Updating Financial Assumptions and Goals

When I first started this blog and began writing about my progress to financial independence (FI), I put a lot of thought into my goal net worth amount. That goal amount combined with my current savings rate, monthly expenses, and estimated investment returns are what I’ve been using to track my progress to FI each month. The problem is that over the past 14 months, since I started documenting my progress, my ideas about what financial independence is and what I plan to do when I get there have changed. Initially, I took my current yearly expenses, added a 40% buffer due to uncertainty in the future (likely kids at some point), and then multiplied that amount by 25 (based on the 4% rule) to figure out the amount that would be my target.

After reevaluating, I believe the 40% buffer is very conservative and probably not realistic. My initial reasoning was that my yearly expenses will inevitably increase once I finish traveling and settle into more permanent housing and will also increase once I have children. While I still believe that my expenses will increase, I have decided that a 25% buffer is probably more realistic especially when considering the fact that I will likely still have some sort of income after financial independence, although I’m still not sure what I plan to do exactly. In addition, I plan to spend at least a portion of each year living outside of the United States (at least in the beginning) in lower cost of living areas such as southeast Asia. Traveling and living abroad should be a great way to broaden my worldview while simultaneously decreasing my expenses.

I have now adjusted my spreadsheet to reflect the decrease in my spending cushion from 40% down to 25% and the result is pretty cool. All of a sudden my FI date is about 8 months closer, and I’m almost exactly halfway there after only working for two years. Seeing this result made me reconsider my goal. When I started this blog my plan was to reach financial independence with only a five year working career which would have been right around my 32nd birthday. After steadily saving more and more each month over the past year, the estimated date got closer, and now after this adjustment and a change to my estimated monthly savings last month, I have a new target in mind.

My new goal is to reach financial independence at the age of 30 after only a 4 year full time working career. I define financial independence as my current yearly expenses plus a 25% buffer being 4% or less of my total net worth. Although this goal may seem lofty, I am 100% certain that I can achieve it with higher paying travel jobs, working as much overtime as possible, working PRN jobs when available, and continuing to hustle with bank account and credit card sign up bonuses. I also plan to begin seeking out opportunities to make extra money by writing posts for other blogs and continue to earn referral bonuses for matching other travel therapists with a couple of my favorite and best recruiters.

It always feels great to put my goals out there for you guys to hold me accountable and follow along. The blog has grown a lot lately, and I sincerely appreciate everyone that reads my posts. I want to encourage everyone reading this to create your own financial goals and share them publicly for critique and to create accountability. I welcome any comments or questions in the comments section below! What are your goals for the next two years??

The Importance of Asset Allocation

Disclaimer: I am not a licensed financial advisor, and the information in this article is not meant to be individualized financial advice. Everyone’s situation is different, so if you are unsure about what to do with your funds, please seek an advisor that can consider your own individual case and make recommendations to you.
When I first began reading about asset allocation for my investment accounts, I felt like I had just opened up Pandora’s Box. You can find endless articles and blog posts on the subject, but I feel that many of these over-complicate the issue.  The truth is, asset allocation can be as simple or as hard as you choose to make it. Mutual funds that are focused on different fund classes are an option, but probably not the best one. The reason for this is the additional fees associated with mutual funds that inevitably eat into your earnings. For this reason, I choose to diversify my portfolio among a variety of low cost index funds. For more on index funds, read this post where I give some background.
Before I get too ahead of myself, let’s talk about why asset allocation is important. Asset allocation allows you to spread your risk out over multiple asset classes in order to decrease the possibility of catastrophic loss in any one class. The major asset classes include: equities (stocks), fixed income (bonds), and cash equivalents. I would also add real estate (REITs) and commodities (Gold, oil, silver, etc.) as separate classes even though they aren’t considered “traditional.” Within each of these large classes it is further broken down into many subsets, then many of those subsets are broken down into further subsets. This could get confusing and complicated if you are trying to micromanage every portion of your portfolio. But what can happen with improper asset allocation? In short, you can lose a lot of money, but this is best illustrated with examples.
First let’s look at an extreme example of what can happen with little or no asset allocation to drive home the importance of diversification. Say you decide that you really like Apple products and choose to invest all of your retirement savings into Apple stock. Now jump forward to the year before you plan to retire. A new cell phone is made that completely blows the iPhone out of the water. Since most of Apple’s profits are from their phones, their stock price plummets, they are no longer profitable, and they go out of business. In this example, you lose most, if not all, of your retirement funds. This is not the most likely scenario, but you never know what the future holds. Where did you go wrong here? You put all of your proverbial eggs in one basket. You were not at all diversified, and that led to significant loss.
Now let’s look at an example that is a little less extreme but that involves only investing in one asset class. In this scenario, you decide to use a low cost S&P 500 index fund, but you have very unfortunate timing. It’s January 2008 and you are very excited that you will be retiring in a year. Between January 2008 and January 2009, the US stock market dropped about 37%, which means that you only have 63% of your initial investments available for retirement when the day comes. Do you think this drop would drastically alter your retirement plans? Most likely. These investment mistakes can be financially devastating and should be avoided at all costs. In the first example, you were very risky with your asset allocation, only investing in one fund (Apple) in one subset of one asset class (US equities). In the second example, you had a little less risk because you were more diversified over the 500 biggest equities in the US (S&P 500 index fund), but still this is only one subset of one asset class.
No matter how well you diversify, you will always have some risk when investing and could always lose money, but proper asset allocation makes that less likely. Also remember that timing can play a huge role in return, so no matter your allocation, investing should be a long term plan.
Individual asset allocation should be a well thought out process with your goals in mind. Based on previous returns and volatility, it is possible to estimate what your returns will be; but, usually, with higher returns comes more risk. It is conventional wisdom that the more money you put into bonds and cash equivalents, the safer and less volatile your portfolio will be. This should be a strong consideration for you, because if you have so much risk in your portfolio that you are losing sleep due to worrying about how the market will perform, you need to make some adjustment. A good financial advisor can be a valuable asset in helping you to make your decisions, but there are a lot of online resources that can help you get started for free. I have recommended this book before, but I feel that it is very fitting in this situation as well: The Bogleheads’ Guide to Investing helped me significantly when I was starting out.  Also lazy index fund portfolios is a very good resource if you choose to go that route.
Initially I decided that I was going to allocate my funds using the three fund portfolio because it was so simple, but later, after much reading and learning, decided that I would like to be exposed to more asset classes including REITs and commodities. My current allocation includes: Domestic stocks (value and growth), international stocks, emerging markets, bonds, precious metals, REITs, and energy. This is what I have chosen based on my goals, but this allocation may not be right for you.
After you choose your allocation and invest your money accordingly, it is inevitable that some classes will grow more quickly than others. This means that “rebalancing” will need to occur at regular intervals to keep you on track with your target asset allocation. Basically this means moving your money around to achieve your target percentages once again. Usually once a year is sufficient for this, but some choose to rebalance more often.
How do you plan to allocate your assets? Are you comfortable with a lot of risk in your portfolio or are you more conservative? I hope that this information will help to get you started if you haven’t already. Thanks for reading!

Options for Where to Invest Money in Retirement Accounts

Disclaimer: I am not a licensed financial advisor and the information in this article is not meant to be individualized financial advice. Everyone’s situation is different, so if you are unsure about what to do with your funds, please seek an advisor that can consider your own individual case and make recommendations to you.
Once you have opened your IRA or brokerage account and have begun contributing, you may run into a problem. Where should you invest the funds in the account? Is it worthwhile to try to choose stocks on your own to invest in? Are mutual funds the best option for safety? What about index funds? This can all be very complicated as there is a nearly unlimited number of options for your investment accounts. After reading several books on the subject, as well as blog posts and podcasts, I determined how I will invest the majority of my funds. Before I talk about what I chose, let’s discuss some of the options. There may be additional options for very high net worth individuals, but I will keep this more geared to the new investors which will mean that you likely don’t have millions of dollars to invest.
  • Choosing your own individual stock funds: This is by far the most risky option and not one that I would recommend for 99% of people. There are people who choose stocks for a living and still lose money in this realm. The possibility of someone with no investment knowledge and limited amounts of time to study individual stocks succeeding here is very rare. Please do not buy stocks of a company just because you like the company but have no knowledge about the business aspects or finances of that company, this is just asking for trouble.
  • Picking a mutual fund and letting the fund manager choose where to put your money: A mutual fund is a collection of individual funds. These could be stocks, bonds or other assets. Because of this, mutual funds are less risky because your money is more diversified across multiple funds instead of just one fund. At any given time an individual fund could drop significantly in value due to some unforeseen circumstance, but it is much more unlikely that this will happen to several funds at the same time. This is a much better option that choosing individual funds for the majority of people. So what about the cons of mutual funds? Mutual funds charge fees for managing your money and this fee is charged no matter whether your money is increasing or decreasing in the market. In addition, although some mutual fund managers are able to do a good job of picking funds and “beating the market” in an individual year, the amount that are able to outperform the market in the long term is very low.
  • Investing in index funds: An index fund is a fund that literally tracks an index. An index is made up of many, many individual stocks. You’ve probably heard of the S&P 500- this is an index made up of the 500 biggest stocks on the New York stock exchange. If the majority of the individual stocks contained in the index increase in value, then the index also increases. It is possible to put your money into an S&P 500 index fund or into the index fund of any number of other indices. There are also index funds for different sectors of the market such as energy, precious metals, international funds, etc. Since an index fund’s holdings are based on the index it tracks, it is considered a “passive” investment. That means that there is no manager who makes decisions regarding the fund, but instead the holdings adjust based on the holding contained in the index that it tracks. This means that you can achieve the same amount of diversification, or more, than you can with an actively managed fund without the extra fees associated with having someone “actively” make adjustments to the holdings.
  • Exchange traded funds (ETF): These are very similar to index funds and for most part time investors, it won’t make a very big difference if you chose an index fund or an ETF of a certain index. To learn more about ETFs vs. Index funds, here is a very good article.
It is important to take these options into account and fully understand what they mean before making a decision on the matter. Due to the fact that mutual funds charge fees and are only occasionally able to outperform the market, I choose to follow a more “passive” strategy with a portfolio of index funds. This makes the most sense for me because I do not have the knowledge or time to allocate to choosing individual stocks. If the indices in which my money is invested go up, then my money will increase; but the opposite is true as well.
It is also important to come up with an “asset allocation” and consider it before making choices. Your asset allocation is a very individualized decision and where a good financial advisor can really be of value. I will write more about asset allocation in a later post, but this is basically where you decide how much of your money you would like to have in stocks (domestic or international), bonds (domestic or international), and cash equivalents (cash, gold, silver, etc.).
There are two books that I would highly recommend on the topic of investing and those are:
I have read several others, but these were the two that taught me the most about the stock market and investing. They both strongly support index fund investing as well, which I believe is the best option for the majority of people reading this post.
Where do you put your money? Do you believe that index funds are the best option? I would love to hear other opinions on the subject. Thank you for reading!

Don’t Repeat My Investing Mistake

You’ve decided that you should save a portion of your paycheck, hopefully 10-15% or more, and you are confident that this is the right thing to do. But now that you have saved the money, where do you put it? Do you let the money sit in a checking account earning no interest? Do you put it in a savings account… earning, basically, no interest? Do you invest it in the stock market where returns can be all over the place? Mutual funds are a thing that you have heard of, are they the holy grail for decent returns with less risk? I was in this same position when I as in my late teens. I had $12,000 that I had saved from working full time during the day, delivering furniture, while going to community college at night over the course of two years. I made a huge mistake with my money and lost half of it in 9 months. I would like to help you not make the same mistake.
First I’ll explain a little bit about what happened with my money. The year was 2008 and I had been working hard to save all that I could in preparation for transferring to a university after completing my associates degree.  It was my goal to save enough while working full time during community college that I would be able to pay for as much of my living expenses as possible from savings after I transferred. I assumed that a university would be much harder than community college and wanted to not have to work once I began so that I could focus on getting the best grades that I could. All of the adults in my life at the time told me that a mutual fund was the way to go. This was the best way to get decent returns on my money without much risk because the capital is diversified across multiple individual stocks. The stock market was a great choice, they assured me, because it had been going up steadily for several years. Everyone was making money in the stock market and it would continue for a long time (warning sign). I was intimidated by the whole process but was eager to have my money working for me, so I agreed that I would meet with an advisor and put my money in a mutual fund.
The first couple of months that my money was invested, it was steadily increasing, and I was kicking myself for having let the money that I had accumulated sit in a checking account for so long, basically doing nothing. I even began to add to the amount in $1,000 increments as I was able. Then, all of a sudden, I logged into my account one day after about a week of not checking it, and to my horror, the number was down about $1,500. I panicked and called my mom. Who else do you turn to in a time like that? She assured me that this was normal and that I should leave the money alone and it would eventually rebound. This eased my mind, but I was still very concerned. Over the next several months, the account did not rebound, it got much worse. After about nine months, I decided enough was enough. I called the advisor and demanded that the mutual fund be cashed in. Since the advisor that I chose didn’t really care about my well-being, he didn’t try to deter me and help me to make a more rational decision. I ended up with about $6,500 of the original $12,000. My two biggest mistakes that I made in this situation were that I was not selective about the advisor that I chose and also that I had no idea about the inner workings of mutual funds or the stock market in general. At the time of this writing, had I left the money alone and never taken it out of the mutual fund, I would have over $20,000. The stock market did rebound and it rebounded to a huge degree, but I was in it for the short term and not looking at the bigger picture. After losing so much money, I was determined to never invest in the stock market again. Luckily, since then I have had a lot of time to learn about finance and investing, and I am able to recognize the mistakes that I made.
Any investments made into the stock market have to be focused on the long term. No one can accurately predict the daily, weekly, or monthly fluctuations of the market, but we know for sure that historically, over time, the market has increased at an average rate of 8-10% a year. Any money that you invest should be money that you will not need to touch for at least 5 years, but more likely closer to 10 or more years. For most people this means retirement savings or college savings for their children. There are other places that you can put money that you will need in the shorter term (

The Simple Way to Determine Your Retirement Date

Early retirement and financial independence sound pretty amazing, right? Stop working full time and pursue other interests, spend more time with family, travel to new places, or just continue working while having the peace of mind to know that you can stop whenever you want. What’s not to like? At this point, you may be wondering how long it would take you to achieve this kind of freedom. Before you can set a goal date, it is important to know how much you will need to officially announce that you are financially independent. The answer to that question may seem complex to figure out, but it’s really pretty simple. This is due to what is known as the “four percent rule.” Basically the four percent rule states that if you have your money in a well diversified portfolio going into “retirement,” you will be able to withdraw four percent of your beginning investment each year without ever running out of money. The calculations that were used to determine this rule are based on historic stock and bond returns. For example, you will need $1,000,000 invested in a well diversified portfolio in order to withdraw $40,000 per year for the rest of your life without ending up in the poor house.

This is somewhat of a worst-case scenario though. Considering the average market return of 7-9% per year over long periods of time, four percent may seem pretty low to you. You’re right, it is low. It is much more likely that you could withdraw a significant amount more than four percent each year and still be fine, but better safe than sorry when your financial future is at stake. I don’t know about you, but I would much rather overestimate and have too much money at the end of my life than to underestimate and end up eating cat food for my last few years on earth.

Figuring out how much money you will need in order to live off of four percent can lead to difficult calculations for some. But, never fear, we have the power of elementary school math to help us out. Working backwards, you can determine how much your current yearly expenses are, and then multiply that number by 25. As with the previous example, if you add up your expenses and determine that you will need $40,000 per year to maintain the lifestyle that you wish to have, $40,000 x 25 = you guessed it, one million dollars (please imagine me saying this in a Dr. Evil voice).

In order to determine what your yearly expenses will be in retirement, you will need to make some educated guesses. Will you be spending less money on gas when you don’t have to drive to work each day, or will your gas bill increase because you plan on driving around the country several times? Will you be living in the same house for the rest of your life, or is it likely that you will upgrade or downgrade? Will your health insurance costs increase after you retire? Will you  be spending your extra time cooking more meals at home or will you go out to dinner more often? Only you are able to answer these questions for yourself, but I would suggest being conservative on the estimates.

There has been some criticism of the four percent rule for early retirees because it is usually based on a “normal” length retirement, not fifty or more years that are possible with early retirement. For my situation, I do not believe that this will be a concern. My reasoning for this is that I plan to continue to “work” on something for the rest of my life. It is highly likely that I will be able to monetize one or more of the hobbies that I pursue in the future. Even if this turns out to not be the case, I will have no problem working part time at any number of jobs to earn a little additional money if needed. It would take only a very minimal amount of income to supplement the returns from my investment portfolio, if any at all. In addition, I enjoy earning cashback and achieving now sign up bonuses on credit cards. It is very unlikely that these things will change in the future, and this will lead to some additional income (or at least reduced travel expenses) as well. I will feel completely comfortable declaring myself financially independent when I reach my target number based on the four percent rule.

So now that you have the actual amount that you will need in order to live off of (i.e. the $1,000,000.00 from the previous example), you can use a compound interest calculator to determine when you will be able to get to that number. The calculator is very easy to use and lets you choose all of the factors on which you choose to base your calculations. I use a conservative yearly savings amount as well as a 5% expected rate of return just to be safe.

Based on all of my projections, I am well on my way to being financially independent before my 33rd birthday. This would make my “working career” only about six years total, but again, I will likely continue to do some kind of “work” for the rest of my life. The difference being that it will just be exactly what I choose to do at that time. Do you have an estimate of when you will be financially independent? Do you believe that the four percent rule is sufficient or are you planning to have a bigger safety net? Do you enjoy living on the edge and/or love the taste of cat food, and choose to retire earlier? I’d love to hear other thoughts on the topic. Thanks for reading!

What Financial Independence Means to Me

About a year ago, I became fascinated with the idea of early retirement. There is a small group of people that I discovered through blogs and podcasts from whom I learned a great deal. Most people in the mainstream have never even considered early retirement an option and neither had I. It seems the norm to spend almost all of what you make while only saving a very small amount for retirement, or financial independence, as I prefer to call it and will refer to it from this point forward. The reason that financial independence is a more fitting term is because I don’t plan to “retire” once I reach financial independence, but I do plan to be financially able to pursue whatever I may choose. My personal financial plan leads me to this ultimate goal in approximately 5 years. It could be more, it could be less depending on what life has in store, but overall I am confident that I am heading in the right direction.

I believe truly learning yourself and what makes you happy is a never ending process. I am still very early in this process, but it is already readily evident to me that what I am interested in today is likely not what I will be interested in ten years from now. This may not be the case for everyone, but for me I know this to be true. Although I love physical therapy at this point in my life, I want the freedom to go back to school or change careers in the future if that’s what I choose to do, without the fear of not being able to pay my bills. Also, I plan to have kids within the next five to ten years, and I want to be able to spend as much time as I choose with them. Even if you love what you do and you can’t imagine not doing that thing for the rest of your life, wouldn’t the freedom to take off when you needed to for life circumstances (family vacations, illness or death in the family, or whatever else life may have in store) be invaluable? So you’re thinking, yeah that sounds great, of course everyone wants that freedom, but how is that possible?

Financial independence comes down to one factor, and that is living below your means. It will never be possible to be financially independent before retirement age if you only save a small amount of your income. You could be the world’s best investor, but it is difficult to invest without capital. There are only two ways to live below your means: make more or spend less. For me, this was a big factor, but not the only factor, in choosing travel physical therapy. I am able to make more money than I would if I were to take a full time job somewhere. In addition to earning more, I also focus on spending less. Whitney and I split all of our expenses; we both have budgets and we do our best to stick to them. We strive to save as much of our income as possible.

Trying to save as much as possible while also still enjoying life can be a delicate balancing act, but we do a very good job of balancing each other out. I’m all for saving as much as possible, but that doesn’t mean I’m willing to sacrifice my happiness in the present in exchange for gaining early financial independence. I have always been a natural saver, but Whitney does a good job of keeping me in check and keeping me from being too frugal. We are lucky enough to be able to save a substantial amount without having to sacrifice much, if anything, that we want. We have had a number of exciting experiences thus far in our first year out of school, while still saving at least 75% of our paychecks each month. I understand that this isn’t feasible for everyone, but by choosing the paths that we did, this is possible for us. Regardless of your specific circumstances, there are definitely ways for everyone to take a look at your budget and begin saving more than you spend, while still having great experiences and enjoying the present.

One example of how we made sacrifices to be in our present situation is that we saved for 6 months right out of school in order to pay cash for both our camper and our truck, instead of going with costly financing. This meant that we had to sacrifice and find alternative housing for our first two contracts (living in an over the garage apartment at someone’s house we found on Craigslist), rather than jumping right into our plan of living on our own in the camper.  This decision definitely paid off, and now we are living out our dream plan.

To some, living in a camper itself may seem like quite a sacrifice, but we don’t see it that way at all. The camper allows us to avoid having to pack and move every time we finish a contract. Which is not only a hassle, but also a waste of time, which ultimately means a waste of money. The old saying “time is money” is true throughout life, but especially so when there is no such thing as paid time off. In addition, the camper gives us some consistency when moving. We may have to adjust to a new geographical location, new people, and a new work environment, but no matter where we go, our living area will be the same.

Other ways that we “sacrifice” to save money include eating in and cooking most nights of the week, packing lunch everyday, and making coffee at home. We still enjoy eating out once or twice per week, and if there’s some special treat we really want, yeah we can go ahead and buy it. It’s really not that big of a sacrifice if you just make it part of your lifestyle. I like to think of every dollar I spend on something in terms of how long I have to work to pay for that thing. For example, if you buy coffee every day before work at an average of $3 per coffee, times 5 days per week, times 52 weeks a year, over a 30 year career, you could have saved $23,400 in cash. If that same amount was being invested (i.e. in your 401k or IRA) at an average return of 7% per year (reasonable based on previous market returns) you would end up with just below $80,000 saved over a 30 year career. Based on the average individual income of approximately $30,000 per year gross income, that would mean an approximate additional three years of work to fund this daily habit after taking income taxes into account. Everyone has their own priorities, but to me this just doesn’t seem reasonable. You can take this same example and apply it to bigger purchases too, such as eating out daily, or even choosing a  more expensive car or house.

The point of this is that life is about perspective. What seems like a sacrifice to one individual is not at all to another. Make a list of the things in your life that are truly important to you, and then make a list of the top places in which you allocate your money. Do the things at the top of the lists match up? If not then that is an ideal place for reflection. Now look at the bottom of the list of things that are important to you. Could you allocate fewer resources to those “unimportant” things in order to reach “freedom” sooner? Again, time is money, and the more money you spend today the further you push financial freedom into your future and take the focus away from the things that are truly important to you. Is a new car and house what truly makes you happy, or is it a status symbol? Do you use all of the space in your house or apartment, or could you get a smaller space that is still accommodating while paying less? Is coffee at Starbucks and eating lunch out every day worth an extra few years working at the end of your career when you are ready to pursue other interests or spend more time with family?

Every day is a gift and there is always the possibility that there will be no tomorrow. But, if you are able to live a full life today and allocate your resources to the things that truly matter to you, while also saving a substantial amount for the future, then why not? To me this seems like common sense, but I know that it isn’t because I have met many people that can’t understand why I wouldn’t just buy things because I can afford them.

Financial independence to me means freedom. Freedom to do whatever I want, whenever I want. I may go back to school at that time; I may begin a new career; I may travel the world (frugally of course); or, I may continue working as a physical therapist, whether full-time, part-time, or PRN. But the point is, I will have that choice because of financial independence. I won’t be locked in to a 40+ hour work week. Whatever I choose to do when I reach financial independence, it will undoubtedly include: family, reading, learning, developing new skills, and making the world a better place to the best of my ability. This is a top priority in my life and I imagine that it will be for the foreseeable future. Thanks for reading. What are your thoughts on the subject?

Disclaimer: This is not meant to be specific financial advice, just illustration of the concepts that I choose to apply to my own life.