Friday, August 1, 2008

Financial Independence Progress (FIP) Graph

Here's the second installment of my new favorite way to evaluate my financial situation - the Financial Independence Progress Graph. This is a simple but elegant graph that actually provides quite a bit of information, but directly and indirectly. The blue line tracks my income month-to-month, the red line tracks my monthly living expenses (all spending minus savings and investments), and the green line tracks my investment income. The key is to try to maximize blue, minimize red, and increase green until it crosses or surpasses red - this is the point at which financial independence (FI) is achieved.

As you can see things are at least trending in the right direction after a horrid June, expense-wise. I picked up a little bit of extra income in referral bonuses and brought spending back down, although not nearly as low as I'd like. Although it's barely noticeable here, that green line is beginning to rise as well coming off a tiny gain in my IRA.

The real key to increasing the green is to maximize my monthly savings and investments. The key to doing that is to maximize the area between the blue and red lines. It's a simple formula: income - expenses = cash flow. That cash has to be used as investment capital in order to have any hope of accelerating my journey toward FI. As you can see from the graph I had a couple great months in this regard, which helped me get my assets to where they are now, and a few so-so and bad months that have brought my efforts to a crawl. I need to work much harder than I have been on this.

It's a long road to be sure, and a tough one, but by starting early and focusing now it will make it easier as the power of compounding works for me.

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