Last year, I asked you what you’d like to see more of on this site and the biggest request was to see more stories of people who are on the path to early financial independence so today I am introducing the Under the Microscope series, the series where we peak behind the curtain of someone’s journey to financial independence and offer advice to help them reach FI even sooner!
The second most-popular request from my survey was that you wanted me to write more about my personal story so to kick things off, I decided to go under the microscope first! Be easy on me :)
Current after-tax savings rate
My savings rate in 2014 averaged over 73% but I expect that number to be higher this year because my expenses have dropped dramatically.
Time to FI
Since I figured I’d continue earning money after leaving my full-time job, I decided that I would be FI once my savings covered my essential expenses. My discretional spending would then be funded by my supplemental income from my side projects (i.e. websites, mobile apps, etc.) that I enjoyed working on and planned to continue after leaving my job.
When I reached the point where my essential expenses were covered though, I realized it wouldn’t take too much longer to build my savings so that my discretionary expenses were covered too.
Now, all of my expenses are covered but when I tried to quit my job last year, I got an offer I couldn’t refuse so I’m currently still working (see The Power of Quitting).
Since my wife isn’t FI yet, I figure I’ll keep working until I either get sick of it or accumulate enough money so that neither of us has to ever work again.
I’m also hoping for another bear market so that I get one more chance to buy a bunch of shares cheaply before I give up my salary.
To be honest, I will likely work longer than I actually need to because I think I’m going to have trouble finally pulling the plug. For the past year, I’ve finally allowed myself to spend freely, which after a decade of watching every penny has been a great change. I worry that that carefree feeling could disappear when I stop having a steady income so padding my balances a bit more while doing a job I still enjoy seems like a good idea for now.
How did you get on the path to FI?
I nearly drowned for a few pennies once.
To keep me occupied as a kid, my family would throw coins into the pool without me noticing. As soon as I spied something glimmering on the bottom of the pool, I would spend the rest of the day diving for money, only breathing when absolutely forced to.
My obsession with money continued into my teens when my dad bought me four shares of stock: one share each of Pepsi, Wendy’s, Disney, and my dad’s employer, ADP. The only section I cared about in the newspaper was the stock quotes page and I would check obsessively to see how my stocks were doing. I couldn’t wait until I had a real portfolio to manage someday but those four stocks kept me occupied until then.
When I got a job after college, I finally was able to start my own portfolio so I began building up my savings.
My girlfriend (now wife) and I bought our first house together and luckily sold it for over 50% more than we bought it for, just two and a half years later (immediately before the financial world collapsed), and that became the base I’ve been building on ever since.
I was an above-average saver throughout my 20s but it wasn’t until I stumbled on earlyretirementextreme.com that my savings went into overdrive.
Before finding ERE, I had used my savings to fund multi-month sabbaticals from work every few years but I wasn’t really saving for anything in particular (I just liked the idea of having a lot of money in the bank and a portfolio to manage). Once the FI lightbulb went off in my head though, I put every spare dollar towards the pursuit of financial independence and started doing a lot of research to figure out how to get there even quicker.
Since I had never been a frivolous spender and already had relatively low expenses, my strategy focused primarily on the income side of the equation.
My approach to increasing the amount I could invest every month was two-fold:
Reduce tax burden
Every dollar that I didn’t pay the government was another dollar that went towards my FI savings.
I could see that people on the path to financial independence were drastically different than “normal” people so I figured the normal advice didn’t apply to those of us pursuing FI so I began researching ways to legally exploit the tax code to help me (and you!) reach FI as quickly as possible.
I currently max out my 403(b), HSA (see why I think it’s the Ultimate Retirement Account), and SEP IRA every year.
Increase supplemental income
Since my initial plan was to fund my discretionary spending with supplemental income, I decided to focus on building my supplemental income streams but chose to limit the work to only opportunities that had unlimited upside (i.e. those that didn’t require exchanging x hours for $y) and that I enjoyed doing and would continue doing after FI.
I’m invested primarily in low-cost index funds with the following allocation:
Total Stock Market: 44%
S&P 500: 9%
Small Cap: 12%
Cash: 21% (see below for why this value is so high)
Future Investment Changes
I’m sitting on a lot of cash right now because I’ve yet to invest the proceeds from our recent house sale. I’m also bad at manually buying investments in my taxable account so I was already sitting on too much cash even before the house sold.
The reason I’m waiting to invest that cash is because I’m currently applying for a UK visa and the British government wants to see that I have enough cash (they ignore invested assets) to support myself so I’ll need to keep that money in cash until my visa application has been approved.
I also plan to adjust my overall portfolio allocation a bit this year but I need to do some more research first because I want to make my allocation as tax-efficient as possible (look out for an upcoming post on that topic soon).
Post-Retirement Income Strategy
After leaving my job for good, I plan to build a Roth IRA Conversion Ladder and will use that to sustain myself after the initial 5-year waiting period. My taxable accounts and supplemental income will provide sufficient income in the meantime.
I have a love/hate relationship with real estate (I love the idea of it but I hate actually dealing with it) but I may decide to invest in rental real estate in my hometown of Pittsburgh, Pennsylvania.
To learn about real estate and the Pittsburgh market in particular, I may get my real estate license and work for a bit before diving in myself (why not get paid to learn something rather than pay to learn something?). This is just a pipe dream at the moment though so it’s possible I’ll just decide to stick with stress-free index funds.
Once my wife stops working, I’d like to spend a third of the year in America (where my family lives), a third of the year in Scotland (where my wife’s family lives), and a third of the year somewhere else in the world.
I plan to focus more on music (classical piano, blues guitar, and synth programming), expand my efforts on my side projects, write some computer programs that I’ve been planning to write for a while, and even potentially get a job in a completely new field that interests me (you can see why I shy away from the word “retirement”).
Best part of being on path to FI
While achieving FI can take some time, the happiness you get from realizing you’re not trapped for the next four decades is immediate and the power you get from having a bunch of money in the bank follows shortly after.
Once you have that F-You money, as my buddy Jim from jlcollinsnh.com likes to call it, the world is yours. You can make demands that you wouldn’t have thought to make before and your life becomes even more enjoyable as you pursue the ultimate goal of financial independence.
Biggest challenge while pursuing FI
I’ve tried to keep my pursuit of FI quiet offline because I don’t like people knowing how much money I have saved and I feel weird talking about money in general with friends, family, and other people who are on the “normal path”, since it’s so drastically different than the path I’ve chosen, so the hardest part has been dealing with the awkward conversations that I’ve had after more and more people in my real life have found out what I’ve been up to with my finances.
Questions for your fellow fientists
I’d specifically like to get some feedback from any real estate people out there…
Is it worth pursuing the idea of purchasing a few buy-and-hold, single- or multi-family rental properties? If I decide to hire a management firm, do they really take on the bulk of the hassle/stress or does quite a lot of nonsense seep through?
Any parting advice?
Focus on the things you can control (i.e. the amount you save, the amount of taxes and fees you pay, etc.) and ignore the things you can’t (i.e. what the market is doing, etc.).
Once you have some F-You money built up, use that power to create a better life so that you are happier while you pursue full FI. It’s amazing what you can get when you just ask but people are so afraid to ask, they never do. F-You money is a ridiculously powerful thing so use it when you have it!
Mad Fientist’s Comments
Even though it’s weird giving myself advice, I know there are things I can improve on so here are my two cents…
It’s obvious you can’t be trusted to manually invest your taxable money, since you have such a high percentage of your portfolio in cash, so you need to automate your taxable investing. Once you get your Betterment account set up, schedule automated investments to take money out of your checking account and invest it every month. This will reduce the amount of cash you have on hand and will increase your overall returns.
It’s also apparent you like to plan things out a lot before pulling the trigger on anything. While it’s probably a good idea to do a lot of research before diving into real estate, make sure you don’t just research for decades and let good opportunities pass you by. You’ll learn more by actually doing so you’ll have to just dive in at some point if your really want to get into real estate investing.
Finally, be careful with the slippery slope of “saving up just a bit more money before quitting”. It sounds like you have enough saved up to allow you to take Mr. Money Mustache’s advice and remove money completely from your decision-making process so if you still enjoy your job and would keep doing it for free, by all means keep doing it but if not, find something else that you would be happy doing for no pay.
Besides that, everything looks great. Smart guy :)
What advice would you give the Mad Fientist? What else do you think he could improve on?
If you’d like to go under the microscope yourself, just respond to the above questions (feel free to add or omit any) and email them to me at [email protected] with the subject “Under the Microscope”!
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