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  • Nate Carter

Case Study 1: Achieving Financial Independence

The path to financial freedom combines managing personal finances with strategic thinking on how to spend your time. It is about creating income from more flexible activities you enjoy, thus eliminating the need for a traditional day job, while also managing expenses to keep your annual income needs lower. The research shows you are more likely to be successful in achieving your goals if you take the time to create a clearly defined plan.

The example of Enoch and Alicia below helps explain this process. This case study shows the specific steps needed to achieve financial independence and what daily life is like when you reach this goal.

The Plan: Enoch and Alicia decided together at the age of 25 that they wanted to reach financial independence by age 45. This gave them 20 years to implement this plan. Their 20-year plan was also long enough to recover from stock market corrections and career setbacks. Their plan focused on five key pillars for achieving financial independence:

* Living below their means;

* Saving as much as they could each year and investing it to create passive


* Creatively cutting major monthly expenses like housing and


* Increasing their income from side hustles and from learning new skills;

* Learning enough about taxes to make wise savings and investment


Life During 20 Years of Working:

Rental Properties: Instead of buying a single family home, Enoch and Alicia bought a triplex building. They lived in one unit and rented out the other two apartments. The income from the other two units allowed them to bring their housing expenses down to zero while earning a small profit each month. They soon realized they could increase their rental profits by listing their properties on Airbnb as nightly rentals. They used the higher profits to make extra mortgage payments and to save for a down payment to buy another triplex. They rented out all three units in the second triplex, hiring a friend to help them manage the nightly rentals.

A few years later their city imposed new taxes on nightly rentals which made them less profitable. Enoch and Alicia decided to switch back to renting their units on a monthly basis. This is a great lesson in knowing when to change your investing strategy to take advantage of opportunities (Airbnb) or respond to challenges (new taxes). If their second triplex was only profitable as a nightly rental they would have been in trouble. Fortunately, they ran the numbers before they bought, and knew the triplex would be profitable as monthly rental or a nightly rental. It pays to know this information before you buy. As they paid down the mortgages, their rental properties allowed them to live for free while also earning a profit on the five rental units.

Retirement Plans: When Enoch and Alicia worked full time they maxed out their contributions to their employers' 401(k) plans. They also maxed out their contributions in their Roth IRAs. Their accounts were all invested in a broad index of stocks like the S&P 500. Once they quit full time work they reallocated their portfolios to be 60% in stocks and 40% in a bond index fund. When they reach the age of 59.5 they will withdraw 4% from their portfolios each year. This will provide them each with another income stream in retirement.

Jobs: Enoch's day job was in public relations. He enjoyed the social interactions and applying his creativity, while earning a good salary. When his previous employer was bought out, he was laid off and had to restart at a new firm. He found another job right away, but it took him nearly two years to get back to his previous salary. After many years he decided he no longer liked sitting in an office or being in front of a computer everyday. He made the decision that when he turned 45 he would scale back the amount of time he worked in an office.

Side Hustle: Separately, Enoch is an enthusiast of older BMW motorcycles which he has learned to repair. He and Alicia created a simple repair shop in their garage. Alicia is also good with tools and enjoys working on the bikes. They occasionally buy rundown motorcycles and fix them up to sell at a profit. This has become a viable small business and they are able to take a tax write off on the cost of tools and part of their garage space. They both enjoy these projects which provide additional monthly income, and do not feel like work. They spend the profits to pay down their mortgages or to increase their savings. While working full time they never lived on any of the money they earned from the motorcycle business.

Job: Alicia works in sales and has consistently performed well. Her base salary is not particularly high but her commissions and bonuses allow her to earn a very good income. She was out of work for a year during the 2008 recession, but quickly filled her time and the income gap by fixing a few more motorcycles and working at a friend's tax preparation office. When she lost her job she did not wait around for a new sales job to emerge. She immediately found ways to generate more income so she did not have to draw down her savings.

Side Hustle: While working at her friend's tax office, Alicia realized she has a talent for completing taxes quickly and finds it enjoyable. Alicia now works part-time at her friend's business each tax season helping clients with their tax returns. She uses what she has learned to save on her own taxes and to make tax efficient investment decisions. Outside of the tax season, Alicia became a volunteer math tutor for kids. She enjoys giving back to her community but also had many requests from parents who wanted to pay her to tutor their kids. She enjoys tutoring kids and it has become another side hustle for her. She is becoming burned out with sales after so many years and when she turned 45 she quit her sales job.

Life After Reaching Financial Independence

Spending: Enoch and Alicia have now both quit their full-time jobs. They paid off the mortgage on their first triplex. They refinanced their mortgage over 15 years on their second triplex, which significantly lowered their monthly payments. Their real estate expenses include property taxes, insurance, and money set aside for repairs, vacancies, and capital expenditures. They bought a four year old pickup truck with cash. They take a tax write off on the mileage when they use the truck in the motorcycle business or in fixing their properties. They stay fit and lower expenses by mostly biking and or walking in the city instead of driving. They limit eating out, cook food at home and have cut out unnecessary expenses over the years. But, they like to splurge on seeing live music whenever possible and they take a couple of trips every year. Their annual expenses are $48,000 and they expect that to increase 3% each year with inflation.

Jobs/Income Now: Enoch does periodic part-time work with his former employer. He prefers to work for a few weeks at a time on a couple projects a year. This allows him to reconnect with old work contacts and also gives him large blocks of time when he is not working to travel. He and Alicia work in the motorcycle business as often as they want but keep it to a modest amount to increase their free time. Enoch is taking classes to get his real estate license and is learning about construction and home repair. He is looking at potentially selling real estate and to buy and renovate a property to sell at a profit.

Now that Alicia is no longer working full time in sales she has much more free time. She volunteers as a math tutor and is also paid to tutor. She became interested in Brazilian jujitsu and has a goal of earning a black belt. She teaches introductory jujitsu classes a few hours a week and she recruited some of the students she met while tutoring them in math. Each tax season she still works for her friend's business and uses this income to pay for travel.

They have both saved over the years in a traditional brokerage account. The $100,000 portfolio is a blend of 60% stocks and 40% bonds. They can withdraw 4% or $4,000 per year. They also have $48,000 in a savings account as an emergency fund, which is equal to their annual living expenses.

Joint Income: Annual

Public Relations Consulting $12,000

Motorcycle business $15,000

Math tutoring $ 5,000

Teaching jujitsu $ 1,000

Tax preparation work $ 6,000

Traditional brokerage account 4% withdrawal $ 4,000

Rental income profit after expenses $30,000

Pre-Tax Annual Income $73,000

Federal and State Taxes (effective rate nearly 22%) -$16,000

After Tax Total Income $57,000

Annual Expenses -$48,000

Annual Savings (Roth IRAs and future health care) $ 9,000

If Alicia and Enoch need additional money they can work more hours in their motorcycle business or in one of their part-time jobs or side hustles. They think buying and renovating a home every two years, while they live in it, would be a great way to create extra income. It would also allow them to rent out their sixth apartment in the triplex. Even though they have achieved financial freedom they are still looking for creative ways to generate new income streams.

Once they reach the age of 59.5 they will begin their 4% withdrawals from their retirement accounts. This annual income will fully replace their part-time work and side hustles, although they may continue these activities to save more, splurge on travel, and to keep their minds active. They expect their health care costs to rise as they get older and will put some of this money into a health savings account.

They have decided to apply for their Social Security Retirement Benefits at age 70 which will allow them to maximize their monthly benefits. Their Social Security monthly benefits will be an extra income stream to help pay for any health care costs or new expenses that emerge. Enoch and Alicia had a plan that they stuck with for 20 years. It opened the door for them to have financial independence at age 45 and to avoid many of life's stresses about money. They also have created multiple ways to increase their income if necessary and are still thinking up clever new ways to produce new income streams.


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