The goal of diversification is to ensure access to a lot of upside without being exposed to an unacceptable downside. But are you as diversified as you think you are? Long-time community member, Frank Vasquez says there are three roles bonds have in your portfolio, income, stability, and diversification. The Holy Grail Principle focuses on what the concept of diversification really means. It doesn’t mean different, it means uncorrelated. Investors can use online websites to calculate the correlation of two assets that results in a number ranging from 1 to -1. The closer the number is to 1, the more highly correlated they are. A number close to 0 indicates the assets are uncorrelated and move randomly with respect to each other. A negative result means the assets are negatively correlated and typically go in opposite directions. Why would an investor want assets that are negatively correlated if that means while one is doing well, the other is not? In the accumulation phase when an investor is trying to build wealth, they probably would want negatively correlated assets. Upon reaching FI, they may be helpful when attempting to ensure the highest safe withdrawal rate. Safe withdrawal rates for each portfolio will vary slightly and range from 3-5.5%. There are websites online to help calculate the rate for different portfolios. Frank has three adult children who he advises to max out their retirement accounts in basic index funds. The next bucket to fill is an emergency fund, followed by a taxable brokerage fund to used toward a down payment on a house. His son’s brokerage account used a risk parity-style portfolio, which is good for intermediate-term savings. When first starting out, money invested is a big pile of future cash. You invest a little each year and should get it into risky, growth-oriented, and reliable investments, which are stock index funds. Until you have $100,000 in your account, being invested in one fund is perfectly fine. It’s about earning and saving at that point. After the first $100,000, earnings begin to mean a little more and you can embrace a little more complexity. In the four phases of investing for retirement, the first two are earning and saving and are the most important to get automated saving going. Phase three is investing and the fourth is managing the investments to ensure they don’t blow up or go away. Long-term accumulation comes first in a portfolio, and Frank’s son is extremely frugal, making the risk parity portfolio possible. But what considerations are there if you are looking to transition index funds into a risk parity portfolio? The first step is to figure out where you are going and where the goal is. Next, look at what you have and what needs to be transitioned. Start the process when you hit your FI number or about five years out from when you think you are going to need it. You don’t want to be 100% equities and have the stock market crash two years before you retire. A risk parity portfolio does not stop earning money. The return is approximately between 6-8% after inflation, but the tradeoff is you are also only getting half the volatility of the stock market. You can’t optimize the performance of your portfolio in the future, but you can control your expenses, modify them, and take less in one year if you need to. Treat all of your assets as one big portfolio. You don’t want to incur unnecessary capital gains in your taxable accounts, so moving funds in retirement accounts is appropriate. The least movement possible is best and anything taxed as ordinary income should be put into retirement accounts. Risky parity is a style of investing that has become more accessible to everyone with no-fee trading. It is finding uncorrelated or negatively correlated assets and combining them to reduce the risk of the overall portfolio. The main driver of the portfolio is going to be stocks at 4-60%. The most diverse thing from stocks are Treasury bonds, like long-term Treasury bonds, at 20%. Gold may be an alternative. Bonds are not good income generators anymore. The go-to places for income sources are REITs and Preferred Shares. If you want to invest in something like Bitcoin, make sure you have a volatility match to it. Listener Andy asked about what percentage of a stock portfolio should be in international stocks. Frank says the issue with international funds is that they are highly correlated with US funds so they aren’t very useful. When Frank is deciding on investing in something, he looks at how useful it will be in his portfolio. He looks at its correlation with the rest of his portfolio and its volatility. You don’t want to put very much of something with high volatility in your portfolio. Listener Luke asked about Frank’s views on factor investing and if has or plans to have small-cap value funds in his portfolio. Franks says he does have small-cap value in his portfolio because they are less correlated with the overall stock market than an international fund. Franks says you want a basic and diversified two-fund portfolio that covers the whole market would consist of large-cap growth and small-cap value funds. The correlation between a total stock market fund and an S&P 500 fund is extremely high and a kind of false diversification. Although index funds are cap-weighted and gaining more and more of the larger companies over time, they are also self-cleansing in that companies doing worse fall down or fall off. Small-cap value funds do the reverse. When a company gets too big, it gets kicked out. Holding both types captures each end of the spectrum. According to the Macro Allocation Principle, what matters most in investing are the macro allocations between stocks and bonds. According to Jack Bogle, any 60-40 stocks to bonds portfolio is going to perform 94% the same way as any other 60-40 portfolio. Listener Claudia asks what a bond tent would do to her sequence of return risk. Franks says a bond tent is an old-fashioned way of dealing with sequence of return risk, but he says it’s not functionally different than buying a short-term or intermediate bond fund. Bonds should move opposite of the market, but lately, they have moved with the market. Franks says different bonds behave differently. Some do not provide much diversification. Focus on Treasury bonds for diversification. The hallmark of a very diversified portfolio is when you see different things moving in different directions at different times. Rental real estate and stocks have a low correlation, so it can be a good way to diversify, although sometimes they can move together as in 2008. In Frank’s mind, diversification should mean uncorrelated, it doesn’t mean having lots of stuff. Frank’s podcast is focused on risk parity and he has created six sample portfolios at Fidelity that he discusses each week. While Frank likes to nerd out on this stuff, you don’t need to to become a successful investor. Frank Vasquez Website: Risk Parity Radio Podcast: Risk Parity Radio Podcast Resources Mentioned In Today’s Conversation ChooseFI Episode 194 The Role of Bonds in a Portfolio Portfolio Visualizer Portfolio Charts The Four Phases of Saving and Investing For Retirement ChooseFI Episode 176 Flexible Spending Rules for Early Retirees Using Gold as a Hedge Against Sequence Risk – SWR Series Part 34 The Little Book of Common Sense Investing by Jack Bogle Money for the Rest of Us Podcast Money for the Rest of Us by J. David Stein If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy. Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.
1 hr 7 min
In 2008-2009, the American dream of a home with a white picket fence turned into a financial nightmare, sending many families underwater for a decade. After looking at the numbers, there’s an ongoing debate over homeownership. Owning may not be the right decision for everyone. Scott Trench and Mindy Jensen from BiggerPockets join the show to discuss home buying and their new book, First-Time Home Buyer: The Complete Playbook to Avoiding Rookie Mistakes. Even if you’ve already purchased a home, Scott and Mindy’s book is a masterclass to help you rework the process during your next home buy. According to their book, “…a smart home purchase will not only give you a place to live, but also offer flexibility, financial stability, and the chance to recognize and increase in that home’s value over time”. Is purchasing a home a good investment? Mindy says, “Maybe”. Housing is an expense whether buying or renting. The more you buy, the more you are spending, and the less wealth you will have. Don’t ask how much can you afford. How little can you spend to meet your lifestyle needs and what’s the best financial decision to meet those needs? There’s a lot of math behind a buying vs. renting decision. As a real estate agent, Mindy tries to stop herself from asking clients how much they can afford. Instead, she asks about the price range, what kind of home they are looking for, and what condition it should be in. Mindy’s home is an investment, but that’s because she buys dumpy homes, fixes them up, and forces the appreciation. However, she says the average person shouldn’t consider their home an investment. For the average buyer, appreciation will generally occur over the course of the ownership time period, but it is the product of the housing market around you. It tends to appreciate 3-8% year over year. Selling after just a few years of ownership won’t make much when you sell, in fact, you may lose money to closing costs. For regular buyers, a home is a place to live, not an investment. Roughly 10% of a property’s purchase price is out the door in closing costs the moment you buy it. If you don’t improve the property and force the appreciation, you have to allow appreciation to carry you back over time. Over a long period of time, the returns on your home are low compared to investment alternatives like the stock market. When deciding to buy or rent, what’s the breakeven point? Scott and Mindy assume a 3.5% appreciation rate, which comes from the Case-Shiller Home Price Index. At that rate, the breakeven point comes in 5-7 years. The higher the appreciation rate, the faster you reach the breakeven point. You don’t need to live in the property for the 5 to 7 years to reach the breakeven point, you only need to own it for that time to make it work. You could rent it after you move out as an exit strategy and increase the desirability of buying. If you rely on a lending calculator to answer the question, “How much house can I afford?”, you’ll end up being house-poor. Median incomes and home prices around the country differ more than other categories, such as food. All the disposable income over what is needed for day-to-day life can go to your scarcest asset, which is housing in many high-cost-of-living areas. There is no rule of thumb for what percentage of income you can spend. It’s about how little house you can buy and eliminate all of the waste. When making the rent vs buy decision, Scott says the biggest variable to consider should be time, then what your appreciation is going to be, what you can do to force the appreciation, and then exit strategies. There can be a dramatic difference between a home you would want to live in and one you could potentially rent. First-time home buyers tend to live in the property, but it’s likely they won’t live there forever and should make the smartest choice by thinking outside their own needs. Mindy suggests using the internet to research what you need versus how can you rent it out. It’s not a smart financial maneuver to decide you want to buy a house today and put an offer in tomorrow. Do some research and figure out what exactly you want. Most people go in with the framework of buying the house they like and pray that it goes up in value so they can sell at a profit. But when you buy a home, there are three eventual outcomes. You live in it, rent it, or sell it for a profit. Keep all three of those in mind when buying. If the chances of you moving are almost zero, it’s a great idea for a first-time homebuyer to begin looking for their forever home, but Mindy thinks the whole idea of a forever home is garbage. It’s not realistic for a 20-year-old to be able to afford the 3000 square foot home and stay there for 30 years. Lenders, real estate agents, and contractors are all incentivized to have you buy the biggest home you can afford because they make the most money that way. If you don’t focus on the first home being your forever home, you can have more assets available for when you are in a place to get what you want. The first step is to be clear where you fall on the “live in it forever, rent it out, or sell for profit” spectrum. Next, figure out the price range for what you want. Don’t look at the active listings, look at what has sold in the last 180 days. Finally, narrow that search down to the 10 properties you would have purchased yourself. That gives you a realistic idea of your market. Mindy says the exercise can be a great way to screen agents as well. If they are unwilling to do this for you, cross them off the list. You should interview the agent before deciding to work with them, keeping in mind that their incentives are not necessarily aligned with yours. Find someone considerate of what you want. The home seller is usually paying the commissions of both agents involved in the sale of a home, though for it’s usually very practical for a first-time homebuyer to have an agent represent them. The next step in getting a good deal is waiting for the home you want to come on the market. Be pre-approved or pre-qualified for a loan and be ready to view the property as soon as it comes available and make an offer that night or the next day. It’s not a rush decision because you already pre-determined what you wanted to buy. If you think through the exit strategies before buying your first home, you won’t feel trapped by your decision if something like a job opportunity in another city comes up. In a hot real estate market, the fear of mission out can be real for first-time homebuyers. It’s a hot market right now, but it’s not going to continue forever. Make offers based on the numbers, not out of emotion. Scott is currently renting because it’s a cheaper way to fund his lifestyle right now and there’s too much risk for him to assume with buying. Other than student loan debt, a first home purchase may be the biggest financial decision you make. It’s worth spending a little time thinking about it. Scott and Mindy from BiggerPockets Website: BiggerPockets Podcast: BiggerPockets Podcast Resources Mentioned In Today’s Conversation First-Time Home Buyer: The Complete Playbook to Avoiding Rookie Mistakes by Scott Trench and Mindy Jensen BiggerPockets Home Buyer Bonus content If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy. Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.
1 hr 16 min
“When you are financially whole in the way I’ll teach you to be, you won’t have to live in fear. You’ll have a plan for each area of your finances so that they are constantly working on your behalf“. — Tiffany Aliche America’s favorite budget expert, Tiffany Aliche joins us to discuss her new book, Get Good With Money. Financial fear can come from financial trauma and drama. When you know that the money you are making isn’t quite enough for the things that you absolutely need, or you can foresee a future when your finances will not be okay, most of us carry that fear secretly and with a sense of shame. Tiffany wants her community of more than 500,000 Dreamcatchers to release that shame, focus on solutions, and create plans that actually work. According to Tiffany, wealth is more than just money in the bank. It’s really a mindset, which is the building block of personal finance. People often chase an end goal without a foundation to ensure they will still be okay if something were to happen. Tiffany’s teachings are foundational. The goal is to give you the foundation that you need to go on greatness, such as investing at a high level, buying the home you want, or starting a business. For many of us, fear comes from a lack of knowledge and it takes an external, traumatizing incident to awaken us. Tiffany wants to reach people before they get to that point by normalizing financial education early on. Tiffany’s approach is three-pronged: knowledge, access, and community. She delivers knowledge through her blog, The Budgetnista, and podcast, Brown Ambition. For access, she showcases other financial educators, like the ChooseFI Foundation, to those who want a financial education for the children and community. And finally, she built Dreamcatchers for the third prong, community, so that people know they are not alone. The 10 components that constitute financial wholeness are budgeting, savings, debt, credit, and learning how to earn for the first tier. In the second tier, she includes investing for retirement and wealth, insurance, net worth, your professional money team, and estate planning. This foundation of financial wholeness is what you build the rest of your goals, hopes, and dreams on. While writing her book, Tiffany decided to Google, Jake the Thief, a man from her past who had caused her financial trauma. She discovered that he had escalated his thieving behavior from poor 20-something-year-old women to defrauding the United States Government and he is currently sitting in federal prison. Jake’s story is a cautionary tale. Sometimes the wrong thing or risky behavior works for a short period of time. But it’s important to learn how to manage your money from the ground up versus from the top down because you can lose it all if you don’t know how you really built what you built. Tiffany ended up with credit card and student loan debt and a mortgage she could no longer pay for, In total, it was around $300,000 in debt. That experience taught her that her father was right, slow and steady wins the race. She now takes her time and is very methodical with her decisions. Even it means taking a loss, she’ll take a short-term loss if it means a long-term win. Once she built her foundation, she was able to build wealth much more quickly. She wants others to have the opportunity to build the life that they want. After reading her book and matching one of her workshops, Jonathan says he likes how good Tiffany is at organizational structure and categorizing things. With budgeting, Tiffany assigns control categories to expenses. First, she lists all of the expenses and then assigns them to categories. The first category is B, or bills, like a mortage. Some of those bills are usage bills that fluctuate depending on usage, such as water or electricity. She puts a U in front of those Bs. Everything else is a C, meaning cash or choice expenses, because these are expenses you have choices over, like haircuts or gas for the car. Categorizing in this way can help determine if you have a spending-too-much issue, or a not-earning-enough issue, when there isn’t enough at the end of the month. If most of your money is going to Cs, you are spending too much because of your choices. If most is going to Bs and UBs, you aren’t making enough to take care of your financial responsibilities. When things are temporarily tight, you know you can look at your Cs and make some cuts there first. If it’s not enough, move to the second level, UBs. If that’s still not enough, move up to the Bs. Tiffany’s father taught her in an age-appropriate way about the financial consequences of her actions and says it’s a lesson we could learn as adults. A budget isn’t deprivation, Tiffany says it’s your “say yes plan”. Budgets are like your mom. She wants to say yes, but there is an “if” button. You can do the things you want, but only if you’ve lined yourself up in a way that makes it sustainable and safe. If you can master your budget and look at it differently, it is there to accommodate your goals, hopes, and dreams. But it might require you to give something up. Jonathan thinks Tiffany’s book speaks well to those who are broke. When writing it at the height of the pandemic when people were losing jobs and scared, she didn’t want to leave behind those starting in negative territory. She wanted to give them permission to focus just on their sleep, health, and safety. It’s okay to focus on expenses related to health and safety and tell everyone else that you don’t have it right now. You will get to them when you get to a safer place financially. 30% Whole is the chapter Jonathan thinks is worth the book’s price all on its own and you really need to know these tips if you are in debt, such as dealing with debt collectors or mortgage lenders during foreclosure. You can insist on a debt verification letter to verify that they have the right to inquire about it. Debt freedom is a goal, but it’s not the goal. You can be debt-free and still broke. Financial freedom is an incomplete picture. There may still be holes in areas like insurance and estate planning. The FIRE movement is great, but Tiffany believes there is a holistic view that is missing. Not matter how high or low your income, financial wholeness is available and accessible to everyone. Tiffany Aliche Website: The Budgetnista Podcast: Brown Ambition Resources Mentioned In Today’s Conversation ChooseFI Episode 240 From Financial Imperfection to America’s Favorite Budget Expert | Tiffany Aliche Get a copy of Tiffany Aliche’s book at getgoodwithmoney.com. If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy. Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.
Winter is over, spring is here, and Brad and Jonathan have hosted their fifth live event on Stereo! With the new season and sense of hope, people are beginning to think more about traveling and travel rewards points. Start thinking about a trip you want to take and join us on Stereo next week for a live group travel rewards coaching call with Brad. The focus of this episode is college. How can you do college for less or do you even need to go to college at all? After more than 400 episodes, optimization tactics related to college have popped up frequently. What has changed for 2021, what are the best practices, and what should you be thinking about? In the FI community, we take a step back, see the world for what it truly is, and look at a problem a little bit differently. Society tells us that college is on the path to success, but knowing what we know now, there may be another way or a way to improve the ROI of going to college. Back a generation or so ago, it wasn’t uncommon for a college student to be the first in their family to attend college. College was seen as a way to make it into the middle class. It may have been true then, can still be true in some ways today, but the difference is the cost of college has risen dramatically while the earning potential did not rise at the same rate. We have to be looking at college through the lens of ROI and understand what we are trying to get out of it. College signals that you can follow the rules, but an undergraduate degree doesn’t necessarily mean you have skills or mastery over something and it’s skills that matter today. No one can afford to go to college for one hundred thousand dollars and come out earning $50,000. It will create financial chaos for a decade or more of your life. Most people’s incentives to go to college fall into one or more of these three areas: wanting to have the college experience, access to higher-income jobs, or a love of learning. The college experience was not high on Jonathan’s list of priorities, nor was attending a prestigious university, so he did two years of community college before transferring to Virginia Tech. Brad’s goal for college was to get a job upon graduation. Though he was accepted to Ivy League schools, he chose not to go to them as they were too expensive and opted for the University of Richmond instead. If having the college experience or getting into the right school are top priorities for you, listen to ChooseFI episodes 114 and 154 to learn more about how to discount the cost of college using test scores and the FAFSA. In episode 083, Cody Berman talked about how he approached applying for scholarships as if it was a part-time job and thought about it systematically. Rob, from The Simple StartUp, called in to say that his parents used geo-arbitrage and moved back to Ireland so that Rob and his siblings could go to college for much less. For graduate school, Rob coached women’s soccer in a graduate assistantship so that he was able to get his Master’s for free and earn a stipend. In episode 138, Anthony Gary discussed how he hacking his college room and board costs by becoming a Resident Assistant. Other past guests have talked about utilizing niche scholarships, like ones for golf caddies. One listener left a voicemail asking how to incentivized kids to apply for scholarships. Jonathan would like to try and gamify it for the kids and Brad believes that there are a lot of merit scholarships available if which college your child attends isn’t concerned with attending the most prestigious schools. He and Laura have made it clear with their daughters that they don’t care about prestige when it comes to college. Choosing where to go to college may mean saddling yourself with student loan debt for decades. We are having 17-year-olds make these decisions that can negatively affect their lives for decades without thought or counsel. Jonathan suggests slowing down and providing kids with a better option. In 202, the average cost of college was $110-120,000 and the average annual income for a graduate was $50,000. It’s a lot of debt for a young adult to get out from under. A little bit of optimization can make it so much easier. If looking to improve test scores, considering investing and paying the fee for test preparation services from companies like Edison Prep. Chase called in to talk about the ROI of college in the military. He is in the National guard and gets reimbursed from both the military and his employer for going to school. When you chose to put the time in to serve our country, it’s possible to optimize the compensation package and never have to work again. Options to pay for college and serve include ROTC and the US military service academies. Marjorie called in about geo-arbitraging college. She attended college in Puerto Rico for a fraction of the cost in the US mainland. Many states have a guaranteed admissions program where you can attend community college for two years and then are guaranteed acceptance to a four-year-school, saving two years of higher-priced tuition, but make sure you know what credits will transfer over to the university. How can you test out a college? In addition to getting college credit for AP courses, dual enrollment while in high school can be an option. CLEP testing is a little-known secret as discussed in episode 238 with Millionaire Educator. Another listener called in to mention Scholarship For Service, where you can get tuition and fees paid along with a $25,000 academic stipend with a requirement to later work for a federal agency. This program is similar to the Department of Defense Smart scholarship mentioned by Sunny Burns in episode 139. If your desire to go to college is for the love of learning, do you really need to go to college? Jonathan says that they have proven there is a replicable path to earning six figures a year without going to college. The son of ChooseFI’s CEO, Edmund Tee, is earning his associate’s degree while in high school thanks to dual enrollment then plans on taking a gap year to pursue Salesforce through Talent Stacker. Resources Mentioned In Today’s Conversation Inspire your 10-18-year-old with the free download 102 Business Ideas for Young Entrepreneurs. Learn why the Chase Sapphire Preferred is one of our favorite travel rewards cards. ChooseFI Episode 114 Demystify College Scholarships | Brian Eufinger | Edison Prep (Start at [4:00]) ChooseFI Episode 154 Hacking the FAFSA | Brian Eufinger Seonwoo Lee (Start at [4:05]) Edison Prep ChooseFI Episode 083 A Second Generation FI Case Study | Cody Berman | FlytoFI (Start at [15:00]) ChooseFI Episode 138 How to Get Paid to Go to College with Anthony Gary (Start at [12:50]) Colleges and Universities That Award Merit Aid ChooseFI Episode 095 A Military Path to FI | Military Dollar (Start at [40:00]) ChooseFI 238 How to Test Out of College While You’re Still in High School | Millionaire Educator Modern States Sophia.org Scholarship For Service ChooseFI Episode 139 Reaching FI With Real Estate With Sunny Burns (Start at [5:35]) DoD Smart Scholarship ChooseFI.com/Salesforce Visit ChooseFI’s college resource article: Should You Go to College in 2021? Ditch the spreadsheets and upgrade to NetSuite. If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy. Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.
1 hr 15 min
Do you have a budding entrepreneur at home? Help them bring their business ideas to life, learn the value of money, and gain future-proof skills. About a year ago, Rob Phelan, launched The Simple StartUp workbook and live coaching series aimed at helping kids aged 10-18 develop their first business idea. This episode will highlight lessons learned from his program. The Simple StartUp has given Brad a language to talk with his own girls about business and entrepreneurship. His daughter, Molly, has grasped the concept of affiliate marketing and how it might help her Gardening Gals business. Molly and her friend are now making slime and thinking about the costs of each component in the slime like little businesswomen. Rob says even if she doesn’t become an entrepreneur, she is learning personal finance skills, problem-solving, how to break down costs, and return on investment. These are conversations every parent can be having with their child as we are all customers of different businesses. Rob has put together a document that parents and kids can use as a launch board. Access it for free at ChooseFI.com/idea. At the core of any business idea is something that will solve a problem for someone else. The Simple StartUp tries to help kids get past the idea that they need to come up with the perfect idea before they can start a business. In reality, you’re going to go through multiple businesses or many iterations with your business. It does not need to be super creative or innovative to get started and learn about the process. In his document, Rob came up with 102 ideas that kids ages 10-18 can start at home right now if they have some skills and equipment available. The kids taking Rob’s course usually start with assets they already have by thinking about their skills, hobbies, and interests. They go through a thought exercise of thinking about complaints people have and what solutions they propose for solving them. Can they solve it in such a way that people are willing to pay for it? Parents can prompt their children to go through the thought exercise themselves when they have a complaint about something. Everyone has something that they are marginally better at than the people around them. Annalise messaged Jonathan to let him know that her Easter cards have been released. In The Simple StartUp, she has learned what a powerful selling tool word-of-mouth marketing can be and is working to create super fans by reaching back out to previous customers like Jonathan. What Analiese is doing is core to business development. Like Kevin Kelly states, you can make a living forever if you have 1000 true fans. Recommendations from someone people trust are better than any PR you can pay for. Rob has made some changes to the course since last Summer and Fall. Parents have been requesting to have immediate access to the course to feed existing passion and excitement rather than wait for the next cohort to begin. Not every kid needs the structure of a group course. As an alternative, Rob has created a self-paced, on-demand course that any entrepreneur can start right now. It includes video lessons and an online community of course alumni. The next cohort course will be The Simple StartUp Summer Challenge, beginning at the end of June and running for six weeks. How can parents foster these conversations with their children and help them start? Use the 102 Business Ideas document as a starting point and ask them to come up with other ideas for solving the problem and then how it could make money. The Simple StartUp student, Arianna, started a finger puppet business after talking through the business idea with Rob. She began using free tools create awareness for her product and after receiving positive feedback, switched to Etsy which would direct customers to her. She has learned a ton in the process and had fun doing it. Arianna’s mother, Shelia, began listing to ChooseFI to learn how to take care of her debt but when she heard about The Simple StartUp, she thought it would be perfect for her teen. Initially, Arianna wasn’t thrilled about doing a program over the summer, but she reluctantly agreed. Nervous at first, she liked the videos and found everyone in the chat to be friendly. When coming up with her idea, Arianna knew she liked crafting, plus her grandmother had taught her how to sew. Outside of class, Sheila helped Arianna understand terms like profit and to use coupons when purchasing supplies. Arianna’s lightbulb moment came from selling items in the video game Animal Crossing. She realized she could incentivize people to buy more with quantity discounts. Her business name is Plushet, a mash-up of plushie and puppet, and its mission is to bring the family together through imagination and puppets. Arianna discovered that she’s pretty good at making logos after making one for a fellow classmate. Not only does Arianna encourage other kids to take the course, but says it’s better than video games and she would also even like to do it again. Sheila believes the course opens the door to learning new skillsets. Resources Mentioned In Today’s Conversation Get free instant access to 102 Business Ideas for Young Entrepreneurs Annaliese’s store: Creative Card Designs Get on The Simple StartUp Summer Challenge waitlist! Purchase The Simple StartUp workbook. If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy. Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.
After four weeks of hosting the live weekly show via Stereo, Brad and Jonathan continue to refine the format and come up with ideas for improving the experience. Jonathan needs some specialized dental work performed and the dentist he found is out-of-network. Insurance isn’t going to cover much in this situation, but thankfully, it doesn’t put him in financial straits. As they reminisce about being children of the 80s, Brad and Jonathan come to the conclusion that time moves on and the rulebook changes. If you are stuck in a world that doesn’t exist, you aren’t going to be successful. Be aware that things change and be open-minded. Google is coming out with its own certificate programs in project management, data analytics, and user experience design through Coursera what will cost most around $250. Google is partnering with 130 other companies to partner with them to hire the graduates of these programs. In past decades, a college degree may have mattered, but in 2020, employers are looking for what can you do or what have you done, not necessarily the degree. Listener Colin called in to say that he started a side hustle last year teaching people computer programming and asked about how to go about finding new clients. Jonathan says that as a business owner, Colin has a product he has created and needs to figure out how to deliver that product, ensure a great experience, find new customers, and finally scale and grow the business. For Colin’s business, is there an awareness problem or is there a problem converting awareness into sales? Brad says something that has worked for him is making connections within his niche and be authentic. Jonathan suggests establishing yourself as a subject matter expert using LinkedIn and Quora and a blog or podcast to begin attracting people interested in the subject. Another thing Colin should do is demonstrate his course has value, get testimonials, and constantly test and iterate. Marjorie called in because she knows how much Jonathan loves the Paprika app, but recommends a similar app called Whisk. It can download recipes from the internet, but you can also take pictures of recipes to upload to the app. Plus, it organizes recipes really well, has a weekly meal planner, and can create a shopping list. The next caller said she loved the coaching call that Jonathan did with Corrine and would love to hear more of those kinds of episodes. Jonathan worked with Households of FI member, Corrine to map out her FI number. Jonathan recommends watching the video for that episode because he shared a lot of screenshots while working with Corrine. Similar to the recipe app Whisk, Brad said that he could have saved money on his recent CT scan using MDSave. Instead of being charged $2,093 for his scan, a provider found through MDSave would have cost him just $289. He was eventually able to negotiate the bill down to around $1,300, but that is still much higher than he needed to pay. The next caller from LA is a side hustle addict. He has been self-employed his whole life and realizes that his nest egg is very small. He wants to know where he should focus his investments for retirement. The caller has a choice between a SEP IRA, a Simple IRA, and a solo 401K. There may be some advantages to using one over the other depending on the size of the business. Brad has set up a SEP IRA and thinks that a solo 401K would have allowed him to defer more money by contributing as the employee and employer. A SEP IRA only allows for employer contributions. If he still meets the income thresholds, the option for a Roth IRA may also be available. There is little downside to contributing to a Roth IRS since contributions can be withdrawn tax and penalty-free. The next caller shared what they would do if looking for a career move. For their technology and financial services company, they would focus on people and find out everything they could about them so that they could engage in relevant small talk. This advice follows nicely with the points Chris Hutchins made in episode 121R. A weak point for a lot of is how can you build a system around building authentic relationships over time? This was something discussed with Jordan Harbinger in episode 233. The next caller wants to know how to account for a mortgage that you expect to pay off during retirement when calculating your FI number. Jonathan plans to pay his mortgage off before beginning to drawdown his investments, however, he calculates his FI number based on what his life costs with a mortgage. It gives him a bit of a fudge factor. Your FI number is calculated by taking your annual expenses and multiplying it by 25. If you plan on paying your mortgage off before retiring, remove the payment from your annual expenses. While principal and interest can be eliminated, taxes and insurance will not be and should be included in your annual expenses. A multi-phased approach will need to be employed to calculate your FI number if planning on paying off the mortgage during retirement. Listener Phil called and left a voicemail asking about tax tips for those with side hustle income and how to balance work-life, side work, and life in general. Jonathan thinks turning a hobby into a business is a great way to explore something within the confines of a business entity. Brad’s tax tip is good record keeping and keeping things separate from your personal accounts. Jonathan also likes the thought of putting advertising expenses on a business card that earns travel rewards, like the Chase Ink Business Preferred, since advertising is a legitimate deductible business expense. A work-life balance can be tough. Jonathan says the biggest misconception is that you’re always going to be balanced all of the time but there will be sprints and tilts. It’s how it averages out over time. Experiment and test a bunch of different things, but don’t put a massive amount of time into something with no ROI or thought to the balance and other areas of our life. If you aren’t going to be in balance and there are other people relying on you, have a conversation about it. Communication will always buy you more room. Map out the cadence to your life and realize where you have control of your time. You might have a boss that needs to sign off on it, but if you work for yourself, you don’t need to ask for permission to make time. Resources Mentioned In Today’s Conversation ChooseFI Episode 121R How to Get Any Job ChooseFI Episode 304 Mapping Out Your FI Number | Households of FI with Corrine MDSave ChooseFI Episode 274 Tax Planning 2020 ChooseFI Episode 289 The Roth 401K ChooseFI Episode 233 Networking with Jordan Harbinger Join us for the next live show at ChooseFI.com/live. ChooseFI.com/cards ChooseFI Episode 168 Make Time Learn why the Chase Sapphire Preferred is one of our favorite cards. If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy. Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.
1 hr 15 min
Diania Merriam is the Chief Economeist behind the EconoMe conference, a two-day event at the University of Cincinnati whose roots are in the FIRE movement. In 2019, Diania was preparing for the launch of EconoMe in the spring of 2020. She could not have anticipated the risk of a global pandemic impacting her conference, but it was successfully held on March 7, 2020, just before the event location’s shut down. The 2020 event hosted 250 attendees and nine expert speakers. After putting 20 months of work into the conference, Diania was gratified to hear that 90% of participants loved the event and would recommend it to a friend. Getting together as a community is something that has been missed in the financial independence community over the last year. While some may label the movement as a cult, that is s misconception. Like many others in the financial independence community, Diania felt the need to share content to make it accessible and help those receptive to the message get their financial houses in order, much like Mr. Money Mustache did for her. She finds that many people have preconceived notions and assumptions, thinking that it won’t work for their personal situations, but Diania believes putting more content out there will help others it’s a mindset and there are no hard and fast rules. Although some may believe you have to be a white 3o-something male with a tech career to be in the FIRE movement, Brad points out that is far from the reality ChooseFI sees in its Facebook and local groups. Brad says that 90% of the responses to his weekly email are from women. Financial literacy is for everyone and FIRE is merely an aggressive and enthusiastic brand of it. Though there seems to be an assumption that those in the FIRE movement earn high incomes while eating rice and beans, Diania says in truth, it is rather agnostic when it comes to income. It might be easier for those with high incomes, but those with lower incomes can also improve their finances. The way to improve your finances is to increase income, decrease spending, and invest the gap. What is most important is the gap. The loudest voices in the space tend to talk about frugality because it’s the easiest thing you can do when first starting out, however, ideally, you should be doing both. Jonathan gets angry at the assumption that there’s little to nothing you can do to increase your income. You aren’t stuck at your current salary level. A lot of personal finance content revolves around sacrifice and struggle, but there is a sense of optimism in the FIRE community. You have control over reducing your expenses and increasing your income. Coming across FIRE content helped Diania realize how much privilege she had and enabled her to be honest about how wasteful her spending really was. For Brad, the heart of financial independence is optimism and an internal locus of control. You can affect change on your life with tiny actions that compound, resulting in success. For awhile, Diania wanted to be the female Mr. Money Mustache. It took her a while to realize she needed to be herself and figure out her own flavor of FI that was based on her own goals. Diania’s original plan looked a lot like other bloggers, where she would reach a net worth of 25 times her annual expenses and then retire at 40-years-old. However, life presented other options and she began to ask what she wanted out of life and what she wanted to create. Now she feels like slowing down instead of just racing to meet her FI number. Jonathan likes to think about life in terms of five and ten-year timelines. Ten years ago, did you have any idea you’d be where you are today? Brad notes that just being on the path to FI gives you the space to explore what you want your life to look like and what you want to focus on. The nuts and bolts of money is pretty easy to figure out. Figuring out how you want to spend the next 60 years of life is harder. Like Diania, because Jonathan was on the path to FI, he was to explore interest-led learning, turn it into an income stream, and eventually leave his career as a pharmacist. One of the lessons Diania has learned is that your money is only as valuable as your clarity on how you are going to use it. When her work situation started to degrade and become toxic, she realized she was already at Coast FI and had enough FU money where she could take some educated risks and look at self-employment. Being at Cost FI meant that Diania had already saved up enough money that would grow enough to support her in retirement. In the meantime, she only needed to cover her annual expenses without adding to retirement. Her life right now looks a lot like how she would want it to look if she was at FI and retired. Retirement has a branding problem. Another misconception about FI is that if you are retired, you aren’t working. Regardless of your age, if you are retired, you shouldn’t be sitting around doing nothing. EconoMe was born out of Diania asking herself what she would do if she no longer had to work for money. She wanted to create a party about money. Why wait for retirement? Is there a way to change your life around and do it now? Greed is another misconception associated with the FI community, but Diania believes FI puts you in a position to be really generous. She has experienced the generosity of those in the community who have been generous with their time to help her with her conference dream. When you have figured out money for yourself, there’s nothing left to do but help other people. For example, 20% of the EconoMe conference attendees were over 50 or had already achieved FI, but there were there to share knowledge and cheer others on. Diania thinks the benefit of having money is to be able to share it in some capacity through what you create and the gifts that you give. Brad agrees with the generosity of the community. FI allows you to rethink how you relate to people and gives you an abundance mindset. A quote Dinia loves is, “If you look at your inner circle and you aren’t inspired, you don’t have an inner circle. You have a cage“. She is incredibly inspired by all the people she has met in the community. The three most important resources that have a huge effect on your life are time, money, and energy. The people you surround yourself with have a huge effect on your energy. Is FI a fad that everyone will move on from in exchange for the next big thing? Diania doesn’t think so. Like time and energy, money is a resource and we’ll always be fascinated in optimizing our resources. FIRE is an identification with something to build habits and meet goals. There has been an identity and support system created around it. Rather than thinking of FI as a fad, Brad thinks we are normalizing the conversation and there are more and more people to talk to about it without feeling like a weirdo. The EconoMe conference will be held this year on November 13-14 at the University of Cincinnati. Some of the speakers and activities have already been announced and can be found on the website. There will also be more breakout sessions to facilitate learning from each other. Tickets are on sale now. However, if large groups are not allowed to gather by November, EconoMe will not pivot to virtual. Instead, they have backup dates of March 19-20, 2022. The decision and notification will be made by September 1, 2021. Earlybird tickets are available until April 10th. 200 tickets are available at $149, and then the price jumps to $199. Diania Merriam Website: EconoMe Conference Podcast: Optimal Finance Daily Resources Mentioned In Today’s Conversation ChooseFI Episode 150 Accountability | Diania Merriam EconoMe Conference Get started on your own path to financial independence at ChooseFI.com/start. If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy. Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.
It’s the third edition of ChooseFI’s live and interactive show via Stereo. You can submit a question, feedback, or comment, and find out how to join us for the live event by visiting ChooseFI.com/live. Brad and Jonathan are getting high on life. Not only have Brad’s daughters started back at in-person school, but he and Laura were also able to attend a Crossfit class together. Meanwhile, Jonathan is successfully combating fatigue by getting the right amount of sleep, cutting out caffeine, and maintaining high hydration levels with juices. In an ongoing effort to get 1% better, Brad recently reviewed his credit card bills. He found a $50 recurring charge for his daughter’s saxophone rental and decided to buy it for $500 rather than continue incurring the rental fee. He suggests doing this twice a year and asking if those recurring charges are continuing to serve you. Jonathan recently canceled his Netflix subscription and wonders if there is a way to the effort of it and streamline our finances. In a hypothetical example of a $2,000 car loan with a 2-3% interest rate, Jonathan asks if Brad would just pay the balance off versus keeping a monthly payment. At that low of an interest rate, Brad would not, but because of the intersection between math and psychology, there are others so debt adverse that they would pay it off. For higher interest debt or 8-12% or more, Brad believes that is more of a hair-on-fire scenario in which paying the debt off as quickly as possible would be best. Regardless of which side of the scenario you fall on, there is nuance and stigma. Rather than allow others to tell you what you can and can’t do, it’s important to know yourself and why you make the choice you do. Understanding the why behind the car payment is a better thought exercise. If it’s because it gives you the cash flow to finance even more stuff, it can grow to become a difficult position is dig yourself out of. Financing allows you to trade your most precious non-renewable resource, time, for more stuff. With every dollar you are saving, are you using it to invest, or are you buying more stuff? If you are continuing to buy more stuff, then you are still in the trap and aren’t looking at money as a tool. Because Jonathan is a spender, he wants to keep things simple and doesn’t like having structural payments. In the hypothetical scenario, he would feel the need to pay off even a low-interest rate car loan. The first listener voicemail wants to know how much in retirement is enough to adequately cover long-term care. His original goal was $10 million at age 65. According to the 4% rule, that would give the listener $400,000 a year to live off of, which is a big number. It comes down to what does your life cost? Traditional retirement calculators all start from the point of “what do you earn today”, rather than “what does your life cost”. Your income is irrelevant. In retirement, you need to cover what your life will cost. Health care insurance is based on actuarial tables put into place to ensure the provider doesn’t, in aggregate, lose money on you. The same is true for long-term care insurance. It’s priced so that providers don’t lose money on you. What is the effort to reach a $10 million balance to cover the cost of long-term care costing you in terms of time and health now? You can focus on putting systems into place now that give you the best chance to reclaim decades of quality life. Rob Phelan, fromThe Simple StartUp, called in with a question about being open to new technologies and investments. Brad isn’t a first-mover on anything. However, he has a diverse set of interests and prides himself on knowing when the tipping point is to jump in earlier than the average person. He’s done some reading on non-fungible tokens (NFTs) and believes they could be transformative 10-20 years from now. Jonathan’s process is curation and synthesis. When he reads, he skims everything and sees the point when something new becomes real. He’ll do a deep five if it fits into one of the buckets he’s interested in. He’s been doing that deep dive into crypto and blockchain, but not NFTs. While neither Brad nor Jonathan can get behind spending $2.5 million for Jack Dorsey’s first Tweet, they do agree digital ownership is interesting because of all the unique ways the concept could be implemented. Next up is a seven-year-old who says they want to learn about investing. It starts with saving. What Brad tells his own kids is that life gets so much easier if you can save money. If you spend every cent you earn, it takes away a lot of choices in life and gives them fewer options. The higher you can make your savings rate, the more freedom you’ll have. As for investing, think long-term, like many decades of investing. With a long investing horizon, the best chance at being really wealthy is with low-cost broad-based index funds or ETFs. When Jonathan’s kids are older, he thinks he will try and attach a real company to the discussion and carve out a portion to invest in it. It would be one they know and has products they get excited about to help make the feeling of ownership real. Natalie called in to say that she just opened an M1 Finance account for her traditional IRA contributions as well as a savings account so she can earn 1% on it. However, she’s never done a portfolio rebalance. Rebalancing can be scary and easy to avoid. It comes back to having a plan and an investor policy statement and not letting your brain get in the way. M1 can do this automatically and there may be some tax consequences if it is done in a taxable account. Rebalance in your portfolio totality, not within individual accounts. If you don’t have a plan, go and figure out what your goals are and have the plan match them. Rebalancing can also be done by making weighted contributions. James, who is in Jonathan’s podcasting course, asks about speeding up his path to FI by purchasing multi-family real estate by withdrawing from a 401K and obtaining a HELOC. While there are likely both success and horror stories of others who have gone that route, Jonathan would look for ways to avoid 401K withdrawals or taking a line of credit against your home. Brad would only go into his 401K as a last resort. 401K withdrawals are subject to a 10% penalty and would be taxed as ordinary income. Rather than a 401K withdrawal, Jonathan says that if the deal is good enough, the money will come. Bringing on additional investors may be an alternative. Network, be creative, and try to cap the downside. Resources Mentioned In Today’s Conversation Join the live show Tuesdays at 7:30 Eastern with Stereo! ChooseFI Episode 297 From Pandemic Layoff to $100K+ | A Salesforce Success Story Start your new language learning journey today with Babbel and get six months for the price of three with promo code “ChooseFI”. ChooseFI Episode 016 House Hacking with Coach Carson If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy. Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.
1 hr 13 min
Jonathan checks back in with Corinne from the Households of FI series to look at her numbers, goals, and map out a FI plan. Financial independence is not about having the most money. In the pursuit of FI, the math is simple, but the math will change depending on your goals. It’s important to start with understanding what you want your ideal day to look like. Following Corinne’s last coaching session with Jillian, she learned how to build good habits and strategies to get closer to the goals she wants. One of the strategies she’s using is her phone to set reminders for the goals she wants to achieve. The reminders hold her accountable without her having to remember everything. Jonathan pointed out one of the great pieces of advice from the episode with Jillian was her advice to explore the goals you find yourself resisting giving even two minutes to. What is it in your subconscious that is sabotaging your goals? Corinne is on track to become a partner at her firm but that comes with a lot of expectations. In an exercise with Jillian, she was asked to write down what her ideal day would look like. to start, she’s been writing down which activities are energizing and which are draining. It has helped her to manufacture her day to be the kind of day that makes her want to get up and go to work in the morning. She discovering that she doesn’t have to work as many hours as everyone one else. She can balance it out, earning a little less money while being happier. We can make time to make each week more memorable and enjoyable when we spend less time on meanless activities. When you take what earn and subtract what you spend, what you are left with is the gap. When you live paycheck to paycheck, there is no gap. Corinne earns $120,000 a year as an accountant. She was in a five-year program where she got her Bachelor’s and Master’s degree that gave her enough requirements to take the CPA exam. Due to a scholarship, she graduated without any student loan debt. A similar recent graduate starting out now would make around $50,000 a year. She was able to double her salary and excel by narrowing her focus and becoming an expert in that space. In her industry, there are clearly defined roles with specific salary ranges. Increasing income requires the desire to progress and take on more responsibility. Becoming a partner wasn’t always on her radar, but she liked the idea of having ownership in the business. Corinne hasn’t researched the details of the retirement payout for partners at her firm, but there is some form of payout in retirement. Since she is on the trajectory to becoming partner, being able to project the retirement payout will help to calculate her FI number. One of Jonathan’s favorite income tax calculators is at Smartasset.com because it will incorporate state and local taxes. Using Corinne’s salary, he calculates her federal tax plus FICA and Social Security is $29,227. Since she maxes out her 401K, it reduces her tax to $23,000 and saves her more than $6,000 in income tax. The income she brings home is then $77,445, or around $6,500 per month. Now looking at Corinne’s expenses, her mortgage is approximately $1,000 and she spends $500-550 a month on food. She does not have a car payment but between gas and other expenses, it’s around $100 a month. Utilities run $400 per month. Additional budget categories include dining out and shopping for $500, charitable giving at $200, housekeeping is $100, and her HOA bill is $150. Though travel is on hold at the moment, she’s like to budget $250 a month for vacations. And finally, an additional $200 was included to cover odds and ends. Corinne’s total monthly cost-of-living is $3,375. To find out her gap, Jonathan takes her net monthly pay of $6,500 and subtracts her monthly expenses of $3,375 to calculate a gap of $3,125 each month. Jonathan suggests putting the gap to work for her as quickly as possible and sending it to her investment strategy. Before doing this exercise, Corinne had no idea what her gap was and grabbed a random number to move to savings. To start working on a plan for financial independence, Jonathan uses net worth and age. Corrine’s 401K balance is about $150K and her taxable account has another $100K making her invested net worth $250,000. She is 32 years old. Using ChooseFI’s simple Retirement Projection calculator, Jonathan plugged in Corinne’s numbers. Her FI number is $1,012,500. Next, Jonathan uses ChooseFI’s Future Value of Investments calculator to project how many years it will take Corinne to reach her FI number through both the growth of her current invested balance and her monthly contributions. Using an 8% rate of return, in 10 years Corinne will have $1.4 million far exceeding her FI number. Sometime between 7 and 8 years is when she will reach financial independence. The exercise is energizing for Corinne who previously thought she would need to eat rice and beans to reach financial independence in 10 years. She was nervous to see the numbers but now finds it motivating. Her next step will be to ensure she’s taking that extra money every month and putting it to work for her. Once you’ve got what you earn, what you spend, identify the gap, and decide what you’re going to do with the gap, you’ve got your FI plan in place. Resources Mentioned In Today’s Conversation Join the live show Tuesdays at 7:30 pm Eastern on Stereo! ChooseFI Episode 243 Households of FI | Corinne and Jillian Johnsrud Watch ChooseFI episodes at ChooseFI.tv. ChooseFI Episode 168 Make Time Smartasset.com Apps.choosefi.com Take ChooseFI’s free 5-day challenge. If You Want To Support ChooseFI: Earn $1,000 in cashback with ChooseFI’s 3-card credit card strategy. Share FI by sending a friend ChooseFI: Your Blueprint to Financial Independence.