Last Friday I got to hang out with Pete from Do You Even Blog as part of his site's one year anniversary livestream.
It was a fun stream. We played some trivia (which I won!), listened to Katy Perry, and Pete took some time to review a few blogs. As you may guess from the title one of them was RisdomFI.
Pete had some helpful comments, and I learned a lot. One thing in particular was how he and his wife behaved on the site and YouTube channel. They didn't do what I want, and that's a reflection on how I set things up.
The main takeaway from Pete was that the website part of RisdomFI needs some love. Now this wasn't a surprise, he is right. I have been aware that this site needs some TLC, since it hasn't been a huge priority for me. I've got a fire under my butt now and it's time to shit or get off the pot.
So here's the plan:
So how's all this going?
The move: So far I've built a lot of the new site, and it is looking a LOT better. Thanks in a big part to Pete's MEGA post on Starting A Blog. The thing is a beast. Anyone who wants to begin blogging would do well to sit down with a beverage and start making their way through it.
The videos: I've got a few planned - some big, some small. I'm recording one of the small ones today and plan to have that out next week!
The blog: Ta-da!
It will be a little while yet while till I introduce the new site, so until then I'll see you in the next video!
You’ve heard about the 4% Rule - aka 4% Safe Withdrawal Rate - aka the Multiply by 25 Rule. But, is it safe? To answer this, we have to look at where this rule of thumb came from: Back in 1994...
(If you haven't heard about the 4% Rule? Start here.)
In the early 90s an "obscure advisor" (his words not mine) named Bill Bengen published a paper. He did a study to figure out how much money someone could safely take out of a retirement account and not run out of money after 30 years.
The question still persists, is the 4% Rule Safe?
I say yes.
He had strict assumptions so that the study applied to everyone, and anyone would be able to improve on.
To find the SAFE MAX, the percent that anyone could use, Bengen had to test all the combinations of his specified asset allocation, withdrawal rate, and starting year.
The withdrawal rates he tested ranged from 2% to 8%, to see how long they would last with each asset allocation. Each combination was tested for every starting year that data was available for, beginning in 1926. Note: Bengen has since updated his study with the last 20+ years of data.
In Year One, the withdrawal was equal to whichever withdrawal rate was being tested.
In Years 2+, the withdrawal was the dollar amount from the previous year adjusted for inflation. Not the original percent!
Bengen found that historically, 4.15% was the largest starting withdrawal rate someone could take out and still have money after 30 years. He called this the Safe Max, and thus the 4% Rule was born.
This has since been updated to 4.5%, but according to Bengen in 2017:
SO IS IT SAFE?
Let's go over the facts.
The 4% Rule was developed by using the worst times in US history. It is conservative.
The study assumes you'll never have any income, social security, or emergency fund. Conservative (and probably wrong).
It assumes you won't cut back if the market goes south. Conservative (and dumb).
So it it safe? Yes.
For the 4% Rule (should be the 4.5% Rule) to fail we would have to see the worst ever times in US history. And not do anything about it.
Of course it's possible to see worse times than we've seen so far, and to mismanage money. But even after all that you'd still have a Ton of money to get back on your feet with. So it's not totally foolproof, but it is very, very safe.
There are a lot of articles out there about the 4% Rule, here are a few that I like.
The 4% Rule. What is it? If you’ve been around the block of Financial Independence or Early Retirement (FI/RE) you have probably seen this come up. On its surface, it’s a simple rule of thumb. It guides how much money you can take in retirement and helps you determine how much you need.
Unsurprisingly, it goes deeper than that. This is the first video in a three part series where I discuss what the 4% Rule is and its effect on financial planning. Let’s get started.
WHY I CARE ABOUT THE 4% RULE
The 4% Rule was the first thing that got me hooked on the idea of getting to Financial Independence early. I learned that I could multiply my annual spending by 25 and have a savings goal for Financial Independence. Nice simple math! Other thoughts quickly followed:
After this series, there will still be plenty of unanswered questions: “What what are the criticisms?” “How and why has the 4% Rule changed?” “What else do I need to consider?” Good questions, but for now, I’m just going to stick with the “birth” of the 4% Rule, not the toddler years or beyond.
4% RULE: DEFINITION
The 4% Rule is a rule of thumb that guides a retiree to the amount of savings that can be withdrawn each year of a 30 year retirement. It was designed so that a retiree would maintain their current standard of living, by accounting for inflation. For a person planning on a 30 year retirement, 4% is the Safe Withdrawal Rate for the first year.
HOW TO USE THE 4% RULE
YEAR 1 OF RETIREMENT
If you were to use the 4% Rule in retirement, you would withdraw 4% of your portfolio during your first year. This is the amount needed sustain your current standard of living. For example:
Say you have $1,000,000 in savings
That’s it. That is when the 4% is used. The first year.
RETIREMENT YEARS 2-29: HANDLING INFLATION
The 4% Rule has a very simple (and simplistic) answer for dealing with inflation and the rest of the “29” years of retirement. After the first year, you withdraw the same amount as the previous year plus inflation. Back to our example.
Let’s assume an average 3% inflation during year #2:
Now, let’s assume 3.5% inflation for year #3:
As inflation varies, so does the amount that can safely be withdrawn from savings. The 4% Rule says that you should, in almost all cases, have enough money to sustain your current standard of living all the way to that 30th year.
The “4% Rule is also used to calculate your savings goal. To do that, multiply your annual spending by the inverse of 4%. Divide 1 by 4% to get the inverse.
Fun fact, this is why the “4% Rule” is also called the “Multiply by 25 Rule.”
Using the same example as above, let’s say you want to be able to withdraw $40,000 during your first year of retirement. How much do you need in savings?
That, at its most basic level, is the 4% Rule.
Why 4%? Who came up with it? If you, like me, aren’t comfortable with just that simple number, continue on.
A link to the second video in this series will be here after it has been posted.
Having confidence makes the world feel like a new place, and understanding your finances is a good place to start!
In this video I talk about my 2 first steps for people who want to make a change and be more confident with money.
That's one heck of a claim but I stand by it!
I wanted to make a short video telling a bit about how I got started I am and what RisdomFI is.
Risdom FI is a channel where people can come and learn about personal finance and how to achieve financial independence in a way that is understandable and personable. I'm here to actually explain things so that you can do something with your money and end up in a better spot.
I got my start reading blogs about financial independence and early retirement. I immediately began reading as much as I could and started making changes in how I lived my life. Understanding my finances has let me leave my job as an engineer and travel the world. Now I want to bring that freedom to YouTube.
If you think humans are bad at guessing how interest rates and percentage growth works then I have a surprise for you. You're wrong.
We aren't bad at it.
We SUCK at it. Hard.
Combine this with a population that doesn’t fully understand how their credit cards work in general and, well, it's bad news bears.
In testament to those two facts I was inspired to make this video to explain how interest on a credit card works, as well as talk about minimum payments, and run through a few examples. It’s all stuff that is good to know, even if you pay off your credit card every month!
There is definitely a lot more to say about opportunity cost. For instance that it is one of the base concepts for financial independence. Let me explain:
Opportunity cost is defined by Investopedia as "a benefit that a person could have received, but gave up, to take another course of action." In the example I gave in the video where you got offered a job, the opportunity cost of not taking the job was $5,000 a year. Nice, clean, and to the point. However, opportunity cost does not have to be about money, and in fact I argue that it is most important to expand the assessment of a decision's cost to be qualitative as well.
Humans have a need for belonging, and a simultaneous desire to one day reach a state of relative actualization. People want to be happy, maybe retire, travel, or whatever else floats their boat. To achieve this future we must keep the quantitative opportunity cost of a decision in mind, but also the qualitative cost so we can remain happy and productive individuals. The most challenging part for many people is that spending money is a way to feel like they belong socially. Nobody wants to be a pariah.
To illustrate this I'll use getting a new car to replace an older one as an example. So according to Bankrate the average payment for a new vehicle is $479.
Which, real quick: Holy crap. For that much I could get Chipotle every day for a month... and bring a friend a few of those days. Every month.
Anyway, the focus then is on how much that $479 a month car will buy. Since we are assuming there was already a working vehicle the buy is about status. Unfortunately unless the car is that impressive the lasting impression on others will be nil. We tend to use ourselves as a reference point for the perceptions (judgement) of others, but frankly other people don't care that much about you. They are focused on their own lives and what other people think of them. If it was your new car people would presumably be impressed! But then they will quickly forget it. Just like whatever thoughts they have on the car you happen to be driving currently. They have better things to think about. And so do you.
To be financially stable then we need to focus on the future. To focus on the opportunity cost of picking the easier, immediate, and more exciting option in front of us. Letting go of that desire is hard, but worse is living paycheck to paycheck like 78% of Americans. If you're living paycheck to paycheck then there's work to be done. It's not fun. But ultimately choosing the future where you have better finances results in a happier, less stressed you.
Personally, when it comes to turning down things I don't really need I have a technique. Imagine a person who has a less than impressive car/wardrobe/house, etc. And despite that they manage to pull it the fuck off. Now imagine it's you who you are looking at. Pulling. It. Off. Doing this in day to day life feels a bit weird. My advice? Own it regardless, it'll make you badass. Until then, fake it till you make it, baby!
Lastly some math. Below are some fancy numbers and stuff. I got them all using a compound interest calculator here.
If you were to save $479 every month you'd have stashed away:
$5,748 after a year, and $57,480 after 10.
If instead you invested that and got the average, inflation adjusted return of 7%?
$83,391.25 in 10 years.
Heck, even at a conservative 5% growth rate you'd have over $81,000 in 10 years... I'll take my free $30,000+ and be on my way, thanks.
What makes you happy is what's important. Specifically what makes you lastingly happy is what's important. A new car is all well and good, but in the end will it just end up being a vehicle to ferry you to a job? A job you have to have to go to because you still owe money on the car. You need the car for your job, and you need the job for the car. Nothing against a good job, but do you want to have to go every day to keep my life from collapsing. I get more lasting joy out of knowing I have the freedom to do what I want.
And, no, I don't stress out too much about going out to Chipotle once in awhile. Neither should you.
Welcome to the first post, thanks for stopping by!
My name is Russell and I'm attending the Popup Business School at the Mr. Money Mustache HQ in Longmont, Colorado. The best part? The training, flights, car, and lodging is all free! The obvious question then is how? Let's break it down.
First the course. The Popup Business School is a UK based business that teaches people how to start their own businesses quickly and cheaply, without being bogged down by writing business plans that immediately become obsolete, or by taking out huge loans. They travel around "popping up" around the UK (and now the US!) doing seminars ranging from a few days to multiple weeks. The session I'm attending is the massive two week one and we have the pleasure of meeting Mr. Money Mustache himself! This session has been sponsored by a variety of companies (Betterment, Bluehost, and Treehouse; the links because I'm here on their dime!) One and a half days of free education in and I already have a website, also free!
Total value: $500
Next is the flights and car. This is all thanks to travel hacking and the Chase Sapphire Rewards card and the juicy bonus they are giving away. In a nutshell travel hacking is based around getting a credit card with some signup bonus, using it until you get the reward (usually this is spend X dollars in three or so months, more on this later), and then moving on. Now some people get pretty fancy with this, personally I'm a bit more laid back. I have only gotten two cards in the last year, so about six months per card.
The Chase Sapphire Rewards card is the one that got me here today, here are some bullet points about it.
I took the 50,000 bonus points, and bought the plane tickets for my girlfriend and I to fly out here. Two round trip tickets on Jetblue from Boston to Denver: ~48,300 points. Because I got the plane tickets, my girlfriend got the car. It cost less than the round trip plane so I don't owe her any extra for that. If it was just me I may have come up short on points, luckily we could split it! Worth noting, you can pay for a portion of a flight, car, hotel, etc with points and the rest with cash. Value.
Total value: ~$605
It's worth noting now that if you are interested in getting this card (or others), you need to have a decent, 700+, credit score, average spending that is able to qualify, and pay off the balance every month. The credit card companies make their money when people don't pay off their cards... Pay yours off, this money is only free if you don't up your spending to qualify, and don't pay them back by paying interest. My favorite place to find cards is on the MadFientist Travel Card page. Quick disclosure: the cards there are affiliated with the Mad Fientist so he will get a kickback if you sign up with his links. It doesn't change what you get, the credit card companies are just paying him to send them customers.
Finally let's talk about lodging... or rather camping... for free.
There's this great website FreeCampsites.net. You just put in a zip code or location and it'll show you all the nearby camping. You can look for free only, as well as specify if you are tent camping, RVing, etc. Each location has some info about the location, an address, as well as comments by other people who have stayed there. Most of the free sites are rustic, but with a little planning during the day we've been ok. I'm a fan. You should be too. I assume about $20 a night for camping, and we'll be here for 14 nights so:
Total value: $280
Overall I've saved ~$605 on airfare, $500 for the Popup Business School, and $280 on lodging . Total: $1,385
Now I am paying for gas and food which let's say will average to about $5 on gas and $5 on food. So I'll spend about $120 plus other misc stuff, say $100 or so, for a spending total of $220.
Grand total: ~$1,165
Not too shabby if I do say so myself. I hope you enjoyed reading!