Big Data - Budgets

My financial education began one afternoon when I was maybe twelve. My parents had divorced two years before. That event alone had shaken my view of our family’s position on the economic ladder. At school the year after, I paid reduced prices for lunch based on economic need. I remember the long looks and negative commentary from certain teachers in my elementary school. We qualified for free lunches but my mother refused to enroll us. She believed that we wouldn’t value something unless we paid at least something for it. I think part of her decision was pride.

Even that change didn’t sink in right away. My sister and I were kids. By the time we were both in middle school, my mother was working. We thought were back where we started. We weren’t. A teacher’s salary doesn’t replace an engineer’s even supplemented by child support.

That day, my sister was asking my mother to buy her something she wanted, clothes as I remember. She was a couple of years older than me, at an age when many girls begin to focus on their appearance and their peers. My mother told her we couldn’t afford whatever it was she wanted. My sister would just have to save her allowance until she could afford it. My sister didn’t believe her and said so.

My mother then did something unusual. Instead of getting angry or just telling my sister that’s the way it was, she sat us both down and laid out the household budget. She walked us through her take-home pay. She added in the child support from my father. She subtracted off the mortgage, the car payment, the utilities, groceries, gas, school lunches, our allowances and showed us what was left for all the other expenses of the month, like clothing. As I remember, it wasn’t a lot of money, and somewhere near the price of the item my sister wanted. I’m not sure my sister believed the math, but I did.

It is a lesson I have not forgotten. To this day I keep a budget, using only slightly more modern technology than my mother’s father. He kept an accounting notebook in his desk, recording each piece of information in neat, orderly columns. I use an antique spreadsheet program. Where he updated his budget every week, I update mine once a year.

At its very simplest, a budget is third grade math, addition and subtraction. You add all your income and subtract all your bills and payments. If your income is greater than your expenses, you have savings. If your expenses are greater, you’re living on borrowed time. It’s that simple.

It’s so simple, in fact, that most people never bother to write one out at all. Many people will tell you they know how much money they have to spend in any given month. A few can balance the numbers in their head. More just glance at their checkbook register, sometimes remembering what bills are due within the next week. And an amazing number of people never bother to even balance that register against their monthly statements. The majority get by with that ad hoc strategy all their lives, at least until a financial crisis hits.

If it’s so simple, why bother with it at all? Economics 101: Knowledge is power, and power creates money. (It’s probably not economics; it’s more politics, psychology or military strategy, but you get my meaning).

If personal finances are an adventure, a budget is the map. At the center is a signpost reading “You are here.” In reality, it is more like a GPS. It not only tells you where you are, but where you’ve been. And if you’ve programmed in a destination, it can help you get there, though it won’t call out directions unless you ask.

You probably have a good idea how much extra money you have in a month. But do you know how that varies month to month throughout the year? Does that depend on whatever crisis arises in any given month? Do you know how much you are spending on maintenance for your house in any given year? How much of a pinch rising gasoline prices put on you in 2007? Do you know whether that new calling plan is actually saving you money (yes, they still exist)? Does the cost of repairing your old car cover the loan payments for a new one or are you better off keeping the one you have? Does your Sunday paper pay for itself? Can you tell whether your water-heater might have a problem? Your AC? Your toilet?

(And what about the airspeed of an unladen swallow? Wait, it can’t tell you that. Aaaah!)

I’ve used two types of budgets in my life, short-term and long-term.

When I say budget, I mean backward looking rather than forward looking. Where money went, not a Soviet 5-year plan of where I want or plan for it to go. So based in reality rather than informed speculation. I see that as a critical distinction. Many people get frustrated when their (often unrealistic) projections don’t match reality.

I started keeping a long-term budget when Karen and I were renting a house back before we were married. We entered the experience as an experiment to see whether we could or wanted to afford owning a home of our own. Instead of relying completely on the landlord to do all the repairs, we took on some of the minor ones ourselves, did a little DIY like painting with their permission and noted the big things that went wrong.

This first long-term budget was a way to see if we really had enough money to afford the added expense a house brings, not just a mortgage payment but all the maintenance and upkeep that goes with it.

We found we did and bought a house after 18 months of renting that one. The house we’re still in now.

When I first started, I updated my budget at the end of every month. Over time as I grew more comfortable with where we were, I deferred updates to every quarter. Almost thirty years later, I only enter numbers into our budget spreadsheet at the end of the year. By now, I know our bills like a well-worn book. If one comes up looking odd, I pull up our spreadsheet and browse the historical data to see if something truly is amiss.

A long-term budget is what people think of as the classic budget, a month over month record of household expenditures. Mine is a grid. The left-hand column contains the following categories (with subcategories in parentheses, each on their own line):

Electric (kW-hours)

Phone

Water (gallons)

Trash

Cable (internet)

Groceries (coupons)

Credit Card

Gas

Insurance (auto/registration, dental, eyes, medical)

Property Taxes/Insurance

House Maintenance (AC, appliances, cars, exterior, interior, lawn service, pest control)

Pets (food, vet)

Charity

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Total Expenses

Across the top of the budget are the months of the year (Jan, Feb, Mar, etc.). I just fill in the appropriate box for each month. In our spreadsheet most categories automatically add their subcategories into a total (House Maintenance, Gas) so I don’t have to. All the categories are added into the Total Expenses for each month.

In those first budgets the line for Property Taxes/Insurance was Mortgage or Rent (property tax and insurance was included in our mortgage payment). When we paid rent in apartments, things like trash and water were included but when we rented the house, those were ours to pay. At points, we’ve had other categories that no longer apply (Propane, Long Distance under Phone, Newspaper and TV). There are subcategories we could add now (Netflix and Amazon under Internet which used to be a subcategory under Cable).

Mostly, it comes down to what I think I might want to know going forward. As long as it covered all our basic expenditures, the only thing required is that the document fit my needs.

For us, House Maintenance (exterior) includes any gardening or landscaping (including Karen’s tools), structural repairs like a new roof, windows or doors, and outdoor painting. Interior includes things like wall paint, new furniture (even my throw pillows) and repairs or remodeling. Cars for us includes any repairs along with oil changes and other regular maintenance, basically anything that’s not gas. For Insurance (dental, eyes, medical), I’m not talking about the premiums that are automatically deducted from Karen’s paycheck, but our out-of-pocket co-pays and deductibles. If we paid premiums from her take-home, we would those to add that category. Insurance (cars) is our premiums as well as registrations and AAA.

A note on House Maintenance for those of you who don’t own a home. Most financial experts say to plan on annual house maintenance running roughly 1% of what you paid for the house. So that’s $1000 a year for each $100k of the purchase price. I’ve found that to be pretty accurate for us, though over time we have had to base it on the current worth of the house rather than what we paid. That only includes things that must be maintained or replaced, not upgrades, redecorating or remodeling. Of course, like the S&P returns I discussed in the first essay, these expenses don’t conveniently average out year over year. So as a rule of thumb, we try to keep an emergency fund on hand that covers at least the most expensive maintenance. For us, that is a new roof, followed by an AC.

From the beginning, we’ve used US Savings Bonds to cover this rather than keeping the money in a savings account for a couple reasons. First, there is less temptation to spend that money because it’s harder to get to. Second, those bonds earn more interest. We’ve used CDs in the past, but I don’t like the penalty for early withdrawal. Neither of those interest rates is anywhere near S&P returns, but again, both are guaranteed and not subject to the vagaries of the market. More on that in a future essay.

Some of you are probably asking yourselves, what do kilowatt-hours (kW-hours) of electricity and gallons of water have to do with our budget? Strictly speaking, nothing. But when I am reading numbers off of bills and typing them into a spreadsheet, one more really doesn’t take much longer.

These numbers allow me to compare things more easily from year to year. The cost of electricity goes up, but with kW-hours, I can tell if our consumption jumped in a given year. A big jump in summer might mean an AC problem. An average jump, slightly higher in winter, might point to an issue with the water heater. I can also tell how much of a difference setting the AC thermostat one degree higher or lower makes.

A jump in water consumption might mean a plumbing leak. When we were on a minute-based long-distance plan, I input minutes used so I could see if we were routinely over or under the allocation of our plan, and maybe change it to one that’s more cost effective. When we had a Sunday paper delivered, we could tell whether the grocery coupons inside paid for it and more. (Hint: they did for a very long time).

(Ah, maybe he’s not just number-crazy or anal-retentive. Ok, too early to judge).

As an aside, our power consumption (along with a nifty bar graph of our usage from the past year) and gallons of water consumed (with a less nifty column of numbers) are prominent on our electric and water bills respectively. Our grocery store prints our coupon savings right on the receipt (separate from sales and specials) which is convenient.

I have never had any entries in the budget for Income. That’s because in general, Karen and I have been salaried. If our take-home pay varied significantly month-to-month (if we worked hourly or freelance), I would input that as well. Currently I compare Total Expenses to Karen’s base take-home salary for the month.

Now, here’s the first trick I use with budgeting. Karen gets paid every two weeks. At different points in my engineering career, I was paid weekly, biweekly and monthly. Currently, we round our monthly income down to two paychecks. When I was paid weekly, I rounded it down to four. That leaves us two (biweekly) or four (weekly) extra paychecks a year as money we don’t see. What we don’t see we don’t miss.

And note that I said base take-home salary. That’s the second trick I use in budgeting. I never consider any overtime or bonuses. We have each occasionally gotten one or the other, but I never included either in my income calculations. Again, all that becomes bonus money. So if we didn’t receive a bonus one year, or our overtime got cut, we were never caught short. Believe it or not, I worked with a number of engineers who depended on 10 hours of overtime a week just to pay their mortgages. They ran into a real problem when the contract ran short of money and overtime got slashed.

By basing my calculations on our base take-home salary that is two to four paychecks short, I’ve created a 7.8% annual buffer for emergency funds, savings or just bonus money. Money I can put to better use.

If you remember from the first essay, 7.8% is pretty close to my 10% S&P marker. And essentially created out of thin air. Ok, it’s actually an illusion. But as I said in the first essay, part of our philosophy is that if you don’t see it, you won’t spend it which actually does free that money up. That psychology is important. You will see it becomes a theme.

As well, that 7.8% is the entry point of living below our means, which as I said, I see as the key to our financial independence. Yes, it’s an illusion. But as long as it’s an illusion we want to believe, we will. And that’s all magic is, wanting to believe.

Another aside on the way we organize income. This is more esthetic than functional. But it does have an impact on the way we see our money.

When Karen and I bought the house together, we weren’t married, so we treated the arrangement in the same way we had as roommates. We each had our own separate checking and savings accounts but for ease we opened a new checking and savings account for the house. We each placed a set amount per month into that joint account. We based that number on our record of expenses from renting the house before along with adding in our new expenses. We paid all our shared bills from that account. Basically, all the items I listed off in the budget above.

We each contributed half to household expenses, including building up a small reserve in our joint savings as an emergency fund. We did this with automatic transfers from our personal accounts where our individual paychecks got deposited so we didn’t have to think about it (again, if we don’t see it, or in this case have to think about it, we won’t spend it). Anything each of us had left over at the end of the month was ours to spend as we pleased.

When we got married, that changed. We shifted the arrangement so that all of both of our paychecks were deposited into the joint account and then created automatic transfers of an equal allowance to each of our separate accounts.

We did this because when we were living together, we saw it as a limited partnership. Without that marriage certificate, each of us was free to walk away at any time. Keeping separate books and paying our share out of separate accounts made sense to both of us. Any overtime or bonuses were ours to spend alone.

After we got married, we shifted our view to something more like a corporation. Everything from both divisions got pooled together for operating expenses, with each of us getting enough side cash to buy gifts, treats for ourselves or lunches out without having to consult the other or potentially disrupt the joint accounting. If we ended up with extra money in house savings over time, we jointly decided how it got spent.

There is a distinct psychology behind all this that I’ll get into a bit more in a future essay.

As I said, I tally our budget out once a year using an Excel spreadsheet that Karen and I designed (which started in Lotus 1-2-3. I told you it was an antique). Now there are numerous other programs, off-the-shelf or online, which do all that but at the time this was our best option. We already owned a license for Lotus from work Karen did. I could have just used pencil and paper with a calculator as long as I double-checked my math, the same as I do with our taxes.

It usually takes me 2-3 hours at the end of December to input the data for the year. I sit down with all the bills from the previous year, sorted into piles by company and category, then input the numbers. Anymore, Karen reads them off for me. For the few items which don’t have statements, I pull what we paid out of our checkbook register.

As a final aside in case you are wondering, a year’s worth of paper bills for us takes up a 9” x 12” x 2” tray plus a standard envelope for the grocery receipts. We keep the grocery envelope by the bill box and put in receipts as we get them. We used to have another for Home Depot receipts for the house, but now we just pull them off our credit card statements, along with highlighting a number of other categories.

Each year, I have to make sure the spreadsheet doesn’t double charge for line items we pay for with the joint credit card (like groceries and most maintenance). But in the end, the budget just an estimate, not a financial ledger. In general, better an overcharge than an undercharge.

Most financial experts recommend you keep a full set of bill receipts for at least a year. I keep filed bills for one full year (the year before current) and shred the prior year’s unless there is a dispute (which I hang onto for five or longer). House maintenance receipts for major work we keep forever (things like AC repair or carpet replacement where we want to know who did the work, when it was done and how much it cost). We also keep a book with notes by year on what was done, mostly to satisfy our curiosity when one or both of us can’t remember.

All that, along with our financial account statements, easily fits in a two-drawer file cabinet. I could likely cut it down to one if I had to. And yes, I still stick with paper copies everywhere I can. We don’t pay bill electronically, mostly from momentum. Though as a side benefit for us, it’s harder for an anonymous stranger to hack an air-gapped paper file cabinet.

But as I said, when I started this, I didn’t have a full year’s bills saved. I just input as many months as I had, at the time only one or two. I built it from there forward. I’ve found a year is the best baseline because some bills, like electric, vary significantly month to month, while others, like home or car insurance, only get paid once or twice a year. For us, the water bill only comes every other month. Trash only bills us every three. I’ve known several people who get caught short when they forget something like their car registration, insurance or property taxes are due in a given month.

When I’m done inputting numbers, I print out a one-sheet summary, compare it to the year before and file it with other summaries dating back almost thirty years. The summary contains all the categories I listed above, where I have the program average the expenses monthly. If I see something jump from year to year, Karen and I discuss it, first to try to see if we can understand why, then to see if it is something we can or need to change.

I compare that summary to our income in a few different ways as a redundancy check.

First, I look at our joint savings at the end of the year to see if it has grown or shrunk. In general, it stays stable or grows a little. Because it’s a closed system with no other eternal inputs other than her paycheck (and her intermittent flexible savings account payments plus any tax refund), that is a good, instantaneous health check.

Next, I compare the monthly average to what I know goes into our joint savings and checking each month (based on two biweekly paychecks). The budget averages should be equal or lower.

Finally, I work our W2s backwards, taking her gross salary, subtracting off Social Security, Medicare, taxes, retirement savings, and insurance premiums (but not her flexible savings account money since we get that back), and dividing what’s left by 12. That should be greater than or equal to the monthly average from the budget. Ideally, I should be able to divide that number by 13 (to account for the 7.8% buffer) and have it come up the same, greater than or equal to the monthly budget.

Fortunately, for us, comparing those numbers has never come up in the red. That would have meant we were either underwater, or, with the 7.8% buffer I talked about earlier, skating a very thin line. Neither would have been acceptable to me. Both would have required either cutting back expenses or expanding our income.

But there have been individual years we’ve had to dip into savings to keep on an even keel, whether from replacing a roof, an AC, a car, or upgrading the windows. Which is exactly why we keep an emergency reserve. The real trick is remembering after drawing it down to build it back up.

In general, we dip into joint savings four times a year, when we pay property taxes and homeowners insurance, fund our IRAs (more on that in a future essay), and at Christmas. This is where that 7.8% buffer comes in. But in the end, it all has to balance out with the numbers in the black.

With that long-term budget, I had a baseline for what we were spending to see where we could cut back if we needed to when we transitioned from two incomes to one. I used it again when Karen was under threat of being furloughed for 30 days a year without pay, which would have meant losing one full month of her salary. I’ve used to as a baseline to determine where we’ll be when Karen retires, and will use it again when she actually does. A lifelong exercise.

Now that I have a map telling me exactly where we are, I can use its newfound wealth of information to navigate the shoals and shorelines to get to where we want to be. In the next essay, the real adventure begins.

© 2019 Edward P. Morgan III

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

Afterword (Winter Solstice 2018)

Afterword (Winter Solstice 2018) - a reading (on Google Drive)

By the river in the returning rainforest, the camp stands empty, its ghosts cautiously creeping toward daylight like flowers on the razor wire. All conflicts end. But only after their suffering has become intolerable and indefensible. By then, too many lives, too much potential has been lost. The carnage cannot easily be undone. The old growth forest may have been replanted after clear-cutting but untold generations need to pass unhindered to recover what’s now missing. Generations of temptation to forget and resume that grim harvest, likely over some perceived or prejudicial slight. The distrust between trees and axmen run as deep as sap and steel. But columbine doves emerge from eagle claws in the artificial alpine meadows. Their green now camouflages the assembly ground between the towers even as their purple occasionally brightens or bruises the mounds tucked behind the weatherworn barracks, depending on the light. In the same shifting sense, the truth of what happened here remains as difficult to establish as reconciliation.

Witnesses needing answers to unlock their lurid past tour the inhumane monument which whispers: Are you seeking me? Are you seeking the key? For some, entry remains locked and barred behind an iron door of denial. For others, the maze of collapsed tunnels beneath the wire confuses them. Did the prisoners tunnel out or did we eventually tunnel in? Did the monsters reside before or behind the wire? Did they don the uniforms we remember, or simply raise hands to temples as blinders against the dirty, anguished faces they never seemed to see in some kind of informal salute? There is little beauty in this truth, and little truth that acknowledges their victims’ beauty. The ode inscribed above the entry celebrates artifice over artistry, a cruel joke cast in statutory iron. If that gateway opens into a gallery, it’s a theater of performance art. The somber enforced silence in the audience chamber echoes like a tomb.

Masked by greasy smoke, shrouded by dirt like a fresh laid grave, some look but cannot see as history complains: Your delusion's killing me. Distant visitors cast their eyes about in righteous pity, certain in their hearts nothing like this could happen where they live. They would never starve a population into subjugation. They would never abuse a child for the circumstances of her birth. They would never torture a woman to make an ideological point. They would never eradicate entire peoples to attain a little cultural living room. They would never claim their former friends and neighbors as anesthetic vermin or chattel. But they would fight. Always, they say they would fight. They would never board the buses quietly, only reddened tooth and nail, at least until instructed to rejoin the tour. Or they would stand to be counted, damn the cost, damn the consequences, damn their unrelenting cowardice, just like their mythic, iconized ancestors. Conveniently, they avert their eyes from the looking glass of their own past, too dark, distant and tarnished to be relevant. Empathy remains elusive. It’s easier to sympathize with pain received than to ponder pain inflicted.

In the shadows of misty killing fields and murky crematoria, the pain isn't real unless you invoke it, like the memory of a people's loss. Pain begets pain more often than its stepchild solace. Our pain is ours alone, not shared to be comforted. The specters of our allies become suspect because of they lack the magnitude of our suffering, the depth of our ragged scars. Never mind that they stood beside us against the advancing shield wall while most merely watched from darkened alleyways behind that thin blue line. Life feeds on life. Only fully sated does it pause to mourn what’s missing. The spell of each epileptic episode endures, casting an illusion over the landscape, softening its edges with night and fog. Phantasms move in moonlight, some heroes, some villains, some shifting between, often indistinguishable by the shadows they lay down. As we stand chained in the center of the maze below, they are all we have to distinguish their true nature, good from evil, right from wrong. Until we unbind ourselves from the blank wall before us and turn to face the fire behind. Momentarily its brilliance might blind us but eventually our eyes adjust.

Like the diamond that cuts the knife, the image of a mound of moldering, headless dolls slices through the gathered ignorance of men. Here lies all that remains of a generation of mothers and their daughters, a post-modern gravestone. Here their captors offhandedly piled the magnitude of their loss. Each girl had been allowed only one to give her comfort and keep her quiet through her journey to the underworld. What became of the doll heads, none of the meticulous ledgers say. Perhaps the oppressors feared those heads would speak and bear witness where none of their victims could. Perhaps they were afraid they concealed unclean thoughts that might be passed to the next generation. Perhaps they served as a warning only a child would understand. Or perhaps, like their owners, their usefulness was done. With no eyes, they cannot see. With no ears, they cannot hear. With no mouths, they cannot scream.

Tattooed by scars that will never fade, bystanders emerge into the light of reconciliation understanding the future belongs to the brave. Some testify against erstwhile friends and neighbors. Some recount small acts of kindness, the everyday heroics that offer hope. A few bear witness to missing martyrs, joining in collaboration to piece together the puzzle of their fractured lives where no one else remains. The most courageous admit their guilt and seek mercy but not through understanding. Their bare their shame for all to see like a red triangle pinned upon their chests. Their belated tears cannot wash the landscape clean. Even heavy rains now only muddy this once fertile ground. Unsatisfied with their suffering, the righteous mob exhumes stones from the exercise yard. Eager for retaliation and retribution, they mirror the other's tactics. Stained glass houses shatter like fragile crystal throughout the night.

Crucified by nails of complicity and silence, they swear an oath of Never Again, knowing promises, like lives, can be bought so very cheap. But each generation slips a little further from the memory that spawned that vow. First the survivors, then the witnesses, then the daughters, the granddaughters, all the aunties and the children who listened enraptured on their knees. Until the past shifts restlessly in its grave like a creature neither alive nor fully dead. We attempt to enshrine these events by erecting holidays as sacred monuments, convinced that one day, the oppressors will all wake up on the wrong side of history. Or, alternately, that one day we will all wake up in shallow graves.

But we have to ask ourselves, do we remember to help stoke the hatred of our enemies? Or do we remember to fill the holes in our hearts because of the pictures in our heads? If the latter, we will heal through our compassion. If the former, we would be better off burning this wine-stained book.

© 2018 Edward P. Morgan III