Financial and Business lessons from The Game of Thrones.

Hello Class. Welcome back to Fire University. As many of you know I am a big fan of the Game of Thrones TV series and in today’s class we will discuss the financial and business lessons that can be learned from the show. Let’s start with the financial lessons.

Winter is coming

In the show the Stark family is famous for saying “Winter is coming” and I take that to mean that winter both literally and figuratively is coming, whether we are ready or not. In life we experience good and bad financial times. During the good times it is easy to forget about planning for the bad times and just have fun. Examples of this are not budgeting for car maintenance or home repairs. Logically we all know that it is a part of life for things to break or need repairs but often times we fail to plan or save for them. Many of you are aware of my advocacy for having a large financial emergency fund. I advocate for four months of total expenses as well as a separate account for future home repairs, car purchases, and just the unexpected things life throws at us. Many people will say that I am being to cautious but I’d rather be safe than sorry. In the game of thrones we see in the recent episode that Sanza say’s they didn’t budget for having to feed hundreds of extra troops let alone two dragons. Then she says “What do dragons eat anyways” to which Dany replies “anything they want.” I love that exchange but it is also a good example that not planning and preparing for the winter could mean certain death. During the harvest time food is plentiful but the leaders of Winterfell know that they must budget and allocate some of the excess for winter rations.

A Lanister always pays their debt

As you all know I despise debt. I believe that debt creates bondage but do acknowledge that debt leveraged wisely can yield large returns. Some debt is okay if it is used to purchase cash flowing assets or to buy a home that locks in a low interest rate on an appreciating asset, now I know some are saying but a house barely keeps us with inflation and that it has overhead maintenance cost to keep up and that you could get a much better return in the market. I agree with most of those statements but studies show that home ownership is one of the leading indicators of wealth accumulation and it locks in your monthly housing cost. The point of this is that if you have debt, pay it off and do it as quickly as possible. Your credit score is a reflection of your credit worthiness and measured by your ability to pay back loans as well as your income versus the amount of debt you have. In the Game of Thrones show we see that a person or family’s reputation is vital to their survival as it can make access to both capital and alliances with other houses.

Choose your partner or spouse carefully

One of the best gifts we were given was our ability to choose who we love and who we spend our time with. We should take this decision seriously because choosing the right or wrong person has the ability to not only make us happy or sad but also the power to greatly affect our wealth. In the time of GOT most people made marital choices based on their standing in society and what would best serve their family fortune. However in today’s times, we have the luxury to choose based purely off love. While love is arguably the most important part, it is also important to make sure our partner has the same views and desires when it comes to handling finances.

Now it’s time for the business lessons.

It is better to be loved than feared

Throughout the TV series we saw many rulers gain power through force and attempt to lead by fear. While this may work for a while, it is only a matter of time before the followers will either rebel or switch their allegiance to someone else. We saw Daenerys rise to power and build a following based off of her compassion for those that were enslaved. The former slaves followed her because they believed in her vision of the future. Later in the show we saw the people gravitate towards John who was a fair and honorable leader. In today’s business world a new leadership style called “servant leadership” has emerged and is gaining widespread popularity as well as yielding great results. The basis of it is that the leader is there to serve the employees, it is the bosses job to provide the resources necessary for the employees to succeed in their current roles and prepare them to advance in their careers. This is a stark contrast to the former style of autocratic leadership, in which managers made the decisions and forced the employees to comply.

S.W.O.T

One of the first things we learn in business school is how to perform a SWOT analysis. The word SWOT is an acronym for Strengths, Weaknesses, opportunities, Threats. This is a strategic way of thinking, that helps to design long term goals and strategies. Warren Buffet often talks about the businesses he invest in have a moat around them, by this he means they have a strategic advantage over their competitors. This may be in the form of technology, distribution systems, or being first to market. In GOT we saw many examples of this, from the Night King being able to raise the dead, to the moat of fire around Winterfell, to Daenerys fire breathing dragons. Each of these gave them an advantage that they could exercise over their competitors. In business, whether for your company, department, or for yourself it is best to define your strengths and work to make them as strong as possible, while finding others that are strong at your weaknesses. When you have time perform a SWOT analysis on yourself and use the results to know where to focus your time and attention.

FIRE University is not a licensed or registered financial planner or accountant, please speak to a professional before making any investment decisions.

Thanks,

FU

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.

silhouette photography of group of people jumping during golden time

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

battle black blur board game

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.

card dark floating focus

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.

 

FI – RE, you can’t have one without the other.

Hello class and welcome back to FIRE University. In today’s class we will be discussing the importance of attaining Financial Independence. The “FIRE” (Financial Independence – Retire Early) lifestyle has been receiving a whole lot of outside press lately, while this is obviously a good thing as it has the power to greatly improve the lives of those that choose to adopt it’s lifestyle and philosophies, it also has drawn the wrath of many that choose to focus on the Early Retirement aspect alone and point out how it may or may not be actually feasible as a long term plan. To be able to properly separate the two ideas we first need to define them.

silhouette photography of group of people jumping during golden time

Many people in the FIRE community may have first been introduced to personal finance by Dave Ramsey and his Financial Peace program, Dave preaches that debt creates bondage in the form of financial obligations from the lender to the borrower. Financial Independence is a very similar concept in that once someone reaches FI they have the peace of mind to know that they are in a financial situation to make choices that are not afforded to people who are living paycheck to paycheck. Financial Independence in a nutshell is the point where an individual has accumulated enough income producing assets to live off of without having to work any longer, this freedom allows them to choose to either continue what they are doing or pursue either another career or even stop working all together. For most in the FI community the game plan seems to be the accumulation off a large enough investment portfolio to withdraw 4% of the principle to cover living expenses, while allowing the interest earned over and above the 4% withdrawal to continue to accumulate, thus creating a perpetual money machine. There are of course many other routes such as rental income form real estate and passive income from ownership in private businesses. There are different stages of Financial Independence, from having enough saved to be able to take time off from work or to accept a lower paying position that offers a better quality of life, to having enough money saved to never have to work again. Financial Independence allows an individual to have many options not available to most people and one of those options is Early Retirement.

man and woman holding hand walking beside body of water during sunset

Early Retirement or the “RE” in FI/RE is as mentioned earlier when someone has accumulated enough assets to live off of the earnings and no longer depend on outside income derived from another person or entity. Everyone has a different path to Financial Independence and therefore will arrive at the crossroad of continuing work or Retiring Early at different times and stages in their lives.  Retiring Early is an option only afforded to someone that has already achieved Financial Independence. Many detractors of the Early Retirement movement point to the fact that there is not much data to back test to see whether the 4% rule will actually work over a 40-50 year retirement period, however they fail to see that the main point is that the individual has achieved financial independence at an early age, something that the majority of people may not ever actually achieve in their entire life, this is great evidence that Financially Independent people are extremely good at handling their personal finances and that if a problem does arise in the future they will most likely be able to resolve it with the same hard work, focus, and discipline that got them to financial independence at such an early age. Another thing to keep in mind is that the 4% withdrawal rate was not just picked out of thin air but actually derived from a study known as the trinity study that sought to find the highest withdrawal rate that would allow for complete certainty of never running out of income and in fact the majority of the time the scenarios in the study had someone using the 4% rule end up with much more money than they started with 30 years later, even after making yearly withdrawals of 4%. This is because the stock market on average returns much more than 4% and thus allows the principle to continue to grow over time.

man and woman holding hands walking on seashore during sunrise

Fortunately their are many young and extremely intelligent bloggers in the FIRE community that are there to help and not just offer generic advice but give highly specific and specialized advice to people of all walks of life, so regardless if you are a physician, a mechanic, a pharmacist, a teacher, a military officer, or even a single parent, there is a blog out there just for you that offers specific advice that can not only save you money but time and frustration from trying to comb through what seems like never ending advertisements from investment firms wanting to charge you to invest your money.

So what’s your reason for pursuing FIRE??? I would love to hear from you, simply fill out the comment section below.

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?

balance business cobblestone conceptual

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.

person writing on white book

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.