Monday, September 12, 2011

Too lazy to work, too chicken to steal

Summary: This post tells a formula for deciding when to quit your day job.

First we define Enough money. It is the monthly sum, which allows you to buy most things you want, so that not working increases your standard of living more than extra income from your day job.

Mortgage is such a huge factor that we exclude it from Enough and account it separately as Debt Costs. It covers both interest and repayments.

Secondly, we assume that investments are the basis of your new income. Investing is the only way to pay once and get money back for the rest of your life with minimal effort, either as dividends, interest or rent. Historically 4% withdrawal rate has proven robust. Even after you spend 4% each year, your pot still grows enough to resist inflation. We also assume 25% tax rate, which is the average of dividend and capital gains tax rates.

You can quit your day job when:
Debt Costs + Savings / 12 * 0.75 * 0.04 + Side Income >= Enough
Debt Costs + Savings / 400 + Side Income >= Enough

Notes about the formula:
  • You need to own 400 euros to get 1 euro of monthy income. 400 comes from multiplying the constant factors. Only with compound interest and lots of waiting is it realistic to get these kinds of multipliers.
  • To get there quickly, you need side income schemes. For example €100 of monthly ad income from a blog corresponds to €40000 of savings. While writing interesting content is hard, it is probably easier than to save €10000/year for 4 years.
  • Side income schemes also provide cover, if you have to explain, what you did for the past few years.
  • Cheaper apartment speeds up the plan by years. There can be €100000 difference in apartment prices between Helsinki and Oulu city centers. If you value big city life, you probably prefer working to idle life in Oulu. Debt Costs depends very much on your lifestyle.
  • If you are near retiring, you can withdraw more. Multiply your monthly pension by 400 to see how much less you need to own at retirement.
  • If side income raises the sum past Enough, you should save the difference to gradually phase out the necessity of side income schemes. Otherwise, you either are not lazy enough for this plan, or have set Enough sum too low.
  • Enough sum raises with inflation.

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