One topic that comes up from time to time in the FI community is the high cost of pet ownership and its impact on our individual journeys to FI.
Mr. Money Mustache had a take a few years ago about how great it was that dog ownership is optional because you can do without and reach FI faster. To his credit, he also balanced this opinion out with a rebuttal from his sister on why dogs are great. However, if you look at the comments… or his forums… or our own Choose FI Facebook group… you'll see that pet ownership can certainly be a very contentious issue for FI seekers.
Personally, I've always been a dog person. I was born into a family with a Golden Retriever and an alley cat. Later on, we picked up a second pup and she was with us through to about the end of my college years. Now that I'm out in the world “adulting”, adding a dog to my home was a top priority. My wife and I found a lovable (and slightly crazy) rescue dog to join our family before we had even gotten engaged.
At this point it's probably clear that for me, as it is for so many other pet owners, having a dog was never a financial/budgetary consideration. It was a foregone conclusion that we would own a dog and we really only wanted to wait to be stable from a location and schedule standpoint, not a financial one (although that happened to be the case too). We knew we wanted a dog and we didn't care (much) about the costs.
Now, no one wants to be a total financially optimizing robot for all of life's decisions, but when you make a decision purely from emotion like we did, you may end up with the following:
Our dog is really freaking expensive.
In the five years that we've had her, Mint says that I've spent $8,465.34 on our dog and that's just my half (and possibly under-reported thanks to Mint's annoying tagging).
That's an average of almost $1,700 per person, per year.
Now, I'm sure there are some readers who've spent plenty more on their pets and some readers that think I should probably shred my “frugal” card and hang my head in shame. That's okay, we're all on different paths.
Objectively, though, we can all probably agree that's a good chunk of change to be spending on a small, furry animal that mostly lays around my house and occasionally wakes me up at night with a paw to the face.
Here are some of the most expensive highlights from my pet spending wall of shame:
$700 for an emergency Vet trip when she got dehydrated
On that note, never leaving a Vet's office without paying at least one or two hundred dollars
Fancy, natural food that she isn't allergic to, which is currently priced at $70 per bag (!!!)
$80 for a harness to wear in the car (it's legit though–crash tested even!)
$40/night while we're away, to stay with nice sitters and not be stuck in a kennel
$70 of allergy medicine every few weeks
So, yeah, it's safe to say that for this DINK couple, we treat our dog like a member of the family and it shows in our spending. The end result is that she's cost us plenty of money over the years and ultimately delayed our FI path a bit.
But here's the thing…
It's totally fine.
She's brought so much love and joy to our lives that I'd happily pay multiples of that amount.
Additionally, one of the amazing benefits of a FI lifestyle that we're always preaching here is that it gives you options. For me, having my financial life in order and a mighty fine savings rate means that I can splurge and be not totally “optimal” with pet costs. It's just about spending on what you value in life.
I can have this crazy expensive (and sometimes just crazy) dog bringing me joy and not worry about the financial costs.
Now, of course I can't just leave you there. Despite our dog being inherently expensive, we do try to be frugal in the Aardvark household and so here are some things we've done to try and keep pet costs to only what's actually necessary (or…at least less out of control…)
She was a rescue dog. This often means only spending a minimal fee and/or paying for vaccines and spaying/neutering. Some people out there drop hundreds or thousands on a purebred dog, but there are lots of wonderful animals at shelters that need homes and will cost you very little to take in.
We don't buy toys. There are subscription services to send you dog toys every month, but a dog doesn't really need this. We've gotten toys as gifts and she's just as happy to chase an old lacrosse/tennis ball across the yard or pull on some old ripped jeans that have been knotted into a rope toy. No need to spend money regularly getting new toys.
We don't spend on grooming. She's got short hair that doesn't need cutting, but even if it did we'd be happy to do this ourselves. Nail clipping and teeth cleaning are also easy to do regularly if you train your dog to accept them.
We don't hire a dog walker. When we lived downtown and she was little we had a walker come during the day while we were at work. However, we were eventually able to move to a cheaper house with a yard and eliminate this expense.
We now buy her medicine in bulk.
We only use daycare when necessary. This means if we're going to be out of town or if we have contractors working on the house and need her out of the way. If it's just a regular workday, she's totally fine to nap at home by herself for free.
She is not a human child. Kidding! But also kinda true. Actual human children are way more expensive, so having a dog that fulfills our need to nurture has probably saved us many thousands of dollars. Clearly, this is a highly personal choice though and one I'd never preach on.
Certainly, these sorts of options will vary based on your dog and your lifestyle. For puppies, for example, paying someone to let them out in the middle of the day may not be optional. Additionally, if your dog is less manic than ours, you might be able to never pay for overnight care and just use friends (for us it'd be a nightmare…).
Just as with everything else in the FI world, it's about questioning your assumptions and choosing to “think a little bit differently,” to quote Brad. For some great tips on frugal pet ownership from the Frugalwoods check out this and this.
Pets can be crazy expensive or they can be a bargain for all the joy and love they bring. I'd encourage you to assess your own situation and lifestyle and figure out if having a dog (or other pet) is something that will work for you.
For us, she's one expense that we'll never regret.
In April of 2017, my family received devastating news when my mother-in-law called us one day from Florida. Through tears and sharp, sad breathing, she told us that the sudden onset asthma symptoms she'd been coping with during the previous six months were actually the signs of terminal, stage 4 lung cancer. Her prognosis was finite, she only had months remaining to live, and with that news, we were instantly stripped of any hope for a cure.
When the cancer diagnosis came, we felt suspended in a distant and lonely state of shock. But Nancy, my mother-in-law, went straight into action. “I need to get my things in order”, she said; and over the next week or two she repeated this mantra when we'd call for updates and next steps. When she resurfaced, she told us that she held a small life insurance policy. Her children were beneficiaries. She made copies of the policy number and a proof of insurance letter, and gave them to both sons to hold.
In those moment, we didn't care about the insurance papers, nor the money for the grand children that she spoke of–we were still in pain over the diagnosis. We were unable to think ahead to the financial impact of her death, because the immediate thought of losing her was so much to bear. As a nurse, I had cared for many patients as they passed through the final stages to death. I accept that dying is inevitable. However, in the past few months I have learned that losing a loved one “before their time” is jarring, depressing, heart breaking.
She lost her short battle with cancer eight months later, on December 12th, 2017. Writing about dying feels morose since we are still actively mourning her loss. Still, I think it's important to push through those feelings, and share my thoughts–hopefully helping others to take action on end of life planning. The following is what we have in place at this time as it relates to our assets and our family. We have worked to make sure that if anything happens to either of us, as parents, the other won't need to worry about finances when staring in the face of shock and possibly depression.
What can you do today to protect your family in case you leave them unexpectedly? What should your significant other do to protect you and your children? Here are a few things I have done to ease the burden of a loss for my family.
1. I have a notarized Will and Testament in a safe place, and I let family know where it is. I have a benefit through work called prepaid legal services. Many government employers and companies have this service. Through this program I was able to have a will drawn up by a lawyer. At the time I had a home, investments, a car and savings. I included instructions about these items. For instance, if beneficiaries of your life insurance are currently minors, you may want to keep the assets protected until they reach a certain age. You can specify these instructions through the will.
Make sure to update the will when there are changes in your situation. Since my will was drafted three years ago, I have started a profitable business. At some point I will need to add this asset to the will.
2. We have term life insurance in place until the kids reach a certain age. How much insurance do you need to buy and for how long? You should call an insurance agent for more direction, but the standard answer is 20-25 times your annual salary plus debt obligations. So, If you make $25,000 a year, you would need a policy of $625,000 in insurance. It would replace your household contribution for the next 25 years, which would be nice if your children are very young.
3. Beneficiaries are listed on all of my accounts. Retirement, pension, savings accounts, insurances and anything else with a beneficiaries line has one listed. I add the values up to make sure that each person is getting the share of my assets that I would like them to have.
4. I have a safe and a paper file box that includes all copies of my documents. My parents, sister, husband, and children know my financial wishes. My husband and parents know my medical wishes, and my will lists my health care proxy. It would be a good idea for me to revisit my health care desires and make sure my health care power of attorney is up to date.
5. I keep my birth certificate, social security card and other state documents in a file that is clearly labeled.
Protecting Our Loved Ones
When you leave this world, your loved ones will feel like it is too much to bear. And yet, all around them, time and life will continue on. I know that if I passed away tomorrow, my children and husband would be cloudy minded and devastated. Knowing that their lives continue on as easily as possible in my absence is my lasting wish–and these documents are the best way to ensure that outcome.
What documents do you have in place? What should I add to my list?
I’m sure you’ve heard this quote a million times before. Whether it’s when you have to set targets at work or New Year’s resolutions, the more measureable a goal is, the more likely it will be achieved.
This could be putting a quantity or timeline around the goal such as, “eat five servings of fruit or veggies a day” or “learning to dance the waltz for my wedding”. At work it could be something like, “complete the analysis on issue X by the end of the quarter.”
As you can imagine, the concept of measuring progress plays out across many sectors and industries as well. For example, some companies use ‘balance score cards’ to get a snap shot of measured progress towards targets. Others may use some kind of operational plan with indicators as the way to action the objectives set out in a strategic plan. For social and health programs funded by philanthropic organizations and governments, there is a whole science around evaluating program impact and results. Seems like we can all agree that it’s important to have a way to measure progress in order to attain a goal.
What does measurement have to do with reaching FI?
Many folks in the Financial Independence (FI) community are seeking to achieve FI by increasing their savings rate through frugality and intentional living, combined with investing aggressively in low cost index funds. An excellent and tried and true approach. These and other general principles of those pursuing FI have been discussed on ChooseFI podcasts. However, my path to FI is not really unfolding in the same way. In fact, it’s doubtful that there will be any significant part of our portfolio in index funds. We will be focusing on optimizing our lifestyle expenses for sure, but really trying to acquire and pay off real estate investments. We will also be investing in pre and post-tax funds for our kids, and trying to leverage our careers, which bring important benefits including a defined benefit pension.
Since my path to FI is not quite the same as others, the milestones that I need to reach are also not quite the same. This means that even though we share the ultimate goal of achieving financial independence, the milestones that have been suggested by Jonathan and Brad and others don’t quite seem to fit:
Milestones of FI
Positive net worth
1-3 Years of expenses saved
1/2 FI–12.5 years of expenses saved
Lean FI–Basic living expenses covered at a 4% withdrawal rate. AKA; The perpetual emergency fund
Flex FI–20 years of expenses saved
Full FI–25 years of expenses saved
Fat FI–30 years of expenses saved
Getting to FI might take many years. That’s why it’s important to have some milestones to keep us on track and encouraged along the way. They are like the guideposts to our journey. Therefore we must be thoughtful on what we identify as being milestones so that we don’t get side-tracked or worse yet, veer off the path away from FI.
Set your own Milestones for FI
You can use these steps to identify your own milestones to reach financial independence (FI). This is how we were able to identify ours (see Figure 1) perhaps this can work for you too!
Set the goal
This is the goal of reaching FI! Seems obvious, but certainly worth unpacking. What does this look like for you? 25x your annual living expenses? A set dollar amount? For those of you who feel like FI is so far away that you don’t even need to put an exact dollar amount on it, I totally hear you. To be honest, I kind of feel that way too sometimes. But it’s important to dig just a little deeper on this one.
For us, I see FI being made up of two parts:
a. Cover all annual expenses:
Given the fact that we have kids in daycare, extra-curricular activities and we need to escape the winter once in a while for our mental health, we have ball parked needing $50K per year. This might seem like a lot for some of you–and not enough for others. Point is, this number is one that only you and your FI team can figure out. We came up with this number in two ways: the ‘back of the envelope’ way was to say, how much of our after tax salary can we live on? The more rigorous way was to look at our actual annual expenses on for the last few years and make an average of what it seems like we need to live. With some buffer room for good measure, we came up with this number. Now this number might change–that’s ok. The important thing is that we identify milestones that are flexible and robust enough to handle a bit of wiggle room on our FI number.
b. Significant investments and assets paid off:
Before we ‘pull the cord’ for FI, we would like to have a few major assets and investments put in place. The first is our primary residence. Now, I know that there is much debate on this, but for Mr. MoneyPenny and I we would really like to have that taken care of and paid off. The second is a plan for a new car. Again, financing could be an option, but ideally we would have funds ready to purchase a car. We may also need to invest or do renovations on our primary residence and rental property. We would want funds accessible to take these on before FI. And third, would be our legacy plan. For us, this includes an education fund and hopefully a start on a FI fund for our kids.
We are not on this journey alone. It’s important to involve those who may be directly (or even indirectly) involved in your path to FI. A significant other, perhaps close family member(s) or friends. This is especially important if you share your finances with someone. There have been some great discussions on how to engage your significant other on the path to FI if they’re not quite on the same page. Perhaps going through an exercise such as this could be another approach. Sharing in the process of identifying a goal and the steps to get there is a great way to co-create something that may even strengthen your relationship.
Another reason it’s important to involve these key people early is because the path to FI should not be imposed but something that is a shared objective. And importantly, you will probably find that engaging your key people will bring new ideas and perspectives that will make your plan to reach FI even better.
For me, it’s team MoneyPenny. That consists of Mr. MoneyPenny and myself. We have Mini and Baby MoneyPenny, but they are not quite at the age where they can contribute meaningfully in these discussions. However, my hope is that as they get older we can figure out a way to get them involved.
This is where the rubber hits the road. Perhaps with the one or two key people in your life, it’s now time to connect the dots. What are the necessary preconditions that have to be fulfilled in order to reach your goal? Linking back to what FI means to us, there are two groups of pre-conditions to meet FI (see Figure 2):
a. Fund our retirement, pre and post age 60:
Here we have two things that need to happen. First, we have to have one rental property paid off so that we can live off the rental income. Second, I need to log in as many years of service as I can in order to maximize my defined pension.
b. Prep and lay the foundation for FI living:
We are being uber conservative here. Ideally we would like to have funds to pay for a car and any capital investments on our rental/primary residence before we retire. And we would like to have our kids education fund and the start of a FI fund for them.
All this is predicated on Mr. MoneyPenny and I working and sticking to a savings rate of about 35%. Of course, if we can do better–fantastic!
Identify values and assumptions
As you develop the steps to reach FI, it’s helpful to identify the assumptions that you are making. For this process, your assumptions are likely closely tied to your values. That means that there is no right or wrong answer here. Up to this point, you have probably already seen a few of these assumptions play out in the MoneyPenny plan including:
a. The world is an unpredictable place:
This could be a product of our upbringing, our personalities, too many documentaries or a combination of all of these things. Together, it means that we want to leave as few things to chance as possible. And yes, that means leaving some money on the table. We are ok with that if we know that if all $#%& breaks loose that we will have a roof over our head and a way to feed our family. This underpins our decision to pay off our house, be prepared to buy a car before retiring, and having money for our kids.
b. Importance of team MoneyPenny:
From a financial perspective, Mr. MoneyPenny and I bring different things to the table. For us, the goal is more than just each of us individually – it’s about what’s best for our family. For example, the plan is for me to continue working even after Mr. MoneyPenny can retire so that I can accumulate the years of service that I need for my pension. This pension is an important part of our plan, so back to work for me!
c. We can have it all:
One of the key ways that we plan to reach FI is through a solid savings rate. However, this will not be at the expense of today. We will still put our kids in swimming lessons and take family vacations once and while. Will this push the clock back a bit on FI? Likely, but that’s ok for us.
Set milestones and track progress
How will we know if we are getting there? This is where a timeline comes in for me. As you can see in Figure 2, the estimated timeline of what happens when is mapped out. Now, like most things in life this is dynamic and likely will shift around a bit. Right now we have Mr. MoneyPenny retiring when our rental property is paid off. The timeline for when I retire is still TBD. Since I have a defined benefit pension plan, the longer I work, the better my pension. Depending on how much I still like working, I could decide to retire alongside Mr. MoneyPenny. Now for some of you, seeing the age at which we retire is not that exciting. But for us, not starting out with much and getting onto this FI path more recently, we feel pretty good that we can enter the FI/retirement chapter in our lives at a decent age and feel super comfortable financially.
For those of you who have related to the Milestones of FI that Jonathan and Brad have discussed, I have also included the corresponding milestones on the MoneyPenny plan. By seeing our milestones in the form of a loose timeline will help us stay on track.
What we still need to do is get even further into the numbers and validate this plan. This will mean running some scenarios with the numbers and adjusting as we go. To date, we have based these milestones on our early calculations but we know that this will continue to be tweaked and refined going forward. Since each of our milestones are not all the same in magnitude–meaning some will be harder to reach than others–our progress will seem faster and slower at different points. But that’s ok, as long as we know that we are on the right path!
Identify the key folks in your life who can help you on your journey to FI
Follow some of the steps listed above–figure out what FI looks like, map backwards on what you need to do to get there and be conscious of your assumptions and values
The plan doesn’t have to be perfect. Start with something and you can refine and add detail as you need to. Remember, a plan is only as good as it’s implementation!
Points for Discussion:
How did you come up with your milestones for FI? For those of you who have made it, were there any key milestones or steps that we have missed?
It’s not an exaggeration to say that starting a blog changed the entire trajectory of my life. And many of you have expressed interest in exploring this as a hobby or maybe even as a side hustle. So with that in mind if you’re looking to start a blog, here is a step-by-step guide you can follow to get started today. You can have a blog up and running in just a few hours, even if your tech skills are limited.
Why Start a Blog
Before you get started creating your blog, you'll want to take some time and figure out why you’re looking to start a blog in the first place Having a ‘why’ behind your blog can help when it comes to choosing a name, theme, topic, and the positioning of potential affiliates. Also, the ‘why’ behind your blog will help you determine who your ideal reader is.
Here are some of the primary reasons people start blogs.
Some blogs exist purely to act as a form of journaling. Some individuals find it cathartic to put their thoughts into words and share them. And, in some cases, the blogger behind the blog remains anonymous to create even more comfort when sharing their personal thoughts and feelings.
Blogs are amazing for educating a specific audience on a given topic. Blogs posts vary in style, but those that are informational or ‘how-to’ in nature, help their audiences learn more about a given topic, or specifically show them how to do something.
Some people are blown away when they learn that blogs are great for earning money. For some, blogs are much more than a hobby, in some cases, blogs are full-blown businesses. Not only do big blogs earn plenty of money, but they can also be sold for big sums of money too. While your goal doesn’t need to be to make loads of money, it can be fun to aim for some level of monetization.
For those with another primary business, a blog is a great secondary method of building credibility within an industry. While you might have a business presence through LinkedIn or other social channels, a blog is a space to share what you know about your field of expertise–whether it’s cooking, decorating, personal finance, investing, cars, etc.
Getting Started–The Nuts And Bolts To Your New Blog
Once you know what your goals are for the blog you can begin creating it. To do so you will need three basic things:
Domain: This is your “.com” and how people find you, for example ChooseFI.com
Host: This is where your files are stored, for example Siteground.
Blogging Platform: This is the framework of your blog. It provides the content management system and design, for example WordPress.
It's important to know that some services offer the blogging platform and host in one. These are sites like Squarespace, Wix, and Weebly. Even WordPress has it own in-house hosting service. While these services make it easy to get started we don't recommend them. They have limited flexibility which means you will quickly outgrow them. And your content is often trapped on that service. If you decide to leave you likely will not be able to take your content with you.
Choose Your Topic/Niche
Your blog topic should be something specific. Get started by starting with a broad topic and narrowing down as you go. For example, those in the personal finance space could blog about all personal finance topics–like debt, savings, investing, real estate; while other blogs choose to be more specific. For example, someone might focusing exclusively on paying off debt.
Your blog will require plenty of your attention so it’s best to choose a topic you feel passionate about. Your chosen topic should be one where you could already imagine endless article topics.
Choose Your Domain
The domain, if you’re unfamiliar, is the web-address or URL for a website. A domain is usually www.example.com. Domain names can include .ca, .net., .org but we recommend getting a *.com address if at all possible
While it’s easy to get hung up on choosing a name for your blog, it’s not worth delaying the launch over the perfect name. Recall companies like Uber, Skype and Google. You wouldn’t have known the purpose of their businesses just by their name–and yet, they are massive success stories. When brainstorming a name, work to keep the name relatively short, simple to spell, and something unique. Start with five potential names.
It’s not worth getting too hung up on any one name, as you’ll need to see which of the names you’ve brainstormed are available through your host.
Keep in mind, if you buy your domain at the same place you are going to host your site, you save yourself the trouble of moving it to your new host. However, moving it is possible, so if you already own a domain at one site you are not forced to host it there.
Choose a Web Host
The hosting service is where you site lives. If you are starting out I would recommend taking a look at Siteground. Siteground is an easy-to-use web host, with plans starting from as little as $3.95 per month. It is by far the best value for a new blogger. They also have great customer service and plenty of opportunities to scale as your brand grows.
The host ensures that your website is accessible 24/7, that it can handle multiple visitors, that it can’t be hacked and so on.
While free hosts are available, paid hosts offer premium features which are highly recommended such as enhanced security, email addresses, and back-up services. A paid host will allow and support high volume traffic.
As far as we are concerned there is only one choice here–Wordpress. You will get WordPress through your host. Set up your domain and host first, then add WordPress to your site via the host.
WordPress may appear complicated but it has endless templates and plug-ins, including the best potential for selling online. Also, with an almost cult-like following, the WordPress community has endless discussion forums where nearly any question has an answer. Think about this, 25% of the internet is built using WordPress. There is plenty of help out there if you have questions.
We use WordPress and would recommend it for you as well.
Choose a Template
Templates often offer a stylish color palette, and, in some cases, are geared towards the intention of the website. WordPress has a near unlimited number of paid and free themes; and even, themes intended for bloggers, restaurateurs, creative services, etc. Choosing a more specific theme, like those for bloggers can enhance the user experience saving you time in the form of optimization and formatting. You don’t need to find the perfect template on day one, in fact, experimenting with different free options could be a good strategy.
The Bottom Line
Too many would-be bloggers fail to start blogs because of paralysis by analysis or perfectionism. Don’t get hung up on the perfect theme, template, font, or color. The most successful bloggers just get started and adjust as they go. Successful blogging requires constant iteration and adjustment, but it doesn’t have to happen before you get started or overnight. The biggest regret of most bloggers is that they didn’t get started sooner. So, carve out some time, be willing to make mistakes, and take action.
Cait Flanders, author of “The Year of Less”, talks about building $30k of consumer debt, challenging herself to go two years without shopping, and learning how to be comfortable in her own skin without the distractions of consumerism.
When did Cait start blogging, and how did she start writing her book?
How did Cait build $30k of debt?
How did her Dad’s interest in money and finance influence Cait?
Did the disorder and discontent in Cait’s finances manifest itself in other aspects of her life?
How did Cait get started paying off her debt, and saving?
What motivated Cait to move from a minimal savings rate, to a more effective and sustainable savings rate?
What was Cait spending 90% of her salary on?
Would Cait qualify her former self as a shopaholic?
Did Cait get any negative responses from her immediate support circle?
What were the rules of Cait’s “Shopping Ban”?
The two hardest things in the first few months: no take-out coffee, no books.
What filled up the time and space that had previously been filled with shopping?
Cait decluttered during her two-year shopping ban: why?
How many pieces of clothing does Cait use now?
If you own something, do you have to own it forever?
Did the shopping ban include anything besides physical items?
What spurred Cait on to learn life skills that help her insource some of the tasks and activities that she had previously ignored, or paid for?
How did changing spending and consuming habits impact Cait’s health?
Advice would Cait give to someone who wants to live with less:
Take inventory of the things you own the most of in your home.
Tell the people in your daily life, and make sure there’s at least one person who will encourage you to make a good decision.
Become more resourceful.
Ask yourself if you really need to own something.
If you’re unhappy about something, track it to see where you’re at.
“Are you almost done daddy?” My oldest son eagerly asked, dressed in his policeman Halloween costume. Behind him stood his younger brother, dressed as batman, his younger sister as batgirl, and his baby brother as Spider-Man.
They had been looking forward all day to a trunk-or-treat at the church and had been doing their best to be patient. I was sitting next to our only vehicle with dirtied hands and feeling defeated. I'd managed to remove one rear wheel and the old brake pads. I was attempting a DIY brake job, not because I'm handy with cars (quite the opposite), but because we didn't have the money to take it in.
I had successfully turned what I thought would be a quick project into an all day saga, thanks to not having all the right tools and a stubborn rotor.
As I stared, perplexed at the caliper and after consulting the all-knowing world wide web, it became apparent that I needed a special tool that could be rented from the auto parts store. I couldn't get there in a car with three wheels and I wasn't about to put it all back together just to take it apart again! A ride sharing service seemed like the best solution. In what felt like the first win of the day, I redeemed a new rider discount for a free first ride and was there and back in no time. The sun was setting but I was determined to come through for my kids. The tool made quick work of the job and I finally had the new pads installed and the wheel back on.
We got the kids loaded up and raced to the church hoping to catch the last bit of the party. My worst fear was realized. My optimism was fruitless. The parking lot was all but emptied and the stragglers were cleaning up the leftovers of a good time. The looks on my kids' faces as we told them we missed it are imprinted on my mind. I had failed. I couldn't help but blame the parenting blunder on our financial situation. If only I made more money I could have taken the car to the shop like most people. If only we had saved some money for a rainy day. Had I not been working an extra job to make ends meet, I would have had time earlier in the week to take care of it.
Why I chose to pursue FI
It was reminiscent of how I felt a few months previous. We were getting the kids ready for bed one night. As I helped my son step into his pajamas, his foot got caught in a hole in the knee–ripping it wide open. “Why do we even still own these pajamas?!” I said in an exasperated tone. “Can we please get rid of these?!” “You said we could only buy things if we really needed them and these were some of the few that still fit him.” was my wife's response. It hit me like a brick. She was right…I had said that during one of our budget discussions.
I felt awful realizing that my pleas for a more frugal lifestyle led her to the conclusion that we couldn't afford a $10 pair of pajamas or that clothing our kids properly wasn't a “need”. If only we were out of debt we could stop living paycheck to paycheck and ease up on the budget.
On another occasion, my sweet daughter asked if we could buy a mask that looked like me so that mommy could wear it and go to work in my place and I could stay and play for once. I couldn't blame her…After all, I had been working a full-time job and delivering pizza three (or more) nights a week for almost two years. I silently cursed my dependence on my job(s) and couldn't help but wish I had more freedom with my time.
These experiences and others led me to my breaking point. I got sick and tired of being sick and tired. I realized something had to change. My wife deserved better. My kids deserved better.
How I found FI
I was already an avid Dave Ramsey listener. I knew all the principles. We had tried to start the “baby steps” many times. But in Dave terms, I felt like our shovel to hole ratio was too small. Whenever we began to gain traction, Murphy would pay us a visit. The light at the end of the tunnel really did seem like an oncoming train. We were in debt, and the biblical warning– “the borrower is slave to the lender”–was becoming more and more true.
Around this time, through a series of fortunate events, I came across the financial independence community. I was inspired. I'd found new hope and meaning. I saw the bigger picture. My views on money and life changed. My wife and kids were always my “Why?”, but the “How?” became more clear.
Now, after “going down the FI rabbit hole, I am committed to giving my family the life they deserve–one with me in it. While I know that the journey will be more difficult on one income with five kids and counting, I believe that with some creativity financial independence is attainable. I want to be held accountable, and I want other one income families (and anyone else) to be inspired. I want to “spread the FIRE”.
As other families with small children will understand, the most common phrase we hear from strangers is “You have your hands full!” So please, follow us on our journey as we pursue financial independence as a family and prove that it's possible to have our hands full and our pockets!
When doing work with clients, I have several ways to determine the correct allocation they should have to stocks and bonds. More often than not, I find that clients are over allocated to stocks and are therefore taking more risk in their portfolios than is needed. Today, I want to discuss why investing more conservatively is usually better at helping clients meet their financial goals.
Having a lower allocation to stocks may seem counterintuitive but it would help you reach your goals with less risk.
When we run simulations for clients, one of the items we check is the impact of the allocation on the success. By reducing the client’s stock allocation, they are usually surprised that their rate of success increases. The reason is twofold, by limiting risk you keep more of what you earn, and you are also more likely to stick to your investment strategy. Our planning model can quantify the effect of keeping more of what you earn, but it can’t quantify the likelihood that a client’s investment strategy will change during the downturn. Therefore, the increase to success is probably even greater than shown in our Monte Carlo simulations!
When we are determining a client’s rate of success, we are rarely aiming for an infinite amount of money. Instead, we are trying to get the client through their lives while having enough money to meet their spending needs, while also leaving some assets to their heirs. Our goal is a number greater than zero. Some clients have an inheritance goal, say $1,000,000 per child, and this is still much easier to target than “as much money as possible.”
How Much Risk to Take?
Because we are shooting for an actual number, we can determine the minimum rate of return to reliably reach this figure. Any deviation from this rate of return can be defined as “risk.” To reach our goal, we want to stay as close to on track as possible.
Usually, investors don’t view above average returns as risk. Therefore, when stock markets are trending upwards, investors tend to increase their allocation to stocks in order to grab the higher returns. This, increases the percentage of stocks in their portfolio in two ways. Firstly, they are either selling other assets and moving them to stocks or they are simply adding more money to the stock portion of their portfolios. Secondly, the overall value of the stocks are increasing, which in and of itself would increase the percentage of stocks in their portfolio. This often makes investors over allocated to stocks in the latter part of a bull market.
When the downturn comes, those investors will likely experience outsized losses in their portfolios, especially compared to their original expectations. For example, if you started out investing 60% in stocks and the market increases by 100%, you will now have a 75% stock allocation if you did not rebalance. The normal portfolio decline in a bear market is 21% for a 60% stock investor. However, since the stock allocation is now at 75% this investor has an increased decline of 26%.
The takeaway here is to determine the required rate of return to meet your goals. It’s easy to find historical rates of return for stocks and bonds, so with the target rate of return, it should be fairly easy math to come to a portfolio allocation. In my planning process, this is one of the three pieces of the puzzle we use to come to a recommendation on portfolio allocation.
Keeping What You Earn
I would submit that limiting your risk allows you to keep more of what you earn, rather than giving a large portion of it back when the next downturn comes. With that in mind, lower stock allocations through rebalancing may limit the upside, but it also limits the downside and can actually increase terminal portfolio value after a full stock market cycle.
For argument’s sake, please endure my simplified math of investment returns. I have used a 12% rate of return for stocks and zero for bonds. I chose these numbers due to the “Rule of 72” which tells you how long it will take (approximately) for your money to double.
If you invested $10,000 with an original allocation of 60% stocks and 40% bonds, after a 100% increase in stocks over six years, your account will likely have $15,840 in it. If stocks then decline by 35%, you will end up with $11,700.
Alternatively, if you maintain your 60% allocation to stocks by rebalancing the portfolio at the end of the year that your allocation rises above 65% stocks, you will have a total account value of 15,300. If stocks now decline by 35%, your 60% allocation will limit portfolio losses to 21%, or a decline in portfolio value to $12,100.
By using a properly allocated and rebalanced portfolio, you will have less of a wild ride up, but save yourself the terror of the rollercoaster ride down.
Keeping Emotions in Check
With the above examples, would you have stuck it out during the downturn? In reading the first example, I’m sure you would have been emphatic that you would have stuck to your guns. However, after reading the second example, maybe you’re not so sure.
I think that educated investors know that their stocks are not going to go to zero. Therefore, during a downturn, they’re not thinking about losing all of their money forever. Instead, the siren song of “they’re not losing as much as me” or “maybe I wastaking too much risk” creeps in and they change their allocation at or near the bottom. It’s the comparison game that comes in to bite us!
It’s important to manage your emotions as an investor. I think the easiest way to do so is to dial back your risk when times are good, so to limit your risk during those downturns. Sure, the loss of upside will be painful, but let me be clear, the pain in the downturns is exponentially worse!
The best way to systematically reduce risk is by rebalancing when your allocation gets out of whack. This works during the downturns as well, allowing you to replenish your stock allocation as markets are falling and stocks get cheaper. Once again, this takes emotions out of the picture, allowing you to maintain the target allocation and make purchases while others are running from stocks.
Academic literature would say that rebalancing hinders accumulation of wealth, since letting your stock allocation continue to rise will statistically increase future returns. The higher stock allocation is self perpetuating since stocks rise more often than they fall.
However, if your ultimate goal is to reach the end of your life with enough money to meet your spending needs and leave money to heirs, you don’t need to target infinity, just a number greater than $0. Limiting your risk, while eliminating the chance to reach infinity, will allow you to sleep better at night, all while helping you achieve your goals. Heck, it may allow you to live longer by reducing the chances of a heart attack when you open those brokerage statements way in the future!
On Episode 52, Brad and Jonathan sat down with Todd Tresidder from the Financial Mentor to discuss the FI State of the Union.They discussed that there was currently a one dimensional path to FI, popularized by Mr. Money Mustache and widely followed and his fan base that involved stoicism and low-cost index fund investing.
Stoicism from the Mustachian point of view, involves being happy with less and avoiding the endless hedonistic treadmill.Pete’s special spin involves a dose of bootstrapping–don’t just learn to live with less, learn to do things yourself.You can’t find easy, quick fixes, but by empowering yourself, you can be happier. A hallmark of the Mustachian stoicism is also riding a bike instead of driving a car.
When you are crafting your path to FI, we often focus on one approach to FI, but there’s more to the financial freedom path than just the numbers.Often, we fixate on the “F” of FI- the “finance,” but not the “I,” the “independence” part of the journey.Before numbers are crunched and you sign up with Vanguard, it's critical to really get down with how you define freedom for yourself.
What does freedom and independence feel like for you and your family? If pinching pennies and researching ways to save money by cutting your own hair or biking to work feels like the right way to approach your FI journey, awesome!
But, if stoicism isn’t the life philosophy that truly makes you feel fired up about FIRE, there are alternative paths that can be activated beyond a focus on index funds and a low cost of living to reach FI. Your vision and enthusiasm are critical to your success, and luckily there are many combinations of choice to get you there.
The key point that Todd describes, that he asks everyone to think about is beyond stoicism.If it feels personally empowering to bootstrap and relentlessly optimize, then that path may be for you.If the more popular forms of FI feel more stifling than freeing, then luckily–there are alternative paths.
While this path works for many, and Todd was clear that this path can absolutely be successful for many, he desired to explore other legs of the FIRE stool.For each of the below paths, you can customize your journey with different spending levels, different equity levels, asset classes & investment strategies.
Option One:Passive Index Fund or “Paper” Investing:
Traditional FI, as he previously outlined with influencers like Pete from Mr. Money Mustache, outlines a path of “low costs and passive investing.” Getting to FI is simply a matter of calculating your expenses and multiplying it by 25.
So, to achieve FI , you’d need to get your expenses down as low as possible.Lower your expenses, find happiness with that level and be able to retire early because low expenses are easier to cover overall.
When you get to 25x your annual expenses, and you can begin a 4% withdrawal rate in passive index traditional asset/paper assets, you are at FI. Todd outlined this as “lean FI” and said while there’s nothing wrong with this approach, it’s not for everyone–especially those who do not ascribe to stoicism or have circumstances that don’t lend themselves to a frugal lifestyle.
The following two paths to FI differ in that they aren’t as focused on spending less, but earning more so that when you do achieve financial freedom, even if it doesn’t look like the “traditional FI model,” it will fit your needs and embody what true financial freedom means to you.
Option Two:Real Estate Asset Class Investing
While investing in real estate isn’t as seemingly straight forward as what Todd describes as “paper assets” or “passive investing,” he argues that it can get you to FI faster if you’re in a lower income bracket, as you can get creative with financing or implementing your own skills to develop your asset for less cash.
It can be challenging for a person who is living on a tight budget, let’s say, as a teacher, to be able to hit FI as quickly on a $35,000 a year salary, even with the most frugal of lifestyles.But, in terms of real estate investing–you can house hack, pool your assets with a family member to invest in a rental property, and also develop and improve an existing property while it’s earning you income.
Of course, while there are ways to utilize creativity to access this asset class, there are also barriers and problems.Being aware of your own risk with each property and the inevitable market rise and fall is key.
You can’t time the market, but watching out for signs the bubble will pop (risky financing, high demand and hot markets that can’t be sustained) is a skill everyone should hone in on to make this lever of FI work for them.
Option Three:Business Asset Class
Starting your own business is the third lever of an alternative FI path that isn’t as often discussed in the FI world.To build wealth with the other two levers, your equity/assets must compound, but this isn’t the case with a business.With time, the other two assets classes will begin to compound and grow, but time is utilized a bit differently with a business.
Here, you can create equity with your time–and little else, if you don’t have a huge margin to work with in term of your primary income.By keeping your financial investment low in your business asset, you can tinker, experiment and yes–even fail.It may take a few (or many) tries to get a business model that brings in the income you need, but if you have no money to lose, you have everything to gain.
In the end, your blend of FI should boil down to happiness, even if it doesn’t fit a mold or seem quickly summarized in a blog post. Respect your values and know that the path you take may change over time.
Being clear onwhat freedom means to you is where you should start, and always, the tactic you should come back to.Your definition of freedom, even if it’s a bit contrarian, dictates the path you can take to get there.
All in all, there isn’t just one path to FI. Your path may look like a combination of several levers , with a bit of penny pinching and a few areas you simply won’t cut corners. Adding complexity, and nuance to your plans better represents reality and you can be more successful with an outcome that’s personally tailored for your FI goals.