Balance. Enjoying today and planning for tomorrow.

Hello class and welcome back to Fire Univesity. Today I want to talk about something that is very personal to me and Mrs. FU. Recently my family received some bad news in the form of a health diagnosis. In light of dealing with the eventual death of someone we love and being forced to acknowledge our own mortality, it has caused us to reflect on finding the right balance between enjoying the present moment and saving for the future. Our family member is fairly young and faces a reality of not living much longer, having spoken to them they have regrets about waiting to do things until retirement as well as fears of not having saved enough to care for their spouse and kids. This created an interesting question about the reality of postponing spending money and having instant gratification versus saving and waiting to spend money until later in life. When speaking to older people that are near death, I don’t recall ever hearing one say they wish they had saved more or spent less, never a single person, their regrets are usually centered around the things they didn’t do. Things like staying in a job they didn’t like instead of pursing a dream job, or never having the courage to sell everything and move to a new place to live a life they dreamed of.  However I have never met an older person nearing retirement or in retirement that hasn’t said they wish they had started saving and investing sooner. That’s a weird combination isn’t it. When you think you have health and time, you wish for more money but when you are out of health and time you wish for more of both and could care less about how much money you have. I try to be mindful of this and live in a way that will not create regret later in life but it is so hard, there are so many things that pull at us for attention and time continues to pass, whether we like it or not. Kids grow up and become adults, parents grow old, and spouses both have different demands that seem to battle for attention. I wonder how many rich old people would trade it all to be a teenager again?

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Personally Mrs. FU and I are very frugal but because we have always lived that way we do not feel like we are sacrificing anything. Also as the parents of four kids we both prioritize saving to ensure their futures as well as ours. This is where the FIRE journey comes into play and why it is such a powerful lever for us to pull. Pursuing FIRE does take a lot of discipline and sacrifice, we could easily afford much nicer cars and a much larger house, however I am not convinced that either would provide more enjoyment or happiness. In fact I think that by learning to be present in the moment and by practicing gratefulness for the simple things in life it actually makes us happier and more thankful for the things we have. Since we have a simpler live style we are able to save a larger percentage of our incomes and therefor hope to hit retirement earlier than the average person. By not locking ourselves into large mortgages or ridiculously expensive car loans, we are able to not only save more but we are also able to enjoy more disposable income. So we are enjoying the present, while also saving for the future. Our shared goal or purpose is for Mrs. FU to retire before 50 years old and both of us spend time traveling and enjoying life doing the things we have always dreamed about doing. I think retiring any earlier than 50 would harm our long term financial goals such as paying for our kid’s college and saving enough to withdrawal 3% of our nest egg to live off of, which will give us the peace of mind to know our money will last as long as we do.

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There is peace in having a plan and knowing the math behind the plan, however when you see a life cut short it makes you rethink the why behind the plan. So is sacrificing in the present worth saving for something that you may never get to enjoy? Well in our opinion YES. For us the satisfaction of knowing that we can not only provide for ourselves in retirement, when we need our money to work for us, instead of us work for our money. Add to this the fact that our children will have a strong foundation to build on for their financial lives and we are confident that we are making the right decisions.

Another way of looking at this is that being financially independent would allow us to know that even in the absence of one of us, the other surviving spouse would not be destitute and unable to maintain the same quality of life. The thought of knowing that you would not only be unable to physically protect someone but that you would also be leaving them in financial ruin would make being sick even worse. The age old saying that money doesn’t buy happiness is true, however it does provide peace of mind and comfort knowing that your loved ones will be okay no matter what.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

Personal Vision and Mission Statements and why you need them.

Hello Class. Welcome back to FIRE University, in today’s class we will be discussing the importance of creating personal vision and mission statements. Most of us are probably familiar with mission statements from seeing or hearing them at companies you’ve  worked for. So to start lets define what they are.

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A vision statement is what you would like to see yourself doing in the future. A great example might be “To have a job I enjoy that both pays a quality salary and offers a great work/life balance.” Another example might be  “To live in an area I love and to have plenty of money to spend time with the people I love and doing the things I enjoy.” These examples are simple but profound enough to add clarity to where you would like to be someday. Once you have defined your vision statement it is easier to set short and long term goals that are designed to propel you towards that vision. Examples of these goals might be to start saving 25% of your annual salary, another might be to have a $100,000 saved by the age of 30. Yet another might be to travel and find an area that you really enjoy and then work on finding employment there.

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A mission statement is a little more complex than the vision statement. A mission statement is a short statement defining what you are passionate about and usually includes something that is very important to you on a personal level. Some examples of personal mission statements are, “To create financial independence for me and my family. To use my talents and resources to enrich the lives of those around me and to help others reach their financial goals.” Another example might be, “To eliminate all debt in my life and prevent myself or others from falling into debt bondage. To improve the lives of those I love and care about through educating them about the dangers of consumer debt.” As you can see a personal mission statement is a short but sweet statement that sums up your main purpose and goal in life.

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Of course there is so much more to life than money, so your vision and mission statement don’t have to include anything about money, but since money is how we facilitate trade both locally and internationally, we should be realistic enough to realize that like it or not it plays a major role in us being able to truly enjoy our lives. Financial Independence allows all of us to be able to make the decisions that affect our long term happiness, such as what part of the world we want to live, the types of creature comforts we choose to enjoy, and most importantly how we choose to spend our time.

Your homework for tonight is to create your own personal vision and mission statement. I can’t wait to see what all of you come up with and look forward to reading them.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

How missing my goal helped me find my purpose.

Hello class. Welcome back to FIRE University, In today’s class I want to talk about the importance of setting financial goals. They say that the measure of a good goal it should be realistic, achievable, tied to a time frame, and motivating. For many of us, especially those of us in the FIRE community our financial independence goals are highly motivating and if we can tie them to a realistic and achievable time frame then we just may have a recipe for success. Now I want to share with you my own experience with setting financial goals. As a young man I set a goal of being independently wealthy or financially independent by the age of 35, that seemed old at the time. I am now 36 and have changed my goal to fit my current life. I decided to extend my FIRE age from 35 to 45, which is a little more realistic. So to define financial independence,  it is when I have accumulated enough assets to completely retire and not be dependent on outside sources of income. The goal is to acquire enough income producing assets to cover my monthly expenditures, however at 20 years old I didn’t have a good grasp of what life would bring or what type of income I would require later in life. My original goal was to hit a million dollars in net worth, which at the time seemed like a a lot of money and a good round number. Originally I thought I would do this by starting a small business but later decided to achieve it through traditional earned income. Around the time I hit 30 years old I began changing my goal and moved back the age and the net worth. I decided on creating passive income since I wasn’t going to have access to a pension and then build up a nice investment portfolio of stocks and bonds. I decided to do this by investing in rental homes which allow for both monthly income from the renter as well as the renter paying down the mortgage, which creates forced equity. So we have income and equity as well as a host of taxable savings such as depreciation that I can claim. The next goal was to accumulate $1,500,000 spread between my 401K, ROTH IRA, traditional IRA and brokerage accounts. I figured that would allow me to safely withdraw 3% of my account value to live off of without ever exhausting the principle and in fact adding to it with a conservative return of 5%. So I’d be withdrawing 3% but earning 5% annually over time. At $1,500,000 a 3% withdrawal would equal about $45,000 in income, which is actually enough to cover my basic expenses but coupled with the rental income and the elimination of my personal debt obligations, it would all be a great amount of disposable income. At 45 years old I would use that income to leave corporate America and bridge to age 67 where I would begin taking Social Security income and be eligible for Medicare.

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So did I fail at my goal, yes and no. I did achieve a level of wealth accumulation that would have allowed me to leave work but the income I needed in my twenties isn’t what I need now as a father of four children. I have changed my goal because now I am in a job I love and instead of selfishly leaving work, I plan to focus more on creating a lifestyle I enjoy and leaving a legacy to my four children. I feel that even though I abandoned my original goal that it was instrumental in allowing me to position myself for future success and to create a sense of strength from which I am able to make decisions.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

 

The Best Investing Strategy

In this class we will discuss the best investment strategy for everyone. Now this is sort of a loaded statement as it’s probably obvious that there isn’t one investment strategy that is perfect for everyone but there are many basics that will ring true for all investors. If you haven’t read our post FIRE 101, which talks about the basics of becoming financially independent and thus having the option to retire early, please check it out. There are as many different investing strategies as there are investment managers but this class is meant to focus on the basics of portfolio design within the constructs of the FIRE lifestyle and community, which is mostly based on low cost index fund investing.

First let’s explore the different types of accounts available to hold our investments in.

401K – Usually provided by an employer but can be for business owners. 401K accounts are employer sponsored accounts where the company will usually offer a matching program where they invest dollar for dollar in your account, matching your contributions up to a certain percentage. 401K contributions are pre-tax, meaning they are not taxed going in and are allowed to grow tax free within the account. Income and asset appreciation are not taxed.

Traditional IRA – Similar to the 401K but with smaller contribution limits and instead of contributions coming out pre-tax they are able to be claimed on tax returns to reduce your taxable income.

Roth IRA – Retirement account where contributions are taxed going in but allowed to grow tax free and be withdrawn tax free. Income and asset appreciation are not taxed.

Brokerage account – Individual account where contributions are taxed going in and when withdrawn. All earnings in the account are taxable but not asset appreciation until sold.

Now that we have discussed the various types of accounts to hold our investments in let’s explore the different types of investments we can use.

Large Cap, Mid Cap, Small Cap – Each category of Large, Mid, and small cap refers to the actual capitalization of the companies in the fund. So large cal would be the 500 largest companies based off market capitalization and small cap would be the smallest companies based off market capitalization

Total Market – Basically what it says, fund that tracks the whole stock market

Foreign stock index fund –  Can be Large, Mid, or small cap just like above or total market also. It tracks foreign stocks outside of the USA.

R.E.I.T index fund – Real estate investment trust are investments in commercial properties. A REIT index fund will track either certain sectors or the whole market

Bond index fund – A bond index fund will track the bond market or a specific segment of the market depending on the fund.

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Now that we know what type of accounts we can use and a broad understanding of the types of index funds available to invest in, let’s look at how we can actually build a portfolio. It has long been said that you can do this simple math equation to determine you allocation of stocks/equities to bonds (100 – current age = Amount of stock in portfolio) So for me it would be 100 – 36 = 64. So according to traditional wisdom I should have 64% of my portfolio in stocks and 36% in bonds. While this is a simple and time tested method let’s look at what some other famous people suggest.

JL Collins author of The Simple Path to Wealth and well known blogger, suggest using only two funds VTSAX (total stock market) and VBTLX (total bond market) over at his blog at https://jlcollinsnh.com/2014/06/10/stocks-part-xxiii-selecting-your-asset-allocation/

Paul Merriman a famous investor and long time champion for index funds shares the same philosophy of Mr. Collins but suggest adding in small cap plus foreign and emerging market funds, which he shows will yield a slightly better return over time. You can check out his material at https://paulmerriman.com/the-ultimate-buy-and-hold-strategy-2017/.

Scott Burns the person who created the Couch Potato portfolio shares Mr. Collins approach and suggest holding only two similar funds VFINX (total stock) and VBMFX (total bond) You can see more at https://couchpotatoinvesting.com/

Dave Ramsey who is world famous for his debt snowball system and for helping thousands of people to rid their lives of debt recommend a four fund portfolio. Growth and income. Growth, Aggressive Growth, and International. It should be pointed out that Mr. Ramsey is a big advocate of mutual funds and most FIRE investors are not, but it is interesting to see the similarities in his portfolio investments and you can find them at https://www.daveramsey.com/blog/how-to-invest-in-right-mix-mutual-funds.

Ray Dalio is a billionaire investor who runs one of the world’s largest hedge funds and the main character in Tony Robbins’ book Money Master the Game suggest what he call the all weather portfolio, which consist of stocks, long term bonds, intermediate term bonds, commodities, and gold. As you can see his portfolio is probably what we would consider the outlier in the group but he obviously knows what he is doing. To learn more check out his Bridgewater website

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In closing as I said earlier there is no one size fits all when it comes to portfolio design but there is one big secret that I will tell you. The best investment strategy is the one you can stick to, yep that’s right, after all this the best piece of advice is to pick a simple strategy that you can stick with for the long term and just keep plowing money into it. Jack Bogle was famous for saying to just keep investing and not even look at your account until you are ready to retire but make sure you have a cardiologist present because you are going to be shocked at how much money you have. The truth is that most of the losses the average investor suffers is what we call self inflicted wounds, meaning it is not due to the market but due to their own irrational fears or desire to try to time the market. While some in the FIRE community dislike Dave Ramsey, he is correct when he says that it isn’t as much about whether you use mutual funds or index funds, rather it’s about actually getting started saving and investing and leaving it alone to let compound interest work it’s magic.

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There is one more piece that is worth mentioning. The reason for holding stocks and bonds in an account is because they are non-correlated or basically they tend to move or react differently to economic fluctuations. Historically stocks have yielded a much higher return than bonds but bonds tend to be more stable and prevent large losses in the account value, which may cause many investors to lose their grit and sell at the wrong time, thereby locking in big losses. So as we age they say to move more into bonds because we are getting closer to retirement where we will be more dependent on our savings rather than our ability to earn income. So here is the question, since we need stocks to participate in the growth and appreciation but need to lessen our exposure to them the closer we get to retirement but need to keep some to ensure we don’t run out of funds and at least keep pace with inflation, then how does someone who is planning on retiring early need to allocate their portfolio? Well if you are 30 and want to retire by 40 then you are only 10 years away from retirement, so by normal wisdom you would have a very small exposure to stocks, however because you plan to have a much longer retirement than traditional, in my opinion you will need to actually have more stock exposure to ensure you money last for 40 year. I am currently 36 and plan to retire from full time work by 45, by then we hope to have enough rental income and business income to live off, as we will have retired all of our mortgage debt and only have basic food, insurance, utilities, and fun money to worry about. We do have four kids but we have been saving for their college in 529 accounts. So this is my current allocations in my various accounts.

401K 

60% – large cap S&P 500 index fund

20% – International non-US

20% – Total bond index fund

Traditional IRA

60% – VOO

20% – VEU

10% – BND

10% – VNQ

 

Roth IRA

50% – VTI

20% – VYM

20% – VEU

10% – VNQ

 

Brokerage account

70% – VTI

30% – VEU

 

This is important to mention. This is PERSONAL finance and this is our personal asset allocations. Ms. FU and I are both employed and have what we consider stable jobs, plus we could easily live off either of either of our incomes alone. Our goal is to live off of the 401K and slowly convert the RMDs from the IRA to the Roth account as the Roth is basically an inheritance to our kids along with a couple brokerage accounts to help cover the tax cost of the tangible assets they will receive. I should also mention that these are my accounts and Mrs. FU has her own similar accounts as I do but they are not included nor their holdings.

 

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

 

The Nifty Fifty

Before we begin class I would like to say that the statements made in this lecture are mine and only represent my personal opinions, they in no way are meant to represent any company or share of said companies as good or bad purchases, nor to make any attempt to insinuate that the individual companies aren’t good investments, instead they are to help shed light on how I attempt to use past performance and investor behavior to analyze and predict future market fluctuations. Also for complete transparency I need to say that while I am predominately an index fund investor, I do own shares of several companies that we will talk about in this lecture. These shares represent a small portion of my overall portfolio and are held in taxable accounts and a Roth ira. I took positions in these companies because I like analyzing them and reading their 10q and 10k reports, yes I’m a dork.

During the 1960’s and 1970’s the Nifty Fifty referred to 50 massively popular large cap stocks listed on the New York Stock Exchange. These companies were all regarded as buy and hold bets that were thought to be not only safe but almost certain bets, much in the same way that many young investors are beginning to view index funds. Many great and highly recognizable companies such as Anheuser-Busch, IBM, Johnson & Johnson, Black and Decker, Coca-Cola, Gillette, McDonalds, PepsiCo, Disney, Walmart, and Xerox were on the Nifty Fifty list. So in many ways buying into the “Nifty Fifty” was similar to buying an S&P index fund. Interestingly enough over a long period the best performer of the Nifty Fifty seems to be Walmart which had a return of 15,854% when last calculated about 5 years ago. If only we could go back in time and go all in on Walmart Stock, we would be very very well off.

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In my opinion we can draw many similarities to today’s current market with the popularity of the FANG (Facebook, Amazon, Netflix, Google) Stocks. In fact those stocks coupled with Apple and Microsoft account for over 70% of the S&P 500’s recent gains and tech stocks as a whole account for almost a quarter of the S&P index, of course the silver lining is that unlike the dot.com bubble where almost anything with .com behind it had a huge valuation, today’s top tech companies are actual businesses that provide amazing products, are profitable, improve or simplify lives, and are highly innovative companies. So what does this all mean? Well looking back at the Nifty Fifty stocks that investors fell in love with during the bull market of the late 60″s and 70’s, where investor’s over confidence in the Nifty Fifty stocks that were supposed to be sure bets drove the share prices above sustainable levels and it was that speculation and overconfidence that subsequently led investors to continue to pour money into them even though their prices were becoming way over valued and eventually led to a major bear market where prices fell by almost 50% and lasted for several years. So in my opinion we can draw a correlation between the Nifty Fifty and the large cap index funds of today. So if we know that in 2017 and 2018 the S&P had the highest market valuation ever and that just a handful of companies are accounting for a very large portion of the valuation, coupled with massive over confidence of the average investor, historically low interest rates, and the longest running Bull market in history, then it is in my opinion that we need to begin to draw comparisons to the past and take steps to avoid similar results, or pick one and go all in, I’m kidding, please don’t do that. Now don’t get me wrong all the FANG stocks as well as Apple and Microsoft are all great companies with amazing business plans, strong balance sheets, loyal customers, and great products offered the world over. Each of these individual companies could continue to see increases in their share price as well as index investors could continue to see the market climb and climb. It is worth noting that it usually isn’t the businesses that cause the problem with the share prices, it’s actually the investors that get greedy and instead of investing based off of actual company earnings, they begin to speculate and believe/hope prices will just continue to rise, in the hopes that someone else will come along and be willing to pay them more for the share than they paid. We discussed in a recent article that Mrs. Fu and Myself have very different views on how to handle market fluctuations and I would recommend checking it out to gain insight into our opposing views. It is my opinion that even though we have a strong economy, low unemployment, and almost historically low interest rates that we should be amassing a large cash position to take advantage of the eventual market downturn. I mean just imagine a national clearance day sale, where all major companies were selling their goods for 20%-50% off!!! Well when the eventual bear market does take place that is essentially what will happen, except instead of consumer goods it will be shares of the actual companies that will be on clearance.

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As you all know I am a part of the FIRE community and an  index fund investor and believe that the best course of action is to minimize expenses as much as possible, increase income as much as possible, and save the difference to invest. I believe that over time index funds will offer not only the best long term return but do so with the least amount of stress and worry. I say this because of all the amazing companies in the Nifty Fifty, how could anyone have guessed that Walmart would offer the best returns? I mean I love Walmart and I’m always amazed at how Sam Walton was able to build such an amazing company that offers it’s customers items from all over the world at such low prices but you would have to be one lucky person to pick it over every other company. So this leads me to what in my opinion is the best course of action, I think that at least 20% of your current contributions to your retirement accounts should currently be going to a money market account to be held for the chance to take advantage of the average investors current overconfidence in today’s market. Let them buy HIGH and sell LOW.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

 

 

Mr. FU vs Mrs. FU – Reacting to a bear market

Yesterday in a class discussion the topic of preparing for a bear market came up and it was interesting to see that my wife and I have different views and plans to handle a drop in the market. What is a bear market? A bear market is a drop of 20% or more in the stock market. It is worth mentioning that bear markets are very normal and should be expected every so often, in fact on average they happen about every 4 years and last for about a year, interestingly bear markets are usually followed by a bull market which is an increase of 20% or more and the best part is that bull markets usually last for several years or 4-5 times as long as bear markets. So the question was if we know that we are due for a bear market or a drop in prices what should we do to prepare ourselves?

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Mrs. FU was the first to field this question and her stance was to do NOTHING, absolutely NOTHING!!!! Her advice is that she believes in the investing plan and the asset allocation she has and that it will be successful over the long term, so she will continue to dollar cost average regardless of what the market is doing. She plans to have her asset allocation set and only readjust it once per year to realign her holdings to match her desired allocations. It is worth mentioning that Mrs. FU is usually right and I get in to the most trouble when I don’t listen to her:)

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I Mr. FU decided to add my stance on the question next. I believe that we are overdue for a significant drop in the market but must add that markets don’t go up or down based on the length of a bull or bear market, they rise and fall based off of a number of factors. A significant drop is usually due to a bubble caused by mass speculation that artificially drove up the prices. This was seen in the tech bubble where companies were being traded for unreal prices, especially considering most didn’t even have any earnings just lots of hype. I would like to also mention that every single share of a company listed on a secondary market is owned by someone, so to buy a share someone else has to decide to sell it, this means that someone has to have an opposing view of the value of the share as the one you have. My personal plan and what I am currently implementing is to continue to invest the same amount in all my tax advantaged accounts but to allocate a large percentage of those funds to a money market account, basically holding them in CASH until I see a good buying opportunity. When I see a significant drop I will first change my future contributions back to domestic and foreign equities and slowly start using the cash reserves to buy shares at a nice discount, the plan is to spend 25% of cash reserves at a time to see if the price will keep falling. I have not and do not plan to liquidate or sell any of my current holdings, just to use the cash reserves to buy shares at a significant discount.

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So who is right? I would say that Mrs. Fu has the safest plan and that in 40 years it may not make that big of a difference what exactly we paid per share as they will be worth much more anyway. The main thing is that we are both fully funding our tax advantaged retirement accounts as well as using our taxable accounts. We both practice paying ourselves first or as we call it “forced scarcity” by having the funds taken out automatically before we even have a chance to spend them and we have aggressively paid down our debts to free up cash flow to invest. My kids who all have ROTH IRAs and each follow the same investment strategy of 60% large cap index fund, 30% foreign non-US index fund, and 10% REIT index fund, have all decided to follow their mother’s advice and just dollar cost average regardless of the market conditions. For the kids who have a 50+ year time horizon saving 20-30% on several shares now will make almost no difference at all.

What do you think? Should we follow Mrs. FU and stick to a set plan or should we listen to Mr. FU and try to wait for the market to go on sale? I’d love to hear your opinion.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

The importance of Collaboration

Hello students and welcome back to Fire University. In today’s class we will be discussing the importance of being able to collaborate with a diverse group of people and the benefits it has for you both personally and professionally. Collaboration basically means to have two or more parties working together on the same task. In today’s fast paced and high tech business environment it is imperative that we are able to work with people of different age, sexual orientation, religious beliefs, economic standing, and ethnic background.

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So how does this relate to Financial Independence? Well I’m glad you asked. First off we now live in a global economy where trade happens across the globe from country to country. A great example of this is how large companies are moving their manufacturing overseas to harness cheaper labor in underdeveloped countries with a much lower cost of living, this allows the companies to greatly reduce the final price offered to their final customer. These customers are typically in another country than the where the manufacturing took place, so the company leaders have to be able to work with a design team to create a product and then work with a foreign entity or government to secure manufacturing and finally a marketing team to properly market the product to the consumer. At each level of production it is important that all parties feel that they are being treated and compensated fairly.

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In our personal lives we sometimes live in bubbles made up of friends and family with the same beliefs and world views that we have, this causes us to never truly be tested and forced to think outside the box or see things from someone else’s perspective. By creating a diverse group of friends we are able to gain a better insight into our own selves and understand why we behave and act the way we do. Having friends of the opposite sex is great to be able to bounce questions about a relationship off of and having friends of different ethnic groups gives us a chance to broaden our cultural intelligence and see world events through their lens not just ours.

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When it come to investing we always hear the old advice of diversification when it comes to proper asset allocation within our portfolios. Why is that? Diversification of assets allows us to spread our risk among different asset groups that are not directly correlated or related to one another. The hope is that if one asset loses value another will help to offset it. One of the usual allocations we see in the FIRE community is the use of index funds which are diverse by nature, but even with that in mind we still diversify further by putting some in domestic equity markets, foreign equity markets, and some into bonds. This allocation allows us to share in the growth both here and abroad as well as offer some stability through the presence of bonds. In essence we are collaborating with managers and team members of businesses from all across the world as well as economies and consumers from the world over. This type of collaboration allows us to broaden our horizon and earn returns from a much larger group, rather than relying on ourselves to earn income.

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One of the best examples of collaboration is the Fire Community of bloggers. All one must do is hop on twitter and search Personal Finance, Financial Independence, or Early Retirement and they will be met with a wide array of some of the most amazing people from all over the world. The FIRE community is made up of men and women from all different ages, races, religions, and backgrounds that have one thing in common, their desire to help others save more, spend less, and become financially independent. By following people in this community you will be privileged to a wide array of different ideas and strategies to help you on your journey towards Financial Independence.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

F.I.R.E 101

This post is designed to give students the basic knowledge to get started on their path to Financial Independence, we will tackle the money, the math, the plan, and most importantly the REASON. To start with we need to define Financial Independence, Financial Independence is when you no longer need to trade time or energy for money. It is when you have saved enough financial capital to continue living the lifestyle you want without worrying about earning money. The goal is for the money you have saved and invested to be working and providing large enough returns (capital gains) that you can live off of the interest and never worry about running out of money. There is a lot of debate as to what the perfect amount someone needs to confidently walk away from their career but for simplicity and for safety we will go with 25 times your current monthly expenses. This would equate to being able to comfortably withdraw 4% of your account balance every year to live off of. This number has been studied extensively and proven to be the sweet spot. Trinity University did a thorough study of historical returns and back tested the 4% withdrawal rate, they found that it had an almost 100% success rate of insuring that the investor did not run out of money after retiring. The really interesting thing is that in most cases the investor actually ended up with more money than they started with even after they had withdrawn 4% to live off of for 30+ years. So where do we start?

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The REASON– The reason for Financial Independence in my opinion is the most important part because without the why it’s hard to get motivated to even start and really hard to keep going when progress seems slow or setbacks occur. Everyone’s why will be different depending on their personal beliefs and what is important to them, for me it’s security for me and my families. Simply saying my why is because I want to be rich is not enough, you need to really define what is important to you and connect your finances to it on an emotional level. I recommend spending time thinking about what a future of financial independence would look and feel like, how would being secure in your future and having the ability to choose to work because you want to, not because you have to feel like? How would you behave or act if you didn’t depend on a job to pay your bills. What would you do with your free time, how would your freedom affect your family and friends? Once you have written down your WHY and what it means to you then we need to tackle the how.

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The How – The how can be summed up very simply as getting your monthly expenses as low as possible so that you can save as much of your income as possible and so that you require very little income to live off of. So if you can imagine paying off your debts and saving 40% of your income, that means you only need 60% of your current income to actually live off. So lowering your monthly expenses speeds retirement up exponentially as it allows you to save more and at the same time require less to actually live off of.  The chart below is from the Mr. Money Mustache (MMM) website and does a great job of showing just how powerful a high savings rate can be. It shows that saving 5% of your income takes 66 years to be able to retire, it means you need 95% of your income to pay your bills. On the other hand a 50% savings rate only takes 17 years to reach retirement because you only need half of your monthly income to cover your living expenses. So let me say this one more time, the lower you can get your living expenses the more of your income you can save to build an income machine and the less you require to live off of.

              Savings Rate (Percent)        Working Years Until Retirement
5 66
10 51
15 43
20 37
25 32
30 28
35 25
40 22
45 19
50 17
55 14.5
60 12.5
65 10.5
70 8.5
75 7
80 5.5
85 4
90 under 3
95 under 2
100 Zero

I’m sure that many of you are saying this sounds great but who can afford to live off of only 50% of your income, unless of course you make a million dollars a year. Well the great part about this math is that it is all about percentages, so whether you earn $10.00 an hour or $100,000 a year the math is all the same. The less of your monthly income you require the more you can save and the sooner you can afford to retire. Honestly if you could live with family or friends for free you could probably retire now. The first thing to do is to begin tracking your income and expenses and get a clear picture of what you have coming in and what you have going out. If you spend more than you make you have a deficit but if you earn more than you spend you have a surplus. Managing your monthly finances will allow you to better understand where you are, where you want to be, and how to get there. Remember the earlier you retire the longer you will need to live off of your investments. Interestingly if you can increase earnings and simultaneously cut spending your savings and net worth will start to grow exponentially. Once you start to see progress it becomes really fun, actually it starts to become slightly addictive. Albert Einstein said that “Compound interest was one of the great wonders of the world”, it allows your money to earn interest off of the interest and once you get a decent amount saved your money will start earning more than you do by working, that’s when it gets really fun.

man in red crew neck sweatshirt photographyOkay class, we defined our why, we looked at the math behind how lowering expenses allows us to shorten the time till retirement, and we also know how much we are spending and saving. Now we need to see if the amount we are saving each month will get us to our retirement goals. For me it easiest to work backwards by finding my FIRE number, once you have this in hand, check out “madfientist.com” for some really amazing retirement calculators.

photograph of men having conversation seating on chairSince most of the students are regular W-2 employees, here is my recommendation for where and how to save your money. Start with your companies 401k and put in enough to get the company match, this is like free money and everyone loves free money. Next let’s move over to a traditional IRA, my personal favorite brokerage is Vanguard and it only takes about 10 minutes to open an account. Currently individuals are allowed to save up to $6,000 per year in an IRA. This money is post tax but you get a credit on it when filing taxes, so you get an immediate tax savings in the year invested. Once you max out the IRA account, we can move back to the 401k. There is one exception and that is if the 401k administrator charges higher than normal fees, (greater than 1%) if this is the case please speak to your Human Resources manager and ask them to research other options, it is your companies duty to provide the best plan they can. Assuming this isn’t the case start putting in as much of your income as you can into the 401k, 2019 contribution limits are $19,000. Maxing out your 401k should be your next goal, all the money put in this account is put in pre-tax and instantly lowers your taxable income. So not only does it lower the amount of taxes you have to pay it allows that money to grow. This is especially advantageous for someone who is in a high tax bracket because once retired chances are you will be in a lower tax bracket. So if you make it to the point that you are maxing out an IRA and a 401k then you are saving $25,000 annually and also not paying taxes on the $25,000. If you have additional income to invest above this amount I recommend utilizing a taxable brokerage account. These accounts are for post tax income and have no limit to contributions, these accounts don’t have any real tax savings but they allow you to invest in anything you can imagine and as long as you keep the investments for more than a year you benefit from the long term capital gains tax rate.

bank banking business cardsI of course as all of you know believe in paying off all debts and holding at least 2 months of expenses in cash in a savings account. All of these can be worked towards at the same time. I recommend paying off any debts with high interest rates and leaving debts associated with appreciating or income producing assets until last. I would in fact suggest that if the debt is on an asset that produces enough income to cover the debt payment that it should be moved to the bottom of the list. Also if you have a stable job and feel secure in it I think the emergency fund can be less of a priority, however you must be able to cover any unexpected expenses that might arise without having to dip into your savings or go into debt to cover them. This is not only a plan to get you to financial independence but to create generational wealth. Once you have reached what we call critical mass or saved an amount that spins off enough money for you to withdraw 4% to live off of, not only will you most likely never have to work again but you will likely leave the next generation a massive inheritance. If you couple this with teaching them how to save and live below their means, plus getting them started saving young they will be able to grow that nest egg and change the course of the family tree.

woman man and girl sitting on snowOkay class, this is concludes our lesson for the day. Now for your homework, I would like everyone to head over to FOUR PILLAR Freedom and do some research on finding your why, I personally suggest checking out the “Wake up – You’re Dying” post for a little perspective. Please take your time and do not only some research but some soul-searching as well. Be sure to leave your name and email as I will sending you another classmates submission for comments. I look forward to meeting again and hearing what everyone has to share. Please include your homework submissions below no later than 4pm 1/25/2019.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.

 

Welcome to FIRE UNIVERSITY

Hello everyone and welcome to FIRE UNIVERSITY, we are glad you are here and joining us for our open house. We look forward to meeting and getting to know each of you as we grow together. Here at FIRE UNIVERSITY we believe that everyone no matter what age, race, gender, level of education or income level can achieve Financial independence and we are here to help anyone who wishes to begin that journey. You can call me Mr. FU and my beautiful wife Mrs. FU will be joining us as well, along with the both of us we will also be presenting both guest writers and showcasing articles from other personal finance authors. As a student and now a teacher I recognize that being able to see and learn from someone who has actually done something can be very powerful, so to get started let’s discuss a few blogs that we will be quoting and providing links to. To get started one of my favorite articles to send new students is the Mr. Money Mustache article Titled The Shockingly Simple Math Behind Early Retirement, this is by far one of the best and simplest articles to help someone new understand the concept of Early Retirement. After that I like to then send students to authors that they can relate to on an individual level or that focus on certain subjects. For debt payoffs and inspiration to get out of debt I really like The $76K project, for help setting a strong foundation I like FOUR PILLAR FREEDOM, their four pillars are great advice. My personal favorite blogs are  thinksaveretire.com, retireby40.org, and 1500days.com. Mrs. FU’s favorite blogs include TreadLightlyRetireEarly.com, bitchesgetriches.com, chiefmomofficer.org, and thisgirlisonfire.blog. Some of our favorites to read together are jlcollinsnh.com and ChooseFI.com. 

It is the goal of FIRE UNIVERSITY to provide a free education to anyone willing to learn and work hard, as FU grows we will begin accepting sponsorship from affiliated companies as well as placing advertisements on our page. It is up to the board of directors as to what companies we partner with but they have a duty to only accept funds from businesses that we fully back and that agree to behave ethically and morally. We will never advertise or endorse something we do not believe in or use ourselves. Students are encouraged to explore other investing courses and options but should agree to never push another student on this platform into purchasing or investing in anything that is not within the core curriculum. As index investors we will not be discussing individual stocks much but if you are interested by all means do your own research, we will however not permit random post or tweets soliciting students to purchase such shares. It is also a policy for all students to behave in such a way that creates and maintains a safe and friendly environment that everyone feels comfortable engaging and sharing in. As our school grows and we begin offering both virtual and in person meet ups to further build strong relationships and link students up with both friends and mentors to help them along their journey, it will be our main priority to maintain the safety of everyone involved, if at anytime another student is made to feel unsafe or threatened in any way, the accused will no longer be permitted to participate in school activities. We look forward to growing together with you as we enter this new chapter in our lives.

Thank you for joining us and remember that we are not licensed financial advisers or tax professionals, please consult with your financial specialist before making any financial decisions.