Lazy Man and Money

The Best Personal Finance/FIRE Book You’ve Never Heard Of

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If You Made A Million

You probably know that I’m not a fan of clickbait titles. That’s why I didn’t use a clickbait title.

Let’s make a deal. If you’ve heard of this personal finance book, you stick around as a reader. If not, I’m okay if you click away angry and never come back.

Have you ever heard of If You Made a Million by David M. Schwartz? It’s illustrated by Steven Kellogg who happens to have written and illustrated one of my wife’s favorite books, The Mysterious Tadpole. My wife read it when she was a little girl. Our own kids are very familiar with Alphonse.

By now you may have realized that If You Made a Million is not about helping adults understand money. It’s about helping children. But please don’t click away just yet. If there’s one thing I’ve learned over the last 2 years, it’s that adults can learn quite a bit from children’s books.

Let’s dig into what makes If You Made a Million so special. (By the way, I was not paid to write this review. I simply saw it at the library. I will however make a small commission if you purchase the book from the above link.)

If You Made a Million

Before I get started with the review, let’s get a very important number out there: 1989. That’s when If You Made a Million was written. Yes, the book is as old as Taylor Swift. It is also three years older than Your Money or Your Life, which is often considered the first FIRE book. It was also written 6 years before Suze Orman wrote her first book.

Being old doesn’t make things good. (This blog is living proof of that.) Let’s get to the actual content.

Overall, the book takes a child on a journey of earning and spending money. It starts with feeding a fish a penny, which will allow you to buy one of a shyster’s pebbles. It continues to educate children about coins with increasingly more difficult jobs and ways to spend the money. These first few pages are fairly boring, but they go quickly since there’s only a sentence or two on each page. It’s an important to build that foundation.

Once you get into earning a dollar, the book tells the story of compound interest. Here’s the first one:

Compound Interest

At ten dollars, the compound interest story gets a little more exciting:

Compound Interest

At one thousand dollars, the idea of checks and how they work is introduced. It’s simply much easier than carrying around a wheelbarrow of coins or even a bunch of bills.

At fifty thousand dollars, we learn about how mortgages work:

Mortgages

There’s a little more to mortgages. Specifically it shows how you keep giving money to the bank year after year for 40 years. The illustrations show the old man still physically bringing his check to the bank for his castle payment. It also explains that, this time, you are the one paying interest to the bank.

Finally we get to the FIRE part of the book. It only takes six sentences. The first four are:

“If you have some very expensive plans, you may have to take on a tough job that pays well.
If you think ogre-taming would be an exciting challenge, you can have fun and make a great deal of money, too.
Of course, you may not enjoy taming obstreperous ogres or building bulky bridges or painting purple pots.
Enjoying your work is more important than money, so you should look for another job or make less expensive plans.”

Remember what I wrote before about adults learning from children’s books? That last sentence is “Exhibit A” of that.

I promised you six sentences. Here’s two more:

FIRE

Did you catch the financial independence message there? Having that kind of passive income gives you the option to not work at all, but maybe you should choose the work that interests you because doing nothing could be boring.

There’s a quick concluding page after that to get children’s minds thinking about what they’d do if they made a million dollars.

Final Thoughts on If You Made a Million

I found it surprising how well the math from 1989 holds up today. Obviously the banks aren’t paying 5.25% interest like the examples. However, we often work with similar (or even larger) interest rates assuming more risk and different asset allocations.

Also, the one million number at the end might not seem like enough today. However, it is $2,034,157.94 in 2018 dollars. You’ll often see $2 million as the target number for FIRE, so the one million number from 1989 is solid.

After the story ends, there’s a significant section of “A Note from the Author.” Here you get about 1500 words on each of the themes in the book: why money?, how banks work, interest and compound interest, checks and checking accounts, loans, and income tax.

Finally there’s a huge explanation on how he calculated some of the amazing numbers used in the book. These are things like a million dollars in pennies will stack 95 miles high and a million dollars in quarters would way as much as a whale. If you love geeky math, this is fun, but you could choose to skip it and still get all the financial lessons.

Now that you have a good understanding of If You Made a Million, I have two questions:

1. Are you going to live up to the deal and stick around as a reader?
2. Did you think my title was clickbait or just spot-on analysis?

Let me know the answers in the comments.

Junk Drawer Personal Finance #1

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There’s a lot of things going on in the personal finance blogosphere. I know I can’t follow it all, so I’m guessing you (unless you are a blogger) probably can’t either.

For one, I’m not sure if there is much of a personal finance blogosphere anymore or if it is just the same as the FIRE (Financial Independent/Retire Early) blogosphere. I suppose you could say that FIRE is a subset of personal finance. However, there are blogs that I think consider them FIRE who deal with getting out debt, investing, taxes, insurance and just about personal finance topic you can think of. However, not all personal finance is about FIRE, but it certainly looks like that because who wouldn’t want to be financially independent and be able to choose the work they love?

It’s kind of like how all squares are rectangles, but not all rectangles are squares. Except in this case, all four sides are extremely close to equivalent in size.

That was an unexpected tangent.

That was also the point of this kind of article. This is a junk drawer article of personal finance thoughts. I used to do more of these, but with social media they’ve become somewhat less necessary.

Great List of Early Retirement Blogs

Building on that opening, Joe from Retire By 40 has a great list of early retirement blogs. I knew of most of the blogs, but there were a few new ones that I added to my list to follow. Now following it all got even more difficult.

Life’s Not Always Puppies and Rainbows

My favorite article over the last week or two has been Tawcan’s The End. He’s not ending the blog, but he’s working through some personal struggles. It seems like few people ever talk about this stuff personally, but in groups of surveyed data, it seems to be all over the place. I’ve felt some of the same struggles and wonder if it’s related to parenting a couple of very young kids.

Life always has its frustrations I guess, but there was some good thinking if you find yourself in the same place. Yes, it’s a little light on the personal finance aspect of the articles that I usually like to highlight. However, you should definitely watch the Happiness film there as it covers a lot of personal finance.

Bad Personal Finance Celebrity, Bad

A personal finance celebrity/self-described-expert went on a podcast with the awesome Paula Pant and had a bit of a rampage against the FIRE community. We’ll call her S.O. to avoid giving her publicity for what many people thought was a media stunt to launch her new book.

S.O. viewed personal finance and FIRE very differently, loving the first and hating the second. Her rant went on for awhile covering a lot of different unlikely scenarios that could lead to personal harm. They were things like a truck with pipes on the highway having an accident and being behind it. (That can happen despite how much money you have in the bank.) Another example was her own mother who I think she said she spent 3 million in care near the end of her life. I might be misquoting, but it was literally hundreds of millions of dollars.

There was another extreme example of when artificial intelligence takes over the world and there are no jobs left. In that scenario, the thinking was that taxes would go through the roof to support all the things like Medicare and Social Security.

The doomsday scenarios lead Mr. Tako to write a humor satire where Justin of Root of Good Falls to His Death Off a Boat. It was a great price of writing noting that “Life is a Risk” either way. The real risk is getting to age 65, 70, or 75 and missed out.

This continued on for awhile until finally S.O. realized that the “Retire Early” part of FIRE community doesn’t usually mean eating Bon-Bons at the beach at the time. It often means moving to another type of meaningful work. Somehow that alleviates all the problems of a pipes falling off trucks and artificial intelligence.

S.O. was actually correct that a lot of these could occur, and in aggregate might occur to some degree. However, it is the people who have thought about these things and actually planned for them who are most likely to be best prepared for them.

Closing the Drawer

There are a few things that I didn’t get to which I wanted to, so maybe I’ll have to do this again sometime soon. If you could drop a line and leave a comment on this very different style of writing from what I usually do (or see others do), I would appreciate it.

Are we FIRE, leanFIRE, or FatFIRE?

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I was talking with someone in the FIRE (Financial Independent, Retire Early) community recently and they asked if we were FIRE.

I didn’t know how to respond. Is there a “kind of” FIRE?

What do I mean by that? I’ll get to that in a bit, but first we have to come up with a definition of FIRE.

What’s the Definition of FIRE?

Unfortunately, there’s a lot of subjective grey area in both the terms “financial independent” and “retire early.”

Let’s start with “financial independence.” The most common definition is someone who has a nest egg that is 25x his/her expenses due to the rule of 4%. However, as that article pointed out, the rule of 4% may not be accurate. Almost no one talks about it, but expenses may vary greatly over time. Our expenses will change so much that I found it easier to estimate our next 45 years of expenses and then just use an average.

Essentially we have an uncertain, vague rule of thumb combined with a moving target. That leads to huge grey area when trying to define financial independence.

Unfortunately, the definition of “retiring early” is perhaps more difficult. Ten years ago, I tried to come up with a definition of retirement and in a lot of ways, even earning income as a blogger counts as retirement. It doesn’t necessarily mean sitting on the beach with a tasty beverage. With my dog sitting business, I sometimes enjoy the dogs I get so much that it’s strange to consider it “work.”

If you say that blogging and dog is work, I wouldn’t disagree. However, by that standard, I don’t know if I’ll ever retire. Even with blogging and dog sitting, I could take 3 months off to live in Spain. In that scenario, I’d be limited to blog income, but it would still be a retired lifestyle.

When I put these two nebulous concepts together, I struggle to come up with a firm definition of FIRE. I could say that I feel that we are financially independent, but you might look at the details and conclude differently. Some people could stretch the definition of retirement to include me, but it would be unanimous that my wife’s pharmacy career doesn’t meet any reasonable definition of retire early.

So are we FIRE?

Given the detail about my wife’s career, we are certainly not the RE part of FIRE. However, in 7 months she’ll be eligible to retire with a very healthy military pension. We could make some financial moves to get us through those 7 months.

I think the best answer of whether we are FIRE comes from this song:



“Whoopty fricken doo.” No, I’m not referring to that part of the song. Instead, it’s “I Could If I Wanted To.”

(It would be more accurate to say “we”, but it doesn’t fit the song as well.)

For most people pursuing FIRE it’s a gradual progress of saving and investing money month after month. Unless the market has some wild swings, it’s mostly a boring process of buying more and more shares of companies or index funds and growing that nest egg to be 25x expenses.

For us, it’s three major things:

  1. The wife’s aforementioned pension – Again it’s a pretty big number compared to national averages. Also, since it is military, we are able to get into health care that most people wouldn’t get. Finally, her GI bill should cover half of the college expenses of our kids (unless they go to expensive private schools where it will cover less). For many people, this situation alone gives them a fast track to FIRE.
  2. 2027 – What happens in 2027? Our primary residence and our investment properties have their mortgages paid off. That means that our living expenses drop by 30K and our income jumps by about 40K. It’s just your typical, run-of-the-mill 70K annual swing in income/expenses. (That’s a joke.)
  3. The kids’ school – Due to the above two situations, and because we are doing financially well in other areas, we found ourselves in the position to invest in our kids’ education. While we get a very good discount, it’s still a lot of money.

The “we could if we wanted to” largely comes from that last point. If we eliminate that expense we could probably be FIRE if we sold off all the investment properties and paid off our primary residence. That would probably qualify us as leanFIRE in most people’s view. However, that series of moves is something we don’t want to do. They aren’t very smart in the long term.

In the long term, say post 2027, I’d think we’d be able to clearly say we’d be fatFIRE. It’s been a few years since I updated the article, What Does an Annual $200,000 in Retirement Income Look Like?, but it’s looking like it could be around $225-$250K a year as the market has done well since 2015.

So when a blogger asks me if we’re FIRE, leanFIRE, or fatFIRE, I suppose I should answer no to be accurate. However, I’m thinking of going with, FIRE isn’t the smart choice for us right now.

Am I alone in thinking that this is one of the more unique personal finance situations?

The FIRE MarketWatch Article You Didn’t Read

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A few weeks ago, there was a great MarketWatch article about retiring early: How much does financial independence cost? It depends on your retirement philosophy

The article profiles four bloggers, two of which regular readers will recognize: Justin from Root of Good and Tanja from Our Next Life. I’m not as familiar with Jillian from Montana Money Adventure or J from Millennial Boss who were also highlighted.

I was interviewed for the article. I couldn’t connect with a phone call as the author had another deadline, so I offered to answer any questions I could over email. Unfortunately, my story didn’t make the cut. I’m disappointed, but at the same time I realize that not everyone can be included. You win some, you lose some. I’ll get it next time. (Am I missing any other cliches here?)

Since I put significant time and thought into my responses, I’m sharing it here. It’s not MarketWatch, but I have green, white, and black in my logo, so it will have to be good enough.

First the reporter wanted some basic profile information. (I provided a full name if she wanted it. Sometimes they need that.) Other than that, the questions and answers are exactly as outlined here (I’m don’t want to put so much text into a quote box as it would be difficult to read):

Name: Brian
Website: Lazy Man and Money
Age: 42

Question 1:

How much do you think is enough to accomplish FIRE?

Answer 1:

I don’t think there’s a firm number to accomplish FIRE.

It depends on expenses which can vary greatly depending on where you live or life choices you make such as to have kids or not. If I needed to give a number, I would say $2 million. That’s based on $2 million being reasonably able to provide $80,000 a year using the famous “rule of 4%.”

Question 2:

Why do you think that’s enough?

Answer 2:

It’s not enough for everyone, but I think it’s enough for most people in most cases.

Question 3:

Why do you think there’s a spectrum of FIRE, such as “fatFIRE vs leanFIRE”?

Answer 3:

I don’t know if it’s a spectrum. It’s usually only those two different types.

The leanFIRE people seem to want to get to FIRE earlier. There are tax benefits and health care subsidies for those who keep their income low(leanFIRE). The fatFIRE crowd seems to have more high-income earners who could be used to living off a 6-figure income. I think you find more doctors and lawyers in the fatFIRE group.

Question 4:

What advice do you have for people looking to accomplish FIRE in the same way as you?

Answer 4:

Save money and invest it… the earlier the better as it will give time for compound interest to work for you. For example, if you have a portfolio of $1 million invested in stocks and the market goes up 10%, you’ve made $100,000 doing nothing.

For us, personally, my wife is nearing 20 years of active duty service where she’ll get a pension. Because of that, we are going to be in the fatFIRE camp with the rest of our savings and investments. It’s a bit of a unique situation and I understand others can’t do it the same way.

And that was the end of my answers. The author thanked me for the responses and I let her know I was happy to do any follow-ups. I never heard from her again.

Two weeks after the responses, I saw some people tweeting about the article that seemed to be a result of the interview. Naturally, I was curious to see if I was included, but I was also curious what other people had to say about the topic.

It seems that the FIRE is surprisingly standard. It’s so standard that I essentially covered almost everything in the article in about 17 sentences. Let’s dig into the MarketWatch article and see what new things we can learn. (This time I will use quotes.)

Author:

“One side, known as Fat FIRE, believes retirees should have enough saved so they have a $75,000 annual budget in retirement, the other side, Lean FIRE, maintains that a $40,000 a year budget will do.”

I suppose it really is just the two different types and not really a spectrum.

[Justin at Root of Good] said one rule of thumb people could use is multiplying your expenses by 25.

This is the mathematical inverse of the 4% rule.

Jillian Johnsrud from Montana Money Adventure, 32, took a frugal approach to her financial independence. She and her husband looked at their expenses and cash flow and saw they had enough passive income through a military pension and investments, as well as cash, to cover all their basic needs.

The military pension and investments sounds exactly like our plan as I wrote in the last paragraph. Again, I don’t know Jillian’s story, but when I get some time I’ll have to look on her site some more or maybe try to talk to her at Fincon. I thought my wife getting her pension at 43 was early due to the 20 years of service that is necessary. (My wife joined right after pharmacy school.) I imagine Jillian has a unique situation within a unique situation. I’m guessing that there aren’t many 32 year olds retiring with a military pension, unless it’s due to a disability. That’s something that I don’t want to think about or wish on anyone.

Author:

Financial independence ultimately relies on a very personal strategy — what people want in their lives, how much they need to fund those goals and a dedication to save enough to do so. …everyone is coming at early retirement from different points in their lives — some are younger with more years to accrue returns and interest on their assets, others might be living in very economical cities (not expensive hubs like New York City and Los Angeles)…

This seems to come very close to my first answer where I mentioned where you live and life choices you make (such as choosing to have kids or not). Quite a few of the commenters mentioned that some of the profiled people don’t have kids which makes their journey easier. Justin and Jillian have multiple children and were able to pull it off.

Author:

J, the personal finance blogger behind Millennial Boss and the podcast FIRE Drill, said she believes $2 million is enough, and she and her husband have incomes high enough to reach that goal. Using the so-called 4% rule, where you withdraw that much of your assets every year to live on, would be more than enough for the average person, especially if they pay off their home like they plan to do.

This happens to be the exact number, $2 million based on the 4% rule that I mentioned. Am I psychic? Hardly. The $2 million number based on the 4% rule goes back a long time. For instance, I had been reading 2million’s Personal Finance Blog since 2006. You can literally follow 13 years of nearly monthly net worth updates in his archives as it goes from $184,000 to $1.8M.

At first when I read the Marketwatch article, I was frustrated. Why didn’t any of my answers make it? Then as thought more about it, it’s because there really aren’t a lot of ingredients in the secret sauce of FIRE.

Perhaps more importantly, the author focused on people in their 30s (though Millennnial Boss is in her 20s from the website). Maybe because I’m an ancient 42, I missed the cut.

I also noticed that while leanFire and fatFire were mentioned, it doesn’t seem like fatFire was represented among the bloggers. Justin and Jillian are forward about their frugal lifestyles. I think Tanja is as well, but with some of the financial numbers a secret I can only make an educated guess that she’s leanFire as well. J from Millennial Boss writes of paying off $100,000 of debt and being in her 20s, so I can’t imagine she currently has the millions to be fatFire. (Maybe there was a big lottery win that I missed.)

I’ve seen a lot of chatter in the FIRE community that “you can’t frugal your way to FIRE.” Yet, when you look at the people who are FIRE, it seems that frugality is a very noticeable trait.

On the other hand, it’s extraordinarily difficult to get to fatFire in your 30s. You almost certainly need a combination of a very high paying job (such as doctor or lawyer) and a very frugal background. Or you could be extraordinarily talented like a professional athlete or famous entertainer. It’s typically going to be a very unlikely situation that few readers could use as a blueprint.

Just like snowflakes and fingerprints everyone has their own unique financial journey. While no two are exactly alike, it seems to me that there’s are many common practices and plans.

Calculate Your Financial Inflection Point

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There are tons of math rules of thumb when it comes to personal finance. There’s the rule of 69/70/72 which helps you calculate when investments will double. There’s the rule of 4% that is used to estimate financial independence.

Few people write about one of the most important numbers*: Your Financial Inflection Point

If you aren’t familiar with the term inflection point, I was able to find two definitions from Google’s Dictionary search:

  1. Math – A point of a curve at which a change in the direction of curvature occurs.
  2. Business – A time of significant change in a situation; a turning point.

When you point both of these definitions together and apply them to your own finances you get something amazing:

Your money works more for you than you do.

As my tagline has said for years, “Making my money work, so I don’t have to.” That’s where the “Lazy” brand comes from.

Some people might not understand the concept of making their money work. It’s letting your investments make money passively. Even if you aren’t personally familiar with investing, you’ve probably heard the saying, “The Rich Get Richer.”

Let’s pretend you won a medium-size lottery and after taxes and getting the money at once, you had $10 million. If you invest it and earn 7% a year on it, they’ll make $700,000 a year. It takes a lot of McDonalds workers a lot of years to make as much money. Those investment dollars are working hard.

It’s fun to pretend winning $10 million dollars, but what if we looked at something more realistic?

Let’s take off a zero. If you amass a portfolio of a million dollars, your money can make you $70,000 a year (assuming 7% investment gains). That’s a very good second paycheck, perhaps even better than what you make working for yourself. While a portfolio of a million dollars may sound out of reach, the magic of compound interest can make easier than you think. (This may require you to earn a lot of money and/or avoid significant debt hurdles like tons of student loans or health problems. Here’s how you can get to a million dollars in 20 years.)

Calculate Your Own Financial Inflection Point

Over the last couple of years, I’ve noticed that our investments are doing very well. It’s not my imagination, investments have been well for almost a decade now. It got me thinking, have we reached our own financial inflection point?

The calcuation turned out to be surprising easy. It’s:

Income / Expected Return = Inflection Point

So let’s say that your income is $50,000 a year. You expect the markets to return 7.5%. The math of 50,000/.075 = $666,666.66. While that number looks evil, it’s actually not so bad. Maybe you want to call it $700,000 if the markets don’t peform as well as you think they might. It seema a lot more achievable than the million dollar example above, right?

When I initially did the math, I was extremely surprised to learn that we are far off of our financial inflection point. It felt like we were there.
What went wrong?

There were three problems:

  1. Our income has jumped a bit lately as I’ve taken on some substantial freelance work. The income number has recently grown. This raises the bar for the inflection point.
  2. I plugged in an expected return of 7.5%. While that’s a reasonable expectation, I was comparing it to the returns of the last few years… which were NOT reasonable. Someone should slap me with a mutual fund prospectus because “past performance is no guarantee of future results.”
  3. I was looking at the growth of our net worth, not just our investment gains. I have no excuses other than just being a bonehead.

When I first realized how far away we were, I was disappointed. Then I realized that two out of three of these “problems” were very good “problems” to have. Who doesn’t more income? Who doesn’t mind a period of double-digit investment gains skewing their expectations? Who doesn’t mind being a bonehead? (Ummm, ignore that last one.)

Fortunately there’s an easy fix. My wife has to retire next March when she’s elibible for her military pension (at age 43) and I have to remove all advertising here and quit any freelance work. That will solve that pesky income problem. I’ll also assume the markets will return 12% annual, because there was a time where that was normal. I won’t even get into any pesky asset allocation problems that could lead to less than my optimal expectations.

What’s the Value in your Financial Inflection Point?

If you didn’t catch my sarcasm in the last paragraph, shame on me for not being a little more obvious. I wanted to illustrate that on some level reaching your financial inflection point may not mean much. It’s definitely a great milestone, but it might not be realistic.

If you are a doctor making $300,000 a year, your financial inflection point would be $4 million (at 7.5% investment gains). If you “only” have half that amount in investments leading to $150,000 in gains each year, you’ll probably do okay.

Your financial inflection point is most helpful when it is combined with your expected expenses.

Last May, I projected our expected expenses over the next 45 years. (Yes, it was insane and you should read it, right away).

The quick and dirty answer is that we’ll likely have around $35,000 in expenses per year. We don’t need to replace our income completely like the financial inflection point suggestions. Our money only has to work hard enough for what we need it to do. This was one of the considerations in buying solar panels. While we might not be investing towards our inflection point today, we are investing in reducing our expenses in the future.

* At the time of publishing, I decided to do a search and found that The Green Swan covered this topic very well, but in a different way.

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