Post 10.0 –> Three Lies You Tell Yourself about Your Finances

We are not Tax or Investment experts and are not in any way providing expert advice.
Please seek your own tax, legal, or other professional for advice and counseling.

FI-light-ER post 10.0 / FirstPublished20200723 www.filighter.com

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FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Disclaimer: We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.  FIlighter accepts no responsibility for any actions or activities you may take based on anything discussed on the website, postings, or comments.

These lies have absolutely more impact on your pursuit of Financial Independence than you can imagine.

What are the lies?

  1. I’ll buy it now and return it if it doesn’t fit or meet my needs.
  2. I’ll pay off my credit card in full each month.
  3. I will start saving for retirement later and make it up.

SPOILER ALERT: English is not my best subject but I have created my own suggested thesaurus additions:

Later == > Never (those that know me know the quote, Later is Never)

Tomorrow == > Never / Too Late (almost the same as Never, but usually equals “much later”, when do you really take action?)

Let’s start with the first lie.

1) I’ll buy it now and return it tomorrow or later if it doesn’t fit or meet my needs.

Go look in your closet RIGHT NOW!  Are there any items in your closet that still have tags?  I rest my case!.. OK it is about more than clothes, but that is usually a good place to start.  Extra belts, shoes that were not the right color, trendy styles that are not “in” any more, and accessories that never made the cut to wear “out”.

Sometimes it is a much bigger deal than a pair of shoes; it can be extra cars, extra motorcycles, extra boats, extra homes, extra extras…!!!  These items that seemed like a good idea and for whatever reason are not utilized or enjoyed as much as you imagined. 

Did you envision TV Commercial like RV Travel and after the first trip decide that emptying the holding tanks was more UNFUN than the time in the trailer was FUN?  Were the kids too old to cherish/value the experience, did you miss the window of opportunity?  Maybe sometimes renting before buying is REALLY a good idea!

Don’t get me wrong, many people are diligent in returning items and don’t let the sun set on receiving something in the mail or at home (in the non-fitting room COVID-19 times) and making the decision to keep or return and follow through with the transaction/shipment. 

How many times have you let too many days go by and cruised past the return deadline?  Most of the time? Never? Always?  (I hate to even type Always and Never as they are not allowed to be used in our home, why? Because you are usually wrong, there is almost always an exception you never think about).

2) I’ll pay off my credit card in full each month.

Many of us rationalize that we can get extra benefits from charging and using specific cards.  [If you pay your cards off every month in full, even better using auto pay, this post is not directed to you].  Some have even gone so far as to use credit cards in place of an emergency fund.  How consistent are you on paying off your credit cards in full?  Do you know the interest rate on your balances that are rolled over?  According to wallethub.com the average credit card interest rate is 18.61% for new offers and 15.09% for existing accounts.  See the table below from their website:

How many of you would like to make these returns on a portion of your portfolio even in light of the default risk?    The absolute most guaranteed ROI on your money is to pay these cards OFF rather than rolling any balances over.  Even worse is the thought of paying 20% interest on a tank of gas or meal out that is long gone!  Short of payday loans, this is about the worse debt to carry.

Do you really think the credit card issuers are losing money on the cash back offers, loyalty points or promotional balance transfer rates?  Here are a few 10 year stock quotes for MasterCard and Visa:

Would you like to make 13X or 6X your money in 10 years?  Who wouldn’t? Let’s move on.

3)  I will start saving for retirement later and make it up.

This is arguably the most important item on the list.  It can make the path to financial independence steeper and harder than you can imagine.  A spreadsheet of course is the chosen mechanism to communicate this example. 

WARNING: If you are one of my more mature readers, don’t beat yourself up over this one, time is an unrenewable resource.  Do your best to save going forward, it is never too late.  You can however help the young people in your life understand the value of starting as early as possible.

For simplicity sake, all three in our example have the same $2,000,000 FI Goal by age 50 and we assume each family will be capable of making lifestyle changes to make the savings/investing deposits required to catch up. After reaching 50 they will all live on about $80,000 per year using the 4% rule.

Early Bird Filighter starts saving $16,020 per year at age 25 to make his goal by age 50.    Later Filighter starts 5 years later, age 30, but must start by saving $26,887 per year more than 1 ½ more than Early Bird.  PAUSE…did you get that, by waiting 5 years, he had to save more than $10,000 more per year than if starting at 25.  Finally, Ten Year Filighter waits till 35 to begin but must save almost triple the amount Early Bird did starting at $47,699 per year.

The loss in time value compounding translates to $331,130 more than Early Bird that Ten Year must put in to catch up.  Stated another way, Early Bird Filighter can enjoy $331,130 more in lifestyle spending during the 25 year period and still make his FI Goal.   [For more on this you may want to read about YOLO vs. SLOFI in The Fioneers post]

As promised, here are the numbers:


So what?

How do you avoid these missteps on YOUR path to FI slightly ER?

  • Don’t even buy it.  Then you won’t have to look at it (the proverbial IT) hanging in the closet with tags and never worn finally to be donated.
  • If you can’t afford to pay off your card don’t even make the purchase.  But if you do have a balance you can get guaranteed ROI on paying it off.  Guaranteed at say 15-20% APR.  This is why it is generally better to pay off credit card debt than beginning investing.
  • Start Investing NOW!!!  Not next month, next quarter, next year, stop it with the excuses.
    • Get started in any matching benefit plans with your employer first
    • Consider a Roth or Traditional IRA Contribution
    • Build your after tax investment account

Resolve to do these things this week:

Are you taking action based on this or other posts?  Send some feedback or leave a comment!!!  Share it with your friends.

I would love YOUR ideas to be covered in future posts; your constructive input is welcomed and appreciated.  Use the boxes below to send your comments.   Join the Facebook page it’s a great place for comments and community sharing.

_____________________________________________

Remember MIND THE GAP!  +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

www.filighter.com

or on Facebook: https://www.facebook.com/FIlightER

Post 9.0 –> CONSCIOUS SPENDING…What do you VALUE?

FI-light-ER post 9.0 / FirstPublished20200709 www.filighter.com

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Disclaimer: We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.  FIlighter accepts no responsibility for any actions or activities you may take based on anything discussed on the website, postings, or comments.

9.0 –> Does money flow through your hands with no inhibition?  Do you spend it and receive lasting value from experiences?

SPOILER ALERT=> You will gain insight and diagnose your financial WINS or WOES!  And pursue what brings you JOY!

This week we talk about heightened awareness with respect to where your money goes.  In last week’s post, 8.0 we talked about the book “I Will Teach You To Be Rich” by Ramit Sethi.  This week I would like to spend some time talking about one of the key concepts in the book Ramit refers to as “Conscious Spending”.  Ramit covers many facets of conscious spending but I want to focus our discussion around two main points:

  1. Knowing what you spend
  2. Spending on what brings you value (and not spending on things that don’t)

For you to have any bearing on your personal spending, you have to know what your current habits are and where your money goes.  To do this, I’ll take you back to the first of Seven Steps posted in 4.0.  If you already did the homework from post 4.0, you are ahead of the game and can skip down to the second section of this post.

Part I – How do I know where my money goes?

As I tell my kids, there are no short-cuts in life; however there are computers that make this step extremely easy.  To know where you are currently spending your money, you will need to create a Spending Analysis.  To prepare an effective forward look on your personal finances there must be a basis or beginning reference point with a high correlation to future expenses.  The goal of this exercise is understand current expenses with a high enough confidence that they can be used as the basis for future projections. Personally to confirm our spending, I began with downloads from bank, credit card, and healthcare account detail transactions for 2019.  Using categories included in the credit card and a few added for our needs, all of the data was downloaded to Excel.  Utilizing the pivot tables functions in Excel a rough cut was pretty easy.  A 12 month look back is beneficial as the annual, semi-annual, and quarterly items will surface as well as regular monthly bills.  At a minimum I would suggest going back 3 full months and then add in things that may be paid outside of the monthly frequency like insurance premiums, property taxes, or other “lumpy” expenses.  Building a database and using pivot tables provides easy research and spending analysis.  This is my comfort zone, yours may be a pencil and paper approach with a stack of bank or credit card statements, use the tools at your disposal.

WARNING:  Don’t make this overly complicated.  You need to know three things, how much $$, when, and where was it spent?  It will become obvious if you need more detailed analysis.  Just get something on paper.

To get your action started, use the below categories as a start (most are courtesy of my Chase Credit Card download):

Sample Franky Filighter Spending Analysis

In the sample table above, Franky Filighter is earning $60,000 a year and is paid twice a month for simplicity.  All In-Flows are Positive + amounts and all Out-Flows are Negative (-) amounts. We will keep this discussion focused on CASH FLOW not Net Worth.  Read post 4.0 if you want to know more about Net Worth.    The format above accomplishes several beneficial analytical methods:

  • Monthly Trends in the 6 monthly columns
    • These are very helpful in identifying what are fixed or routine expenses and what tends to be one off special items.  For instance the Insurance category for January included an $850 homeowner’s policy premium that is paid up front for 6 months and the rest of the months include a $150 automotive insurance premium that is paid monthly.
    • Note that May Bills and Utilities included a new iPhone purchased after the previous phone was dropped in the river on Memorial Day weekend.
    • Did you notice spending on Food & Drink decreased with COVID-19 impact and Groceries increased?
  • Quarterly Aggregation
    • By aggregating data across three months, the volatility or noise is reduced
  • Average Monthly amounts
    • When developing budget or forecast spending projections, it is helpful to look at average amounts realizing that sometimes you may spend more or less, for instance in the health and wellness category there was a co-pay for doctor visits in January and June.  Most people probably will not visit the doctor every month, but it is a good idea to budget funds in any category where expenses are likely during the next year.

If you are still with me after all the number and table talk, bless you and thank you!!  I’m one of the financial guy types and if I see a table of numbers, they just jump off the page and speak to me.  If you know where you are spending your money and something is out of line, it will jump off the page at you.  On the path to FI or FU money, we talk profusely about growing the GAP.  Remember,

+Income – Expenses = The GAP <– Grow IT! 

If you are completely unconscious about where your money goes, you will likely spend until you run out, or if you are like many people, you will routinely spend more than you are making.  In our example, Franky Filighter only had one negative cash flow month and was able to build an additional month of expenses for his Emergency Fund.  Additionally, he invested $100 per month in his long term investment account (no doubt he was using automatic transactions he learned about in post 8.0).

Think about the same example above and Joe Knofeye with a salary of $36,000 a year or $3,000 per month.  The expenses shown would not be sustainable.  After 6 months cash flow would be negative over $7,000.  Is this possible?  Of course!  A few credit card offers come in the mail and Joe Knowfeye runs up credit card debt to meet his spending wants/needs.

9.0 #protip – if you need credit cards to pay your bills you may not have figured out that there is no money tree in your closet and you do not have a good shot at winning the lottery. 

If this is your situation, I will refer you to “The Total Money Makeover”, I mentioned in post 1.0.  Get rid of your debt!

Action Needed => Download first half of 2020 to understand your spending by category.  Ideally, you will just need to download your Credit Card transactions and your Bank Account Transactions.  Organize your data in the same format including month, transaction date, category, $ amount. 

Some up front effort may be required if you want to do this every month but the number of transactions will be only 30 days rather than 6 months on future routines.  My personal transactions include 848 rows for the first half of 2020.  It only takes me a few hours to download format and pivot to analyze two credit cards, two bank accounts, and one health spending account.  (While I’m at it, I also update a monthly balance sheet with Asset and Liability balances to calculate Net Worth but that’s another post). 

Anyone with basic to intermediate excel skills can become quite proficient at the process and it will get quicker each time.  You may want to just do it quarterly, semi-annually, or once a year depending on your needs. 

The key is – you have to do it.  The fresher the process, the faster, more consistent and thorough you will become.

Now that you know where your money goes…let’s move on to the second half of the post…

Part II – What do you VALUE?

A little story from the Independence Day weekend really hit home.  A good friend of my daughter’s and I were having a discussion as we sat over a boat trying to get the butterfly valve on the throttle body to open up with PB Blaster flowing everywhere.  The boat under us is 15 years old and the combination of brackish water, salty air, and father time are fighting against us.  He looks up at me and says, “This is something people without boats will never understand.”  I look at him and ask, “What?”  “You don’t buy a boat and worry about how much you can sell it for one day, you buy a boat because you have fun and create memories in it.” I replied, “You are so right! I can’t put into words what you feel as a parent when you are riding in the boat with your arm around your wife driving into the sunset up river with the perfect song on the stereo and your son at the wheel.  You remember teaching him to drive the boat safely and then trusting him to take others out skiing.  It is just magic.  The memory burns into long term storage and there is nothing better.”  My wife and I have been around boats all our lives growing up on the coast and we wanted to share the boating experience with the kids and their friends.  In this we succeeded and as they say in commercials the memories are priceless.

I talked in earlier posts and on the website www.filighter.com about some life decisions we made on our path to FI (light-ER).  The choices we made on cars, houses, vacations, all boiled down to the bigger picture of what we valued.  Our faith, family, friends, and community have been high priorities.  We support several charitable causes and are active in the community but we have also enjoyed travel, sports, and entertainment experiences.

Getting the balance right and growing the GAP does not mean you eat beans and rice for life or you will run out of money.  As they say on the show, “Strange Inheritance” when signing off, “Remember, you can’t take it with you!”

It’s REALLY important to have conversations with your significant other and understand what brings you value or joy.  Kind of another way of saying (let’s review from last week):

 8.0 #protip –> It is extremely important to know your WHY? 

What brings you value?  Just as important, what does not bring you value?  What are you spending on categories that don’t bring you value? 

Do you really enjoy mountain biking? 

My buddy goes on a man trip to Utah each year with some other hardcore mountain bikers.  He gets serious value from the combination of relationships, scenery, comradery, physical challenge, and time to unplug.  He and his wife have grown the GAP and have room between what they make and what they spend thanks to conscious decisions on minimizing the things that do not bring value so they can maximize spending on value rich family experiences. 

As Paula Pant says, “You can afford anything, but you can’t afford everything” life is full of priorities and choices and choosing what brings you value and conscious awareness on spending can help you build the buffer we call the GAP that permits you to choose value, grow the GAP, build FI, and live a full life doing what brings you joy!

Resolve to do two things this week:

  • Analyze your spending (facts are friendly)
  • Write down five things that bring you value

Does your spending reflect your values?  Have you grown the GAP to make the Value Activities a reality?

Are you taking action based on this or other posts?  Send some feedback or leave a comment!!!  Share it with your friends.

I would love YOUR ideas to be covered in future posts; your constructive input is welcomed and appreciated.  Use the boxes below to send your comments. 

_____________________________________________

Remember MIND THE GAP!  +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

www.filighter.com

or on Facebook:

https://www.facebook.com/FIlightER

First Car…

Post 8.0 –> Just Do IT! Take Action to Build your Investment Confidence…Its AUTOMATIC!

FI-light-ER post 8.0 / FirstPublished20200701 www.filighter.com

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Disclaimer: We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.  FIlighter accepts no responsibility for any actions or activities you may take based on anything discussed on the website, postings, or comments.

8.0 –> Volatility has returned…so what?  With the news of several states regressing back to more protective measures to mitigate the rising cases of COVID-19 the markets are reacting negatively.  Recent recovery gains have been given back.

Spoiler Alert –> Just Start! Make a move forward, a step at a time.  Grow the GAP!

1) Set Up an Account Today and 2) Automate for Painless Success

So do you stay glued to the CNBC or Fox Business ‘Talking Heads’ (and I don’t mean the great music group headed by David Byrne with songs like Once in a Lifetime or Take me to the River, or And She Was…).  Does the financial news just build anxiety about what to do with your money?  Or have you learned that their only goal is to create drama and attract as many advertising eyeballs as possible? 

You are focused on the Big Picture and the Long Term….this drama doesn’t work on you!  You are a FI-light-ER!

I have a broad demographic of regular readers and this post is one of those that could be for those at either end or in the middle depending on your particular situation.  It’s about taking action!  Engaging in your Financial Future!  And to take a line from a song above, asking yourself “How did I get here? Letting the days go by…”

Many who know me or have worked with me have heard me refer to someone in a situation with the question, Are they a pinball or a flipper? A pinball works its way around the game table bouncing off the sides, flippers and bumpers the result of physics and gravity, whereas the flipper is setting the trajectory of the ball and the success of the game.  Are you the pinball just “letting the days go by?” Is your financial life the “same as it ever was”?  Nobody is going to ask you to take the blue pill or the red pill, it’s not all or nothing, just take action.

One of my 20 something readers asked me a question this week that prompted me to think about all the noise everyone hears when thinking about the next moves in their personal finance world.  Advice from parents, friends, the internet, their siblings, advertisers, “experts”, it goes on and on…  As you may guess the answer to the question was…”It depends” which I’m sure is not anyone’s favorite answer.

When we were young and were blessed with children, I can remember thinking we were doing the right things financially, we had a house (big enough to grow into – FIRE Translation, Bigger than we needed), a Chevy Suburban to haul our first born and one small dog around, (also bigger than we needed) and we began to save a little.  In spite of some less than optimal decisions, long before there was a FIRE movement, we began to grow the gap. 

Why?  We had begun having conversations and wanted the option to allow mom to stay home with the kids if we chose that path.

 #protip –> It is extremely important to know your WHY? 

Having this one goal drove numerous decisions to align with this mission/vision/goal.

Lambo Lookback: After paying down our mortgage a bit and refinancing 2 times in 8 years, we got our interest rate from 11+% to a mere 7% and our payment down to $320 for P&I literally like a car payment at the time in the late 90’s.  As paychecks grew, we held our lifestyle static.  When a bonus came, a large chunk went down on the house.  There are many other things I would have done to help our outcome later like fund IRA’s, Buy into the Texas Tomorrow Fund, etc, etc… #hindsightin2020

What is the point of this nonsense?  By growing the gap we had options and by options, I mean CASH.  Cars got paid off early, mortgage refi dropped our monthly payment and we had the option to break the yuppie trend and have a spouse at home with the kids.  You don’t just wake up and have a new option if the foundation and groundwork have not occurred to give you those possibilities.  

I’m not talking about having FU money.  I’m talking about breathing room and getting your financial lifestyle on the rails that lead to happy success rather than nail biting canyons and dangerous mountain passes living paycheck to paycheck when you need new tires on a car.

I don’t always agree with Dave Ramsey but I can tell you I’m 100% in alignment with his early baby steps.  Having $1,000 in hard cash literally frozen in your freezer can be the difference between a good night’s sleep and stressful days.  If you have debt on anything besides your house, start by reading, “The Total Money Makeover”, I mentioned this in one of my earlier posts, 1.0.  Get rid of your debt!

Got an Emergency Fund of 3-6 months expenses in place?

Pay off all Credit Cards and adopt a policy that if you can’t pay the full bill you won’t use the card.  Rewards are NEVER a reason to carry a balance on a credit card.  Carrying a balance on a credit card is simply a symptom of living beyond your means and not planning for the reality of emergencies.  That is it.  Don’t buy off on the fallacy that credit cards are for large purchases and then you can pay them off over time at a crazy high interest rate.  How much sense does it make to charge a meal and pay for it say 3 years later when you finally pay off a credit card.  Think of the most temporary experience like a tank of gas, or a quick lunch, and then pay interest on that experience for many months before you finally pay it off, long after the gas leaves the tail pipe or the meal meets its demise in a sewer plant. 

Ask yourself

  1. Is this purchase something that should be covered by the Emergency Fund?  (If yes, use the emergency fund and then quickly rebuild it).
  2. Can I pay this bill entirely when it comes because I budgeted and expected this expense? (If no, save until you can, who knows you may decide you really didn’t need it after all).

ENOUGH DEBT TALK!!!  We can save Delayed Gratification for another posting in the future.

I’m so debt averse that it takes over my mind when the topic is near.  I want to talk about the other side, ASSETS and Investing with Automation Systems.

Open a Low Cost On-Line Brokerage Account (Vanguard {suggested}, Schwab, or Fidelity)

Open a Vanguard account today and start funding it each week or month.  Automate your investing.

There you have it, stop reading if you are good to go and are taking the above two actions.

Why do this?  Why Vanguard? (I am not paid to endorse Vanguard).Fidelity and Schwab are also great options for robust low cost investing.  The key is low/no trading fees and solid blocking and tackling.  I’m not suggesting the best complex options trading platform, I’m saying these firms handle billions or trillions of transactions and millions of accounts and do it well for any investor from $5,000 accounts to the $50,000,000 accounts.

You don’t need any elaborate investing product to begin automated savings and investing.  If you believe your buddy the stock broker or investment professional that can beat the market, you are already on the wrong track and they will do everything to keep you there and paying their fees.  That is not the point of this post, this light and positive post is to get you moving to control your financial future.

Open an account and start funding it each pay period with something.

Automation – Create Automated Funding and Investing

It doesn’t matter if it is $50 or $500.  One of my kids is on a pretty tight budget and funds his brokerage investment account with $50 a month.  Another is putting $10 a week into a robo-investment system.  These are not big, but they are automatic.  Painless money off the top that just happens.

I’m currently about halfway through “I Will Teach You To Be Rich” by Ramit Sethi.  This author is huge on systems and automation for good reason.  Automated transactions are a great use of technology and features available on many platforms to systematically accomplish your goals.

Automation does not “forget” to make a deposit or investment.  It does what you ask of it; on time every time.

A FIlightER example: Currently, our HSA (Health Spending Account) is funded through a monthly $675 transaction ($675*12 months = $8,100 Max allowed including catch up for families over 55 for 2020) and that HSA system has an automated balance transfer for surplus funds above $4,000 to a brokerage account where it is invested.  This leaves money to cover monthly medical expense needs as they come up but automates transfers to a brokerage account for investment.

This just HAPPENS.  No intervention or reminders required.

The same is true for funding our operating account for monthly expenses and allowance stipends for our college student (now a graduate off the payroll).  In our Vanguard account a weekly purchase of 4 index funds takes place.    

The point is, once you set up the automation based on commitments to save and invest, you wake up a few quarters later and your accounts have transformed based on the planned and executed transactions.  I can look at one bank balance and know exactly the YTD variance to our expense budget.  One number, no spreadsheets or analysis required.

A post on managing Operating Accounts will be left to another day.  Today we are focused on two things, Opening your Investment Account and Automating Funding and Investing.

By paying yourself first, you are committing to growing your assets.  I say over and over, “Cash gives you options!” For Investments, Large Purchases, Debt Payoffs, Large Bills, etc, etc.  If you don’t benefit in any other way, this alone is worth the effort of opening an account and funding it regularly.

What are some of the other benefits?

You will be able to learn the simple task of making your own investments.  Start slow and safe with Money Market Funds, CD’s, and the like.  You have to know the timeline on using the funds to know how to invest them.  If you are 10 years away from needing the money, you could likely invest a good bit of it in equities such as the famous VTSAX at Vanguard.  Consider a portfolio of VTSAX, VTIAX, VBTLX, and VTABX with appropriate allocations (See post 7.0 for more on Allocations).  Other firms have similar low cost index funds.  Those are issues that can be decided in the future.  

What you must do now is open an account and automate your funding.  

Next, while your balance builds, there will be time to create your investment plan, set your allocation, and research the ETF and Fund options that you will soon be the vehicle to grow your investments.

Anyone taking action?  Send some feedback or leave a comment!!!

It only takes a few minutes to set up an investment account and link it to a bank account.  Just take a step forward, they can’t eat you.

Please send feedback or comments, even ideas you would like to see covered in future posts, your constructive input is welcomed and appreciated.  Use the boxes below to send your comments. 

_____________________________________________

Remember MIND THE GAP!  +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

www.filighter.com or on Facebook: https://www.facebook.com/FIlightER

This week’s read mentioned in post 8.0, what are you reading this summer?

Post 7.0 –> Two portfolio considerations for today and always!

FI-light-ER post 7.0 / FirstPublished20200618 www.filighter.com

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Disclaimer: We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.  FIlighter accepts no responsibility for any actions or activities you may take based on anything discussed on the website, postings, or comments.

7.0 –> So much for the gushy great news last week!  I’m back in the red and seized last Thursday’s Drop to put in a little more dry powder.  Opportunistic Buys …some would call that market timing…but I’d like to say it is more of “Adjusting my Asset Allocation” …. Which brings us to the topics for this week’s post.

1) Asset Allocation

    All Equity when you are young, higher bond mix when you get old….well it’s not that simple.

2) Diversification

    No, ExxonMobil, Chevron, and Shell does not equal a diversified portfolio.

Let’s dive in a little deeper to these two areas. And for those of you that are picking up a few books and educating yourselves, two books I have read cover these topics very well although they have slightly differing perspectives on the allocation mix suggestions and other nuances, but the guts of the process and theory is consistent.  The Simple Path to Wealth by J. L. Collins is one of the books and the current book I got for my upcoming birthday is The Bogleheads’ Guide to Investing (Second Edition) by Mel Lindauer, Taylor Larimore, and Michael LeBoeuf.

Before we wade in too deep a little back story to frame my perspective… you can skip a few paragraphs if you want the main course right away… Back when I was a W-2 guy it never seemed like I had time to read…or at least I didn’t make time to read as much as I wanted.  Reading was one of my goals and happily I can say this is something I have achieved but at a cost.  With new found learning and education around personal finance came the perspective that many of the things I was doing with our finances was much less than optimal.  I found myself getting hit upside the head with a 2X4 repeatedly and as they say on the Choose FI podcast there were actionable takeaways that I needed to … embrace and take action to move in a better direction.   

Some of you who know me better than others know I tend to plan, plan, plan, plan, and plan some more, then finally execute flawlessly.  This does not always give you ideal results in personal finance.  One of my earlier writings (Post 2.0) included the mantra I tell my kids all the time, If you are not IN, you can’t WIN!  I have two (there are many more, but let’s start with these two) significant concerns with respect to our portfolio and the topics for this week.  The first is an overly conservative Asset Allocation and the second is lack of Diversification.  Both of these I have worked hard to address over the last 3 quarters but as they say, it’s a journey. 

Early this year, after eating lunch with Jim, a longtime friend…I went back to the house to dig into my accounts and identify how many unique investments we held.  Not including a few retirement accounts with employers, I counted over 130 different investments.  Many of them were overlapping each other with subtle differences.   Some were small, some were big, and the reality was there was no reason for so many.  A portfolio of a dozen or so low cost index funds and ETF’s would provide a pretty similar exposure to the market with MUCH LESS RISK.

Let’s start peeling the onion!

ASSET ALLOCATION

Source: Personal Capital

The above photo is from the Personal Capital application that is available free of charge.  You may get a call likely from a Personal Capital financial manager offering to assist with you portfolio.  I find these tools very useful in aggregating multiple accounts and giving you graphic and numerical representation of your holdings sliced and diced in many ways.  Full Disclosure: I am not a paying client of Personal Capital and I am not paid to promote Personal Capital.  And now back to Blog Post 7.0…

“The most fundamental decision of investing is the allocation of your assets: How much should you own in stocks? How much should you own in bonds? How much should you own in cash reserve?” – Jack Bogle

This quote opens Chapter Eight on Asset Allocation in the Bogleheads’ Guide and I tend to agree this critical decision will drive many decisions and adjustments along the path to your financial independence with respect to investing.

As you can tell from the graphic above, much of my allocation is held in U.S. Stocks and Cash (Includes money market like funds). It comes close to a 70/30 allocation, or in a more detailed format, 62% Equities (55% U.S. and 7% International), 7% Alternatives (Primarily REITs), and 31% Cash and Bonds.  As mentioned in Post 6.0 my goal is to be near a 75/25 allocation thus I will need to increase equity exposure and lower Cash/Bonds from the present allocation.  When the market dropped 1,800 points last Thursday, I nudged a little more into the VTSAX and the VFIAX to move the needle closer to 75% equities not as a market timing event, but more like an allocation adjustment ;). 

How do you know what your allocation should be?

  So many factors can impact this decision from risk tolerance, volatility appetite, time horizon for using the portfolio as to cover expenses or some other goal/major purchase, sleeplessness, etc. etc.etc…  The Bogleheads’ Guide distills the process to the following four steps:

  1. What are your goals?
  2. What is your time frame?
  3. What is your risk tolerance?
  4. What is your personal financial situation?

A key to working through this process involves one of the homework assignments in Post 4.0, developing a Life Plan looking at the longer term horizon and significant goals or needs along that path.  The planning exercise should help you crystalize an asset allocation that considers much of your personal situation and goals that may require liquidation points within your portfolio.

Another point that seems fuzzy for many is their risk tolerance.  Simply stated if you are afraid of losing money (or value of investments) on any given day, month, quarter or year and it keeps you up at night, you may have a low risk tolerance.  On the extreme case, you bury your money in a bank CD or savings account and it rusts away with the impact of inflation and the missed opportunity cost by not being invested in higher return assets you will be disappointed when retirement time comes and the car that your bought 10 years ago for $20,000 is now $35,000 and your savings account has only miniscule gains from 0.05% interest.

On the other extreme being exposed 100% to equities makes great sense for 20 or 30 somethings that have a long time horizon that can take the down years as well as the majority up years to get higher returns over a longer period.

So what to buy?

Once you establish your allocation generally between Stocks and Bonds/Cash, the next step is to determine what investments to buy.  The number and type of investments are endless, but we are going to take a simple approach and buy four funds using Vanguard as an example for low cost diversified index funds. 

Remember this is just an example, we are not financial experts; please seek your own certified and licensed advisors when making personal decisions.

For stock or equity exposure the two funds (Domestic and International) are:

  • VTSAX – Vanguard Total Stock Market Index Fund Admiral Shares
  • VTIAX – Vanguard Total International Stock Index Fund Admiral Shares

For bond exposure the two funds are:

  • VBTLX – Vanguard Total Bond Market Index Fund Admiral Shares
  • VTABX – Vanguard Total International Bond Index Fund Admiral Shares
Sample Allocation using Vanguard Index Funds or ETFs

It is important to understand, you can achieve an allocation mix across different asset classes with mutual funds, ETF’s, or even individual stocks and bonds.  ETF’s are particularly useful if you have less than the minimum purchase amounts for a fund (some require a $3,000 initial purchase) but still want the diversity in your exposure to different classes.  Individual stocks and bonds introduce higher risk if a small number of stocks or bonds are purchased.  The low cost index funds above and corresponding ETF’s provide good diversification within each asset class and can be purchased as little as one share at a time.

If four funds are more than you want to manage, consider Vanguard’s Life Strategy Funds that as a bonus hold the asset classes above and these funds auto re-balance periodically to maintain the target allocation mix.

Diversification

Diversification does not have to be complicated.  My simple mind thinks about it as the opposite of concentration.  Within each asset class, you can chose any point across the diversity spectrum from a single stock or bond to a broad stock or bond index fund holding literally thousands of company stocks or corporate and governmental bonds.

Let’s just think a little about concentration.  Remember Enron?  Here’s the stock chart (source: slideserv.com)

Enron Stock Chart (Source: Slideserv.com)

If your only equity holding was Enron purchased in 1998 for $20 per share, about two years later it would hit $90 per share, a 450% gain over a two year period!  Not a bad choice you think, until…at the end of 2001 Enron is worth pennies per share almost a (100%) loss.  This is about as good a reason as there is to be diversified and not put all your eggs in one basket within one asset class.

While it seems like this is just a shock factor ancient example, think again. 

Look at MCI, GE, or even the broad energy sector decline.  Companies like ExxonMobil long considered the best in class holding within Energy.  Along with the Covid-19 crisis the reduced demand for oil and the oversupply caused XOM to fall to the 30’s.

XOM Stock Chart (Source: TD Ameritrade)

And here’s GE’s stock chart, of course I bought heavy in the $30’s in the late 2000’s because hey, GE is a great company and I listened to Jack Welch all the time on CNBC interviews. Just to be clear I did not sell in 2016 because it was recovering to be the great company it once was…NOT. I continue to take tax losses on GE to offset gains. It is painful every time.

GE Stock Prices (Source: TD Ameritrade)

A good reason to be diversified not only in holding multiple companies stock to mitigate the impact to your portfolio if one stock falters, but also to have exposure to multiple sectors if you will within the markets. In any given year, Technology may be a leader and Financials may be declining, having exposure to the winners is difficult to predict but broad funds will include the whole market.  An example of various sector exposures from my personal capital account follows.

U.S. Market Sectors (Source: Personal Capital)

Having diversification among asset classes and within each asset class can go a long way to help you sleep at night and remove the fear of headlines on the morning news causing one of your individual holdings to go to zero. 

If you must trade and own individual stocks, include it in your allocation say 5% of your equities as your speculation funds.  I’ll admit I have a bit of a bug to buy stocks and now I’m slowly selling the individual holdings and moving to index funds.  The hard part is selling stocks that have dropped 95% and taking the loss in an IRA account that has no tax benefit to apply the loss as offset to capital gains.

Key Take Aways

1) Set your individual allocation to balance return goals appropriately between Stocks and Bonds/Cash.  Realize that there is usually an inverse correlation to Stocks and Bonds that soften the down cycles and these also sometimes constrain the up cycles but provide lower risk. Consider your timeline for needing funds from your portfolio.

2) Diversify your holdings across an asset class to mitigate the negative impact to your portfolio.  Realize that many studies have shown that most managed funds cannot beat the index over a longer period.

Focus on your allocation goals.  Does your portfolio reflect the mix you selected?  Is it time for you to take action and make some changes?

Has the lack of diversification impacted your net worth?  Did you own too much of your company stock only to have it fall with the sector? 

Future posts will deal with Rebalancing, a process that will help you maintain the target allocation you have established.

Please send feedback or comments, even ideas you would like to see covered in future posts, your constructive input is welcomed and appreciated.  Use the boxes below to send your comments. 

_____________________________________________

Remember MIND THE GAP!  +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

www.filighter.com

or on Facebook: https://www.facebook.com/FIlightER

My Latest Reads? What are you learning about this summer?

Post 6.0 –> Four ways the COVID-19 Market Drop and Recovery Made You a Better Investor

FI-light-ER post 6.0 / FirstPublished20200611 www.filighter.com

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Disclaimer: We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.  FIlighter accepts no responsibility for any actions or activities you may take based on anything discussed on the website, postings, or comments.

6.0 –> Spoiler Alert…I’m no economist nor do I know what and when The Fed or President will do something that will move markets…….but…WOW….just wow.

Back in posts 1.0, 2.0, and 3.0 we covered the market fluctuations and some concepts from “The Simple Path to Wealth” by J. L. Collins (TSPTW).  At the time of those writings, I was preparing for a much longer and slower recovery of the markets.  It now appears that the rapid government response to stimulate the economy through a$$i$tance and lower interest rates have revived confidence in a recovery.  

But how quickly can that recovery be reflected in your individual investment accounts?

Source: Vanguard App

(This chart above covers August 2019-June 9, 2020 for my Vanguard account)

As it turns out, recovery can happen quickly depending on your individual portfolio holdings.

While the balance in this Vanguard account has not achieved the high water mark which included gains in market value plus reinvested dividend income, it has returned to positive territory.  Going into the downturn I had approximately 80/20 mix Stocks/Bonds & Cash in this account. 

The purpose of this post is to make much of the concepts the FI-light-ER blog has covered in the past real.  You know by now I like facts and data and sometimes get a little thick on the analysis.  This week’s post simply covers the one issue you have heard over and over, sit tight and stick to your personal investment strategy. 

If you listened to the J. L. Collins meditation from post 3.0 giving you actions and perspective when the market is dropping perhaps you have recovered much of your losses during the past few quarters.  As I read TSPTW it inspired me to open a Vanguard account and primarily invest in low cost index funds and ETFs. 

How did this experiment work out?  

Having read that statistically it is better to invest funds as soon as they come your way (if you are truly investing for a longer term) rather than layering them in over time, 80% of this account was invested between opening in August 2019 and January 2020 (much at record highs).  This was definitely not a case of wait for the drop and then invest to capture and amplify the upside gains. Another full 10% was added in February before the dismal March drop.  The final 9% was invested across March-June.

Did you sit tight through the downturn we covered so thoroughly in post 3.0?  Or did you capitulate and sell on the way down and lock in losses?  Why were you patient?  Why did you sell?  Do you have an investment policy?  Did you follow it?

Many of us have experienced these black swan events in the past and know what the result will be if we just sit tight and remain invested.  The question usually is how long is the recovery going to take?  In this case it appears the market was irrational on the doom and gloom side in March and presented an upside opportunity if you had confidence and new money to put to work.

What did I learn (again):

  • Calm patience is rewarded
  • It is painful if you let the unrealized losses get to you
    • Note the graphic above, I started investing in this account in August 2019 after taking early retirement and in March of 2020 the account was down almost ($70,000)
    • On January 31st, 2020 I was pretty happy to be up over $20,000 and 60 days later I was down ($70,000) that is a ($90,000) move the wrong way
  • Continued investment amidst the chaos is rewarded
    • During the third week of March I nibbled and picked up a few shares of the VTI in the low 120’s and high teens and on March 23rd I picked up 2 shares at $110.16, today it closed at $161.39, up 47% from that low (Why only 2 at this price? Because you don’t know it’s the bottom until the market climbs out)
  • Specialized funds or sector specific funds may have a longer (or shorter) recovery period than the broad VTSAX/VTI type funds, I would have preferred more broad funds
    • My sector weightings will need some re-balancing
  • My risk tolerance was not as high as I thought it was, having experienced this level of pain and learning I have drifted down to a 75/25 mix and will likely hold there
    • I do agree with much of the writings concerning early retirees with a long horizon, those writings suggest you must remain exposed to equities to fight off the impact of inflation and allow the portfolio to maintain a high enough return to support withdrawals
Source: Vanguard App

It was tempting to put other buckets of reserves in the market at the low March levels but back to having an investment policy and financial plan, those funds are not exposed to the stock market for a reason.  That reason is to prevent the need to sell at depressed levels to cover expenses.  This approach is designed to allow the normal cycle to return portfolio values to higher ground.  Remember you can’t time the market but you can continually invest over time regardless of market volatility as funds are available.

Takeaways:

  1. You have lived through a black swan event (or at least the first part of one) and can appreciate the first hand emotions that you experienced and how you may be able to keep them in check next time the market drops. 
  2. Continued or automatic investing through the cycle helps enhance your portfolio values when recovery takes place.
  3. Panic selling (another word for market timing) on the way to the bottom is seldom matched with buying in at the bottom and experiencing the full benefit of the recovery.  The market timing game requires that you are right twice, when you sell and when you buy.  Resist this temptation.
  4. Having a long term horizon, as you should if you are an investor, guides your policy and actions and can ease the anxiety or nerves that accompany negative volatility.

As for my biggest personal take away, the TSPTW approach was something I believed but putting it in practice/experimenting with a portion of our assets made it real. This is a viable approach for our investing across retirement and other accounts and I plan to continue to deploy the tenets of the strategies.

How did you do in the COVID-19 Investment Cycle?  Let us know in the comments below.  Did you learn anything else through this experience?

Please send feedback or comments, even ideas you would like to see covered in future posts, your constructive input is welcomed and appreciated.  Use the boxes below to send your comments. 

_____________________________________________

Remember MIND THE GAP!  +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

www.filighter.com

or on Facebook: https://www.facebook.com/FIlightER

Post 5.0 –> Mind the GAP! Discover the Secret Turbocharger to YOUR Early Retirement!

FI-light-ER post 5.0 / FirstPublished20200603 www.filighter.com

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Disclaimer: We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.  FIlighter accepts no responsibility for any actions or activities you may take based on anything discussed on the website, postings, or comments.

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5.0 –> Spoiler Alert…it isn’t rocket science…this Turbocharger may get you to early retirement quicker than you think!  How about an extra million dollar$ for your nest egg?

There was a brief example in my last post that really bears its own post.  This one tool in your FI path tool box can accelerate your arrival at Financial Independence.  First let’s discuss WHY it matters then reveal the Turbocharger!

Frequently you hear the term “Grow the Gap”.  I personally close every post with “Mind the Gap!” taken from a trip to London a few years back.  When riding the subway train the announcer warns everyone to mind the gap between the platform and the train door for your safety.  So my message is Mind the Gap for the benefit of growing the Gap and accelerating your path to Financial Independence.

The formula is really simple; Plus/Add Income Minus/Less Expenses equals the Gap.

+Income – Expenses = The GAP

The Gap is what you have left over to invest, provide emergency funds, save for a large purchase, fuel your dreams, and create Financial Independence.  The larger the Gap the more fuel you have to Grow Assets.  In post 4.0 we discussed Net Worth in detail and the growth of assets coupled with reducing liabilities is the key to building net worth.

The simple formula above gives you two means to grow the gap.  Increase your income, or decrease your expenses.  Either or both will work to accelerate your path to FI along with increased cash flow each month and who doesn’t need a little more breathing room in the budget.  The opposite actions   delay your path to retirement, i.e. lower income and higher expenses delay your ability to accumulate the asset base required to sustain your retirement lifestyle.  Several terms in the previous sentence are outside the scope of this posting, we will not cover the size of assets required or what your retirement lifestyle will cost.  Those factors are highly personal and geographically driven.  What we will focus on is the Turbocharger that could greatly reduce your expenses particularly if you have a longer horizon to your early retirement.  This could be the key to Early Retirement or perhaps FAT FI (see Physician on FIRE definition of FAT FI).

The Turbocharger I’m speaking about is what vehicle you drive.  Most families spend the largest piece of their income on their home.  Right behind housing costs is transportation.  Typical couples have two vehicles or more and when their children obtain drivers licenses.  Our fleet maxed out at 6 vehicles and at the peak, the last three vehicle purchases were what we called Econoboxes (my coming of driving age terminology).  Per Wikipedia definition, “Econobox is a United States informal slang term for a small, boxy, fuel-efficient economy car with few luxuries and a low price. The term is typically used for cars from the 1970s and 1980s”.  I wish I could say this was always my philosophy; however the marketing and debt culture worked its spell on me as it does many if not most young professionals.  I graduated, started my first job in public accounting at $23,500 per year and 6 months later scraped together a down payment for a brand new car and actually drove it right off the showroom floor.  It was a 1985 Dodge ES Turbo Convertible all mine for $16,800 (does anyone think spending >70% of your gross pay on a car is reasonable?).  Not three months earlier, my dad suggested I consider a Chevy Chevette which could be bought for $6,000.  I had the Ray-ban sunglasses and a black turbo convertible with alloy wheels, leather seats, and a cassette tape deck.  I loaded up my buddies and cruised Westheimer listening to Dire Straits “Walk of Life” or “Money for Nothing”…but I digress.  While on this dream look back tangent, had I invested the $10,000 difference saved in the SP500 and reinvested the dividends, it would now be over $325,000, but hey…I looked really good in that car. #stupidlessons #hindsightin2020

1985 Dodge ES Turbo Convertible Source: motorbase.com

Let’s look at a data based scenario for three couples that buy their first cars in 1990 and continue to own two cars for 30 years ending with 2019.  Both drivers will purchase equal cars to begin.  Holding periods will vary as will trade in credits as detailed in each scenario assumptions below.  For all scenarios, we assume cars are purchased for cash; any interest costs would be additional.  We used an average 14,000 miles driven per year and maintenance and insurance costs were ignored.  It could be argued that maintenance would be higher on cars held for longer periods; these costs may be partially offset by lower insurance costs.  In any event as you will see the savings significantly exceed incremental maintenance cost.

Scenario 1 Base Case graphic

In the above scenario image one driver having the newer car and the other driver holding their vehicle slightly longer.  Many couples end up passing cars down or taking turns buying so the cost doesn’t hit in the same year.  If children are involved and they get one of the vehicles, obviously the trade in would not happen and costs to maintain an additional vehicle would be added.  We are sticking to Scenario 1 as our base case and not adding a 3rd vehicle or downsizing to 1 vehicle during the 30 year period.

Now let’s make a small adjustment moving to Turbocharging our pursuit of FI. Scenario 2 has the same assumptions on holding vehicles, however Drivers MiniFI A & B spend 25% less on vehicles.

Scenario 2 MiniFI Case graphic

As in Scenario 1, the MiniFI drivers end up purchasing 13 vehicles over the 30 year period, however with a modest move to a bit less luxury the Scenario 2 couple’s decision to spend 75% of the base case cost on a vehicle saves them $132,434 in straight cash.  If the savings are invested when achieved at a very conservative 5% rate, they will have $292,145 more in their nest egg at the end of 2019.  That’s like getting a $100,000 bonus check every 10 years falling out of the sky!  If a slightly higher 8% investment return assumption is used, the difference swells to $509,424 over 30 years and what did they give up?  They chose a mid-level trim package instead of a loaded premium vehicle.  Friends, these are real savings, hundreds of thousands of dollars that would go to your personal financial independence rather than the pockets of the auto makers, dealer networks, and lending institutions.

In this third scenario, we will call them the MaxFI drivers.  They get more aggressive on their pursuit of FI.  This couple spends even less on the first cars and both drivers hold their vehicles for 10 years.

Scenario 3 MaxFI graphic

The Scenario 3 MaxFI couple is handsomely rewarded for their pursuit of FI by holding modest priced vehicles for 10 years and as a result during the 30 year period, they only purchase 6 vehicles and their savings compared to the base case invested at 5% generate $720,627 at the end of 2019.  With slightly higher investment assumptions of 8%, the savings generate $1.2 million!  Yes, the decision to buy less and hold longer can single handedly make you a millionaire in 30 years (assuming you are not running up debt in excess of your assets elsewhere).

The new car bug can bite anyone.  The question is; have you really done the math?  Do sales tactics or in your face marketing campaigns work on you?  Do you fall for the “monthly payment” sales strategy?  How about zero percent interest?  Rebates?  Do you believe you will always have a car payment?  Did you trade a car that wasn’t paid off and end up “upside down” on that next car rolling the old balance due into the new loan and leaving the dealership with more debt than the new car was worth?  Have you sold a car and after settling with the buyer, withdrawn thousands from your bank account to pay off the upside down loan?  Did you trade a car just because it had 100,000 miles on it (I did because the car was supposed to fall apart when it hit 100,000 miles)?   Sometimes we have to learn these lessons the hard way.

Make no mistake one of the concepts of FI is to have what brings you joy.  As Paula Pant says, “You can afford anything but not everything.  What’s it going to be?”  If your vehicle truly brings you joy over and above reliable transportation from A to B perhaps it is worth a little extra in your budget.  But if you are here for the long game, do the math and accelerate your path to FI.

Even if you feel like there is no way you would own a car that is 10 years old, perhaps you just decide to hold cars for 7 years, that savings over time is real!  It aggregates and compounds and looking out 10, 20, or 30 years, it could be the difference between an early retirement or having to settle for a traditional retirement.  There are many shades of grey on the path to FI, it is not all or nothing, feast or famine, have or have not, there are degrees of decisions than can tilt favorably and increasingly so if you have the mindset to push them a bit further than a pre-conceived comfort zone.

That’s it this week!  Take ACTION!  Mind the GAP!  Start building your net worth with a Turbocharged Engine.  No longer do you make emotional decisions when buying a vehicle with respect to timing or price level.  Buy what you need and take care of it.  It’s just A to B and that could be 7 to 10 more years of retirement.  Or go ahead and “keep up with the Jones’s” buy that nice car every 4 years, finance it and you can work till you are 65 or 70 just like them.

Please send feedback or comments, even ideas you would like to see covered in future posts, your constructive input is welcomed and appreciated.  Use the boxes below to send your comments. 

_____________________________________________

Remember MIND THE GAP!  +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER Email: [email protected]

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

www.filighter.com

or on Facebook: https://www.facebook.com/FIlightER

Post 4.0 –> Covid-19 Personal Finance Silver Linings…and Homework Assignments (Seven steps on your path to FI)

FI-light-ER post 4.0 / FirstPublished20200528 www.filighter.com

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Disclaimer: We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.  FIlighter accepts no responsibility for any actions or activities you may take based on anything discussed on the website, postings, or comments.

4.0 –> Seven steps you can take today on your path to early retirement or Financial Independence from the FI-light-ER

Each of us has different experiences to share on our Covid-19 Storm.  I’ve got a high school classmate that posts a daily SL or Silver Lining in the midst of the Covid-19 Pandemic “Storm”.  This week I would like to focus on a Personal Finance SL related to the opportunity many of us have to spend more time than usual with our significant others.  At the same time, I want to recognize and thank the souls in healthcare, law enforcement, retail and other disciplines that have been caring for all of us that are weathering the storm that is the Covid-19 Pandemic.

Spending more time with those important relationships in your life give you opportunities to reflect, communicate, dream, and generally have deeper conversations.  A major point of the FI-light-ER name is to consider a trajectory to reach Financial Independence and achieve a sLIGHTly Early Retirement.  You may already have routine financial plan, budget reviews, and retirement conversations as a matter of course with your significant other (SO) or if you are single, you may have given serious thought or taken more formal steps to this future state.  As I have stated in previous posts, education and data are key in understanding your preparedness and status to achieving FU money, Financial Independence, Early Retirement, or other personal goals.

As a reminder recall the disclaimer above, see your own professional advisor with regard to your individual situation.

We are going to cover several items today and many of them are likely actionable homework to take a heading on your preparedness or next steps as you begin the path to FI (it doesn’t have to end with retirement, it’s really about independence to pursue your dream future).  I’ll number these items for reference and further discussion and keep in mind, we will be taking the 50,000 foot view, and each of these items could be a lengthy post on its own.  These items can be pursued in different sequences; however you will definitely need to create the spending analysis before any budgeting is completed:

  1. Spending Analysis – While some call this a budget, it is really the precursor to any budget or longer term plan.  To prepare an effective forward look on your personal finances there must be a basis or beginning reference point with a high correlation to future expenses.  The goal of this exercise is understand current expenses with a high enough confidence that they can be used as the basis for future projections. Personally to confirm our spending, I began with downloads from bank, credit card, and healthcare account detail transactions for 2019.  Using categories (included in credit card download and a few additional unique categories created for our situation) and pivot tables with Excel skills a rough cut was pretty easy.  A 12 month look back is beneficial as the annual, semi-annual, and quarterly items will surface as well as regular monthly bills.  At a minimum I would suggest going back 3 full months and then add in things that may be paid outside of the monthly frequency like insurance premiums, property taxes, or other “lumpy” expenses.  Building a database and using pivot tables provides easy research and spending analysis.  This is my comfort zone, yours may be a pencil and paper approach with a stack of bank or credit card statements, use the tools at your disposal.
  2. Net Worth – Don’t let this term scare you, it is simple math.  What do you Own (Assets)?  What Do you Owe (Liabilities)?  Your Financial Net Worth is simply the difference between your assets and your liabilities or obligations.  The goal is to grow this as a positive number.  In the case of a person just starting their career as an attorney or doctor and a mound of student loan debt, their assets may be much smaller than their liabilities generating a negative net worth.  Don’t be discouraged, each month you earn a paycheck and make deposits in a retirement plan and begin to build assets and reduce or pay off liabilities your net worth will reflect improvement and eventually become a growing positive number.  Please don’t underestimate the value of this step.  If you have no reference point (Net Worth) you can’t navigate to the destination (FI).  Many people are surprised when they add up all their home value, retirement accounts, investments, bank accounts, emergency funds, etc. and subtract their student loans, car loans, mortgages, medical debt, etc. they find that they are already millionaires. Or thirty year olds may find they are already above a six figure net worth.  Each number in this calculation is a lever that may be pulled or adjusted to favorably impact future net worth.  For instance, my daughter drives a 2010 Corolla.  We gave it to her with 40,000 miles and a new set of Michelins when she graduated and moved to the big city.  When she got out of school she was talking new car pretty hard.  Six years later, what is she driving?  She figured out that she valued the flexibility of higher positive cash flow and net worth growth more than a smelly shiny new car.  She achieved a solid FU balance and is growing the gap.  She probably has heard a hundred times, having cash gives you options, and having options means opportunities can become actions.  The point is you have to know where you are to figure out how long the path to FI may be in front of you, or conversely you may already be Financially Independent and did not even know.
  3. Current Year Forecast – What does the rest of the year Income and Spending look like?  Will it match the first 5 months?  Does summer include vacations and Christmas large gift budgets?  Are you making any large purchases like cars or homes?
  4. Annual Plan – What does your income and expense budget look like for the next year?  Can you grow the GAP? Increase Income or decrease expenses?  Are you investing the difference?  Will you pay off any debts this year and create more breathing room to deploy funds elsewhere?  Will you use the “found” money to pay more debt or will you grow your retirement accounts or fund a 529 Plan?
  5. Mid Term Plan – What does the horizon look like in the next five years?  Are you sending a child off to college?  Planning to give your child a big wedding?  Will you be replacing one or two cars?  Are you adding vehicles as children become licensed drivers?
  6. Life Plan – Based on all the items above or perhaps only 1) and 2) what does your financial picture look like for the rest of your life?  This doesn’t have to be a line by line budget with extreme details, but it should reflect large items and life changes.  I would suggest annual columns by year including your age(s) for each column (I went to 90, but feel free to live to 100 on paper).  This document was the main validation tool when making my decision to take an early retirement.  Include any income sources and even Social Security (if in the USA) when you reach retirement age or if you defer it and let it grow show a larger amount in those future years.  For more on Social Security see 7) below.  When working on the Life Plan spreadsheet, it is important to include your assets, liabilities, income and expenses as funding the future will have to come from income sources or drawdowns of assets.  Remember while some assets may be real estate, your life plan may include selling a large house and downsizing creating a double benefit as your will capture some liquidity from the sale as proceeds and the down sized house will likely cost less to maintain freeing up some space in the expense budget.  As you drive less will you reduce the number of vehicles?  Will you add an RV or a Boat when you retire?  Be sure and add any additional costs for these new toys.  Do you plan to travel the world?  I encourage you to do two things in this exercise, dream big and be generous/ conservative in expense estimates.  Be careful not to overestimate income sources or underestimate expenses.  Additionally, put a contingency/surprise budget line item in the calculation to cover “what ifs”?  What if grandma needs help?  What if we have a medical surprise and a large balance to pay off?  What if we can’t sell our house for a big gain to fund our retirement?  All these surprises will not happen, but at least one or two will show up without warning.  Plan for some breathing room.
  7. Social Security – When was the last time you downloaded your social security earnings and estimated benefit statement?  Go to https://www.ssa.gov/ right now and download a statement.  Put an annual event on your calendar to do this every year on the last week in May.  In addition to a statement, select the Earnings Record option on the right side of the screen.  This view can be copied and pasted into a spreadsheet.  Focus on the “Taxed Medicare Earnings” as they are not limited numbers.  I encourage you to digest these annual data points, insert columns and calculate your accumulated earnings each year as well as increases or decreases.  What happened the years that you had large increases? Decreases? How many years did it take you to reach $100,000 in cumulative earnings?  $1,000,000? $2,000,000?  What have you earned LTD (life to date)?  Are you surprised?  Where did it all go?  The take aways here are the realization you probably have had more money pass through your hands than you realize, and you will have a number to assume for Social Security income in your life plan and an idea if you may defer to age 70 for higher income.  My personal cash breakeven is age 82 if I wait till 70 for higher benefit vs. taking full retirement at age 67.  Said another way, if I start taking payments at 67, I will have 36 monthly payments before 70 however, my benefit would have been larger at 70 if I waited.  That larger benefit takes 12 years to make up the deferral of the 36 payments from 67-70.  There are many different strategies on claiming social security, just make a guess for now and use it in your life plan.  I was surprised by several things looking at these numbers. 
    • Age 24 – Reached $100,000 cumulative earnings
    • Age 36 – Reached $1,000,000 cumulative earnings
    • Earnings went up >25% several times in my career
    • Earnings went down >(25%) three times including (34%), (62%) and (42%) and none of these related to any unemployment, I remained continually employed since college graduation.  Imagine if my lifestyle would have crept up to the earnings level before these “bad” years?  It would have been devastating.

That is enough for this week.  I’m not sure if you will have an opportunity to do any of this homework but promise me you will take action on at least one of these if you have not already completed them all.  May I suggest you start with 2) and then maybe do 7) for fun.

The second promise I will request is that you open the dialog about the future and even retirement with your significant other if you have one.  What are your dreams?  Can you connect where you are to where you want to be?  Are you living at your means or well below?  Are you growing the GAP?  What is your net worth?  It is extremely important that both people in a relationship have a clear picture of the financial landscape.  That doesn’t mean you have to take turns paying the bills, it means you have to have open communication about all financial accounts, debts, credit cards, etc.  I would suggest at least a quarterly discussion and it can be as detailed as required for both to feel up to date.  If you find yourself in a situation where you are hiding something, strongly consider coming clean.  I would suggest reading Dave Ramsey’s, “The Total Money Makeover” if you are struggling with the debt side of your net worth and also the relationship perspective aspects of combined finances.

That’s it this week!  Take ACTION!  Mind the GAP!  Figure out your Net Worth and set a goal for NW by the end of the year.

Please send feedback or comments, even ideas you would like to see covered in future posts, your constructive input is welcomed and appreciated.  Use the boxes below to send your comments. 

_____________________________________________

Remember MIND THE GAP!  +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

www.filighter.com or on Facebook: https://www.facebook.com/FIlightER

Post 3.0 –> We are in it together, …The Market (and Covid-19)

FI-light-ER post 3.0 / FirstPublished20200520 www.filighter.com

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Disclaimer: We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.  FIlighter accepts no responsibility for any actions or activities you may take based on anything discussed on the website, postings, or comments.

3.0 –> Previous posts 1.0 and 2.0 really dove deep into the details and perhaps a bit lighter post is in order as we head into the Memorial Day 2020 holiday here in the U.S.A.  Memorial Day is set aside to honor and remember members of the United States Armed Forces that died while serving their country.

The financial calendar for this time of year brings back the old adage, “Sell in May and Go Away!”  For many years, this actually proved to be a good strategy but since about 2013, investors would have missed some attractive gains over the period from May to September.  There is some great perspective and history of this quote going back to an old English saying where many Londoners headed out of town for the hot summer months.  Here’s a link to an Investopedia article if you want to read more.

In the case of 2020, we certainly have some optimism as the country (and world) slowly wakes up the economic engine and returns employees to the workforce the economic statistics and more important public company earnings will improve.  The Q2-2020 earnings reports may be worse than Q1-2020 with all three months impacted by the national, state, and local Covid-19 orders to remain home and use precautions with hand washing, disinfecting, wearing masks, and maintaining safe distances.

In the last post, 2.0 we discussed thoroughly the importance of perspective and timeframe when viewing the horizon.  Think about a view of a clear blue sky horizon and visibility for miles and miles as compared to the continual waves of storms with brief good weather between each downpour and wind gust.  The 2.0 discussion was framed around the long term perspective and the fact that the market over time continues to go up.  Also we discussed the fact that timing the market is a fool’s folly and time in the market is a more reliable and effective strategy.

This week perhaps a little sympathy is in order to share in the reality that hit each of us as we opened our 2020 monthly and quarter end statements and found our former 2019 ostrich sized nest egg has become a duck egg.  There are many scenarios and diverse factors impacting each person’s individual unique portfolio and any points may or may not apply to your situation.  We will limit this post to a scenario that uses my actual personal investment results for 2020.

First let’s discuss the emotion and psychology a bit that each of us experience when we see portfolio balances go up or down.  There are so many terms to explore, Confirmation Bias, Overconfidence, Hindsight Bias, Recency Bias, Disposition Effect, Mental Accounting, Regret Aversion, Prospect Theory, and Loss Aversion are just a few.  There are hundreds of books and articles covering this area but we will just look a bit on recent market fluctuations and the Disposition Effect discussed in the findings of the Shefrin and Statman study in 1985 (this link will retrieve the actual publication).  The phrase I want to focus on relates to the following statement “people dislike incurring losses much more than they enjoy making gains, and people are willing to gamble in the domain of losses“.  I want to focus on only the first part of the quote as this seems more pertinent to how I (~we) are feeling based on the 2020 market activity.  (Yes, I realize the main context of the research is why people sell winners and hang on to losers, but the mindset applies to the feelings around potential losses vs. potential gains and since I’m the editor that’s what we will cover).

I’m certainly willing to admit as I prepared to retire and the bull market pushed portfolio values above my target retirement goal it gave me a good bit of confidence around the decision.  My allocation and risk tolerance that allowed the gain also allowed exposure during the entrance of a very angry bear market!  (Allocation and Risk Tolerance are future post items).  Covid-19, as implications became more understood, impacted the market.  How did it make you FEEL?  Did the unrealized LOSS hurt more than the unrealized GAINS made you feel good?  I can tell you the drop in the numbers coupled with the sequence of return impact was personally very painful.  It didn’t help that I had recently read in Todd Tresidder’s book, “How much Money do I need to Retire” that the highest percentage of people that fail in retirement are those that retire when valuations are very high and the situation is further aggravated by a negative returns early in the retirement phase.  In his book he provides statistics that using a safe withdrawal rate of 4% approximately 1 out of 5 people will run out of money in retirement when valuations are in the top 25% at the time of retirement (measured as an 18.5 Price Earnings Ratio or higher).  I do recommend this book particularly if you enjoy understanding the math side of the retirement perspective.  The content above came from a chapter I particularly enjoyed titled “Monte Carlo Calculators And Other Random Myths” found in the first section of the book, “Model 1: Conventional Retirement Planning”.  Having personally experienced financial advisors using these type models to provide a score or % likelihood that you have a successful financial plan based on your inputs and returns assumptions; I’m certainly going to take a more cautious view of this type of data as I retired into the opposite of a sweet spot with high valuations across the board in the fall of 2019.

Enough of the sappy background…what is the data?  Many readers have a particular love for facts and like to focus on the “So what?” perspective.  I can relate to the “Where’s the beef?” mentality… so here are three different data sets.  All three sets of data have the exact same increase or decrease each month to the portfolio.  The difference is the size of the portfolio.  There is a $1,000,000, a $100,000, and a $10,000 portfolio.  Think about how you would feel if each of these were your portfolio?

$1 million, $100,000, and $10,000 portfolio examples

This is the point where I remind you we are not panicking in the midst of this short snapshot covering the first trimester of 2020.  The context that we discussed back on post 2.0 is what sets the perspective and creates the feelings and emotions as we digest the numbers.  Imagine if you will the $1,000,000 portfolio set of numbers above as a recent retiree and you see that almost ($200,000) has vaporized in the first quarter of 2020.  You begin to think about what that money may have been used for like a retirement cabin, an RV and a truck, a nice boat, etc. etc…Who am I kidding, you begin to think you need to return to a W-2 job!!!  After you count to ten and realize you have 30+ years in front of you for retirement living, perhaps you are confident the market will recover and proceed to new records completely wiping out the shrinkage of the nest egg.  In April alone 8.1% of the 18.8% decline was recovered.  Even with this recovery we are down 12.2% year to date.  Spending flexibility is one tool or mechanism in your retirement budget that can be rocket fuel if you can ease back on withdrawals during poor market performance years and conversely, enjoy some extra budget spending in good years.

Now we will focus on the $100,000 portfolio.  Say you were tickled pink on your success at the end of 2019 as you reached the goal of a six-digit nest egg.  This is one of those mental milestones that lends itself to some accomplishment and pride in your diligence to establish savings for retirement, college costs, a real estate purchase, the possibilities are endless.  Then BAM! At the end of March you are down to $80K!  How did this happen so fast?  All that money you dumped in during the last few quarters or years is gone!  Not so fast, it has not disappeared; the valuations have just gone down.  Each share you purchased at say $50.00 last year is now only worth $43.90 at the end of April.  If you are 35 or 40 years old, and have the long view, you are excited as now you are buying new shares at a lower price per share and will enjoy the growth of the price as the economy recovers.  The ($20K) of unrealized loss at March may represent a car to you in tangible terms, but in investments you are likely going to leave those shares invested (and continue to buy more at bargain prices) and allow them to return to higher values as the market recovers.  Unlike a $20,000 car that typically loses its value every year until it becomes junk yard scrap, your shares of broad based low cost stock index funds will likely recover with the market to new highs.  As your retirement approaches, you may continually reduce the risk that these fluctuations have on your portfolio (allocation and risk tolerance, future postings).

If you are just starting out or otherwise have managed to get your investments into the five digit account size perhaps the $1,900 drop in your portfolio set you back on your heels.  If you are putting $500 a month into your investments, this drop is not significant in the long term.  Your account balance will return to previous levels with 4 months of new contributions.  In the future, you may be pleasantly surprised when your share values recover and continue to grow as they have in the past.

Back to our original quote concerning how much more we feel the bad than we celebrate the good.  This is human nature in investing and there are approaches to address this perspective.  Several months back JL Collins, the author of “The Simple Path to Wealth” recorded a guided meditation for when the stock market is dropping (link here).  You may enjoy listening to this file.  I personally reflected back to this perspective as the market saw-toothed its way down to the March 23rd lows.  This meditation also appeared on a Choose FI podcast as JL Collins is a multi-episode guest.

The point in all this is that human nature doesn’t always make investing easy or even pleasant.  But knowledge, experience, and continued education can give you firm foundational perspective on investing.  Setting your frame with a longer view can disarm the fear and disappointment that recent fluctuations have caused.  We have experienced this black swan event together.  There are brighter days ahead. 

If you are an American please pause and reflect this Memorial Day weekend on those in the military that paid the ultimate price for the freedoms we enjoy and treasure daily.

Editor Note: The allocation of the portfolio in the example above:

Sample Allocation used in Portfolio examples above

Please don’t beat me up over the allocation, as I mentioned above everyone has a unique situation and there are reasons for this allocation.  What is not obvious above is the allocation by industry segment and the pain the energy industry has imparted to the overall portfolio performance. 

Please send feedback or comments, even ideas you would like to see covered in future posts, your constructive input is welcomed and appreciated.  Use the boxes below to send your comments. 

_____________________________________________

Remember MIND THE GAP!  +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

www.filighter.com

or on Facebook: https://www.facebook.com/FIlightER

2.0 The Not So Simple Path to Wealth …

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

FI-light-ER post 2.0 / FirstPublished20200512 www.filighter.com

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

2.0 –> By now many of you in the FIRE space have been touched by podcasts, quotes, references and more to a combination of JL Collins Stock Series or his book “The Simple Path to Wealth”.  Some of you may have seen the excellent documentary movie, “Playing with Fire” where JL Collins appears.  I have no official survey but I think it is pretty safe to assume it is the most recommended book to those new to the FIRE concept.  As for me this book was a real page turner and I found so many actionable lessons I have bought several copies and given them away.

Why do you think this book along with a few other excellent titles is common amongst the FIRE movement?  Could be many reasons, but I’ll just give you some of my personal insight.  As a reminder my wife and I are both CPA’s and let me dispel any thought that CPA’s or any Accountant or Financial career individuals are better than the average person when it comes to investing.  Investing is something you learn.  Perhaps you first learned from your parents, then friends, a college class, your co-worker, a full service financial advisor, a 401k representative, your benefits department, could be any number of opportunities or people that helped to form your knowledge base on investing.  That knowledge or perspective may be right on point or a little tainted or one sided.  As we continue to explore I encourage you to have an open mind and willingness to learn and expand your knowledge base of personal finance.  This book, “The Simple Path to Wealth”, is a great way to start or enhance your knowledge and perspective and is easy to follow.

There was little talk about investing in our home growing up.  My first exposure to investing was my second job in the late 80’s when 401k plans were taking hold.  Back then 401k’s were pretty simple, you put pre-tax income into the investment choices and would be taxed when you withdrew funds after reaching 59 ½ years old some 40 years later.  Our company had a great $/$ match up to 6% of your pay plus a voluntary 2% contribution.  Simply stated for every $6.00 you had deducted from your paycheck, the company put in $8.00.  These funds were invested in several of the fund options and after 5 years of vesting you could keep 100% of the company match and retirement contribution portion.  While I had enough sense to put in the 6% to get the full match, I did not see the complete value of hitting the max contribution and compounding over the next 40 years (another post topic). 

What to do with the other money we were making?  After hearing about investing from others in the office and having a Treasury and Tax guy around the corner named Gary with a Bloomberg Terminal (a device in the 80’s that let you see what price stocks were trading essentially in real-ish time)  a co-worker and I started a little investment club.  “The Billionaire Boys Club” which came from a 1987 TV film with the same name.  The two of us opened brokerage accounts and started buying individual stocks.  Back then you literally had to call a broker on the telephone and place a trade or get a quote.  We paid ~$35 discounted commissions on each trade by using a service affiliated with our credit union.  I don’t have to tell you how much this process has changed post internet revolution.  We generally had positive success in our trades, although we had a habit of selling when something was up 10 or 15% after covering buy/sell commissions.  What did we know; we were “Stock Traders” with a capital “T”.

I know this back story is really turning into a death spiral tangent, but hang with me and we will connect the dots to TSPTW.  During this period of investing, I had first person experience with the 1987 crash. 

[Note in this article, all references to Dow or the market refer to the Dow Jones Industrial Average]

Data from Wikipedia fills the background environment, after the Dow set an All Time High of 2,722 points August 25th, 1987, 44% above the previous year’s close, the decline leading up to Black Monday was the following:

  • Wednesday October 14th, Dow Drops 95 points or 3.8% a new one day record
  • Thursday, October 15th, Dow Drops 58 points or 2.4%
  • Friday, October 16th, Dow Drops 108 points or 4.6% a new one day record
  • Monday, October 19th, Dow Dropped 508 points or 22.6%

There is some great background on all the activities that took place over that weekend and the trading policies and models that forced huge sell offs on Monday; here’s the link to a simple summary.  My point in diving so hard into this history is the market dropped >30% in less than a week.  The Covid-19 pandemic economic impact pushed the current market down from recent record highs a similar amount >30% in a fairly short period as well.

So to relieve your suspense…how did 1987 turn out for investors?

  • As compared to prior year end, 1987 was +2.3% above 1986
  • As compared to the record 2,722 high for the year, 1987 finished at 1,939 or down (29%)
    • The record high was reached again in August 1989 two years to the month from the previous record
  • As compared to the 1,739 low for the year, 1987 finished +12%

All these are just data points, (source Macrotrends.net )  but they are interesting…how would you feel if you knew the market would return to record highs in less than two years?  Does history repeat itself?  Sometimes, sort of…however, these points are more or less important to each of us depending on our base lens view.  As I write this post on May 11th, 2020, the market DJIA closed at 24,222 or 3.8% above the beginning of last year, 2019.  That’s not so bad really, but (…pregnant pause) we remain down (16.1%) from the beginning of this year 2020.  Had I been writing on March 23rd, 2020 we would have been down >(30%).  At that low point I was thinking another (10%) drop and I may need to get a W-2 position much sooner than I thought.

What lens do you look through? A few years? A few months? Or remember our discussion earlier, if you are a 20/30/40 something and you have a 20-40 year glide path this doesn’t shake you, perhaps you have enough backbone to remain invested and keep adding to the pile at bargain prices!

One of the most important chapters of the book “The Simple Path to Wealth” is Chapter 7, “The Market Always Goes Up”.  It is largely the horizon that you use when setting your own expectations of returns of equities in a market that is volatile.  Pull up any 20+ year view of the DJIA in modern history and you will find period after period that trends up and to the right.  It’s a fact, given a long horizon; the market will always go up (barring any catastrophic event that will make all the talk about investing less important than human survival).  I’m not going to lie, the mental fortitude to remain invested in the market when you have poured in cash and see the quarterly statements down (30%) is overwhelming.  You can’t help but start thinking you would be better off if you buried your cash in the back yard or hid it under the mattress.  History has rewarded patience over and over during these volatile black swan events.

This brings us to the main topic of Chapter 8, TIMING THE MARKET.  I tell my kids and anyone else who will listen; “If you are not in, you can’t win!” this is true in the market.  Conversely, if you are out you can lose! Imagine a +25% gain year while you bury your money in the back yard.  On top of that what is even worse, inflation eats your cash like termites and you have less purchasing power when you dig it up 10 years later.  Hind sight is 20/20 and two facts that come to mind personally are my need for a large “emergency/opportunity” fund and holding too much cash on the sidelines waiting for the market to drop.  Both of these issues fly in the face of my own advice.  I have improved in some respects but due to my attempt to “wait for the market to drop” much of the bull run was wasted as opportunity cost due to my stupidity that I somehow know better than you when and how far the market will drop, and secondly when it will stop going up.  Timing the market requires you to be correct twice, when to buy and when to sell.  You have probably heard many times the quote, “TIME IN THE MARKET BEATS TIMING THE MARKET”.

As I did in the 1987 Black Monday discussion, let me offer some 2020 data points from my Wikipedia source.  These data points are taken from the top 20 single day percentage gains or losses in the DJIA.

I’m guessing this brings back memories of the craziness on CNBC or FOX Business News over the last few months.  It would be so nice if you could pull out before those big drops and double down before the gains.  The momentum changes in many cases mid-session on some of the days was completely out of left field.  The emotional whip saw that took place from February through April and will continue for months to come can make it difficult to witness.  My point is with swings like this, the market is truly unpredictable in direction or magnitude.  While you will experience drops if you are in the market (invested), you will ALSO experience GAIN$!  Given patience, the market will recover and continue the relentless trek ^ up and -> to the right!  Volatility happens but the market will continue to set record highs long after we are gone.

Let me apologize for the craziness of this post, and wrap up by saying, I love JL Collins approach to all things finance and the reality that investing should not be complicated.  You can do it yourself successfully, and there are many actionable tips that will help you adjust what you are doing now in a positive way, or just get started.  What really moved me was much of the Vanguard discussion and the funds examples in Chapter 10.  Before I read 100 pages, I literally opened a Vanguard account in August 2019 and started selling stocks and moving proceeds funds from my E*TRADE and some of my last paychecks to increase my holdings of low cost index funds and ETFs (Exchange Traded Funds).  While timing was not on my side for some of these purchases, I am confident I will look back in 5 years and they will all be in the green.  I have veered off the “Simple Path” guidelines many times in my own investing history but looking back with 20/20 vision, I wished I would have followed “The Simple Path to Wealth” approach to the letter.  That would have put me in the Suze Orman FI category (Ha!).

Editor comments:  This post was intended to focus on the book “The Simple Path to Wealth”, however the Covid-19 impact on the economy and my investment portfolio led me to focus on the big picture view of the storm we are in with our investments and how a longer view may settle the nerves.  The book does offer quite a bit of insight on these type of market events.  The post title alludes to the path I have taken that could have been much simpler and yielded a better result.  Those other tangents will have to wait for future posts.

Please send feedback or comments, even ideas you would like to see covered in future posts, your constructive input is welcomed and appreciated.

_____________________________________________

Remember MIND THE GAP!  +Income – Expenses = The GAP <–Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.

www.filighter.com

Find us on Facebook at www.facebook.com/FIlightER

1.0 Lambo the FI-light-ER

FI-light-ER post 1.0 / FirstPublished20200506 www.filighter.com

FI-light-ER – n.(Financially Independent achieving slightly Early Retirement)

Two of my coworkers called me out these past few weeks on some of the goals I had shared when I accepted an early retirement package and walked away from an 18 year employer to dreams of my next pursuits in life.  The first 6 months of my early retirement flashed by pretty quickly with preplanned travel, professional volunteer commitments, and holidays with family.  Then a routine or lack of routine set in that let’s just say was not too productive at least from the perspective of those looking in from the outside.

I have some specific goals for this transition and my first mini/maxi retirement.  But above those goals, I have guiding overreaching objectives and shared them all in my retirement party speech back in September 2019.  Those were all the “F” words; I planned to spend more time focused on my Faith, Family, Fitness, Future, and Fun! 

All these activities are now taking place amidst the 2020 COVID-19 Pandemic.  What does that have to do with this blog…NOTHING!

I’m Lambo and I started the FI-light-ER blog and www.filighter.com website to focus on a few things that I had spent a lot of time understanding and pursuing.  Many years ago, I stumbled on Mr. Money Mustache aka Peter Adeney www.mrmoneymustache.com I’m not real sure if I was googling “Early Retirement” or some other derivative but none the less I discovered his writings and the 25X or 4% rule www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ .  These were inspiring and also quantitative measures I could put a pencil to paper so to speak and figure out the roadmap and confirm my proximity to the possibilities of early retirement.

My goal is to highlight or FI-light relevant information each week for others considering or already in retirement.  My general thought is those entertaining, as I did, this ER or early retirement possibility seriously in my 40’s required very few significant changes to our lifestyle to make it a reality in our mid 50’s.  If you are in your 40’s or 50’s and really enjoying your job, putting in a few more years may be your desired trajectory, or maybe you have or will develop a passion or goal at this point to pursue life dreams in work, hobbies, service or otherwise.  The issues and topics in front of you are what I hope to explore.  Some of these I’ve already lived, others are in my future.  I made the official decision to leave when I was 55 and turned 56 before departing.  Having used the password “retireby55” years earlier, I really believed it was a stretch goal, however making some adjustments and a strong bull market put us in position to say yes when the retirement window opened.

First a bit about myself for perspective, I grew up in a middle class life with parents married > 60 years and counting.  My siblings and I all attended public university and obtained 4 year degrees.  I chose to pursue Accounting and did not follow parental advice when selecting a major that may have been more appropriate for my skillset and personality.  What did my parents know? They gave birth to me, raised me with everything I needed in life, instilled strong morals, and witnessed my life for the previous 18 years.  I’m a licensed CPA in Texas (USA), I couldn’t resist, I have travelled the world and everyone knows what and where TEXAS is, even if it is in the United States of America.  I was born in an adjacent state famous for beignets, crawfish, gumbo, gators, … you get the picture, and in the useless facts trivia category, my dad,  brothers, and I can all ride a unicycle, some of us while juggling.

Back in 2000 I found myself looking at the personal finance section in a bookstore smelling the Starbucks coffee brewing and picked up a fresh copy of “The Millionaire Mind” by Thomas J. Stanley, Ph.D.  I read this book and could relate to much of it…so much later I picked up a copy of “Stop Acting Rich: …And Start Living Like A Real Millionaire” also by Stanley.  This one was spot on and confirmed the way we had begun to live in steady state as income continued to rise with a successful career.  Around this same time, I frequently commuted over an hour for work and often would listen to Dave Ramsey on syndicated radio.  I later bought and read his “The Total Money Makeover” book and when he had them on sale I would pick up a few extra copies to give to friends that could benefit from some basic financial education and dig their way out of debt while improving communication with their significant other concerning money and finances.

I continued to read several blogs, just a few include (in no particular order):

ESI Money  www.esimoney.com with three easy steps, Earn Save and Invest – John is close to my age and also has adult children.  He also has an emphasis on faith organizations, a continual charitable lifestyle while exploring financial independence.  Much of his content is first hand; he’s done it, lived it, and communicates the process.  He has collected many “millionaire interviews” that paint a diverse perspective of financial success.  These are educational and interesting as who doesn’t want to know how they are doing compared to everyone else.  Spoiler alert…there are many doing what you may be doing, quietly working hard, living a reasonable lifestyle and amassing a million or multimillion dollar nest egg at various ages.

The Financial Samurai www.financialsamurai.com founded by Sam Dogen – among other things he famously promotes negotiating a severance which was a key to his own early retirement.  Sam offers very granular insight into his financial picture and strategies.  His value of family shines through his writing.  Sam is based in San Francisco and that puts a bit of spin on the values and cost of living if you are in other more economical regions or countries.

Michael Kitces www.kitces.com is one of the more technical experts in the space and one of my favorite.  Much of his content is data driven from first hand analysis he has performed.  Of importance currently is his comments related to Sequence of Return Risk.  As you might imagine retiring into one of the largest bear markets in recent history (COVID-19 Economic Slow Down) is of personal importance to me.

Eventually, the podcast universe exploded (I’ll tell you now, I hope to bring FI-Light-ER to the podcast realm) and I continued to consume material in the FIRE (Financially Independent, Retire Early) movement area.   I have some favorites that have good relevant content for my situation.  So who/what are some of those influencers I enjoy… (again, no particular order)

Afford Anything www.affordanything.com created by Paula Pant is a great podcast that focuses mostly on personal finance but also a regular real-estate segment was included in earlier episodes.  While listening to Paula, I soon figured out these podcasters in the personal finance/ FIRE space frequently appeared on each other’s platforms. 

Stacking Benjamins www.stackingbenjamins.com is a well-produced podcast.  The thing that impresses me most about this one other than their very current content and competency, is that they produce so many shows a week, it’s almost as if there is a Late Night Personal Finance comedy show and you can consume it same day at your preferred timeslot.  Of note here is that Paula Pant above appears frequently as a guest co-host on Stacking Benjamins.

Choose FI www.choosefi.com – And finally Choose FI has become one of the most successful FIRE focused podcast and is one I very much identify.  Brad Barrett and Jonathan Mendonsa co-host this excellent program.  I started binging during a drive over to Louisiana and back when they were in the mid-double digit episodes and I found it so beneficial, I went back and picked up a lot of history.  Like Brad’s family, my wife and I both started our careers in Public Accounting and are CPA’s.  We have employed similar levels of frugality when it comes to cars and have a 2005 Honda in the family with 200,000 miles and are very near that milestone with a 2004 Chevy truck.  The Choose FI organization is growing and expanding to multiple podcasts, not for profit activities, and broader topics than just personal finance. 

Just a few more I can’t leave off this post:

The first is one of my earliest discoveries in the personal finance independence space, The Mad FIentist www.madfientist.com created by Brandon.   Brandon does not put out too many episodes, but his content is high caliber.   I have really enjoyed his episodes on personal health and the psychology around early retirement from a FIRE perspective.  While I have never met Brandon, he seems very analytical and super smart!

Also in my pursuit of content I have listened often to Bigger Pockets Money www.biggerpockets.com/moneyshow .  This podcast has more of a real estate flavor, and by real estate, I’m referring to real estate investing, but also a great range of personal finance information.

At almost 1500 words, I’ve got to stop now or I’ll ramble on!  Future posts will focus on many topics…noticeably above I have omitted many recent books in the personal finance and FIRE areas.  If you can’t wait for those posts order a copy of JL Collins “Simple Path to Wealth” see www.jlcollinsnh.com for his website.  I have a whole post on that book alone that needs writing…if you don’t read anything else related to personal finance and investing, read “THE SIMPLE PATH TO WEALTH”.  Seriously I’ve read quite a few books in the area and this one book 15 years ago would have been the difference between FI and Really FAT FI (aka “Marth Stewart FI” a story for another post) to us personally. 

Remember MIND THE GAP!  +Income – Expenses = The GAP <– Grow IT!

Stay tuned for Weekly Posts by Thursday each week.

Lambo the FI-light-ER

www.filighter.com

We are not Tax or Investment experts and are not in any way providing expert advice. Please seek your own tax, legal, or other professional for advice and counseling.