< DadBodfi >
Crack a Beer. Crack a Joke. Crack the code to Financial Independence.
Beer Review: Ice Punch Thirst Quencher (Gatorade Co., Chicago IL)
My whole family is recovering from nasty colds. I'm trying to load up on fluids.
Official Review: 1/10
The Financial Independence Community is one that has a pretty common theme: Cut your expenses, increase your savings rate, invest the difference. As a member of this community, I concur with that strategy and follow it best I can. My best guess at an early retirement is 15 years from now. It may be 10 or it may be 20, there are some factors to that timeline. It will not be when I'm 59-1/2, you can write that down and take it to the bank.
There are however, multiple views from the outside (as well as some from the inside) that attempt to poke holes in this strategy. I took some time to research the 5 most common myths surrounding Financial Independence and came up with a more accurate outlook. Here we go:
Myth 1: You cannot start your FI journey until you have paid off all of your debt.
What do you consider the journey? My journey started 7 months ago and I still have student loan debt. I found this community after I had a conversation with one of our writers on the golf course. I took some time to dig into my finances and come up with a strategy to retire early. I slashed my expenses (cut the cord, smarter grocery shopping, stopped dining out). I eliminated the debt that I could (small student loans, wife's car). What I found was that I was doing a little bit of everything with zero strategy. I was making minimum payments on debt, I was investing a little into my 401k and ESPP, and I was buying some smaller stocks with a brokerage account and had no monthly budget planned. If you're doing this - you are NOT on the journey.
Actuality: You can start your journey whenever you want, but use your extra savings to pay off debt OR invest. Don't do a little bit of everything and be mindful of interest rates vs. return rates.
Myth 2: You should not purchase a home, but if you do then your mortgage is still good debt.
This is a huge split within the community. The truth is that you can reach FI by renting your entire life or you can reach FI by purchasing a home. The key is how you do these things.
If you're renting a home, what did you do with the money that you saved on a down payment? Did you invest it or did you let it slowly leak out of your savings account?
If you're purchasing a home, did you put down enough to avoid PMI payments? How about those savings come tax season?
If you're renting a home, where will you stash the the savings due to not having to pay for lawn service or home repairs?
If you're purchasing a home, what value do you put on walking through the door of a house that YOU own?
Actuality: You can rent forever or you can buy a home, but be smart with the savings.
Myth 3: Low-cost index investing is the only way to invest your money. You cannot beat the market.
Make no mistake, this investing strategy is perfectly fine and one that I use. If you do not have the time to research individual stocks or refuse to pay for a financial adviser, this is the way to go. But in a world where our largest taxi service has no taxis (Uber/Lyft) and our largest hotel chain has no hotels (Airbnb), which direction do you believe we're headed? When my children grow up, will they even need to learn how to operate a car? How long will it take them to get across the country to visit family? What will their mobile phone look like?
The workhorse of this community will continue to be index funds like the S&P 500. But with our world changing so drastically, it's okay to hedge some smaller bets on funds like technology stocks. The potential return (with research) greatly outweighs the risk.
Actuality: Invest heavy in index funds, but be mindful of what's happening around us. Is Airbnb going away? Will marijuana legalization go backwards?
Myth 4: You must purchase used cars and pay cash.
Have you spent some time is a used car lot recently? Have you attempted to make a large financial transaction on Craiglist? These are not the "cleanest" places to find a car.
That being said, the argument for this myth is a strong one. If you can avoid car payments and find a perfectly good vehicle that depreciated $10,000 just because it drove off the lot, then why buy new?
But what if you're a "car person"? What if you read Car & Driver magazine every morning and you find tremendous value in driving your family around in a car that's never been touched? How about if your wife makes weekly round trips to visit her mother 2 states away and you're not sure what secrets may have been untold from under the hood of that potential used car? The person described in this paragraph is my father, and he is one of the most financially sound people I know.
Actuality: It's okay to buy a new car if you find value in them. It's even okay to finance if it fits in your monthly budget. Just be mindful of interest rates and make sure to stay in your price range.
Myth 5: You have to have a high annual income and buy virtually nothing to retire early.
This is simple math. If you make more money, have no debt, and don't buy anything then you will have more to invest, and you can retire earlier.
I enjoy my job for the most part. It pays well and I like the people I work for/with. I have a company car and last quarter outperformed everyone in my division. That being said, I am quite certain that if I took a couple of weeks to update my resume and research some higher paying jobs then I could increase my income. I know I could find a job that puts me behind a desk every day from 9-5 with slightly higher pay, but that's not for me so I'm happy where I'm at.
My wife has (to a point) come to terms that I would like to retire early. She knows my favorite part of the week is "Pizza Friday". We make our own pizza and celebrate the weekend with our kids. We have good wine and play good music. This usually ends in a dance party with our boys. My "back-of-the-envelope" math tells me that I will have a total of 936 Pizza Nights with each of my children before they turn 18. Then that number will decrease every year after that.
While I would love to retire tomorrow, I also want to make sure I'm enjoying the ride to retirement. Could we start making cheap pasta every Friday and drink water instead of wine? Yes. Could we cancel our Amazon music subscription and play Youtube from our phones? Yes we could. However these actions would slowly take away from what makes Pizza Night great.
Last Saturday morning we were sitting in our living room watching cartoons. My wife softly said "I wish we could go out to get bagels this morning, but I know we're saving money". I immediately felt a weird, bitter-sweet, feeling in my stomach. On one hand I was very proud that she understood the cost savings of eliminating restaurants from your monthly budget. However on the other hand I was ashamed that I had created a feeling in my home that we were not allowed to spend money on things we didn't need - regardless of the value. I grabbed the kids and we all drove to breakfast. It was the best breakfast I ever had.
Actuality: Yes the statement is true, but financial independence is not about suffering for 10 years so you can stop going to work. It's about changing your financial lifestyle and realigning what is most important to you. Find what brings the most value to you and your family. You have to enjoy the ride or the ride is pointless.