2080 to Freedom - Bro

   The Journey to FI is a very long one. Depending on your savings rate it could take many many years. My target savings rate is 40-50%. At that savings rate I have about 17-22 years until I am FI according to the math. With that in mind the goal of being FI is to have your money work instead of you. Instead of just stumbling along I have a trick to try and encourage myself to save. I call it the 2080 method.

   The origin of 2080  starts at a work day of 8 hours, a work week of 5 days, and a work year  of 52 weeks. If you do the math it works out to 2080 work hours a year. Multiplying your hourly wage by 2080 will give you approximately your yearly wage or if you take your annual salary and divide it by 2080 you get your approximate hourly wage. For example if you make $15 an hour working full time your yearly wage is about $31,200 (2080*15). If your salary is $40,000 per year then your hourly wage is about $19.23 per hour ($40,000/2080). The goal of FI is not to replace your income but instead to cover your costs. If your total annual costs are $40,000 a year then you would need to make $19.23 an hour to make ends meet.  From a savings point of view if you had $10,000 in the stock market and you earned 4% each year you would get an extra $400 each year you would not have to earn at your job. Instead of working 2080 hours you could work 2060 hours with the difference being made up from earnings on the stock you own.

   Taking this to the next step you could figure out how much it would cost to replace one hour of work with investments. If your expense hourly wage is $19.23 it would take $480.75 to replace it with investments (480.75*.04=19.23). So in other words if your annual expenses are $40,000 per year for every $500 you invest you can work one hour less (rounding is your friend).

   An example how I use this is when I travel for work. Instead of going out and getting a steak and a beer every night I might only do that one night a week and simply have a power bar the other 6 days. I can then take the money I saved and invest it. Doing so might make my trip slightly more monotonous but it could buy me an hour of my life off of work forever! Another example of this is when you see that great deal on a new laptop you don’t need for $1000. You have to ask yourself if it is worth not having the money invested. With it invested the $1000 is just like having an extra 2 hours of work off for the rest of your life.

   Now onto the gory details. There are a couple assumptions in here you have to be careful of. First, most employers only really allow you to work all or nothing. There is no asking to have a 1% pay cut and 1% more time off. It just does not work that way. That being said if you get to the point where you have 1040 of your 2080 hours invested you could change to part time. Second, all of the math assumes you can withdraw your money at 4% forever. 4% is a good place to start but you should always give yourself some emergency room if something comes up. If you want to be very conservative then use 3%. In this example if you still have expenses of $40,000 a year then your conservative 2080 number would be $641 (40,000/2080/.03). Third, this math assumes that you will need the same $40,000 each year. It does not take into account paying your house off, paying for a new car, or paying for the kids college. Be sure to use a expense number that makes sense. Last, the money must be invested for it to count towards your 2080 number. Your kid’s 529 should not count. You making extra payments on your mortgage is a gray area. You putting money in a bank account does not really count (unless you are using it as part of your asset allocation). The money must grow for you to be able to safely withdrawal parts of it down the road. In another post we can discuss taxes but for now you can ignore them. Investment income in the lower tax brackets is not taxed.

   I have made good progress towards hitting my 2080 number. I keep a little post-it note on my computer with my current “balance”. One last angle to consider is if you don’t take any extra time off of work the money from the invested hours instead gets reinvested. If my 2080 balance was 400 hours then my investments would pay me $8,000. I would then reinvest the $8,000 and get another 16 hours of freedom. Every year this number would grow as the amount invested grows.The power of compounding is amazing.

Comments

Popular posts from this blog

IRA vs Roth IRA - Bro

If I Go - Bro

Phone Choices - Bro