G’day, Tessa here, soaking in the sunshine and sharing some financial insights from our journey towards financial independence (FI). It’s a path many of us aspire to, particularly within the FI community where the notion of achieving a million-dollar portfolio is often celebrated as the gateway to a secure future.
Photo by Ian Schneider on Unsplash
- The FI Magic Number: In the U.S., the magic number for FI is often pegged at $1,000,000, following the 4% rule. This allows for an annual safe withdrawal of $40,000 from investments. Converted to Australian dollars at approximately 0.70 USD/AUD, this equates to roughly AU$1,428,571, yielding AU$57,143 annually. Yet, given the typically higher dividends from Australian shares, an AU$1,000,000 portfolio with a 3-4% dividend yield could very well suffice without tapping into the capital each year.
I first came across this FI concept in late 2016. It was both a revelation and a bit of a heartache. The clarity of the goal was inspiring, yet it underscored some financial choices Finn and I regretted. Had we begun our FI journey just a few years earlier, instead of dealing with the financial strain of two negatively geared properties, we might have been closer to managing a substantial share market portfolio. Still, one crucial lesson stands out—it’s never too late to start, unless you’re already at retirement’s doorstep.
A Reality Check
Discovering the successes within the FI community was enlightening yet daunting. We found ourselves in a tight spot as our property investments had depreciated, suggesting we’d face substantial losses if we sold in the current market. The potential financial setback could exceed $30,000, with more losses if we waited longer.
This prompted a frantic search for strategies to minimise losses while holding onto our properties, capitalising on Australia’s negative gearing benefits. This approach has historically yielded us annual tax returns ranging from $5,000 to $15,000, offsetting some costs associated with these properties.
Financial Breakdown of Property Investments (2019)
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- Annual expenses from two properties: Approximately $51,500, factoring in mortgages and maintenance.
- Annual rental income: Approximately $29,000, reflective of a weak property market.
- Tax return: Around $5,000. About $10,000 last year, with first two years peaking at $15,000.
- Net annual cost from our pockets: Roughly $13,800 after considering the tax returns.
Our financial outgoings remain considerable, even as we diligently pay down the principal on our mortgage. Initially, we locked into a fixed-rate mortgage for a year during a period of declining interest rates—fortunately, this term is just for a year, giving us the flexibility to reassess and potentially switch to an interest-only mortgage to boost our cash flow for further investments in shares. This strategic adjustment is crucial as Finn and I reevaluate our saving and investing strategies to accelerate our journey toward financial independence and early retirement (FIRE).
Key considerations towards acheiving FI
Here are the key considerations we’ve been pondering:
- Current and Future Spending: Living costs in the city where Finn and I reside are not the highest in Australia, but they’re far from negligible. Our monthly expenses average $4,000. With $1 million invested in a dividend-yielding portfolio, we could theoretically withdraw this amount annually without depleting the principal. In the future, we want to live in somewhere in South East Asia, this means the $4,000 is more than enough.
- Progress Towards FI: Since shifting our investment focus to the share market two years ago, we’ve reached about 20% of our FI target. However, at this rate, full financial independence might take us nearly another decade. At 43, I’m not inclined to wait another eight years to achieve this goal. This means we need to fine side hustle to increase the inventemnt rate and to be more frugal on living.
- Property vs. Shares: We’re grappling with whether to hold onto our properties in anticipation of future capital appreciation or to cut our losses, sell now, and funnel our resources into the share market. This decision is critical as it could significantly influence our financial trajectory.
- Work-Life Balance: Achieving FI doesn’t necessarily mean waiting until I can fully retire. I’m open to working part-time or trying different jobs that require fewer hours—perhaps 20 hours a week instead of 40. This approach would allow me to maintain a healthy balance between work and personal life, enabling me to continue earning while enjoying more freedom.
Driven by a desire to escape the rat race as soon as possible—and acknowledging that I don’t have the luxury of waiting another eight years—my focus has shifted from simply reaching financial independence to finding ways to retire from full-time work much sooner. This adjustment in strategy is about aligning our financial actions with our immediate lifestyle goals and long-term aspirations.
Refining Our Approach to an Aggressive Investment Strategy for Financial Independence
When it comes to accelerating our journey toward financial independence, Finn and I are considering an aggressive investment strategy:
- Investing $20,000 Monthly: By investing this amount each month, we project that we could generate approximately $40,000 annually from dividends at a 4% yield within just over four years.
- Investing $10,000 Monthly: At half the investment rate, achieving the same annual dividend income would take double the time, roughly over eight years.
Adjusting Financial Strategies to Achieve Semi-Financial Independence First
To make our path to FI more achievable in the near term, we are adjusting our strategy to initially aim for semi-financial independence:
- Portfolio Milestone: We’re setting a target of $500,000 in shares, rather than the full $1 million, to generate an estimated annual dividend income of about $20,000 at a 4% yield. This milestone can be reached more quickly with aggressive saving, frugal living, and maintaining full-time employment alongside our side hustles.
- Supplementary Income: We aim to generate a combined annual income of at least $100,000 through part-time jobs or side hustles. This figure is less than half our current total income and will cover our living expenses while allowing us to continue investing aggressively.
- Ongoing Investment for Full FI: We plan to invest anywhere from $5,000 to $100,000 each month into shares, depending on our monthly income and savings rate.
Currently, our side hustles already contribute over $25,000 annually, a figure we plan to increase as we push toward our $500,000 investment goal. This additional income boosts both our financial stability and our investment capabilities.
Your approach to achieving financial independence may differ based on your age, financial situation, and how long you’re willing to stay in a full-time job or a business that no longer fulfills you. It’s essential to review your current financial status and adapt these strategies to better suit your personal FI journey. While the strategy framework remains similar, the details will vary for everyone.
Dream or Achievable Reality?
To some, our financial planning might resemble a daydream. However, through disciplined savings and strategic investing, achieving financial independence—or even financial freedom—is genuinely within reach. We are committed to turning this dream into reality and will continue to share our progress and insights on this blog.
What are your financial goals or aspirations? How do you plan to achieve them? Your stories and insights are incredibly valuable, and I’d love to hear about your journey towards financial independence. Let’s inspire and support each other as we explore these possibilities together!