Need To Save But Can’t? You Need A First, A Focus & A Fruit

 

Why is saving money so hard sometimes? It seems there is always something vying for the precious dollars we attempt to save. Sometimes savings doesn’t happen because of the bumps in life, like a medical issue, a job loss or an auto accident which requires immediate action. Sometimes it is because there are so many impulses vying for our money. Between TV commercials, social media, influential friends and peer pressure we are bombarded with reasons to spend instead of save. And there are many other reasons why we struggle to save. From a recent poll done by Forbes, here are the four top reasons Americans said they either could not or do not save:

  • Spending Money Offers Positive Short-Term Feelings, While Saving Money Does Not
  • Financial Goals Typically Take a Long Time to Achieve
  • Life Always Seems to Intervene
  • Unexpected emergencies

This contention for dollars results in a troublesome situation in America. MarketWatch reported in a 2016 study: “Americans are some of the worst savers in the developed world. U.S. adults currently save just under 6% of their disposable incomes, according to the most recent data from the Federal Reserve Bank of St. Louis. That number includes savings and retirement accounts.” Six percent is far below the levels needed to meet most family goals and obligations like retirement, college, new cars and the occasional vacation.

What’s more, the article found that: “Almost half of American adults could not cover an emergency expense of $400 without selling something or borrowing money, according to the Federal Reserve. And about 31% of non-retired adults have no retirement savings or pension at all.”

So, if saving is that hard, how do some people do it very well while most people struggle? After researching this issue extensively, and interviewing many spenders and savers in person, I think the answer comes down to this: People who save money well have a FIRST, a FOCUS and a FRUIT. Let me explain:

Good Savers Have A FIRST

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Meaning good savers prioritize saving FIRST, then spending what is left after saving. How do you do that?

Most of the people I have talked to accomplish their savings goals by consistently doing three things:

  1. They develop a set of goals and objectives and then budget, make and use a spending plan, to allow money to be put aside to meet those goals. In other words, they have a budget that ensures money is allocated each month toward their goals.
  2. Most good savers work hard to define and separate needs from wants. Needs are required for simple living and must be funded in the budget. Wants are something more and good savers usually are willing to fund goals before spending on wants. Good savers are willing to sacrifice wants in order to afford savings for important goals. By that, I mean, savers know what must be paid for, like basic housing, food, clothing and other essential needs.  For instance, let’s take housing. A good saver may be willing to afford basic housing (need) but forego something really fancy (want) because they want to save the money to fund an important goal.
  3. Last, good savers commonly use technology to pay themselves first, automatically and usually quickly so they never miss the money in their paychecks because they never see it. What are examples? Direct deposit into savings or 401K retirement accounts or 529 college savings plans. Many good savers also set up automatic payments to their credit cards so they never carry a balance. Only after all the savings and investments are completed does the remaining money become available for spending. And even then, some good savers automatically pay their important reoccurring bills automatically to make sure they never get behind on items like rent or auto payments.

 

Good Savers Have A FOCUS

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As mentioned earlier, good savers have clear goals which help them to FOCUS where their money should go. If, say, your goal is to retire from full time work by the age of 55, that will require a certain amount of saving and investing each month. Having clear goals helps the good saver stay focused on what’s most important.

There are two important mindsets that help people stick to saving for their goals that are used commonly:

Having “micro goals”. Good savers usually break down their big, seemingly far off goals into smaller goals that feel attainable and are easier to measure progress against. For some people, the goal of retiring in 30 years is not a good motivator to save because it is too far away. But if you broke that goal down into something more immediate and measurable, like “I need to save $275 from every paycheck”, it could keep a person on track to save the money.  As long as the end result of the micro goals contributes to your overall goal, this technique can be quite useful.

Focus on progress made, not the distance to the goal. When you’re working toward a big goal, it’s tempting to keep your eyes on the far off prize. After all, this is all about where you want to go, right? You’re moving in a positive direction. Why would you want to look backward? Well, because sometimes looking backwards focuses on your successes to date, which can motivate future successful actions. Case in point: saving for a big vacation. Doesn’t is sound more motivating to say “I have saved $4,000 toward our Bali trip”, than to say, “I need to save for another 6 months to afford our Bali trip”?

Having clear goals to save toward give us our “why saving is the priority” when we are tempted to spend in the moment on less important items.

 

Good Savers Have A FRUIT

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In order for people to save and/or continue to save, they need to see fruit from their saving efforts. Most good savers consistently do a couple things that bear fruit in their saving journey:

Celebrate small wins: They celebrate small wins to build momentum to continue the quest. Celebrating little wins does two things: It recognizes progress and it allows us to include others into the progress of meeting our goals. It also prioritizes the attainment of the goal over immediate gratification through meaningless impulse purchases.

Another fruit of good savers is knowing that giving up something “good” (an immediate purchase) in order to obtain something “great” (achievement of the goal), builds a higher level of satisfaction and ultimately, self-worth. It builds and shows character that leads to financial freedom!

BONUS – One More Thing – Prepare for Life To Happen

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No matter how wonderful your plans are, sometimes life just intervenes. Murphy’s Law. Whatever you want to call it. Life happens in the form of emergencies, crises, and unexpected costs.You lose your job. Someone gets sick. Your car needs replaced. Your hot water heater fails and floods your basement. Making it hard to make financial progress. And, with that, your plans start to go awry. The path you were on is suddenly diverted and the big goal seems farther away than ever. It begins to feel impossible.

It doesn’t have to be this way. Good savers can take action early to protect their progress toward big savings goals in the way of an emergency fund. Most savers start very early in making their emergency fund. They scrimp, save, live beneath their means and earn extra money to build a fund, usually 3-6 months of expenses, that is there in case of an emergency and make sure the fund does not get eaten away by other expenses. Once the emergency fund is establish and available, they stop contributing to it and start saving towards their other goals.

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Really, the emergency fund is self-insurance. Not only does the emergency fund prevent a run up of wealth-stealing debt, it provides the piece of mind and confidence that goals are attainable and worth saving toward.

Having Trouble Saving?

When it seems like you can’t save money no matter how hard you try, sometimes changing your focus can help. Yes, life happens and sometimes it gets unpredictable and expensive. But by prioritizing savings before spending, having a laser like focus on your goals and celebrating small wins as they big toward the larger goal can be just enough to keep us going and, eventually, realize the goals. That’s why good savers have a first, a focus and a fruit!

 

Should Financial Independence Enrich Our Lives Or Define It?

Recently, I was sitting amongst a group of thrifty friends discussing financial independence (FI) and how important it was to each of us. Some of the discussion was around the definition of FI, and I learned that the definition of FI differs from person to person. Some of the discussion was around dates and amounts of money needed to meet FI. Most of the discussion focused on how important FI was to the group. After about an hour or so of discussion, it occurred to me that FI was the only topic we discussed. There was no discussion of life goals (beyond FI), family, friends, work, sports (Go Astros!) or recent adventures. I found that a bit interesting. On the one hand, FI was a central theme to everyone there. That’s no surprise. Clearly, FI was a top goal for each of us. But on the other hand, is that all there is to our interests and pursuits? Don’t get me wrong, the conversations were interesting and spirited. I really enjoyed it. But it left me asking: Is there more to our lives and our friendship than financial independence?

Which precipitated the topic question in this post: Does financial independence define our lives or does it enrich our lives with the freedom to pursue the goals and dreams in our hearts?

Financial independence: What Is It?

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Financial independence (FI) is a term often used without consistent meaning. Typically, FI means having enough income to pay your living expenses for the rest of your life without having to work full time or be dependent on others.  It also usually includes being free from debt, worry and anxiety about money. Some simplify the definition and see it as simply being self-sufficient. While each person might define it differently, it was obvious that FI was the primary focus for each of us. But in this particular conversation, FI was the only thing being discussed. Aren’t we more than the pursuit of financial independence?

A Case For FI To Define Us

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Starting with a little help from Webster’s Dictionary, being defined by financial independence means to be described or identified with the nature or essential qualities of financial independence. In this case, that means, identified as being frugal (living below their means), having ample income outside of a regular full time job to meet all money needs, dependent on no one other than themselves, free of debt, free of worry and free to pursue one’s goals or dreams. Sounds worthwhile so far!

People pursuing financial independence are passionate people in their pursuit. Usually focused, committed and goal orientated, or obsessed. Saving and investing, combined with the magic of compound interest, is intoxicating and satisfying. Each goal met just increases the desire for the next FI milestone. In addition, FI can be viewed as a great way to provide or support your family, so it is easily perceived as honorable, wholesome and worthwhile. Still sounds pretty good to be defined by our pursuit of FI!

Sometimes, it helps to find answers by looking backward on life decisions, so it begs the question: On my deathbed, will I be satisfied that my life was worthwhile and all that it could or should be if I defined success as being financially independent? Does my pursuit and ultimate achievement of financial independence completely define me and my purpose on earth?  This view of the topic question starts to shed doubt in my mind that FI should define us because it seems too narrow. Why? Because it seems to me that life should be so much more. I can’t image my tombstone saying something like “Here lies Mike, who pursued and achieved financial independence.” I’ve never seen one of those tombstones. But I have seen tombstones that have listed many other attributes to define the deceased: father, husband, Christ-follower, man of integrity, leader, brother and son, to name a few. This leads me to believe there is more to life than just being financially independent.

 

A Case For FI To Enrich Our Lives

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There is no doubt that money is absolutely necessary to live and the more you have of it, the more freedom, and choices, you have. So having money is very important. And making or getting money independent of full time work is extremely desirable. But money and financial independence do not define us, but enhance  our lives and the possibilities.

Money is just a tool for us to use to meet our goals and obligations. Whether those goals are to raise a family, travel, buy a home or eat dinner, money is just a mechanism to achieve those goals. So to define ourselves by being able to meet those needs, independent of full time work or any dependence on anyone else, seems to be too limiting. I’m not defined by other tools that I have, like a computer, a hammer or a pencil, so why would I be defined by the tool of money independently obtained from full time work?

 

Means To An End

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We are so much more than our money or possessions. Which means that we are so much more than our pursuit and achievement of being financially independent. We are (in my case) a husband, father, Christ-follower, businessman, leader, neighbor, friend, a brother, an uncle, a son, travelers and so much more. The financial independence we pursue is a better way to be all those things. But FI doesn’t define us. To let FI define us is to sell ourselves short. The faster we get to FI, the better, because we can spend more time doing what we want or are called to do, and less time working full time to make money. So financial independence enhances our lives.  It does not define us.

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So, going back to that conversation that started of this post: There’s nothing wrong with talking about something you are passionate about, like financial independence. And having deep conversations with friends and family about FI is encouraging, invigorating and informative. But since money is just a tool and being independent of full time employment is just a better means of making it, it stands to reason that financial independence is simply a means to an end. A means to achieve one’s goals in the best possible way. A means to freedom.

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Everyday More Salt & Less Pepper: FI Wisdom From Years Of Mistakes & Miscues

While recently getting my hair cut by the same person who has cut my hair for the past 12 years or so, she looked at me sheepishly and said “Mike, times are a changing…it seems like every time I see you, you have more salt and less pepper.” After a moment of bewilderment, I realized she was telling me that my brown hair was gaining more and more gray hair over time. Her statement, while funny, and true, was also a reflection of the years that have gone by in my journey to financial independence. Then I thought about it. Its been 30 years, 8 homes, 6 jobs, 3 kids and 2 careers since I started my FI pursuit. I have learned a lot. Some learning has come from wise decision making, but most, it seems, has come from my mistakes and the steps to overcome them. Here are four FI lessons from many years in the FI pursuit:

 

Tortoise & The Hair

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Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.” – Warren Buffett

Warren Buffet, perhaps the single greatest investor of our time, is credited with this famous quote. Unfortunately, it has taken me the past three decades to get it through my head that loss prevention is the higher priority over the risk of chasing huge returns. See, I have been invested in the stock market all this time. And for most of the time, I only invested in what I knew, which was high tech stocks. At the time I was in the industry. The good news was that high tech stocks have had some incredible returns. Years like 1995 through 1998 come to mind when the annual returns ranged from 20% to 37%. The bad news is that those same stocks had some horrible losses. The years 2001, 2002 and 2008 come to mind. The net result was that I made, and lost, two huge fortunes in the stock market since 1983 with very little to show for it as of the 2008 financial crisis. Hence, starting in 2009, I started to put Warren Buffet’s rules into place and have been rewarded handsomely for it. What I have learned: Slow and steady wins the race, just like the story of the tortoise and the hair. You don’t have to chase high returns with high risk stocks to get a good return. Preventing losses is more important than sporadic years of high returns. In terms of my stock investing, that means investing in high quality stocks, with a proven record of profits, growth and good management operating in good markets. For the most part, I invest in strong dividend stocks which also helps guarantee a decent return. I also re-balance my portfolio to lock in profits and lessen the chance of large losses should the market turn. While I have not had huge annual returns in the past nine years, I have not experienced ANY negative return years. The end result is that compounding the small but regular annual returns have produced more wealth than the previous 25 years of investing combined.

The Few, The Proud, The Life Goals

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“If you aim at nothing, you will hit it every time.”― Zig Ziglar

Early in my FI pursuit I had vague, long term goals: Something about retirement, kid’s college, independence and travel. Blah, blah, blah. I focused on climbing the corporate ladder and thought regular promotions would take care of meeting my eventual goals. It wasn’t until the first major stock market crash in 2001 that I realized that my goals were too vague and too long term to foster the best FI actions. It’s true, when you aim for nothing, you hit it every time…and go nowhere! What I have learned: Have specific goals in all aspects of financial independence. That includes quantitative giving goals, savings goals, investing goals, as well as qualitative goals for gratitude, contentment and peace. The reason why? The quantitative goals provide concrete targets that are easily measured for motivation and a sense of accomplishment. The qualitative goals help us round out the true independence spirit (Freedom from worry or anxiety) as well as give more meaning to what FI is all about.

Set It & Forget It

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When I was younger, I would invest regularly, but only after I paid all my bills. Some months I had a lot to invest, but others, not so much. It was irregular at best. Also, as mentioned above,  in those early years, I really didn’t have stated financial goals. The end result was I never knew if I was on track with my saving and investing. What I have learned: As I have aged, and truly learn to appreciate having financial goals and the power of compound interest, I have learned, first, to order the allocation of money as such: Give first, save second, then spend the rest. Meaning, I give to my church and God first because He deserves it. Then I save (pay myself) second after giving to ensure all my savings goals are met. Then, I make my spending plan (budget) based on what is left over, never spending more than I have. Here’s the best part: I use technology to automatically give, save and pay bills so that I am faithful, regular and not consumed with handling money. Simple and easy.

Sacrifice Good For Great

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“There is no progress or accomplishment without sacrifice.”
Idowu Koyenikan

Sacrificing to reach a goal has never been foreign to me. Sacrificing time and effort to get in shape to play high school and college sports was normal for me. Sacrificing fun and parties to get good grades was expected of myself. But somehow, when I got into the working world, and made good money, I didn’t want to sacrifice the trappings of success for the purposes of reaching a bigger, and better, goal. What do I mean by that? I wanted, and got, the bigger house, the nice cars, the big vacations. In some ways, I was trying to stay up with the Jones…and it was very unfulfilling. Bigger homes and nicer cars cost more money and take more upkeep. After a while it felt like my stuff owned me. What I have learned: Foregoing good things, like a bigger home or a nicer car, and using that money for great things like financial independence, helps speed up the process to independence and true wealth, in a big way! I have learned to cherish my smaller home (low taxes, less to clean, less room for stuff to build up) and my old car (paid for) so that I can use the money instead to fuel financial independence! Sacrificing good stuff for great stuff also helps me appreciate everything I have even more. And guess what? I don’t miss the bigger home or nicer car. Sure, they were fun to have but they are not as fulfilling as the long term goal of financial independence.

More Salt – More Focus, More Intention, More Better!

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“There are no mistakes, save one: The failure to learn from a mistake.” – Robert Fripp

Yes, the hair is getting gray-er and the time is flying by. But, a lot has been learned and hopefully, that knowledge can be helpful to others on their way to financial independence:

  • Consistent investment gains in solid stocks are better than the vicissitudes of high risk/reward stocks.
  • Quantitative and qualitative goals help focus FI efforts,
  • Automated Fin Tech tools help assure the Give-Save-Spend prioritized relationship,
  • And, sacrificing good stuff for the sake of great stuff speeds up achieving your FI goals.

Financial independence is not easy, but it is worth it! As one of my kids would say when they were young: It’s more better!

 

What Do Aging Athletes And Financial Independence Have In Common?

I am passionate about sports and I have been that way for as long as I can remember. More so playing them than watching them but nevertheless, passionate. It was football, baseball and basketball in high school. Then, football and baseball in college. Followed by softball, basketball, tennis, cross-fit and competitive running thereafter. And all the while, I have lifted weights and worked out as a way of life. I love it. It makes me fit, I feel good and it’s cheaper than a psychiatrist when it comes to working out your daily problems! But over time, or more specifically, advancing in age, has a way of catching up to you when it comes to physical performance!

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I remember playing sports in my twenties and it was so easy to perform: Stretching the muscles was easy, as was gaining strength and endurance. If you got a little bit out of shape, you were able to get it back really fast. It wasn’t until I turned 34 that I realized my first reduction in athletic ability. I lost a step. I was moderately fast and running the bases while playing softball I was thrown out going from first to third on a base hit. For the first time ever!  This was my first dose of reality that athletic ability diminishes with time.

Then, I went into my forties. Now I was introduced to regular soreness after working out, coupled with a longer time period to fully recover from the workout. What used to take 24 hours to recover now took at least 48 hours. In addition, it took considerably longer to get in shape. At a twenty something, it felt like three weeks of solid work would produce a great fitness level. But by forty something, it took every bit of eight or nine weeks to feel really fit and even then, I wasn’t sure if I had reached the highest level of fitness. The other side of it was also true: As a forty something, it felt like six or seven days of not working out resulted in losing every bit of fitness and you had to start over again from the bottom of the fitness ladder!

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Then I reached my fifties…and a further reduction in athletic ability, with more aches and pains, and longer recoveries. It was in my fifties that I had to fully accept my physical limitations as an athlete. I could no longer deny that past performance levels were long gone and unreachable.

What Do Athletics Have To Do With Financial Independence?

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At this point, you might be asking, what does athletic ability have to do with financial independence? And I would understand if you did. But follow me here for just a moment. Because the lessons learned as I have aged as an athlete are directly applicable to the process of obtaining and maintaining financial independence. How, you might say?

First, It’s About Time

As an aging athlete, it takes time to get ready to perform. Much more time than it used to as a younger athlete. You need to take the time to fuel your body right before the workout. You also need to stretch and stretch a lot. In other words, you need to be patient  and prepare correctly before you can really perform.

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The same is true with the pursuit of financial independence. It is over time that one can develop wealth. It usually doesn’t happen overnight, and, expectations to the contrary can build unwanted anxiety or stress. To build wealth that can lead to financial independence requires saving and investing money over a long period of time, in order to produce a return. This patient approach to building wealth, and as a result, financial independence, is both time proven and considerably less stressful. There’s one more piece to the time element to develop wealth and that is compound interest.

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Saving money over time is only the first part of the equation. The second part, and largest part, is investing the money and letting compound interest work to develop an exponential wealth effect. What does that mean? It means that investments over time will produce far more profits than the amount of money you actually put into the investments. It is a multiplying effect. An example: A one time $2000 investment with a 6% annual return will yield $xxx after 40 years. But if you left it accumulate for only 20 years, half the time,  you don’t have half of the 40 year amount, you have only xx% of it. It takes an investment in time, using compound interest, to develop wealth, and it grows more and more each year. Just like it takes time as an aging athlete to prepare for a workout to produce athletic results.

Limitations Can Be Your Friend

As an aging athlete, you have to recognize your limitations or else run the risk of hurting yourself. When I was 21 years old I ran a five minute mile as part of a fitness test in college as we were getting ready for my junior year of college football. I’ve got NO CHANCE of running that same five minute mile now, regardless of my preparation or efforts to perform at my best. I need to accept my limitations or risk being deeply disappointed or getting hurt when I tey. In essence, I need to be content with my diminished performance level.

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Contentment is also a key foundational element when it comes to financial independence. Without contentment (Being happy where you are, while on your way to where you are going), what you have will NEVER be enough. You will always think in your mind: “I need more to be happy, or rich, or successful, or wealthy, or (fill in the blank).” Part of being financially independent is to be independent of envy or perceived need for something to make you complete or happy. In fact, only when we can learn to be content in the moment, combined with gratitude for what we have, can we be truly independent of envy, covetousness and the sense of lack. There is certainly nothing wrong with ambition, but when that ambition prevents you from ever feeling secure, peaceful or blessed, you can never truly be financially independent.

Three Cheers For Consistency

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As an aging athlete one of the most important fundamentals of working out is consistency. You need to consistently stretch, consistently eat right, consistently hydrate and consistently work out because of what I mentioned before about losing your fitness level fast! When you can get into the appropriate consistent rhythm, your workouts and performance can be very rewarding.

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The same is true when it comes to financial independence. I have found that most financially independent people I have met didn’t hit the lottery or write a best selling novel to develop instant wealth, but built that wealth over time with consistent savings and investing. What do most of the financially independent people do consistently:

  • They save money consistently
  • They invest consistently
  • They live on a budget in order to meet their goals consistently
  • They track goals consistently to stay focused and on track

Consistency also lessens the sting of living below your means. If you consistently put money into an emergency fund, a retirement fund and a vacation fund, you eventually get used to that money being “gone” and you don’t miss the spending power in your day to day budget. Consistency is so important to old athletes and people pursuing financial independence alike.

Taking Advantage Of Technology

As you get older, an aging athlete is wise to take advantage of new technology to increase their performance, and comfort. There are new fabrics on the market that wick away your sweat while you perform. Running in the Texas heat, I depend on moisture wicking clothing. There are new shoes of all types that help you run faster, farther and with more comfort. There are new training apps that help you work out at peak performance. There is an abundant amount of new technology that can help you better perform.

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There is also new technology to help you obtain financial independence. There are tools like Mint to help you track your expenses and budget, Acorns to help you save spare change, Robinhood to help you invest and most banks now have automatic deposit and withdrawal for 401K plans and emergency savings accounts. Use technology to achieve your financial plans: In most cases it is easy, cheap (as in free), automatic and efficient.

Last, Know Your Why

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Motivation is paramount when it comes to working out or achieving financial independence. People ask me all the time: At your age, why do you workout so hard, and so consistently? It’s easy. I do it because it makes me feel great, it clears my mind, it challenges me and it helps me sleep so soundly. In other words, my “why” is to feel better and, God willing, live longer. It is worth it to me to put the effort in now, to feel better later. We need to “know our why” in the pursuit of financial independence too. We need to know why we are budgeting, saving and investing because it sure would be fun to live life unrestrained now. It would be fun, but it would not help us reach our goal of financial independence. Our financial independence “why” we sacrifice now is so that we can be independent later. Independent of money worries or stress and to be independent to follow our heart’s desire. To move working from something we have to do to survive, to something that we choose to do if we want to. Financial independence is not easy and it does not happen overnight. Just like trying to get into and staying in shape as an older athlete. But by using time to our advantage, practicing contentment, being consistent, taking advantage of technology and knowing our why, we can better enjoy the process and eventually achieve the goals of feeling good and experiencing financial independence at any age!

If you want more information on financial independence and/or the steps to get there, consider Dave Ramsey’s book “The Total Money Makeover”. Click the image to enjoy instant savings.

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

I Think I Have A Better/FASTER Way To Financial Independence! Fact or Fallacy?

I’ll get right to the point:  I think there’s a better and faster way to grow passive income in order to achieve financial independence! We are committed dividend stock investors looking to build wealth through stock market investments. But I’ve been learning/studying for the past two years and implementing a new investment strategy the past nine months and the results are promising. Let me run this income producing investment strategy by you and help me figure out if this is sustainable or just a short term phenomenon that can’t be maintained to and through retirement from full time employment.

Path To Financial Freedom

We’re not much different from your average FI enthusiasts. My wife and I live below our means, have eliminated all debt except the home mortgage, have a six month emergency fund and invest aggressively, including in retirement and taxable accounts,  to develop long term wealth. We have set aside money for our last child’s college fund (two are already out of the house) and we invest in our Health Savings Account for current and future medical expenses. In terms of investments, we are deeply invested in dividend producing stocks and our account is equally dividend between stable, high dividend yield stocks and faster growing dividend growth stocks. Our stocks produce an average 2.8% annual dividend yield, growing about 11.5% annually. All in all, our stock portfolio has averaged a total annual return of 18% including dividends and appreciation over the past eight years. Everything mentioned so far is pretty straightforward and consistent with most FI practices.

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Also consistent with standard FI practices, my wife and I have been planning to develop wealth that is 33 times our expenses (assuming a 3% annual drawdown in retirement to be conservative). While we are well on our way to meet that goal, a new (to us) passive income path presented itself a couple years ago that I have studied and now implemented for the past nine months with incredible (to me) results. The results have been so good that we are re-thinking our FI goals, amounts and timeframes. In addition, the new (fairly) passive income stream seems to be sustainable into retirement.

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Conservative Options Trading As A Significant Passive Income Source

Hear me out. Monthly dividends are and have been a consistent income source. If we didn’t invest another dollar in the stock market and retired in a couple years from now, dividends would produce one third of our income needs in retirement. But its not enough to be safe as the rest of our financial needs would need to come from asset (stock) appreciation and sales. So two years ago we started studying option trading, focusing on a fairly conservative approach to produce additional monthly income. Then, nine months ago, we implemented the following monthly options trading plan:

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  • Each month, we sell out of the money (OTM) puts on premiere dividend and dividend growth stocks to produce immediate income and give us the chance to buy well researched, desired stocks at a discount. If the option expires OTM, then we keep the premium. If the stock price falls and the option is in the money (ITM) then we get the premium and we “get to” purchase a dividend producing stock on sale. Both are wins to us. (In general, we target to earn 1% or more on the monthly option premium each month and use an OTM strike price that is at least 5% lower than the stock price.)
  • Each month, after much research and analysis, sell OTM covered call options on the dividend stocks we own at strike prices that meet or exceed our researched sell price target. If the option expires out of the money, we keep the premium as income. If the strike price is met, we get the premium AND a nice profit from the sale of the stock. All proceeds from the sale of stock are then reinvested in more dividend producing stocks. (In general, we target to earn .5% or more on the monthly option premium each month and use an OTM strike price that is at least 10% higher than the current stock price.)

That’s it. Each option has a one month duration. If the option expires OTM, the money is then reinvested in options for the next month. Some call that “Stock Option Rinse and Repeat”.

The Results, So Far

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Thus far, the options trading income nearly quadruples the monthly dividend income. Take a look at these results:

  • We are averaging a monthly return of 1.79% (or over 21% annually) on the sale of put options. We have made over 250 put option trades in the nine months, with 236 expiring out of the money and 14 put options being assigned. We have purchased great dividend champion and dividend growth stocks on sale, such as ABBV, LOW, QCOM and CSCO.
  • We are averaging a monthly return of .99% (almost 12% annually) on the premiums of covered call options! We have made over 100 covered call option trades in the nine months, with 94 expiring out of the money and 6 call options being assigned. We have sold some great dividend stocks but got a large premium for the sale, at least 10% higher than our target sales price. Usually these sales result because of a higher than normal run up of the stock price. So our covered calls allow us to cash in profits on unusual spikes in price. Then all proceeds from the sales of stocks are reinvested into other dividend stocks. Sales have included stock in CSCO, STX, SBUX and ETP.

Summing up the performance of this income strategy over the past nine months we find that the total income return by adding the monthly option trading premiums to the monthly dividends equals 18.15% on our entire stock portfolio not including stock appreciation. (The stock appreciation during that timeframe was 19.1%) After taxes, fees and other costs, the net return on trading and dividends, or net income, was slightly over 12%.

 

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

So, Working Backwards, Doesn’t That Mean…

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Let’s take that 12% net annual income return and reduce it by a small safety factor to 10% to be conservative. And let’s assume we do not want to spend any of the stock assets nor any of the stock appreciation. Just keep letting that build. Let’s also ignore social security and any other side income. Where does that leave us? I think that leaves us needing an investment base of 10 times expenses to meet our total retirement needs. Let’s take a look at some actual numbers to this situation: If we need $7,000/month to live comfortably in retirement, or $84,000 a year, doesn’t that mean we will need $840,000 of investable assets to produce that income ($840,000 X 10% = $84,000)?

But let’s continue to make the case more conservatively. Let’s assume that you trade options on only a portion of your investments, say only half of your investments. So, for option and dividend income to cover $84,000 in annual expenses, you would need roughly $1.2M of investable assets (This assumes dividends from all of the investments but options trading on only half of the investments).

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The net result: I don’t think we necessarily need an investment account that is 33 times expenses to retire comfortably. I think with conservative options trading in conjunction with a stock portfolio of dividend and dividend growth stocks, that a couple could retire with an investment account that is only 15 times expenses.

Fact or fallacy ? Set me straight…

 

Now for something different: A look into the life of the most polarizing president of our time:


Understanding Trump

Dumb Financial Freedom Dichotomies & How To Avoid Them

Dumb Dichotomies

So, you’re eliminating your credit card debt. And your friend tells you that they know a thing or two about personal finance and tell you that you MUST quickly choose between using the Debt Snowball method or the Debt Avalanche method to pay off your debt or else you are making a huge mistake. Which method are you going to use?

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Really? There’s only two choices and I MUST pick only one right now and use it forever? Not true! Although there are pros and cons for these two popular debt elimination approaches, nothing says you must only use one of the two methods and be faithful to that method forever.  That’s a dumb dichotomy. You don’t have to pick one over the other. In fact, many times, a mixture of the two methods might be best. Why would we want to put that kind of unnecessary pressure on anyone who is trying to do something as important to personal finance as eliminate their credit card debt? Debt elimination is hard enough without undo requirements. Dumb dichotomies can get in the way of financial freedom because they make the task that much harder to accomplish. Here’s a look at some financial freedom dumb dichotomies and how to avoid them:

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Snowball Or Avalanche

To finish the discussion of which debt elimination approach is best, we first have know a little about the person eliminating the debt. Does that person need constant motivation to stay the course? If so, then the Debt Snowball is perfect, where the focus is to pay off the smallest credit card balances first and then work off the larger accounts as the smaller ones are paid off. This approach motivates the debtor in that the debtor sees a rapid reduction in creditors and uses that motivation to continue the debt elimination effort.

Another valid debt elimination technique is called the Debt Avalanche, whereby the debtor pays off the highest cost debt first. In other words, the debtor pays off the credit card that has the highest interest rate first, then works his way down the list towards the lowest interest rate card until all debt is repaid. This technique may interest a “math person” or a cost conscious person. This approach affords the debtor the lowest cost approach to debt elimination. This blog is not judging one approach versus another, but intends to highlight that you don’t have to pledge allegiance to one or the other. In fact, a combination of the two can very effectively motivate the debtor to eliminate the debt AND minimize the amount of interest paid during the debt elimination. For instance, some people have had success starting out with the debt snowball by paying off a small balance to get a quick win, and therefore boost motivation, and then switching to the debt avalanche to reduce interest payments.

From my point of view, “just tackle the debt!” Eliminate it as fast as possible and at the lowest cost as possible because debt, especially consumer debt, is the biggest obstacle to building wealth and more importantly, financial freedom. Debt snowball, debt avalanche or a combination of both…use either or both but just kill the debt!

Looking for a great resource to lead you through debt elimination? Check out Dave Ramsey’s book:

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Emergency Fund: In Savings Or An Investment?

An emergency fund, money set aside for when, not if, you have a real financial emergency, is central for financial freedom. In effect, an emergency fund is self-insurance to ensure that an emergency  1) does not force you into deep credit card debt or 2) cause you physical and emotional stress from money worries. And for some time there has been an ongoing debate where that money should reside. The two loudest groups suggest that an emergency fund show either be placed in a savings account (because it is the most readily available) or in a secure mutual fund (because it can earn a “greater than inflation” return while sitting in the account). In reality, this is a dumb dichotomy, because you don’t have to choose one or the other. While both are valid options, you could also split the money between an account that is readily available (like a savings account, understanding it will have a very low or no return) and a safe investment like a mutual fund or something similar that produces a larger return on your money. While leading experts, like Dave Ramsey, suggest you have between three to six months of expenses in your emergency fund, you can allocate that money according to your priorities and risk level.

Investing: Active Or Passive?

Active investing, defined here as using professional investing resources to buy and sell investment instruments, is an effective investment approach. So too, is passive investing, where investors invest their money in simple automated investments, like index funds or ETF’s. I recently witnessed a lively debate where people took sides on the “right” investment approach. The battle was focused on the slightly better returns of the active investment approach versus the low cost and low stress of the passive investment approach. There is no one right answer! This is a dumb dichotomy. Both approaches work and the right approach for any investor is based on that investor’s needs and approach to investing. Some people, like me, have both active and passive investments. The point is, there’s no one right approach and you don’t have to unilaterally choose.

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Budgeting: To The Dollar Or With Margin

Budgeting is essential to achieving financial freedom because the budget “tells our money where to go instead of just wondering where it all went” (Dave Ramsey quote). Yet most Americans don’t take the time to budget and the results are not good. The facts are that the same percentage of people in America that do not budget (roughly 74%) equal the same percentage of people who are living paycheck to paycheck! Budgeting is important. But the debate between the experts that say you must either budget “to the dollar” and have every dollar accountable to a category, or, budget with a large amount of margin, or reserve cash, has formed a dumb dichotomy. It doesn’t have to be one form or the other. Pick the budget form that works for you and follow it. Since only 26% of Americans budget anyway, any form of budget would be better than the norm! There’s just a couple foundational rules that a good budget must follow to be effective and sustained: The budget must balance, must be measured and must be followed to be effective.

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Financial Freedom Is The Point

Eliminating debt, having an emergency fund, investing money and having a budget are all essential to developing financial freedom. But the approach to accomplish each one of these elements is dependent upon the person or persons involved, and any person suggesting that one approach is inherently better than the other is causing a dumb dichotomy, which is both unnecessary and distracting. Eliminate your consumer debt as fast as possible, using the method, or methods, that work best for you. Make and keep an emergency fund and reduce your financial worries. Invest money to develop wealth in the way you are most comfortable. Last, make a budget and follow it to ensure proper allocation of your precious dollars. Don’t let any dumb dichotomies distract you from your pursuit of financial freedom! These dichotomies are just…dumb.

For more information on financial freedom, check out Dave Ramsey’s book:
 
The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Financial Freedom Geek Fest // Budget By The Numbers

Many, if not most people, start off the new year with new goals and dreams for the upcoming year that include budgeting and financial goals. When it comes to personal finance, that is the easy part. The hard part can be following that plan during the course of the year. Now that we are several months into the new year, we can look at our budget performance and see if we are sticking to our plan. We can compare our financial goals and corresponding budget to our actual spending. Simple enough. Then we can make adjustments, if needed, to keep on track on meeting those goals.

But there is another budget exercise that is also worth doing. How does that saying go: “A manager makes sure things are done right, but a leader makes sure we are doing the right things?” So it might make sense to spend some time making sure that we not only are staying on budget but to make sure we have a good budget in the first place. What is a good budget?  In fact, let’s go one step further. Let’s look at the budget through the lens of financial freedom. Let’s make a budget that not only makes sure the bills are paid and our goals and dreams are being funded, but is also optimized to let us experience ongoing financial freedom, and eventually, financial independence.  It may sound complicated but it is not if you have the discipline to stay the course!

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Budget: A Dirty Word

Let’s just put it out there. For some people, a budget is an awful thing. It is hard to make, confusing, very confining and seems to steal joy from life. But let’s start by change our perspective on the budget for this discussion. A budget is simply a tool to help us meet our goals.

“The budget is a plan for our money so that it goes where we want it to go, instead of getting to the end of the month and wondering where it all went.” Dave Ramsey

Don’t think of it as constraining or difficult math, but simply as a useful tool. A good budget can be as brief or detailed as you need to meet your goals and experience the financial freedom you want.

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Financial Freedom: What is it? Why Do We Want It?

If a budget is a tool to help us meet our financial goals, then what is the overall purpose of having financial goals? Is it simply just to afford more stuff? Or to be rich? No, the purpose of having financial goals and a good budget is to achieve financial freedom and hopefully, financial independence. Financial freedom is discussed a lot but what is it?

“Our definition is having the attitude and resources to live abundantly in each stage of life, free of worry and free to completely live out the full purpose and goals of one’s life.”

This freedom allows peace of mind, security and choices, which usually result in a fulfilling life. So let’s get started to define a good budget that can get us on our way to financial freedom.

Typically, a good budget has four characteristics:

  1. The budget has clearly defined goals
  2. The budget funds those goals
  3. The budget has margin, breathing room,  to account for emergencies, opportunities and life challenges, in general
  4. The budget defines and prioritizes needs over wants

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It Starts With A Prioritized Set Of Goals

Before we start talking about making a good budget, we need to define our financial goals.  Goals should be the priority in your budget. They should be funded first. Goals should include responsibilities, short and long term plans, life goals, passions of the heart and family goals. Common goals include:

  • Home ownership
  • Financial security or financial independence
  • Large expenditures: cars, vacations, travel, furniture, etc
  • Retirement
  • Kid’s education/college
  • Hobbies/side businesses
  • Bucket list items

Make a list of your goals. Then ask yourself: Am I willing to fund these goals at the expense of other possible uses of my money? If not, drop them off your list and go through the process again until you have a set of goals that you are excited to pursue AND are willing to fund. Here’s a sample list of 2017 goals with dates and amounts:

  • Max out 2017 401K retirement savings, to support a 2020 retirement from full time work. $18,000 this year
  • Family reunion vacation in July. $3,000
  • Braces for our teenager in June. $3,200 out of pocket (Insurance pays the rest)
  • Tithe, charitable giving, to my local church. $9,000 a year

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Needs vs Wants: Knowing The Difference

One more step before we start making our budget. We need to know the difference between needs and wants, and make sure needs are funded before any budget money is used on wants. A need is something required for basic living. Needs usually fall into six basic categories:

  • Housing and utilities
  • Reliable transportation
  • Groceries/basic food needs
  • Clothing
  • Medical/prescriptions
  • Insurance

One more thing on needs. What you need to spend is just the amount for basic living so as to keep you safe, secure and functional. Anything more is a want that will be discussed later. An example of a need versus a want: The transportation need for a family might be a basic four door sedan or SUV, but a transportation want might be an expensive European sport car.

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Margin Means Freedom: What Does It Look Like In A Budget?

Margin, or breathing space in a good budget, is fundamental for financial freedom and usually takes two forms:

  • An emergency fund (usually between 3 to 6 months of expenses saved for emergencies)
  • Adequate insurance that usually includes: medical, property and long term disability insurance

The amount of money in an emergency fund varies depending upon your situation and risk-adverseness level. Once you reach your goal, you do not need to keep contributing to it but each time you use money from the emergency fund, the money should be replaced for the next emergency. What constitutes an emergency? Job loss, auto repairs, housing repairs, deductibles for medical issues and such.

Many people working full time today have medical, dental and vision insurance (medical) through their employers, but one way or another, we need to have medical insurance to have financial peace. The same is true with insurance for our large pieces of property (home and auto) and with employment insurance (long term disability). Note: Short term disability insurance can be your emergency fund.

One more note on having margin in our budgets. We know each year that we have seasonal expenses coming, like presents at Christmas time and for birthdays. We should budget for them. You might say, what’s the big deal about birthdays? But if you have an 8 year old, that is in a class of 21 students, and has the same school invite policy as our school, you know that you are required to invite all classmates to your birthday party AND you should expect to be invited to ALL 20 of the other classmate birthday parties too! That could be $400 or so of presents each year you should be setting aside for financial freedom in your life.

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Pressing The Information Into A Good Budget

Let’s recap: We know what our goals are and how much money they require. We know what margin in our budget looks like and we’ve identified what that costs. Also, we defined our basic needs in our budget and classified everything beyond those needs as wants that should be funded last, if money is available. Now we can start allocating money to make a budget.

Where to start. A GREAT place to start when forming a budget is to use tools by successful organizations who specialize in budgets and budget allocations. Two such tools are made by Dave Ramsey, http://www.everydollar.com,  and Crown Ministries, http://www.crown.org, that provide guides as to how much money should be allocated to each budget category. Here is a great starting point for each budget category:

Take your net income (net pay after taxes) and allocate as such:

Budget Category       Percentage of Net Pay     Description                             

Charity (tithe)              10%

Savings/Investment   15%   Retirement, emergency fund,

Total Housing             30%    Mortgage, taxes, utilities, cable, HOA, insurance, repairs

Auto                              12%    Car payment, gas, repairs, insurance

Food                              14%   Groceries &  eating out

Entertainment              6%   Recreation, pets, travel, gym, gifts

Household                      6%   Clothing, phone, beauty, services (lawn, cleaning, etc)

Medical/Insurance       3%

Children                         4%   If no children, go towards savings or a college fund

100% of net pay. Can’t be more than that or we have an unbalanced budget (Read: debt!)

What Makes For A Good Budget?

What makes this budget any good? First, it funds our financial goals (In this case, retirement, travel, children’s needs and entertainment). Second, this budget amply provides for all our needs (housing, food, transportation, insurance and clothing) and many of our wants (cable, eating out, etc). Third, this budget provides savings for an emergency fund and prevents the accumulation of credit card debt, which is the biggest wealth stealer around. Notice what this budget doesn’t have in it? It doesn’t have debt payment as a line item, consumer debt that is. That is because consumer debt is not a financial freedom maker, it is a financial freedom stealer. So pay off your credit card in full each month, while sticking to your budget. It also doesn’t have any money that is not allocated in the budget. Unallocated money usually results in mindless spending. In fact, in 2016, Fidelity reported that 22% of all discretionary money is spent on items we don’t remember just 24 hours after the purchase. Mindless.

Recap A Good Budget

Let’s go through our “good budget for financial freedom” checklist:

  1. Our budget clearly funds our current goals, In this case retirement, travel, children’s needs and entertainment). Check
  2. Our budget has margin built into it in the form of an emergency fund and insurance. Check
  3. Our budget has funded all our needs (basic housing, transportation, clothing and food), all of our goals (previously stated) and some of our wants, like cable TV, pets, etc.

There’s one more important thing our budget provides for and that is charity or generosity. It is the first line item in our budget, because generosity helps us keep money in its proper place as a tool, nothing more, and it is a huge component in financial freedom!

Wait! You say, you have completely different budget needs to obtain financial freedom. Ok. Just re-allocate the money according to your goals and/or lifestyle and as long as you are living within your means, savings for your goals and dreams and have ample margin for life’s challenges, you will be all set.

There you have it. We have a good budget that supports financial freedom. There’s nothing better than that!

 

Want more help with your budget. Try Dave Ramsey’s book: The Total Money Makeover. Click here and SAVE!
 
The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

And Then There Was One

 

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On The Path To Financial Freedom

To this point, the path toward financial freedom has been straight forward. The budget is in place. All consumer debt has been paid off, including cars, student loans and credit cards. Emergency fund is all set. Same is true with college savings for our last child in the house. We are saving and investing 15% toward retirement and tithing 10% to our church. And any left over money gets invested in a taxed account that will be used for future purchases.  Last, everything is automated so it “just happens”. Now, time and compound interest should produce results that lead toward freedom freedom. So far, so good. Now there’s only one debt left to deal with, the home mortgage, so the big question is: Do we pay off the mortgage, our last debt,  or do we invest that money to meet future needs?

Two Choices, Is One Better?

I think the choice between paying off an existing mortgage on a primary residence or investing that money to growth wealth is a matter of priority between financial freedom and financial independence. They are the same thing, you might say? I don’t think they are. Financial freedom puts peace of mind at a priority, including freedom from money worries and anxiety. So that would favor paying off the mortgage, because a debt, any debt, is an obligation that presumes we know and can control the future. Unknown-3It presumes we can make all the payments, but that is not a sure thing. Because in a 30 year mortgage, (15 year mortgage if you are really savvy), a number of things can go wrong that are out of your control and could prevent you, or hinder you greatly, from paying the mortgage like job loss, physical injury or other family health related issues. Yes, an emergency fund certainly helps in these circumstances, but if peace of mind and total freedom from money worry is the top priority, you probably would pay off the mortgage as soon as possible to ensure you always have a place to live.

Want financial freedom but don’t know where to start? Start with Dave Ramsey’s Total Money Makeover, click and enjoy!


The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Financial independence, on the other hand, prioritizes choice over freedom. And it is quite possible that investing the money, instead of paying off the mortgage, can provide more choices. Choices like work (or not to work) choices, location choices and purchase choices. The assumption here is that the return on the money invested is greater than the savings in interest paid on the mortgage. And for the last ten years, including the financial recession of 2008-2009, that has clearly been the case. First, let’s look at the math.

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The Math – The Easy Part

Simply put, the cost savings by paying off the mortgage in the last ten years has been significantly less than the return on investment if that money was put into any S&P500 Index Fund for investment. This is how it works out for me: Mortgage interest rate of 3.875% minus the mortgage interest tax break (use a conservative tax rate of just 10%) gives you an effective cost of the mortgage money around 3.5%. Another way of saying this is that the financial benefit of paying off your mortgage is roughly a 3.5% return on your money. Compare that with investing that same money in a simple S&P500 Index Fund for the same time period, ten years, which according to Fidelity Investments, returned 7.5% annually, not including dividends. Minus out the taxes on that return and you have an after tax return of roughly 6.7%, or almost double the return when compared to paying off the mortgage!

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But There’s More

The math between our two choices is the easy part. Clearly, investing money instead of paying off the mortgage will generate more value. In my example, investing produces almost two times the return as paying off the mortgage. But there are several other factors to consider:

  • Peace of mind – Clearly paying off the mortgage will give you great peace of mind but it will cost you. In my ten year example, the investment difference of investing the money instead of paying down the mortgage is worth over $115,000! That is a high cost for peace of mind but for those that are truly risk adverse, it may be still worth it to pay off the mortgage.
  • Cost of the mortgage – If your mortgage interest rate is over 5%, the financial freedom of paying off the mortgage may be worth it, since the financial benefit of investing the money is much smaller. But, something else to consider, if your mortgage interest rate is that high, consider refinancing your mortgage. Today’s rates are much lower.

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It’s A Personal Decision, Possibly An Expensive One!

For me the decision is simple, because my investments actually did far better than average over the past ten years, (10% including reinvested dividends) and my mortgage rate is fixed at 3.875%, I choose to continue to invest our money instead of using that money to pay off the mortgage. Our six months of expenses emergency fund gives us peace of mind as far as making the mortgage payments, as does our long term disability insurance. Worst case, I can change my mind any time and pay off the mortgage with a portion of the investments. But the priority is to invest the money for a greater return. Assuming my wife and I live an average life span and we keep the money invested in the market, we can expect to earn about $400,000 more dollars by this decision than if we decided to pay off the mortgage. That certainly helps calm the nerves about having a mortgage!

What do you think? This is what I think: Financial freedom (or independence) is hard work, but it is worth it!

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The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

The Financial Freedom Letter I Want To Write To My 30 Year Younger Self

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Letter To Self

Dear Self,

Freedom is a big deal. Great people in our country have fought and died for it. And financial freedom is no exception. If you start early and 1) aggressively save,  2) use the power of compound interest and 3) exercise some budget restraint, you can achieve complete financial freedom and transition into retirement at an early age. What does this mean? You will have the freedom to choose if and where you work. You will have freedom from worry about money and the anxiety of debt. You will have freedom to chase your dreams and spend time in those things you are passionate about. Sound good? I think so too. If you are seriously interested in financial freedom, listen carefully. There are just a couple simple actions you need to take right away. They require immediate commitment and action. Still interested? Then read on…

Begin With The End In Mind

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The first step toward financial freedom is to know your “why”. Actually, it is to know your “what” and your “why”. The what we already discussed. The what is to retire from full time employment at an early age and to experience financial freedom. To go a little further, let’s be more specific. The what is to retire by age 55 and have the freedom to pursue the passions of your heart, namely: tropical beach centered living, travel and generously giving back in my community. That brings us to the why. The why is that financial freedom allows me to contribute the most to my family and to society in general. I am more valuable to my family, community and God if I am financially free to live and serve others without the constraints of a full time job or full time financial worries. Let’s get started.

Save And Invest From The Start

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You’re 22 years old and fresh out of college, making a good salary in a growing industry. Your first step is to save aggressively. You just came out of four years of living frugally on the college campus, so before you expand your cost of living with the new salary, dedicate yourself to save 30% of your salary from the first paycheck on. That’s right, 30% right off the top. Have the savings automatically deducted from your paycheck before you see it in your checking account. That way you don’t even miss it, because you never had it to spend in the first place. Where will the savings go? Three places to start: 1) 10% of your paycheck will go into an emergency fund until it gets up to one month’s of expenses. 2) 15% will go into your retirement account, offered by your employer, and includes a matching program. 3) The balance, 5%, goes into a new investment account. Once the emergency fund totals the equivalent of one month’s of expenses (enough for a single guy with a stable job, for now), that 10% of your paycheck will be added to the investment account (now totaling 15%). It’s that simple. Do this and your on your way to financial freedom…but not there yet.

Keep It Simple And Watch It Grow

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You were taught compound interest and investment principles in college, but go back and learn them again. What will you learn? That compound interest of savings that is invested in low cost, equity based investments develop rapid growth of wealth. Let’s go over the basics in some detail. The emergency fund goes into a checking or savings account and does not earn any investment return, but acts as self-insurance. This is called “sleep at night” money because it helps you sleep at night knowing that you can cover most of the unexpected little costs that come up in every day life. The emergency fund is the single biggest deterrent to mounting credit card debt. In turn, credit card debt is the single biggest threat against financial freedom, so we want to avoid consumer debt at all costs.

For all things investing, try The Street

The retirement account goes into the company 401K program as a pre-tax investment which lowers your taxable income and is eligible for the company matching program. That means the 15% of your income that you put aside from each paycheck automatically gets another 5% (50% match up to 10% of your income) added to it and then gets invested in low risk equity based mutual funds. This retirement savings, match and investment gets done automatically, each paycheck, before you see your paycheck.

Here’s a great place to start for Financial Freedom! Click the book and save!

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Last, your regular investment savings goes straight into a low cost equity index fund. Specifically, an S&P 500 Index Fund, which over the course of history has produced a 10% return annually. It’s that simple. Save money, invest money, let compound interest do it’s thing. What’s the key? Have the money automatically taken out of your paycheck so you don’t see it or be tempted to spend it before it goes to your investments.

Embrace The Budget

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To ensure you stay disciplined in your regular savings, embrace living on a budget. What does that mean? Develop a spending plan and learn to live (and spend) by it. Take the 70% of your paycheck that is left after savings is invested and allocate the money for living expenses. It’s pretty straight forward but you would be surprised how many people do not have a budget and lose track of their spending, only to end up broke or in debt. Here are the big budget items and targets for spending:

Housing (house payment/rent, utilities, insurance, taxes, HOA): 30% of net monthly pay

Auto (Car payments, gas, repairs, insurance, etc): 15% of net monthly pay

Food (Groceries, toiletries, eating out): 15% of net monthly pay

Debt Payment (No debt payment, no credit card balances, start off right!)

Generosity (Tithe, donations, etc): 10%

Entertainment (Fun, travel, vacations, pets, hobbies): 10%

Living Expenses (Clothes, gifts, household stuff, medical): 10%

Misc. 10%

Make a budget, live by that budget and get comfortable living well below your means by learning how to find low cost or free entertainment, food, transportation and household needs. You will not miss anything important by keeping your cost of living down. It’s that simple: Save, invest, live on a budget…and oh yeah, compound interest!

Enjoy The Ride

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I’ll say it again, it’s that simple: starting right out of college, save 30% of your paycheck, invest in an emergency fund, a retirement fund and low cost equity investments, and live below your means using a simple budget. Those are the primary vehicles to financial freedom. Because, over 33 years, from age 22 to 55, using the power of compound interest, those investments turn into something much bigger than the sum of the savings made over that time. Let’s take a look at the math with a couple assumptions:

Starting pay right out of college: $50,000 annually.

Assume 3% annual salary increases, pay by age 55 is $128,000 annually

Total savings over 33 years at 30% of income (Age 22 to age 55): $1,030,550 including company match

Investment value at age 55, given the following returns: emergency fund 0%, retirement fund 6.5%, investment account 10%: $2,991,000

That much money, almost $3M, produces $120,000 a year in annual income at age 55 (4% rule) or $10,000/month, which supports just about any lifestyle. More importantly, this income, allows for full financial freedom! And this does not include other income sources such as social security. In addition, by starting your saving and living on a budget early, and investing regularly, the process to achieve financial freedom was simple and easy. Compound interest does the heavy lifting. It turns your million dollars of savings over 30 years and into three million.

Start early, be disciplined, trust investments over time and the power of compound interest. It’s that easy!

Sincerely, The older you.

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The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Free Money! What Do I Do With It?

Free Money!

Maybe its money from a long lost relative. Maybe its a business deal or stock trade that went far better than planned, or maybe its a big tax return check or a bonus. We all LOVE getting money we weren’t expecting. I call that free money! Boy, the possibilities start to enter your mind on how to enjoy that money! I’m not talking about the dollar bill you found on the sidewalk or the five dollar bill folded up in a pocket. Those finds are sweet, don’t get me wrong, but I’m talking about some serious money that could afford something big, like a vacation, a new car or a whole lot of fun! If you’re like me, my head can get filled with ideas on how to use the money real quick. So years ago, when I was in one of these sweet situations, I had to stop for a moment and come up with an approach to dealing with large amounts of unexpected money so that I would make the best use of this new windfall. I call it the 30/50/10/10 plan. Here’s my approach:

Before We Get Started

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Before we get started let’s do two things: First, take a moment and list your overall financial goals and objectives. It helps to look at the big picture before we get into the details. For me that’s pretty simple: 1) Live in complete financial freedom, 2) Provide for my family, 3) Responsibly help in my community, 4) Pursue our passions. What does that look like practically?

  • No debt, no money worry or anxiety, no dependence on others for our needs
  • Ample savings for emergencies, retirement, family/house needs, and college expenses
  • Live on a balanced budget and teach our kids to do the same
  • Tithe to our local church plus support some local charities
  • Travel!

Second, before we use the free money, subtract an amount for taxes and (in our case) our tithe so that we know the real amount available for use. Typically, that totals about 30% of the free money. This is the 30 in the 30/50/10/10 plan, meaning the first 30% of the free money. In other words, if we received $10,000 of free money, we would put aside about $3,000 for taxes and tithe, ( giving thanks to God and giving Uncle Sam his portion), then plan to use the remaining $7,000. By doing this, we eliminate a nasty surprise come tax time at the next of the year when the money is all spent and we have nothing to pay the taxes with. Now we are ready to use the rest of the free money. But what do we do with it?

Step #1: Pay Yourself (The “50”)

Since financial freedom is our top priority, always, we need to pay ourselves first, in the form of eliminating debts and/or adding to our various savings and investments. At least half of all free money goes to paying ourselves first. This is the 50 (50% of the free money) in the 30/50/10/10 plan. First step: pay off any outstanding consumer debt. Is there a credit card with a balance still on it? Pay it off first. No questions asked. If there is no credit card balance but there is a car loan balance or a student loan balance, we make payments to pay down that debt. Next, if we paid down our debts and we still have some of that half left, we pay ourselves by adding to our savings and investments in this prioritized manner:

  • Top off our emergency fund, if it needs it, which when full, stands at three month’s worth of expenses
  • Extra savings for upcoming household needs: replacement used car, replacement washer and dryer, etc
  • Money towards the kid’s needs: College 529? Summer camp?
  • Add to long term investments
  • The retirement fund already gets maximum contributions from the budget so it gets a lower priority for any free money allocation.

Again, about half of the available free money goes to paying off any debts and/or savings, with the hope that we can achieve a milestone of some sort that we then can celebrate as a family.

Step #2: Celebrate!

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Celebrate! Take some of the free money and take time to celebrate 1) the free money and 2) the debt reduction and savings milestones you achieved in step #1. If the free money allows us to completely pay off credit card debt. Awesome! Let’s celebrate that. If the free money allows us to purchase, with cash, a good replacement washing machine because the old one died, great, let’s celebrate. If we can put some money away for that next vacation, celebrate! You get the idea. Most people don’t celebrate saving money or paying off debt, but most people will get excited about achieving a milestone. Take the family out to dinner, or go to a movie, or something that everyone gets excited about.

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The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Let your kids know what you are celebrating so they connect the fun with the milestone. The celebration doesn’t have to be big. Just big enough to make the point that the free money is an unexpected blessing that allows you to obtain or maintain your financial freedom as a family. The money to celebrate is a portion of the first 10 in the 30/50/10/10 free money distribution plan. In fact, step #2 and step #3 (explained next) combined make up the full 10%.

Step #3: Meet Family Needs

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Now’s a good time to put some money aside for upcoming family needs. These are things like kid’s school expenses, clothes, a delayed car repair or shoes. This money can also go toward a date night with your spouse or attending a special event. This money allows us to catch up on “want” expenses. Those purchases or experiences that make you feel special but don’t qualify as a “must have item”, like an emergency fund or putting money towards retirement. As mentioned in step #2, the combined total of money spent in steps #2 & #3 is not to exceed 10% of the free money.

Step #4: Be Prepared…And Generous (The Last 10)

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Want to really experience financial freedom? Try taking 10% of your free money, after you have tithed, paid Uncle Sam, saved, eliminated debt, celebrated and bought something special for that someone special, and set it aside…for what comes your way. That’s right, set aside money for living, and helping, in the moment. Do you have a friend that needs a little help? Maybe that friend just lost her job and you feel like you’d like to bring over some groceries. Use this money! Maybe you get an opportunity to help a local charity. Use this money. Maybe you’ve got wedding/birthday/Christmas presents you want to purchase, outside your regular budget. Use this money. Take 10% of your free money and set it aside as a contingency to help and/or bless others as you feel moved to do so. You may be surprised how freeing this money makes you feel, because it gives you the freedom to act in the moment. This is the final 10 in the 30/50/10/10 plan.

Financial Freedom Is Better

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Coming into free money, that is, a large amount of money that you did not expect to get, is wonderful in and of itself. But free money that is allocated in a way that supports your financial goals following financial freedom principles is even better. Why is that? Because the money is allocated consistent with your long term dreams and priorities. Let’s recap the free money allocation discussed here:

  • We gave thanks to God for the free money (Tithe)
  • We set aside a portion for taxes so that there would be no “gotcha” come tax time
  • We paid off debt
  • We saved and invested money for future needs, emergencies and dreams
  • We celebrated the blessing of the free money
  • We invested in some family  wants
  • We set aside money for opportunities that come our way

That is great use of money we never expected to get. It is invested in both our present and future needs that the whole family will benefit from. This distribution of free money is also generous, grateful and opportunistic, which goes a long way in our quest to live in financial freedom. What do you think of the 30/50/10/10 model? Let’s us know what you think! However you use your free money, I hope you achieve and maintain financial freedom.

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The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness