19Aug

Save Today – Sleep Better Tomorrow

Life today is stressful for all of us at times. Some of the things that may stress us out are things that we can’t control, such as political conflicts, natural disasters or the pandemic. These things affect everyone and it’s only natural to feel some anxiety about these things.

There are also things that may be stressed about that we have a little more control over. Our health for instance. We can’t guarantee perfect health, but we can improve our health to varying degrees through diet, exercise and lifestyle changes. Health is something that is partially in our control.

Finances are another major stressor for some. People worry about making ends meet, losing their job, or dealing with an unforeseen expense. This can cause them to suffer emotionally and their quality of life is affected.

Finances are something we have a great deal of control over. While everyone’s circumstances are different (and we should never discount the advantages some have had just by where they were born), almost anyone can manage their finances and lift themselves to financial stability. The results are not guaranteed. However, just the feeling of taking ACTION on the problem will help to alleviate some of the stress that is felt about money problems.

No Savings = Stress!

One of the best ways to reduce stress about money is to save money. Some may feel that saving money is impossible, especially if they feel like they are living paycheck to paycheck. However, no matter what your circumstance, there is likely a way that you can save at least some money, or bump you income in some way to save.

The crazy thing is this. A large percentage of people in the US do not have anything saved. There was an article on CNBC that said that 40% of Americans would struggle to handle a $400 financial emergency. That is a shocking statistic! No wonder so many people feel stressed about their finances!

Living life with nothing saved is like walking a tightrope without a net. No, sorry, it’s like walking a tightrope, blindfolded with no balancing pole in a hurricane. Oh, and the rope is greased up and there are man-eating sharks waiting for you when you fall.

The point is, bad things are going to happen. It’s inevitable. If we are not prepared for them, they become major life changing catastrophes instead of small bumps in the road that we can handle. Some common examples:

The car that you need to drive to work breaks down.
An appliance fails
You get a leak in your roof
You need emergency surgery or other medical procedure
There is a glitch in payroll and your check is delayed a week
Your uncle in Phoenix dies and you need to buy a last minute plane ticket to attend the funeral
Your landlord decides he is selling your rental and you need to find a new place to live

Any of the above problems would be stressful enough on their own without money being an issue. Bring a financial aspect into the mix on top of the problem and it makes it much more stressful and difficult to handle.

How To Get Started Saving

Even $20 taken from each paycheck and earmarked for savings can go a HUGE way towards building a financial cushion that can give some peace of mind. $20 to save every 2 weeks should be able to be found in almost any budget, or income level. Some examples:

Eliminate three lunches at McDonalds ($6.66 x 3)
Make coffee at home instead of going to Starbucks ($3.33, 3 times a week )
Downsize (or eliminate) your cable package
Sell stuff you aren’t using
Take on a handful of extra hours at work
Develop a modest side hustle
Get your haircuts at home

If you were able to save $20 per paycheck (assuming you get paid bi-weekly) after about 10 months you would have $400 saved. This would put you ahead of 40% of Americans in terms of having a safety net. This would be a really big financial milestone and a great first step towards having some peace of mind about money.

In reality though, $400 is just a start. While many emergencies could be handled with $400, there are many that could not. I would recommend that the absolute bare minimum to have saved for an emergency should be at least $1000. Dave Ramsey recommends having a $1000 emergency fund before tackling any debts.

If you have worked your way up to $1000 in savings from $0, congratulations! There is at least some breathing room in case of an emergency. Hopefully you are able to sleep a little better at night knowing that you should be able to handle many common financial emergencies.

However, I encourage you not to stop at an emergency fund. Saving money for unexpected problems is a basic first step, but savings can unlock even greater things, if you keep building continually.

Taking Savings to the Next Level

Imagine if tomorrow your manager called you into their office and informed you that you were being laid off. How long would you be able to last without steady employment? Sure you may get a few weeks of severance pay and unemployment, but it’s likely you will very quickly start having financial problems if you only have a $1000 emergency fund.

Now picture that you have saved six months or a years’ worth of living expenses. Perhaps this money is in savings account, money market, CD, or even invested in a brokerage account. How would having this larger cushion impact how you feel about getting unemployed?

If you know you have six months plus of cushion against unemployment this may give you a lot more peace of mind about the situation. Instead of getting laid off being a catastrophe, maybe it’s just an annoyance as you have to go through the process of getting another job.

On the other hand, maybe it’s even better than that. Perhaps you are even (wait for it) HAPPY that you got laid off. Now, instead of unemployment being a disaster, its actually an OPPORTUNITY! Here are some of the reasons why you might be happy about losing your job if you have a decent sized cushion:

You didn’t really like the job. You felt underappreciated and under paid. You knew you could do better but didn’t have the motivation to look for a new job.
It’s been years (or decades) since you had some meaningful time off. You have the opportunity to take a few months off and then start looking for a new job in earnest.
Turns out you have no passion for accounting (or whatever you were doing) anymore. You use your unemployment as a chance to take photography classes at the local community college.
Since you were a kid, you always wanted to see all 30 major league baseball parks. You take your severance and unemployment and embark on an epic summer road trip, make memories and have the experience of a lifetime.
You are a great baker. All your friends say you should start a business selling cookies for events. You always thought it was a crazy idea, but now that you have the time…

The list could go on and on. Insert your own dream here. Think about what you would do with a period of unemployment if you didn’t HAVE to go back to work immediately. Maybe getting laid off isn’t so bad after all.

Saving a year of living expenses is not easy. If you only save 10% of your income, it will take you 10 years. On the other hand, if you save 50% of your income, you can do it in one year. The key is to get started. Make savings a habit. Over time you will see your savings rate grow and you will have increasing peace of mind about the level of problems you will be able to handle with a cushion.

Longer Term Opportunities

Remember what we said about savings giving opportunities? Well, the real value of saving money for the longer term goes beyond being able to handle unexpected bumps in the road. Options and opportunity expand as your savings (and net worth) grow. A basic emergency fund, or savings/net worth of a year’s worth of living expenses is a great start, but there are other amazing opportunities with expanded savings.

For instance, imagine if your net worth was 10 times your annual expenses. That would mean you have a 10 year cushion. Things like needing a new roof, an appliance breaking, needing a new vehicle or other major expense does not really put much of a dent in your savings. If you are properly investing, your net worth is expanding without you having to do anything. This is basically where I am currently on my financial journey.

Maybe with that type of a cushion, you wouldn’t wait to get laid off to find a new job. Perhaps a job that pays less, but that is more fulfilling or in a field that you are more passionate about. Or, maybe your cushion will give you the peace of mind to take a big risk and jump to something completely new and exciting, perhaps starting your own business, or joining a startup. With a big chunk in savings, you don’t have to worry that your next big move will completely derail your finances. You have more confidence to try things and take risks.

The Ultimate End State

The ultimate end state of savings is achieving financial independence. For many people, this is when they have accumulated a net worth of 25 times or more of their yearly expenses. This total is based on a concept called the “4% Rule” which basically defines a “safe” withdrawal rate for a large sum of money that will result in probably never running out of money.

When you have saved enough to be financially independent, your options increase exponentially. You have gained the most precious asset that is out there.. Time. In addition, you can sleep well every night knowing that your basic needs are cared for and that you can weather financial storms both big and small. I am about 40% of the towards financial independence, so I can’t yet tell you what this feels like. But for me, time and options are the most exciting parts of the savings process.

Bottom Line

Saving money is a must if you want financial stability and eventually financial independence. Start small and accumulate enough savings so you can handle the inevitable things that come up in life. Make savings a habit and build bigger cushions and net worth to open up more peace of mind and options to you!

16Aug

Dividend Stocks – A Magic Money Machine

What if I told you there was a magical machine that could create money. Every year, on a specific day, this machine will spit out $1. Once you buy it, there is literally nothing you have to do. You stick it in a closet and forget about it and BOOM, once a year your dollar pops out. The machine doesn’t need any maintenance. You don’t have to plug it in. It doesn’t break. It just spits out dollars every year.

It gets better. Every year, the machine gets just a little bit more efficient and actually INCREASES the amount of money it can create. So the first year you get $1.00 even, but the next year you get $1.03. The next you get $1.07 and by year four it’s up to $1.12!

The machine allows you to either take your money and spend it, or automatically buy a little more of the machine so it can make even more money. Over time the machine grows and grows and spits out more and more money!

If you ever get tired of having the machine, you are free to sell it. This only takes a few clicks of a computer mouse. There are millions of people out there who will bid on the chance to take the machine off your hands.

The machine will go up and down in value over time, but the general trend is up. Hold onto the machine and keep buying more of it with the money it produces over a long period of time and you can have quite a contraption that can feed you in your retirement!

Sounds like a dream right? A machine like this can’t exist or be this easy. The reality is that this thing is out there and you can buy one (or a million of them) today!

Question: How much would you be willing to pay for a machine that could make $1 every year, grow in value and increase the amount of money it makes most years?

Well, if you invest in stocks, mutual funds or ETF’s that pay a dividend, you are in essence buying such a machine. The MARKET determines how much the machine costs at any given time. Sometimes it’s a great value, sometimes not so much. The dividend is the money that is produced by the machine and paid out yearly (or quarterly, depending on the fund).

What Is a Dividend?

A dividend is a payment to shareholders of a stock, mutual fund or ETF that comes from a portion of the profits of a company. Dividends are not guaranteed and may be reduced or eliminated at any time by a company. There is also the option to either take the dividend in cash, or reinvest the dividend into additional shares in the company (buying more of the machine).

Generally speaking, ordinary dividends which are paid out by big companies and funds are taxed as ordinary income. So Uncle Sam will want a slice of the pie the same way he would tax your paycheck. Just make sure you are prepared for that at tax time.

What Companies Pay Out Dividends?

Lots of companies out there pay a dividend. Probably the best known dividend stocks are large, established companies that pride themselves on consistency and steady growth. Coca-Cola (KO), McDonalds (MCD), Proctor & Gamble (PG), General Electric (GE) and AT&T (T) all pay a dividend. They all are well known brands that produce products and services that millions of people use daily.

Let’s use Coca-Cola as an example. A share of KO costs $57.23 as of today. It is projected to pay a $1.68 annual dividend this year, distributed quarterly. Basically, ever 3 months a share of KO will pay you $0.42. Over time, the company has a history of increasing its dividend (however this is NEVER guaranteed).

Believe it or not, there is even a list of companies in the S&P 500 that has increased their dividend every single year for 25 years or more! These are called the “Dividend Aristocrats.” KO is one of the Dividend Aristocrats. It has increased its dividend ever year for the last 59 consecutive years!

Increasing Dividends.. I’ll drink to that!

The Dividend Aristocrats give a lot of investors a warm and fuzzy feeling. They are often industry leaders with a proven track record. These companies may also tend to be less volatile than the broader market.

The cool thing is you don’t need to buy individual stocks to get a dividend payout. Even index funds that contain dividend paying stocks will pay a dividend!

For example, I am invested in the Vanguard S&P 500 Index (VFIAX). A share of VFIAX costs $413.04 as of today. Over the past 4 quarters it has paid dividends as follows: $1.31 on Sept 28, 2020, $1.38 on December 21, 2020, $1.26 on March 25, 2021 and $1.33 on June 28, 2021. Not bad!

Since I am in the growth/accumulation phase on my journey to financial independence, I do not take any of the dividends I receive. Instead, I choose to reinvest them into buying more shares of the funds I own. This helps me continue to build wealth for when I will need an income stream in the future.

What Companies Don’t Pay Out Dividends?

Not all companies pay dividends. Does that mean you shouldn’t buy those companies? Not necessarily.

A big reason why a company may not pay a dividend is because they prefer to reinvest the profits back into the company to fuel more growth. This is very common with the high growth stocks found in the tech industry. Companies like Amazon (AMZN), Google (GOOG), Facebook (FB), Netflix (NFLX) and Tesla (TSLA) do not pay a dividend.

When you invest in non-dividend stocks like the tech stocks mentioned above, you are hoping to grow your wealth through the appreciation of the stock price as the company grows. For investors in the growth/accumulation phase of their FIRE journey, the potential for this growth can be very attractive.

I invest less than 5% of my net worth into individual stocks. None of them are dividend stocks. I am currently holding Google, Facebook, Peloton (PTON) and Duolingo (DUOL). I don’t plan to go past 5% of my portfolio in individual stocks because of the risks.

Why Invest in Dividend Producing Stocks?

One of the biggest reasons you may want to invest in dividend stocks or funds is to get a steady stream of income. When you are retired and are not working anymore, having streams of income that are predictable and likely to rise over time with inflation are very valuable. Also, if you can live off the dividends of your portfolio only, it means you don’t need to sell stocks when you need income. This will likely result in an ever increasing portfolio over time. What better way to earn a living than to sit back and watch your magic money machine provide for you!

The biggest thing is you really need a lot of capital to generate enough dividends to live off of. For instance if I wanted to generate $50K a year in dividend income from VFIAX, I would need 9,470 shares! At $413.04 a share, that works out to a cool $3.9M!! Of course there are other funds that will produce higher dividends with less of an investment, but you get the point.

Dividend stocks and funds can be a great supplement to other income streams in retirement. Dividends coupled with money from rental properties, sales of growth stocks, side hustles and in time Social Security payments can combine for a very comfortable and stable retirement.

I would currently say that I am not a dividend investor. Right now, I am focused on growing my portfolio and net worth, saving money and planning for early retirement. However, I am learning all I can about dividends because they are a very attractive tool for producing income in retirement! I may be relying on a magic money machine of my own when I reach FIRE!

What are your thoughts? Do you invest in dividend stocks or mutual funds? Do you have recommendations on funds that pay a healthy dividend historically?

13Aug

Index Funds – Set It and Forget It!

For most people (myself included) the path to financial independence is a journey that can take many years (or decades). Very few people achieve financial independence overnight. Sure these things do happen occasionally, but planning to win the lottery or get in on the ground floor of the next Tesla may not be the best way to hit your FIRE number. For me, one of the top tools for building wealth is index funds.

I like easy. I remember when I was growing up there used to be these infomercials on TV all the time. One that I clearly recall is for a product called the Ronco Showtime Rotisserie & BBQ. Basically you would put in your meat, set a timer and walk away. Sometime later you would come back and a perfectly cooked chicken or beef roast would be waiting for you!

Ron Pompeil was the pitch man for these gadgets. Every time he would set the timer on the rotisserie in the commercial he (and the TV audience) would say, “Set It and Forget It!” Awesome tag line that everybody remembered. That phrase alone probably made Ron Pompeil a millionaire many times over. (Sadly, he recently passed away at the age of 86.)

People like easy. People like automated. People like something they don’t have to worry much about. For me, index funds are like the Ronco Showtime Rotisserie & BBQ of investing. You set it. You forget it. You (likely) come back a lot wealthier than you did when you started. The majority of my net worth is invested in low cost index funds.

So how does this work? First off we need to define what an index fund is.

What Is an Index Fund?

An index fund is a portfolio of investments (stocks and/or bonds) that replicate (mimic) a specific market index. For instance, the S&P 500 is an index that is made up of the 500 largest publicly traded companies in the US. By purchasing an index fund that tracks the S&P 500, you are getting slivers of every single company that makes up the index!

There are tons of different index funds out there. Some track a specific sector like technology, healthcare, or finance. Others track bond or real estate indexes. Still others are total stock market indexes where you can literally buy exposure to every publicly traded stock!

Index funds are generally purchased as part of a mutual fund or an ETF (Electronically Traded Fund).

On this site, when we talk about index funds, we are generally talking about funds that track the market, such as the S&P 500 or Total Stock Market indexes.

Some of the index funds that I am currently invest in are:

VTI – Vanguard Total Stock Market ETF
VFIAX – Vanguard 500 Index Fund (S&P 500 Index)
VGSLX – Vanguard Real Estate Index Fund

Ok, so what is so great about these funds? Here are my reasons for investing such a large portion of my net worth in index funds.

Easy to Manage

Index funds are super easy. You buy the fund and get all the stocks or bonds that make up the fund. When there are changes that are needed in the allocation within the fund, you don’t have to do anything.

Even easier are when you set up for automatic investing into these types of funds through your brokerage account or IRA, or when the money is automatically deducted from your paycheck for your 401K.

All you have to worry about is regularly buying funds and then holding them for the long term. History has shown us that the trend of the stock market is always in the upward direction over time! Buy, hold and forget about it!

Low Fees

Index funds generally have lower fees than actively managed mutual funds that are not tracking an index. This is because with actively managed funds, there is a highly compensated fund manager who is buying and selling stocks within the fund trying to boost the its performance. All of this costs money, which is generally passed down to the investors in the form of fees.

VTI has an expense ratio of .03%. That means that if you have invested $100K in that fund, you will be charged $30 per year in fees by Vanguard. In contrast, there are actively managed funds that charge 10-20X that (or more) in fees. These fees eat away at the growth of the fund.

The crazy thing is that most actively managed funds don’t beat the index funds over the long term!

Diversified Investments

You have heard the term don’t put all your eggs in one basket right? Well, the same is true with investing. There may be some success stories out there of people who have personally picked five or ten successful stocks and have done quite well. However, more common are people who do poorly by not being more diversified.

The beauty of index funds is you are investing in the market. With a total stock market index, you get all the companies! Big companies, small companies, medium sized companies. Tech, healthcare, finance, entertainment, travel, automotive, communications, commerce. Wildly successful companies. Some failures. But you get everything. The advantage here is you spread your risk across a wide variety of sectors, industries and companies. The net result will be a trend up with the markets.

It is possible to create a well diversified portfolio on your own. This would take a lot of research and work on your part and you would have to take care of re-balancing all on your own. With an index fund, this is all done for you and you don’t have to think about it. Simplicity at its best!

Self-Cleansing

Ok, so what happens if you have some real dogs in your index funds. I am talking about companies that are losing money, heading for bankruptcy or just plain going out of business. How are these handled? Well, over time, companies that fail or go out of business will be dropped out of the index and replaced by new companies that are growing and profitable. Again, this is all managed within the fund and you don’t have to worry about it.

For instance, last year when Tesla (TSLA) was added to the S&P 500, a company called the Apartment Investment & Management Company (AIV) got dropped out of the index. That means if you owned an S&P 500 index fund like VFIAX, you just dumped AIV and got TSLA! Ever heard of the Apartment Investment & Management Company? Me neither. But I’ll bet you have heard of Tesla. Maybe you feel like you missed out because you didn’t buy Tesla at the bottom and become an overnight millionaire when it rocketed to the top. Never fear, you can still be part of the action (and shed some of the risk) by owning it in an index fund.

The lesson is that in the entire market, there will be winners and losers. The winners will find ways to keep growing. The losers will die off and be replaced by new companies who are incentivized to become one of the winners. This is why the market keeps going up over the long haul.

Solid Historical Returns

The S&P 500 index has been around since 1926. Between 1926 and 2018, the index has averaged 10-11% per year in returns before inflation. This does NOT mean that ever year is a guaranteed 10-11% return. That is the average. There have been some very good years and there have been some very bad years. But over the long run, the index has consistently gone up with nearly 100 years of past history to give you confidence about the future.

You are not going to become rich quickly by investing in index funds. They are best utilized when they are bought and held over long periods of time, perhaps even decades. But the growth can be amazing when compounded. This is the key to building wealth even if you don’t have a lot of money to invest.

Less Temptation to Time Market

Ok, so the key to the Ronco Showtime Rotisserie & BBQ was that you set it and then forget it. That was what made it so amazing. You didn’t need to come back and keep checking or adjusting the food. You didn’t need to baste it, fiddle with the temperature gauge or anything like that. Trying to do anything before the cooking process was done actually would MESS UP the end product. You just had to walk away and not do anything to get the best result.

It’s the same with index funds. They are not trying to beat the market. They are trying to keep up with the market. The idea is that if you are satisfied with the consistent returns of the index fund you will be less likely to do something crazy like sell when the market is down. This could seriously eat into your wealth building ability over time. The best approach if you are pursuing FIRE is to hold your investments and play the long game.

So that’s my thoughts on index funds! I invest most of my net worth in them because they are easy, low cost and I can truly set it and forget it! Do you invest in mutual funds? Why or why not?

08Aug

Invest a Windfall to Accelerate Financial Independence

A “windfall” is generally a chunk of money that lands in your lap unexpectedly. Perhaps you win a prize/contest. Maybe you receive an inheritance. Your company does very well and gives out unplanned bonuses. You pick a stock that goes to the moon. All these count as a windfall.

A windfall can be relatively small, perhaps a few hundred dollars or it can be a life changing amount that sets you up for financial independence immediately. Either way, a sum of money that shows up in your life out of the blue is a great opportunity to build wealth. It’s a chance to accelerate your FIRE journey and get to the destination a bit sooner.

What should you do if you are fortunate enough to land a windfall? Let’s start with a story about my favorite example of someone who had money raining from the sky.

Bobby Bonilla Day

Bobby Bonilla was a professional baseball player from the mid-80’s until the early 2000’s. He was pretty good, going to the All Star Game six times in his career. I remember him well because he played for some really good Pittsburgh Pirates clubs (my home town team).

In 2000, Bonilla played for the New York Mets and was owed $5.9 million. For some reason, the Mets and Bonilla worked out a deal where they would defer paying him that money. Instead, from 2011-2035 the Mets would pay him $1.19 million a year. Bonilla gets this money every July 1. Fans jokingly refer to the date as “Bobby Bonilla Day.”

Talk about the mother of all windfalls! I would imagine that very few (if any of us) are getting a deal like that! Let me tell you though how I have my own mini version of Bobby Bonilla Day.

My Personal Bobby Bonilla Day

I worked for 9 years for a small, privately held company. This company did not offer a 401K plan. Instead they offered an ESOP (Employee Stock Ownership Plan) along with a profit sharing plan. Basically the way that this worked was they would put some shares of the company stock into a tax qualified account for each employee every year. In addition, each employee had a second account where the company would add some of the company profits every year. The profits account was invested in a bunch of stocks that the company pooled on behalf of the employees.

The plan sucked. The shares were not publicly traded and so every year some accounting firm would appraise the company and set a stock price. You had no control over the investment choices in the profit plan and it was way too conservative for a younger person. There was no website to look at the real time value of your account. And in the end, it was not portable at all.

I quit that company in 2015 and by that time, the account had grown to a non-trivial amount. It represented about 50% of my net worth at the time. However, instead of the company allowing me to immediately roll that money over to a traditional IRA when I quit, they had some pretty ridiculous rules. I had to wait 4 years to become eligible to roll over the money, and then when I did, I found out they had the option to spread the payments over 5 years1! The day of my yearly payouts? August 1.

Starting August 1 2019 and ending on August 1, 2023, I receive a windfall from my former company every year. Ok, it’s probably not technically a windfall since they are just giving me MY MONEY, but it is money that is coming into my life that I am not actively working for. I like to think of it as my own Bobby Bonilla Day.

What should you do if you get a windfall, or some type of regular, deferred payment?

Resist the Urge to Cash Out

The money I get is tax-qualified. This means that I have not paid income taxes on it yet. I will have to pay Uncle Sam when I withdraw the money, and only after age 59 ½. Thus, the money is tax deferred. I have the option of taking my payment in cash or rolling it over into another tax-qualified account like a traditional IRA. By rolling it over, the money retains its tax-deferred status.

If I would have chosen to take the cash, I would have gotten crushed with taxes and penalties. I would have had to pay income taxes at my current tax rate (24%) as well as a 10% penalty for accessing the money before at 59 ½. Over a third of my money gone! Not a good deal for me.

To resist the urge to cash out, I actually instructed my former employer to just send my yearly chunks right to my brokerage. I get a photo copy of the check, but it’s never in my hands and simply gets rolled over. I never have the chance to spend it!

Treat Yourself (Reasonably)

On the other hand, maybe you are getting money that is NOT tax qualified, perhaps in the form of a prize or inheritance. It can be tempting just to spend the money on yourself. I think this is especially tempting if the money is significant, but not earth shattering. I think for me that number would be around $10K.

Instead of blowing it all at once, perhaps leave it alone for 30 days and really think about the possibilities you have for the money. This may help to cool down any immediate desire to spend the money.

It might also be good to treat yourself with a small portion of the money, perhaps up to 5%. This gives you a treat but also preserves the majority of the cash so it can work for you.

Pay Off Debt

If you have debt, especially the high interest variety that is common with credit cards or certain types of loans, by all means, consider paying this off with your windfall. Paying down debt is a fantastic use of a windfall as it helps you shed something that is eating away at your income, so you can start building for financial independence.

Currently, I have no credit card debt and $4,500 left on a car loan (5.9%). The car will be paid off by the end of the year. My mortgage is currently financed at 3% and so personally I am not in a hurry to pay down this loan since I can get much better bang for my buck in the stock market.

Invest For Financial Independence

By investing your windfall for the long term, you will get a gift that keeps on giving. If your dream is to retire early or accomplish some other dream with financial independence, investing your windfall can help get you there sooner.

I invest my “Bobby Bonilla Day” money in a traditional IRA, in low cost index funds. Currently, my account is invested in VFIAX and VGSLX. I don’t plan to touch this money for at least 18 years. Due to a bull market, my payments so far since 2019 have gone up nearly 60% in value!

Help Someone Else

Perhaps the greatest thing we can do if we get an unexpected chunk of money is to use it (or part of it) to help someone in need. Maybe you have a friend or family member who really could use a little bit of help. Or, perhaps there is a charity that aligns with your values who would put that money to good use. Either way, if you are in a position to help someone out when you get a windfall, you are likely to feel great happiness and fulfillment by giving.

Bottom Line

If you get a windfall or deferred payment of some sort, congratulations! Many people never get that experience. Understand that it’s an opportunity and think carefully before taking any action. Either way, continue to work hard, save money, build wealth on your journey to FIRE!

07Aug

Work From Home (WFH) – Right for You?

I have experienced work from home (WFH) since the very start of COVID-19. I work in the tech industry and much of the work that I do can be done from home. I am going to be returning to the office this coming Monday after 17 months of WFH! For me, it was an incredible experience plenty of learnings along the way!

I will never forget March 2020. I was told that we would be working from home for the next month, and my son (11 at the time) would be home from school for the next 2 weeks. COVID-19 was such an unknown at the time, we had no idea how long it would last. Little did I know that it would take almost a year and a half for me to get a chance to return back to my office. In addition, we chose to enroll my son in remote classes for the entirety of the last school year (7^th grade), so my family was home together the whole time.

Here is what I experienced and learned from WFH. Some of these things were surprises to me.

More Time with My Family

The best part of working from home was getting to spend more time with my family. I was able to see them more before and after work and on breaks. We ate lunch together most days. If there was something fun or special going on, I was able to pop out of my home office and be part of it.

I have a habit of taking walks in the middle of the day to noodle on problems and get some light exercise. I was able to take my walks in my neighborhood and took my daughter (age 4) with me in her stroller. We spent countless hours (and probably hundreds of thousands of steps) together this way, and it’s a memory I will cherish forever.

I do think the biggest thing I will miss about returning to an office is seeing my family like this on a daily basis. Small unplanned experiences build up to large happiness.

More flexibility

Working from home is great because it gives you greater flexibility to get things done personally. For instance, if you are on a short break, you can put in a load of laundry, make a bed, start a crockpot or run a vacuum for a few minutes.

Another benefit is if you need to be home for a package delivery, repair person, cable installer, etc., you don’t need to make a crazy adjustment to your schedule. Since you are WFH, you are just there and can keep working.

I really liked the flexibility to work when I am most productive, especially early in the morning. I loved that I could get up, get ready and dive head first into my toughest tasks without being tired from the slog of just getting to work (I have a 45 minute commute). I also found that I got better exercise because I had the option of working out when I had a break from work, or a stretch between meetings.

Got More Individual Work Done

When it came time to crank on individual contributor work, hands down, WFH rocked. There were less distractions. I had my own quiet place where I could shut the door and produce. I felt like I was able to get into flow and get things done working from home.

In the office, there are a ton of distractions and sometimes the only way to get things done is to put on headphones, or find a quiet meeting room or enclave to work. Neither is really as effective as having a place of your own to work where nobody will come and bother you. I did some of my best individual work from home.

A Home Office is Worth Its Weight in Gold

We built our house in 2017 with Ryan Homes. At the time, we were a family of 3, with a baby on the way. We originally were going to buy a 4 bedroom house, but we look at the 5 bedroom option and there was only a $10K difference in price. We didn’t need 5 bedrooms, but I figured why not when the cost was so low.

Fast forward to March 2020 and the value of that extra bedroom skyrocketed. I had a comfortable space that I could completely transform into a usable office, replicating the exact setup I had at work. The space was quiet, private, comfortable and clutter free. I saw so many of my coworkers during video calls working from living rooms, bedrooms, basements and kitchen tables. I felt very grateful that we made the decision to add on the 5^th bedroom. This allows each member of our family to have a personal bedroom, plus a dedicated office and a spare bedroom for when family visits from out of town.

As we shift to a culture with more remote work moving forward, I expect the investment in a 5 bedroom house will pay off with increased home value.

Saved Money

Prior to COVID-19, I would put around 8K in miles on my car commuting to work, working out to about 11,300 miles over the course of the 17 months I WFH. The IRS Standard Mileage Rate for reimbursement calculation assumes 56 cents per mile for business travel. I think this is a bit high when calculating my own savings, so let’s assume 30 cents per mile. That works out to $3390 in savings due to not driving to work.

Not commuting also meant not going into as many stores. Less opportunities to spend = savings. I also wasn’t really wearing out my shoes or clothes much and so I really didn’t buy those things the whole pandemic.

Time to THINK

While WFH in my quiet, cozy office, I got the time to really THINK. When I had a problem, I was able to really dive in deeply and think about it. I also got the chance to do a lot of self-reflection. There is something about being in a room by yourself for 9 hours a day that just lends itself to getting to know yourself better. I came to several personal revelations during these precious moments of solitude and learned a ton about myself. This was a benefit I didn’t expect at all.

Moving forward, I am going to schedule time for thinking like this into my day. I really never knew how valuable this time would be from a professional and personal development standpoint until I worked from home. This will require some discipline, but one of the ideas I have here is to try waking up early, which is something I am learning about from 5 AM Joel. Stay tuned for more details!

Missed My Commute

Yeah, this one probably sounds contradictory, especially with the extra time and monetary savings, but there were moments when I missed my commute. When you WFH, there is no buffer between work and home. I would tell my family to have a great day, walk upstairs and 15 seconds later I was thrust into the whirlwind that is the work day. It was like going from 0-100 MPH.

When I work from the office, the 40 minutes of solitude in the car is time I can spend on me. On the way down to work, I review mentally what I need to do that day. I think about how I’ll handle certain situations. I essentially plan out my day’s strategy in my head. When I walk into work, I am fully transitioned to “work mode” and ready to tackle the challenges. I think this helps me get traction quicker when I arrive at work.

The drive home is more about de-compression. Processing the day and also mentally shelving the problems I faced so I can be 100% present and focused on my family for the evening. When I WFH, there is no de-compression period at all. I have found that I still am thinking about work when I am supposed to be focused on my family. This is not great.

I think that ideally a 15-20 minute commute would be sufficient for the ramping up/decompression process.

Missed My Colleagues

I really missed being around people while WFH. Sure, I was on hundreds (or maybe thousands) of video calls over the last year and a half, but it was very hard to feel present with people. I missed the random office interactions. Seeing someone in the cafeteria, the water cooler or at the coffee pot. I found that my circle of interactions was restricted almost entirely to my project team. I really am looking forward to getting back to seeing people in person, building report and engaging in ad hoc communication again.

The other factor is there are a lot of new people that have been hired since the pandemic that I have never met in person before! I am looking forward to being able see them face to face!

Collaboration Was Hard

The type of work that I do requires me to do some individual work, but also to do quite a bit of coordination, planning and design with a team. Collaboration with a remote group can be tough while WFH. For instance, if we were in person, we’d likely gather around a whiteboard to plan or collaborate on a problem. When working remotely, we are limited in the tools we can use, and getting concepts (especially intangibles) can be more difficult with virtual tools.

I do feel I started to get better at this type of collaboration as time went on. One of the tricks I learned was to rely more on asynchronous communication. For instance, using a Google Docs for collaboration and then only meeting in real time to discuss specific points to the plan was very helpful. I think this is a tool that I’ll use even when I am back in the office.

Missed Travel

In general, I don’t travel a ton for work, but probably average 3-4 times per year, mainly to the West Coast. I have really missed traveling for work. Traveling is a great opportunity to see new things, connect in new ways with colleagues and add some excitement to work. Not traveling the last year and a half seems like a bit of a missed opportunity. I am really looking forward to traveling for work again once it’s safe to do so.

Bottom Line

There are pros and cons to WFH. For me, I think I ultimately prefer working from an office, but I have built up the skillsets to be successful from home too. I am really glad I had the experience of extended WFH as I learned a lot about myself and learned new ways of working that will help me in my career moving forward! And I’ll never forget the precious time with my family.

Whether I am working from an office or WFH, my goal is still the same.. Financial independence. With the return to the office, I plan to stay focused on my FIRE goals, save money and build wealth for the future!

03Aug

Try Out Retirement Now with “Trial FIRE”

Retiring early is a desire many people have. Maybe this is also your goal and this is why you came to this blog! However, getting to actual FIRE can be a lengthy process. You may not want to wait until you are 100% FIRE to get a taste of what early retirement will be like. How can you try out early retirement in the near term, even if you are not yet in a position to permanently retire early? Well, just like you would test drive a vehicle before making a purchase, there are ways to get an early “taste” of retirement life before achieving FIRE. Let’s call this “Trial FIRE”

Trial FIRE = Some length of time where you try out retiring early, with the safety net of a job (or plan) to return to traditional work

What are some reasons why might want to Trial FIRE?

You don’t really know if want to retire early. You may be concerned that you will be bored, miss the social interactions of the workplace or feel a void in your personal fulfillment by not working in a traditional work setting. Trial FIRE can help you to see what the experience is actually like, with the safety net of a plan to return to the workplace.
Your FIRE date is a long ways off and you need a break NOW. You may have been working hard for years and have made great progress on your journey to financial independence. You have built up enough wealth that you are not paycheck to paycheck. You have lowered your expenses to a rate that has allowed you to save a large chunk (hopefully 50% or more) of your income. You can’t yet FIRE, but you need a breather on your journey.
There are things you want to do NOW. You have things that you want to do or experience now and you don’t want to wait. Maybe it’s a trip around the world. Maybe you want to spend more time with your kids. Perhaps you want to start a business. If you just had some time, you would choose to do those things now, instead of waiting for FIRE.

Ok, fair enough. There may be compelling reasons to Trial FIRE. But you may wonder how to pull this off. How can you Trial FIRE without completely ruining your finances or derailing your FIRE journey? Here are some ideas:

Take a Long Vacation

The most lightweight version of Trial FIRE. You are still getting paid and your job is waiting for you at the end. Most people at most take a week off at a time. That really is not enough time to Trial FIRE. By the time you get relaxed, you are already thinking about going back to work. The minimum time for a Trial FIRE that I recommend is 2 weeks.

Since 2002, the longest break I had taken from work was 7 consecutive work days, which works out to about a week and a half. This summer for the first time ever, I took a 2 week vacation at a beach house and I was really surprised at how much of a difference I felt in terms of detachment from work by adding on that second week. I got into a rhythm, felt a routine and experienced on a mini-scale what retired life could be like. I read books, cooked meals, walked on the beach and rode bikes. I spent hours of one on one time with my kids. I felt relaxed and focused. I took the time to THINK. It was great! I learned a little about what I would want my own FIRE experience to be like as a result.

If this sounds good to you, I encourage you to save up your vacation days and try to take 2 weeks (or more) off. Talk to your manager in advance. Work hard before your Trial FIRE so that things are in order while you are out. Come back recharged and more focused on attaining your FIRE goal, since you know what it tastes like!

Paid Sabbatical or Leave

Some companies offer paid sabbaticals or leaves at certain cadences, such as every 5 years. These may be for a month, 6 weeks or more in length. Not all companies offer them, but they are more common in academic environments or big tech companies. If your company offers one of these definitely take advantage.

If you have a full month or more off, you will be able to do more with your Trial FIRE. You may be able to do some extended travel, deep dive into a passion or hobby or even get your own business started. By having the safety net of the job waiting for you, you can dive into these endeavors 100% and really get to explore. This will give you a great idea of what FIRE could be like. It might also give you some extra impetus to speed up your path to FIRE when you return since you have gotten to experience a taste of your dream for a decent chunk of time!

If you are able to use your paid sabbatical to start a business, this may plant the seed to an additional income source. This can accelerate your FIRE journey. It can also pave the way to an income stream that will support you after you retire from your day job.

I happen to work for a company that offers a sabbatical every 5 years and I look forward to taking advantage sometime in 2024. Right now, I am not sure exactly how I will use that time, but I am viewing it as a chance to learn more about what I want out of FIRE.

Parental Leave

Some companies offer very generous parental leave, in addition to the mandatory time off that may be required by the law. Some offer 4 months or more of paid parental leave, which is an awesome opportunity for new parents to explore FIRE. This is especially helpful if you are pursuing FIRE because you want to spend more time with your kids while they are young.

I have two kids ages 13 and 4, with a baby on the way! I am planning to take some extended parental leave next summer. This will give me a chance to bond with the baby, support my wife AND get to spend extra time with my older kids. I think especially the 4 year old will need some extra attention as she deals with not being the youngest anymore! The older I get, and the more I see my children changing, the more I realize how precious these moments are. I don’t want to miss anything! My goal is to build a lifetime of memories I can look back on and cherish when they are older and gone.

One of my main motivations for financial independence is to have the chance to spend more time with my kids. I am looking forward to my parental leave giving me a taste of what that life could be like, over a 3 month period.

Unpaid Leave

Perhaps a 2 week vacation is too short for you and your company does not offer a periodic sabbatical. What else can you do? Depending on your situation, you may consider talking to your employer about an unpaid leave. While every employer is different, they may be open to discussion about taking some unpaid time off.

You should consider carefully whether or not this is a good option for you, as everyone’s circumstances are different. Taking unpaid leave could be detrimental financially and to your FIRE progress if you are not in the right position to do so, or have not planned accordingly. You also want to consider things like how benefits will be handled if you choose to take unpaid leave.

Take a Year Off

Taking a full year off is probably the closest thing to simulation of FIRE that you can do. A full year gives you an extended experience and plenty of times to see the good (and potentially bad) side of retiring early. You also will likely have the chance to accomplish things from your bucket list, such as seeing the world or immersing yourself in a passion project. A year will probably give you a very good barometer of what FIRE will be like and help guide you into what you want FIRE to be. It also might be a fantastic way to take a break and experience something awesome while you are still young, and then pick up the FIRE journey again a year later.

Taking a year off is pretty serious. You really need to do your homework and understand if you are in a position to take a year off. Not only do you need to consider the financial side of things (including healthcare benefits, etc) but career impact. Depending on the industry or type of job you will want to return to, reentry into the job market may be difficult and take some time. So have a good plan, understand all the risks and give yourself a cushion if you choose to take a year off.

The Bottom Line

Trial FIRE can be an awesome way to try out what retiring early will be like before you actually achieve FIRE. There are small options like taking a long vacation all the way up to taking a year off! Do your research before deciding if Trial FIRE is right for you!

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 3^rd 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 3^rd 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.

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.
Once you have access, you will land on the My Social Security dashboard. Click “Review your full earnings record now”
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:

40% – Equity in Primary Residence
40% – Non-401K “retirement fund” from previous employer (Tax Qualified)
20% – Cash Value in Variable Whole Life Insurance Policy

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.