How To Make $1,000,000 In 8 Years

The quickest way to FI (financial independence) is to have an extremely high savings rate.  We touched on this in our post about reducing debt when we showed that in a matter of just a few years you can go from saving around $12,000 per year to $48,000 per year.  And these numbers were based on "normal" salaries.

In other words, you don’t have to make $200,000+ per year to save this kind of money.  Savings rate is more important than the amount you make.  Savings rate is more important than the amount you make.  (Repeat, as necessary).

Public Art In Brooklyn, NYC.  Yes!  $1 Million in 8 Years!

What Does My Savings Rate Need To Be?

Everyone is different, but typically in the FIRE (financial independence retire early) community people aim for a savings rate between 50 - 70% of total income.  You can calculate your savings rate by first figuring out how much money you brought in for the year (regular income, 401k, employer contribution to 401k, dividends, etc).  Next add up the money you did not spend.  Finally, divide total unspent by total income and multiply by 100 (Confusing right? Let’s look at an example).  

Here is an example of a typical year for us: 

So we are currently sitting at a 67% savings rate for 2018.  Take some time to calculate your savings rate and strive to have it eventually fall within that 50 - 70% range, and you will be well on your way to reaching FI.  

But You Mentioned $1,000,000 In 8 Years…..

Let's play with the numbers to see just how powerful a high savings rate can be.  

Our family started saving for FIRE back in 2015, once all of our debt was paid off.  It was at this time that we started living off of just one salary (a teacher's salary!).  Here is a breakdown by year of what we have been able to save.  (The annual increases typically come from the salary adjustments we receive).  

I will also forecast out the next few years just so we can better illustrate the power of compound interest in the chart below.  Everything after 2018 is what our planned savings amount for that year would be (in reality we should reach FI by the end of 2019 so these aren't our exact numbers, just an example).  Note, just like above our numbers include: 

-Savings in our Vanguard Taxable Account

-Savings in my company's 401k plan / plus the company match of 5%.

-Dividends earned from investments.

While these numbers alone look great, this isn’t their true value because they will all be invested straight into our favorite Vanguard index fund: VTSAX.  Being invested this way will historically net you about a 10% rate of return in the long run.  When you adjust for inflation (typically 3%), we have an inflation adjusted rate of return of 7%. 

Wow!  We just went from ZERO to $1 Million in 8 years! 

That is the power of having an extremely high savings rate, while also reaping the benefits of compound interest from a low-cost total stock market index fund.  

I can’t stress enough the importance of having a large % of your investment portfolio allocated to stocks.  For those that want to be conservative and smooth out the wild ride of the stock market an allocation of 75% stocks (VTSAX) and 25% bonds (VBTLX) is the way to go.  

The key to reaching FI is having an extremely high savings rate (ideally between 50 - 70%) and investing those savings into VTSAX.  The higher the savings rate, the more quickly you reach FI!

What is your savings rate? 

-Erik

How To Survive The Next Financial Apocalypse

Retiring early sounds nice and all, but what are you going to do when the stock market crashes again?

Calmly riding out the next financial storm (Lego Art in Houston).

This is by far the most commonly asked question in regards to early retirement, and rightfully so, because the stock market is going to crash again.  If you’re in your 30’s / early 40's like us, you will probably witness at least 3 - 4 more major stock market collapses in your life.  

What will we do when the inevitable happens?  Simple.  We’ll turn to our safety margins to ride out the storm.  

What are safety margins?

Safety margins are ways that you can protect investments during economic downturns.  Living off of the 4% philosophy of withdrawals is great and extremely safe on its own.  But when the market does tank, rather than continue to withdrawal down your investments, it’s good to be able to let them sit while you tap into your safety margins.

Safety Margin I: Cash

The first safety margin everyone should have in place is cash.  Cash is king, and when the market tanks, it is your best friend.  A good practice is to have 3 - 5 years of spending set aside in cash.  This will provide you with enough of a cushion to ride out any economic downturn that we have experienced in the history of the stock market to date.  

Wait!!  We assume that a typical early retiree lives on around $40k per year.  Are you telling me that I need $120,000 - $200,000 extra cash for when the market tanks?  No, not really.  Rather than worry about covering 100% of your expenses (in this example 4% or $40,000 per year), all you need to do is have enough to cover 1% of your expenses.  Thus you drop your withdrawal rate from a safe 4% to a bulletproof 3%.  Using our example of someone living off of $40,000 (4% of $1,000,000) this means that for this safety margin to be effective you only need a cash cushion of $30,000 - $50,000 (3 - 5 years worth).   Not too shabby.

Let us take 2008 as an example.  As bad as 2008 was (the market dropped about 40%), in 2009 the market was back up over 26% and has been up every year since.  So rather than pulling the 4% from your investments in 2008, you could have pulled maybe 3% from investments and 1% from your cash cushion and been just fine!  That should get you excited.

Safety Margin II: Be Flexible

Being flexible, should probably be number one on this list because it is absolutely key to having a successful retirement.  There are numerous ways to be flexible in early retirement.  It could be anything from reducing your grocery budget to deciding to take a cheaper vacation.  Here’s one example.  Let’s say you’re retired and enjoying the good life, and the bottom falls out of the stock market.  You’re a pro and so you don’t panic.  You adjust your withdrawals down to about 3% and tap some of your cash cushion.  Next you decide maybe it’s not the best year to take that big vacation to Disney World (or destination of your choice), so maybe you decide on a staycation and just do fun things around your own city for a couple of weeks.  Either way you have remained flexible and adjusted your lifestyle (temporarily) to help weather the storm.  Mickey Mouse will be there next year (I promise!).

Safety Margin III: Part Time Work / Side Hustle

Wait, WHAT?  Work??  I thought this was (early) retirement?!  You don’t work in retirement! 

Alright, settle down, and let’s consider some facts.  If you are an early retiree, you are probably still young, educated, and healthy.  Just because you’re “retired” doesn’t mean you are never again allowed or able to make any more money.  How silly is that? 

This is one of the most debated topics when talking about FIRE (financial independence retire early).  Being FIRE does not mean you are not allowed to work.  Being FIRE does mean that work is no longer mandatory.  You can instead pursue what interests you, and do it on your own time.  

Additionally, keep in mind, you no longer need $100k per year to get by.  Rather, $5k - $10k per year would be more than enough as a safety margin.  For example, let’s go back to our family living off of $40,000 per year at a 4% withdrawal rate.  Bringing in $5k just lowered your withdrawal rate from 4% to 3.5% or from $40,000 to $35,000.  That’s huge!

Safety Margin IV: Geographic Arbitrage

If you’re like us and part of your plan for early retirement involves a lot of travel, then geographic arbitrage is a very powerful safety margin.  When things get bad, instead of panicking you could just go to Croatia.  Or maybe Thailand is more your speed.  I don’t know about you, but spending time in either of those places while living off of considerably less money while you ride out the storm sounds like a win win to me!

The ride isn’t always going to be smooth.  There are going to be plenty of twists and turns along the way, but remain confident that your investments will last and continue to grow.  After all, up to this point you have been disciplined enough to clean up your budget, pay down all of your debt, invest, and reach FI (financial independence) much earlier than most people.  Do you really think that when you get to retirement that you are all of the sudden going to start making poor decisions with your money?  No!  You have a solid plan.  All you have to do is implement it, and sit back and enjoy the flight.

Are you ready to take flight with us?  Are you ready for the next financial apocalypse?

-Erik

Financial Independence With Kids? But Kids Are So Expensive!!

Have you ever said (or heard someone say) "kids are so expensive!"?

FIRE (Financial Independence Retire Early) with kids?!  With two average professional salaries (we are (way) below $200k total)??  And one being a teacher's salary?  How can you save enough (kids are so expensive!)?  Yep, not only can it be done, but it will be done by us ... and it has been done by others (Root of Good).

I'm going to bring you a series of posts related to saving money even WITH kids.

The Arts

I'll start with entertaining the kids for free or cheap around town which is one of my favorite things to do with them.  Even before kids I liked exploring the city.  If you don't live in Houston, you can probably find some similar activities if you are near a major metropolitan area.  Or if you aren't near a major metro area, I'd love to hear your thoughts on free or cheap entertainment nearby.

What about the arts?  Museums?  Experiencing Picasso or Warhol for free with your kids?  Teaching them about artists and the world through viewing the art?  Teaching about proper museum manners?  And for free (or cheap)?  Yes, please.  Sign me up!

My passion is experiencing the arts, learning about art, and making art for myself and my kids.  This is my 10th year teaching art in a public school.  I've taught Pre-K through 12th (except for 5th Grade), and before that I worked in art museums (Education, Public Relations, and Specials Events).  And previous to museums, I worked in advertising, and as a child I always loved the arts.  So this is easy for me, and I love to share the arts with others!

In the summertime I do Art Thursdays with my kids, and during the school year we just try to get out and experience art as much as we can (and at home).

My youngest enjoying art (Oscar de la Renta) last Spring.

The Museum of Fine Arts, Houston

My favorite art museum in Houston is The Menil Collection.  But today I will start with The Museum of Fine Arts, Houston (MFAH).  Did you know that kids 12 and under are always free?  And everyone is free on Thursday (courtesy of Shell) which is why we try to visit on a Thursday.  If you have a Bank of America card (we do), the first full weekend of the month is free (one free general admission for each cardholder) so this is helpful during the school year when it is harder to get there on Thursday.  But wait!  They are open later on Thursday (until 9 pm) if you want to try to go after school hours.  Read more about the MFAH's admission costs here.

Okay ... now that I got you in for free, but what about parking?!  Isn't that difficult and expensive?  (The rail is an option too if that is convenient for you).

Parking

Honestly parking for free use to be easier.  If you are dead set on parking for free (and are good at parallel parking) you may be able to find a nearby street available that does not have a meter and walk a bit (go towards the neighborhoods near the Contemporary Arts Museum Houston).  This will be harder during peak hours.

If you are only there for a few hours, metered parking a few blocks away (towards the Children's Museum of Houston) is the cheaper route if you don't mind walking a few blocks.  I've found this is cheaper (less than $10 for a few hours) than their parking garages.

I personally prefer their new parking garage (new underground parking garage on 5101 Montrose Blvd.) because you can visit the sculpture garden and the new outdoor area easily on your way back from the museum to your parking spot.  This parking garage is $10 for visitors up to 4 hours and $6 for MFAH Members for up to 4 hours.  (We will talk more about membership another time).

You can find parking for free or up to $10!  Not too bad.  Read more about transportation / parking here.

The Art

Have you ever experienced an art museum with kids?  Or is it intimidating to you?  Don't let it be!

Oscar de la Renta show at the MFAH in the Spring.

What do we see and do at The Museum of Fine Arts, Houston?

My kids are 7 years and 5 years, and since we hardly ever pay admission price (maybe for a special exhibition) I'm never stressed about having to spend a ton of time in the museum.

I usually pick one area that I want to see or have the kids see (or sometimes ask their ideas too).  For example, this summer we went to look at Pre-Columbian art in their collection since we were taking a trip to Belize a few weeks later to see Mayan ruins.  Sometimes we will pick a theme - for example, "let's see how many animals we can find at the art museum today!"

I also suggest packing a sketchbook and some writing materials for the kids and have that on hand to draw and write (You can find these for less than $5 even at your local grocery store, or just bring some paper and writing materials you already have at home).

Oscar de la Renta show at the MFAH in the Spring.

Let the kids guide the experience, or here are some easy questions:

• What do you see?  Why do you say that?
• Why do you think the artist made this?

If family / kids activities are available, we visit those.  In the summer there are activities on Thursdays (free!) at the MFAH, and there are activities year-round on Sundays.  Read more about the MFAH's Family Programs here.

Family Programs at the MFAH this summer.

Family Programs at the MFAH this summer.

Next we pick a few easily entertaining spots for kids.  We visit Dan Flavin's "The Light Inside" tunnel (connects the Law building and Beck building underground!), and given their age - my kids are easily entertained by the vast array of stairs, escalators, and elevators (if you have a baby / toddler I do not recommend a stroller in the Law building!).

An art museum (usually) isn't the place to be loud, horse around, or run so I typically let them get their energy out in the Cullen Sculpture Garden.  The MFAH just recently added on to their outdoor space too which includes a water play area - great for beating the heat in Houston (and free!).

Getting out energy in the Sculpture Garden in the Spring.

Exploring the new outdoor area (this summer).

The new outdoor area has a water play area (this summer)!

Food

But my kids are going to get hungry?  I am going to get hungry!  How to save on food?

I always pack reusable water bottles and lunch / snacks in a small Igloo thermos bag.  I don't have to worry about having to spend money on lunch (although sometimes I budget that in) or listen to hungry children.  And we eat in the sculpture garden!

Bonus: Art Museum Manners 

I recommend speaking to your kids about art museum manners before you go (mine have been going since birth, but I always remind them before we walk in).  The link above provides even more museum manners.

• No outside voices - quiet voices!  We can be loud when we go to the sculpture garden.  (Yes, sometimes there are noisy activities, but mostly you do not want your child screaming in the art museum).  We don't want to disturb other visitors.
• Walking feet.  No running inside.  We can run when we go to the sculpture garden.  We want to be safe inside, and we don't want to damage the art.
• No touching the art unless it says to touch, and no pointing at the art because we don't accidentally want to touch it.  The oils on our fingers and hands can damage the art.
• Have fun!

I usually go over no horse play and be kind to each other (they are siblings), but you do the rules that best fit your own kids / age of your kids.  (When my kids were toddler age I made sure I was holding on to them or had them close by since I definitely had one runner!).

When you leave ... ask, "What was your favorite work of art today?  Why?"  I always get interesting answers!  I love to hear what left an impression on them.

There you go.  A trip to an art museum for possibly under $10 (not including gas).  My favorite kind of free entertainment!

So what do you think?  Up for a (free or cheap) art day with your kids?  If you aren't in the Houston area, what art museums (or other art) do you have nearby?

-Tara