Lazy Man and Money

“It’s a Combination of Things”

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Happy Election Day 2020! I know you can get your fill of political commentary from people today. I’ll give you a break and mostly steer clear of politics.

(Of course, if you want my view on the election and your money, I suggest you read vote Biden for the economy.)

I was thinking about not writing an article today. I know that even I wrote my best article ever, it’s not going to get much attention. Just when I had convinced myself not to write an article, life intervened. This article practically wrote itself.

It’s a Combination of Things

I was looking forward to a productive Monday to start the week. My to-do list was a dozen items long, but I was well-positioned to fly through most of them. The first thing on my list after dropping the kids off at school was to get my car inspected.

I’m fishing through my glove compartment for the car registration when my phone rings. It’s the kids’ school. An automated message says the head of the school has sent out an important email. We all know what that means. I find the registration and walk to the mechanic while I’m reading the email.

I breathe a sigh of relief as there are no positive COVID cases at the school Instead there’s an early dismissal because there were three people who were in close contact with a positive COVID case.

I pick up the kids at school and get them home. My phone rings. It’s the mechanic. The car needs new brakes and some other repairs. It’s going to be $1100.

It wasn’t even noon and it was shaping up like a terrible week. I didn’t give my to-do list another thought.

I did take a minute to reflect on what this truly means. As long as the kids are healthy*, all of this is only slightly inconvenient. For many families in a different financial situation, it would be much, much worse. For many families in a different working dynamic, it would be much, much worse. The (relative) freedom of time and money was the right “Combination of Things” to combat this stressful day.

Those freedoms came from a combination of things:

  1. Our household income is far above average. My wife does well as a pharmacist. I piece together 3 part-time jobs and some contract work while managing much of the household errands.
  2. We live frugally. We drive our cars into the ground. Aldi groceries are cheap. I’m literally wearing a 24-year old shirt while I write this article.
  3. We’ve been very lucky. This shows up in our various ways, but one example is that we’ve had very few financial disasters.

Make more, spend less, be a little lucky… it’s a combination of things.

A few hours later, my mother emailed me asking why anyone thought Cam Newton would be a good quarterback for the Patriots this year. My response was predictable, “It’s a combination of things…”

* The kids were only in school for 2 hours this morning after a 3-day weekend. As there are no known positive cases yet, we are optimistic that health won’t be a concern.

Compound Interest is a River

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Last week I had the idea of putting together a couple of thoughts on how to achieve financial freedom at any income. I came up with exactly two ideas, but I’m thinking about include a 3rd idea.

Before I go any further, I need to clarify that this is financial freedom at any reasonable income. (The title would be very, very long if I added “reasonable” and this whole explanation.)

What do I mean by “reasonable”? I’m saying that you can be financially free even if you don’t make a huge doctor or lawyer salary. You can be the Average Joe… if you can manage your expenses well. That’s the baseline assumption I’m making here. It might be best to think of this as advice for someone starting with a clean slate. I was fortunate to have learned today’s point before I even graduated.

At last year’s FinCon, I met Monica Louie and she told me about her story of getting out of debt. It’s an amazing story that I will (cruelly) save for another day. An idea flew into my funnel. (These are phrases you use when you are a parent to a 3 and 4 year old who love Thomas the Tank Engine.) I can’t confirm or deny if this idea may have been aided by a couple of drinks at the gathering.

Compound interest is a river. You and try to swim upstream by paying compound interest. Or you can float downstream by earning compound interest.

Lazy Man and Money is about making my money work so I don’t have to. Can you guess which one I prefer?

Compound Interest is a River
Compound Interest is a River

Swimming Upsteam by paying Compound Interest

Let’s imagine that you have $10,000 in credit card debt. A quick Google search tells that the average credit card has 15% interest rate. It’s a little complicated, but you are roughly throwing away $1500 each year. And that happens every year unless you pay off that $10,000. If you throw an extra $200 at it every month, you are paying $2400, but barely making a dent in the $10,000.

It’s like you are swimming upstream. You are putting in a lot of work, but you aren’t getting very far. While it is difficult to keep swimming, if you stop the current will just stronger and take you further away from financial freedom.

The speed of the river’s current is simply the interest rate. You might have a low rate like a fixed mortgage… or it might be a large one like this credit card example.

Float Downstream by receiving Compound Interest

Let’s instead pretend that you choose to invest $10,000. It is very difficult, perhaps even impossible to make 15% every year, so I’ll use the standard 8% that is a long-term average return of investing when one invests in stocks.

Instead of throwing away money, you are receiving free money. The first year you earn $800 and have $10,800. The next year you earn $864 for a total of $11,664. You are getting more and more free money each year.

The current of the river you are on is accelerating and all you have to do is keep floating on towards your financial freedom goal.

Struggle to Swim or Float: It’s Your Choice!

Compound interest is either going to work for you or against you. It’s up to you to decide which you want.

Life throws us a ton of curve balls. Some people get a lot more curve balls than others. I’ve been fortunate to face very few curve balls. I don’t want to be insensitive to those who have went through a lot more difficulty. (I can drop the curve ball analogy now, right?)

However, there are many, many people out there who are spending their money without thinking about where they want the Compound Interest River to take them. That almost always puts them into a situation of swimming upstream. Other people are mindful of how the Compound Interest River works. They are working to increase their floating current by investing and reinvesting more and more money.

If your income is smaller, your journey on the Compound Interest River might be longer and slower, but you’ll still likely get to your financial freedom destination. If you are fortunate to have a large income, you may be able to make your river start out a little further towards the goal.

Next week, I’ll continue with my next fundamental idea of financial freedom. In the meantime, leave me your thoughts in the comments.

Happy 2017: Here’s Your Guide to Success

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The calendar does what it always, moves forward. While the change of a year is arbitrary, it does serve as a wake-up call for millions to take stock and try to improve their lives. I’m one of those millions. In fact, I’ve felt the push to improve for a full week now. (More on that later this week.)

Mountaintop Success

New Year’s resolutions don’t change much year to year. Last year I wrote researched 7 simple ways to Make and Keep Your New Year’s Resolution.

Seriously, that’s all you need, so just click that link.

You’re still here? Why?

The fact that you are still here is a good sign. It tells me that you have persistence or grit. This is important to succeed in any New Year resolution.

Want to know how much grit you have? Bestselling author Angela Duckworth has a Grit Scale test. On the 0 to 5 scale, I scored a -37. Yikes. On the bright side, you can be confident that you are ahead of me.

The general ideas are great for building a foundation on how to succeed with your resolution, but I thought I’d cover a few more. Here are some common resolutions and my very best tips:

Personally, I’d pick one area (more than one is setting yourself up to overwhelmed) and read the specifics and jot down a few notes. Then I’d use the Make and Keep Your New Year’s Resolution article to set up a plan to keep motivated… which is the most difficult part.

Calculating My Financial Independence Ratio

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[Editor’s Note: I’m going to get “mathy” with this article. Consider yourself warned.]

For months I’ve been crushing on Joe Udo’s blog, Retire by 40. Perhaps I’m a little jealous as this blog’s initial goal was early retirement before I got sidetracked by a number of other interesting financial topics.

One of my favorite topics of Joe’s is his financial independence journey. His “mile marker” is his financial independence ratio.

Don’t know what a financial independence ratio is? You may remember it from 10th grade math class. It was usually squeezed in the 5 nanoseconds between the discussion of cotangents and the Mr. Rogers’ “number” i.

I feel like you could use a refresher. Your financial independence (FI) is your passive income divided by your expenses. If you make $1500/mo. from stock dividends and need $3000/mo. to live, you are half way to financial independence (FI)… an FI ratio of 50%.

I would wager that 95% of the general public just read that as Charlie Brown’s teacher talking.

Another 4% fit into my category, how do I begin to calculate numbers? (Maybe it is easier to go back to cotangents and imaginary numbers?) The last 1% are all set and ready to calculate the numbers.

Let me try to help you out.

Calculating Your Financial Independence Ratio

Let’s start with passive income… the numerator of the ratio. I think most people don’t have any passive income if they stopped working today. That’s a FI ratio of “goose egg” (zero).

The Thompson Twins are likely collecting royalties which is a form of passive income. Maybe you have a pension. Maybe you have a huge nest egg in retirement accounts that you are looking to draw down on. Maybe you have investment properties that pay you an income each month. Maybe you have a small business that other people could manage.

Maybe you have all of the above like we do. (Okay, I’m still working on my one-hit wonder.)

The other part of your FI ratio is your expenses… the denominator. If your Ferrari payment is $3000/mo. you are going to need a lot of passive income to cover it.

Most people don’t know their expenses. That’s a shame because it’s as easy as using Personal Capital FREE web app.

Calculating My FI Ratio: Forty-Nine Shades of Grey

As I noted above, we have a few sources of passive income. In reality they are “potential” passive income sources.

My wife is a few years away from her military pension. Our income properties are about 11 years of having the mortgages paid off… when the rental income starts to add to our passive income. We continue stuff our retirement accounts to defer taxes. I don’t typically count Social Security, but it is worth noting that it’s a source.

My website and dog sitting income can contribute for years even in “retirement”, but they aren’t passive. They fall into the category of “If you love what you do, it isn’t work.”

As you can tell, passive income is difficult to quantify when it kicks in a few years. We could refinance the investment properties with 30 year mortgages to have some passive income now, but that’s against the long-term goal.

On the other side of the equation is expenses. We still have the mortgages of the investment properties. We have a 2 and 3 year old with daycare commitments. The expense of kids change quite a bit over time. We can plan for them, but it doesn’t help for keeping a consistent financial ratio.

We are in the process of paying off the mortgage in our own home (11 years left!). We are in the process of paying off our solar panels which will eliminate our electricity bills. We are half-way through paying off our new cars from a few years ago. Since we tend to drive our cars for 11-12 years, we’ll have some time where our expenses are zero.

(Soapbox: I can’t anticipate frivolous lawsuits from lawyers. I hope that someday America will be a country where a person can write his opinion or his personal experience to help people.)

In short, there’s a lot of ebb and flow on both sides of the equation. We could go from 0% FI to 200% FI very quickly depending on the timeline.

For now, I’ll keep it simple… our FI ratio is “goose egg.”

How To Be a Millionaire in 20 Years

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I’ve been officially old (big 4-0) for a few months now. It occurred to me that 40 year-olds have around 20 years of work experience (depending on high school, college, graduate school degrees).

The other reason I picked 20 years for this article is that the numbers work out. This clip from Something About Mary explains why 20 years is the perfect number:

At first glance 20-years seems like a long time. No one wants to wait 20 years for something right?

I thought the same thing until I realized that Summertime by The Fresh Prince and DJ Jazzy Jeff is 25 years old. We’re not even going back to Parents Just Don’t Understand. Time can sneak up on you.

How To Be a Millionaire in 20 Years
How To Be a Millionaire in 20 Years

So how do you get to a million dollars in 20 years? I decided to work backwards with two assumptions that I considered safe:

  • You are going to save some amount of money each year and invest it.
  • The investment is going to earn 7% a year. While that number will vary, this 7% is generally accepted as a rate of return when investing in stock indexes.

What’s the magic number you need to save and invest each year? Let’s see if you can spot it:

(It’s my first time publishing a Google Sheets document on the web, so hopefully this is a link where you can view the sheet and calculations. If anyone sees anything wrong or has any tips on how I can do this better in the future, please leave a comment below.)

Yep, it’s $23,000. By the end of the 20 years you’ll have invested “only” $460,000. (We’ll get to the “only” in a bit). The investment gains will be $540,000**.

When I did the math, the $23,000 number surprised me. Why? The maximum amount a person can contribute to a 401k plan is $18,000. The maximum a person can (typically) contribute to a Roth IRA is $5,500. If you were to max out both, you’d be saving and investing $23,500.

To all the conspiracy theorists out there, doesn’t it appear that the government set these numbers because they want you to become a millionaire in 20 years?

How Can I Save $23,000 a Year?

Saving $23,000 a year can be easy for those with big incomes or an enormous challenge for those with small incomes. There’s no one “right” way to get that money to save. I think it’s best to work with a blended approach.

The first thing I’d do is track your finances through Personal Capital. Many people are surprised to find out that their restaurant spending is several thousand dollars a year. You might be able to save a couple thousand dollars at restaurants with these tips.

I would try to put as much money as I can in a 401k. Why? Because it’s pre-tax money, you won’t notice as big a hit in your paycheck. (Yes, you’ll pay taxes later**, but psychologically, you’ll get a big boost from the big number in the 401k.)

Next, I’d sign up with Digit Dobot. This free service takes a small amount of money out of your banking account and “hides” it in another FDIC insured account. The idea is that you won’t miss the money the money you don’t see. You can read my Dobot review here. I’ve saved more than $1000 dollars and I didn’t even notice.

By now you are probably seeing that you may be able to save a few thousand here and there. It really depends on what you are already spending and what you are earning. Over 20 years you’ll probably need to buy a new car. You may be able to get a car that is cheaper and save yourself a hundred or two a month, which really adds up.

Does saving $23,000 still sound like too much money? Get a spouse and you can cut the savings goal in half. Some may consider it cheating, but I think most people would consider a great joint accomplishment. When I got married I found that many expenses, rent, utilities, cable, were cut in half as I had someone sharing them.

Looking for more ways to become a millionaire? Here’s a lighthearted look at How to Become a Millionaire. Here’s the story of how one person became a millionaire in ten years.

* When I was 23, I was introduced to a 27 year-old woman. I flat-out called her “old”. Perspective is a strange thing.

** I’m glossing over a few details such as:

  • Investment Expenses – These can be minimized with index investing.
  • Inflation – A million in 20 years is likely going to buy less than it does today. On the flip side, it should be easier to save $23,000 in year 18 than in year 1.
  • Taxes – This is a big one. I’m going to do what everyone else tends to do and suggest that this is in a retirement account and that there are no taxes when they are really just deferred. I think most people with a million dollars in their retirement accounts would call themselves a millionaire. Am I wrong?