What does FIRE mean?

FIRE is a new acronym spreading like fire (pun) throughout the personal finance world.  It stands for Financially Independent and Retired Early.  FIRE is the new personal finance goal replacing “I want to be rich.”  Being rich really means nothing—the same as being wealthy.  FIRE is the new standard because it allows us to define goals and objectives, and more importantly, measure our progress.  Let’s look at each one separately.

Financially Independent – The goal of being financially independent is to create a lifestyle focused on passively earning income while minimizing expenses.  There are many objectives you can use to achieve being financially independent and here are some: 

• Generate passive income – You can do this by investing and earning interest and dividends.  Renting out real-estate properties is a very common method.  You can also do this by having a side job like blogging.  The main objective is to create multiple “streams” of passive income so you minimize risks of losing a stream.
• Minimizing expenses – The most common mistake people make is losing control of their expenses or living beyond their means.  Minimizing expenses allows you to make the most out of your income and to save more.  This means staying away from debt, making smart purchases, and being aware of how much you’re willing to spend on entertainment and services 
• Increase your savings rate – By using your primary income to generate passive income and minimize expenses, you should be able to increase your savings rate.  Unfortunately, many people struggle to save at least 10%, when we should be striving for a 25-50% savings rate (or higher if possible).  In an age of seemingly infinite resources and excessive consumerism, people are struggling to save any money.

Retired Early – Defining “early” is a personal goal.  There is a huge movement to break away from retiring at 60 or later, and having very limited time to enjoy your retirement years.   Retiring early also doesn’t mean a specific retirement savings goal either.  For example, some people just want one million dollars without thinking what the $1M will provide or how long it will last in retirement.  The objective of working towards retiring early involves identifying how much you’ll need to generate by the time you retire.  You calculate how much retiring will cost you annually and then figure out much you’ll need to retire at the specified time you’d like to retire.

• Identify WHEN and HOW you’d like to retire – A common retirement goal for military members is to retire from the military at ~45 within the same lifestyle they were living.  When military members retire after 20 years of service, we receive 50% of our basic pay plus an additional 2.5% for each year after that.  In the beginning of 2018, the retirement system will change significantly.  The main problem with that goal is that BAH (Housing Allowance) is not part of our retirement, so military members actually only retire with 35% of their paycheck.  They’d need to generate an additional 65% of that income through investing and passive-income strategies in only about 20 years—a difficult task.  A generic FIRE goal is to retire at 55 with a lifestyle slightly less than having full-time jobs.  It’s recommended that your expenses (living, traveling, hobbies) only make up 80% or less of pre-retirement expenses.
• Your savings rate is within your control – The easiest ways to retire early are to have a high savings rate and live a retired lifestyle within your means.  It would be difficult to retire early saving only 10% of your income.  Conversely, one could retire early within an aggressive savings rate of 50% or more.  Additionally, you could also live a life in retirement which requires very little income.  I know one military family that will only need $25K a year for their retirement plans.  The military member’s retirement income will fully cover the cost of their simple retirement.

The people most interested in FIRE tend to be minimalists.  They have no interest in excessive consumerism or working until they’re old.  They want to enjoy life earlier and without the distractions of excessive TV consumption, celebrity worship, and the exhaustion of a hectic life.  Is this something that interests you?

The Real Debate about Raising the Federal Minimum Wage

In July 2009, the federal minimum wage was increased to $7.25 from $6.55.[1] In his 2015 State of the Union, President Obama called on Congress to raise the minimum wage.[2] The minimum wage debate has caused protests and, like all topics, is hard split by the two parties. Most of the debate revolved around raising the federal minimum wage to $15 from $7.25. This is more than doubling the previous wage increase in just six years. The intent of this blog is not to discuss politics but to address personal finance concerns. So this blog post won’t be discussing whether we should or should not increase the minimum wage; but rather, it will focus on what you can learn from what the true debate should be on.

If you’re mathematically or economically inclined, then your first question should or probably is why isn’t $7.25 enough anymore? What’s changed from 2009 to 2015 requiring an increase of over 100%? The real answer and one of the biggest problems in our economy is the damaging impact of inflation. The debate isn’t centered on reducing the cost of Consumer Prices though; it’s simply based on increasing the wage.

If you just analyze simple inflation, using the Consumer Price Index from 2009-2015, then $7.25 is equal to $8 in today’s dollars.[3] So why is the current administration and federal minimum wage supporters asking for $15 instead of $8? The answer and another problem in our country is way we handle of our current income (regardless of what we’re currently making).

• Inflation: Every adult has experienced inflation in almost every commodity. College tuition, health care costs, movie prices, gas, food, utilities, etc. Most of us aren’t seeing our income keep pace with this inflation either. So even in times of low Consumer Price Index (which doesn’t capture all commodities) increases, inflation is still outpacing our incomes. To protect yourself, you need to start saving money for your short-to-long term goals, retirement and long-term health care costs. The economic principles of time value of money and compounding interest relies on timing to help protect you against inflation. The sooner you start saving, the better protected you’ll be against inflation.
• Handling of our current income: One of the main reasons that people want it increased to $15 versus the inflation adjusted $8 is because we don’t know how to handle our current income. People can become financially independent by making $8 an hour or by making $200 an hour. Conversely, people can be in extreme debt and financial ruin while making $15 an hour or $200 an hour. There is too much focus on how much we make and not what we’re doing with the money we’re currently making. When I help people with their finances, the first thing I do is track expenses. By raising the minimum wage to $15 we’re not solving the problem of helping people financially. To help protect yourself, you need to track your expenses and maximize the income you currently earn. I’ve always recommended to people that before you seek and pay for professional financial guidance, you need to track all expenses for 30 days. About 60% of people I’ve dealt with quickly saw where they could make life changes without earning more income.

So regardless of whether you oppose or support a federal minimum wage increase, you can still implement changes in your life to protect yourself from the real problem.

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[1] http://www.dol.gov/whd/minwage/chart.htm

[2] https://www.whitehouse.gov/the-press-office/2015/01/20/remarks-president-state-union-address-january-20-2015

[3] http://data.bls.gov/cgi-bin/cpicalc.pl?cost1=7.25&year1=2009&year2=2015

How do People on Welfare Afford Luxuries?

A reader asked me to write a blog post about how people on social programs afford luxuries that as an E6, first-line supervisor, he couldn’t afford. He was obviously frustrated at something he saw recently, but I know exactly what he’s referring to. I went on leave last year back to my hometown in California; north of Los Angeles. I was at the only shopping market we have in town and a woman in front of me paid for her groceries with an EBT card (a social program) while answering her iPhone6 and her nice clothes and then left in her nice, new car. How can someone afford these luxuries and be on social programs? As I’m writing this blog post, I, a prior-enlisted Captain in the Air Force, currently only own an iPhone5s and desperately long for the newest iPhone.

The majority of this discussion will obviously be on the people abusing the program which garners the most attention. Economically speaking, it’s imperative for a country to have a solid social safety net to encourage entrepreneurship, risk taking, and to take care of those with disabilities. Unfortunately, many states in America, like California, have let the social programs get out of control and have created and perpetuated a negative feedback loop that keeps poor people poor. The political reason for this is not the subject of this post. Rather, instead of worrying about taking this ability away from people abusing social programs, I plan to give you ways to mimic this behavior if you need to and provide a caution.

So how do they afford these luxuries? It’s because the social programs pay for most of the “needs” of the household leaving any additional income from the social programs or from side/part-time jobs as disposable income. Most of us don’t have that option because after bills, reducing and eliminating debt and saving for retirement, we have little disposable income left.

Here’s an example of what I’m talking about.

·         Housing - A person living near Los Angeles, CA can get a near-free apartment through Section 8, HUD rental vouchers. If the person is working they only have to pay the difference between the rent and the voucher. It was difficult for me to get the benefit amount but in Fiscal Year 2012, a family of four could get a 2 bedroom apartment voucher for up to $1,447 a month. A person doesn’t necessarily “make” money on this program since it goes directly to rent. Most utilities are paid for under this program. (http://www.huduser.org/portal/datasets/fmr/fmr2012f/FY2012F_SCHEDULE%20B_922.pdf).

·         Food - The federal government estimates that we spend nearly 30% of our income on food and someone receiving Supplemental Nutrition Assistance Program (SNAP) benefits using his Electronic Benefits Transfer (EBT) card could earn up to $649 a month. (http://www.fns.usda.gov/snap/how-much-could-i-receive). Using the government’s calculation of $649 a month on food, for a family of four, this person would be “making” $2,100 a month.

·         Income – Every state administers its welfare program differently. I used California’s CalWORKS program and used the conservative estimate for Region 2 (basically not the expensive parts) and for a family of four could earn $725 a month in income. http://ca.db101.org/ca/programs/income_support/calworks/program2b.htm Since food and housing is paid for, most of this welfare is pure disposable income. Most military members don’t have $700 a month in disposable income.

 

My AT&T bill is $50 for an iPhone5s data plan a month which would easily fit into a disposable monthly budget of $700. Phone companies allow you to split the costs of phones across 12 months so people with pure disposable income can afford expensive phones. A car payment can be less than $250 a month still within the disposable income limits. If the person gets a part-time job they can extend the amount of time they’re on these benefits but their program benefits decrease.

Like I said, the purpose of this blog is to show you how to increase your disposable income. Assuming your income can’t be changed at this moment (but should always be your primary goal), you can reduce your expenses. Many people are ditching their expensive television plans for internet streaming services like NetFlix and Hulu. Paying down credit card bills and paying off other debts is a very quick way to increase disposable income. Find ways to cut on gas and transportation costs. Stop eating out so much (full disclosure: my largest expense is food). By reducing your expenses you can also increase your disposable income so you can “blow” it like the person I saw at the shopping market and the subject of my friend’s frustration and motivation behind asking me to write this blog post.

But be careful. The problem with social programs is they offer no future for people. There is no retirement planning and these people continually need these programs and become dependent. The reason why we have to wait for all these luxuries is because we’re waiting until we can afford them without sacrificing our emergency planning, long-term health care and retirement plans. So it may suck watching the abuse but remember in 5, 10 or 20 years those people will be in the same exact spot as they were when they started the program posting on Facebook, “This year will be different” or “Things are about to change” but they never do. Through your short-term sacrificing, your 10-year later Facebook post will be about how much your life has changed.

Try not to judge those on social programs and instead understand that the system has created a negative feedback loop preventing them to escape. Instead focus on your current position and how you could reduce expenses to increase your disposable income to better your life in 5-20 years.

Marriage and Finance Part 1: Common Roles

I’ve always been reluctant to post about Finances and Marriage because it is such a touchy subject. But a fan of the blog suggested I should, so I shall. This is Part 1 of Finances and Marriage and will concentrate on the common role divisions I’ve typically seen. The list is not inclusive and your marriage may differ on range of the power you and your spouse exerts in the role. Also, I don’t know if it’s the “alpha-male” syndrome in the military, but women are more likely to seek financial advice then men. Some men will go bankrupt, face disciplinary issues and ultimately get a divorce before seeking financial advice. When I volunteered at an Airman Family and Readiness Center, I would only typically see people after the disciplinary issues. But according to an article in Psychology today, couples who fight more than once a week about finances are 30% more likely to get a divorce¹ and the extra pressure only compounds the military divorce rate. Here are the roles I’ve typically seen:

·         Dominant Money Maker – In the military, this is commonly the active-duty member. The money maker makes the money and also handles all the finances. In the beginning of a marriage, this is often the easiest role division. But as time goes on, the submissive spouse will lose independence or feel unequal. If your spouse is financially submissive, continue to update him or her on the family’s overall financial situation; whether they want it or not. This role division could be dangerous if the dominant money maker is reluctant to take financial advice. If the couple experiences financial troubles, the money maker will become emotionally distraught and it will cause a wedge in the relationship. If the submissive spouse is completely dependent, then financial troubles can cause major troubles. Another complication is, in the military, we are held liable for supporting our dependents as long as they are qualified dependents. So when a couple is “separated” the military member is still liable for supporting the dependent, which may have no experience in financial independence.

·         Dominant Dual-Income Role – This is also quite common in the military with one spouse being the active duty member and the other having a civilian job. At least from what I’ve seen, there isn’t a correlation from the person making more and them being the dominant member. Usually the spouse with the most financial fluency takes the dominant role. Like everything in marriage, communication is the key to success with this role division. The submissive spouse needs to be engaged in the “end goal” and the direction the family is going financially. After the goals are set, the submissive spouse just needs updating. I’ll cover the logistics of making this role division work in Part 2 of the series. This role division could be dangerous if there is disagreement in the goals or if the submissive spouse unexpectedly decides to take a more dominant role. Again, constant communication is the key.

·         Submissive Money Maker – For a lot of military members, finances are the last subject they want to think about after a difficult day at work. In this situation, the spouse becomes the dominant financial decision maker. I found this role division works the best if there are no other complications in the marriage. But if there are other surface cracks in the relationship, this role division could be difficult to maintain. If the job becomes too stressful, the money maker could feel like a “slave”—working all day and someone else getting the money. The spouse needs to ensure other aspects of the marriage are sound before trying to fix any financial issues. Often times the money maker can feel like the spouse is “lazy” and not keeping up his or her “end of the deal”. The submissive money maker is usually okay with relinquishing control if they are happy with the “stay at home” duties.

·         Equal Roles – At least in the military, I’ve found it very rare that both spouses are equally interested in being dominant in financial planning. In this division role, both spouses are usually both dominant in all areas and continuously butt heads from simple decisions to life-changing decisions. The marriage, in general, is highly volatile. They have the highest of highs and the lowest of lows. Like everything, strategic communication is the best advice. This may sound unorthodox, but visual aids help greatly to keep emotions from flaring. Go to a website, create an excel sheet, or even make a PowerPoint to ensure a logical, rational discussion is held. Banks DO NOT care about the fight and make-up you all just had.

Regardless of the type of division role you have, I highly recommend that when discussion finances, both spouses try to use the word “we” as much as possible. Try to say, “we need to cut expenses,” or “we should save more.” I’ll recommend how to manage accounts, maximize finances and how to prevent financial fights in future parts of Finance and Marriage. What kind of role do you and your spouse have? Is it working?

¹http://www.psychologytoday.com/blog/communication-success/201304/how-money-issues-predict-divorce-how-prevent-them 

I'm Ready to Start Making Money!

Many people have asked me, “My finances are in order, so now what?” I’m very pleased to get this question. When I get asked this, I ensure, and/or assume, they have: accounted for all their expenses (as suggested in my 30-day challenge post), eliminated or reduced their debt levels and, most importantly, established an emergency savings account. If this describes you and you’re ready to start investing and making money, then read on.

·         The first step is to take advantage of tax-sheltered investments. I typically recommend everyone have an Individual Retirement Account (IRA). To determine if you should open a ROTH or Traditional IRA, then read this previous blog post: You can invest up to $5,500 annually in an IRA. Once you have the money in an IRA, you can invest it in pretty much any investment possible—mutual funds, stocks, gold, bonds, etc.

·         If you have more than $5,500 annually to invest, then you should fund your Thrift Savings Plan (TSP). Again, you can choose the ROTH or Traditional accounts, but you are limited to the funds offered by TSP.  For military members, the TSP does not match and for civil service employees, the TSP does match (up to 5% in a complicated matter). You can invest $17,500 (does not include your employer’s contributions) annually to your TSP.  With an IRA and the TSP, you can contribute to $23,000 a year in tax-sheltered investments.

·         On a lateral financial decision, if it makes sense for your particular financial situation, then purchasing a house while in the military is a great investment. When living in the dorms, base housing or renting, you are theoretically “losing” the BAH we receive. If you were a civilian, it would be factored into your base pay, but it is separated in the military. This is a basic discussion and gets more complicated on how to make the decision to buy or rent, but buying a house allows military members to “earn” that BAH.

·         Back to normal investing, if you have more than $23,000 a year to invest, then you can open up a normal taxable, brokerage account with any large bank and purchase stocks, mutual funds, bonds, art, oil, etc up to however much you want to invest.

Mathematically, the earlier you invest the better potential you have for earning a large return on your money. If you do it right, by using tax-sheltered accounts, avoiding fees and saving as much as possible, you could retire early and live a long, financially independent, life.  

How Do Celebrities Go Bankrupt?

Have you ever been confused about how celebrities lose their money so quickly? Has one of your favorite musicians or athletes just filed for bankruptcy even though they just signed a multi-million dollar contract?  How do lotto winners lose their money so quickly and end up worse than they started?  All of these situations happen because these celebrities aren’t watching their expenses. They know they have a lot of income, but they rarely track their expenses. This is an important lesson we all can learn from.

Let’s consider a musician, 19 years old, who has $3M in income and he purchases, in cash, a $2M mansion and a $100K car.  In his mind, he has $900K to live a lavish lifestyle and his recording company is telling him, “It’s just the beginning.”

But what these musicians don’t realize is it’s expensive to have a lot of money once taxes, insurance and maintenance is included. Think about your own car insurance compared to what you drive and your age and then consider how expensive it would be for a 19-year old with a $100K car or two $100K cars. Property tax is based on the value of the house, so the more expensive house, the more taxes. 

But even including all the recurring expenses, our musician would still have a lot of income compared to our standards. Most musicians have money managers handling their finances but never actually see the income and expenses. The money manager may recommend to our musician to stop spending so much, but the lavish lifestyle is addicting and the industry promotes “keeping up” with other celebrities. Eventually, the mathematics catch up and it happens quicker if the musician stops selling records, or the celebrity falls out of popularity, or the athlete gets released.

While we may not have any sympathy for those making $1M or more every year, we can be able to learn from their mistakes and apply to our own income levels. Here are some lessons learned from celebrities:

1.      Know where your money is going. Try my 30-day challenge I discuss in this blog post: http://militaryfinrep.blogspot.com/2014/02/the-secret-to-becoming-financially.html

2.      Sometimes our income is out of our control, but almost always, our expenses are within our control. Like we’ve all seen with celebrities, we’ve seen plenty of “rich” people go broke and I’ve seen plenty of “not rich” people live financial sound lives. Our income determines how much we make but our expenses determine how much we have.

3.      If someone, like your spouse or money manager, tells you to control your spending, then you might want to listen.

4.      “Keeping up” with other people can be a very expensive habit. If you’re concerned with “keeping up” with what other people are spending, then be equally concerned with what they are making to be in line with them.

What’s the most surprising or crazy celebrity, athlete, or lotto winner, financial story you’ve heard?

The Secret to Becoming Financially Independent

Financial independence is a goal for many people. The feeling of not having to worry about money is one of life’s ultimate goals. Many people think the secret to being financially independent is to make more money, but I would argue that many rich people don’t feel financially independent. The true secret to being financially independent is from having an overwhelmingly large amount of discretionary (or free) money at each paycheck. That’s why more people dream about winning the $5M lotto than actually trying to earn that much money. The lotto represents all discretionary money. But then this same principle hurts lotto winners as they reduce their discretionary money by increasing the amount of liabilities (bigger houses, expensive cars, the “entourage”, etc.).

The best way to become financial independent and to increase your discretionary money is to track EVERYTHING that you spend for a whole normal month. Take an ordinary month, with ordinary income and expenses, and then keep track of everything that you spend for the entire month.  Once you have done that, you will be able to see exactly what you can change to get more discretionary money.  If the minimum payments on your credit cards are high, then start paying those down to reduce the minimum payment. If you don’t have much wiggle room, then you can save on variable-fixed expenses like gas, groceries, dining out, entertainment funds, etc.

Here’s a sample scenario:

Income	Amount($)
Paycheck	$3,000
Expense	Amount($)
Mortgage/Rent	$1,300
Utilities	$300
Groceries	$400
Car Payment	$250
Insurance	$100
Gas	$150
Credit Card Payments	$100
Total Expenses	$2,600
Total Discretionary	$400

$400 a month may or may not provide the “independent” feeling that people crave but it is the starting point. Now that you know what your discretionary funding is, you can start to pay off your credit cards or your car payment, or you could save your money and try to increase your income. Either way, you now have the starting point to becoming financially independent. I would argue that almost everyone who feels financially independent knows exactly where every dollar goes to, thus taking the 30-day challenge is a great way to start your path to financial freedom.

If you go pay and see a financial advisor, this will be the first step in the process. If you’ve done this in the past, then do it again. Most advisors recommend doing this every six months or at least annually.