Earlier this year, my fiancee casually mentioned our plan to reach Financial Independence, or FI, by our mid 30’s to her father. She used the phrase, ‘we plan to reach retirement in our mid 30s,’ which naturally set off a lot of bells and whistles. I wrote more about this experience in an earlier post; it was the first time I found myself explaining early retirement to someone, let alone to my future father-in-law. Before writing that post, I googled the topic of early retirement in relationships. I then started to google some of the common issues couples face. I was genuinely appalled at some of the articles. When it comes to financial problems in relationships, many of the headlines read similar to, “How to Convince My Wife to Save More,” or, “How to Handle Significant Other Who Has No Interest in FI.”
I started to ask myself this basic question: “Why is there such a disconnect and what should people DO about it?”
This post is all about the 90 Day Frugality Challenge my fiancee and I are about to undertake. I’ll link the philosophy of Stoicism with frugality and how it is helping us on our path to financial independence. I’ll also bring up obstacles we’ll encounter during the challenge and our plan to overcome them. This post will wrap up with what excites and scares us the most about this challenge. (Maybe we’ll see another guest post from Mrs. Distilled Dollar as the challenge unfolds!)
As Q3 comes to close, I couldn’t be happier. This was, by far, the best three months of my life. I’ve reestablished my old frugal habit of reading 1 book a week, I completed my best triathlon race ever, and of course, the pinnacle moment was becoming engaged to my beautiful fiancee.
Turns out, engagements are much more expensive than I anticipated. We now need to realign our budget and our lifestyle. Our overall goal for 2016 is still to double our savings rate. As such, we’ve entered the final phase of the year: A 90 Day Frugality Challenge.
Today’s post is a link to an article I wrote, which was featured on the front page of The Dollar Stretcher. I discussed the topic of taking out a 401k loan — when it might make the most sense and when it is something you should avoid. I’m including an excerpt below, but definitely check out the full article by clicking here. Q: What are the main considerations someone should think about when deciding whether to use a 401k loan for home repairs?
DistilledDollar: Understand the full implications of taking out the loan. I’ll walk through the potential value you can access and what the loan terms will look like, including repayment.
Unlike a personal loan or a mortgage, a taking out a 401k loan is taking a loan out against the value of your own assets located within your 401k.
The amount you can withdraw might depend on your individual plan, but the general guideline is that the amount of the loan can be no greater than either:
A) $50,000, or
B) 50% of the value of your 401k
As an example, if your 401k has a balance of $80,000, you can take out $40,000 at most as a loan. If your balance is greater than $100,000, then you are limited to a $50,000 loan.
Repayment terms for a 401k loan involve at least a quarterly payment and the term will typically be for five years. Again, each employer may have differing periods, so always check to see how their options might differ.
Today’s post is a lead-in for a guest post I did on Vicki’s excellent site, Make Smarter Decisions. I discussed a recent decision my fiancée and I arrived at when we asked ourselves, “Should we pay down student loan debt or save for a home?”
Here’s a link for the full article. I’m a large proponent of maximizing all pre-tax accounts prior to accelerating any student loan payments. This post details the next step, because 2017 marks the first year we will have additional cash after maxing out our pre-tax accounts.
Thanks to the decision making framework shared by Vicki in the past, it is now clear what we should do with our extra cash.
Here’s an exert from the post:
The first step [in the decision matrix] is defining the question. In my case, it is relatively straight forward, “Should we use our extra monthly cash flows to save for a down payment on a home or to accelerate our student loan repayments?” Second step is to define our goal. Our end goal, and I often use “our” because I refer to the collective me-and-my-fiancée, is reaching financial independence in our 30’s. Now, that’s a big goal that might be 10+ years out relative to where we are today, at the age of 26 and 27. So, we’ve developed smaller milestone along the way to reaching the large goal down the road. Before I dive into these, I want to shed light on a fundamental belief I have and that is: It is much more critical to focus on our alignment towards our goals than to focus on our goals. What I mean is, we need to make sure we take the right actions today, and not get distracted by what lies too far ahead. As anyone who’s ever climbed a ladder will tell you — focus on the one rung ahead of you at a time. Another way to view this belief is the phrase, “our actions speak louder than our words.” If we’re taking all these different steps that are just not putting us closer towards our goals, then we are clearly out of alignment. If this is the case, then I typically spend some time trying to understand why I’m out of alignment in the first place. Then I either change my approach or change my goal.
Especially with long-term goals, life has a funny way of throwing curve balls. In 3 years you might realize that your 5 year plan no longer makes sense. This isn’t a bad thing, it just means you’re growing as person and your circumstances and/or priorities have changed.
From this perspective, our short term goal is to build the right habits today that will reinforce our ability to reach financial independence in our 30’s. This is more of a “means” goal, so I’ll come back to this in step 4.
The other day, I came across an old note that I had written to myself a few years ago. I was attending the 2014 Berkshire Hathaway shareholder meetings when Warren Buffett and his partner, Charlie Munger, answer questions throughout the span of 6 to 7 hours and offer their advice on everything from investing to happiness. My note reminded me of a billion dollar habit I picked up from Warren Buffett.
Here’s how it came up: Warren and Charlie were answering a question from an analyst when Charlie inched on saying something negative about a particular individual. The analyst followed up to gain some clarity and, again, Charlie’s short quip was no doubt negative.
Without pausing for a moment, Mr. Buffett followed up and said, “Don’t condemn it too much. You and I are practicing similar habits in other areas of our lives.”
I was FLOORED. I remember I completely tuned out for the next few minutes as I thought of the impact of what was just said.
Here’s a multi-billionaire talking to another multi-billionaire about financial habits and he’s saying they have similar negative habits. He’s not suggesting that they might have negative habits, he’s saying they do.
And, if you stick with me here, this is the part that really resonated with me:
He cut the negative criticism immediately, and shifted his lens internally.
He took a brief moment to acknowledge it was negative, and then immediately honed it in on himself.
That is a VERY tiring way to think. It is much easier to condemn and leave it at that.
The common response for anyone in Warren’s shoes would have been, “Oh yea, that jerk. Did you hear he also did XYZ?” Luckily, Warren possesses an uncommon mind that demonstrated a constructive way to behave in that moment.
How I’ve Applied this Billion Dollar Habit in my Life
When I see someone acting in way that is destructive or counter to something I want to achieve, I take a moment to acknowledge what led them to make that decision.
If I’m part of the conversation I’ll even ask them, “Hey, I’m lost here, what led you to make that decision?” and — here’s the key to gaining perspective — LISTEN EMPATHICALLY to their response.
I want to know.
I’ll try to rephrase their belief to see if I understand. Typically the conversations continues, but the next chance I get, I pause for a moment of reflection.
Here’s where it all comes together; I ask myself, “Where is my similar belief that is leading me down a different path? One that is counter to where I want to go?”
Similar to Buffett’s response to Charlie, I know I have poor habits in areas of my life that I am blind to.
Today’s guest post is written by Ricard from Escape to Freedom. I think he put together a killer post on the number one factor it takes to accelerate our path to financial independence: our savings rate! I hope you get as much out of the article as I did!
Without further ado:
How To Increase Our Savings Rate and Accelerate Our Financial Independence
We all have “light-bulb” moments along our path towards financial independence when everything suddenly clicks into place and we acquire a new level of understanding. From learning that money can actually allow us to retire decades early, to experiencing the first returns from our investments. For me, the biggest moment was realizing that it all comes down to the savings rate.
Simply put, having a high savings rate will mean you’ll be able to become financially independent pretty quickly. The beauty of this is how absolute it is; a 50% savings rate will make a minimum wage earner financially free as quickly as it will a multi-millionaire. This is exciting (I admit I may have a slightly alternativedefinition of exciting!) for two reasons:
Anyone, at any income level, can realistically become financially independent.
Accelerating financial independence boils down to increasing this number – nothing else matters as much.
When you’re armed with the knowledge that all you have to do is increase that number by 1% at a time, the gargantuan task of becoming financially independent suddenly becomes a lot more manageable. Matt himself wrote an article a while back about how a 1% increase in your savings rate could shave two years off work. For some people, a 1% increase will mean saving another $15 per month by only getting coffee three times a week instead of five. For others, it’ll mean saving $50 by buying the cheaper food brands.
While I’m convinced that most people would be able to save another 5 to 20% if they were serious about reaching financial independence, there are some things that are simply worth spending a little more on. Things that make our lives better.
This is why I believe the best way to significantly improve your savings rate is to focus on earning more money.
If you seek wealth, then avoid life’s big mistakes. Such mistakes can be buying luxury cars that are outside your budget, overseas vacations purchased on credit cards, or living in a place you can’t afford. Which brings me to today’s post on how we Live Big in a Tiny Home! If your goal is to upgrade to a mansion, as The Green Swan shared in a cool article, then that’s great. But only if you make a conscious decision to make that happen responsibly.
“Hey, I want to live THERE, which costs $X/month, so I’m going to save money at Y rate and make it happen in three years!” = GREAT.
“Hey, I’m going to get a second mortgage that I probably will never be able to pay off and make this happen next month!” = HARD NO. What I find most detrimental to building wealth is an unconscious urge to spend for selfish reasons or as an insatiable appetite to live bigger and better with the hope that this leads to happiness. Mindlessly spending money might lead to a temporary ping of excitement. But, if spending is what leads to excitement, I can tell you right now, all money will eventually run out. Money can be a source of greatness by providing security & freedom, but it will not provide true or lasting joy. One of life’s big mistakes is falling into the trap of always wanting more. My girlfriend and I have taken the opposite approach. We learned early on that spending money to find happiness is not a sustainable approach. Outside of the monetary benefits of our approach, it has led us to a deeper sense of happiness and has made our relationship stronger.
I finally got down on one knee and asked Mrs. Distilled Dollar if she wanted to actually become Mrs. Distilled Dollar! 😉 Luckily for me, she said, “It’s about damn time!” So, in other words, “yes”. (queue the music and drop the balloons!) This article will briefly talk about the process of getting an engagement ring (it is a BIG expense afterall) along with the our other marriage (bank). About a month before the engagement, we also decided to get, “bank married.” I didn’t know the term before hand, but it means we both deposit our paychecks and utilize one bank account for all expenses. My girlfriend fiance will be keeping her other checking account open as it is with a credit union. I’m not 100% sure if there are benefits to keeping it open or if we can expect any type of preferential treatment in terms of mortgages, but that is where we are today. If you know any details, feel free to chime in below.
So, last month was a big month for us. We’re now engaged AND bank married!
The engagement was obviously a long time coming. When I asked my future father-in-law for his blessing, he basically grilled me on one point: “What the hell did you wait so long for?!” I’m crossing my fingers that my girlfriend fiance (this will take some getting used to) will let me discuss the ring details in the future, but for now, she prefers to keep that under our veil of anonymity. Here’s what I can share about the ring:
This post will highlight one of my favorite frugal hobbies – reading. I’ll highlight my take on why reading is essential and share six tips to read countless books for free. Reading is great because, for a few dollars, you’re able to get hours and hours of entertainment. Depending on the book, you might even take away valuable life lessons. If you’re not one to spend money on books, there are a lot of other options available to you. If you’re concerned your book budget will weigh you down, here a few tips I’ve used to cut back on my reading expenses: 1) Free audiobooks from audible or on youtube. Many people can’t handle audiobooks because they read too slow, but you can actually play a video from youtube and increase the speed to 1.5x, 2x, or sometimes even 3x the speed.
2) Buy used books for a dollar. If you’ve seen my latest book review of Smart Women Finish Rich, you might have noticed the cover photo of that article contains the price tag. From $14.99 to $7.99 to $2.00. Many of the books I physically were purchased for a $1.00 or less.