Saturday, August 23, 2008

Your money or your life

Recently glanced through this book, especially the section covering the crossover point which signifies "financial independence" after mymoneyblog wrote up an article on this. This point dictates the start of financial independence when your passive income (income generated not by working at a job or business) exceeds your expenses.

The author describes the crossover point by means of this simple figure.

Figure courtesy of the book : "Your Money or Your Life" and

The author uses the treasury note rate of return to calculate annual return of investment.

Consider the savings invested 60% in one year CDs and 40% in stocks will earn an interest/rate of return of around 4% and 6%(typically stocks should return more) to give an average of 5 % rate of return.

$100k will earn $5k per year or $416 per month before taxes. In reality it will take a long time before which the monthly investment come will touch the line of tip over of financial independence which is the expense line.

However I see that a few milestones could be derived from this discussion. Complete financial independence is the ultimate goal but there could be minor goals on the way. One common example is grocery or eat out bills. This I call as food independence as seen in this example.

There could be other milestones built on the same fundamental idea.

Essentially an individual would like to track the performance of passive investment making some intermediate goals along the path to the final goal.

The crossover in my mind is not a single point but a range. I will discuss that in a separate post.