How to Know if You Are Financially Secure

Financial IndependenceAt one time, I was just a working stiff.  I still am, for now.  Working a 8-5 job, sometimes on-call, weekends, and trying to climb the corporate ladder.  I was a member of a hot shot team that was selected for future management.  When you are climbing your way up, you have a tendency to make a lot of people happy, and some not so happy.

It’s fun when you are making a lot of money; but you know the money train cannot last.  At some point, a merger may knock you down, a layoff, a boss that you cannot satisfy, or some other reason that you may not even understand.

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Regardless, you need to make sure you are prepared.  An emergency fund comes first, then becoming debt free, then bringing in other forms of income.  I already had the first two, when I started investing in real estate.  Here is how I knew I finished the journey to be financially secure.

I have always been a busy person.  While holding a full-time job, I purchased a tavern in southern Minnesota.  My partner and I ran it for five+ years, and then sold.  I ran for political office as the endorsed candidate for the Minnesota House of Representatives.  I received my graduate degree while working.

I had a lawn care and snow plowing business, that started shortly thereafter.  It was a great weekend and after work project – unless it rained for a few days.  Then it was hell.  Or if it was super-hot outside.  Or it was cold and snowy.  Or if I had other things to do.  But the sacrifice made money, and helped garner capital to invest in real estate.

I really ramped up my investing career in 2008.  I purchased a 4-plex, and did what I thought was an extensive remodel.  As it turns out, it was mostly new appliances, painting and cleaning in most of the units.  A light remodel.

This worked well for about 9 months, and another 4-plex became available.  I bought it.  After all, if the first 4-plex was a deal, the second one would be too. About 9 months later, another one.  Then another and a final one in 2012.  I had a total of five 4-plexes, plus the two duplexes I already had.

Each 4-plex required a significant down payment, nearly $100K.  Each one required a lot of work and vacancy expense.  You can add another $10K to $60K to the purchase price.  Each one cash flowed better than the previous, but my investment account was slowing eroding away.  I would spend $100K on the property, and a year later my account would be close to where I was again, just slightly lower.  After five buildings, including one that took ~$260K cash, I was down quite a bit.

In 2012, I purchased my last 4-plex, and it was a cash deal.  Approximately $200K investment, plus another $60K in repairs, and a lot of free labor to get it back in rentable condition.  On 1/1/2013 I had it completely rented, approximately 6 months after I purchased it.  Something happens when you do not have a mortgage.  Rental property cash flows like a madman.

Prior to tax year 2013, I always received a big refund in my income taxes.  I had lots of deductions due to all of the depreciation, interest expenses, property taxes, etc.  I paid a lot of taxes through my employer, and I claimed zero deductions, so they withheld a lot.  Those big refunds were a good deal.  I was working so much, and trying to keep the rentals going, that I didn’t have time to spend money, or see how much the rental were cash flowing.  I was just working, sleeping, and working again.  Nights, weekends, vacations, etc. were all used to work on the rentals.

I also did a property flip in November 2013 that generated a bit, but required another $140K outlay before it was sold in January 2014.  I always felt that I was barely making money, but it was because I was continuing to invest in properties and had no time to look.

As I was doing my 2013 taxes around February of 2014, I realized that I was going to have to pay income taxes.  Despite of having already paid a large sum, I had to send in additional check for about another $10K.  WOW.  I really needed to look at my income stream and see how much I was really making.

I calculated it out, and low and behold, I was making more than my gross pay at my real job.  I didn’t have to work.  I still could not quite believe it, so I set a retirement date on a whim.  I have saved about 50% more than my gross pay at my real job for the past 3 years.  Here is how I set my date to leave my real job.

I figured that I was near 55, so I said “25% chance I will retire at 55, 50% chance at 56, and 25% chance at 57”.  There was no science to it.  Since my birthday is in November, I added a few months because I wanted to max out my 401K the next year by the end of April, then leave.  I found out that after 1,000 hours, my company gives me another year of pension, which is about an extra $100 per month at 65, so I added just a couple of months to my end date to ~6/25.  I then added July 1st, to get another 1.67 days of vacation and healthcare paid for the month.  I added July 5th in, so I would get paid for July 4th, double-pay day.

At one time, I did have a “do or die” asset amount I wanted to have in my investment account of $1.5M, but since then, I paid off my personal home, another large rental mortgage, almost paid off another large rental mortgage, and purchased another rental property with cash.  All told, paying those extra mortgages off generates another almost $4,000+ per month in cash flow.  So my investment account is not going to be that high.

Looking back, I probably should have left a year ago, or even three, but I am now nearly 100% positive I will not have financial issues, regardless of what the stock market does.  And I can live better than I did while working.

Disease Called Debt

How will you know you are financially independent?  If you are already, what criteria did you use?  Or what criteria will you use?


24 Replies to “How to Know if You Are Financially Secure”

  1. I think it’s hilarious that you had no idea how much you were really making until you ended up owing taxes in 2013. Your bank account balances must have been growing like weeds and you barely noticed. 🙂

    My criteria for financial independence is going to be when I hit a certain passive income mark. For now, arbitrarily, that’s going to be about $120k. I don’t know exactly how I chose that number, there’s just some point where you have to just pick a number, right? The idea behind that goal is that I would be earning enough passive income to cover very comfortable living expenses without dipping into principal at all. Then, if things take a turn for the worse (late-term medical expenses, for example), I’ll still have plenty left over to draw from.

    It sounds like that’s where you already are, which is awesome. Is it going to be hard to change gears into spending mode instead of saving mode? What are you going to do in retirement to keep from going stir-crazy?

    1. Thank you for reading!

      The balances were actually decreasing a bit, as I put more money in new properties. And fixed up many deferred maintenance issues. Equity was growing fast, but that is hard to actually see. Once you get to $120K, that number may creep too. I had a number of $50K at one time, when I was making ~45K.

  2. Well said landlord. We’re not quite there, but I think cashflow is the key. If your income exceeds your costs by even a little bit, provided you also have a liquid emergency fund, I think you’re financially secure. There could always be more money to make, but if you have peace of mind and come out ahead every month…..that’s financial freedom.

    1. Thank you for reading!

      Keep chugging along. It will be there before you even know it. I had about 3-4x my expenses before I even know it. I felt it, but really didn’t stop to figure it out as I was too busy. I was going through the motions of setting myself up, and doing the right things, and it was a bit past the finish line (I hope…)

  3. “Wealth is the ability to fully experience life.” – Henry David Thoreau

    “A man is wealthy by those things he leaves undone.” – Thomas Jefferson.

    My definition of financial independence, inferred in the above quotes, to the ability to do what I want, when I want. (No, I’m not there yet).

    To clarify Jefferson’s quote, I can pay someone else to mow my lawn thus freeing up my time to read (improve my mind or my skills) or to exercise (improve my health), to spend time with my family (improve my relationships with them). I cannot pay someone else to read for me or exercise or improve my family relationships. Leaving these items “undone” make me poorer.

    Thanks for sharing Eric

  4. For me, financial independence is the ability to live the lifestyle I choose both in the present and in the future.

    The present is usually much easier to gauge but the future, due to unexpected life circumstances, is tougher. Can you still live the lifestyle you want if you have a child (or 2nd or 3rd, maybe unexpectedly), if you have to support the treatment for an ailing parent, if severe damage is done to your house, etc.

    Having a nest-egg that does not decrease or better yet, grows every month, that can cover such events is important. When I’m at the point where I am comfortable that unforeseen events will not impact my lifestyle and it is not even a concern that runs through my mind, that is when I would consider myself to be financially independent.

    1. Thank you for reading!

      Great analysis. Planning for the unexpected is the hard part. Some unexpected things can be planned with insurance, some by having a larger asset or income cushion, some by better living habits. In the end, it is a leap when you leave a good job to be independent.

  5. Where I’m at in life I’m just placing a bunch of bets and hoping to increase my income as much as possible. In turn I hope to pay off debt and invest faster. I have the blog business going which has some upside potential (and obviously cash flow), the book coming out in May which could really have big upside, and then the random poker tournaments I play once in a while 😉 Overall I just want to place a lot of bets that have high upside and hope some pan out.

  6. I am an accountant by trade so I track a lot of numbers each month by habit. Once my investments hit the point where they can cover my expenses, I will know I’m financially independent. I want to work towards building additional income streams so I am more diversified and can rely on more than just the market.

  7. Yowza — I would say you are WAY past financially secure. LOL. Presumably you could sell any of your properties to generate capital if you needed it, you have tons of cashflow and minimal debt it has to cover, and you have investment accounts to back all of that up. Plus pension?! You need your own category: Super Secure. 🙂

    We think of ourselves as financially secure now because we have the cash to pay off our mortgages on our home and our rental with money leftover, and if we had to, we could go into uber frugal mode and live off the rental income. Of course, we don’t want to go quite that bare bones, so we’re planning to work for two more years, but knowing that we’re already financially secure feels pretty great. 🙂

  8. How awesome! I’m glad all your rental properties worked out so well. It’s terrific to go through a season where you’re so busy, you don’t even realize how well all the work is paying off. It’s exciting when that moment does come.

  9. Wow, well done on your amazing financial progress! I’m a landlady myself but not really by choice. I had to rent out my former home due to work relocation – the market crashed here in the UK and it was the only way not to lose money. I have to say that managing a rental property has been a bit of a headache to say the least. Nightmare tenants! But then, I’m not currently “in it” as an investor with a portfolio of properties like yourself. Do you get a company to manage your tenants?

  10. That’s pretty amazing.

    I’d like to eventually own and pay off 5 rentals, while fully funding my 401k by the time I retire. I feel that this, along with my pension and (maybe) SS benefits, will give my family and I enough cash flow to be able to travel and complete everything that’s on our collective bucket list.

    Great post!

    1. Thank you for reading. Two 4-plexes paid off, 2-duplexes paid off, a SFH paid off, my home paid off, and another 4-plex paid off by ~2016 year end.

      Never under estimate financial tings to go against you, have plenty of cushion.

  11. Thank you for the article, I can relate to your situation somewhat. My wife/I own 22 Units(mostly SFR). I work full time for 2 more years until I get my 30yrs and can retire with a pension/healthcare at 53. We have both been doing this for 25yrs and have bought 13/14 in the past 3yrs. We do all of our own mtce,managing,etc just like yourself(guess what I did last night and tonight…and this weekend lol).

    It’s great to read articles like this as even though you know good things are happening you get so caught up in the day/day operations you have to look back to see how far you have come.

    We are big fans of finance short term and payoff as quickly as possible so its difficult at times looking at the checkbook but it’s nice every month to look at the amortization sch’s. We choose to payoff the loan first that frees up the most cash and then snowball.

    The other thing for us and I think can’t be stressed enough is for both husband/wife to be on the same page. Our biggest difference is that she would like to continue buying more properties and I am not opposed BUT I worry about “TIME”. I don’t want a bigger truck or larger home etc.(neither does she) I want to travel & spend more time with family and enjoy the “TIME”. I am sure we will always be involved in Rentals to some degree as it becomes who you are and we both enjoy it

  12. I really admire your work ethic. I am just at the start of my professional career, and find it hard to even imagine making the kind of decisions you have made throughout your career.

    I am really, really hoping that I can grow my income quickly and generate enough in investments and in passive income that my inevitable future income decline doesn’t hit me too hard!

  13. Great story on how taking risk, hard work and a little timing help can make you financially secured! Job well done. From the reading, it soudns like you are a hard worker not only for the man but also for yourself.

    The cash flow you have now seems to be well in excess of your needs. Where/how do you invest the rest?

    1. Thank you for reading!

      It has been a long road, but I am glad I took it. I keep investing in S&P index funds. They are commission free, return a 2%+ dividend, and should get some growth. If I need more, I can sell the actual ETF, but for now, I just reinvest the dividend.

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