Let’s Talk Money…Part 2: Is My Goal to Reach Financial Independence in 7 Years possible?

In part 1 of my Let’s Talk Money series I calculated our savings rate and net worth. Calculating these numbers will help me track our progress towards financial independence (FI). They will also allow me to calculate the length of time it will take to reach my savings goal. There are many retirement calculators on the internet that can help you determine how long it’s going to take you to reach FI but the one I liked the best was on Mr. Money Mustache’s website at http://mustachecalc.com so it’s the one I used to calculate the numbers for our journey.

The first number that’s required for this calculator is “yearly expenditures”. I calculated our yearly expenditures by adding up all of our monthly bills including mortgage, utilities, cell phones, internet, and childcare. Then I added the bills we pay on a yearly basis such as HOA fees, life and auto insurance, and taxes that are required in our state. Those were the easy numbers to calculate as they are all relatively the same amounts all the time. Determining our averages for gas, groceries and miscellaneous spending like entertainment was much harder as these are variable. I took a one month snap shot from our bank statement and multiplied it by 12 to get a yearly estimate. Going forward I will create a monthly statement of our spending so I can better track where our money is going. I also included an estimate for vacations, christmas and birthday presents to get our yearly spending number of $85,000 which I entered into the calculator. I was disheartened by what the first set of numbers showed me:

Yearly expenditures at present of $85,000 x 25 = 2.125 million needed for retirement.

TWO MILLION!! How in the hell were we supposed to save that much money? I’m 42 so it’s not like I have time on my side here. Suddenly all my bad money decisions and mistakes came crashing down on me and I felt like I couldn’t breathe. Anxiety laid on me like a fat sweaty man lays on a couch. I proceeded with the calculator hoping something good would come. The next step is to enter your net worth ($451,000) and your yearly savings. The calculator determines your years to retirement by adding interest to your savings and deducting for inflation:

With current yearly savings including 401k plus employer match = $43,800
Interest earnings at 7% with inflation at 3% with an expected withdrawal rate of 4% we can retire in…

18.4 years

If we change nothing and continue spending as we have been then we can retire at age 60! Our spending MUST STOP NOW! There is no way that I’m working for the toxic corporation that employs me until I’m 60. That’s not early retirement, that’s regular retirement. I started to panic. How can we speed this up to seven years? Is it even possible? My husband has already said that selling the house and cars are not options so we can’t move to a cheaper location or drive cheaper vehicles. How can I accelerate this? What the hell have we done to ourselves?

I realized that if we could drastically decrease our miscellaneous spending we could live off of my husband’s salary and only need one of my two bimonthly paychecks to pay our bills. That means we can essentially save an entire paycheck of mine every month. But what’s the best way to use this money? Do we invest it or apply it towards our mortgage. This question causes many debates in the FI community and while I won’t go into the logistics from the community here, I will say that paying off our mortgage allows us to be debt free and to live solely off my husbands income. This will allow me to leave my full time position without worry of the stock market dropping and decreasing our investment gains. So the biggest help in accelerating our FI date is to drastically decrease our spending and eliminate $405,000 in mortgage debt.

I went to a mortgage payoff calculator on the internet and started plugging in some numbers. I used the calculator on Lendedu’s website at https://lendedu.com/blog/mortgage-calculator/ and what I found out was that in order to pay our mortgage off in seven years we need to pay an extra $50,000 a year to the principal. Now, I know that I need to make changes that will yield an extra $4,200 a month to magically appear in our savings account so I can accomplish this goal. I’m feeling rather cynical about this number if you couldn’t tell from my sarcastic use of the word “magically” in the previous sentence. While we are a moderately high income earning family, saving $4,200 a month is a lofty goal. However, while working with the mortgage payoff calculator I saw another number…we will be saving over $240,000 in interest by paying the mortgage off early. That’s an insane amount of money to save just by hustling for seven years. All of this is motivating me to sit down, evaluate our spending in a more specific way, and get our game plan together.

Besides drastically cutting our spending to allow us to save a paycheck each month there are two other things that will accelerate paying off our mortgage. The first is selling our piece of land. We own this land so while there is no monthly payment on it there are yearly taxes, HOA fees, and lawn maintenance that’s required by the community. Selling this land will eliminate those expenses and give us a windfall of cash to apply towards our mortgage, speeding up our payoff by over one year. Based on this event happening I would need to alter our net worth to show the removal of the land from the assets column and subtract the expenses of this property from our yearly expenditures. For now, as we still own the land I will continue to keep the numbers as I calculated them in part one.

The second event that will accelerate paying off our mortgage will come in due time and that is when my daughter starts public school. Currently we have to pay for preschool as its not free in our state. This is almost $600 a month that we will save once she’s in kindergarten. Paying off our mortgage, decreasing our spending, and having no childcare expenses for preschool decreases our yearly expenditures to $38,000 which allows the numbers to look like this:

Yearly expenditures of $38,000 x 25 = $950,000 needed for retirement
Yearly investment savings including 401k plus employer match = $43,800
Interest earnings at 7% with inflation at 3% with an expected withdrawal rate of 4% we can retire in…

7 years

This means that my husband and I could BOTH retire in seven years if we withdrew only 4% from our 401K accounts!!!

Seeing that my husband plans to work full-time and I plan to work occasionally after we reach FI, we wouldn’t have to touch our 401k accounts so they can continue to earn interest and allow us a bigger cushion for when my husband is ready to stop working. There are some extreme changes to our spending that have to happen and I also have to consider that our land may not sell for our asking price. But I’m elated to know that this can be done! It is possible for us to reach FI in seven years. Let the journey begin…

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