The last few months I’ve kind of went crazy getting into frugal living ideas and investing with the hope of reaching complete financial independence. For me, financial independence would be reaching the point where my passive income replaces my day job and I reach a point where I could theoretically “retire” if I wanted to. The magic formula for this being that you save 25 times annual spending. Once you reach this point, you can withdraw 4% annually which allows for inflation to create a sustainable flow of income from passive investments. I’ve always considered myself somewhat frugal, but some areas of my life I’ve admittedly become complacent like dining out frequently, getting lazy about price comparing stuff like insurance, and spending too much on groceries. A lot of this was kick started by reading some motivational bloggers and authors including:
Rich Dad, Poor Dad – This book probably deserves some disclaimers because it’s been pointed out by others that some of the advice may be suspect and the author himself filed for bankruptcy on one of his corporations (although I would argue this demonstrates his point of incorporating to protect personal assets). For me, this book is meant to serve as a motivator to get out of the rat race with inspirational ideas and quotes which point out the folly that most Americans follow…namely investing in liabilities (stuff that depreciates like electronics, cars, etc) instead of assets (stock, bonds, real estate, notes, etc).
Mr. Money Mustache – This excellent blog is a must read on ideas for frugal living with a eye towards early retirement. The author quit his day job at 30 and retired. He’s gotten some flack for saying “retired” because people get bent out of shape thinking retired must mean sitting at home eating pudding in your PJ’s and watching The Price is Right. He still does construction jobs here and there, makes money from the blog, etc but people who nitpick are missing the point. Of particular interest from his blog:
- His 2013 spending ($25k for a family of 3!) – http://www.mrmoneymustache.com/2014/01/12/exposed-the-mmm-familys-2013-spending/
- Excellent list of money saving ideas – http://www.mrmoneymustache.com/mmm-recommends/
- A link to a series done by another blogger. A great writeup which advocates for passively managed total stock market index funds – http://www.mrmoneymustache.com/2013/03/07/how-about-that-stock-market/
A Random Walk Down Wall Street – Tremendous book discussing the efficient market hypothesis. Also, replete with examples of past stock market bubbles and busts. Ultimately, another book demonstrating how low fee index funds really are the way to go.
As for me, here’s some steps I’ve taken in my journey towards financial independence:
- Signed up for the American Express Blue Cash Preferred card. I’ve never been one to pay attention to new credit cards. I always thought signing up for credit cards would hurt credit, but if used wisely and used responsibly it can actually provide some nice cost savings. I chose this card even though there is an annual fee because it included a bonus of $100 (after you spend a certain amount on the card) and has a very nice 6% cash back at grocery stores and 3% cash back at gas stations. So we’ll be using this as a gas and groceries card (it gives 1% cash back on everything else). It should be noted that this card will not give 6% cash back at a place like Costco so you may want to check which businesses are eligible. We still have Discover for their 5% promo of the month deals and MasterCard where businesses don’t accept Amex or Discover. Ballpark figure, the new credit card will save us around $500 a year.
- Speaking of Costco, we just got a membership. We ran the numbers before and didn’t see enough savings to warrant the membership and extra gas to drive to Costco, but Living Social recently had a deal which effectively made our membership $17 so we figured we’d give it a shot. We’ve started a file where we record prices for some of the food we regularly buy to determine which store we should buy it at. We cycle between Kroger, Costco, Amazon (subscribe and save 20% discount), Azure Standard, and the occasional trip to the small local organic grocery store.
- Switched auto insurance to Geico. For some reason I felt irrationally nervous about switching from our old insurance agent. At the end of the day, Geico is going to save us hundreds of dollars. This process also involved switching home insurance once we got the Geico auto insurance, and used the Geico affiliate program to tack on home insurance from Liberty Mutual. All said and done this will save us over $600 per year for apples to apples coverage.
- Cell phones – getting off the “subsidized phone price in exchange for oppressively high monthly prices” phone plans. I’ve made the switch to Net10, and once my wife ends her contract, I’ll put her on Republic Wireless for a super affordable unlimited talk, text and 3G data plan at $25 a month. I also considered switching from Net10 to Ting because Ting now supports my Nexus 5, but they do not offer roaming data which is kinda a deal breaker since I use my phone for a GPS and Sprint coverage is not a guarantee everywhere.
- The newly initiated dining out rule – Only 2 meals dining out per week…max.
- For investing, I now manage all my accounts thru Scottrade and after some initial nervousness I absolutely love it. When you research the history of the stock market and understand how it ebbs and flows over time and invest primarily in broad market index funds, self-guided investing is pretty simple actually. You could make a strong argument that by simply investing in a few Vanguard index funds you will do better than most actively managed accounts where brokers and high expense mutual funds eat away at gains over time. I’ll just need to recalibrate asset allocations (lots of easy calculators online to help you determine a good allocation based on age, and tolerance for risk) periodically and let the market do what it’s going to do with dollar-cost averaging.
- Now having said that, before I saw the brilliance of simplifying my portfolio with index funds for complete diversification and low stress investing that will beat most people’s returns over time, I started dabbling in individual stocks. I got a subscription to Stock Advisor with Motley Fool when they were running a promo and I’m currently managing a list of individual stocks. Overall, I do enjoy investing, following the market, and researching companies I find interesting so I consider it a hobby. I’m using Google Finance to track my individual stock performance vs a mirrored portfolio where I would have instead investing the same amount in a Vanguard index fund (VTI). After my subscription ends, I’ll see where I’m at in terms of beating the market (so far…losing). If I prove to have some acumen for picking stocks (read, I get lucky) then I may continue. If I crash and burn, I’ll just redirect it towards index funds and sleep well at night.
- One other area that I plan on investing is peer to peer lending via LendingClub and Prosper. Not all states are eligible but the returns are pretty darn good. I have a friend that’s using Prosper currently so I’ll be checking in with him.
- Started having regular conversations with fellow independent investors as a way to network and talk each other off the ledge when the market takes turns for the worse. I think most people prefer a financial advisor not only because of their knowledge they provide but also as a shrink to help keep people from doing something stupid or acting irrationally.
- I’ve also been doing a fair amount of research on real estate investing. Right now I’m just collecting information with an eye towards one day owning a multi-tenant apartment building. There are a fair amount of tax advantages of real estate investing, but I’m not sure how active or passive an investment this would be relative to gains that can be realized with the stock market or peer to peer lending.
- Other past posts discuss cutting the cord on cable TV and trimming the power bill