What is geographic independence?

November 9th, 2008 · 8 Comments

After a number of discussions with my wife, we’ve agreed that we are setting our long-term financial goal as the achievement of “Geographic Independence”.  We define this as having the ability to go wherever we want, whenever we want, in a comfortable manner, without running into financial problems.  We don’t currently imagine this to mean that we’ll sell our home and become nomads eating off the land and showering in waterfalls. (That wouldn’t be too comfortable I think.)  Nor do we envision that we’ll be traveling 100% of the time and the concierge at every ultra-lux hotel world-wide will greet us by our first names.   We don’t even envision wanting to travel 100% of the time!  What we do want is to be “rich” enough that there are no financial restrictions limiting our ability to follow our travel or relocation whims.

A good passive-income investment?

A good passive-income investment?

I’ve quoted the word “rich” because I’m not using it in the way most people likely think of it; which I predict is having attained some stratospheric net worth, or even of having amassed a large asset base.  While I certainly wouldn’t mind if those phrases could truthfully apply to us, our definition of “rich” is that we’ve achieved a state where our passive income consistently exceeds our monthly expenses.  Thus, freeing us from needing to generate active incomes from jobs.   An evil four letter word if there ever was one!

For those not familiar with the differentiation between passive and active income, this Wikipedia entry can help provide some context.  But be warned that it seems to have incited some cynical disagreement from a couple editors regarding the financial blogging community.  🙂  I may be putting words in my wife’s mouth regarding specifically what types of passive income we’re looking for (we haven’t finished those discussions yet,) but I think the illustrative purposes of a few example income streams that I’m interested in will help you better understand our definition:

  • owning businesses which we’ve hired others to manage
  • getting paid dividends or interest from equities, bonds, and other investments
  • royalties from intellectual property
  • income from leased real estate

What do you think?   Would you like to have geographic independence?

Tags: Geo Ind Goal · Passive Income

8 responses so far ↓

  1. 1 TJ // 2008.11.11 at 9:58 am

    My suggestion is to be clear about the definition of passive income. Renting real estate can be time consuming unless you’ve hired someone to manage it. (Like you hired someone to manage the business.) Also, your list doesn’t include appreciation of assets (like stocks) above the rate of inflation that you can then sell for income. Is this intentional?

    Seems like an important term to nail down.

  2. 2 davmp // 2008.11.11 at 11:07 am

    My list of streams doesn’t include appreciation of assets for two reasons. First, most people (myself included) then think of capturing income from those assets by selling them. And that is problematic in that it is a one-time income. You no longer have those assets to generate future income. Second, while you can trade your growth-based assets for income producing ones, you’re doing so relatively late in life and you have little experience in this other “space”. I’d rather make my errors earlier when I can possibly correct for them.

    This is not to say that I’m against the accumulation of net worth (which I think stocks do pretty well, and passively!) In fact, accumulating net worth and then switching that investment to something that does throw off income is exactly what I believe most rational people do when they retire, or even better, as they near retirement. However, I also believe people can trap themselves into thinking that the only way to get income is to sell those assets. I don’t want that to be me.

    My point here was to set the goal of *having* the income generating assets rather than just a large asset base. I want to ensure I’m constantly thinking about meeting my expenses via renewable income. I *do* plan to grow my asset base using equities. The question is what portion of my current assets and income goes toward producing immediate passive income and what portion goes toward asset growth? I don’t yet know the answer to that but I hope this blog helps me figure it out.

  3. 3 TJ // 2008.11.11 at 1:47 pm

    It’s not one-time income if you sell small enough portions to maintain the inflation-adjusted value of your assets.

    If your assets appreciate at 10% and inflation is 3% then you can sell about 7% of your assets every year forever. You’d have passive perpetual income from your assets.

    But, I belabor the point. Yes, the goal should be to have an income stream that meets your needs without requiring full-time work.

  4. 4 davmp // 2008.11.11 at 2:48 pm

    TJ: I agree with you, and I think that’s exactly what most people try to achieve. Whether this is all in my head or not, I’m trying to think about things from a different viewpoint. I *want* to focus on the income the assets throw off rather than thinking I have to sell some to make my income. There may be no practical difference beyond that perspective.

    I’m curious. Are you trying to say that a focus on building income will actually delay retirement? I ask because I believe it will actually help me to retire sooner. I’ll try to describe why in an upcoming post.

  5. 5 TJ // 2008.11.11 at 6:13 pm

    I’m concerned that ignoring income generated by slowly selling assets may lead you to conclude that you’re not capable of geographic independence and thus to frustration.

    Unless you are a business owner, expect a significant pension, or have significant rental property, I think slowly selling accumulated assets is the primary means of retiring.

  6. 6 davmp // 2008.11.13 at 3:08 pm

    TJ: I’m not sure why this isn’t clear from what I’ve already said but I’ll try one more time. I’m not against asset accumulation at all. I just view it as a stepping-stone to generating passive income. Focusing on the income you receive (or could receive after conversion costs to an income producing asset) is important because it helps give you a monthly check on where you are with your goals. Not to mention that it reaffirms that money is only useful if you spend it. 🙂

    I’m not sure yet how I’ll be keeping score (measuring progress toward a goal) since most of my current assets aren’t focused on producing monthly income. But I’m looking to find a way to do so. Anyone’s advice is appreciated. 🙂

  7. 7 Pat // 2008.11.13 at 4:55 pm

    This thread caught my eye and I guess I’ll just jump right in. In 1986, I decided I wanted to achieve financial independence before the end of the millenium (I was a computer programmer and didn’t want to deal with all the Y2K issues 🙂 ). My definition of financial independence seems quite like what you describe here as geographic independence.

    Initially, I just kept the goal in the back of my mind. Then in 1992 I read a book entitled ” Your money or your life : transforming your relationship with money and achieving financial independence” by Dominguez, Joseph R.

    The book really got me energized. The basic premise is that you work simultaneously on two fronts: accumulating income-producing assets and reducing your cost of living. At some point the two approaches will cross-over and then you’ve achieved financial independence.

    I’m over-simplifying the book, of course. A great deal of it is geared to helping one shift one’s mindset from working + consuming to determining what one’s most important goals really are.

    There are many practical exercises such as tracking and graphing expenses and non-employment related income. The approach really worked for me and I was able to retire in 1995 while still younger than my original target age of 45. Plus I missed all the Y2K angst!

    I may have taken the “reduce cost of living expenses” entirely too much to heart. I’m now trying to work on spending more… 🙂

  8. 8 davmp // 2008.11.13 at 11:15 pm

    Pat: Congratulations on reaching your goal early! Your story is very motivating to me, though I doubt I’ll be able to hit the same target you had: retire by 45. And while I can imagine having the problem of having to work on spending more, it’s only because my imagination is pretty skilled. 🙂

    Thanks for the book mention. I’ll need to go dig up a copy somewhere. I suspect and hope the local library will have a copy.

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