Tag: money

3 Strategies for a Volatile Market

I originally wrote this for another blog during the severe COVID volatility of 2020, and with the return of uncertainty and market gyrations, I thought it would be a good time to dust it off and share the 3 strategies I have used to build wealth during times of volatility.

From my perspective there are only three things you should be doing with you investment portfolio right now, depending on your risk profile, and the state of your non-investment finances.

1) Go All In

If you are young, bold, flush with cash, or some combination of the three, then you should look at this as a stock sale and deploy all your available cash to buy stock, and boost your 401(k) withholding while you’re at it.

“But wait”, you say, “shouldn’t I wait until the market hits bottom?” or “But it’s too late, the market already hit bottom!” No, no one can predict the bottom of the market, and worse no one can predict the day the next Bull market starts, and missing the start of a recovery, or the even just a few of best days, can cost you serious returns.

Had someone invested $10,000 in the S&P 500 on Jan. 1, 2002, they would have a balance of $61,685 if they stayed the course through Dec. 31, 2021.

If instead, they missed the market’s 10 best days during that time, they would have $28,260.

CNBC

If you can’t stomach going all in at once, then buy the dips, or give yourself a daily limit and put that much into the market per day. There are good arguments against this kind of short-term dollar cost averaging, but in my book it’s better than sitting on your hands. This is what I did during the Great Recession as I watched my years of hard savings and investing cut nearly in half. Once I was out of free cash, I had to wait for each paycheck and invest my free cash flow.

Part of what gave me the confidence to do so was that at that point, I had just returned from a deployment to Iraq with the Guard, and my wife had built our emergency fund up to 12 months expense (and she had also managed to cut our expense 20%, so there was that boost too). If you don’t have an emergency fund, put money there first until you are ready to put your free cash in the market.

2) Have Faith In Asset Allocation

Disciplined investors, as opposed to traders or speculators, need to have a clear view of what their asset allocation plan is. Now there are tons of different models and advice out there for what the ‘correct’ mix is. If you are coming at investing from a FIRE perspective you really should be pretty aggressive in your stock target, but even if you follow some of the other advice, such as being 120 minus your age in stocks with the balance in bonds, you will reap the benefits of asset allocation.

When I first started working I was 100% in stock, then in my 30s moved to the method mentioned above, so for example at 35 my target allocation was:

  • 85% Stock / stock funds
  • 15% Bond index funds

I was headed down the slow path from heavy stock to 53/47 upon retirement at 67. Along the way I was winnowing out stocks and dumped all my actively managed funds in favor of index funds.

(As an aside this has helped bring the fees I’m paying down to 0.04% from over 1% when I first started investing, but that’s a whole other post.)

Then, thankfully I started reading some really contrarian thinking in the form of the various FIRE bloggers. I looked at my own risk profile, and settled on the following target asset allocation plan, which I intend to keep indefinitely.

A few notes on this:

  • You really could just go Stocks and Bonds on this, Jim Collins has made a compelling argument that you already get international exposure with Total Market stock and bond index funds. By breaking up my Stocks and Bonds targets into US and International, I’ve made my rebalancing more complicated, but I like to be more hands on, so this is definitely an area you could simplify for yourself.
  • ‘Alternatives’ in my case is just one thing – real estate in the form of the Vanguard Real Estate Index Institutional (VGSNX) available in my 401(k)
  • Cash I have in there just to keep some cash on hand to buy dips. The reality is that if you use a good asset allocation monitoring tool like Personal Capital it will surface the amount of cash your mutual funds actually have sitting around which is usually close to 1%.
  • Essentially, I have one fund per asset class in column D, which is not too hard to manage.
  • While I do hold crypto, I consider these as purley speculative, and not part of my investment portfolio that I plan my financial life around.

All well and good so far, we’ve settled on our target asset allocation, and we’re ready to enjoy the rewards of balancing risk, and get on with the rest of our life, right?

Active Rebalancing

Unfortunately, no. Mind you that I have been saying target asset allocation all along. Our actual asset allocation is going to change as the markets go up and down, and as we put more money in, even if we’ve set our 401(k) new contributions to match our target (which we should.)

We have to regularly rebalance our investment portfolio, and there are a few ways you can do this, especially while you are still contributing:

  • Selling those asset classes that are over allocation and using that money to buy funds in asset classes that are under allocation.
  • Adding new money in your taxable brokerage account, and just buying those asset classes that are under allocation.
  • Adjusting future 401(k) contributions to over-weight those classes that are under allocation.
  • Some combination of the above

So what does this look like, you might ask. Let’s take a look at where my asset allocation stood at the end of last weekend, with a hypothetical portfolio value of $250,000

I use Personal Capital to track my portfolio, and I really love their allocation view, below.

I simply paste the values from there into a spreadsheet I built for myself. This let’s me not only see where I am over/under, but also by how much. Generally I ignore anything less than 1% as noise, so in this hypothetical scenario above I would only focus on the International Stock asset class, which is 1.7% under allocation, and figure out how to buy as close to $4,250 as I can.

How often you do this is probably a matter of taste, and whether or not looking at your losses makes you anxious. I’ve read everything from once a year, once a quarter, to once a month. Personally, I would view once a quarter as the minimum, I checked mine at least once a month when I was tracking my progress towards FI (I love the Mad Fientist’s Lab for this.) I am pretty hands on though and when things are volatile I might check and move money once a week. If that sounds stressful to you then you definitely should not do so, I just happen to find satisfaction in staying on top of it.

Benefits of Asset Allocation

Be fearful when others are greedy and greedy when others are fearful.

Warren Buffett

Why go through all this trouble? There are several key benefits:

  • Sticking to your model, and a rebalancing schedule forces you to buy low and sell high. For example, in December 2021, January 2022, and February 2022, my asset allocation plan forced me to sell stocks funds at their recent heights to boost my bond holdings, which stocks were leaving in the dust. Am I brilliant or what? Actually no, I just stick to the plan.
  • This keeps emotion out of the picture, and forces you to be a disciplined investor, helping you avoid making costly panic-driven mistakes.
  • Unless you are 100% stock, which I guess technically is an asset allocation plan, it helps reduce risk on the downside when downsides might make you break for the exits.
  • It forces you to implement Warren Buffett’s famous quote above, and who doesn’t want to be more like Warren.

For example, during the COVID induced Stock Market Crash of 2020, THE most important decision I made that year was to stay invested in the market during the meltdown in March. I stuck to my asset allocation plan despite suffering a little over 25% drop in the value on my investment portfolio.

This has the effect of forcing you to by low and sell high – the exact opposite investors tend to do when allowing their investing to be governed by emotion and an over-estimation of our own abilities. Instead, as the market was falling, my bond allocation was growing, and I repeatedly sold bond funds in lots of increments of $3k-$5k and bought stock funds at lower and lower prices. Then as the market got into recovery, I had to move money back out of stock funds and into the now lower bond funds.

Sounds like too much work, and stress-inducing to sell stocks that are dropping. No doubt, I won’t lie and say I was sanguine thru the whole process, but I am committed to this process. More importantly, how did it work out?

By regularly rebalancing throughout the year (due to the volatility I was doing this 1-2 times a month) during the volatile 2020 I ended the year up 22.4%. However, that’s looking at my portfolio value at the beginning of 2020, but what I want to really, REALLY emphasize for everyone reading is that by the end of 2020 I was up OVER 50% from the lowest point of my portfolio value which was 3/23/3020. NO ONE can predict when the market will recover, and people who panicked and pulled out of the market to wait for it to recover will have missed most of that recovery.

So in the end, 2020’s so-called “V-shaped recover” really illustrates how important staying invested is to long-term investing success. During the volatility we are currently experience in 2022, I continue to rebalance and have bought several dips with the cash I have set aside for this purpose.

3) Do Nothing

No. 1 rule of investing: When you don’t know what to do, do nothing

Mark Cuban

The last option I’ll discuss is summed up by Mark Cuban’s quote above, especially if looking at your portfolio is likely to make you upset. Take a long break from looking at the market, turn off the news, go get some fresh air, and wait for the markets to recover, because they will. Just don’t turn off your 401(k) contributions.

At different points in my life I’ve done all 3. I was so shocked by the tech bubble bursting I did nothing. In the Great Recession I went all in buying all the way down every time I could scrounge up some cash. Nowadays, and for the foreseeable future, I’m sticking to my asset allocation plan.

And because I’ve stuck to one of these three strategies, well over 50% of my investment portfolio is made up of gains. Knowing this also helps remember that I haven’t lost anything if I don’t sell.

So don’t listen to industry pundits, do the work to define your asset allocation plan and stick to your strategy.

That’s it for today, share your thoughts and strategies in the comments.

Feel free to use my Asset Allocation Planner spreadsheet and make it your own. If you don’t have Excel, you can make your own copy of it from our Google Drive account, or just upload the Excel to Google Sheets.

Photo by Towfiqu barbhuiya on Unsplash

The Value of a Financial Plan

The act of creating a financial plan helps you identify your financial goals and how you will achieve them. More importantly it gives you an accountability mechanism.

While there are more tools than ever to help you track and manage your finances, I still find it helps to take a step back and identify your financial goals broadly and for the current year specifically. These goals can help guide you in decision making throughout the year and serve as an accountability check to keep you on track. Perhaps as important, it forces you to think about what your priorities are and to think through what steps you need to take to advance closer to the outcome you are trying to achieve.

By Failing to prepare, you are preparing to fail.

Benjamin Franklin

In pursuing Financial Independence, there are fortunately only a few variables we need to focus on. For that matter, even if FI isn’t your goal, having a plan to maximize these variables will still lead to a more secure financial life.

  • Maximize savings
  • Eliminate debt
  • Lifestyle choices to reduce expenses

For several years, my wife and I documented our annual financial goals on a single Powerpoint slide, and I can now look back at over a decade of goals and see how we did each year. Below you can see our goals from 1997, along with annotations I made throughout the year to track progress.

Powerpoint slide showing several financial goals for 1997.

This was a powerful way to keep us on the same page as a couple, but also to keep us focused on our goals. You can see above that we didn’t hit our goal of getting our credit card debt below $3,000 by 6/1/1997. That caused us to figure out where to cut back and pay all our credit card debt off by 11/1 a month ahead of schedule.

If you are following a FIRE plan, you’re in luck because really there’s less analysis to do. Unlike most people, you’re NOT trying to figure out what’s the least you need to save in your 401(k) to be able to retire at 67 (for those born in 1960 or later.) You’re building your lifestyle to max out your 401(k) and your HSA, but I still urge you to write it down and do regular reviews of your progress.

When you are making good progress against your plan, that will make you feel great and energized to continue on the path. When you miss your goals, then you will have to face it and figure out what needs to happen to get back on track.

Schwab recently published research showing that “Having a written plan can increase confidence and result in more constructive financial behavior.” This includes a finding that 78% of people with a financial plan pay their bills on time and save regularly, compared to only 38% of those without. As I have written before, and is pretty much obvious anyway, living below your means is the key to Financial Independence and wealth.

That said, you definitely do not need to go out and hire a financial planner, though you certainly can. However, the advice they’ll give is the standard fare you’d get from all of the popular financial press, and not in line with the approach most FIRE adherents are taking. Really what you’d be paying for, in my opinion, is simply the ability to have someone to talk things through with and bounce ideas off of. And if that is what you need to have the confidence in your plans, by all means do so.

For my part, my wife and I have evolved from a simple one page slide to a more detailed written plan in the outline below. Note that we no longer carry any debt and have money set aside for the college, so those goals are no longer part of our plan, but might need to be part of yours.

  • Objectives
  • Allocation Strategy
    • Stock strategy
    • International strategy
    • Bond funds strategy
    • Alternatives (they only alternatives we have in our portfolio are REITs and crypto)
    • Cash (not including emergency funds, which we consider outside of our investment portfolio)
  • Link to current portfolio and allocation trackers
  • Rebalancing plan
  • Tax management strategy
  • Annual targets for 401(k)s, HSAs, IRAs (we use backdoor Roth IRAs to build a conversion ladder)

Also, here a few other resources to check out that I liked and may help you with developing your own plan. While these are best practices, also make it your own and make it work for you and your particular circumstances:

Photo by Helloquence on Unsplash

Personal Finance Lessons Learnt, Part III

Now that we have done a bunch of reading on personal finance, are paying ourselves first, have established our savings goals, and put some automation in place it is time to think about investing.

LBYM

I have mention lifestyle creep a few times, but it is worth restating – if you want to achieve personal financial success, or even Financial Independence, you must have the discipline to Live Below Your Means (LBYM.)

I believe many people confuse what it means to be wealthy with having a large income. While a large income certainly will help you attain wealth, no amount of income will make you wealthy if you stay on the hedonic treadmill our consumerist society is built to keep you on, and you keep spending more as you make more.

Wealth consists not in having great possessions, but in having few wants.

Epictetus

I can’t say it better than Epictetus. If our goal is to create wealth, then we need to focus equally on our careers and opportunities to make more money AND also keep our lifestyle in check. Then use the difference between income and expense to 1) pay down debt 2) build an emergency fund and set money aside for savings goals, and 3) invest.

We can see below the dramatic difference in the size of the investment portfolio you would need to achieve financial independence based on a given annual expense level using the 25x Rule.

Annual ExpensesInvestment Portfolio Needed
$50,000$1,250,000
$60,000$1,500,000
$75,000$1,875,000
$100,000$2,500,000
$150,000$3,750,000

Even if your goal isn’t financial independence or to retire early, being aware of lifestyle inflation and ensuring you live below your means will give you the fuel to fund your investment portfolio and give you the peace of mind that comes with not being overstretched financially.

Start (and stick with) index funds

The financial services industry has all manner of fancy products and big marketing budgets to get you to give them your money to manage. But despite what seems like common sense – that smart money managers backed up by teams of analysts (or AI powered ‘robo-advisers’) must be able to beat the market – it’s just not true. (Note: I’ll be referring to mutual funds in this post, and while they are different, you can also invest in ETFs. My points are true for both.)

Index funds are going to be your best bet for 3 main reasons:

Index funds outperform actively managed funds year after year

There are plenty of opinions as to why this is, but set that aside for the moment. The simple fact is that being invested in the entire market (or a substantial portion of it), which is what an index mutual fund buys you, beats actively managed funds year after year.

According to the SPIVA scorecard, for the 5 years ending December 2020, 75.27% of US Large Cap funds underperformed the S&P 500. That’s a lot of funds controlling a lot of other people’s money, with teams of (highly paid) analysts and money managers failing to beat an automated index.

Of course it does mean that 24.73% of funds did manage to beat the S&P 500. The issue with this is threefold:

  • You have to pick the right funds, and while they definitely offer more diversification that picking stocks yourself, you have to do the research and somehow pick the right funds
  • But it doesn’t stop there – just as with stocks, active funds go up and down, and fall in and out of favor. So you need to keep monitoring your funds and try to accurately decide when to sell, and what to buy to replace that fund in your portfolio. Fine enough if you enjoy it, but few people can accurately time the market or individual funds and stocks. Most humans are fundamentally inept at this and lose money in the market when they try to time things.
  • What’s worse, actively managed funds are expensive, though deceptively so because of the way costs are articulated. So your actively managed funds not only need to beat the market, they need to beat it by more than enough to offset the likely thousands of dollars in extra fees you will pay, which we’ll look at next.
Actively managed funds are 10-20 times as expensive as index funds

When I started investing in the 1990s it wasn’t unusual to see mutual funds with expenses over 1%. Now that doesn’t seem like much right? I could even hear myself saying that was cheap – “one percent is worth paying for the 10% return.” The problem is that compounding works both ways, we all love earning compound interest, but mutual funds (and other financial products) fees also compound.

As a simple example, let’s look at a $10,000 investment that we let grow for 30 years (not unreasonable for a retirement account) at an 8% growth rate and a 1% annual fee. Using this CalcXML calculator we get:

It appears that your initial investment of $10,000 is estimated to grow to $74,434 reflecting opportunity cost and expenses totaling $26,193.

The way that $26,193 breaks down is $10,056 paid directly in fees and, this is where the compounding comes in, $16,137 opportunity costs – all the growth that we didn’t get from the money we paid in fees. Our lost earnings end up costing us more than the fees themselves, and we used an 8% growth assumptions, historically the stock market has returned 10%.

Now let’s look at a Total Stock Market index fund, both the Schwab1 and Vanguard Total Stock Market funds have net expense ratios of 0.03% as of this post. That not 3%, that’s 3/100ths of a percent, so that’s $3 per year on our hypothetical $10,000 investment versus $100 per year at 1%. So let’s see what that gives us:

It appears that your initial investment of $10,000 is estimated to grow to $99,725 reflecting opportunity cost and expenses totaling $902.

The way that $902 breaks down is $365 paid directly in fees and, this is where the compounding comes in, $537 opportunity costs.

So if you had invested in our actively managed fund in the first example, you might have been really happy to end up with $74,434. You might even think you’d been pretty smart to pick it, but would you feel that way if you realized that you gave away $25,291 to your fund manager? Even if they had out performed the market in a few years, they’d have to have really outperformed it to make up for the fees. And remember you pay these fees whether you are up or down in the market, so the fund company can’t lose. Now, in part thanks to pressure from index funds, active funds fees have been dropping, according to Morningstar “The asset-weighted average expense ratio for active funds fell to 0.66% in 2019 from 0.68% in 2018”, even using that number we still get opportunity cost and expenses totaling $18,130.

And as pointed our above they usually don’t outperform the market, so you end up actually paying a lot more money for poor performance.

Personal Capital has an interesting view on this with their Retirement Fee Analyzer which shows how a seemingly ‘low’ fee of 0.67% results in 10% of lost growth opportunity over a 10 year timeframe on my existing retirement portfolio.

Graph showing 10% of earnings lost to fees
personalcapital.com

If you are worried at all about funding your retirement, fees should scare the crap out of you. I have managed my own fees down to 0.07% (mainly because I do have some money in international and emerging market index funds, otherwise it would be lower.) If you don’t know what you are paying in fees, you should stop reading this and go figure that out 😉

You can’t pick stocks (neither can I)

Stock picking is a fools errand, and even smart money managers backed up by a team will struggle to match the markets performance as detailed above. Why do you think you can do any better? No seriously, before you make a bet like this sit down and think through whether you have the time, the knowledge, access to the same information as professional money managers, the discipline, and the interest to keep up with it.

I learned my lesson early during the ragging dot-com bubble of the late 90s, back when we all thought we were brilliant for buying this dot com or that start-up. Many of my peers were getting in on IPOs, bragging about our gains, and thinking we were all going to retire in a year or two. (We were in our late 20s/early 30s, what the hell did we know.)

Then reality set in and market collapsed. I was invested in multiple technology focused funds, or a dozen individual stocks, lots of options and shares of my company stock, and fortunately a few Schwab and Vanguard index funds. I got wiped out to the tune of around an $800k loss, on paper at least. The technology mutual funds didn’t just drop, the fund companies themselves went out of business. The stocks I owned dropped a ton or simply went out of business, and the options I had were suddenly underwater to the tune of $50 or even $100 per share, most never to recover their value.

I mourned that loss for a good year; shock, anger, depression, resignation – I went through it all. But now from the vantage point of my 50 year old self I am glad it happened early in my investing career. I learned that I was not a brilliant stock picker, and I didn’t have the time to keep up with individual stocks. As I tallied my losses and unwound any remaining individual stocks I had, I put the remaining money in index funds, and kept putting money there.

We’re seeing this today in meme-STONKs and in the crypto market (I am not anti-crypto, but it is early days and it isn’t investing, so it belongs outside of your portfolio as speculation IMO.)

If you want to consistently and reliably build real wealth, with a simple portfolio that you can manage with a few hours a year and avoid panic selling or hype buying, you really can’t do better than a small set of index funds that you steadily invest in.

* I am not a financial professional or consultant, none of this information should be taken as advice for your specific financial and personal situation. Do your own research and form a plan that is appropriate for you.

1 Full disclosure that I own Schwab stock, but I am not being compensated by them or Vanguard for using them in my examples.

Photo by vadim kaipov on Unsplash

Personal Finance Lessons Learnt Part II

Continuing on from my previous post on what’s worked for me over the years.

Pay Yourself First

Paying yourself first is a staple of personal finance recommendations, but that doesn’t make it any less relevant or even easy. In a nutshell, the idea is you don’t pay off debt, build your emergency fund, your retirement and investment portfolios from what’s left over from your paycheck, but rather these things come out first.

Also know as reverse budgeting, the idea is that you don’t set your budget based on your prior spending habits, after all where would that leave you if hadn’t been living below your means? Deeper in a hole.

Rather, you start with your saving priorities and allocate your available cash flow to your highest priority first, then if there’s cash flow left, the next priority, and so on through your main budget categories. I like to think of it as saving buckets, and as one fills up money starts flowing out of that bucket to the next.

Graphic of three buckets with funds flowing from one to the next. The buckets are labeled debt, retirement, goal 1
Forgive the crude clip art 🙂

So in our example to the left first you would allocate your free cash flow to pay off your outstanding credit card debt, then to retirement, then on to your next goal when you had met your retirement savings goal for the year.

An alternative is to set a target date for example paying off your debt in X months, then divide the debt and projected interest by X, do that for your retirement goal for the year, and then allocate any left over to other savings goals. This way while you are paying off your debt you are making some progress against other goals. I would argue that if you have a credit card debt, that interest is so egregious you should prioritize paying that off over everything else, but the most important thing is your system has to work for you.

Employer sponsored plans like HSAs and 401(k)s (or the TSP for those in the military or other Federal service) where the money is literally deducted from your paycheck before you get your hands on it are a great idea, and if you aren’t maxing these out I would strong recommend allocating any future raise to doing so before you start letting lifestyle inflation creep in. Lifestyle inflation will literally kill your chances of being financially independent.

With many employers, you can set up a separate payment of a set amount to a savings account separate from your paycheck deposit account, say a $200 a paycheck deduction that goes into your emergency fund directly. This is a great way to build up saving without having to really think about it.

Other goals, or you if can’t set up an allocation like this, brings me to my next lesson.

Automate Everything

We live in a time when all our financial service providers are trying to win at Customer Experience management. This means they are always looking for ways to make things easier for us as customers. (Well except for companies using dark patterns to trick us into spending more, but that’s another website.)

Because we humans are of limited will-power, time, and attention, take all these things out of the equation. Make it so you’d actively have to stop yourself from saving and investing.

  • Set your 401(k) to annual increase it’s percentage until you’re maxing it out
  • Set up automatic transfers to build your emergency fund
  • Do the same with other goals to separate savings accounts, we have one each for: cash reserves, taxes, travel, property maintenance, dining out (when we started doing this years ago we opened separate savings accounts for each, but now many banks let you set up multiple savings goals/buckets/whatevers within a single account.)
  • Put all your bills on your credit cards, which also helps maximize points
  • Have your credit card bills in turn set to auto-pay, just maintain a cash balance in your checking to cover your average spending
  • While you’re at it set up balance alerts so you know right away if you don’t have the buffer you’d normally want
  • Have all these accounts aggregated on a platform like mint or Personal Capital so you can monitor them all in one place

* I am not a financial professional or consultant, none of this information should be taken as advice for your specific financial and personal situation. Do your own research and form a plan that is appropriate for you.

Photo by Francesco Gallarotti on Unsplash

Personal Finance Lessons Learnt Part I

I have been a saver and investor all my post-Army/post-college life, that’s a good 27 years at the writing of this post, and want to share as much of what’s worked and not, so hopefully you can benefit from it. It goes without saying, but this is really just my opinion, please consider your own circumstances carefully, and seek professional advice if you need it.*

Read about Personal Finance and Investing

The first place to start is what you are doing right now, I highly recommend regularly reading up on personal finance and investing. Read different perspectives, and different authors, see what resonates with you and dive deeper into topics you find interesting.

When I first started working, the web was still in its infancy, so I read the financial press – The Wall Street Journal, the Economist, Money, and the like. I also read the newsletters from my financial institutions – at one time or another I have been a client of USAA, Vanguard, Schwab, Fidelity, E*Trade and they all used to publish newsletters on personal finance tips and planning advice. I always found Schwab’s On Investing to be the best and looked forward to it coming each quarter.

And of course now with the tremendous amount of resources on the web, there’s no shortage of advice (and opinion) – I maintain a list of my favorites on the Resources page.

There isn’t any one thing you will get from all this, it is the grounding you’re after, to learn the language of finance, see how certain topics are generally presented, and look for some contrarian opinions among FIRE bloggers.

Fair warning that you will read a lot of crap, and you’ll also notice that a lot of writers will all write about the same thing, so you will need to read everything critically. But in the process you’ll also start to see through some of the hyperbole in the press, you can think of these as inoculations against following the crowd when the press is screaming about the market collapsing or the bull run extending for X months. “DOW 40k!!!”, “This bear called the last recession, you won’t believe what he says now!” Meh.

Blog forums and comments, and finance sub-Reddits are also good places to connect with others pursuing FIRE or just better personal finances, but tread with caution, and double check any recommendations you get there before acting on them. For God’s sake don’t take anyone’s word for it when it comes to taxes. Read the primary source, at least here in America it’s actually pretty understandable and easy to find on the IRS’s website. I have been surprised to find that it’s easier to read the IRS materials rather than sort thru all the different opinions you’ll find on the internet.

Track Your Spending

The best place to start next is to get a picture of where your money is going now. See what you are spending your money on, and really spend some time thinking about if you are getting the value out of your money. One of the exercises in Your Money of Your Life that has really informed a lot of my choices in life is understanding what you are trading in terms of the hours and energy of your life for a thing you are about to buy. In other words – if I want X, really do the math on how many hours I would need to work in order to afford it (after taxes) – this can be a very clarifying experience and I have passed on a lot of impulse purchases because of this. And while I am a big proponent of being frugal for the benefit it brings your finances, sanity, and lack of clutter, etc. – you will also quickly see that you aren’t going to skip a few lattes into financial independence.

Others have written a lot about frugality and the Big Four, but saving on housing, transportation, food, and taxes is where you will find the fuel for savings and Financial Independence. While I didn’t go the hardcore route exemplified by many millennial FIRE bloggers, my wife and I did make deliberate choices to mange the cost of these like:

  • Renting a little further out of the city – this saved on rent of course, and we were always able to take some form of train into the heart of the city or the trendy parts of town without paying the associated rent to live there,
  • Once we were ready to own, we always put at least 20% down even when that meant getting a smaller house. You save on interest, on insurance, and we never paid PMI, which I just found offensive, as you are paying to insure your mortgage company.
  • We took the higher deductibles on insurance, and contribute the difference to our emergency fund, essentially partially self insuring.
  • We shared one car and took public transportation while we lived in the city (I realize no car at all is better, but we didn’t make that choice.)
  • Bought our cars to own; paying cash or aggressively paid off our loans early, and then driving them as long as possible
  • Buy fresh ingredients and cook at home, which also has health and relationship benefits
  • Hike, bike, and go camping instead of fancy vacations or cruises.
  • Max out tax deferred savings vehicles like IRAs, 401(k)s and HSAs

For me, the thing that tracking really highlighted in the beginning was interest payments, and the amount of just random retail crap we were buying.

Having to look at the interest payments every month helped me get motivated to aggressively pay down debt and not buy things on credit (other than our house.) Since we paid off our credit card debt in 1997, we have always paid them off in full every month. For big purchase we saved up for them first (I know, a novel idea!) in high interest savings accounts set up for specific goals.

As for how to track your spending, there really is no lack of choices, depending on how nerdy you want to get with it, you can build custom spreadsheets to slice and dice the data any way you want. To just get started however, I’d go with an automated aggregator that can pull in all your financial transactions and categorize them for you.

Looking at our random spend also made us really think about whether we really needed things before we bought them and, though it sounds fundamental, stopping yourself in store or online when you are about to buy something and really think about it, what it costs, and how long you’d have to work to pay for it, really helped us really cut our spending. Now it’s not uncommon for us to allow a day or two to pass between when we put something in the online cart and when we actually purchase it. Easily 1/3 of purchases never make it through the filter of a little time.

As for tracking tools there are a lot of options – Mint and Personal Capital are good online options, I’ve used Quicken for just about forever (and MS Money when that was a thing.) There are tons of other options out there, just find something that works for you and see what’s lurking in your spend.

* I am not a financial professional or consultant, none of this information should be taken as advice for your specific financial and personal situation. Do your own research and form a plan that is appropriate for you.

Photo by Markus Spiske on Unsplash

Five Books to Re-read This Year

Day 5 of the Daily Stoic’s 14 Day Stoic Challenge is to pick 5 books that were impactful in your life and re-read them, with a focus on studying them more deeply than when you last read them. The idea of course being that with each re-read you will get more and different lessons out of them.

I want to elaborate the why behind my selections, and neither the challenge’s Slack channel, nor my remaining social social media channels seem appropriate, so I am putting these here, mainly for myself to be able to come back to after I’ve read each.

Anabasis by Xenophon

Written by the Athenian Xenophon, it details the return trip of a group of 10,000 Greek mercenaries after the defeat of their patron, Cyrus the Younger, in the battle of Cunaxa in 401 BCE, outside Babylon. I originally read this when I was an NCO in the US Army National Guard between deployments to Bosnia and Iraq. I remember being struck by how little has changed in terms of leading people, and human dynamics. Certainly technology has changed, our view of the world has changed, and religious views are quite different, but I remember that the leadership challenges he faced were all too familiar.

I have therefore long considered this to be one of the greatest books on leadership (that you’ve probably never heard of). So I am eager to see how that holds up, and as I served right at the site of Babylon for most of my deployment to Iraq, I am curious to see if re-reading this brings out any other connections.

Tao Te Ching by Lao-tzu

I am using the Stephen Mitchell translation. The Tao Te Ching was the first book I read from a school of belief that was not the Catholic Bible, and it was the start of a reading exploration that ultimately led to me to Stoicism. I remember that I felt like I had found a whole new way to look at the world, and I remember being a little surprised at how much the Tao seemed to have in common with Lucas’s Force. I feel like there is a lot of shared wisdom between Stoicism and the Tao, including the notion that there is no good or bad beyond the value we choose to assign to things. So we will see how that holds up.

The Problems of Philosophy by Bertrand Russell

I remember this book from my first philosophy class in college at the University of Connecticut, and I remember that class being the first time I realized that philosophy was not a stuffy subject for insufferable snobs. That it could both be interesting and a tool for thinking deeply about things we assume, and a way to work on oneself and our beliefs.

Your Money or Your Life by Joe Dominguez and Vicki Robin

I am re-reading my original 1993 version, though I may eventually read the revision that several FIRE thinkers have written about including Mr. Money Mustache, who I read regularly. Reading this set me on the path of my own financial education and led me to take control of all of my own finances, and to buck conventional wisdom on money and investing. I never fully embraced the almost hippy approach of having minimal attachments, no home, travel often, extremely minimalist possession, but it did teach me to value my time carefully and not trade it for things I didn’t need. And I never again took on debt other than a mortgage. I do remember Joe advocating buying 30 years bonds as the means of financial independence, so that part won’t hold up, but I do want to see how much of their thinking remains relevant and how broadly it is reflected in the FIRE community.

*A Short History of Nearly Everything by Bill Bryson

Bill Bryson is simply one of the greatest writers of our time, and I have read nearly everything he has written, but this and A Walk in the Woods are my favorites. This one for the simple fact that it really makes you realize just how much of a miracle just existing really is, for me it was a tonic for being too wrapped up in work and myself. And the stories about the rivalry between scientists and how human they all actually are is just fascinating. (And you have to have some sympathy for someone who has spent their entire professional life invested in something that has turned out to be wrong – you might resist that too.)

I will post back to this as I complete each book and any new observations I have to share.

What will you read?