Don't listen to all early retirement and financial independence advice
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A couple weeks ago, I got to thinking about bad advice - especially within the Financial Independence and Early Retirement (#FIRE) community. The same advice gets thrown around so much that it's becoming conventional wisdom.
And, you know what I think about conventional wisdom.
Advice like always max out your retirement account(s). Or, invest as much as you can in the market. Never take on a debt. Don't buy a new car...or a big house. It's advice blindly thrown around so much that it's becoming an echo chamber of repetition.
And, it's not that the advice is necessarily "bad". Yes, new cars can and do depreciate extremely quickly. Yes, investing in the stock market generally will pay off in the long run. At its foundation, the advice isn't necessarily "wrong".
The larger problem is this advice simply isn't appropriate for all people. Some of it will work, some of it won't. What works well for one person may not work for another. It's a minefield of advice out there. How are we to know when the next step we take will blow up in our face because we followed that advice?
Naturally, I took this question to Twitter.
What popular #FIRE advice do you disagree with? And, why?
I asked the question on Twitter:
What popular #FIRE advice do you disagree with? And, why?
— Steve @ Think Save Retire (@ThinkSaveRetire) May 31, 2018
The responses were incredibly interesting, and it's tough for me to argue against any of them. Here are my favorites:
While it's true that driving can be expensive, there are less expensive ways to commute to work without risking your life on a bike (in some cities). Steveonomics happens to live in an area with large bike lanes, but not all of us do. Public transportation like buses and trains are also reasonable options.
Or, driving a used and high-MPG car can be a very inexpensive way to get to work every day.
I'll admit I've written a lot about debt and how detrimental it can be to our lifestyles, but I also do concede that smart debts DO make sense. Smart debts give us a reasonably high expectation that we will end up in a better position. Student loans and mortgages are examples of debts that can be smart. But even with these, not all student loans or mortgages are smart debts.
It all depends on you and your personal situation.
Personally, I believe that smart debt mean two things:
You're in good financial standing
Those who are in good financial standing can “afford” debt. They have a good, steady job and earn quite a bit more than the anticipated monthly payment to repay the debt.
They currently have no debts – or very little. If they lose their jobs suddenly, they can afford to keep paying their monthly payments for several months.
They have an emergency fund with at least three months of living expenses.
They don’t live paycheck to paycheck and have a proven track record of paying monthly bills on-time. Automatic monthly payments are even better.
They regularly spend less than they earn.
And, there's an incredibly good payoff that's worth the risk
The payoff must be worth the risk of taking on debt. For example, using a student loan to fund a computer science degree, for example, can easily turn positive after just a few years of working in information technology – a sector with traditionally big salaries. Business Management, Accounting and Finance degree programs are other good choices for bigger payoffs.
However, it is probably tough to argue that a $40,000 car loan was worth the risk. Less expensive cars exist – nice cars that “go”. They get you from Point A to Point B just like the expensive car.
Buying a house with a $150,000 mortgage in a real estate market where rents are high may also make sense. But even then, understand how expensive homeownership truly is.
Smart debts offer a quantifiable return.
I hate that the word "rule" is associated with the 4% Trinity study because most of us in the early retirement community use the 4% "rule" as a guideline. A baseline, or a starting point. I agree with @GO4ITUSA's idea of re-applying the 4% guideline each year based on net worth at the time, but even that plan may not work for everyone.
I've found that the best way to NOT fall victim to insane depreciation with some vehicles is:
- Buy used, or
- Drive the car until it falls apart
To the second point above - if you never sell the car, then you're driving 100% of the value that you paid for whether or not you purchased the car new.
But, Heather Mayfield is right. Some cars will depreciate faster than others, and newer vehicles may offer safety and efficiency improvements not offered on used vehicles. While I probably won't buy a new car again, that doesn't mean it'll never be the right decision for someone else.
Besides, money is only one element in the decision-making process. It's an important one, yes. But, it is very rarely the primary motivator in selecting the car that we drive.
We're heavy investors in the stock market, but Erik is spot on in his concern about diversification of your net worth picture. Real estate or small business investment are other options to help expand your investment life. Financial Independence isn't only based on the market.
Unfortunately, there does tend to be an emphasis on early retirement, but specifically within the #FIRE community. I've written before that it's okay to love your work and also about the wisdom of achieving financial independence without early retirement.
There’s nothing wrong with loving what you do for a living. In fact, a genuine love for your work makes your career that much more enjoyable. It’s awesome doing a job that you love each and every day.
But, here’s the reality: For most of us, your job is nothing more than a means to an end. Your job enables your work. It puts into action the thing that you love doing. The conduit, if you will. It’s the path you take to earn a living. Okay, I think you get the point.
Jobs come and go. They also suck sometimes.
The idea is that once a rental property is set up and generating income, that income is primarily passive because you aren't working a traditional job to maintain that income. Rent comes in every month without lifting a finger. But, Kate's got a point: Sometimes, it's not passive at all. There's a lot of work to maintain rental properties. It may not look precisely like a typical job, but there is definitely work involved with real estate.
Here are a few others I loved:
My philosophy on #FIRE advice
It's easy to just say "ignore all advice" because that's much too simple. Most people in the community mean well, but not all advice is created equal. Some advice will make sense for you and your life, other advice probably won't. And, that's okay.
That's what makes life organic rather than a rigid mathematical formula.
I like to approach #FIRE advice like I would any advice: Listen and accept it, but also take it with a grain of salt. Apply that advice to my life and see where it makes the most sense. If it seems reasonable, I give it a try. If it works, great! I'll keep doing it. If not, I'll make a change.
And if it doesn't truly apply to my life from the beginning, then I enter a "thanks but no thanks" situation and move on with my life. No harm, no foul.
However! There's a fine line between advice that doesn't make sense and advice that you'd just prefer not to follow. In my life, the latter was much more common than the former. Much of the financial advice I've received throughout my life (especially from my dad) has made sense, but I refused to take the advice. It required me to change the way I live. Spend less money. Think before making purchases. I didn't have the discipline to make those changes, and I made myself believe that the advice just "wasn't for me".
Being honest with yourself is tough, but it's also a critical element of change.
What #FIRE-based financial advice do you disagree with?