Words to Live By in the FIRE Movement

In the famous, life-changing book, Rich Dad Poor Dad, author Robert Kiyosaki shared in Chapter 2 that financial literacy is what sets the rich apart from the middle class and the poor. I agree completely, but there’s A LOT to learn. In my previous article, Day 18 of Financial Freedom in 2021, I defined a list of terms to get acquainted with when developing your personal finance vocabulary. Understanding different retirement investment vehicles, tax terms, and the basic steps of financial independence is important, but there are additional terms that many people in the FIRE community use quite often.

I repeatedly hear the following words or phrases from individuals who have reached financial independence, and while technical vocabulary is important, these seem to be the ones to truly live by.

“Simple Life”

Many FI families emphasize living life to the full but in a more simplistic way. It’s not necessary to fill your home with excess material goods, travel to the hottest tourist locations, stay in 5-star hotels, live in the biggest house in the neighborhood, or drive the newest luxury SUV to have an abundant life. The happiness factor on all of these things fades.

What makes life full is the people in it and the experiences you have. Think of someone you look up to, maybe a grandparent or neighbor or civil rights leader. What do you admire about that person? Is it their stuff or what they did/do with the life they were given?

I admired my aunt who lived in Michigan. She was a devout woman who worked as a special education teacher and served her church community multiple days per week, including bringing communion to elderly residents in a nursing home. My aunt didn’t travel much except to visit our family occasionally, and she lived in the same house for nearly 40 years. She raised two boys on her own and lived with a debilitating kidney disease for many years before she passed. Despite all of that, she was able to retire early and paid off her house. I don’t remember much of what she had in that house other than several crosses and religious paintings, but I remember fondly how much joy I felt while staying there. My aunt was always happy. Every day in her simple life seemed joyful, and it was contagious. Her frugal life had a greater impact than the life of luxury and debt that I see many people living today.

“Community”

Relying on a community of like-minded individuals is a common thread in the FI culture. I often hear FI folks speak of how much they rely on their neighbors and close friends for help with babysitting or carpool, to participate in clothing and toy swaps, to agree to share meals in each other’s homes rather than going out to a popular restaurants, and for support on common goals.

If financial independence is a goal of yours, then a community of Joneses, and those chasing after them, won’t do you much good. You need to find a community of Frugalwoods, Money Mustaches, Rich Dads, and Mad Fientists, along with some kind and like-minded neighbors. There are Facebook groups and meetups related to the topics of minimalism, frugal living, financial independence, swapping, and cheap travel that can be great places to start when looking for the type of community mentioned above.

“Lucky” or “Blessed”

Gratitude is one of the biggest mindset shifts necessary to achieve financial independence. Being grateful for and recognizing the blessed life you already have is the first step in financial freedom, in my opinion. I practice daily gratitude in prayer, and if you listen to podcasts or read blogs from people who have already reached FI, most of them write down what they’re grateful for at least once per day. They also mention often how lucky they are for buying real estate when they did, investing early, having college paid for by their parents, finding an influential book during a turning point in their lives, for meeting the man or woman who gladly walks this FI journey alongside them, and so on. In the FI community, I hear very little bragging yet a whole lot of thankfulness.

Photo by Gabby K on Pexels.com

“No Regret”

Mistakes are only failures if you don’t learn from them. A common thread in the FI community is that people are willing to share their mistakes and what they learned with anyone willing to listen. They don’t dwell on or regret their errors in judgment but rather celebrate them for helping to move them along on a better path toward financial freedom.

Welby Accely openly shares how he was scammed multiple times and cheated out of hundreds of thousands of dollars before he became a successful real estate investor. He doesn’t regret these poor decisions. They made him stronger and taught him what NOT to do. He attributes his current success to learning from those mistakes.

What I love so much about the FI movement is not just the freedom that financial independence offers but the positive mindset and meaningful lifestyle it encourages. While developing the strategies of living on less money than you make, investing the difference, and making your money work for you are essential to financial independence, the phrases mentioned in this post (and the attitudes they represent) are what truly make this movement worthwhile.

Adjusting the Budget for Job Loss, Planned or Unplanned

Do I need to find another part-time job?

Job loss was one of the biggest realized fears that crept in after the COVID-19 shut-downs in March of 2020. Many people were forced to adjust their lives and their budgets due to being furloughed or laid off with short notice. Thankfully, along with the loss of those jobs came higher and extended unemployment benefits, economic stimulus packages, relief from eviction or foreclosure, and fewer opportunities to spend money. Who knew that after mass lay-offs around the country that now, a year later, there’d be a shortage of labor, not jobs! A large percentage of the workforce learned how to adjust to one income or a lower income and have now chosen to be unemployed, with or without the government benefits.

In my situation, the business my mother and I started about 15 years ago managed to stay afloat through the pandemic, but the effects it’s had long-term on both of us, as well as our client caseload, may lead our business down a path of never fully recovering. We are considering closing our family therapy practice for good. This is a combination of forced and chosen job loss, for which I now have to adjust our family budget.

Over the many years, I’ve slowly reduced the number of hours I put into the business and also the amount of my pay. I have a very flexible schedule and work exclusively from home, which has been such a blessing at the current stage of my family. I still have two preschoolers at home with me three days per week and two older children with very busy extracurricular schedules. The paycheck has been smaller than when our business was at its prime and our caseload was overflowing, but the extra money has been essential to getting us ahead in our journey toward FI. We’ve been able to contribute the full amount of my part-time income to investing and charitable giving, while meeting all of our living expenses with my husband’s salary. Now, we will have to make cuts as my mother and I move closer to closing the doors to our practice for good.

My total take-home pay is currently $1,910 per month. $1,700 of that goes toward my ROTH contribution (averaging out to $500/month but invested as a lump sum at the beginning of the year) as well as my husband’s and my combined contribution to our joint brokerage account ($1,200 automatically invested into VTSAX monthly). The other $210 is set aside to make charitable contributions of our choice each month. This giving is in addition to tithing.

The last thing I want to do is cut out our investing or our giving when I lose that monthly income. Whether we’re a one-income or two-income household, we still plan to hit FIRE by 50 (or hopefully sooner). Continuing our current rate of investing is essential to meeting that goal. So, I now have to make some tough decisions about where to reduce our spending or whether to take on more work to replace that income.

I can also take into consideration the cash flow we are receiving from our rental properties, if that’s where the money is best served right now. However, we’d ideally like to put all our cash flow this year toward reserve funds or future real estate investing.

So, I decided to dedicate a slow, rainy, unseasonable cold morning at home to analyze our current expenses and determine where I can “find” as much of that $1,910 per month in our budget. There is a strong possibility that my final paycheck will come in June, so we will need a total of $11,460 for the last 6 months of the year to make up for the loss. That’s a big chunk of change!

Our annual budget was my first place to look. I discovered that I had budgeted some overages in our savings categories above the contributions mentioned above. Because we already have a 12-month emergency fund, plus money set aside to buy our next two vehicles in cash, I decided to re-allocate the $1,000/month going into our online savings account. That adds up to $6,000 over the 6 months that I’d be without my part-time income.

Then, I reviewed what I had budgeted for a new life insurance policy this year and what we actually spent. After reading about life insurance options, listening to a couple podcasts on the topic, and doing some comparison shopping, we were able to secure a term life policy for my husband for much less than we had budgeted. We had $860 set aside for that new policy (as a supplement to the one offered through his W-2 job), but we only spent $380 and paid in full. Therefore, we had a surplus of $480 in that category. Additionally, we’ve already pre-paid for all of the kids’ summer activities and camps, as well as the registration fee and August tuition for our preschooler, leaving us with no child care costs for the summer. We will not have to pay the $749 monthly preschool tuition for three months, and we can remove the $300/month we’ve been budgeting for kids’ activities and camps. That leaves us with another $3,147. A few additional cuts include a decrease in cell service fees for a savings of $100/month by switching to Mint Mobile; cancellation of Camp Gladiator membership for a savings of $79/month; and cancellation of private horn lessons now that our eldest daughter will be receiving additional band instruction each day at her public high school for a savings of $100/month. These three changes add up to $1,674.

Also, I’ve resolved to going back to at-home haircuts for all the males in my household, which amounts to a savings of $85/month. That will provide us an extra $510 through the end of 2021.

The total amount “found” in our annual and monthly budgets to make up for the loss of $11,460 in income is $11,811!! I was able to complete this analysis in less than half an hour using the detailed spreadsheets I keep for our family’s income and expenses. With the conclusions drawn, it will not be necessary for me to find other part-time work to replace my lost income for the second half of the year! We can continue making substantial progress toward our FI goals without sacrificing what’s important to our family or seeking additional sources of income.

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Many people fear that having detailed budgets and tracking expenses will limit their spending and, therefore, their happiness. However, I find that these practices provide the opposite: freedom! And for me, freedom with my time (and my family’s time) is the ultimate goal of pursuing financial independence.

If you find yourself in a similar position, either preparing to leave your current job or fearing that you might lose yours at any moment, I definitely suggest tracking every dollar you spend, if you haven’t started doing that already. Once you have a framework, finding places to make cuts is pretty easy.

If you’re already a great budgeter, think of your income loss as a total dollar amount through the end of the year instead of what you need to cut or save each month. Recognizing that there are annual expenses/allocations that might be easier to cut than your monthly ones might give you a little room to breathe (and spend) when the expected or unexpected happens.

For more specific ideas on where to make big cuts, check out 9 Ways to Save this year.

9 Easy Steps to Buying an Index Fund

I’ve been asked several times, “How do I get started in investing?” Usually, my response includes several follow-up questions, such as, “What are your investing goals? What’s your risk tolerance? How much money do you have to invest? Have you started first with your employer’s 401K? Do you have debt? An emergency fund?” and so on. There can be dozens of factors to consider.

Then, I recently came to realize that many of my friends were simply asking how to take the steps to open an investment account and contribute to it. Most had already decided that they wanted to invest a certain amount in the stock market but didn’t know how to actually start a new account (outside of 401K investing). Hopefully, the 9 steps below can be helpful to those who are looking for a literal answer to that initial question.

The guide in this post is specific to opening a Vanguard account because it’s the brokerage firm we use, but the process is likely the same or similar for other firms/banks.

Why do we choose Vanguard? We consider it to be the leader in low-cost index fund investing. After all, John Bogle, the founder of Vanguard, was also the inventor of index funds. Vanguard makes investing easy and has several options for mutual and index fund investing. If you’re more interested in trading stocks, options, and ETFs than taking the simple path to wealth, those trades are commission-free. Vanguard also has great customer service, including agents who will answer even the most amateurish questions and will gladly walk you through every step if you get stuck while navigating the website. For all of these reasons, my husband and I have both our ROTH IRA’s, as well as a joint brokerage account, with Vanguard.

Other highly-recommended brokers include Charles Schwabb and Fidelity, which also carry a wide variety of funds and low fees for many of them. (We have investment accounts in both of these brokerages and a few others due to past employer offerings, but we are slowly transferring balances on accounts with higher fees to Vanguard. We’d like to consolidate and reduce fees as much as possible.)

If you’re ready to purchase index funds, here’s your guide on how to do it in 9 steps or less:

1. Have your bank account info available, including routing number.

2. Go to Vanguard.com and select the Personal Investors page.

3. Click on “Open an Account”, then select “Start Your New Account”.

4. Follow the prompts and answer the questions on subsequent pages.

5. Determine the type of account(s) you want to open based on tax advantages, income limits, and contribution maximums.

• The max contribution for an IRA each year is $6,000 for under age 50 & $7,000 for over age 50.
• Simple rule of thumb: Traditional IRA‘s give you a tax deduction now, but you will pay taxes on the withdrawals in retirement. ROTH IRA‘s require contributions from earned income and do not give you a tax deduction now. But they allow your money to grow tax-free and allow you to withdraw the earnings tax-free in retirement. Also, you can withdraw ROTH IRA contributions (not earnings) before age 59 1/2 after owning the account for 5 years. (So, if you contribute the max for 5 years, you can withdraw the $30,000 penalty-free as soon as that 5 years ends, but you can keep your interest earnings in the account.)
• Brokerage Accounts, also called Taxable Accounts, General Investing Accounts, or Non-Retirement Accounts, have no contribution maximums, no income limitations, and also no tax benefits on the interest you earn or the sale of funds. You are subject to taxes on all of it the year you receive the money. These can be joint or solely owned.
• The other available options are investment accounts for children or small business owners. More on those in a later post.

6. Provide personal and banking info.

7. Complete required paperwork and send it in.

This may take several days for a response.

8. IMPORTANT: When you receive confirmation of funding via email, go back into your Vanguard account to select funds to invest in.

Index funds are recommended very often in the Financial Independence Community. VTSAX is one of the most common ones and allows you to be invested in ALL 500 companies of the S&P 500. Read more about index funds here. Index funds track almost identically over time, so don’t stress too much about which one you choose.

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https://www.personalfinanceclub.com/

Keep in mind that an index fund is a 100% stock investment. If you’d like to limit your risk a bit and balance out your portfolio, you can invest in a bond index as well, which pays monthly dividends. (We reinvest ours.) Many investors believe that the closer you are to retirement age, the higher percentage of bonds you should hold in your portfolio to minimize risk. (Reminder – lower risk usually means lower return.)

If you’re still not sure how your investment portfolio should be balanced, Vanguard can walk you through a risk assessment quiz to determine asset allocation for your target portfolio before you choose your investment funds. You can also view how different portfolios have performed over the last 94 years.

9. Buy!

Follow the prompts to buy the funds you’ve decided to invest in. You’ll select the desired fund(s), choose the dollar amount you want to invest, and designate where you want the money to come from (likely the bank account you uploaded).

If, at any point, you’re stuck or not sure what step to take next, open a live chat with an agent, read FAQ’S in the margin, or call Vanguard customer service.

Voila! You’re invested in the stock market! Hopefully you’ll watch your money work for you! My husband and I have seen 30%+ returns in the last couple years. These gains are unusual as we’re still in a bull market. Fluctuations are to be expected, but because we plan to keep our money in these funds for over 10 years, we feel good about riding the waves.

For a more in-depth guide to getting started with Vanguard, go here.

Everything written in this blog is based on personal experience. It is not professional advice and should not be taken as such. Personal finance is personal, and decisions should be made based on analysis of individual situations, as well as risk tolerance and financial position. 

Fuel your FIRE: Your Why for Financial Freedom

Financial Freedom in 2021! Take Action: Day 30

Wow! We made it to Day 30! I calculated that I’ve written (and you’ve read) over 25,000 words in the last month. That’s enough words to fill 1/3 of a novel, and all of them were about saving money and investing for the purposes of financial freedom.

But why?

In my post titled, What Does Financial Freedom Mean to You?, I summarized what motivated me to jump on board with the FIRE movement:

“Financial freedom allows the ability to let go…

of maintaining a specific image; of an addiction to other people’s lives; of the shackles of material goods; of the restrictions placed on me by others; of saying ‘yes’ when I want to say ‘no’; of saying ‘no’ when I want to say ‘yes’; of negative relationships; of working to achieve someone else’s dream.

It provides the option to linger…

with a baby in my arms; in bed all morning with my husband; on the floor in my kids’ playroom as they set up a tea party; at church after service or maybe on a Wednesday; on a restaurant patio with a friend; at a beautiful beach all day; in my sister’s living room catching up on a favorite TV show; at my mom’s house sipping coffee; at my children’s favorite museum; on the hiking trail or in the river at a state park.

It affords the privilege of indecisiveness…

on whether to build a forever home, buy an investment property… or both; on whether to volunteer in local church ministries, start the business I’ve always dreamed of… or both; on whether to do travel homeschooling, keep my kids in public school… or both; on learning to play golf, participating in an over-40 soccer league… or both; on whether to write a book, start or podcast… or both.

It commands the responsibility to give…

financial literacy lessons to my children; personal finance advice to the young and old; donations to charitable organizations; more time to important projects; opportunities to the underprivileged so that they can break the cycle of poverty; gifts to my church; more of me to those I love.”

It’s this final paragraph that makes the FIRE movement especially appealing, not just for myself, but for the entire community too. I recently heard that while others might see an individual’s push toward financial independence and early retirement as a selfish, greedy move, the truth is that most people in the community want to use their freedom for greater good.

Those who’ve reached FIRE write blogs to help others improve their money situations. They host podcasts and share the best tips available. They write books to make investing easier. They teach classes for free to the under-privileged, under-educated, and under-represented. They run fix-it clinics, start buy-nothing sites, and inspire minimalist movements. FIRE people don’t keep this to themselves; they share what they know and encourage others to make the best use of their money as well.

Consider the type of people who truly subscribe to the Financial Independence Retire Early life. These people are often intelligent, motivated, educated, persistent, goal-driven, risk-tolerant, and innovative. When people with these qualities are freed from the daily grind, their talents can then be put toward philanthropy and changing the world we live in.

Take action today on Day 30 by determining what fuels your FIRE and decide what good you could do in the world if earning a regular paycheck was no longer a top priority.

Thank you so much for going on this 30-day journey of action steps toward financial freedom with me! I truly hope it’s been helpful and that you’d be willing to share these tips with others.

I invite you to subscribe to this blog and follow Frugal_with_Four on Instagram. I’m looking forward to sharing so much more on living this frugal yet wonderful life with you.

Thanks for reading!!

Know Your FI Number

Financial Freedom in 2021! Take Action: Day 19

Whether you plan to retire early or work until the Lord takes you home, it’s helpful to know the magic number you’re aiming toward to no longer be dependent on a regular paycheck to pay your bills and live a full life. Your FI (Financial Independence) number is the amount of net worth you need to support you for the rest of your life moving forward.

The breakthrough Trinity Study published by three professors from Trinity University in 1998 determined a safe withdrawal rate* from stock portfolios despite the fluctuations of the market, and the conclusions they made have had a huge impact on retirement planning. Their research produced the “4% Rule” mentioned in yesterday’s post. What this means is that if you can estimate your annual expenses for when you plan to retire (or when you’re hoping to reach that state of financial freedom), you can multiply that yearly amount by 25. This is a simple way to calculate your FI number.

Here’s an analysis of how I’ve calculated my family’s FI number:

• Anticipated Retire Early Date: January 1, 2030
• Family Status (at that time): 2 children graduated from high school, 2 still in grade school
• Potential Side Income: Real estate investing (monthly cash flow)
• Estimated Annual Expenses: $70,000
• Expenses Remaining after Side Income: $70,000 – (10 homes * $3600 cash flow) = $34,000
• Required Net Worth: $34,000 * 25 = $850,000
• FI Number (with RE investing): $850,000 … almost there!
• FI Number (without RE investing): $1.75 million … NOT almost there!

There are so many variables, right? But that’s ok. The analysis is the the fun part. It’s a game to see how low you can get your expenses by paying off debts and cutting unnecessary spending. There are also so many ways to earn a passive income to offset your anticipated annual expenses and decrease your FI number; real estate is just one of them. What’s important is that you continue to keep track of your expenses and net worth with intentionality. If you do that, chances are that you’ll reach FI much sooner than planned.

In the example above, I conservatively estimated owning 10 doors in our real estate portfolio at $300/month cash flow, but our goal is to own 20, and maybe our average cash flow will be even higher than that. If so, we may be able to cover ALL of our anticipated expenses through those investments. We may also downsize our home with fewer children living with us or we may decide to do traveling homeschool, which will decrease our living expenses, and therefore, our overall annual expenses.

The point is that things will change; the future is unknown. The good news is that you now have a framework and an easy way to calculate your FI number even as income, expenses, and investments change.

Another aspect to consider is that many believe that the safe withdrawal rate is now higher than 4% and closer to 7%. This would significantly reduce how much you’d need in your nest egg. At a safe withdrawal rate of 7%, our FI Number (without real estate investing) drops to $994,000!

Today’s action step is to calculate your FI number. It’s ok if you have a few different scenarios with a few different outcomes. Just doing the calculation will give you a ballpark to aim for and get you in the habit of doing the math as things change. There are FIRE calculators online that you can use to find your FI number while taking into consideration your side hustles, higher or lower withdrawal and return rates, as well as anticipated expenses. So… what’s your number?

*The safe withdrawal rate (SWR) method calculates how much a retiree can draw annually from their accumulated assets without running out of money prior to death.

Set your Priorities

Financial Freedom in 2021! Take Action: Day 2

There are about 20,000 ways to set goals and about twice as many books, websites, worksheets, webinars, and videos to teach you how to do this the “right” way. Goal-setting can feel overwhelming, and figuring out how to start can be a deterrent to starting at all. Instead, I try to identify my top *priorities* first. I find it helpful to make a short list and a vision board of what’s most important to our family before thinking through budgeting, saving, investing, or goal-setting.

For us, those priorities are (in no particular order):

• Travel (hoping to see all 50 states before first child graduates)
• Family Traditions
• Tithing/Giving
• Saving 25% of income for early retirement
• Real Estate investing (2 doors/year)

Other priorities that might make your list include: Career Advancement or Change, International Travel, Marathon Race(s), Visiting Out-of-Town Family, Ministry or Mission Work, Retirement this Year, Climb a Mountain, Vacation Home, Pay Off Debt, or Start a Side Hustle/New Business.

For today, make your family’s specific list. Write these down in a journal or under the net worth number you calculated yesterday. Once big priorities are set, it becomes much easier to set incremental, measurable goals. These priorities will also become key in establishing your annual budget. More on that tomorrow…

FIRE By 50… Starting at Age 40

Can it be done?

I had never heard of FI or FIRE until just before I turned 40 years old. At that point, I didn’t consider it a possibility for me and my family. I was turning FORTY. I was a stay-at-home mom. We have 4 children. We love to travel. Plus, my husband and I had recently chosen to move to an area with an esteemed school district and elevated home prices to match.

FIRE was not in our cards.

However, hearing about this movement and the different paths people chose to reach financial independence piqued my interest in a way that money and finances never had in the past. Money was simply a means to gain possessions, feed our family, and to pay for vacations. I had never considered money as a path to freedom….

But once my eyes were awakened to this idea, my brain couldn’t shut off. I made a list of books to read and devoured them quickly, often calling my husband mid-day, excitedly sharing new tidbits or strategies I had learned. I started binging podcast episodes and blogs during every free moment I had. I spent hours and hours learning. There seemed to be no end to the ideas and creative ways to completely change my life through better money management.

When it finally set in that maybe we could forge our own path to financial independence despite the obstacles I saw in our way, I scribbled down a list of requirements to get us to FI(RE) at 50. With that list staring me in the face, I was again inclined to say, “This isn’t in our cards.” But something stronger was tugging hard at me. It was an adorable toddler with bright blue eyes and blonde hair who was born with an innate spirit of adventure and risk-taking. As he tugged on my arm to lift him in my lap, I looked at that list in a whole new light. The fire in my belly surged and the smile on my face widened. I looked my baby boy in the eye and announced, “We’re going for it!”

Goals to reach FI by 50…

1. Track spending every month and maintain an annual and monthly budget.
2. Practice frugality consistently to decrease expenses and increase savings rate to at least 25%.
3. Pay off debt (car loan) and don’t take on any new debt (outside of mortgage).
4. Move savings/emergency fund to high yield savings account.
5. Invest additional savings in Index Funds.
6. Take part-time work for extra cash (me).
7. Sell primary residence for profit and set aside funds for real estate investing.
8. Buy new home with very low interest rate and in low tax rate neighborhood in same school district.
9. Purchase 1-2 cash-flowing rental properties per year for the next ten years.
10. Use equity or do cash-out refi of a few investment properties to fund college, technical education, or business start-up for each child.
11. Continue to decrease expenses as first two children graduate, then sell/downgrade home and purchase one with cash or practice geographic arbitrage.
12. Wes retires, and we live off of rental property income and investment dividends…

FINANCIAL INDEPENDENCE!

As of today, September 11th of 2020, almost two years into our journey, we’ve accomplished the first 8 goals and started on #9. We’re in the process of purchasing our first long-term rental property. I never thought we’d be this far along in such a short time, but I also recognize that the last several goals will be the hardest, especially finding ways to fund multiple rental properties and learning how best to manage them. But we’ve made it this far, so there’s no turning back now. I hope this blog and my readers can help to keep me accountable. Please share what’s worked for you.

Do the difficult things while they are easy and do the great things while they are small. A journey of a thousand miles must begin with a single step.

Lao Tzu