Hello Income Streamers!
As many of you know, I have returned to writing more regularly on this blog, and with this return I would like to shift the focus of this site. Traditionally, stevesincomestreams has been about ways to make some extra income – opening up some new income streams. Upon returning, I paused to think about why that was important to me, and why I chose to describe them as streams. That is because, without realising it, my desire deep down is to create automated streams of income rather than “streams” that require consistent effort on my behalf. And why does this appeal to me? Because I want to be free of financial burden. Needing to work to survive limits one’s creative pursuits and forces them to dedicate at least some time each day to fulfilling the needs and wants of others. Personally, I’ve discovered that I really enjoy programming work and computer science, and I don’t regard it as a burden but rather as an opportunity to work in this field. But if I can open up some income streams, it creates options for me that I won’t have if I must depend on actively earned income. What if I wake up one day and decide to switch to a lower paying field? What if I want to risk my livelihood and pursue a startup? What if I want to go into volunteer development or teaching?
As a result, I have been researching those who have developed strong enough income streams to cover their basic needs, and then some. This goal is known as Financial Independence, and the pursuit of financial independence will be the new focus for this blog. As we know, passive income streams either require some dedicated work, or capital, to allow them to begin flowing. Financial independence is the idea that by saving enough capital, one can invest in the general stock and bond market to allow the ultimate form of passive income – investment gains – to sustain your needs indefinitely, even accounting for inflation. Imagine the opportunities being in such a financial position opens up for you. You could keep working, if you really love your job, and continue contributing to your invested capital. You could retire, and have enough to last the rest of your life. You could switch to a lower paying job that covers only your current needs, while allowing the invested fund to compound and net you an even larger passive stream.
But how much is enough capital? The general idea, according to a famous economics paper known as the Trinity Study, is that the stock and bond markets return highly enough on average to both keep pace with inflation and allow a withdrawal of 4% of a fund’s value annually without running out. The study concluded that this annual withdrawal rate would have succeeded during every time period in US stock market history, up to 30 years. “Succeeded” was defined as the fund never running out of money – in particularly bad years, the fund may seriously deplete, but it would regain its value thanks to particularly good years.
Therefore, if you would like to build up enough savings to last a lifetime, the Trinity Study indicates you simply need to save 25 times the amount of your annual expenses. For me personally, I always prefer to err on the side of caution, and will save 33 times my annual expenses, by aggressively investing in pre-tax retirement accounts and investing left-over income in post-tax accounts and in paying down loans. I will post more on the specifics of this plan in the days to come! The gist, though, is that the best passive income stream we can all build is a strong retirement portfolio. If that can be supplemented with the types of income streams I often (and will continue) to try out and report back on here, it will make the journey to Financial Independence that much faster!
Do any of you have experience with pursuing FI? What questions can I answer in coming posts about the concept?
As always, stay earning streamers!