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?

four men sitting on platform

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.

smiling man holding woman s left shoulder

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.

alphabet creativity cube letter

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.

sea people service uniform

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.

man and woman standing beside body of water during sunset

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.

gray bridge and trees

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.

 

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?

brown bear in body of water during daytime

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:)

achievement activity adolescent arms

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.

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?

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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.