Lazy Man and Money

The Problem with Second Generation FIRE

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The following is a guest post from my sister site, Kid Wealth.

We’ve been doing a lot of cleaning for the new year. One of the areas I’ve come across is my book collection. I feel like I’ve finished about ten books in my life, but somehow I’ve managed to own at least a couple hundred books. Of the ten books I’ve finished, at least two are by Malcolm Gladwell. You can read my Outliers review here and my What The Dog Saw review here. For some reason, I’ve never reviewed The Tipping Point or Blink on this website, which is weird because I would have thought those were the two Gladwell books I’ve read.

Wow, that’s quite a Grandpa Simpson story of a paragraph. In the cleaning, I came across Gladwell’s David and Goliath and realized that I’ve never opened it. Each chapter is a story of “underdogs, misfits, and the art of battling giants.” Gladwell makes the point that sometimes who we feel is the underdog should not be an underdog at all.

The second chapter caught my attention. The main point that Gladwell wants to make is that we think about school class size all wrong. We have always assumed that smaller classes help kids learn better and achieve more. He argues that’s simply not true.

To prove his point, he uses an analogy involving parenting and wealth. It can be hard to parent if you are very poor – “Poverty is exhausting and stressful.” A point that I’ve made many times on this website is that money may not buy happiness, but it can cure a lot of unhappiness. It is common sense enough that I don’t need to spend more words on this point.

As you go up the wealth ladder, it gets easier to parent. I enjoy having landscapers, which saves me time and energy that I can use to help kids with homework or another enrichment activity like Cub Scouts. However, there comes a point where more money doesn’t buy too much more time – the advantage of having enough money levels off.

Then something strange happens. Gladwell tells the story of a Hollywood producer who has hundreds of millions of dollars. Parenting becomes more complicated when you have too much money. The kids grow up spoiled. They see their parents with a Ferrari, and they expect that they can have almost any material object they want. Kids know you have more than enough for the PlayStation 5 and 40 new games. It’s much easier to explain that you can’t afford something than you won’t give it to them.

I think of my kids. They’ve seen me “go to work” once in their lives. (I had one meeting in Boston a few years back.) I write for the blog a lot, but they don’t see that as work. They don’t see my customer service gig as that’s through email. Fortunately, they actively participate in my dog boarding business. I can show them a lot about how money is earned. The dog boarding business was just supposed to be a little side hustle. I hadn’t planned on it becoming a full-time income. I got lucky.

In an alternate universe, my wife could have retired, and we’d use her military pension for income. Perhaps I have no dog business or a customer service gig. (These are new income sources over the last few years.) Our kids could grow up watching neither of us works aside from my blog hobby or answering a rare tenant’s phone call. For them, it would be normal that adults simply don’t work.

That could have been a big problem. What do kids think when they see that their parents don’t work? I tell my kids that doing their best in school is their job. I would have a problem telling my kids that they need to do their job while I spent the day surfing or golfing.

The biggest issue is when kids grow up with too much money; they don’t have to work hard to make money themselves. My wife was motivated to become a pharmacist because her family always had money problems. Pharmacy was a way out of a bad situation.

First generation FIRE has eliminated money adversity. The next generation has a very comfortable life. There’s nothing to light the FIRE fire.

Second-generation FIRE isn’t all bad, though. I haven’t met anyone who has said, “I wish I learned about compound interest and financial independence later in life.” They always wish they had learned it earlier. Second generation FIRE grows up with that. They know that a Kid Roth IRA can be worth a million dollars and can help them get started with that early.

Gladwell moves on from the analogy of kids, parenting, and wealth to get back to class size. His point is that there’s a Goldilocks Principle* where there is a “just right” class size. If you have a class too small, the group dynamic suffers, and you lose the diversity of class discussion.

* Gladwell never mentions the Goldilocks Principle. I stumbled upon it completely by accident. I thought that Goldilocks made sense to describe it, and I guess enough other people did as well.

How Many Days of Financial Freedom do you Have?

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This article could have been short. I was tempted to repeat the title and make that the whole post. However, I can do better than that.

Imagine a scenario where your money didn’t compound anymore. Perhaps you took it all out and put it under your mattress. (Note: Please don’t do this.) It’s an unlikely scenario, as there are cases where you’d at least earn interest. Then again, banks paid very little interest for a couple of decades.

How many days of financial freedom can you purchase with your savings?

Here’s how I calculated our number:

Lazy Man’s Financial Freedom Days

The first step is to calculate your expenses. I’ve done this a few times. A couple of years, I pegged it around $100,000 a year. I recently did a similar expenses exercise here. The second one came out to $75,000 but didn’t include the $25,000 we spend on the kids’ private school. It’s good that the math worked out close to the same in both scenarios. I don’t budget or watch every dollar – I try to make good financial decisions. It’s worked well for me.

Our expenses may be more than $100,000 because these estimates are primarily for our necessities. However, we only spend a little money on other stuff. It’s very clean to work with the $100,000 number.

The $100,000 is accurate for the next five years. At that time, we pay off our 15-year mortgage, and the kids are in (potentially free) high school. That brings the expenses to around $50,000. To make things easy, I’ll use these numbers going forward.

We’ll probably have some college expenses, but those are impossible to plan. My wife’s GI Bill can fully fund one child attending a state school (or partially fund a private school). Since we have two kids, that’s half of the plan. They will hopefully get some scholarships as they get top grades in the private school. Finally, we have a couple of rental properties, and that income would likely offset the expenses there. For this exercise, I’ll ignore the ballooning cost of college and figure something there will work out. We do have some 529 savings, but it could be better. (Hey, spending $25,000 a year is already a lot of money.)

The beauty of this calculation is that there are no rules. No one is checking your work. It should work out fine as long as you are consistent over time.

Now that I’ve established my expenses ($100,000 for the next five years, $50,000 after that), it’s time to look at how much money we have.

Fortunately, I update my net worth every month, making this calculation easier. Our liquid cash and investments roughly add up to around $1,750,000. Some of these investments are in retirement accounts, which would have tax consequences. Since I’m estimating, I’ll lower the number to $1,500,000 to account for that.

I expected to use a calculator, but the math here is elementary. If we allocate $500,000 for the first five years, we have a million going forward. A million dollars will last 20 years at the $50,000 annual expense rate. Five years plus twenty years is 25 years. My wife and I would be age 71. That’s very, very good.

Having 25 years of financial freedom is nice, but we have more than that. The rental properties that I mentioned before will help. Also, my wife’s pension will be more than $50,000 in annual expenses. I don’t intend to stop working, and there will be some kind of Social Security around. Finally, we’ll let the investments grow, not stuff the money under the mattress.

Final Thoughts

At first, I wondered if this idea was useful. It won’t mean too much to us for all the reasons I mentioned in the previous paragraph. It’s nice validation, but it isn’t actionable. I take that back. I think that we can spend more now. It also motivates me to optimize my health to enjoy the money much longer.

However, it is perhaps much more motivating for younger, newer savers/investors. The amount of financial freedom may seem low, like a few months, but if you are saving and investing, it will grow. Watching this number grow will undoubtedly help one feel better and encourage them to save and invest even more.

It becomes less valuable as those savings and investments grow. I’ve been preparing this for a long time, and everything went well. If you are a long-time investor, perhaps you find yourself in a similar place. We’re all on different parts of our money journey, so use whichever tools that work to motivate you.

What’s Your FIRE Score?

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Fire Score

The other day the famous Sir Mix-A-Lot song came on the radio. The lyric about Cosmo made me wonder if the magazine is still around. I admit that one of my guilty pleasures of my early twenties was reading my girl friends’ Cosmopolitan. It was very different than anything I would typically read. It was certainly not close to Money or Kiplinger’s.

I don’t know if it was pioneered by Cosmo, but one of the signature things in seemingly every issue was a quiz. Usually, it was something like, “Are you compatible with your man? Take the quiz and find out.” By answering questions honestly, you scored points and at the end, you added up all the points and gave you the result. I imagine they still have this kind of thing today… if anyone is still reading magazines.

What if we adapted the concept to FIRE? Here’s one attempt at creating a FIRE quiz. It’s only five questions, so it will be quick and easy. Add up your points and we’ll see what your FIRE score is at the end.

What’s Your FIRE Score?

I’m going to be asking you some questions about income and expenses. Answer as best you can and just try to be truthful with yourself. There’s no judgment here and this is all in good fun.

1. Income

What’s your income look like? Are you much wealthier than the average person in your area? Do you make a lot less money than the average?

Give yourself:

10 points if your income is very high
8 points if your income is high
6 points if your income is average
4 points if your income is below average income
2 points if your income is far below average income

Expenses

Income is easy, it’s just one number. I want to break expenses down into various areas:

2. Housing

Housing costs are typically the high expense anyone has. For that reason, I’ll start here and points for frugality are worth more here.

Give yourself:

4 points if your housing costs are very low
3 points if your housing costs are below average
2 points if your housing costs are average
1 point if your housing costs are high

For example, if you live in a tiny house or have roommates or another kind of house hacking, you can probably give yourself 4 points for this. If you might describe yourself as living in McMansion or “house rich and cash poor”, you get 1 point.

3. Transportation

Transportation is the second biggest expense, so you have a chance to earn a lot of points for frugal behavior here.

3 points if your transportation costs are very low
2 points if your transportation costs are below average
1 point if your transportation costs are average
0 points if your transportation costs are high

If you buy a used low-end reliable car and drive it into the ground your transportation costs would likely be very low. If you are a one-car family that’s likely to be very low too. If you use public transportation and/or a bike most places, that’s a low cost of transportation as well. If you lease a new car that would normally cost 6-figures to buy, your transportation costs are expensive.

4. Food

Next up in the expense hierarchy is food. If you live on rice and beans you can score extra points here. If you buying organic, artisan foods from Whole Foods you won’t get any points on this one.

2 points if your food costs are below average
1 point if your food costs are average
0 points if your food costs are high

5. Extras/Adjustments

You may need to subtract points if you have some extra expenses. One example could be student loans. We don’t have student loans, but we do pay a lot for private school for the kids. I’ll have to subtract some points here.

Add Up all the Points

The maximum amount of points you can score is 19, but that’s very hard to do. The minimum score is 2, but that’s a very poor financial situation to be in. If you have a priority of FIRE, you probably want to be in the 12-15 range.

Let’s see what my scoring is:

My FIRE Scoring

Income – 8 points – I gave us 8 points here because my wife does well as a pharmacist. I’m much more average in income. We aren’t doctors or CEOs so we don’t fit in the 10 area. We are better than average though so 6 points didn’t seem right either.

Housing – 3 points – I could have maybe gone with 2 points here – it’s borderline. We bought our house for $400K about 10 years ago. With a fixed 15-year-mortgage at very low interest rates, it is less expensive than it would ordinarily appear. Also at 1800 square feet, it isn’t a McMansion for 4 people. Zillow says it is worth around 600K now, so people getting into the housing market have a much higher expense. That helped sway me towards a lower than average housing cost.

Transportation – 2 points – This one could have maybe been 3 points, but I rounded down on this one to make up for the housing expense above. We have two cars that are paid off, each 7-8 years old. The Subaru Forester (my car) was cheap, while my wife’s Acura MDX was a little more luxurious. We don’t walk or bike or do anything else to lower our transportation costs much. Most days, I just drive the kids to school and maybe go to the grocery store. We put few miles on our cars unless my wife is commuting.

Food – 2 points – I’m the master of shopping for cheap food at Aldi and the military commissary. With a chest freezer, if I find a good deal on meat, I can usually stock up for a long time. We don’t eat a lot of organic foods. For health reasons, we should probably be spending more on quality, but that’s a topic that is outside the scope of this quiz.

Final Total – 15 points

But wait, I didn’t add in the adjustment for the kids’ school expense. I think that’s going to cost me a couple of points, so my real final total is probably closer to 13 points.

This will also change over time. When my wife retires our income will be average (she’ll get a pension). When we finish paying off our mortgage in about 5-6 years our housing expense will drop to a very low number earning us another point there. When major life circumstances change, it may be worth revisiting and seeing where you stand with this quiz.

Final Thoughts

There are a lot of limitations with this quiz. For example, I didn’t include a lot of expenses. I also didn’t include investing. It’s a Monday, so I wanted to make it light, easy, and (hopefully) fun.

I think five questions were about the bare minimum that was needed to get a meaningful result. If you leave some suggestions on how to make it better, I might make this more comprehensive with a FIRE Score version 2.0.

How to Become a Millionaire by 30

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Millionaire by 30
How do you become a millionaire by 30?

How do you become a millionaire by 30? That’s a question I’ve been thinking a lot about lately. I was cleaning out my basement recently and I came across an old book Millionaire by Thirty by Doug Andrew and sons. I reviewed it several years ago and I didn’t give it high marks.

Nonetheless becoming a millionaire by 30 is an intriguing concept. It’s extremely aggressive and not feasible for most of the population.

Putting Your Millionaire by 30 Plan Together

I’ve found that success relies on two things, having a plan and executing that plan. I’m going to tackle the easy part by giving you a millionaire by 30 plan. That’s the best I can do from my side of the keyboard. You have the difficult part: executing the plan.

1. Start Early

You simply can’t hope to make a million dollars on the last day before you turn 30. It’s important to have compound interest work for you over the last ten, and especially 5 years.

(I’m sorry if you are reading this a little later in life. If that’s the case, it may make more sense to set a goal such as how to be a millionaire in 10 years or how to be a millionaire in 20 years.)

2. Earn a Great Income

This can be a double-edged sword for millionaire by 30 race. Usually, to earn more income, you have to spend more time getting an education. I’m always in favor of great education, but you could graduate college with a lot of debt. High-earning post-college degrees like law school or medical school add more debt, and little time to become a millionaire by 30.

While this exercise is a race to an arbitrary finish line (30 years 0ld), your life is not. Earning a great income after 30 is critical to your financial success, so don’t let this race prevent you from reaching more important goals.

3. Save Money

I know people who make great incomes, but they spend all their money. I think they are happy with their spending, but it’s hard to know for sure. It’s common sense, but if you spend all your money, you won’t be a millionaire, right?

4. Invest

Saving money is good, but investing and compound interest is going to help. Because becoming a millionaire by 30 is so difficult you are likely going to need every advantage you can get. It’s unlikely that you are going to be able to work out 20% raises every year as in the example above, but investment gains can make up the difference.

My two favorite ways to invest are in stocks and real estate. Real estate is more work, but you may be able to use leverage and appreciation to get a million dollars faster.

5. Be Lucky

To be a millionaire by 30 you need a lot of luck. Hopefully, you were born into a good supportive family. Hopefully, you were born into a good environment (region of the world). Hopefully, your investments went well. Hopefully, you’ve been healthy. Hopefully, you get the idea here.

There’s a lot of hope and luck that goes into becoming a millionaire by 30. Not everyone has all that luck, so it may be important to adjust your goal. Some people have more luck. I like to say that Paris Hilton was effectively born a millionaire due to her parents’ great wealth. Not everyone starts life on an equal playing field.

If you’ve done most of these things and have some bad luck along the way, hopefully, you’ll still have a nice six-figure net worth to get on the path of being a millionaire by 40.

Millionaire by 30 in Reverse

One way to see if you are on the right path is to work backward from the goal. To get a million dollars by 30, you should have a certain amount of money by 29, 28, 27, etc. That is unless you are expecting some kind of huge financial event (stock options at a big company). Even if you have a big goal that requires aggressive gains, it’s best to look backward and see if you are on pace to have a good chance.

Here are three models. One shows 10% net worth growth per year, the next shows 15% growth per year, and the final one 20% growth per year. I picked these numbers because they are somewhat reasonable if you are a high-income earner and have good investment luck. Outside of lucky breaks, being a high-income earner is a prerequisite to becoming a millionaire by 30.

Age20% Growth15% Growth10% Growth
30$1,000,000$1,000,000$1,000,000
29$800,000$850,000$900,000
28$640,000$722,500$810,000
27$512,000$614,125$729,000
26$409,600$522,006$656,100
25$327,680$443,705$590,490
24$262,144$377,150$531,441
23$209,715$320,577$478,297
22$167,772$272,491$430,467
21$134,218$231,617$387,420
20$107,374$196,874$348,678
19$85,899$167,343$313,811
18$68,719$142,242$282,430
17$54,976$120,905$254,187
16$43,980$102,770$228,768
15$35,184$87,354$205,891
14$28,147$74,251$185,302
13$22,518$63,113$166,772
12$18,014$53,646$150,095
11$14,412$45,599$135,085
10$11,529$38,760$121,577
9$9,223$32,946$109,419
8$7,379$28,004$98,477
7$5,903$23,803$88,629
6$4,722$20,233$79,766
5$3,778$17,198$71,790
4$3,022$14,618$64,611
3$2,418$12,425$58,150
2$1,934$10,562$52,335
1$1,547$8,977$47,101

Getting a Kid to be a Millionaire by 30

I have two kids (ages 7 and 8) and it’s really difficult to get them motivated to do anything but watch YouTube videos about Pokemon. If there was a career in that, they’d already be millionaires. Maybe they’ll make their own videos someday and become the next YouTube stars.

In the meantime, the kids are helping me with the dog sitting and earning a little money in their Kids Roth IRAs. I started investing their birthday money at ages 2 and 3 and the great stock market has worked well.

It’s a good head start, but they’ve wasted so much time learning how to walk and talk ;). They’ve used up 25% of their time to be millionaires by 30 and aren’t even 1% of the way there yet. What am I going to do with these slackers ;)?

Is It Worth Trying to be a Millionaire by 30?

I can’t tell you what is worth your time. If you really enjoy high-earning careers and entrepreneurism and you are great at them, more power to you. Most people have outside interests that don’t revolve around the singular goal of getting to a million dollars by an extreme, self-imposed, deadline.

However, there are benefits to being a millionaire by 30. For example, the odds are very good that with investing compound interest you can become a young multimillionaire. That gives you the freedom to do a lot of things later in life such as choosing to retire early or do some space tourism (if that happens any time soon.)

I find it’s better to have balance in my life, but I recognize others might benefit from setting the goal and having a plan to drive after it. In the end, you have to do what’s best for you.

Two Motivational Ways to Start Saving and Investing

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motivation start saving investing

Last week, I saw a Tweet from someone lamenting that their relatives could have made a few million dollars if only they invested their money. Instead, they saved hundreds of thousands of dollars in the bank for decades earning little interest. I don’t know all the details of it so I don’t want to get into the specific situation. Instead, I wanted to share that it inspired me to make this Thanksgiving reflection:

I realize that I’m in the minority… a tiny fraction of a minority of people who learned about saving, compound interest, and investing very early. I live at the intersection of Nerdy and Boring, so those topics interested me. I know I’m weird.

For everyone else, getting started investing is tough. It can be confusing. But before you can get started investing you need to save some money. That’s a huge obstacle for many with student loans, child care, expensive housing, health care costs, stagnant wages, etc. (I’m sure I missed a few in there.)

If you are anything like me or anyone else I know, life keeps you busy. It’s easy to put saving and investing to the bottom of the priority list. You can always find time to save and invest later, right? (Unfortunately, wasted time investing can be costly with to how compound interest works.)

I think it’s a mistake to put off saving and investing. Today, I wanted to present two powerful mental hacks that motivated me to keep saving and investing.

1. “Retire” Expenses for Life

We all have monthly expenses. Wouldn’t it be nice if we didn’t? Who wouldn’t want free Netflix, a free car, or a free home?

Well it’s all possible, but you have to start small. There’s a thing in personal finance called the Rule of 25. It’s the inverse of of the 4% Rule. The 4% Rule can get complicated, but it roughly says that if you have $1,000,000 invested you can spend $40,000 (4%) a year and retire. I cover some of the more complicated parts in the 4% Rule link above, but for now we’ll rely on it as if it were proven fact. The inverse of this means that if you have $40,000 in annual expenses, you should save 25x… or $1,000,000.

Your total expenses are made of many little ones – things like house, car, utilities, and even that streaming subscription.

Let’s take Amazon Prime as an example. Prime is so popular that I’m guessing most of you can relate. It’s $120 a year, which makes the math convenient for us. If you save and invest 25x or $3000, you can have Amazon Prime for life. It seems like a lot of money to save for that expense, but compound interest can really help you out. You don’t have to invest $3000 at once.

2. Track Your Net Worth by Percentage

You may see some bloggers posting about how their net worth jumped 2% for the month making them $40,000. That can happen when you have a $2 million dollar investing nest egg. I’ve got good news and bad news about that. The bad news is that $2 million nest eggs is not very normal. Fortunately, you already knew that bad news. The good news is that the story behind the nest egg is usually saving and investing over a number of years. That’s doable if you have the right mix of income, frugality, steady investment, and some market luck.

When you are starting out, the large numbers can seem either inspiring or scary. I could see people going in both directions. I see it as inspiring, but I’ve read comments from people that say, “I could never do that kind of thing.” Everyone’s situation is unique. I’ve read stories about a 9-year-old who is worth over a hundred million dollars from his YouTube success. I’ve also read stories about the low-income janitor who died with millions of savings. There’s a lot of room for financial success anywhere in between.

When you are starting out, try to focus on your monthly gain of net worth. Hopefully, you are saving some money and because your net worth is low, you can make big gains here. When you have $2 million dollars, it’s hard to grow your net worth by 10% (unless you are a 9-year-old millionaire YouTuber). You are at the mercy of the investment markets. When you are starting out, you might be able to grow your net worth by 20% simply by saving $2000. Saving $2000 may not be easy depending on your situation, but hopefully sneaking $40 away a week in a bank (or investing) account is something reasonable for you.

Final Thoughts

I hope that these tricks help you. The biggest thing is to get started and realize that it is okay to start small. Do you have money hacks that you use to movitate you?