As a visual person, I very much appreciate graphical motivators such as wall charts and the like. Whether you are tracking weight loss, or progress towards early retirement, a wall chart can be a powerful tool.
This concept was first introduced to me in the book Your Money or Your Life. The book’s authors advocated creating a retirement chart to track passive income and expenses. The idea was that as expenses were lowered, and passive income increased, you moved closer and closer to not having to work for money. Sounds like a good plan to me!
How To Construct an Early Retirement Chart
1. Determine your total monthly expenses. For the next month (or use the previous month if you have all the records), track all expenses. This includes everything from the mortgage payment to the daily trips to the vending machine at work. When you have a good idea just how much money you spend each month, move to step 2.
2. Calculate your current monthly income. Begin to track your income from all forms of employment. That is, track money earned from your primary job as well as any self-employment or freelancing work.
2b. Calculate your currently passive monthly income. Add up your monthly passive income–that is, income that is not earned in step 2. This might include interest on deposits, stock dividends, book royalties, etc.
2. Construct an early retirement chart. This step can be as high-tech or low-tech as you prefer. I personally like to go low-tech here, opting for a giant poster-board available in the school supply sections of most stores. Using a large ruler, or similar straight edge, draw a large X and Y axis taking up most of the poster.
Divide the vertical axis by an interval that fits your situation. Most of us could probably work with a chart from $0 to $10,000 in increments of $100. Again, using your ruler and a pencil, lightly draw horizontal grid line across the chart at every $100 marker.
Along the lower axis, label the current month/year combination (i.e. “07/09″) and increment the months out as far as the size of the post poster allows, spacing about 1/2 inch in between months.
3. Plot your progress. Using three separate colors, begin to chart your monthly expenses, income and passive income. Chances are your chart will start off looking like mine did – my expenses exceeded my income each month, which explained why I was accumulating debt. However, over time we managed to lower our expenses and increase our income, which also increased the amount of passive income we were earning.
4. Find your intersection. After tracking passive income and expenses for a few months you will start to see a trend where these two segments will eventually meet. Your Money or Your Life refers to this as the cross-over point, because this is the point where your expenses are met by passive income. Theoretically, this is the point where you could quit working for income, assuming your expenses never increased.
One thing to keep in mind is that there are no guarantees with passive income. There are many variables that can affect this amount from month to month. Companies might slash dividends. Interest rates may rise and fall and affect your interest income. Royalty sales might drop significantly reducing the amount of payments to expect. For this reason, try to “lock in” as much of this income-producing money as possible by investing in things like long-term CDs, bonds and high-interest savings and money market accounts.
This post appeared in the Money Hacks Carnival: 84th Edition
Photo by thombo2
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Not a bad plan. I’ve been tracking my net worth for a while now, but it would be good to break things down into income, passive income, and expenses. It sounds like you’re moving in the right direction.
Personally, I would want a significant margin of safety above and beyond the crossover point before I quit my day job. But it’s good to know when I put all my earned income into new investments, if nothing else.