032 - The Milestones of FI

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Time Speaker Text Tags
1 - 66 Jonathan Mendonsa Welcome to the show today we have Joel from FI 180 dot com and he is our first repeat guest and this is super cool because Joel just released an article called the milestones of FI that was released literally within the last several weeks and it was one that Brad and I were incredibly excited about because one we hadn't seen anything like this in the FI blogosphere up to this point and to it provided the perfect contrast to the Dave Ramsey baby steps which while they are very nice in the enclosure of getting out of debt they really don't provide much value to someone that is pursuing FI. And we needed a new set of metrics. as Joel is going to call them and we will call them going forward milestones to really track your progress to stay motivated on this journey to get excited about the little wins along the way. And FI is essentially the Master's degree of personal finance. If Dave Ramsey was the kindergarden or the Bachelor's Degree FI is the Master's degree. It fills in all the blanks and explains the why to your choice. So today I'm incredibly excited to get a chance to have this conversation. And as usual I have Brad here with me in the studio. How are you doing Brad.
debt, ramsey
66 - 78 Brad Barrett I am doing quite well. Jonathan Yeah this is exciting. Joel is one of my favorite people in the FI community so always happy to talk to him in general and yeah after he published this article it was just an absolute no brainer to get him on so Joel thank you for being here.
78 - 80 Joel - FI180 Hey guys. Good to be back.
80 - 83 Jonathan Mendonsa So Joel what's been going on with you since last time we spoke.
83 - 98 Joel - FI180 Yeah last time we spoke we had just gotten rid of that rental property the route from hell and we turned around and took the proceeds from that and we paid off the mortgage on the house we're living in now which was great. So we are like truly debt free now. Not a dollar of debt which is pretty awesome.
debt
98 - 100 Jonathan Mendonsa Wow.
100 - 130 Joel - FI180 And yeah since then I've just been slowly working towards our FI date. We recently published that I'm going to be pulling the trigger I believe in January was what the mad Fientist projections are showing now. So we're really excited about that and kind of moving towards a transition mode where I'm going to be fully fi and then Alexis is going to be kind of ramping down from work. So we're taking all the steps to get ready for that. And it's pretty exciting. I'm going to be blogging about each step of the way as I progress into the actual early retirement order. I'm excited about that.
blogger
130 - 143 Brad Barrett Yeah that's really cool. So I'm at your homepage right now and yeah it says FI countdown January 30 first 2018 That's incredible. So you're basing that on the mad fientists projections that his FI laboratory is that 4 percent, 3 percent.
143 - 178 Joel - FI180 Yeah we've been tracking on the FI laboratory if you guys haven't tried this. It's pretty awesome. We've been using that tool for about two years now and it's it's a little conservative in the way that it's calculating everything. But he kind of has some parameters you can go in and tweak and set it up just how you like. And so we've been using that. We've also been comparing with fire Sim and a few other tools but it's looking like we're going to hit that milestone early next year. And that's assuming that the market continues what it's doing right now which there is no guarantee. Pete just recently talked about the next recession is coming. So who knows. But that's the current projection.
178 - 199 Brad Barrett Yeah let's close soon. Talk us through real quick. A lot of people have questions about the 4 percent or 3 percent or whatever it may be. I know we're going to have big Ern from early retirement now on to talk about safe withdrawal and all that kind of real technical stuff. But can you give us high level like what are you basing your FI number on. Is it 4 percent or is it something more conservative.
myfinumber
199 - 265 Joel - FI180 Yes so we're using 4 percent to me actually the 4 percent rule is actually a little conservative in and of itself because if you look at the Trinity Study and if you look at the tables and the simple the well that Jim puts at the back book showing where the 4 percent rule came from the 96 percent success rate actually is considering a 50 percent bonds portfolio which is very conservative when you move it to something like 25 percent bonds 75 percent stocks. That success rate actually goes towards 100 percent it's much higher with the 4 percent rule. So to me 4 percent is actually conservative all by itself. I've gotten into all kinds of discussions and debates with other people who say no way with the way that markets are moving right now we actually need to be moving towards more of like a 3 percent rule where it's a more conservative pool. But to me actually 4 percent is perfect for us. And actually where I talked about in the milestones article this concept the flex FI which is based around a 5 percent withdraw rate which I think can work to as long as you're flexible.
stocks
265 - 280 Jonathan Mendonsa There are a couple of things that stood out to me one I love that you're actually publishing your numbers right now and I know that your annual spending you're shooting for $25000 a year and that's very cool and I think that's very doable. But one of the things that makes it possible is that you have no mortgage. So it is $25000 of spending right.
280 - 296 Joel - FI180 That's correct. No mortgage no interest no other expenses other than just the actual meat of the expenses. So and we're actually still trying to get to 25 each year. We inch a little bit closer. This year we finally just broke under 30 so it's a it's a moving target.
296 - 300 Jonathan Mendonsa Right. But based on that six hundred twenty five thousand dollars would get you to the four percent rule.
300 - 301 Joel - FI180 That's correct.
301 - 303 Jonathan Mendonsa So you don't need to be a millionaire to be FI.
303 - 320 Joel - FI180 Absolutely not. A million dollars is way more than I would need. And who knows. I've heard from everybody at camp saying Oh you'll get a million without even trying and it just happens because you're frugal because of the way you save and everything else. But that would be a lot of extra gravy if it did happen but totally unnecessary.
320 - 349 Jonathan Mendonsa I loved this you had this little paragraph down at the bottom but it explicitly states something that I was trying to verbalize to someone else the other day. I like to think of it like this I need to save six hundred twenty five thousand dollars to purchase a magic money making machine that will print me $25000 checks once per year every year forever. The law of thermodynamics may forbid perpetual motion machines but luckily there's no law of finance that prevents perpetual money machines beautiful.
349 - 357 Joel - FI180 That's the key to it. Once once you get there that money is working for you and your work becomes completely optional which is. That's the exciting part.
357 - 379 Jonathan Mendonsa That's what fi does it simplifies this concept. That's essentially what we're doing we're trying to purchase ourselves by living a slightly more optimized lifestyle. We're trying to purchase a magic money making machine that we have in our back pocket for the rest of our lives which allows us to put time as a tool that we can use in our other pocket which makes our life awesome. In your 30s 40s 50s and 60s.
379 - 417 Joel - FI180 Yeah that's exactly it. And it's funny because I know some friends when I'm discussing these concepts sometimes I'll get challenged by. Well aren't you sacrificing a lot by saving so hard and having such a high savings rate or are you sacrificing the things you can be doing in the way that I think of it as I said. No I'm actually saving for the ultimate luxury purchase. Right. I'm going to buy this $625000 money making machine. It's the ultimate luxury purchase because I want to have that so that I don't have to work so that I can do things on my own schedule. And so to me that's like I can easily not spend on everything else so that I could purchase this really great luxury item.
savings
417 - 468 Brad Barrett That's so cool Joel. You know I absolutely love that. Yeah I mean I hear I do hear that often is aren't you depriving yourself. And yeah that's almost exactly how I put it just slightly different words. So I think I'm a user of perpetual money making machine from now on. Yeah. I mean I'm buying 30 plus years of my life back and all that I'm giving up is maybe a trip to Jamaica and some fancy dinners every year. And I would argue I could get the trip to Jamaica with travel rewards. So just being a little bit smarter. So I'm giving up a couple of fancy dinners and like you talked about on our other episode some random purchases at Target that you can't even explain what you spent the money on. That's the difference right. We're quote unquote sacrificing but we're actually taking back three decades of our lives from mindless drudgery sitting in an office and they're just getting to waste some money at Target. Isn't that a pretty easy choice.
Brad_Catchphrases, travelrewards
468 - 470 Joel - FI180 It's obvious to me. Well actually it wasn't.
470 - 472 Brad Barrett it wasn't it wasn't it. And that's the cool part.
472 - 478 Joel - FI180 Now. Now it just seems so so obvious once you when you see it you know once you get there.
478 - 552 Jonathan Mendonsa So we want to set this up for our community and essentially what we want to accomplish with this conversation is once you're on this FI path you made the choice and your and you're rocking forward toward your destination. What are the little metrics that you can get excited about along the way to tell you that you're making progress to confirm for you that you're getting closer to your goal because there's a lot of little wins along the way to saying I have purchased my money making machine and I'm there. What are the things that you can get excited about every single step of the way. And the obvious thing to compare and contrast this to is the Dave Ramsey baby steps. Now let's just for the sake of comparison let's go through those real quick. Baby Step number one was get a thousand dollars to start an emergency fund baby step two is to pay off all the debt including the debt snowball. Baby Step Three was three to six months of expenses in savings. Baby Step Four was invest 15 percent of your income into one of these tax deferred or Roth IRA accounts. And then it was college funding for kids. Pay off your home early. Build wealth and give. That was step seven. That's fine. That really doesn't do anything for us. Once we've decided we want to pursue FI we're already basically past all that point or we've identified that but we want to know what are the little wins that we want to hit along the way to reach our goal of financial independence. So Joe where should we start with this.
college, debt, ira, ramsey, roth, savings, tax
552 - 579 Joel - FI180 Yeah I think I think the first real milestone you know to to FI is you're debt free may be made that $1 Net Worth where you're in the green. Finally and I think that's like the the real starting point towards the actual savings end of the journey. Now that can take some time for people you've got a lot of debt that you have to pay off. But I think that's kind of where my article is starting from which is that the green net worth the positive networth.
debt, networth, savings
579 - 593 Brad Barrett Yes. Just to clarify. Positive net worth and debt free can be different items right especially for talking like I have a mortgage personally and that's that's a separate argument that we can talk about another time. But yeah you're saying positive net worth. Right.
debt, networth
593 - 602 Jonathan Mendonsa And along with that can we maybe go ahead and put a line in the sand and say it's debt free except for the House is that is you've gotten rid of all other consumer debt.
debt
602 - 619 Joel - FI180 Yeah. Possibly. I mean you can still potentially have a positive net worth and still have student loans you know depending on how much you save. But yeah I would say for the most part I'm very debt averse and so I like the idea of debt free. You know except the mortgage I like that idea.
college-loans, debt, networth
619 - 634 Jonathan Mendonsa And let's just call that let's use some terms that we get from the fi community. That's when your financial freedom clock starts That's a Go curry cracker term your financial freedom clock starts when you've gotten rid of all of your consumer debt except for maybe a mortgage so we can put that in asterisks beside that.
debt
634 - 662 Joel - FI180 I agree with that. All right. What's next. Yes so after publishing the article I get a lot of feedback about wouldn't be great. We got some or early milestones because in my article I kind of go through more milestones in the second half. And so for example Gwen from firing millennials she said hey forget you know your first $100000 where personal capital starts to call you and want you to invest in them and said Oh that's that's a great one you know because that's a. Big hit that six figure milestone so that's a that's a big one.
662 - 686 Jonathan Mendonsa Let's let's pause on that. I love that so we love personal capital most of the FI bloggers do as a great way for you to track all of your different investment vehicles in one particular place. And if you don't already have one of those it's generally recognized as one of the best places to track all of your accounts in one place. And we've set up an easy link to get a free account for that. Just go to choose F-I dot com slash PC and you can set that up.
blogger
686 - 697 Brad Barrett And yeah Joel is exactly right. They will call you to set up a free consultation once you reach a hundred thousand. So be aware that that will happen. But yeah Jonathan I both use personal capital. It's a really solid tracking tool.
697 - 717 Jonathan Mendonsa But wait that's your milestone. You know you've made it to the first milestone when you get that phone call so that is an objective marker everybody needs to set up that account. That way you can get your first milestone in the bag when you get that call. It's hilarious. But now that is absolutely documented. That is the first milestone of the fi community personal capital phone call.
717 - 814 Joel - FI180 Yup there you go there you go. Or you know around the same time depending on your your number and how much you need to save for F-I around the same time you're probably going to have that F-U money under your belt which is one of the milestones that I spell out in the article. So for the wife and I are F-you money came in, we found it to be about two years two and a half years maybe of annual spending. And for us I wanted to contrast it a little bit from the emergency fund that Dave Ramsey talks about. So the emergency fund is really focused on having three to six months of your essential spends. Right. This isn't everything this doesn't include Netflix. This doesn't include you know all of the non essential items but the F-U money for the wife and I at least to us that's one or two years of everything. So nonessentials This is where you can now take a leisurely year to walk away from your employer or your career and do something else and have no pressure on you. And so that's kind of in the article I kind of compare them side by side. And so the F-U money is a much more luxurious milestone than the Ramsey emergency fund. So yeah the first few milestones might happen around the same dollar amount depending on your FI number. So if you have if youre FI numbers a million dollars and your F-U money comes in at around two years of your spend two and half years that's 10 percent of your FI number so that's it. That is around $100000. So to us that's what we wanted to contrast on on the blog post is that this is a more luxurious milestone than the emergency fund that Dave Ramsey writes about.
career, emergencyfunds, myfinumber, ramsey
814 - 917 Jonathan Mendonsa Now we really haven't gone too much into depth about F-you money but it is a concept that the more contrarian fi community prefers to talk about you're probably not going to see f-you money discussed on the Dave Ramsey podcast. The cool thing about it is it wrests control of your life away from your employer and gives it back to you to make decisions that are in your best interest. And frankly there is an emotional component to this that will create some extreme variability in what this number actually is. some people it may be like you just said this exact two years of expenses but the psychological power that you get doesn't have to be reached by you explicitly Having two years of expenses. It could be having three months of expenses six months of expenses. F-you money is just you having enough money set aside to essentially be able to have a more powerful position at your job where if they are making unreasonable request of your time or if they are put into a position where you have to choose between maybe your family your relationships or your job you have the ability to make a choice that's in your best interest. And as long as you feel comfortable making that choice you have the power back. And so F-you money is very distinct to the community and its a topic that is its own podcast this is by no means a final explanation but it is absolutely a milestone of FI. And it actually may be one of the first milestones because you just having some savings not being paycheck to paycheck is essentially there's a huge difference there. And ultimately everybody needs to be pursuing this. And I would even make the case after thinking about this that it's F-you money first and then now the milestone number two with the personal capital phone call because F-you money is the immediate Win that you have by having some margin in your life.
Jonathan_Catchphrases, ramsey, relationships, savings
917 - 929 Joel - FI180 Yeah that's how it went for the wife and I because our numbers are lower. Six hundred twenty five thousand. As soon as we save 60 grand We were happy with our F-you number. It's really dependent on what your number is. What is your annual spend.
Jonathan_Catchphrases
929 - 991 Brad Barrett Yeah I like that a lot. Because a lot of this and we talk about this on the podcast all the time. A lot of FI comes down to personal preference. Just like from my perspective at least there are no set rules. So we mention Mr. Money Mustache and the bicycle riding. And that is wonderful for him and that is really one of his bedrock foundational principles. But for me in my life bicycle riding just doesn't work perfectly. So does that mean that I'm not in the FI community does that mean I'm not even mustachian. I would argue no I think I follow the vast majority but you have to pick and choose what you value. So I would even argue with this f-you money it could like Jonathan's saying it could be dramatically less depending on the person if it gives you some degree of certainty some degree of power in your life that might be $20000. Right. That might be a couple of months of expenses. Joel I'm with you personally that for me it would be a couple of years so I wouldn't consider that I had any degree of f-you money unless I had I would say one to three years worth of expenses saved up in my total net worth. So that's that would be my f-you money.
Jonathan_Catchphrases, networth
991 - 1010 Joel - FI180 It just needs to be enough to where you're completely comfortable walking away from an employer that doesn't treat you right or that isn't working for you and not having to worry about how am I going to pay these bills what am I going to do. You can leisurely take your time find your next job your next endeavor. And that's what the F-U money is all about.
1010 - 1022 Jonathan Mendonsa Joel what is the next milestone that we're looking for so we've covered the first two and we can make the case that they're interchangeable one and two. But but now we're past that we're looking at Milestone number three.
1022 - 1116 Joel - FI180 Yes. This is a big one. The. Half-FI Mark. So this one was huge for the wife and I. Once you hit half five what you're centrally doing is you've saved up half that number. Twelve and a half times your annual spend you have twelve and a half years of spending. What that does is it allows you to kind of really have a good pin in the journey of where you are right now. And so a lot of people would assume that OK you saved up half your FI number. That means you're halfway done with your journey but actually because it's not linear you're actually closer to two thirds done with your journey. You pass though the majority of your journey already. And of course that depends on the market and it depends on your portfolio. But for us we hit half FI and we were more than two thirds done with our journey which is really cool. And that's what I show in the post where I show some of those graphics that kind of show the charts and what it looks like from a time perspective. So for us this was significant as well because my wife and I both work full time jobs at this point. And so that's kind of like a psychological point where you say all right one of us could stop completely you know one of us is actually FI in the relationship which is a fun way of looking at it. But for us it was really just seeing wow we have passed more than half of this journey already. And even though we only have half the number we need we actually have maybe a third of the time left on the journey so this can be a very motivational milestones like for the wife and I this was like OK we've been saving for a while and this was something we celebrated because this was just a really big milestone.
myfinumber, relationships, savings
1116 - 1122 Brad Barrett For a lot of people out there who aren't math majors. Can you explain the concept of what you're talking about with. It's not linear.
1122 - 1170 Joel - FI180 Yes so the idea here is that in the earlier part of your journey it's going to take longer to save for because as your money starts making more money those additional dollars start working for you. Interest starts to compound and every dollar that you add kind of accelerates this process. And depending on the market this can this can be seen dramatically so in the past two or three years we've actually had some really really great market returns so I'm seeing this maybe even exaggerated from what the average 7 percent return on the market would be. But yes so what that means is you've now saved up half your money but you've only got a quarter of the way to go in terms of time. So because now all those extra dollars are working even harder making more money for you on the second half of the journey. So you're going to get there much quicker.
1170 - 1228 Jonathan Mendonsa To me the place that we need to spend a little bit extra I'm talking about is just a value of time. We keep coming back to it. That is essentially what we're trying to recapture. And Warren Buffett in a recent conference that was mentioned by one of our previous guests Mr. 5300 he was telling us that Warren Buffet was taking this Q&A session and this one fellow asked him about what books would you recommend Warren and Warren looked at him and and after maybe giving an answer he ultimately said the thing to me that is more valuable than my entire fortune. I would trade you my entire And right now give it to you. in order to be 25 years old again because you know time works for you. And if we can get this to second generation FI, if we can capture their imagination and make them realize that it's not having the car with the 30 inch rims. It's not mortgaging your future so you can have all the stuff. Time is what you're running out of if you can make a few right choices early on. Your story will write itself. The math works for you. And once you get on the compound interest rate your money will work for you.
2ndgenfi
1228 - 1241 Joel - FI180 Yeah and like you said it's so important to get that started early. The earlier you set up that Vanguard account you get that index fund set up the early you start contributing. It just really does work magic in the later years.
indexfunds
1241 - 1246 Jonathan Mendonsa And I bet you Warren if he were 25 years old again he'd be doing index funds the whole way through.
indexfunds
1246 - 1259 Joel - FI180 I believe that's what he said too in one of his shareholder letters the what he's going to do for his wife and for his estate is just take the money after he passes away and put it into broad based index funds like 90 percent into index funds.
indexfunds
1259 - 1265 Brad Barrett Yeah that's exactly right. He said 90 percent of his estate would go to the Vanguard S&P 500 index fund.
indexfunds
1265 - 1267 Joel - FI180 Sounds like a good plan to me.
1267 - 1281 Jonathan Mendonsa Indeed indeed and then to put a cap on that I love the idea that you're half FI by and by extension one of if you're married one of the one spouse or the other is now at FI. The other one you got to stay on the grind. But the other one to you. You guys are good to go.
1281 - 1305 Joel - FI180 Yeah it's a fun way of looking at it. We both kept on working after that milestone to get to FI quicker but it takes some pressure off and psychologically it kind of builds up that level up mentality. I know Jonathan you like to gamify some of this and think of it as you know leveling up in a game where you've done that at that point where one of you is now FI and can kind of take some pressure off and kind of really give you a sense of power of what you've accomplished.
1305 - 1316 Jonathan Mendonsa Yeah I had this visual image as you were saying that of like Sonic the Hedgehog flying down the path and then hitting some sort of Boulder and the coins going everywhere you know silly run road bumps on the way.
1316 - 1321 Joel - FI180 They just put Sonic for free on the App Store. I downloaded it today. The original.
1321 - 1338 Jonathan Mendonsa Oh. All right. So milestone one was F-you money. Or alternatively milestone 2 was the call from personal capital and then milestone 3 was half FI And now we are on milestone number four lean FI. Tell us about it Joel.
Jonathan_Catchphrases
1338 - 1431 Joel - FI180 Yes so lean fi is actually pretty cool. The wife and I actually just crossed this milestone earlier this year. This was in I believe March or April that we passed this and the idea behind lean FI. Is that you have enough money now to stop working forever and be FI forever as long as you cut out all of the discretionary elements of the budget. So for the wife and I we looked over our budget kind of ran through everything we saw that about 30 percent of our spending was discretionary. The Netflix the entertainment the movies theme park tickets that kind of stuff travel. And so that's not stuff that you technically need in your life. It's obviously stuff that can make life fun and enjoyable but what it means is when you hit lean FI you've got the confidence that if you needed to, you could stop working. And it's like having an emergency fund that will last forever. Right because the idea of the emergency fund is that it's just covering your essentials. So this is like an emergency fund that would last forever. And so what that does is it makes you realize wow no matter what happens to me I've got my housing covered. I've got my food covered. I've got a roof over my head. No matter no matter what happens. Those are covered for the rest of my life. And so to me this is the perfect time. If you're somebody who doesn't like your career doesn't like your job and you want to start something new you want to take a plunge and really start something new on your own. You can go ahead and do it right just live clean cut out the discretionary stuff for a year or two while you're working on whatever your your side hustle whatever your next gig is.
career, emergencyfunds, housing, hustle, travel
1431 - 1437 Jonathan Mendonsa You still might be under from me. I was going to go to the side hustle. It's perfect for the side hustle.
hustle
1437 - 1446 Joel - FI180 This is it. This is that point in time you can take that plunge right. You've got it you've got your nondiscretionary funding completed forever. That's that's the idea of lean fi.
1446 - 1460 Jonathan Mendonsa Super powerful and while I want to stress to people that you do not have to be a lean FI in order to start a side hustle you can start at anywhere along the way lean FI is the place at which you can do it with no risk. It is. It is perfect.
hustle
1460 - 1487 Joel - FI180 Yeah yeah. Instead of the person trying to make ends meet while working on their passion when you hit this point you can just take your leisurely time you know work at whatever that passion is as much as you want and assuming that it will generate some income eventually you'll be able to get more into discretionary things back in your life at that point. But for us that that number was about 70 percent FI. Because that directly related to how much of our spending is discretionary. Your number might be different.
1487 - 1497 Jonathan Mendonsa So in the article you said it's 437 thousand dollars which is less than a half a million so you don't even need half a million dollars to get to lean FI.
1497 - 1536 Joel - FI180 That's right. That's all it would take and you know because of the way the Trinity Study works about half the people who do the 4 percent rule who get all the way to FI they have way more money than they ever needed. They actually end up with portfolios twice as big as what they what they needed for FI. So it's 50 percent of the time the 4 percent rule is way too much. It's a less popular way of looking at the 4 percent rule but it's still true from a statistic standpoint. So for those that are more risk seeking for those that aren't afraid maybe to go back to work one day if they had a worst case scenario or those that just kind of want to make a change in their life lean fi could be it that could be all you need.
1536 - 1561 Jonathan Mendonsa I don't want to stress to our audience that this is not the ultimate unpacking of the 4 percent rule. So for those of you that want to critique something that we're saying about the 4 percent rule and give us another perspective on it this is not the show for that. But I think that what Joel is saying still is valuable in the context of just once you have 437 thousand dollars you can absolutely pursue your side hustle without the fear of what if it doesn't work.
hustle
1561 - 1562 Joel - FI180 Absolutely.
1562 - 1575 Brad Barrett And that 437 just to be clear is based on your personal FI number so we're not telling everyone in the audience once you hit 437 you're at lean FI. That's based on your your annual expenses of 25000.
myfinumber
1575 - 1579 Jonathan Mendonsa No no we are. Everybody needs to do exactly what Joel's doing.
1579 - 1601 Joel - FI180 It's going to be different for everybody for us it was 70 percent of our FI number. And even that percentage might be different for you. Brad for example if you find that discretionary spending is half of your money maybe you've got a lot more flexibility than I do. Well then your Lean FI number could be much smaller. It really depends on what portion of your expenses are considered discretionary.
myfinumber
1601 - 1641 Jonathan Mendonsa I want to do a full podcast on people that have made wildly unconventional choices on how to live their life and reduce their core expenses so we are going to feature these really cool ideas of people that are that have figured out a way to get their core expenses under $10000 a year. It is absolutely possible. I'm not telling you to do it but it does help to see what choices other people have made so that then you can figure out where in this moving target of a playing field you want to be. And Joel sounds like he has a very similar lifestyle to mine and Brad's. Once you get rid of the mortgage but you can certainly be in a much higher bracket or a much lower bracket there is room for everybody on this field.
1641 - 1648 Joel - FI180 Yeah I think of Jacob from early retirement extreme I think he was living in San Francisco for under $10000 a year.
1648 - 1650 Jonathan Mendonsa Yeah. It's intense. It's certainly intense.
1650 - 1653 Joel - FI180 Yeah. But it's important to know it's possible.
1653 - 1676 Jonathan Mendonsa It is possible I agree with you exactly one supercool thing about lean FI that you kind of mentioned is at this time for the first time ever your dollars are working potentially harder than your income at this point. It's it's really cool right. The point at which your returns of your portfolio is actually more than what you're contributing to your investment vehicles.
1676 - 1701 Joel - FI180 Yes so that only works on good months right in the market. It's not going to be every month that your money is earning more than you but there were plenty of them that I started realizing the first one happened right around lean FI where my my portfolio increased in a given month more than the contributions that I made from working. And that's powerful, right that means wow your dollars worked harder than you did that month. And so that's a very humbling feeling.
1701 - 1711 Jonathan Mendonsa I want a new milestone for that so we got lean fi. And then I think we need to figure out a new name for that one. A milestone where your money is working harder than you are and 24 hours a day.
1711 - 1716 Joel - FI180 Yeah. Yeah. I think I call that the crossover point in an article I don't know if that's a good name.
1716 - 1719 Brad Barrett Yeah that's cool let's carve that out as a separate milestoen.
1719 - 1720 Jonathan Mendonsa build this thing as we go.
1720 - 1721 Joel - FI180 Yeah.
1721 - 1726 Brad Barrett All right Joel So looking at your article here the next milestone is called flex FI. Why don't you tell us about that one.
1726 - 1869 Joel - FI180 Yeah. So kind of all of these milestones so far have been calibrated if you will to the 4 percent rule where FI is I'm defining it as 25 x 25 times your annual spend or if you've got real estate or you've got other passive income it's the equivalent to having a passive portfolio that could generate your annual spend and passive income at the 4 percent rule. So what flex FI does is it kind of loosens that a little bit. So instead of being FI which is at 25 times a year and you'll spend flex FI is at 20 times your annual spend. This would correspond roughly to a 5 percent rule where you would be withdrawing 5 percent per year. And so the idea and the reason that it's called Flex 5. Is that this is the point where you could call yourself financially independent as long as you are flexible and you remain flexible. And so what does that mean. That means if the market is having a really bad year you're going to cut back on your travel you're going to cut back on some of your discretionary expenses. It means you have flexibility in your spending from year to year. There are some people who might not have that flexibility or don't have any type of side hustle or any other income coming in but for those that do the flex FI milestone is kind of the perfect time where you could potentially pull the early retirement trigger as long as you stay alert and flexible. And that's kind of what these later milestones start getting into here is this idea that the RE, the retiring early, portion of fire can be dissociated from the actual numbers so you can retire early at lean FI, at flex FI at FI as We're going to get into these other milestones. But it just depends on your situation and your flexibility. And so that's kind of what the flex FI milestone is to me. For us it was $500000. And so it's that point where yeah we could actually pull the trigger on early retirement here as long as we remain flexible. And I think one of the things I say in the post is that this is ideal for people who are a little more risk seeking who don't need a sure thing but are ready to take the plunge on something new. And the worst case scenario that I like to talk about is everybody else's every day scenario which is you might have to go back to work maybe part time maybe do something more fun. But that's your literal worst case scenario.
hustle, passiveincome, travel
1869 - 1880 Jonathan Mendonsa That is awesome. And people come to me and ask me Well what if the market takes a downturn. Well you're still in infinitely better shape than everybody else that doesn't have any savings.
savings
1880 - 1880 Joel - FI180 Right exactly.
1880 - 1903 Jonathan Mendonsa You're in fantastic shape. And now this is where you use the same amount of creativity that you've been using this whole point to turn up your hustle and either go back to work. Oh what a horrible thing. Right. Everybody else is going to work this whole time. Now it's an option. You're going to go back to work for a short period of time. Or you can start using some of the other tools that you have in your tool bag like the side hustle or geo arbitrage right.
geoarbitrage, hustle
1903 - 1944 Joel - FI180 Exactly. And you know what. One of the things that actually got me to write this entire article is because so many people think of FI as like this one. It's the only milestone. And if you're a dollar under your FI number you have none of the benefits of FI. And then you've got that dollar you hit FI now you have all the benefits of FI. So what I'm trying to do with these Milestones is show that it's it's actually not one finish line it's a smooth continuum where your benefits that you get and the power that you get along the way just keep on increasing at each milestone that you cross. So it's not this binary cross this one line and then you have all of FI's benefits and then you go back under it and you've lost it. It's really not like that.
myfinumber
1944 - 1963 Brad Barrett So Joel just reading from your article here. So this is flex FI you're saying it's 20 times your annual expenses which put another way would be a 5 percent withdrawal rate. Right. That's correct. So this according to the Trinity study has an 82 percent chance of success even if you're completely inflexible with your withdrawals.
1963 - 1974 Joel - FI180 That's right. And so if you are able to handle a little bit more risk this could be more than enough for you. There's an 82 percent chance you're actually FI at this milestone is what that means.
1974 - 1981 Brad Barrett Yeah that's really powerful. So 82 percent chance you're at FI when you reach flex-FI. According to Joel. So I like that a lot.
1981 - 1990 Joel - FI180 And that's according to the Trinity Study. You have a 25 percent a 25 percent bonds and 75 percent stocks broad based portfolio.
stocks
1990 - 2038 Brad Barrett And again the flexibility there is is what's really important right is if you're a little bit flexible. If you have any way to make additional money if you don't mind theoretically going back to work if something catastrophic happened. Well you might be a fine when you're at 20 times your annual expenses. So again it's just kind of approaching this mentally from a different perspective not that OK I need a 100 percent chance of being at FI and never having to work one minute again. Right. So I mean that's a very inflexible way of looking just at life in general and most of us can't get 100 percent certainty of anything but that's pretty cool to potentially claw back another couple of years from your working life. Right like that's another coupĂ©e looking at this is you have an 82 percent chance of success and you may claw back a couple of extra years of your life. So that's not nothing. Right.
2038 - 2092 Joel - FI180 Yeah. No that's significant. And this milestone is especially significant to me because one of the things that people talk to me about is while you're getting ready to pull this FI trigger in January and so they said well what if the recession hits like right right as you're getting ready to pull that trigger and I said well then maybe I'll get down to flex FI but that's still going to be good enough for me. And so you have this compensation. OK. All that means is that my per cent success potential has gone from OK. near a 98 plus down to 82 and so you say OK I'm willing to deal with that I'm willing to deal with that worst case scenario where one day I might have to do some side work. And I think a lot of us here in the financial independence community we do tend to have side hustles we do tend to have passions that just on their own nature will end up making some money. In our 30 plus year retirements.
hustle
2092 - 2126 Jonathan Mendonsa And I think the one thing to point out is you still have all the money from the previous milestone. Do you have the money that f-you money essentially that was in your bank account so if a storm were to happen and were to affect your monster portfolio. You don't have to touch that because you have these reserves that will allow you to just cash flow your life as you need to. And you can use the same amount of hustle and creativity that you are using now to essentially like we like to say have a backup plan for your backup plan. This isn't a one way door. It's a turnstile it's a rotating swivel door and you get to make choices based on the environment that you find yourself in at any given point in time.
Jonathan_Catchphrases, hustle
2126 - 2127 Joel - FI180 Yes exactly.
2127 - 2130 Brad Barrett All right Joel I think we have a very large milestone coming up next.
2130 - 2159 Jonathan Mendonsa Wait hang on. We've got to catch people up to where we are so yeah. Hang on. Let's go back to the pillars again. We want these to be fresh in your mind especially when I start getting the T-shirts made Joel I'm going to get a lean FI T-shirt made and sent to you Milestone. Number one is the personal capital phone call milestone number two F-you money milestone number three half fi milestone. Number four lean FI milestone number five. The crossover point milestone number six flex F-I and then Joel why don't you go and set us up for milestone number 7.
Jonathan_Catchphrases
2159 - 2217 Joel - FI180 Sure. So this would be your financial independence milestone the one that gets the most publicity and the one that gets the most attention as defined by 25 times your annual spend. So this is it. You've saved up 25 times your annual spend. You have. A 96 percent chance of success based on the 4 percent rule. If you have a 50/50 stock bond portfolio if you if you lower those bonds down to 25 percent your success rate goes up closer to 100. And this is it. You've achieved financial independence. Now this doesn't necessarily mean this is the point where you're going to stop working. What this just means is that you've crossed that line right. You've hit the FI in the fire acronym And so what this means is you're there you could stop working all the work that you do. This milestone after this milestone is completely optional. If the alarm clock goes off on Monday and you go to work that was completely optional right. It's all just for extra cushion at that point is really what this milestone entails.
stocks
2217 - 2250 Brad Barrett Yeah I love the thought of extra cushion but it's also actually directing your life time in the manner that you so choose. Right like that's another way of looking at it like you chose to go to work and hopefully you're enjoying it and maybe that goes back way back to the concept of F-you money. I think F you money actually follows us all along this path. Yes. To me F-you money is not just a one point in time. It's constantly evolving because you get more say right you have more F-you money all along the journey and as you get farther down this line.
Jonathan_Catchphrases
2250 - 2282 Joel - FI180 And To make an analogy the lean FI milestone is to the emergency fund. You know the Dave Ramsey emergency plan as this FI milestone is to the f you fund. Right so here we are including the discretionary we're including your Netflix and your traveling we're including all these things that might make your life more fun and more enjoyable. And so that's what you've got now you've got this perpetual passive income that's going to support your lifestyle with all of the frills. This is the point I think I see where you've reached enough to quote your money or your life.
emergencyfunds, passiveincome, ramsey
2282 - 2328 Jonathan Mendonsa One of the things that's so interesting is as you're on this path and you're checking off these milestones that show you the compelling draw of actually pulling the trigger on your FI date is intense. It's addictive. And while I know you are feeling it more and more I bet you right now even though January 18th seems so extreme to all your family and friends you want to make it September right now and you're having to fight to kick it back down the road like an extra six months because you know that you'll be OK to go ahead and do it right now and yet you're still checking back in till January. And to you it feels like restraint. And at the same time I bet you that for Alexis she's more and more feeling the pool of what you're doing. And although she says she's ramping down as it's getting closer she's like ah I think I should just think I should just pull the trigger too.
2328 - 2353 Joel - FI180 Yeah. She is becoming more aware of the power that she has. And so the other day we were talking about that and she was saying yeah I'm going to stick with the program I'm on at work because I enjoy it. I enjoy the people and I enjoy what we're working on. But if they let's say decide to move me to another program that that I don't like or you know another project that I don't enjoy. She knows it's like that's a card in her and she can just say yeah I'm done now.
2353 - 2399 Brad Barrett Yeah. And that is exactly what I was trying to get out a minute ago about F-you money. Yeah. That power just shifts and it just keeps shifting towards you. And that's a perfect balance. You can pick and choose when you're at FI, You can pick and choose what you want out of your life and out of your job there might be things about Alexis's job that she absolutely adores and she can go in if she reaches a point where she just can't do 100 percent of it anymore. She just doesn't want to. She could go into her boss toward the office and say hey look these are the things I love out of my job and I really just can't do these other items anymore. That's a conversation that is impossible at negative net worth or even slightly positive net worth. But when you're at FI. That's a conversation that moves into the realm of possibility very quickly.
Jonathan_Catchphrases, networth
2399 - 2446 Joel - FI180 Yeah and choosing when you might pull that early retirement trigger that's going to be specific to everybody on their journey on their own individual journey. What makes sense for them and their family. But the way that I kind of show it here with these milestones is lean FI, Flex FI and even fat FI all of those are perfectly viable times to test the waters of early retirement. You can pull that trigger at any time in that spectrum given flexibility and it's going to depend on how much risk are you willing to accept and how much flexibility do you have in your annual spending. And so everybody's situation is different there but I think that's the power that I wanted to get across here is you've got this giant spread of hundreds of thousands of dollars so it's not a single dollar that you're reaching for.
families
2446 - 2463 Jonathan Mendonsa You know I almost wish we could stop right here with this being the final milestone just because that would be seven milestones and it would so perfectly contrast with the Ramseys but because FI is better in every single way we're going to go and do one more milestone. Joel what is the eighth and final milestone of the FI community.
ramsey
2463 - 2530 Joel - FI180 Sure. So this would be what I'm calling fat FI. And the idea here is that you've saved up 30 x 30 times your annual spending. So this would correspond to a safe withdrawal rate of I think three point three three three percent. And I believe Jim Collins calls this basically as close to a sure thing as anything you can ever get. So for people that really they don't have a side hustle they have no flexibility in their annual spend. They want that as close to 100 percent certainty of success as you can get to. This is it. Right. So once you hit 30 times your annual spend this is it. So so for us that would be $750000 in a portfolio generating $30000 year passably. And so for us though we don't feel like we need to wait that long. I've got side hustles that I work on on the side. My wife has stuff that she works on and so for us this is overkill but for some people this might be right for them if they don't want to ever count on a side hustle that they don't want to have to think about earning money they want just a really low risk and maybe they are just very risk averse. That's what the fat FI milestone is for.
hustle
2530 - 2560 Jonathan Mendonsa This is nothing like this has been done before. And this article was a game changer I think and this is an original idea. I don't think anybody has considered framing it this way. And I know that people have been looking for a way to document their progress and document their wins and give themselves something to check the box with because frankly it's a wasteland until you get to F-I historically speaking. And this gives you an opportunity to say I'm here I'm here I'm here. So alright Bradd. Which one are you in.
2560 - 2589 Brad Barrett Oh man Jonathan that is a that's a hard question. I go back and forth on this all the time. And you did just ambush me with this. I think for me the flex fi's is a very interesting concept because because my wife does do basically seasonal accounting work so that makes up basically a full third of our yearly expenses if not more it's probably closer to half. And I guess if you count are we counting my online businesses around.
2589 - 2592 Jonathan Mendonsa No I'd say that's it. Yeah OK. Joel are the in.
2592 - 2595 Joel - FI180 Yeah. I mean that's your side hustle right. So that's that's part of it.
hustle
2595 - 2602 Brad Barrett OK. Well yeah if they're in then I will go on record as saying I'm at Fat FI.
2602 - 2604 Joel - FI180 Fat Fi Give me a T-shirt. Love it.
2604 - 2624 Brad Barrett Yeah it sounds crazy to say I'm without the businesses. I would I'm probably I would say I'm definitely between flex FI and FI. I think depending on Joel I think you might have convinced me to be less conservative in my FI calculations so you know we're we're I'd say inching closer to true FI here.
2624 - 2641 Joel - FI180 That's great. I feel like I accomplished something. You know it's awesome. I am and I'm going to really really think about that question even more in-depth and maybe get back to it on on our Friday roundup because I feel like I'm not giving the perfect answer here but yeah I think I would say between flex FI and FI.
2641 - 2644 Joel - FI180 I have to say congratulations. That is awesome.
2644 - 2644 Brad Barrett Thank you.
2644 - 2656 Jonathan Mendonsa And being a lemming still I am somewhere just after number two so I am. I've gotten my personal capital phone call and I got my F-you money locked up so I am right in there yet.
Jonathan_Catchphrases
2656 - 2665 Joel - FI180 You know Jonathan some of the feedback I got is that people wanted another milestone for that long journey to hit half FI. And so I made up you know quarter five so you might be close to a quarter FI.
2665 - 2688 Jonathan Mendonsa I am a quarter FI a concept was introduced to me a while back called by slowly sipping coffee called the fully funded lifestyle change and it implies that when you have a side hustle that has legs or you have a plan, it essentially it can empower you to pursue your passions earlier. And so I would say that I am at an intersection of quarter FI and FFL. Currently all.
hustle
2688 - 2689 Joel - FI180 Right sounds good.
2689 - 2705 Jonathan Mendonsa And we know where you are. So thank you so much for spending the time to create these and to come on the podcast and share with us. You know I think probably the final thing that we should do is talk about how do you celebrate when you go from one milestone to the next. What is it what is your celebration of choice.
2705 - 2714 Joel - FI180 Yes. For us what we've been doing lately is we will go to Aldi which you know Brad we're still waiting on your. on your.
2714 - 2715 Brad Barrett Yeah my update will come. don't worry.
2715 - 2767 Joel - FI180 nice. But yes so we go to aldi. We get some aldi champagne. We'll get a bunch of good food cook a big dinner celebrate maybe listen listen to a ChooseFI podcast if there is one out. It's kind of our Friday night you know date night thing you know what we do is we just try to have some fun and you just really think about that milestone and what and what we've achieved. And I think that's the whole point of all of this is to keep you motivated and to realize the power that you have. Like Jonathan even you at quarter FI That power to take on more risk. Stand up for yourself at work and to actually live life with more confidence. I think that's that's what it's all about and that's what the celebration is for us to say wow we just crossed another point. We've gotten more power. We can better weather any storm that's going to come at us in the future. And so you know that's what that's what we do.
2767 - 2840 Jonathan Mendonsa That's awesome. And can I say that I think that I will. I paid off my student loans that are all gone by the way. I don't know if I made a formal announcement on the podcast about that but they are all gone and I gotta say I think I will get even though I thought I was going to get a huge kick out of being done with the student loans. I think that internally I will get a much better kick by checking off one of these milestones just because it feels like that was just to get to get the financial freedom clock started. But that's when it begins. Once you get to that point there's so much more than just being debt free debt free still has you and your 9-5 pursuing fi allows you to take the time back and put it as a tool in your back pocket. And so I hope that to our community as you have latched onto this concept as you have now spoken to your spouse and gotten her on board hopefully or him on board. And as you are now teaching your kids about this concept I hope that you can start getting excited about where you are on these milestones and that it gives you an achievable metric that you can hit as you follow us on this journey over the next 2 5 10 or 15 years. It's going to be a lot of fun and we look forward to seeing you on the ride and on the other side. The fire is spreading my friends and we'll see you next time. As we continue to go down the road less traveled.
Jonathan_Catchphrases, college-loans, debt

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