FIRE 101: The Core Rules of Financial Independence Retire Early

Updated : Sep 05, 2019 in Articles

FIRE 101: The Core Rules of Financial Independence Retire Early


Robert Brokamp: Let’s get down
to more practical stuff. Let’s say someone’s listening. You really have their interest piqued. What are the first few things they should
do to put themselves on the path to an FI lifestyle? Jonathan Mendonsa: Let’s take
a look at the simple equation. What you earn minus what you spend
is equal to the difference of the gap. We want to grow the income, we want to decrease
the expenses, and we want to figure out how to optimize the difference. Those are three different strategies with
virtually unlimited options around them, and you need to look at where
you are on the spectrum. What is your problem?
Is it you have great income? You’ve got a decent baseline but you just don’t know
what to do with the difference. Let’s talk about that. Let’s say that you are just paycheck to
paycheck on $100,000. Let’s talk about that. We’ve got to figure out what
individual we’re actually talking to. The FI community is really good on the spend
less side of things and we’re really good at the optimize the difference side of things. I think that in this particular conversation,
this is probably where we can add a lot of value. I think that earning more is great.
I think all of us should look at earning more. I think it’s a great opportunity,
but it’s a little more nebulous. Like what am I going to do tomorrow?
Let’s talk about career hacking. Let’s talk about alternative careers.
Let’s talk about moving across the street. Do a startup. Do a side hustle. I think just for the sake of this short conversation
we should say that that’s great. Let’s focus on earning more, but let’s just set that to
the side and let’s focus on the other two; spend less. And Brad, there’s a bunch of really cool levers
that you can pull almost immediately to kick that savings rate into gear. Brad Barrett: For me, it’s the
big line items in your budget. Again, we don’t want to live this life of
deprivation, so we can talk about cutting out Starbucks and avocado toast,
but to me that’s beside the point. It’s how do you design that life
that things that you buy actually matter? For me, it’s housing makes up probably
about one-third of people’s budgets. Cars somewhere in the vicinity of 15-20%.
I think you can look at those immediately. Obviously, that’s a big
decision for many people. Moving is not something you take lightly,
but if it matters $1,000-plus dollars a month, maybe it’s worth looking into.
I think some really simple ones are food. People just hemorrhage money on food.
For me it’s about being intentional. My family cooks basically all of our meals, and our
meals cost about two dollars per person per meal. That sure beats going out to the local grocery
store and even just getting the prepared food there for $10 a pound; not less going out
to dinner for whatever plus drinks plus tax and tip. I think you can save many hundreds
of dollars per month just on food, alone. I think to me that is the simple
low-hanging fruit. Just looking at subscriptions. I think looking at your phone bill. My phone bill
through Republic Wireless costs me under $20 a month. I have a regular smartphone.
You wouldn’t know I’m doing anything crazy. I’m just a little more intentional.
So it comes back to that; intentionality. I don’t download YouTube videos
and podcasts when I’m off Wi-Fi. That is literally the only thing I give up, otherwise
I have a perfectly functional normal human’s phone. I just don’t do those couple of things.
Is that like a “oh, poor me, cry me a river” type deal? Or is that, “Wow. I’m saving
$1,000 per phone line per year.” It’s an obvious choice once
you’re presented with it. Again, it’s those kinds
of things. Cutting the cable, etc. We could talk about this ad nauseum,
but there are these items to look at. Mendonsa: I don’t want to belabor this
particular side of things, but just to point out how powerful this is. We talked
about the car earlier in the conversation. If you are to do the math on the true cost
of car ownership; if you are to basically look at the difference between buying that
brand new car and financing a new car for life vs. just having, frankly, one new car,
paying it off and sticking with it for years and years and years until it disintegrates
into dust in your driveway, the difference is $1 million. I mean, it’s that truly incredible. If you look at something that’s a powerful
idea called house hacking, it’s a big word for basically saying you buy either
a single-family home or a duplex or triplex. You’ll stay in one room and you rent out the
others hopefully with enough to cover most or all of your rent, so you live for free.
Imagine just simply living for free. Cutting that line item for your budget. And then if you want to compound that,
we know that between your home costs and your transportation costs that’s
50% of most people’s budget. If you then moved your house that close to
your job and you could bike, walk, or very easily go to work, suddenly you
have cut your expenses by 50%. You then put that into the other side
of the equation, the life optimization side. For instance, if you have a 1% savings rate,
that means it takes you 100 years to replace that one year of expenses. If you have a 50% savings rate, we know that
you can get to a point where working is optional within 10 to 15 years using
the power of compound interest. That’s how powerful it is. So when you look at your life
— when you look at this as a puzzle — and you say, “I can focus on any aspect
of this, but what do I want to do now?” You don’t have to do everything, but my friend,
you’re going to have to do something. And that’s the really cool part of this.
Let’s just get a little bit better every single day. And we see this. I was talking to an
individual the other day and his name is Chris. He says, “Guys, I found your show
last fall, and I was just drifting. I don’t know what I was doing. It’s so obvious.
My net worth has tripled.” And there’s no hook to this. There’s no upgraded mastermind class where
now you’re going to get the real secrets. It’s just stupid simple. Just do it! Just do something each day to
put yourself in this better situation! Brokamp: So some people who are considering
this lower-cost lifestyle might think, “Oh, that’s fine, but then from
now on all my vacations are…” Alison Southwick: I get to have no fun ever! Brokamp: We’re going to be at the tent
at the KOA, but that’s not necessarily… Mendonsa: I have been to KOA, but it was a long
time ago. I didn’t know they were still out there. Brokamp: I actually love camping,
but the point is that’s not necessarily true, and Brad you, in particular, are sort of this ninja
in terms of finding ways to see the world for free. Barrett: Yes, it’s been quite
a journey for me, no pun intended. Southwick: Literally. Barrett: My wife and I have earned, I think
at the last count, like 2.5 million miles in points by just being very
intentional about our credit card spending. Again, kind of going through the entire FI
life, it’s living a very optimized financial life. And part of that for me, personally
[and, of course, every person is different], but for us we put all of our
expenses on our credit cards. We pay them off clearly on time
and in full every single month. That’s the crucial part of this. If you’re not
one of those people, just please stop listening. Southwick: Stop listening
right now! We’re done! Mendonsa: So everybody just
leaned in to listen more closely. Southwick: I totally
agree with that. I do that! Barrett: So table stakes, but what we do is
we open up very targeted credit cards and earn these massive sign-up bonuses.
You’ll see, obviously, different advertisements. Spend $3,000 in the first three months and earn
50,000 American Airlines miles, or some such. Well, if you can redeem those for any type
of reasonable value, you’re going to get probably $700 to $1,000 in value from that one credit card
sign-up, and that’s just using your normal spending. In that case it was $3,000 of your normal
spending on this card, instead of using the other card that you were getting
1% back, which would be $30. Here you’re using this very targeted
card and getting $1,000 in free travel. Now, we’ve done that over a period of many years
— over probably seven years at this point — and like I said earned this massive amount
of points and miles that we’ve turned into real travel. So my family of four, and actually the four
grandparents, came with us to Disney World. So instead of it costing $4,000 approximately
for the hotel, which we stayed on-site, four round-trip flights, and the park tickets,
we spent about $150. On one trip. Mendonsa: And talking about real travel, going
back to my story, if you remember that interaction I had with my employer where I said, “Hey, I want
to take my wife home to go visit her family,” travel rewards had a profound impact
on my wife for this very reason. Travel is expensive, and when you marry someone
from another country, you’re baking that in. The family is important and
travel is just going to happen. Southwick: Put it in the vows.
Mendonsa: Virtually. We’re staying here in the States, but I promise we’ll come
back and visit you guys every couple of years or so. And pre-Brad, I was very happy with my 1.5% cash back
card where I would get maybe $30-40 to spend. $40 and cash rewards. But post-learning about this and how to
implement and benefit from it, it would have cost my wife and I probably $3,000 to go visit
her family for two weeks in Zimbabwe. I did all of that using points and miles. And I want to emphasize how valuable this is,
because it’s not just that I got the flight for free. If you think about it, in a past life I would
have had to pay that same $3,000 for those two air tickets and I would have
paid for it with post-tax dollars. Cards and points are non-taxable. The way they’re structured, spending that
you were having to do with post-tax dollars and you’re benefitting from whatever
marginal tax bracket you find yourself in, and not only are you not having to spend the
money on it, but then you’re getting the travel with tax-free benefits. That is incredible, and this is one of the
things that allowed me to just take that line item that was travel in my budget,
and just take it completely out. This is about getting more for less. What if we can get more housing for less
because you’re using a form of house hacking. What if we can get the same
college experience for less? What if we can go and get a better job than
we could have just following the traditional college course, and what if we
can travel around the world for free? It’s been well-documented that this is possible. Brokamp: Obviously, we’ll give the caveat
that that means that you pay the bills off, of course, because if
you’re not paying off you’re maintaining a balance…
Southwick: I’ve been like that. Brokamp: … and all that stuff. Some people might have concerns about how
it affects their credit score, but you guys have been doing this for years and I’m going
to bet that you guys have pretty good credit scores. Barrett: Yes. I think my credit score started at like a 792
and the last time I checked within a month it was 811. I would say everyone who’s hearing this, you
need to look at your own life and figure out what works for you. My wife and
I have these wonderful credit scores. We said, “OK, this sounds good,”
but it was a trust-by-verify type situation. “We’re going to dip our
toes in and see if this works.” We have that margin where even if our
credit scores plummeted 50 or 70 points, nothing bad would have
happened. We had a home. We weren’t going to buy anything on credit.
There was no risk here, for us, at all. I’ve worked with many thousands of people
who have been using this similar strategy and I’ve yet to hear of one
person whose credit score plummeted. I think I can speak again anecdotally but
with knowing tens of thousands of people who have done this that it really doesn’t impact
you all that much, but you are going to see, just in your normal course
of life, intra-month swings. Right before you pay off your credit card,
your utilization is going to be slightly higher than the day after you pay it off. So regardless of what credit card
you’re using, your credit score fluctuates. I think you’ll probably see a 20-point plus
or minus, but if that’s within that margin of safety for you,
then I see no downsides here. Southwick: What level of frequency do you find that
you guys are opening and closing new credit cards? Mendonsa: We both, I believe,
try to keep it just as simple as possible. To go back to Brad’s point, I think it really
helps to understand just what credit card companies actually look at. That’s been publicly documented and there may
be some other factors, but they look at utilization. So if you have a card with a $10,000 limit and you’re
only using $100, you’re not really utilizing your card. That’s a positive thing.
The age of your credit. If you have a card that you opened 10 years
ago and you still have it, or you have a student loan that you’ve had forever, that’s a positive.
And there’s a few derogatory marks. For instance, if you don’t pay your bills
on time, that’s a really bad thing. That’s what would hurt you, if anything. Like he said, table stakes for this is make
paying your bills on time and in full. To your other question, I will open a card
and I will then just put all of my normal spending on that card until we’ve reached
this certain minimum spend and gotten the reward. Then maybe my wife will open another one. Usually it’s going to take us a couple of months
to get through a minimum spend on a card. There are people, I’m sure,
that are incredibly aggressive with this. I’m not trying to have 20 million points,
but this is a way for me to replace spending that I was already making, putting regular
stuff on a card, and then using that to give my family a wonderful trip
once or twice a year. And we just have this extra stash of
travel that we can use when we need it. Maybe one year we use more, maybe one year
we use less but it offers us freedom and flexibility. Where in the past maybe I was looking at this
from this one-dimensional place. “I’m sorry, honey. We can’t go visit your family because
we’re paying down our student loans.” Southwick: Once again, for our listeners who
want to learn more, you guys are at ChooseFI.com. And then your podcast, if they just go to iTunes and
search ChooseFI are they going to land on you? Barrett: Yes. Just ChooseFI.
We publish every Monday and Friday. Mendonsa: And there is an episode on our podcast
where we really went into depth on what this would look like for an individual
that wants to get started with this. It’s Episode 9 of our podcast. I think it’s actually our most downloaded
episode of all times, so it would be a wonderful place to start if you were to say, “Hey, that
sounds really cool, but I think I need a little bit more information before I really dive into that.”
Go check out Episode 9 of our podcast.

11 Comments

  • great excerpt from that interview, also as long as you're not looking to borrow money anytime soon which you really probably shouldn't be if you're on the path fi anyways who cares about a credit score

  • In truth the F.I.R.E. movement is about self-discovery, our authenticity, experiences and our journey towards personal mastery. The mastery of being able to better define, develop and live our own authenticity and to add value to others. Financial independence on its own, is not our solution. For many its allure and the effort required for its attainment is like every other form of escapism.

    True fulfillment and mastery in life is attained through embracing all of it and its daily challenges including the unknown rather than seeking to escape it.. https://www.peterhorsfield.com.au/…/266-refined-by-f-i-r-e

  • Does anyone have republic wireless? How’s the reception? I’ve been pay WAY TOO MUCH for my cell service

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