Tuesday, August 20, 2019
Questing for FIRE part 2, or...
Try not to get burned by the markets...
Once you've tabulated your net worth, tracked your monthly outlays, and put into place the reductions in your spending, getting a rough idea of what your monthly expenditures are, you need to see how you'll meet them without a job. This is where the math gets harder but the feeling of deprivation hopefully dissipates. The painful adjustments occur mostly in the beginning, as you develop a system for cutting expenses, learn to relate to money differently, and hopefully begin to see frugality (or at least not wasting money) not only as a painful necessity, but as something to be cultivated as an end unto itself, beneficial to one's well-being, a spiritual exercise in humility if you will. This may be asking too much.
If your spending is mostly within your control, your rate of return is not. You still need an approximation to use in the calculator. As mentioned in my prior post, one of the tenets of FIRE is to take the money you're suddenly not spending and put that cash into Vanguard index funds, preferable VTSAX. All Vanguard funds have very low costs, which is why the FIRE community so often references the company. Anyway, VTSAX fund tracks the S&P 500, which is a good estimation of the entire American stock market. No less an investor than Warren Buffett advocates the same position. Historically, the average rate of return of the S&P 500 is approximately 10%, but that is a gross, not net, value. First, you have fees, which in my case are only 0.30% via TIAA-CREF, and second is inflation, estimated at around 2%. That's the Fed goal anyway. With both of these factors in mind, you can't use the base 10% rate of return to determine your FIRE number or date. On paper, that means I can use a real rate of return of 7.7%. Most people in the community use the more conservative figure of 5%, but I'll use 6% for reasons I'll discuss later. Also, the withdrawal rate is listed at 4%, which gives you a 1% cushion in case of higher inflation or a stock market dip. This is called the safe withdrawal rate, and is an accepted figure in the financial industry. Again, I'll use 5% instead. When the safe withdrawal rate and your spending match, you've reached financial independence; whether or not you stop working is another matter.
The safe withdrawal rate of 4% is actually just a rule of thumb, widely quoted though it may be. It originated in what is now called the Trinity study, which tracked the stock market over an extended period of time, and it does work - almost all of the time for almost all people. It does not, and cannot, account for major drops in the market or sudden unforeseen expenses, like a new roof or huge medical bill. According to the book Playing with FIRE, it works 98% of the time, but that two percent will apply to almost everyone at some point. This uncertainty in one of the reasons why the FIRE community advocates such serious frugality and conservative estimates - both provide a safety net, psychological and financial.
With the rate of return and what I can use for living expenses covered, it's time to use the calculator. I mentioned above that instead of using 5% returns and a 4% withdrawal rate, I can increase both by 1%. This is because I have TIAA-CREF as part of my employment, so I can turn my holdings into a low-cost, high-return annuity, and this step can be taken at any time. The fixed rate of return is 6%, and I can make the change while still adding to the said annuity until I stop working. This will never replace the pension I didn't get, but it does mean I could ostensibly quit tomorrow. That's not going to happen, but I wouldn't be able to access my pension until 60, something I only found out recently. The similar time frame applies to my TIAA fund if I just wanted to take out normal distributions. There's value in that approach, because I could still see gains from the market, potentially indexing my holdings for inflation. On the other hand, the thought of working here until 59 1/2 fills me with dread.
Now that I know my present rate of spending, how much am I making? To truly get a handle on what I can invest, I'll use my after tax income, which is presently $88,000, and the goal is a savings rate of 50%. My income will be more or less stable for the next few years, as our union negotiations are going poorly. I won't include any side gigs, as nothing moves the needle enough to make a difference. I'll make two calculations, one for my present situation, one for when my loans are gone and my spending decreases.
There are a plethora of FIRE calculators online, like the Playing with FIRE version, and we'll try that out at this time. It's useful because it has a mix of investment types and rates of return. It also takes into account your net worth. It does assume you're saving everything beyond your expenses, which isn't possible for me right now. Anyway, my age is 48; my income is listed at 88,000; my net worth is listed at 35,000, and my monthly expenses at $5000. This is what is my situation seems to be right now. After checking my allotment, I'll use the 93% in stocks at 6% returns, 7% in bonds at 2%, and 0% cash at (-3) percent. Some of the stock allotment is actually in REIT's, but I should get 6% regardless. This is very aggressive for someone who is 48, but that's part of the FIRE method. Plug in those numbers and I can retire in only 24 years! Wow, that sucks. It's also wrong. Readers (wait, do I have any?) who are better at financial planning than I, will see the flaws in these numbers: I'm counting the debt twice. I can either count the payments on my debt as part of my expenses, or I can deduct them from my net worth. With that, my net worth is corrected to a net worth of $370000, but my monthly expenses stay the same. Now I can retire in only 15 years. Again, not good, but it's at least better. However, I said flaws, not flaw, so what else is missing? It both way overestimates what I can save towards retirement and ignores what the college contributes. I'm saving $22,000 or so a year, so lets adjust the numbers to reflect what I'm actually investing. Now I can retire in 28 years or 17 years, so the news is even worse than I originally thought.
Because the above scenario is only a snapshot, and I am both actively eliminating debt and cutting spending, I will recalculate using more optimistic figures. The second calculation assumes that I have eliminated the retirement and student loans, and dropped an additional $600 a month in other spending, reducing my monthly expenses to $3578, but increasing my age to 49. I'll increase my net worth by 10% as well, to account for gains in the market and my own contributions, so that will be $407,000. I will also tweak the numbers to include the school's money as well as my own, by increasing my income until I reach a 59% savings rate or a whopping $62,000 per year. If I reach and maintain these numbers, I can retire in only 6 years, at 55. If it's that close to the County's requirement of reaching 55 years old and 25 years of service to officially retire (which occurs in the same year), so I can keep my health care after leaving the school, I'm better off waiting until then. It's actually just as I turn 56, since my anniversary date is in October, and my birthday is in December. Aside from playing with the numbers, where the calculator is most useful is giving me my FIRE number, and at minimum it's $1,100,000, for a monthly payment of $5,500. This would be more than enough, and if I did wait until 56. I could have 1,200,000 for a monthly payment of $6,000. Both are higher than my spend rate, which is great, but I also don't get any more returns on the annuity. This means I'm living on a fixed income, so any money above my spending acts as a hedge against inflation, the value of which cannot be understated.
As instructive, painful, or even fun as crunching these numbers can be, they're only a guide, but hopefully they'll motivate anyone looking to retire before the accepted age of 65, or even older. At minimum the calculator should drive home the point that you have to exercise much greater control over your finances than you may be willing to admit. Completing this step certainly made me aware that I'm not saving anywhere near enough. I already knew that on some level, but my bigger mistake was in overestimating my rate of return. Now I know where I truly stand, and it's a little frightening, which I suppose is a good thing.
I glossed over income a bit, so I'll cover that, what's happening at the job that makes this topic so relevant, and some serious criticisms levied against the FIRE approach in the next post.
Once you've tabulated your net worth, tracked your monthly outlays, and put into place the reductions in your spending, getting a rough idea of what your monthly expenditures are, you need to see how you'll meet them without a job. This is where the math gets harder but the feeling of deprivation hopefully dissipates. The painful adjustments occur mostly in the beginning, as you develop a system for cutting expenses, learn to relate to money differently, and hopefully begin to see frugality (or at least not wasting money) not only as a painful necessity, but as something to be cultivated as an end unto itself, beneficial to one's well-being, a spiritual exercise in humility if you will. This may be asking too much.
If your spending is mostly within your control, your rate of return is not. You still need an approximation to use in the calculator. As mentioned in my prior post, one of the tenets of FIRE is to take the money you're suddenly not spending and put that cash into Vanguard index funds, preferable VTSAX. All Vanguard funds have very low costs, which is why the FIRE community so often references the company. Anyway, VTSAX fund tracks the S&P 500, which is a good estimation of the entire American stock market. No less an investor than Warren Buffett advocates the same position. Historically, the average rate of return of the S&P 500 is approximately 10%, but that is a gross, not net, value. First, you have fees, which in my case are only 0.30% via TIAA-CREF, and second is inflation, estimated at around 2%. That's the Fed goal anyway. With both of these factors in mind, you can't use the base 10% rate of return to determine your FIRE number or date. On paper, that means I can use a real rate of return of 7.7%. Most people in the community use the more conservative figure of 5%, but I'll use 6% for reasons I'll discuss later. Also, the withdrawal rate is listed at 4%, which gives you a 1% cushion in case of higher inflation or a stock market dip. This is called the safe withdrawal rate, and is an accepted figure in the financial industry. Again, I'll use 5% instead. When the safe withdrawal rate and your spending match, you've reached financial independence; whether or not you stop working is another matter.
The safe withdrawal rate of 4% is actually just a rule of thumb, widely quoted though it may be. It originated in what is now called the Trinity study, which tracked the stock market over an extended period of time, and it does work - almost all of the time for almost all people. It does not, and cannot, account for major drops in the market or sudden unforeseen expenses, like a new roof or huge medical bill. According to the book Playing with FIRE, it works 98% of the time, but that two percent will apply to almost everyone at some point. This uncertainty in one of the reasons why the FIRE community advocates such serious frugality and conservative estimates - both provide a safety net, psychological and financial.
With the rate of return and what I can use for living expenses covered, it's time to use the calculator. I mentioned above that instead of using 5% returns and a 4% withdrawal rate, I can increase both by 1%. This is because I have TIAA-CREF as part of my employment, so I can turn my holdings into a low-cost, high-return annuity, and this step can be taken at any time. The fixed rate of return is 6%, and I can make the change while still adding to the said annuity until I stop working. This will never replace the pension I didn't get, but it does mean I could ostensibly quit tomorrow. That's not going to happen, but I wouldn't be able to access my pension until 60, something I only found out recently. The similar time frame applies to my TIAA fund if I just wanted to take out normal distributions. There's value in that approach, because I could still see gains from the market, potentially indexing my holdings for inflation. On the other hand, the thought of working here until 59 1/2 fills me with dread.
Now that I know my present rate of spending, how much am I making? To truly get a handle on what I can invest, I'll use my after tax income, which is presently $88,000, and the goal is a savings rate of 50%. My income will be more or less stable for the next few years, as our union negotiations are going poorly. I won't include any side gigs, as nothing moves the needle enough to make a difference. I'll make two calculations, one for my present situation, one for when my loans are gone and my spending decreases.
There are a plethora of FIRE calculators online, like the Playing with FIRE version, and we'll try that out at this time. It's useful because it has a mix of investment types and rates of return. It also takes into account your net worth. It does assume you're saving everything beyond your expenses, which isn't possible for me right now. Anyway, my age is 48; my income is listed at 88,000; my net worth is listed at 35,000, and my monthly expenses at $5000. This is what is my situation seems to be right now. After checking my allotment, I'll use the 93% in stocks at 6% returns, 7% in bonds at 2%, and 0% cash at (-3) percent. Some of the stock allotment is actually in REIT's, but I should get 6% regardless. This is very aggressive for someone who is 48, but that's part of the FIRE method. Plug in those numbers and I can retire in only 24 years! Wow, that sucks. It's also wrong. Readers (wait, do I have any?) who are better at financial planning than I, will see the flaws in these numbers: I'm counting the debt twice. I can either count the payments on my debt as part of my expenses, or I can deduct them from my net worth. With that, my net worth is corrected to a net worth of $370000, but my monthly expenses stay the same. Now I can retire in only 15 years. Again, not good, but it's at least better. However, I said flaws, not flaw, so what else is missing? It both way overestimates what I can save towards retirement and ignores what the college contributes. I'm saving $22,000 or so a year, so lets adjust the numbers to reflect what I'm actually investing. Now I can retire in 28 years or 17 years, so the news is even worse than I originally thought.
Because the above scenario is only a snapshot, and I am both actively eliminating debt and cutting spending, I will recalculate using more optimistic figures. The second calculation assumes that I have eliminated the retirement and student loans, and dropped an additional $600 a month in other spending, reducing my monthly expenses to $3578, but increasing my age to 49. I'll increase my net worth by 10% as well, to account for gains in the market and my own contributions, so that will be $407,000. I will also tweak the numbers to include the school's money as well as my own, by increasing my income until I reach a 59% savings rate or a whopping $62,000 per year. If I reach and maintain these numbers, I can retire in only 6 years, at 55. If it's that close to the County's requirement of reaching 55 years old and 25 years of service to officially retire (which occurs in the same year), so I can keep my health care after leaving the school, I'm better off waiting until then. It's actually just as I turn 56, since my anniversary date is in October, and my birthday is in December. Aside from playing with the numbers, where the calculator is most useful is giving me my FIRE number, and at minimum it's $1,100,000, for a monthly payment of $5,500. This would be more than enough, and if I did wait until 56. I could have 1,200,000 for a monthly payment of $6,000. Both are higher than my spend rate, which is great, but I also don't get any more returns on the annuity. This means I'm living on a fixed income, so any money above my spending acts as a hedge against inflation, the value of which cannot be understated.
As instructive, painful, or even fun as crunching these numbers can be, they're only a guide, but hopefully they'll motivate anyone looking to retire before the accepted age of 65, or even older. At minimum the calculator should drive home the point that you have to exercise much greater control over your finances than you may be willing to admit. Completing this step certainly made me aware that I'm not saving anywhere near enough. I already knew that on some level, but my bigger mistake was in overestimating my rate of return. Now I know where I truly stand, and it's a little frightening, which I suppose is a good thing.
I glossed over income a bit, so I'll cover that, what's happening at the job that makes this topic so relevant, and some serious criticisms levied against the FIRE approach in the next post.
Saturday, August 10, 2019
My quest for FIRE, or...
Pass the burn cream.
On the surface, achieving financial independence should be exclusively a mathematical formula: I decide I'm pursuing FIRE, and I'll first need to find a calculator to plug in the numbers that follow: I calculate my net worth, measure my present spending mercilessly (averaged over 3 months), both of which tells me where I stand financially at that moment, and considering my research into the efforts of others, the news is rarely good; next I look at my income, valued at X; I'm Y age; I wish to retire (a slippery term oft-derided in the FIRE community) in Z number of years, so I need to reduce my spending by a percentage (preferably around 50%) of X, concentrating on the big three: housing, transportation and food, find new ways to make more money if the savings aren't enough or spending cuts would be too extreme, then invest the newly found savings and/or earnings in the stock market, preferably in Vanguard funds, hope the market and economy cooperate to enough of a degree that my returns eventually match my new level of spending without touching my principle, and I can retire, or at least have control over what I do for a living, and I'll have achieved FIRE, but don't be shocked to learn the reality is a little more complicated (and yes, this entire paragraph is actually one horribly constructed sentence - suck it Strunk and White!).
Now, the formula and directions listed above are the ones used by the FIRE community, and have been proven to work, but it glosses over the psychology of money. As mentioned into my brief foray into behaviorism, money seems like a primary reinforcer, i.e., we need it to survive, so we get off our asses every day to work to get more of it, but it's really a secondary reinforcer: its motivating power is derived from the perceived value of the of the receiver of the money and the other rewards is supplies. Because the value is subjective, one's personal history and feelings around money have a much greater effect on your ability to commit to the sacrifices needed to hit your FIRE number than a mathematical formula would indicate.
Figuring out where your net worth is usually the most painful and hardest part of the process. When you have the dollar amount, you then know how far you are from being financial independent, and how much longer you may need to work. If the timeline is too long (and it almost always is when someone first does the math), you'll need to start looking at what spending you can eliminate or reduce, investing that money instead, to make the FIRE date sooner. It's like an alcoholic admitting he or she has a drinking problem, and just as gut-wrenching, because realize the thing you love (the booze or your lifestyle) is about to get taken away from you. It's not quite that dramatic, but it seems to feel that way in the beginning. Overspending is not like being an alcoholic; you probably need to give up alcohol completely, but you can't exist in Western society without spending. You will need to change your relationship with money and give up some things to which you're probably quite attached. If you don't mind working until 67 or beyond, then you don't need to do anything different. Most people suddenly label spending as wasteful and more willing to cut expenses when confronted with 20 years or more of required work.
Using myself as an example, I have a net worth of approximately $35,000. That's not an exaggeration or me downplaying the numbers for effect. I have a retirement fund of $370,000, and that's all I'm counting for assets. I'm not including the value of my car, or the $1000 in the bank at the moment, or the unknown amount in a joint account with Carolyn. On the liabilities side, I have a whopping $335,000 in debt. Now, this is a huge improvement over my net worth 6 months ago, before I sold my apartment, and before I was able to pay down my retirement loans. If I was writing this post in February, my net worth would have be in the negative, at around minus $112,000! I'm certainly pleased with my progress, and my situation should continue to improve, as I'm paying off the retirement loans swiftly (I started out with $34,000 borrowed, and I've paid back almost $15,000), and I should be able to get loan forgiveness, eliminating $70,000. Finally, the mortgage on my condo is around $254,000. Once the two loans are gone, my net worth would grow to $124,000, with my only debt being the mortgage on our condo. This assumes that in 9 months or so my investments hold their value. I'm hoping they will be higher, but they could be lower too. As mediocre as all this sounds, I'm actually in decent shape.
This covers one part of the equation, but what about spending? Fixed costs that are automatically paid, total $2857, and that includes housing, phone, life insurance, car insurance, debt payments, and all my subscriptions: SiriusXM, WoW, Bigger Pockets, Planet Fitness, even the monthly average of my BJ's membership and twice-yearly shots of Botox for sleep apnea (really). Advanced FIRE devotees would probably blanch at this figure or some of the specific bills, but just like my net worth, the figure represents a major improvement compared to 6 months ago, or even one month ago. I cancelled my storage unit, stopped paying extra to my student loans, cancelled Life Lock, sold the apartment, etc. When the retirement and student loans get eliminated, my fixed bills drop to $1990, and I'm comfortable with that. My other smaller bills either have too much value to me or are necessities. I would never cancel my life insurance, for example. Carolyn would need that money if anything happened to me. Now, I could search for a cheaper policy, and I might, but I'm comfortable not doing anything. I'm happy Carolyn has that security, so it's worth the expense. This doesn't mean I can't cancel some things because they're a waste of time, like Warcraft. The hours I spend playing WoW could be used to build an online business or taking a walk, but that's outside the scope of the FIRE math and therefore this post.
Now that I know my fixed costs, what about my variable expenses? First I need to define what those are. These are goods or services I need to buy and could be reduced or changed, but not eliminated. Let's start with transportation. I usually estimate one tank of gas per week, but it's more like every 6 days, equating to $210 or so per month. This expense is fairly resistant to change. My car isn't very good on gas, and my commute is long, but I can get gas at cheaper stations, combine trips, and avoid pointless driving. I will get a car that's better on gas when I replace my Camry SE, but I can't include that here. Some of these changes have already taken place, but the figure seems to be around $210 regardless, so that's what we'll use. Additionally, maintenance on the car must be counted, and I average that at $70 per month. Some months it's nothing, and other months need an oil change, new tires, and new brakes. This makes the total $280.
Food is up next, completing the big 3 of FIRE. Here I'm counting only the groceries I buy for the household. This includes things I've bought for myself, like instant coffee for the office. I'll use net spending, since Carolyn reimburses me for things like chicken breats for the dogs. She really loves the pups. The numbers are harder to pin down for this entry, as I have bought some things in cash, but using my budget in Google Docs, I can estimate about $900 per month spent on groceries. I'll know more as I track my spending more closely. Reducing this expense is easier than other expenses on some level, but harder in other ways. The easier changes are just buying what's on sale, shopping at BJ's whenever possible, changing brands, etc. The harder part is asking anyone else to change what they eat, and I will concentrate solely on my own choices before I ask anyone else to alter their lifestyles. Moreover, I have to include quality and value along with price. I could get a jar of instant coffee Now, is $900 a lot? It's hard to say. When you consider it covers my share of a three person household, I can't complain too much.
Miscellany is the next group, and it's everything else that I'm not labeling optional or wasteful. Now, deciding what was required is a personal value judgement in some cases. My needing dental work is not optional, but send my dad $50 gift card could be subject to interpretation. I'm not a miser, so I'll include it as needed. This is the slippery slope on which so many people fall, so I still have to examine and justify these purchases. For the moment, I have the amount as $950, not including car maintenance. Two expenses stand out: 1/2 of my dental work: $261, and data transfer from 5 old computers to an external hard drive, which was a whopping $445. Now, these bills won't every month, but in the many times I've examined my spending, something unexpected invariably pops up. My laptop broke; the washer and dryer needed to be replaced, whatever. Let's earmark $500 per month for unforeseen stuff. That's probably way too high for most months, but for this post, I'll use that figure.
Before I dive into the shallow end of my pool of spending, I should mention that I'm sending $433 a month to my retirement fund, which started when I sold my co-op. It goes into a 403(b), so it's not a dollar for dollar exchange. Because my taxable income is a little lower, my pay is lowered by $297 a month. This is just small taste of what I'll need to save for retirement of any kind, early or otherwise, but it serves as a valuable benchmark. When my financial situation was it its worst, turning off the extra contributions was one of the reason I was able to recover. There's no reason to stop this extra payment, so it serves as a warning that my situation has spun out of control.
With that little aside finished, it's time for the painful admissions to be begin. The optional and/or wasteful spending is the last entry, and for most FIRE practitioners, where the biggest savings are to be found. I'm including eating out, Amazon purchases, and oddly enough, tolls. I have almost no reason to cross a bridge or tunnel, so why am I getting charged tolls to the extent I am? Well, I love walking around the Palisades Mall, but it that experience really worth the gas and $4.75 in tolls? If I'm shopping or working at Woodbury, then I'd pay a $1.50 to cross the Bear Mountain Bridge, but that's it. Without going into too much detail, the total was $842. I'm not differentiating between spending I consider wasteful and spending I consider optional. Again, I have improved this area as well compared to both 6 months ago and 1 month ago, for reasons I'll discuss below.
The total for everything per month right now is $5879, but as I'm not ready to retire, I can reduce that figure. First, the student and retirement loans will disappear. That removes $822 a month, totaling $5057. I'm dropping $500 per month for unforeseen expenses, so the total is now $4557. My optional spending should be around $400 a month, and I can say that is obtainable. This makes my total $4115. Now, how do I know these reductions are possible? Because I just dropped $3000 towards my retirement loan and barely noticed. I hate my under-powered laptop, but I keep using, it. I was penny wise and pound foolish in choosing the model, but I cannot afford to replace it, at least for now. I haven't signed up for any more classes, don't drive to the Poconos to go hiking, and cook almost exclusively at home, making breakfast before I meet Scott, packing leftovers for lunch, no longer stop at Starbucks for coffee, etc. Do I miss these small indulgences? Of course, and I read only a few people pursing FIRE that didn't.
This covers where I stand today, and that's enough for now. In part two, I'll delve into the income and investment returns portion of the FIRE formula.
Now, the formula and directions listed above are the ones used by the FIRE community, and have been proven to work, but it glosses over the psychology of money. As mentioned into my brief foray into behaviorism, money seems like a primary reinforcer, i.e., we need it to survive, so we get off our asses every day to work to get more of it, but it's really a secondary reinforcer: its motivating power is derived from the perceived value of the of the receiver of the money and the other rewards is supplies. Because the value is subjective, one's personal history and feelings around money have a much greater effect on your ability to commit to the sacrifices needed to hit your FIRE number than a mathematical formula would indicate.
Figuring out where your net worth is usually the most painful and hardest part of the process. When you have the dollar amount, you then know how far you are from being financial independent, and how much longer you may need to work. If the timeline is too long (and it almost always is when someone first does the math), you'll need to start looking at what spending you can eliminate or reduce, investing that money instead, to make the FIRE date sooner. It's like an alcoholic admitting he or she has a drinking problem, and just as gut-wrenching, because realize the thing you love (the booze or your lifestyle) is about to get taken away from you. It's not quite that dramatic, but it seems to feel that way in the beginning. Overspending is not like being an alcoholic; you probably need to give up alcohol completely, but you can't exist in Western society without spending. You will need to change your relationship with money and give up some things to which you're probably quite attached. If you don't mind working until 67 or beyond, then you don't need to do anything different. Most people suddenly label spending as wasteful and more willing to cut expenses when confronted with 20 years or more of required work.
Using myself as an example, I have a net worth of approximately $35,000. That's not an exaggeration or me downplaying the numbers for effect. I have a retirement fund of $370,000, and that's all I'm counting for assets. I'm not including the value of my car, or the $1000 in the bank at the moment, or the unknown amount in a joint account with Carolyn. On the liabilities side, I have a whopping $335,000 in debt. Now, this is a huge improvement over my net worth 6 months ago, before I sold my apartment, and before I was able to pay down my retirement loans. If I was writing this post in February, my net worth would have be in the negative, at around minus $112,000! I'm certainly pleased with my progress, and my situation should continue to improve, as I'm paying off the retirement loans swiftly (I started out with $34,000 borrowed, and I've paid back almost $15,000), and I should be able to get loan forgiveness, eliminating $70,000. Finally, the mortgage on my condo is around $254,000. Once the two loans are gone, my net worth would grow to $124,000, with my only debt being the mortgage on our condo. This assumes that in 9 months or so my investments hold their value. I'm hoping they will be higher, but they could be lower too. As mediocre as all this sounds, I'm actually in decent shape.
This covers one part of the equation, but what about spending? Fixed costs that are automatically paid, total $2857, and that includes housing, phone, life insurance, car insurance, debt payments, and all my subscriptions: SiriusXM, WoW, Bigger Pockets, Planet Fitness, even the monthly average of my BJ's membership and twice-yearly shots of Botox for sleep apnea (really). Advanced FIRE devotees would probably blanch at this figure or some of the specific bills, but just like my net worth, the figure represents a major improvement compared to 6 months ago, or even one month ago. I cancelled my storage unit, stopped paying extra to my student loans, cancelled Life Lock, sold the apartment, etc. When the retirement and student loans get eliminated, my fixed bills drop to $1990, and I'm comfortable with that. My other smaller bills either have too much value to me or are necessities. I would never cancel my life insurance, for example. Carolyn would need that money if anything happened to me. Now, I could search for a cheaper policy, and I might, but I'm comfortable not doing anything. I'm happy Carolyn has that security, so it's worth the expense. This doesn't mean I can't cancel some things because they're a waste of time, like Warcraft. The hours I spend playing WoW could be used to build an online business or taking a walk, but that's outside the scope of the FIRE math and therefore this post.
Now that I know my fixed costs, what about my variable expenses? First I need to define what those are. These are goods or services I need to buy and could be reduced or changed, but not eliminated. Let's start with transportation. I usually estimate one tank of gas per week, but it's more like every 6 days, equating to $210 or so per month. This expense is fairly resistant to change. My car isn't very good on gas, and my commute is long, but I can get gas at cheaper stations, combine trips, and avoid pointless driving. I will get a car that's better on gas when I replace my Camry SE, but I can't include that here. Some of these changes have already taken place, but the figure seems to be around $210 regardless, so that's what we'll use. Additionally, maintenance on the car must be counted, and I average that at $70 per month. Some months it's nothing, and other months need an oil change, new tires, and new brakes. This makes the total $280.
Food is up next, completing the big 3 of FIRE. Here I'm counting only the groceries I buy for the household. This includes things I've bought for myself, like instant coffee for the office. I'll use net spending, since Carolyn reimburses me for things like chicken breats for the dogs. She really loves the pups. The numbers are harder to pin down for this entry, as I have bought some things in cash, but using my budget in Google Docs, I can estimate about $900 per month spent on groceries. I'll know more as I track my spending more closely. Reducing this expense is easier than other expenses on some level, but harder in other ways. The easier changes are just buying what's on sale, shopping at BJ's whenever possible, changing brands, etc. The harder part is asking anyone else to change what they eat, and I will concentrate solely on my own choices before I ask anyone else to alter their lifestyles. Moreover, I have to include quality and value along with price. I could get a jar of instant coffee Now, is $900 a lot? It's hard to say. When you consider it covers my share of a three person household, I can't complain too much.
Miscellany is the next group, and it's everything else that I'm not labeling optional or wasteful. Now, deciding what was required is a personal value judgement in some cases. My needing dental work is not optional, but send my dad $50 gift card could be subject to interpretation. I'm not a miser, so I'll include it as needed. This is the slippery slope on which so many people fall, so I still have to examine and justify these purchases. For the moment, I have the amount as $950, not including car maintenance. Two expenses stand out: 1/2 of my dental work: $261, and data transfer from 5 old computers to an external hard drive, which was a whopping $445. Now, these bills won't every month, but in the many times I've examined my spending, something unexpected invariably pops up. My laptop broke; the washer and dryer needed to be replaced, whatever. Let's earmark $500 per month for unforeseen stuff. That's probably way too high for most months, but for this post, I'll use that figure.
Before I dive into the shallow end of my pool of spending, I should mention that I'm sending $433 a month to my retirement fund, which started when I sold my co-op. It goes into a 403(b), so it's not a dollar for dollar exchange. Because my taxable income is a little lower, my pay is lowered by $297 a month. This is just small taste of what I'll need to save for retirement of any kind, early or otherwise, but it serves as a valuable benchmark. When my financial situation was it its worst, turning off the extra contributions was one of the reason I was able to recover. There's no reason to stop this extra payment, so it serves as a warning that my situation has spun out of control.
With that little aside finished, it's time for the painful admissions to be begin. The optional and/or wasteful spending is the last entry, and for most FIRE practitioners, where the biggest savings are to be found. I'm including eating out, Amazon purchases, and oddly enough, tolls. I have almost no reason to cross a bridge or tunnel, so why am I getting charged tolls to the extent I am? Well, I love walking around the Palisades Mall, but it that experience really worth the gas and $4.75 in tolls? If I'm shopping or working at Woodbury, then I'd pay a $1.50 to cross the Bear Mountain Bridge, but that's it. Without going into too much detail, the total was $842. I'm not differentiating between spending I consider wasteful and spending I consider optional. Again, I have improved this area as well compared to both 6 months ago and 1 month ago, for reasons I'll discuss below.
The total for everything per month right now is $5879, but as I'm not ready to retire, I can reduce that figure. First, the student and retirement loans will disappear. That removes $822 a month, totaling $5057. I'm dropping $500 per month for unforeseen expenses, so the total is now $4557. My optional spending should be around $400 a month, and I can say that is obtainable. This makes my total $4115. Now, how do I know these reductions are possible? Because I just dropped $3000 towards my retirement loan and barely noticed. I hate my under-powered laptop, but I keep using, it. I was penny wise and pound foolish in choosing the model, but I cannot afford to replace it, at least for now. I haven't signed up for any more classes, don't drive to the Poconos to go hiking, and cook almost exclusively at home, making breakfast before I meet Scott, packing leftovers for lunch, no longer stop at Starbucks for coffee, etc. Do I miss these small indulgences? Of course, and I read only a few people pursing FIRE that didn't.
This covers where I stand today, and that's enough for now. In part two, I'll delve into the income and investment returns portion of the FIRE formula.
