Total net worth or passive income: which metric to chase?

I have been thinking a lot on which metric shall I use to measure how close I am to financial independence. Both total net worth and passive income have as a basis my expected yearly expenses but whereas total net worth generally assumes a 4% net return rate, the passive income assumes that the amounts I am earning now can be replicated in the future. Both have flaws but both can be used as a guide.

In my specific case, I have invested mostly in real estate (on my way to buy property #2) and my investments yield more than 4%. Therefore, if I consider both properties and the passive income generated by them, 40-45% of my yearly expenses are already covered by these properties (potentially even more, because I can still decrease the amount of taxes I pay for both properties if I decide to create a company and deduct expenses and VAT, which I am planning to). On the other hand, if I use the total net worth metric, I am only 30% financial independent.

It is more conservative to target total net worth, which, in our case, is 870k EUR (my husband disagrees and think this is too low) but I will still celebrate when we reach 100% of expenses covered by passive income!

What about you? How do you keep up the motivation towards your goal?

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30% Financial Independent

I am currently taking a sick leave from work the whole week and I have to admit that I am actually enjoying staying at home. I have a 1-year old baby and it’s been over 1 year I am not home alone! So, despite the pain in my body and throat pain, I am actually enjoying this “time-off” from work. It got me even more motivated and more into financial independence because it allowed me to have time to do things I really enjoy:

  • I read 2 books I have been wanting to read for a long time (Misbehaving and When, totally recommend both!)
  • I have been reading more blogs on financial independence, running and updating my numbers and learning new concepts, in particular the difference between Full FI and Lean FI. I have realized I am a bit over 30% Full FI, which sounds great, because the following 30% will be much faster to reach than the first.
  • I have been doing yoga by myself and realised I need to learn more/do more, even though it is very challenging to find the time when you work full time + have a baby. I will definitely do a yoga teacher training once I decide to “retire”.
  • I have also been thinking on how to combine my two passions which are personal finance + girls empowerment. I am not specifically talking about the new movement current out there, I would like to focus more on how to help poor girls get through, empower them and help them to make sound financial decisions. Again, very difficult to do it in the country where I am currently living – Germany – not only because of the lack of time but also because I do not speak German fluently (not even close!), so maybe I have to delay this till when I go back to my home country. Meanwhile, I have to think what could I do online related to these topics. Any suggestion?
  • I have convinced my husband to finally start saving first, i.e., every month both of us will put in a separate account 2.5k each so that we manage to save 5k a month. Let’s see if we manage to do it! We start this month!

Even though there are many things I love about my work, to name a few being an international environment, my manager is an amazing coacher, my organization is very flexible in terms of working hours, the high salary, etc., working is definitely killing my creativity and separating myself from my true passions. I feel I would be of so much more use to the society if I could focus my time on helping others to achieve their own freedom and to thrive, either through personal finance or yoga/meditation practices. However, on the other hand, I feel I still do not know enough of personal finance or meditation to be able to teach. And because I work full time I cannot find the time to get better, or at least not as much as I would like to. I guess I still need to wait a couple of years and meanwhile I will try as hard as I can do improve my skills on the topics I passionate about, without being hard on myself for not being able to do it full time.

Tracking my expenses

Yes, I do not (yet) track my expenses. I know how important it is but since I was pretty happy with our savings rate (around 60%) and my husband was not a fan of tracking expenses I decided there was no point in doing it myself.

Luckily, nowadays banks do this for you since they categorize your expenses automatically. You just need to make sure it is the right category and categorize a few when the bank does not have information on the correct category of a specific expense. The only thing you have to do is try to use your card always, if possible. If it is not possible and you need to cash out, which in our case it is only to pay the cleaning lady and some lunches/coffees, it is fine. So, I managed to convince my husband and we will track our expenses from today onwards!

This graph below is my idea of how I currently spend my money. In one month, I will compare it with how I actually spend my money.

expenses

Keep posted, I will keep you updated on my real expenses and on my first month as a real estate investor. I have learned so much in this process of buying a house for short-term rental and hiring a management company and I will share all the tricks and tips that worked for me!

An image worth more than a thousand words

The Eurostoxx 50 and the S&P 500 have historically been fairly correlated. However, since 2009/2010 we clearly see them splitting, as Europe is rather stable and the US presents amazing returns.

Index fund investing as a simple strategy is more complex than what John C. Bogle says. There are too many options to choose from. For investing in Europe I am confident that ishares is the best, do you have any other suggestion?

Naturally many other factors have to be taken into account when deciding what to do in terms of investment, in particular which index funds to buy. But, as we know, there is no point in thinking too much about an investment strategy; even financial experts rarely beat the market. So, would you say there will be a crash soon in the US? Shall we invest in the EuroStoxx? Let me know your views!

I create my own luck

Most of the people like to believe that external factors such as luck or being in the right place at the right time play a major role in other’s people successes. I believe those people, in general, are just lazy and it is just easier for them to continue being lazy and believing there is nothing you can do to improve your life than actually making efforts and having a plan.

You live next to your family and enjoy a perfect work-life balance. If I had that, I would also have kids right away. Have you ever thought that maybe the person though a lot before having kids and actually shaped his/her career based on where the grandparents live? That this decision actually required effort and it was not just a matter of luck but most likely the result of a well-thought plan?

You are so lucky, you have a high salary. If I had that salary I would also save more than 50% of my salary. This one actually applies to me. I have worked hard to be successful in the tests and interviews that have put me in this high paying salary. Not only I was rejected many times before and after going to interviews, but also I have spent weeks preparing for every interview, studying more than for an exam. Also, I have carefully planned, together with my husband, the places to live that could be more beneficial both in terms of salary, costs of living, safety, etc. and we have both focused our search in those countries. Plan + hard work + focus = success. Also, not many people would be willing to sell their car, like I did, to think thoroughly before spending your money, and rather focus on generating passive income consistently.

I believe some people just choose to be negative and unlucky. I strongly suggest reading this article from Richard Wiseman where he performed an experiment in two groups of people – lucky and unlucky – and where he shows that “lucky” people are not only more efficient in embracing new opportunities but also they pay more attention to the details that may help them thrive. Therefore, what is generally so-called luck is the result of personality factors, such as optimism, openness to new situations and less anxiety combined with the ability to notice and trust the unexpected. It is not an external factor that cannot be controlled by us.

All of us are lucky to some extent, we just need to work hard, take some risks and embrace the opportunities that come across our paths. Try to learn from the experiences of the lucky people that you meet instead of just assuming that they did nothing to achieve success. I am pretty sure that if you start changing your mindset and your behaviour you will also get lucky in the near future!

Rules to follow

1 – Look for a high paying job and save at least 50% of your salary

Yes, you need to work. Especially if you have no money saved. Not only you need a stable influx of money to start saving but also it is important for you to understand how society works; focusing on improving your social and technical skills, which will be highly important once you reach financial independence. Try to find a good compromise between working hours and pay but, honestly, from my point of view, there is no way you can build financial freedom if you do not have a high paying job. Look for a job that pays well, preferably in a city that is not expensive. I had to leave my beautiful low salary country to start my journey to financial freedom in Germany. Even though I was not very excited about moving in to Frankfurt at first, I have actually been positively surprised by the city in many aspects. Not only it was easy for my husband to come here and to also find a high paying job, I have managed to visit many places around Europe and I have learnt how much I love biking.

2 – Do not discuss or try to justify your financial decisions to others

In general, people feel they are taking the best financial decisions that can possibly be taken. However, remember that 99% of those people will work their ass off until they are 65 or more. Everyone is trying to convince you to buy instead of renting your current house? Nobody understands how you are saving/investing money while at the same time renting a house? Do not waste your energy trying to explain because 1) they will not understand and 2) it takes a long time to explain people the hidden costs and the lack of flexibility in owning a house, so you will be wasting your time too. Focus on your plan and accept the fact that, while most of the people would love to be financial independent at the age of 40, nobody wants to think strategically on how to reach it and especially are not willing to make any effort. Yes, you are alone!

3 – Treat yourself and others with compassion

Do not aim for perfection. Have a rational plan and stick to it 90% of the time. If one month due to whatever circumstances you end up not saving what you had expected – or not saving at all – do not blame yourself. Those are sunk costs and, again, do not waste your time or energy with guilt. This lifestyle is like a diet, yes, you will reach your destination sooner or later and yes, cheat days are allowed from time to time.

We, humans, have this natural tendency to compare ourselves with others. Try to be as smart as your neighbor, as interesting as your friend, feeling envy in a positive way, and do not try to strive with material goods. Feel compassion for those who do it. Unless they are Warren Buffet, they will never be 100% fulfilled. All the latest studies on happiness show that wealth is irrelevant so feel compassion for those who feel they can only achieve happiness with material goods.

4 – Make 2 lists: one with all the things that are highly valuable to you and another one with all the things that you would have more time to do more if you didn’t have a full-time job (some overlap of course)

Here are my lists:

Highly valuable/make me happy

  • Biking
  • Spending time with my husband (and, in the very near future, my son)
  • Learning/reading about psychology and economics
  • Writing
  • Being there in important steps of my family/friend’s lives
  • Doing something for others
  • Have an experience on starting a start-up full time
  • Be an example for my son and show him that being free is more important than being super wealthy, that taking care of himself/his health and happiness are more important than working for others
  • Doing yoga and understanding its benefits for the human body
  • Feeling I own my time

This I would love to do more if I wold have time

  • Surprising my husband more often and write about my feelings
  • Cooking
  • Read and write more
  • Learn German
  • Volunteer
  • Do more yoga
  • Be more mindful