Category: Enjoying Life

Financial Status Update – Dec 2022

Wow, another year in the books! I started a new job with a new company, we road-tripped to the Black Hills, Yellowstone, and Grand Tetons driving over 5,000 miles round trip, our youngest turned 1, we visited family all over the state, made progress on our home remodels, and on and on.

All the while the market continued dropping [slowly but surely] over the course of 2022. Thankfully the economic floor didn’t drop out, but… average mortgage rates went from sub-3% to over 7% and, while the official inflation peaked at 9.1%, many basic necessities (groceries, energy, travel, etc) saw price increases of double digits:

Source: https://www.cnbc.com/2022/12/29/why-egg-prices-have-been-rising.html

But even through all that, our family is very, very blessed. And, using the extra $$$’s from the large pay bump moving companies, we continued saving and investing.

Investors should be “fearful when others are greedy, and greedy when others are fearful”

Warren Buffett, Berkshire Hathaway “Chairman’s Letter, 1986“

We maxed out two employer-sponsored retirement accounts (401k and 457b). We maxed out a Health Savings Account (HSA). We maxed out two IRA’s. We contributed to our kids’ 529 college savings plan. That’s over $55k saved and invested! BUT our Net Worth barely grew though year-over-year (~15k). Most would be frustrated and give up. But we see it as a buying opportunity. As long as we keep earning money and keep investing money, you want the downturns WHILE employed instead of early in retirement (sequence of returns risk).

So, what is our Net Worth at the end of 2022 AFTER saving and investing all this money? Drumroll, please…

Year-over-year, our Net Worth increased by $30k, which sounds decent until you see the chart below. We only adjust the value of our home once a year, at the end of December. The real estate market has been crazy this year, but we also have been making improvements to the house, so we increased the value by a conservative $19k. After all the contributions and investing in our retirement accounts, we are ONLY +$11k for the year. But remember, we’re continuing to buy even when the market is down, knowing we’re investing in living and breathing companies that continue to turn a profit, whose value (and the overall value of the US economy) will almost certainly continue rising, whether fueled by real economic growth, inflation through poor monetary policy and willy-nilly spending, or most likely a combination of both.

So, what are our plans for 2023, learning what we can from 2022’s mistakes, knowing where we want to go, and the likely continued side-ways economic picture?

Control the miscellaneous spending. We easily spend $500-$1,500/mo extra – for nice-to-have and just-in-case things, for hobbies, for whatever. It’s not wrong, but it’s eating into what we really want in the next 3-5 years. And that’s 75%+ of financial independence and maximized time with the kids as they grow so fast.

Declutter and deliberate spending on what is most valuable to us, knowing time with family is in the top 3. Lifestyle creep is real, and we certainly delayed gratification for many years. We need to find a happy medium.

Diversify our investments, including semi-passive income through Real Estate rentals.

Excel at our jobs to continue providing seed money for our investments.

FIRE Options: Financial Independence Retire Early

FIRE, or Financial Independence Retire Early, is for those who don’t believe they will be employable for a full 45+ years or they won’t want to be. And to be honest, the most important part is the “FI”. Financial Independence is empowering, no matter what age, lifestyle, or income. JL Collins describes it as “F*!# You” money on his blog. And you don’t even have to be full FI to see the benefits. Your ability to say yes or no won’t come from a position of fear of losing your job or missing the next promotion, but one of “I don’t need you like all your other employees do”. And in a twist of fate, that will likely give you more options than them.

I won’t belabor the “How” as many have already covered this topic. Search “Trinity Study” and “3.5 to 4% Safe Withdrawal Rate” for more. Let’s focus on the “What” and “Why”.

None of these terms or definitions are my own, merely boiling down some of the FIRE acronyms for simple understanding…

FIRE

FI or Financial Independence: Have enough money invested where your passive income (no work other than occasionally re-balancing or meeting with advisors/agents) can completely cover your current and future lifestyle. Often earned through giving your all at a 40-60-80+ hr/week job for 10-15 years until you completely reach your financial goals, then working, or not, on your own terms. For many, this is $40-60k/yr of indefinite income from $1-1.5 million in investments.

Note: Owning rental property can lead to FI, but for many landlords, it’s a very active endeavor managing tenants and repairing/maintaining the property. So although you have the money/income, you technically aren’t FI because if you stop working, so will your income. Transferring the operation of your business, rental homes or otherwise, to managers and becoming an absentee owner may be all that is required, given you have enough business income to offset their fees and still afford your lifestyle.

RE or Retire Early: I mentioned earlier that Financial Independence is the most important goal. If you want, you can keep working, or find another gig with less hours or more meaningful work, or you can quit working altogether. The choice is yours. But don’t excuse not saving and investing because you cannot see yourself quit working before 65 years old.

PROS:

  • Enjoy full retirement and FI earlier than any almost anyone else and for 50+ years
  • Once you’re done working, you are done! No more levels of bosses, pointless meetings, endless policies and procedures, poor health and wellness, etc

CONS:

  • 10-15 years of work that will almost certainly burn you out
  • You may have to move from the HCoL area when you have earned FIRE, away from your existing social circles and old haunts
  • You missed out on enjoying your 20’s and some of your 30’s

Lean FIRE

You will be eating lean and living simple with Lean Fire. For many, this is about ~$750k of investable assets generating $30k or so per year. The dollar amount varies, but most in this camp expect to need between $2k to $3k/mo to maintain a low cost of living indefinitely.

PROS:

  • Reach FIRE earlier, because you have to save less
  • Enjoy your 30’s, and maybe even some of your 20’s
  • You’re going to move to a low cost of living area, maybe even internationally, so why would you slave away for more years than absolutely required?

CONS:

  • Stuck with a lower middle class income for the rest of your life, regardless of future goals or surprise medical expenses
  • No fudge factor
  • Have to re-enter the workforce when you are much older and your skills are rusty if you eventually want a better lifestyle (see Barista FIRE)

Fat FIRE

You’ll have enough to live fairly well in a high cost of living area (HCoL) like New York City or SoCal, or live like royalty in a low cost of living area (LCoL). Many need $100k/yr and $2.5 million invested at a minimum to live like this indefinitely.

PROS:

  • You will live like a king or queen enjoying a luxury vacation all day everyday, as long as it isn’t ridiculous
  • Your social circle, family, and favorite places are all in expensive areas
  • Leave a large inheritance to your adult children and even grandchildren

CONS:

  • Your working career will likely span 15-20+ years in a high-stress, but high-paying job
  • What if you only want to live with excess for a few years, then you delight in simpler things? You would have worked for 5-10 years longer than you needed to, maybe even missing out on your 40’s.

Barista FIRE

Similar to Lean FIRE, where you NEED to draw from your investments when you leave full-time work, but also MUST immediately pick up a part-time, lower-paying job or gig for additional income to offset a better lifestyle and perhaps provide some benefits/discounts. You could have reached Lean FIRE with your investments and the additional income takes you to full FIRE, or require the additional job to reach even Lean FIRE.

PROS:

  • Reach almost-FIRE fairly quickly, as you might only need $500k saved and invested
  • Barista-type jobs can be in pleasant places all over the world, where you might want to retire and plug into a local community anyways

CONS:

  • The grass isn’t always greener: You’re probably glorifying a low-paying job from the cubicle or corner office of your high-paying job. Similar-enough boss, a schedule to follow, lower pay and you are burning your hands in hot water while washing dishes and dealing with impossible customers.
  • What if you don’t want to work anymore, or can’t, or have surprise medical bills with no insurance?

Coast FIRE

With Barista FIRE, you’re “retired” but you MUST work?! With Coast Fire, cut back how much you save while keeping the same or similar job, or something completely different that still pays the bills. But you don’t have to save anymore nor will you withdraw from your investments until much later in life. You’re working to pay for your current lifestyle, letting your nest egg compound in the background. At Coast FIRE, you’ve saved enough in your nest egg, if left to compound until you reach your desired retirement age, you will have enough money to fully retire without contributing a single cent more (if your calculations are correct). And you’ll have a better lifestyle for the second half of your working career since you are saving less, or nothing, for retirement once you reach your Coast FIRE number.

PROS:

  • Better lifestyle in your 30’s, if you saved up enough in your 20’s to start coasting
  • Many people prefer to stay employed, but in a less stressful and/or only 40 hours per week job (or less). Provides health insurance, travel perks, sense of purpose, decent lifestyle, etc.

CONS:

  • Be cautious of completely stopping all saving for retirement before reaching FIRE. Continue to contribute up to your employer match or maxing an IRA each year, at a minimum. When your coasting period is 15-20 years or less, there is a statistical 10-30% chance the 7-8% returns after inflation may not happen. The safer bet: decrease your savings rate from 50%+ down to 15%, so you can still inflate your lifestyle considerably while also building a safety net.

The advantage of Coast FI is access to more money, time, and a better Quality of Life at an earlier age. The tradeoff of Coast FI is a smaller retirement nest egg or retirement at a later age.

Flamingo FIRE

We recently discovered this term by an Aussie blog based on the same name, and we really like it. In fact, it is a really good way to view our own plan! In a nutshell, use your after-inflation return and calculate how many years for your portfolio to double. If it’s the historical stock market return of 7%, then your portfolio will likely double in 10 years. When your investment portfolio is 50% of your FIRE number, Coast FIRE for that many more years while your portfolio doubles in the background. And then do whatever you want! Like Coast FIRE, Flamingo FIRE lets you sample semi-retirement, easier work, or however you want to cover your current living expenses. Since many don’t/can’t quit all work cold turkey, and will likely get bored and pick up a income-producing hobby at some point, it’s a good way to step down your work.

PROS:

  • See Coast FIRE pros, but likely fewer years of working/Coasting

CONS:

  • Not many, but see the Coast FIRE cons

MISC

  • BalloonFI – Inflate your lifestyle (balloon) to match your safe withdrawal rate
  • LifestyleFI – Adjust your lifestyle to your net worth

Our Plan

Short Story: A mix between FIRE, Coast FIRE, Flamingo FIRE, and Fat FIRE.

Long Story: Between the Great Recession and taking a long time to discover a career then building skills and experience to earn >$40k/yr, earning a college degree while working 2 jobs and 70+ hours per week, plus several children who will graduate high school before we could reach full FI… We have decided to pursue FIRE as best as we can, then probably a Coasting Fat FIRE depending on how things go. For us, the current goal is saving $50k/yr and investing it mostly in a Total Stock Market index fund.

Because no one knows the future or what the job market will be in 15, 10, or even 5 years, we want to reach Lean FIRE and then full FIRE as soon as possible (~40-43 yrs old). But we also want to travel and spend time with our kids before they leave the house; so we are doing those things on a budget focusing on experiences rather than luxury vacations. Think road trips and staying with family near natural beauty.

Once we reach FIRE, likely after our oldest two kids leave the house, we will work fewer hours (just 40 hrs a week sound nice) and either continue to save 50% of our income to reach true Fat FIRE by age 50 or drop our savings rate to 10-20% and increase our travel budget. …and retire when we want to. Either way, our goal is to enjoy FI with our older teen/young adult children, and hopefully eventual grandchildren.

Congo Dandies vs American Consumers

I recently watched a RT Documentary titled, “The Congo Dandies: Living in poverty and spending a fortune to look like a million dollars” on YouTube (link).  According to RT, “Congolese soldiers returning from France after WW2 brought back the latest Parisian fashions and took to dressing like Dandies”.

congo_dandies_1

Source: YouTube

Today, “Les Sapeurs”, as those in the La Sape movement call themselves, allocate more time than their wives getting dressed, spend relative fortunes on imported clothes, and show off their well-dressed frames along muddy, trash-filled streets.  One of the men interviewed mentions that he spent two years of savings to buy a pair of dress shoes.  From watching this documentary, two main things stood out to me, along with their correlation to Americans.

First, these well-dressed men spend their productive time and life savings on their own personal appearance.  Instead of spending it on their wife, children, and home, or improving their earning potential, they buy high-end name brand dress shoes, suits, and glittery watches.  One man even admitted that normally he would “have bought a plot of land” if he hadn’t spent the money on his pair of shoes.  While most Americans have basic utilities and don’t live in such an environment, the same financially self-destructive tendencies still exist.  We know we should be saving for a rainy day and adding money to our retirements accounts.  And yet we don’t.  And even when we do save money, it is an afterthought and only a pittance of what we should be saving.  Instead, we max out our credits cards, buy newer cars with $20k+ loans, max out home mortgages; or some combination there-of.  Are we really that different from these flashy poor?

congo_dandies_2

Source: YouTube

The second main takeaway is how these men are regarded by their peers and community.  They aren’t viewed as crazy or berated by their wife for their spendthrift ways.  Rather, they are viewed as celebrities when they walk around town.  One vendor in the market hailed a passing Les Sapeur as the “pride of our area”.  Even his own wife views herself as lucky to have such a showy man, when he could have had any girl.  While this seems ridiculous, is America or any country really that different?  We praise the person driving a luxury car, even if if they are loaded with debt and are living paycheck to paycheck.  Income, but especially spending, are our barometers of success.  Not net worth or savings.

While a longer video at 26 minutes, even watching the first 5-10 minutes should make you blush as you think about some of your own spending habits and initial opinion of someone based on their looks.

 

Copyright – PrudentCoin.com

How to Learn Financial Maturity

Financial Maturity, similar to all genre’s of maturity, can be difficult to gain and requires learning from mistakes we would rather forget.  I distinctly remember times in my life when I made poor financial decisions (such as rushed purchases I later regretted or not postponing a luxury until I could really afford it) and later wished I hadn’t.  While not a minimalist by any stretch, all around me are things that I wished I didn’t have or things I wished I had waited to purchase.  And it’s not that they aren’t useful or cool, or that I wouldn’t purchase them someday.  Rather, I am at a point where I would rather have my total investment balance in my Personal Capital app be $10,000 higher than have all these items.  And, given the bull market we have seen since 2010, I could have easily doubled my money if I had just invested in a S&P 500 index fund!

Yahoo Finance S&P 500 5 year stock history 2011-2016
Source: Yahoo! Finance

This has made me incredibly passionate about delaying purchases.  Once upon a time, eBay was difficult for me and I just had to stop visiting.  It was easy to find “deals” that were a good value, but not something I truly needed.  Amazon has been my most recent temptation since it is so easy to add anything you could ever want to your Cart, and then see it over and over again.  You keep thinking about how nice it would be to have that one item, or maybe two of them.  You reach the $50 Free Shipping minimum and BOOM! you get it.  You receive the box in a week or less (I don’t have Prime, but my brother does, which is a whole other temptation!) and you have your shiny new items.  The new stuff gets put into circulation, you use it every once in a while, but it just adds to everything else lying around in the home.  And, the temptation for something new starts creeping again.  It’s a vicious cycle that I am working on personally.

Lest you think this is only a post about buying things you don’t need…

Where I am most tough on myself and my past mistakes, though, is not saving as much as I should have.  In your teens and early 20’s, a young adult is in an AWESOME position to save money since you have almost no expenses.  You live with your parents or in a cheap apartment, you share meals, don’t have expensive tastes, etc.  There is very little reason someone working full-time can’t have $10,000 or more saved in less than 5 years, even if they started at 16 years old.  If you attend college, the money you make from internships and part-time gigs should be able to cover a large part of the cost, allowing you to supercharge your saving at your first post-graduation job.  This is all predicated on the smart idea that you go to college for something that pays well.  Which you did, right?  Please tell me that at least you didn’t go to an expensive college for that low-paying career choice?!

As they say, “Hindsight is 20/20”.  We can’t change what choices we made or actions we did.  What we can do is accept personal responsibility, learn from past mistakes or poor choices, and make right decisions going forward.  I challenge myself and you to limit spending to only that which is necessary to live life and truly enjoy your family, and save as much as possible for the rainy day and eventual portfolio that will give you freedom.

Why Do I Need To Save?

This is really the most important question.  And the answer is likely going to be as individual as the person, with common themes visible in most.  We only live life once, and more and more people are wanting to live their life to the fullest at every age instead of just in their 70’s.  While not quite YOLO (You Only Live Once), there is a temptation to put off saving for just a little bit longer.  Before you know it, you are in your 30’s or 40’s with less than $10,000 to your name.  You had a great time, but are behind the eight ball.  Others who may travel, explore, or “live” less fall into the same trap by putting off savings as normal expenses come up.  The number of those 50 years and older who don’t even have $100,000 saved/invested is staggering.  Most retirement calculators will say you need over $1 million saved as you exit your career.  Additionally, the pressure to help with children’s college, wedding, or first house can push back any hope for retirement even further.

If we don’t know what we are saving for, then we won’t be consistent in saving.  Or, maybe we will realize we don’t need to save anything at all (doubtful).  So, why might we want to save?

Common Reasons to Save

  • Rainy Day or Emergency Fund
  • House Down-Payment
  • College
  • Wedding
  • Upgraded Vehicle
  • Generating Passive Income

 

Making the Reasons Personal

What are your goals?

Housing

Would you like to own a home, or even have the possibility if the need/desire arises?  Per the US Census, the 2010 Median Home Price in the United States was $221,800 (Source: http://www.census.gov/const/uspriceann.pdf).  A 20% down payment would require $44,360 saved, with an additional $5-15,000 for the fees, costs, and escrows required when purchasing a home.  While you could buy a house with less than 20%, the extra mortgage interest and PMI makes it less than ideal.  And the more you save and put towards your mortgage early, the less you pay in total interest.  It is not unheard of, even in the current low interest rate market, to pay close to the value of the mortgage just in interest.  So, for a $200,000 house, you will end up spending more than $300,000 between principal and interest.

Or maybe you want to continue to rent to have flexibility or less responsibility with maintenance (as of 2016, this is why I rent).  Rent prices can go up or down, and are not something you can control.  Nor is the availability or consistency of jobs that pay what you expect.  The Great Recession taught us that.  Let’s say your rent for a decent place is $1,000/mo (high in some places, but definitely lower than many).  You would need $6,000 to $12,000 to $24,000 saved just in case you were unemployed or underemployed for months to years.  Could you raise your hand in the affirmative if asked about having that much saved for a rainy day/poor economy?

Vehicle

Auto loans are expensive, but handy.  They get you a decent car, even when you don’t have 100% saved up.  First, let us define a decent car.  Something under $10,000 (and even as low as $1,000) will provide you with a safe, decent, reliable vehicle to get to your job or chauffeur the kids around in.  My wife and I purchased a 12 year old minivan for $1,500 that has worked decently reliably for us.  All repairs and maintenance the van has needed over the past 4 years has cost us less than another $1,500 easy.  Spending a little more on the front end will get you a nicer, even more reliable vehicle, like when we purchased my daily commuter.  It is a clean, low mileage, 7 year old sedan with a four cylinder engine that runs like a dream.  There is no need to spend more than $10,000 on a vehicle, let alone $30-60,000, when you haven’t saved at least a couple hundred grand for retirement and a rainy day.  And the more cash you put up front, the less the vehicle (a liability you are wearing out) will cost you.

Travel, Fun, or Hobbies

Putting a vacation on an already maxed out credit card is no fun, and makes zero sense.  Every time you charge something, you are mentally doing the math to make sure you have the room.  Instead, save the money, budget a trip, and then enjoy it!  You know what you can afford, and the trip won’t be as expensive due to interest saved.

 

The MOST Important Reason

FREEDOM and CHOICES!  How many enjoy a Sunday evening when you fantasize about not going in to work on Monday, only to realize you wouldn’t make next month’s mortgage or rent payment, the car payment, or the credit card payment if you lost this job?  I have been there and it is not a good feeling.  While most may not quit their jobs once they have a rainy day fund, just having that stress gone is worth its weight in gold.  And beyond that, savings and investments can and do create opportunities for you and your family to enjoy life, help others, and be more secure.  “The rich rules over the poor, And the borrower is servant to the lender.” (Proverbs 22:7)