Any fool can learn from their own mistakes; it is the wise who learn from other peoples’ mistakes.

Having been plugged into the FI community for close to a decade, I’ve seen many people work towards FI. It’s a long road, and along the way there are a few mistakes people make over and over again. Mistakes that cost them time and stress – or even derail their FI journey altogether. The good news is that with awareness, these mistakes are completely avoidable.

Burn Out

You’ve seen the studies – crash diets almost always fail. It’s more sustainable to adhere to a set of guiding principles – like get enough protein and eat whole foods – and to lose weight slowly over time. The same applies to FI. I get it; we are excited by the idea of FI and want to commit fully to accelerate the timeframe. So we make huge cuts in our spending – I can survive on beans and rice for 5 years, no problem! – that aren’t realistic to stick with, because, you know, we also want to enjoy our lives now. There is not a one-size-fits all answer here of course. It may take some iterating to find the right balance. But that’s just what you should be aiming for – balance.

So how about instead of slashing all of your entertainment subscriptions – Netflix, Hulu etc- and planning to spend your downtime staring at the wall, you keep your favorite one around. Or if going out to dinner is something you really enjoy, you put it in the budget to do on occasion. A good way to find a sustaining balance is to get clear about the spending that brings you real joy. Then, cut the rest.

Going It Alone

There is an African proverb – “If you want to go fast, go alone. If you want to go far, go together”. We just established above that FI is more of a marathon than a sprint, and takes a longer view perspective to achieve. Well, that means it will be very motivating and helpful to have a community to support you along the way. The benefits are numerous – you can share tips and ideas, hold each other accountable, and have someone to complain to when you’ve eaten beans and rice for the third month straight (just kidding, don’t do that).

There are communities that already exist that you can join – the Bogleheads or a Mr. Money Mustache meetup. However, I think the best way is to build your own. Personal finance can feel like a taboo subject in American society, and for some it certainly is. If you put yourself out there and give it a shot, I think you’ll be surprised at the reception it’s likely to receive. We talk about finances in depth with our close friends, and now they all talk about finances with each other too. The acronym FIRE is fitting – this idea spreads easily.

Analysis Paralysis

There are a lot of opinions out there on the internet, in podcasts, in books and interviews. Combine that with the fact that finances are already an intimidating matter because we lack experience and expertise. Then add in high stakes – with these decisions affecting our very livelihood…and you get stuck. It all feels over your head and so you freeze, preferring to delay action until you “have more information” or “understand it better.” And yet this never seems to quite materialize.

Our advice? Don’t overcomplicate it and do what you can with what you’ve got. The key word here is do. Assess your current financial situation and take the next rational step. I guarantee that things will fall into place and the next move will become clear once you start. It’s like driving in the dark in the rain with your headlights on – you know there is a road there, but you can only see 10 feet in front of you. Just worry about those 10 feet. That’s much more likely to work out for you than to attempt to chart the whole trip in advance and catalog every scary corner and pot hole. Don’t worry – we’ve already got it covered for you on where to start.

The Post-FI “Now What”?

This isn’t a mistake in terms of affecting your trajectory to FI, rather it’s to prevent a crisis in meaning once you’re there. Are you running from something to get to FI (a crappy job, location constraints, stress) or towards something? What do you want your post-FI life to look like – as in the nitty gritty.

A helpful exercise to help flesh this out is to imagine your perfect day – from the moment you wake to turning out the lights at night. What are you doing? Who are spending time with? I’ve seen people who have reached FI underestimate the purpose work gave them or the social connection it provided. Then, once living in FI Valhalla, they end up feeling unfulfilled and isolated. Yikes. I chose to continue to work in a part-time capacity with a lot of flexibility on projects that I care about with people that I like. That, mixed with ample time to hang out with friends and pursue hobbies like rock climbing, has enabled me to create a fulfilling and balanced daily rhythm.

Did any of these mistakes resonate for you? If you think you have a handle on what to avoid, let’s take a look at where to double-down and jump start your journey to FI.

The post Four Mistakes on the Way to FI – And How to Avoid Them appeared first on A Way to FI.

My goodness, was I wrong.

In this past year, my partner and I have amassed enough travel reward points to book flights to four different countries on two different continents—almost completely for free. This article will dig into how we did it.

Credit card sign-up bonuses = maximum travel rewards

Before digging too far into the process, I want to clear up something that had me a bit mystified when I first started investigating this stuff.

The best way to accumulate a high number of points quickly is through credit card sign-up bonuses.

While using credit cards for everyday spending is a great way to continuously amass points, by far the best way to gain points quickly is by taking advantage of sign-up bonuses through various travel rewards credit cards.

For example, Chase Sapphire Preferred (my top choice for an everyday-spending credit card) has sign-up bonuses of 60,000 to 80,000 points, depending on when you sign up—so long as you hit the minimum spend within the first few months of owning the card.

If you can open a few cards that all have hefty sign-up bonuses, you’ll find yourself with a nice pile of travel rewards points in very little time. This is what my partner and I did to accumulate over 350,000 Chase points and nearly 200,000 Southwest points—plus scoring us the coveted Southwest Companion Pass—in less than a year.

Travel rewards cards we use

Here is our line-up of credit cards that allowed us to earn the above points.

• Chase Sapphire Preferred
• Chase Business Ink
• United Business MileagePlus
• United Explorer Mileage Plus
• Southwest Rapid Rewards Plus
• Southwest Rapid Rewards Performance Business

Technically, these are all Chase cards, but the United and Southwest cards only earn points for those airlines, with a bit of flexibility for transferring between the three.

We’ll use all our Chase Ultimate Rewards and United points to travel to Europe and Africa in early 2023. Our Southwest points will be used for several domestic trips and to visit Central America, which we’re taking advantage of in late October to go to Mexico.

Southwest Companion Pass

The Southwest Companion Pass is one of those travel rewards that sounds a bit too good to be true. Here’s how it works: If you collect enough Southwest points, you can choose a companion to fly with you for free. And if you get the timing right, you can have this perk for almost two full years.

My partner and I learned about this travel reward almost exactly a year ago, which was great timing. If you can meet the point threshold for the companion pass (125,000 points in a single year) early on in the year, you can get the pass for an entire two-year period.

To make this work for us, my partner opened both his Southwest cards in November 2021. We then made sure to meet the minimum spend by February 2022. We did this through a combination of normal spending and putting large expenses on these cards, including paying our estimated taxes to help us meet the spending threshold required to get the sign-up bonuses.

One of the cards had a 50,000-point sign-up bonus, and the other had an 80,000-point sign-up bonus. We hit both minimum spends by February 2022 and had 130,000 total points, which was enough to qualify for the companion pass for almost two full years—through the end of 2023.

If this all sounds a bit confusing, there’s an excellent podcast episode by Choose FI that dives into this in great detail (Choose FI Episode 353: Families Fly Free). It’s the episode that clued me into the Southwest Companion Pass, and I highly recommend listening to it (especially since we are in the perfect time of year to take advantage of this!).

The 5/24 rule

There’s an important caveat for folks who are going the Chase travel rewards route: Chase has a rule they call 5/24, which means you cannot open more than five Chase credit cards in a 24-month period.

While it may make sense to cycle through cards every few years to maximize your ability to earn points, it’s important to keep track of how many you have and when you opened each.

Best practices for using credit cards for travel rewards

While using credit cards for travel rewards is amazing, there are some best practices to keep in mind.

1. Pay off your card in full each month

This is a big one if you’re trying to keep your credit score high—which you should be doing if you want to keep qualifying for high-reward credit cards.

2. Don’t overbuy just to reach your minimum spend

The only way to truly make your credit cards work for you is if you only use them for purchases you’d already be making. Don’t go out and buy a new wardrobe just to meet your $3k minimum spend: It defeats the purpose of achieving truly “free” travel.

3. Instead, look for creative ways to meet your minimum spend

This was a huge one for us. Rather than buying stuff we didn’t need to meet the magical sign-up bonus spending threshold, we got creative. My favorite way to meet my minimum spend is by paying estimated taxes with credit cards. There is always a fee for doing so—about 2%—but it’s money I have to spend anyway and it allows me to get sign-up bonuses quickly.

Spoiler alert: Credit card points are tax-free

One excellent perk of cashing in on credit card points is that they are tax-free. So, the minute you cash in your rewards, you’re getting that amount tax-free.

Say you earn 200,000 points in a year. When it comes time to book your travel, you’ll get close to the equivalent of $2,000 in flights without having to pay a dime on that “income.”

Travel & FI: Can you really work toward FI while prioritizing travel?

Hell yes. In fact, I think yearly travel helps ready your mind and body for your post-FI lifestyle (see Rose + Jeff).

Before I started working toward FI, I took “mini-retirements” by working really hard, saving up a stack of cash, and moving across the globe for as long as I could until I ran out of money. While I don’t recommend this approach, it did instill in me a ferocious travel bug that I’m not willing to set aside while I save and invest diligently on my way to FI.

Travel rewards are my golden ticket to continue to travel while pursuing FI.

Not only am I finding creative ways to travel for (almost) free, but I’m also reminding myself how valuable and enriching international travel can be.

The post Intro to FI Series: All About Travel Rewards (and How to Travel the World for Free) appeared first on A Way to FI.

1. Tap into your competitive spirit

You may be naturally competitive. Were you always striving to be top of your class, the best athlete on the team, the one that got into the ivy league university?

If this resonates with you, then I would suggest harnessing that inner fire to crush your personal finances. One way to determine where you fall on the bell curve is using the Millionaire Next Door Calculation for Net Worth. You’ll get a raw look at how you’ve managed the money you made in your life.

Basically, it works like this:

Expected Net Worth = (Age * Taxable Income)/10 – inherited wealth

For example, a 35-year-old with an earned income of $90,000 plus $5,000 investment income, would have an expected net worth of $332,500 ($95,000 X 35 divided by 10). If her net worth is actually lower than this, she is considered an under accumulator of wealth (UAW); if higher, then she is a prodigious accumulator of wealth (PAW).

So, where do you sit? Have you been wise with your money and are a PAW or on your way to becoming one? Not quite? Compete with yourself to see just how much money you can save!

2. Embrace the nerd in you

For some, spreadsheets are a love language. They want to see all the data and in every which way, slicing and dicing to their hearts’ content. If that’s you, then good news! There is ample data to organize and track, and projections to explore. Here’s where you can start.

Build your montage of spreadsheets. The main bits to track are your income and expenses (income statement), and your assets and liabilities (balance sheet). You can use tools online to easily gather the data (I like Mint for this as you can import all of your accounts) and find template spreadsheets. I suggest getting some ideas from others’ templates and then building your own. After all, if it’s your creation you’re more apt to actually use it!

Once you have gathered the last few months of data (6 months to a year is best) you can start to run the numbers. What are your average monthly expenses? How much is “left over” at the end of each month and where is that money going? If this piques your interest but you still don’t know where to start, let’s set up an FI coaching session and I’ll walk you through it in detail!

3. Don’t let go of those hard-won dollars

Studies show that the pain of losing something is twice that of the pleasure of gaining something. We can leverage this tendency to set up our future selves for a stable financial life by considering the power of compounding interest. This is especially important for those bigger expenses, like rent, a car, or an expensive vacation. What is the true cost of your decision? 

One of my biggest financial regrets is buying a BMW in my early twenties. It was used, but still $10,000 more than another reasonable alternative, a VW Golf. I fell for that sleek black color, heated leather seats, and the allure of luxury to the tune of $20,000. A short two years laters, I ended up selling the BMW for $12,000 after tiring of the stress of owning a nice car. I was always worried about it getting “damaged” (ever parked in the back of the lot to avoid other careless drivers dinging your doors?) and loathed the expensive repairs and maintenance.

Now, had I bought the Golf instead and invested the $10,000 difference what would that money be today, 12 years later? Well, at 8% growth it would now be $25,000 and in another 10 years it’s $54,000. A handy rule of thumb to do this math is that when invested, on average, your money will double every 10 years. Do the math upfront for bigger purchases and decide if it’s worth it! That BMW sure wasn’t for me.

4. Put it on the chopping block

We all want to be happy. And sometimes we believe that buying stuff will get us there. Maybe it does temporarily give you a dopamine hit that leaves you feeling great. But I’ll bet that moment passes pretty quickly and you’re soon looking for what’s next. 

I’ve certainly been there. For me it was impulsively buying a cheap shirt from H&M. I rode feelings of elation at the incredible deal all the way to the counter… and then soon after getting home and hanging my new prize alongside my other shirts in my overstuffed closet, I became deflated and wondered why I just spent hard earned money on low-quality stuff that I didn’t really need. Never mind the ethical implications of fast fashion.

One way to address this impulsivity is to spend time thinking about the money you have spent that has truly made your life better. Is it a trip to a new city? That gym membership where you kicked your butt into shape? Drinks out on Friday night with friends? Are there things in your life where you can happily say, “Oh, I would gladly pay double for that if that’s what it costs!” because it’s just that important to you?

Spend your money there and ruthlessly cut the rest. You’ll be happier and wealthier for it.

5. Keep your eye on the prize

Having a singular focus can be an incredibly powerful accelerant. Imagine if you were to make every decision based on the answer to “does this bring me closer to my FI number?” If you were to truly adhere to that, I bet you would shorten your journey to FI by years, if not decades. 

While that’s a pretty extreme method, it’s a useful thought experiment. And though you may take the choice that won’t bring you closer to FI, running decisions through this lens gives you more awareness and improves your decision-making on the whole. Which brings us to…

The common denominator

All of these approaches will build awareness around your financial life. And awareness is almost always the first step towards positive change! Which of these resonates with your personality? Have you found other hacks to be successful in jump starting your way to FI? Let us know in the comments below!

The post 5 Hacks to Jump Start Your Way to FI appeared first on A Way to FI.

Our credit scores, for better or worse, are a glimpse into our perceived responsibility as an adult. Whether you want to buy a car, rent an apartment, or get a new job, your credit score could be the determining factor.

This article is going to dig into credit scores: Specifically, the factors that influence them and how to raise them. I’ll also tell you how I raised my score from the mid-600s to 800+ in just a few month’s time.

But first, let’s discuss why a good credit score helps you on your path to financial independence.

Do credit scores matter for financial independence?

Short answer: Hell yes they matter. For the longest time, I avoided getting credit cards. I thought that through avoidance, I’d be saving myself from debt and turmoil.

Turns out, I was not doing myself any favors through avoidance.

A high credit score will help you reach FI for several reasons. Let’s look at a few.

Lower interest rates on big purchases

While one of the tenets of financial independence is avoiding large purchases, there are assets that many of us want and need in our lives. Purchasing a car, buying a home, and even renting an apartment all depend on a high credit score.

Not only does your approval hinge on your credit score, but it can also determine what interest rate you will pay.

Access to money-saving lines of credit

One of my most exciting discoveries on this path to FI is travel hacking. Credit card rewards can lead to incredible savings on travel, and having a higher credit score will allow you to qualify for high-value cards that can rack up enough points for trips around the world.

I’ll do a post later on about how my husband and I are traveling for (almost) free these days thanks to credit card rewards.

R.E.S.P.E.C.T.

I definitely have some qualms with the weight that credit scores carry in our adult lives, but a higher score will earn you more respect when it comes time to rent a house or apply for a job. While not every landlord or employer will check your credit score, it can be a major red flag if you have a score that’s below average.

Before we dig into the factors that influence your score, let’s look at what constitutes a “good” or “bad” score.

What’s considered a “good” credit score?

Credit scores range from 300 to 850, and the majority of people sit somewhere in the 650-800 range.

Here’s how Equifax breaks it down:

• 800 to 850: Excellent.
• 740 to 799: Very good.
• 670 to 739: Good.
• 580 to 669: Fair.
• 300 to 579: Poor.

Okay, here we go.

The big players: credit score factors you need to know about

There are several major factors that influence your credit score, and they carry different weight. I’ll break them down into three categories: Low, medium, and high impact. We’ll start with the heavy hitters first.

High impact: Payment history

Payment history is one of the largest factors that influence your credit score. Even one missed payment can make a huge dent in an otherwise healthy score. Here are some important notes on how missed payments hurt your score (from Credit Karma):

1. A single 30- or 60-day missed payment is easier to recover from, but will still create a big drop in your credit score.
2. A 90-day missed payment will be more damaging and could fully disqualify you from some loans.
3. After 90 days, missed payments can be sent to collection agencies.

If you’ve missed some payments, don’t despair; I’ll include some tips on how to offset this later on.

High impact: Credit utilization

Credit utilization is another high-impact factor for your credit score. Credit utilization is the percentage of credit you’re using of your overall credit availability. For example, if you have a limit of $15,000 (based on all your credit lines added together) and you have used $4,500 spread between your credit lines, your credit utilization will be 30%.

Here are some things to remember with credit utilization:

1. Keep your usage as low as possible—ideally under 30%. I aim for zero, paying off all my cards each week. Contrary to what you may have been told, you do not need any credit card debt to build credit.
2. Credit usage on each individual card is most impactful, but your overall usage is also important. So, if we were to take the example above, say you have three credit cards, each with a $5,000 limit. If you max out one of those cards but keep the others at zero, your credit will still be negatively impacted by the 100% usage on a single card. However, if you were to spread that $5,000 among the five cards, the overall negative impact on your credit will be less significant.

There are some easy ways to improve this area of your credit, which I’ll explain more below.

High impact: Derogatory marks

Derogatory marks are about as bad as they sound—these refer to any debt that has been sent to collectors or public records such as bankruptcies or tax liens. It’s best to avoid these at all costs because they can stay on your credit report for seven to 10 years.

However, derogatory marks aren’t necessarily the kiss of death they may seem.

I have a confession: I had a derogatory mark on my credit that made a massive impact on my credit score, but I successfully had it removed. More on that later.

Medium impact: Age of credit

The age of your oldest credit line has a medium impact on your credit score. There are some important takeaways to consider here.

1. Keep your oldest lines of credit open, even if you aren’t using them. However, don’t let them sit unused in your old wallet for too long: Creditors can close dormant accounts. One way to keep old cards alive is to dedicate them to a certain cause, such as fuel or groceries. Just remember to pay it off each month…
2. Paying off large loans can cause your credit to drop because it means you’re losing an old line of credit. This happened to me when I finally paid off my student loans. It was my oldest line of credit (18 years) but when I made my last payment, I was disappointed to see a ding in my credit afterwards. This is pretty easy to recover, but keep in mind that it can happen. Pay off your loans anyway, even if means you’ll lose a couple of points.

Low impact: Total accounts

The total number of accounts you have open is another factor on your credit, albeit a lower impact one. While there’s no perfect amount of credit lines to have open, it’s good to have some diversity (think: credit cards, student loans, a mortgage).

Similar to the credit age, when you pay off a loan and it drops off your report, you may see a couple of drops in your score.

Low impact: Hard credit inquiries (aka “hard pull”)

Whenever a new creditor does a “hard pull” or makes a hard inquiry on your credit, you will see a couple of points drop. It’s a temporary drop and typically is recovered within three months.

If you know you’re going to make a large purchase in the coming months such as a house or a large car loan, avoid hard pulls in the previous nine to 12 months. They can stay on your report for up to two years, but their effects are diminished after awhile.

Keep in mind that there are also “soft pulls” which allow potential creditors or landlords to view your report without making a hard inquiry. If you are applying for an apartment and know that the landlord will be checking your credit score, you can request that they make a soft pull rather than a hard one to avoid any damaging effects on your score.

Similarly, if you’re buying a house in the coming year and want to shop around for mortgages, be sure that potential lenders are making soft pulls rather than hard ones until you choose the lender you know you want to work with.

How to improve your credit score

If this is overwhelming so far, hopefully this section will help distill some information for you to start improving your score. I’ll go through each high-impact factor and provide some advice on how to help you raise a sinking score.

Payment history: The saturation effect on your credit score

Missing payments can wreak havoc on your credit score. Fortunately, I’m going to tell you about a great way to turn it around.

If you’ve had some missed payments, the first thing to do is ensure your cards are all set to automatic payments. This is the best way to avoid another missed payment in the future, and will help you get started on the right foot with recovering your score.

Next, work on opening new lines of credit. While I wouldn’t recommend rushing out and opening five new credit cards, start with one or two and then set up automatic payments on those.

Eventually, the number of on-time payments will start to saturate your credit score in a positive way.

For example, say you opened a card in 2015. By 2020, you’d have a credit history of five years, and in that five years, you had 60 months of payments on one line of credit (5 years x 12 billing cycles = 60). And say that you missed seven payments during that time. That’s a considerable amount of missed payments; about 12%.

Let’s look at the following scenario, assuming you opened two new cards in 2020 to help offset your missed payments.

• Credit card #1: Opened in 2015. Total of 7 years or 84 billing cycles
• Credit card #2: Opened in 2020. Total of 2 years or 24 billing cycles
• Credit card #3: Opened in 2020. Total of 2 years or 24 billing cycles
• By 2022, a total of 7 years or 132 billing cycles

So at the end of seven years and 132 billing cycles, those seven missed payments will only account for 5% of your payment history. Over time, that saturation effect will help reduce the impact of those earlier missed payments and your score will rise.

Credit utilization: Pay off your card often and raise your limit

There are two primary ways to improve your credit utilization. First, paying off your card in full as often as possible (before the end of your billing cycle) will keep your usage low. I pay all my cards off weekly which keeps my utilization at about 0%.

The second way to keep your utilization low is by raising your credit limit but keeping your spending the same. Many times, a simple request to your creditor will be enough to raise your limit.

The trick is, don’t spend any extra money on that card. If your spending stays the same but your overall credit limit rises, your usage rate will shrink and voila, more points for that score.

Derogatory marks: The power of a letter on your credit score

Derogatory marks can be one of the hardest factors to positively influence. They are highly impactful on your score, and as mentioned above, can take almost a decade to clear.

But all is not lost if you have a derogatory mark. Here’s how I raised my score from the mid-600s to over 800 with a simple letter.

Student loans: Missed payments, delinquencies, deferments, oh my!

When I was in my early 20s, I took out student loans to pay for school. They weren’t astronomical, but they allowed me to study without having to work full-time.

By the time I left university, my loans hovered around $20,000. I vacillated between paying the minimum amount due and putting them in economic hardship deferment, typically while I was travelling and not working.

Most of my loans were Perkins and federal student loans. I had two Perkins loans from two different universities; one was from Western Washington University and the other, the University of Washington.

At some point, my loans from the UW were transferred to Mohela, a student loan servicing company. I still paid off my Perkins loan from WWU, and those were my two primary student loans payments.

Fast-forward to mid-2021. I was $500 away from making my last student loan payment, when I finally did a deep dive into my own credit.

WTF is up with my credit score?

I’d been confused because my credit score just seemed to keep falling, despite not having any credit card debt. When I finally took a closer look at my score, I was horrified to find a had a derogatory mark on my credit and almost a year’s worth of missed payments.

Here’s what happened: I thought all of my UW loans were consolidated into my Mohela account, but that wasn’t the case. My Perkins loan from UW for $1,000 that wasn’t rolled into Mohela, and it had been sitting in purgatory ever since it went back into repayment in 2019. There were over a dozen missed payments, and the loan was now sitting in collections.

I was horrified. I went through every correspondence I could find, and it took quite a few phone calls before I finally got someone on the phone who could help me. As it turned out, there was very little I could do to rehabilitate the loan. Because it was in collections, it was out of their hands, so I thought.

My Hail Mary

I made one last attempt at making things right by emailing the University of Washington. Below is my letter.

And it worked.

A wonderful man named Brian responded saying that due to some errors on their end, they were willing remove the derogatory mark and correct my missed payments.

Now, I know this is a unique situation, but I’m sharing it to offer hope to those of you who are dealing with a similar scenario. Getting my credit score corrected took a lot of effort, but it helped me raise my score by over 100 points almost overnight.

How much energy should you put into raising your credit score?

It can be a harsh reality check to do a deep dive into your credit score, especially if it’s sub-par. I recommend focusing on one high-impact area at a time to help improve your score.

Keep in mind that if you don’t have any big purchases or moves coming up, this is a great time to work on improving your score.

A note of warning: Be realistic about what cards you apply for because if you apply for a high-value card like Chase Sapphire Preferred and get denied, this will suck a few points out of your score and leave you empty-handed. (This happened to me four years ago, but I’m happy to report I qualified for the Sapphire last year after some serious credit score rehabbing.)

I’m happy to answer any questions you may have about credit scores; leave comments below and I’ll do my best to help.

The post All About Your Credit Score (AKA your adult report card) appeared first on A Way to FI.

Debt can feel shameful, embarrassing, and impossible to manage. In this guide, I’ll lay out some tips and strategies for eliminating your debt and moving on with your financial life.

Take stock of your debt

This can be a brutal awakening for some. I know that when I was in the depths of my debt, I consciously avoided checking my balances because they caused me so much anxiety.

This obviously did nothing to help eliminate my debt, but it was very effective in making me even more stressed out.

At the height of my debt, my partner and I were living out of the van we’d just spent our life savings to build. We were living off my (meager) income as a writer and making the minimum payments on about a half dozen different credit cards and my student loans.

It was a temporary situation as we knew we’d eventually settle somewhere and go back to having two incomes, but at the time it was the best we could do with the resources we had. It was a conscious choice to let the debt accumulate while we frolicked through the west on a six-month climbing trip, but it took its toll on my credit score.

When we finally settled in Boulder and sold our van, we made it our first priority to get rid of our debt.

Here’s what worked for us.

Make a list of each credit card, its balance, and interest rate

This was the real come-to-Jesus moment for us, and one that was equal parts stressful and empowering.

Here’s an example of the spreadsheet I made to help me make sense of it all:

As you can see, the total we owned was nearing $13,000, and that wasn’t even including the $10,000 I still owed on my student loans.

Prioritize paying off the cards with the largest interest first

As you can see in the example above, Wayfair had the highest interest rate at 28.49%. The total balance owed was relatively low at $472, so we took that one out in one fell swoop.

Next, we tackled Lowe’s, which had an interest rate of 26.99% and a balance of $830.

With those two out of the way, we then set our sights on our Home Depot card and Key Bank loan, with roughly the same cadence.

Pay the rest off as soon as you possibly can

This is where some of the challenges arose: While we had gotten rid of the worst cards/credit accounts first, we still had a decent amount of debt to chew through. We were paying as much as possible based on our financial requirements at the time, but by no means did we get out from under our debt quickly.

The crux for us was in our spending: Rather than choosing to buy things or go out to dinner, we looked at paying off our debt like we were buying our financial freedom. I knew how much debt would hold us back, and didn’t want to live in that reality.

Now, our debt wasn’t astronomical: At its worst, it was close to $25,000 with my student loans added in.

But with this strategy, we paid our debt off in less than six months.

What about student loan debt?

Now, this is a tricky one.

I was fortunate that I didn’t have staggering student loan debt as do many of my peers, and my husband Callan has no student loan debt. Once my credit cards and loans were paid off, student loan debt was the next hurdle. I would put upwards of $500 a month into my repayment, a strategy that was pretty painful at the time but paid off immensely.

If you’re in a situation in which student loan debt is in the hundreds of thousands, even sinking $1,000 a month isn’t going to make a sizeable dent in your balance.

I’d recommend putting as much energy as you have into finding ways to access debt forgiveness.

This article has some great options such as teacher loan forgiveness, public service loan forgiveness, and others.

Where am I now?

Right now, I have zero credit card debt. Here’s what I chose to do with each of those cards after eliminating my balances:

• Home Depot: I chose to hold onto this card, partly because I’d had it longer than the others and wanted to keep it on my credit history. Plus, my husband is a carpenter, which means never-ending projects.
• Wayfair: I closed this account. It had a huge interest rate, and I don’t buy from this site often enough to justify it.
• Barclay: I kept this credit card open, again for the credit history. I have one expense that I pay with it each month to keep it active: Netflix. It’s set to auto-pay, so I don’t have to think about it.
• Lowes: I closed this account, because we shop at Home Depot more often, and the interest rate was quite high (nearly 27%).
• KeyBank: I kept this account open, again for credit history. I try to use it every once in awhile to keep it active.
• BECU (Credit Union): This was a small personal loan I took out to help pay for our van build-out. Once I paid it off in full, the account automatically closed.
• Best Buy: I closed this account because I don’t shop often at Best Buy, and the account hadn’t been open long enough for it to make an impact on my credit history.

Nowadays, I have a totally different line-up of credit. I’m not fully debt-free, however: I have roughly $2,000 left on a car lease (which you can read more about in this budgeting article).

Current lines of credit

My current credit cards/lines of credit:

• Chase Sapphire: I use this card for all of my expenses, aside from rent and a few utilities. I tend to pay it off weekly to keep my credit utilization low.
• Chase United Explorer: I recently got this card and am using it all the time right now to hit the minimum spend to get the rewards.
• Barclay: As described above, I only pay for Netflix with this card.
• KeyBank: I hardly use this card but keep it for credit history.
• Car lease: This will be paid off in May 2023.

I keep my credit utilization as low as possible to keep my credit score high, which means I essentially finish each billing period with a zero balance. (We’ll dig into credit scores in a later article!)

How to think about debt

If you’re riding the line between managing sizeable debt while also investing your savings, I want to challenge you to rethink your strategy.

Holding onto debt is a net-negative. It’s a financially soul-sucking, credit score-wrecking, HUGE headache that doesn’t get better with time.

Before you get too excited about tossing all that extra coin into your retirement accounts, get real about your debt. If you’re faced with credit card debt, eliminate that first. Car and house payments are more manageable, as are student loans, but tackling credit card debt should be your first order of business.

As Mr. Money Mustache says, “Your debt is an emergency.” Treat it like one.

Think of investing as the REWARD you get for eliminating debt. Your money will start making you money, which is a beautiful transition from dealing with high credit card interest rates.

Being debt-free is the first stage of financial independence.

Featured photo by Alice Pasqual on Unsplash

The post Intro to FI Series: Managing Debt appeared first on A Way to FI.

• companies to improve investments,
• workers to stay competitive, and
• governments to implement legislation that improves market safety.

In the same way that short-term struggle (i.e. physical exercise) keeps you and me from getting too soft and squishy, market downturns help the economy stay fit and healthy.

Stock market dips are (not) scary

As a person working towards FI, we are often keenly aware of how stock market fluctuations affect progress toward our FI Number. Because most of our net worth is invested in index funds, I’ve seen single-day market drops “reduce” my net worth by 10s of thousands of dollars.

To the uninitiated, this can be scary! After all, money you keep in cash in savings accounts (at least in the US) is “safe” from downturns because they are insured by the FDIC.

We are not the uninitiated! We know that the stock market historically recovers from these dips. And we know that afterwards, the economy emerges stronger than it was before.

As FI investors, we take a long-term view of the market. We do not pin our definition of success to the short-term, or even multi-year stock price. We buy and hold for decades. After reaching FI, we sell only a small portion of our investments to cover our carefully considered living expenses.

Hormetic stress for humans

The obesity epidemic shows us how abundance and easy living actually hurts us in the long run. While constant access to calorie-dense food might feel good in the short run, it can make us obese and more susceptible to disease in the long run.

Intermittent fasting: Between feast and famine

Optimal living lies between feast and famine. Sustained lack of food results in starvation, while unrestrained indulgence in food results in higher risks of:

• Type 2 Diabetes,
• Cancer,
• Heart Attacks, and
• a ton of other diseases that ruin your quality of life and may kill you.

One effective answer is hormetic stress in the form of intermittent fasting.

Hormetic stress, or “good” stress, is defined as:

Controlled, acute stressors that trigger healthy adaptive responses

– Stephanie Eckelkamp

Hormetic stress is not intense enough to cause harm, ie. starvation. And it’s not too long-lasting so that it becomes “chronic”.

Intermittent fasting (or “IF”) is when you create an eating window of four to eight hours per day. During your eating window, you eat. When your eating window is over, you don’t eat. Simple.

Benefits of intermittent fasting

Denying your body food a few hours each day has a few positive results including fat loss and autophagy. Allow me to digress briefly to chat about autophagy: It’s a near-magical process in which your body cleans up old weak cells, parts of cells and misfolded proteins.

Autophagy is linked to better skin and hair, reduced cancer risk, and even reversing early stages of Alzheimer’s.

Autophagy is a process we want to stimulate as much as possible. We get the majority of autophagy’s benefits when we place ourselves in a state of hormetic stress by taking a break from food or when we are exercising.

If this piques your interest and you’d like to dive deeper into fasting check out:

Hormetic stress for the economy

The same is true for the economy. Stress, in the form of dips and bear markets, to the economy and its constituent companies can keep things healthy in the long run.

Stock market primer

The stock market is comprised of every publicly traded company. Indices, such as the S&P 500, track large sets of actual companies. So when we hear that the stock market “is down”, they mean average stock prices of the companies in the stock market or an index are down.

A company’s goal/obligation is to provide value to its shareholders. A drop in stock price sends a message to company leadership that shareholders don’t approve of the direction of the company.

Share-price decline places real stress on the companies affected.

Stock price’s major impact

According to the Harvard Business Review, more than half of corporations’ upper-level management compensation in large companies is made up of stock and stock options. This effectively ties the stock price of a company with its executive’s wallets.

If a company’s stock performs badly enough, shareholders can exercise their rights as part owners of the company to oust corporate executives.

Additionally, a company’s stock can act as a currency used to make acquisitions of other companies. When its stock price falls, so does its purchasing power.

At the extreme end, underperforming stock can enable a hostile takeover. In short, a hostile takeover is when a prospective acquirer goes directly to the shareholders (subverting the company’s management) to aggressively acquire a company.

Finally, governments are watching for foul play and can levy fines and enact legislation in response to major market recessions.

Stress encourages change

Given the stress imposed by stock price fluctuations, how do companies, individuals, and governments respond? How do these responses result in a stronger economy in the long run?

Increase workforce competition

Companies can lay off mediocre employees. In stress-free times when the stock market is going up, the expense and liability of firing under-performing employees may not be deemed “worth it”. One way to increase share price is to decrease expenses. This puts those under-performing employees on the employment chopping block.

This may sound harsh, but increasing competition among members of the workforce ensures that individuals are working to keep their skills sharp. It also encourages people who are just in certain careers “for the money” to go look for work that they are more passionate about.

Divest underperforming investments

Take the automotive industry for example. During times of plenty, auto manufacturers can afford to produce both electric vehicles (EVs) and gas and diesel engines. As consumer preferences, environmental legislation, and the economy change, these same auto manufacturers are divesting themselves of assets tied to gas and diesel engines.

According to a report by Ernst & Young:

Since the days of the combustion engine are numbered, most decision-makers are trying to decouple these [combustion engines and electric vehicle] parts of the business and sell them while it is still possible.

Constantin Gall, Ernst & Young

Governments Improve Legislation

After the 2008 Great Recession, the Federal Government passed the Dodd-Frank Wall Street Reform and Consumer Protection Act. This complex law limits predatory mortgage lending by banks, limits risky investments a bank can hold, and established a branch of the Securities and Exchange Commission (SEC) to improve how investment credit ratings are devised.

If your eyes glazed over in the above paragraph, I don’t blame you. In short, the government took several of the root causes of the 2008 financial crisis and created legislation designed to prevent them from causing another recession. The legislation attempted to (and has succeeded at?) encourage consumer confidence in economic markets generally and banks specifically.

What Should You Do in a Recession?

First off, take a deep breath. Your bank might show that you’ve lost money, but this is just a loss on paper, unless you need to sell.

Remember that we’re investing for the long run, so daily, monthly, and even longer downturns don’t really matter to us. It’s all about how the market performs over decades. As we can see below, even though the S&P 500 is down (considerably) this year, it’s up nearly 60% over the last five years!

You could lose money if you sold in a panic during one of the several downturns or mini-recessions we’ve had during this time period. But if you avoid that and just did nothing, your paper-loss would turn into a paper-gain shortly thereafter.

Conclusion

Of course, without stock market dips and recessions, companies still invest, still create competition in the workforce, and governments still create legislation. Market contractions and individual stock price drops serve to accelerate these changes and squeeze out less competitive practices.

While there are downsides to recessions—big companies tend to outlast smaller competitors, good employees are fired when companies downsize, and not all legislation is effective legislation—market contractions encourage change and health in the economy.

As FI people, we invest for the long term and get to simply ignore these downturns!

The post What Do You Do in a Recession? appeared first on A Way to FI.

That’s why this post is dedicated to the uber-newbies out there. I’m going to share how I do my investing each month through my Fidelity account.

Step 1: Open an account with an investing company

There are plenty of options here, but some of the heavy-hitters include Fidelity, Vanguard, and Schwab. I personally use Fidelity, but I also think Vanguard is an excellent choice for its customer-owned operation model.

Because it’s my personal investing platform, these instructions will be all focused on opening an account with Fidelity.

So, first step; click the orange “Open an Account” button and get rolling.

Then, a pop-up will appear asking you what type of account you want to open. If this is your first rodeo, a Roth IRA will be your best option, as long as you earn less than $144k per year. If you earn over $144k a year (fist bump), select Traditional IRA.

More on Roth IRAs in a moment, but for now, let’s keep going.

The account creation process will lead you through a few steps, including adding your personal information and creating a username and password. Once you’ve successfully opened a Roth IRA account, you’ll be ready to transfer money into your account.

(If you run into any issues while setting up your account, Fidelity has pretty top-notch customer service that can walk you through it.)

Step 2: Link your bank (and set up automatic contributions for your investments)

You’re in! Now you need to start adding some money to your Roth IRA account.

The easiest way to do this is to connect your primary bank account to your Roth IRA. To do this, open your Roth account (located on the lefthand side of the screen), and then click “Contribute to this IRA.”

You’ll be prompted to move money from a drop-down list of options. Click “Link a bank to a Fidelity account,” and proceed to add your banking details.

At this point, I think it’s highly beneficial to set up automatic contributions to your Roth IRA. Note that there’s a $6,000 yearly limit for Roth IRA contributions, so it may make sense for you to spread that out over a year. While the cadence of adding money to your account is up to you, it’s often in your best interest to max out this puppy each year.

Step 3: Choose (and make) your investments

This is a crucial step, and one that I’ve heard horror stories about. While adding money to your Roth IRA is great, if you don’t invest any of it, you’re essentially just letting it sit in purgatory. Don’t let this happen! I schedule my investments the minute I schedule money transfers so I don’t forget to invest.

Once you have a nice wad of cash sitting in your shiny new Roth IRA account, click on the “Trade” button on the top lefthand side of the screen.

Next, you’ll be prompted with a trading menu as shown below.

Here, you have options. I choose to invest in IVV (shout out to Jeff for the recommendation!), which is an index fund. It’s important to do your own research here, but as J.L. Collins says, index funds are for people who want the best possible investing results.

Then, you want to select “Buy,” “Dollars,” and “Market,” and choose an amount—ideally, the amount you just transferred from your bank account. Here, I’ve entered $500 as an example.

Then, hit “Preview Order” to ensure everything looks correct, and finalize. Note that you can only trade between 9:30 am and 4 pm ET.

Step 4: Invest regularly, ideally with as much of your income as possible

As someone who is trying to quickly catch up on my FI savings, I’m contributing about 50% of my income each month to my investment accounts. Here is how my investments break down:

Roth IRA

This is an excellent retirement account for everyone to own as long as you don’t exceed the income max ($144k per year in 2022). By contributing post-tax income, you’re allowing money in this account to grow tax-free. There are plenty of other handy things to know about Roth IRAs; this HerMoney article is a great resource.

I max out my Roth IRA each year and invest in IVV index funds.

Roth 401(k)

A 401(k) is a retirement savings account offered by many employers, often with a matching contribution of around 4%. My company does this, so I take advantage of it by maxing out my contribution in each paycheck.

My 401(k) is managed through a company called The Standard, but I’m able to choose my investments. I invest in Schwab’s SWPPX, their S&P 500 Index Fund.

A quick note on Roth vs. Traditional 401(k)s: I chose to open a Roth 401(k) because I want to contribute post-tax to my account. While a Traditional 401(k) would allow me to skip out on paying taxes when I contribute, I’d rather pay taxes on today’s tax rates than take a gamble at what those rates may be when I choose to start withdrawing.

I’ll be hitting the max contribution level for this retirement account, which is $20,500 for 2022.

SEP IRA

As someone who has a side-hustle, I also qualify for a SEP IRA. This is a great account for all the freelancers out there to open; it has a high contribution limit ($61k for 2022), and can mimic a 401(k).

After maxing out both my 401(k) and Roth IRA, I split the remainder of my investments between my SEP IRA account and I Bonds.

Series I Bonds

I Bonds are a bit of a dark horse at the moment but are a great option for folks who want to diversify between stocks and bonds. While there are a number of bond options out there, I chose I Bonds because they have a relatively high return rate of 9.62% through October 2022.

The downside of investing in I Bonds is navigating the Treasury Direct website. It’s old and cumbersome, but worth setting up if you want to take advantage of the high return rate.

Keeping track of investments

Once you have your investments happening on a regular basis, it’s wise to come up with a system that allows you to track everything.

A simple spreadsheet will probably do the trick for most. Better yet, include it in your budgeting app like I do, with contribution “buckets” set aside each month. It reminds me to invest and keeps me honest.

Ride it out, even when things look rocky

One of the biggest pieces of wisdom J.L. Collins likes to impart is this: Ride the wave of the down markets. Collins often refers to the “relentless upward march” of the stock market, as a fantastic reminder that things will bounce back.

The post Intro to FI Series: How to Start Investing appeared first on A Way to FI.

Begin with with the end in mind.

Achieving Financial Independence in the shortest amount of time possible requires many subtle and not-so-subtle lifestyle changes over several years. If you’re just starting down the path to FI and depending on many personal factors this time could range from four to 15 years.

Given the effort and time required to achieve FI, it’s super important to establish how want your post-FI life to look. This future lifestyle design is not imaginary. Creating this vision of your future self will serve as your main Goal, the reason you’re working toward financial independence to begin with!

Money is not the goal

Money is not your goal. With all this talk of saving rates, the 4% rule, and safe withdrawal, I often forget that Financial Independence is not actually about money. Rather, FI is about removing money as a limiting force in your life and turning it into a tool that enables the lifestyle you crave.

Excuses

We’ve all thought some variation on the following:

• If I could just afford…
• If I didn’t need this job…
• If I just had more time, I would…
• I can’t wait for when I retire, I’m going to…

Money is a lifestyle tool

The goal is to do away with those (very real) money-based excuses and to design your ideal life now. We do this by converting money from an inhibiting obstacle into a powerful tool.

Lifestyle vision

What does your ideal life look like? Write this down! In addition to what you yearn for now, try to imagine yourself in 10 years. Who are you with? Where in the world are you?

Perhaps images of you in a cabin in the woods with your family pop up. Or it could be you as a single person sailing a catamaran around the Mediterranean Sea. Maybe it’s more simple and you are in the house you’re in now with the people you are with right now, only difference being you’re not stressed about money.

What are you doing? Some of us love the career we have now, but do you wish your commute was shorter? Do you want to work a more flexible or reduced schedule so you can spend more time with people you love and on your hobbies? Maybe you’re in front of a computer all day now and you’ve dreamed of building your own house or wood working.

Focus on your lifestyle, not your bank statement

You can probably see where I’m going with this. Making your way to Financial Independence is about using money to realize your lifestyle goals. It’s about freeing yourself from the need to work a job you may or may not love so you can start spending time how you want.

Money becomes a tool. You will have enough money in the bank to leave your job altogether or (if you’re like me and like what you do) change jobs to reduce your commute, avoid toxic office politics, or increase your geographic and time-flexibility.

It’s a tool to allow you to travel, to live where you want, and live how you want. If you still desire a standard 40 hour-per-week work week you can even keep your job! The point is: you no longer have to after Financial Independence. You have greater freedom to craft your ideal lifestyle.

My ideal lifestyle

I’ve done this exercise myself and iterated on it throughout the years. I’ve broken out my goal, my ideal lifestyle, using three broad categories: Community, Purpose, and Adventure. To live my ideal life, I want a balance of all three.

Adventure

In my ideal life I am able to travel, both domestically and internationally, quite freely.

I have established a home for myself in a place designed for outdoor enthusiasts like myself—the Colorado Front Range. I want to be able to get outside during the week when trails and climbing areas are less congested. If the weather is good on a Tuesday, I want the freedom to go climb or trail run on that Tuesday.

I also want to chase spring and summer conditions, avoiding winter. This means that when it’s frigid in Colorado in January, I want to be able to go to Moab or Greece.

Rose and I put a high value on international travel. It’s important for us to be able to spend long periods of time exploring different countries. This winter, for example, we spent two months in Ecuador. Upcoming, we have a longer trip planned to Croatia.

Purpose

In my ideal life, I’m not working for a paycheck, but I am using my skills as a software developer to make the world a better place. I do get paid for that work; I selected a job that is both extremely flexible and gives back.

I am currently working on a software application that removes human bias from commercial loan underwriting to more fairly give loans to deserving, hard-working entrepreneurs.

The difference now is that I am not seeking the best paying job, I’m seeking a job where my skills make a difference.

Community

Family and friends are the essences of a meaningful life. Rose and I have developed a community in the Front Range of friends and a few family members with whom we climb, hike, and share meals.

When we travel abroad, we take time to learn the local language so that we can form meaningful relationships in the destinations we spend time in.

Why FI?

It’s important to start with your lifestyle goals in mind. When talking about Financial Independence, we talk a lot about money. Remember to keep an eye on these lifestyle goals and remember that money is just a tool to achieve the lifestyle you want. Money itself is not the goal.

The post Intro to FI Series: Lifestyle Goals appeared first on A Way to FI.

One of the beautiful parts of financial independence is that it looks different for everyone—aside from one constant: budgeting.

Reaching FI is far more than increasing your income (although it certainly helps). Getting to financial independence is about knowing your spending habits intimately and practicing some hard-won discipline.

We’re going to dig deeper into what it looks like to trim your expenses—even those that are unavoidable. But first, a note about tracking spending.

Budgeting is the first step to achieving financial independence

In my early adulthood, I probably only checked my bank account a few times a month. I’d make sure I had enough money to pay my bills, and just floated on a vague knowledge of what was in there.

Budgeting back then meant having just enough to cover my living costs and lifestyle. Savings wasn’t a factor, and investing was mysterious and complicated and risky, or so I thought. 

It turns out it was my lifestyle that was risky. I was always teetering on the edge of being broke, and it kept me from succeeding as a young professional earning a decent salary.

Knowledge is power 

It wasn’t until my late 20s that I realized I wasn’t doing myself any favors by hiding from my bank account. While I didn’t start really saving and investing until my mid-30s, I began taking a more strategic approach and carefully calculating what I needed to get by. 

More often than not, my big savings goals were around travel and adventure. I had short-term goals that were fairly easy to achieve. This allowed me to take extended trips around the world with little worry about earning.

Taking it to the next level: budgeting apps

I began using budgeting apps two years ago because I suddenly had a large savings goal in mind: buying a house. So, my husband and I started squirreling money away each month.

While I hadn’t yet discovered the power of investing, my budgeting app (YNAB) helped me understand my spending habits. I was able to categorize my spending into major buckets such as monthly bills (broken down into categories such as rent, utilities, insurance, etc) and consistent expenses (fuel, groceries, dining out, etc). 

This was a major turning point in my financial life. I felt a level of clarity I’d been missing; a daily snapshot of my spending habits. I now categorize transactions regularly through YNAB’s app on my phone which helps me stay on top of my budget.

Unleashing the power of tracking spending 

The exciting part of this came last year when I started my deep dive into financial independence. 

I realized that my knack for frugality could be my superpower when it comes to achieving financial independence.

Eventually, I added a new category in my budgeting app: Savings. I allocated nearly 50% of our monthly income into these savings goals, split between our house savings and investments. 

Taking control of my spending gave me a level of confidence that’s both vital and empowering for my path to FI.

The big three: Housing, food, transportation

These three expenses often cut the deepest gauge into our savings rates, but it doesn’t have to be that way. Read on for tips on how to hack each while continuing to track spending.

Housing hacks

We all need a roof over our heads, but what does that look like for you? Are you paying rent or mortgage that takes such a sizeable chunk out of your income that you can’t fathom raising your savings rate without some serious financial consequences?

One great way to reduce your mortgage or rent is by getting a roommate. This may not be for everyone, but it has the potential to halve your monthly payments.

If you own your home, you might want to consider geoarbitrage, which means moving (or traveling) to a place with a lower cost of living than your current home. Jeff and Rose are pros at this approach, which you’ll learn about more in another post. 

And finally, if you’re living in a high-cost area that doesn’t seem to be getting any cheaper anytime soon, you might want to think about moving to a lower-cost area. With so many folks able to work remotely these days, it’s worth taking a hard look at your current expenses and comparing housing prices in other parts of your state or the country where your dollar will stretch.

Food

Even for the more savvy FI-ers out there, food is a massive expense. It’s often the second biggest expense after housing costs and can spiral out of control quickly if you’re eating out often.

• Learn to cook. One easy way to cut your food costs down is by choosing to eat at home instead of dining out. Beyond the obvious health benefits, it costs a fraction of what a typical meal out costs.
• Make a plan. Making a food plan each week can lower your grocery bills considerably. In our household, we plan just three or four meals per week, assuming that each will feed us twice. That frees us up from cooking half the night, and often means we’re shopping for fewer overall ingredients.
• Set a budget. If you know you’re a chronic over-spender on food, set a solid budget for yourself. Figure out how much you want to spend per week, and do your best to stick within that range. Having a goal can help you make some hard decisions when you’re eyeing up that $15 jar of almond butter (I’m lookin’ at you, Jeff).

Transportation 

While I’d like to tell you that you should get rid of your car and commit to bike riding and public transportation, that would be disingenuous.

I love driving, and I can’t quite imagine a scenario where I’d be completely fine without a vehicle at my disposal. 

Two years ago I decided to lease a vehicle: In true Boulderite fashion, I leased a 2020 Subaru Outback—by far the nicest, newest car I’d ever driven. It was the best choice for me at the time with its low downpayment and manageable monthly payments.

However, if I could make the same choice today, I wouldn’t choose to lease because I’ve committed to sinking nearly $15,000 into a car that I don’t own.

Instead, I’d follow the car-buying advice of the financially independent and buy a used vehicle, likely for less than $10,000.

Cars are a status symbol, and breaking away from new or luxury car ownership is an important step for folks on their FI journey. 

My lease is up next year, and while used car prices are outrageous at the time of this writing, I’m hoping to find something used and affordable.

Oh, and I’ll also dust off my bike to save on gas money. (More on biking in a future article!)

A minimalist approach

Once you start tracking spending and investing and realize that your money can make money, buying material goods starts to make very little sense.

One thing my husband and I have started doing is instigating a “no-spend month” every few months. This helps us reign in unnecessary purchases and usually helps us squirrel away almost $1,000 extra that month. 

You can also spend some time paring down your possessions. Once you stop buying so many items, you begin to realize how much junk you’ve accumulated. Take a hard look at what’s surrounding you at home, and consider selling what doesn’t spark some sense of joy.

The 90/90 rule

A great concept to keep in mind is the 90/90 rule when you’re considering what to clean out: Make a pledge to get rid of things you haven’t used in 90 days, and that you don’t plan on using in the next 90 days. 

Dropping the excess baggage

A beautiful thing happens when you start reducing your spending and letting go of excess belongings: You gain clarity about what really matters. You’re free to focus on your true goals and life values, minus the commodities. 

This is the first taste of financial independence.

The post Intro to FI Series: Budgeting appeared first on A Way to FI.

We set the FI Number by multiplying the amount of money we spend each year, called “Annual Spend”, by 25. To get to the same number, you can live off of 4% of your net worth annually.

For example, if you spend $30,000 per year on housing, transportation, travel, food, and everything else you need and want to live on, your FI Number would be $750,000. Four percent of $750,000 is $30,000.

The 4% rule

Why 25 times your Annual Spend? According to Investopedia,

The 4% Rule is a practical rule of thumb that may be used by retirees to decide how much they should withdraw from their retirement funds each year.

The purpose of adopting the rule is to keep a steady income stream while maintaining an adequate overall account balance for future years. The withdrawals will consist primarily of interest and dividends on savings.

Historic stock market performance shows that between stock market growth in the form of capital gains, dividends, and interest, you can annually withdraw 4% of your total net worth without reducing your net worth.

This 4% accounts for both inflation and periodic market downturns, including crashes. Some economists argue that 4% is actually too conservative and that 5% is more accurate, but for argument’s sake and to satisfy the more financially conservative among us, we use the 4% rule as a starting point.

Calculating your annual spend

Before you can multiply your annual spend by 25, you have to know what that spend is. You can calculate your yearly spending by adding up all of your expenses. It’s important to include both recurring expenses like rent payments, phone bills, and groceries as well as one-off expenses such as that new winter jacket, that new cell phone, and flowers for your front garden.

Tools of the trade

The best way to do this is to use a personal finance application such as YNAB (which Meghan talks about here), Mint.com, or Personal Capital. Each of these applications allows you to link your bank accounts, and then auto-import your transaction history—aggregating all your transactions from (possible) multiple credit cards, Venmo, and direct deposits/withdrawals into one place.

I personally use Mint.com and have used Personal Capital in the past.

Of course, you can always create your own spreadsheet—and maybe you do to perform further analysis. To get started, however, I’ve found that using the above tools to automate the transaction aggregation is a critical value-add.

Add up all expenses

Once you have all your accounts imported and have one year of history, add up all the expenses you had in the last year. Feel free to leave out reimbursable expenses such as airfare bought for a work trip that your company paid you back for.

This sum (less reimbursable expenses) is your annual spend.

No Judgement (yet)

If you’re like me, this number might be higher than predicted. Diving into my data I learned that though my recurring expenses (food, housing, etc.) are quite low, my “one-off” purchases for hiking and climbing were not so “one-off”. That’s okay! For now…

Remember, right now your goal is to simply calculate your annual spend so you can calculate your FI Number. There will be plenty of time to trim up your budget (and re-calculate your FI Number!!) down the road.

How does other income affect your FI number?

Most people don’t want to actually retire once they hit their FI number. Hard-working, driven people—like those in the FI community—tend to stay busy and productive throughout their lives.

This is why I take issue with the acronym FIRE (Financial Independence, Retire Early). It implies that once you hit FI, you retire. You may want to actually retire for a time, but most are just looking for flexibility and freedom in their lives.

Most in the FI community still generate income, and many actually end up increasing earned income after reaching FI.

If you are calculated about this, this means you may be able to reduce your FI number. Let’s look at two examples.

Example 1: Real estate supplemental income

Let’s say you own your own home in Boulder, CO. Boulder is a desirable place to live and it is a year-round vacation destination for climbers, hikers, and skiers. When you travel, you like to take advantage of “Geo-Arbitrage” (leveraging travel to less expensive parts of the world like South or Central America, East Asia, or Eastern Europe to reduce costs over your home town in an expensive place like Boulder, New York City, or London) to save money on housing and you make money by renting out (via VRBO or Airbnb) your house while you’re gone.

In a nice but very inexpensive city like Quito, Ecuador, you can find a luxury apartment for $475 per month.

In Boulder, your house might rent out for $4,000 to $7,000 per month.

This is a CRAZY difference in price. If you were to do something similar to this a few months out of the year, you might be able to take home a net income of ~$30,000 per year.

Additionally, you’d be able to write off a lot of your housing expenses against this $30,000 of income. We’ll chat more about tax optimization in future posts!

Example 2: What if I like my job?

You (like me) actually like writing code! You just don’t like being told where or when to do it. As mentioned above, if it’s nice out on a Tuesday, you want to be able to go outside and not be beholden to some corporate rule about the number of vacation days you can take.

What if you can still code, but do so with a flexible schedule. Maybe even work remotely…

According to Glassdoor, the average salary for a mid-level software engineer in the US is over $110,000 (or roughly $55 per hour).

Let’s say you’ve built a good reputation and are competitive in the job market. You can be very selective about the company you work for and the benefits that the company provides. Critically, because you like coding, but no longer need to make money, you can trade a portion of my salary for flexibility.

With some persistence, you find a part-time side hustle that pays way below the market rate at $30 per hour (or roughly $60,000 per year if you work full time) that allows you to work part-time—say 20 hours per week. If you also take two weeks per year completely off, this gives you ~$30,000 of income that you enjoy making.

One big caveat

The keyword here is enjoy. The whole point of FI is to have enough money to live out your ideal lifestyle. If you like programming, great! But you should enjoy every aspect of the work, including: the projects you work on, the team you spend time with, and the schedule you’re asked to work. It should be a passion project, not a job.

Other ideas

Obviously, this does not just apply to coding or AirBnB. These examples are similar to two of the side-hustles I’ve picked up. Here are some other ideas:

Maybe you like carpentry, but don’t like working for a big construction contractor and you decide to start your own gig.

Maybe you love helping people optimize their finances, but don’t want to be an accountant anymore. You could become an IRS enrolled agent and volunteer to help people optimize their taxes.

You’re a busy journalist for your city’s newspaper. You love writing but are sick of intense deadlines and competitive culture at the paper. You could start your own blog or newsletter and publish articles on your own schedule.

Adjusted annual spend

Earned income in retirement can dramatically reduce your FI Number. There are many ways to do the accounting on this.

One way would be to take this after retirement annual income and subtract it from your annual spend. We’ll use the $60,000 as a sample (very high) annual spend.

$60,000 (annual spend) – $30,000 (post-retirement income) = $30,000 adjusted annual spend

This would cut your FI Number in half from $1.5m (25 x $60,000) to $750k (25 x $30,000).

You don’t have to be a millionaire to retire.

Technically, if you still need to pull in external cash to fund your lifestyle, you’re not financially independent. However, I’m willing to argue that you’re well on your way to FI if you’ve made some tweaks to how you make money that make you happier now, versus slaving away at a job you don’t like for another several years.

Through the above examples, I want to throw a spotlight on some of the nuance and opportunities that exists in the FI community.

Final thoughts

It’s so easy to focus on your FI Number and what you want your net worth to be in order to retire and lose sight of what you want your life to look like. You need to determine for yourself what that life looks like and, importantly, if you’re likely to be making any money once you do “retire”.

With some thoughtfulness and goal-setting, Financial Independence might be a lot closer than you think!

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