Catching F.I.R.E. - Goals

Nearly twenty-one years ago, I left behind an engineering career to write full-time. It was a dream I’d been working toward fulfilling for the previous five to six years. Ideally, I would have waited another six months to a year to pull the trigger on that change, but circumstances did not work out. In hindsight, that additional time would not have changed anything except me getting a small hunk of metal to mark my time as an engineer.

When most people hear what I was able to do, they say, “You are so lucky.” And they are right. I am, in more ways than they likely know. I am not one to say luck, random chance, had nothing to do with my life. It did. As did what I, or really we, did with that luck (Karen has a big part in this, too). The two parts are really inseparable.

By the time I left engineering, I knew the profession likely wasn’t the one I was best suited for for the rest of my life. I liked the work, at least most of it. I liked the challenge of solving problems and still do. I liked many of the people I worked beside directly and still miss seeing them. I was decent at what I did and could have advanced farther. But the environment and prevailing attitudes were not for me.

Ideally, I would have found another engineering job with a company that might have been a better fit, preferably something involved with space-based communications. I looked but was constrained by Karen’s career and job situation which would not easily transfer to the locations I was looking at. Balancing two people’s wants and needs is part of the price of marriage. Even though mine was the primary salary at the time, it was not mine alone to say.

When Karen and I got married, I set some goals for myself. They had been rolling around in my head for a while. The first was that I wanted to do something that I enjoyed for a living. Too many nights, I came home frustrated with work. We spent too much time either hashing through the issues or trying to detox from it. At first, I wasn’t sure what that something I wanted to do was, but I settled on writing fairly quickly.

I have enjoyed creating worlds and characters and situations since I was fifteen. I have enjoyed writing since sixteen. The two didn’t really come together until ten years later, which perhaps sounds odd. But I had begun working on stories by then, one of which grew into a novel. I enjoyed reading about the process of writing and creating, the systems involved, as much as I enjoyed reading and experiencing them myself.

So writing was the first and primary goal.

The second goal was a timeline. When did I want to pull the trigger on it? What was realistic? What needed to be done to make it work? I took a look at our financial situation. By far our largest expense at the time was our mortgage. Previous decisions we’d made were already in our favor. When we bought the house, we didn’t push to the limits of our finances. We had already started paying down the note early. With that expense gone and trimming back on others, we could get by on Karen’s salary alone. How long would paying off the note take? Based on the numbers, I settled on five more years.

Getting to the first goal by the time I turned thirty-five was the second goal.

The third goal was where we wanted to live. This was more nuanced and complicated. Neither of us wanted to live in Florida long term. But moving while starting a new financial situation didn’t necessarily seem like the best idea. In the end, we did a trade study of the five locations we desired or considered which included inputs like cost of living, social network and employment opportunities, plus a number of others. In the end, we found staying in Florida best fit all the inputs.

For the moment, that meant staying where we were.

And with that, my goals were in place. The next step was how to achieve them, most of which involved long-term financial independence (the F.I. in F.I.R.E. above).

The key to financial independence is simple: Live below your means.

It really is no more complicated than that. If you ask most people who have achieved it, that is the one thing you will consistently hear. Where the concept is simple, the implementation is more difficult, but again not overly complex. Most of it involves exploiting a few well-known pieces of psychology, central to which is: You don’t miss what you don’t see.

The specific ways we have done that is what this series of essays will be about.

When I was young, I didn’t think about money much, other than how far my allowance would go and how to get my parents to spring a little more. I was born into the middle class with all that means in American society, mostly comfortable material life concealed beneath a thin skin of security. Then, when I was ten, my parents divorced. That was the first of two times in my life my financial situation suddenly and radically changed without my having any control. The second was when I was a junior in college and half my funding dried up, literally overnight.

Those two experiences started me thinking a lot more about money, particularly how not to be caught short again by events beyond my control.

As I’ve grown older, I found that one of the keys to life is understanding what you can control and what you can’t. The average person changes careers five times during their life. Some of those will be by choice, others by necessity. Those choices are set against, and often influenced by, a backdrop of economic events over which we have little if any control. Mostly we notice the negative impacts, recessions, layoffs, corporate restructuring, revised business priorities, personal setbacks and outright disasters.

My grandparents survived the Great Depression, a financial disaster that defined their generation. My parents experienced Stagflation, oil embargoes, rampant inflation and the market crash of 1987, all of which colored their financial world. Since graduating college, I’ve witnessed the Savings & Loan collapse, the Emerging Market Bubble, the Tech Bubble, 9/11, the Housing Bubble and now the Great Recession. Everyone has a story, a pivotal event or person that shapes their attitudes toward money.

For some that translates into never wanting to think about money. Like children living in an idyllic, Victorian world, they assume it will always be there when they need it. Others are driven in the opposite direction, always wanting more, sometimes regardless of the cost. Like inveterate gamblers they are always on the lookout for an opportunity to get rich overnight. Some get squeamish talking about money because their parents always fought over it. To hold that memory at a distance, they opt not to discuss it at all. A few tell themselves there is no reason to stress about money. You may as well spend what you have while you have it, before something or someone comes along and takes it away, like inevitably happens. A handful want it now, regardless of the long-term consequences. They’ve earned and deserved the finer things in life right now. If they waited until they saved and could afford them, they might not be able to enjoy them.

The majority of people fall somewhere in between. They muddle through their financial lives, saving a little because they’re told they should, splurging when they get a little extra, all based on their current situation, not any real plan or understanding of where they need or want to be. Most people don’t start thinking about retirement until after they turn 40, even 50. Even then, they don’t always know how much money they need to maintain their current lifestyle, never mind realize their dreams.

Almost everyone I know wants to retire early (the R.E. in F.I.R.E. above). They all think they should be able to. But when I ask them pointed questions like whether they will be able to pay for health insurance between the time they retire and when they enroll in Medicare, most say they hadn’t considered that. Or whether they have enough to cover medical expenses during retirement. Doesn’t Medicare cover all those? Sadly, no.

What about an emergency fund? The average American doesn’t have enough savings to cover even a month of their existing expenses. Ideally, financial experts say you should have enough emergency fund to pay 3-6 months of expenses. That covers events like getting laid off, having a major health scare, or experiencing a natural disaster. Or at least a dozen other things most of us never consider possible until they happen. Life, if nothing else, is creative in the challenges it throws us.

The purpose of these essays isn’t to tell you how much money you need or really how to get it. There are tons of resources out there more than willing to tell you both. The Internet is rife with calculators that will spit out how much money you need to begin a 30-year retirement based on your current living expenses adjusted for inflation. Every individual with a Social Security number gets an annual statement of their projected benefits which includes a breakdown of ages when they can claim it. Besides, I can’t tell you what you need because everyone’s needs and goals are different.

Let me start by saying that I’m not a financial analyst. I don’t have a degree in economics, personal finance or investing. I’ve never even taken a course. I’ve read books and articles here and there because, like many people, I find money an interesting subject. So I am no expert, and nothing I say should be taken as advice (legal disclaimer).

Throughout this life, I have been fortunate to encounter people who knew a lot more about money than I ever will. All I had to do was listen and learn from their experiences. Not all of their examples were positive. But I believe you can learn from anyone, good or bad, if you are willing to. Mistakes and missteps, whether ours or someone else’s, are the most valuable lessons life has to offer.

Where has that gotten me?

We’ve been living debt-free for almost twenty-two years, when Karen and I paid off our final outstanding obligation, our mortgage. A year later, I could afford to write fulltime because my engineering income was no longer required to keep us in groceries. I’ve only looked back twice, once when Karen was diagnosed with breast cancer and again around the bottom of the Great Recession. Both times, I was considering whether I would have to return to engineering to keep us financially afloat. So in dark days of 2009, I sat down and reviewed our financial situation.

What I found surprised me. If Karen continued working until full retirement age, our retirement was already taken care of. Between social security and both of our pensions, we would have the same income as we have today, as long as those commitments were honored. On top of that, we already had the recommended savings for health care expenses during retirement along with a healthy emergency fund. That was all based on what we still had during the worst market conditions in a generation while we were living on a single salary. And we were saving over a third of that each year, with another twenty years to build up more.

I was stunned. Reviewing those numbers allowed me to sleep peacefully for the first time since the meltdown had started some six months earlier.

Even with that peace of mind, I knew life holds no guarantees. As I said, two years before Karen had been diagnosed with breast cancer. Her treatment consisted of a combination of surgery, radiation and chemotherapy. Without insurance, the medical bills came close to $350k. We were fortunate. We had good health insurance with catastrophic coverage. Were it not for that, we easily could have spent our entire life savings on her treatment. We have been doubly lucky in that twelve years later she remains cancer-free. But over the course of that adventure, we met many others who were not as fortunate.

Had we found ourselves in their situation, we would have been ok. It would have wiped clean the balance sheet, but likely wouldn’t have driven us into bankruptcy. And we were still relatively young (Karen was under 45 at the time). We could have started rebuilding. As it turned out, we didn’t have to. That experience once again reminded me how quickly circumstances change. This time, however, I had been financially prepared. For both of us.

It turns out we were members of the F.I.R.E. movement before it was cool, before it even had a name.

So, why exactly am I writing this?

If you are a cynic, you might say because it costs me nothing. That, at least, is true. Finances are not a zero-sum game. By telling you how we got here I am not endangering our position. If you are a pessimist, it might be because my experience is worth exactly what you pay for it. That may be true as well, but you will judge that for yourself. If you are a pop psychologist, you might say it’s because I don’t have any children to pass this information on to. There may be some truth in that, too. If you are an altruist, you might say this is my way of repaying some of the generosity I’ve received, both in money and in knowledge.

That is the closest to an answer I can come up with. I was raised to want to help others and give back some of the generosity and good fortune I’ve received. I’ve met too many people whose personal finances were a mystery to them.

I was also raised to believe you lead by example, not by telling people what to do. The story I’ll relate is based on things Karen and I have actually done, not speculation or untested advice. While I can’t say it will work for anyone else, I know it has worked for us. Time and circumstance differ. Plan accordingly.

From the onset, what has worked for us falls into four fundamental themes: planning, patience, simplicity and discipline.

Planning because I need to know my goals to know where I was going on the journey. A roadmap if you will. How could I know when I’d arrived without knowing where I was going or where I’d been?  

Patience because like any worthwhile destination, for us it took some time to get there. Change is incremental. None of this happened overnight. There were great leaps forward and setbacks. Slow and steady wins this race. It lasts a lifetime.

Simplicity because I’ve found that on a long journey it’s best to travel light. Long ago, I discovered that all the best, brightest, shiniest new toys I was hauling around were weighing me down and holding me back. It’s more than a purely philosophical principle, it’s one borne out by psychological science.

Discipline because there were definitely moments when I was tempted to turn back. Or to celebrate a minor success with a major spending spree. Resisting and staying the course, if it’s working, were crucial in achieving the goal. Parts of this were tedious and time consuming. Many times I had to convince myself to stick with it.  

The items I packed for this financial journey were relatively simple and compact: A mechanical pencil and paper notebook; a calculator; a spreadsheet; copies of our bills, expenses, mortgage, payroll and checking/savings/retirement accounts (none of which I intend to share); an online retirement calculator; and a book of compound interest, amortization and annuity tables and formulae I picked up on a whim.

In all likelihood, you already know a lot of what I’m going to tell you. To me, most of it is common sense. I don’t take credit for the originality of the ideas. As I’ve said, I gleaned information from a number of sources. But I was never taught these things in school. As with most of people, our financial experience came as OJT (on the job training). Few of us ever get formally taught how to create a budget or balance a checkbook, much less how to calculate the impact of paying just a little extra of the principal of a loan each month.

A few principles I plan to cover in the upcoming essays are budgets, priorities/mindset, the magic of compound interest, the rule of 7/10, and average S&P 500 returns.

Let me start with that last one for a minute.

For the past 90 years, the average annual returns on the S&P 500 stand at roughly 10% (9.8%, but I round it up for simplicity). Which means, the average growth of the 500 diverse companies that make up the S&P 500 index is 10% in an average year. That’s two averages, first the average of annual growth of an index of 500 companies (that change over time), the other the average of that average annual growth over 90 years. Which means it if you were to invest say $100 in an S&P 500 index mutual fund, at the end of an average year, you would have $110. Which isn’t really true but is close enough for my purposes.

The trick is realizing that there is no such thing as an average year. Some years S&P 500 returns will be less, even negative (like 2008), some years will be more, even twice as much (like 2017).

You might wonder why this is important to our personal finances. In general it isn’t, though it did become more so as we started planning for retirement. But I find 10% to be a useful marker for making financial decisions. If I can save nearly as much by a certain financial behavior as I could by theoretically investing that same money in a mutual fund that mirrors the S&P 500, it is likely the right thing to do. 10% is an exceptionally good annual return.

Now it’s easy to get carried away with this. At least one financial advisor told us that if we can get better returns by even a percent from investing in the S&P 500 (or some other investment), we should do that rather than spending that money to, say, pay off debt. A lot of analysts and advisors think the same.

I am not one of those people.

I have always favored guaranteed returns over theoretical ones. Future investment returns are always theoretical. Past performance does not predict future results. The interest you save from, say, paying off debt is always guaranteed (as long as you don’t have a pre-payment penalty). For me, that’s money in the bank.

So that was the first piece of information I tucked away as I planned out how to achieve my goals. I’ll come back to it again as I go along.

Finally, before I go, let me clear up any misconceptions.

I’m not going to tell you how to get rich quick, or really how to get rich at all. If that’s what you’re after, you’re reading the wrong essays. You may as well stop right now. I can’t help you (second legal disclaimer. Now you’ve been warned twice).

I can’t tell you how not to worry about money. Everyone worries about money, from my mother to Donald Trump.

I also won’t tell you exactly what to do. I haven’t stumbled on a step-by-step formula for spinning lead into gold. No one’s entrusted me with a set of risk-free instructions for success. Nothing in life comes with a guarantee, including these essays (third legal disclaimer. Now it’s a magic spell).

Finally, I’m not going to tell you to live like a monk, regardless of how it might seem. If I were to claim five years of complete privation would deliver people to a promised land, I’d be unlikely to find many behind me as I charged up that hill, regardless of whether I was right or not. In fact, people would be more likely to break out the torches and pitchforks and come after me. Just look at the unrest in Greece and other parts of Europe several years ago. Austerity is not in most people’s vocabularies or a realistic answer to most of their financial problems. Rarely does it work. Just ask the IMF.

What I hope to do is get you thinking about the way you see money, whether it makes you work for it or whether you make it work for you. What I intend to lay out is a lot like my Swedish grandmother’s smorgasbord. Take what you like and leave the rest behind. Or sample a bit of everything to see what you enjoy. Or treat it like a potluck and bring something new and tasty to the table. Or just oow and ah politely as you look at the pretty spread, realizing you have healthier food at home.

Although, no matter which course you choose, I recommend you at least try the meatballs. They are kind of a specialty and I’m told they’re pretty good.

© 2019 Edward P. Morgan III