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.