We recently crossed the half way point of 2017 and I thought this would be a good time to dive into the status of our financial independence (or FI) journey. Not to long after starting this blog a couple of years ago, my wife and I laid out a rough plan to be completely FI by the age of 40. In other words, we would have enough invested that the growth and dividends from those investments would cover our living expenses with enough buffer to last for the rest of our lives.
The 4% rule is a good rough guideline for how much money we’ll need to make that happen (25x annual spending), but we don’t plan to follow the 4% rule robotically and will adjust up and down as necessary. And even though we’ll no longer have a financial “need” to work, there’s still a decent chance we’ll be bringing in some kind of income to supplement the investments. I don’t picture us each spending 40+ hours per week at work like we do now, but I also don’t pretend to be able to predict the future. Maybe we’ll find a job that’s just too much fun to walk away from!
Anyway, I’ll use this as an opportunity to see if we’re still on track, what moves we’ve made recently to help ourselves out, and what the near future might hold for us on our path to FI.
The 4-Pronged Plan to Achieve Early FI
In the original FI by 40 post, I lay out 4 high-level steps that we plan to follow to reach FI at an early age:
- Keep Expenses Down
- Avoid Debt
- Boost Income
- Invest Efficiently and for the Long Term
Seems simple right? Achieving FI isn’t complicated, but it does require some financial discipline and your own life situation may make the path much easier or much more difficult than others. What’s important is to not focus on comparing yourself to others, but rather focusing on optimizing everything that is within your control.
And “optimizing” doesn’t always mean reducing expenses, the real goal here is to lead a happy fulfilling life. Sometimes spending money can help achieve that, but you have to be conscious of everything you are spending your money on and whether or not those purchases are helping you work towards the larger goal. The same goes for any time you invest towards earning additional income, make sure you are valuing that time appropriately.
I haven’t done a full FI update since the middle of 2015, so let’s cover some of the things that have changed in our own situation since then in each of the 4 steps.
Keeping Expenses Down
I believe one of the most important steps in managing spending is first tracking all of your spending. I’ve diligently tracked our own spending since 2014 and have even shared our exact expenses on this blog for the last two years (2015 and 2016 respectively).
Knowing where our money is going allows us to re-evaluate our priorities on a regular basis to make sure we’re getting value out of each purchase. Having said that, we don’t have a formal budget and are fairly “naturally frugal” which has allowed us to keep spending under control without itemizing each of our expenses during the month (although I do categorize everything in retrospect).
Last year had a couple of large expenses that were mostly planned for in the form of a wedding and LASIK surgery which I covered in more detail here. Aside from those big one-off items, our spending has stayed steady at right around $64,000 per year. (Keep in mind we’re in the high cost of living Seattle and I have fairly conservative accounting practices [such as including mortgage principal in spending], so you may have to adjust downwards if you’re trying to compare to your own situation.)
The good news (sort of?) about our spending in regards to the plan for early FI is that almost 1/3 of our overall spending is completely discretionary! These are items that we enjoy enough to spend money on them now, but are also items that we’d be willing to cut back while still living fulfilling lives if our situation changed. This kind of flexibility is key if we plan to walk away from our jobs at a really early age.
While our expenses haven’t really dropped since we started tracking them, we have done the very important thing of avoiding lifestyle inflation as our respective salaries have grown. As we were already saving a good % of our income a couple years ago, all of our bonuses and increases in pay have gone straight into investments which means our savings % gets higher each year even if we hold spending constant.
For now we’ll keep tracking our expenses and re-evaluating our priorities. Regular spending so far this year is coming in a little below average compared to the last couple years, so we’ll see where it shakes out at the end. I’ll cover the only big surprise so far in the next section.
Staying out of debt is a key tenant in the FI mindset, but that doesn’t necessarily mean all debt is bad.
We deliberately made the choice to open a large mortgage and buy a townhouse several years ago and we continue to make the choice of investing instead of paying it off early. In early 2016, we did refinance in order to remove PMI and lower our interest rate, but we currently have no plans of paying it off early.
Our first priority is definitely maxing our all available tax-advantaged space because that has a huge impact over time, but even beyond those accounts we’ve chosen to invest in a regular brokerage account rather than make additional payments on the mortgage at 4%.
Historically, this has been the financially optimal choice, but only time will tell if it was the correct choice at this point in time. I know many other people prefer to take the guaranteed return on paying down low-interest debt in exchange for the opportunity cost of potentially higher returns in the market.
Despite our priority of investing rather than paying down low-interest debt, we did make the choice to avoid taking on more low interest debt when we purchased a car at the beginning of this year.
After moving to Seattle in 2013, my girlfriend (now wife) and I went from 2 cars down to 1 and kept her 1999 Honda CR-V as the single car we shared. I was able to walk to work from the first place we lived after moving to the city and deliberately purchased a place near good public transit into work once we moved out of the downtown area. This means only Becky has ever needed the vehicle to get to work on a regular basis and we really don’t use it a lot beyond that, so having only one car has worked great for us. Uber and other options are easy and cheap whenever we may have conflicts in needing transportation.
Unfortunately, at the beginning of the year, the CR-V finally gave out on us. A trip to the mechanic to investigate an engine light and some odd sounds led to an estimated repair bill beyond the value of the car. The car had always had some quirks and we had previously discussed upgrading once the next significant repair came up, so the car shopping began (and the CR-V was still drive-able so we didn’t need anything in the interim).
After a little hunting and deliberation, we settled on a 2010 Mazda 3 hatchback from a local dealer. While they offered financing, it wasn’t going to be the generous 0-1% financing deals that you can often find on brand new cars so we decided to pass and pay with cash instead.
Would it have been more optimal to take the financing and pay it off slowly? Maybe, but we took the easier road of just getting the purchase over with.
One fun note is that they let us put $3,000 on a credit card for no fee, drive off the lot with the new car, and bring back a money order for the rest the next day. That knocked out the minimum spend on an Arrival+ in one shot to give us ~$560 in free travel.
Other than that, we haven’t really had any debt related decisions to make in the past couple years. Assuming we drive this car until it’s as old as the last one we had (and end up on the better side of Mazda’a reliability record), we shouldn’t have any major car expenses for the next 11 years! That’s pretty crazy to think about.
Since I wrote the last FI update in mid-2015, both Becky and I have been promoted in our full-time jobs which far overshadows any benefit we’ve gotten from side gigs. When you’re young, I’ve heard advice that investing in yourself and your career growth may be the most lucrative option and that seems to hold true for us so far.
Despite that, we still have a few income producing hobbies on the side.
Our primary side hustle (which doesn’t really require any hustle) is churning credit cards. We sign up for new credit cards on a regular basis that come with very large signup bonuses for meeting a minimum spend requirement. We simply put our regular expenses on each new card until the minimum it met, then move onto the next one.
This rewards us with a large amount of “travel money” in the form of miles and points, but also a solid amount of cash that more than covers the annual fees and other expenses that come along with playing the game.
2016 was a slower year compared to 2015 and the second half of 2014 when we started this hobby, but we still applied for 13 credit cards with signup bonuses worth many thousands of dollars. My high-level data shows we ended up positive ~$1,800 in straight cash in addition to hundreds of thousands of points and miles on top that we will most likely use for travel.
In 2017, we’re off to a more aggressive start already having applied and opened 11 new cards between the two of us. There are just so many lucrative offers out there! If you’re an organized person that is on top of your finances, I can’t imagine why you wouldn’t be doing the same thing. The banks are just giving away money! If you want to learn more, I have an introduction post and a getting started series you might be interested in checking out. I’d also be happy to answer any questions in the comments below.
Aside from the credit cards which are by far our most lucrative side gig, I also dabble in gift card arbitrage, but have scaled it way back since starting in 2015. I only grab the really easy flips at this point which means my volume and effort is way down, but I still get a small amount of cash and spend.
We’ve also scaled back bank bonuses from previous years, but there seem to have been a ton of great offers this year based on reading Doctor of Credit. If you have some extra free time, this can be another great side gig that doesn’t require any real hustle. Just open accounts, follow the rules, shift a little money around, and profit handsomely for doing so. Not quite as lucrative as the credit cards, but there’s nothing stopping you from doing both!
Finally, the other side gig I have going on is the blog you’re reading right now. I’m still treating it as more of a hobby than a side gig, but that doesn’t mean I haven’t experimented with a few affiliate programs this year. Overall traffic has been up and it looks like I’ll bring in a couple thousand dollars by the end of the year (which will all be wiped out by business trips to FinCon and such for tax purposes of course).
There are certainly ways I could boost this number higher, but I’ve chosen to keep it pretty low key for the time being. I expect I’ll explore some additional monitization options if I walk away from my full time job, but I don’t plan on ever being reliant on the income from this website to cover our living expenses.
Investing Efficiently and for the Long Term
This part is probably the easiest and I recently covered our simple investment strategy which now consists of only 2 different investments:
- ~67% Total US Market Index Fund
- ~33% Total International Market Index Fund
In a separate follow-up post, I covered why we chose to move away from bonds and switch to 100% stocks. Basically, at our age with our long term plan, bonds just don’t add any benefit at this point in our lives.
Our first priority when investing is to utilize any tax-advantaged accounts we can, specifically pre-tax accounts if possible. By deferring those taxes now at our marginal tax rate, then converting them to post-tax investments during our low income early-retirement years, we may end up never paying tax on that income at all!
The most common execution of this is with a Roth IRA Conversion Ladder and we plan to do something similar in our own early retirement.
After maxing out our HSA’s, 401k’s, and backdoor Roth IRA’s, we place any additional money into a regular brokerage account. The funds in all of these accounts are some form of a Total US Stock fund or a Total International Stock fund which in aggregate match the our goal allocation ratio listed above.
The great thing about our investment strategy is that it requires almost no mental effort on our part. The HSA’s and 401k’s are automated out of our paychecks, we each max out an IRA at the beginning of the year, and I sweep additional cash into the brokerage account on a monthly basis. We completely ignore what is currently going on in the market because attempting to time it in any way is often a losing proposition.
I like to remember a quote from Peter Lynch:
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
Will the market crash eventually? Most likely, but we don’t pretend to have any more information about that then the rest of the world and leave our investments alone accordingly. Over time, the market continues to march upwards and we’re simply going to ride the dips and bumps for decades and decades.
What the Future May Hold and Fun Charts!
As you can see from the 4 point plan above, our overall FI strategy hasn’t changed since we started pursuing it a few years ago, but we do continue to charge closer and closer by following those few simple steps.
We’re currently in the middle of a raging bull market and no one knows what the near future holds, so I don’t think there is much benefit in extrapolating to when we might be able to pull the trigger and declare ourselves FI.
We’re still figuring out the spending portion and how much we want to live on going forward, plus kids and other life changes may move those numbers in a very significant way. Also, while we live in Seattle now on the higher end of the cost of living spectrum, we don’t know where we may want to live in the future. There may even be a point in our lives where we don’t have a permanent home base and instead travel around to different parts of the country and world instead. There are so many options!
Not to mention the investments side which will depend on which direction and by how much the market moves in the coming years, plus we now have a significant investment in Seattle real estate that has well out-paced our expectations up until this point. Who knows what that might look like 5-10 years down the line.
For now, we continue to save and invest, and will adjust our lives accordingly in the future as we see fit. For now we’re on pace to reach FI well before our goal of 40, but there’s far too many unknowns to say what our future may look like at that point and beyond.
Here’s some fun charts I have in my FI excel workbook if you’re curious:
The Your Money or Your Life Chart
Your Money or Your Life is a great book if you’re interested in learning more about the FI mindset and it contains many actionable steps to help set you on the path. One of my favorites is the income and expense chart and while I don’t have it prominently displayed in our house like they suggest, I do have a digital version that I look at at least once a month.
Once that tiny little green line (4% rule) gets past the red line (our expenses), we will pretty much be FI (barring any major planned life changes).
The Overall Net Worth Chart
I’m always inspired by other FI bloggers that post their net worth and are very open with their finances. While we’ve chosen to not reveal our exact income and net worth at this point (and I’m not sure if we ever will), I think there is still value in looking at growth over time.
The power of compound interest is truly astounding, especially if you start at a young age like we were able to. So far, our net worth chart looks mostly linear, but at some point in the future I expect that hockey-stick look of an exponential graph to show up. I also expect there to be some dips as our contributions become a smaller and smaller part of the movement each month, but there hasn’t been a significant drop in the market since we started investing. (*knocks on wood*)
For now, our house overwhelms the chart and has been our best performing investment by far (especially considering how leveraged it is), but that was just a good amount of luck on our part. The cash and investment portions have just been from consistent monthly investing following the simply strategy I laid out above.
For Now We Just Keep Trekking
Overall, our path to FI up until this point has been fairly boring in the best possible way!
We simply spend consciously at a level well below our income, avoid debt, and invest all of the excess cash efficiently. It can be tough to find the perfect balance of what level of spending will bring the most joy to our lives, but we continue looking over our expenses to make sure they match our values. It’s important to remember that the overall goal is happiness and a fulfilling life, both now and in the potential future where we are no longer working traditional jobs (or any jobs at all).
At some point in the future, we’ll have to make the decision of whether or not we have enough, what our lives will look like beyond work, where we want to live, and numerous other important life decisions. For now, we’ll just keep chugging along at our current pace knowing that all of the money we’re investing now will open up opportunities and choices in the future.
The good news is that we don’t have to make many of those choices now, but the various options certainly make for fun dinner conversation!
Hopefully all of your FI plans are going just as smoothly as ours, thanks for following along with our journey!