tmcc wrote: ↑
Wed May 02, 2018 11:56 am
KF, I started using the % of expense method to measure my savings rate in my budget. Its a solid method so thanks for that.
I am curious how people look at debt based obligations like a mortgage when factoring in the asset multiplier that one needs for financial independence.
For example, I expect to pay off my house and die here provided global warming doesnt take the eastern seaboard in my lifetime. Accordingly, I would not factor the current debt obligation into expense needs in the future. Since my single biggest expense is housing, the % of adjusted annual expenses I am saving is substantially higher after I adjust for this amount. Accordingly my FI multiplier (20x, 25x, 40x, etc) is an expected "no income situation" where I am drawing or living off of some form of interest and should be net of a mortgage that is not in future expenses -- really just the prin+intr is out. Taxes and insurance are in. I'm tempted to exclude auto expenses but the reality is that I may need to buy a vehicle so some sort of sinking fund or debt may be possible - unknown risk.
Add: Gross cash outflow
Less: total savings (pre/post/whatever.. dont have to go crazy with pre/post tax impacting each number)
Less: mort prin+intr
Adjusted expenses are the basis of the multiplier. I think this is pretty legit and definitely a better barometer than a % of gross or % of net.
<<I am curious how people look at debt based obligations like a mortgage when factoring in the asset multiplier that one needs for financial independence.
Then, you are not looking at FI. You are thinking about retirement. You could FI at any time. You do not need to wait for the house to be paid off. In my system, the number is based on current annual expense. Hence, the whole PITI is counted as an expense. Literally speaking, if a person stopped working now, can the person's portfolio sustain his current annual expense forever?
On the other hand, there are 2 ways to calculate the numbers. We use 25X as the example here. Someone may use a different multiple.
For example, annual expense = 60K with the mortgage. The remaining amount of the loan is 300K. Without the mortgage, the annual expense is 45K.
The FI number = 25 X current annual expense = 25 X 60K = 1.5 million
Use 300K to pay off the housing loan. Then, the FI number = 25 X 45K + 300K = 1.425 million
As a first-order approximation, method 1 is good enough. Someone may use method 2 or better refinement when they are a few years from FI.