Special note from Dividend Mantra: Today, we have a guest post by Eli Inkrot. I don’t allow guest posts often, and this is the second in the last week. But Eli has a story that really resonates with me. He will probably be familiar for quite a few of you readers out there, as he routinely writes for Seeking Alpha. I actually met Eli once, as he dropped off his book for me to read, review, and recommend if I enjoyed it. Today, he’s discussing some recent changes he made in his life, and how those changes can apply to others.
Hi my name is Eli, great to meet you. A little about myself: by age 24 I had received two undergrad degrees, a Master’s in Finance, lived abroad, wrote a book, published over 100 articles and was the vice president for two different companies. At 25 I decided to live more purposefully.
You can check out my new website “The Currency Of Time” to learn more.
Before we get started, I’d like to thank Dividend Mantra for allowing me to Guest Post on his site. I know he has a lot of Guest Post options, and I’m pleased that he put his trust in the Eli Inkrot brand.
Speaking of trust, much like the majority of this sites readers, I applaud Jason’s recent transition to writing full time. Incidentally, I actually made a similar move myself. When I said, “living more purposefully,” I meant that I quit my VP job and became my own boss.
So are Jason and I both crazy – giving up perfectly reliable paychecks – or do we just want to inspire others, regardless of the sudden monetary sacrifice? I can only speak for myself, but I would imagine that the answers to those questions would be: “perhaps” and “almost certainly.” Of course that’s probably not the question you wanted to ask. I’m guessing your inquiry would be more along these lines: “How did you figure out when you can quit?”
It’s a great question. We’re both pursuing financial independence, yet we both decided to take temporary pay cuts. For me, the answer comes down to two basic tenets.
The first ideology is psychological. You see I didn’t just outright quit my job – barreling into my boss’s office and proclaiming, “Screw you, I quit!” Quite the contrary actually: I went to my employer and proposed a pay cut in exchange for some time off. It was never about hating my job. I laid out an idea that I believed to me mutually beneficial and was simply looking for some middle ground. Instead, my employer told me that they had no interest in paying me less or having me work less. So I had to make a choice.
I thought about what a shame it would be if I “died with my music still in me;” with a song still to be sung – and all because my office chair had a cushy back, because the paycheck was steady. My decision was made. I went back to my employer and said:
“I appreciate the opportunity, but I want to try my hand at a variety of endeavors.”
Just like that, I had become my own boss. Sometimes you’re forced out, sometimes you choose to leave, and other times it’s an awkward negotiation. Whatever the situation, keep in mind that if you don’t truly enjoy it then the extra or “dependable” money likely won’t solve any problems. But you have to be ready for it.
The second underlying tenet rests in the mechanics of your financial situation. If I had a boatload of student debt or no emergency fund I likely wouldn’t be writing to you right now. I’d be sitting in a white box, taking client calls or answering emails for an employer. But I’m not doing that. Today I get write from where I choose (water view with a breeze) and interact with you lovely folks.
See the thing is, before I tried to negotiate for a pay cut, I had roughly 10-years worth of expenses covered in the form of net assets. Not enough to retire, but certainly enough to buy some intermediate freedom. If I couldn’t figure it out in a decade well then perhaps I wouldn’t figure it out at all. It’s comforting to know that you could take a year or two off (or a decade for that matter) and still be just fine. Plus, it’s helpful to understand that you don’t need to immediately (or ever) replicate your previous salary to be happy.
Allow me to give you an illustration to demonstrate what I mean. Below I have included a trailing-twelve month view of my finances:
The top blue line is my trailing twelve-month income leading up to my decision, the middle red line represents expenses and the bottom green line shows passive income received from dividends and interest. I keep track of my monetary life down to the penny, but for universality sake I decided to use “X” instead of the actual dollar multiple on the y-axis. The exact numbers aren’t important; it’s the concept that should be highlighted. Finally, the x-axis is simply a plotting of each observation period.
The above chart was the second leg to my decision process. Here’s how I thought about it:
There are basically 6 increments on this graph. My highest trailing yearly income reached about 5.5X, yet my expenses never topped out past 2X. As such, I knew that I didn’t need to make 5 or 6X to be successful. I could make 4X and be just fine. Actually that’s better than fine, if I could make just 3X I’d be ok. For that matter, with 2X coming in I would still be living quite comfortably. In fact, based on my most recent mark, I would need to start going out to eat more and buying more stuff just to hit the 2X level. “Success” could very well mean making half of what I was previously.
Putting it in graphical form squashes the notion that you need the same amount of income as your day job to survive. If you have a healthy savings percentage, your net assets and earnings ability allow you to be happy on less. As long as you’re making more than you spend, all is well.
As a bonus, I thought it might be fun to take a look at Jason’s historical finances as well:
Based upon his Monthly Budgets you can see a very similar, albeit much more consistent, theme play out leading to his decision to quit (this time with real numbers). He was making around $60,000, but the work didn’t drive him so he struck out on his own.
The thing about it is Dividend Mantra doesn’t need to make $60,000 to be successful (although at the rate he’s going, he could very well do so). As seen in the graph above, something in the $20,000 area would likely do just fine. In fact, we all know that he could even beat that mark if he wanted to. Add in the idea that more than a fourth of his needed expenses are covered in dividends and it’s easy to see that matching the previous job income shouldn’t really be a primary focus. It could happen anyway, but the focus – once you have a reasonable financial fortress built – should be on doing something you enjoy.
Perhaps most impressive is the idea that even if he can only match income to expenses, by simply reinvesting payments and allowing dividend growth to do its thing, Jason would likely reach $20,000 in annual payouts in the next 15 years or so anyway. Of course the astute wager would certainly be on the sooner side of that mark.
In the end, it basically comes down to two things: being mentally ready and being financially ready. It’s simple, sure, but I believe each has lasting realizations. On the psychological side a lot of people have the “one more year syndrome.” They think that maybe they’ll just stick it out for another year and get that much comfortable. That’s fine; yet realize that what you’re gaining in perceived security could very well be diminishing your finite resource of time. On the opposite end of the spectrum, you probably shouldn’t quit today without an inkling of a plan. There’s no pride in sitting on your couch watching Judge Judy reruns all day because you didn’t like the way someone looked at you during work. You need to have a basic outline of what you’d like to do with this new “found” time. A mental roadmap, if you will.
On the financial side there’s two basic schools of thought. My idea, as was Jason’s, was to build up a nice little cushion – trading time for money – before venturing out on your own. This way you have something to lean on if everything doesn’t go according to plan. On the other hand, you could subscribe to the Mark Cuban “no safety net” attitude whereby failing isn’t an option because that’s all you have. Either way, keep in mind that the decision is yours. That is, the only person who has to approve of your actions is the one making them.
So, have you figured out when you can quit?
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