A few years ago when my husband and I first got into personal finance our investments were not substantial. We were playing with spreadsheets all the time and watching our portfolio (very slowly) grow, but our goal of financial independence still seemed super far away.
Then one day my husband had an insight. Looking at his spreadsheets, he realised that assuming a return (after inflation) of 4%, he would never have to pay for his phone bill out of pocket again. His investments would be enough to pay for it forever – assuming investment and returns stay at the same level of course.
With that, a fun game had begun. Instead of tracking our progress only in percentages, we started looking at what expenses were covered or not by our investments. We started with our phones, then added more and more. The first big goal was to have our investments pay for all our (lean) expenses but housing – regardless if we are renting or paying a mortgage.
This is a fun way to track your financial independence and I highly recommend it. It’s somewhat abstract to look at a spreadsheet and see that you are 10% financially independent. But it becomes a lot more real when you see that you no longer need to pay for your phone or insurance.
I am somewhat familiar with Dave Ramsey and his advice. I think he has great advice for people who are starting out on their personal finance journey and trying to get out of debt. This fun way of tracking your financial independence reminds me of his snowball system.
In case you are not familiar with Dave Ramsey, his snowball system is based on listing all your debt from the smallest to the largest one and start paying them off in that order. This way, you will see your list shrink and get momentum – even if this is not necessarily the cheapest way to pay off your debt.
Similar to Ramsey’s system, our tracking game suggests that you list all your expenses from the smallest to the largest, then build your investments to pay for each one, in that order.
This is how I would suggest doing this:
1- List all your expenses
This is obviously the first step. If you don’t know your expenses, you won’t be able to calculate how much you will need in investments to pay for it. List each one separately.
2- Organise your expense from the smallest to the largest one
Using a spreadsheet helps 🙂
3- Decide on a rate of return that you are comfortable with
In the early financial independence world 4% seems to be an acceptable ROI. If you are risk averse you might consider a lower ROI, or if you are very confident on your skills you might choose a higher rate.
4- Calculate the ROI on your investments
How much do you have invested? Calculate the ROI based on the percentage that you chose in step 3.
5- Tick off your expenses as your ROI becomes enough to pay for them
Remember that for the purposes of fire they must adds up. It might be your phone bill first, then phone bill PLUS insurance, then those two PLUS your power bill, etc.
6- Have fun doing this!
It might be a slow process but it’s certainly more tangible (and fun) than simply tracking percentages.
How do you track your financial independence? Do you know any other fun ways? Let me know in the comments!