021 - The Pillars of FI

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Time Speaker Text Tags
0 - 25 Jonathan Mendonsa We're back in today as usual we're talking about financial independence. You know this thing it's really easy but it's also incredibly difficult. It's simple yet incredibly complicated. It can be distilled into a couple of bullet points or expounded into a library of books and hundreds of new Web sites every day. But we're going to try to go through some of the bullet points today in this episode which we're calling the pillars of FI. So Brad's here with me in the studio today welcome Brad.
library
25 - 62 Brad Barrett Thank you Jonathan I'm glad to be here. This should be a fun one. I think the Pillars of FI is a really good overview podcast that we can really touch on. You know the main aspects of financial independence and hopefully we captured as many of the important ones as we could come up with and you know as always we love the feedback from the audience so if you guys have any that we miss you know send it to us in an e-mail [email protected] Or you know leave a comment on this post. It'll be choosefi.com/021.
podcaster
62 - 182 Jonathan Mendonsa You know this episode is is a high level picture and I think it's cool that we're doing it as Episode 21 instead of episode 1 because so many of these we've actually fleshed out now and will kind of point you to those specific episodes as we go but we're going to go kind of high level we're going to pull a couple of these pillars out and then at the same time while we're doing it we'll try to point you to the ones that we've already done so you can get more information about each one of those and then we'll also tell you when the other ones will be coming up. So you know I was listening to this to this podcast the other day this personal finance podcast and I'm not going to name it but they were kind of going through some basic you know kindergarden stuff about just doing a budget and kind of you know why debt is bad and all those sorts of things. But I love our podcast and I love our community all of the ideas that we're really going through one by one because it's next level stuff you know it's essentially the guaranteed path to wealth. There's no really unknown's or uncertainties built into this we're not we're not building a bunch of really high flying techniques that only the select few has access to almost anybody can use the techniques that we're talking about. And we're just trying to show you how to get started. And so when the feedback comes to us and basically says I've listened to 17 episodes and I've made one actionable step from each one of those you know your life is going to be so much better as a result of those changes that you've made. This isn't like sending you to go get the lottery ticket or trying to send you down some rabbit hole where you don't know what's happening. The math works for you as we say over and over again. So today what we're doing is just going through kind of one by one. Some of these things that that people in the FIRE community they all have in common if they've done these in one shape or form... and frankly you know after this episode we could probably all just stop right. Nothing else needs to be said about any one of these where it's it's all over. And obviously that's not true. But today is just a fun look at what those individual levers actually look like and then hopefully pointing in the direction where you can get more about each one of those if that's something that you're interested in following. So Brad you ready for this.
debt, podcaster
182 - 183 Brad Barrett Yeah let's do it.
183 - 191 Jonathan Mendonsa OK. So these are in no particular order but number one we thought we would talk about low cost index fund investing.
indexfunds
191 - 314 Brad Barrett Yeah. This is a crucial one. There's no doubt about it. We talked about this with Jim Collins in Episode 19 and we also you and I talked about it in episode way back in episode three. We believe that low cost index fund investing is the absolute way to go with investing in the stock market and growing your wealth over a period of decades. Sure there's a small chance that you could outperform the market with your own stock picking genius or maybe you found the one mutual fund investor who actually can outperform over the course of you know for five decades. But the likelihood of that is extremely extremely slim. And you know you're you're going to pay a significant amount in fees for for that potential. Right which is a very very small small likelihood of a positive outcome. So for us the more prudent choice is invest in the market invest in you know in the case of VTSAX the total U.S. stock market index fund you're buying a tiny little piece of every U.S. company every publicly traded U.S. company and you're paying a tiny minuscule fee to do so. You know with Vanguard it's it's point 05. And you know we've seen Charles Schwab came out with even smaller expense ratio. So. So this in our opinion is is the absolute best way to invest. And this does seem to be a pillar of fire that you've heard over and over again and again you know the mad fientist when he was on in episode 17 he said that you know when he first started investigating fi He thought for sure that through the course of you know tons of research and and work that he could outperform the market and he very quickly came to the realization that that was not the lever that he want it to pull you know for him it was tax optimization and we were all talking about that later. But you know that just just goes to show that you know even the smartest people around and even someone like Brandon just realized that it was a fool's errand to try to outperform the market.
indexfunds, stocks
314 - 395 Jonathan Mendonsa I think it always takes a little bit of humility to come to that point because I think part of it is just as a person maybe as a guy I don't know. But you just feel like I'm going to learn the secrets to beat this thing. And it actually is probably what holds you back because you're very quick to acknowledge your successes and marginalize your failures but it's crazy to me that what probably seems like the most complex thing is actually one of the simplest. It's probably out of all these things that we talk about my investing strategy is probably the thing that I put the least amount of thought into I'm just doing low cost index fund investing. I've done a lot of initial research. I've made my decision on that. I don't second guess it. There's no other real information that I need there. I'm just I'm I'm I'm putting my stuff in Vanguard. You know whenever possible. Low cost index funds. And then I just don't watch it and I fully expect you know essentially what it is that we always like to tell me wake up in 40 years and ask for your cardiologist. I mean it's just there are other tools that we're going to talk about that you will use but from an investing perspective when there are hundreds of TV shows dedicated to it hundreds of thousands of magazines dedicated to its stock tips you know Cramer and Money magazine and all these other things all these flashy bells and whistles I just ignore it. I'm just doing low cost index fund investing and it's just the simplest thing in the world. We just move on. I mean really it is just that simple.
indexfunds, stocks
395 - 465 Brad Barrett Yeah agreed and just an addendum to this. This pillar is actually not timing the market. It kind of goes hand-in-hand with with low cost index on investing. You know you can outperform the market in all likelihood and you cannot time the market. It's just it is almost impossible to do. And I mean you have to be right. You have to be right twice. You have to be right on the selling side and on the buying side. And that's it's just so so unlikely. So you know again our strategy which works for us both mathematically we believe and psychologically certainly is to just keep pumping money into low cost index funds as often as we possibly can. Don't you know look at the market don't like Brandon from the mad fientist joked in his episode. He you know looks for the fun price to be his hockey number or something crazy like that. You know like we let our brains screw us up and you just this is an instance where you just can't just put it on autopilot let it roll and you know wake up in 40 or 50 years and you know have more money than you could possibly possibly imagine.
indexfunds
465 - 475 Jonathan Mendonsa All right. The second pillar that we're going to go over today is affordable housing. So this is one that when you screw it up it's really really hard to dig your way out.
housing
476 - 634 Brad Barrett Yeah there's no doubt about it. I mean it's it is a huge line item in your budget. And you know buying intelligently or or renting as it may be is just so crucial. I mean I know we talked about this with Chad Carson on house hacking and that's something that Jonathan you and I both wish we could go back and do over if we could if we could be you know 22 again without a doubt. But you know there are ways to be to be intelligent with your housing and just just like everything with fi. And we will talk about this at the end of the episode is it just thinking a little bit differently. And so you know this this is not to say that someone in a high cost of living area someone in New York City or San Francisco can't pursue fi. You know we're not arguing that at all. It's not you know move to Richmond Virginia or Wichita Kansas and that's the only way to reach Fi. It's it's just it's being a little bit smarter and just being cognizant of where your money's going. And I think you know housing is certainly a huge aspect of that. I mean if you live in one of those high cost of living areas think differently and get a get a roommate or rent out a room or something like that. Or maybe go slightly further away from your job and find something that's that's a little more reasonable. You know that might go against you know what Mr. Money Mustache would say which is you know live close to your job and bike but but you know we're not making any kind of proclamation here on what you have to do precisely. It's just I think a little bit differently and I know you know in my own life we live. My wife Laura and I lived on Long Island New York our entire lives. And you know we came to the point where we were getting getting married and we realized that we were going to have a very difficult life there on the island and that's even as you know two CPA is making you know a decent living. It just wasn't practical for us just because housing prices were crazy. I mean our friends were spending 400 plus thousand dollars on fixer uppers with $12000 a year taxes. I mean that's that's crazy and you know our entire mortgage payment now including principal interest and taxes are less than what our friends pay just in taxes. Wow. And that yeah I mean in the end that's no joke. I mean that's for living in one of the nicest parts of the Richmond metro area and a four bedroom house with a yard I mean you know this was a tough decision that we had to make but sometimes pursuing FI requires tough decisions. So you know that's kind of my more philosophical look at housing and I'd be curious to hear what you think Jonathan.
Brad_Catchphrases, househacking, housing, tax
634 - 786 Jonathan Mendonsa I agree with you. So I think the conversation is different in the fire community when you go in and you're trying to let's just say you're just average joe schmo and you're looking for your first house that the house that you buy is just a function of your income you go to the bank and they say OK you make $100000 a year you can get approved for a $600000 mortgage. OK great. Right. In our community like I could get I could get a much larger mortgage them than what I have currently. I could I could afford it. And I say afford with quotes around it I could afford a much larger much more expensive home that I'm currently in. But that's that's not the way our brains are wired because we're pursuing fire. It's a function of the math and you know you can go much deeper with this and this particular episode we're just talking about affordable housing as a function of as a tool that allows you to reach fire faster in episode. I think we're going to do it. Episode 23 which is going to be two episodes from now we are going to actually dig in to renting versus buying. It's a huge debate on the internet especially in the fire community. Jim Collins and go Curry Kracker and Christy from all the Revolution are heavily in the rent camp and there are plenty of other people that are in the buy camp and we're going to kind of play devil's advocate because both Brad and I are homeowners but Brad is a firm believer in renting and I'm a firm believer in whatever the math says. But at the same time I get the emotional connection to the home. And so we're going to have fun with that episode and go through all their arguments and then we're going to go to the straw men and then just kind of come up with some sort of answer but that that's coming in Episode 23 but for the sake of today and this little short analysis my big thing is just the math and you do not want your home to slow you down on your on your progression to FI. It should be somewhat comparable to what you would get renting and you should get some additional benefits. I would imagine if you're doing that and all that goes out the window when you try to get the biggest home that you can afford based on what the bank tells you it's just ridiculous. So that goes back to Brad and I did this episode the other day about the entry level middle class lifestyle. I believe that it that was Episode 20 then yes. So 20. And we talked a little bit about what that looks like but I am perfectly happy with the entry level middle class lifestyle because my primary goal is not to have a paid off McMansion but it is to reach fi and fire. So you know that's kind of my own personal analysis on it. Anything you want to add to that Brad.
housing
786 - 824 Brad Barrett Yeah I mean I think you hear commonly that you know homeownership is you know your biggest investment. And you know the American dream and all this kind of stuff. And you know we would say is it's just math. And for people like us our home is not our biggest investment. You know in all likelihood it's our 401K balance or you know whatever balance you have sitting there in Vanguard. So you know don't get thrown off by you know what popular culture says it's it comes down to math. In most cases and you know we're just asking you guys to be smart with with what really is going to be the biggest line item in your budget.
401k
824 - 869 Jonathan Mendonsa So and one of the things that's really interesting about the show this is everything that Brad and I think about on a regular basis about how we're going to get to FI I mean we are going to get to FI Brads probably. I would say probably two to three years ahead of me on this track but he's going to be there very very quickly and I'm going to be there right on his coattails trying to get in right behind him. And these are the things that we're doing to get there. And if you kind of follow us and you buy into a few of these items that we're talking about you're going to be there either before us or right there behind us. And so you know look at your housing look at your investing techniques and then ask them the next one right behind housing has to be car ownership and how much value do you place in the type of car you drive. So Brad how do we want to start with this one.
housing
869 - 1014 Brad Barrett All right. This is a perfect timing because we're actually going to have a real in-depth episode on car ownership and the ultimate costs of car ownership. Next next Monday so that will be Episode 22. So definitely stay tuned for that. So we don't want to waste too much time here on this but but car ownership is another large line item that you know many people are you know families spending I don't know $400 a month per car. And in many cases for a new car or a leased car I mean you're talking big bucks. When I say you know it's $800 for a family with two cars plus you know then you throw in insurance and gas and all that stuff. I mean you're well over $1000 a month for many regular middle class families and I mean that is just crazy talk to me. We do not believe in buying new cars and we certainly don't believe in leasing harness that is really not a smart strategy at all. You know in my perfect world it's buy a very reliable used or a lightly used car where all the major depreciation has already come off of it. You know let some other sucker pay for the first couple of years of depreciation and you reap the benefits of a car that could last for 15 or 20 years. And you know really only have to have to deal with a tiny portion of the depreciation. So you know I know in my case we did something similar with that with my wife's Toyota Highlander. We bought it four years used but it actually only had twenty seven thousand miles on it which was fantastic. And you know we got it for basically half of what the current sticker price was at the time for a brand new Highlander. So literally 50 percent of the purchase price it only had 27000 miles on it and we still have it it's coming up on 10 years. And the thing is going strong. There's no reason to believe that it won't last forever at this point and you know I actually bought when I was a you know basically fresh out of college I bought a new car at the time. I didn't know quite as well but it was a Honda Civic. It was only like fourteen or fifteen thousand dollars and I I still have it you know 14 years later so you know that's that's how we do with cars and I think I think really the larger message is avoid new cars if at all possible. So Jonathan throw it over to you for your thoughts.
college, families, insurance
1014 - 1225 Jonathan Mendonsa I am horrible with cars. I have this has always been the bane of my financial life. I'm just so bad at it. But the conclusion that I've come to is and I've always been that I've never actually purchased a brand new car in my life so that's my little win in this. But I think like for me more and more as I look at the math more and more I'm just thinking you know if you can just be satisfied with that at least five year old car that's got relatively low miles. It's already taking the depreciation hit the Brad talked about. And so you're just not throwing $100 bills out the window every single week in depreciation those add up those add up to real dollars over time. And so I think you know more and more the common theme that I've seen is get a gas sipper that makes sense we can all visualize gas costs get a gas sipper that's five years old. Get one that so it's or meaning gets great gas mileage to get one that's easy to repair. So lots of old parts out there if they were to actually need a repair you're not going to. It's not an Audi where we're going to have to have something imported or a Land Rover or something crazy like that where just the single part is going to cost you triple what it would in a Honda. And then you know because if you want the best of both worlds get something with a fair amount of storage space so like one of these economy hatchbacks. So next week we're going to we're going to actually do the true cost of car ownership The Ultimate Guide to the true cost of car ownership. And we're going to go through the high level math. So big picture what it's going to what that will save you over a period of 20 to 40 years and then low level. What is the cost of depreciation maintenance taxes. I mean on an annual basis what is your car choice actually costing you and then with those two sets of information you can then go and analyze it with your cars and you can figure out exactly how much you're losing. You know based on your current set up and then if you made a decision to switch to something else you can pretty easily figure out what that might look like. And I think there's just a very very fraction of people a very small fraction of people that actually win with cars meaning they buy it at one price they drive it for three years and even after they take the that is the small amount of depreciation they end up selling it and making enough profit to offset some of their other costs. That is a rare breed and I'm not one of them but I can tell you average Joe Schmoe that just goes out and buy something brand new off the street. You know their cars probably costs anywhere from seven to 10 grand a year. Just just realistically through and we'll go through that math and take a look at it. But I mean it can get really really absurd when you dig down into it. So that's going to be a really cool episode and it's helping me. So based on that episode that's coming up. I actually have kind of a game plan going forward so that even if I don't win you know with quotes at least I at least don't lose as badly. You know cars or something that are going to cost you money if you make the decision and you'll see after you go to that episode why so many people talk about bikes. It really does make sense. You know whether or not that's feasible for everybody or not you can at least understand from a Maths perspective how powerful riding a bike would be. Right next to that was pillar number three so for Pillar number four we're going to take a look at the food budget. Brad and I talked about this this was Episode 7 where we. Congratulations America you're fat and broken also episode 10 where we did skinny waist fat wallet which is a look at frugal food and fitness. So we really went into some depth there but crushing your food bill is critical. And I think more and more I've come to just settle on Brad's magical number of $2 per person per meal.
fitness
1225 - 1408 Brad Barrett Yeah. I mean that has definitely worked for us as far as you know our approximate dinner cost and you know usually breakfast and lunch will be a little cheaper actually at that. But that's kind of like our our guideline for dinner and it was interesting that Jeremy from go curry cracker I had the exact same figure in his mind and I actually also found it pretty cool that he thought about it in the exact same terms it was. You know that per person per meal cost and you know we've we've definitely talked about this before you know eating out is prohibitively expensive. It just is. I mean when you you're talking about you know going to a restaurant buying a $10 entree buying you know a drink or even a you know a soda for a couple of bucks or a beer for you know five or six bucks and then you're you know in on tax and tip. I mean it's $20 plus per person. And you know in all likelihood you're getting dramatically less healthy food to put it mildly. So as we said you know skinny waist fat wallet by by eating at home and saving money and just being a little bit smarter. So you know just like a lot of stuff with fi it comes down to just thinking a little differently and being a little bit smarter. So you know if you have a game plan for your food and for your meals for the week you know sometimes it just takes a little bit of extra time. You know this is kind of what we talked about with that that quote from the guy Jocko Wilink which is discipline equals freedom. So this is a perfect example. You know it doesn't mean like discipline like sit and study for 10 hours and work your tail off and then you do well it's not that it's it's setting up a framework in life that makes your life dramatically easier. That's what discipline equals freedom is all about. And you know for us this is a perfect example with our food which is you know on the weekend Laura sits down and plans out basically two meals that she's going to cook that week sometimes it's only one because you know she knows it's going to make a ton of leftovers. Oh always she plans a meal to be to two nights so it'll be you know she'll cooking on Monday both. of us will eat. And then we'll have it again on Wednesday and then in all likelihood there'll be another meal's worth of leftovers. So five person meals from one meal that she cooked and I mean that's that's fantastic. That's essentially three nights when Laura throws in her her one slice of pizza and then we have three nights from one time of her cooking. So you know that is an instance where discipline equals freedom you sit down you plan it out for 10 minutes and instead of scrambling every day and running to get fast food or running to get this or that you just have it set. So it's cheaper dramatically and it's much more psychologically satisfying that you just know you know what your plan is so you don't have to deal with those impulse buys. I mean you know when you go to the food store and see the $10 per person per meal prepared food you just have it set. So yeah. Jonathan what about you. As far as food goes.
Brad_Catchphrases, Guest_Catchphrases, cooking, health, mealplan, savings
1408 - 1591 Jonathan Mendonsa So this is actually a great way for me to announce that I came to the end of that program and I went from one hundred ninety eight pounds down to a hundred and seventy three pounds I think now I'm back up to 175. So I did drop twenty five pounds didn't quite get my 30 I'm sorry guys. Reality hit me at some point and I think part of it was I went up to the. It's always good to have an excuse lined up when you don't totally hit your goals you know that's a great life tip right there does have one or two you know teed up just in case you need them. But when we went to two days a week publishing it really cut down on my exercise. Now I didn't get as much exercise in but I crushed it on a diet perspective. I didn't cheat I think I cheated one time the entire 12 weeks which is unheard of for me. And I stuck with the one fast day a week I told them I was going to do that. I got really good at going to bed on an empty stomach. And I that one day week I just did a total fast. And yeah I mean I was dropping one to two pounds occasionally went up to three pounds a week. There were some weeks where I didn't lose any. You know they were kind of mixed in there and it was fantastic. And a couple of things happened as I was doing that I won. I kind of just reprogram my brain to get in touch with the foods I was eating again. So I started noticing extraordinarily different levels of energy just based on the breakfast I had whereas when I was just eating whatever I wanted all the time you kind of lose that you just kind of feel like garbage all the time. But after 12 weeks of really eating very clean high quality foods you know you just feel alert you feel mentally awake occasionally to have cravings. But they are very controllable. And then when I would screw it up like the other day I had some Cheetos the other day for the first time and I just felt horrible and it just kind of tells you know your body gets used to these different types of garbage food and accepts it. But it just slows you down more and more and if you get back and you're just eating this clean high quality food especially over a period of like 12 weeks it really does make an extraordinary difference in your energy levels and how alert you are just your overall satisfaction you get enjoyment out of a lot of things. So overall it was it was an incredible success. Twenty five pounds 12 weeks I decided I was going to keep on going. It's really not that difficult. I think I'm just going to kind of keep on doing it. And essentially it's not really adding a whole lot to my life. I really didn't exercise very much at all I didn't run a single time. I stopped altogether about halfway through I really even stopped walking for the most part because my life got so busy with work and other stuff and this podcast probably in particular particularly. And then the one thing I did is I stole Brad's goal with the pull ups and I got my pull ups up to 50 pull ups so how many problems. Yeah I crushed it. I can do 50 pull ups now in one set. Yeah man. Yeah I took it all and ran. That's amazing. Yeah I was always pretty good at them but when I heard you say 15 and then I ended up being like my one exercise that actually do. So I'd literally get home shirt and tie from work to go to bed. You know let me go do one set of pull ups. The only physical exercise I'm going to get today and I probably started with a baseline of like 12 to 15 somewhere in that range. And yeah just kept on pushing it. So I'm up to 50 now. That was my that was my win right there. But overall I feel great man. Feel absolutely fantastic. And I think I'm just going to keep on going if I lose like one pound a week for the next you know several weeks I'll be very satisfied with this.
1591 - 1602 Brad Barrett So yeah that's incredible progress. Twenty five pounds in 12 weeks. Good work. And obviously you saved the whole boatload of money over what you know the regular middle class Joe Schmoe is doing so. Yeah. Good for you.
1602 - 1778 Jonathan Mendonsa Yeah I didn't I don't think I I think I went out to eat one time at Chipotle. Over that 12 week period. And I really didn't feel like I missed anything either so we'll do some cookouts in the spring. You know I do love actually cooking really good foods but I'm really in it for the social component which works so well with the Fi space I mean FI is all about community it's all about building these relationships and instead of moving something just from a restaurant where you're just going through the motions and actually making a community based thing. Maybe you're doing a barbecue in the backyard. That's where that's where I get the most enjoyment out of so kind of frugal analogs there. Anyways that was off topic but you guys deserved it. I know I told you about it back in February and March and we're obviously at the end now so that's that's where I'm at. And yeah. So thanks for all your support and questions and we'll just keep going from here. Pillar number five tax optimization. I think this is of everything we do this is the sexiest thing which only in the fire community would you call tax optimization sexy but it really is the coolest thing that we dig down and break down for people. And there are so many techniques that our community has figured out that nobody outside of this space was talking about like you're never going to hear Dave Ramsey talking about capital gains harvesting. You're never going to hear him talk about the Roth conversion ladder. You're just not going to get the stuff on Suzy Orman. But in the fire community we have these really cool advanced techniques to never pay taxes again. And I'm just looking at our episodes and we have done so many on them now so we started with 17 which was mad fientist were we really went through the Roth conversion ladder and then in opposite 18 with go Curry cracker we went through capital gains and losses and specifically harvesting those and then upcoming we're going to be going into some real depth with wealthy accountant taking a look at just crushing it on all sorts of other little deductions and special techniques that you can use in he's already got them all listed over his blog. We're going to try to turn those into a story on our podcast. Really excited about that. And then in our Friday round ups we went to even more depth so if you want more information on how you can use the Roth conversion ladder or how you can use capital gains harvesting to incredibly powerful techniques that you can use to never pay taxes again especially in your FI life that's already been set up for you. So one of the things that we do is we use the podcast to get this information turned into a story. And while you could certainly listen to our podcast starting from episode 1 marathoning and coming out episode 22 or 23 and you'll be very happy with the story that that tells you a year from now this information is still going to be here and there's going to be a lot more added on to it. So when you're ready to start taking the specific class on crushing your taxes you can go to choose FI dot com and you can go specifically to our tax optimization page and you can dig through all of those content all that content individually on an as needed basis it's going to be there for you. That's the idea. Take all this stuff find it Coalate it put it together in a place that makes sense and that you can grab it and apply it to your life on an as needed basis. And when we've designed this web page that's how we designed it to really set that up and make it easy to find.
cooking, gainharvesting, podcaster, ramsey, relationships, roth, rothladder, tax
1778 - 1865 Brad Barrett And yet just final word for me on on the tax itemization standpoint is you know Jonathan is one of the one of the big episodes we had was with millionaire educator actually on on tax optimization and really the biggest key in the take takeaway is to max out all of your tax deferred accounts. So your 401K if you're a public employee and you have a 403B 457 your IRAs you know we want to as Jonathan said we want to never pay taxes again and we think that using some of these advanced strategies like the Roth IRA conversion ladder and the capital gain harvesting that we can effectively really outsmart the system and that's that's what Fi is all about. To some degree it's about knowing the rules and maximizing them as much as possible. So you know whereas the conventional wisdom is maxed out your Roth IRA. Right that's what you hear all the time. That is not the general advice from the fi community it's maxed out the tax deferred accounts because we think you can get that money out on the back end without paying any tax on it at all or at the most a very very small amount so you can literally never pay taxes on that money period. So locking yourself into a Roth IRA now and paying the taxes now is not good advice for the community. So you know again that's just just looking at a problem a little bit differently.
401k, 403b, 457, gainharvesting, ira, roth, tax
1865 - 1978 Jonathan Mendonsa That's awesome. I'm glad you rounded that out and honestly millionaire educator to me he is one of my all time favorite episodes because he is the first person that got me thinking about taxes differently. I mean he crystallized the concept of creating these buckets and then filling these buckets and treating it as a game. How can you live your life within these margins that have been set up by our federal government. But if you can do it inside those those those buckets inside those brackets then it just gives you all this other freedom and so the story he tells without episode transformed the way I will forever look at taxes. I'm not saying it was the final note on that. But if you implement the tools that he talked about in that episode and I think that's Episode 13 the unfair FI advantage of teachers if you take that episode and use that as a starting place all these other tools become available to you that really is just one of the perfect episodes to start with. OK guys. Pillar number six we think that's college hacking. We realize that some of you already already passed that point but it still affects you because you probably don't have kids at some point. And for those of you that are listening to this earlier than maybe you still have time to implement it but in general college hacking has been focused at the parents for the kids. This is a second generation fire conversation. They're going to patent that I don't think anybody has second generation fire. If they do you just got a free plug. But second generation fire's the future. I mean can you imagine that child starting at the age of 18 with these tools under his belt maybe graduating college debt free. You know maybe the parent implementing all these tax optimization strategies for them teaching them how it works giving them these tools when they go into their 20s. I mean you learning this in your 30s is powerful you learning this in your 40s 50s 60s is powerful it can change your life. But if you learned it in your teens if you're a parent and you're teaching your kids this stuff this is a game changer. Any single one of these is a game changer put together. You know with great power comes great it comes great responsibility right these are super powers when you apply them to a 20 year old.
2ndgenfi, college, college-loans, debt, tax, teacher
1978 - 1998 Brad Barrett Yeah there's no doubt about it. And what's funny the second generation fire I actually got an e-mail from Jim Collins yesterday. I didn't tell you this Jonathan. He was listening to a bunch of our old podcasts and he literally wrote an email that just said second generation fire. Great line. Love it. That was really cool. I know you. You coined that phrase so you know now little kudos to you.
2ndgenfi
1998 - 2008 Jonathan Mendonsa I think I'm definitely setting someone up someone has probably already reserved that domain name after listening to it at this point and I've definitely set you up for success. But yeah I enjoy it yeah.
2008 - 2105 Brad Barrett You know as far as college hacking goes you know this is something we're going to talk about certainly in great detail over the next year or years because it is such a big line item in people's budgets and you know we had an article on dual enrollment where you can start earning college credits and in high school and really you know cut the number of years that you have to to actually go to a four year college. There are ways to you know go do something unconventional You know not go to the best college you can get into but you know go places where you can get scholarships or even better go to a community college for two years and then you know make sure again you know the rules. You know we always come back to these pillars. Right which is what we're talking about here which is knowing the rules and maximizing that right. So if if you know for certain that your child can go to X community college you know around the corner from you and can take all these courses and have them transferred to a top tier public university in your state. Well I mean that's going to save you essentially two years worth of college. I mean because community college is extraordinarily expensive. Then we have seonwoo lee coming out with his article on hacking the FAFSA which we're going to detail in depth here. I mean there are ways especially for people in the FI community who eventually who once they're in fire don't quote unquote have a lot of income. Right we have a lot of assets but not a huge amount of incoming income. Well there are ways that we that you can hack college aid and potentially get any college for free or pretty close to free. So this is this is a real big item. And that's why we included it in the pillars of FI.
college, dual-enrollment, fafsa, scholarship
2105 - 2281 Jonathan Mendonsa And that financial freedom clock starts when you hit zero and the thing that keeps people from getting to zero faster is the student debt. So that's why this is such a big play. Let's let our next generation let's try to get to the point where they're they're starting from broke or starting from zero. You know in their teens instead of in their 30s. Years. Nuff said there. That's one of those will constantly be coming back to if you want more information on that. You can check out our episode I believe it's 15 with Justin from root of good also called second generation fire. And then we went. We had a featured article by Edmund Tee. That is under our college hacking page on our Web site. Check that out where he talks about how he saved his son two years of his life and eighteen thousand dollars by focusing on dual enrollment and then to come soon will be that college. Hacking. I'm sorry the FAFSA hacking tutorial by seonwoo and we'll let you all know when he releases that OK. Pillar number 7. This is one that is very unique to the FI community and in fact I think it's what puts us at odds with you know the Dave Ramsey crowd and this is the joy we get from travel rewards the pure joy that we get from traveling the world for free. So you have this entire army of people and maybe rightly so maybe rightly so they say that credit cards are the devil and you should cut them up and they are and they are ruining lives and you know actually that's probably true. I don't really take issue with that. That is true. They are dangerous. But our audience is a different audience. We're already doing all the math on everything we're already for other reasons not because we don't we. We have the self-control we've demonstrated that we're pursuing other things we're not just purchasing stuff just to purchase that we're already talking about. What's the value of something and how is this holding me from getting back to my financial future. And so once you're debt free and living far below your income all that stuff about credit cards goes out the window and now we can actually start to look at credit cards as a tool that we can use to literally travel the world for free. And it's a completely different conversation. So Dave Ramsey can be 100 percent right and 100 percent wrong. At the same time depending on the audience that he's talking to many people need to cut up their credit cards. I don't deny that I know who those people are. I probably would be in danger of being one of those people at some point in my life if I didn't see what the other side looked like. But I'm pursuing FI and I organize my life in a way to make FI possible. And in that construct that I've created. Credit cards are a tool that I can use to literally take my wife to Italy for free next year if I want and spend a week there you know and I don't have to spend anything extra for it. It is a way that I can go and visit my in-laws in Zimbabwe and Africa I can go to Cape Town. It's a way that I can take my family of four to Disney World for free. It turned something that could otherwise be stressful into a game that I can play and I can only do it because I'm in the fire community and because I know these tools I know about these life hacks they'll allow me to do that. Allow me to leverage it. And that's something that honestly that's something that Brad taught me. He was the one that finally got me in on this on this fun game. And so I'll forever be grateful to him for that. And at the same time I'm incredibly excited that that's something that now we can share with your audience and that you all can benefit from it as well.
2ndgenfi, college, college-loans, dual-enrollment, fafsa, ramsey, travelrewards
2281 - 2355 Brad Barrett Yeah and that's how we met actually. Right. You heard me on the Mad Fientist his podcast and realized I was in Richmond and then we met up for a burger for lunch. And you know the rest is history. Now we have this podcast so that's pretty pretty cool back story now. Yeah but you're unquestionably right. I mean Dave Ramsey you know his advice honestly is good for many more people than our advice is good for. And in this realm of credit cards credit cards are dangerous for many people but for people who are listening to this and people who are pursuing FI. Jonathan is exactly right. I mean we are are clearly beyond those you know day to day month to month concerns of not paying our credit card. Right. So that's that's like the very first rule of pursuing traveler rewards points is do you pay your credit card on time and in full every month. If you do which I'm sure all of you out there do then you know this is something that can really juice your credit card rewards from like the normal like piddly little 1 percent to 15 20 30 percent. I mean that's that's essentially a rebate on every dollar you're spending in life that you funnel on to your credit card. When you think about it like that that is a very powerful concept so that is why we include travel rewards in our pillars of FI.
podcaster, ramsey, travelrewards
2355 - 2429 Jonathan Mendonsa Pillar number eight. Cut the cord and I love this one because this is one that Brad hasn't done yet. I'm working on him. He's going to do it soon hopefully. But cut the cable cord. You know this is a generation that you know you're living in a time where there are a million ways to get your necessary needed information such as quote unquote news and also a way for you to get your entertainment. That does not involve paying $150 a month to a cable company for the privilege of pumping commercials into your home all day long. And if you can just immediately chop $150 a month from your budget just by getting rid of the garbage that's been pumped onto your TV then you should do it you know take control the media that's been that's in your home and instead of watching whatever comes on the TV. Now watch what you actually want to ala carte via you know channel such as Netflix or you know Amazon Prime or Hulu or any number of things like the Roku. Watch what you want to watch don't pay for everything just to get that tiny little fraction. It's an awesome play and I think that everyone should consider whether or not that's something that they can do and it makes a big impact over your 20 or 30 year investing financial outlook. You know it's it's kind of one of the ones that we put at the end that seems like a small thing but it's always it's the small things when you add them together that add up so number number eight. Cut the cord.
cordcutting
2429 - 2558 Brad Barrett Yeah totally agree. And again this is while it sounds like small fries you know as far as actual dollar figures you know it's still in most cases $100 a month. And when added up over years and decades uncompounded compounded those are big big dollars. So and it's also like a larger look at life which is you know as Jonathan kind of alluded to like don't just sit back passively and you know sit on a couch for hours a day and do nothing like that. That's not what our lives are about. So why would we spend our resources on expensive cable packages. It just doesn't make any sense. And you know it just it just kind of jokingly follow up to what Jonathan said. We essentially did try to cut the cord and we're basically paying now like $25 a month for what the cable company threw with us which is pretty significant stuff. So I don't feel I don't feel too bad about it at this point you're saying after our episode you call them up after our episode. I looked into it a little further and realized that I was not paying quite as much as I as I thought I was honestly and that you know what they giving us is was a value judgment for you know 25 bucks a month is great. And is that that it was worthwhile you know because the funny thing was we actually went to them with the intention originally of cutting the cord that was our intention. And you know we realized that as you said like the Internet package was either 45 or 50 dollars a month. And you know they gave us this ridiculous ridiculous package for just under $80 a month for you know all in. So that was something we determine especially with our kids. And you know that it made sense to spend that you know some $30 on on that cable. But you know it's something that we are definitely going to contemplate cutting at some point in the future just because we really don't watch much TV. So once our kids get a little bit older that will go. But but at least it was intentional and I think and I think from the larger standpoint like that intentionality is what's so important about fi and like how we value our money. Right. Like everyone values their money differently and chooses to spend in different ways. But as long as it's intentional and there's some thought behind it that that's OK with me. So that that's where I come from.
cordcutting
2558 - 2564 Jonathan Mendonsa That makes sense it makes sense. And then finally number nine pillar number nine cheap cell phones yeah.
2564 - 2670 Brad Barrett This is this is very similar to number eight. And I guess you know we theoretically could have package together with number eight put it but it's cool that you that you separate it because you know I think a lot of people do just spend a ton of money on their cellphones. I mean I know you know what's normal for a couple of Jonathan like 150 $200 a month. Does that mean it's reasonable for sure. And you know and again it's it's just not thinking differently or making those tiny little hard choices that are going to give you disproportionate benefit. And this is this is why I like this actually as a standalone pillar personally because it illustrates that. Right. So you can get unlimited data and just you know stream movies from you know your car going down the highway like you know do all sorts of you know wacky stuff because hey you have a cell phone you deserve it. Right. Like you know said sarcastically right like that's that's just the normal American mantra is hey I'd pay for it. I'll pay for whatever I need to get every little bit of access. And you know I choose to look at cell phones in particular just as as that hard choice that makes for an easy life. So I mean my cell phone bill is about depending on the month 12 to 16 dollars a month and that's through Republic Wireless. And you know I use it more than I feel like I should. Like I I checked my Facebook and check e-mail. And all this other stuff. You know when I'm when I'm out of the house and it just doesn't amount to that much data because I'm smart about it. I'm not streaming videos when I'm out. I'm just doing the tiny little thing that makes a tiny tiny little hard choice but that saves me 90 percent on my cell phone bill. So for me that's it. That's a decision that's well worth making.
2670 - 2693 Jonathan Mendonsa Yeah that's great. That's great. OK so pillar number 10 pillar number 10 is probably the most important of all these pillars and it's the one that we're going to go into the least detail about partially for the sake of time and partially because when we do go into depth we want to make sure we do it the right way. This is one that most of these other budgeting type pillars are based on and that is the 4 percent rule. Brad you want to just introduce that concept us.
2693 - 2914 Brad Barrett Sure. So the 4 percent rule as Jonathan said is really the underpinning of the entire concept of financial independence. It helps us calculate the amount of money we need to see in our total net worth between our retirement accounts and our taxable investments. So ultimately what the concept is and as Jonathan mentioned this is far far beyond the confines of one pillar here. So we're going to do a very in-depth episode on this. But the concept is you can withdraw 4 percent of your total funds every single year as a quote safe withdrawal rate and what that means show your money. As we've always assumed. And this is of course a very very broad generalization. But your money is going to grow at an approximate rate of 8 percent compound annually. And if you can withdraw 4 percent of your total assets every single year to live off of. In theory that money will last forever. It will last in perpetuity. And there are lots of articles on this we're going to link to a couple of these in the show notes from go Carrie Kracker and from JL Collins and Mr. Money Mustache and evidently there was a study done called the Trinity Study and they looked at 84 year study period and the possible retirement periods and the percentage success rate after 30 years. During this study so they looked at essentially every single option and they did. There's a great table here in the GO Curry cracker article that I'm looking at now. They have a different section with if you had 100 percent stocks if you had 75 percent stocks 25 percent bonds 50 50 25 stocks 75 bonds and 100 percent bonds. So essentially I'm looking here at the 4 percent withdrawal column. And if you had 100 percent stocks there is a 98 percent chance that money will last you 30 years if you withdraw 4 percent. There's a 100 percent chance that if you had 75 percent stocks and 25 percent bonds which is interestingly that's what Jim Collins mentioned is his allocation. So that is a 100 percent likelihood of that money lasting you 30 years and you can see the schedule here. On the article I think we will link to it in the show notes. So that's really the concept when we talk about you know what is your FI number. It's your annual expenses multiplied by 25. It's as simple as that. And that covers the 4 percent rule. So you know just looking at the math it's you know it's multiplied or divided essentially. So if you had a million dollars. Multiply that by 4 percent. That is $40000. OK. So that's your. That's the amount you would need to live on and turned around. Mathematically it's 40000 multiply by 25 is the same million dollars. So you know that's the number that we're looking at. You know honestly like some people might not be 100 percent comfortable with that. As I mentioned you know many many times on the podcast I'm a little more conservative with my money. You know I wouldn't up and retire up and consider myself financially independent. The second I hit four percent for me I would probably be a little bit on the conservative side you know three and a half percent even three percent withdrawal. And you know that then is going to make it as close to a certainty as humanly possible that that's going to last me forever. So that's something I feel comfortable with. But you know to each his own obviously it's you know the math says there's a real high likelihood you know to the tune of 98 to 100 percent that this money is going to last you for 30 years. Based on on the Trinity Study. So Jonathan I'll throw it over to you for any thoughts.
myfinumber, networth, stocks
2914 - 3019 Jonathan Mendonsa Yeah I've been itching to take a stab at this one. First of all there's another word that we use for the 4 percent rule it's sometimes called the safe withdrawal rate. That's just another way that we frame it. But it's a maximum rate at which you can spend your retirement savings so that you don't run out within your lifetime. Now whether or not the safe withdrawal rate is 3 percent or 4 percent or 2 percent you know for the sake of this particular conversation it doesn't really matter I feel pretty comfortable with a 4 percent rate at least as a place to start. But what I love about having a number that you can work with when you're doing a case study is that you actually do have a realistic place that you can start. So you know people say well how much do you need to retire and that people out in the regular you know average Joe will say oh two million dollars. Five million dollars. Ten million dollars $600000 like what is that based on. Not based on anything. And until I heard about the 4 percent rule or the safe withdrawal rate that was just kind of you know what I felt comfortable with it was just saying a random number and hoping that that was a good one you know no without really knowing anything else. But this gives you a great framework so when Brad and I do these case studies going forward or we send these case studies off to other people to do to announce on the show so like you send us what you would like for us to do is a case study and we start working on it. This is where we start. And then we can bend the curve up or down depending on what we want to do. But if you calculate your expenses out and it cost you your fixed expenses plus discretionary comes to 40 grand then you know that gives us a really good number we need to multiply that times 25 and we're at a million you know conversely if you're at you know 80 grand or 90 grand that also gives us something that we can work on as well. And so that is the simplicity and the beauty of the 4 percent rule that 3 percent of the 2 percent rule and all that other jazz. The math isn't quite as clean right just not as fun to work with. It doesn't mean it's wrong but just for the sake of having a common baseline that we can start from. I love the 4 percent rule and it's what Brad now use when we're you know running to our own personal case studies and when we're doing other people's From there you make adjustments right Brad.
savings
3019 - 3060 Brad Barrett Yep without a doubt. And you really touched on the most important point which is it's all about your expenses. Nothing really essentially nothing else matters. If you can keep those expenses under control then financial independence looks a whole lot easier. Right. At $30000 a year of expenses it's only $750000 that you have to save up which you know sounds like a big number in theory but as we've discussed on many of our case studies on these on our Friday roundups you can amass that fairly quickly. You know the 10 to 15 years you know based on a decent amount of savings obviously. But it's very very plausible. So it's all about keeping those expenses under control. And yeah I mean this hopefully was a good overview of the 4 percent rule.
savings
3060 - 3110 Jonathan Mendonsa So then those are 10 pillars guys. I love those. I'm not necessarily saying that they are perfect that there's not some room for some you know honest discussion and some disagreement I think you could maybe say travel hacking. Come on guys guys this is the Fi community we get to make the rules. And in the FI community we freaking love travel hacking. So it's a pillar for us. You see it all the across the board look at every single FI blogger that's out there. They're comfortable with this we enjoy it we enjoy talking about it. So I think it's reasonable to include it even if you're thinking it yourself well I don't know if I'm gonna do that. The logic and the principles behind it, where we game everything out and we look for wins where other people are hemorrhaging money. We look for ways to win. I think that is essentially where our mindsets are at. We put that particular philosophy into everything else we do. So what is the philosophy Brad you want to go and tackle that how can we take all those different pillars and turn all of that into one singular philosophy.
blogger, mindset, travelrewards
3110 - 3335 Brad Barrett Yeah absolutely. I think you know this is something if you know people out there in the audience have been listening to us over these you know 20 some odd podcasts they know that I really try to take a step back and look at this as a life philosophy. And I think it's so important and you know I think there are a couple of things that jump out to me right away which is that the first is is unconventional thinking and we've talked about this all throughout this particular episode and and prior episodes it's it just thinking a little bit differently than the next guy you know just looking at spending at it and then life as just like a problem to solve with smart thinking and like that to me is just so satisfying. It's living that same middle class lifestyle as everybody else but getting wealthy while doing it. And while everybody else is living paycheck to paycheck. So I mean like that's just such a cool thing and like you know I think like I like to think about like my neighbors you know my neighbors would never ever in a million years know that we were any different or that we were saving you know 50 to 75 percent of our income while everybody else is living paycheck to paycheck. They just want to know because we look like every other family. Right. But it's just these these few unconventional choices that that add up over over the monthly budget. And over the years the budget and compounded over decades and that's that's what it's that you know the biggest thing you know like we've talked about many times Jonathan is is maximizing the rules. Right. It's just knowing the rules again being a little bit smarter and just intentional. Right. And you know we talked about this in many instances like you know potentially the college hacking down the road is if I can get college for free or pretty close to free for my two daughters just by knowing the rules and thinking about it 10 years in advance that's something I'm absolutely thrilled about. And you know most people unfortunately are have a tough time you know just getting through the day. Right. Just regular regular people are just worried about what they're going to put on the table for dinner that night or you know when they're going to have time to do the laundry or something. You know minuscule like that and that again comes back to you know just not planning right. And it's just being a little bit smarter like not worrying about the mundane stuff but worrying about trying to figure out life a little bit better and maximizing the rules is really one of one of those main main pillars and in my estimation and you know my final thing and I'll throw it over to Jonathan for his thoughts is really patience. You know Jonathan kind of alluded to this in in his intro which you know kind of saying like that fire is easy but incredibly difficult. And you know like my take on that is there's nothing incredibly difficult about this. But I think he hit on something essential which is this is this is not this is incredibly difficult for most people because they don't have the patience to think about life more than you know this week. Right. We in the community look at this a 10 to 20 year journey to reach financial independence true financial independence where we control our lives for the forthcoming decades multiple multiple decades. And that's that's long term thinking that that unfortunately most people just don't have the ability to do or it just hasn't crossed their plate you know. But hopefully everybody out there listening to this knows this is not a short thing. This is not a quick fix. This is if you can be smart over a period of 10 15 20 years you can take control of your entire life. So that's that's my final word on the pillars of FI. Jonathan I'd love to hear what your closing thoughts are.
Brad_Catchphrases, college, podcaster, savings
3335 - 3528 Jonathan Mendonsa Yeah. OK so mine is these are all such you know some of them may have seemed larger so it may have seemed smaller but why do the small ones matter. The reason is because these are going to be implemented consistently over the next 20 years for you. So basically the easiest way to look at it. For every hundred dollars that you can slice from your from your budget from the from the end of your budget each month. So you know when we talk about going from $150 down to $50 a month on your cell phone bill that's just that's $100 a month that you've just saved right there over 20 years. You know if you invest the difference and that's the key when whenever we talk about you finding a way to reduce the cost of your lifestyle usually the difference is not being spent on frivolous stuff. That's a way for us to increase our savings rate and to get it back into pillar number one which was low cost index fund investing. Now you could make the play and put it into a side hustle. You know you could maybe start a rental real estate business you started side hustle. But assuming that you're just focused on low cost index fund investing that's good enough. That's that's more than good enough that's that's probably one of your best options for the guaranteed path to wealth for every hundred dollars a month that you cut from your budget. That's going to be $60000 in 20 years. And not only is that $60000 that you're going to have but you're going to need to. Twelve hundred dollars a year less in expenses. I mean that's that's the double. That's that's that's a double power of you slashing that from your budget. So we just went through 10 things. Now some of those every single one of those will save you a minimum of $100 a month. So that $60000 you know at the end of that 20 year period each individual ones but some of those are worth way more than that not starting out with $40000 with the debt. That's probably a multiple $100000 decision right. They're getting an affordable housing instead of the McMansion that's going to be a million dollar decision right there. Every single one of those adds up to a number that's almost incomprehensible so our final thing is just math everything right. Just understand the math and then make the value choice and the small decisions matter too those ones at the end. They do make a difference. And so that's just a nice little general rule of thumb if you can slash $100 a month from your budget and you invest the difference 20 years later that's 60 grand. It's a big deal. The small stuff does matter. So anyways I hope they all enjoyed this. This is some high level stuff. If you want more information about any one of those levers that we talked about we have started to really dive into and we made a special effort to tell you what episode that was in. So depending on where you're at on this journey you should consider going back to those other episodes. And we talked more about the cell phone on Episode 20 and also the cable on Episode 20. And then one other thing that we didn't mention today was insurance. We also talked a little bit about that. So 20 and we're to have another episode coming up in somewhat in your future about it as well. So that's it. Those are the pillars of FI and all those small details matter. And if you implement them just one at a time you don't have to do everything tomorrow. But if you do them one at a time you are going to retire incredibly wealthy and you're going to retire decades in front of your peers. So I hope that you enjoyed this and we'll see you next week as we continue to go down the road less traveled.
Jonathan_Catchphrases, debt, hustle, indexfunds, insurance, savings

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