FIRE: The Keys to Financial Independence Retire Early Lifestyle

Alison Southwick: This is Motley Fool Answers! I’m Alison Southwick and I’m joined, as always,
by Robert Brokamp, personal finance expert and snappy dresser here at The Motley Fool.
Robert Brokamp: Alison… Hello! Southwick: In this week’s episode we’re going
to learn all about the FIRE movement, which stands for “Financial Independence/ Retire
Early,” and we’re getting help from Jonathan Mendonsa and Brad Barrett, the two guys behind the popular
ChooseFI website and the ChooseFI podcast. All that and more on this week’s
episode of Motley Fool Answers. Southwick: So, Bro, what’s up? Brokamp: Well, Alison, a giant
in the financial advisory business is retiring. Chances are most investors don’t know the
name of Harold Evensky, but he’s a pioneer in the world of research-based financial planning. It’s pretty safe to say that there’s no advisor who’s won
more awards or accolades than Harold Evensky. He’s so respected that one of his clients
is psychologist Daniel Kahneman who won the Nobel Prize in economics and is considered
one of the fathers of behavioral finance. So if a guy’s that smart and he’s going to Harold Evensky,
you might think he must know what he’s doing. Harold just turned 76 and he gave his final
speech last month at a conference in San Diego, and the speech was summarized by
Robert Huebscher for There’s a lot of good stuff in there,
but I’m just going to highlight four key takeaways. No. 1 is expect lower future returns. Evensky recommends that after fees, taxes,
and inflation, investors should expect to earn just 2% a year on
average over the next decade. So not over the next year,
or two, or three years. We don’t know. But over the next decade
we should expect pretty low returns. Now he’s not the only person to predict that
the markets will provide below-average returns, but it’s particularly notable coming from
him because for a very long time, some of the financial planning software that is most
commonly used by financial advisors relied on Harold Evensky’s predictions for their
return assumptions, so his predictions are fairly well respected. In his speech he emphasized that in a low-return
world managing fees and taxes is even more important than ever, which brings us to No. 2.
And that is be both active and passive. The debate of whether investors should try
to beat the market or they should just stick with index funds rages within the financial
advice business as well as without. What does Evensky recommend?
He says you should do both. He was actually one of the early pioneers
of what became known as the core and satellite approach to investing. A core of
your portfolio should be index funds. It’s clear that they outperform most active
strategies, but more importantly, very low cost and very tax efficient. Then once you have your core in index funds,
you can do what he called satellites in your portfolio. Try for more aggressive strategies.
Try for a little more active management. See if it works out. It could work out,
but not everything’s riding on those. And make sure you do it in your IRAs, because
generally active strategies are more tax inefficient. No. 3 is don’t invest money
you need in the next five years. That may not sound particularly insightful. Everyone knows to keep short-term money out
of stocks, but the actual size of that cash cushion differs by whom you ask.
Even I’m a little squishy about it. I tend to say if you don’t need
it in the next three to five years. Some people say in the next one to two years,
so I think it’s significant that someone like Harold Evensky is saying five years
is really what you should be targeting. If you need that money in the next five years,
it should not be in the stock market, especially if you’re retired, because that’s
generally the length of an economic cycle. And No. 4, the last one,
is give annuities a fresh look. Like many experts, Evensky derided
annuities for years, and I did that as well. But that’s changing, mostly because the cost
of annuities has come down so much. And by annuities, he’s generally talking about
what are known as single premium income annuities. You hand over a large lump
sum to an insurance company and they pay you a check
for the rest of your life. Regardless of what’s going on in the stock
market with interest rates, the economy, and how long you live; you know you’re going to
get that check in the mail each and every month. Generally speaking, the research is that you
should wait until you’re age 70 to do it, because the longer you wait,
the higher your payout. It’s based on life expectancy, but 20% or
more of a retiree’s portfolio could be in annuities and that would generally replace
what you would otherwise invest in cash and bonds. Those are just four takeaways
from Evensky’s final speech. There’s plenty more from that presentation
and from the many speeches he’s given over the years as well as the many academic
papers, articles, and books he’s written. If you’re looking for some good, evidence-based
financial planning, just google his name and you’ll come up with some pretty solid stuff. And finally, I’d like to say that after spending
decades of helping other people retire, I wish Harold Evensky the best now that
he finally gets to retire all on his own. Brokamp: Everyone is seeking
financial independence — that day when you can kiss your boss good-bye
and spend the rest of your days doing whatever the heck you want. Southwick: What are you doing to your boss? Brokamp: Kissing. Kissing him good-bye.
Southwick: Should I just warn Andy Cross about what’s coming?
Brokamp: Platonic. In a platonic sort of way. Southwick: OK, fine! Brokamp: Anyways, for most people that day
comes when they retire which happens between the ages of 62 and 65 for most Americans. But there’s a growing movement of people out
there who are challenging the traditional timeline. They’re giving the boss the
old sayonara smooch — do you like that? I just made it up — while they’re
in their 50s, 40s, or even their 30s. So, how is that even possible? Well, today we have two people who have done
it themselves and now make it their mission to teach others how to do it, as well. So, welcome to the show
Brad Barrett and Jonathan Mendonsa, co-founders of the ChooseFI
website and podcast. Jonathan Mendonsa: Bro,
thanks so much for having us on! Brad Barrett: Yeah, really
appreciate it! This is exciting! Brokamp: Let’s start by letting you guys
introduce yourselves and tell us a little bit about your embracing of the FI lifestyle; FI, again,
standing for financial independence. Mendonsa: My name is Jonathan and I have been
a fan of the financial independence community since 2012 where I first stumbled onto
a little-known blog called Mr. Money Mustache. That led me down a very deep rabbit hole which
convinced me that I could handle a large percentage of my finances myself and, in fact, it was
in my best interest to learn just a little bit about personal finance.
About building a financial ground game. That rabbit hole increasingly steered me towards
the financial independence community; this idea that I could claim control of my
financial life not just in my 60s and beyond, and not just in my golden years, but frankly
my best years of life [my 30s, 40s, and 50s]. And along with that came this idea of optimizing
my life around value, jacking up my savings rate well beyond maybe
the standard 5% or 10%. Indeed, in my own life, I at one point was
touching closer to 70-80% and what that has allowed me to do is build the life that frankly
I can get incredibly excited about and I couldn’t even have imagined as little as maybe five,
six, seven, or eight years ago. Barrett: I’m Brad Barrett. I’m a CPA by trade
and I’ve always been a natural saver. I think whereas Jonathan describes himself as the
“reluctant frugalist,” it’s a means to an end for him. He wants this freedom that financial independence
gives, but I’ve always been the saver just from the very beginning. I don’t know why. But my wife and I lived at home
for a couple of years before we got married. We had probably like a 90%+ savings rate and
we made very intentional decisions that have led us to this point of financial independence.
We drive old cars. Oh, poor us! We have these cars that get us from
Point A to Point B but, as Jonathan would joke, they’re not very impressive to put it mildly. Mendonsa: We call it Golden Boy, but this
2003 Honda Civic that we drove down in today… Barrett: But it does drive,
and it drives wonderfully. Like I said, we made these decisions. We moved from Long Island, New York where
we lived our entire lives and we moved to Richmond, Virginia where probably
the house and the taxes are one-third of what we would
have spent on Long Island. And was that an easy decision?
Was it easy to leave our families and our friends? No, of course not, but it was in service of
this goal, which is to have a wonderful life that we could enjoy so my wife could stay
at home with our kids, which she did. She was a stay-at-home mom. My youngest is now nearly seven, and Laura’s
been a stay-at-home mom for nearly 10 years. It’s amazing, but this life that we
planned out at 25 or 26 has come to fruition. I left my corporate job as a CPA three-and-a-half
years ago now, and I work full-time on this podcast. Brokamp: We’ve talked about this, before,
on previous episodes, and we talked about it in terms of what’s been known as the FIRE movement
which stands for Financial Independent/ Retire Early. You don’t have the “R-E” as part
of your website. I’m curious. Was that deliberate and do you
guys consider yourselves retired? Mendonsa: I am definitely not retired
and I think that is a huge point to make. I do think it was intentional, but I don’t
think we, at the beginning when we picked our brand name, were quite aware
of how much that resonates with us. That this is about FI for us.
We are part of the FIRE community. We love the FIRE community.
And frankly I’m grateful for the acronym. I think it gives people
something to latch onto. I think that when you see this
idea of retiring early, you click the article. You want to find out a little bit more. But very quickly what you find out is that
financial independence is about control. It’s about designing
a future that you can get excited about. And if that gives you the option to choose
retirement because you hate your job, or it just gives you the flexibility to build a
career that excites you, or maybe you can move across the street to an employer that
treats you better; it puts control on your side of the court and I think
that’s what’s so attractive about it. Barrett: We basically say that it’s not what
you’re running from. It’s what’s you’re running towards. It’s designing this life that you can enjoy. We get a finite number of years here on the
planet, and to live them working a job for decades just to afford a fancy car, or a fancy
house, or maybe to go out to dinner a couple of extra times a week wasn’t
a trade-off that I was willing to make. Again, to your question,
it’s not about retiring early. I feel like that has almost
become a distraction for a lot of people. It’s about accruing that power in your life to make
decisions that serve you and to not be stuck in a job. If that boss says, “Hey, you need to come
in an hour early,” you have no option because your entire life is going to fall apart within
like 30 to 90 days for most people who live paycheck to paycheck. Or someone who gets a flat tire and literally
that $200 expense they have to put on a credit card. So for me it’s about saving money. It’s about accruing power in my life to make
the decisions that I want to make. Mendonsa: And imagine being in a situation,
even in your early 30s, where your employer needs you more than you need them. Those individuals that are able to carve that
out; those are the ones that inevitably get raises. Those are the ones that are able to carve
out unique working situations. Work from home. Those are the ones that are able to —
even before they choose early retirement — build a working environment and create
a company culture, even if they’re the pioneers. They’re the ones that are able to act as a
vanguard for a better-working environment. I think it’s a benefit to people that will never
retire early to still pursue financial independence. I’ll give you an example.
I was a pharmacist. I was a pharmacy manager at a retail pharmacy
and the way I got this job was that in my early teens I googled.
Googling was still a relatively new thing. I actually heard the word “Google” in my
senior year in high school. I remember that. But I googled “top ten paying professions
in the United States” and pharmacy came somewhere near the top of that list. And then I went to undergrad for
four years, and then got a four-year doctorate. Southwick: Based solely on that Google search.
Mendonsa: Man, Google is powerful. It’s had an effect on my life.
I am a professional Googler. But at the end of this eight-year
stint I graduated with pharmacy school. I had an entry-level six-figure income and also
a little side effect; $168,000 in student loan debt. And then I started working in this job that
I had been pursuing for the past eight years and paid them off aggressively.
I talked about that 70% savings rate. Most of that just went
to paying off my student loan debt. I paid it off in about four years getting
back to broke. Getting back to broke at the age of 32. And I continued this aggressive form of savings
and I had roughly $100,000 saved up because I’d also been doing my 4% match. So along the way I decided to start this little
podcast with my friend here, Brad, and it blew up. And what happened was because I was doing
this in the context of no debt, I had slashed my expenses to the bone and on top of that,
this little startup that we had developed was starting to just cover all my bills. There were some very interesting things that
happened, and I’m just telling all of you this to demonstrate how powerful it is to
have this sort of financial ground game. So a documentary about our community,
which is going to get aired next year, wanted to come to town and film
with us for a couple of days. On top of that we were going
to go to our first conference. It’s a big networking conference
for people that are in our community. And then on top of that we wanted to go visit
my [wife’s family] for a couple of weeks. Now, she’s from Zimbabwe.
We had not seen them in several years. We wanted to go do all of this.
Like there’s so many things you want to do in life. And what was keeping us
from that? Well, it was my job. I’d get a total of about 20 days a year to
take off and I have to divvy that up between paid and sick leave. It’s very structured.
I went to my boss and said, “I have this, this, and this.” I laid it out. “And I just don’t see any way
that I can keep all of this going. I simply cannot do it. I’ve checked our company policies and there is a
way that you can give me an unpaid leave of absence. I need three weeks. I need three weeks, unpaid,
so that I can do all of this. I can’t keep doing both.” To which my boss said to me, “I don’t think
it’s in our best interest to let you do that. I don’t think it’s in our best
interest to let you take this leave.” To which, in the context that I just told
you, I was able to say to him, “I don’t think it’s in my best interest to stay.” And that’s a situation you get to make
because you’re not saddled by student loan debt. That’s a situation you get to make because
you have a strong financial ground game. That’s the power of financial
independence and not even reaching it. I wasn’t FI when I did this.
I was on the path to FI. Brokamp: It seems to me that the essence of
financial independence — whether it’s what you guys are doing, or even someone who
I think many people credit for being one of the first, Vicki Robin and Joe Dominguez
in their book Your Money or Your Life [I know you guys did a great
interview with Vicki Robin] is basically transforming
your relationship with spending. Being more deliberate about spending and
appreciating what choices you no longer have if you’re spending too much.
Was that a difficult transition? It doesn’t sound, Brad,
that was as difficult for you… Southwick: For Brad it was a joy.
Barrett: Absolutely a joy! Mendonsa: My buddy, here,
is an aspiring minimalist. He’d have one suitcase,
one 2003 Honda Civic, and live out of hotels. Barrett: And a laptop. That’s all I need.
Mendonsa: Life is so simple! Brokamp: But I’ll add to that that
you’re both also married, so it’s not just… Mendonsa: I said aspiring minimalist.
It’s hard to be a true minimalist… Barrett: With two kids it’s not so easy. For me, getting your expenses
under control doesn’t mean deprivation. I think this is the crucial part. Financial independence is not about deprivation
— it’s about choices — so we say that there are hundreds of different
levers you can pull. There are hundreds of different choices you can make
in your financial life, but you have to take action. I don’t care which ones you choose. You don’t have to sell your house and move
into an apartment, and you don’t need to sell your car, but you are going to need to make
some choices to get money saved up so that you can have that little bit
of power in your life. And it starts from the
very beginning, like Jonathan said. It’s the path to FI.
This is not binary. It’s not zero or one. So when you save up, if you’re living paycheck
to paycheck and if you have $2,000 in the bank, your life is dramatically better than it was.
So I think this starts from the very beginning. Mendonsa: I am truly a reluctant frugalist.
This does come naturally to me. Like my easy path is just not spend money. Well,
you guys can relate to this. I have a board game list. There’s like 300 more
board games on this list that I want. Brokamp: We at The Fool are big
board gamers. That’s why he brings that up. Mendonsa: But I think I want something more
powerful, so let me just paint another picture for you. I was getting a lunch with Brad early on when
we had first met, and I am bringing with me this entry-level six-figure income; I think
somewhere near $120,000 depending on the year. And I’m very happy and
very proud of this income that I have. But what I became very clear on, after I met
Brad, is that it’s not about how much you make. It’s about how much you save. I had this great income, but all of it was
either going back to student loans or, in many cases, it was going to finance a car.
It was going to finance a big house. It was going to finance consumer debt. And frankly, all this stuff you purchase you
don’t have to use because in many cases you’re in a job you don’t like. Contrast that with Brad, as this natural frugalist,
because he has put all of his savings towards buying his freedom. I’m at work all the time.
Every other weekend. Nights and weekends. He spends all of his time
at home with his family. And suddenly that FOMO — that fear of missing
out that maybe would be used to get you to buy something new — I wanted
to buy the ultimate luxury. I wanted to buy a perpetual moneymaking machine
that would allow me to spend my time with those I love. You mentioned my wife. I want to spend
my time with my wife and my son. That’s where I want to spend
the time; with the people that I value. And I don’t want to just do it when
my son is 20 or 30 and we’re trying to reconnect. I want those best years. I want to watch him growing up and I want
to be able to say when I want to go home and visit my wife’s family in
Zimbabwe we can do that. We can make that a priority.
And we can build work. We can build everything else around that.
So I think what this does is this is a reprioritization. If you think about what it is you actually
value and you build that list out, I think you will find that it’s rarely the consumables.
It’s very rarely how much crap we all own. In many cases that is just a really poor substitute
for quality time and that’s what this gives us. Brokamp: In the earlier days of when I first
discovered this whole movement many years ago, many of the people I came across were
people like Vicki Robin or other people who, frankly, didn’t have kids. But more and more
it does seem like people are doing it. They’re able to raise
families while living this. Do you feel comfortable with any of the trade-offs
you might have made, or do you feel like this actually hasn’t been that difficult?
Barrett: I have two young daughters. I have 10-year-old and
a nearly seven-year-old. I think they’ve lived this wonderful life
of abundance because we spend time with them. What do kids want?
They want time with their parents. And I’m not at work all the time. I’m there at home so when
they come off the bus, I’m there with them. We come home. We run home.
We play board games. I mean, I’m playing board games
at four o’clock on a Wednesday. How crazy is that? It’s almost hard, honestly,
for me to imagine that this is real sometimes. Seven years ago when I was working
in an office, this would have been impossible. My daughter Anna knew me in the pre-FI days
and the post-FI days and now she’s getting to, I guess, experience this
life where I am there all the time. So to me, I don’t know what
the trade-off is, honestly. I search for it, and it’s almost like it’s
hard to imagine sometimes what people are spending money on. What they prioritize
over spending time with family and friends. So for me it’s such an obvious choice.
Like what am I giving up? A 2018 BMW as opposed to my 2003 Civic? And you mean I get to spend all this time
with my kids and watch them grow up? That’s so obvious to me. I couldn’t even fathom anyone making the other
decision when it’s presented to them in that manner. But sadly, people don’t think
about that. You go through life. You see what the Joneses next door
are doing, and you emulate it, because sadly we don’t have financial education in
this country. People don’t learn how to do this. They don’t learn what
it means to spend all your money. So I guess I’m fortunate that
on some level I was this natural saver. But I think what’s beautiful about what we’re
trying to do in the FI community is we’re trying to open people’s eyes
to the fact that this is possible. I’m just a regular guy.
There’s nothing special about me. I just happen to be a saver. And even if you aren’t that saver —
even if you’ve made mistakes in the past — you can start today and take action.
So we talked about those levers? Make some choices that
will provide you some space. Will provide some savings
rate and move forward from there. Brokamp: One thing some parents
might think about is college. At some point either you may decide to save
for college or not, or some parents will decide that kids are on their own
for college. What’s your take on that? Mendonsa: This community
is a crowdsource community. It’s one of those where best practices rise
to the top, and we find that while you and I might have trouble thinking of a single
solution for our kid; as a whole [as a collective group of people], there are ways
to do college more intentionally. Smartly. There are ways to do college for less. So if MSRP [to grab a term from the car industry]
for college is estimated at $300,000 for my two-year-old to go to college when he’s 18,
there are plenty of people who have a plan to do it for less $40,000. There are plenty of people that have a plan
to do it for nothing, because they know how it works. And I can think of several examples that have
risen to the top which I would be happy to share with you; most notably in Virginia. In Virginia, we have guaranteed admissions
programs in like 23-plus public universities. Barrett: The University of Virginia and William
& Mary, so we’re talking top-tier universities. Essentially you go to a Virginia community college,
you get your two-year associate’s degree, and you check a number of boxes.
You need a certain GPA, but it’s not a 4.0. [I believe it’s a 3.4 that’s in the contract]. This is an actual contract between the Virginia
community colleges and the Virginia university system. So you look at this contract for UVA and
you take X number of courses. You get a 3.4. You are guaranteed admission to UVA.
UVA is one of the top 25 universities in the country. Now as a high school senior,
you need a 1500 on the SATs. You need a 4.2 GPA to get into UVA. Well, if you take the somewhat unconventional
choice to go to community college, you are guaranteed admission to UVA. So you go for two years at a tiny fraction
of the cost [even as compared to a public university], get your associate’s degree,
go in as a third-year student in UVA [or William & Mary, James Madison, or any of those
Virginia universities] and finish up your two years and you’ve got that degree
from that university. That’s amazing. That’s essentially half price right there. Mendonsa: And that’s just
an anecdote for the Virginia area. There are all sorts of little outlier events,
but they don’t necessarily have to be outliers. They’re outliers because we’re not
talking about them as a society. We’re not highlighting
them for our community. There are certainly public programs
that I would like to see expanded. There are things that I would like to see
done to make college more affordable for everybody. But when you’re talking about what I can
control for my kid — with what I can do now — you need to also look at the
scholarship side of things, as well. There’s an app called Scholly.
There’s I know an individual in our community,
and what they did for an entire summer is they looked at the common threads
between all of these different scholarships? Are they merit scholarships?
Are they based on your ethnic background? Whatever it may be, realizing that there were
these common themes, he said there’s probably seven different types of scholarships. He created a template for each one of those
different types, and once he had the templates, then he just rolled through
10 applications a day. He was getting like 10%
to 30% acceptance rate. Think about just doing that instead
of a summer job. Is that an option? If you start looking at your ROI, it so vastly
outperforms your minimum wage job that you got over the summer, it’s truly insane. There’s a caddie program [a Caddie scholarship]
if you act as a caddie while you’re in high school. You can get a free ride to Purdue.
I think that’s called the Evans Scholar Program. There’s a firefighter scholarship. There’s the HOPE scholarship
if you’re down in Florida or Chattanooga. It’s based on the lottery system. I say all this because you couldn’t possibly
write that down and act on every one of these, but what if you had a community of people
that were not just doing it, but documenting it with other people in the community
and best practices rose to the top? And you said, “You know what? If you’re in
Tennessee, this is what you should be looking into. If you’re in Virginia, this is
what you should be looking into.” Can we solve the problem as a society
from this particular podcast platform? Maybe not. But can we highlight for our community what
options are available so you can take ownership of it? Instead of saying, “$300,000. $300,000,”
what if we could just bypass college altogether. This is all, “Hey, college is going to happen.” But right now we know that society is trending
increasingly away towards either a gig economy, a “what have you built economy,”
or one where you look at trade schools. Trade schools in your traditional sense,
but also what about software engineers? We know that you can self-teach this stuff
and we know that plenty of people, if you have taught it to yourself,
are willing to give you that first shot. And we know that once you have
your first job, your degree rarely matters. In fact, an individual I was
talking to is a CEO of a startup. He doesn’t want me to name his name,
because he doesn’t want to be behind this, but I’ll put it out there.
He says, “I’ll be honest with you. Having an MBA actually holds you back a little
bit, because I want to see what you have built. I want to see that process.” And so we have got to understand that the
rules are swiftly changing beneath our feet and not just assume
that it’s college at all costs. Not just assume that it’s
$168,000 in debt for everybody. Barrett: So I think to summarize that it’s
just looking at the problem differently. I think this is how we view the entire FI community
is look at your life, look at these issues, look at these problems,
and just think a little bit differently. Unconventional thinking can get you
further in life and this is a perfect example. Brokamp: Got you. What about
healthcare? That’s a tough one. Obviously most people
get it through their jobs. There was a report today in The Wall Street
Journal saying that on average, an employer pays $20,000 a year for that, and that doesn’t
include the deductibles and the copays. From what I understand of your story, you’re
also looking outside the box for how you handle that. How do you do it for you and your family? Mendonsa: This is a great question just because
it’s one that affects us very dramatically as we are now, essentially, entrepreneurs. I can tell you that there are several strategies
in place and also let me preface this by saying that this is a disaster.
This is truly a disaster. There is no good answer here.
I would love to tell you that it’s just going to work. If college was a problem,
this is a freaking iceberg. But having said that, you work with what you can do.
There’s a couple of options that are out there. One of them is the ACA is still intact. If you are a low-income individual, even without an
employer, you will likely be eligible for ACA subsidies. I know an individual that has
a small startup that he created post-work. He makes roughly $40,00-$60,000 a year
[somewhere in that range] for his family of five. The subsidies are
in place. It’s $300 a month. You can control your tax rate to some degree
if you’re one of these individuals because you can then load up your 401(k), still taking
care of your retirement which then drops your AGI, when then will likely increase
your subsidy amount, so that’s one possibility. Let’s say that you’re in the situation where
your business has done very well. You have a lot of income. In that situation you’re just going to take
it in the face, or let’s say that you are retired with $3 million,
$4 million, or $5 million in assets. You have a wonderful problem. If that is your situation, you’re going to
take it in the face and, like you said, it’s just a line item that
you’re going to have to budget for. If you’re willing to get outside of that normal
paradigm you can look at something like health shares [health share ministries]. There are
some disadvantages of health share ministries. One, it’s not technically insurance.
Not everybody is eligible for it. Two, there’s something that’s called balance
billing that I’ll let Brad talk about it briefly, but let me just go away from
the cons and talk about the pros. In many cases you have up to $1 million in
damages that are covered for roughly $450 a month for a family. I think you’ve also got to think about
healthcare as there being three different types. There is preventative, there is
maintenance, and there is acute. Who is going to be the healthiest person? The person who has low-level stress constantly
and because of that overeats, under-exercises, or an individual that has reclaimed bandwidth
in their life and is actively taking care of themselves. But from a mental state, a physical state
and otherwise, as a whole, if you look at the FI community [and I have not data to back
this up] but I would put my money on the fact that as a whole the FI community is healthier
than a cohort which doesn’t have the bandwidth to take care of themselves.
That’s one additional thing to keep in mind. Barrett: As Jonathan said, there’s truly no
good answer, here, but one thing he slipped in there is if you’re on the ACA, or even
if you’re using a health share ministry, this is a line item in your budget, and you just
have to deal with it and plan accordingly. I think that’s the background.
I wish there was some great answer. I wish we had some amazing
hack for this. We simply don’t. What my family has done is used LibertyHealthShare
for almost four years, and it’s worked exceptionally well. As Jonathan said, it is not insurance,
so there are definitely downsides to it. The biggest is that the hospitals and doctors
do not have a contract with this health-sharing ministry, so they’re not legally obligated to take what in
essence is that negotiated rate. We all see that. There’s the rack rate, there’s the negotiated rate,
and that’s what the insurance company generally pays. I’ve had an instance where I’ve been
actually balance billed by the hospital. Let’s say a procedure cost $10,000.
The normal standard repayment is $3,000. They bill me for the other $7,000; but incredibly
LibertyHealthShare [and this is anecdotal of course] hired a team of lawyers. They negotiated
it and they paid the remaining amount. So I was not out an additional dollar. Again, in my very anecdotal experience,
it’s been truly wonderful. Brokamp: Let’s get down to more
practical stuff. Let’s say someone’s listening. You really have their interest piqued. What are the first few things they should
do to put themselves on the path to an FI lifestyle? Mendonsa: Let’s take
a look at the simple equation. What you earn minus what you spend
is equal to the difference of the gap. We want to grow the income, we want to decrease
the expenses, and we want to figure out how to optimize the difference. Those are three different strategies with
virtually unlimited options around them, and you need to look at where
you are on the spectrum. What is your problem?
Is it you have great income? You’ve got a decent baseline but you just
don’t know what to do with the difference. Let’s talk about that. Let’s say that you
are just paycheck to paycheck on $100,000. Let’s talk about that. We’ve got to figure out
what individual we’re actually talking to. The FI community is really good on the spend
less side of things and we’re really good at the optimize the difference side of things. I think that in this particular conversation,
this is probably where we can add a lot of value. I think that earning more is great.
I think all of us should look at earning more. I think it’s a great opportunity,
but it’s a little more nebulous. Like what am I going to do tomorrow?
Let’s talk about career hacking. Let’s talk about alternative careers.
Let’s talk about moving across the street. Do a startup. Do a side hustle. I think just for the sake of this short
conversation we should say that that’s great. Let’s focus on earning more, but let’s just
set that to the side and let’s focus on the other two; spend less. And Brad, there’s a bunch of really cool levers
that you can pull almost immediately to kick that savings rate into gear. Barrett: For me, it’s the
big line items in your budget. Again, we don’t want to live this life of
deprivation, so we can talk about cutting out Starbucks and avocado toast,
but to me that’s beside the point. It’s how do you design that life
that things that you buy actually matter? For me, it’s housing makes up probably
about one-third of people’s budgets. Cars somewhere in the vicinity of 15-20%.
I think you can look at those immediately. Obviously, that’s a big
decision for many people. Moving is not something you take lightly,
but if it matters $1,000-plus dollars a month, maybe it’s worth looking into.
I think some really simple ones are food. People just hemorrhage money on food.
For me it’s about being intentional. My family cooks basically all of our meals, and our
meals cost about two dollars per person per meal. That sure beats going out to the local grocery
store and even just getting the prepared food there for $10 a pound; not less going out
to dinner for whatever plus drinks plus tax and tip. I think you can save many hundreds
of dollars per month just on food, alone. I think to me that is
the simple low-hanging fruit. Just looking at subscriptions.
I think looking at your phone bill. My phone bill through Republic Wireless
costs me under $20 a month. I have a regular smartphone.
You wouldn’t know I’m doing anything crazy. I’m just a little more intentional.
So it comes back to that; intentionality. I don’t download YouTube videos
and podcasts when I’m off Wi-Fi. That is literally the only thing I give up, otherwise I have
a perfectly functional normal human’s phone. I just don’t do those couple of things.
Is that like a “oh, poor me, cry me a river” type deal? Or is that, “Wow. I’m saving
$1,000 per phone line per year.” It’s an obvious choice once you’re presented
with it. Again, it’s those kinds of things. Cutting the cable, etc. We could talk about this ad nauseum,
but there are these items to look at. Mendonsa: I don’t want to belabor this particular side
of things, but just to point out how powerful this is. We talked about the
car earlier in the conversation. If you are to do the math on the true cost
of car ownership; if you are to basically look at the difference between buying that
brand new car and financing a new car for life vs. just having, frankly, one new car,
paying it off and sticking with it for years and years and years until it disintegrates into
dust in your driveway, the difference is $1 million. I mean, it’s that truly incredible. If you look at something that’s a powerful
idea called house hacking, it’s a big word for basically saying you buy either
a single-family home or a duplex or triplex. You’ll stay in one room and you rent out the
others hopefully with enough to cover most or all of your rent, so you live for free.
Imagine just simply living for free. Cutting that line item for your budget. And then if you want to compound that,
we know that between your home costs and your transportation costs that’s
50% of most people’s budget. If you then moved your house that close to
your job and you could bike, walk, or very easily go to work, suddenly
you have cut your expenses by 50%. You then put that into the other side of the
equation, the life optimization side. For instance, if you have a 1% savings rate,
that means it takes you 100 years to replace that one year of expenses. If you have a 50% savings rate, we know that
you can get to a point where working is optional within 10 to 15 years using
the power of compound interest. That’s how powerful it is. So when you look at your life —
when you look at this as a puzzle — and you say, “I can focus on any aspect of this,
but what do I want to do now?” You don’t have to do everything, but my friend,
you’re going to have to do something. And that’s the really cool part of this.
Let’s just get a little bit better every single day. And we see this. I was talking to an
individual the other day and his name is Chris. He says, “Guys, I found your show
last fall, and I was just drifting. I don’t know what I was doing.
It’s so obvious. My net worth has tripled.” And there’s no hook to this. There’s no upgraded mastermind class where
now you’re going to get the real secrets. It’s just stupid simple. Just do it! Just do something each day
to put yourself in this better situation! Brokamp: So some people who are
considering this lower-cost lifestyle might think, “Oh, that’s fine, but then from
now on all my vacations are…” Southwick: I get to have no fun ever! Brokamp: We’re going to be at the tent
at the KOA, but that’s not necessarily… Mendonsa: I have been to KOA,
but it was a long time ago. I didn’t know they were still out there. Brokamp: I actually love camping,
but the point is that’s not necessarily true, and Brad you, in particular, are sort of this ninja
in terms of finding ways to see the world for free. Barrett: Yes, it’s been quite
a journey for me, no pun intended. Southwick: Literally. Barrett: My wife and I have earned,
I think at the last count, like 2.5 million miles in points by just being very
intentional about our credit card spending. Again, kind of going through the entire
FI life, it’s living a very optimized financial life. And part of that for me, personally
[and, of course, every person is different], but for us we put all of our
expenses on our credit cards. We pay them off clearly
on time and in full every single month. That’s the crucial part of this. If you’re not
one of those people, just please stop listening. Southwick: Stop listening
right now! We’re done! Mendonsa: So everybody just
leaned in to listen more closely. Southwick: I totally agree with that. I do that! Barrett: So table stakes, but what we do is
we open up very targeted credit cards and earn these massive sign-up bonuses.
You’ll see, obviously, different advertisements. Spend $3,000 in the first three months and
earn 50,000 American Airlines miles, or some such. Well, if you can redeem those for any type
of reasonable value, you’re going to get probably $700 to $1,000 in value from that one credit card
sign-up, and that’s just using your normal spending. In that case it was $3,000 of your normal
spending on this card, instead of using the other card that you were getting
1% back, which would be $30. Here you’re using this very targeted
card and getting $1,000 in free travel. Now, we’ve done that over a period of many years
— over probably seven years at this point — and like I said earned this massive amount
of points and miles that we’ve turned into real travel. So my family of four, and actually the four
grandparents, came with us to Disney World. So instead of it costing $4,000 approximately
for the hotel, which we stayed on-site, four round-trip flights, and the park tickets,
we spent about $150. On one trip. Mendonsa: And talking about real travel, going
back to my story, if you remember that interaction I had with my employer where I said, “Hey, I want
to take my wife home to go visit her family,” travel rewards had a profound impact
on my wife for this very reason. Travel is expensive, and when you marry someone
from another country, you’re baking that in. The family is important
and travel is just going to happen. Southwick: Put it in the vows.
Mendonsa: Virtually. We’re staying here in the States, but I promise we’ll come
back and visit you guys every couple of years or so. And pre-Brad, I was very happy with my 1.5% cash
back card where I would get maybe $30-40 to spend. $40 and cash rewards. But post-learning about this and how to
implement and benefit from it, it would have cost my wife and I probably $3,000 to go
visit her family for two weeks in Zimbabwe. I did all of that using points and miles. And I want to emphasize how valuable this
is, because it’s not just that I got the flight for free. If you think about it, in a past life I would
have had to pay that same $3,000 for those two air tickets and I would have
paid for it with post-tax dollars. Cards and points are non-taxable. The way they’re structured, spending that
you were having to do with post-tax dollars and you’re benefitting from whatever marginal
tax bracket you find yourself in, and not only are you not having to spend the
money on it, but then you’re getting the travel with tax-free benefits. That is incredible, and this is one of the
things that allowed me to just take that line item that was travel in my budget,
and just take it completely out. This is about getting more for less. What if we can get more housing for less
because you’re using a form of house hacking. What if we can get the
same college experience for less? What if we can go and get a better job than
we could have just following the traditional college course, and what if we
can travel around the world for free? It’s been well-documented
that this is possible. Brokamp: Obviously, we’ll give the caveat
that that means that you pay the bills off, of course, because if
you’re not paying off you’re maintaining a balance…
Southwick: I’ve been like that. Brokamp: … and all that stuff. Some people might have concerns about how
it affects their credit score, but you guys have been doing this for years and I’m going
to bet that you guys have pretty good credit scores. Barrett: Yes. I think my credit score started at like a 792
and the last time I checked within a month it was 811. I would say everyone who’s hearing this, you
need to look at your own life and figure out what works for you. My wife and I have
these wonderful credit scores. We said, “OK, this sounds good,”
but it was a trust-by-verify type situation. “We’re going to dip our
toes in and see if this works.” We have that margin where even if
our credit scores plummeted 50 or 70 points, nothing bad would have
happened. We had a home. We weren’t going to
buy anything on credit. There was no risk here, for us, at all. I’ve worked with many thousands of people
who have been using this similar strategy and I’ve yet to hear of one person
whose credit score plummeted. I think I can speak again anecdotally but
with knowing tens of thousands of people who have done this that it really doesn’t impact
you all that much, but you are going to see, just in your normal course
of life, intra-month swings. Right before you pay off your credit card,
your utilization is going to be slightly higher than the day after you pay it off. So regardless of what credit card
you’re using, your credit score fluctuates. I think you’ll probably see a 20-point plus
or minus, but if that’s within that margin of safety for you,
then I see no downsides here. Southwick: What level of frequency do you
find that you guys are opening and closing new credit cards? Mendonsa: We both, I believe,
try to keep it just as simple as possible. To go back to Brad’s point, I think it really
helps to understand just what credit card companies actually look at. That’s been publicly documented and there
may be some other factors, but they look at utilization. So if you have a card with a $10,000 limit and you’re
only using $100, you’re not really utilizing your card. That’s a positive thing. The age of your credit. If you have a card that you opened 10 years
ago and you still have it, or you have a student loan that you’ve had forever, that’s a positive.
And there’s a few derogatory marks. For instance, if you don’t pay your bills
on time, that’s a really bad thing. That’s what would hurt you, if anything. Like he said, table stakes for this is make
paying your bills on time and in full. To your other question, I will open a card
and I will then just put all of my normal spending on that card until we’ve reached
this certain minimum spend and gotten the reward. Then maybe my wife will open another one. Usually it’s going to take us a couple of months
to get through a minimum spend on a card. There are people, I’m sure,
that are incredibly aggressive with this. I’m not trying to have 20 million points,
but this is a way for me to replace spending that I was already making, putting regular
stuff on a card, and then using that to give my family a wonderful trip
once or twice a year. And we just have this extra stash
of travel that we can use when we need it. Maybe one year we use more, maybe one year
we use less but it offers us freedom and flexibility. Where in the past maybe I was looking at this from
this one-dimensional place. “I’m sorry, honey. We can’t go visit your family because
we’re paying down our student loans.” Southwick: Once again, for our listeners who
want to learn more, you guys are at And then your podcast, if they just go to iTunes
and search ChooseFI are they going to land on you? Barrett: Yes. Just ChooseFI.
We publish every Monday and Friday. Mendonsa: And there is an episode on our podcast
where we really went into depth on what this would look like for an individual
that wants to get started with this. It’s Episode 9 of our podcast. I think it’s actually our most downloaded
episode of all times, so it would be a wonderful place to start if you were to say, “Hey, that
sounds really cool, but I think I need a little bit more information before I really dive into that.”
Go check out Episode 9 of our podcast. Southwick: Thank you guys
so much for joining us! Barrett: Yes, this is a blast! Thank you!
Mendonsa: So much fun!__ Southwick: Well, that’s the show! I want to thank Jonathan and
Brad for joining us once again! That was a good chat!
Brokamp: It was! Southwick: Our e-mail is
[email protected] Drop us a line. We always have a mailbag episode coming up
around the corner to answer your questions. Also you can still send us a
postcard from your travels around the world. Our address is 2000 Duke St.,
Alexandria, VA 22314. The show is edited emblazonedly by
Rick Engdahl [because of the FIRE community]. Brokamp: Hey!
Southwick: There we go! For Robert Brokamp, I’m Alison Southwick. Stay Foolish, everybody!

40 thoughts on “FIRE: The Keys to Financial Independence Retire Early Lifestyle

  1. You can have anything in this world but not everything, if you try to have everything you will end up with nothing. Focus on happiness !

  2. "Several weeks ago, I came across an episode of the Motley Fool Answers podcast that turned my entire financial planning perspective upside down. I mentioned in the introduction to this series that the Motley Fool was my first real exposure to the world of personal finance nearly a decade ago, and in a full-circle sort of way, the same outlet is now responsible for my exposure to a radical new way of thinking about personal finance and retirement." – A little excerpt from my blog series.

  3. what's really sick is the 2003 civic is not only ten times cheaper but could be more reliable than the bmw over the next 5 years, wtf?? Let's see, spend time with family or drive a 2018 BMW? Invest in your appreciating family asset or send your money to Germany at unfavorable trade terms weakening your own country in the process and have them dump an over engineered , high maintenance, premium gas guzzling depreciating asset on you now made of even cheaper plastic than that civic? Let's see…..

  4. How to survive the worldwide starvation crisis caused by Peak Oil;

    "What can I do"?

    According to the experts you should:
    1. Garden with sustainable agriculture techniques (less pesticides and fertilizer (organic or better yet permaculture)).
    2. Buy food and manufactured goods made locally
    3. Pay down debt
    4. Learn skills they will be useful in the future and make friends that have useful skills you don't have (related to providing food, water, shelter, and medical care. A necessary skill is organic/permaculture gardening/farming). Very important: medical plant and medical skills are the best way to ensure your survival. All others will gladly sacrifice their life to protect your life, so you are around to use your medical knowledge to keep their families alive.
    5. I recommend to invest some money into technologies to increase the "carrying capacity" of the planet (high risk investments);
    A. decrease environmental impact per capital
    B. alternatives for our food system input to improve production
    C. alternatives to our current living arrangements,
    D. alternatives to our plastics industry,
    E. alternatives to disaster capitalism
    F. "Savior technologies", ie faster-than-light travel, "game changer" technologies, ie Cold fusion energy & "delaying technologies", ie deep drilling technologies.
    6. I also recommend you inform and prepare your family, friends, and others. It is best to initially suggest people have an emergency kit… for any emergency such as flood, earthquake, tornado, hurricane, loss of electricity due to a winter storm. Then, if the friend or relative puts together a disaster kit, what I do is introduce Peak Oil (by telling them of the 43 second movie trailer , the "National Geographic Collapse" movie on YouTube, & free book downloads;
    7. For the truly motivated, a community based organization to mitigate Climate Change and Peak Oil is:
    (For non USA;

    Google "2052 free book summary download", & "Plan C".

    See the Facebook page: "National Geographic Collapse movie"

  5. I’m sorry, but this is not reality. “Left my job as a CPA,” and “was a pharmacist” lol. Becoming a CPA/pharmacist requires years training and expensive education. FI is not as easily achieved by even a standard college grad.

  6. The ChooseFI podcast rocks. These 2 guys, Paula Pant, The Mad Fientist, Jim Collins, Mr. Mustache, etc. are all doing an amazing job teaching about FIRE. Doesn't matter how old you are, these folks give great financial and retirement advice and steps. The secret sauce to their financial advice staying interesting… is the common theme (and celebration) of FREEDOM.

  7. I tune out when these people (here and other media) say that they start out with six figure incomes in their 20's or 30's. Yeah, they had it rough smh..

  8. I’m currently in the market for a duplex I plan on house hacking. This has the potential to save me a decent chunk in living costs. Would highly recommend looking into this.

  9. employers will always have the upper hand when you don’t have your finances in order. Having a full year emergency fund allows you to walk away with a straight back, integrity fully intact and a clear mind to make good decision. If that’s not motivating enough….

  10. good luck being a welder and dream of this. These people here are out of touch with reality that 90% of people have to deal with. ALMOST everyone does not have more than few 100 free moneys available towards saving. that will NEVER EVER amount up to anything meaningful as far as retirements go. Look at this talk and understand why trump won.

  11. Just forgot to mention that Miles&Points is almost game over due to new bank restrictions and devaluations. It is a completely different landscape than in 2015 so I'm turning this off around minute 45:00 and must admit I have not learned anything from this video.

  12. Opening different credit cards for miles and points … that’s ridiculous … trouble for most people

  13. I just updated my $111,000 Dividend portfolio dripping $4707 I plan on FIRE by 35-40!!! come check me out!!

  14. Some queries for the guest: e.g., Jonathan mentioned that he was saving up to 70% to 80% of his income and that he had a six-figure income.
    [1] What was the gross income?
    [2] What was the take-home pay?
    [3] Was the savings-rate based on gross income or take-home pay?
    [4] To pay off $168,000 in student-loans over 4 years is approximately $3,500 per month . . . plus interest of how much?
    [5] What were your main ways of saving that amount of your income?

  15. Tip: The best approach to healthcare is to take care of your own health. Do not wait until you are sick to get serious about exercise, stress-management, nutrition, sleep-quality, etc. Simple daily habits can take us to 100 y.o. or more with our health, happiness, sanity, mobility, and intellect intact and working well. The most effective wellness-strategies cost a few dollars to zero per day versus giving your life-savings to preventable sickness and/or overpriced sickness-insurance, price-gouging drug-makers, overcharging hospitals, and overpaid doctors.

  16. Kudos to the ex-C.P.A. at minute 32.50 onward: I can share my own proofs of these tips,
    [1] CARS: I gave up driving a luxury-car and switched to walking [= FREE exercise and a boost to health, to energy, and to productivity] and, where necessary, public transportation (which costs only U.S.$1.00 to $1.50 each way in the countries where I choose to live). Since a car costs around $1,000 to $2,000 per month in total average long-term costs, this one decision is worth MILLIONS of dollars of future lifetime value.
    [2] HOUSING: I moved from owning 3 properties to getting rid of all of them to eliminate the related debts and expenses and then moved to a lower-cost country and rented a spacious, furnished 1-bedroom apartment for less than U.S.$400 including all utilities.

  17. Credit-scores become meaningless and irrelevant (e.g. when you follow Dave Ramsey's programme): avoid any new debt; simply plan, save, and invest towards your goals; hence, you can STOP BORROWING for the rest of your life, while paying off all existing debt as quickly as practicable.

  18. DDDUUUHHHH. Captain obvious bs. But we can't pull it off because we are SLAVES. stop placing the onus on the oppressed. Fuckin mlm.

Leave a Reply

Your email address will not be published. Required fields are marked *