How would your life change if you reached Financial Independence and got to the point where working is optional? What actions can you take today to make that not just possible but probable. Jonathan & Brad explore the tactics that the FI community uses to reclaim decades of their lives. They discuss reducing expenses, crushing debt, tax optimization, building passive income streams through online businesses and real estate and how to travel the world for free. Every episode is packed with actionable tips and no topic is too big or small as long as it speeds up the process of reaching financial independence.
262 | How to Decide | Annie Duke
Annie Duke is a world champion poker player and author of Thinking in Bets, a book which makes the case for embracing uncertainty in our decision-making framework. In Annie's latest book, How to Decide: Simple Tools for Making Better Choices, she answers the question, what does a good decision-making process look like and how to incorporate that into your own life. The only way we can become better at making decisions is from our own experience, and our experience is going to be the outcomes of past decisions we've made. We need to understand the way in which knowing how something turned out can mess with our ability to figure out why. In a thought experiment concerning the 2015 Super Bowl between the Seahawks and the Patriots, Annie reviews a play called by Pete Carroll in the last seconds of the game. Though widely panned as the worst play called in Super Bowl history, Annie states that it's hard to evaluate the quality of the play called when we already know the outcome. Had the outcome of Pete Carroll's play been a touchdown, the reaction would have been the opposite. This phenomenon is called Resulting, where the quality of the result is attributed the quality of the decision. Reviewing the actual odds of the result of that specific play, Annie determines that Pete Carroll's decision was far from the worst play called of all time as there was only a 25 likelihood of that specific result. Annie applies what she's learned playing poker, specifically realizing that what you see happen doesn't change the decision that you make, to other aspects of life. The paradox of experience is that while we know we need all of these experiences to learn, we see how things unfold and we take our lessons for individual experiences, not in the aggregate. Poker has some surprising similarities to real life in that your outcome is a combination of luck and the quality of your decisions. The definition of luck is what you don't have control over. You cannot control your own luck. You can control the quality of the decisions you make and reduce the chance that luck has an influence that will turn out poorly for you. While we are all under the influence of luck, we are also very much under the influence of our own decisions. In our decision making, we should see the luck clearly and make the decisions that are more likely to advance our goals. Brad ties that to ChooseFI's philosophy of the aggravation of marginal gains and striving to do 1% better. We have a lot of cognitive bias that delude us into believing things are much more stable than they really are. COVID has torn that away from us. We are also feeling the effect of imperfect information. COVID is not a special case, it's just something we can't hide from the uncertainty. COVID does give us an opportunity to think about how to navigate uncertainty which will improve all decisions we make. A pro and con list has no dimensions to it, specifically missing are the magnitude of the payoff or how much will it advance or take away from your goal, and what is the probability of each con. These lists also amply biases you already have and can be gamed to reach a predetermined decision. With inside view thinking, our personal models create cognitive trenches. When new information comes in, we mold it into a model we already have rather than be objective. An outside view is what is true of the world. To try and avoid inside view thinking, we need to expose ourselves to different perspectives of corrective information. The foundation we base our decisions on is flimsy and full of inaccuracies. We should increase the probability that we collide with perspectives and information we don't know. It's okay to say you don't know very much and decide to get more information to become a better decision-maker. Making a good decision with one stock doesn't necessarily make you a good investor, you would ha
261 |"Nothing Gold Can Stay" | What is a HELOC?
After 18 years of ownership, Brad says goodbye to his beloved Honda Civic, Golden Boy. When it comes to car ownership, ChooseFI often talks about only buying a new car every 15 years. Over a 45 year adult lifetime, the savings, when invested, can amount to almost $750,000 when compared to someone who leases or just manages a constant car payment. Although Brad wanted to keep the car, it had been having some mechanical issues and his family was no longer comfortable riding in it anymore. The impact it was having on Brad's family was not worth it. For his next vehicle, Brad opted for a 2013 Honda Civic rather than a brand new car. He purchased his new Civic through Caravana, the car vending machine business, who was selling Civics for roughly $3,000 less than CarMax. The buying process through Caravan was quick and streamlined. The car was delivered to his home and he spent approximately one-hour signing paperwork and finalizing documents. There are sweet spots when purchasing used vehicles. Although Brad's car is seven years old, after five years, cars have generally already depreciated at the fastest rate. If you are going to buy new, keep it forever. If you buy used, target 5-7 years old. Listener Oscar wrote into the show asking about Home Equity Line of Credit (HELOC) which hasn't been something that ChooseFI has discussed much in previous episodes. A HELOC is a revolving line of credit on your home where the equity you have in your home is used to secure it. For instance, a home worth $300,000 with a mortgage balance of $100,000 has $200,000 worth of equity. A HELOC allows homeowners to tap into the equity locked up in their homes. An advantage of using a home equity loan over other options for access to cash, like credit cards, is that the interest rate is often much lower, although it is a variable rate and can change. The interest rate on a HELOC may be in the 3-5% range versus 15-30% with credit cards. For homeowners who placed a sizable down payment on their home, whose home has appreciated, made extra payments, etc., a HELOC becomes a potential source of low-interest revolving credit. A HELOC is different from a home equity loan in that with a loan, the loan amount is deposited into your bank account and interest begins accruing immediately. A HELOC provides you with the ability to tap into the equity at any time, such as in the case of an emergency. No interest accrues until you decide to access the money. It gives you options if ever needed. Occasionally, HELOCs can be had for no closing costs. Considering that the process to apply and be approved for a HELOC can take weeks, it can be useful to have one in place so that it is already available if and when it is needed. Frequent guest and friend of ChooseFI, Big ERN, does not have an emergency fund. He believes that there is an opportunity cost to keeping 6 months of expenses in a liquid account that is likely earning every little in interest. In a thought experiment, he tried to envision a true emergency that he could not cover with credit cards or a HELOC. Those working to build an emergency fund before beginning to invest are potentially missing out on higher interest rates earned from investments. They might be better off investing their savings and using money from a HELOC to cover monthly expenses in an emergency rather than selling off investments or using high-interest credit cards. Jonathan mentioned that there are schemes to paying off a mortgage early using HELOCs and credit cards that people can learn about for a fee. Brad doesn't doubt that these might work, but it's too complex. There's no insider knowledge worth paying for. He doesn't believe these methods are any more beneficial than making additional principal payments to a traditional mortgage. Rather than a HELOC, Jonathan uses a margin loan through M1 Finance for a line of credit. He can borrow
260 | What's your Survival Number? | Jully-Alma Taveras
Immigrating to the United States as a child, by early adulthood, Jully found herself caught up in our consumer culture and had acquired five figures worth of debt. After working to dig her way out and starting on her path to finical independence, she's become an advocate. Drawing from her experience, she now help Latinas become financial powerful through investing. At the age of four, Jully moved from the Dominican Republic to New York. Her extended family all began making the move as well, but as many immigrants to, they continued to send money and invest in their socioeconomic systems back home. For immigrants, investing in their home countries has multiple purposes. There is often an expectation that money will be sent home to support the family. Jully's father supported her grandmother by building her a new home and making sure she was taken care of. However, when the grandmother also immigrated to the US, the house back in the Dominican Republic was rented out and became the first property in a real estate portfolio. Immigrants have struggles that a typical American doesn't go through. Investing in real estate in their home countries helps connect them to their communities. However, Jully says immigrants tend to invest more in real estate than in the stock market. She shares the message that it is important to diversify their investments. When she started working for a non-profit at the age of 19, Jully began investing a 403b for the free money. That decision was criticized by her mother who felt retirement was a long way off and that it wasn't necessary because Americans receive Social Security. When her family first arrived in the US, they didn't speak the language. It was a lesson in how to figure things out in the moment and just survive. It took a couple of years before her father began thinking in an entrepreneurial way and on a bigger scale. He went from driving a taxi to starting a bodega business. The bodega enabled Jully to see both her parents work in that environment, build their business, send money home, and contribute to the community. The money lessons she learned from her parents were to be generous and give. But the reality was her father worked a lot to build their life and they didn't see him much. Had he invested more, perhaps they would have been able to see him more. Jully went to school for fashion merchandising and economics. When she got her first job, lifestyle inflation kicked in. Working in the fashion industry required looking good with the latest trends. After accumulating the debt, Jully realized that she was channeling her emotions with her shopping. She was both celebrating and consoling herself with shopping to the point where it became unhealthy. Thankfully she had continued to invest even when the debt was bringing her down. It wasn't until her father became ill that she realized the safety net she had in her parents won't always be there. At that point, she began working to pay off all her debt. Once debt-free, Jully increased her 401K investments to around 20%. Jully notes that when first entering the workforce, you feel that nothing can go wrong, or if it does, you'll just figure it out. But you have to start with the basics. You have to start with the foundation of an emergency fund. Credit card debt is subject to incredibly high-interest rates of 12-30%. With five figures of debt, the compound interest is working against you and it's hard to fig yourself out from under it. To get out from under her credit card debt, Jully had to make significant payments toward it. The key was knowing her survival number. She created a simple chart with eight categories of things you need to come up with a survival number. The categories include housing, food, transportation, and even entertainment. Jully's survival number is $581. The items in her $581 figure are the absolute minimum things she
259 | Kristi & Big ERN
In our eighth Households of FI touchpoint episodes, Kristi was successfully following the standard path with a six-figure job and keeping up with the Joneses but waiting to take a breath and enjoy life. After finding FI, she realized the money was no longer the goal but simply a tool. Kristi has been connected with Big ERN, from Early Retirement Now, and over several conversations, they discuss Employee Stock Purchase Plans, 401K contribution strategies, the phase of retirement, and more. While wealth accumulation is simple math, decumulation is more complicated so Big ERN created the ultimate safe withdrawal rate series. Some recent changes Kristi has made to her investments since starting her path to FI are moving from a Roth 401K to a traditional 401K and maxing her contributions out. She also moved her current balance and future contributions out of target retirement date fund and into an S&P 500 fund. While Kristi has the option to self-manage her 401K in a Schwab account which would give her access to a total stock market fund, Big ERN doesn't believe that the difference between it and an S&P 500 fund is minor. Expense ratios are a more important consideration. Moving from a 0.2% expense ratio to a 0.02% might be worthwhile, but leaving the money where it is fine when the difference is 0.01% unless it is an in-kind transfer or a quick process. Human Resources may know how long the process is likely to take. Kristi approached her HR department about making after-tax contributions so that she could do a mega-backdoor Roth conversion, but the HR department was not clear on how much she would be allowed to contribute. She found the ChooseFI community to be quite helpful for bouncing ideas off of. She's also interested in her company's Employee Stock Purchase Plan (ESPP). The advantage of it is that she can purchase stock at a 15% discount, but she will pay taxes on the discount and be required to hold the stock for two years. Such a purchase gives her investment a 5% per year boost, however, there's no diversification in purchasing company stock. Kristi's income, bonuses, and employment are all already tied to her company. That being said, Being ERN says he would probably still do the ESPP, although he would only keep two year's worth of money in the plan and then pull it out. After taking it out, it will be subject to long-term capital gains. The ESPP may have contribution limits, in which case she should make the additional contributions to her 401K and then do the backdoor Roth conversions. Big ERN likes to say don't let the tail wag the dog, meaning that asset allocation and expected returns should be the primary concern before tax considerations. Kristi has a difficult time determining exactly how much to contribute as her company does it by percentage and how bonuses are paid out. If she overshoots it, she could miss out on the company match in the last month of two of the year. Big ERN says some companies will do a true-up, or another HR term, where they will still contribute the match. Some who have access to a true-up prefer to contribute the maximum to their 401K at the beginning of the year so that their money is in the market longer. Those without a true-up need to be careful. Big ERN suggested Kristi could look at the minimum and maximum of her salary and bonuses to come up with a range. $19,500 divided by her maximum would give her a rough percentage to start the year with. Toward the end of the year, she will need to look at it again and make adjustments. Kristi also asked about Big ERN's thoughts on the stages of retirement, but she is most interested in the early retirement phase. Retirement is an uneven path. Health expenses may be higher before Medicare kicks in and there will be a boost of income once Social Security is received. How do you structure your withdrawals? What are the tax aspects? Which acc
258 | Back to Basics Part 2: The Income Side of the Equation
Brad has been taking part in a mastermind group and teaching its members about financial independence. While they understood the “Why of FI”, how to get started wasn't as clear. The Back to Basics series of episodes covers just that, how to get started on the path to FI. The journey to financial independence is not about deprivation. It is about a life of personal choice and abundance. Its starts with understanding your “why” and then setting goals for the next 5, 10, or 15 years. There's a difference between the money you need to pay bills and meet basic needs and discretionary spending. Understanding how much your lifestyle costs is the first step. It can be psychologically difficult to do this first step. It may reveal mistakes, but it's important to be honest with yourself and not beat yourself up over them. We all make mistakes. After knowing what your life costs, what comes next? To calculate your FI number based on your current lifestyle, multiply your monthly expenses by 12 to get your annual expenses. This is how much money you will need each and every year in retirement to cover your expenses. The 4% Rule of Thumb suggests that you can withdraw 4% from your total assets each year to live on and reasonably expect the money to last for the remainder of your life. For example, if you have $1 million in assets, 4% of it is $40,000 that you could withdraw each year. The 4% withdraw rate is adjusted for inflation. To get to your FI number, multiply your annual expenses by 25. $40,000 multiplied by 25 is $1 million. $80,000 in annual expenses, multiplied by 25, results in a FI number of $2 million. Whether starting with a net worth of zero or with some assets, the next step would be determining your current path to your FI number. The point of saving money is not for it to be finally used for a retirement far off in the future. Save to reclaim decades of your life when you can spend time as you see fit. Reframing the goal of saving allows you to reorient and see that saving money is investing in your time. One of the reasons Brad and Jonathan enjoy board games so much may have parallels with financial independence. Both involve iteration and getting better and better at making smarter decisions through gamification. People who win games the most have an intermediate mindset. They understand the limitations balanced with longterm thinking. When looking at income, what is the bare minimum needed to cover your expenses? For a married couple living in Virginia spending $80,000 a year on expenses, they will need to earn an income of $102,000 before taxes and without contributing to savings or retirement. They would pay $9,000 in federal taxes, $5,000 in state taxes, and roughly $8,000 in FICA (social security and medicare taxes), for a total of $22,000 in taxes. When income and expenses are exactly the same, you can never afford to retire. How do you create some space between the two? Expenses are not always fixed. Cars loans come to the end of their terms and student loans are paid off. Add in some cuts to a few other line items in your budget and you might find an extra $1,000. How might that change things? Cutting $1,000 from your monthly expenses reduces your annual expenses and subsequently your FI number by a whopping $300,000. What should you do with that extra $1,000 a month? Putting that savings into a 401K allows that money to begin working for you. In addition, the $1,000 a month going into a 401K becomes a tax deduction and reduces your federal income tax. For the couple in the previous example earning $102,000 per year and bringing home $80,000 after taxes, contributing $12,000 to a 401K doesn't mean they have $12,000 less to spend. With the tax advantages of contributing to a 401K, they will bring home $70,000, only reducing their take-home pay by $10,000. They saved $2,000 in taxes. Since they already ha
257 | Back to Basics: Getting Started with FI
In this ChooseFI Back to Basics episode, we review Health Savings Accounts (HSA). What happens when you need to finally pull money out after funding it year after year? ChooseFI Chief Content Officer, MK, is just weeks away from having her baby. For years, she and her husband, Jason, have been funding separate HSA accounts without making any withdrawals. They now contribute to a family plan HSA and decided it was a good time to test out how complicated the process was to withdraw HSA funds. They discovered some plans are easier than others. The process of withdrawing funds from the fund MK had rolled over to Fidelity was super easy. Jason's was a bit more tricky due to the Health Insurance Portability Accountability Act (HIPPA) compliance laws and auto-reinvest settings. Now that they tested it out, they feel confident they will know what to do in the future. An HSA is a type of investment vehicle that gives you a tax deduction in the current year and helps pay for healthcare-related expenses. Only those participating in qualified in high-deductible healthcare plans are eligible for HSAs. For 2020, the IRS defines a high-deductible plan as one with a deductible of $1,400 for an individual, or $2,800 for a family. the maximum a family may contribute in 2020 is $7,100, and half of that for an individual. The money going into the account isn't subject to income tax and sits in the HSA account until you submit for reimbursement of healthcare expenses. HSA withdrawals for healthcare expenses are also tax-free.The benefit of an HSA is that the money can build and grow over time. Healthcare expenses do not need to be submitted for reimbursement as they are incurred. HSA participants can pay out-of-pocket and wait for years before requesting reimbursement if they choose to. The IRS criteria dos state that the high-deductible plan must be a qualified plan. Check with your company's human resources department to determine if your plan is a qualified one. HSA participants should also understand who their plan is with, what investment options they have, and what the fees are. Based on fees, Fidelity and Lively are two good providers who offer low-cost, board-based investment fund options. The goal is to cash flow medical expenses in your younger years when they are generally lower, funding the HSA with pre-tax dollars and allow them to grow until later in life when healthcare costs begin to increase. There may be additional tax benefits from using your employer's HSA provider rather than Fidelity or Lively. Because you can submit for reimbursement years after the expense was incurred, save your receipts. Brad has a Google doc that lists all of the healthcare expenses he pays out-of-pocket and saves a pdf of the receipt in his Google Drive account. Even if your provider offers a way to upload receipts, you should always maintain your own records and only use the provider's system as a secondary backup. If you change HSA, you could lose your receipts. It is your responsibility to verify to the IRS that you've been using the funds in the HSA appropriately. It makes it easier if you have all of that information maintained in your own cloud-based account. After several years or decades of cash-flowing healthcare, it may be possible to have tens of thousands of dollars of reimbursable expenses that are accessible anytime, tax, and penalty-free whenever it is needed. The final episode in round one of the Households of FI series airs next week. Throughout this series, ChooseFI follows eight diverse households at different points on their path to FI. More exciting news for ChooseFi is the website redesign, expected to launch in the coming weeks. The new website format was designed with your experience and journey to financial independence in mind. The content on the site has been curated so that people looking for specific content can easily fin
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This podcast has totally changed our lives! When covid hit, my husband and I found ourselves with cut hours at work, reduced income, a tenant who was unable to pay rent, and severe anxiety over our finances. After listening to ChooseFI, we took control of our financial lives and are in a much better place, with a significantly increased savings rate, a growing Vanguard account, and overall happier lives with a goal to reach FI in the next 10-15 years! Thanks for giving us hope!
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Host of the Talent Development Hot Seat and The Andy Storch Show