March 31-On the way to Freedomville

I want to thank every single one of you who took the time to drop a line or two in the comment session.

If you are a classroom teacher, I want you to know that admire the work you do in the classroom juggling tens of problems at a time under the most stressful circumstances.

My stories here, may not be the next best-seller, but I am sure that you and I can agree that there are many similar situations in our lives as classroom teachers, special area teachers and paraprofessionals who work in the educational system.

These stories are really just a potluck of hundreds of stories and experiences that I have heard over the years from colleagues in and out of my district and even friends. Due to the current situation in my homeland Venezuela, all my friends have migrated to many different parts of the world. Which has given me an opportunity to gain some insights on the cost of living in other countries.

I also want to thank and highly recommend some of the sources of information I have used to learn about this wonderful movement called FIRE (Financial Independence /Retire Early) community. Since the beginning of year 2018 took it upon myself to figure out what I need to do to retire. Thanks to all the free information put out by FIRE bloggers I have learned just a ton of things I had no clue about.  I am completely out of consumer debt(Credit cards) and now my wife and I are about to make the last payments to walk into the hallways of student loan freedomville!

I know some of the math in some of my posts was a bit speculative and it’s easier said than done. But never underestimate yourself. The only thing that is holding ourselves back inhabits in our minds.

With that said, if you are interested in some of the information I presented in the last 30 days, check this out; embrace the power of “podcast listening”. It is possible to become the CFO of your money.

 

Madfientist.com

AffordAnything.com

Budgetsaresexy.com

Rockstarfinances.com

Mrmoneymustache.com

ChooseFI

Gocurrycracker.com

Rootofgood.com

Getrichslowly.com

Mint.com

PersonalCapital.com

Fidelity.com

Boggleheads.org

Coachcarson.com

Start your financial journey today. Any destination is possible as long as you know where you are and where you want to go.

March 30- A new way of living

After traveling the country and part of Canada, the Simpleton’s found a passion for blogging about their trips to different national parks, highlighting some city attractions and the “must see” things in every city or town they passed by.

Their blog and occasional videos on Youtube were starting to draw an audience. They were making a lot of connections with other teachers that were interested in reaching F.I. or who were already financial independent and were on the path of simply enjoying life to its fullest without the need to wake up to an alarm clock.

The Simpleton’s were also regular speakers at events like FinCon and Chautauqua every year, where they could bond with like-minded people and share new ideas. These kinds of events had become a new stream of income along with some private financial consulting they were doing at distance.

The McCarthy’s continued living their year in Uruguay and then moved to Ciudad Real, Spain for a year. A town south of Madrid, not too far from Malaga and Barcelona, but small enough so that rent would be affordable as well as the cost of living. Their days went by in between long walks on narrow cobblestone streets, coffees, tapas and taking their daughter to the park or whatever they decided to do for the day as their main activity.

Joan, with all the free time she had in her hands as early retiree had been exploring Yoga. She decided to become a certified instructor, so she could work here and there whatever country they traveled to. With her certification, she could earn a little extra through something that she enjoyed without the burdens of a soul-sucking job full of stress.

Life was completely different for both families once they got off the beaten path. At times they would find themselves mesmerized watching people passing by in a rush to get somewhere, driving fancy cars or simply walking all dressed up as if they were impressing someone.

They celebrated in silence their new acquired freedom.

March 29- Location Arbitrage

In the summer of 2019 the Simpleton’s and the McCarthy’s decided to retire. They hadn’t quite hit their numbers but they had been devouring all sort of financial information for years now.

Jon had run into this article by Paula Pant at Affordanything.com where she talked about location arbitrage; which basically promotes the idea that by being flexible and willing to change locations to an area with a lower cot o living our financial situation can be impacted positively.

For example, if you live in the San Francisco area you may feel like you need millions of dollars to someday be able to retire. However, if you are willing to move to another city or state with a more affordable housing market you may need quite less than what you think you need. Even better, you might be able to move to a different country and not only live for less, but also afford health care for just a fraction of what we are used to paying in the U.S.

With that thought in mind, both families were getting together to set sails. Jon and Jane bought a nice but small RV and decided to take their first year of retirement to travel around the country. They continued their rental business but this time they hired a management company that would be in charge of collecting rent and resolve any issue that may arrive. They also rented out their own home and put all their belongings in a storage unit.

The McCarthy’s, now retired, moved their tax-deferred funds into a regular IRA account and were slowly moving their savings to a Roth IRA account to minimize the tax burden.

Just like the Simpleton’s they continued renting out their properties; counting their own residence they now own 3 properties. All of them were rented out using a management company as they were moving temporarily to Montevideo, Uruguay, where they could live comfortably for under 2k a month including medical care and health insurance.

At the time of their resignation, their school districts took their resignations and in just two days all their positions were filled and running again like nothing ever happened.

March 28- Loopholes

Eight years went by. The Simpleton’s and the Mccarthy’s went through many changes and stages. Joan had her baby; a beautiful girl they named Eva.

The Simpleton’s were now on their third rental property. The first one was completely paid off, the second was almost there, and the third one needed about 8 more years to go. Accounting the three rentals, plus their own residence their net worth was nearing 600K plus about 300K they had been able to put aside in tax-deferred accounts. Two more years and they would be retiring at 35.

The McCarthy’s were also tagging along in their journey to FI. Their rental was a success and they were considering buying another investment property in a touristy area to rent it on a weekly basis through Airbnb.

According to the last time Patrick and Joan checked their Personal Capital account, their net worth was nearing 800K between tax-deferred accounts and equity.

The Simpleton’s were expecting. If everything went well they would become parents in 4 months and were really considering pulling the trigger that summer. Worst case scenario they had decided that Jane would stay home and Jon would work for 1 or two more years at the most, before resigning.

The McCarthy’s daughter had been going to school and now they were expecting their second child. Joan’s mother had been able to help them with raising Eva but unfortunately she had passed now. So, having another child was putting some pressure on Patrick and Joan to also pull the trigger. Otherwise, they would have to afford the outrageous bill of daycare.

Even when both families had a bit more to go as part of America’s workforce, they both also recognized that by not working and not receiving an “earned income” they would be taxed differently.; which was on their favor.

The McCarthy’s were planning on sustaining their lives through rental income, as well as dividends from index funds. They were far away from the 65 year old mark when officially they could gain access to these accounts. However, they were fully aware of strategies such as “Roth ladders” that would allow them to transfer savings. From a 401K/403B account, one can roll funds to a regular IRA account. Then from the IRA account, you can roll them over to a Roth IRA( After tax account). Minimizing this way taxes and penalties. 

Once the money is transferred one can reap the benefits. The government allows a married couple to receive up to 77K in dividends a year without paying a dime in taxes.

Even more interesting, people living off dividends can even qualify for subsidized health insurance and benefits because in theory, they are not earning an “income” per se. The tax brackets are different for unemployed folks.

The future never looked brighter.

March 27- FIRE-The new American dream

Things were unfolding nicely for the Simpleton’s. They had rented their first home and gotten a second house putting 20% as a down payment, which made their mortgage very comfortable to pay.

They were moving fast paying off the first mortgage using the cash flow from their rental, plus some extra cash added to the loan’s principal. They couldn’t believe how fast you can see the life of your mortgage coming to an end by making these extra payments.

Most people don’t know that when they start making loan payments the first few years are mainly payments towards interest accrued by the loan. Doubling the principal payment in those first years is relatively easy because the principal payment is minimal. However, the effect on the life of the mortgage is like an atomic bomb! It wipes out thousands of dollars in interest. You might not be able to double your principal payment in the tenth year and after, but for sure you can afford it for the first few years and it’s well worth it.

Patrick and Joan had found a cute little ranch near their school district, which drastically reduced their commuting time and consequently their expenses in transportation. By having a quick commute home they also had more time to cook, hang out, and enjoy each other.

Now not even the most mind-numbing meeting could bother them because there was something else to life, other than work. There was THEM. Plans. Goals. There was passion between them again; a spark that had been dwindling, but now was lit and alive again.

The McCarthy’s also found a great rental property. By putting down more than 20% as a down payment they got the property to cash flow nicely from the beginning, helping them out with their savings and long term goals.

Both families were using the Personal Capital App to track their net worth progress and the forecast was terrific. They were making great progress although people at work wondered if they were struggling financially due to the changes observed. People were assuming that they were struggling financially because they had moved to a much smaller home.

Rarely people escape the trap of buying the bigger house they can possibly buy. Unfortunately, there are consequences to that:

However, the outcome is usually this:

1. We pay more for the actual home by tens, sometimes hundreds of thousands.
2. We pay more for the interest to finance the home by tens, sometimes hundreds of thousands.
3. We pay more every year on the taxes that result from having a home that has a higher tax assessment.
4. We pay more every year on home insurance premiums.
5. We pay more every year to heat and cool the home.
6. We pay more for all of the new furniture and decor to fill all of the lonely, empty, dust-collecting room we don’t use.
7. We pay more for renovations and upgrades.
8. We pay more for maintenance.
9. We encourage home builders to continue to build more giant homes, with huge environmental consequences.
10. We spend more time cleaning all of it.
11. We overwork ourselves to pay for all of this.

Read full article: https://20somethingfinance.com/big-home-american-dream-disease/

March 26- Work may be optional on a teacher’s salary

Patrick and Joan’s plan had work a little bit different than Jane and Jon because they were about to have a baby; so health  insurance had to be part of their equation to reach F.I.( Financial Independence).

Patrick estimated that without having the burden of a mortgage payment and car payments they could live off 30-35K a year comfortably.  They had also done their due diligence of trimming discretionary expenses. No more buying out lunch or Starbucks twice a day. No more baseball season tickets and finally…the cable subscription…gone.

Patrick reflected on how much money he had spent over the years on cable to watch sport shows that really didn’t make any difference in his life. Nobody cared if he watched the game or not. There was no reward for feeding an industry of consumerism; not even for the most die hard fan. The only thing that was a given was a lot of expenses and wants. Over $200 a month for the cable service and few subscriptions to special channels. “Not worth IT!” he muttered.

After trimming expenses, Joan and Patrick calculated they could bring in about 170K yearly. However, this was going to require some strategy to avoid paying taxes in a high income bracket.

In order to get the most out of their pay, they were planning on investing to create some liability against such high income.

For starters, they wanted to invest in a rental property. This would not only allow them to deduct their mortgage interest paid each year, build up their equity, and get some appreciation but also gain through depreciation. Patrick could not believe that the IRS allows one to shelter 1/27.5 of the property value in the form of depreciation. In other words, if you have a rental property appraised at, let’s say 200K, you are allowed to depreciate 200,000/27.5 yearly= $7,272K a year.

They also wanted to use the magic of tax deferred accounts and compound interest to invest in the stock market. The government also allows you to pay yourself first in savings every time before taxes are collected . As a married couple, Patrick and Joan could put aside up to 38K in the ir 403B plan without paying one cent in taxes. Besides that, they were planning on fully funding Roth Ira accounts for 6k each, totaling 12K extra in savings.

All these savings plus a standard deductions for married couples of 24K, would total their savings at 81K in taxes. Incredible. Not to forget the tax credit for having a child. And if needed they could also fund a 457 plan for each one of them for up to 38K more. Mind blowing!

Patrick and Joan, could taste the winds of freedom and independence. Life has taken a new meaning for them. Instead of just going to work day in and day out the planning of their future had brought them together again.

The IRS had their backs!

March 25-Spend less than what you make= Wealth

The housing market was strong. Patrick and Joan were getting a lot of offers. The best of all was that if things worked out as expected they could walk out their sale with about 150K , out of which 60K were solid profits from a strong market with high demand for housing in the area.

The next area to challenge in the McCarthy’s spreadsheet was transportation. Patrick’s car was not too old, but definitely not worth it what he paid for it. After 5 years, the 35K car was worth only 15K. He decided to sale it and buy a Honda Accord. Cash. 10 years old for 4K. The rest of the money would go towards their savings.

Joan’s car was a similar situation. After selling her car they were able to buy a Dodge Caravan just 10 years old for 6K and still keep 8K.

Patrick realized that conversely to what most people believe, despite of owning less expensive things, moving to a smaller house and so forth, their net worth was increasing rapidly. In other words, it might have seemed like they had wealth, but in reality their net worth was depleted before all these changes.

Very quickly he came to the conclusion that “most people equate expensive lifestyles to wealth and nothing can be further from the truth.” he thought.

One can have the highest income. However, if that income is used to afford a life of luxury and unnecessary wants, then little room is left for wealth accumulation.

On the contrary, if even on a small salary one manages to invest and save, wealth is accumulated and potentially it will produce a life of comfort in the future.

Case in point: athletes. We tend to admire sports athletes who we associate with wealth because they have an expensive life-style. Without realizing that more than wealth what they have is a very high income. They are high income earners. It’s not rare to see athletes who after they make it to the top of their game making millions, they tumble right back down because as they earned the money, they also spent it. They didn’t bother to accumulate wealth but rather flashy things that lose value over time.

The media loves stories of expensive life-styles. We look in awe as we hear how much a celebrity or business person spends on car or a house; without realizing that whatever amount they spend on an item it only represents a minuscule percentage of their wealth.

The equation is simple. Spend less than what you make, and work on increasing your net worth.

The opposite to that simple formula would look like this: Earn 30K  a year from an hourly job and buy the latest 45K pick-up truck in the market to be paid for the next 6 years. It just doesn’t make sense. Somehow we are pushed to believe that it this makes sense.

Patrick had taken “the red pill.” He was not leaving anything to serendipity. Rather, he was looking at his finances now like a CFO.

He had become the CFO of his own damn money.