“What gets measured gets done”
I’m sure you’ve heard this quote a million times before. Whether it’s when you have to set targets at work or New Year’s resolutions, the more measureable a goal is, the more likely it will be achieved.
This could be putting a quantity or timeline around the goal such as, “eat five servings of fruit or veggies a day” or “learning to dance the waltz for my wedding”. At work it could be something like, “complete the analysis on issue X by the end of the quarter.”
As you can imagine, the concept of measuring progress plays out across many sectors and industries as well. For example, some companies use ‘balance score cards’ to get a snap shot of measured progress towards targets. Others may use some kind of operational plan with indicators as the way to action the objectives set out in a strategic plan. For social and health programs funded by philanthropic organizations and governments, there is a whole science around evaluating program impact and results. Seems like we can all agree that it’s important to have a way to measure progress in order to attain a goal.
What does measurement have to do with reaching FI?
Many folks in the Financial Independence (FI) community are seeking to achieve FI by increasing their savings rate through frugality and intentional living, combined with investing aggressively in low cost index funds. An excellent and tried and true approach. These and other general principles of those pursuing FI have been discussed on ChooseFI podcasts. However, my path to FI is not really unfolding in the same way. In fact, it’s doubtful that there will be any significant part of our portfolio in index funds. We will be focusing on optimizing our lifestyle expenses for sure, but really trying to acquire and pay off real estate investments. We will also be investing in pre and post-tax funds for our kids, and trying to leverage our careers, which bring important benefits including a defined benefit pension.
Since my path to FI is not quite the same as others, the milestones that I need to reach are also not quite the same. This means that even though we share the ultimate goal of achieving financial independence, the milestones that have been suggested by Jonathan and Brad and others don’t quite seem to fit:
Milestones of FI
- Positive net worth
- 1-3 Years of expenses saved
- 1/2 FI–12.5 years of expenses saved
- Lean FI–Basic living expenses covered at a 4% withdrawal rate. AKA; The perpetual emergency fund
- Flex FI–20 years of expenses saved
- Full FI–25 years of expenses saved
- Fat FI–30 years of expenses saved
Getting to FI might take many years. That’s why it’s important to have some milestones to keep us on track and encouraged along the way. They are like the guideposts to our journey. Therefore we must be thoughtful on what we identify as being milestones so that we don’t get side-tracked or worse yet, veer off the path away from FI.
Set your own Milestones for FI
You can use these steps to identify your own milestones to reach financial independence (FI). This is how we were able to identify ours (see Figure 1) perhaps this can work for you too!
Set the goal
This is the goal of reaching FI! Seems obvious, but certainly worth unpacking. What does this look like for you? 25x your annual living expenses? A set dollar amount? For those of you who feel like FI is so far away that you don’t even need to put an exact dollar amount on it, I totally hear you. To be honest, I kind of feel that way too sometimes. But it’s important to dig just a little deeper on this one.
For us, I see FI being made up of two parts:
a. Cover all annual expenses:
Given the fact that we have kids in daycare, extra-curricular activities and we need to escape the winter once in a while for our mental health, we have ball parked needing $50K per year. This might seem like a lot for some of you–and not enough for others. Point is, this number is one that only you and your FI team can figure out. We came up with this number in two ways: the ‘back of the envelope’ way was to say, how much of our after tax salary can we live on? The more rigorous way was to look at our actual annual expenses on for the last few years and make an average of what it seems like we need to live. With some buffer room for good measure, we came up with this number. Now this number might change–that’s ok. The important thing is that we identify milestones that are flexible and robust enough to handle a bit of wiggle room on our FI number.
b. Significant investments and assets paid off:
Before we ‘pull the cord’ for FI, we would like to have a few major assets and investments put in place. The first is our primary residence. Now, I know that there is much debate on this, but for Mr. MoneyPenny and I we would really like to have that taken care of and paid off. The second is a plan for a new car. Again, financing could be an option, but ideally we would have funds ready to purchase a car. We may also need to invest or do renovations on our primary residence and rental property. We would want funds accessible to take these on before FI. And third, would be our legacy plan. For us, this includes an education fund and hopefully a start on a FI fund for our kids.
Gather your team
We are not on this journey alone. It’s important to involve those who may be directly (or even indirectly) involved in your path to FI. A significant other, perhaps close family member(s) or friends. This is especially important if you share your finances with someone. There have been some great discussions on how to engage your significant other on the path to FI if they’re not quite on the same page. Perhaps going through an exercise such as this could be another approach. Sharing in the process of identifying a goal and the steps to get there is a great way to co-create something that may even strengthen your relationship.
Another reason it’s important to involve these key people early is because the path to FI should not be imposed but something that is a shared objective. And importantly, you will probably find that engaging your key people will bring new ideas and perspectives that will make your plan to reach FI even better.
For me, it’s team MoneyPenny. That consists of Mr. MoneyPenny and myself. We have Mini and Baby MoneyPenny, but they are not quite at the age where they can contribute meaningfully in these discussions. However, my hope is that as they get older we can figure out a way to get them involved.
This is where the rubber hits the road. Perhaps with the one or two key people in your life, it’s now time to connect the dots. What are the necessary preconditions that have to be fulfilled in order to reach your goal? Linking back to what FI means to us, there are two groups of pre-conditions to meet FI (see Figure 2):
a. Fund our retirement, pre and post age 60:
Here we have two things that need to happen. First, we have to have one rental property paid off so that we can live off the rental income. Second, I need to log in as many years of service as I can in order to maximize my defined pension.
b. Prep and lay the foundation for FI living:
We are being uber conservative here. Ideally we would like to have funds to pay for a car and any capital investments on our rental/primary residence before we retire. And we would like to have our kids education fund and the start of a FI fund for them.
All this is predicated on Mr. MoneyPenny and I working and sticking to a savings rate of about 35%. Of course, if we can do better–fantastic!
Identify values and assumptions
As you develop the steps to reach FI, it’s helpful to identify the assumptions that you are making. For this process, your assumptions are likely closely tied to your values. That means that there is no right or wrong answer here. Up to this point, you have probably already seen a few of these assumptions play out in the MoneyPenny plan including:
a. The world is an unpredictable place:
This could be a product of our upbringing, our personalities, too many documentaries or a combination of all of these things. Together, it means that we want to leave as few things to chance as possible. And yes, that means leaving some money on the table. We are ok with that if we know that if all $#%& breaks loose that we will have a roof over our head and a way to feed our family. This underpins our decision to pay off our house, be prepared to buy a car before retiring, and having money for our kids.
b. Importance of team MoneyPenny:
From a financial perspective, Mr. MoneyPenny and I bring different things to the table. For us, the goal is more than just each of us individually – it’s about what’s best for our family. For example, the plan is for me to continue working even after Mr. MoneyPenny can retire so that I can accumulate the years of service that I need for my pension. This pension is an important part of our plan, so back to work for me!
c. We can have it all:
One of the key ways that we plan to reach FI is through a solid savings rate. However, this will not be at the expense of today. We will still put our kids in swimming lessons and take family vacations once and while. Will this push the clock back a bit on FI? Likely, but that’s ok for us.
Set milestones and track progress
How will we know if we are getting there? This is where a timeline comes in for me. As you can see in Figure 2, the estimated timeline of what happens when is mapped out. Now, like most things in life this is dynamic and likely will shift around a bit. Right now we have Mr. MoneyPenny retiring when our rental property is paid off. The timeline for when I retire is still TBD. Since I have a defined benefit pension plan, the longer I work, the better my pension. Depending on how much I still like working, I could decide to retire alongside Mr. MoneyPenny. Now for some of you, seeing the age at which we retire is not that exciting. But for us, not starting out with much and getting onto this FI path more recently, we feel pretty good that we can enter the FI/retirement chapter in our lives at a decent age and feel super comfortable financially.
For those of you who have related to the Milestones of FI that Jonathan and Brad have discussed, I have also included the corresponding milestones on the MoneyPenny plan. By seeing our milestones in the form of a loose timeline will help us stay on track.
What we still need to do is get even further into the numbers and validate this plan. This will mean running some scenarios with the numbers and adjusting as we go. To date, we have based these milestones on our early calculations but we know that this will continue to be tweaked and refined going forward. Since each of our milestones are not all the same in magnitude–meaning some will be harder to reach than others–our progress will seem faster and slower at different points. But that’s ok, as long as we know that we are on the right path!
- Identify the key folks in your life who can help you on your journey to FI
- Follow some of the steps listed above–figure out what FI looks like, map backwards on what you need to do to get there and be conscious of your assumptions and values
- The plan doesn’t have to be perfect. Start with something and you can refine and add detail as you need to. Remember, a plan is only as good as it’s implementation!
Points for Discussion:
How did you come up with your milestones for FI? For those of you who have made it, were there any key milestones or steps that we have missed?