In The Beginning. . .
All stories have to start somewhere, and for us it isn’t in a very good financial position.
At the time of writing, our combined net worth is -$35,804.59, which includes:
|Car Loan||$ 18,857.95|
|Debt Consolidation||$ 18,576.74|
|Interest Free Cards||$ 16,369.90|
|Total Debt||$ 53,804.59|
|Net worth||$ -34,804.59|
I have purposely left out personal items such as clothes, consumer electronics, and white goods.
Plan of Attack: Step 1
For me, planning ahead for anything has always meant defining the best case and worst case scenarios given our current circumstances. I like to do this so I understand the range of possible outcomes, while also allowing for unexpected events that may occur outside of our control.
Given the current situation, it is pretty obvious that anyone would want to pay off the debts in the quickest, most cost effective way. Unfortunately our interest free cards have specific time frames that limit us from leaving them til last, so we are paying them off first before the interest free period lapses. We will then target the debt consolidation loan as it has an interest rate of around 11.45%, and finally the car loan at around 6.4%.
By my calculations we have the best case and worst case scenarios:
- Debt free by 1st January 2020
- Debt free by 1st June 2020
The best case scenario would involve changing our current living situation which would reduce our annual expenses by $18,720. This is still up for discussion, and if we do decide to change it won’t be until May 2019
I have also devised the following monthly goals for our combined debt:
Plan of Attack: Step 2
Okay so what next? To become financially independent you need to produce enough passive income to cover your annual expenses. My partner and I would like a very comfortable retirement, including lots of travelling and eating good food. As such I estimate that we would be able to maintain our current lifestyle with around $40,000 per year.
I considered two options:
- Target of $1 million invested across multiple ETFs producing 5% real growth (nominal growth – inflation) per year, with a 4% withdrawal rate
- Target of $1.5 million invested across multiple ETFs producing 5% real growth with a withdrawal rate of 3%
My partner and I discussed the above, and though we think we could probably survive with $1 million, but we’d much rather work a few extra years to have a bit more of a safety net. As such we agreed on $1.5 million with a 3% draw.
From my calculations, we should be able to save $45,000 very easily each financial year after 2019, and optimistically up to $65,000. Here is what that looks like in excel.
With $45,000 invested per year:
And with $65,000 invested per year:
*assumptions: 8% annual growth in investments, with 3% inflation
As you can see the extra $20,000 a year makes a huge difference, with a gap of 5 years between each scenario. Given that this is our first rodeo, I am setting our first annual target at $45,000 to be invested over the course of 2020. I will be revisiting this number after 2020 to see exactly how we went, and if we can revise it upwards.