The Simple Math Behind Retiring Early

downloadApparently, there were quite a few raised eyebrows when I posted last week that we are a mere 4 years away from Financial Independence.

I had people asking if we had inherited a large sum of money (nope). Did we win the lottery? Negative – we’d have to play to do that. Are we involved in some shady offshore dealings? Ha! OK – no one really thought this but I thought it sounded fun and made me sound cooler than I am.

The truth of the matter is much more mundane and boring. We saved. A lot. Our goal is to save 60% or more of our income every month.

The math is really simple:

If you save 100% of your income than you are financially independent. In other words, you don’t need to make any money to cover your expenses – thus you are able to save 100% of your income.

If you save 90% of your income then you are able to live off of 10% of your income and it will only take 2.7 years for you to generate that 10% passively for the rest of your life.

We save about 60% of our income which means that it will take us 12.4 years of saving 60% of our income to generate a passive income stream large enough to cover that 40% that remains.

Here is the graph that I’m using to calculate all this.

Here’s the kicker: It really doesn’t matter how much you make. If you only make $100 a year but you are able to save 90% of that (meaning that you only need $10 a year to live off of), it will only take you 2.7 years to get there.

This is why being frugal matters. When we cut our food out monthly bill from $1,000 a month (don’t judge) down to $100 a month, we shaved over five years off of our retirement date. Moving the lawn myself instead of paying someone to do it shaved 6 months off of our date. Making my own coffee at home rather than getting a Starbucks everyday cut off almost a year. You get the idea.

I can get a side job and put all that money into our savings account, but ultimately putting even an extra $1,000 in the bank matters very little compared to cutting out expenses permanently.

But, wait a minute – if it is going to take you 12 years to retire why are you only 4 years away? In short, because we have been doing this for a while. We originally wanted to retire by the time we were 30 – knowing absolutely nothing about retiring or how to get there. We just wished really hard. Surprisingly, this strategy did not work, but it did start us saving and investing. We’ve spent the last half of our 20’s and first half of our 30’s buying houses and and investing in micro-lending. Watching our net worth grow.

Knowing a little bit more about how tax advantage accounts work (hello 401K and IRA) we are now switching our strategy a bit and saving a bit more, but ultimately it is just a lot of boring saving up. Trying to get to our magic retirement number.

Magic retirement number, you ask? Yep – its the magical number that once you reach you should be able to generate enough passive income to cover your expenses. In other words – once you reach it, you are retired!

While this number is different for everyone, the take-a-way is: the less you need the lower that number will be and the sooner you will reach it. To figure out your number, first figure out what your monthly expenses are, multiple that by 12 to get your yearly expenses and multiply that by 25. This is your magic number.

Mr Eivy just read over my shoulder and pointed out that it is a bit more complicated than just saving money. True. You have to invest this money and use the 4% safe withdraw rule to calculate your passive income. This basically means that once you hit your magic number and have it safely invested, you should be able to withdraw 4% a year without touching the principal (in fact, your principal should grow 3% with inflation using this rule of thumb). I promise I’ll write more about this later so stay tuned!

Math Error In Your Favor!

downloadAnyone who had read this blog for more than five minutes knows how I feel about math (namely that it is wonderful and fun and I do it in my free time because I just that big of a nerd).

One of my biggest pet peeves about math, though, is the assumption that only people who never make mistakes are good at math. This is so blatantly wrong. Its like saying that only people who read perfectly are good readers. Or only people who spell perfectly are good writers. It is just ridiculous. While I don’t proclaim to be an amazing mathematician, I enjoy solving problems and using it to map out my life.

I’ve created all of my own spreadsheets and mapped out our early retirement goals with a projected 7% growth. Sounds impressive, I know 🙂 But, its actually not that hard. I mostly add numbers in the spreadsheet.

Which brings me to a big mistake that I just realized I made. It was actually a little mistake (I had added a number twice when figuring out how much we needed to make each month), but the effect was HUGE! We are talking one year huge!

Our retirement goal was just moved ahead by one whole year!

After reaching our retirement number, our plan is for Adam to continue working for one additional  year so that we can practice living off of just a 4% safe withdraw rate. That way if for some reason we are not able to do it, he will still have a job. Plus, it will give us a big chunk of change that we can invest as an added buffer.

So, as of yesterday, the date that we hit our retirement number was 12/20 – which mean that we would be FI and actually retired by 12/21 (what a fun number!). However, since fixing my mistake, I figured that we should reach our number by 12/19 which puts us at retirement by 12/20!

I feel like I’ve won the lottery. Math mistakes can be so good. (I will not, however, mention the math mistakes I’ve made that have pushed us back because those are not as fun).

Adam will be 40 in July 2020. Our super secret goal has been to retire by the time we are 40 (shhhh – don’t tell). If my math is currently correct, I only need to figure out a way to shave 6 months off of our number to reach that goal.

Maybe I can find another math error…

Defining Your Dreams

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While I don’t personally subscribe to a lot of the new agey mantras of, “if you visualize it, you will get it,” I do think that they are partially right. In order to get what you want, you have to first know what you want to get. It seams logical, right?

Figuring out what we wanted our lives to be like was actually more challenging that one might think. After eliminating the impossible dreams – living in outer space with weekends get-a-ways to Saturn (who’s with me!) – we had to look very hard at what we actually wanted our day to day life to be like. Do we want to work for someone else? NOPE. If we are not working for someone else, then what ARE we doing? We both mapped out very clearly what we wanted out daily life to be like – traveling, drawing, photographing, exploring…you get the idea – and then worked backwards. To achieve this dream, we needed a plan.

If I’m going on a road trip from Seattle to New York, I MIGHT get there if I simply hop in the car and start heading east, however, I am much more likely to get there sooner and with less difficulty if I have a map. Or an Adam who gives me directions from his phone as we go along.

Specific step-by-step plans are a must. This is why everyone says you need a budget. I don’t personally subscribe to this school of thought since the quickest way for me to spend a lot of money is to tell me that I can only spend a little bit of money. I do, however, get really excited about investing money and paying down my mortgage. Really excited. Way more excited than I get buying a new pair of shoes. So, for me the choice is (mostly) easy. Every dollar that I save is a dollar that I get to invest! Woo Hoo! Plus, I am working towards my plan. I have a plan to save 60% of our income each month so that is what I try to do.

Regardless of if you have a budget or not, you MUST have a plan. Our plan includes tracking our money very carefully and knowing where each dollar is going to go. It involves lots of spreadsheets and projections. Ah, spreadsheets and projections. My life is complete.

I amazed by how many people I know who go though life doing what they think they should do because that it what everyone else does. They go to college because that is what they need to do to get a good job (I don’t actually agree with this line of thought, but it is pervasive in our culture). They get a job so that they can pay their bills. Extra money goes towards those little luxuries that they deserve for working all day at a job they can barely tolerate. Maybe some money goes to savings but not much. Kids come along – they buy a bigger house further away.  More debt. More possessions. More waste. Never once wondering if there is a different way to live.

The hardest question to ask yourself is what you want your life to be like. If there were no other considerations (money, expectations…) what would you like to do with your day? Then hold onto that dream with all your might and never let go. Work backwards and figure out a way to get to that dream. It can happen. It does happen. All the time.

 

When to hire a professional

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This frugal living has put all sorts of crazy ideas in my head. Working towards early retirement is not only completely changing my lifestyle, it is rewiring my brain!

The most noticeable change that I see is the way I look at everyday tasks and projects. We are so accustom in our society to simply throw money at a problem when it arises to make it go away. Look, I have no judgements about this. I did it for a very long time:

The dishwasher stopped working. Buy another one.

Leaky faucet. Hire a plumber.

Grass is hard to mow. Hire a gardener.

You get the idea. These are not unreasonable purchases. I wasn’t out there buying a $50,000 sports car or hiring a full time Nanny when my child is in school most of the day. It was just easier to hire a professional to do the things that I didn’t know how/want to do. It wasn’t that much money and besides, I’d rather spend my time doing other things.

This is what I told myself. This is what I honestly believed, but let me explain why I couldn’t have been more wrong.

First – the money: Let’s be honest. Hiring a professional is a lot of money. And it should be. These people have invested a lot of time and money to know what they know, and they need to pay their bills and support their family. If you hire a professional plumber, for example, you are not really paying for the materials. You are paying for the knowledge. Knowledge is valuable and expensive.

Now, what if, instead of paying a for a plumber, you were to take the 30 minutes to look online and research how to fix your plumbing problem yourself. Sure you wouldn’t know how to fix every plumbing problem in the world like a professional would, but I’ll bet you could figure out how to fix your plumbing problem.

Instead of paying someone to mow the lawn, you were to get a used mower and do it yourself.

Instead of hiring the landscaper, you were to do the research on how to landscape yourself.

You could save so much money. Not just for the current problem that you have but for all future problems. Once you have the knowledge, you never again have to hire a professional to fix that problem.

Will it be done perfectly? Nope. And that is OK. Well, its OK with me. If you are a perfectionist, you might need to hire a professional, but the more you practice and study, the better you will get. Worst case – you can always hire a professional to fix what you have done.

Second, the ease. I used to hire professionals because I thought it was easier. Who wants to go study how to fix the pipes when you can just pay someone else to do it. I thought that a little bit of money was worth the peace of mind, but here’s the rub: what gives you more peace of mind? Knowing that you can only maintain your home and lifestyle as long as you keep making a certain amount of money or knowing that no matter what happens, you will be able to handle it.

There is such power and accomplishment in being able to do things yourself. There is tremendous ease in knowing that if something breaks, you are capable of fixing it. It is never as hard as you think it is.

So, back to my crazy new brain. Over the past year, I have:

  • landscaped my yard (I’m not talking about planing a few plants. I have literately ripped up the sod and replaced it with different beds, walls, pathways and gardens).
  • fixed my vacuum
  • installed my own washer/dryer (good god, I can’t believe I used to pay people $75 to do this!)
  • remodeled my kitchen (this one is currently in progress – I’ll tell you more about it later)

I’ve saved a ton of money (at least $10,000) but more importantly, I feel so much better and more secure.

To sum up – are there times to hire a professional? You bet. It is every time something breaks? Hell no. Give it a go. See you learn something new. I promise you’ll feel so much better if you can fix it yourself.

March Wrap-Up

greenbelt-11Tiny Eivy is determined to kick some April butt!

Its my favorite time of the month! The time when I get to tally up all of our numbers and see how well we did!!! Woo Hoo! And before you say anything, I am aware that I have a problem as I would vastly prefer this to going to a big party (introvert problems).

March is always a tough month for me. Its long, dark, cold and boring. No fun holidays to celebrate, no vacation days from school, just a long adult month in the middle of winter (I guess technically the end of winter but whatever).

First, our successes: We spent very little money on eating out. I took my mom out to lunch on her birthday and I splurged on a pizza (GF crust and totally not worth it) when Adam was out of town one night, but other than that we ate exclusively at home.

I’ve also started a new challenge for myself: remodel the kitchen for as little as possible! Ha! Never let it be said that I don’t love a challenge. As I write this, I am sitting in a demolished kitchen with all of my stuff scattered around the house like confused sailors after a hurricane. However, I’m going to chalk this one up as a success since to reach this point, I have spent a total of $100 (a crowbar – necessary for prying off cabinets, and an under the counter fridge – these things are like $2000 new so I totally scored when I found this on craigslist). Granted, at some point I’ll need things like walls and shelves, but for now I’m very satisfied.

This months challenges: property tax was due for one of our rental properties. For some reason when we bought that house, property tax was not included in escrow so we end up having to pay it ourselves every year. I don’t mind this at all since it means that we keep our money for longer (earning interest) and then just pay for the tax ourselves when it is due, but it does mean that we end up with quite a bill once a year.

Other challenges: our stove bit it. It saw the shiny new dishwasher and furnace and decided that it needed some love too, so long story short – we have a new stove/oven.

In musing how to rearrange our kitchen during our remodel, we realized that if we traded our washer/dryer in for a washer/dryer combo unit we would have a lot of extra room (possibly for a fridge) in the utility closet. The only problem is that those combo units are expensive and you cannot find them used so good-bye $2K hello combo unit.

In the good news category, though, almost everything in our home is now shinny and new so we should be good for a while (knock on wood – a lot).

Despite all of these unexpected (OK – I guess they were somewhat expected) expenses, we still managed to save quite a bit. This was all me. I took on a few weddings and was able to bring in a few thousand dollars this month to contribute which really helped our numbers.

So, without further ado….drum roll please…..

Percentage of monthly savings: 42.35%

Percentage of house paid off: 49.77%

Percentage of the way to FI: 30%