Monthly Archives: August 2014

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Progression and Regression [August 2014]

Category : Uncategorized

This month I pulled the trigger and traded in my precious Mazda3. The car had about 130k miles on it, and I was plagued with both front and rear suspension problems. Already having sunk about $1k in ‘fixing’ the shocks & struts over the last year, I decided to run some numbers.

$14k – price paid with taxes and registration
$2k – trade in value
77 months – timeframe of ownership

Averaged out, the price per month of the car was $156 per month. Insurance over those 77 months was an average of $70 per month. Totaling the two together, I drove that car for $226 per month. It gets pricier though. In the last 18 months, I’ve been plagued with repair after repair on that Mazda3. The monthly repair costs on the Mazda3 have been around $128 per month. Excluding maintenance, my total cost to drive that car was $354 per month.

The Chevy Cruze I’m leasing is $179 a month for the lease payment and $135 per month for insurance. This totals $314 a month.

Jcurtiswebb 2014 chevy cruze

A no-brainer right? Drive a brand new car for $40 less a month… Not exactly. I derived these monthly numbers by more of an accrual accounting method. I owned that Mazda3 outright, so my monthly cash expenses are actually going to go up significantly. It’s an interesting lesson in cash versus accrual accounting: looking at the amortization of a piece of property helps you figure out what you actually paid per month for it, but not what you are dishing out each month in cash. The monthly expenses that I track are essentially all cash outlays.

August was the strongest dividend month I’ve ever had. I spent a couple hundred more on food than I wanted, but I guess eating is necessary.

Expenses: $1012.03
Dividend Income: $266.42
Percentage of expenses paid by dividend income: 26.3%

Jcurtiswebb Passive Income Versus Expenses August 2014

Over a quarter of my expenses were paid by dividends this month, however, I’ve missed my $25 a day budget for several months now, and it’s going to get inherently harder with spending more cash each month on the leased car. I’m upping the goal to spend $30 a day. Progression and regression.


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The Simple Math of Financial Independence

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Financial independence is the state in which one’s income from passive sources exceeds expenses.

Financial slavery is the state in which one’s income from passive sources cannot cover expenses.

A financially enslaved person must work in order to cover their expenses.

A financially independent person can still work, but does not have to. That is the key, the person has a choice of whether to work or not. Independence is freedom of choice.

The amount of money needed for an individual to achieve financial independence is directly proportional to his or her annual expenditures:
30*(Annual Expenditures)=(Total Amount Invested)
Understanding the implications of this 30:1 ratio is the key to achieving financial independence.

An example:
A person living on $20,000 per year will need to invest $600,000 in order to be financially independent.

Why is the ratio 30:1?
The 30:1 ratio is based on dividend growth investing. It is predicated on a few assumptions:

  • Portfolio is comprised entirely of dividend growth stocks
  • Stock market gains on average will atleast match inflation
    Historically it has: the 1950-2009 average inflation adjusted capital appreciation was 3.3% per year for the S&P. This means stocks grew an average of 3.3% more than inflation per year!
  • Average dividend yield of portfolio ≥ 3.33%

The key here is that the dividend portfolio gives a total annual yield of 3.33%. A portfolio of $30 will annually yield $30*(3.33%) = $1
$30 invested : $1 annually

How long will it take to reach financial independence?
It depends on your expenses and income. Say you are living on $20,000 per year. By the 30:1 ratio, you will need to invest $600k before being financially independent. $600k is a lot of money. Even if you had a high paying job that allowed to you save $50k a year, it would still take you $12 years ($600k/50k = 12 years). Capital appreciation, dividend growth, and dividend reinvestment would slightly reduce this time to 11.15 years based on my model [more to come on my dividend model in another post].

Achieving financial Independence faster
There are two-ultra-secret techniques to achieving financial independence faster; use at your own risk.
1. Reduce annual expenses
2. Save more money

These are two sides of the same coin.

1. Reducing expenses is the most effective way to cut down the time to achieve FI. Every $1000 you reduce annually will reduce the amount of money you need to invest by $30,000.
From the previous example: If the person were to cut $5,000 annually from their $20,000 in expenses, they would reduce the total amount they need to invest by $150,000. Thus, $600,000-$150,000 = $450k. Assuming they still save $50,000/year, they will achieve financial independence in just 9 years. Why would they only save $50,000/year though? Didn’t they just cut $5,000 from their expenses? Enter saving more money.

2. Saving more money can be broken down into two sub categories

  • Reducing expenses and investing the difference: Building on the previous example, the person who reduced their expenses from $20k to $15k, can now invest the $5k each year. Investing $55k per year will allow this person to save $450k in just 8.18 years. Including capital appreciation, dividend growth, and dividend reinvesting, the total time is realistically 7.75 years.
  • Earning more money and keeping expenses the same. Nuff said

Calculate How Many Years It Will Take You to Reach FI
Step 1: Determine your annual expenses
Step 2: Apply the 30:1 ratio to find your Total Amount Invested
Step 3: Determine your annual income after tax
Step 4: Subtract your expenses from your income, and determine how much you can save per year.
Step 5: Divide (Total Amount Invested) by (Amount Saved Yearly)

Financial Growth


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Peer Pressure [July 2014]

Category : Uncategorized

July 2014 financial update:
Expenses: $1091.99
Dividend Income: $106.50
Percentage of expenses paid by dividend income: 9.8%

This graph shows that roughly 10% of my expenses were paid for by dividend income this month. There is some turbulence in the graph, but it’s trending up towards a larger and larger percentage of my expenses being paid for by dividend income.

Jcurtiswebb Dividend Income Versus Expenses July 2014

This July was my second highest month for dividend income, but my highest month for spending thus far. After spending $1091 this month, I have nothing to show for it except a personal realization about the way I spend money.

July’s goal was $775, and I spent $1091.99. That means I went over budget by $316.99… Jesus.

How did it get so bad?

Well, a couple of my good friends (whom I also work with) wanted to take a trip down to the red river gorge, KY to climb. Instead of roughing it and camping, we ended up splitting the cost of a cabin. The cabin ran $125 per person for two nights… This is opposed to spending $5 a night to camp. I also was quite reckless with food spending this month. A co-worker of mine wanted to go out to a nice restaurant after work, and I went however my bill came to $50 more than I wanted to spend (the bill was $50). I also was quite liberal about going out to lunch this month, both during work and on the weekends. Little trips add up, and I spent about $100 more than I wanted on restaurants.

I certainly wouldn’t have spent this money if I was by myself; many of these purchases were due to the influence of my peers. Now, I have a pretty firm resolve to be frugal and save money, however, I don’t want to ostracize my friends, girlfriend, or family with my frugality. Because of this, I spend more money than I otherwise would have. Most purchases I’m fine with, however, the extravagant ones like eating out at a fancy restaurant or staying at a nice cabin, I feel guilty for purchasing.

At the end of the day, I can let it go fairly easily because I realize it’s all a part of the journey.