Every couple of months, I read an article about early retirement that knocks my socks off. This past week I read such an article and I’d like to share it with you. We have a similar story, so you might want to stick around after you read it.
Before I get to our story, I’d like to shine a spotlight on what really worked for Justin. It feels weird analyzing someone else’s personal finances like this. However, I’ve detailed our estimated $200,000 in annual retirement income and have explained what’s working for me. Maybe this makes me qualified to give an opinion on someone else’s journey?
As my old math teacher used to say, “There’s more than one way to Main Street.”
Here are some of the most notable items I found in Root of Good’s journey:
Big Income Not Necessary
While they did have two incomes, neither made close to six figures. At their peak, they combined to make $138K.
That’s not to say that big income can’t work. It’s even easier. It’s just that big income is not a requirement.
Frugality Wins the Day
It might not come off in this particular article as much as other Root of Good articles, but Root of Good is very frugal. When I read their monthly spending reports, I think, “That simply can’t be.” Then I read the explanation that goes with them and say, “but it is!”
In this article, the frugality comes into play when they point out that they didn’t upgrade their starter home or their cars. These are typically the two largest expenses adding up to around 50% of spending. They all took vacations using bonus miles by signing up for credit cards.
Saving a Lot of Money
When you aren’t spending money, it becomes easy to save it. If that sounds too simple, perhaps it is because it really is that simple.
My absolute favorite tool for saving money is Digit. (I reviewed Digit it here.) Digit is a FREE tool that squirrels small amounts of money from your checking account to a Digit account. That automatically builds an emergency fund. You don’t have to think about it and you’ll never notice the small amount of money being moved. In 18 months, I’ve squirreled away over $8000, but I’m extremely aggressive with it. It’s always a happy surprise to see a big chunk of money in that account.
Digit is one of two tools that I think everyone should get.
Investing the Money in the Market
They poured the savings into the stock market and let it grow over ten years. Using a quick Rule of 70, if they even made 7% (which might be conservative), they’d have doubled their initial money. In two years, 2012-2013, savings and investment gains added over $500,000 to their net worth going from 697K to 1.24 million dollars.
Let that sink in for a minute. A couple whose combined income (before expenses of 3 kids) was $138K grew their net worth by $500K in two years! You simply can’t do that by saving alone.
They benefited by a very good stock market as the S&P 500 was up ~16% and ~32% in those years respectively.
You can call it luck if you want. I’d rather focus on how years of saving prepared them well to take advantage of that stock market.
They didn’t do any special stock picking or market timing. Sorry if you were looking for some fancy investment advice. Instead it was boring… slow and steady investing in index funds with low expense ratios. That’s what’s worked for me as well. I recommend Vanguard ETFs.
Tracking Financial Progress
As you can see from the charts, Justin tracks his net worth very regularly. I’ve done the same and I can’t express how much of a difference it has made.
When you are doing the right things, it is empowering to see your net worth number grow. Imagine what it feels like when your money makes makes more money than you did
Over the years, I’ve gathered so many financial accounts (banks, credit cards, brokerages, mortgages, Paypal, etc.). I used to track it all with a spreadsheet, but I’ve found a better tool for the job. Personal Capital pulls in all your financial information securely from all your financial institutions and puts it in one place.
You get great charts of your net worth, but it’s a lot more than that. You can see where your money is invested (large-caps vs. small-caps, international or domestic). You can also where you are spending your money via the categorization of credit cards. I couldn’t get this information my manual spreadsheet.
Best of all, like Digit, Personal Capital is free.
Making Very Smart Financial Choices
As you read through the article, you realize that Justin is extremely smart when it comes to personal finance details. Those small details add up over ten years.
Specifically these two moves stood out to me:
- It started in year two with a real estate investment move that lead to a 100K net worth gain.
- Justin understands taxes extremely well. This article shows them saving lots of money in tax-deferred, retirement accounts. In the past I wrote, they also have a plan to get the money out by paying few taxes.
Plot Your Own Course for Success
The Root of Good plan to early retirement may not be for everyone. Not everyone wants to live as frugally as they do. If that sounds like you, you might want to look into making more money. Not everyone may have the ability to tax-defer so much of their income. There’s still a lot you can build on here.
And so what if takes you 12 years to only have a million net worth instead of their 1.2 million in 10 years. You can live with that right?
Personally, we’ve built a real estate component to our retirement plan. It was accidental, but the results have been very positive for our net worth.
We initially bought the real estate at the wrong time. We intended to live there, but “life” changed our plans. We were able to refinance the properties and rent them out. It not only dug them out of the hole, but also helped get us to a point where they have equity.
It is essentially the same idea as Root of Good investing in the stock market, but a different type of investment. It has more leverage and is more work. However, when the mortgages are paid off in a decade or so, we’ll have a sizable income stream.
If you need any more inspiration, check out these 20 inspiring quotes by influential people.