How I motivated myself on the way to life from capital: the ladder method

How I motivated myself on the way to life from capital: the ladder method

Life on capital (early retirement, financial independence, FIRE) as the idea sounds cool. It can inspire someone to change their life: start saving significant amounts from all income, start monitoring expenses and cut them. I personally know such people.

But someone, on the contrary, can be pushed away and driven into longing. The gap between a 6-month safety cushion and a diversified portfolio of assets for 30 years of expenses is huge. So big that you can immediately put down your hands and abandon the whole idea.

Steps on the way to a bright future

When I first started building capital, financial independence seemed very far away. She was over the horizon, and I just didn’t understand which way to go and how long it might take.

That’s when I invented the “staircase” method (of course, then I found out that it was invented thousands of times before me): I wrote down all my current expenses, highlighted among them the most important ones and sorted them by growth, so that I could begin to gradually cover everyday expenses with the help of my assets. Example:

📱Pay 300 rubles for internet on a smartphone – invest 40,000 in an asset that yields 9% annual dividends. You no longer need to earn money on the Internet on your phone, you always have it with you

🏡 Pay 10,000 rubles for a utility – create an asset of 1,000,000 rubles, from which 12% per annum will drip. Now they are provided with utilities

So, step by step, you will cover your expenses. The moment of closing the basic needs is beautiful – from this day comes a very stable feeling of stability and comfort. I took the percentages here in bold, please do not focus on them – I want to convey the idea.

It is even possible to use “mental accounting” here, when for any new regular expense, an asset that “secures” it is created at the same time, and its yield and volatility are selected based on the regularity of payments and projected inflation. I will leave this as a topic for a separate post.

How good is this scheme

The whole process can be imagined as a set of levels / list of objectives / turn-based strategy game. And you can’t imagine – it’s still more interesting than just growing the number in the account for the sake of abstract retirement in a few dozen years. Excitement appears and the allocation of money to assets is not perceived as some kind of deprivation or oppression.

Both income and expenses are involved
Since we consider costs to close them, it will be an additional reason to stop and think every time we want to raise them. From now on, the introduction of some regular expense into your life will be accompanied by an increase in the bequest amount to cover capital needs.

That doesn’t mean you never need to increase spending again. It will just be possible to do it in a more balanced way.

Encourages diversification at an early stage
When I started using the ladder method, I wanted to tie different categories of my expenses to different asset classes. Of course, you shouldn’t allocate assets for a long time based only on their mental attachment to expense categories, but studying different tools at an early stage can give you a push.

What is wrong with this scheme?

If we really withdraw money, we end up with taxes
To cover recurring expenses, you need some regular cash flow. It can be from the sale of part of the assets, or from dividends/interest. Owning a rental property, we will receive this rent one way or another. But here, for example, in the case of stocks/bonds, it can make sense to use funds that do not pay taxes (plus they fall under the benefits of long-term ownership), and actually do not withdraw money from them as long as you have an active income.

For example, you buy a fund for shares of the Russian Federation for 1,200,000 and tell yourself that you are ready to withdraw 4% per annum from it (4,000 per month). Instead of the monthly sale of fund shares for 4,000 rubles, you grow the body of capital, as if reinvesting these 4,000, and cover expenses with active income. And as soon as there is no active income, you will start withdrawing the required amount.

You can start pulling the body of capital
In the pursuit of cash flow, there can be a bias into high-yielding assets that will actually eat away a percentage of your capital.

If you decide to receive a coupon of 12% per annum from bonds and cover your grocery basket with them, for example, then due to inflation, you will start to lose weight over the years. Here, a terrible situation can be when the inflated cash flow at the moment exceeds the expenses: a person thinks that he is ready to live on capital, quits an active business and, without noticing it, begins to deteriorate his lifestyle.

Yes, calculating the moment of retirement is not an easy matter. But in any case, you should not forget to consider how much the body of your asset grows with inflation / what percentage of the withdrawal will be reinvested so that the asset does not sink.

Diversification is wrong
The ratio of asset classes should primarily be determined by your life goals, not by expenses. If we proceed only from costs, then a not very economically justifiable bias may result. So, at first, of course, this is permissible, but with time and the growth of the portfolio, this point should be taken into account and thought through.

how did i do

As I said earlier, I prescribed expenses for myself and began to systematically cover them with various investment instruments.

When the portfolio began to grow larger and include housing, a minimum set of food, communication and consumables, he prescribed target percentages for each class of assets and began to rebalance the portfolio primarily for them, as well as for tax optimization where possible.

Currently, there are some instruments in the portfolio that give a high percentage yield, but do not fully catch up with inflation, I let them go for expenses. Some of the assets do not create flow – let them continue to grow until the next rebalancing, when their share in the portfolio will be greater than that of the “cash cows”, and the advantage will turn into assets that give a regular flow. And if the balance does not converge, then, as a rule, the same units of funds with LDV are sold.

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