To Retire Early with $2.5 Million We Took These Actions (13 minutes)

Key Takeaways

• Calculate you FIRE Number
• Calculate your Savings Rate – perform a quick and dirty calculation. Don’t obsess about creating weighted values to account for pre-tax vs post-tax savings.
• Create an Investment Plan, maximize Retirement Accounts first, then other tax-preferred accounts, then taxable investments
• Understand your Withdrawal Plan aka your “Draw Down Strategy” particularly if retiring before age 59.5, for example a Roth Conversion ladder, 72T – taking at least five substantially equal periodic payments (SEPPs), Dividend Stock payments from a taxable brokerage account, then later Pensions and/or Social Security
• Develop a Phased Plan if you plan to retire before age 65. Medicare and Social Security start in your 60s, plan how you will support yourself throughout the different phases of your retirement. Consider that you may need more support in your later years, from hiring people to clean your gutters to an assisted living facility.
• Plan for Worse Case Scenario – hold sufficient insurance, have a plan to support elderly parents if necessary, create your plan if your kid goes to private college instead of a state university
• Create a Side Hustle – develop multiple streams of income, these will speed your progress toward financial independence as well as provide protection from misfortunes, such as a layoff. These could also be restarted in early retirement during market downturn years if you would like an additional financial buffer.
• Optimize your Money Mindset – think positively and creatively about how to reach your financial goals

Discussion Questions:

Does FIRE seem overwhelming? Or totally achievable?

What would you do if you did not have a “day job”?

Why Financial Flexibility Is the Most UNDERRATED Key to Financial Success (17 minutes)

Key Takeaways

There are a ton of numbers flying throughout this video. In summary, if you are able to significantly reduce your spending in retirement during market downturn years, you can:

A – Withdraw money at a significantly higher rate during good and average market years

OR

B – Retire with significantly less money saved

Discussion Questions

This concept lends itself to some interesting creative solutions.

Perhaps you love hosting friends and family. Maybe you live in a sweet house with lots of spare rooms in a vacation town and spend the good market years hosting family and friends to week-long visits with fun barbeques and clambakes. Then during market downturn years, you retreat to the tiny house on the back corner of your property and rent out the big house, and spend the year inexpensively visiting the family and friends you hosted during the good years.

What creative solutions can you think of to significantly reduce spending during market downturns during retirement?

 >> Forward to Week Six Activity >>

How would you feel if you knew you could have a simple yet comfortable life going forward without ever making more money?  

Unless you plan to work until the day you die, most of us are hoping to reach this point eventually.  Even the workaholics among us should consider the alarming statistic that 56% of workers over the age of 50 have been pushed out of jobs before they would willingly have retired. Learn more in this article:

Investopedia – What Is Forced Retirement? https://www.investopedia.com/terms/f/forced-retirement.asp

How would you feel if you knew you could have a comfortable life with some splurges like travel or a  vacation house going forward without ever making more money?

Both of these scenarios are examples of FIRE – Financial Independence/Retire Early.  “FIRE people” have accrued sufficient investments and passive income to live indefinitely without traditional work.

How will you know when you have enough?  

MATH  

Screams Heard Echoing in the Distance….

Fear not!  This week’s calculator will do all the math for you.  You enter your spending into the relevant categories (most will remain $0) and the calculator will do all the math.

The calculator uses the “4% Rule”, based on the Trinity study.  The Trinity study concludes that retirees can safely withdraw 4% from their investments every year and support themselves for 30 years (and frequently end with more money than they started).  Read this article to learn more about what asset allocations are necessary for the highest likelihood of success and what data the study was based on.

White Coat Investor – The 4% Rule and Safe Withdrawal Rates

Calculating your FIRE numbers

We start with your current spending patterns because many aspects of your life will be the same in retirement.  If you plan to stay in your current community, near your family and friends, you will probably shop the same stores for groceries, clothing, etc…

This system allows you to:

• Keep all the things you plan to continue doing the same,
• Eliminate categories that will no longer apply, such as business travel and expenses
• Add in retirement categories like golf or traveling in an RV
• And you are done! 

You have created a realistic picture of what your typical spending will be like in retirement.

Digging INTO The Calculator –

What is this “Future Expenses” section all about? 

Have you ever looked at your suddenly drained bank account and wondered “What happened?” 

You are not alone! 

Many of us have a good sense of our typical monthly expenses: rent, car payment, groceries, etc…    However, most of us have a TERRIBLE sense of our annual expenses, such as life insurance, and eventual expenses, such as car repair.  We cruise along managing our cash flow and monthly expenses, but every few months a large annual or eventual expense comes along and wrecks everything, and we are left feeling financial progress is hopeless.

The Future Expenses section solves this issue once and for all.  

You will track all your annual, semi-annual, and quarterly expenses in the future spending section, recording how much money you will need and when you will need it. 

You will also track all your eventual expenses.  If you have a car, you may not know when you will need new tires but you know you will need them eventually.  Record the estimated cost of new tires and other necessary car repairs and estimate a date.   If you have a home with a 20-year-old furnace.  You may not know when your furnace will die but you know it will probably happen sometime in the next 2 to 8 years.  Record the estimated cost of a new furnace and other necessary home repairs and estimate a date.  

The calculator will divide the amounts you need by the number of months you have left to calculate your monthly transfer amount.

The calculator will also sum all the “monthly transfer amounts” from all you future spending categories.  Practitioners of the “Automatic Budget” aka “No-Budget Budget” will open a separate high-interest savings account and automatically transfer this amount from their checking account to their high-interest savings account each month. 

This leaves only the money that can be spent this month in your checking account.   You can check the spreadsheet once at the beginning of the month to see any annual expenses that are due this month (showed in BLUE) and proactively transfer that money back to checking.  Any time one of the “eventual expenses”, like car repair, occurs you simply transfer the money back from your high- interest savings to checking. 

Capturing and estimating these annual and eventual expenses are the only way to have a realistic picture of your typical spending and how your spending will change in the future. 

What is Survival FIRE? 

Survival FIRE exists when you have accrued enough investments and/or passive income to support your basic needs without working.  You define what are your basic needs. 

• Do you need a car?
• Could you get a roommate?
• Do you need Netflix and Hulu and Disney+……?
• Do you need to go out to eat periodically? 
• Do you need to travel and go on vacations?
• Do your kids need to go to a private college rather than a state university?

Most people aspire to greater luxury and comfort than their basic needs and will continue working beyond this point.   HOWEVER, knowing that you have reached Survival FIRE could dramatically reduce the stress in your life.  If there are rumors of layoffs at work, you don’t need to stress about losing your housing.  If you hate your job, you can now consider switching careers, even with a reduction in pay, without putting your future at risk.  Any situation where you feel taken advantage of, you can take your ball and go home whenever you choose.

Calculating Your Survival FIRE Number

After completing the Future Expenses and Monthly Expenses sections of the  “AutomaticBudget” worksheet, switch to the “SurvivalFire” worksheet (second tab).  The expense fields will be populated with the numbers you entered on the “AutomaticBudget” worksheet.  Now go from top to bottom and eliminate all the spending you would not need if you stopped working, as well as anything you could live without.

At the bottom you will see your projected “Survival Fire” expenses and your associated “Survival Fire Number” based on the Trinity study’s 4% rule.  You can change the safe-withdrawal-rate to 3.5% or even 3% if you feel the Trinity study is not conservative enough.

The health insurance costs assumptions are based on this article: Investopedia – How Much Does Health Insurance Cost? However, you may get a more accurate number by contacting your state’s healthcare exchange.

What is Comfy FIRE? 

Comfy FIRE exists when you have accrued enough investments and/or passive income to support your comfortable life with no sacrifices without working. 

You define your comfortable life. 

• Where do you want to live?
• Do you want to travel?
• What interests and hobbies do you want to pursue?

When you reach Comfy Fire, you get to decide the best way to spend your future knowing that your needs and comforts are provided for.   You may love you work and decide to continue working.   You may decide to work part-time and develop “core pursuits” that you will continue in retirement.  You may decide to pursue a new career that you always loved but wasn’t lucrative enough.

Read this to learn “What Are Core Pursuits?” by Wes Moss and how they contribute to a fulfilling retirement.

Calculating Your Comfy FIRE Number

After completing the Future Expenses and Monthly Expenses sections of the  “AutomaticBudget” worksheet, switch to the “ComfyFire” worksheet.  The expense fields will be populated with the numbers you entered on the “AutomaticBudget” worksheet.  Now go from top to bottom and eliminate all the spending you would not need if you stopped working and add any new categories you will pursue when you retire.

At the bottom you will see your projected “Comfy Fire” spending and your associated “Comfy Fire Number” based on the Trinity study’s 4% rule.  You can change the safe-withdrawal-rate to 3.5% or even 3% if you feel the Trinity study is not conservative enough.

The health insurance costs assumptions are based on this article: Investopedia – How Much Does Health Insurance Cost? However, you may get a more accurate number by contacting your state’s healthcare exchange.

What is Retirement After 65 Financial Independence? 

Your expenses may change significantly when you are 65/66/67.  Some factors include:

• You will be eligible for Medicare
• You will be eligible for Social Security
• You kids will likely be fully self-sufficient
• You may choose to include extra medical spending if you have a medical condition that worsens with age.

Calculating Your Retirement After 65 Financial Independence Number

After completing the Future Expenses and Monthly Expenses sections of the  “AutomaticBudget” worksheet, switch to the RetirementAfter65 worksheet.  The expense fields will be populated with the numbers you entered on the “AutomaticBudget” worksheet.  Now go from top to bottom and eliminate all the spending you would not need if you stopped working and add any new or increased categories you will need at 65.

At the bottom you will see your projected “RetirementAfter65” spending and your associated “RetirementAfter65 Financial Independence Number” based on the Trinity study’s 4% rule.  You can change the safe-withdrawal-rate to 3.5% or even 3% if you feel the Trinity study is not conservative enough.

The health insurance costs assumptions are based on this article: Investopedia – How Much Does Health Insurance Cost? However, you may get a more accurate number by contacting your state’s healthcare exchange.

Legal Disclaimer

This website and calculator do not provide personalized financial advice.  It is merely a tool to organize your information.  Before making any financial decisions consult a licensed financial professional with any questions you have.  This article provides a comprehensive review of what to look for and what to avoid in a financial advisor.

 >> Back to Week Six IceBreaker >>

Who indeed….

There are quite a number of personal finance experts recommending broad-based low-fee index funds like the S&P 500, or Vanguard’s famous Vanguard Total Stock Market Index Fund (VTSAX). Let’s hear from a few of these experts.

Let’s start with…. WARREN BUFFETT

In his 2016 letter to Berkshire Hathaway shareholders, Warren Buffett explained:

Over the years, I’ve often been asked for investment advice, and in the process of answering I’ve learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion. I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I’ve given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant.

That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is delivered in esoteric gibberish that explains why fashionable investment “styles” or current economic trends make the shift appropriate. The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive. In many aspects of life, indeed, wealth does command top-grade products or services. For that reason, the financial “elites”—wealthy individuals, pension funds, college endowments and the like—have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars. This reluctance of the rich normally prevails even though the product at issue is—on an expectancy basis—clearly the best choice. My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade. . . . Human behavior won’t change. Wealthy individuals, pension funds, endowments and the like will continue to feel they deserve something “extra” in investment advice. Those advisors who cleverly play to this expectation will get very rich. This year the magic potion may be hedge funds, next year something else. The likely result from this parade of promises is predicted in an adage: “When a person with money meets a person with experience, the one with experience ends up with the money and the one with money leaves with experience.”

JL Collins Says

The great irony of investing is the more you watch and fiddle with your holdings the less well you are likely to do.  Fill your basket, add as you go along and ignore it the rest of the time.  You’ll likely wake up rich.

Here’s the basket: VTSAX.  No surprise here if you’ve been reading along in this series so far.  Stock Index Fund.  Low cost so almost all our money is working for us.

Owning 100% stocks like this is considered “very aggressive.”  It is and you should be.  You have decades ahead.  Market ups and downs don’t matter ‘cause you avoid panic and stay the course.  If anything, you recognize them as the “stocks on sale” buying opportunities they are.  Perhaps 40 years from now you might want to add a Bond Index Fund to smooth out the ups and downs.  Worry about that 40 years from now.

The Financial Diet – 7 Money Habits That Are Red Flag Behaviors (16 minutes)

Key Takeaways:

tbd

Discussion Questions:

tbd

WEEK 5 ICEBREAKER: 7 Money Habits That Are Red Flag Behaviors

Planning is over.  It is time to move real money!  We suggest setting up 5 recurring automatic transactions to five different accounts.  Why not follow week four’s money cascade plan?  Right now, we are going to capitalize on your focus and motivation!  We are going to “front-load” the work now so managing your plan is easy going forward.  Setting up recurring automatic transactions can be tedious, however increasing transaction amounts later is quick and easy.   

The following accounts are suggestions however, you are in charge.  You can skip any accounts that don’t apply to you, and swap for accounts that are a better fit.  If you would like to invest more or less money, invest whatever works for your budget.

STEP 1: Automatically Invest $10/month in your emergency fund IN A HIGH INTEREST ACCOUNT 

Step 2:  Automatically Pay $10 extra on any debt you are carrying, such as credit card, car loan, student loans, or mortgage. 

Step 3: Open a ROTH IRA and automatically contribute $10/month. 

Step 4:  AUTOMATICALLY CONTRIBUTE $10/month to your employer’s 401K or 403b retirement account

Step 5: AUTOMATICALLY COntribute $10/month to a SEPErate Saving Account and start a “Wants” list. 

Hello All! A combination of pinkeye and a cold has interrupted progress loading the Week 5 content onto the website. I have pasted everything onto this one page below so EVERYONE can proceed while I am catching up making the properly formatted webpages.

STEP 1: Automatically Invest $10/month in your emergency fund IN A HIGH INTEREST ACCOUNT 

Open a high interest account for your emergency fund.  In “I Will Teach You To Be Rich”, Ramit Sethi recommends Capital One 360 and Ally (not an affiliate link).  Their interest rates are frequently as much as 10 times higher than your current checking or savings accounts, and they have excellent customer service.  Starting your emergency fund account at a different bank than your checking account is designed to create friction to help you actually save the money for a true emergency, and resist emptying out the account to buy the latest iPhone or trip to Hawaii.  (See step 5 for splurge purchases)

You will use the routing number and account number from a check from your current checking account to automatically transfer $10 from your checking account to your high-interest saving account each month.  If you have any trouble finding the right place to set up this monthly automatic transfer on your high-interest saving account website, call their customer service to walk you through the process. 

This step should take you about 30 minutes to an hour.

Step 2:  Automatically Pay $10 extra on any debt you are carrying, such as credit card, car loan, student loans, or mortgage. 

Pay $10 extra on any debt you are carrying, such as credit card, car loan, student loans, or mortgage.  For many people, credit cards will be the best place to start, usually having both the highest interest rate and the lowest balance.  Enroll in AutoPay for all your credit cards and other debts to ensure all your payments are applied to your balance rather than late fees.  Even if you can only afford the minimum payment, enroll in AutoPay.  You will need the routing number and account number from a check from your checking account to enroll in AutoPay. 

To pay $10 extra each month, create a Bill Pay “payee” in your checking account that will transfer the additional $10 to your credit card company with the lowest balance.  Set the Bill Pay to automatically transfer $10 each month to your credit card “payee” 2 days after the AutoPay from the paragraph above. 

When the first credit card is paid off, move on to paying $10 extra on the debt with the next lowest balance (credit cards, car loans, student loans, mortgage, etc…).  Dave Ramsey followers call this debt payoff method the “Debt Snowball” because each debt you pay off results in more cash to pay off the next debt.

Now that you have this credit card Bill Pay “payee” in your checking account, it is easy to make an extra bonus payment anytime you have unexpected cash, such as a tax refund, a birthday check from grandma, or a federal Child Tax Credit. 

This step should take you between 30 to 90 minutes.

Bonus Info

Math enthusiasts will tell you to ignore the balance and pay the debt with the highest interest rate (aka the “Debt Avalanche”).  If we were all robots, this would be 100% correct!  However, the psychological benefit of finally paying off a debt in full is amazing and is the most effective incentive to tackle the next debt.  See a full comparison of the two debt payoff methods in this YouTube video:

Next Level Life – Debt Snowball Vs Debt Avalanche | Which is the Best Debt Payoff Strategy?

If you need extra motivation, watch this video to see how amazing it feel to be debt free

YouTube – Debt Free Screams – Dave Ramsey Show – Debt Free Scream – $200,000 paid off in 3 years 2 months – Student Loan

Step 3: Open a ROTH IRA and automatically contribute $10/month. 

A ROTH IRA allows you to invest money today and let it grow for a few decades and then withdraw it TAX FREE after you are 59.5 years old.  Please note, there are income limits, continue reading below to confirm you are eligible.

It is critical that you set up your monthly $10 contribution to transfer automatically.  Humans are terrible at remembering to manually transfer contributions each month.  NO ONE remembers, accept this reality and plan accordingly. 

Wait!!!  What if you need your money before you are 59.5 years old?  This is one of the many benefits of a ROTH IRA.  You can withdraw your contributions penalty-free 5 years after opening the account, however you must leave the earnings and dividends in the account until you are 59 ½ years old. 

For example, you contribute $10 a month ($120 a year) for 15 years in a low-fee broad-based index fund such as Fidelity’s Total Market Index Fund (FSKAX).  You earn average returns of 8%* and after 15 years you have $3,289.98.  You could withdraw your contributions $1,800 penalty free ($120 per year X 15 years) and leave the earnings and growth, $1,489, to continue growing until you are 59.5 years old or older.   If you are truly desperate, you could withdraw the $1,489 of earnings and growth as well, however you will pay a 10% penalty tax fee on that portion.

This step should take you between 30 to 120 minutes.

Fidelity’s FSKAX is used for this example because Fidelity allows you to open a ROTH IRA with no minimum required initial investment and invest in the mutual fund FSKAX (and some others) with no minimum required contribution.  This means you can open a ROTH IRA at Fidelity and contribute to FSKAX, a low-free broad-based index fund, with only $10 a month (or even less if necessary).  Please note, as you become closer to retirement age you may choose to invest in a less volatile fund such as a “target date fund”, a “balanced index fund” or even a “bond index fund”.** 

Read the article at the link below to investigate other companies that offer ROTH IRAs with no minimum deposit.

Investopedia – Who Offers IRA Accounts With No Minimum Deposit?

https://www.investopedia.com/articles/personal-finance/033015/ira-accounts-no-minimum-deposit-2015.asp

In 2021, you can invest up to $6,000 each year in a ROTH IRA.  Also, if you earn more than $125,000 as a single person or $198,000 as a married couple read this article to learn more about your contribution limits:

Investopedia – Roth IRA Contribution Rules: A Comprehensive Guide

https://www.investopedia.com/articles/personal-finance/081615/basics-roth-ira-contribution-rules.asp

*8% is the minimum inflation-adjusted average rate of return for the stock market over every 30 years period in the last 100 years

**To learn more about the stock market and which index funds to select, consider reading the book “The Simple Path to Wealth” by J.L. Collins, also available in audiobook.  This book explains how to withstand the volatility in the market and how to adjust your holdings when you are living off your investments in retirement.  J.L. Collins followers may ask why I did not recommend J.L.’s favorite Vanguard VTSAX fund above.  Unfortunately, VTSAX requires a $1,000 initial investment, however Fidelity’s FSKAX is similar. 

Playing with FIRE- The Simple Path to Wealth with JL Collins

Step 4:  AUTOMATICALLY CONTRIBUTE $10/month to your employer’s 401K or 403b retirement account

Contact your employer’s Human Resources (HR) Department to open a 401K or 403b retirement account and automatically contribute $10 a month.  A 401K or 403B is an employer-based retirement plan that you can contribute with pre-tax dollars.  That means that the money that you invest is not taxed at all this year.   Instead, you are taxed when you withdraw the money in retirement, when you may be in a lower tax bracket.    Withdrawing the money before age 59.5 would result in a 10% tax penalty, however you can “loan yourself” $50,000 (or 50% of the assets, whichever is less) from your 401K without tax penalty ***.  Please note, some employers offer “matching funds”, which means the employer puts additional free money in your retirement account when you contribute.  Warren Buffett, Ramit Sethi, JL Collins and many others recommend investing in a low-fee broad-based index fund.  Ask which fund is closest to an S&P 500 Index fund (the most common index fund) and confirm the fees are less than 1% a year.

This step should take you between 30 to 90 minutes.

If you are do not have access to a retirement account at work, contribute this $10 a month to your ROTH IRA instead.

***To learn more about 401K loans and why they may or may not be a good idea, read this article.

Investopedia – 4 Reasons to Borrow From Your 401(k)

https://www.investopedia.com/articles/retirement/08/borrow-from-401k-loan.asp

Step 5: AUTOMATICALLY COntribute $10/month to a SEPErate SavingS Account and start a “Wants” list. 

You have been saving money, you are getting out debt, you are investing toward your retirement, You Rock!  But what about now?  What about enjoying the journey of life?  This account is where you accrue money in advance for you next vacation, a new iphone, a sweet leather jacket…  It is your choice. 

For the first time you can enjoy these pleasures guilt-free because you saved in advance, and you are simultaneously making progress toward your financial goals.  You may also find that after a few days, you realize that you don’t want that air fryer after all, which saves money and reduces clutter in your home. 

Create a new savings account and automatically transfer $10 each month from your checking account to the “Wants” savings account.

This step should take you about 15 to 30 minutes.

Step 6: LET IT RIDE!!!!!!!

Let the system ride for a few months and enjoy the feeling of making progress financially.  Enjoy feeling less stress and overwhelm when you think about the future.  Feel the relief of learning that “money stuff” wasn’t that confusing after all, it was just a bit tedious to set up.  Be proud of yourself for putting the effort in to create the 5 accounts and enjoy the reward of everything running automatically for the months thereafter. 

As your income increases or your expenses decrease, you can log back into any of these automated transactions and increase the amount transferred. It is quick and easy to do once the automated transaction exists.

The Financial Diet – 4 Controversial Money Decisions Experts Can’t Agree On (12 minutes)

Key Takeaways:

Financial Experts continure to debate the following issues:

• Emergency Fund vs Paying Off Debt
• Budgeting by Category VS Automated Savings
• Cutting Expenses VS Growing Income
• Rules of Thumb VS More Nuance

Discussion Questions:

Where do you fall on each of the controversies? Let us know in the discussion box below!

<< Back to Week Four Summary << – – – – – – >> Forward to Week Four Learning Module 1 >>

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The Conscious Lifestyle Inflation Plan may work for you if you having been saving and investing for several years (even if only in your employer 401K or 403B).

First a thought experiment: If you suddenly inherited money from a long lost relative so you could live your current lifestyle forever without working, what would you do?

• Would you quit your job?
• Would you start a passion project or business?
• Would you ski or surf five days a week?
• Would you coach kids basketball at your local community center?
• Would you write a novel?
• Would you volunteer at a particular charity?
• Would you travel?
• Would you simplify, do daily yoga, and pick up your kids after school every day?
• What would you do if you could do anything?

At it’s core, the Conscious Lifestyle Inflation plan is designed to help you incorporate the activities you outlined above into your life as soon as possible while meeting your financial responsibilities.

It’s time to get a pencil, a good eraser, this week’s printable, and a cozy blanket. You are going to figure out how to use money to make far-future you, 5-years-from-now you, AND current you have the most fulfilling life possible.

A financial plan can be used three ways:

• Some of us need a financial plan to spend less money on things we do not value.
• Others of us need a financial plan to give us permission to spend more money on the things that are important to us.
• All of us need a financial plan to spend less money on things we don’t value and more money on the things that are important to us.

Stay calm, naturally frugal friends. The thing you spend more money on could be a comfortable retirement, or enough investments to never be a financial burden on your loved ones. Or you could choose to get monthly massages…. Or both!

The Conscious Lifestyle Inflation Plan is designed to do several things:

• Use rewards to make focusing on your long term goals easier. The Pew Research Center reports that gamification can improve learning, participation, and motivation. You will use prizes and rewards to maintain your motivation toward your financial goals over the long-term. You determine the rewards based on what you value. As you reach a “new bucket” you can add a small “reward bucket, such as new winter boots or hiring a house cleaner.
• Save you from over-spending in high-impact areas (housing, transportation, food) making progress toward your goals impossible. Bankrate.com reports that average households spend over 50% of their budget on these three categories. Paying high rent or a large monthly car payment may consume all your discretionary income, leaving you to scrimp on everything else in your life or start accruing credit card debt. Paula Pant famously says, “You can afford anything, but not everything”. At this point in your life, you may have to choose participating in your employer 401K plan over your dream car, so someday in the future you can have financial security and your dream car.
• Remind you that money is just a tool to make your life fulfilling. Free your mind and think about what your ideal life would include and determine if you can use your money to make that happen, while still meeting your current and future financial responsibilities.

Conscious Lifestyle Inflation Plan Directions:

Fill out the Conscious Lifestyle Inflation printable based on your goals and the things that will add value to your life.

Step 1: Create the first section based on your current net-worth

To determine your current net worth you may choose to use an online net worth tracking tool such as Mint by Intuit or Personal Capital. You would link your current accounts to your profile, then the tool would provide an updated net worth totals every time you log in.

Or you can use a one-time net worth calculator like this one from Forbes.

Set limits to your high-impact expenses such as housing, transportation, and food.

Allocate money toward your

Step 2: Put your second highest priority financial responsibility in your second bucket. And repeat for third, fourth, fifth…. buckets.

Step 3: Add rewards into “side buckets” for each level.

As you are able to meet more of your financial goals, you can also use more of your money for the things that add value to your life, such as vacations, charitable giving, and more free time through a house cleaner or lawn service.

Step 4: Try to get to the next bucket faster by:

• Ask for a raise by following Ramit Sethi’s system.
• Reduce spending on high-impact areas, such as housing, transportation, and food.
• Find ways to earn money by using your current resources. Have a spare room? Rent it to a traveling nurse for 3 months using this service. Do you live in a cool area and have friends you can stay with periodically? AirBNB your apartment around holidays or whenever you are traveling. Do you walk to work? Rent out your car on Turo.com (includes special insurance coverage).
• Start a side-hustle. These can take months to build up to real income but check out this podcast channel, “The Side Hustle Show”, for an endless supply of great ideas.

Things to keep in mind:

Research shows the money spent on physical things (cars, clothes, etc) tends to have less impact on our long-term happiness. However money spent on freeing up time, on experiences, and on others has greater impact on our long-term happiness.

Research also shows that you are more successful at reaching your goals when they are SMART (Specific, Measurable, Achievable, Relevant, and Time-bound). This suggests that you will have more success saving for “a three week trip to India with my best friend next July” rather than “future travel”.

Have you ever made a new-year’s resolution to create a new habit that you would do daily, weekly or monthly forever only to abandon it a few weeks later? Everyone does. Forbes reports that 80% of new year’s resolutions are abandoned by February. Sustaining high effort for months and years is hard.

With the Automatic Budget, you will set up your system now, while your motivation is high! Then the system will run automatically, requiring no additional effort. Periodically as your goals change, you will make small tweaks to the system with minimal effort. It is that easy, and that is why it works.

I avoided this for years, fearing that one of my direct-deposits paychecks get lost and before I noticed, a series of automatic transactions would occur burying me in overdraft fees. Fear not!!! Bankrate.com reports most banks now offer automatic email/text alerts for: Low balance alert, Direct deposit alert, Unusual account activity alert, Large purchase alert, Large ATM withdrawal alert, etc…

It’s time to get a pencil, a good eraser, this week’s printable, and a cozy blanket. You are going to figure out how to use money to make far-future you, 5-years-from-now you, AND current you have the most fulfilling life possible.

A financial plan can be used three ways:

• Some of us need a financial plan to spend less money on things we do not value.
• Others of us need a financial plan to give us permission to spend more money on the things that are important to us.
• All of us need a financial plan to spend less money on things we don’t value and more money on the things that are important to us.

Stay calm, naturally frugal friends. The thing you spend more money on could be a comfortable retirement, or enough investments to never be a financial burden on your loved ones. Or you could choose to get monthly massages…. Or both!

The Money Cascade is designed to do several things:

• Use rewards to make focusing on your long term goals easier. The Pew Research Center reports that gamification can improve learning, participation, and motivation. You will use prizes and rewards to maintain your motivation toward your financial goals over the long-term. You determine the rewards based on what you value. As you reach a “new bucket” you can add a small “reward bucket, such as new winter boots or hiring a house cleaner.

• Save you from over-spending in high-impact areas (housing, transportation, food) making progress toward your goals impossible. Bankrate.com reports that average households spend over 50% of their budget on these three categories. Paying high rent or a large monthly car payment may consume all your discretionary income, leaving you to scrimp on everything else in your life or start accruing credit card debt. Paula Pant famously says, “You can afford anything, but not everything”. At this point in your life, you may have to choose participating in your employer 401K plan over your dream car, so someday in the future you can have financial security and your dream car.

• Remind you that money is just a tool to make your life fulfilling. Free your mind and think about what your ideal life would include and determine if you can use your money to make that happen, while still meeting your current and future financial responsibilities.

Money Cascade Directions:

Fill out the Money Cascade printable based on your goals and the things that will add value to your life.

The Money Cascade pairs perfectly with the “Automatic Budget” as known as the “No-Budget Budget”. You will adjust your automatic payments, savings, and investments as you “fill your buckets”.

Step 1: Put your highest priority financial responsibility in your first bucket.

This could be a monthly contribution forever, such as “invest 15% of income for retirement”, or you will contribute to only this bucket until you have reached your goal, such as “build at 3-month emergency fund”.

Step 2: Put your second highest priority financial responsibility in your second bucket. And repeat for third, fourth, fifth…. buckets.

Step 3: Add rewards into “side buckets” for each level.

As you are able to meet more of your financial goals, you can also use more of your money for the things that add value to your life, such as vacations, charitable giving, and more free time through a house cleaner or lawn service.

Step 4: Try to get to the next bucket faster by:

• Ask for a raise by following Ramit Sethi’s system.
• Reduce spending on high-impact areas, such as housing, transportation, and food.
• Find ways to earn money by using your current resources. Have a spare room? Rent it to a traveling nurse for 3 months using this service. Do you live in a cool area and have friends you can stay with periodically? AirBNB your apartment around holidays or whenever you are traveling. Do you walk to work? Rent out your car on Turo.com (includes special insurance coverage).
• Start a side-hustle. These can take months to build up to real income but check out this podcast channel, “The Side Hustle Show”, for an endless supply of great ideas.

Things to keep in mind:

Research shows the money spent on physical things (cars, clothes, etc) tends to have less impact on our long-term happiness. However money spent on freeing up time, on experiences, and on others has greater impact on our long-term happiness.

Research also shows that you are more successful at reaching your goals when they are SMART (Specific, Measurable, Achievable, Relevant, and Time-bound). This suggests that you will have more success saving for “a three week trip to India with my best friend next July” rather than “future travel”.

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KEY TAKEAWAYS

Do I recommend Dave Ramsey? Maybe? With reservations? His program is simple and easy to understand. Dave Ramsey believes in the power of the individual to improve their circumstances in life. These are good things. However his approach doesn’t acknowledge that over 60% of homelessness in the US is related to medical causes and medical debt. Strict adherents to Ramsey’s teachings might blame the most vulnerable members of our society for their circumstances.

That being said, Dave Ramsey’s Baby Steps were one of several inspirations for the “Women and Money Bookclub – Money Cascade”.

Dave Ramsey’s Baby Steps are:

1. Save $1,000 for your starter emergency fund.
2. Pay off all debt (except the house) using the debt snowball.
3. Save 3–6 months of expenses in a fully funded emergency fund.
4. Invest 15% of your household income in retirement.
5. Save for your children’s college fund.
6. Pay off your home early.
7. Build wealth and give.

DISCUSSION QUESTIONS

What do you think of the “baby steps”?  What changes would you make for it fit your life?

YouTube – Chris Invests – Lifestyle Inflation Will Keep You Broke (No Matter How Much You Earn) 10 minutes

KEY TAKEAWAYS

This video covers the dark side of lifestyle inflation.  Lifestyle inflation is the real-life manifestation of the C. Northcote Parkinson quote, “A luxury, once enjoyed, becomes a necessity.”

We predict that if we made 50% more money than we currently do, we would have “enough” and would be free from financial stress.

However this is rarely what happens in real life. As we make more money, we move to a “nicer” neighborhood, buy a “nicer” car, we buy the super light-weight laptop we “need” for work. Once we have experienced a nicer neighborhood, car, and computer, we can’t go back to our crummy old stuff without feelings of discomfort and failure. Therefore we actually now need another 50% more money than we now make in order to have “enough” and finally be free from financial stress.

Some say the solution to this never-ending hamster wheel, is to never increase your standard of living and save and invest all raises, bonuses, etc. Some (not all) followers of the FIRE movement, suggest that you do this until you reach your FIRE NUMBER and then you can finally start living. Others say you should enjoy the fruits of your labor today. Yet others find a middle path.

DISCUSSION QUESTIONS

Has lifestyle inflation impacted on your life?  Do you feel “house poor”?  Is your car payment weighing you down?  Are you shocked by how much you spend on your food budget?  How might you reduce some of these high-ticket expenses to create some breathing room in your budget?

House poor is a term used to describe a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance, and utilities.  – by Investopedia (https://www.investopedia.com/terms/h/housepoor.asp)

I Will Teach You To Be Rich PODCAST – Episode 20. “My wife is going to divorce me unless I can stop being so cheap” (45 minutes)

https://www.iwillteachyoutoberich.com/podcast/020-michelle-charles/

KEY TAKEAWAYS

This podcast features couple with a net worth of $10 million, yet they are on the brink of divorce because the husband doesn’t spend money on vacation, landscaping, or anything else he does think is “worth it”.  The wife feels that they have worked hard, been successful, and she wants to use some of their wealth to make their lives more enjoyable, with a nice vacation and some landscaping.  

You will be shocked at some of the things you hear in this podcast.   At some points I noticed some disturbing similarities with financial abuse, when the couple stated that the wife had to check with the husband before making relatively small purchases to confirm the husband thought “the purchase was worth the money”, as if the wife had no decision-making power at all in the relationship.

This episode is fascinating on many fronts, however the key takeaway for today’s purposes, is money is not an end in itself. Instead money is a tool to live a fulfilling life. Too many of us confuse net-worth with self-worth and always crave more and more, with no regard to the experiences we miss in pursuit of more money. This week’s activities will require you to write down how you want to use money to have the most fulfilling life possible.

DISCUSSION QUESTIONS

After listening, think about how you would like to use money to pursue your goals and bring even more enjoyment to your life once you’ve “won the game” and have reached financial security.  You may be frugal now, but someday you may choose to splash out and pursue something amazing like visiting the seven wonders of the world or buying that house on the lake that you’ve always dreamed of.  Money is a tool to make your life secure, comfortable and (don’t forget) amazing!

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