complex, but I simply think of it as getting the average mortgage interest deduction without actually having to pay mortgage interest. Do not let anyone tell you that paying interest to someone to get the tax benefit is a good financial strategy. It’s not, from our third post:
This year (2018) would have been the first year that we wouldn’t have itemized our deductions on our income tax because we will not pay enough mortgage interest. This makes us looks way smarter than we actually are. We get the benefit of the standard deduction without having to pay the interest to the bank. Since we are paying off our mortgage early, have saved over $82,000 in interest payments versus saving less than $1,000 per year in paid taxes (from 2012 to 2017 the total was about $4,600).
We live on 50% of our income
Having no mortgage payment reduces our monthly income needs. It also provides stability against changes or unexpected events.
2. Save dat money
Even though we are aggressively paying off the mortgage, we are still investing in multiple ways. The largest investment is a tax-deferred 401(k) starting in 2009 through work. We are also investing in Vanguard in a low expense ratio account. This year we are starting a 403(b) through Mrs. LOTT’s work and then will be exploring starting Roth IRAs for both of us. We plan to max out my pre-tax 401(k) and get close to maxing out the 403(b) as well, this will reduce our taxable income. Additionally, I have been investing in after-tax contributions as a part of my retirement plan and will be using the Mega Backdoor Roth this year to maximize my contribution to tax-advantaged accounts. I haven’t done this before, but it seems pretty straight-forward.
Once the house is paid off, the money that was going towards the principal payment every month will be shifted to tax-advantaged accounts, the 403(b) and the after-tax contributions in my 401(k). We will need to work out the details of the availability of the Roth IRA principal from the mega backdoor conversion, but this is part of a long term plan so we do not expect to need this money for several years.
A high savings rate is very important for trying to achieve early financial independence, we have steadily increased our savings rate over the last few years with a promotion and a new job while decreasing our spending. We are now at the point where the income probably won’t go up that much more, and we would have to make some radical changes to decrease the spending. There is always room for improvement, so we frequently review our expenses and make adjustments as necessary.
We need to have multiple aspects to this strategy to cover different periods of time in our lives. There may be periods of time with high income with breaks from working in between, which leads us to the next part of the strategy.
3. Build Something
Freedom by itself is not enough, you also need a purpose in life. I am a maker and a teacher, sitting at home doing nothing is worse than having to go to work at a job that you hate. Making things better is a part of who I am and what I do. Most likely, the something that I build will not make any money. Let’s call it the myth of the four-hour workweek; building something that is scale-able and something that makes money requires a lot of hard work and a lot of luck. That is not the point, being free means having the time and the resources to do what you want to do.
Building stuff takes time and effort, effort takes energy. The stress of work is energy depleting. Working for an employer is time and effort spent building something for someone else.
Building something also requires skills and tools. Skills are developed by trial and error and persistent practice over time. A tool is an investment that can pay off by reducing the cost or time it takes to perform a task. Our investment strategy includes developing skills and investing in tools to do the activities that we want. In this way we are not minimalists, we don’t make only digital work. Physical creations require a physical canvas and real-life tools, and that can take up a lot of space.
This part of the strategy is on-going but it is limited while working full time to nights and weekends. If I build something that can generate income but requires more time it is possible that I would leave work to pursue it. How would that look in terms of the strategy?
4. Be barbelled
All financial strategies are susceptible to The Black Swan; life is too. You can’t be black swan proof, but you need to be aware that they exist. To be invested in financial markets exposes you to sudden large losses. For our strategy to work long term, it has to work for the future, not been shown to have worked in the past. This is the logical error that people make when they discuss the simple math behind financial independence.
Quitting your job when your net worth reaches some magic number requires multiple backup plans. Where I work it is possible to separate for 2 to 3 years but have a position guaranteed if you need to return. There quite are a few hoops to jump through, but because the program exists I could stop working for a period of time as a trial and have the insurance of returning to a job for up to 3 years. This complements the build something strategy. The safe side of the barbell is the guarantee of the job for 3 years, the high payoff side of the barbell is the potential of asymmetric payoff from making something that is valuable to other people.
I am 36 years old as I write this, I started down this path in my early thirties. There is a large part of me that wishes that I could walk away from the stress of the work today, but there is a chance that I could separate by 40. This is my escape plan!
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