The following is a guest post from one of our readers – Ben. Everyone who would like to achieve financial independence should come up with a plan to get there someday. It’s not going to happen by accident so you need to work for it. Check out Ben’s plan and tell him what you think.
Ben Shearon is an English teacher living in Sendai, Japan. He blogs about teaching and living in Japan at sendaiben.org.
I have been enjoying the “7 phases to retirement” series and was inspired to write my own. It is fairly similar to the ones published already, especially in the projected endgame (phases 6 and 7). My journey towards financial freedom started a few years ago when I inherited some money and had to figure out what to do with it. Several catastrophic mistakes later (investing in a hedge fund, selling at the bottom in 2007…) I am a wiser, more experienced investor. Here are my seven phases as I see them going forward.
1. Waking Up
This first stage was the most important for me. Basically it involves waking up from normal financial behavior such as borrowing money to buy things, buying unnecessary things, misusing credit cards, spending money you don’t have, and living above your means. Talking to friends and family, it is surprisingly difficult to spark this phase in other people. It seems to be something that develops from within when people are ready. I have not yet managed to persuade anyone else to take the red pill.
2. Building Basic Habits
Getting into the habit of saving regularly and investing in appreciating or income-producing assets. This requires a change of perspective and some knowledge. Luckily I find reading about investing fairly interesting. Books like Millionaire Teacher and A Random Walk Down Wall Street made a big impression.
3. Financial Stability
This phase is where it all starts to come together. The financial cushion starts to build up and money is not really a worry any more, but rather something fun and satisfying. This is where you have two or three years of living expenses saved up and are able to add to your savings regularly.
4. All-out Effort
At this point you realize that the habit built up in phases 2 and 3 will result in financial independence eventually. This realization spurs you on to greater efforts to maximize spending effectiveness and save as much as possible.
5. Financial Strength
Here is where you have 5-10 years of living expenses saved up and start to see significant (10-50% of monthly expenses) passive income coming in.
6. At-Will Work
The culmination of phases 4-5, you have 25 years of living expenses saved up/100% of monthly expenses covered by passive income. Work becomes optional, and the choice of what to do with your time is yours.
7. The End of Work
Traditional retirement. You cease working in favor of leisure activities, travel, volunteering, or spending time with family. It is also very possible to ‘retire’ temporarily, for example to travel, and then go back to phase 6 later on.
Right now at 36 years of age I am at phase 4. It took me a long time to get through phases 1-2 above (in my early 30s) and I am now very much in phase four. I get a real kick out of buying ETFs, dividend shares, or peer-to-peer lending and seeing my passive income build up. I’m enjoying the journey and look forward to learning more and more as I go deeper into the rabbit hole. Personally I really enjoy my job, so will probably flit between phases six and seven above once I reach the end of my financial journey.
Thank you for sharing your plan with us! I particularly like the measurable goal of saving 25x of living expense. I was very lucky to get through phase 1 and 2 quickly. I never had much consumer debt and started investing as soon as I got out of college. I think the end goal for me will be going back and forth between phase 6 and 7 as well. It would be quite nice to work 6 months out of the year on something I like and take the rest of the year off. Good luck on your journey.
I would love more guest posts on this subject. Please make your own 7 phases to retirement and send it to me for publication.