My wife and I spent some time over the past holiday weekend coming up with the numbers that define our geographic independence goal. We tried to approach this from multiple different directions. What do we need? What do we think we can achieve? When you figure out what it takes to get there, does it seem at all feasible?

The first thing we wanted to think about was what it would take for us to live relatively comfortably, after all there’s not much point in setting a goal to feel poor. In doing this, we started out by creating a budget / cash flow forecast with a level setting exercise that looked at our actual expenditures over the past year. From that, we tried to subtract out costs that we thought we wouldn’t have if we weren’t “working”. That is, things like multiple cars and the insurance for them, dry cleaning (we’re not the type of people that insist on wearing anything close to our “Sunday Best” to the grocery store), new clothes, gas, etc. We then tried to add a bit of a buffer for having some additional fun, though we didn’t add much for this since we’re assuming that when not “working” for someone else, we’d have more time to earn money for ourselves by doing something fun. Through this exercise, we came up with an income range that we felt would represent hitting our geographic independence goal.

Now, since this was all done in terms of 2008 post-tax dollars, we knew we’d have to account for both taxes and compounding inflation over whatever number of years we decided to set our goal out at. This was easiest to calculate by creating a relatively simple spreadsheet where we could enter assumptions on tax rates, average annual inflation, and the number of years we’d set our goal out at. We ended up with a spreadsheet that had 5 controlling variables:

- Target income per month in 2008 dollars
- Average annual inflation percentage
- Tax rate at target date
- Starting date
- Number of years until goal

Given values for these 5 variables, we could calculate how much income per month we’d need to hit our geographic independence goal. For example, if we decided on a target income of $7,500 in 2008 dollars, 4% inflation, and a 25% tax rate, to be earned 10 years out from January, 2009, then our target monthly income would be $13,877.29 / month in January, 2019.

The resulting numbers for all our scenarios looked pretty daunting, so we figured we’d have to break it down into yearly goals to really understand whether it was possible to work our way there. This meant figuring out what our starting monthly passive income was, which, unfortunately, was a short exercise. Given that number, we first tried dividing the difference into a linear growth pattern of small, but equal, increases in our monthly income for each month along the way. For example, to go from $100/month to $13,877.29/month meant adding $114.81 additional income each and every month for the next 10 years. This meant year-end values like:

- Year 1: $1,477.73 (1377.73% growth)
- Year 2: $2,855.46 (93.23% growth)
- Year 3: $4,233.19 (48.25% growth)
- ….
- Year 9: $12,499.56 (12.39% growth)
- Year 10: $13,877.29 (11.02% growth)

For all of our scenarios, this pattern meant ALOT of growth early on which we didn’t think feasible at all. We’re assuming our larger income increases will come from things like started businesses, compounded growth, and other things that take years to set up. If anything, our larger increases would be on the backend of the goal.

So instead we tried a scenario of a constant growth rate of monthly income. In this situation, we simply solved for the Nth root of the target income divided by the starting income — where N is the number of years to the goal. The resulting number is the annual growth rate, which can then be further broken down into a monthly compounding growth rate using a spreadsheet’s NOMINAL function. Continuing the example we’ve already started, this gave us a 63.77% annual growth rate, or 4.20% monthly growth rate. This gives year-end values like:

- Year 1: $163.77 (63.77% growth)
- Year 2: $268.20 (63.77% growth)
- Year 3: $439.23 (63.77% growth)
- ….
- Year 9: $8,473.72 (63.77% growth)
- Year 10: $13,877.29 (63.77% growth)

Here the early numbers don’t look too far out of reach in terms of actual dollar figures, but the last couple of years are really significant in actual dollar increases. But this fits relatively well with our theory of being able to make some smaller changes that have an immediate effect, and larger efforts that will take years to have an impact but when they hit will have a really large impact. In the end, does something like this see feasible to us?

Well, to properly answer that I should point out that we were also considering having a changing growth rate, say a geometric one. But all of those scenarios meant even lower increases in the first couple years and larger ones in the last couple. As it is, we didn’t feel that the first couple of years would be exceedingly difficult to meet so we didn’t feel that lowering those was important. In fact, we’re expecting that we can exceed the goals for the first 3 years, though I’m not sure how much that will really ease the latter year’s increases. But that is our hope — excel early on to lower the growth required in the latter years.

When all was said and done, when we’d run a number of different scenarios through our spreadsheets, we decided we’re willing to set an aggressive goal — we’re aiming for $7,500 / month in post-tax 2008 dollars by the end of 2018 with annual targets along the way defined by the constant growth rate. Our assumptions are actually a little different from some of the numbers defined above, but the principals are the same.

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