The Frugal Weirdos Who Have No Fun

And live a life of deprivation.

I am sick of this stereotype about the Financial Independence; Retire Early (FIRE) community. Recently, a friend shared an article with me from AOL that called early retirement a fantasy. Boy….. Are they wrong!

Last month, Steve from ThinkSaveRetire retired at age 35. There are countless others who have done the same. Early retirement is not a fantasy but a goal anyone can accomplish with a bit of planning; a goal I will accomplish.

Early Retirement Ahead
The Argument

The awful AOL article says the path to early retirement is not sustainable. The author claims her husband and her were burnt out from extreme budgeting. Furthermore, she complains about having only one short and inexpensive vacation a year. She groans about the lack of material gift giving for Christmas, birthdays, anniversaries and other occasions. All of this is hog wash!

Additionally, the author argues that the early retirement crowd does not live in the present. Her article recommends finding a job or career that is enjoyable instead of extreme savings for 15 years (typically FI is achieved in 7-10 years). The author also thinks those who ‘retired early’ retired are frauds since many still work or have some form of income.

The Rebuttal

It’s decisions not deprivation…. stupid! Working towards early retirement or financial independence is not about extreme budgeting or depriving yourself of enjoyment. Rather, it’s about decisions and allocating resources to maximize your happiness and financial well-being. The Latin word for ‘decision’ literally means “to cut off”. Every time we make a decision we are saying ‘no’ to every other option by cutting off all other choices.

Ultimately, we all are responsible for our own decisions. I am debunking the frugal stereotype of the FIRE community with my upcoming travel plans. As a DC local, the inauguration is miserable time to be around the city. (*DISCLAIMER* Regardless of which party won. NOT a political statement. Read the city is flooded by tourist, prices are jacked up and roads shut down).

So… I am flying to Colorado. A long weekend filled with skiing sounds like the perfect getaway. Skiing is something that I enjoy LOVE and will do more of when I reach FI. My travel plans show that I am living in the PRESENT and enjoying life.  I made the DECISION to live in the PRESENT. This is at the risk of pushing back my early retirement a few months (years?). Saving money is still a big priority this year. I believe many of the FIRE community share the same view.

More Counter Arguments

While we are still talking about the present…  I am a forward thinker and will always look for ways to improve my future. I live in the present but I will never reach my goals without thinking about tomorrow. (Cue Fleetwood Mac’s Don’t Stop Thinking About Tomorrow).

The author came across very materialistic complaining about the lack of gifts. Perhaps she could try not being a materialistic person or try making her gifts like Gwen at Fiery Millennials.

The author of the AOL article also believes that life after retirement does not get any better. This statement blows my mind! Mr. Money Mustache and Go Curry Cracker seem WAY MORE happy than before they retired. Neither of them are dying to go back to a day job. Why would anyone want to waste 40+ hours a week to do something that is not necessary? Goodbye alarm clock and goodbye useless conference calls. Hello waking up when you want and traveling whenever you feel like it. Who would not want more time to spend with family or volunteering? FIRE provides freedom.

Lastly, according to AOL’s retirement calculator, I will need over $21 million to retire. This is just flat out laughable. Their calculator’s maximum savings rate is capped at 40% which is a shame. For a more accurate retirement calculator, visit the Mad Fientist’s Time to FI Calculator. What are your thoughts? Do you think early retirement (or financial independence) is a fairy tale? Maybe, FI is a a bedtime story we tell our kids. Or do you believe it’s a goal that can be achieved?

Q4-2016 Dividends – The Dividend Report

As many of my readers may know, I love dividend stocks and believe dividends provide a great source of passive income. Moving forward, I will be providing quarterly updates regarding my dividend income. Utilizing ‘The Dividend Report’ section of my blog, I will share my progress towards my dividend goals. I will also share dividend growth stock ideas and thoughts. Additionally, I will share the rational behind any future purchases or sales. Dividends are truly a wonderful thing.

The current goal is to average $1,500/month in dividend checks. I would like dividends to provide between 25-33% of my monthly retirement income. However, this goal may be revised upwards over time.

My Q4-2016 dividend income was $1395.26. Last quarter (Q3-2016), my dividend income was $521.31. This equates to a $873.95 or 167.64% increase from the previous quarter. The increase was solely due to 401k contributions that provided more dividends via index funds. Additionally, the funds in my 401k provide larger distributions at the end of the year. I anticipate a step back  in dividend income for Q1-2017.

Last year’s fourth quarter dividend income was $363.75. This equates to a $1,031.51 or 283.6% increase from the same quarter last year.

In 2015, my total dividend income was $1,164.03. I am proud to report that my 2016 dividend income was $2,715.01, which is $1,550.98 or 133.2% increase.

My average monthly dividend income is now $226.25 ($2,715.01 / 12 months = $226.25), which is 15.08% of my current goal of $1,500/month. I am now 3.50% closer to my goal; Previously I was at 11.58% of my goal.

The graph below outlines my quarterly dividend income dating back to Q1-2013:

The table below outlines my quarterly dividend income dating back to Q1-2013:

New Purchases

No individual stock purchases in Q4-2016. During 2016, I purchased $DIS, $KHC, and $SBUX. Additionally, I added to my previously existing positions of $C and $WFC.

It’s the Most Wonderful Time of the Year… For Goal Planning

The last two weeks of every December, I take time to reflect on the the year that just past and the year that is ahead. I use this time to evaluate how I did in meeting this year’s goals, where things went wrong, and what I did right. I also use this time to set my sights on what I want to achieve over the next twelve months. You cannot expect to get to where you want to be with out a plan and a defined goal.

Knowing your ‘Why’?

It’s not enough to just have a goal. You should have a ‘why’ or reason for wanting to achieve your goals. Everyone would say saving $ 1 million would be great, but why? Just because it sounds like a cool number? Or because you think it will be enough to retire on? Depending on your spending habits it might or might not be enough.

Or do you have a clear vision for wanting to save $1 million? Some sort of logic like, using the 4% rule I can safely drawn down $40,000 from my portfolio every year which is more than enough to cover all of my family’s expenses.

Knowing your ‘why’ will give you a clear vision on if a goal is important to you or not. Your ‘why’ will also provide insight on if you need to adjust your goal(s) upwards or downwards. Not all goals are monetary. Goals can be relationship or lifestyle oriented. Goals can focus on personal development or be career oriented. Fitness, travel and reading are other great areas to focus on in goal setting.

Planning Your Goals

I encourage you to take an hour to sit down and write a handful of goals you would like to achieve next year. Next to each goal you should also right the reasons you want to achieve this goal. For example, your goal could be to volunteer at a local non-profit twice a month. Your reasons could be you want to help people, give back to your community and meet like minded individuals (networking).

You should keep your goals somewhere where you will see them often. Make sure to check in periodically and see if you are on pace or need to pick up the slack. You should share your goals with someone. Informing a person(s) about your goal will act as a form of accountability.

Reviewing My 2016 Goals

Buy another investment property: Unfortunately, I did not accomplish this goal. I submitted offers on 9 homes and lost on each bidding war. Though discouraging, I will not give up on my efforts to acquire more income producing properties. This will be a goal for 2017.

Max out my 401K: VICTORY! For the first time in my life, I max out my 401k. This was a great way to automate my savings and pick up on free money via my employers matching contributions.

Max out my Roth/IRA: VICTORY! This was a habit I established right after graduating college and will continue to do so. The Roth IRA is a great way for young people to establish an emergency fund while investing.

My goals for 2017

Or at least a few of them…

Read More: In 2015 I read over 30 books. Last year I did not place a priority on reading since I focused on growing my business. Next year I will read 12 books from various genres.

My why – Reading is a great way to decompress, learn and grow. This is an activity I enjoy and its great escaping to another world or borrowing someone else’s mind.

Run More: I was a runner/triathlete in college and my early adult life. Over the past few years, I have lost the ability to run any meaningful distance and gained several pounds. Towards the end of 2016, I started working out again and lost modest weight. In 2017, I would like to regain the ability to run 5 miles+ without hating my life.

My why – The human metabolism typically slows down the older we get and I would like to control my weight. I would also like to improve my overall health and activity level; I have yet to meet a doctor that recommends sitting at a desk all day. Running/exercise helps me cope with stress and clears my mind. Some of my most creative thoughts and ideas have come during a long run. Additionally, I would like to improve my overall fitness to pursue some of my future goals like climbing more complex mountains and completing an Iron Man.

Investment Property: This will be an annual goal for the next 4 or 5 years.

My why – Rental properties provide a great source of (mostly) passive income. The increased cash flow will allow me to quit my day job once I have a few more properties. The extra income will give me the flexibility to travel, spend time family and volunteer more.

Travel More: I want to take one international trip and a couple trips around the U.S. Travel is a wonderful thing. The world is to big to stay in one place.

My why – Traveling allows me to relax and opens my eyes to the world around me. I feel refreshed after a long trip. There are many places I would like to see and cultures I would like to experience.

Volunteer More: As previously stated above

Max 401k/IRA: This is a FIRE blog and I hope this item does not need an explanation.

Merry Christmas and Happy New Year!

What are your goals for 2017? Do you know your ‘why’ or plan to write out your goals? Written goals are more likely to be achieved than unwritten goals. Having a plan will help you achieve your goals in life.

How do you approach goal setting? Merry Christmas and Happy New Years! May 2017 be better than the year before.

 

I Plan to Retire with Over $1 Million of Debt

AND THATS OK

From financial advisors to personal finance bloggers, there are countless views on debt in retirement. Many in the FIRE community view eliminating debt as an important step of achieving financial independence. There are many benefits of living debt free. However, I am planning on achieving financial independence and retiring early with over $1 million in debt.

You see, I view debt as a wonderful tool when utilized properly. No, I am not talking about getting a loan to buy a new car; that cost my friend over $240,000.   Rather, my mountain of debt will consist of various fixed-rate mortgages for rental properties. Fixed-rate mortgages or debt means the interest rate stays the same and does not fluctuate. On a side note, my primary residence will be paid off or I will elect to rent (TBD).

So, why am I comfortable with so much debt?

First, I will not personally pay my monthly mortgage payments. My tenants will pay the mortgage via their rent payments. The properties rent for substantially more than my monthly caring costs which is commonly referred to as PITI (principal, interest, tax, and insurance). The difference between the rents and carrying costs allows for the property to support itself, pay for repairs, AND provide me with monthly cash flow.

Second, the cushion between the monthly rental rate and carrying cost will allow me to build up a reserve for repairs and/or vacancies (read emergency fund for the property). I self-manage my properties and my only vacancy to report was a half of a month on one property. For those new to real estate investing, I would recommend assuming at least 5-10% vacancy rate when analyzing a property. Additionally, the cushion allows me to drop the rent if the area becomes less desirable or if rents decline while still paying myself every month. Please note, rental rates typically do not decline. Rather, rental rates typically increase with or faster than inflation. (Obviously, this depends on the market).

Furthermore, I have fixed-rate debt which means my monthly payment will not increase for the next 30 years. Naturally, over the next 30 years, inflation will be my best friend. My rental rates should continue to increase gradually over time which will increase my monthly cash flow. I will also be paying back my debt with less valuable money since $1,000 twenty years from now will be worth less than $1,000 today.

Over time, my mortgages will be paid down and eventually be paid off. This is commonly referred to building equity. The properties will likely be worth more in 10, 20 or 30 years, however, I never assume the homes will appreciate in value. I recommend never buying a property because you think the price will appreciate; that is pure speculation. BUT!!!! There is a good probability the value will increase gradually over time but I am conservative in my underwriting/investing assumptions. As such, I care more about the cash flow and less about the property’s appreciation.

Once the properties are paid off, my monthly cash flow will increase greatly. The extra cash flow creates more financial freedom. I can use the new cash flow to buy more properties. I will have the freedom to travel to more places. Donating more to charitable causes that I am passionate about will be another great use of the extra cash flow. More cash flow = more options = more freedom.

Have you thought about how much debt you want in retirement? What are your plans? Will you be debt free or have debt like me? No one size fits all.

My Former Co-Worker’s Broke Man Habits

We all have that one colleague with horrible spending habits. You know the one I am talking about. The guy or girl who constantly eats out and buys useless crap. Well, after reading a financial success article of a well to do individual, my former coworker made a very interesting statement to our whole team. He said something like, “Wow, it must be nice to be rich. I wish I knew how to do that.”

Being the nerdy financial blogger that I am, his comment caught my attention. I quickly chimed in and told him, “It’s rather simple really. All you need to do is live below your means, save and invest the difference and repeat.”

This statement was scoffed at and quickly dismissed by my co-worker. He is about a decade older than me and has typically discriminated against me because of my age (but thats not a story we are going to get into).

Later that day, another colleague of mine brought up this conversation. She agreed with my statement and we began discussing spending and saving habits. The guy who dismissed my philosophy on creating wealth  plays horrible defense and spends money like its going out of style.

He buys breakfast AND lunch every day from the various eateries around the office. Additionally, he takes at least two trips a day to Starbucks for coffee. Mind you, there is free coffee in the office. However, according to him, if it’s not Starbucks its not coffee….. *Face Palm*

Bag lunch with a banana and an apple.

 

Furthermore, this guy and his wife recently bought a house. The couple struggled to muster up the cash for a 3% downpayment and elected for a five year adjustable rate mortgage. Their investment theory is that they can refinance into a lower rate in a couple years once their house builds equity. Apparently, property values will always go up….. NOT!

Let’s preface the following analysis of my coworker’s spending with the fact that he makes between $120,000 to $130,000 a year; this is more than double the average household income in the United States.

The table below outlines my coworkers basic spending habits:

coworker-spending-habits

Assuming Johnny (not his real name) spends $5/breakfast, $10/lunch and $5/coffee, he would spend $125/week.  This habit costs him $6,500/year, which is more expensive than buying a new car. Over a decade, Johnny’s poor spending habits will cost him over $65,000 (see table below).

decade-coworker-spending-habits

Obviously, eating is a necessity. However, there are more cost effective and healthier options than eating every meal out. Below are just a few affordable and healthy alternatives to eating out every meal.

Low cost meal alternatives

Breakfast

  • Two servings of oatmeal & blueberries: <$1.00
  • Two servings of hot quinoa, cinnamon & blueberries (my favorite): <$1.00
  • Two eggs, toast with peanut butter or jam, and a piece of fruit: ~$1.00-$1.50
  • Two eggs, two diced potatoes for homemade home fries or grits: ~$1.00
  • Yogurt w/ fruit or granola: $1.00-$1.50
  • Homemade breakfast casserole. This is a great dish that takes about 10 minutes of prep and provides great hearty breakfast for the entire week. 1 dozen eggs, pre sliced hash browns, 1lb of ground (turkey) sausage, cheese and spinach: ~$10.00 (~$1.67/serving)

Lunch

  • Peanut butter and jelly sandwich with a piece of fruit: <$1.00. Average PB&J costs about $0.30
  • Pasta and sauce: <$1.00
  • Grilled boneless skinless chicken breast & quinoa: $1.50-$2.00,
  • Italian sausage, on a sub roll with sauteed peppers and onions: ~$2.00

According to Commerce Department, for the first time ever, Americans are now spending more dining out than at the grocery store. A 2015 study conducted by Visa shows the average American spends approximately $3,000 on lunch dining annually. This expense is a luxury and not necessity. Anyone struggling to pay off debt or save could easily reduce their dining habits to improve there financial health. What are your dining habits like? Do you have any low-cost meals that you enjoy?

 

Q3-2016 Dividend Report

As many of my readers may know, I love dividend stocks and believe dividends provide a great source of passive income. Moving forward, I will be providing quarterly updates regarding my dividend income. Utilizing ‘The Dividend Report’ section of my blog, I will share my progress towards my dividend goals. I will also share dividend growth stock ideas and thoughts. Additionally, I will share the rational behind any future purchases or sales. Dividends are truly a wonderful thing.

The current goal is to average $1,500/month in dividend checks. I would like dividends to provide between 25-33% of my monthly retirement income. However, this goal may be revised upwards over time.

My Q3-2016 dividend income was $521.31. Last quarter (Q2-2016), my dividend income was $453.51. This equates to a $67.80 or 14.95% increase from the previous quarter. The increase was solely due to 401k contributions that provided more dividends via index funds.

Last year’s third quarter dividend income was $311.52. This equates to a $209.79 or 67.3% increase from the same quarter last year.

My average monthly dividend income is now $173.77 ($521.31 / 3 months = $173.77), which is 11.58% of my current goal of $1,500/month. I am now 1.51% closer to my goal; Previously I was at 10.07% of my goal.

The graph below outlines my quarterly dividend income dating back to Q1-2013:

q3-2016-divvy-income

The table below outlines my quarterly dividend income dating back to Q1-2013:

q3-2016-dividend-chart

New Purchases

I established a partial position in Starbucks ($SBUX) in mid-September when the stock pulled back close to it’s 52 week lows. I will continue to buy shares if the stock prices moves lower. This is a company I want to own for the next 5, 10 or maybe even 20 years.

The company enjoys a strong cult following from its customers, exceptional returns on the capital invested, a healthy balance sheet, and a low dividend payout ratio. I believe that Starbucks will continue to increase their dividend by 10%+ annually for the foreseeable future. The company has great growth prospects due to their expanding business operations in China and India.

Q2-2016 Dividends – The Dividend Report

As many of my readers may know, I love dividend stocks and believe dividends provide a great source of passive income. Moving forward, I will be providing quarterly updates regarding my dividend income. Utilizing ‘The Dividend Report’ section of my blog, I will share my progress towards my dividend goals. I will also share dividend growth stock ideas and thoughts. Additionally, I will share the rational behind any future purchases or sales. Dividends are truly a wonderful thing.

The current goal is to average $1,500/month in dividend checks. I would like dividends to provide between 25-33% of my monthly retirement income. However, this goal may be revised upwards over time.

Going through old statements from the last three years took a great deal of effort. However, the end result was well worth the time since all of my dividend data is compiled (see graph & table below). On a go forward, it will be much easier to track my dividend progress.  The great news is that my dividend income has increase modestly over the past three years but is still far from my goal.

My Q2-2016 dividend income was $453.51. Last quarter (Q1-2016), my dividend income was $344.93. This equates to a $108.58 or 31.5% increase from the previous quarter. The increase was largely due to the additions of dividends from Disney and Kraft Heinz; both stocks were purchased in February. Additionally, I also acquired more shares of Wells Fargo to during the market pull-back. Lastly, continued 401k contributions also provided a source of more dividends via index funds.

Last year’s second quarter dividend income was $256.42. This equates to a $197.09 or 76.8% increase from the same quarter last year.

My average monthly dividend income is $153.17 ($453.51 / 3 months = $153.17), which is 10.07% of my current goal of $1,500/month.

The graph below outlines my quarterly dividend income dating back to Q1-2013:

Q2-2016 Quarterly Dividend Income

The table below outlines my quarterly dividend income dating back to Q1-2013:

Q2-2016 Dividend Income Chart

 

The $30,000 Car That Cost My Friend Over $240,000

Last week I met a buddy of mine for a few beers. Over the course of several pints and wings, my friend informed me his car will be paid off next month. He bought a brand new car five years ago after graduating from college for approximately $30,000. Since then, his monthly payment was just over $500/month for the last 60 months! This does not include taxes, maintenance or insurance. By many accounts, the car is considered a practical four-door mid-size car and far from lavish. This entire discussion had my wheels spinning and I immediately started running numbers in my head (more on the numbers later).

Car Money PitYou see, we both had older cars while in college. Both of our cars still had several years left in tank. In fact, I am still driving my now 18 year old junker but acknowledge that I will need a replacement in the near future. Between 18 years and almost 200,000 miles, my car has seen better days.

The average price tag for a new car in the United States stands at $32,994 as of May 2016. According to a recent Experian report, the average auto loan is now $30,032, which is the highest level in history.  The average monthly payment and loan term are $503 and 68 months, respectively. Both of these figures are also record highs. As a result, Americans are paying MORE every month for a LONGER period of time. That new car smell must be really worth it… NOT! This is a recipe for disaster, especially since cars are depreciating assets (lose their value over time).

Over the past several decades the automotive industry experienced a wave of innovation. Automobiles are more durable and high tech than 30 or 40 years ago. The average life expectancy of a modern car is approximately 200,000 miles and the average American drives between 12,000-15,000 miles year. Based off these numbers, the longevity of an average car driven by an average person is between 13 and 17 years. (200,000 miles / 15,000 miles  = 13.3333 years; 200,000 miles / 12,000 miles = 16.6666 years)

Now… back to the numbers. Let’s just assume my friend’s ONLY car related expenses were his $500/month loan payment (not true, several other costs associated). This equates to $6,000 in annual loan payments ($500 x 12 months = $6,000) and $30,000 in total payments ($6,000 x 5 years = $30,000).

Now lets imagine if my friend invested $6,000/year for the past five years instead of paying for a depreciating asset. Assuming he earned an 8% return annually by investing in a low cost index fund or other forms of passive income, which is a modest assumption over a long period of time, his new car purchase would have cost him over $240,000 (see table below).Car Return Payments Final

I was shocked when my buddy mentioned his intensions to buy another NEW CAR in the next year or two. His car is only five years old and has less than 60,000 miles. Conservatively, his current car has eight to ten years of useful life left. From a financial standpoint, my friend would be well served continuing to drive his car for the foreseeable future. Purchasing another new car would push his retirement back over $785,000 before he turns 60 years old (see table below).Car Payments S2

Note: this friend does not buy into FIRE and believes he will work well into his 60s or 70s. With financial choices like this, its not surprising he thinks such a thing.

Buying a used car provides a worthy alternative for anyone in need of a ‘new’ car. Purchasing a car that is two to four years old, has been well maintained and has low milage, provides a great value. By doing so, you allow someone else to deal with the depreciation. Also, you can typically buy this type of used car between 30-40% of the original costs. This approach to car buying will save someone several hundred thousands of dollars over the course of their lifetime.

As previously mentioned, I plan on buying a used car to replace my old junker in the next year or two. I will seek a car that is two to five years old that has relatively low milage. Additionally, I plan to pay for this car in cash to avoid having a pesky car payment.

A while back, I set up a bank account to save for my future car purchase. I funded this account by directly depositing $100 every pay period. Additionally, I never carried the debit card for this to account; this helps avoid the temptation to raid the account for frivolous expenses.

Let’s assume in two years I buy a used car that is similar to my friend’s $30,000 car at 40% of the original cost. This used car would cost me approximately $12,000 ($30,000 * 40% = $12,000).

Let’s also assume that I will be paying all cash upfront. By deferring this purchase I benefitted by saving/investing $6,000/year for six years, which my friend did not. Additionally, I did not go and buy a brand new car (again) which lowered my overall out of pocket expenses ($30,000 vs $12,000). The table below shows my savings and what I lose when buying the car.

Car Savings S3

My friend’s decision to buy a new car cost him $240,000 by buying a new car after college. Over the same course of time, my decision to defer a car purchase and to buy a used car saved me $208,000; this is a difference of $448,000. If he buys another new car in a year or two (hope he does not) the difference will be greater than $1 million.

In conclusion, buying a new car costs several times more than the sticker price suggests. Cars are getting more and more expensive every year and there are several hidden costs associated with owning a car such as maintenance, taxes and insurance. My friend’s $30,000 purchase cost him $240,000 while my deferred purchase of a used car saved me $193,000. Purchasing a slightly used car provides a finically savvy alternative for anyone needing a ‘new’ car. What are your thoughts on purchasing a car? Does this analysis make you reconsider your future plans?

House Hacking: Getting Paid to Live

This article was originally posted on Two Cup House as a part of the Alternative Living Arrangement Series

Housing is typically the largest monthly expense in any budget. But what if it wasn’t? What if we could eliminate the cost of housing? Or better yet, What if we flipped this concept upside down and actually GOT PAID TO LIVE?!? This is exactly what I did.

Following conventional wisdom or traditional ways of thinking does not resonate with me; maybe I am crazy. Rather, I have always challenged ‘the norm’ or the ‘its always been done this way’ mentality. The same holds true when I heard housing is generally the largest monthly expense in a budget. Being fairly frugal most of my life, I wanted to keep my housing options as affordable as possible. A general rule of thumb is to keep rent/mortgage payments less than or equal to 1/3rd of your income. However, many individuals are paying 50% or more of their income for housing. This is common for younger adults, who are early in their careers, and live in expensive cities.

I currently live in a 52 square foot (9′ 6″ x 5′ 6″) room in a home that I renovated last year (more on the tiny room in a bit). Prior to the renovation, I had no idea which room I would be living in. The goal was to live in one room and rent the other rooms for a profit (Yes, I said PROFIT!). And that is exactly what I did. Realistically, I could live any of the rooms and still earn a profit. However, around the time of moving into my home, I stumbled upon several blog posts about the minimalist lifestyle (I also wanted to maximize my cashflow from the property).

The minimalist lifestyle intrigued me and resonated with some of my life experiences. I spent a summer during college working with Habitat for Humanity in El Salvador. The locals we were building homes for had few material possessions. Most of the people owned maybe two or three pairs of clothes and many lacked shoes. I was perplexed at how happy these people were with ‘so little’. I came to realize, these people who I thought to be ‘poor’ were actually very ‘rich’. They were rich in the sense of their friendships, appreciation of nature and the joy from a simplistic lifestyle. They were not burdened with debt or worrying about keeping up with the Joneses (whoever the heck they are). From these wonderful people, I learned that happiness in life does not come from designer clothes, fancy cars or other material (and trivial) objects. Rather, meaningful relationships, basic necessities such as food and shelter, enjoying a scenic view from the top of a mountain (or volcano in El Salvador) and the other simple things in life bring happiness.

NOW! The thing you are all wondering about, the 52 square foot room. Yes, I opted to live in the smallest room and maximize my cash flow. While moving in, I spent a lot of time sifting through my possessions in an effort to downsize my life into such a small space; the results were astonishing. I donated four (4) large bags of clothes to a local non-profit. The clothes were in great shape but either did not fit or were never worn anymore. Over the previous several years, I accumulated a bunch of junk that served no purpose other than taking up space. I began to randomly give away nicknacks to friends and throw away the other junk.

Living in such a small space, I knew organization would be paramount. As a result, I bought a loft bed off of Craigslist. The bed has a desk with several shelves and drawers. This instantly allowed me to double the amount of space I could utilize in the room. I also bought additional storage to stack on top of my dresser. Lastly, I modified my closet to double the amount of hanger space and bought a shoe rack that hangs from the inside of my closet door. Suddenly, 52sf of room seemed a whole lot bigger (see pictures below).

Now, living in such a small space and with 4 other people is not always the most enjoyable situation. I share a bathroom with two other people, which is not the end of the world. Generally, I opt to shower at work to avoid the morning traffic jam in the bathroom. Things get untidy in common areas relatively quickly with so many people. Everyone keeps different hours and sometimes I am woken up by my roommates stumbling in from the bar. Meshing interest, political views, lifestyles and needs of 5 people under one roof can also present challenges. Thankfully, I have a girlfriend who does not mind if I crash at her house on occasion.

The minimalist lifestyle and renting out extra rooms in a house provides many benefits. Downsizing to a small space forced me to declutter my life. In fact, a minimalist lifestyle has made my life simply more enjoyable. Eliminating the cost of housing has done wonders to my ability to save, pay down debt and invest. I am on my second home and intend to add a few more over the upcoming years. At some point, I believe that I will take a more reasonable sized room. All the headaches of living with so many people and in a small room seem worth the short term pain. The long term gain is almost priceless as I will be retiring in my early 30s (or at age 30 if things go really well).

Guy on FIRE - Room

Life in 52 sq ft  = loft!

Guy on FIRE - Desk

Plenty of space at this desk!

Guy on FIRE - Closet

A place for everything…

Think you can live small for a few years to live big for the rest of your life?

Dividends: Getting Paid to do Nothing

What if you could collect a steady and predictable income without having to lift a finger? Better yet, what if that income were to increase every year at a rate greater than inflation (meaning you earn more over time)? Sounds pretty good, right? Well this idea is not hard to obtain. Dividend paying stocks provide an excellent source of passive income and there are several reasons to own dividend paying stocks. In fact, I plan on having dividends provide somewhere between 25% and 33% of my monthly retirement income.

I did nothing and still got paid

First, you may be wondering what the heck is a dividend? Individuals may buy stock in publicly traded companies. Many publicly traded companies share their profits with stock owners (shareholders) in the form of dividends. Dividends are cash payments by a company to the shareholders. Cash dividends accounted for 71% of the market’s overall returns over the last 40 years. These payments typically occur quarterly but can also be monthly, semi-annually or annually.

Dividends allow investors to capture returns without selling the underlying asset. A dividend provides you with cash while allowing you to still own the business. The business’ value can appreciate over time while continuing to provide more dividends.  As an investor, you should never have to sell your asset in order to earn a return. Additionally, I would never own a stock that does not pay a dividend. Why would you own an asset that does not provide a return?

Dividends have preferential tax treatment. What does this mean? Dividend income is subject to capital gains tax and not income tax. Most people will pay a 15% tax rate on dividend income… Unless you are a complete baller and fall into the highest income tax bracket, then you will pay a 20% tax rate on dividend income.

Most companies generally increase their dividend payments annually. Some years the dividend increase may be north of 10% while other years shareholders enjoy a modest 4-5% increase. Typically, dividend increases out-pace inflation; this serves as a great hedge against inflation and way to preserve purchasing power. Companies that have a strong track record of continually growing their dividends are known as Dividend Aristocrats.

Now that we have established what a dividend is, the next logical question is what to do with a dividend? There are two schools of thought on utilizing dividends.

The first practice is known as a dividend reinvestment plan or a DRIP.  A DRIP allows an investor to take the cash from the dividend payment and reinvest it back into the company that paid the dividend. Numerous companies offer DRIPs and there are several advantages to dripping. By participating in DRIPs, investors can purchase fractional shares,  avoid costly transaction fees and even receive a discount on their purchase (discount only offered by some companies and typically ranges between 1% and 10%). Jim Cramer is a big believer in DRIPs.

Alternatively, investors can elect to receive their dividend in the form of a cash payment. There are limitless options once the investor has received the cash. The investor could elect to buy another company with their funds from dividend payment. This would provide an additional dividend income stream and increase diversification. This would also add to the power of compounding interest.

Additionally, the investor could use the cash to pay for bills or go on a vacation. Or, the investor could actually buy more stock in the company that paid them the dividend at a price of their choice. Warren Buffet never participates in DRIPs and utilizes the dividend income to buy additional stock at his price.

Over the course of my journey, I will be tracking and providing quarterly updates on my dividend income. The goal is to grow my dividend income through two methods. The first will be organic growth of my existing portfolio by companies naturally increasing their dividends over time. Secondly, I will opportunistically invest new money to increase my dividend income.

There are several compelling reasons to own dividend paying stocks. Dividends are a good source of passive income. Over time, dividends typically outpace inflation which serves as a hedge against inflation while preserving purchasing power. Dividend income has preferential tax treatment compared to wage income. Lastly, dividends have made up a majority of the market’s returns over the last 40 years. Are you collecting dividends? If not, you might want to ask yourself why.