Month: July 2021

31Jul

Slippery Slope Spending & the $200 Haircut

Buidling wealth on the road to financial independence can be hard. One of the keys to success is to manage your expenses and avoid wasting money on things that don’t really add value to your life so you can invest as much of your cash as possible to build for the future. 

Let me tell you about how I used to get $200 haircuts… 

No, I didn’t actually go to some upscale salon and pay $200 for a haircut. However, what was INTENDED to be a quick run out for an average priced haircut regularly turned into a much more pricey affair. Let me tell you how. 

Roughly once every 4 weeks, my son (age 13) and I need haircuts. There is a chain salon about 10 minutes from our house. You know the cool place where you can watch sports while you get your hair cut, and they even have hot towel treatments and massages while you are there! Of course, none of this is free, and if we both got a haircut and the towel treatment, we were looking at $60 total, including tip. It felt like a bit more than what we should pay for haircuts, but it was so much fun! 

Well the fun didn’t end there. My wife and daughter would usually come with us. Conveniently, just a few doors down from the haircutting place there is a nail salon, and often my wife would get her nails done to pass time while we were getting haircuts. Again, this is an enjoyable experience, but not cheap and she would usually spend about $50 including tip. 

Running tab so far.. $110. 

Now the haircutting place and nail salon are in one of those typical suburban plazas. Starbucks, Moe’s, and ice cream shop, Jersey Mikes, an upscale liquor store, yoga studio and two sit down restaurants (among other places) conveniently located mere feet away from where we got our hair cut. Since we would usually go out for haircuts on a weekday evening, it would be 7:00 PM by the time we were done and we would be hungry with no dinner plan. Naturally, it was very easy to go the convenient route and walk across the parking lot to eat at one of the fun/hip restaurants in the plaza. Three adult entrees, a kids meal, milk, apple juice and a couple of beers later and our bill would be in the $60-80 range, including tip.  

Running tab for the evening $190. 

Just like that, in about an hour and a half, we went from getting haircuts to spending 20% of a GRAND! How did this happen? What led to this snowball of unplanned and unnecessary spending? 

The Slippery Slope of Spending 

We had hit the slippery slope of spending. What started out as quick errand out had morphed into a large purchase. And our story isn’t some crazy outlier. Lots of people (and maybe most typical American consumers) have evenings like this all the time and think nothing of it. I know this because in this particular plaza, its actually hard to get a parking spot and the restaurants regularly have 1 hour waits, on a WEEK NIGHT! 

WARNING, WARNING, WARNING – This is the type of spending that over time will completely derail a journey to achieving financial independence! Sure it seems small, but over time, these types of purchases add up and the opportunity costs actually compounds. 

So what can you do to avoid the slippery slope of spending? Here are some things that have helped us. 

See The Problem 

You won’t realize you have an issue with slippery slope spending unless you actually LOOK and THINK ABOUT what you spend. This requires a few actions on your part: 

  • Track your spending! If you can’t see where your money is going, you may not realize you have a problem. Don’t worry, there is a really useful tool out there that can help. I have been using Personal Capital to track my spending and net worth, and it makes analyzing your spending trends REALLY EASY. 
  • Review your spending trends consistently! You may track things for a while and think you are doing fine. However, these trends can change slowly over time and bad habits can creep in without you even realizing it! 

Plan Your Spending 

Slippery slope spending is unplanned. We had the intention of just going and getting haircuts and then going right home, but we added on more spending because we saw them and they were “convenient.” That is how advertising works. In fact, the plaza was probably DESIGNED in a way to maximize people’s spending by packaging everything they might need for a “regular night out” with very minimal effort. If we had a firm plan in our minds, we would have stuck to the singled errand and saved $120. 

Also, please do not underestimate the “hunger factor” especially if you have kids. If you choose to run to the store on an empty stomach, or during the time dinner normally takes place without a plan, it’s very likely that you will end out eating from a restaurant unplanned.  

  • Plan shopping trips and errands for times that are between meals 
  • Bring snacks if you will know you will be hungry 
  • Eat before going out 

Batch Shopping Trips 

Reduce the opportunity for slippery slope spending by batching your errands into larger, less frequent chunks (maybe weekly) instead of more regular (or daily) trips out. By batching your trips you will be more efficient and have less opportunity for unplanned spending. Other benefits include: 

  • Less driving from fewer trips = savings on gas and reduced wear and tear on your vehicle 
  • More time from fewer trips 
  • Opportunity to plan a shopping trip during a less busy time of day (early mornings, etc), reducing stress and saving time 

Eliminate Certain Errands 

You know what the best way is to stop paying for haircuts? Get your hair cut for FREE at home. When the pandemic hit, my wife purchases a basic haircutting kit from Amazon for $33, watched some YouTube videos on haircutting and started cutting our hair. Sure the first few cuts were a bit rough, but with some practice she has gotten really good at it and our hair looks just fine! We save $60 a month vs going into the fancy salon and we have reduced the opportunity for slippery slope spending. Additional benefits: 

  • My wife learned a fantastic new skill. Not only can she cut our hair, but it’s possible in the future she could expand on this skill and pursue haircutting as a career 
  • Time is saved. Haircuts went from an evening out (2+ hours) to a 10 minute affair in the living room 

Reward Yourself 

All this saving talk doesn’t mean that you don’t reward yourself for making these choices. For us, the biggest reward is saving for financial independence and building for things that have real value. We know that a fancy haircut or a meal out is not what will make us happy and content. We have been saving the $60 saved in haircuts in a brokerage account and are having fun watching that account grow over time! We also plan meaningful meals out that we know we will really enjoy and remember as a treat.  

Financial independence will not happen overnight. It is achieved slowly over time with good habits, discipline and planning. Contentment with what you have is a huge help along the way. Avoid the slippery slope of spending on your journey to building wealth for the future! 

28Jul

Convert Earnings to Wealth for Financial Independence

Ever see the movie “Rush Hour 2?” There is a part where Chris Tucker and Jackie Chan go to see Don Cheadle to see if the bad guy in the movie had spent any counterfeit money in his restaurant. Don Cheadle says yeah, and then Jackie asks if he still has the bills. Don Cheadle’s response is classic.  

“Still got my lunch money from the 3rd grade.” 

I love that line. The character respected money, saved and obviously had something to show for his work, going back all the way to the 3rd grade. He had successfully converted past earnings into actual wealth. 

Working for money is really hard. My first job was at Burger King when I was 16 years old. My day basically went like this. I got up at 6:00 AM, went to school, came home around 3:00 PM, did my homework, ate something and then went and worked from 5:00 PM – 10:00 PM slinging burgers, cooking fries, waiting on customers and cleaning bathrooms. It was hard work and I came home exhausted and smelling of fryer oil. All for $5.15 an hour.  

When you work that hard for so little, you build an appreciation for money. You think to yourself if a purchase was worth it before parting with your precious money. If a trip to the movies and popcorn cost $15, you think if it really is worth trading 3 hours in the back of a miserable, hot fast food restaurant to earn the privilege of watching that movie in a theater versus watching TV at home for free. Whatever it is you do with that money, you want to have something to show for it, otherwise it’s a big fat waste. 

Working in the corporate world is hard too. Sure you make more, but the hours can be long, the work can be stressful and there may be politics and drama you have to deal with. Again, if you are going to trade such a significant portion of your life for money, you better have something to show for it. I had a moment like that in 2015 when I checked my net worth for the first time and realized that I had worked for 13 years and had little to show for it. 

The key is to actively convert what you trade your time/energy for (earnings) into something lasting (wealth) that can help you accomplish your goals (in my case financial independence). This takes saving, shrewd investing and some luck along the way. But how do you know how efficiently you are converting your earnings into actual wealth? 

The trick comes from figuring out your net worth as a percentage of your total earnings. For example, if you have earned $500K in your career, and your net worth is $50K, you have converted 10% of your earnings into wealth. And if you look at it in terms of the TIME it took to create that wealth, you would realize that 90% of your time was spent earning money that is 100% gone forever and can’t help you in the future. Sobering fact. 

Back in 2015, my ratio was 13.8%. It made me sad that 86.2% of all the money I had made up to that point in my life was gone forever. But it also helped to motivate me to change my actions. I am happy to say that 6 years later I have increased that number to 40.5%!! That feels a lot better and makes me feel like my hard work has actually started to BUILD SOMETHING that will LAST. My goal is to one day see that ratio go over 100% which would mean I had saved MORE that the total of everything I had ever earned.

So how can you figure out how much of your earnings have been converted into wealth? It’s probably easier than you think! 

Step 1 – Calculate Your Net Worth 

Hopefully you are tracking your net worth on a regular cadence already, but if not, it’s pretty straightforward! First calculate the sum all of your assets (bank accounts, investments, real estate equity, cash, etc.). Next, calculate the sum of all your liabilities (credit card balance, mortgage balance, car loan balance, etc.). Finally, subtract your total liabilities from your total assets to get your net worth. 

Step 2 – Calculate Your Lifetime Earnings 

Ok, so how are you supposed to do this? Do you need to have saved every pay stub from years and years of working at various places? Fortunately, there is a much easier way! The United States Social Security website actually give you your lifetime earnings all the way back to your very first job! Here is how to get it. 

  1. Access the Social Security site and create an account. You will need some basic information to sign up including your social security number, date of birth and address. 
  2. Once you have access, you will land on the My Social Security dashboard. Click “Review your full earnings record now” 
  3. You will see a chart with your reported earnings for your entire working career! Add up the “Taxed Medicare Earnings” column. This is your total lifetime earnings. 

Step 3 – Calculate Your Earnings to Net Worth Ratio 

Here is the easy part. Take your net worth from Step 1 and divide it by your lifetime earnings from Step 2 and multiply by 100. This is the percentage of your earnings that you have converted to wealth! 

When you first see this number, you may be a bit disappointed. But don’t worry, you can totally take action to make it way better! Track this metric along with your net worth monthly and feel the satisfaction of small victories on the road to financial independence! 

Additional Reading: 

There are a ton of amazing articles on the value of the earnings to wealth conversion ratio out there. Some of my favorites are Your lifetime wealth ratio (and how to calculate it) from JD Roth at Get Rich Slowly and How Much Should My Net Worth or Savings Be Based On Income? from Financial Samurai. Check them out! 

26Jul

Our Investments For Financial Independence

As I shared in our intro post, I really started to get a handle on my finances and actively start working towards financial independence about six years ago. When I sat down and actually took inventory of my net worth, not only was I disappointed with the total, but I learned that how my money was invested was not yet optimized for maximum growth. The breakdown of my net worth was as follows: 

Ok, so cash value in a primary residence… that’s good, right? What made the rest of my “portfolio” not so great for financial independence? 

Well first, the “retirement fund” from my previous employer was not a 401K and not very portable. First off, the investments were tied up in the stock of the company (not publicly traded and so the stock price was determined by yearly company audits by an external firm) and an investment portfolio managed by the company that was intentionally conservative. The company had a policy where it took YEARS to extract that money from them when you quit and so at the time, I had literally no control over this money. In the years since, I have gotten paid out about 75% of this cash (which I have rolled into a traditional IRA) so far with my final payment coming in 2023. For a job I quit in 2015. Yeah.  

Second, the variable whole life insurance policy. With this plan, I got life insurance and an “investment” that was packaged together and sold as a single product. When I really dug into it, this plan was riddled with of fees that were killing the growth of the cash value. Like multiple percentage points each year of precious growth were tied up in a bunch of charges I didn’t understand which came from actively managed mutual funds, that weren’t even matching the performance of the market. Yikes. 

I knew I had to take action. For the sluggish retirement fund, there was not much I could do but live by the payout terms, but when I did start to see that money I rolled it into a traditional IRA and invested in low cost index funds. For the whole life insurance policy, I called my insurance guy and told him I was terminating the contract. Of course he tried to keep me from doing this (he got a healthy commission each year that I kept the policy), but eventually he relented and I took the cash value from that policy and paid off a ton of consumer debt that was bogging me down. I replaced that insurance with much lower cost term coverage that would protect my family. I then took the balance of my monthly savings from not paying for the variable whole life insurance and invested it. 

So how am I invested today? Most of my net worth is invested in low cost index funds. These are spread out across several accounts both taxable (Brokerage) and tax-qualified (401K, IRA and HSA). All my funds come from Vanguard, Schwab or Fidelity. 

Total Stock Market Index Funds – 26% 

By investing in the total stock market index funds, I am getting exposure to every single publicly traded company in the US. The costs are low and I am guaranteed to at least keep up with the performance of the market. I am invested here in FSKAX, SCHB and VTI. 

S&P 500 Index Funds – 36% 

By investing in the S&P 500, I am getting exposure to the 500 biggest companies in the US and especially getting a healthy chunk of growth stocks as the index is tech heavy at the top. Again, I am guaranteed here to at least keep up with the S&P 500 with very low fee funds. I am invested here in VFIAX and SWPPX. 

REIT Index Funds – 8% 

REITS (Real Estate Investment Trusts) are mutual funds that invest in real estate. The nice thing here is you can get a broad exposure to a ton of different types of real estate investments (homes, apartments, offices, healthcare, retirement homes, etc.) without having to invest (or manage) actual property. I am invested here in SCHH and VGSLX. 

Individual Stocks – 5% 

I keep a modest amount of net worth in a few big tech growth stocks. These give me some opportunity for major breakout growth, but I keep the overall allocation low to reduce risk. 

Equity In Primary Residence – 21% 

Still a major chunk of my net worth, but not nearly as large of a proportion as it used to be. Not only does the house provide a reasonable yearly uptick in value (especially in the last year or so as home values have risen dramatically) but it provides me and my family with shelter, comfort and a place to be happy. In the last year, we have sheltered in place here, worked, gone to school and pretty much done everything in it. 

My mortgage is not paid off and I am paying the minimum payment on it because I am financed at a very low rate (3%) and I find greater opportunity for grown in my other investments.  

Cash – 4% 

I keep some cash on hand for emergencies, including an emergency fund of roughly six months’ worth of living expenses. While there is probably some opportunity cost being in so much cash, it helps me to sleep better at night and I like the fact that I wouldn’t have to immediately sell assets if I lost my job. 

So there you have it! Where I am invested, and why. Steady investing and saving money on the path to financial independence. Feel free to leave comments on your thoughts! 

24Jul

Money Lessons From a Basketball Hoop

During the early part of the spring, my son (13) started to get into playing basketball. Since we didn’t have a hoop at home, we would hop into my car and drive to a county park that is less than 5 minutes away and play together. Good times, good exercise and a fun shared activity. After a few weeks of this, my wife found an ad for a home basketball hoop from Target on sale for $225.99. We figured that was a good deal and decided to go and make the purchase, especially since with the weather being good, we would get a lot of use out of it. I went down to Target and picked up the hoop (which came in a huge box), assembled my tools and took a look at the instruction booklet.  

I will be honest. I am only moderately handy, and the instructions were a bit intimidating. There was a lot more hardware included than I expected, and thus more work (and time) that I would need to put into setting it up. It was also already 2PM on a Sunday, and to be honest, putting together a basketball hoop was not exactly how I wanted (or planned) to spend a precious day off.  

I took a deep breath and said to myself that I just needed to get started. After about an hour, I had the rudimentary shape of the hoop coming together. As I worked, my neighbor came outside and saw what I was doing. As it turned out, his family had essentially the SAME hoop set up in his driveway. We talked for about five minutes while I took a break, and finally he said “You know, I paid a handyman to put mine together.” 

“Oh really?” I asked. “How much did you pay him?” 

“$75. I could give you his number if you want.” 

My neighbor is super nice and we are about the same age. It’s likely we have very similar household incomes and to any other observer live a similar lifestyle. The big difference is my neighbor spends for services that make his life “more convenient.” Grass cutting service. Car detailing. House cleaning service. Professional basketball hoop setup. The list goes on and on. As I went back to work on the hoop, I started thinking about what all these services must COST. And not only cost once, but on a continual basis, because you know, the grass grows back, the car and house gets dirty and there is ALWAYS some new purchase that you need to hire a handyman for to put together. $75 here, $50 there, $100… it all adds up. 

Have you ever heard those stats put out there where if you make your own coffee instead of going to Starbucks, you will have $10’s of thousands of dollars in 20 years? I decided right then and there as I was working on the basketball hoop that I was going to create an account and start actually SAVING what most people would spend on things they could be doing themselves. 

I started here: 

  • Basketball hoop installation: $75 (one time) 
  • Grass Cutting: $50 (recurring) 
  • Haircuts at Sports Clips for me and my son: $30 each (recurring) 
    • NOTE: During COVID, my wife got clippers and started cutting our hair at home. We plan to never return to paying for haircuts 
  • Any other thing that I choose to do for myself vs. Pay someone: $50/hour 

Starting that day, I put the money I saved by doing the above things for myself into a brokerage account and invested into a low cost total stock market ETF (VTI). Every time I got paid from work (every two weeks) I would add the appropriate amount to the brokerage account based on the last two weeks’ worth of savings. 

So what happened? Well that was back in April, and just three months later, I have $914.05 in that account. Over the course of a year, that is well over $3600. All easily obtained by just developing simple habits like being willing to roll up my sleeves and work hard for myself. Crazy, this stuff actually works. 

Thing is, the money isn’t even the most important thing. There are so many other awesome benefits to NOT paying someone else to make your life more “convenient.”  

  • Exercise – I get a workout and fresh air when I do projects outside or cut the grass. This lifts my mood and boosts my health, especially since I have a desk job. 
  • Learning – Putting together the basketball hoop was hard and I made some mistakes along the way. But I learned how to do it. I also learned more about the tools I using. I now feel confident that I could put together a hoop a lot more efficiently the next time 
  • Satisfaction – I get the awesome feeling of satisfaction from doing a job well myself. Every time I walk past my grass or the hoop I feel great thinking “I did that with my own hands!” 

So what is the lesson? Going the “easy” route and paying someone to do work that we could easily do ourselves literally drains our banks accounts AND deprives us from some pretty awesome side benefits. Don’t be one of those people! Even if a project looks a little scary at first, you CAN do it. You may make some mistakes, but you will be successful, you will develop some “grit” and feel an amazing sense of accomplishment when you are done! Also, find a way to actually capture your savings. A lot of people make choices to save money in an area by not spending, but don’t actually save/invest it. Thus that money probably gets spent on something else, instead of increasing and compounding over time. 

As it turned out, putting the basketball hoop together took about 3 hours. I paid myself $75 and so I guess I was working for $25 an hour. I learned something, got some exercise and feel great that I did it myself! I’ll be sure to keep you all updated on how this account grows over time and other ways I find to do things for myself (and pay myself.) All small baby steps on my journey to financial independence. 

22Jul

Intro: How Did I Get Here?

My name is Glasses Guy and I am 41 years old and a full time professional working in the tech industry. I am very happily married to Glasses Girl with a 13 year old son, a 4 year old daughter and a baby on the way! We live a very happy and contented middle class life in a suburb in Pittsburgh, PA. Family, building memories together, hard work and togetherness is what we are all about. We feel very fortunate to live in a place where we can afford a reasonable lifestyle on a single income from my salary in tech. 

I love my job! I have awesome co-workers and I enjoy my work and the daily challenges it brings. At the same time, I also have a ton of other passions, including cooking, traveling (we love Walt Disney World), photography and baseball. So while I really like my job, I also really like my TIME too! And with two kids (and the 3rd on the way) I realize just how precious time is. And so that is why for the past several years, I have gotten really interested in the FIRE movement. For me is not about an escape from a job I can’t stand, its more about having the option to no longer have to trade so much of my TIME for the MONEY I need to take care of my family.  

We are super happy with what we have. We live in a modest home, drive two modest cars (9 year old SUV and a 2 year old compact car) and don’t have any real expensive hobbies. A lot of our friends and my co-workers drive much nicer vehicles, have boats, campers, etc., but we have never really needed any of that to be content. I think our biggest vice is we do like to travel, especially to Disney World, which we do about once every year. So my goal in achieving a level of financial independence is really to support our current lifestyle. 

So, how DID I get here. Well to explain that, let me take you on a little history tour of my financial journey: 

Phase One: Salary Income is EVERYTHING! 

I came out of college with a Computer Science degree at age 22 not knowing a ton about money. I was very fortunate that my parents paid for my education at a large public state school and I graduated on time with NO STUDENT DEBT. I had no clue at the time how big of a head start I had on so many of my peers. I took a job working as a junior level software engineer for an entry level salary. The timing of my entry into the job market was not great because it came on the heels of the dot com bubble crash in the early 2000’s and so my wages were not great. At the same time, it was enough to fund a great life for me as I got started. I was able to get married and buy my first starter house and welcomed my first child into the world with that salary. After about 4 years at my entry level job, I moved on to another company for 9 years that also did not pay exceptionally, but had good work-life balance and was close to home. 

At that level of financial maturity, I thought that salary income was everything. I would think that if I could only make $X (which I assumed some senior manager or director made) everything would be great. I was initially fooled into thinking that the brand of car, size of house or the vacations that people took indicated how well they were doing financially! So I really became focused on salary income as a number, thinking that was the main ticket to doing well with money. I continued like this for the first 13 years of my professional career. 

Phase Two: Net Worth is EVERYTHING! 

After 13 years of mediocre salaries, I made a big move professionally and took a job with a larger national company that paid significantly well and had much better benefits. The increase in cash made me stop and think a bit more carefully about my finances. I decided to actually go through the exercise of finding out my net worth. How I had neglected to do this in my first 13 years of working is beyond me, but I did it and I was pretty disappointed with the result. It was non-zero, but with the salaries I had pulled in and how much blood, sweat and tears I had put in at work, I felt like I had little to show for it. I knew I needed to make some changes. 

Starting in September 2015, I tracked my net worth religiously, always taking a snapshot on the first day of the month. I have done this every single month since! Getting that frequent feedback helped me to take action. I increased my savings rate to my 401K. I got out of some bad “investments” like a variable whole life insurance policy that had horrible fees. I took better inventory of my debt and put in better plans to pay down the balances. Every month I actually looked forward to logging into my account and seeing the number go up! I started to worry less about salary income as a thing because I realized that what REALLY mattered was the wealth I was building, not my salary. Over the next 4 years, I doubled my net worth. 

Phase Three: Passive Income Is EVERYTHING! 

In 2019, I made another career move to a bigger tech company and got a significant increase in salary, including equity grants that vested over time. I realized that I had an amazing opportunity. To build wealth much more quickly than before. I realized that financial independence was actually achievable, I just had to be smart with my money. This required me to expand my financial education. I scoured the internet for information and fell in love with many blogs, including Financial Samurai and Mr. Money Mustache. This was like going to college all over again (financial college) and I drank from the firehose of knowledge. I simplified my investments (going with low fee index funds from Vanguard, Fidelity and Schwab), and also got into some new investments like REITS. I took advantage of the Roth mega backdoor option on my company’s 401K. I built up a solid emergency fund. I watched my net worth more than triple in just 2.5 years. 

As I watched my net worth grow, I struggled to understand how my net worth could actually translate to financial independence and maybe early retirement. My net worth felt like a mishmash of savings accounts, 401K, IRA, brokerage account, equity in my home, etc. and to actually retire I needed an income! That is when I started to focus on what was the actual income my net worth could theoretically create, assuming the 4% “safe” withdrawal rate. Every month as I captured my net worth, I would track this key metric and focus on it. I am very happy to say that my current net worth could support roughly 40% of my income need assuming the 4% withdrawal rate. So I am nearly halfway to my goal of financial independence! 

So that’s my story! I have a ton of stuff to share both from my learnings on financial independence, a long career in the tech industry and just general discussions on being content and happy! 

Thanks so much for going on this journey with me!