Thursday, March 29, 2007

Welcome to Financial Freedom at 40!

What would be a fitting introduction to this blog which would track our journey to our destination?

We are a family of 4 with young children -- a family which could be considered middle-class -- with an aspiration of achieving financial freedom when we both reach age 40. That would be about 6-7 years from now. Yes, 6-7 years! We define financial freedom as the time when our unearned income covers our monthly expenses, so we are able to no longer work for corporations or other people and have our time for ourselves to spend for each other, with our children, with our extended families, and with our friends. When that time comes, we will be able to pursue our own interest with freedom.

In the U.S. tax code, there is a notion about earned income, that is income that is received as compensation of one's labor (mostly for somebody else or some other business entity). The earned income is taxed at the rate which generally surpasses the tax rate on other type of income: investment income and business income. Tax Foundation tracks on its website the income tax burden on individuals by calculating the date on which we moved on from "working to earn taxes for governments" to "working for our own income". Never has this date been less than April 18 in the last 24 years! Furthermore, the governments will tax our already-severely-taxed income when we spend (sales tax), we save (interest income tax), we invest (capital gain tax), we give (give tax), and when we die (estate tax). Robert Kiyosaki, the author of Rich Dad Poor Dad books, mentions that our earned income will be taxed at 50% in total! So, why don't we focus on unearned income, which at the end would be more tax efficient?

We will start with Net Worth; However, this measure is becoming obsolete, as we want to focus on measures which are related to income-producing assets. Assets which work for us. The goal is to have our money work harder for us, rather than having ourselves work hard for the money.

Today, our Net Worth is about $300,000. Most of our investment is in the Retirement, Insurance, and Education accounts -- all tax-advantaged accounts. We own our home with outstanding primary and secondary mortgages. We fully own our cars which we purchased by cash. We always pay our credit card balance in full every month and carry no outstanding month-to-month balance, thus paying no finance charge to the banks.

More of this introduction to come....