My Late Journey To FI
With some serious career hacking in 2017, I started out 2018 debt free! You need to understand the gravity of that first statement--I own my entire income. I get to choose where my paycheck goes and I choose FI!
I have pretty much been in debt from the age of 18, when I bought my first new car, until now, age 45, minus a short stint when I was living in Colorado as a hippie. Financial freedom might be in the air in Colorado.
I want to spend just a little time basking in this new debt-free reality. Pre-sobriety me could not even imagine this possibility as I was always chasing something that would never satiate my appetite. As you can imagine that cost a lot of dough.
Something in me has changed since paying off my debt. As tight as I was with my money in the debt pay-off phase, it's even harder to spend my money now that I know the opportunity cost of investing it. I work hard for my money and I want my money to work for me. While this is a great new attitude, I also know my propensity for extremism (ahem, the attraction to FIRE!). Therefore, I need to take time to enjoy this journey. Overall, I am in love with this new relationship with money.
The plan now is to go full speed ahead toward financial independence. I have been thinking about and planning my investment strategy, but things got a bit more complicated after listening to episode 53 with Todd Tresidder. At first I was overwhelmed. Then I listened again. I decided I am grateful. The strategies below will include some tweaks in reaction to a broader understanding of ALL the factors that need to be included in my FI calculations.
I first learned of Mr. Money Mustache and Tim Ferris when my boss shared with me a podcast of Tim Ferris interviewing MMM. I didn't fully get how he was living off his investments, but I did get that he and his family were happily retired and living on ~$25k a year. I remember thinking this guy might really be onto something! Little did I know how big of an influence he was in the finance world.
Shortly thereafter, I was turned onto the ChooseFI podcast and introduced to the concept of financial independence. From there on I started to dig into this stuff and came to understand that saving 25 times my annual spending would potentially allow me to live off my investments without depleting them--also known as the 4% rule.
Through reading The Simple Path to Wealth by JL Collins, I have learned a lot about investing. Here are some overarching themes:
- If I am going to invest in the market I need to first have faith in the U.S economy.
- Stocks provide more aggressive growth, while bonds smooth the ride.
- Pick an asset allocation I am comfortable with, for example, 80% stocks/20% bonds.
- Rebalance this percentage annually.
- Know what stage I'm at (wealth accumulation) and adjust the above percentages to be less aggressive as I near the wealth preservation stage.
- In a bear market, stay the course. Don’t sell and as a matter of fact, buy more at this sale price.
All things considered
In a deflationary market decline, the Fed can bail it out by lowering interest rates.
Todd Tresidder from the Financial Mentor got me thinking about the possibility of an inflationary decline, which has not been recorded in a lot of the data. All of the models take into account that stocks and bonds are inversely related, as one goes up the other goes down. That is not the case in an inflationary decline. In an inflationary decline stocks and bonds are correlated, meaning they can both go down at the same time. Ugh!!!
Todd said, “as an investor, you always want to look for the obvious thing that nobody’s looking at.” He went on to say that as of October 2017, that thing is inflation. If/when inflation comes back all rules change. This cautionary advice resonates with me and adds a second layer of complexity.
Am I now going to abandon my initial strategies of low-cost index fund investing? No, but I'm now thinking about how to diversify my portfolio with some other asset classes. Plus I'm still fairly comfortable with the 4% rule because of my age. Discovering financial independence when I was 44 means that I'll be in my 50's when I actually hit FI. The time that I have to live off of my investments is truncated compared to typical FI'rs.
2018 financial goals/investment strategies
Tax-Advantaged Accounts
I have access to a simple IRA through my job. This will make up my tax-deferred investing. My boss puts in 2% and I will throw in the maximum contribution annually, $12,500. Keep in mind at age 50, the contribution limit goes up to $15,500.
Initially, the fund I chose inside my IRA account was a Target Retirement Fund (TRF). JL Collins gives them his seal of approval and the simplicity of TRFs spoke to me. Pick a retirement date and the funds rebalance itself and become more conservative the closer I get to my retirement date. Plus, I can push out that retirement date if I want to be more aggressive. TRFs do have a slightly higher expense ratio, though.
I will also set up a Roth IRA account and max it out ($6,000). Again, my contribution limit goes up at age 50 ($7,000). Most likely I'll buy Vanguard Total Stock Market ETF (VTI) inside of my Roth. I realize this account will change the percentage of my asset allocation so it turns out, I will be looking at this percentage annually.
As I wrote that last sentence, I realized that I may end up doing some re-balancing after all. That being said, I might as well take advantage of lower expense ratios and so I just called Vanguard and switched my TRF to VTSMX and VBMFX.
You're witnessing my education process in action.
Non-taxed Advantaged Accounts
Depending on my upcoming housing situation, I may have some extra money to invest and I was thinking I'd open up another brokerage account with Vanguard. I may still do that; however, I'm now thinking of a business investment or a beside hustle.
My emergency fund, affectionately named my POM (peace of mind) fund, is enough to cover six months of expenses. It is stored in an online savings account with Ally The interest is peanuts but it's better than a typical brick-and-mortar bank. I plan on growing this to include enough money to buy another car when my old Saturn with 176k miles dies.
Other asset classes
So, all of the above strategies are in the paper asset class. Todd Tresidder talks about three classes to invest in:
- Paper asset class
- Real estate asset class
- Business asset class
I'm now thinking about the latter two more seriously. I may consider real estate investing in the next several years but for now, the business class intrigues me the most for two reasons.
- I am a late bloomer and entrepreneurship can allow me to achieve FI quicker.
- I'm creative and can dabble in this class without investing a lot of capital.
I've been playing around with painting this past year by watching YouTube videos. I found one particular instructor, Angela Anderson, whom I adore. She teaches techniques I would've never dreamed of on my own.
I find painting to be very therapeutic, which is the initial attraction in making this a side hustle. If I can create a side business that provides relaxation, then I have an income stream that can continue during my retirement years, meaning I might not need to live off the full 4%.
Part of my 2018 plan is to produce more paintings and open an Etsy store. I figure the more I paint the better I'll get. It's yet to be determined if this will produce any fruit, but with a low barrier to entry why the heck not!? You'll hear about it when it launches...
I love my new freedom and have peace about my strategies. What could be better?
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