Category Archives: Financial Independence

How to Make the Most of Your Tax Refund

Tax refund: Next to the words “pay day” and “debt free,” these are my two favorite finance-related words. Whether my annual tax refund is a modest sum or a mid-size windfall, I am always happy to see my refund directly-deposited into my checking account. Admittedly, knowing how to make the most of your tax refund can be a daunting task.

Still haven’t submitted your 2016 tax returns? If you have a simple return, such as a 1040-EZ, I recommend completing your simple return with E-File.com today. You can complete your Federal return for FREE and receive free support along the way. And FinanceSuperhero readers can receive a discount on state returns by using this link – $6 Off State Filings With Coupon Code “6OFFSTATE”.

If you’re planning to complete a 1040A or require additional schedules, the team at Liberty Tax has local offices in your area to help you every step of the way. Other tax preparation services come and go, but LibertyTax has been helping people file their taxes the easy way since 1997.

Receiving a tax refund is a great opportunity to improve your financial outlook. Follow these 9 pro tips to make the most of your tax refund!

The FinanceSuperhero Guide to Making the Most of Your Tax Refund

Assuming you have a tax refund coming your way, you could be on the verge of changing your financial picture.  With great opportunity comes great responsibility! The following advice will help you to make the most of your tax refund and make significant progress on your financial journey. I recommend following the steps in numerical order.

1. Give a Portion of Your Tax Refund to a Charitable Organization

Longtime readers will not be surprised that I am suggesting giving as the first step to make the most of your tax refund. As previously mentioned, Mrs. Superhero and I have placed Giving at the top of our monthly budget. Giving aligns with our values, and helping others provides us with much more satisfaction and enjoyment than buying more stuff or eating delicious food.

I strongly believe that giving 10% is the best way that we can make a charitable contribution prior to reaching financial independence (at which time we will significantly increase our giving). We have always done this, dating back to the time when we faced a mountain of debt, and we continue to do so today, even though we are only a few months away from carrying no debt other than our mortgage.

Why? As I mentioned, we believe helping others is both a calling and the most satisfying use of our money. Giving is also a strong reminder that money is not something to be hoarded out of greed. We want to value money and practice good stewardship, but we also want to remain far removed from the love of money.

Many people reject giving in favor of keeping their money strictly to themselves. Ironically, it is usually these same people who senselessly give their money to big banks and other financiers in the form of outlandish interest payments on cars, boats, and other stuff.

Personally, I would rather give in a meaningful way. Even if you give 1% of your tax refund, you will help others and begin to change the way you view money.

2. Increase Your Savings and/or Emergency Fund

When looking to make the most of your tax return, simply saving money can be a wise choice.
When looking to make the most of your tax return, simply saving money can be a wise choice.

After supporting societal progress by giving, use your tax refund proceeds to improve your liquid savings. Unless you are an extremely high income earner or have a stable passive income stream, you absolutely must have an Emergency Fund. If you do not have one, consider this a full-blown, alarm-sounding crisis that must be addressed immediately! Statistically-speaking, there is close to a 100% chance that you will experience some form of an emergency within the next decade, so be ready!

While I recommend maintaining an Emergency Fund of at least 3-6 months of minimum living expenses, you may also wish to establish an additional Opportunity Fund. I do not specifically recommend amounts or figures for this fund, and you may wish to skip it entirely in favor of moving onto Step 3. However, an Opportunity Fund could allow you to make a fun, somewhat impulsive decision without any accompanying feelings of guilt or regret.

3. Get out of Debt – Once and For All!

After you have given and increased your security via your Emergency Fund, you are fully-prepared to take on the primary barrier standing in the way of Financial Independence: Debt.

The sooner you eliminate your non-mortgage debts, the sooner you free a significant portion of your monthly income and simultaneously gain the freedom to invest in tax-advantaged retirement accounts. Both the Snowball and Avalanche methods are valid means to achieve debt freedom. For the purposes of this post, I am less-concerned with the method you implement to eliminate your debt; just get it done. You may get the push you need if you make the most of your tax refund in this way!

 

4. Invest in Tax-Advantaged Investments

The real fun begins when you no longer have non-mortgage debt. If you are free from the shackles of debt, the next optimal use for your tax refund is to maximize your retirement contributions. For the purposes of this limited space, ensure you are maximizing employer-offered plans, specifically if they offer a match, and then move onto your Roth IRA.

Want to make the most of your tax refund? Opening an IRA or taxable brokerage account with Betterment is a smart way to maximize the impact of your refund.
Betterment returns vs. US Market and Typical Investor Returns (Credit: Betterment)

If you’re looking for an easy to use platform for investing, Betterment could be the solution for you. Their Tax-Coordinated Portfolio works to maximize your earnings and minimize tax burdens across all types of accounts, including taxable accounts, Roth IRAs, and traditional IRAs. It is simple to sign-up or rollover an account, select a portfolio of ETFs, and be on your way toward earning better returns right away.

Compared to other platforms, the Betterment portfolio is designed to achieve optimal returns at every level of risk. Through diversification, automated rebalancing, better behavior, and lower fees, the Betterment approach to investing can help you generate 2.9% higher returns than a typical DIY investor.

Make the most of your tax refund and start investing with Betterment by signing up today!

5. Contribute to Your Children’s College Funds

If you do not have children, skip ahead to Step 6. If you have children, you need to learn the nuances of the Coverdell ESA (Education Savings Account, also nicknamed the Education IRA) and 429 plan. The ESA has income and contribution limits (currently $2,000 per year), but I recommend you start with the ESA in most circumstances, if eligible.

The important thing to understand is that minimal contributions to these vehicles will place you in a position to send your children to college without the burden of student loans if you begin early.

Related PostEscape From Student Loans: How Two Educators Paid Off $17,831.65 in 54 Days

6. Destroy Your Mortgage Debt

Pause with me for a moment and imagine a life without a mortgage payment. If you can’t imagine it, check out the FREE E-book, How to Hack Your Mortgage and Save Thousands, written by my friend Andrew at FamilyMoneyPlan. This is the plan he and his wife used to wipe out their $320,000 mortgage in 6 years.

What could you do with an extra $1,000 per month? $2,500? $5,000? I just felt an overwhelming sense of excitement  and peace typing these words. The next time I visit my doctor and have my blood-pressure checked, I am going to visualize the wonders of a mortgage-free life to improve my numbers.

For the average family, mortgage interest represents the second-largest expense that they will pay in their entire lifetime. In some cases, total mortgage interest paid on a 30 year mortgage can be approximately 75-80% of total principal, even at today’s advantageous interest rates! Make the most of your tax refund to accomplish progress on an annual basis and you could shave several years off your mortgage, especially if you are already paying extra on principal on a monthly basis.

7. Invest in Non-Retirement Funds and/or Real Estate

If you have made it to Step 7, please allow me to offer my congratulations. With no debt whatsoever, healthy savings, and kids’ college covered, you are poised to generate significant wealth. At this stage, you may have achieved Financial Independence, depending upon your lifestyle.

I recommend using tax refund money to invest in simple index funds at this stage. A modest tax refund sum is enough to get you started with many index funds. Adopt a long-term approach, relax, and watch your money grow.

Similarly, this is the time to invest in real estate, if interested. Becoming a landlord isn’t for everyone, and paying a property manager could eat into your net profit from owning a rental property. However, a rental property can yield some of the highest annual investment returns if managed well and purchased at prices below market value.

Want to make the most of your tax refund? Investing in real estate with Fundrise is an exciting option for investors in 2017.Fortunately, today’s investors can invest in real estate without the hassle of becoming a landlord or hiring a property manager. Fundrise offers real estate investment options with low entry costs.. As of February 2017, they offer three eREITs for new investors: the West Cost eREIT, the Heartland eREIT, and the East Cost eREIT. It is amazing that technology has brought common investors like you and me the opportunity to invest in multi-million dollar buildings half way around the country!

Even if you’re on the fence about real estate investing or just not quite ready to dip your toe in the water, I recommend signing-up with Fundrise today – it is 100% FREE, with no obligation, and in doing so, you’ll position yourself to learn more and possibly avoid wait lists.

8. Improve the Value of Your Primary Home

At this stage, true fun begins. When you are financially well-poised for the future, a tax refund represents an opportunity to both invest and add joy to your life simultaneously. This is the time to make improvements around your home which increase your happiness and feature a high return on investment.

Good Investments: new front door, landscaping, deck or patio, kitchen or bath remodel, walkway lighting

Bad Investments: swimming pools, utility sheds

9. Build Sinking Funds for Bucket List Items

Last, but not least, comes additional saving for specific purchases. If you make it down to Step 9 when determining how to implement your tax refund, you are an authentic Superhero. I recommend establishing separate sinking funds for a variety of priorities, such as vacations, new car purchases, secondary homes, or major home additions.

The purpose of a sinking fund is to plan for future purchases which are far off in the future. At this stage, you do not want to be fooled into getting back into debt or be caught off guard by large, necessary expenses. With a sinking fund, you won’t be financially caught off guard when your house needs a new roof, your furnace fails, or your vehicle sputters and dies.

Are You Ready to Make the Most of Your Tax Refund?

A tax refund is a great opportunity to get ahead in your finances. I am confident that you will not fail to cover all of your bases by following these steps. Depending upon where you are in your journey toward Restoring Order to Your World of Finances, you may wish to skip steps or modify the order. For example, renters may wish to place saving for a home down payment in the Steps.

If you haven’t yet filed your 2016 tax returns, be sure to check out E-File.com or LibertyTax today. Either way, careful consideration of your circumstances will put you on the path to make the most of your tax refund this year!

 

Note: This post was last updated on February 14, 2017.


Readers, did you receive a tax refund this year? Are you currently awaiting a refund? How do you plan to make the most of your tax refund?

Retire With Dignity – Reject the Normal Financial Outlook

Everything is relative when it comes to money and determining what is “normal.” At least that is what we have been conditioned to believe over time. The normal financial outlook is very different for blue collar workers and executives, plumbers and CEOs, and teachers and doctors. Unfortunately, a statistical average generated among such a wide variety of professions and incomes does little good in helping us learn what normal looks like today.

Income, of course, is only half the battle. On the flip side, expenses complicate the search for normal even further. Even two doctors with identical incomes and living in $450,000 homes in San Francisco, California and Arlington, Texas, respectively, may have wildly differing expense to income ratios due to property taxes and cost of living discrepancies.

So where does this leave the search? Is a “normal financial outlook” definable?

Is a "normal financial outlook" definable? Everything is relative when it comes to money, yet the desire to be normal could be sabotaging your efforts.

A Normal Financial Outlook is a Fallacy

The other day, I spoke with a friend about the manner in which “normal” people manage their finances. After citing problem after problem, we came to a realization: We won’t want to be normal. Normal is broke, greedy, overconfident, and unfulfilled. 

Following our conversation, I pondered the idea a bit more and came to a conclusion which I believe is tight enough to hold water: the average person’s desire to be normal is to be blame for his pessimistic financial outlook. Furthermore, normal is simply a self-defeating social construct which ultimately holds us back.

Consider the following connections:

*The desire to be normal drives us to take on a 72 month auto loan so we can drive the same car as our colleague; never mind the fact that the vehicle will be worth a fraction of its sticker value when the loan is paid off.

*The desire to be normal motivates us to take on the maximum pre-approved mortgage when looking for a home. It also causes us to spend at an unreasonable clip to furnish the home at high interest rates and rationalize it because “everyone else is doing it.” Many normal people will end up paying nearly twice the value of their home due to 30 years of interest accumulation (or more if they refinance to another 30 year mortgage after several years of paying on an initial 30 year mortgage).

*Because most normal people do not have any idea how much money they will need to live on in retirement, we adopt a normal mindset and rationalize that “it will all work out.”

*The desire to be normal leads us to go out with colleagues each day rather than brown bagging it for lunch. This kind of “normal” comes at a cost of over $100,000 over a working career.

These are only a few examples, but they drive home the truth that normal is bad.

Normal is the Worst

Statistically speaking, normal people are house poor, broke, in debt, and destined to slave away for 40-50 years only to retire in old age and poor health. And this is what most of us strive to become?

I have a different vision for my future. I don’t want it to be anything close to “normal.” As a result, I’m doing the sensible things now to ensure that my family’s future isn’t depressingly bleak.

First and foremost, I am consistently striving to challenge my everyday perception of “normal.” I know that if I surround myself with people and experiences which are “normal,” I will fight the desire to live abnormally. On the other hand, if I surround myself with people who share my view of what is “normal,” I am cultivating a healthier perception of the idea itself. This is vital.

Mrs. Superhero and I have intentionally taken steps to become good friends with others who share this mindset. For example, one couple we frequently spend time with also maintains an entertainment/dining budget. We have no qualms with being transparent about that among our families, which often leads to double dates at our home in lieu of expensive meals out. We look at as iron sharpening iron.

Secondly, Mrs. Superhero and I have worked at minimizing the frequency with which we experience luxury in our lives. We know that once we become accustomed to luxuries it can be very hard to give them up. Once luxuries become the norm, it can become very difficult to grow wealth and develop a favorable financial outlook; raising the bar in this manner is “normal,” but it minimizes satisfaction and happiness while permanently raising one’s bottom line required spending. We aim to make luxurious experiences the exception, not the norm.

Third, we are diligent in taking excellent care of the nice possessions which we have prioritized over the years. We have found that we appreciate these items for their true value, utility, and contribution to our overall happiness simply because we exhibit pride in maintaining what we have worked and sacrificed to gain. For example, I marvel at the fine condition of my 2008 Honda Accord while driving to work each day. Instead of dwelling on the fact that it is nearly nine years old now,  I choose to take pride in its fine condition.

I often think that if we were resigned to a normal financial outlook, we would be far less mindful about these sort of things. In rejecting this kind of thinking, we choose to believe that there is a better way to live. It is a path lined with hard work, sacrifice, and self-control, but we firmly believe it is the best path toward happiness both in the present and in the future.


How do you define “normal” when it comes to money? Do you have a normal financial outlook? In what ways do you reject being “normal” on your path toward happiness both in the present and in retirement?

The Herd Mentality and Retirement – How to Free Yourself and Others

In my last piece, I wrote about my apparent decision that perhaps early retirement just isn’t for me. I outlined several pros and cons of early retirement, all of which I had previously read about or otherwise heard expressed.

Confession time: I was subtly and intentionally trying to stir the pot.

The result? It worked. My faux-criticism of early retirement worked just well enough to spark some lively discussion.

For reference sake, here are the pros and cons I listed.

Pros:

*Opportunity to spend increased time with family and friends
*Freedom to travel
*Reduced stress and improved health
*More time to pursue other interests or even a new career

Cons:

*Possible negative impact upon health (possible loss of health benefits, decreased physical activity)
*Possible boredom and/or depression
*Increased stress (more time to worry; constant fear that your nest egg may be insufficient)
*Limitations due to fixed income

For the record, I don’t necessarily buy into the above cons. They are possible, but as Physician On Fire stated, “if you’re more stressed and less active when retired, resulting in poorer physical and mental health, you’re doing it wrong.”

So why was I intentionally-deceptive?

The herd mentality plays a large role in the formation of the average retirement plan. We may wish to deny it, yet our actions are telling. Learn how to break free and help others do the same.

Testing the Herd

While I don’t mind readers agreeing with me based upon the merits of my arguments, I do have a problem with those who mindlessly agree with others. To the credit of those who left responses in the comments, you all got pretty critical with my shallow analysis. Some of you were kind, even though I could sense that you really wanted to sock it to me. Some of you downright took me to the cleaners, which I fully deserved!

I’ve noticed more and more that this kind of honest dialogue is rare. Heck, if the two top candidates to become the next leader of the free world cannot even participate in a simple debate without displaying an egregious lack of manners and an overall inability to communicate, how can we expect people to be candid yet respectful in a blog or other forum? And how can we expect people to disagree with one another in person and still continue the conversation?

These are tough questions to navigate, so many just don’t bother to try. We pat each other on the back despite the presence of disagreement, stand pat as others share misinformed or half-baked ideas, and keep our mouths shut.

We might not possess a herd mentality ourselves, but we often do very little to discourage its advancement among our friends and loved ones. Think about it. How many of us have said nothing when a friend or family member spoke of his latest voluntary investment in “can’t miss” company stock, the “stable return” of her annuity, or the “deal” he received on a whole life insurance policy?

I know I am often far too nice, and you are, too, in all likelihood.

Understanding the Herd Mentality

The act of discouraging the herd mentality on retirement begins with understanding. If we can grasp the reasons for the perpetuation of this mentality, we may be better equipped to combat against it.

At its heart, the herd mentality may be traced to man’s desire for conformity. Put another way, being different is very often undesirable. Even a majority of the weirdo middle school kids with dreadlocks and trench coats don’t like being different, if they’re being honest. So we often find ourselves following along with others in group-think as a means of gaining a sense of belonging and becoming part of a group.

Similarly, the heard mentality is rooted in the fear of being wrong. Even if we feel we are more likely to be correct in taking a specific course of action, nagging fear may drive us to choose the opposite course out of fear that we could end up isolated by our own wrong doing. After all, it is better to be wrong and with others than to be correct and alone, no?

Intellectually, many of us may wish to shed these notions, yet our behaviors and actions say otherwise.

Discouraging the Herd Mentality

So how exactly can we help others overcome the tendency to conform, fear mistakes, and perpetuate a herd mentality? No two people are alike, but the following guidelines will prove to be helpful in most situations and with most people.

1. Listen more than you speak

When helping another person by seeking to change their opinion or behavior, it is most important to fully understand their position. This understanding can only be achieved through careful listening.

Billionaire Richard Branson articulated the importance of listening very well in sharing a lesson learned from his father:

When I grew up our house was always a hive of activity, with Mum dreaming up new entrepreneurial schemes left, right and centre, and me and my sisters running wild. You were as likely to find me helping Mum with a new project as outside climbing a tree. Amidst all the fun and chaos, Dad was always a supportive, calming influence on us all. He wasn’t quiet, but he was not often as talkative as the rest of us. It made for a wonderful balance, and we always knew we could rely on him no matter what.

Within this discreet support lay one of his best and most simple pieces of advice for me: listen more than you talk. Nobody learned anything by hearing themselves speak. Wherever I go, I try to spend as much time as possible listening to the people I meet. I am fortunate to travel widely and come across fascinating characters from all walks of life. While I am always happy to share my own experiences with them, it would be foolish if I didn’t listen back.

2. Ask questions with care and humility

Aside from listening, it is equally important to engage with others by asking thoughtful questions and remaining humble. These steps go hand-in-hand, and they are the keys to earning others’ trust.

Remember, most people do not care what you know until they know that you care.

3. Acknowledge your own mistakes and imperfections

In order to continue building a foundation of trust and credibility, seek to admit your own mistakes and imperfections. It is very difficult to shatter the herd mentality if you skip this step.

Yesterday, I was listening to the Dave Ramsey show podcast when Dave took a call from a confused caller. The wife and mother of four shared that she and her husband were considering following the advice of friends and family by moving in with her parents and selling their house to save money. Dave took this caller to task in a manner that made me wince a bit. He was critical of the caller’s lack of planning, overblown spending, and knee-jerk reactions. Dave also pointed out the this woman was attempting to implement a plan which treated only the symptoms of the problem rather than the problem itself.

Naturally, this caller became a bit distressed and defensive. In a moment of swift timing, Dave pointed out that he himself had made “far dumber” mistakes with money than even the mistake that this woman and her husband were about to make. As he outlined several of them in crystal clear detail, he displayed empathy and earned credibility with the caller. Little by little, the caller warmed up to Dave and become more and more interested in what he had to say. By admitting his own mistakes, Dave broke down the herd mentality barrier which had driven this caller.

Final Word

I apologize for any genuine concern I may have caused over my views on early retirement. Despite my deception, my true vision for early retirement is simple:

I desire to reach financial independence and gain the option to work, if I so choose, for purposes other than monetary rewards.

Despite experiencing some guilt over my slight deception in my previous piece, I am glad that the outcome was as I had expected. Collectively, the tight-nit community listened to my ideas, posed relevant questions and counter-examples, shared personal anecdotes, and tapped into long-established trust and credibility in an attempt to show me the error of my ways.

I am proud to be running with the right herd.


Have you had experience breaking others free from the herd mentality surrounding retirement? 

 

 

 

Early Retirement Musings – Is It Worth It?

I have been thinking about early retirement a lot lately. Upon first glance, you might read that sentence as an indication that I am looking for an escape from my current day-to-day grind. On the contrary, I feel that Mrs. Superhero and I are in a good place at the moment. We enjoy our full-time careers in the classroom, and we feel invigorated by our side businesses in real estate and the music studio, respectively.

My thoughts on early retirement are admittedly impacted by a variety of influences. First and foremost, everyone in our family trees has opted for traditional retirements. On the other hand, nearly everything I read on a regular basis, from books and magazines to blog articles, touts the benefits of early retirement and financial independence.

What are my current thoughts about early retirement? I’m seriously pondering whether I am even interested at this point.

Retirement Basics

Any discussion of the pros and cons of early retirement should begin with a look at the purposes behind retirement at a basic level. Quite obviously, the cultural phenomenon of retirement exists because humans are not physically and mentally equipped to work forever. As a result, we work and save for four to five decades, on average, in order to survive when we are no longer able to support our basic needs through earned income.

To recap, the most basic life plan is as follows:

WORK 40-50 YEARS + SAVE MONEY = BASIC SURVIVAL AT AGE 65-70 

The above plan is a reality for an alarming cluster of the population. Yes, you can and probably should aim higher with your retirement goals. For example, you could save and invest more than is required to meet your basic retirement needs, allowing yourself to live a little in retirement. However, tomorrow is promised to nobody. Or you could save more and retire a bit earlier, say in your late 50s or early 60s.

So, we might describe the intermediate plan as follows:

WORK 30-40 YEARS + SAVE MORE MONEY = COMFORTABLE RETIREMENT AT 55-60

For a small number of renegades with their hearts and minds set on early retirement, even this sensible plan is insufficient. Thanks to mathematical breakdowns by Mr. Money Mustache and countless other bloggers, waves of people are targeting a much earlier retirement. How? They are aiming to increase their savings rate, as a percentage of net income, to figures which exceed 40 percent and approach 85 or even 90 percent!

Early retirement
The Shockingly Simple Math Behind Early Retirement (Credit: Mr. Money Mustache)

 

 

 

 

 

 

 

 

 

 

 

 

 

In order to reduce this table to a formula, we might proceed as follows:

WORK 3-20 YEARS + SAVE LIKE THE DICKENS = RETIRE EARLIER THAN EVERYONE ELSE

The most beautiful thing about the chart above is that it is not income sensitive in any way, shape or form. It applies to you whether you earn $40,000 per year or $4 million per year. Of course, it should be much easier to save when you have an inflated income. Yet, that pesky thing called “lifestyle” tends to get in the way.

In essence, we might say that early retirement is a largely a choice.

Early Retirement Pros and Cons

Now that it is apparent that early retirement is mathematically accessible for virtually everyone, let us examine the merits of such a plan.

Among many pros of early retirement, the following stand out:

*Opportunity to spend increased time with family and friends
*Freedom to travel
*Reduced stress and improved health
*More time to pursue other interests or even a new career

Obviously, early retirement is not without its cons, which include:

*Possible negative impact upon health (possible loss of health benefits, decreased physical activity)
*Possible boredom and/or depression
*Increased stress (more time to worry; constant fear that your nest egg may be insufficient)
*Limitations due to fixed income

As with virtually all matters of personal finance, the pros and cons are largely situation-dependent. For example, my Grandpa retired only a few years early and came out ahead in nearly every manner possible: he increased his earnings and kept busy by working side jobs, gained the freedom to spend time with his children and grandchildren, and took several vacations each year with my Grandma.

On the other hand, I know a person (who shall remain nameless) who would quite likely suffer an early death if he were to retire early. He would spend his days and nights wasting away in a recliner watching television, despite being of able mind and body. Quite likely, early retirement would be an early death sentence for this person.

Our Current Plan

Back in June, I established 30 goals as I approached my 30th birthday. Goal 5 stated, “Set a target date for early retirement and formulate a plan to get there.” I have been dragging my feet on this one ever since; as I said, I’m just not sure what I want to do at this point.

Strictly based upon Money Mustache’s chart above, Mrs. Superhero and I could likely retire somewhere in the neighborhood of 15-17 years, or 2031, given our current assets and savings rate. Since I am a proponent of stealth wealth, that’s about as specific as I’d like to get at this point in time. However, we could make some changes in current spending and investing plans and possibly retire in approximately 10 years. This would not be achievable without significant sacrifice and postponement of other significant goals.

All of which has led me to an important conclusion: I simply desire to achieve other goals more than I desire early retirement at this point in time. Among other goals that I feel will bring me and Mrs. Superhero greater joy than early retirement, starting a family ranks at the top of the list. Additional goals include:

*Fund college for our future children
*Travel with moderate frequency
*Give and support missionary work beyond our current ability to do so
*Finish our basement (which is currently unfinished)
*Possibly own a second home

If our pursuit of these goals brings us increased happiness and slightly slows our pursuit of early retirement by 5-10 years, I feel I am OK with that. I would rather retire slightly later than mathematically possible and achieve more in life rather than retire with unfinished business.

In closing, let us consider one of the oldest retirement clichés, which says, it is better to retire to something than to retire from something.


What are your current retirement plans? Do you aspire to retire early? If so, how do you hope to achieve early retirement?

 

From Zero to Hero: Skills to Advance Your Life

Happy Friday, readers! The fact that you are reading this post means I have survived the first few days of school. The first few weeks are always a whirlwind of excitement and chaos for students and teachers, but they are fun, as well.

While I ease back into the school year and keep a pretty full slate with my side hustles, I am happy to host yet another excellent guest post.  Today’s piece comes from the one and only Mr. AE at Apathy Ends. If you haven’t checked out his site, I recommend you do so today. You can also follow Apathy Ends on Twitter and Pinterest.

The ApathyEnds logo
The Apathy Ends logo

Take it away, Mr. AE!


As you wade through life you move from the bottom of the ladder to the top. The kicker is, you are only on top long enough to enjoy the move for a brief spell before tumbling back to earth and starting from the bottom again.

The typical cycle looks something like this:

Freshman -> Senior ->Freshman -> Senior -> Entry Level Job -> Senior -> New Title -> Senior New Title

Rinse. Repeat.

The last two iterations can go on for 40-45 years; that sounds exhausting.

We have decided to break the above cycle and are pushing our way to the top of ladder, but plan on staying there for the majority of our adult life. Putting job titles, income, awards and acknowledgments in a bin labeled “crap I don’t care about” is the dream.

I don’t plan on looking back and saying “I was the Senior Master VP of Made Up Job at POS Corporation for 15 years.” I want to say “From this day forward, we will make our own decisions.”

To do this effectively, we need to be Financially Independent. Those words may mean different things to every one, but to me, they mean – Money does not dictate our decisions, we are not dependent on work to fund our lifestyle.

The irony is to accomplish this feat you need to be on your A game in many different areas, and unfortunately a traditional job is the vehicle of choice for most of us. Even though I do not enjoy my job, making more money is the fastest way for us to accomplish our goals. I am going to outline some skills that have increased our salary, cut our spending and paved the way for happiness.

Some Skills to Help you on Your Path

Solve problems

Be a problem solver, not a problem avoider, or worse a problem creator.

Remember that the easiest solution/method might be the right one. Organizations tend to overthink simple procedures and processes and make them way more difficult than they need to be. Install simplicity whenever possible.

Bring a solution to every problem you identify. I can’t emphasize enough how huge this is for your career and personal relationships. Employers don’t promote people that point out issues and don’t think about potential solutions. Effort will not got unnoticed and it is OK to be dead wrong occasionally.

Think Critically

The majority of my peers are Millennials, and critical thinking is not a widely used skill in our generation. Its not that we don’t posses the intelligence, it’s that we want to be told the answer now. This is a downside of the information age, we don’t take time to set out our options and weigh them against each other or potential outcomes.

Use fact or probability based evidence to support your outcomes whenever possible.

Learn To Live With Less

I know first hand how much “stuff” can start to clutter up a home. We went through a Decluttering Challenge and got rid of over 231 items that we simply did not need.

  • Hobby Equipment – Is there a pile of sports equipment in the garage going unused?
  • Square Footage – Have 3 of your 5 bedrooms turned into a glorified storage container?

An interesting thing happens when you rid your house of a bunch of stuff that cost money at one time. Whenever you go to buy something, your brain visualizes everything you got rid of and you second guess your purchases.

Seek Happiness – Destroy Stress

Money is a contributor to stress, the longer it goes unmanaged the deeper the hole you have to eventually dig out of.

One of the most ironic things I have observed is people will spend money on things that don’t make them happy and compound money stress by having less of it.

Try flipping the equation to only spending money on things that TRULY make you happy. It can be anything, I like craft beer, good food and a day on the lake. That means I cut out fast food lunches at work to eat 2-3 good meals at a new restaurant and a 12 pack of craft beer in the fridge at all times.

Don’t Care What Other People Think

Excluding your significant other and family/friends (I go back and forth on them some days) don’t waste time caring what other people think of your decisions. It is not a productive use of your time, energy or brain power.

Do what makes sense for your family and your goals. Don’t feel pressure to spend time or money on anything you are not interested in.

Take Away

There are a lot of things working against you and you may be working against yourself just as hard. You need to manage your money, time and resources effectively to get on top of the ladder for the long haul.

Take some time to separate what brings you joy and strategically cut out the rest. I don’t like Big Bang events, avoid cutting everything in one day. Spread it out over a few months and make sure your changes take hold.

Thanks for hosting today Mr. Superhero!

Thanks again to Mr. AE for his willingness to share a guest post, and be sure to check out Apathy Ends!

My Motivation to Achieve Financial Success – Legacy

Before today’s post, I wanted to share that I recently took part in the Behind the Screen Interview Series at FamilyMoneyPlan. You can check out my interview with Andrew here.


My Motivation to Achieve Financial Success – Legacy

A brand-new home with every amenity.

Freedom from stress and the day-to-day rat race.

Full control over your life and your finances.

When it comes to money, we all are motivated by different factors. Those motivating factors can also change over time based upon our formative life experiences.

However, for as long as I can remember, my motivation to achieve financial success has always been about one primary factor:

Legacy.

My motivation to achieve financial success has always been about one thing: legacy.

My Model of Motivation

I have written extensively in the past about the impact my Grandpa had on my life and my outlook on work ethic, success, and money. Since he passed away just over three years ago, a day has not passed in which I fail to think about him and the incredible legacy he left behind.

While many people do not aspire to leave a legacy or make a profound impact upon their loved ones, my Grandpa knew exactly what he and my Grandma were doing. I learned this at a very early age.

As a young child, I vividly recall the long walk to the lake one warm July 4th evening. As was customary, the entire extended family – Grandpa and Grandma, several aunts and uncles, and far too many cousins to count – had set out well before dusk to stake out our seats for the evening firework show.

To be clear, I cannot recall if my memories of what happened next are firsthand or simply recollections of the story; strangely, time has a way of clouding memories. Regardless, I will always remember the words my Grandpa spoke to my Grandma and as they walked side-by-side and lead the way to our usual seats.

“Look what we did, Mother,” he said, glancing over his shoulder at our entire family.

We were Grandpa’s proudest accomplishment. We were his legacy.

With my Grandpa in 2012
With my Grandpa in 2012

I think back on that story often. In many ways, it ranks as one of the most formative experiences of my childhood. In that moment, I learned a valuable lesson on what is truly important in life.

In my eyes, my Grandpa had it all: a long, relatively-healthy life; a beautiful home; considerable, though undeclared, wealth; and the freedom to do as he pleased. Yet, his family meant far more to him than all earthly possessions.

Yes, my Grandpa loved money. In fact, when I spoke at his funeral, I shared the true story of the time he opened his wallet and a moth flew out. Like a typical, hard-working Dutch man, he was not in any hurry to spend his hard-earned money. But he had his priorities in order. He was generous and kind when it mattered most, especially to family and friends.

I often wonder if my priorities, too, will stand the test of time.


On the surface, I have no doubt that many of my friends and loved ones completely misunderstand my money motivations. To many of them, I am sure I appear to be greedy, miserly, or a workaholic. Some may even think I must be self-obsessed and vain.

However, I believe short-term sacrifice is worth the long-term gains waiting to be realized. Over my lifetime, I have learned that it is the motivation behind one’s actions, not the actions alone, which deserves scrutiny.

My wife and I aren’t working hard to inflate our current lifestyle, live it up in the present, and run the risk of burn-out. No, we are sacrificing in the short-term in order to build our ability to focus on what is truly important to us five, ten, and twenty years from now. In a culture which places the highest value on instant gratification, we are embracing the opposite.

Once in a while,  when it feels like I’m burning the wick at both ends, I like to hit the streets for an evening run and clear my head. Invariably, my thoughts drift and I begin to form visions of the future: our future kids playing in the yard, sending them off to college without any debt, walking my daughters down the aisle on their wedding days, and taking the entire family, grandchildren included, on a two-week getaway to Disney World. Those thoughts are the magical panacea for my weariness.

In the present, those visions represent a future worthy of current sacrifice and hard work.

Those thoughts – my future family and the experiences I hope to provide for them – will be a significant part of my legacy.


What motivates you to achieve financial success?

 

The Two Most Important Numbers to Achieving Financial Success

My family is soft-spoken. Though members of my extended family tend to be people of very few words, when someone speaks it is a certain sign that those words are important and have been carefully crafted. My uncle, a wise man of few words, unexpectedly told me a surprising story during one of our trips to Michigan this summer.

One of his very elderly friends at church had passed away a few months ago, and shortly after this gentleman’s passing, his wife died. As described, they were a very sweet old couple. They had been married for more than 50 years and still lived in the tiny home which they had purchased shortly after getting married. The man’s wife never held a job, as they felt it would be more valuable for her to remain home and raise their children. The man worked a blue-collar job as a machinist in town and remained with that company throughout his entire working career until he retired in his sixties.

My uncle’s friend and his wife were a model of frugality. They owned only one vehicle at a given time and chose to drive well-maintained used vehicles. According to my uncle, he couldn’t recall a time in which the couple owned a vehicle fewer than five years old.

You probably know a similar couple. Though I did not know this pair myself, I know many other older couples who fit this billing. My grandfather was similarly frugal, though a bit less extreme.

A true story-teller, my uncle saved the best for last in the tale of his friend, and what he told me was most-unexpected.

Head over to ApathyEnds and read the remainder of this article, as it is the featured guest post for today. Be sure to check back here on Friday for an offbeat piece on lessons learned from an unusual football star.

A Different Kind of Saving For the Future

Close your eyes for a moment and visualize your future. Perhaps you see a beautiful home with a wrap-around porch, a white picket fence, and children playing happily in the yard. Maybe your vision includes a cruise around the world, hiking in the Austrian Alps, or climbing the Great Wall of China. No matter the specifics of your vision, this can be a fun and inspiring mental exercise.

In reality, most people are keenly aware that most dreams come at a cost. As a result, we plan, scheme, make do, and go without in an effort to save money and make our dreams an affordable reality.

When it comes to saving money for the future, following Stephen Covey’s recommendation to Begin With the End in Mind is critical. However, if you’re reading this post with the hope of learning how to better save money for future expenses or plan for your retirement, you’re reading the wrong article. This isn’t  about that kind of saving.

This article is all about saving money with the ultimate intention of letting loose a bit and having fun with money. In fact, it will focus much more on future spending than on present saving.

Recently, I have read many articles which have clarified my vision of how, when, and why I will spend my future discretionary income and earmarked savings. In no particular order, I would like to present to you a wide variety of items (and their price tags, when possible) which have caught my attention in recent days and worked their way into my future plans and/or dreams.

Most people are keenly aware that most dreams come at a cost. We plan, scheme, make do, and go without in an effort to save for the future.

 

Rising Future Technology

It’s no secret that today’s technology is changing by the minute. Much of today’s cutting-edge technology will be discarded or revamped within the next six months. The average person intuitively knows this to be true based on perception and experience. However, it is important to note that data also supports this finding.

According to analysis by The Emerging Future, LLC, which is based upon Ray Kurzweil’s historical trends of exponential growth, the rate of technological growth is ever-improving. Consider, for example, the following chart, which articulates the projected thirty-two fold increase in current technological ability over a five year period beginning in 2012.

Most people are keenly aware that most dreams come at a cost. We plan, scheme, make do, and go without in an effort to save for the future.
Credit: The Emerging Future

While the notion of this kind of advancement is exciting, the prospect of technology becoming one thousand times more advanced in the next ten years is nearly mind-boggling. Expand the projection to 20 years, and technological advancements are projected to be over one million times more advanced. As you can see from the chart below, The Law of Accelerating Returns really makes its mark beginning sometime around year 16.

Most people are keenly aware that most dreams come at a cost. We plan, scheme, make do, and go without in an effort to save for the future.
Credit: The Emerging Future

Interestingly, I first learned of The Law of Accelerating Returns in a very practical way. When I was in fifth-grade, I learned to play chess and quickly became enamored with the game. I devoured over 50 books on chess strategy and eventually learned to play the game (and defeat opponents) without sight of the board. While my friends were preoccupied with other interests and pop culture, I became hooked on reviewing the 1996 and 1997 six-game chess matches between the World Chess Champion Gary Kasparov and IBM computer Deep Blue.

Most people are keenly aware that most dreams come at a cost. We plan, scheme, make do, and go without in an effort to save for the future.
Kasparov vs. Deep Blue (Credit: Mentalfloss)

Naturally, I assumed, perhaps due to youthful naiveté, that Kasparov would crush Deep Blue. In 1996, the Champion won the match 4-2. However, a year later, the computer improved greatly and defeated Kasparov 3.5-2.5. Though many chess experts blamed the loss on uncharacteristically-poor play by Kasparov, artificial intelligence had defeated human intelligence.

I note these historic chess matches because they serve as a poignant illustration of exactly how far artificial intelligence has come in the past 20 years. While it was once impressive to witness a machine defeating man in the world’s most-complex game, today technology is capable of much, much more. This is where dreams, saving, and spending come into play.

 Autonomous Vehicles and Tesla Motors

Beginning around 2008, Tesla Motors began the production and sale of its Tesla Roadster, the first automobile to use lithium-ion battery cells. The Tesla Model S sedan was unveiled in 2009 and hit the public streets in 2012. Last March, CEO Elon Musk unveiled plans for the Tesla Model 3, which is set to debut in 2017 at a base cost around $35,000.

Most people are keenly aware that most dreams come at a cost. We plan, scheme, make do, and go without in an effort to save for the future.
2017 Tesla Model 3 (Credit: Motor Trend)

When I read reviews and watch videos on the Model 3, I tend to have a very different reaction than many people. Yes, I am simultaneously intrigued by the vehicle itself and disgusted at its price; yet, on the other hand, a part of me considers the impact that the Law of Accelerating Returns will have upon Tesla vehicles’ performance and cost over time. Interestingly, Musk himself believes that future Tesla models will continue to become more and more affordable. He also believes that his company is currently only six years away from achieving an autonomous vehicle (i.e. its driver can go to sleep and awaken having arrived at his destination).

While I don’t plan to spend $35,000 on a Model 3 next year, I hope to be in the market for a future Model 7 or 8 at the hopefully-low cost of around $22,000 (my optimistic prediction) ten years from now.

It’s time to start saving!

Flying Robots

I will never forget the day I learned that Amazon was working on a plan to deliver packages via drone; it was certainly an intriguing idea. Naturally, I was even more impressed when I viewed the following video some time later.

Though it seemed like a far-off fantasy at the time, the use of Unmanned Aerial Vehicles (UAVs) is just around the corner. According to Business News Daily, the Federal Aviation Administration recently passed new rules on civilian drone usage. The rules, called Part 107, go into effect on August 29, 2016, and will allow for unlicensed pilots to legally operate drones as long it weighs less than 55 pounds, is monitored by a remote pilot, and flies at a maximum altitude of 400 feet.

In my estimation, it is only a matter of time before further research verifies the safety of drone operation, thereby making UAVs more-accessible and usable by the average Joe. A quick look at current options on Amazon led me to the $495.00 DJI Phantom 3 Standard Quadcopter with HD Video Camera.

It could come in handy for real estate business, right?

Augmented Reality

By now, you’ve surely heard of the Pokemon Go craze sweeping the world. The wild popularity of the game is attributable to two phenomena, in my opinion: nostalgia and augmented reality. The latter, commonly referred to as AR, pushes the limitations of graphics to a new level by blending reality with computer-generated elements.

An article on HowStuffWorks.com predicted the rise of AR games like Pokemon Go. It provides more detail and insight than is practical or possible to share in this space, but the possibilities associated with this technology are fascinating. In the future, AR may be used in advantageous ways by medical professionals, military personnel, and educators.

I, for one, cannot wait to don a pair of AR goggles and walk the streets of Chicago while my goggles take me on an architectural and historical tour of the city.

The Lilium

As if AR, self-driving vehicles, and drones weren’t exciting enough, a group of German engineers have raised the bar even higher with the development of a conceptual electric plane called LiliumTouted as the first-ever vertical take-off and landing jet, the Lilium is projected to reach speeds of approximately 250 miles per hour.

As of the date of publication of this article, the Lilium is expected to be made available for purchase in its initial public rollout in January 2018. It is certainly not without its limitations, including the required training and licensure in order to legally operate the Lilium, but if we are to trust the Law of Accelerating Returns, perhaps the technology will be become both affordable and easy to use by 2040.

The Perks and Rewards of Exponential Growth

While the above examples are certainly fun to dream about in the present, many experts believe that we can scarcely begin to imagine what will be possible in the next 10, 20, or even 50 years as a result of the exponential growth of technology. Perhaps a 50-year old FinanceSuperhero will become the market leader for the sale of smart homes or stay busy planning a family vacation to the Moon.

Whether these examples serve as fuel for your dreams of financial independence or new and interesting topics to discuss around the water cooler, one thing is clear: for those who are pursuing early retirement, there will be plenty of ways to spend their hard-earned dollars.


Do you think about future “fun” purchases like those above when dreaming of financial independence and early retirement? Have you budgeted or planned for any similar purchases or experiences? What technological advances do you most hope to witness in your lifetime? 

 

Checking Up On My Goals

One month ago, I turned 30. Much to my surprise, I didn’t wake up the next day feeling like a stiff old man. In fact, I didn’t feel a day older than 20.

A day prior to this milestone birthday, I published a list of 30 goals I hope to achieve in the next year. Yesterday on Twitter, Staci – @Streamline365 – checked-in and inquired about my progress, which made me very happy. As I have written in the past, I have a strong desire to both help others with my blog while also seeking accountability for my actions and pursuit of my goals. So, thank you, Staci, for calling me out!

With that said, I offer a quick check-in on the progress toward goal achievement one month into my 30s.

INVESTMENT GOALS
1 – Max out both of our IRAs for 2016. $11,000 total investment.
PROGRESS: None to report, but that will change in September.
2 – Invest a minimum of $2,000 with Fundrise.
PROGRESS: I am going back and forth on which Fundrise option I wish to pursue, the Income or Growth eREIT. Both options, though different, are enticing. I had planned to dive in during the month of July, but a few unexpected medical and personal expenses proved to set us back in this regard. The current plan is to make a decision and pull the trigger in late August or early September.

Related Post: The Fundrise eREIT: Accessible Real Estate Investing for the Average Investor

3 – Grow my overall account value with Betterment.
PROGRESS: None to report.
4 – Increase our overall net worth by 50%.
PROGRESS: I have begun tracking our net worth on a more regular basis, so that counts as progress, I suppose. According to Personal Capital, our net worth rose by 1% in the past 30 days. Ho hum.
5 – Set a target date for early retirement and formulate a plan to get there.
PROGRESS: Mrs. Superhero and I have had several discussions about our retirement options and plans. More specifically, we have defined our vision of what early retirement will look like for us. I intend to write about this in the future. With any luck, we may be able to narrow down a specific target date in the next few months.

HEALTH GOALS 
7- Lose 10 pounds by September 1, 2016.
PROGRESS: In the midst of birthday and anniversary celebrations, I gained 4 pounds. Oops!
8- Run at least four times per week.
PROGRESS: I’ve been consistently running twice per week. Time to step it up!
9- Weight lift at least twice per week.
PROGRESS: None to report.
10- Implement Meatless Mondays on a regular basis. This will represent a health goal as well as a budgetary goal (decreasing our grocery budget).
PROGRESS: Success! I miss meat every Monday, but this goal has been a good one.

FITNESS/RUNNING GOALS
11 – Run an unsanctioned half marathon in the month of July. This will help me to have a target for getting myself back in excellent running shape after a year of inconsistent training.
PROGRESS: I have one more week to achieve this one. Chicagoland has been an inferno lately, so I might not be able to squeeze this one in.
12 – Run a sanctioned or unsanctioned marathon in August.
PROGRESS: This remains a big stretch goal. Time will tell
13 – Run a sanctioned marathon in October.
PROGRESS: I have looked into a few options and am narrowing them down based on my calendar.
14 – Begin training for and compete in the Artic Frog 50K scheduled for December 2016; definitely a stretch goal!
PROGRESS: Remains a big stretch goal.
15 – Run a 5:30 mile. I haven’t been able to do this since I was 18; my best has been hovering around 6:05 for  while now. Nothing like jumping in the time machine to prove I’ve still got it!
PROGRESS: Also a stretch goal.
16 – Shoot hoops in the driveway at least three times per week. Mrs. Superhero surprised me by taking me out to pick out a basketball hoop for our driveway as my birthday gift a few weeks ago. I intend to put it to great use.
PROGRESS: The basketball hoop has been my favorite birthday gift in years. I love getting out and shooting around, even if for a few minutes, as a break and a means to clear my head.

BLOG GOALS
17 – Reach 15,000 Twitter followers prior to turning 31.
PROGRESS: As of today, I have 4,177 followers.
18 – Boost my Alexa ranking into the top 200,000 globally. This is part of the Yakezie Challenge.
PROGRESS: As of 7/24/2016 – Global: 628,956. US: 80,587. I’m thrilled with this progress!
19 – Break into the top 100 on the Modest Money Top Finance Blogs List prior to turning 31.
PROGRESS: Currently sitting at 271.
20 – Continue to publish 2-3 new articles per week while also pursuing additional guest posting opportunities.
PROGRESS: Success. In the past few weeks I have been fortunate to guest post on Budgets Are Sexy and Distilled Dollar, and I have another guest post slated on Millennial Moola this week. Thank you to J. Money, Matt, and Travis for these great opportunities!

CAREER GOALS
21 – Decide what I want to do with the next chapter in my life.
PROGRESS: I anticipate completion of my real estate licensure very soon, and the new school year kicks off mid-August.
22 – Join a real estate brokerage and close my first real estate transaction in 2016.
PROGRESS: See above.
23 – Reach my commission goals for my current consulting role.
PROGRESS: None to report.
24 – Begin laying the groundwork for writing my first book.
PROGRESS: I’ve jotted down some foundational ideas.

BUDGET GOALS
25 – Reduce discretionary spending by 10%. We can learn to be happy with less. This will be a primary key to achieving our investment goals.
PROGRESS: We reduced our restaurant allotment for the month of July.
26 – Include Mrs. Superhero more in the formulation of our goals. To her credit, Mrs. Superhero is great at supporting my dreams when they are wise and shooting them down when they are stupid. I would like to be careful to involve her more when strategizing.
PROGRESS: Mrs. Superhero and I have scheduled more frequent budgeting sessions recently.

LIFESTYLE GOALS
27 – Visit Nashville, TN for vacation and do our “Debt Free Scream” on the Dave Ramsey Show.
PROGRESS: Tentatively planned for March 2017.
28 – Go on three vacations – one in the fall (hopefully Las Vegas), one in the spring of 2017 (see Goal 27), and one in the summer of 2017 – and plan them utilizing travel hacks and deal hunting techniques.
PROGRESS: Aiming for Las Vegas in October!

RELATIONSHIP GOALS
29 – Take Mrs. Superhero on one date each week. Sometimes this will be simple, and other times it will be more elaborate.
PROGRESS: Success. It has been the highlight of each week to spend dedicated time with Mrs. Superhero.
30 – Spend more quality time with my two nephews and new niece. Also, call my siblings to catch up on a monthly basis.
PROGRESS: Success. I’ve especially enjoyed bonding with my niece, who has to be the most adorable 4 month-old in the world!

Uncle FinanceSuperhero and Charlotte
Uncle FinanceSuperhero and Charlotte

How has your July progressed? Are you on track to meet your goals?

The SIMPLE Method to Achieving Financial Independence

Over the past year, I have spent many hours reading about personal finance and investing. The biggest takeaway from this experience:

I have learned just how much I don’t know about money and how it works.

While some financial bloggers might be upset about this, I am excited! Learning new things and sharing that knowledge with others is one of my greatest passions. As an educator, I have carefully cultivated an ability to teach difficult concepts – first in a simplified manner, and then in greater depth.

In this post, I will aim to simplify the complex pursuit of financial independence.

The educator within me developed the following acrostic, which is intended to remind you of the SIMPLE nature of financial independence:

Start as soon as possible
Invest in funds with strong track records and low fees
Manage risk wisely
Practice stealth wealth
Leverage your strengths
Enjoy the process

Achieving financial independence is a challenging and worthwhile goal. If you start investing early, invest in low fee funds, manage risk, practice stealth wealth, and leverage your strengths, you can enjoy every step of the journey!

Start as soon as possible

It is no secret that getting an early start on building your net worth is one of the most basic fundamentals of achieving financial freedom. I have used this illustration in the past, but it is so effective that it warrants repeating here:

Ben and John are both 20 years old. Ben begins investing $250 per month in index funds, and he continues until he is 30 years old, at which time he never invests another cent, allowing compound interest to grow his money until retirement at age 59 ½. John decides to lease a vehicles for $250 per month during this same 10 year window, and wisely snaps out of it when he reaches age 30, at which time he begins investing $250 and continues until age 60. For the sake of argument, let’s assume that both gentlemen invest in similarly-performing index funds, which average a 10% return each year. Surely John must catch up to Ben? Take a look below:

Ben’s Investments John’s Investments
Age Contribution Interest Balance Contribution Interest Balance
20 $3,000.00 $300.00 $3,300.00 $0.00 $0.00 $0.00
21 $3,000.00 $630.00 $6,930.00 $0.00 $0.00 $0.00
22 $3,000.00 $993.00 $10,923.00 $0.00 $0.00 $0.00
23 $3,000.00 $1,392.30 $15,315.30 $0.00 $0.00 $0.00
24 $3,000.00 $1,831.53 $20,146.83 $0.00 $0.00 $0.00
25 $3,000.00 $2,314.68 $25,461.51 $0.00 $0.00 $0.00
26 $3,000.00 $2,846.15 $31,307.66 $0.00 $0.00 $0.00
27 $3,000.00 $3,430.77 $37,738.43 $0.00 $0.00 $0.00
28 $3,000.00 $4,073.84 $44,812.27 $0.00 $0.00 $0.00
29 $3,000.00 $4,781.23 $52,593.50 $0.00 $0.00 $0.00
30 $0.00 $5,259.35 $57,852.85 $3,000.00 $300.00 $3,300.00
31 $0.00 $5,785.29 $63,638.14 $3,000.00 $630.00 $6,930.00
32 $0.00 $6,363.81 $70,001.95 $3,000.00 $993.00 $10,923.00
33 $0.00 $7,000.20 $77,002.15 $3,000.00 $1,392.30 $15,315.30
34 $0.00 $7,700.22 $84,702.37 $3,000.00 $1,831.53 $20,146.83
35 $0.00 $8,470.24 $93,172.61 $3,000.00 $2,314.68 $25,461.51
36 $0.00 $9,317.26 $102,489.87 $3,000.00 $2,846.15 $31,307.66
37 $0.00 $10,248.99 $112,738.86 $3,000.00 $3,430.77 $37,738.43
38 $0.00 $11,273.89 $124,012.75 $3,000.00 $4,073.84 $44,812.27
39 $0.00 $12,401.28 $136,414.03 $3,000.00 $4,781.23 $52,593.50
40 $0.00 $13,641.40 $150,055.43 $3,000.00 $5,559.35 $61,152.85
41 $0.00 $15,005.54 $165,060.97 $3,000.00 $6,415.29 $70,568.14
42 $0.00 $16,506.10 $181,567.07 $3,000.00 $7,356.81 $80,924.95
43 $0.00 $18,156.71 $199,723.78 $3,000.00 $8,392.50 $92,317.45
44 $0.00 $19,972.38 $219,696.16 $3,000.00 $9,531.75 $104,849.20
45 $0.00 $21,969.62 $241,665.78 $3,000.00 $10,784.92 $118,634.12
46 $0.00 $24,166.58 $265,832.36 $3,000.00 $12,163.41 $133,797.53
47 $0.00 $26,583.24 $292,415.60 $3,000.00 $13,679.75 $150,477.28
48 $0.00 $29,241.56 $321,657.16 $3,000.00 $15,347.73 $168,825.01
49 $0.00 $32,165.72 $353,822.88 $3,000.00 $17,182.50 $189,007.51
50 $0.00 $35,382.29 $389,205.17 $3,000.00 $19,200.75 $211,208.26
51 $0.00 $38,920.52 $428,125.69 $3,000.00 $21,420.83 $235,629.09
52 $0.00 $42,812.57 $470,938.26 $3,000.00 $23,862.91 $262,492.00
53 $0.00 $47,093.83 $518,032.09 $3,000.00 $26,549.20 $292,041.20
54 $0.00 $51,803.21 $569,835.30 $3,000.00 $29,504.12 $324,545.32
55 $0.00 $56,983.53 $626,818.83 $3,000.00 $32,754.53 $360,299.85
56 $0.00 $62,681.88 $689,500.71 $3,000.00 $36,329.99 $399,629.84
57 $0.00 $68,950.07 $758,450.78 $3,000.00 $40,262.98 $442,892.82
58 $0.00 $75,845.08 $834,295.86 $3,000.00 $44,589.28 $490,482.10
59 $0.00 $83,429.59 $917,725.45 $3,000.00 $49,348.21 $542,830.31

At age 59 and approaching retirement, Ben will have invested a total of $30,000 and hold a portfolio valued at $917,725.45. John will invest $90,000 over 30 years -three times what Ben invested-yet he will only hold a portfolio valued at $542,830.31! John never caught up due to the avalanche of compound interest that worked in Ben’s favor.

What secured Ben’s advantage and prevented John from catching up?

Time.

Invest in Funds with Strong Track Records and Low Fees

Recently, I was talking with Superhero Dad about his 401k. Fortunately, it is doing well, as he and I rebalanced his portfolio a few years ago in order to take advantage of mutual funds with more successful track records and lower fees. Simple awareness and diligence saved Superhero Dad money.

This, however, isn’t the norm. According to a 2010 AARP study, a staggering 70 percent of surveyed 401k participants were not even aware that they paid fees to maintain their accounts. More specifically,

When plan participants were asked whether they pay fees for their 401(k) plan, seven in ten (71%) reported that they did not pay any fees while less than a quarter (23%) said that they do pay fees.  Less than one in ten (6%) stated that they did not know whether or not they pay any fees.

Why are 401k participants so unaware of fees paid? It turns out, according to Kipplinger, that it isn’t entirely their fault.

Mutual fund returns in 401(k) plans are normally reported as net returns, meaning that fees for managing your investments are subtracted from your gains or added to your losses before calculating the annual return. Other costs, such as administrative and record-keeping fees, are often divvied up among plan participants but are not explicitly listed on individual investment statements.

My recommendation: Do not invest in anything unless you fully understand every component of the individual investment, including the structure of fees. When evaluating your options, seek funds with a strong track record and low fees. Most people should consider investing within an automated portfolio service, such as Betterment, which minimizes fees, improves diversification, performs automated re-balancing, and provides greater returns.

Open an IRA with Betterment today!

Manage Risk Wisely

Of all the recommendations contained in the above acrostic, this one is perhaps the most difficult to act upon. To manage investment risk requires many steps: an understanding of what risk truly is and is not, an understanding of personal risk tolerance, and methods to evaluate risk.

In practical terms, risk is a phenomenon that most humans naturally seek to avoid. It is the reason that I personally do not drive 20 miles per hour beyond the established speed limit in inclement weather or eat fried foods at every meal of my day. I associate risk with a consequence which is to be avoided at all costs.

When it comes to investing, however, a certain degree of risk is necessary. As Investopedia notes, investment risk is commonly defined as “deviation from an expected outcome.” In the broadest possible terms, an investor expects to profit from her investments; of course, the risk is that the opposite –loss– may happen.

Generally speaking, while personal risk tolerance varies from investor to investor, the Prospect Theory asserts that most investors experience greater pain with investment loss than euphoria associated with gains. In other words, losses are far more emotionally scarring than ego-boosting gains.

As a result, risk tolerance is often dependent upon an investor’s past experience. For example, a relative who shall remain nameless recently shared that she and her husband are keeping all of their non-pension assets in low-interest bearing CDs because they cannot bear the risk of loss associated with mutual funds and individual stocks. As she explained it, they had been burned in the past decade and wanted to avoid a repeat occurrence at all costs.

Among many methods to evaluate risk, one of the most commonly utilized methods is standard deviation. As described by Morningstar, “Standard deviation simply quantifies how much a series of numbers, such as fund returns, varies around its mean, or average.” Based upon this information, an investor can examine a particular fund and weigh the risks of an investment by observing the fund’s performance highs and lows over a set period of time. The more a fund’s returns change over time, the greater its standard deviation. At the same, an investor who is armed with standard deviation data is hardly guaranteed to make money, as even funds with low standard deviation can still lose money, theoretically speaking.

For most investors, understanding risk, evaluating personal risk tolerance, and ultimately seeking to minimize risk will be vital to achieving financial freedom.

Practice Stealth Wealth

While the past steps outlined within the above acrostic have been on the heavier-side, the recommendation to practice stealth wealth is less critical, even optional.

However, I recommend it for a variety of reasons. First, while many of your friends and family will be happy and desire to celebrate your financial successes, you will certainly have to deal with critics. Second, many people will seek you out for hand outs and contributions. Third, publicly-recognized wealth will make it difficult for you to evaluate the intentions of new friends who suddenly enter the picture.

For more on this topic, I advise you to check out Financial Samurai’s fantastic article on this subject, “The Rise of Stealth Wealth: Ways to Stay Invisible From Society If You Have Money.”

Leverage Your Strengths

While most people would prefer to reach financial independence early, few are willing to put in the effort and practice the self-discipline necessary to do so. An overlooked key to achieving financial independence is leveraging your strengths to maximize the likelihood of your success.

As a culture, Americans tend to strive to improve upon their weaknesses as a primary means of self-improvement. In graduate school, I read StrengthsFinder 2.0 and my paradigm was forever changed. Recent theory suggests that you should strive to improve upon your strengths rather than minimize your weaknesses because you are more likely to significantly build upon your strengths than you are your weaknesses. While marginal improvement in areas of weakness is possible and even beneficial, the overall impact of these improvements pales in comparison to building upon your strengths.

Related: Forget About Working On Your Weakness, Play to Your Strengths: Your (Overwhelming) Reaction To The Idea by Paul B. Brown

Enjoy the Process

Lastly, while the pursuit of financial independence is marked with challenges, do not forget to enjoy the process. Perhaps the greatest example of this principle which comes to mind is ultramarathon Dean Karnazes, who launched his running career on his 30th birthday. As a runner who has run a 50k ultramarathon and aspires to soon run a 50 mile ultramarathon, I idolize Karnazes and remain in awe of his accomplishments.

When reading Karnazes’s book Ultramarathon Man: Confessions of an All-Night Runner, one  piece of advice given to the author by a friend stuck with me:

Life is not a journey to the grave with the intent to arrive safely in a pretty and well-preserved body, but rather to skin in broadside, thoroughly used up, totally worn out, and loudly proclaiming: Wow!! What a ride!

While I note the extremism of this quote, particularly in its application to athletic pursuits, I have found that the underlying enthusiasm of this philosophy makes it applicable to all pursuits, even those which are financial. Pursuing financial independence may leave us with our fair share of scrapes and leave us worn out, but we would be wise to enjoy the process every step of the way.


Readers, in your experience, what are the keys to achieving financial independence?