Outdated Financial Rules

There are very few universal truths within personal finance, yet some ideas have persisted for so long that they’re now looked upon as financial rules that must be followed in order to succeed financially.

Take a look at these five outdated financial rules and see if you agree that these rules need to be broken.

1. Cash is Safe

Cash is what humans use to simplify the barter system. No longer do fishermen exchange their catch for fresh fruit. Instead, we all rely on and trust the cash system.

For millennia people have exchanged their goods and services in return for money, which was distributed in the form of precious metals, jewelry or other rare objects. In modern times, people rely on banknotes, or cash, to exchange value. I trade you my cash in exchange for your goods or services. It’s a win-win.

Why this rule exists

Since money is what we use to barter, it’s naturally very valuable, and people tend to protect their valuables. Nobody wants to lose their hard earned cash, so we protect it and keep it safe. Today, people feel their cash is safest in a checking or savings account at their local bank or credit union.

In previous generations one could expect to earn a respectable rate of return by parking cash in a savings account. That idea has persisted and today, checking and savings accounts are the go-to solution for the majority of us to hold our cash, regardless of the low interest rates paid by these accounts.

Why this rule needs to be broken

Cash is a great invention, but a terrible store of value because of inflation, which robs you of about 3% of your buying power each year. Think about the house your grandparents (or great grandparents) purchased for $3,000 in the 1940’s. Today that same house would cost PopPop and Nana about $200,000 thanks to inflation. Same house. More expensive today. That’s the time value of money.

A dollar tomorrow is worth less than a dollar today.  And the longer you hold onto cash, the less valuable it becomes and that’s why you need to break this outdated financial rule.

How to break this rule

You can escape the corrosive clutches of inflation by putting your cash to work. It doesn’t even need to work terribly hard. It just needs to earn an average of 3% annually to keep up with inflation. Anything over 3% means your cash will be more valuable in the future than it is today.

The best way to put your cash to work is to invest it. Investing in index funds is the simplest way to invest. Other ways to invest your money is to buy real estate or to start your own business.  Whatever you do, break this outdated financial rule and start to invest your cash rather than holding onto large chunks of it.

2. The Stock Market is Risky

Stock markets as we think of them today trace their origins back to 1400’s Antwerp, Belgium. The world’s first publicly traded company was the East India Company. Shipping at that time was incredibly risky … too risky for one company to assume all the risk. So the “Governor and Company of Merchants of London trading with the East Indies” corporation was formed; this was the East India Trading Company.

Risk and the stock market, together from the very beginning. The stock market is a way to share risk. And reward!

Why this rule exists

The free market is very competitive and companies that can’t keep up with their competition get left behind. This also applies to publicly traded companies. Even “blue chip” stocks from well known, often international companies, that typically offer lower risk to investors, aren’t immune to getting left behind. Consider this: 88% of Fortune 500 firms from 1955 are gone! If you invest in a company that can’t keep up, then you’re going to lose some or all of your money.

Layer in the fact that most people don’t understand how the stock market works to begin with, and it’s no surprise at all that many people assume that “stocks are too risky.”  So instead they keep their money ‘safe’ by putting it in a savings account (see rule #1 above).

Why this rule needs to be broken

While individual stocks can indeed be risky, the stock market as a whole is quite safe. In fact, the stock market has always gone up. Sure, there are peaks and valleys along the way, but the trend is unmistakable: up and to the right.

How to break this rule.

Since 1976 index funds have been helping people mitigate their risk by allowing them to invest in the stock market as a whole, rather than individual companies.

The stock market, on average, grows at about 7% per year, and index funds track to this average.  Sure, you’ll never hit a home run by investing in index funds, but you’ll never crash and burn either.

Avoid picking just individual stocks and instead, index and chill.

3. Renting Your Home is Like Throwing Away Money

For generations, pop culture has propped up the suburban residential home with a white picket fence and a two car garage as the ultimate symbol of status and success. Home ownership was a cornerstone of The American Dream. And wise financial advice to boot!

After all, the home is your biggest investment and renting is throwing money away, right? That’s been the consensus for a few generations now, but a growing number of people have come to the realization that home ownership isn’t all that, and it’s no longer essential American Dream – financial independence is.

Why this rule exists

From generation to generation, the same advice has been passed down: buy a home, don’t rent. For many, their home was also their greatest source of wealth. Real estate has been viewed as one of the safest investments available. And for those leery of investing in the stock market, it was easy to look at home equity that had been building for decades and think, ‘this is a great investment!’

Why this rule needs to be broken

Because your home is your home, not an investment (to be clear, this rule isn’t for real estate investors – this if for those that treat their primary residence as an investment). If you’re looking for a place to invest the majority of your wealth, there are simpler places to so.

How to break this rule

Not everyone *should* break this rule. Buying makes sense for many, but so does renting. You need to analyze your own situation, run your own numbers and determine if renting or buying makes sense for you. And you should also read Renting is Throwing Money Away … Right? from Afford Anything today. This is hands-down the best Rent vs. Buy article I’ve ever found.

4. College is Required

Almost every single office job, or white collar job description you read includes some variation of the line “college degree required…MBA preferred.” Because many of these jobs are also high-paying, it’s no wonder so many are flocking to college, taking on student loans to pay for their education. Employers demand it.

It’s easy to see this and feel like a college education is the only way to secure a good salary and a secure future. That’s nonsense.

Why this rule exists

Just a few generations ago graduating high school was rare, whereas today it’s the norm. In the past, when the masses were all competing for the same blue collar jobs, one way to increase your chances of escaping to the middle class was through college. Parents that wanted the best for their children pushed this idea. And it worked for a great many!  Today, more than than 1 in 3 people have an advanced education and the middle class is bigger than ever.

Why this rule needs to be broken

College is not the only path to a middle class (or greater) salary and lifestyle. Especially when the cost is so high. Teenagers, whose brains haven’t yet fully developed, are signing up for levels of debt they can’t even comprehend. Allowing kids to sign up for this much debt ought to be discouraged, instead, it’s encouraged.

Meanwhile, millions of high-paying jobs go unfilled in the skilled trades. Jobs like plumbers, mechanics, electricians, welders, etc. pay $45,000 – $60,000 per year. In Seattle, the *average* heavy equipment operator makes more than $95,000 per year in salary and benefits, according to Salary.com.

Don’t get me wrong, a college education is a wonderful thing. And that education no doubt leads to many fantastic opportunities. But when a college degree leaves you saddled with debt approaching six-figures, and you’re unable to find a job that lets you pay that debt off in just a few years, then something has gone wrong.

How to break this rule

You’ve got two options.

1. Go to college on the cheap. Start by attending a local community college and live at home as long as possible. Work part-time to help pay for school. Take longer than 4 years to complete your degree if necessary, just do whatever you can to avoid taking out a crushing amount of student loans.

2. Skip college and go to a trade school, or become an apprentice and learn one of the skilled trades while you’re on the job and getting paid.

Society’s plans work for many, but they aren’t the only way to lead a happy and successful life. Financing your education is just another example of this – taking out student loans to get a college degree is not the only path to financial success.

5. Retirement Age is 65

Retirement is a modern idea, first proposed by the Chancellor of Germany, Otto von Bismarck, in 1889. Understanding that, I suppose we should be grateful that we have the opportunity to retire at all. But life is short, and most of us don’t want to spend the best years of our lives punching a clock. So if an alternative is available that allows you to retire even earlier, wouldn’t you want to know about it?

Why this rule exists

Most people peg retirement to age 65 because that’s when you can claim your social security benefits from the government and/or pension benefits from your employer. Not surprisingly, as soon as someone had a stable source of income outside of a full time job, they retired. The only problem is that when the concept of social security was first introduced, life expectancy didn’t go past 50 years old anywhere in the world.

This is an interactive chart. Use the blue slider at the bottom to see what life expectancy was around the world at different times.

Why this rule needs to be broken

Because life is short and most of us don’t get a great sense of purpose or satisfaction from our jobs. Life expectancy today has climbed into the 70’s and 80’s, but the idea of working full time for 40+ years only to enjoy the last 10 years of life (when mental and physical health will likely be on the decline) isn’t an idea that many will get behind if they don’t have to.

How to break this rule. 

Thankfully, the principles preached in the FIRE movement teach us exactly how to break this outdated financial rule:

• Save and invest 25 times your expenses
• Live off 4% of the portfolio gains

With a little planning and conscious spending, many people can build a retirement portfolio capable of supporting a retirement in about 10-15 years. Depending on when you start your journey, you could retire as early your 30’s, easily in your 40’s and definitely in your 50’s.

If you got off to a late start on your retirement planning, or if you find yourself in a deep financial hole, then the principles of FIRE Finance can help you retire on time.

Update Your Financial Rules

If you’re still following these outdated financial rules then you could be adding years, possibly decades, to your working career. But if you’re interested in achieving financial independence and an early retirement, then breaking these outdated financial rules could help you achieve your financial goals earlier than you thought possible.

Chime In!

Thanks for reading! Now it’s your turn. What other financial rules exist that need to be broken?

The post 5 Outdated Financial Rules that Need to be Broken appeared first on Camp FIRE Finance.

This Contributor article was written by Good Nelly

Today, I am going to share with you a story from our financial journey.  It’s about our debt payoff journey and how we overcome financial struggles that shaped the financial life we have today.

If you think that our financial lives were a smooth ride, you’re wrong. In spite of being a personal financial adviser now, once we struggled to repay debt.

This is our story.

Unavoidable Circumstances and Wrong Decisions

Like many others, we started our married life with debts and bills. Apart from credit card bills, we both had student loans. At some point in time, our family also had a mortgage loan, a car loan and some additional unsecured loans.

After we got married, we decided to buy a decent house and invest in a property instead of spending our hard-earned money on apartment rents.  So, we took out a mortgage loan.  At that time, we didn’t have much idea about how to manage personal finances efficiently.  Today, being a personal financial adviser, I would say that we didn’t take out a good mortgage loan.

On top of that, we had personal loans due to marriage celebrations.  Like most other young people, we also didn’t pay heed to advice to repay the outstanding credit card balance each month. What can be the possible result of this? A significant amount of credit card bills!

This is what I would always suggest you not to do. Try to repay your credit card balances off each month. You can even make additional payments from time to time, to keep your credit utilization ratio within 30%.

It might help you a lot to take out loans at suitable interest rates in the future as your credit report and score will be good.

Our Debt Situation

So, coming back to out credit card debt that I was calking about.  We had:

• Credit card A with $11,000 @ 9% interest
• Credit card B with $14,000 @ 11% interest
• Credit card C with $15,000 @ 11% interest

So, all total our outstanding credit card bill amount was about $40,000. The minimum payment per month in total was about $810.  And, after paying back a certain amount, the outstanding personal debt amount was in total $24,000.

Our total amount of unsecured debt was around $64,000.  Fortunately, we were current in out student loan payments and we usually didn’t miss our payments.

Something About Our Financial Life – How It Was At One Point In Time

Both of us were earning money, though it wasn’t much and I didn’t get any job satisfaction.   We didn’t have an emergency fund or a retirement fund. Actually, we didn’t pay heed to have a retirement fund before hitting thirties.

That was a mistake. I now advise everyone to start saving for retirement right from the time they get their first paycheck.

The Ultimate Debt Payoff Journey

I would always say that you try to avoid debt at all cost.

However, if at some point, you find yourselves in debt, don’t worry. You can always overcome your debt crisis.

Let me share with you all a real-life example of how we overcame debt, even with limited income.

The Decisions That We Made to Overcome our Debt

There were a few big decisions and some not-so-big decisions to save money and repay debt.

Mortgage Debt

I found that the current mortgage rate was relatively lower than what we were paying. So, we refinanced the mortgage loan at a lower rate. We opted for a longer term as well, as this helped to make the monthly home loan payments even lower.

Childcare Debt

During this time, we were blessed with two kids, the greatest happiness ever.

Since one of us had to take care of the kids, I opted to stay at home. I left my regular job and opted for freelancing job opportunities. It helped me to save dollars on daycare. Plus, I loved spending time with the kids.

Better Debt Management

This time I took more interest in managing personal finances effectively. Apart from doing some work from home data entry jobs, I also started blogging about personal financial issues. I wrote for several websites.

My husband switched jobs so that he could earn more money. Often he had to travel to different states, too.  Some other decisions that we made to better manage our debts:

• We canceled our gym membership – We opted for enjoying time at the park with two of you. I liked the hiking trails with both of you in the prams. Believe me, it’s more enjoying than working indoors.
• We restricted eating out at restaurants – We started enjoying home-cooked meals. We used to go out but only to celebrate special occasions. This way, we could manage money to celebrate your birthdays, though they weren’t elaborate ones.

The Debt Payoff Calculations

Now, a bit of math and the financial calculations we used to get out of debt.

My husband and I discussed and decided that it was difficult to repay the entire outstanding balance along with staying current on our mortgage. We had paid back our car loan by that time. We only had one car.

We were getting collection calls for our personal loans. So, I started negotiating with the collectors to settle the debt.  After a few months, we reached an agreement to reduce the payoff amount to $15,000.  By that time, we had saved about $9,000. I used that amount and settled one of the personal loans. It took another 3 months to settle the other personal loan.  For the credit cards, till that time, I was somehow managing to make the minimum payments and a bit extra whenever possible.

After getting rid of the personal loans, I had a talk with my partner and decided to consolidate bills into one payment. We opted for balance transfer method as I had a credit card in my name with a much lower interest rate but a good credit limit.

Our Debt Payoff Journey

The entire debt payoff journey took about 3 years of time.

We don’t want to do the same struggle what we’ve done in our lives. It is our duty and we’ll always guide you to manage your finances efficiently.  We are on the way to achieve financial independence and hopefully, if everything goes well, we’ll reach it within a few years.

The post From Overburdened with Debt to Debt Free Within 3 Years appeared first on Camp FIRE Finance.

Mike Tyson once said “everyone has a plan till they get punched in the face.” The opposite was true for me.

It took a solid punch to the face for me to wake up and realize that I needed a plan. This is the story of how my 14 months of unemployment led me down a path to financial independence and early retirement.

High School Sweethearts

In November 1998 I married the girl I’d dated throughout high school. Three months before we got married I had enrolled in my Sophomore year of college and was living several hours away from her. But after 3 weeks I couldn’t stand the thought of being away for another day, so I withdrew from school and moved back home to be with her.

A few months later we were married.  I was just a week away from turning 22 and she was 20.

Work or School?

After moving back home the plan was to get married and start creating our new life together. I’d gotten a full time-time job as a car salesmen. I’d work during the day and go to school at night. But being a car salesman provided a few challenges:

• The hours were long
• It was 100% commission-based
• The pay was good … if you could sell

Long hours on the car lot interfered with class and study time. I was making more money by selling cars than I could make anywhere else with just my high school diploma and no work experience. So although the commission-based nature of the job made my paychecks very inconsistent, the money was still decent and quitting for a lower-paying job with better hours didn’t seem like the right move.

I’d picked a job that made it very tough for me to go to school.

Choosing Work over School

So I sold cars full time for just over two years instead of going to college.

Eventually I left the car business and took an office job where I was selling merchant accounts over the phone.  The pay wasn’t as great, but at least I had an hourly rate, which made budgeting easier.  Plus, I could still earn commissions, so the potential for more money was always there.

But I wasn’t a great salesman.  So that larger paycheck never really materialized.

One day while sitting at my desk I vividly remember thinking to myself, four years from now I can still be doing this, or I can be a college graduate with more options.

Choosing School over Work

Four years later I was a college graduate with more options.

Shortly after I’d had that epiphany my wife and I took the steps necessary to get me enrolled in college.  She worked one and two jobs at a time to cover the majority of our bills, and I overloaded my class schedule and enrolled in summer semesters to graduate ASAP.

While going to school full time I took on a few part-time jobs and picked up some side hustles here and there, got student loans, and even received a scholarship to help get by.

During this time we had babies #1 and #2, so we were also both sleep deprived the whole time. Being poor and exhausted sucks in every conceivable way.

It took three just over three years to earn that degree, but we finally got it, and in the end were rewarded with our first “real” job that paid a respectable wage.

My salary was $36,000 per year and it felt like we’d hit the lottery after squeaking by financially for so many years.  This newfound wealth was also our first experience with lifestyle creep.

More money lead to a better apartment & newer car.  No savings though.

Climbing the Corporate Ladder

I consider myself to be a reasonably bright guy and a hard worker.  My boss must have thought so too because over the next 3+ years my starting salary grew from $36,000 in 2005 to just over $60,000 in mid-2008.  We were also further in debt than we’d ever been, and still didn’t have a penny saved.

2008

By this time we were rollin’ in two new cars.  And living in a brand new house (bought at the peak of the housing market).  We also had a few grand in credit card debt.

2009

In late-2008 I took a new job with a new company and got a small raise, and a lot of job stability.  I really liked this company and job. My salary was up to about $75,000 per year, which I liked quite a bit as well.  Baby number three was born in 2009.

2010

In 2010 I was recruited away by another company that was offering a 15% raise. Although I enjoyed my current job and company, greed took over and I accepted this new job, along with their raise and I was now earning $84,700 per year, with a 10% bonus and great benefits.  Baby number 4 joined our family this year as well.

In just a few short years my salary had climbed from a then eye-popping $36,000 per year, with no benefits, all the way up to $85,000 plus bonuses, stock options, a 401k, health, dental and vision benefits.

I was 34 years old.  I’d been married to my high school sweetheart for about 11 years. We had four amazing kids.  Life was good!

But the future wasn’t looking so hot. We had exactly $0.00 saved and a total net worth of negative $305,000.  Change was needed.  Quickly.

Changes

About this time my wife and I came up with our ‘Get Out of Debt Plan.’  I knew something needed to change financially and one day while driving home from work I stumbled across the Dave Ramsey radio show.  I’d never heard of this guy before, and on this particular episode Dave was, rather harshly I think, telling some poor sap to sell their freaking cars and swap them for something they could actually afford.

I was amused at the “tough love” this radio guy was dishing out, but at the same time his advice to the caller resonated with me, and a seed was planted. I’d realized that in one fell swoop I could not only eliminate many tens of thousands of dollars in car debt, but we could also free up money each month that could be used for paying off other debts.

The thought of creating a bit of financial breathing room was exciting!

Destroying Our Debt in Two Weekends

I approached my ever-supportive wife with a plan to eliminate all debt, with the exception of our house, ASAP. She was on board and within about two weeks I’d sold both of our new cars and was left with about $6,000 left over from the transactions.

My wife’s new SUV was replaced with a low’ish mileage, 9 year old minivan.  We paid about $5,000 cash for the van and with the remaining $1,000 I bought a then 20 year old car with unknown miles for $700 (it was a 1989 Dodge Ares K car).

The van, while still a used minivan, at least looked nice.  My K car however was butt ugly! I didn’t care though because both cars were paid for and it felt great!  And just like that we’d eliminated a huge amount of debt and freed up a significant amount of money in our monthly budget.

About a month later I was unexpectedly let go from my job and didn’t find another one for 14 very long months.

I refer this this time as our Dark Year.

The Dark Year: 14 Months of Extended Unemployment

The minuscule amount of money we’d managed to start saving was gone almost instantly.  Unemployment benefits were just enough to keep food on the table and lights on in the house, but not much else.  Had we not sold our cars when we did, they almost certainly would have been repossessed by the banks.

We were in serious danger of losing our home, which we’d bought in late 2008 at the peak of the housing market.  We were so far underwater on the home that we couldn’t sell it unless the bank was willing to agree to a short sale.

After a about 4 months my unemployment benefits ran out. Two more times during our Dark Year I would apply for, and receive, an extension of these benefits. But unemployment benefit extensions don’t, and shouldn’t go on forever. Eventually that well ran dry.

In an attempt to get our hands on whatever cash we could, we sold almost everything we owned that had any value at all. My wife and I took a janitorial job cleaning an office building one night per week.  An old high school friend let me work for his demolition company for a few weeks.  Another friend threw a couple of freelance projects my way.  My parents and in-laws put tires on our car and bought groceries for our family more than once.

Thank God for family and friends!

The Unsuccessful Hunt For Employment

During this fourteen month period it was my full-time job to find a full-time job. As days turned into weeks and then months, the pressure to find employment kept increasing.

That mounting pressure began to negatively impact my ability to interview well.  Knowing how desperately I needed a job, I felt the weight of the world each time I’d interview, and I’d choke.  There were times that I could feel interviews slipping way, and it was beyond frustrating.

I walk away from other interviews thinking that I’d just nailed it!  Then I’d hear nothing from that company, and it was depressing.

Extended unemployment was affecting every aspect of my life.  As a husband and provider this was a soul-crushing, humiliating, confidence-destroying time which mercifully came to an end when I *finally* received a job offer in November 2011.

A Light At The End of the Tunnel

A couple of times during my extended unemployment I’d flown out of state to interview with potential employers. In October 2011 I’d been flown to Seattle for interviews with a well-known company.  It had been a grueling two and a half day interview process, that I didn’t think had gone particularly well.

When it was all over I was at the airport, boarding my return flight home when the job recruiter called me. I’d just left their campus a couple of hours ago. “If they’re calling this soon, it isn’t with good news,” I remember thinking to myself.

I answered un-enthusiastically, anticipating the bad news, “Hello, this is Ty.”

“They LOVED you and want to offer you a position!” the recruiter excitedly responded.  My eyes immediately welled up with tears and the lump in my throat was painful.

I couldn’t believe it! I was sure I’d bombed the interviews. Could this really be happening? I hung up the phone and immediately called my wife to tell her the news. Our Dark Year was coming to an end.

Surviving Extended Unemployment

This new job would take us to another state over 1,000 miles away from home, away from our family, friends, and all that was familiar to us. But there was not a chance in hell I was going to turn it down. I’d tried unsuccessfully for a year to find work in our home state, but had no luck.

Righting our ship required us to take some drastic moves, which after being unemployed for so long we were happy to make. But even though we had this job offer in hand, actually moving to a new state and coming up with enough cash to cover first and last months rent (plus a deposit), plus moving expenses wasn’t something I could do on my own.

My final slice of humble pie came when I had to ask my dad and brother for money to help pay for a moving truck and cover our rent.

Those were some extremely tough times.  I’m glad they’re in our rear view mirror.

Present Day

Fast forward just over seven years and I’m still working for that same company.  A few weeks ago I turned 42 years old and a just a few weeks before that I celebrated my 20^th wedding anniversary with my high school sweetheart.

Our four kids now range in age from 18 to 9 (boy, girl, boy, boy).  My wife stays home to take care of our kiddos. I’m the only source of income for our family.  We live in the Seattle area, which is the 8th most expensive city in America to live in, and we’re thriving on a single income.

But it hasn’t always been this way.  Only recently, at the ripe old age of 35, did I finally get serious about finances and retirement, oddly enough because of a link I found while browsing a college football message board. That day two guys were having an online argument about whether or not Costco was worth the cost of a membership (it must have been the off season).

Discovering FIRE

Early in my Dark Year I found this link to a blog post where a guy that called himself Mr. Money Mustache had done a Costco vs. Safeway comparison. I read through the Costco post. Then read another post. Then I stumbled upon an article that literally changed the course of my financial life titled The Shockingly Simple Math Behind Early Retirement.

Right there before me, laid out in shockingly simple math, was a path to financial independence. For a guy that was pretty much just going along with the ebbs and flows of life, this was like a lighthouse calling me in.  Who knows how or why these things happen, but that blog post resonated with me.

It didn’t matter that I was flat broke, unemployed, had no job prospects and was in danger of losing my house. I couldn’t stop thinking about this concept. I was curious about my own situation and what it would take to retire early, and without even knowing that it had happened, I was officially all-in on the FIRE movement.

Prior to that point in my life I was like a lot of people that know they should be saving, maybe they even do save a little bit, but they don’t know what to do with that savings.  Or how much to save, or what else they could and should be doing.

So we end up just plodding along through life knocking out one day at a time and before you know it you’re approaching retirement age and hope like hell you’ve got enough saved and that Social Security covers the rest.

How Unemployment Led me to Financial Independence

It took a solid punch to the face for me to get serious about money.  It wasn’t until I lost my paycheck that I realized just how dependent upon it I truly was.

During this time I also came to understand that the best thing money can buy is freedom.  And financial freedom really doesn’t cost that much.

When I started my new job I vowed that I’d never put my family in a situation like that ever again. It’s been just over seven years since I accepted that job and now we’re just a few years away from financial independence.

Finishing Strong

Today life not only feels good – it is good!  We’re not there yet, but we’ve got a plan to Get Rich Quick’ish, reach financial independence and retire early.  Rather than buying stuff (i.e. garbage) with our money today, we’re investing it so that we can buy our financial freedom tomorrow.

The plan is to retire early at 49. When all is said and done we’ll have gone from broken and unemployed to financially independent in 13 years.

Chime in!

Thanks for reading. Got something to say?  Say it in the comment section below.

The post How 14 Months of Unemployment Lead to Financial Independence appeared first on Camp FIRE Finance.

This Contributor article was written by Just Start Investing.

Learning how to save 50% of your earnings is a great way to set yourself up for financial independence. Maximizing savings is something anyone can do, regardless of income.

Learning How to Save Money

Obviously, I understand that it’s much easier for someone making $100,000 a year to save 50% of their income (and spend $50,000) than it is for someone making $30,000 a year to save 50% of their income (and spend $15,000).

In either situation though, maximizing your savings is possible, and the closer you can get to 50% (or higher) the better off you will be in the long run.

With that in mind, it’s important to be in the right mindset before trying to save a large portion of your earnings. An easy way to do this is to set firm goals. You’ll never accomplish a high savings rate if its a secondary goal, because short term things always come up. Spending the extra $20 to eat out or $30 to go to the movies is second nature when you aren’t thinking of the opportunity cost of that money.

If your main goal is to save 50% of your income, then do that and prioritize that goal.

If your main goal is to retire at age 35, or to save $100,000, or to double your net worth, then put together the plan to get there.

Build Your Budget

In this article, we’ll be walking through exactly how to get to a 50% savings rate, but the same principles and budget outline can be applied to any financial independence goal.

Step 1: Determine Your After-Tax Income

The first step in building any budget is to determine your after tax income. This should include your total income plus any contributions you make to a 401k (this will count towards your savings!).

Step 2: Analyze Your Situation

The next step is to analyze where you stand today. So, break out the pad and paper (or excel doc or use free Personal Capital software) and rack up your spending for either the past month, 3 months, or year. The goal is to get realistic view of what an average month of spending looks like. Common expenses could be:

• Housing
• Transportation
• Other living expenses
  • Utilities
  • Internet / Cell Phone
  • Groceries
  • Dining Out
  • Travel
  • Entertainment
• Savings

Step 3: Free Up Money Wherever Possible

After determining your after-tax income, and analyzing your current financial situation, step three is to tweak your spending where possible to shift money from your expenses to your savings.

I know, step 3, easier said than done. Let me help bridge the gap. Below is a typical budget, based on a couple budgeting principles (including the 50/30/20 budget and the five category budget), with the percentages being how much of your income gets assigned to each bucket:

• 35% Housing
• 15% Transportation
• 25% Other living expenses
• 25% Savings

Woah, 25% savings, this “typical budget” is already off to a good start!

Adjusting Yourself Into A 50% Savings Rate

Stick with me as we push this even farther. Here are the adjustments you’d have to make to get to a 50% savings rate

• 30% Housing – barely any change, you can live like a King or Queen at 30%
• 3% Transportation – start taking public transportation (or enjoy the cyclelogical benefits of riding a bike and this becomes 0%!)
• 17% Other living expenses
• 50% Savings

How would this play out for an average American bringing home about $40,000 a year in after-tax income? Let’s see (monthly figures below):

• $1,000 Housing
• $100 Transportation
• $566 Other living expenses
• $1,666 Savings

Not so bad when you see an example, right (I hope)? Here’s some more explanation on why this budget could work for you:

• Housing: Average rent in the U.S. is about $1,200, but obviously more affordable cities will be lower. If you want to get to 50% savings, you’ll either have to live in an affordable city or increase your income.
• Transportation: You can get a public transport pass in almost any city for $100 a month (some employers, especially in major cities, will either cover your public transportation costs, or will reimburse you for them).
• Other living expenses: This is a catch all bucket, but includes everything from groceries, utilities, internet, dining out, entertainment and more. Arguably, this is the easiest bucket to pull from in order to increase savings, but also likely has the biggest effect on your quality of life right now.
• Savings: The rest (50%) goes to savings.

Obviously, you would scale these numbers up or down based on your earnings. Or would you?

One of the best things about your income rising over time (again, hopefully) is that you don’t have to increase your standard of living. You could spend more on rent, dinners or groceries, or you could increase your savings rate to 60%. Then 70%. And so on.

It’s completely up to you how to evolve your budget and savings over time.

If you need some further inspiration, here are some easy tips on how to save more money.

Options to Invest Your Savings

Alright, you made it to a 50% savings rate. Now what?

Here are some of the common places to store your savings:

• Emergency Fund: Many experts advise building up an emergency fund of 1-6 months of expenses. This may be a wise first spot to store your savings (a high yield bank account works great) if you are a conservative investor.
• Tax Advantaged Investment Accounts: A 401k and Roth IRAs are great places to invest extra savings (up to the allowable contribution limits).
• Personal Brokerage Account: A personal brokerage account gives you the ultimate flexibility over your investments (there are no limits on contributions or withdrawals). It’s a great place to invest extra savings once your tax advantaged accounts have been maxed out (or before that).

You can learn more about your investment account options here.

Don’t Get Carried Away

I will leave you with one last thought.

Saving for financial independence is great and something most Americans do not do enough. However, not enjoying yourself today in the hope of enjoying yourself tomorrow is also a risky game in and of itself.

If you’re killing yourself to increase your savings rate, you may need to reconsider you original goals you set out to accomplish. Saving only 25% for now may be fine, and when that big pay raise comes your way, you’ll have more money to save later.

The bottom line:

Don’t set a number and get to it at all costs. Set a reasonable goal, strive to get there, and re-adjust your plans as needed. If you are in the saving mindset, that’s half the battle!

The post How to Save 50% of Your Income (or more) In 3 Simple Steps appeared first on Camp FIRE Finance.

Who doesn’t want to get rich quick then ride off into the sunset to live the life of their dreams? I do – that would be awesome! And based on the Google search results that drive people to this website, I’m not alone either.

Here’s the good news/bad news reality: it is possible to get rich quick.  But you shouldn’t spend much time or money trying.

Two Ways to Get Rich Quick

I know of two ways to get rich quick:

1. Break the laws of probability
2. Break the laws of the land

Like I said, you shouldn’t spend much time or money pursuing either of these options. 

Breaking The Laws of Probability to Get Rich Quick

While it can be fun to try and break the laws of probability with the occasional lottery ticket or trip to Vegas, the math just isn’t in your favor.  In fact, when compared to you winning the lottery, you’re more likely to

• get murdered in the grand canyon
• die from an asteroid strike
• or pass away from chronic constipation than you are of winning a jackpot

Here are 7 other crazy things that are more likely to happen than you winning the lottery (not all of them are death related).

Best to keep the gambling limited to entertainment purposes only and far away from your retirement plan. Same goes for breaking the laws of the land. If either of these options are part of your financial plan, then you need a new plan. 

A couple of years ago I witnessed someone trying to get rich quick by robbing a bank.

Breaking the Laws of the Land to Get Rich Quick

A few years ago I happened to be standing outside of a fast food restaurant, talking with my wife on the phone, when I witnessed a bank robbery. Because of where I was standing I happened to be looking in the direction of the bank, about 30 to 40 yards away.

While we were chatting on the phone the dual glass doors of the bank suddenly swung open and a man came running out.

What first caught my attention were the white gloves this guy was wearing as he ran out of the building. Then I saw the velvety blue bag that he was carrying in one hand.  Last I noticed that he was wearing a hoodie pulled up over his head (this wasn’t hoodie wearing weather) and, even from a distance I could tell that his mustache was fake.

It didn’t take long to figure out what was happening and I said to my wife “I’m witnessing a bank robbery!“

The Great Escape

My heart began to race as I realized that this guy was running directly at me.  He was looking right at me.  I was on my phone.

Oh $#!7, I thought.  This guy thinks I’m on the phone with the police and he’s coming for me.

I had no idea if he had a gun (nor if he’d used it to rob the bank and was willing to use it on me)? I just kept staring at the guy, taking it all in and telling my wife what I was seeing:

• Big sunglasses
• Hoodie
• Fake as hell mustache
• He’s running right at me!
• Jeans
• Work boots
• About 5’10 to 6 feet tall
• White gloves
• Blue velvet looking bag
• He’s getting closer!

Before I knew it, he was right on top of me, about 10 yards away.

Way too close for comfort, when suddenly he turned to his left, ran up an alleyway then darted off behind some shrubs.

Phew!

Crime Doesn’t Pay

My heart was pounding. I’d just witnessed some clown get rich quick! 

Or did I?

Based on the size of the bag he was carrying, the thief wouldn’t have nearly enough cash to disappear forever and live a life of luxury with Andy Dufresne down in Zihuatanejo, Mexico.

Doesn’t matter though because the guy got busted about a week later. I know because I was called to do the police lineup.

While I couldn’t ID the guy (because that fake mustache, big sunglasses and hoodie was a surprisingly good disguise), I found out later that the police caught their guy. Case closed.

How To Retire Early Without Breaking Any Laws

So if you need to get rich quick and the odds of hitting a jackpot aren’t in your favor, and if robbery is out of the question, then what’s a guy to do?!

First, you need to accept that getting rich quick takes time.  But it doesn’t need to take a lifetime either. And it won’t if you’ve got a plan.

I don’t know many people that have an actual plan, other than the cookie-cutter, one-size-fits-all strategy that society has defined for you. But society’s plan sucks and it costs too much in terms of time.  You need to Get Rich Quick’ish, because slow’ish sucks.

My Plan to Retire Early  

I don’t want to work till I’m 65 or 70, so this is my plan to Get Rich Quick’ish, reach financial independence and retire early.  I’ve broken my strategy out into five main categories, with ten total steps.

The steps are simple to understand, but actually taking the steps can be hard. Check out my plan below and see if I’m doing anything that you can duplicate that will help you Get Rich Quick’ish too!

My Plan to Get Rich Quick’ish

This plan is unique to me and my situation. Hopefully some of it will be useful or interesting to you, but the details in each step would need to change from person to person, and from situation to situation.

So your plan will look a bit different. With that said, here’s my outline, with full details below:

1. Avoid Lifestyle inflationDeflate lifestyle whenever necessary
2. Bank all financial gainsSave half of all raises at work
3. • Save half of all bonuses at work
4. • Save one percent more than the year before
5. Take advantage of free moneyInvest at least the minimum into 401(k) to get full employer match
6. • Increase 401(k) contribution until it’s fully maxed out
7. • Participate in ESPP program
8. • Increase participation in ESPP program until it’s maxed out at 15% of salary
9. Put our money to workInvest all extra cash into a Roth IRA or a traditional IRA
10. Avoid debt

If followed, these steps would help anyone build a solid financial foundation. Here’s a bit more detail on each step in my plan.

Avoid Lifestyle Creep

Lifestyle creep happens when you spend more money as your income grows.  It’s also known as lifestyle inflation. Avoiding lifestyle inflation is one of the things that I can control, and so I do.  By starting my plan to Get Rich Quick’ish with ‘avoid lifestyle inflation’ I’m guaranteeing that, regardless of where I’m at today, I won’t lose any more ground.  There’s nowhere for me to go but up.

Thankfully I think my family is already living a pretty good life and there’s not much temptation to inflate our lifestyle.  We live in a decent house, in a good neighborhood, within a very good school district. We drive new cars. Everyone gets to wear new clothes. Christmas morning looks like the North Pole exploded in our living room. We go on a handful of weekend getaways each year and try to do one family vacation as well. 

Our life is pretty dang good right now. If all we do is maintain this current standard of living, then ten years from now we’ll still be living a pretty good life!

Bank All Gains

For years (for more than a decade actually) our family was living paycheck to paycheck.  There simply wasn’t enough money in my paycheck to cover rent, transportation, food, medical, clothing and other unexpected expenses AND to save money on top of all that.

During these times the only way for us to get ahead financially was to save any unexpected bonuses, commissions and pay raises that came our way. Theses unexpected gains were rare, but when they came along we were able to get a bit of breathing room, and saving these gains for long enough allowed us to slowly start making financial progress.

Today we’re able to thrive on a single income and those paycheck-to-paycheck days are in our rear view mirror. Because we’ve avoided lifestyle inflation and have saved all of our financial increases, we’re able to save like never before.

Under this ‘bank all gains’ category, I’ve got three steps:

1. Half of all raises at work go into savings
2. Half of all bonuses I get at work also go into savings
3. Each year, increase our overall savings rate by 1%

We’ve been banking the gains in these three ways for a few years now and our stash, and our savings rate, have skyrocketed.

Take Advantage of Free Money

My employers offers two ways for me to get free money: a 401k program and an ESPP plan.

Almost everyone has heard of a 401(k) plans and knows they are valuable for two main reasons:

• You’re contributing pre-tax dollars into your account, and
• Many 401(k) programs offer an employer match … a.k.a. free money for you!

Luckily my company does offer an employer match (with immediate vesting!), which means I’m getting several thousand dollars per year, for free, simply by participating in the program.

A big part of my Get Rich Quick’ish plan to take advantage of free money, and to help that money grow by investing it. And speaking of free money, I’m lucky enough to have access to an ESPP, an employee stock purchase program.

An ESPP allows you to buy company stock at a discounted rate.  That discount is applied to the stock price at the beginning or ending of a six month period, whichever is lower.  There is potential here to get a steep discount on stock, which can them be sold immediately for a gain. Free money!

The ‘take advantage of free money’ part of the plan has four more steps:

1. Invest the minimum amount required to get the full employer match (i.e. grab that free money!)
2. Increase participation in the 401k until I’ve maxed it out at $19,000 per year.
3. Participate in my employer’s ESPP program.
4. Increase participation in the ESPP until it’s maxed out at 15% of my salary.

Put Your Money To Work

It’s not enough to just save money, you need to put your money to work by investing it. Otherwise you’re losing buying power each year due to inflation.

Understanding this, we are investing our cash into our 401(k), into a Roth IRA, and into a traditional IRA as well.

We personally don’t invest in real estate, or fine art, or in anything else other than stocks (that’s not true, I have a little bit of crypto currency). If you invest in things other than the stock market, that’s fine. What’s important is that you are investing in something.  You need to put your money to work and let it grow for you.

Again, the formula to reach financial independence is simple, but the execution is not. It takes discipline and the development of good habits. But by following our plan to Get Rich Quick’ish, and assuming the market continues to deliver historical average returns of about 7% on our invested dollars, then I’ll be set to retire early in 2026.

I’ll be 49 years old at that time, and while the thought of being a 9 to 5 cube jockey for another 6 years is somewhat depressing, it beats the HELL out doing this until I’m 65!

Avoid Debt Like The Plague

Up to this point, everything has been an attack strategy. But it’s defense that wins championships, right?

That’s why the last step in my plan is defensive: avoid debt.

When you have zero debt, you get to keep every dollar you make. Imagine that for just one second: what if you got to keep your entire paycheck?

How quickly would your financial situation change if you got to keep the money you make rather than give it way to others by paying bills? I’m guessing your financial situation would change for the better very quick’ish!

This last step in the plan is simple. Avoid debt!

When you’re doing all of these things, and you get to keep all of your money because you have no debt, then suddenly you’ve got a 10 point strategy to Get Rich Quick’ish, reach financial independence and retire early.  It looks like this:

My 10 Point Plan to Get Rich Quick’ish and Retire Early

1. Avoid lifestyle inflation
2. Save half of all raises at work
3. Save half of all bonuses at work
4. Each year save an additional 1% more than the year before
5. Invest at least the minimum required to get a full 401(k) employer match
6. Increase 401(k) contribution until it’s maxed out at $19,000 per year
7. Participate in my employer’s ESPP
8. Increase ESPP participation until it’s maxed out at 15% of my salary
9. Invest our cash in a 401(k), Roth IRA, or Traditional IRA
10. Eliminate, then avoid debt

I Love It When A Plan Comes Together

I’ve estimated that I’ll be working till I’m 49. That’s a lot older than many of the people you’ll hear and read about in the early retirement world, but considering that I didn’t get started until my late 30s, it’s not bad at all.

Besides, I stay motivated by reminding myself that this is just the minimum amount of saving and investing that I need to do. I can always speed up my FIRE clock by getting more aggressive, taking on another side hustle, being more frugal, etc, but for now this is our plan and I’m happy with it.

Chime in!

Is this plan perfect? Not by a long shot. But it’s worked for us for several years. If and when our situation changes, then we’ll simply change our plan to make the most of our opportunities and challenges.  Do you have a plan?  What does it look like?

The post My 10 Step Plan to Get Rich Quick’ish and Retire Early appeared first on Camp FIRE Finance.

The Camp FIRE Contributor article was written by Good Nelly

Budgeting is often given a wrong meaning. Many people view it as something that puts a stop to every fun thing in life.  They mistakenly think that a budget restricts you from eating out or shopping. In short, you’re devoid of any enjoyment if you follow a budget.

However, it’s not like that. At all.

Actually, budgeting helps you to spend money on the things you want. It helps you to take control on your finances and get your financial life on track.

How To Create a Realistic Budget

First, let me ask you a simple question – What is budgeting?

Do you know the answer? Well, it’s quite simple.  Budgeting is a list of your spending; that is, the complete list of items with the amount you spend.

A realistic budget is what you can follow almost effortlessly and still save a substantial amount every month.

It can’t happen overnight. Some months of effort will help you create the perfect realistic budget for you and your family.

Now, it’s time to sit with your budget worksheet.

Calculate Your Income From All Sources

It is easier for you if you earn only one paycheck. But, if you have multiple sources of income, then you need to take into account your overall income.

Plan All Of Your Expenses

While planning your expenses, first of all, list your needs. It is a good way to manage your needs within 50% of your income.

Next, allot 20% of your income to save. If you don’t have an emergency fund, devote 10% of this amount to the emergency fund and remaining 10% to repay debt.

About 30% you should allot for your wants but when you’re paying back debt, you can use this amount to repay debt quickly.

How Budgeting for Debt Works

When your intention is to budget to pay off bills, you need to pay extra attention to your budget plan. It is almost the same, just you have to set an amount that you’ll save and use to repay your credit card debt and other bills.

Here are some tips to do so:

Change Attitude And Separate Needs From Wants

Often we can’t distinguish between needs and wants; but, when our objective is to budget to pay off credit card debt and save, we should include our needs and not wants in our get out of debt budget worksheet.

So, first list all your needs and decide an amount to put towards paying off bills, then set an amount to fulfill your wants.

Assess Your Budget And Mark Things You Can Do Without

For the time being, you can decide to have the cleaning service twice a month instead of every week or you can cancel your gym membership and enjoy a run at your nearby park.

Likewise, assess where all you can save.

Plan Your Debt Budget

Calculate how much you need to put towards paying off debt within a certain time. Treat that amount as your necessity and plan your budget with the remaining money.

When you get extra perk at your workplace, include that amount to pay off debt. This will help you get out of debt quickly.

Tips To Repay Outstanding Debt

Check out these tips to repay outstanding debt:

Choose A Debt Repayment Plan

You need to choose a suitable debt repayment plan to pay off your debts. One way to do so is to make minimum payment on all your bills and choose a debt account where you’ll pay extra.

It can be the debt with the lowest balance or one with the highest rate of interest. List your bills from the lowest balance to the highest or from the highest interest rate to the lowest one.

Once you repay one debt, use that extra amount to repay the next one in your list.

Consider Debt Settlement To Repay Debt Quickly

If you want to repay debt quickly, you can opt for debt settlement. By choosing this method, you can solve your debt problems by paying less than what you owe.

You can enroll in a debt settlement program or negotiate with your creditors on your own to reduce the outstanding balance.

Practice frugal living

Frugal living helps you to save a decent amount every month. Start couponing and use your coupons to get your grocery at discount rate. Make your own coffee and carry it while you drive to work. Do this and calculate how much you’re able to save after a month.

Get A Part-Time Job To Earn Extra Money

One of the ways to repay debt quickly is to earn extra cash. You can opt for a part-time job. You can also browse online to look for opportunities to earn extra at your leisure time.

Also, revisit your budget from time to time and make changes as required.

So, follow all these things, plan a realistic budget, and repay your debt as fast as you can.

The post Repay Debt Faster by Budgeting for It appeared first on Camp FIRE Finance.

People are funny creatures. We quickly become accustomed to new luxuries and then we can’t seem to live without that thing we’ve lived our entire lives without.

Cell phones are a good example. Just a few short years ago cell phones were expensive nice-to-haves. Today they are must have items that people have become addicted to and can’t seem to function without.

The Luxury Trap

In the book Sapiens, author Yuval Noah Harari explains this phenomenon well and shows that people have been falling into The Luxury Trap since our hunter-gatherer days:

“…The pursuit of an easier life resulted in much hardship. It happens to us today. How many young college graduates have taken demanding jobs in high-powered firms, vowing that they will work hard to earn money that will enable them to retire and pursue their real interests when they are thirty-five? But by the time they reach that age, they have large mortgages, children to school, houses in the suburbs that necessitate at least two cars per family, and a sense that life is not worth living without really good wine and expensive holidays abroad. What are they supposed to do? Go back to digging up roots? No, they double their efforts and keep slaving away.

One of history’s few iron laws is that luxuries tend to become necessities and to spawn new obligations. Once people get used to a certain luxury, they take it for granted. Then they begin to count on it. Finally they reach a point where they can’t live without it.”

This is The Luxury Trap and it’s a lot like lifestyle inflation.  Both can wreak havoc on your finances, your pursuit of FIRE and your personal freedom.

Personal Finances and Personal Freedom

Those caught in this trap find themselves upgrading their lifestyle with each pay raise. Earn more money, spend more money is the cycle. Sure they get to wear the latest fashions and drive newly leased cars, but are they any closer achieving financial independence?

Rather than buying our freedom, the luxury trap keeps us focused on maintaining, or inflating, this luxurious lifestyle. It’s such an easy trap to fall into, regardless of your income level because people at all income levels want nicer things.

A Few Examples of The Luxury Trap

It’s not hard to think of examples where it’s easy to fall into the luxury trap:

• Bigger homes
• Nicer vehicles
• Better food
• Luxury hotels
• First class airfare
• Fancy jewelry
• Name brand clothing
• Frequently dining out

While there are many examples, I’m going to focus on two of them.

The Amazing, Expanding Home

The average size of a home in the 1960s and earlier was just 1,500 sq. feet. Today the average new home is over 2,200 sq. feet. That’s an increase of more than 45%.

But the interesting thing is that while homes have increased in size, our families have gotten smaller. In 1960 the average number of people per household in the United States was 3.33; today that number is 2.54. That’s a decrease in family size of 31%.  Shouldn’t homes be getting smaller as well?

We don’t need the extra square footage to accommodate larger families, so why are home sizes growing while family sizes are shrinking?

Why are people going into massive debt to by more home than they need?

Is it because we’ve fallen into a luxury trap of more square footage, high vaulted ceilings, guest bedrooms, floors made from exotic wood or stone, custom crafted kitchen cabinets, high-end stoves, powder rooms, and more?

All of those things are very nice, but are they necessary?  Or are they slowing down your journey to financial independence?

The Incredible Automobile

Modern vehicles are truly incredible machines. Have you been in a brand new car recently? They’re amazing machines that ooze modern conveniences, safety features and niceties. It’s no wonder we’ve fallen into the luxury trap of needing these upgrades in our cars and trucks.

We “need” power windows in our vehicles because ain’t nobody got time to crank a window up and down by hand. And what about power seats, keyless entry, cooled leather chairs, heated steering wheels, moon roofs, entertainment systems, HD monitors built into head rests?!

All extremely cool items to have in a vehicle! And once you’ve had them, it’s tough to go back.  Seriously, when was the last time you hand cranked a window in a vehicle? The next time you are shopping for a car, would you consider a stripped down version that had manual everything and zero convenience upgrades?

Most people won’t. I know this because I sold cars for several years and watched as buyers up-sold themselves to nicer and more luxurious cars.  Just more evidence of the luxury trap in action.

Keep The Money You Make

If you live in the developed world, make a good salary and are still living paycheck to paycheck, then you’ve almost certainly fallen into the luxury trap. It’s easy to do!

And breaking free is simple enough; you just need to change your priorities around. You’ve got to want “stuff” less than you want financial independence.

The good news is that once you break free of the luxury trap and start pursuing FIRE, you can become financially independent in a relatively short amount of time.

Escaping The Luxury Trap

It’s dangerously easy to continually upgrade and inflate your lifestyle. And to be honest, it’s also kind of fun (that’s one reason it’s easy to do). But few of us ever go in reverse and deflate our lifestyles.  And that’s too bad because lifestyle deflation is the secret to breaking free of the luxury trap.  Those that do are poised to reach financial independence much sooner.

Here are six examples of people that have seriously deflated their lifestyle to shatter many luxury traps that were holding them back financially.

How to Deflate Your Lifestyle

Deflating your lifestyle and breaking free of your own luxury traps begins with self-reflection and taking an honest inventory of your life.  As you do so keep in mind that luxury traps aren’t limited to big ticket items. Your habit of eating out multiple times per week could be a luxury trap that you’ve fallen into.

Identify the luxury traps you’ve fallen into

Identifying the luxury traps in your life is something that only you can do. Nobody but you gets to decide if that new car you’re driving is a luxury trap or a necessity. And even if your car is a luxury, that’s nobody’s business but your own.

Eliminating all the fun, cool and admittedly needless stuff out of our lives sounds awful, and doing so just to reach FIRE a few years sooner sounds like a terrible trade-off to me.

However, if you feel your lifestyle has become over-inflated, and if you want to speed up your journey to financial independence, then you’ll need to be honest with yourself.  And the truth is that *most* things in our lives are wants, not needs.

The key is finding a balance between being overly excessive and extreme frugality.

Prioritize the luxuries in your life

After identifying your luxury traps it’s time to decide what gets to stay, and what gets eliminated.  Start by putting things into one of three categories:

1. Stuff you’re unwilling to live without
2. Things you’d like to keep, but are open to eliminating
3. Items that add no real value to life

This is the hard part because it’s easy to justify our luxuries and you might find yourself putting everything into that first bucket.

If you do find yourself struggling with how to prioritize things it’s helpful to remember that things you eliminate can always be replaced later.  Deflating your lifestyle can be a temporary strategy to help you get out of debt, or reach a certain net worth milestone.

Luxury items and experiences are great, but they should probably be reserved for those that are on solid financial ground.  And once you get there, then feel free to treat yo’ self all you want!

Taking action

Personally, I have zero intention of removing all of the nice things from my life.  But there really are a ton of things that I don’t really need in my life that cost me money.

Here’s a list of a few luxury traps we’ve eliminated from our life:

• Traded in our Mercedes GL450 for a bus pass
• Moved out of the fancy home with an amazing views of the Seattle and Bellevue skylines
• I drove a 20 year old car (with unknown mileage because the odometer only went to 99,999), for years
• My wife drove a 12 year old used minivan with high mileage for years
• Eliminated our second car for three years (not easy to do as a family of six)
• Temporarily moved into my parent’s basement
• We temporarily moved into my in-law’s basement
• We uprooted our kids and relocated over a thousand miles away from family & friends

All of these things were done to help us get ahead financially in some way. Most of the things we’ve given up were nothing more than expensive luxuries that didn’t make us any happier than we are today without them.

Whenever I’m on the fence about eliminating a luxury trap and deflating my lifestyle I ask myself this question: would I rather have this thing or would I rather have financial freedom sooner?

Chime in!

Have you fallen into the luxury trap?  Do you have plans to get out, or are you comfortable enough that you don’t need or want to break free?

The post The Luxury Trap: When Niceties Become Necessities appeared first on Camp FIRE Finance.

By Ansley Fender 

The Stale Donuts Test & the Financial Disadvantages of Instant Gratification

In my household, you can often hear the phrase “stale donuts” thrown around. It’s a reference to a study conducted by Walter Mischel to test willpower. In his experiment, children were given a marshmallow and told that if they didn’t eat the marshmallow, they would be rewarded with another one in a few minutes. The study has subsequently been replicated on adults by using stale donuts with the promise of fresh donuts should the subjects abstain; hence our turn of phrase.

The purpose of the experiment was to test the subjects’ willpower and then track them over time to see how their performance in the experiment predicted future success in life. The theory was that subjects who displayed a lack of self-control would fair worse than those who were able to wait for the reward. My husband and I use the phrase “stale donuts” to promote delayed gratification. It’s a great reminder that practicing a little self-control can yield extraordinary results down the road.

A Rough Financial Start

This is especially true for our finances. My husband and I had a rocky financial start to our marriage. We were living on one income and had a combined $80,000 of student loans. Then I found out I was pregnant. We desperately wanted to pay off our debt and save for the future, but $80,000 was such a deep hole and the future was so far away. Every time we saved a little money, we found a new gadget we wanted or treated ourselves to a fancy dinner. And there was always the threat of an emergency just around the corner.

The first month we charged more to our credit card than we could afford to pay off was the wake-up call we needed. I sat down and created a budget that allowed us to enjoy our lives while still prioritizing our child’s college education and our future. We began to take on side projects to pad our income, and when our daughter was a year, I went to work full-time.

More Money, More Problems

And somehow our financial situation became more difficult. How were we worse off financially while making more money? Lifestyle creep was the new enemy. We worked hard for 40+ hours each week; didn’t we deserve to treat ourselves?

I imagine that many people working toward financial independence wrestle with the same issues. It’s hard to stay motivated to achieve a goal that’s 10, 20, or 30 years away, especially when it’s fun to own a fancy car or go out to eat instead of cooking dinner.

Sometimes the convenience and instant gratification of the stale donuts sounds way better than waiting thirty minutes for the good stuff. But nothing worth having was achieved overnight. So how do you keep yourself motivated for the long haul?

Visualize the Path

Focusing on the end goal doesn’t make the path any easier; it just makes the journey seem really long. Instead, focus on each step you need to take to achieve financial independence. How much do you need to save for your emergency fund, college tuition, or your retirement? Lay out step by step how much to allocate to each savings goal each month. Where should your portfolio be in 1 year, 5 years, 10 years to keep you on track? See yourself putting the money in each account, or better yet, automate it and remove the threat of your humanity.

Visualize these steps periodically. What will it feel like to have a net worth of $100,000? $500,000? $1 million? That feeling is worth the delayed gratification.

Understand Your Why

Why do you want to achieve financial independence? For me, being in debt makes me feel like I’m drowning. Plus, I hate that my creditors are getting rich off of my past poor financial decisions; I don’t want to give them one penny more than I have to.

I also want to be able to give my children the life I didn’t have growing up. My parents were terrible with money; the little we did have was quickly spent, to the point of making us homeless for a brief, unfortunate period. The drive to avoid repeating the same financial mistakes is greater than any shiny new gizmo or dream vacation.

Know Yourself

Be intimately familiar with your triggers so you know how to combat them. I forbid myself to go to Target because it’s my kryptonite. It’s like Target’s buyers are in my brain and somehow know exactly what to stock to make me spend money. So I avoid Target like the plague. In my town, Target is in the mall and has the biggest parking lot. I would innocently park in Target’s parking lot and walk through the store to get to the mall, but that somehow still cost me money. Now I don’t go to the mall. Problem solved.

When you understand your triggers, you can avoid them and, in doing so, adjust your bad habits. On the other hand, you can find ways to trigger yourself to build a good habit. For example, let’s say you discover that you’re spending $500 at restaurants, which you would much rather contribute to your emergency fund. At the end of each month, if you’ve successfully abstained from dining out and saved $500, go out and celebrate. It may sound counter-productive and it is to a degree, but one $50 dinner a month as a reward for staying the course is much cheaper than the $500 you were previously spending.

Understand Inertia

The law of inertia is Newton’s First Law of Motion. It states that an object at rest will stay at rest and an object in motion will stay in motion until an external force acts upon it. For many people, getting started is the hardest part of the journey to financial independence. Inertia keeps them at rest. The good news is that doing one thing to get your journey in motion, such as setting up auto-transfers from your checking account to your investment account, is likely to keep you in motion.

Develop a Growth Mindset

Carol Dweck is a psychologist at Stanford and the author of Mindset: The New Psychology of Success, which discusses how our mindset affects our ability to improve. According to Dweck there are two types of mindsets–a fixed mindset and a growth mindset. Individuals with a fixed mindset believe they are who they are; they’re constantly working to prove themselves rather than improve themselves.

On the other hand, “the passion for stretching [oneself] and sticking to it, even (or especially) when it’s not going well, is the hallmark of the growth mindset. This is the mindset that allows people to thrive during some of the most challenging times in the lives,” such as when your debt seems insurmountable or you need $10,000 in roof repairs thanks to Mother Nature.

Fresh Donuts

Educate yourself on ways to grow your income, invest smarter, and reduce your expenses. Understand that you alone are the greatest obstacle to your success, and work to control your bad habits. Accept that the road to financial independence will be long and hard, rife with market downturns and unforeseen expenses. Don’t miss out on the freedom that comes with achieving your financial goals because of a few stale donuts.

The post Stale Donuts: The Greatest Obstacle to FIRE appeared first on Camp FIRE Finance.

Personal Finance is Personal

You’re ready to up your money game, so you start searching for financial advice. You begin looking online and find thousands of articles to choose from. Or you turn to Amazon and your local library for books to improve your financial knowledge. But you quickly notice some articles and books tell you to do precisely the opposite of others.

The more you read, the more confused you get.

Because even if the financial advice conflicts, you can see how each argument makes sense. They’re backed up with numbers, and some include real-life examples. Analysis paralysis sets in. So instead of taking action on what you are trying to do – fix your finances – you sit back perplexed and don’t make any noticeable progress on your money matters.

Who Do You Believe and What is the Best Financial Advice for You?

Before you go searching for any more answers, you should know there are few universal truths in personal finance – no matter what anyone tells you. Is there anything everyone agrees on? Yes. To get ahead financially, you have to spend less than you earn.

But most other “sacred cow” money advice can be disputed. There is no “one size fits all” personal finance plan. Why is that?

There is a lot more to money decisions than just the math.

Take a look at these ten examples of conflicting advice in personal finance.

1. Taking on Debt

Being able to do a debt free scream or post on social media that you are #debtfree is the goal of many. And most would agree if your goal is to pay off debt you shouldn’t take on more of it – especially bad (consumer) debt.

But there are others who think you can leverage debt and take on more of it to accelerate building wealth. Robert Kiyosaki, the author of Rich Dad Poor Dad, explains that using other people’s money (banks/investors) to invest in cash flowing assets like rental properties is the smart thing to do.

2. Eliminating Debt

You may have read about different ways to pay off debt. Money guru Dave Ramsey believes in the debt snowball method. He thinks people get out of debt by modifying their behavior. Paying off the smallest balance first (regardless of the interest rate) builds momentum and motivates people to stay focused on their finances.

Others think you’re wasting time and money by not focusing on the highest interest debt first. If the high-interest debt is on a large loan, it might take a long time to feel like you are making progress. Those who choose this debt avalanche method (also called the debt stacking method) may lose motivation over time.

3. To Budget or Not

If you need to get your finances in order, it makes sense to create a budget and track your expenses – whether you do that through apps, spreadsheets, or using paper and pencil. You’ll even find different ways to budget. A few examples are the zero-sum budget or the envelope method of budgeting.

The anti-budget is another option. In this method, you first take money each month to pay off debt, invest, and save. Next, you pay your monthly bills. Whatever money remains is yours to spend without tracking.

4. Emergency Fund

Most people believe in having some kind of emergency fund. But the size of the fund is up for debate. Is $1000 the goal? It can then be used to pay off emergencies like a car repair or an appliance that quits. Or should your emergency fund be 3-6 months of expenses? For many people, this could be $15-20K. That’s a huge difference.

Others think putting that kind of money into an account earning very little interest is a waste. They believe that if you have other ways to get money in case of an emergency (using credit cards or a home equity loan/line of credit), you should instead invest the money earmarked for an emergency fund.

5. Using Credit Cards

There is conflicting advice here too. Even though it’s hard to navigate our world without a credit card – some people do it. And with the average family having over $16,000 of credit card debt, maybe others should stop doing using them too.

But credit cards can cover you in an emergency, help you build your credit score, and provide you with benefits like cash back, travel rewards, and warranties on purchases. But there is no benefit if you can’t pay them off and face steep interest rates on your balance.

6. Earning Extra Money

Everyone has a side hustle these days. And many people have more than one. Some have even moved to the gig economy as their primary source of income. Others are scratching their entrepreneurial itch by starting a small business.

But if you have a W-2 job and need extra money, does it make more sense to freelance, start a side gig, or take contract work, over working available overtime hours or striving toward a promotion in your field? Overtime and promotions have the potential to make you more money, but side hustles and entrepreneurship are undoubtedly what’s popular right now.

7. Cars

Should you buy a new or used car? Does leasing ever make sense? There can be a case made that each one makes sense depending on your life situation and the offer given.

You might have heard the frugal idea that you should only buy a used vehicle. Many swear by the high value of buying used and avoiding the depreciation lost when you drive off the new car lot. But that discounts the low-interest rates, maintenance packages, and warranties offered on new cars. And even though many would disagree, there are a few smart reasons to lease over buying new or used.

8. To Rent or Buy a House

This is one of the hottest debates in personal finance, and like the other options in the list, only you can decide. Renting allows you to have greater mobility and more fixed expenses. You’ll probably spend less time on home maintenance too. But you’ll also have to prepare for criticism that you’re throwing out your money with nothing to show for it – even if you are investing more of your hard-earned cash than your homeowner friends.

If you buy your home, you are in control. You can change the paint and landscape the yard. It’ll take time, but it’s yours. And your mortgage payments will help you build equity. But new homeowners often don’t have a plan to pay for large expenses (think furniture, appliances or a new roof) and end up going into debt.

9. Investing

Should you invest in a Roth? What about a 401k? Should you max them out or not? Which one do you put money in first? When you decide to invest, do you buy international funds or not? What about investing in index funds or REITs?

You might find just as much conflicting advice and ideas about investing in yourself! Is it worth it or not? For everyone who thinks their advanced degree paid off, you’ll find others telling you it’s a waste.

10. Retirement

You’d think everyone would agree that retiring is a good goal! But not when you read the statistics. Some people never want to retire, and some may need to keep working whether they want to or not.

And what about retiring early? Should FIRE be your goal? Are you planning on being frugal forever (Lean FIRE) or are you going to work longer and save, so money is never an issue in retirement (Fat FIRE)? Or does somewhere in between make more sense?

Financial Advice Conflicts for a Reason

After reading all of these examples, your head may be spinning! If money experts recommend all of these different strategies, which ones will work best for you?

The most important thing to remember is that personal finance is just that – it’s personal. What works best for one person may not be what’s best for you. Making smart financial decisions isn’t just about the numbers. Your unique situation and your behaviors and emotions (and those of a spouse or partner) matter too.

Ready, Fire, Aim

Reaching financial independence is your end goal, but “trying on” different money advice on the path to that goal can be overwhelming. Read, learn, discuss and ask questions about what you don’t understand.

But get started.

Waiting until you become an expert in each area will set you back. Create your own personal financial plan, making adjustments as you go, learning from mistakes. Remember – one size fits one.

The post The Best Financial Advice? One Size Fits One appeared first on Camp FIRE Finance.

Budgets get a bad rap.  Many people feel held down and restricted by a budget, but the reality is that a budget doesn’t hold you down – it gives you freedom!  I’ll explain using a short object lesson.

What is a Budget?

A budget is nothing more than an estimate of how much money you’re going to make and spend within a time frame.

By that definition, everyone has a budget.  You might not “prepare” a budget or think you’re following one, but EVERYONE has a budget. It’s defined by whatever cash and credit you have access to.

• Got unlimited cash and credit?  Then you can buy whatever you want, whenever you want it with that kind of budget.
• Got zero cash and no credit? Sorry friend, you can’t buy squat on that budget.

Most of us are somewhere in between those two extreme examples.  Our budgets come down to nothing more than second grade math where income – expenses = your budget.

It’s All About The Surplus

Hopefully you’ve got some money left over after you’ve subtracted your expenses from your income. If so, this is your surplus, and because a surplus is a very good thing, the bigger the better!

However, if you’re in the negative after subtracting your expenses from your income, then you’ve got a financial emergency on your hands.  You’re spending more money than you earn, and you need to change that immediately.

Fixing Your Budget

There are only three ways to fix or improve your budget:

1. Make more money
2. Spend less money
3. Some combination of make more money and spend less money

If you can’t seem to get ahead of your finances, then you either have too many expenses, not enough income, or both.  Personal finance is simple.  If you’re having trouble getting ahead then you just need to focus on earning more and spending less.

Do Budgets Work?

Dave Ramsey has a great quote that says “a budget is telling your money where to go instead of wondering where it went.”

Budgets work best when you have a plan and and you stick to you.  When you stick to your budget, by spending less than you make, you prevent yourself from digging a financial hole for yourself.

When you don’t stick to your budget, by spending more than you make, you crash a burn by digging a financial hold that you’ll eventually need to dig yourself out of.

Budgets work by preventing you from digging a hole that will be difficult and expensive to dig out of later on.

This isn’t restrictive – it’s protective. While everyone has a budget, not everyone has a plan. You need both if you’re going to take control of your finances.

Creating A Financial Plan

If budgeting is tracking your income and expenses, then a financial plan is your strategy for reaching your goals.  Whether you’re goal is to save money, to make a purchase, paying off debt, reaching financial independence, or all of the above.

How Do Budgets Work?

Imagine yourself flying a kite on a breezy day. Pushed up by the wind your kite climbs higher and higher, cutting effortlessly through the sky. You can feel the wind pushing your kite upward, the only thing holding it down the string.

Now think of yourself as the kite and your budget is the sting.  It’s holding you down!  If someone would just cut the string you could take off! Right?

Except the string isn’t limiting you or holding you down – and neither is your budget.  It’s keeping you up. Cut the string (or live like you don’t have a budget) and what do you think will happen?  The kite doesn’t soar off into the wild blue yonder.  It crashes and burns. Fast!

A Budget Doesn’t Hold You Back

Just like a kite can’t fly without the tension of a string, you’ll never reach financial freedom without a budget and a plan. These two things don’t limit you – they give you options and actually allow you to fly higher!

A Budget Plus A Plan = Financial Independence

If your ultimate long-term money goal is to reach financial independence (the point where your investments and assets generate enough income to cover your expenses), then align your path to that goal with several smaller goals.  One of those goals should be increasing your surplus, then investing that into an index fund so that your dollars become employees that go to work for you.

Sometimes it can feel like your financial situation is a train wreck. I know. I’ve been there. It can get to the point where you don’t even dare track your income and expenses.If you’re in this situation right now, hang in there.

Control Your Cash Or It Will Control You

Remember the first step to getting rich then do whatever it takes to generate a monthly surplus. Save money. Figure out what your magic number is then roll up your sleeves and get to work and remember: the secret to getting ahead is getting started.

So get started!

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