The world is too much with us; late and soonGetting and spending, we lay waste our powersLittle we see in nature that is oursWordsworth The World is Too Much With Us
Reading the signal flags
As the journey progresses, some questions are increasingly pushing themselves forward. Questions such as: what does achieved financial independence look like in practical day-to-day terms? Will I recognise it when I see it? The answers to these questions will help recognise the length of the journey still to travel, and the signposts of arrival.
Over the last few years I have been recording my credit card expenditure, and more recently, have started comparing this against the income produced by the portfolio. This is on the theory that if my investment income matches or exceeds average credit card charges each month, then at one level some variant of FI has been achieved (is “credit card FI” copyrighted?). In July I mentioned this, and provided a snapshot. This post seeks to dig deeper into this data, to better understand where I am from a different perspective.
The portfolio goals I am working to are built from target incomes, which are then translated into lump sum targets, using an assumed average return (of 3.92%). Each month I report a percentage progress towards these goals. Currently I’m about 95 per cent of the way to Objective #1 and 70 per cent of the way to Objective #2.
There are some interesting subtleties to bear in mind in using a percentage based measure of progress, that are well discussed here. The goals also have a time frame based on progress to date, which means, for example, that I noticed the other day I was officially only around 100 days from Objective #1.
Each of these are useful measures for understanding progress, but at its most basic, financial independence is having a steady passive income sufficient to meet required daily expenses. There are different variants of this concept, with ‘leanFIRE’ and ‘FATfire’ referring respectively to a capacity to meet a modest, if not minimal lifestyle, or the capacity to live a relatively unconstrained, comfortable lifestyle from passive income.
Constant bearing, decreasing range
To better understand the answers to the questions above, I have stepped beyond credit card expenses records, to look at total expenditure from all sources. This includes items such as rates, energy and utility costs, day to day cash, as well as contributions to irregular major expenses such as holidays, house and car repairs, as well as eventual car replacement. It does not include income taxes.
This record has never focused on frugality of living expenses, or detailed expense analysis to a significant degree, and will not start doing so now. Rather, what I sought to understand was an estimated total cost of maintenance of my current lifestyle. Over the past few years my total credit card expenses have averaged around $72 600 per year. Adding all other expenses not paid by credit card ($24 300) gives a total current expenses of $96 972 (or around $8 081 per month). The figure below sets out a ‘credit card only’ and a ‘total expenses’ series against an averaged measure of monthly portfolio distributions. The green line effectively represents actual credit card expenses, added to an equal monthly contribution of other non-credit card expenses.
This shows that while on average portfolio distributions have been around equal to credit card expenses since the middle of 2017, there is still some further progress before portfolio distribution can regularly meet total current expenses. As that is a quite busy graph, I have produced a simplification of the same data, expressing instead the proportion of total expenses being met by portfolio distributions over time.
This data, and the trend line, shows steady progress through the last five years. Distributions have risen from meeting only around 20 per cent of expenses, to now meeting around 80 per cent. On current trends, it would appear that the next several months could see it passing the point at which annual distributions regularly fully meet my current lifestyle expenses.
Summary – Running before the wind
By definition, this log can only be a record of what has been. There are dangers in linear extrapolation on any course. For this moment, progress seems relatively steady and consistent beneath month to month market variations.
Yet there are a few cautionary points to observe:
- Right target? My current estimated total expenses are above those assumed in my portfolio goals ($96 000 compared to $80 000 per annum), potentially implying the latter need to be revisited.
- Irregular estimated expenses – The total expense estimate is influenced by some broad estimates of major but irregular spending requirements, which could turn out differently than expected.
- Both income and expenses are variables – while portfolio income has been mostly stable over the long-term, there can be large variations in half-yearly totals. It is not impossible for future periods of higher expenditure to coincide with lower portfolio income.
The answer to the questions I posed may well be that I will not immediately recognise the cross-over point, that I will need to actively monitor for it. In the immediate term, it’s possible I will drift into a position in which notionally my entirely ordinary salary income is available to add to the portfolio, increasing portfolio growth strongly. This is an intriguing and motivating part of the mathematics of long-term portfolio investment.
As the portfolio reaches towards full expense replacement, there is a duality. Amongst steady but small changes and weekly habits it feels as if an inflection point, or some form of phase transition is creeping upon the stage. The task is to measure, notice, reflect and act on the result.
The contributions of different investments have changed over time. A significant part of very early income was actually linked to cash holdings in high interest savings accounts.
Over ten years, the median level of distributions from the portfolio has been 4.4 per cent. The mean average has been higher, at 5.1 per cent. This now allows me to have some degree of certainty around the likely bounds of future distributions from any projected portfolio level.
