This is Part 2 of a 4 part series in which I share some of the details of the road my wife and I took to pursue financial independence.
In Part 1, I explained our backgrounds, shared some details of our married life together, and discussed the first key factor which enabled us to reach FI (namely, Motivation).
Our Keys to Reaching FI (Continued)
In this post, I will talk about four more key factors in our journey.
Salary Growth & Incentive Stock Options
During our marriage, both my wife and I have worked full time in the tech industry, where salaries are relatively high compared to many other professions. Moreover, we both performed well in our jobs and received periodic promotions, which resulted in us experiencing pretty significant salary growth over the course of our careers.
We also each had incentive stock options from our early employers. This was during the original Internet boom and bust, when most companies went belly up, so we were extremely fortunate that both of us were able to reap some financial windfall from our options. Neither of us earned life-changing amounts — but enough to help us buy property in the uber-expensive San Francisco Bay Area later in our journey.
One of the keys to reaching FI is to create a substantial gap between what you earn and what you spend to enable savings and investment (see Paula Pant’s post Mind the Gap). Accordingly, I want to fully acknowledge the advantage we had courtesy of our well-paying jobs, as compared to those who may be struggling to survive paycheck to paycheck in lower paying professions.
A high income is an advantage when pursuing FI, but it is not required or enough by itself to achieve the goal.
Controlling Lifestyle Inflation & the F-Word
For anyone in the dark, below is the definition of “Lifestyle Inflation” according to Investopedia:
Lifestyle inflation refers to increasing one’s spending when income goes up. Lifestyle inflation tends to continue each time someone gets a raise, making it perpetually difficult to get out of debt, save for retirement or meet other big-picture financial goals. Lifestyle inflation is what causes people to get stuck in the rat race of working just to pay the bills.
Limiting our lifestyle inflation was perhaps the biggest enabler for us to reach FI. As our income grew over the years, we did not scale our cost of living accordingly. Consequently, the gap between our income and expenses continued to increase (in our favor), freeing up more and more money for investment.
The F-Word: To varying extents, both of us are relatively FRUGAL by nature (my wife is also a minimalist), which helped us to constrain our lifestyle inflation. We are anything but ostentatious or pretentious. We favor neighborhood ethnic holes in the wall over trendy, nouveau restaurants (and we eat out only about once a week on average). We are not brand conscious and don’t chase fashion trends when it comes to clothing. For most movies, we prefer watching at home (granted on a big screen TV) over paying a fortune to go to a movie theater. We do not stay in five-star top-end hotels when we travel. We generally prefer to make coffee or tea at home (or at work) over buying expensive beverages at Starbucks and the like. You get the idea.
As a case in point, when it comes to cars, we have made mostly wise purchases and have driven relatively modest vehicles by comparison to our neighbors in San Francisco (and later on the peninsula). Between us, in our lifetimes, we have bought (in cash without financing) a used Toyota Corolla (driven for 10 years), a new Honda Civic hatchback (driven for about 8 years before it was stolen), a new Honda Accord sports coupe (which I drove for six years while my coworkers were buying BMWs), a new Toyota Rav4 (driven for 12 years and counting), and a new Mazda 3 Hatchback (driven for 11 years and counting).
I know that conventional wisdom says that we were unwise to buy most of our cars new. However, we are not frugality extremists (or members of “Lean FIRE”), and I am superstitious about used cars due to bad luck with the Corolla. New car smell has been a small luxury we could afford and lavish on ourselves as an intentional choice. Plus, we get many years of value out of each car we buy, as opposed to upgrading every two or three years. The main point is that we had more than enough resources to drive virtually any car on the market, but that is not how we chose to spend our money — and we have bought unassuming, reliable cars instead.
We are not hesitant to spend large amounts of money intentionally when we feel we are getting great value. For example, we have traveled extensively as a family, and we have lived in nice, roomy houses. Also, I do enjoy my iOS devices and consumer electronics gadgets. Those are not inexpensive interests, but they bring me great joy in my day to day life, so I feel I get a meaningful ROI on those (intentional) expenditures.
Hopefully, I am stating the obvious, but our lifestyle choices enabled us to avoid debt. Outside of our mortgages and a couple of 0% interest loans, we have not had to take on any debt in our married life.
- Resist the temptation to keep up with the Joneses.
- Avoid mindless lifestyle inflation as your income rises.
- Minimize or eliminate debt.
- You don’t have to be an extreme couponer or frugalist to reach FI, as long as your spending is intentional and mindful.
Long-Term Investing & Financial Advisors
The combination of being a double income family on tech industry salaries and keeping our cost of living in check ended up creating a sizable surplus (gap) between our income and expenses.
By 2005, we were already maxing out our 401ks every year — not just to the amount needed to earn the full employer match but to the maximum IRS limit. We also were saving money at a pretty good clip in 529 accounts for our kids’ college educations. Even factoring in all of this and a healthy emergency cash cushion, we started to have too much excess cash to just park it in the bank, especially since CD rates were dropping.
Beyond our 401ks, neither of us had any experience in stock market investing, nor did we have any inherent interest in learning the ins and outs of various types of investment vehicles. We concluded pretty quickly that we were neither suited to nor interested in a DIY investment strategy.
We decided that we should work with a financial advisor. However, I knew that evaluating and picking a good advisor can be challenging, and I was a bit stuck in analysis paralysis mode. My wife, however, knew that some action was better than no action. She skipped deep research and comparison shopping and simply contacted Wells Fargo Advisors (since Wells Fargo was our primary bank at the time). This is not how I’d recommend picking an advisor, but it ended up working out fairly well for us.
To make a long story short, we ended up working with a good investment advisor for well over 10 years, following him from Wells to Washington Mutual back to Wells and finally to Morgan Stanley. His team was strong on the investment side, and they produced excellent results for our portfolio after we started investing the majority of our after-tax excess cash.
As with any advisor, part of our onboarding was a review of our risk tolerance and retirement goals, since those data points would help influence the investment strategy. We were in our mid to late thirties at the time, and we shyly mentioned an “early” retirement goal of 60. Over the years, we kept decreasing our target retirement ages as we got more serious and aggressive about early retirement (long before we had heard of the FIRE movement).
Whether or not we paid too much in fees over the years (as no doubt many FIRE proponents would argue), while working with our advisors, we experienced substantial growth in our net worth, with a smart, diversified portfolio. I don’t think we would have achieved the same results left to our own devices, especially given our lack of interest in the nitty-gritty of investing.
More recently, as we started to get closer to reaching FI and decision points about major life changes, we switched to a different advisory company which is incredibly detailed, thorough and meticulous on the retirement planning side. Even if you plan to keep it simple and just stick your money in low-cost index funds (as many in the FIRE community recommend), I still think good advisors can offer tremendous value (especially when your situation becomes more complicated). I’ll touch more on this in part 3 of this series.
If you have investable income, take action, do something rather than nothing. As Joe and OG of The Stacking Benjamins Show are fond of saying: “don’t let perfect be the enemy of good.” If my wife had not taken action, I might still be frozen by analysis paralysis even today!
If you don’t know where to get started with investing (like me 15 years ago), check out the post, I Don’t Know How to Invest and I’m Afraid of Making Expensive Mistakes, from Paula Pant at Afford Anything. If the only thing you do with your money is to follow all of the advice in her post, you will be managing your personal finances in a smarter (and more intentional) way than most Americans.
Serendipitously, while I was writing this post, Money Crashers published a good article about Why You Should Hire a Certified Financial Planner — detailing how to choose and work with an advisor.
Investing in real estate (whether via buying your primary home, owning rental properties, flipping houses, or getting into commercial real estate) is a common strategy for reaching FIRE.
As with traditional stock market investment, we are not savvy or knowledgeable about real estate investing. However, homeownership turned out to be a key factor in our FIRE journey, mostly through luck and circumstance as opposed to intention or planning.
Early in our marriage (and while engaged), we lived for a couple of years in an expensive apartment in San Francisco’s Marina District. Our lifestyle was great, but the amount of money we were flushing down the drain in rent started to increasingly bother us. We also were renting an extra garage spot for one of our cars and picking up takeout for dinner on the way home from work several nights a week (as the nearby commercial district had tons of fun, casual and delicious eateries).
Eventually, we decided that buying a place would make more financial sense than continuing to rent since property values tend to consistently march upward in the Bay Area. We focused on the peninsula in order to maintain easy commutes to San Francisco and also because some areas there still had some relatively affordable neighborhoods which were not yet gentrified.
In 2004, we bought a new construction townhouse in South San Francisco, right near a BART station, a Costco and a Trader Joe’s (at least we’d be able to walk SOMEWHERE). For the price we paid (North of $500,000), we could have purchased a mansion in many towns and cities. In the Bay Area, we got a 1,600 square foot townhouse with 3 bedrooms, 2.5 bathrooms, and a 3 car garage.
When we bought the townhouse condo, we were not thinking about school quality since we did not have kids yet. However, by the time my daughter was getting close to kindergarten age, we realized we’d either have to move or send her to private school (since the public schools in the area were poorly rated).
So, in late 2009, during the heart of the housing market crash, we decided we had no choice but to sell our condo and move to a better school district. We put our townhouse up for sale and churned through several sets of prospective buyers, all of whom dropped out after making offers (some at the eleventh hour). In the end, we finally sold the townhouse for a small loss (about 1.7% not including realtor fees and closing costs). This was painful, but it could have been worse.
While we paid a penalty for selling in a down housing market, on the flip side, 2009 was a relatively good time to be buying into a good school district further South on the peninsula. Also, due to our healthy salaries and previously mentioned stock option gains, we had saved enough to afford a single family home in our target communities of Millbrae and Burlingame (which have highly rated schools, good commute options to San Francisco and the Silicon Valley, and homes priced well over $1 million). House prices in those areas did not drop much during the crash, but they did flatten out, so our market timing was pretty good for buying our next home.
We settled on a cute 2,600 square foot, 3 bedroom house in Millbrae, in a tree-lined neighborhood with shops and schools in walking distance. The front half of the house dated back to 1936 and needed a ton of work. Even so, the house turned out to be a great investment and a key factor in us reaching FI.
By 2017, our investment portfolio had grown enough to put financial independence within practical reach. Our home had also substantially appreciated in value over our eight years of living there. Toward the middle of the year, we started to wonder whether selling the house could put us over the top.
I used the Retirement Planner in Personal Capital (in addition to consultations with our financial advisor) to compare multiple “what if” scenarios:
- Retire in 2018 and stay in Millbrae.
- Retire after the kids graduate from high school and stay in Millbrae.
- Retire in 2018 and sell in Millbrae (and move somewhere cheaper).
- Retire after the kids graduate from high school and sell in Millbrae (and move somewhere cheaper).
Over several months, we continually refined our inputs into Personal Capital and periodically reran our four scenarios. Eventually, we concluded that we could pull off an early retirement in 2018 if we were to cash out on our house and move somewhere cheaper. Another deciding point in favor of that scenario was that we felt uncomfortable with having so much of our net worth vulnerable to earthquake risk. (For anyone unaware, the SF Bay Area is an extreme earthquake zone.)
So, we hatched a plan to sell our house and move to the (relatively less expensive) Sacramento area after the 2017-2018 school year ended.
The housing market was pretty hot in the Bay Area in the Spring of 2018, and we put our Millbrae house on the market in June. The market has since cooled a bit, but we caught the tail end of the optimal time to sell. Our house was a tweener (bigger than typical 2-3 bedroom homes in the area but smaller than the premium 4-5 bedroom houses), so it did not sell for as much as our wildest dreams. Even so, in the end, we reaped a pretty good windfall, and the sale price was 81% over our initial purchase price. (We also had sizable capital improvements costs to help decrease the tax liability on our profit.)
Houses in our new community (near the Sierra Foothills Northeast of Sacramento) are pretty expensive compared to the rest of the country. However, they are very reasonable compared to the Bay Area. The price we paid for a five-year-old, 3,200 square foot, 4 bedroom/3 bathroom house in a suburb of Sacramento was just 34% of the sale price of our 2,600 3 bedroom/2.5 bathroom house in the Bay Area. The difference between the two housing markets enabled us to buy our new home in cash. Living mortgage-free was a key requirement in our FIRE calculus and the only way we would feel comfortable leaving our jobs and shaking up our lives.
In summary, the good fortune of substantial home appreciation of our second house was a big factor toward bumping us over the FI finish line.
- Real estate investment of one form or another can be a key enabler for reaching FI. For us, house appreciation was mostly a function of good timing and luck. However, for many in the FIRE movement, intentionally investing in rental properties to generate extra income or practicing house hacking to decrease expenses is a key to success.
- Buying a home in a good school district is usually a wise investment, even if you don’t have kids, since housing prices are highly correlated with school ratings (especially in the Bay Area).
- “Geoarbitrage” (geographic arbitrage – moving elsewhere in the country or world where the cost of living is less) is a good and popular strategy for reaching FIRE and was a big factor in our FI equation.
- If you are committed to achieving FIRE, you may need to make bold moves and take big risks. For example, we bought our new house and moved to a completely different region of California after just a single 24-hour visit to the area (and a lot of Internet research).
- The free Personal Capital Retirement Planner is an invaluable tool for planning any major financial goal (whether early retirement or something else).
That ends Part 2 of the story of our journey down the FIRE trail. In the next installment of this 4 part series, I will discuss the last key factor which enabled us to reach financial independence.
In the meantime, please feel free to share any thoughts you have on our story so far in the comments. (Note: I moderate all comments so you may experience a delay before your comment appears on the post. For any SPAMMERS out there, don’t waste your time submitting as I will reject your comment.)