Lazy Man and Money

What’s Your True Investment Rate?

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Usually, when I start an article, I have an idea where it’s going until the end. This is not one of those articles.

Part of the reason is that things have been busy over the last couple of weeks. I’ll explain more in the monthly report, but our dog sitting has reached new records. At the same time, my wife has been spending more time office. I honestly feel like my kids, at age 5 and 6, are more competent than their camp director or counselors (but I try to go easy on them as managing many kids can’t be easy.) Finally, I’m feeling that summer is passing us by as it does every year. It will be back to school in about a month.

The topic of school is a large part of what I wanted to cover today, but first I want to review some FIRE basics. Most FIRE people would say that your savings rate is what impacts you the most about being able to FIRE (be Financially Independent and/or Retire Early). Some bloggers are saving as much as 50% of their income and investing it. With the power of compound interest and 10-20 years, they’ve got a nice nest egg to retire on. That would be a accurate, though oversimplified version of our financial situation.

Our situation is a lot more complicated with my irregular freelance, side hustles, and businesses (blogging and dog sitting), and our investment properties. For this reason, I don’t bother to calculate our savings rate. Instead, I’ve recented used a net worth growth to income ratio. They are both high numbers for us, so that’s a good thing. For most people a savings rate would be easier to calculate.

Spending vs. Saving vs. Investing

You’d think after blogging about these for 13 years, I’d be clearly able to delinate all these things. It’s not always so easy. In fact, there are mashups of them like “spaving”, which is loosely defined as spending money to save.

It possible to have a high savings rate, but not invest it. For example, maybe you love the safety of having cash in the bank, but it’s not paying a good interest rate. Technically, you may be investing on that savings account, but it’s called a savings account for a reason. A high savings rate doesn’t mean a high investing rate.

In our situation, we have a good savings rate. If anything, we may invest too much and it might be better to keep more liquid cash on hand.

I suspect that for most FIRE bloggers, once they get a nice cushion of liquid cash in their emergency, they invest a vast majority of the rest. When I read some blogs, it seems like most of that 50% gets invested. You’ll see the typical brokerage and retirement accounts mentioned: 401k, Roth IRA, SEP-IRA, TSP, solo 401k. Occassionally, you even see a 529 plan for bloggers with kids.

These are all great investment vehicles. We have them too. As explained above, we have a lot of unusual things about our financial lives.

What About “Invest in Yourself?”

For the last few years, we’ve paid around $30,000 a year for school. You may notice that I didn’t wrote “paid” not “spend.” What I really mean to say is that we invested an extra $30,000 in education.

With my wife graduating in about a week, we’ll be down to around $22,000 for the next few years for just the kids. My wife’s investment was for an MBA to add to her Pharm. D. (We’ve messed up our health system so bad that we are asking our pharmacists to have masters in business as well.) It’s too early to tell if that MBA will pay off, but the “powers that be” at her employment have seemed to change course on valuing it when it comes to promotion time. I could write another 3000 words on the topic, but it wouldn’t help anyone and possibly cause more problems.

If my wife moves on from the military to the private sector, the degree will have a large ROI. However, she may choose to just retire, now that she has her pension.

The other $22,000 is a private school for our two kids. We’re “spaving” a huge percent of the typical costs with my wife’s military status. It’s still a lot more than an average private elementary school. Obviously we think it’s an exceptional school. Would you pay half price if you got into Stanford or Harvard? It’s not an easy question at the elementary school level.

What if that money was put in a 529 plan? Almost everyone would agree that’s investing, right? So is this different? What if it leads to a scholarship down the line?

In almost all these cases, they qualify as the old adage of “investing in yourself”, except it’s literally the people closest to me.

It feels like the rest of the community would consider this as spending, no different than if we spent an extra $22,000 on a sports car.

However, if I were start to really calculate our savings rate and investing rate, I’d create a “True Investment Rate” that included school tuition. It’s not in a brokerage account, but that doesn’t mean it’s any less valuable.

What do you think? This is a complicated topic and I’m sure people have different feelings. I can see a lot of gray areas. Is a vacation to Paris museums an education investment? Are tennis lessons an investment?

In the end, I don’t think the characterizations matter. You are the judge of what’s the best value for your money. I find value internally knowing that the money is invested in personal development that matters deeply to us. For a long time, I felt like we should be saving even more in brokerage accounts or wondering why we don’t feel rich. Once I started to think of education spend as investing, my outlook changed dramatically.

Is Private School a Good Value?

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On Monday, I made a vague mention of being scared to “come clean” about something. You can probably guess from the title.

We send our children to private school. (Actually only the oldest as the 2-year old is too young.)

This may come as a surprise because I’ve been writing for years about how to save money. One way to NOT save money… pay for private school.

Why We Pay for Private School

The public schools in our town aren’t bad. They rank in the top 8, which is good… even for a small state like Rhode Island. Hmmm… that’s not a convincing reason to pay for private school.

I think my mother may think we’re crazy for paying for private school. Nope, that’s not a good reason either.

Third time’s a charm, right? Let’s go with this…

A lot of the value of having money is to be able to spend it on things that are important to you. (Some may even argue that’s the entire value of having money.) For us, our children’s education is one of the most important things. While some are adding $60,000 in Lexus debt this Christmas, we’ll invest in our children’s future.

However, that’s not the entire reason why we pay for private school. The other part requires a little more explanation.

We looked at all the private schools in the area and I think that 9 of 10 were highly religious. That seems to work for a lot of people, but I’m not a big fan of bundling education and faith. In the case of the religious schools, if you pick one with the best education, you get stuck with whatever religious views it has. If you pick a school based on the religious views, you get stuck with whatever the education-level is (which might not be the best).

The single secular school offered a significant military discount… much more than the other 9 schools. They had an open house and my wife and I decided to check it out.

To say we lost our poop was an understatement. When a PS-8 school has electives that I want to take (Robotics, 3D printing, Ted Talks), it’s something special. It feels like the teacher to student ratio is 3-to-1… yes more teachers than students. (It isn’t really that way, but it feels like it.) I could only quibble with them teaching French in the 3rd grade instead of Spanish, but I’ll let it go.

I could go on, but you get the idea. The school far surpassed our wildest dreams not to mention our expectations.

But What Does It Cost?

Different grades have different prices, but after the discount, it comes to around $11,000 a year. They have, PS, Pre-K, K, and grades 1-8, so 11 years total. Thanks to my old Trapper Keeper, I quickly estimate this will cost us $121,000 for each child. Some of it, like the preschool and pre-Kindergarten we’d be paying anyway, so it’s probably an even $100,000 more than public school.

To keep the numbers easy, we’ll say that it is roughly $1000 a month for each child. Technically it’s more because they don’t operate in the summer, but our baseline comparison, public schools also don’t. We’re going to be paying for summer camp either way.

Anyway you slice it, it isn’t cheap. However, with the discount, it fits our definition of having a very good value.

Financial Independence, Private School, and the 25x Rule

The real reason I wanted to write about this though, is to apply it financial independence. When your goal is financial independence, it makes sense to evaluate the impact of spending $22,000 a year vs. saving and investing it.

Personal finance experts tend to use a “Rule of 25” to determine financial independence. The idea is that if you spend $40,000 a year, you’ll need a nest egg of 25 times that, or a million dollars to be financially independent. It comes from some scientific paper that estimated that you can spend 4% of your nest egg and not draw it down for 30 years. (I cover some of this here.)

Paying for private school, or college, presents a bit of a pickle for that equation. We can’t calculate our current expenses and multiply them by 25. Private school expenses are temporary. They will cost around $250,000, but then it ends (or not… there is high school and college to consider). We don’t have to take $22,000 and do the 25x calculation and presume we have a nest egg of $550,000.

I see this kind of mistake most often when people calculate their annual spending and include their mortgage. If you are striving for financial independence, you are probably not going to have a housing payment (other than taxes and insurance) for the rest of your life. The exception would be if you want to rent forever it make sense to include it. Otherwise, just subtract the rest of the mortgage from your nest egg and use the other expenses as the basis for the 25x comparison.

So when I do our financial independence calculation, our expenses later in life will drop as our biggest expenses (housing and education) disappear. Our estimated expenses now are probably around $60,000 a year, but they’ll drop to around $30,000. Which number should we multiply by 25 to decide if we are financially independent? Do we need to have $1,500,000 or $750,000 to be able to say we are financially independent? I don’t think there’s a right answer.

“What if we just invested the money for the kids?”

As I was writing this, that tempting question kept on getting in my head. Imagine if we took the $11,000 and invested it. Let’s presume that it earns 4% so that we don’t have to deal with taxes and inflation. Let’s also presume that they take the money out in 65 years. That $11,000 would grow to $140,000. It would be a real $140,000 since we already accounted for inflation.

[Message to my kids when they read this when they are older: Sorry. Yeah, we could have made you millionaires eventually. Unfortunately, you’ll have to earn it. By they way, do you know how much dog poop I picked up in my dog sitting business so you could get that education? No pressure on using it or anything…]

There some proverb about giving a man a fish vs. teaching him to fish. I think that’s fitting here.

Once again, I’m not sure if there’s a right answer here. I could see people thinking that investing the cold, hard cash is the best answer.

We’ll never know what the road not taken may have presented. However, this feels like the right for us for now.