2 Financial Milestones: Are you on Track to Financial Freedom?

Amidst the noise about the energy crisis caused by the closure of the Straits of Hormuz, and doomsday preachers saying a massive stock market crash is around the corner, lets focus on what truly matters. Well, what matters are just 2 financial milestones. For starters, they are not an absolute number like 100k or 1 million, but these 2 financial milestones show you if you will have the option to say "f*** you boss and chill at home."

1. Your Cross-Over Point
There is a certain point when your returns from your portfolio = your active contribution. That is known as the cross-over point and a confidence indicator that you have reached the first meaningful milestone where compounding will start to feel real. (Don't get me wrong, compounding has always been there even when your portfolio is 10k, but this is the point where it starts to feel tangible) Personally for me, I invest about $3,000 per month. Hence, my cross-over point amount = Annual Contribution Amount / Annual Portfolio Return. I will be using a conservative 5% annual portfolio return. As a result, my cross-over point = ($3,000 X 12) / 0.05 = $720,000.  Just chill and hear me out first, this this amount may be smaller for you, depending on your active contribution and your portfolio annual returns, hence, do not get intimidated by my personal calculation, as this is MY PERSONAL breakeven point. Go and ask AI to calculate your breakeven point, this will shorten the calculation process.

Once I have achieved the projected amount of $720,000, this will be when I know I am almost reaching financial freedom. Once the cross over point is reached, this makes the 2nd milestone more reachable.

2. Your True Financial Freedom Point
Your true financial freedom point is when you attain TRUE FINANCIAL INDEPENDENCE and can choose whether you wish to continue grinding it out at your job. At this point, your investment returns not only = your active contributions, but its large enough to FULLY cover all your living expenses indefinitely. Ok, now here's the thing. Your cross-over point and your "true financial freedom point" may be nearer apart then you think (pardon me, the true financial freedom point is just a loosely worded expression that makes it easy to understand for me. I'm sure it has a more prim and proper expression in the financial world). However, this still depends on the individual. For example, if your active contribution is only $1,000 per month but your true financial freedom point requires a $4,000 per month income, then that represents a big gap of $3,000 per month. 

But let's say if I need $4,000 per month to chill out. My true financial freedom point = annual expenses / Annual portfolio Return. This amounts to $48,000 / a conservative 0.05 = $960,000. For simplicity's sake and for a greater margin of safety, you can round this up to 1 million if you wish. Hence, from this exercise, you can see that if you have been diligently investing a meaningful amount of your paycheck into the markets, you will take a long time to reach the 1st cross-over point. But the time to reach the 2nd true financial freedom point will at most take you a couple more years, as the difference between the points = $240,000. This is not even half of your breakeven point amount.

Questions:
Ok, so are these 2 milestones truly reliable to retire on? Well for me, it will work. Why? Cause I will never withdraw my capital or cash out on capital gains; I will only live off my portfolio dividends. 

Some people will then ask, won't your portfolio shrink due to inflation. It won't. Because I will continue to keep 20% of the portfolio in S&P500 and the MSCI Global Equity Index fund. This portion should be sufficient on a base of 200k.

In conclusion, be aware of these 2 financial milestones and you'll likely be more financially confident and secure. That's all for now, stay in the game and keep your eye on these milestones. You'll be good. Peace out good people.

Yours sincerely,

Finance Kaya Toast

Disclosure: This article was written as me talking to myself as an ordinary Singaporean, wishing to achieve financial freedom. It does not represent any financial advise. All opinions are independent and represent just my two-cents on all matters financially-related.  

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