Archives for April 2018

If you are like I was one year ago, you might be asking what is FIRE? What is with all the acronyms? Is this really a movement? How do you define financial independence? This article is designed to break down the acronyms and concepts. Also, it gave me an opportunity to put words to my why of FI :). 

What Is FIRE?

So what the heck is this FIRE movement anyways?? I discovered the FIRE movement in the spring of 2017, which BTW stands for Financial Independence Retire Early. The more I listened to podcasts and read articles, the more I was blown away by what people in this community are doing. It all pivots from living off less than you make and saving the rest.  Delayed gratification at it’s best! 

There is a whole spectrum from which to choose your level of saving intensity. The math is obvious:

You may ask what are people doing with their time once they retire early? It seems to run the gamut – spending time with their family, raising their kids, homeschooling their children, gardening, teaching, volunteering, traveling the world, and pursuing passion careers – wow! 

My Why

Currently, I find fulfillment in my career and it’s not necessarily about retiring early. For me, it is about having options.

While I’m keen on building wealth, I’m discovering that it’s not the actual money that brings me gratification. The finite thing that I’m running out of here on earth is time. Financial independence will certainly give me more choices of where to spend my time. When you are not reliant on an income, you can take a sabbatical, a gap year, embrace flex time, work part-time, do mission work, travel, and simply help others more often.

My big why is all about helping others. Being that I’ve recovered from addiction/alcoholism, I’m drawn to helping others coming out of this same darkness. Yep, being financially independent will allow me more time and resources with which to do this. 

My faith is my life so when I hit my FI number, I recognize the freedom I will have to really go wherever God calls me. I have ideas of where/what this could be but it could be something I never imagined. The point is I’m willing to go and am being disciplined to create more space in my life for spontaneous mission work. 

Financial Independence

So what does financial independence mean? Firstly, it can mean many different things to many people. I know I felt a level of financial freedom as soon as I went above the line with my assets to debt ratio. However, it generally means having a large enough invested net-worth that you can live off the passive income it produces. 

There are several factors that come into play when trying to hit your FI number:

1. Know your annual expenses
   1. This is where it can get fun by driving down your annual expenses with frugality & other creative life hacks
2. Consider investing in low-cost index funds
3. Consider passive income like real estate
4. Take advantage of travel rewards (if you like to travel)
5. Understand the 4% rule and the controversy surrounding it

My Annual Expenses

While being a student of Dave Ramsey, I became really good at driving down my annual expenses. I learned to analyze what truly brings me happiness in life. I discovered that stuff doesn’t make me happy. It seems kind of obvious when I write it. However, the reality is that we have so many things vying for our consumptive attention in this country. It takes some creative thinking not to fall victim to it.

The thing I value the most is relationships and those can be fostered without spending a lot of money. Yes, it’s true that the common thing to do with friends is going out to eat, and this can get expensive, but it doesn’t have to be the only way. Here are some creative ways to hang with friends:

• Cook dinner together
• Play board games
• Take a walk together
• Play sports
• Do crafts (one of my favs)

Okay, so I do have one expensive hobby and that is skiing. I mostly gave it up while paying off my debt. Now that I’m out of debt, I have a line item in my monthly budget for skiing and plan to do a lot of it next year. I will be exploring hacks for skiing at reduced costs and if I discover any, I’ll share. 

If you read my first article or know me, you know I lived with my folks for the last year & ½ while I paid off my debt. It’s time to move back out. I’m moving into a little apartment close to my work and while my housing expenses are going up, my transportation expenses are going way down. My new apartment is close enough that I can walk or bike ride to work, grocery stores, my gym, and parks. Huzzah!

With my new living arrangements, I am calculating my annual expenses to be at $26,317.80. That doesn’t include what I save or invest. It simply includes what I spend money on every year for things like tithing, food, shelter, transportation, and entertainment.  I’m always looking for ways to drive that down. My other consideration is that I will own a house again someday and plan to do a form of house hacking.

House hacking simple means finding a way to live for a very low cost or free. One way to do this is to buy a duplex or a triplex and rent out most of it out while living in part of it.

The Math of FI

Now onto the 4% rule and how that applies to annual expenses. The basic premise is that if you save 25 times your annual expenses, theoretically you can live off them without drawing the money down. You live off 4% the first year of retirement and then adjust for inflation the subsequent years and you’ll have a good chance of dying before the money runs out. The 4% rule came from the Trinity Study which was conducted by three finance professors at Trinity University.  

There are a lot of questions as to whether 4% is truly a safe withdrawal rate. The obvious things that can affect it are market volatility and inflation. Big ERN at Early Retirement Now is an expert on safe withdrawal rates and has written a 23 part series surrounding the complexities of it. I had the good fortune of meeting ERN at CampFI Mid-Atlantic and hearing him speak on this topic. Very small changes in withdrawal rates over time can make a big difference in the final portfolio value.

Ultimately I’m deciding on one main key ingredient in early retirement…

Flexibility

I think if one is going to retire early, there are several key factors in setting yourself up for success:

1. Know your annual expenses (I mean really know your annual expenses)
2. Account for additional expenses in retirement (i.e. travel, health insurance, etc.). Justin from Root of Good was also at CampFI Mid-Atlantic and gave a really good talk about retirement budgets and the typical things most people don’t account for. 
3. Be willing to be flexible. Joel from FI180 has got this flexibility thing down. Consider listening to The Milestones of FI podcast episode.

How I plan to hit FI

At first, I thought that saving 25x my annual expenses seemed like an impossible feat. If we go with my current annual expenses, that will be $657,945. Now that I am an investor and understand the beauty of compound interest and low-cost index funds, I recognize it’s totally possible. What I love about saving for FI is that it’s really simple to understand. Remember simple doesn’t always mean easy, though. 

I have read several books on investment strategies and have settled on JL Collins book, The Simple Path to Wealth, as the clearest to understand and easiest to execute.  

My Strategy for 2018

Through my job, I have access to a simple IRA with Vanguard. My boss throws in 2% and I set up automatic pre-tax deposits to max it out ($12,500 in 2018). The good news is my contribution limit goes up to $15,500 in 5 years when I turn 50. For now, I have 80% in VTSMX (Vanguard Total Stock Market Index Fund Investor Shares) and 20% in VBMFX (Vanguard Total Bond Market Fund Investor Shares).

I chose 80/20 (stocks/bonds) for my asset allocation as I’m comfortable with that level of risk. Typically bonds and stocks are inversely related, and as JL Collines says, bonds smooth the ride.  Unfortunately, if we experience an inflationary decline, bonds and stocks are correlated and can go down together. This fact has me considering other asset classes to invest in…perhaps real estate or business? It’s yet to be determined but I have an online savings account which I am growing monthly for these options.

I also invest pre-tax dollars into an HSA account. I utilize Health Savings Administrators and set up automatic deposits to max it out for 2018 ($3,450).  With Health Savings Administrators I am able to keep 20% available for debit (health care expenses) and the other 80% gets invested in VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares). 

Additionally, I opened a Roth IRA with Vanguard. Here I am investing in ETFs since they have no minimum and their expense ratios are as low as the admiral shares. I will be maxing this out for 2018 ($5,500).

If any of the above sounds confusing, stay tuned. I plan to write an article explaining what mutual funds are comparative to ETFs.

So there you have it, an explanation of why I got on this crazy train. Ultimately FI lines up with my mission in life and I feel called to embark on this journey. How about you? Let me know your dreams/thoughts/questions…