Dear Friends,
When we were looking for our family home during late 2020, our realtor tried to convince us to look for homes $300k above the price point we were shopping for because mortgage rates were so low. His logic was that the extra $1,000-$1,500 a month weren’t meaningful in the context of a C-level career.
That would be the case if I were thinking just about the income I was making from my job. But I was already thinking about everything in terms of portfolio income tradeoffs in 2020.
Sheila had already left her job in advertising to focus on raising our children. So the calculation for how we would make this work if we were going to be fully living off income from a portfolio went like this:
- $1,000 a month is $12,000 a year in additional yearly mortgage payments (before corresponding property tax, insurance, and maintenance increases)
- $12,000 a year means another $300,000 I would need to build up in my portfolio if I was going to live off 4% a year in income distributions
- Saving up an $300,000 could mean an additional year of working
We decided not to go for the homes that cost an extra $300k.
Now, we have what we think is a very nice home but Ryan Serhant isn’t about to come knocking on our door to do a video tour. I would call it reasonable luxury, not egregious ostentation.
If you’re trying to become financially independent, you don’t have to be Spartan about everything in life but you do need to be intentional with the big decisions.
The nondiscretionary expenses are what really matter. Housing, cars, education, etc. These fixed costs are the baseline for what your portfolio income needs to cover.
If you’re trying to become financially independent, it’s critical to think about these major expenses in terms of what size portfolio can support the incremental costs and how long it will take you to build that portfolio.
Housing is the biggest fixed cost most families carry. But it’s not the only one that can have a significant impact on portfolio income calculations. Let’s talk about education. Specifically K-12 education.
Like many of you, education is important to us. We specifically picked a school district that had a very strong K-12 public school system. There were two layers of decisions that went into this.
- First, we both went to public schools growing up and we wanted our kids to have a similar experience
- Second, we also knew private school was not something we wanted to have to pay for
We didn’t have kids in 2020, but knew we wanted to end up with at least two (which is exactly where we’ve landed since).
In a good public school system, we could expect to pay somewhere around $5-10k a year in school taxes which would cover K-12 for our children.
If the school system was lacking and we had to go to private school, that could easily end up being $60k+ for two kids.
That $50k-55k difference translates to at least an incremental portfolio of $1.25M assuming a 4% rate of income distributions. This could mean another 3-4 years of work to build up. I love my children and would gladly work any job as long as I needed to in order to support them and make sure they got a good education.
But why do it if I don’t have to? It’s much easier to land in a good public school district in the first place.
This is just how we thought about education for our family. Education is a deeply personal thing and there may be other reasons such as religion, specific values, etc. for why you want to send your children to private school.
Affording private school is one of the most common issues I discuss with mid-career professionals and an important component of how quickly someone can reach financial independence.
These kinds of life vs. portfolio tradeoffs and income planning scenarios are a core part of the Personal Endowment strategy I work on with clients. The income-centric portfolio is just the fuel that supports the intentional life that we design together.
If you’re in the middle of decisions like these and haven’t mapped what they mean for your transition timeline, that’s exactly the conversation I have with clients. I’m happy to run high level numbers with you. Feel free to reach out for a complimentary 30-minute consultation if you’re thinking about these things.
Food for Thought
- Your Money or Your Life by Vicki Robin: The foundational book on understanding the real cost of major life decisions — not in dollars but in the hours of your life required to earn them. Most contemporary thinking on intentional living and financial independence traces back to this.
- How Financial Independence Can Quietly Shrink Your World by Jordan Grumet: Jordan is an MD who achieved financial independence and writes about the philosophical dimensions of this lifestyle on his Substack, The Purpose Code. This is a piece about the perils of focusing too much on trying to reduce costs to reach financial independence rather than being intentional about the life your portfolio is meant to fund.
Thank you for being part of our community – whether you’re a client, a reader, or somewhere in between. If this letter resonated with your own situation, I’d genuinely enjoy hearing about it.
Nathan
Founder & Lead Advisor
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Disclosures: This content is for educational purposes only and is not investment, tax, or legal advice. No post is an endorsement of any particular strategy or security. We do not receive any direct payments or commissions for securities discussed in our posts. The Personal Endowment is a conceptual investment framework customized to each client and does not represent a specific fund or guaranteed outcome. Employees and clients of Kangpan & Co. may hold positions in securities discussed in posts. Speak with a licensed tax, legal, or financial advisor before making any changes to your investments or financial strategies. Past performance is no guarantee of future returns. Investing involves risk including the loss of capital.
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