How to Quit Complaining About Having No Money.
First off, you need to figure out where money inflows and outflows in your life.
First discover where your income actually goes each month. Does it go all to bills? Savings? A combination of things? Child alimony? You need to know where your money ends up every month so that you can begin to identify how you can keep more of it!
There is an all-to-common mantra out there about having no money. I hear people crying about it all the time. No money to pay bills. No money to save. No money to have one night out per week. The cries are endless.
Well, here is a newsflash for you: There was probably a significant amount of money that has already passed through your life since you began earning it. Don't believe me? Take a look at this example:
Most of my readers are actually probably making well over this amount, and they're still broke.
In the above example, I use the phrase "pass through" when talking about their money. This refers to the "in one hand, out the other" that typifies money management in the U.S. In this country, it is likely that all of your income goes out the door to expenses with little to no savings left over.
As of 2015, according to the U.S. Census data, the average single individual income is just north of $56,000. So how much money does a person making an average of $56,000 earn in their lifetime? The answer: $2.2 million dollars!
Why the Hell am I Telling You This?!
To prove a point. Somewhere along the ride you decided keeping more of your income was not all that important. You may have decided a new car, new clothes, a brand-new house were all worth having savings in the "slim to none" category. You may have decided that it was more important to own something, rather than own your own life. Your decisions make the indentured servitude of regular "nine to five" employment a guaranteed certainty until you meet an early grave.
You are responsible for this. Not your neighbor, Not your brother. Not a divorce. Not the weather. Not your injured knee. Not that tree that fell on your uninsured home. It's your fault. End of story.
Why do we need the pressure of it being "our fault"?! Because by assuming it is your fault, then you can begin to understand that you are the one responsible for changing it. Life happens to all of us. Unexpected expenses will continue to come. They do not end and they come at the worst time. Even innocent expenses like birthdays, holidays, baptisms, wedding, you name it, will continue to come at the most inopportune time. This is life my friend.
I take the extreme "my fault" approach to money management because it carries with it a zero-tolerance policy for excuses. Excuses are wasted energy. They rarely, if ever, do anything to change the actual situation at hand. Excuses are a bullshit coping mechanism that are designed to make you feel better about why you are not doing better. They are also used to help explain to other people why you aren't doing better in the hopes they won't judge you (trust me, they still are judging you unfortunately).
In the words of the late Jim Rohn...
"Don't wish it were easier, wish you were better".
You are the one allowing all of your money to be directed to accounts other than your own. In many cases, if you posses any type of debt, you are actually spending more money than you have even made in your lifetime. So while the lifetime earning numbers that we calculated above might be very impressive (especially if you make more money than the example I provided), you may actually find that you are spending more than your annual after-tax income.
To make the examples above more accurate, use your actual tax returns from previous years and add up what you have made in your lifetime (note: if you need these but don't have them, visit the IRS Website's "Get Transcript" page) . This can be a very empowering, or very depressing, exercise. If nothing else, it should merely demonstrate how little awareness you have about how much money you actually have made.
The concept of calculating your lifetime earnings is a great place to start to introduce you to your income and create a visual of how well (or poorly) you have managed it throughout your lifetime.
Although this is not completely necessary, I do feel it is an important first step to understanding how to manage your money. If you would like greater depth on this concept, take a look at one of my favorite personal finance books, Your Money or Your Life by Viki Robbin.
Where To Start If You Want to Improve Your Money Management Skills...
You have two options:
The reason why it is important to start here is to understand where you stand. You need to know where you are in order to understand where you are going. If I told you we needed to take a trip to Portugal and we needed to outline how to get there, we must know where we started (especially if we are already in Portugal).
If you insist that you cannot attain a positive net worth, or that you do not ever have enough money, how can you possibly know if this is correct unless you look at your inputs. I don't mean simply looking at your checking account every other week, I mean look at your longer term trends. If you were 100 pounds overweight, you would not assume that your dietary habits in the last 14 days was entirely responsible for this.
Pick one of the above, and get started. Increasing your net worth can literally be as simple as gaining a deeper understanding of your personal financial snapshot. Just knowing how much money flows into your life (lifetime earning) or simply understanding how much you have saved in your lifetime (part of net worth), you can begin to identify areas where you require significant input (expenses, savings, tax efficiency, retirement accounts, investing, etc.).
Part 1 concludes with encouraging you to understand where you are starting from. Two choices, 1) calculate your net worth or 2) calculate your lifetime after-tax earnings. Regardless, you decide. It is about getting started and this is proven to be an ideal way to get your ass moving on improving your money management skills.
Do I Need to Know the Simple Math Behind Financial Independence?
No matter where you are along your financial independence journey, "running the numbers" is an invaluable way to determine your financial health.
For many in the FI community, the details of years until retirement has already been written by a popular blogger (the mustache guy).
Aside from knowing your present net worth, why is it important to "run the numbers" at least annually.
We will cover calculating net worth in another post. For now, the basics are...
assets - liabilities = net worth
Assets are anything you can sell or utilize for future monetary value and are assessed at present value to the marketplace.
Liabilities are what you owe. Where is your money "spoken for". Include everything here. Even that stupid yellow couch you had to finance.
Why Should I? What if I Hate Math? etc.
First and foremost, you need to track your net worth because it allows you to always know where you stand financially. How close are you to your target? How much more money needs to be saved? Do I need to increase my savings rate? Decrease my expenses? You will need to keep track of the numbers. Keeping track of the numbers is the primary reason to calculate your net worth on an annual basis.
Yet that is not the only reason to "run the numbers".
The second reason to get your ass moving on the math is because of what you will become in the process. As the late Jim Rohn says (I am paraphrasing), 'Don't start doing something just for the sake of doing it, rather for what you will become in the process'. So if you think you are bad at math or terrible at tracking finances, then imagine how could you will get by practicing every year.
The third reason is because it helps keep you on track and motivated. By calculating your net worth, you are able to track your progress and stay motivated towards your goal. A word of caution: do not let this overwhelm you. Far too often I hear of this causing anxiety instead of providing motivation. You are only doing this to make sure you stay on track. Some years you will make large strides. Other years will seemingly be a standstill. Expect that. It is not supposed to be a nice, smooth, linear road along the way.
Fourth, you will be amazed at what you learn as you practice tracking your net worth every year. For example, four years ago I had no idea what the hell a 457(b) was... Now my wife and I have over $50,000 in one. I am not telling you this to brag---or maybe I am but who cares---but instead to illustrate my point. "You don't know what you don't know until you know it". Not sure who said that but it sounds profound, yet sound and true. You will discover things along the way that you never imagined will accelerate your net worth. It's like finding the login to your pension plan and discovering you have already contributed $70,000 to the plan which you can choose to withdrawal prior to retirement. You never accounted for that in your calculations, and now you get to add it all at once. Trust me, it will happen.
Fifth, you will identify where others are making mistakes. Use this superpower with caution. Don't be condescending. Be helpful. Point out to a friend the importance of investing in low cost index funds. Show your neighbor how to start investing. Inform your cousin of how you decided to choose your life insurance policy.
These points are all manifestations of you getting better at managing money by improving your ability to track and calculate your worth. It just happens naturally. Don't believe me... give it a try.
Quit procrastinating, and start tracking. Track your net worth. Track your expenses. Track your investment contributions and savings rates. If it causes you anxiety initially, that's alright... keep going. If you simply cannot get over the anxiety, then perhaps wealth and financial independence aren't all that important to you.
Leave a comment below. What have you learned by tracking your money over time?
Housing, Transportation, and Food
Let's face it, extreme frugality isn't that much fun.
To most folks, the idea of putting on 4 jackets in the winter and leaving the thermostat at 50 degrees Fahrenheit simply does not appeal. Standing in the grocery store comparing the cost per ounce of beans is, for many, not a recipe for a good time. Single-ply toilet paper is just too damn abrasive for the potential compounded annual savings over 2-ply for most people.
Don't get me wrong, my fellow frugal friends tend to be pretty weird. Some people actually blog about how they use industrial CO2 containers to make their own seltzer water. We tend to be a pretty strange flock.
If you are motivated by cost cutting and frugality on small ticket items, go right ahead. We won't stop you. Stay the course.
But if the idea of penny pinching on the little things drives you crazy then perhaps you need a much needed re-frame on your concept of frugality.
Enter "The Big Three" Expenses
Housing, transportation, and food.
For those of us who cannot tolerate the idea of skipping our latte factor items, there may be bigger fish to fry for you yet.
Saving on housing, transportation, and food is a hell of a good place to start. In fact, it may be the only strategy you will ever need.
Housing. Buy less house than you can afford, nothing more. Married with one kid and no plans for more? Why the hell do you need a 5 bedroom, 3 bathroom house? You don't. Be smart. Warren Buffet still lives in the home he bought for $31,500 in 1958.
Transportation. Don't buy a new car. Ever. It's really that simple. Buffet, one of the wealthiest men alive drives a midsize sedan, a 2014 Cadillac.
Food. Don't eat out. Split meals when you do go out. Cook at home a great majority of the time.
My Own Rules Regarding "The Big Three"
Housing. Give these guidelines to your mortgage or real estate professional if you have trouble computing a price range off of these numbers.
If you happen to know you need a budget, but cannot see yourself trading in your 2-ply toilet paper for 1-ply to save a few Shekels, then focus your efforts in these three areas.
Housing. Transportation. Food.
Comment below on how you have saved in these areas.
There Are Plenty of Skeptics and "Non-Believers" in Frugality
You might be one of them. I can hear it now---"how does saving $4 a day on my latte make me a millionaire" or "I enjoy my latte so it's not an expense worth eliminating if I need to feel deprived". That's just the story you tell yourself.
Perhaps you need to think differently. Our pals over at ChooseFI encourage "thinking a little bit differently". Frugality does not automatically imply you need to move out of your house, sell your car, ride a bike and live in a tent---all by tomorrow morning. It can, but the beauty is that it does not have to mean extreme deprivation.
In the financial independence and frugality community a term referred to as "the latte factor" has arisen. I believe the term originated with author David Bach. He even has written a great book titled The Latte Factor: Why You Don't Have to Be Rich to Live Rich.
But still, there are skeptics. I hear it all the time. Friends and family making excuses for why they just purchased a new car. New shutters. Remodeled their already remodeled kitchen. The excuses are always related to making themselves feel better.
Have you ever heard the statement "I am not making excuses but...". What typically comes after that statement. AN EXCUSE.
Take ownership of your finances and understand that the most important concept behind "the latte factor" is what you ultimately become in the process of eliminating a "fill-in-the-blank" expense.
The Real Cost of Your "Fill-in-the-blank"
What is your "latte"? What is the item that you immediately identify as a regular expense that you purchase at least once every few days, if not everyday?
Figure out how much that item costs you every month. Then take that monthly expense and plug it into this calculator.
For example, say I purchase a sandwich at work everyday of the typical work week. Say that sandwich costs $7. What if, instead, I could make lunch for $2 and bring it to work instead of buying that $7 sandwich? The immediate response is "I would save $5". Yes, but there is more! Now take that $5 per day and assume that you have approximately 20 weekdays per month which you would save that $5. For simplicity sake, that means we will save $100 just by packing lunch. Not bad. But it gets better.
Such a simple example yields over $100,000 difference over the span of three decades.
So imagine this, if you can adjust your mindset to think of "the latte factor", or rather, think of your "fill-in-the-blank" item that you do not mind giving up knowing it will add up over time.
Just assessing your lifestyle habits this way will change you. It will naturally adjust your mindset. It has the potential to train your brain to think differently. It might even eventually make you frugal. Who knows.
Taking this one step further, imagine you are able to find more than one item to save on over a lifetime. Now the potential savings can be in the millions instead of the tens of thousands territory.
So What's the Point if I Can't Every Have a "Latte"
The most common rebuttal to compounded savings is the concern that you will be depriving yourself. Yet that is not the point!
The point is that by choosing to limit yourself for a definitive period of time---like packing your lunch instead of that delicious hoagie for lunch everyday---you can ultimately choose to start purchasing that item again someday. The difference is that by limiting yourself for a defined period of time, when you ultimately choose to start spending that money again, you can restart the original behavior and then some! You can have your sandwich, and a new car, and a boat if you so choose. How? Because you chose to not spend on something for a defined period with the ultimate expectation to gain far more in the long term. This is the classic marshmallow experiment in action!
The Stanford marshmallow experiment was a study on delayed gratification in 1972 led by psychologist Walter Mischel, a professor at Stanford University. In this study, a child was offered a choice between one small but immediate reward, or two small rewards if they waited for a period of time. During this time, the researcher left the room for about 15 minutes and then returned. The reward was either a marshmallow or pretzel stick, depending on the child's preference. In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures. A replication attempt with a more diverse sample population, over 10 times larger than the original study, showed only half the effect of the original study. The replication suggested that economic background, rather than willpower, explained the other half.
That's the power of choice. That is the power of delayed gratification.
Ultimately the choice to be frugal now is because you can. Because you will never be younger than you are right now. You can possibly handle more now. Work more now. Cut spending more effectively right now. Delay your gratification. That's what frugality ultimately is!
Leave a comment below. What's your "latte factor" item? How do you anticipate this delayed gratification to benefit you in the long term?
Misleading claims by the so-called "Real Estate Gurus"
Most of the gurus out there (especially the guy with "two dads") espouses that you cannot live in an asset. They spout nonsensical, yet convincing reasons why you primary residence is not ever to be considered an asset. I assure you, they are wrong.
They usually cite the returns of housing and real estate in terms of rental property income. They argue that real estate investing does not include your primary residence. This notion is supported with anecdotes of expected returns in excess of 10% annually for rental real estate. But wait, 10% is the goal, it's not necessarily the average expected return of real estate.
According to data collected by Jorda et. al. (2019) from the time period of 1870 to 2015---over a century's worth of data---equities (stocks) beat real estate returns 8.46 to 6.10% respectively after being adjusted for inflation.
That 2.36% difference (8.46 vs. 6.10) in returns is actually attributed largely due to the inclusion of rental yields into the equation. The reality is, capital appreciation is much closer to 1% over the long term, according to Shiller (2000).
Many will argue that the measly 1% capital appreciation on homes is bringing down the real number associated with rental yields. They insist that rental yields are much higher.
Here is the problem, rental yields are very wide ranging and very difficult to predict or forecast.
Why? The expenses associated with owning this property are variable and largely unknown. Many self-proclaimed real estate gurus will cite things like the 1% rule, depreciation, interest deductions, insurance, and refinancing all as tools and strategies to use against these variable expenses. Not sure about you, but this hardly sounds like a solid strategy.
If somebody is coming to you reporting they can tell you how to get your first 30 rental properties, all with $0 down and zero recurring maintenance, I have advice for you... run. This whirlwind strategy deals with highly leveraged properties and more mortgages than you can count.
Further, there are simply too many unknowns associated with rental real estate. Consider any one of the following unexpected costs associated with rental real estate:
Regardless, we are talking home ownership here, not rental real estate.
To evaluate a home as an investment, we will need to know how much a house appreciates over time. This will allow us to measure it's monetary value as an investment.
How much does a house appreciate over time?
Well, this is a tricky one. To find the real answer we should look at the Case-Shiller Home Price Index. There are several indices but the one we focused on was the national home price index.
This index primarily excluded new home construction (there is a separate index for that) and focused primarily on resale of existing homes within a given time period.
When digging through Shiller's website data (available on his website for free), I found historical data---measured with a 3 month moving average---since 1953 (I chose 1953 as a starting point because that appears to be the year they began updating the index on a monthly basis).
Now, the data is broken into real and nominal values. The difference is crucial. The real home price index is adjusted for inflation and is updated for "today's dollars". The nominal price index does not adjust for inflation.
Why worry about the difference between real and nominal values on homes?\
The real home price index from 1953-2019 increased by 54.16%
That's a huge difference!
So why is there such a difference? Well, the nominal home price increase is much larger in the bullets above because it fails to account for the fact that the market value of $1 in 1953 is not the same as the market value of $1 in 2019. This is primarily due to inflation. In other words, a single dollar went "much further" in 1953 than it does today. Plain and simple.
That is why the real home price index is a more useful tool in calculating the expected annual rate of return of housing. This is because it equates yesterday's dollars with today's dollars by adjusting for inflation.
By evaluating the change in real home price index figures from 1953-2019, I calculated an annualized rate of return of 0.81% per year of capital appreciation on your home.
Now that we have calculated the expected annual rate of appreciation of your home, let's dive into the discussion of seeing your home as an investment.
Plenty of confusion surrounding the word investment
Most people simply do not even understand the basics of what is considered an investment. An investment is something that you attain now with the prospects of benefit in the future.
Typically, this is referred to in terms of financial gain. However, this is entirely misleading due to the fact that there are many types of investments don't even generate a positive return.
Some examples of investments that fail to generate positive returns over the long-term:
These are all acknowledged as investments, yet they lose money. So sure, your house can still "lose money" if you sell it at the wrong time, but it's still worth something.
Technically speaking, an investment is simply something that you anticipate will be worth something in the future. You hope it will be worth something in the future that is of benefit to you. But remember, beauty is in the eye of the beholder. Your definition of "benefit" is not a universal definition, it is unique to you only. Many would simply be happy knowing that their house will be worth something someday, regardless of how it compares to the original purchase price--especially if it's paid for.
But can your house make your rich like other investments?
Yes. At least indirectly it can improve your overall net worth.
One of the best write-ups I have seen on this conversation is found here, written by Michael Bluejay. This guys does a great job of analyzing the entire circumstances of a home ownership in a simple, one-page article. He breaks down the concept of "Rent we didn't have to pay" as line item in expenses.
Rather than reinventing the wheel, Bluejay discusses how the average person will have to pay hundreds of thousands of dollars in rent over a 30 year period---which is also the length of the average mortgage.
He breaks down the difference in value of two scenarios:
The math is extraordinary but the numbers are very practical and they do check out. See them for yourself here.
The punchline in Bluejay's article is that by renting you lose over $300,000 over a 30 year period, even if you invest the difference between renting and buying. He recognizes in his example that home ownership may appear to lose money as well, but that's if you forget to include "Rent you didn't have to pay". Basically, this is what he considers to be an objective measure of "having a place to live".
Paying rent over 30 years--at $1,200 per month--would cost you a total of $432,000. At the end of that 30 years you have nothing to show for the $432,000 spent in rent. What's even worse is that this calculation does not even account for the fact that your rent will most assuredly increase over the course of the next 30 years.
Even if renting costed you $300 less per month than buying---which is lunacy because in many desirable areas renting is actually just as expensive, or even more expensive, than buying---and you invested that difference over 30 years with an 8% return. You would have $407,819. You didn't even break even! Not to mention that you also don't have a place to live after 30 years of hard work. That's a terrible trade-off.
So yes, home ownership is considered an investment.
Why Your Primary Residence is the Best Real Estate Investment out there.
First and foremost, let's address the intangibles. Home ownership, subjectively, is:
Objectively, a home is a place to build equity. To realize appreciation, even if it is only 0.81% per year. Further, the faster you pay off your home, the less interest you will ultimately pay.
Many will argue that mortgages and home ownership will leave you paying nearly 2.5 times the original purchase price. I agree with that math if it takes you the full 30 years to pay off the house. That is why I recommend early and aggressive principal reductions---or buying your house in cash if you are in a position to do so.
Your home is definitely an investment. Case closed. Show this to your pals who insist they have a helicopter leverage strategy to take out a second mortgage on their home to buy a 300 unit apartment building because it is a great investment. I feel sorry for your friend, I really do.
1. Shiller, Robert J. 2000. Irrational Exuberance. Princeton, N.J.: Princeton University Press.
First, Let's Clarify a Few Things
Mutual funds are professionally managed investment portfolios. They are funded primarily by the shareholders (investors) like you and I. Typically, their goal is to generate the highest rate of return annually for the shareholders of the portfolio. They do this by actively trading investments inside of the fund. Marketing and advertising for new shareholders (investors) is typically done by comparing recent returns of the mutual fund to that of a benchmark--typically an index fund.
Index funds are actually a type of mutual fund. An index fund is a passively managed that seeks to match a given index. The Dow Jones or S&P 500 are two of the most common indices.
So why is there so much confusion out there about mutual funds vs. index funds?
Although index funds are technically a type of mutual fund, they differ significantly in almost every other way.
For the sake of clarity, it helps to divide the entire category of mutual funds into actively managed and passively managed. Therefore,
What's the difference between mutual funds & index funds?
Fees and management style.
The typical fees of a mutual fund are in excess of 2%. The typical fees of an index fund are often less than 0.1%. Doesn't sound like much? Well, it is!
Let's look at an example headline from our friends over at NerdWallet:
Millennials have decades to save for retirement, but also decades of exposure to avoidable investment fees. NerdWallet analyzed a variety of scenarios and in one case found that paying just 1% in fees could cost a millennial more than $590,000 in sacrificed returns over 40 years of saving.
What is even worse is that this only looked at a 1% fee. Compounded over time, the loss of that measly 1% fee is extraordinary as outlined above. Remember, the average active mutual fund fee is well over 2%.
To make matters worse, if you happen to hold an actively managed mutual fund in a taxable brokerage account, you would need to beat the passive fund by 4.3% just to match the return of the passive fund. Why 4.3%? Professor Mark Kritzman of M.I.T. conducted a study reported in The New York Times.
So if your so-called "index beating" mutual fund was held in an taxable brokerage account.
If you held this actively managed fund in a tax-advantaged retirement account, you would still need to generate at least 2% higher returns just to break even with the passive index fund.
The average actively managed mutual fund consists of the following fees:
Why choosing actively managed mutual funds is a mistake...
There are professional money managers who spend their whole entire life's work trying to time the market and, guess what... 92% of actively managed funds fail to match the returns of the market (i.e. S&P 500 index) over a 15 year period.
If your investment horizon is 15 years or greater- which includes you unless you plan on dying in the next 15 years- you stand practically no chance of picking the 8% of actively managed funds that will outperform the market. What's worse is that not only would the actively managed fund you chose have to beat the market, but it would need to beat it by at least 1.5 to 2.0%.
Why would it need to beat it by at least 1.5%? Fees and expenses. The average index fund has less than 0.1% in fees compared to the 2 plus percent fees of active funds.
See why you are better off choosing index funds instead.
I know many are thinking that 1 or 2% in fees doesn't sound like a lot, but trust me, it is. For example, saving even just 1% on fees could result in big differences compounded over time. Remember, the cost of a 1% fee could cost you $590,000 over 40 years, which is a very typical investment horizon.
WARNING: Your Financial Advisor Will Sound Very Convincing!
Remember, index funds---i.e. passively managed funds---do not generate revenue for your advisor's company. The index funds simply don't make money for your advisor because they do not have all of the above fees associated with them. Beware, your advisor might still charge an "advisor fee" or an "administration fee" which is why I am a firm believer in the DIY method of investing in index funds.
I promise that your current advisor will pitch you something like this:
Our advisement provides you expertly managed portfolios with industry leading research tools that often outperform index funds. We have an experienced staff dedicated to selecting blue chip funds that have demonstrated superior returns in recent market conditions.
This is literally what my advisor emailed me when I exited a high-cost fund through a previous employer's 401(k) program.
It's bullshit. Complete nonsense. Even if they do generate higher returns, it does not last. Never has. Likely never will.
I am certain you will be able to find funds that outperform the market over 1-, 3-, or even 5-year periods. But outperforming index funds over your entire investment lifetime? Outperform for 30 or more years, in a row? They don't exist. Not one ever has.
Perhaps some of you are in a position to require a financial advisor. Some might need to receive tax advice. There are even some of you who are not willing to take just a few minutes to open your own account or call your advisor and inquire about fees and how to lower them by switching to passively managed index funds in your portfolio.
To those of you which this applies, I encourage you to seek the professional help that you require. Do not do so blindly however. Ask. Ask. Ask.
Ask about fees. Ask about expenses. Ask about commissions. Be inquisitive. It's your money and to them, it's just a job, so ask them about the costs associated with their account.
Your failure to ask could result in hundreds of thousands of dollars of expenses over a lifetime.
It's not unreasonable to think that if you start investing in your twenty's, and you live to be 90, you may be invested in the market for 70 years! Now imaging what those 2% fees will do to you compounded over 70 years.
Be smart. Be curious. Don't be shy and don't be afraid to ask some questions. Even if you were able to save 1% in fees just by switching to passively managed funds, it could result in you retiring much earlier with a lot more money someday. It's worth it.
Until next time...
Comment below with your experiences with active vs. passive funds. Index funds vs. mutual funds. Fees and expenses. Run-ins with your advisors commissions. Share with your community.
Financial Independence Retire Early (FIRE) Movement
You may have heard of it. It's all the rage lately. Financial Independence Retire Early. FIRE.
But is it for real? What is it all about? Is it here to stay?
Early retirement. Passive income. Side hustling. Sequence of return risk. Debt payoff. Taxable vs. retirement accounts. Roth conversion ladders. These common FIRE terms are on fire right now (all pun intended).
Truth is, I think it's all bullshit. Don't get me wrong, I am all for financial freedom and financial independence, but I don't want to join a cult to do it. I also don't think that the only way to do it is with retirement as your sole motivator. As a matter of fact, let me argue why retirement is the worst possible goal to shoot for!
Why FIRE is Misleading...
Most of the financial independence community is very encouraging. Great tips and helpful information are shared like never before.
What concerns me is that personal finance is, well, personal. It is unique to your own individual needs. Your path to financial freedom and financial independence does not have to be based on retiring early, although it certainly can be.
Most of us want to work. Hell, most of us are looking for enjoyable work. Problem is, most of us hate what we are doing right now.
The people of the FIRE community tend to discuss passive income strategies that allow you to sip pina coladas at the beach all while having a $5/hr virtual assistant (VA) drop-shipping shit from China to customers. Sound like bullshit? Well, it is.
Yes, there is certainly money to be made this way. How long will that last? Who knows. It might last for decades. The problem is it doesn't seem to drive at the real problem here, your lack of purpose in life.
Early retirement does not seem to encourage a blood-thirsty pursuit of purpose in life. We all need purpose. Dr. Viktor Frankl famously discussed the importance of purpose in his personal true story about surviving the holocaust, Man's Search for Meaning.
The FIRE movement is centered on the concept of achieving your number, the target net worth and savings so that you can have F-you money and walk away from your job. I agree, having F-you money is very valuable in life. But the real value is in attaining that number so that you can do the things you really want to do in life.
Trust me, as badly as you think you want to, you really don't want to "retire". Retirement means doing nothing. The Oxford dictionary describes retirement as:
Retirement - "the action or fact of leaving one's job and ceasing to work"
That's not what I am looking for. I am not looking to cease working. I am looking to find more meaningful and purposeful work. Most of you are as well.
Early retirement is what happens when you treat money as a means to and end. Treating others, and things such as money, as a means to an end is very dangerous and leads to greater self suffering. This concept is hashed out in best-selling author Mark Manson's work Everything is F*cked: A Book About Hope.
What society certainly does not need is a bunch of "retired" 30 and 40 year olds, aka early retirees. What society does need is more people pursuing purposeful work.
If you have a problem with being told when to come and go from work, when to take vacation, and arbitrary rules, then I will be the first to inform you, so do I!
Reaching financial independence, for me, is about permitting myself to do the type of work and choosing my own suffering in exchange for long-term benefit. Manson introduces the concept of choosing your own suffering as a form of "self-limitation". His example is choosing to "suffer" through the pain of physical exercise in exchange for greater strength, endurance, mobility and improved health.
So What Are We Doing Instead of FIRE'ing Ourselves?
We are setting ourselves up to choose our own suffering.
When you are paycheck to paycheck, in debt, too much month at the end of the money, you are not in a position to choose your suffering. You need your current job with all the bullshit hours, rules, and demands that come along with it. You rarely can afford to step away and fully pursue your passion. You're stuck. Many of us are there. Many of us have been there for decades. Even I was there. It wasn't pretty.
25x annual expenses. 4% withdrawal rates. Geo-arbitrage. Passive income strategies. These are all examples of common FIRE terminology.
You can use any or all of these terms from the FIRE community, but use them not as a means to an end. I propose you use them, not to retire, but to find your purpose. A pivot on FIRE is relating to "work optional" status wherein you can choose to leave your current job at any time as you are financially secure.
I encourage you to separate the "FI" from "FIRE". Actually, just get rid of the damn "Retire Early" and focus solely on financial independence (FI).
Financial Independence permits many opportunities for you to no longer be beholden to your present job, especially if you dislike it greatly and do not find purpose in your work.
The biggest problem in the FIRE community is the underlying concept that we should eventually be able to attain a life with freedom to recline in a hammock everyday if we so choose. The major flaw of this underlying ideology is that there will always be a part of your life that will suck. Always.
Assuming that we are chasing an environment that completely avoids suffering and "the suck" is completely impractical and in and of itself, ironically leads to greater suffering. We suffer more, not less, when we assume that life should be completely devoid of pain and suffering. That's a complete falsehood. There will always be pain. Suffering. Suck. Always. It is not avoidable.
The real power is when you are in control of choosing your suffering. Physical exercise is a great example. Me sitting down and writing this damn post when I would rather do just about anything else, is another example. I am choosing to do this, rather than something else, with the concept that there will be some future return---hopefully the future return will be you getting your head out of your ass but only time will tell.
Leave your comment below. Love it or hate it, life is not about retiring. Going through your entire life with one goal, to retire, seems like just about the worst form of hell on earth. I challenge you to look further and realize that your problem is not that you are not retired, your problem is that you just haven't yet found out why you are important to the world, however big or small that importance may be.
How to Make a Real Difference Saving Money
I read and hear about too many cost-saving methods that are impractical and simply do not produce quite the return they promise.
First, figure out why you want to save money.
Are you saving for a house? Saving for college education? Saving for an investment? Saving for anticipated expenses such as repairs or maintenance?
Second, please realize that saving money does not have to be difficult. It also does not need to lead to massive deprivation where you use candles instead of lights (plus candles are a fire hazard).
To prove my point, here are 3 stupid items that I save real money on every single year. Results may vary.
3 Crazy-Simple Ways to Save Money Every Year
1. Eating Almonds
Almonds, my number one snack food item.
I buy a ton of them. Not literally a ton, but damn close. I buy a 40 oz. bag of whole raw almonds online for less than $13.
A typical 16 oz. bag of almonds at the store is $8. The bag I buy online is 2.5x larger but costs less than twice as much. 40 ounces of almonds would cost me over $20 at the store therefore I save about $7 per 40 ounces. I go through a full 40 ounce bag every week which means I save $7 every single week. This adds up to over $350 of savings every single year.
2. Smarter Paper Products
Single-ply toilet paper and half-sheet paper towels. These two are game changers for me.
I can buy a 1000 sheet single ply toilet paper that lasts for 6 months for less than $7 at the store. Supposedly the average American uses $10 worth of toilet paper per month. By switching to single-ply TP I have been able to spend only $14 per year, per person in our household. This comes out to a little over $1 per month of TP usage. This equates to a savings of over $100 per year compared to the average American 2-ply user!
Half-sheet paper towels allows me to be significantly more mindful of how much paper towel I was using. Full sheets are bullshit. Rarely do you ever need a full sheet. I cut my paper towel usage in half my first year using half-sheets. How much could this switch realistically save? I use two less rolls per week at which saves me over $150 per year.
3. Drinking Filtered Water
Using a water filter could potentially save you big money every year. If the typical household purchases a case of water every week, and bottled water is approximately $5 per case of 24 (depending on where you live), you could save $250 in bottled water every year. If you buy two cases per week, you might be able to save over $500 per year.
Some of these companies even claim you can save up to $1000/yr, but that's a pipe-dream in my opinion.
There are two popular options depending on how often you want to change the filter and how easy you want your experience to be:
Saving Money is Easier Than You Think...
Here is proof that even these 3 ridiculous ideas can save you serious money every year without effecting your quality of life via deprivation.
These don't involve turning the thermostat to 45 in the winter or 90 in the summer. They don't involve biking 30 miles to work. They sure as hell don't include eating noodles everyday (just almonds).
What are 3 things that save you real money every year that might surprise fellow readers? Comment below with your answer.
Dr. Jon is a physical therapist by day, and a dedicated frugalist by night, deeply enthralled in the thrill of "pinching pennies" and investing the margin.