FI or financial independence is when your income from sources other than work can replace your expenses. In a way I have finally achieved this 11 years ahead of my initial goal. What really made me realize we were here was the last 8 months of non-ideal finances. Here’s how I achieved Lean FI before 35.
This last year has been crazy for us, with several emergencies or at least financial hiccups along the way. We had tons of unplanned expenses, I had a majority of my work cut, and yet we still ended up increasing our net worth substantially. Not only that, but during a long period of no W2 income our cash position did not run backwards. It appears that we have hit Lean Financial Independence.
In July of last year Mrs. C. quit her job. Based on my income and our new rental income we decided it was the right move to make. In retrospect I wish we had done it a year earlier. She earned around $10 an hour and worked about 20 hours a week. Her employer would schedule her for shorter shifts, so she would typically work 4 to 5 days every week. Overall this job was not worth the amount of time and energy it consumed.
In October I got laid off from my normal nuclear contracting job (this was expected and routine) and went right into working on a rental house. I usually try to line up a 2nd job each season, but there wan’t anything that made sense. A 2nd job would have also had me travelling away from home.
At the end of October the tenant we signed a lease with in our first rental house, didn’t pay her rent. She caused a lot of drama, and we had to evict her. She left on her own before the sheriffs would have had to physically remove her, but she didn’t pay her back rent (which she agreed to pay numerous times.). We had to file a money judgement and garnish her check for the rent she owed, and we did not pursue her for the 2 month lease breaking fee. We had to make quite a few repairs and find another tenant as winter was approaching. Thankfully we signed a lease that started January 1st. We ended up essentially losing 1 month of rental income and we had a several month delay in receiving the rent she owed us because of the garnishment. This was unfortunate because this was a major problem for the first non-family tenant we had and it was her first month there. This didn’t bode well for future rentals.
During this time frame Mrs. C. had 2 surgeries and the rehab on the house we bought in October took longer than originally anticipated, with us renting out the house at the end of February. Right as we were signing the lease for that house we bought another one. This one we rehabbed in just under a month. and Mrs. C. got it rented out at the end of March, despite the global pandemic and the statewide lock down starting.. For that house we were exactly 1 month from purchase to rental contract.
I went back to work in March, however due to the Corona Virus 2 of the 3 jobs I had lined up were cancelled. Due to my job cuts I only worked 3 weeks for half the year, as opposed to the normal 10 to 12 weeks. This was of course a substantial reduction in income.
When I filed for unemployment benefits, they were delayed for a long time. It took 7 weeks for them to come through. During this rough time I was psychologically frustrated, but when I looked over the numbers I realized we were more than OK. Our net worth had increased substantially during this time, and our cash position was actually moving upward very slowly, as opposed to moving downward. Without the stimulus check we received I think we would have been slightly cash flow negative, but still for everything that was going wrong, things were OK. We planned for the “what if” scenario of my employer not calling me back to work for my local job in the Fall, and we would still be OK if that happened (thankfully it didn’t).
Running The Numbers For Lean FI Before 35:
Lean FI occurs in a vacuum. So its a IF/THEN scenario. It basically mean if we chose to stop working altogether we could get by on a relatively minimalist budget, as long as everything went well. If we were to stop working altogether some of our expenses that are large right now would drop substantially, most notably income taxes, payroll taxes, health insurance, and vehicle expenses.
Lean FI Income Sources:
- 5 rental houses: Monthly net income: $1,908. This is true cash income after paying taxes, insurance, maintenance, depreciation, interest, and principal on any loans. As houses pay down the interest expense goes down and as houses pay themselves off our cash flow would increase. (Rents also go up over time.) Our net worth is also growing each month by an additional roughly $700 a month through principal repayment.
- Social Security Benefits: $800 Good for roughly 10 years. Once our nephews hit 18 it goes away, of course so do the expenses associated with raising 2 children. This is top line income for supporting these kids. This is actually the amount the Social Security benefit started at and we have been putting their COLA adjustments into a savings account for them. The true Social Security income is now $896 a month, but the $96 we put directly into a long term savings account for them and intend to continue doing this with all added COLA adjustments.
- IRA/401K/HSA withdrawals: $833. This would be based off of a withdrawal rate that I personally find acceptable. We could structure this to make it happen. We have all the receipts from dental work and health issues over the past 6 years that would allow us to withdrawal tax and penalty free from our HSA to reimburse ourselves, we have Roth contributions we can withdrawal, and we could set up SEPP plans for our IRAs. We don’t plan to actually tap these accounts, but we could.
- Blog Income: $180: This has been the running average. Some months it is closer to $100 and some months its closer to $400.
- Bank Interest: $75 (2 accounts earning 3% at 15K max)
If you look closely you will see that we have a total of 9 sources of non W2 income. Having diversified sources of income is really important to achieve lasting financial independence.
Additional Non passive: eBay sales of stuffed animals and 3d printed ear savers: $400. I’ve been running these 2 micro businesses on a very small scale. I think we could continue earning around $400 per month given our current sales with <1 hr per weekday spent on them. I’m not including this in the total since I’m starting to slack on this, I just wanted to illustrate that we would have some buffer from alternate income.
Lean FI Expenses:
- Mortgage: $116 We still owe around $40,000 on our home, but no longer have a primary mortgage. This balance is on our heloc and has an interest only payment currently at 3.5% for 10 years, at which point we would have to refinance any remaining balance.
- Health Insurance: $0 With only our rental income and blog income counting we would qualify for $0 monthly premiums with very little out of pocket. All 4 kids would receive medicaid. Currently we are paying almost $400 per month in premiums and we have a deductible and 10% coinsurance after the deductible with a $4,800 out of pocket maximum.
- Misc. Medical: $200: This is copays, dental work, etc.
- Groceries: $700 a month: Groceries would by far be our largest expense in the scenario. This is without trying to reign the costs in any, this is a budget area where we could cut back significantly if needed.
- Utilities:$185: Electric, Gas and trash. We have a well and septic.
- Insurance: $120: Life insurance and home owners insurance
- Comcast: $182: Although not cutting cable is blasphemy in the personal finance space we have paid Comcast for over a decade. With a family of six the entertainment provided between internet and tv per person hour is still a good deal.
- Cell Phones: $120: Our 2 straight talk cell phones and minutes for our 2 older kids prepaid phones.
- Property Taxes: $140. Our property taxes are among the lowest in our county. We pay right around 1.1% of the assessed value.
- Misc: $400: This is all the random stuff that pops up.
- Car Insurance: $100: Currently we pay $165. This month we will be able to lower our premiums thanks to Michigan finally getting rid of the requirement to carry unlimited medical insurance. (We are the ONLY state that required this). We also have 3 vehicles insured and could drop to 1.
- Car gas: $200 a month: This represents roughly 100 gallons at current gas prices. 100 gallons at a 25mpg avg gives us 2500 miles of driving. I’m sure we could cut back on this as well. I don’t think we actually drive this much, this is just an estimate. Certainly during the corona virus lockdown our driving has been considerably less than this.
- Income Taxes: $0 We would have no tax liability. We also would not pay any payroll taxes, not working and all. We would not qualify for the EIC or for the refundable child tax credits. It would be a break even $0 deal.
- Saving for retirement: $0. Our largest “expense” is long term savings. If we stop doing this we have a lot less cash coming out of the bank accounts.
Total Monthly: $2,347.
Net Monthly Position: +$1,449.
If we paid back our principal on our mortgage at a rate consistent with a 10 year mortgage we would have an extra $280 a month coming out in cash flow, putting our net position at positive $1,169.
A $31,500 yearly budget for a family of 6 is extremely aggressive, however the main 5 household expenses have been significantly reduced. Our total house payment is just under $400 on a 10 year payback. We don’t have vehicle loans or vehicle depreciation. We don’t pay income tax. We don’t pay anything for retirement savings, and we don’t pay anything for health insurance. This $31,500 budget would for the normal family be providing a $60,000 a year lifestyle. The $14,000 income buffer should be ample for occasional Murphy issues such as evictions and home repairs.
The Problems With Lean FI
Emergencies: What if we have to evict someone and lose 3 months of rent? or a tenant wrecks the place? We have a heloc with a $135K max limit, as well as over 1 year of expenses in cash. Still, relying primarily on rental income and not on a large nest egg does add some extra risk to the equation. A big risk I see on the horizon is governmental action in response to the corona virus. Thankfully all of my tenants have been paying their rent, however up until this month there has been a moratorium on evictions. Some politicians want a year or longer moratorium. If I can’t evict someone who is not paying rent for a full year, the economics of this situation change drastically. I don’t think at any point in human history, even in the most liberal states in the US have landlords been expected to provide free shelter for over a year. Typically if you follow the law correctly you can get a non paying tenant physically removed in 6 weeks in Michigan.
Psychological: For over a decade we have been focused on consistently saving and investing. With Lean FI, to go the opposite way and virtually stop investing overnight, right as we are hitting a stride of some serious positive cash flow would be detrimental. Also the budget I painted above is very bare bones. Even if we spent the additional $1,169 in positive cash flow per month it would still feel like we were living on a budget, which is the exact opposite of where we want to be. I don’t want to have to think about cash because our natural spending should be substantially lower than our passive income. This limited budget could lead to a constant scarcity mindset, which is very debilitating to long term success in every facet of life.
Timeline required to hit full FI: Because our income is at a peak and our wealth is growing through compounding we are on an almost exponential growth curve in our wealth building. Working for even 1 more year would greatly increase our income and our safety margin. We are less than 12 months away from hitting a comfortable standard Financial Independence level where our normal expenses are covered by our non W2 income.
Timeline From Lean FI to Full FI:
Full FI would be where we can live comfortably and cover our normal expenses without having to worry. Our current normal expenses are closer to $3,300 a month. This is still under our lean FI total amount of income, but without much of a buffer. We have the cash right now to buy 2 more rental properties. Adding in 2 more rentals will increase our cash flow by around $800 more per month, putting us at $4,596 in positive cash flow.
Using the BRRRR method we would then buy 2 more rental properties 6 months after buying the 2 we have cash for right now, adding another $800 to our cash flow around May of next year. (I’m padding the timeline to allow for finding the right properties, rehabbing, and finding the right tenants. This would bring us to $5,396 in income and a total of 9 rental houses.
During the next 10 months we plan to use excess cash flow from my outage seasons to pay down on our house substantially. Although I think we will be short of my extreme goal of paying it off by my 35th birthday, I think we will be pretty close. I am aiming to pay down $25,000 over the next 10 months. This would put us at owing only $15,000 on it. This would drop our minimum payment to $44.
Another roughly 1 year of investment gains and steady contributions to our retirement accounts should also lead to another $200 a month in income from our retirement accounts.
In 10 months on my 35th Birthday our total cash flow should then be:
- Income: $5,596
- Expenses: $3,228
- Net position: +$2,368
Being able to spend what we do now, while generating $28,000 extra in cash flow per year is a much more comfortable position to be in. In addition, having 4 more houses gives us further diversification and adds to our total principal pay down and appreciation wealth building, which should exceed over $2,000 per month. Owing only $15,000 on our house versus $40,000 on our house also makes a huge difference psychologically. The $28,000 a year buffer allows us to keep investing, and to not take any draw from our retirement accounts or HSA. If we only invested half of it we would still be able to invest over $1,000 a month.
We are trying to get all of our mortgages issued in a relatively small window of time. We got the first one last fall and will get 2 total for this year. Next year we will get 4 (for the 4 houses mentioned above) and that should be the last of the mortgages, any additional houses we buy we should pay cash for. By getting mortgages on all of our houses in a roughly 2 year window we will be in a spot where when I’m 50, which is still extremely early retirement, all the loans will be paid off IF we never pay extra on them. With an average loan payment of $350, across 7 houses with loans we will gain almost $2,500 a month in cash flow around age 50.
Additionally we are hitting the lowest mortgage rates in US history right as we are accelerating this. The first rental mortgage we got last year was at 4.75%. We just closed on our 2nd at a 3.25% rate, paying 2 points (roughly $800 to drop the interest rate). With the current trend in rates we should be able to get sub 3% for the next 5 mortgages. Getting this debt secured while I have a W2 job is also important because it makes underwriting for the bank a more streamlined process. We are also exploring getting a refinance on our first rental property. We’ve owned this house since 2006 and have refinanced it 3 times already, but each time it has made good financial sense to do so.
Even Hitting Full FI At 35 Doesn’t Mean I’m Quitting My Job:
Along our journey we have used our increasingly strong financial position to maximize the value of the work we do. We’ve cut out our lowest paying jobs and have maximized the amount of hours I work at my highest paying jobs.
- Mrs C. doesn’t work anymore. Mrs. C. quit her job 1 year ago. We figured there may be a scenario where she would need to go back to work, but given our current projections we are in the clear on this.
- I don’t work in the winter anymore. Or in the summer. I haven’t working in the summer since I was a fast food cook for 2004 – 2007. I worked a night shift job doing snow removal and building maintenance in the winter from 2014 – 2017. Night shift with young kids is rough.
- With hitting lean FI I’m more selective with travel jobs. A lot of my peers travel 3 to 6 months of the year. I’ve recently been closer to 2 months a year and am reducing this further.
- We know that if I lose my job its not the end of the world. Psychologically this is really important. I’ve been job scared for over a decade. Knowing that I don’t need my job, that I value it, changes my mindset quite a bit. Being job scared is a part of a scarcity mindset and leads to short sighted poor decision making.
- With our rental model we have proven we can buy houses and rehab them inexpensively and turn them into rentals. We should then therefore have the same ability to rehab them and flip them to owner occupants. Doing 1 house flip a year in our market should net us around $15,000 to $20,000.
Working towards financial independence is not an all or nothing proposition. You don’t have to wait until 65, 55, or whatever other random age to start seeing the benefits from having a high savings rate. We have experienced significant improvements in quality of life long before hitting lean FI.
In addition to not hating my job, it is also really close to the perfect semi-retired job. For my primary job I work as a field supervisor during refueling outages at a local nuclear power plant. I work roughly 10 weeks each outage and there are 2 outages every 18 month period. During this 10 weeks I can earn around 70% of our lean FI budget. Working an average of 13 weeks per year is a pretty good gig. I currently also work as a steam generator tech for jobs I need to travel for and earn close to the same amount on a weekly basis. These jobs are also temporary outage jobs and I can scale up or down in how many I work. For the past few years I’ve been averaging around 22 weeks of work per year.
Most people who pursue FI have a job where they have to work 50 weeks out of the year and it becomes an “all of nothing” decision. Having the ability to scale down to as little as 13 weeks out of the year makes continuing work past hitting Financial Independence much more palatable.
Once Again, I’m Not Quitting When I Hit Full FI
Hitting FI a full decade before our original target is nothing short of a blessing. Although I could stop now I feel I would be robbing my children, my grandchildren, my wife, and my community. With the base of wealth and cash flow we have now we can build substantially on this over the next 5-10 years and allow us to live and give like no one else. Although I’ve earned around $10,000 from this blog since I started it, by forcing myself to constantly be thinking about and learning about money I have greatly accelerated our wealth building. Action Economics may never be a top 100 financial blog or make up a large part of our retirement income, but its affect on our lives has been drastic.
We are going to build generational wealth to an extent that typically only the top 1% do, while having never earned $100K in a year. (Ok, so I’m shooting to break the 6 figure barrier in 2021, but still 15 years of never hitting it!)
We are going to be in a position to give tens of thousands of dollars a year to causes we care about. This level of giving is typically reserved for people with incomes between $500,000 and $1,000,000. (The average charitable donations for this income group was $18,615 in 2014)
We are going to enjoy some of our cash flow, including adding a back patio and a kitchen remodel to our house. We are also planning a 2021 trip to Universal Studios. Mrs. C. grew up very poor and we have lived on a tight budget for 15 years together, with the last 7 being due to aggressive saving and investing. I am really looking forward to loosening the budget and her being able to live closer to a normal middle class lifestyle.
Over the next 5 years (and change) we will:
- Increase our total rentals to at least 12 and deleverage half of those, which will increase our average cash flow per house.
- We will finish paying off our house.
- We will remodel our kitchen, build a patio, and pave our driveway.
- We are going to triple our retirement nest egg (very aggressive goal, relies on good stock market returns too of course).
- We are going to cash flow launch our kids with extra resources. Our oldest are 17 and almost 12.
- We are going to build generational wealth better than most millionaires and top 5% income earners.
- We are going to donate thousands of dollars every year to causes we care about, including RIP Medical Debt, The Wonderland Toy Store, and our local facilitator for the Dolly Parton Imagination Library.
- We are going to do all of this while working an average of 15 hours or less per week.
At the end of this next 5 year period, as I turn 40 we will be hyper financially independent. Our non W2 income will be around 3X our average spending, allowing us to aggressively invest and give. I may still work my W2 job after this since it is seasonal and allows me to fund Roth accounts, which are an excellent tool for building generational wealth.
This Didn’t Happen Overnight:
Super Lean FI is just 1 stepping stone on the journey, but a very important one. This didn’t happen overnight. This didn’t even happen over the 7 years I have been running this blog. Our wealth building journey started 15 years ago. Wealth is built slowly layer by layer. Wealth is built intentionally. Very very few people accidentally become wealthy. For 15 years we made 1,000 decisions that no one else would make.
- We haven’t upgraded in house as our income has gone up. “normal” people in our income bracket could get a loan for a $400,000 house. Our house is worth half of that and we paid $145,000 for it in 2011.
- The car I drive is worth $1,000 (A 2001 Pontiac Montana) Mrs. C’s car is worth around $3,500 a 2007 Honda Odyssey. I’ve always driven a vehicle in this value range.
- I took on extra responsibilities at work well outside of my comfort zone.
- I worked for less money than my peers to build up the ability to have a local job that had a higher pay rate. Essentially my competition left for higher paying temporary jobs, allowing me to move up easier into a higher paying, temporary, but repeating local job.
- I traveled for work a lot.
- I worked a ton of night shifts (and took a ton of night classes as well).
- Mrs. C. worked nights at an auto parts store in a high crime neighborhood.
- We competitive grocery shop across 3 stores.
- We have totes full of hand me down clothes to pass to each kid, labelled by size.
- We rarely go out to eat.
- Our entire house has 1 new piece of furniture.
- My boots have holes in them right now.
- I wear cheap jeans until they wear holes through them.
- Mrs. C. still buys most of her clothes at thrift stores.
- The computer I’m typing on that I run 3 – 4 businesses on is a refurbished computer that’s a decade old. It has a floppy drive on it.
- Out of habit I calculate food costs to calories per dollar. (Mrs. C. and my sister have both told me I’m not allowed to do this anymore.)
- I packed PBJ lunches for work a lot.
- I worked 3 years in a kitchen that the thermometer pegged out at 99.9 degrees.
- Instead of yearly vacations we paid large chunks of money down on our house. (We have taken 2 trips to Florida; 1 to Disney and 1 to Universal, both paid for primarily by this blog)
- Doing all of this allowed us to save and invest over 30% of our income on average each year.
- I spent
hundredsthousands of hours learning about money and then applying what I learned to our personal finances. I did this while constantly looking for ways to lower our expenses and increase our income. This includes researching and writing over 375 articles for this blog.
- We took risks and invested in real estate that most people would never look twice at. We built a plan, made our houses nicer than the competition and ran the numbers to ensure we would be cash flow positive $400 per deal and able to get the vast majority, if not all our money out within 6 months to repeat.
This isn’t about “poor me” this is to show that we paid a price to get where we are, and I’d do it again. Yes there has been a lot of delayed gratification along the way, but we have also strategically used our increasing wealth and income to improve our lives in the “now” by buying ourselves time and options along the way. Even though I most likely won’t retire until 40 or 45 from my current primary career, we have cut the lower paying and less convenient work out of our schedules, which has greatly increased our quality of life, long before hitting financial independence.
What do you think about pursuing financial independence? How far away are you from hitting Lean FI?