Lazy Man and Money

How Many Days of Financial Freedom do you Have?

by 2 Comments

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.

How Many Days of Financial Freedom Have You Accrued?

by 4 Comments

Welcome to September! Wait, it’s already the 8th? I haven’t written an article this month yet?

As my friend Martin from Studenomics always says, “No one wants to hear your excuses!”

So I won’t tell you how me and the two toddlers have been passing a stomach bug back and forth. I also won’t mention that my wife’s been able to avoid it as she’s been traveling for work. Instead I could tell you about how we’ve been preparing for her to get deployed for Hurricane Irma. That’s not too exciting, so instead I’d like to tell you about the extensive water damage at one of our condo rental properties. Actually, since I’m still in the middle of that, I’ll wait until that’s completed and recap it. Quick highlight: Even if the condo association is negligent in keeping their parts maintained (i.e. the roof), the owner of the condo has to complete dozens of hours of legwork to line-up the vendors, insurances and other stakeholders.

I had three things that I wanted to accomplish with this article today. I just crossed the first one off the list with the above passive-aggressive kvetching*.

Next up, I have a favor to ask you. Nominations are open for the Plutus Awards. The Plutus Awards are the “Best of” the personal finance blogging community. There are a ton of different categories and usually a personal finance fits squarely into one. For example there are categories for financial independence/retire early, investment, real estate, frugality, military, entrepreneurship blogs etc. I’ve never fit a particular category, because I’ve written dozens of articles about ALL those topics.

I’m not delusional enough to ever think that I could the Blog of the Year category… my top priorities each day are supporting my wife’s military career and raising the kids. Maybe someone can win Blog of the Year with all that, but dog sitting and condo management is a better fit for our family now.

There is one category where you could be nominate me (using this link): Lifetime Achievement Award. I’ve been blogging for more than 11 years now, which only a handful of single author blogs can say. If you are reading this, hopefully you know a little of my history. If not, I tooted my own horn on Mr. 1500’s website which was the purpose of the exercise.

In any case, I’ve been nominated twice before and I was trounced by some of the biggest names in personal finance. (I don’t know the voting results, but I wouldn’t have voted for myself against the winners.) Won’t you please nominate me so that I can be the next Susan Lucci?

I believe nominations are due today (YIKES!) so please don’t delay.

Finally, we’re onto the third thing I wanted to cover today:

How Many Days of Financial Freedom Have You Accrued?

The idea for this article comes from two diametrically opposed personal finance forces. One is a force for good and the other is a force for evil. Yesterday, the good witch of the south, Our Next Life, wrote about how you should measure your spending in days of retirement. Years ago, the wicked witch of the west, Robert Kiyosaki** wrote about financial freedom as how long you can live on your savings. I’m going to end the metaphor now, because I don’t want to get sidetracked by Idina Menzel, Kristin Chenoweth, and Joel Grey #MyWifeTheBroadwayFan.

I believe Kiyosaki covered this exact topic in Rich Dad, Poor Dad. It has been 12 years since I’ve read the book, so my mind may be Sam Beckett swiss cheese. So while Ms. Our Next Life, can help with your spending, Kiyosaki’s concept can work to calculate how financially free you are… at least in theory.

Both of these concepts require knowing one simply thing, how much money you need to retire for one day. For many people, it’s as simple as dividing what they spend in a year and dividing by 365. Or you can use your monthly necessary expenses and divide by 30 (while recognizing that’s the bare minimum and that you will need more money to retire). For me, it’s a little more complicated since our current expenses include child care for two, an online MBA program, and a mortgage. In retirement, we won’t have any of these. I found it easier to calculate our expenses over the next 45 years and create an average year.

Using that, our necessary expenses are around $25,000 on average. If I add $11,500 to account for extra expenses, that’s $36,500 a year. Conveniently (due to that arbritary amount I added) that’s around $100 a day.

Now comes the hard part… implementing the idea behind Kiyosaki’s theory. After about 3 minutes of trying to apply that to my own financial life, I gave up. While I could do a calculation with my retirement accounts, it got difficult because of penalties and pre-tax vs. post-tax considerations. At least, it’s easy to see there’s a real number there. What’s a little more difficult is calculating the value of the real estate. It earns nothing now, but in 10 years when the mortgage is paid off it should make around $36,000 a year.

Related to the real estate income, it’s worth noting the value of any recurring income you may have from a passive (or passive-ish) business. If I can write an electronic book and sell 10 copies a day at $10, that’s my $100. (Okay, we’ll need to sell more taxes and such, but that’s still not bad.) The difficulty with that particular plan is that the book market is over-saturated.

At the end of the day, I’m more focused on this kind of cash flow than having a huge egg and drawing it down. When you are pulling money out to live on, you have what we used to call a burn-rate during the dot-com bust in 2001. I’d rather be self-sustaining.

I want to hear your thoughts on this. My income and retirement plan is very different from the norm. Perhaps you have a more traditional one that would make it easier to figure out how many days of financial freedom you have accrued. Let’s hope that decades is a better measuring stick ;-).

* You can take the boy out of Brandeis, but you can’t take the Brandeis out of the boy.

** Kiyosaki earns the title for the reasons in the article I linked to.

Financial Freedom Through Live-In House Flips?

by 1 Comment

I love reading articles where people reach financial freedom at an early age. A couple of weeks ago, I mentioned how Joe Udo is growing a dividend snowball to reach his financial freedom.

Today, I bring you the story of Mr. 1500 of 1500 Days. I first met him at last year’s personal finance convention, FinCon. Quite honestly, I saw his small plastic dinosaurs show up on my Twitter feed and figured I had to stop by and say hello to them. Gimmicky, yes… but it worked.

Recently Mr. 1500 told his story of how he became a millionaire at the age of 40 on RockStar Finance. As he says on his own site, he doesn’t make a top income, he’s not ultra-frugal, and he’s had some setbacks. Despite all that, he got there.

How did it all happen? There was a mix of modest living, focusing on savings, investing, and letting compound interest do its thing. Two things caught my attention. The first was his very un-Lazy approach to everything. He openly says that he worked really hard when he was young. After an 80-hour work-week, he’d do the second thing that caught my attention…

The Live-In Home Flip

I’ll defer to Mr. 1500’s words:

“When I started at my first job post-college, along with paying off those loans, I signed up for the 401k immediately and began saving. I also bought my first home for $140,000. It was a starter house that wasn’t pretty, but had a great location. I made modest improvements like putting in tile and painting. With a strong real estate market at my back, I sold the home a couple years later and made $100,000 in profit. My wife and I looked at each other and said, ‘Hey, let’s do that again!'”

And they did it again. It’s not clear from the article how many times they did it. He makes a great point that they didn’t have to pay capital gains on the profit, because they lived in the house for a couple of years (thanks IRS tax-code!). This money was reinvested in more property and stocks.

So flipping houses is the answer. Cue a short tune from my new favorite TV show:

(Did I mention that I have a 1 and 2 year old?)

But not so fast…

Mr. 1500 then tells of a setback where they bought a grand property just as the housing market collapsed. They put a lot of work and a lot of money into it. They broken-even on the money they put in, but not the work. It was a waste of valuable investing time and energy.

We’ve all seen the house flipping shows where everything turns out great at the end. I don’t think I’ve ever seen them lose money. (Side Note: This unfortunately leads to those shady house flipping seminars that you hear on the radio.) Reality check: Flipping houses is difficult and requires a lot of specialized knowledge, especially if you are aiming to do it in 6 weeks like in the TV shows.

There was a sizable portion of luck. The real estate market giveth and it taketh away.

So which is it? Is it awesome, hard work, being smart, or just hoping to be lucky? Like everything in life it is a combination of all four.

Lady Luck can go either way. You are never going to control her, so you might as well just do her thing. Working hard and being smart almost always pay off. For Mr. 1500 the combination paid off in real money early on when Lady Luck was with him. When Lady Luck left, the combination helped prevent actual monetary losses.

So is the live-in flip awesome? I think it’s great for many people. I’m not handy, so it isn’t something I could seriously consider. If I have to outsource all the work, the chance of profiting is lower.

For me, the key would be to buy a real bargain. Mr. and Mrs. 1500 “sought out ugly houses in great neighborhoods. If a house had pink toilets and green appliances, [their] eyes lit up with joy.” Maybe there’s a chance at getting a deal in foreclosure. If you are able to buy low, there’s less of a chance of market crash making it worth less.

I’d also minimize my risk by buying a place that I could live in myself for years in a worst case scenario. If that grand property was one they were comfortable living in, they could wait out a stock market crash.

I’d also consider the “rentability” of the property. A condo might be a good option. If it doesn’t sell, you can rent it out and make some money while you are building equity. When the housing crash turned my wife and my condos upside down (not literally, “equity-ly”), being able to rent them was a savior. The downside is that when you rent a property it becomes an investment property. When you sell an investment property you might have to pay capital gains tax (consult your local tax advisor).

Finally, I’d keep in mind that the improvements are taking place over a couple of years. That should be a lot of time to do some of the basic upgrades. You aren’t “on the clock” like the professional house flippers in TV shows.

If you are able to minimize the downside risk, and capitalize on the sweat-equity of fixing up a home, maybe you too can make a six figures on a flip. Do this a few times at a young age like Mr. 1500 and maybe you’ll be able to retire early too.

Jason Stone’s Journey to Financial Freedom

by Leave a Comment

A couple of months ago, I wrote about living in a tiny house can save a ton of money. This struck a cord with reader Jason Stone of Iowa.

He wrote me an email so inspiring I ask him if I could share with the rest of you. Here it is:

“My wife, medium-sized dog and I live in an 800 square foot house, and it is PLENTY adequate. We get comments on it all the time in fact from people with much larger houses. Usually they are on the order of: I just love your little house (which I take as a compliment). I host get-togethers here ALL the time for the likes of 8 or 9 people. Once in a while 15. If we have to, we move things outside (weather permitting).

We love the low heating bills & low cost of the property in the first place (plus it came with a garage the same size as the house, and a big double-lot yard). We’re already half done paying it off, and bought it in 2005. That’s not rocket speed, but considering my wife’s been in medical school for half that time I think we’re whittling away at it nicely.

She’s now a Doctor of Physical Therapy (as of 2 weeks ago), so we’ll really start down the fast track to getting out of debt which is exciting! We’ve always paid cash for our cars, so no payments there. Only other debt is the student loans. There is so little freedom in having tons of nice stuff. Like you… I guess I just must be lazy, because I don’t wanna work that hard just so I can drive a shiny new pickup that isn’t impressing anyone anyway.”

There are so many interesting things in this email. It is one thing to live in a 800 square foot place in New York City. There, financial constraints may force one to make that choice. I presume that the real estate in Iowa is inexpensive enough that Jason could live in a bigger place.

By choosing to live in a tiny house, his mortgage is low, his utility bills are low, and his property taxes are low. He doesn’t buy a lot of stuff to fill up his house either. The one decision to live small has a dramatic effect on how much he spends every month (in a good way).

The result of that is a mortgage that is on pace to be paid off in 18 years, while supporting his wife in medical school. Presuming that she gets a good job and attack debt as Jason says, they might pay off that mortgage in the next 5 years.

The big question mark is how big the student loans are. If they aren’t big, they’ll have eliminated almost all of most people’s two biggest expenses: housing and transportation. According to the Bureau of Labor Statistics, that’s half of everyone’s expenses on average.

That’s halfway to financial freedom. At the risk of sounding like a teenage girl, that’s super cool.

One of my favorite parts of the email was at the end where he wrote about not wanting to work hard for a material possession as a status symbol. In a follow-up email, he pointed out how some people buy expensive cars and then fret over a ding on the door. It’s a perfect example where people don’t own possessions, possessions own people. Not only did they spend a lot money on the car, but in doing so they created another source of stress, protecting that possession.

This reminded me of a tagline I used to use on this website: “Making my money work, so I don’t have to.” That’s exactly the idea, put the money into appreciating assets such as stocks or a real estate instead of depreciating possessions.

Do you have a story about your financial journey that you’d like to share? I’d love to hear about it. Shoot me an email.

Does Materialism Breed Unhappiness?

by 10 Comments

Below is a guest post from LAL from LivingAlmostLarge and LAL Musings. I’ll let her introduce herself: “I’m a twenty-something DINK, living in the northeast searching for financial freedom. I hope to one day live large and be financially free, but it’ll only happen one step at a time. I admit to not being the most frugal or smartest financial blogger, but I think I’m giving a real perspective on the challenges faced by many other young adults. So please stop on by. I have a couple of giveaways going on including a 1 year subscription to Money Magazine if you subscribe to my RSS or Email feeds.”

This week I read this post called “Materialism breeds unhappiness, ” by Embrace Living. The writer suggests that as a society we use material possessions to value ourselves. Thus it breeds discontent and unhappiness because we are constantly wanting the newest fashions, etc.

She says that there is something within that is wrong with you that causes you to want material possessions. That we have to investigate what it is, work on it, and become happier. I guess she’s preaching the idiom “Money can’t buy happiness.”

Honestly do I think that? Well let me say this, money can’t buy happiness, but it can certainly make you feel better. And anyone who says money can’t buy happiness hasn’t been poor. I am not knocking this chick, I don’t even read her blog. But BTDT [Editor’s note: is it a sign that I’m old that it took me three minutes to realize that this is “been there, done that”?] about being poor and HELL NO I’m not going back.

I believe money buys me freedom and peace of mind. It allows me the freedom to choose where I live, how I live, and what I buy. I honestly like having new clothes that fit instead of used hand-me downs. I like having better wine than $2 chuck. I like eating fresh fruits and veggies instead of canned. I enjoy playing my Nintendo Wii and having two dogs. Luxuries all of it. My DH definitely lusts after an iPhone or iTouch. Will it make him happy? Yes. Will he want something more? Doubtful, he’s been lusting after the iphone since it came out and still hasn’t gotten one. Think of it as delayed gratification

Are we materialistic? I guess so. Are we unhappy? Not really. Do we desire to earn more money? HELL YES. But I have very specific goals in mind. I want to be independently well off enough to quit my job if I hate it at the drop of a hat. I want to be able to pay for my children’s college, and maybe even a home down payment or wedding. I want to be able to drive a car without worry that it’ll break down all the time. I want to be able to provide for my parents (and in-laws) in case they need financial support.

So yes I’m materialistic. I’m also realistic. Money may not buy happiness, but it sure helps. Being poor doesn’t mean you are any happy. One could argue you are even more unhappy because you struggle to get out your circumstances. That you would love to new clothes, fresh food, etc.

So maybe over materialism breeds unhappiness. People who just spend for the sake of spending. People who are thousands of dollars in debt and need to go to debtor’s anonymous. Or perhaps those rich people who can spend money like water and never run out. Then perhaps materialism breeds unhappiness.

But to me it’s not materialism that breeds unhappiness. It’s the person themselves. It’s not about material goods. You can have no material goods and be unhappy. Happiness is from within and wanting material goods doesn’t make you a bad person.

Thanks to Lazy Man for allowing me to do this guest post. Please stop by my blog, I enjoy tons of feedback.