If you want to achieve some sort of financial independence, retire early, or just have some specific lifestyle, you should try to reverse engineer your financial future.

You need a plan.

This, seems obvious, a truth of La Palisse (he said: s’il n’était pas mort, il serait encore envie). But I realize many don’t do it. They’re just sailing in plain sight, no goals, no plan. You don’t need to plan everything, but some paths the outcome is very likely and expected.

It’s not good to realize that you’ve done everything you were told by your parents and society to do and now you’re just living on a paycheck-to-paycheck standard.

You went to college, graduated from a nice university, you’ve entered the job market, have been climbing the ladder for a decade or more, and you don’t seem to be gaining any momentum on your finances.

If you live in a major city in the US or Europe, you’ve been feeling housing costs going up very fast in the last decade. Just being able to live in a major city is a challenge, even if you’re probably doing well when compared to your peers.

You were feeling inflation much higher than the reported 2% of the last decade before it really kicked in. There are many reasons for this, but mainly asset prices, real estate included, were inflated by a decade of low-interest rates, and now, as interest rates rise to control inflation, rents are not slowing down as the alternative of borrowing cash is much more expensive as well. That’s the reason why real estate is not a bad hedge for inflation.

Real Estate prices are not dropping, and you’re stuck between buying or renting because both are expensive.

You’re also realizing that as you’re climbing the ladder, although you’re getting promotions and your salary increases, you don’t really receive much more because you’ve been climbing the tax ladder as well. If you own debt from college or consumption, add it up, and you really feel fu…. lost.

Well, let’s be honest – most of it was expected. So, if you haven’t reverse-engineered your financial future today, it’s a good day to do it.

You can anticipate a great part of your career if you’re climbing a traditional ladder. I personally don’t like to have detailed plans, just some goals and principles, and I like to leave space for randomness, opportunities that may appear. But you need mind and financial openness for welcoming that randomness. That relates to investments, as well as traveling, careers, and life in general. But here we’re talking about reverse-engineering your financial future.

If you want to achieve, let’s say, 5 million USD at today’s prices in ten to twenty years, you can adjust what you’re doing so that is achievable or likely.

Let’s start by thinking of it like a Monte Carlo simulation. https://en.wikipedia.org/wiki/Monte_Carlo_method. In a Monte Carlo simulation, results go as wide as how much is the expected return and the standard deviation of each step, at each measure of time. This post’s image is a Monte Carlo simulation.

So for every career or life path you’re choosing, there is an expected pay and a standard deviation, which are higher or lower, depending on risk. A traditional career will have a much lower standard deviation than an entrepreneur or a day trader (although here, the most likely outcome is 0..).

If you’re choosing a career, you can go to sites like Glassdoor (www.glassdoor.com) and check what the pay is during that career.

If you’re able to move from your state or country, you can also check that different countries have different salaries even for the same positions inside the same companies. Google taxes in each country and compare city living quality and cost of living at numbeo. www.numbeo.com

It is possible to anticipate what you’re going to achieve with a reasonable degree of confidence depending on the path and career. You can be optimistic about how fast you get promoted and how far you’re going to climb the pyramid.

Don’t forget to forecast that this is a pyramid; not everyone can be a partner or CEO of a company, only a small amount, and although it is correlated to your effort, luck plays a decent role here – if you get sick, if you relate well with your superiors, so on…

So even if you’re perspicacious, energetic, ambitious, and smart, there is a chance that you’re stuck in the middle ground.

Once you realize you can guess your future pay, you are able to do some iterations. You don’t need to do a Monte Carlo simulation.

I’ll give you my example.

I started working at a known consulting company. I stayed there a couple of weeks. Why? Well, I realized that the specific work was very boring for me, but mostly because I saw what my future expected. Long hours of work and when I checked what managers were making as salary, I realized that it does not work. That did not fit for me.

The plan was broken from the beginning, even if you’re getting reasonably paid.

Oh, but then you get experienced, and you can have this job or that. Well, the problem is that those salaries will not achieve my goals as well. And on top of that, you’ll work more and more for others… not my goal. Nothing against, just not my personal Ride to Wealth… and never really achieve my financial goals. As soon as you add 50% taxes and social security to a salary of, let’s say, 100 k €, you have a net disposable income of 50k. There is not a lot of room for investing.

So I built a simple xls file, called “until when”.

On that file, I calculated until when I need to work for others.

How?

I just included rows for salary, rows for stocks and real estate investments and simulated how much you need to save each year, invest, and how much the return % impacts your gains, etc.

You quickly realize that you need your first investments as quickly as possible so they can compound.

As Charly Munger says, the first 100 k USD is the hardest. It’s worth mentioning the full sentence:

“The first $100,000 is a bi***, but you gotta do it.” “I don’t care what you have to do – if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000,”

Supposedly he said that in 1994, which equates to 207 k USD today.

Well, after realizing that, I ended up moving to East Timor near Australia for two years, where not only I was living an adventure suited for my personal lifestyle but I was able to get close to those first amounts that make you able to start investing. I was in almost in tax-free country (10%) with most living expenses paid. So I was saving 80- 90 % of what I made and was able to buy my first house. ( Read Buy a House, Don’t Rent it)

I don’t know what works for you and what your East Timor is, but if you start from where you want to go, reverse engineer it,  you will exclude many paths that will not turn into your desired outcome, and you are much more likely to achieve it.

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