Tag: FIRE

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! 

Magic Money Machine!

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? 

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.” 

“Yes! Its July 1!!!!”

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! 

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!