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.
Every person is different. However you need to motivate yourself to save/invest, and it works for you, go forth young man. I personally don’t see the delineation between spending/investing for education. I have 2 masters degrees and didn’t consider paying tuition investing in myself. I also could never do Dave Ramsay’s cash only/envelope system. I have only had 1 month where I had negative balance (less money brought in than spent) and that was when I got a surprise $6700 (my medical deduction) for an emergency appendectomy in the last 5 years. I just naturally save/invest with my own method but I won’t begrudge anyone from trying to do anything they can to motivate/jumpstart/etc. their “Spaving” :)
Hi – great article. I haven’t done the maths but I think for almost everyone except the extremely wealthy, investing in yourself has a far higher ROI than you could ever get investing in stock market. My career earnings has compounded at roughy 40% per annum for the past 20 years and may only now be reaching its limit. I dare anyone else to find an investment that compounds at such a large rate.
That’s really good. Investing in yourself will pay off big when you have a lot of potentials. For me, I don’t bother investing in myself anymore. I’m too old and lazy to make a lot of money.
On the other hand, I agree 100% about education for kids. I guess you’ll see if it’s spending or investing in 12 years or so. If the kids can get full-ride scholarships, then that’s great ROI.
I think you’re right about saving rate too. It’s important, but net worth growth is really the key. But it all starts with saving rate. If you don’t save, then your net worth won’t grow. So having a high saving rate is the first step.
Lazy Man says
If I can find an investment in myself that I think will pay off, I don’t mind, but I’m with you in being too old and lazy. I’d have to find it generally fun such as learning some kind of data visual analysis tools to apply to football, so thing I like.
I think my kids might need the extra attention too, but for different reasons. I’m sure that every parent says though. Never possible to get enough attention, but you also have to leave them alone to figure stuff out on their own. It’s a tough line to toe.
I really should try to sit-down and figure out our savings rate at some point. Finances are working well enough for us right now, I just wonder if the number will tell me anything new and useful. Maybe we are really saving too much, I’ll have a team of professional organizers and contractors come in and fix all the little annoyances and clutter in the house.
Abigail @ipickuppennies says
I definitely have a different view of what constitutes saving versus some of my readers. In my “savings” rate, I include extra money thrown at the mortgage. People have pointed out that I no longer have access to that money, so it’s not really saving/investing. True enough, but what I care about is nearing/reaching a 50% rate on a combination of saving/investing and putting extra toward the mortgage so that it’s gone in a few years. So I’ve compromised by clarifying that in my monthly updates. But it’s still the same goal. I consider getting rid of the mortgage as investing in not having to pay “rent” anymore. (Well, except for property taxes and insurance, but those are ludicrously low for now.)
I think in the end you have to make your own definitions. That’s the prerogative of having a blog anyway.
Lazy Man says
Yep, I’d count paying off my mortgage as saving too. We went with a 15-year mortgage, so in theory we could have 30-year and put the rest of the money in the bank for savings.