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.

Expenses: Where Are They Going and Why it Matters

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Last week I published a few “journally” entries that lacked much focus on personal finance. I could write about how today is the 13th anniversary of my wife and my first date. That’s boring and not worth wasting words on. (Oops too late.)

It’s a new quarter and my baseball calendar tells me spring is officially here, so let’s get back to personal finance.

Let’s talk about expenses

“Where did you come from, where did you go? Where did you come from, Cotton-Eye Joe?”

[Imagine this in John Oliver’s voice…]

Expenses. They are like Cotton-Eye Joe. The song is necessary for any hoe-down, but no one wants it. Nobody likes anything about the song or expenses. Expenses are just like Cotton-Eye Joe who “brought disaster wherever he went.”

[There’s a reason why John Oliver is paid much, much more than me.]

For years I’ve been reading blogs that treat expenses as a single unchanging number. The answer to whether you are financially independent often is whether you have passive income more than whatever your expenses are. The narrative is that you can easily estimate your income by using the 4% rule.

Calculating expenses is also deemed as an easy exercise. Simply add up what you spend your money on.

Does this work for anyone? It sure doesn’t work for us.

We have a TON of expenses, but we expect them to be extremely different 2, 5, 10, and 15 years from now.

Here are some examples:

  • Childcare – We have a 3 and 4 year old. Childcare is tens of thousands of dollars a year. If they go to a public school, our expenses would drop dramaticly.
  • Transportation – We’ll have the cars paid off in the next couple of years as well. Sure, we’ll need to buy new ones, but hopefully not for more than 6 more years after that.
  • Solar Panels – We are looking to have these paid off in 4 or 5 years. After that our electricity expense should drop to $0 (or very close to it) for the next 20 years.
  • Primary Mortgage – Our biggest non-education expense is scheduled to be paid off in about 10 years. That’s tens of thousands of years of expenses gone.
  • Rental Property Mortgages – These are also scheduled to be paid off in about 10 years like the primary mortgage. In this case, the disappearing expense leads directly to income.

If I were to add these all up, we probably are close to paying $6500 a month or $78,000 a year!

That’s insane right? We haven’t even eaten yet. We are crazy spenders!

There are lies, damn lies, and statistics and this is a combination of all three.

It’s almost impossible to claim financial independence with those kind of expenses. However, if you look at these 12 years from now, many disappear and what’s left is a car payment (we’ll need new ones) and profits after rental properties more than pay off the taxes and maintenance on our primary home. Those profits should cover food too.

I know that financial independence is just a label as nebulous as trying to define retirement. In the grand scheme of things it doesn’t matter what you call it.

Expenses: A Modest Proposal

I think the lesson here is that expenses aren’t simply one number. For some they may be. For other others, they are many different numbers over a timeline.

What if we took expense estimates and averaged them over a span of 25 years?

Yes, there will be surprises and it would be hard to be completely accurate. However, we play that game all the time in projecting our income based on the investment averages.

Later this week, I’ll give a shot at calculating my expenses using this method. We’ll see where it goes.

The Best Financial Independence, Retire Early Articles of the Week (#1)

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Years ago, I wrote weekly round-up where I highlighted articles from friends in the blogosphere. Each of those friends have moved on from blogging to do different things. Some became great BBQ chefs and others became real estate moguls.

Over the last 6 months, I’ve noticed there are a lot of new bloggers interested in financial independence and retiring early (aka FIRE). That brings me back to my roots as my original goal for this blog was to explore ways to retire at the same time as my wife. She’s eligible to retire with her military pension at age 43. I didn’t want to be working another 22 years after her.

Every week, I’m going to highlight some of my favorite articles from some of these great blogs. So let’s dig in:

  • Tawcan’s Guest Post via Physician on Fire

    • Why not kick this off with a double FIRE bloggers? FIRE blogger Physician on Fire posted a guest post from Tawcan. This gives you a great introduction to two FIRE bloggers. I recommend adding Adding Tawcan to your daily reads.

  • The Power of a Low Income in Early Retirement

    • This comes from Our Next Life who is one of my new favorite bloggers in the last few months. She can get into the weeds with some complex financial topics at times. I’m envious of her ability to use graphs and images to walk readers though the math and concepts.

    This article focuses on the advantages of keeping a low income in early retirement. Typically one thinks of low-income negatively, but under the right circumstances it can be positive.

  • How to Fund Your Early Retirement

    • Interested in learning how to retire early? Of course, who isn’t?!?! Joe from Retire by 40 gives a detailed article about how he’s funding his early retirement. My favorite tip in this article is how he plans to withdraw contributions from his Roth IRA. Those contributions can be withdrawn penalty-free.

This should be enough reading for a Sunday. If you’re looking for more, regular readers of Lazy Man and Money may appreciate tonight’s episode of John Oliver.

College Funding: FAFSA, Financial Independence, and Real Estate

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I recently wrote that college planning is impossible (but that you should do it anyway). The impossibility comes from having a 2 and a (newly) 4 year old boy. It’s so far away, the best we can do is put aside a significant amount of money and adjust our plans over time.

One of the comments on that article said it best: The decision tree is enormous.

The College Funding Decision Tree

College may be free if some politicians have their way. College tuition could continue to climb at unreasonable rates forcing people to make hard-decisions about whether it’s worth it. Our children may get into some schools and not others. They could be public or private. They could be on a 3-year plan with AP credit and credits from our local college. They could be on a 5-year plan if they switch majors or find it too difficult. All this, and I’m not acknowledging community college or trade schools.

Anything and everything is in play, leading the cost to be literally as low as $0 to as high as $250,000. It seems to make sense to budget for somewhere around $125,000 for each child and let the remaining gap be filled with grants, loans, scholarships, work-study, etc. As another commenter mentioned, many feel it is important for the child to fund part of their own college. I firmly believe in them having some skin in the game.

Financial Independence Makes it A Little Complicated

Regular readers know I am a big believer in the FIRE movement. FIRE is an acronym for Financial Independence/Retire Early. That means you have money freedom before typical retirement age. Money freedom simply means that you’ve achieved Hakuna Matata… you have no worries about money.

When I started this blog ten years ago, I didn’t know such terms existed, but I did know I wanted to get to that place. Years of maxing out retirement accounts, my wife’s military pension, and our real estate have fortunately put us in a good position to achieve that.

It’s so close that the biggest obstacle is the uncertainty of college costs.

Among all the uncertainty, there’s one beacon that represents some stability: The Free Application for Federal Student Aid (FAFSA).

FAFSA and Real Estate

The Free Application for Federal Student Aid (FAFSA) is exactly what it sounds like. It has clear formulas and rules around a family’s income and assets. While those rules may change over time, I would expect the changes to be minor ones.

In other words, it’s something that can be planned around.

For example, retirement assets don’t count. So this person with a hundred million IRA may be in decent shape if he were to fill out the FAFSA. (He’s really not.) To an obviously lesser extent, we would be in better shape as well from years of nearly maxing out all our retirement accounts.

Many people who are financially independent get there by discovering that they can live a fulfilling life and be very happy on a smaller income. It’s easier than trying to save $10 million dollars. We live that frugal lifestyle as well. Having a small income is a big part of the FAFSA application.

It’s like all the pieces are falling into place… except for one… real estate.

One of the legs that supports our financial independence push is real estate. We didn’t plan it that way, but my wife separately bought condos in 2002 and 2005 near the top of the market. When we moved so that my wife could serve in San Francisco in 2006 the properties were well under water. Even today, they are valued at between 25-33% less than what we paid for them.

Fortunately, we were able to rent them and over time the mortgages have started to get paid off. We got a double HARP to refinance them both to 15-year fixed mortgages. Despite all that, we lose a little money each month on them (and a lot when repairs are necessary) while we build equity. In about 10 years, before our children are ready for college, we’ll have significant real estate assets.

[If you are curious you can read a little more about our real estate “empire” here. (There’s a reason why empire is quotes.)]

Overall, I love real estate. I’m not second guessing the decision to keep the properties. The forced savings have really contributed to our net worth.

However, as you may have guessed by now, the FAFSA formula doesn’t work well for those with significant real estate assets. If had taken the money we lost each month and truly maxed out our retirement options (there’s a lot of small business stuff I can do with SEP-IRAs, solo 401Ks) we’d have “protected” assets from the FAFSA. If we created another business, it’s value would also be “protected” from the FAFSA. (And it seems you can’t throw the properties in an LLC and call it a business.)

At the most recent FinCon convention, I talked with a number of bloggers. Some were financial independent bloggers. Others were real estate bloggers. I don’t think I found one person who fit in all the categories of financial independence, real estate owners, and having children… but I’m sure there are many people out there who fit this profile.

I tried to explain my situation to a few people, but it was difficult. It’s taken nearly a thousand words just to paint the picture for you.

I think the correct answer is just to forget about the FAFSA. I have difficulty with that as I like to optimize things in the future. This is the best way for me to look to optimize things.

The other part of me thinks that it might be worthwhile to refinance the 15-year fixed mortgages to 30-year fixed mortgages. Then we’d actually be making money on the properties and we could use it to fund our living expenses which would free me to max out the small business retirement account options. We’d be earning less principle which would make the assets worth less.

Then I stop myself and ask “Is all that worth it for a better FAFSA formula?”

I don’t have any answers here. Maybe you do? If so, please let me know in the comments. Thanks!

College Planning is Impossible (But Do It Anyway!)

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I’m often writing about frugality. Today, I’m writing about futility.

Over the last week, I’ve focused a lot of my attention on estimating college expenses. We have two young boys, ages 2 and 3 years old. Planning for college is an exercise that can’t be ignored.

The spark for this article was inspired by Justin from Root of Good’s article, How to Pay for College while Early Retired. (I highly recommend his website, it’s one of the best resources on financial independence and retiring early.)

The article answers a question I had myself. It’s one thing to retire at age 33 with a huge nest egg of savings, but affording college for 3 kids is a whole other thing. Before reading his article, I did some rough math in my head: $50K/yr for 12 years (3 kids at 4 years) and came out to a whopping $600,000 bill.

As you read the article, it becomes clear that Justin has a good plan to limit the expenses of college. The in-state, public university brings the number per year down to $24,000. It cuts my $50K/yr in half. That $24,000 is split into $10,000 tuition and $14,000 in room & board and expenses. He’s already paying that $14,000 to some degree in his own budget. That $14,000 isn’t $14,000. It’s an average of what people spend. Justin and his family aren’t average in their spending habits.

There’s much more to the analysis, but he makes good points that “nobody pays sticker price for college.” There are grants and scholarships. People can take Advanced Placement classes or even community college classes in high school to earn credits. (I took a computer science in high school at a local university and started with a few credits.) He also brings up the very important point that his children may foot some of the bill. I’m a big believer in this as I think it helps them have some skin in the game.

By all practical measures I can think of, Justin has figured out college planning.

But I claimed that college planning is impossible. I put that in the title!

College Planning is a Pile of Uncertainties

It feels to me that Justin has eliminated many of the uncertainties by focusing on one particular college option. He recognizes that they may go to another university, even a public one, but falls back on his in-state, public school. Without this decision, the discussion gets extremely difficult. This one decision guides all the math that leads to an article with 100 comments. It’s clearly very helpful to so many people including me.

I’m not ready to declare where my toddlers are going to college. I’ve run some numbers for 2030 to create an average between public and private universities. The average public college cost should be around $42,500 assuming a 3% inflation rate. The average private college should cost around $57,500 assuming a 3% inflation rate. Thus I’m estimating that college will cost an average of $50,000 in 2030 dollars per year.

Did you spot all the assumptions there?

When I boil it down to $50,000 a year it sounds like $200,000 is a good estimate. However, choosing a public school would lead to a $170,000 average. Choosing a private school would be $230,000. That a $60,000 difference isn’t trivial.

However, the averages I used for public and private are just that… averages. Some schools will be more expensive and some will be less. A particular public school may come in at $150,000, while a private one could be $250,000. That’s a huge difference.

The other assumption here is the 3% inflation rate. While that rate may be accurate over the long-term, a small change in this number can have a dramatic effect when compounded over 15 years.

Should I try to save $150K, $200K, or $250K? What about scholarships and grants? How much should we assume we get from them? Whatever assumption we make is yet another unknown variable.

How is College Planning Different from other Types of Financial Planning?

At first glance this appears to be similar to planning retirement, but it is very different. If you save too much in retirement, there isn’t a tax penalty. However, if you save too much for college, it can be difficult to get the money out without paying a penalty.

On the other hand, it is dangerous to save too little for retirement. There’s little danger if you don’t save enough for college. After all, the kids can usually get loans.

The difference-maker is that in retirement, you can control some costs without guilt. Skipping a vacation may not be preferred, but it’s easier to justify giving up a luxury to pay bills necessary to live. How do you balance the difference between paying more for Harvard vs. a state school? Isn’t harder to say that you should skimp and give up decades of potentially extremely-high earnings power?

What about Financial Aid?

When I started to research how much college would cost, I sunk my teeth into financial aid. I expected to find more ambiguity, but I was surprised to find some concrete formulas such as the FAFSA.

I felt like I finally found something that I could work with… until I did a little more reserach. I’ll be writing why more in the next few days.

What if Saving for College Becomes Unnecessary?

That question is not nearly as silly as it seems. There’s significant talk from politicians surrounding the potential free college. What will that talk look like in 15 years?

That says nothing about the potential of online learning. Fifteen years ago, feel people had heard of a company named Google. Facebook and YouTube didn’t exist. Today there are abundant resources for learning almost anything online.

Let’s take that 15 years and fast-forward from today. I believe that online learning will be off-the-charts awesome. That’s not to say that all learning should be done through a computer screen. I simply think that such time will be extremely efficient in teaching people.

Final Thoughts

In the next few days, I’ll cover a few areas that I purposely glossed over here. I don’t want to leave people thinking that they shouldn’t save for college. This is one area where we shouldn’t be “Lazy.” As my wife says, “We don’t want to be caught with our pants down” when it comes time to pay for college. (Her way with words is reason #1372 why I love her.)

Instead, I’d like to spark a conversation on this complex topic. Obviously our crystal balls are going to be a little cloudy, but that doesn’t mean we can’t make wise decisions.