Wednesday 18 March 2015

"Work Freedom Day"--A New Way to Chase Your Financial Independence "Crossover Point"?

UPDATED (22 March 2015): I have changed the linked calculator a little so that it shows the WFD for both those working from December to January and January to December. I had adjusted the text a little as a result. Enjoy!
There are two ways of being happy: We must either diminish our wants or augment our means--either may do--the result is the same and it is for each man to decide for himself and to do that which happens to be easier.... But if you are wise, you will do both at the same time.
Benjamin Franklin (1706-1790)

Those of you who--clearly not getting enough just from my blog--are also following me on Twitter may have noticed this tweet a little while back:
The idea of "Work Freedom Day"--put forward by Dividend Life--is really rather neat. As the name suggests, it is essentially the day when your dividend income has, of sorts, freed you from needing to work.

For example, let's say that my expenses work out as £30 per day. If in three months I earn £300 in dividend income then I have earned myself 10 days of work freedom.

On the calendar this would move the needle back to 21 December in that year. In other words, in principle this means I could stop working for the last few days of the year.

Of course, it is (like all such things) not perfect for everyone. But as a general motivational tool I think it is excellent. Indeed, I am planning to start to include the new "work freedom day" date into my monthly dividend income and trading activity updates.

I also think that it can be--with a little tweaking--a powerful tool for helping motivate and track your progress towards financial independence and that all important "crossover point". More on this later.

Working out Your "Work Freedom Day"

First, let's ascertain exactly what "Work Freedom Day" is. For working out your work freedom day, Dividend Life included the simple formula:
Day of year = (1 – (Total Projected Income) / (Total Yearly Budget) ) * 365
This gives you a number which corresponds to the day in the year you are "free". This number can then be used with a calendar which numbers the days (such as here) to work out the actual day.

If you don't wish to work it out yourself, you can use the calculator in Dividend Life's original post. However, do bear in mind that it will give you a date from 2014. Not much of an issue, but worth mentioning. [Ed--Dividend Life has highlighted this is not the case. My apologies!]

Alternatively, you can use a spreadsheet to do all the donkey work for you. This is what I did after a little work (keep reading below for a link to the calculator that you can use yourself). As a result, this is what I ended up with from the dividend income I have received thus far this year:

Work Freedom Day
Monthly Expenses£850.00
Dividend Income£73.18
Dec to Jan
29 Dec 2015

As you can see, the (slow) first two months of the year have earned me a modest two days. Not a bad start (but there is plenty more to come).

Work Freedom Day, Goal Setting and Crossover Points

So what about the cryptic "crossover point" I mentioned earlier?

Well, it seems clear to me that it is possible that a modified version of "Work Freedom Day" could be a useful way of setting goals towards financial freedom. As it involves two variables--dividend income and living expenses--it will provide a stronger incentive to not only invest more but also to spend less.

Of course, this in part exists with the idea of the "crossover point": the holy grail for seekers of financial independence (FI). For those not familiar with this, the "crossover" is the point at which your passive income exceeds your expenses. In other words, you no longer need to earn a wage to live.

The idea of the "crossover point" has been around some time. Having been coined by Vicki Robin and Joe Dominguez in their inspirational book Your Money or Your Life (see chapter 8). 

However, perhaps using the "Work Freedom Day" will avoid the rather dry charts and goals (such as, earn half your yearly expenses in dividend income) used to track progress towards this "crossover point".

Tweaking Work Freedom Day

However, "Work Freedom Day" would--I think--need a little tweaking to work properly in this regard.

If we change it slightly so that instead of moving from the end of the year backwards it moves from the start of the year forwards (i.e. the £300 above would push WFD forward to 10 January rather than back to 21 December)  it would, I think, work better in this regard. After all, by doing this you could see your liberating dividend income chasing you in real time.

Again, using my income so far this year this is where my Work Freedom Day sits on the forward and backward running calendar:

Work Freedom Day
Monthly Expenses£850.00
Dividend Income£73.18
Dec to Jan
29 Dec 2015
Jan to Dec
2 Jan 2015

As a result of this, as part of your goal setting for the year you could attempt to push your work freedom day to, say, 25 March, 14 September, 31 December or whatever is the goal you are aiming at!

The benefit of this is also that you can also set yourself memorable dates as targets making it all a little more personal (and perhaps more inspiring!). Your birthday? Your wedding anniversary? The anniversary of your first dividend cheque? Your annual holiday? The first time your cat mastered the "Hokey Cokey"? The options are endless.

So, how would we work out this Work Freedom Day instead? Here is the slightly tweaked formula:
Day of year = 365 – (1 – (Total Projected Income) / (Total Yearly Budget) ) * 365
Again, if you'd prefer not to do the maths yourself. Below I have given a link to work out your WFD whether you want it running forwards from 1 January or backwards from 31 December.

The TD2 Work Freedom Day Calculator

As a little present here is an "interactive" spreadsheet for you to work out your Work Freedom Day.

First, a little note on how to use it.

The numbers in blue are the ones you need to include inputs for. The rest is worked out for you.

However, If you are a reader from the future--such as 2016 and beyond--you will need also to change the year at the top. Again, just change this. The rest sorts out itself!)

Go Chase your Work Freedom Day!

You never know. Maybe one day you will find your crossover point has been reached. As such, then your dividend income will be living in the future. All you have to do then, is join it.

What do you think about the Work Freedom Day Crossover idea? Is there a way it could be improved perhaps?

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  1. Hi TDD, this is a nice idea. I think I prefer to have the dividend "freedom" point starting from Jan 1st, so that I can see it filling up the year. Personally I have just passed my dividend freedom date, so I have a good way to go yet. I'm not especially looking to "retire" early but the theoretical independence would be nice.

    Also like the look of your portfolio, it's pretty similar to my own so will be interesting to see how they do over a period of years.

    1. I agree. I think when it comes to tracking your progress, chasing yourself along the calendar works better than tracking back from the end of the year. Once I get a moment I will do the maths to get it all rigged up so it automatically works it out!

      Do you mean you have only just overtaken your dividend freedom date in real time recently? That is still pretty impressive. As you say, a long way to go, but it sounds as though you have made good progress. My pace will pick up substantially from this month onwards but I will be well behind my crossover! Still, I am overwhelmingly happy with my progress so far.

      I am not looking to retire early either to be honest. But I'd rather be in the position to have that options and--more importantly--be able to feel secure no matter whether in employment or not!

      Interesting we have quite a bit of portfolio overlap. Which ones stand out as different between our two? Anything in particular?

    2. Yes I've run out of dividends for this year, so if I didn't work it would be beans on toast for the remaining 9 months! But if I can double dividends twice in the next decade that will more or less do it.

      As for portfolio differences, there are a few. Barclays for example, missed some dividends and I don't invest in companies that have missed dividends for a full year in the last decade. It's just a rule I have and obviously doesn't say anything about the merits or not of investing in Barclays.

      But other than that there are six stocks overlapping, but quite a few more that I might buy soon or have sold recently (and could buy again if the price drops).


    3. Haha, thank goodness for employment then! I like the occasional beans on toast but not for 9 months!

      How long has it taken you to get to the stage you are at now? Ideally, I would like to get to about 2 months of my expenses by the end of 2016 (about £1600). That is both a challenge but achievable!

      Barclays is by far the least favourite bank in my portfolio despite the size of the holding. It was one of my first purchases and I would not have bought it today (or at least not in its current size).

      At the time I sort of expected Jenkins to sell the investment bank. As a retail-only operation I think it is still very appealing (and more reliable).

      That is quite a nice amount of overlapping.

      Do you sell often? I am unsure whether I am willing to jump in and out with some stocks. I was quite tempted, for instance, to do so with SSE when it was riding high and with the clear headwinds it was to face. However, I decided to sit still and hold.

      I think my temperament is better suited to a simple buy and hold strategy but, rather like my early growth experiments, I am willing to experiment early on to find my natural investing niche!

  2. Hi DD.

    For me, I don't mind it being from the end of year and counting backwards - I just think of it as 'yessss, I can take the rest of the year off!'

    Also, for google users, they can 'file, save a copy' for the spreadsheet


    1. I agree in that regard. It would be a really nice feeling to be able to consider yourself paid off for the rest of the year (especially as even at the start of your journey it will occur sometime around Christmas/New Year!).

      As a motivator by itself from the end of the year may work better. But as a marker of the "crossover point" I think starting from 1 January is better. Depends on what you want it to do I suppose!

      The idea of Dividend Life itself is great no matter what you do with it!

      Maybe the simplest way is merely to work out how many days you have earned. Then depending on whim you can go forwards or backwards!

      Thanks for that. I thought that may be the case, but I was unable to see that option when I viewed it whilst logged off of my own account so I worried I needed to adjust something for it to work!

  3. Hi DD,

    Great post and not only because it mentions my original article! :) You highlighted the important point that decreasing your living expenses is another way of moving the needle in the right direction.

    I think my original calculator shows a date from the current year - at least it shows 2015 dates when I tried it just now. I'm not sure what I'm missing there - could you let me know so I can look into it please?

    I hadn't thought about the crossover point so counting forward may help some people and that's the most important thing. I suppose that the date would be the same (middle day of the year) regardless if you're counting forward or backward.

    However you look at it, it's certainly a more tangible result than "Yay - I achieved 53.4% of my living expenses!". Any idea that motivates people to save and work towards financial independence is a great thing in my opinion, so thank you for expanding on this topic!

    Best wishes,

    1. Thanks! Glad you liked it. Exactly, this is what I like about it. It allows you to make progress from two angles which can only surely increase your speed (you may note I included a new quote at the top to fit in with this!).

      Yes, my apologies. It does seem to show the correct year. I don't know where I got that wrong from. I have duly updated the text above!

      As soon as I read the "Work Freedom Post" of your I immediately thought of the crossover point idea and how useful it would be. Counting forward also has the benefit of--when you reach the crossover point--being able to continue without issue! You just go further into the future and the next year!

      It is certainly more motivational than a flat percentage, I think. It reminds me of the power of the "natural frequency" in data analysis. If you can make it more directly relevant to the individual it is much clearer and (in this case) more motivating!

      I now just have to work it into my goals for the year...

      Thanks again or the fascinating original post. I look forward to being inspired by your next!

  4. Thanks for the great content, and fantastic calculation strategy I've not seen this approach before and spent the past two hours creating various situations to input.