Starting to plan how to achieve our financial goals

November 25th, 2008 · No Comments

As indicated by the title of this blog, its opening post, and hopefully a bunch of other content, my wife and I have established a mid-term financial goal of achieving geographic independence.  But we really haven’t created a credible plan to achieve it yet.  It’s time to start documenting some of what I’ve been thinking in regards to what that plan is, or ought to be.

One of the major things I’ve been struggling with as I’ve thought about our finances over the last two weeks is how much will we be willing to change about our lives in order to reach our goal?  And what is the rate of change in habits, be they investing, saving, spending, or even earning, that we can tolerate?   In many areas of my life I have shown a willingness to make instant, wholesale changes after a thorough analysis reached a logical conclusion, but for some reason I’m not comfortable doing the same thing with my life savings.  I’m pretty sure my wife will be even more conservative than me on this.  But since we’re certainly not going to improve things without some amount of change, we’ve got to actually do something.  I see two possible ways to get started.

First, we could make no changes until we’ve researched and finalized a plan that overcomes our risk-aversion to change.   I’m going to instantly discard that as an “analysis paralysis” trap.  There is no guarantee that any amount of research will ever overcome that fear.  So it looks the the second way, start with small changes and figure it out as we go, is really our only path forward.  But this is going to be difficult for me as it goes against my natural tendency to do lots of research prior to taking action.  Perhaps my wife and I can backstop each other on this?

That conclusion does not mean we won’t do lots of research and eventually come up with an overall plan, it just means we can’t wait to get started.   I’m proud to say that we’ve already taken some concrete actions by establishing a new high-yield savings account where we’re beginning to accrue money to invest in passive income strategies.  This account will be funded with any money earned from existing passive income activities (such as anything generated by our various blogs), plus some as-yet-undecided percentage of our active income.  As soon as we get enough in there to keep transaction charges below some as-yet-undecided threshold, we’ll start converting that cash to other investments.

Now about that plan.  Why do we even need a plan?   The simple reason is that, without a plan and its associated final and intermediate goals, we’d have no way to measure progress nor any guidelines to help frame and guide the many decisions we’ll need to make along the way.   I think the common saying is that “what gets measured gets improved” and we definitely have some improving to do.  Some of the aspects we’ll need to make decisions on, and my current thoughts, if any, in no particular order are:

  1. What does our passively generated income need to be to reach geographic independence?  Should we base it on our current cash flow needs or tweak that in some way to account for a future state where we’ve either paid down more debt so need less cash each month or where we desire a higher standard of living and so need more cash each month?  Without being too greedy, I think it would be a pretty comfortable living if we had $7,500 in after-tax passive income per month in today’s dollars.
  2. At what point in time do we want to aim to hit our goal?  Five, ten, twenty years out from now?   As you can guess, I’d like to be there sooner rather than later but I’m not sure what’s close to being reasonable.   Taking a stab in the dark, it seems like it might be possible to hit that $7,500/month goal in 10 years.
  3. What percentage of our investments should be focused on traditional asset growth strategies vs. passive income strategies?  I also think of these categories as being somewhat analogous to the cash-flow concepts Robert Kiyosaki talks about in his “Rich Dad, Poor Dad” series of books.  Or like what RichSlick talks about in regards to “getting rich slow” and “getting rich quick”.  Currently, I’d classify all of our current investments as being pretty much 100% in the asset-growth strategy.  I’m not sure what we should aim for,except we clearly need to grow the 0% in passive income investments to something else.  Keep in mind that money in one strategy can be converted to the other so it is not necessarily true that we have to have an investment in the passive income strategy bucket in order to make income off of it in the future.
  4. What asset allocation should we have in each strategy?  Do we treat the combined investments as one large diversification pool or do we try to diversify within each strategy without regard to what the investments in the other strategy are in?   Is there even any overlap in the typical investments in each strategy?
  5. How do we measure the results of the passive income strategy?  Will we only count money we actually remove from investments and live on or will all reinvestments also count? I’m thinking the latter.
  6. At what frequency do we measure our progress?  I think a year is too infrequent so perhaps a monthly checkpoint is good?  Anything more probably gets exponentially more difficult to calculate plus will just tire us out.
  7. How many intermediate goals should we establish?  It seems reasonable to me to have a target for each year along the way to our final goal.  This way we can establish an annual growth rate needed and make it easier to handle a bit of volatility in the monthly reports without extremes of emotion.
  8. What actual investments will we pick for the passive income strategy?  Some potentials are straight-forward dividend-yield stocks or ETFs; real estate via REITs and/or rental property; other income-generating trusts; creation of royalty producing IP; starting businesses; and even possibly ETF covered calls or some type or other of trading-based activity.  I know my wife wants to focus on a start-up business so that will probably take the most time but doesn’t mean its the only thing we’ll be doing.

You might ask why I’m classifying having our own business as part of the passive income strategy since it will likely require alot of active involvement to get going.  Well, I’m not certain it really should be classified as passive but here’s my current thoughts.   First, owning the business does give us the freedom to decide on where the business should be located so it really aligns well with our geographical independence goal.  Second, if it gets big enough to support itself, we can hire managers to run the business so it does become passive.   There are other reasons as well but I don’t think we need to list every one now.   This post has gotten long enough.

Tags: Geo Ind Goal · Passive Income

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