You Bought How Many Cars?!

[Editor’s Note: This is an independent post written by JJ. This post may contain affiliate links. Please read our disclosure for more info.]

I graduated college in December of 2006 and started my first job at a bank in January of 2007.  I had landed my dream job, the job I had wanted since I was a sophomore in high school. I was hired as an Agriculture Loan Officer, with the intention of transitioning to a Commercial Lender by June of the same year.

Our current president announced he was retiring so someone needed to be the bank’s network administrator and since I was the youngest person at the bank, I was it.  Quite literally, I was hired as Network Administrator for a bank with $90 million in assets because I was the youngest person.

I look back and laugh. I also think how badly that could have gone because we’re talking about people’s bank accounts and I was the first line of defense to ensure they and no one else had access to their accounts. I would like to take credit that we had ZERO data breaches, so that’s good.

I did partner with an IT consulting company so I wasn’t alone. So here I was, just graduated college and I was a Commercial Lender and Network Administrator at a multi-million dollar company. I had made it!

New Money = New Debt

Getting this promotion also brought a nice increase to my salary which of course meant I needed a new car!  I remember justifying that thought with, “I had worked hard so I deserve to have a nice truck!” That spring, I bought a sweet new Nissan Titan.  It was beautiful. Silver with four doors, tinted windows, sweet stereo system and a loud exhaust. It was everything I had ever wanted. I was making money and still had money left over after paying all my monthly expenses. 

So, like the great young adult I was, I had to figure out a way to spend that extra money; and it just so happened that my wife also “needed” a new car. I did what any good husband would do, I followed the lead of those commercials and surprised her with a brand new car.  Saturn Ion with 18 miles on it. We were living like kings and queens. New cars, new jobs, new house…and new debt obligations.

I Loved My New Car, But…

Here’s the problem and it’s not what you might be thinking right now. We loved our newly purchased cars, but we loved brand new cars even more.  A car is not brand new once you drive it off the lot and we like brand new cars. We loved the excitement of looking and test driving new cars. We loved the smell and feel of a new car.  We loved the new features of new cars. Leather seats and steering wheel, heated and cooled seats, sunroof, stereo, apps….oh man, it’s taking me back right now.

The one thing I liked the most that every new car did for me was the way people would look and admire my newly financed vehicle! For the next seven years, we had a different car every six months.  You read that right…14 new (sometimes new-to-us) cars in 7 years!!! Whoa! Every time, we would justify our purchase in some crazy way. We were addicted. Life was good and fun!

No Regrets

That was six years ago.  I’m often asked if I regret going overboard on car buying and I don’t regret it at all.  I wish I would have learned my lesson sooner than seven years, but I don’t regret it. I feel that my wife and I needed to go through that time in our lives.  I feel that we would not be where we are today if we had not experienced what we did in our twenties. Luckily, we were able to get past that time in our lives and see our future differently.  

No Going Back

We’ve come a long way and every day we have to make decisions to stay the course.  Would I love to go out and buy the toys that our neighbors have — new cars, snowblowers, ATVs, snowmobiles, bigger houses, vacation houses, vacations every month, and more?  Oh yeah, but I don’t need those things to be happy. Our lives are full of joy, but it took time to get here.

Regardless of where you’re at in your journey to financial freedom, let me tell you that it is possible.  It can be done. We are achieving our goals and you can too. It’s hard work, but it’s so worth it. Make a plan and get after it.

We found the FI movement in 2017.  Since then we’ve been on fire for FI. It took us a while to dig out of the hole we had created, but we are on our journey to financial independence. Here are some resources that helped us get started on this path. Maybe they’ll help you as well!

{Reader Questions} Have you gotten stuck in a rut like we did?  Did you feel like you learned from that experience?  Do you regret those choices?

Where are you in your journey to financial freedom?

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Book Review – Taxes Made Simple: Income Taxes Explained in 100 Pages or Less

  • Piper, M. (2018). Taxes made simple: Income taxes explained in 100 pages or less. Simple Subjects, LLC.
  • Category: Taxes
  • Recommended Financial Literacy Level: [Novice]
  • Recommended Audience: 
    • Anyone interested in either learning how to file their taxes or learn more about how to reduce their tax burden (effective tax rate).

I’ve filed my own taxes (using tax software for convenience compared to the paper forms) for about six years now. Mike Piper and I agree that there are huge benefits in learning the basics of filing your taxes. I know there were for me. Not only did I save money by not hiring out, but I also learned how to maximize the ROI of my investments and lower my overall tax burden. I am confident reading his book and/or using google/forums as you file on your own will allow you to make more informed decisions about your financial planning, which will, in most cases, also result in a lowering your effective tax rate.

His book is very well written to define/explain terminology and introductory concepts to even the most uninformed tax filers; furthermore, he provides relatable examples consistently throughout the book to aid in your understanding. See below for the table of contents:

  • Introduction – Is this the right book for you? Why bother learning this stuff?
  • Part One – Basic Concepts
    • Chapter 1 – Income Tax: It’s Progressive
    • Chapter 2 – Deductions and Credits: What’s the Difference?
    • Chapter 3 – Calculating Your Refund
  • Part Two – Taxable Income and Taxable Gains
    • Chapter 4 – Taxable Income
    • Chapter 5 – Capital Gains and Losses
  • Part Three – Important Deductions and Credits
    • Chapter 6 – Saving for Retirement: IRAs and 401(k)s
    • Chapter 7 – Other Important Deductions
    • Chapter 8 – Important Credits
    • Chapter 9 – Tax Breaks for Education Expenses
  • Part Four – Other Important Things to Know
    • Chapter 10 – Tax Forms
    • Chapter 11 – State Income Taxes
    • Chapter 12 – Alternative Minimum Tax
  • Conclusion – Do it Yourself or Get Help from a Professional?

Jack’s Biggest Takeaway:

We are interested in increasing the real-estate portion of our

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at some point through the purchasing of rental property. I did not realize that passive income (rental income as an example) is not subject to Social Security and Medicare Tax. Additionally, Mike Piper described some of the common deductions/credits associated with rental properties that I was not yet aware of.

Final Thoughts:

Do you NEED to read Mike Piper’s book to successfully file your taxes? Nope. Is it a great resource? Absolutely! Like I mentioned before, I’ve filed my own taxes for six years now and still learned from his book; furthermore, as a teacher myself, I feel like Mike does a great job breaking down a subject that is often daunting for people. Another great advantage of his book is it’s updated regularly to reflect tax code changes. Consider adding it to your own library or purchasing/sharing it with a friend that has been on the fence about deciding whether or not file their own taxes or is just curious about how to reduce their effective tax rate.

If you’d like to support our mission and are interested in purchasing Taxes Made Simple, please click here for your purchase! 

Have you read Taxes Made Simple? What are your thoughts, likes/dislikes, and biggest takeaways? Comment below!

Filing taxes and reducing your taxable income.

[Editor’s Note: This is an independent post written by Jack. This post contains affiliate links. Please read our disclosure for more info.]

Tax Software:

Firstly, if you haven’t tried filing your own taxes I recommend you take the plunge! Most tax situations just aren’t that complicated and can quickly be done with the aid of very affordable tax software (in fact if your tax situation is simple enough most softwares are even free to use). I’ve e-filed for about 6 years now. I’ll admit that doing so costs me some time, but saved me A LOT of money. You can argue that paying an accountant doesn’t cost that much in the grand scheme of things, and I would agree with you; however, by paying someone to do it you’re missing out on a VERY valuable educational opportunity.

I learned a lot my first year filing using TaxAct and continue to learn more each year that I file. TurboTax is by far the most popular tax software around, and it’s arguably more user friendly than TaxAct, but I continue to use TaxAct because it has been consistently cheaper for MY tax situation. The last two years I’ve actually input all of my information into both softwares to compare the two (see the image below), and TaxAct continues to be cheaper for me. Regardless TurboTax, TaxAct, and tax software in general is informative, offering explanations and examples as you progress through inputting your information; however, if you’re feeling any hesistancies, don’t be afraid to consult forums (such as Bogleheads), books (such as Taxes Made Simple by Mike Piper), or a tax professional.

***ACTIVE MILITARY personnel can file their taxes for FREE through H&R block.

Reducing Taxable Income:

Many financial hobbyists out there are big advocates of filing your taxes via paper forms at least once (completely free minus postage) because of how instructional the experience can be. Honestly I haven’t done that yet, but in preparation for writing this post I did go through a line-by-line analysis of the digital copies of my tax forms from 2017 and 2018. The chart below compares my income, deductions, credits, and taxes for each year (click here to make a copy of this spreadsheet for your own use):

You may have noticed that I earned a higher income in 2018 versus 2017 (technically my social security and medicare wages were pretty close, though), but I paid significantly LESS in taxes . Federal Tax Reform contributed a bit to the difference (notice my marginal tax rate decreased from 15% to 12% as a result), but we also took some additional steps to reduce our taxable income this year:

  • What WE did in 2018:
    • Contributed 28k to 529 accounts. This reduced my state taxable income to only $3308, meaning I only owed $14 to south carolina.
    • Tax-Loss Harvested about 22k of losses in our taxable investing account during the last (brief) bear market. This not only allows us to deduct 3k of our ordinary income this year, but we can also carry those losses forward, allowing us to deduct 3k of our ordinary income for the next 5ish years.
  • What we will do in 2019:
    • Contribute to a Health Savings Account (HSA).
    • Ensure dividend income is “qualified” by holding the share(s) at least 60 days within the 120 dividend distribution window.
    • Don’t realize any capital gains (sell investment shares in a taxable account with a net gain). We were taking steps to merge our finances by consolidating our investment accounts, and I just didn’t think about the consequence of liquidating my taxable account to put it in a joint account at the time. I should’ve just held onto that taxable account for later in life, donated the shares to charity, etc.
    • Continue Tax-Loss Harvest if the market takes a downturn and use our carryover losses to deduct 3k of our ordinary income.
  • Other deductions/credits I’ve used in the past:
    • Deductions: State/local taxes, mortage/student loan Interest, PMI, charitable donations, flexible spending account contributed to a flexible spending account (FSA),
    • Credits: Education Credits, Foreign Tax Credits
    • Don’t be afraid to consult google or the library about all of the possible deductions/credits available to you. Taxes Made Simple has a few great chapters on many common credits/deductions that would apply to the average filer at some point.

Terminology:

  • Social Security Wages: employEE and employeER pay 6.2% EACH
    • Caps at $128,400 of wages earned.
  • Medicare Wages: employEE and employER pay 1.45% EACH
    • No cap. Increases to 2.35% EACH for wages earned beyond $200,000 ($250,000 filing jointly).
  • Adjusted Gross Income (AGI): includes additional income not reported on your W2 and “above the line deductions”.
  • Taxable Income: AGI minus allowances for exemptions and “below the line (standard or itemized) deductions”.
  • Taxable Interest: usually earned via money held in bank accounts (checking, savings, CDs, etc.).
  • Tax-Exempt Interest: interest earned that is exempt from federal and/or state taxes, usually from tax-exempt or municipal bonds.
  • Ordinary Dividends: dividends taxed as “ordinary income, because they were paid out on investments in a taxable account and did not meet requirements to “qualify” for the capital gains tax rate.
  • Qualified Dividends: dividends taxed under capital gain rates, because they were paid out on investments in a taxable account and met the requirements to “qualify” for the capital gains tax rate.
  • Capital Gains: gains “realized” from selling investment shares in a taxable account that are worth more than originally purchased.
    • Long-Term Capital Gains (LTCG) are those held for a year or longer and are taxed at the capital gains tax rate.
    • Short-Term Capital Gains (STCG) are those held for less than a year are taxed as ordinary income.
  • Capital Losses: losses “realized” from selling investment shares in a taxable account that are worth less than originally purchased.
    • Can be used to offset realized capital gains and UP TO $3,000/year of ordinary income (an “above the line deduction”).
  • Standard Deduction: the amount each filer is entitled to deduct from your taxable income by default. It’s essentially an automatic “tax break”.
    • The large majority of filers will fall under this category, particularly after the recent tax reform which raised the standard deduction ($12000 for single filers, $24,000 for married filing jointly filers).
  • Itemized Deduction: if the total of your “below the line deductions” exceeds that of the standard deduction, then filers can opt to use their total itemized deduction in lieu of the standard deduction.
    • Examples include mortage interest, student loan interest, private morgage insurance (PMI), etc.
  • Foreign Tax Credit: a credit issued for taxes paid on foreign investments in a taxable account.
  • Marginal Tax Rate: the percentage of taxes you would pay on your last/next dollar earned. What most people consider their “tax bracket“.
  • Effective Tax Rate: your income tax(es) divided by your taxable income. Most people use this as a reference for year-to-year comparison.
  • Actual Tax Rate: this is not an “actual thing” like the other terms listed above. We do however find this calculation useful and determine it by simply dividing our taxes by our total income.

What tax software do you use (if any and why)? What percentage of your income are you paying in taxes? What steps, if any, do you plan on taking next year to reduce your taxable income? Comment below!

Book Review – How to Think About Money

How to Think About Money

  • Clements, J. (2016) How to Think About Money. Author.
  • Category: Money
  • Recommended Financial Literacy Level: [Novice]
  • Recommended Audience: 
    • A great entry-level book for those just getting started on their journey toward financial independence.

“First and foremost, money buys time and autonomy. Secondarily, it buys experiences. Last, and least, it buys stuff, and more often than not, the stuff we buy makes us miserable.”

I really enjoyed Clements candor and insights regarding money. It really is quite fascinating that, in most cases, all it takes to become wealthy is a paradigm shift of our financial priorities. We just have to adapt and learn to think about the problem differently. The following is the table of contents of his book, including a brief description I wrote for each “step”:

  • Foreword by William J. Bernstein
  • Introduction
  • Step No. 1: Buy More Happiness
    • Discusses how people fail at getting the most out of their money, because we aren’t very good at knowing what will us happy. Includes a series of reflective questions as an activity to really get you thinking about what brings value and happiness to your life.
  • Step No. 2: Bet on a Long Life
    • Although we are often times part of the “YOLO” (you only live once) or “I won’t be young forever” culture, most of us will live longer than we realize and need to adequately prepare for it.
  • Step No. 3: Rewire Your Brain
    • The meat of this chapter contains a list of 22 financial mistakes people often make, the consequences of those mistakes, and how to avoid/rectify those mistakes moving forward.
  • Step No. 4: Think (Really, Really) Big
    • Don’t underestimate your income-earning ability over the long-term; furthermore don’t forget to consider spending, health/fitness, and family.
  • Step No. 5: To Win, Don’t Lose
    • “If we want to add to our wealth, we should minimize the subtractions.” Includes tips on how to think about risks and debts that are generally overlooked.
  • Final Thoughts
  • About the Author
  • Notes

Jack’s Biggest Takeaways:

  • I had never considered thinking about debt as “negative bonds” canceling out the bond/fixed portion of a retirement portfolio, and in many cases, leading to a riskier asset allocation overall. As renters we do not currently have any debt, but when we do purchase a home or even rental property in the future I will definitely have to rethink how that affects my overall asset and risk allocation.
  • “If you have saved enough to lead the life you want, you have won the game. There is no logical reason to continue to play and risk throwing away financial security.” This statement really resonated with me. I know a lot of people in the FI community advocate for not only having extremely risky portfolios (100% stocks as an example) building toward FI, but maintaining high risk allocations through retirement. We haven’t won the game, but we certainly don’t need to go, or stay, all in to do so.

Final Thoughts:

If you’re reasonably financially literate already, you probably won’t learn anything mind-blowingly new by reading Clements book; however, I bet you’ll still enjoy it! To close, I’ll share one more quote from his book:

“For 10 years after we are gone, most of us will be forgotten — except by family and close friends. We will live on in their memories. That’s the closest any of us will ever get to immortaility, at least on this earth. My advice: Make sure the memories are good.”

If you’d like to support our mission and are interested in purchasing How to Think About Money, please click here for your purchase! 

Have you read How to Think About Money? What are your thoughts, likes/dislikes, and biggest takeaways?



Financial Independence On A Teacher’s Salary

[Editor’s Note: This is an independent post written by JJ. This post may contain affiliate links. Please read our disclosure for more info.]

First things first — my wife is a financial superhero.  She is the reason we were able to pay off $50,000 in student loans in 12 months (they were mine).  She’s the reason we have extra money to invest at the end of each month. She’s the reason we’re in the financial position we’re in.  Brace yourselves for what I’m about to tell you — she balances our checkbook to the penny every single month. How many of you balance your checkbook, let alone to the penny?! She’s amazing!

We’ve always had financial minds, but we’ve also always been in debt. For the past ten years we’ve said that once we get our debt paid off we would really kick our saving and investing into high gear.  The interesting thing when I look back over the past 10 years, we always had debt so we kept putting investing off until the next year. Then, that next year turned into 10 years. And, wow, 10 years went so fast! We are finally at the point that even though we have one small car loan left, we are finally able to invest.  And it feels so good watching our balance increase every two weeks!

Redefining Retirement

We plan to ‘retire’ by the time my wife is 45 and I’m 50, as we discussed in our roadmap post. When I say ‘retire,’ I think we need to take a step back and define that word.  The traditional definition is to leave one’s job and cease to work. My grandma has been ‘retired’ for many years and she still works every single day.  My definition of ‘retire’ is when I reach Financial Independence. When I no longer need my W-2 income to live because I have already reached Financial Independence. I will always work, I may not get paid for it and it may be on my own terms doing what I want to do, but I will always work when I retire.

 

So, How Are We Saving For Financial Independence?

Create a Plan

The first step is to create a plan.  Seven years ago, my wife and I sat down and created a goal.  By the time she is 35, we would have at least $50k saved and all of our debt (minus mortgage) paid off.  We are eight months from her turning 35 and we’ve already destroyed that original goal. In fact, we’ve already set our next 1, 5 and 10-year goals.  When I think about those last seven years, our lives have changed so dramatically. We made some really bad financial decisions, but also made some good ones.  It was definitely not a straight line, but we made it through and we’re going to be successful.

Keep Expenses Low

As discussed in my last post, we review our monthly expenses every single month. If you haven’t read that post, check it out because it’s extremely important if we’re going to be successful in our short-term and long-term goals.  Do you know how much your expenses total each month? We do and we review those expenses.

Imagine for a minute that a family of four has credit card debt, mortgage debt, vehicle debt(s) and student loan debt with monthly obligations, just on those debts, totaling $2,000/month.  That’s not too far off from a typical family. And, it’s probably on the lower side of bills for those items.

Now, imagine what that same family could do if they didn’t have those debts.  They now have at least $2,000/month to invest and save for retirement. That’s a lot of money each month!

Live On One Income

“We don’t make a lot of money, but we also don’t spend a lot of money.”

My goal in my early 20’s was to have a huge paycheck so I had more to spend. My new goal began in my early 30’s which is to have a $0 net paycheck (no, not work for free!). I want to be able to invest in a 403b, 457 and save the rest so we’re only living on my wife’s income.  

Just to note, my wife doesn’t make much more than me so it’s not like she’s a doctor or lawyer making six figures.  We don’t make a lot of money, but we also don’t spend a lot of money. We’re frugal minimalists or at least we try to be.

Beginning this past January, we’ve been able to almost live on one income.  We are so close to completely living on one income which is super exciting!

We Don’t Buy Stuff (anymore)

I love the quote by Dave Ramsey because it’s so true, “We buy things we don’t need with money we don’t have to impress people we don’t like.” I just want to scream to the world, “Stop buying crap! You don’t need it!”

Our lives and financial mindsets are so different from where we were ten years ago.  Now, my wife and I drive really nice 7 and 8-year old cars. These cars drive so beautifully down the road, in fact, I bet they drive as well as a luxury vehicle. When I spin my leather-wrapped steering wheel to the left, my beautiful car goes left; I bet the same as a luxury vehicle.  

We purchased a house last year for half the amount we were approved. The house is in a safe neighborhood with more space than we need.  I’m trying to talk my wife into a tiny house, but she just doesn’t see my vision.

We eat out more than we should, but still not that often. If there’s a good restaurant in the area that we haven’t tried, we save up some money and go.  Hey, we like good food! We just don’t drop $400 in one night like we did ten years ago.

We minimize our spending by meal planning and creating grocery lists.  And, we never and I mean never go to the grocery store when we’re hungry. Biggest mistake right there. When we buy groceries, we go to Woodman’s, Aldi or Walmart when possible.  And, we always try to buy generic and store-brand items.

Weekends usually get us the most.  For fun, we hang out close to home or with our family.  We try to plan our weekends ahead of time, even if it’s a weekend at home.  If we don’t have a plan, we could find ourselves at a car dealership buying a new car like we often did in our financially-foolish 20’s.  Even if it’s during a snowstorm when no one should be out driving; yeah, that happened!

We just don’t spend that much money anymore, plus we are so close to only having our mortgage so it’s becoming easier and easier to live on one income.  We’re far from where we want to be, but we’re working hard to get to where we want to be.

So, Where Are We Saving For Financial Independence?

Fees Matter!

We invest in low-cost index funds through Vanguard. There are other companies out there, we just prefer Vanguard.  Fees matter! Be sure you understand how much it’s costing you to save for retirement. There are many different kinds of costs when it comes to saving and investing.  Some of the common fees include expense ratios, load fees, marketing fees, purchase or redemption fees and commissions.

If you don’t know exactly how much you’re paying in fees, you need to find out! Here’s a chart showing you how much fees can cost you in the long run:

All of our money is invested in low-cost index funds.  I know exactly how much I am paying in fees, and it’s not much.

Asset Allocation

I like the KISS strategy — Keep It Simple, Stupid.  I try to keep my investing simple. I’m a fan of Jim Collins and his book The Simple Path to Wealth.  Check out my book review to learn more.

Our current asset allocation is:

  • US Stocks: 87% (comprised of VTSAX, VIIIX, VMCIX, VSCIX)
  • International Stocks: 5% (VTIAX)
  • Bonds: 5% (VBTLX)
  • Alternatives: 3% (part of VTIVX)

Our targeted asset allocation is:

  • US Stocks: 85%
  • International Stocks: 10%
  • Bonds: 5%

We moved our investment accounts away from our advisor about two months ago.  I couldn’t handle the fees anymore. I still have a good relationship with our advisor, but I felt I could manage my own financial destiny and not pay so much in fees. Also, I recently decided I wanted more international exposure.  I’m still less than many, but I’ve been learning some good information and decided to add some weight in international funds. I am considering increasing our international exposure even more in the future. Our allocation would then be 80, 15, 5.

We currently have alternatives, but I’d like to move away from that in the future.  This is a part of a small Target Date Retirement (TDR) account that we have through Vanguard. When I was considering moving money away from our advisor a few years ago, I had opened a TDR account and still have some money there.  I actually do like TDR’s and think they are a solid choice for many people.

Final Thoughts

I wish we were at this point five years ago, but we had to learn some hard life lessons before we could get to this point so I’m glad we’re finally here and ready to really ramp up our retirement savings.

My biggest piece of advice for anyone reading this is to get rid of your debt.  If you don’t know where to start, read Total Money Makeover by Dave Ramsey.  Create a budget, control and track your expenses and pour all your extra money towards your smallest debt.  When that’s paid off, take all the money you were paying towards that debt and put it towards your next biggest debt.  Don’t worry so much about interest rates, just pay it off.

Life is so much easier financially when you don’t have debt obligations hanging over your head. Once your debt is paid off, start investing.  

Do we have everything figured out? No.

Is our plan perfect? No.

Is there room for improvement for us?  Oh, man, there are so many areas of our lives we need to be better, but we’re trying.

Create a plan, follow your plan, fine-tune and adjust as needed.  

Since I’m a teacher, I have to add: Never Stop Learning!

If you need help creating budgets or spreadsheets to track expenses, please reach out and let us know.  We want to help! If you want the help of my financial superhero, reach out to her here.

How do you define retirement? Are you on the path to financial independence?

Do you know what fees you’re paying to invest and save for retirement? What is your ideal asset allocation?

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Book Review – The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing

The White Coat Investor: A Doctor’s Guide To Personal Finance And Investing

  • Dahle, J. M., & Bernstein, W. J. (2014) The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing. S.I.: White Coat Investor
  • Category: Finance
  • Recommended Financial Literacy Level: [Novice]
  • Recommended Audience:
    • practicing physicians
    • aspiring physicians (students considering medical school, medical students, & residents).
    • parents of students interested in medicine

Admittedly, I’m a big fan of Dr. Jim Dahle, the founder of the White Coat Investor. Victoria and I actually first heard the term “Financial Independence” from him. We thoroughly enjoyed reading his book and are regular listeners to his podcasts. It may be cheesy, but we reserve the even-numbered episodes for when we are in the car together – it’s one cog in the machine of keeping us excited about talking about finances and retirement together. Honestly, I find his ethics, candor, and no-nonsense attitude not only refreshing, but also quite favorable amongst the financial blogs/podcasts out there.

While his book is obviously centered toward physician finances, I believe most individuals would benefit from reading it, especially if you consider others (such as friends, family, children, etc.) that may be interested in the medical field or other fields requiring professional school. The book is written in such a way that it is easily readable, avoids overwhelming its audience, and can easily be read in a few hours (took me ~4 hours while taking notes). Dr. Dahle does a great job of briefly explaining each of the chapters in the White Coat Investor, so to take a page from his book (quite literally, and two pages at that):

  • Chapter 1 – The Big Squeeze
    • How increasing tuition, decreasing reimbursement, and regulatory hassle are trying to ruin your life.
  • Chapter 2 – Millionaire by 40
    • How to have a seven-figure net worth five to ten years out of residency.
  • Chapter 3 – If I Had a Million Dollars
    • How to convert income to wealth and vice versa
  • Chapter 4 – Medical School and Your Wealth
    • How picking the right school and specialty can affect your bottom line
  • Chapter 5 – Residency and Your Wealth
    • Which financial chores you must do as a resident
  • Chapter 6 – The Secret to Becoming Richer
    • How to get out of debt, buy your dream home, and hatch a nest egg within five years of residency graduation
  • Chapter 7 – The Retirement Number You Control
    • Why your savings rate matters more than your investment returns
  • Chapter 8 – The Motorway to Dublin
    • How to quit throwing your money away on stupid investments
  • Chapter 9 – Getting Off the Money
    • What you need to know about investing in real estate, whole life insurance, private investments, and your own house
  • Chapter 10 – Paying the Help
    • How to get good advice for a fair price
  • Chapter 11 – The Basics of Asset Protection
    • How to protect your hard-earned money from lawsuits
  • Chapter 12 – Estate Planning Made Simple
    • How to avoid estate taxes, protect your heirs, and avoid probate
  • Chapter 13 – Income Taxes and the Physician
    • Why you pay too much in taxes and what to do about it
  • Chapter 14 – Choosing a Business Structure
    • Why incorporating will not protect you from malpractice suits or save you much in taxes.
  • Chapter 15 – Enjoying the Good Life
    • How to quit worrying about your finances
  • Chapter 16 – The Mission of the White Coat Investor
    • How to help doctors quit getting ripped off.

Jack’s Biggest Takeaways:

  • I particularly enjoyed Chapter 4, which discusses the ins and outs of applying to medical school, including the costs/risks, and ways to mitigate that cost/risk. What I appreciate the most, though, was his effort to address the stigma of going to the cheapest school available to you and getting over the name-dropping mindset. It’s easy to get wrapped up in the social status or other appeals of a particular “dream” school, but Dr. Dahle really provides a strong argument for considering the potential financial impact of that decision. I believe his argument extends beyond medical school to all post-secondary education. Most of us probably have someone in our circle that either paid too much for their education or is still paying for it via student loans. I know more than one. In reality where earn your degree isn’t all that important in the grand scheme of things and certainly isn’t worth going more into debt for than necessary for.
  • Dr. Dahle’s “Live Like a Resident” (for 3-5 years after residency) mindset is highly valuable and not limited to just physicians. We can all benefit from growing into our income slowly (or if you’re part of the Financial Independence movement perhaps never). The math is arguably fairly simple: spend less + save more = reaching Financial Independence, and perhaps much sooner than you thought.

Whether or not you decide to add this book to your collection, The White Coat Investor community is free to be a part of, and I highly encourage you check it out! I’m certain you’ll take something beneficial away from doing so. Victoria and I subscribe to his blog, and I am a regular visitor to the WCI Forum.

If you’d like to support our mission and are interested in purchasing The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing, please click here for your purchase!

Have you read The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing? What are your thoughts, likes/dislikes, and biggest takeaways? Do you know anyone who spent too much on their education?

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How risky is too risky?

[Editor’s Note: This is an independent post written by Jack. This post may contain affiliate links. Please read our disclosure for more info.]

We all have different risk tolerances. Some of us speed or text when driving, smoke cigarettes or drink alochol, skydive or climb to great heights, etc. Within each “risky” activity we engage in is a spectrum of tolerance. Investing in the stock market is no exception! “Knowing thyself”becomes increasingly important when deciding how to invest your money. In the wise words of George Goodman (AKA Adam Smith):

“If you don’t know who you are, this [the stock market] is an expensive place to find out.”

Risk vs. Reward

The fact of the matter is you’re going to have a hard time outpacing inflation (~3.15% on average since 1913) if you don’t engage in some sort of risk by investing money in the stock market. Consider the information on following chart, Figure 1, provided by Wealth Management:

Figure 1

DISCLOSURE: past performance is NOT a predictor of future performance. Even though the above information is based on historical returns for 91 years, NOONE knows what tomorrow will bring, let alone the next 91+ years.

Is cash really king in terms of returns when investing? Let’s put some context to the above chart by hypothetically investing 10,000 over 30 years :

  • 100% cash @ 2.2% APR (Currently Ally Bank’s savings account rate):
    • $19,209.98
  • 90% bonds / 10% cash @ 5.1% APR
    • 44,471.47
  • 90% stocks / 10% cash@ 11.2% APR
    • $241,625.97

If you haven’t seen it before, you can see how just a few percentage points (or fractions of percentage points) of APR compounds with a large enough time horizon. Don’t just focus on the “average return”, though! I would argue the most important column is actually the first one, “Largest Loss“, because bear markets are where investors find out who they really are. How would you stomach if your $10,000 endured the largest loss during those same time frames (note: the losses would actually be greater in the moment since the balance of the acct would not have be $10000 at the time of the loss):

  • 100% cash @ 2.2% APR:
    • $10,000 ($0, 0% loss)
  • 90% bonds / 10% cash @ 5.1% APR:
    • $9,580 ($420, 4.2% loss)
  • 90% stocks / 10% cash@ 11.2% APR:
    • $6,110 ($3890, 38.9% loss)

Turning $10,000 into six-figures sounds nice, right? BUT WAIT! Can you stomach watching 40% of the account balance essentially disappear overnight? Many people can’t, which is why you’ve got to be very honest and realistic with yourself when deciding your risk allocation. Think about how many people bailed out (sold their stock holdings at a significant loss in a panic and held them in cash) during the Great Recession 2007-09 and are now suffering the consequences of minimal growth since the market recovery. The key to capatilizing on the compounding growth of the market is NOT bailing out during bear markets. Instead, have faith in your plan and continue to invest/[rebalance] your portfolio according to your desired asset/risk allocation (outlined in your Written Financial Plan).

Jack & Victoria’s Asset/Risk Allocation

Figure 2

Victoria and I currently have an overall risk allocation of 80/20:

  • 55% US Stocks (40% large-caps and 15% small-caps)
  • 5% US Real-Estate Investment Trusts (REITs)
  • 20% International Stocks
  • 20% Bonds/Cash

In a future post I’ll dive in to the details of our portfolio and asset allocation, but for now just understand with an 80/20 risk allocation our portfolio is fairly aggressive. 

How did we react during the most recent bear market?

Albeit brief, the market dropped around 21% between September and December of last year (2018). How did we react? Honestly, we weren’t phased, because we were comfortable with our risk allocation and offset some of that risk by diversifying into bonds/cash, international funds, and real-estate funds. We actually decided to tax loss harvest over $20k in losses that we can now write off on our taxes for the next several years ($3k/year); furthermore, we stuck to our guns with our asset allocation, continuing to reinvest and rebalance according to our written financial plan. As a result, not only have our previous holdings been recovering since the new year, but also the new holdings we purchased have grown significantly.

How do I know what my risk tolerance is?

You can’t. At least not until you’ve been through a bear market or two. I don’t believe in reinventing the wheel, so I’ll share an excerpt from Jonathan Clements book, “How to Think About Money” to get the conversation started:

“For starters, if you were investing in 2008 and 2009 [or the last quarter of 2018], check whether you bought, sold, or sat tight. Our memories are often unreliable, so dig up your old account statements and take a close look at the trades you made. While our investment savvy should improve over time, we shouldn’t fool ourselves: Probably the best indicator of how we will behave in the next bear market is how we bahaved the last time around.”

“What if you haven’t lived through a major bear market? Imagine the stock market fell 50 percent. Try thinking about the consequences in terms of raw dollars lost. Let’s say you have $500,000 in savings, including $400,000 in stocks. Suddenly, your $500,000 portfolio is worth 300,000. The money is gone and, for all you know, it isn’t coming back. Indeed, there is every chance your [now] $300,000 could soon be worth $250,000 or even less. How would you feel – and how would you react?”

So, how risky is too risky?

It’s your call. You’ll need to factor in contributions to your retirement portfolio and your investment horizon, but where to draw the line is ultimately up to you. I just hope you don’t find out the hard way where your risk tolerance begins and ends. I believe it’s better to hedge on being 10-20% more conservative than you believe you are and adjusting based on your response during bear markets.

What is your current risk allocation and why? Have you been through a bear market yet? If so, how did you react?

Book Review – The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

The Millionaire Next Door: The Surprising Secrets of America’s Wealthy

  • Stanley, T. J., & Danko, W. D. (2016) The Millionaire Next Door: The Surprising Secrets of America’s Wealthy.
  • Category: Budgeting
  • Recommended Financial Literacy Level: [Novice]
  • Recommended Audience: Great entry level book for people looking to understand what actual millionaires across the nation are doing to save money and build wealth.

If you want to be a millionaire, you need to know what it takes to live like one… it may surprise you! What I probably enjoyed most about The Millionaire Next Door is the entire book is based on a research study conducted over 20+ years by the authors, Dr. Thomas Stanley and Dr. William Danko. Many “financial books” can often times be based purely on anecdotal evidence, but every claim in The Millionaire Next Door is based on the reports of the research study’s participants. Who were the participants? Over 500 millionaires were interviewed and over 11,000 high-net worth and/or high-income individuals were surveyed. A quick reminder, which the authors also bring up on a multitude of occasions, before we dive more into the book:

INCOME ≠ WEALTH

Just because you have a high-income does not mean you’re wealthy. You can’t build wealth if you spend all (or more) of your money! Adversely you don’t NEED a high-income to build wealth or become a millionaire. The authors use a simple formula to split their participants up into two categories: Under Accumulator of Wealth (UAW) or Prodigious Accumulator of Wealth (PAW). Most millionaires are PAWs. Their formula is income-based, meaning the more money you make the more you need to have saved/invested to be considered a PAW.

Are you a UAW or a PAW?

To determine where you fall simply multiply your age by your pre-tax income and then divide by 10 (age x income / 10). If you’re above the threshhold you’re a PAW and if you’re below you are a UAW. As I write this post, I am a UAW (current income ~$49k) since my individual net worth is a bit lower than the $142,100. I was not surprised given some of the mistakes I made early on. What’s interesting, though, is if I use my average income since I started teaching (~$41k), then I would cross into PAW territory, since my invididual net worth is over $118,900. Regardless, it’s a decent assessment of your savings rate.

Each chapter of the book compares the lifestyles of UAWs and PAWs using case studies and data (often provided in chart format) to dive into the choices each made and how those choices impact their financial success (or lack thereof):

Chapters.

  • Chapter 1 – Meet the Millionaire Next Door
  • Chapter 2 – Frugal Frugal Frugal
  • Chapter 3 – Time, Energy, and Money
  • Chapter 4 – You Aren’t What You Drive
  • Chapter 5 – Economic Outpatient Care
  • Chapter 6 – Affirmative Action, Family Style
  • Chapter 7 – Find Your Niche
  • Chapter 8 – Jobs: Millionaires versus Heirs
  • Appendix 1 – How We Find Millionaires
  • Appendix 2 – 1996 Motor Vehicles: Estimated Price Per Pound
  • Appendix 3 – Businesses/Occupations of Self-Employed Millionaires

Jack’s Biggest Takeaways:

  • I particularly enjoyed Chapter 4 – You Aren’t What You Drive. Listen, cars are expensive and aren’t really an investment given they depreciate over time for the most part. PAWs tend to pay cash for their cars and a surprising amount buy used. UAWs typically finance their car, replacing them often. PAWs tend to not drive the luxurious, high-maintenance vehicles. UAWs generally do. I found the case studies presented very relatable. In fact, I plan to test out one of the methods a participant shared when trying to obtain the most competitive quote with the least hassle. The more into the FI movement I get, the more I realize every dollar I don’t spend on my car is a dollar I can put toward building wealth.
  • Some other tidbits I found valuable:
    • “Never purchase a house [or finance/borrow an amount for a house] worth 2x or more of your realized income.”
    • “A household divided in its financial orientation is unlikely to accumulate significant wealth.”
    • “Operating a household without a budget is akin to operating a business without a plan, without goals, and without direction.”
    • “Even the best financial plans are innaffective if you don’t follow them.”

Final Thoughts

There is an interesting dichotomy between looking wealthy and being wealthy. Most millionaires don’t live excessively – they actually have very modest lifestyles and often times their neighbors aren’t aware of their wealth. Most of us just need to ask ourselves then, Do I want to LOOK wealthy, or do I want to BE wealthy? I’ll leave you with this quote from the authors:

“The majority of people do not have the ability to increase their income significantly. Yet income is a positive correlate of wealth. What, then, is our message? [How do you become financially independent?] If you cannot increase your compensation significantly, become wealthy in some other way. Do it defensively. Inoculate yourself from contracting the high-consumption lifestyle that many have adopted.”

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Budgeting Starts and Ends with Us

[Editor’s Note: This is an independent post written by JJ. This post may contain affiliate links. Please read our disclosure for more info.]

On Friday, February 1, 2019, my wife and I had our monthly date night.  I made reservations for us at a new restaurant that had been recommended to us many times for their excellent atmosphere and food.  I left work to pick my wife up from our home and she looked absolutely beautiful. We got to the restaurant, sat at our table, and then it began.  See, this wasn’t an ordinary date and the conversation may not have been what you were expecting. 

The purpose of the evening was to hold our monthly household expenditure review.  Yup, that’s right. We were out enjoying each other’s company and discussing where every single dollar was spent for the previous month.  And this discussion happens every single month.

Our Why

We feel this date night is important on multiple levels.  The first is obvious, we need to be open and honest with each other about our spending.  I need to own up to my frivolous addiction to Diet Coke. Secondly, it allows us to have a conversation without all of life’s distractions.  It’s a couple hours of just us talking. No kids interrupting us every two minutes plus we put our phones away with the exception for taking pictures of our meals, because, well, we are millennials after all. Lastly, it allows us to dream.  We talk about life now and in the future, set goals and live how we want to live. Financial freedom starts and ends with controlling our spending.

2019 Goals

“We don’t know what tomorrow is going to bring so we plan for tomorrow (and beyond) with the information we have today.”

We start by ordering drinks and reviewing our goals for 2019 to make sure we’re taking the appropriate steps to meet those goals.  Typically, when we create goals we exceed those goals so we usually tweak them each month to make sure they’re not too easily attainable.  Our goals for 2019 include: save $5k in our emergency fund, payoff our small car loan by October, save $35,000 through various investment vehicles, consider refinancing our house to a 15-year mortgage, maintain our blogs (TeachFI and threeismyhappyplace.com), maintain our morning fitness routine and healthy eating, and finish our basement projects. Check out why we have to re-finish our basement, ugh — flooding!

Long-Term Goals

Next, we review our long-term goals.  Within that conversation, we discuss the steps we need to take each year to ensure we’re meeting those goals.  Again, we tweak as necessary.  Life can change so quickly, so it’s important to be flexible. We don’t know what tomorrow is going to bring so we plan for tomorrow (and beyond) with the information we have today. Check out the post on our written financial plan for more information on our long-term goals.

Spending – The Envelope System

The next item on our monthly household review agenda is to discuss our spending for the previous month.  This is not an easy discussion, but my biggest piece of advice for managing finances is to understand where every dollar goes.  We are fans of Dave Ramsey and the envelope system [Purchase Total Money Makeover].  Linked here is a great explanation of Dave’s envelope system. We have an envelope for each of our main expenses.  At the beginning of each month, we allocate money to each envelope and then only spend the money budgeted in each of our envelopes.  We’ve been budgeting using the envelope system for over ten years. We have the following envelopes: groceries, household, restaurants, pets, date nights, JJ fun money, Jessica fun money and miscellaneous.  

Spreadsheets and Apps

Along with the envelope system, my wife and I really enjoy creating and managing spreadsheets.  Creating spreadsheets are great for planning purposes, but it can get difficult and tedious tracking every dollar.  A couple years ago, I found an app called Personal Capital [Sign Up Here] and am loving it, and it’s free! I have all of my financial accounts (bank, investments, car loan and mortgage) connected to my Personal Capital account and check on them daily. Personal Capital really helps us discuss our spending for the month. Another great app that people love is called Mint, which is also free.

Ahhh…We Overspent in January

Back to our expenditure review meeting, we realized that we had overspent in January, by a lot!  We don’t have a gas envelope because we put gas on credit cards to earn rewards, but something interesting was happening and my wife and I were both guilty.  We would pump the gas, then pay inside and get a coffee. It looked like the expenses were just gas when in reality, it was gas and a few extra dollars every trip.  We both owned up to it and agreed to discontinue. We also noticed a couple monthly subscriptions that were costing more and more. We talked about those monthly subscriptions and realized the convenience was not worth the cost.  We canceled those expenses right before we ordered dessert.

Speaking of dessert, wow!  S’more dessert with homemade graham crackers. It was so good!

Our evening ended with a tour and brief history of the restaurant. All cooking is done within the wood fired grill pictured on the right. 

We concluded our date night by realizing that we’re in a great position to continue to meet and exceed our goals. We are so excited to be on the journey to financial independence.  We can’t wait to share our experiences with our son as he grows up to ensure he learns sooner than we did.

Our next household expenditure review is set for Friday, March 1, 2019.

Steps to a successful Household Expenditure Review

Do you budget and/or track your expenses?  Have you tried Dave Ramsey’s envelope system? What are your short-term and long-term goals?

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Book Review – The Bogleheads’ Guide to Investing

The Bogleheads’ Guide to Investing

  • Lindauer, M., Larimore, T., & Leboeuf, M. (2014) The Bogleheads’ Guide to Investing. Hoboken: Wiley.
  • Category: Investing
  • Recommended Financial Literacy Level: [Novice]+
  • Recommended Audience:
    • EVERYONE who is interested in becoming more financially literate. If you intend to become DIY investor like us… great! This book will provide you with the tool/info to get started. If you intend to hire out… great! This book will make sure you aren’t getting ripped off by your advisor. Regardless, it should be on your shelf at home! Personally, it’s one of our go to gifts for friends and family.

The Bogleheads’ Guide to Investing is roughly 300 pages in length and jam-packed full of substantiated information, including data tables from credible sources and wisdom from some of the most knowledgeable players in the game. What makes this book so informative, yet readable, is the use of well-crafted sequencing, relatable metaphors, and thoughtful writing. The book not only does a great job instilling confidence and encouraging its readers, but also empowers them with the information/tools necessary to make informed decisions about their finances, investments, and retirement planning. If this is your first dive into becoming financially literate then I’d recommend you really take your time reading this book, take notes as you go, and consider reading it more than once.

  • Part I:
    • Chapter 1 – Choose a Sound Financial Life
    • Chapter 2 – Start Early and Invest Regularly
    • Chapter 3 – Know What You’re Buying: Part One
    • Chapter 4 – Know What You’re Buying: Part Two
    • Chapter 5 – Preserve Your Buying Power with Inflation-Protected Bonds
    • Chapter 6 – How Much Do You Need to Save?
    • Chapter 7 – Keep It Simple
    • Chapter 8 – Asset Allocation
    • Chapter 9 – Costs Matter
    • Chapter 10 – Taxes: Part One
    • Chapter 11 – Taxes: Part Two
    • Chapter 12 – Diversification
    • Chapter 13 – Performance Chasing and Market Timing Are Hazardous to Your Wealth
    • Chapter 14 – Savvy Ways to Invest for College
    • Chapter 15 – How to Manage a Windfall Successfully
    • Chapter 16 – Do You Need an Advisor?
  • Part II
    • Chapter 17 – Track Your Progress and Rebalance When Necessary
    • Chapter 18 – Tune Out the “Noise”
    • Chapter 19 – Mastering Your Investments Means Mastering Your Emotions
    • Chapter 20 – Making Your Money Last Longer Than You Do
    • Chapter 21 – Protect Your Assets by Being Well-Insured
    • Chapter 22 – Passing it On When You Pass On
    • Chapter 23 – You Can Do It
  • Appendix I – Glossary of Financial Terms
  • Appendix II – Books We Recommend
  • Appendix III – Financial Websites We Recommend
  • Appendix IV – Vanguard Asset Allocation Questionnaire and Pie Charts

The book also discusses the Bogleheads.org website and community. With over 75k members, their forum is top-notch and arguably the best out their for FREE personal finance and investing advice. It’s a safe place for you to ask questions and get valuable feedback. I actually have the Bogleheads Forum bookmarked and am a regular visitor. The members really go above and beyond to answer questions and engage in a wide variety of informative discussions. I would encourage you to make an account and spend some time on the forums, searching and/or asking about nearly anything financial.

Jack’s Biggest Takeaways:

  • For one reason or another, I was jaded (and truthfully still am a bit) about insurance since my teenage years when I started paying for it… to the point where until the last year or two I’ve been arguably underinsured. Don’t get me wrong, I had home insurance, full-coverage car insurance, the standard life insurance policy my jobs have come with, etc.; however, I had always declined disability coverage (I’m young, what could happen, right?) and never agreed to increase my liability limits on things like auto-insurance or take out an umbrella policy. Chapter 21 (Protect Your Assets by Being Well-Insured) has aided in opening my eyes to how lucky I’ve been to not have become disabled during my working years when I’m heavily reliant on my income or been in a serious accident where I was liable beyond my limits. The chapter not only describes and explains the different types of insurance, but describes which types you should or should not consider and why. More than that, it provides information on how to screen potential insurance agents to make sure they have your best financial needs in mind when it comes time to make those decisions. Noone likes paying for insurance, but it’s there to prevent some other catasrophe in your life from also becoming a financial catasrophe as well.
  • Windfalls are something I never anticipated having to deal with and still don’t (I don’t play the lotto, no anticipated inheritances, etc.). We don’t choose who we fall in love with, though, and this is a “problem” my fianceé had. Fortunately she had no interest spending the money nor a need to do so anytime soon, so it just kind of set there for quite some time until we finally decided to invest it according to the written financial plan. In fact, a component of our written financial plan is directly from Chapter 15 (How to Manage a Windfall Successfully), which describes the emotional (sounds weird, I know) experiences people have when receiving windfalls, how they are generally mismanaged, and tips/steps to take to properly manage one.

Final Thoughts:

When Lindauer, Larimore, and LeBoeuf wrote The Bogleheads’ Guide to Investing they really did have your best interests in mind. Jack Bogle and Vanguard’s mission were not lost on this book. In a not-so-subtle overstatement, I would compare reading their book to hiring a large group of the best some of the best fiduciary financial advisors. The best part? It’s less than $20.

While this book has no shortage of valuable information regarding investing and financial planning, tackling debt is not addresssed (a problem many Americans are faced with). So depending on your situation, you may want to consider supplementing The Bogleheads’ Guide to Investing with another resource to create a written financial plan that meets all of your family’s specific needs.

If you’d like to support our mission and are interested in purchasing The Bogleheads’ Guide to Investing, please click here for your purchase!

Have you read The Bogleheads’ Guide to Investing? What are your thoughts, likes/dislikes, and biggest takeaways?

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