Earlier this week I proposed the idea of building a personal endowment. In short, this involves building an investment portfolio that is 25x-33x your annual living expenses. If you can achieve this goal, then you can fund your ongoing expenses from your investment income, without ever having to touch the principal.
Given the large numbers involved (e.g., $50k annual expenses = $1.25M-$1.7M, depending on the multiplier), I also talked about breaking this down into sub-goals. That way you can buy your financial freedom one piece at a time. Your $1k rent expense? That’s yours for a $300k-$400k. You groceries – at $250/month? You can eat for “free” (for the rest of your life) for $75k-$100k.
Today, I want to talk about two related items…
First, a reader (and fellow finance blogger) named Evan pointed out that it’s also useful to look at this concept in reverse. That is, if your ongoing grocery expenses is $250/month, then a “passive” income stream* such as a blog that earns $250/month is roughly equivalent to an investment portfolio worth $75k-$100k.
*Note: As any serious blogger will tell you, this is hardly as a passive endeavor. Nonetheless, it’s an enjoyable hobby, so it doesn’t necessarily count as “work.”
Obviously, this logic scales up with the amount of additional income, and highlights the value of earning extra money. That being said, you have to be careful about the stability of this income stream if you are counting on it being there in the long run.
Second, I also wanted to point out the importance of keeping your expenses in check if you want to achieve financial independence. Look at it this way: for every $10k you reduce your living expenses, you reduce your necessary target portfolio by $250k-$330k. That’s huge.
If you sit down and calculate your number (which I encourage you to do – right now!) and you find that it’s dauntingly high, you have several options:
- Give up
- Increase your earnings to reach your goal faster
- Cut your expenses to reduce the size of you goal
For obvious reasons, I don’t recommend option #1. In reality, the best strategy is a combination of #2 and #3. Minimize your expenses to reduce your target by as much as possible, and then maximize your earnings to get there as soon as possible.