Post 4.0 –> Covid-19 Personal Finance Silver Linings…and Homework Assignments (Seven steps on your path to FI)

FI-light-ER post 4.0 / FirstPublished20200528

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Disclaimer: We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.  FIlighter accepts no responsibility for any actions or activities you may take based on anything discussed on the website, postings, or comments.

4.0 –> Seven steps you can take today on your path to early retirement or Financial Independence from the FI-light-ER

Each of us has different experiences to share on our Covid-19 Storm.  I’ve got a high school classmate that posts a daily SL or Silver Lining in the midst of the Covid-19 Pandemic “Storm”.  This week I would like to focus on a Personal Finance SL related to the opportunity many of us have to spend more time than usual with our significant others.  At the same time, I want to recognize and thank the souls in healthcare, law enforcement, retail and other disciplines that have been caring for all of us that are weathering the storm that is the Covid-19 Pandemic.

Spending more time with those important relationships in your life give you opportunities to reflect, communicate, dream, and generally have deeper conversations.  A major point of the FI-light-ER name is to consider a trajectory to reach Financial Independence and achieve a sLIGHTly Early Retirement.  You may already have routine financial plan, budget reviews, and retirement conversations as a matter of course with your significant other (SO) or if you are single, you may have given serious thought or taken more formal steps to this future state.  As I have stated in previous posts, education and data are key in understanding your preparedness and status to achieving FU money, Financial Independence, Early Retirement, or other personal goals.

As a reminder recall the disclaimer above, see your own professional advisor with regard to your individual situation.

We are going to cover several items today and many of them are likely actionable homework to take a heading on your preparedness or next steps as you begin the path to FI (it doesn’t have to end with retirement, it’s really about independence to pursue your dream future).  I’ll number these items for reference and further discussion and keep in mind, we will be taking the 50,000 foot view, and each of these items could be a lengthy post on its own.  These items can be pursued in different sequences; however you will definitely need to create the spending analysis before any budgeting is completed:

  1. Spending Analysis – While some call this a budget, it is really the precursor to any budget or longer term plan.  To prepare an effective forward look on your personal finances there must be a basis or beginning reference point with a high correlation to future expenses.  The goal of this exercise is understand current expenses with a high enough confidence that they can be used as the basis for future projections. Personally to confirm our spending, I began with downloads from bank, credit card, and healthcare account detail transactions for 2019.  Using categories (included in credit card download and a few additional unique categories created for our situation) and pivot tables with Excel skills a rough cut was pretty easy.  A 12 month look back is beneficial as the annual, semi-annual, and quarterly items will surface as well as regular monthly bills.  At a minimum I would suggest going back 3 full months and then add in things that may be paid outside of the monthly frequency like insurance premiums, property taxes, or other “lumpy” expenses.  Building a database and using pivot tables provides easy research and spending analysis.  This is my comfort zone, yours may be a pencil and paper approach with a stack of bank or credit card statements, use the tools at your disposal.
  2. Net Worth – Don’t let this term scare you, it is simple math.  What do you Own (Assets)?  What Do you Owe (Liabilities)?  Your Financial Net Worth is simply the difference between your assets and your liabilities or obligations.  The goal is to grow this as a positive number.  In the case of a person just starting their career as an attorney or doctor and a mound of student loan debt, their assets may be much smaller than their liabilities generating a negative net worth.  Don’t be discouraged, each month you earn a paycheck and make deposits in a retirement plan and begin to build assets and reduce or pay off liabilities your net worth will reflect improvement and eventually become a growing positive number.  Please don’t underestimate the value of this step.  If you have no reference point (Net Worth) you can’t navigate to the destination (FI).  Many people are surprised when they add up all their home value, retirement accounts, investments, bank accounts, emergency funds, etc. and subtract their student loans, car loans, mortgages, medical debt, etc. they find that they are already millionaires. Or thirty year olds may find they are already above a six figure net worth.  Each number in this calculation is a lever that may be pulled or adjusted to favorably impact future net worth.  For instance, my daughter drives a 2010 Corolla.  We gave it to her with 40,000 miles and a new set of Michelins when she graduated and moved to the big city.  When she got out of school she was talking new car pretty hard.  Six years later, what is she driving?  She figured out that she valued the flexibility of higher positive cash flow and net worth growth more than a smelly shiny new car.  She achieved a solid FU balance and is growing the gap.  She probably has heard a hundred times, having cash gives you options, and having options means opportunities can become actions.  The point is you have to know where you are to figure out how long the path to FI may be in front of you, or conversely you may already be Financially Independent and did not even know.
  3. Current Year Forecast – What does the rest of the year Income and Spending look like?  Will it match the first 5 months?  Does summer include vacations and Christmas large gift budgets?  Are you making any large purchases like cars or homes?
  4. Annual Plan – What does your income and expense budget look like for the next year?  Can you grow the GAP? Increase Income or decrease expenses?  Are you investing the difference?  Will you pay off any debts this year and create more breathing room to deploy funds elsewhere?  Will you use the “found” money to pay more debt or will you grow your retirement accounts or fund a 529 Plan?
  5. Mid Term Plan – What does the horizon look like in the next five years?  Are you sending a child off to college?  Planning to give your child a big wedding?  Will you be replacing one or two cars?  Are you adding vehicles as children become licensed drivers?
  6. Life Plan – Based on all the items above or perhaps only 1) and 2) what does your financial picture look like for the rest of your life?  This doesn’t have to be a line by line budget with extreme details, but it should reflect large items and life changes.  I would suggest annual columns by year including your age(s) for each column (I went to 90, but feel free to live to 100 on paper).  This document was the main validation tool when making my decision to take an early retirement.  Include any income sources and even Social Security (if in the USA) when you reach retirement age or if you defer it and let it grow show a larger amount in those future years.  For more on Social Security see 7) below.  When working on the Life Plan spreadsheet, it is important to include your assets, liabilities, income and expenses as funding the future will have to come from income sources or drawdowns of assets.  Remember while some assets may be real estate, your life plan may include selling a large house and downsizing creating a double benefit as your will capture some liquidity from the sale as proceeds and the down sized house will likely cost less to maintain freeing up some space in the expense budget.  As you drive less will you reduce the number of vehicles?  Will you add an RV or a Boat when you retire?  Be sure and add any additional costs for these new toys.  Do you plan to travel the world?  I encourage you to do two things in this exercise, dream big and be generous/ conservative in expense estimates.  Be careful not to overestimate income sources or underestimate expenses.  Additionally, put a contingency/surprise budget line item in the calculation to cover “what ifs”?  What if grandma needs help?  What if we have a medical surprise and a large balance to pay off?  What if we can’t sell our house for a big gain to fund our retirement?  All these surprises will not happen, but at least one or two will show up without warning.  Plan for some breathing room.
  7. Social Security – When was the last time you downloaded your social security earnings and estimated benefit statement?  Go to right now and download a statement.  Put an annual event on your calendar to do this every year on the last week in May.  In addition to a statement, select the Earnings Record option on the right side of the screen.  This view can be copied and pasted into a spreadsheet.  Focus on the “Taxed Medicare Earnings” as they are not limited numbers.  I encourage you to digest these annual data points, insert columns and calculate your accumulated earnings each year as well as increases or decreases.  What happened the years that you had large increases? Decreases? How many years did it take you to reach $100,000 in cumulative earnings?  $1,000,000? $2,000,000?  What have you earned LTD (life to date)?  Are you surprised?  Where did it all go?  The take aways here are the realization you probably have had more money pass through your hands than you realize, and you will have a number to assume for Social Security income in your life plan and an idea if you may defer to age 70 for higher income.  My personal cash breakeven is age 82 if I wait till 70 for higher benefit vs. taking full retirement at age 67.  Said another way, if I start taking payments at 67, I will have 36 monthly payments before 70 however, my benefit would have been larger at 70 if I waited.  That larger benefit takes 12 years to make up the deferral of the 36 payments from 67-70.  There are many different strategies on claiming social security, just make a guess for now and use it in your life plan.  I was surprised by several things looking at these numbers. 
    • Age 24 – Reached $100,000 cumulative earnings
    • Age 36 – Reached $1,000,000 cumulative earnings
    • Earnings went up >25% several times in my career
    • Earnings went down >(25%) three times including (34%), (62%) and (42%) and none of these related to any unemployment, I remained continually employed since college graduation.  Imagine if my lifestyle would have crept up to the earnings level before these “bad” years?  It would have been devastating.

That is enough for this week.  I’m not sure if you will have an opportunity to do any of this homework but promise me you will take action on at least one of these if you have not already completed them all.  May I suggest you start with 2) and then maybe do 7) for fun.

The second promise I will request is that you open the dialog about the future and even retirement with your significant other if you have one.  What are your dreams?  Can you connect where you are to where you want to be?  Are you living at your means or well below?  Are you growing the GAP?  What is your net worth?  It is extremely important that both people in a relationship have a clear picture of the financial landscape.  That doesn’t mean you have to take turns paying the bills, it means you have to have open communication about all financial accounts, debts, credit cards, etc.  I would suggest at least a quarterly discussion and it can be as detailed as required for both to feel up to date.  If you find yourself in a situation where you are hiding something, strongly consider coming clean.  I would suggest reading Dave Ramsey’s, “The Total Money Makeover” if you are struggling with the debt side of your net worth and also the relationship perspective aspects of combined finances.

That’s it this week!  Take ACTION!  Mind the GAP!  Figure out your Net Worth and set a goal for NW by the end of the year.

Please send feedback or comments, even ideas you would like to see covered in future posts, your constructive input is welcomed and appreciated.  Use the boxes below to send your comments. 


Remember MIND THE GAP +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling. or on Facebook: