500 | Choose Financial Independence Today

0:00Hello and welcome to Choose a 5 and welcome to episode 500. It's incredible. We've been doing this for seven and a half years at this point. And interestingly, we've actually published over 660 episodes because way back in the day, we used to do the roundup episodes. But 500 is a nice round number and it has a nice ring to it. And I thought that this would be a perfect time to redo our episode 100, which was really our welcome to the FI community, where we send people when they were getting started, or honestly, people who are just looking for a refresh, people who are looking to start over with FI.

0:38and maybe get reacquainted with the main background of what we're doing here. So I think this is going to be a good one. And thank you for supporting the ChooseFI community. And together, we're creating what we call the ultimate crowdsource personal finance show. Thanks for being here. Welcome to ChooseFI.

1:05All right. So like I said, this is episode 500. And just to introduce myself, which I realize I don't do very often, I am Brad Barrett. I am now the solo host of Chooseify. I'm the co-founder. My other founder, Jonathan Mendonca, was with me for well over 500 episodes here on the podcast. We're still great friends, business partners, all that stuff. So he is here with us in spirit. And it's fun actually going back and listening to some of the old episodes because we were certainly a yin and yang where he was the much more excitable version. And I was the more calm, sedate one who tried to provide some wisdom.

1:48So I'm going to maybe channel my inner Jonathan here today a little bit. So yeah, I guess to give a little background on me, I was a CPA. So I went to college. I got an accounting degree. I went to work for one of the big firms, and this is now a historical event. But in 2001, I went to work for Arthur Anderson. And basically nine months later, that company didn't exist because of the Enron scandal. And that made me realize just how impermanent your job could be, even if it is what everyone says you should aspire to. And I mean, I did great in school. I got this wonderful job. And the entire company did not exist nine months later.

2:30For a 22, 23-year-old kid, that is a real shock to the system. And it was really at that moment that my FI journey was born, even though it far, far, far preceded the modern financial independence or certainly the FIRE movement, as it was called pre-ChooseFI. But it gave me that shock. And it made me realize that nobody's coming to save me. There is always going to be some potential issue. and I needed to wrest control of my life from being at the whim of the winds in essence, or right, like things going wrong. And the biggest way that I could do that, I realized, was by saving money and by not being beholden to a job.

3:18Because everybody else I knew, no matter how much money they made, they needed their job essentially every second of their life until they got social security at 62 years old. What kind of life is that? Is that what you really aspired to when you were a kid? Did you say, hey, I'm going to graduate college at 22 and work every second in stress that I don't get fired for the next 40 years? It just makes no sense. And I just thought there had to be a better way. And in my naive luck, I realized, okay, well, I think one of the best ways that I can do this is by saving money. And it's interesting that that really has become the bedrock of my entire adult financial life and really this financial independence movement.

4:07And it's taking control. It's trying to realize that you can achieve freedom and you can achieve autonomy in your life to actually focus on the things that you want in life, to spend your most precious resource, your time, doing the things that you want with the people that you want to spend it with. That is truly the ultimate luxury. And what's so interesting, I think our, like I call it, this is ChooseFI for financial independence. And I think ChooseFI has really helped galvanize the financial independence movement worldwide. But before that, it was known as the fire movement, which you have to admit has a certain ring to it.

4:52And for a very long time, we even included that in Jonathan's sign-off at the end of every episode, which was the fire is spreading. And like I said, it has a nice ring to it, but I think so many people used it as a punching bag because it's financial independence retire early. So people would make memes out of it or, oh, look at those lazy people just looking to retire as quickly as they can and sit on the couch or sit on a beach somewhere and do nothing. And honestly, nothing could be further from the truth. And that old caricature, we have tried so hard to kill. We really have. And of course, people for their clickbait and whatnot, attention, of course, want to draw attention to it.

5:34But that's what's so beautiful about what we've built here and what you have built, our community, is something really powerful. We've built a group of people who are taking action in their lives and taking little actions every single day to make their lives better. And other people can look from the outside and say, oh, you're depriving yourselves. Oh, the fire movement, this, the fire movement, that, whatever. Don't you want to just live a little? Come on. It's YOLO, right? And instead turning it around and saying, wait a second, you're talking about buying like fancy cars or wasting it on this or that.

6:12When I'm actually talking about spending my money, if you want to reframe it, instead of deprivation, you're not saving your money for nothing just to be frugal or miser. You're saving it for the most important thing in the entire world, your time, your time, right? Like when you think about a savings rate, Think about it buying back years of your life. Not that you're depriving yourself, not that it's some short-termism like a financial diet, because we all know how well those work. They really don't work that well at all. And you're eventually going to yo-yo and you're going to spend it all in all likelihood.

6:48But we think long-term in the financial independence community. We look in terms of decades and how can we live the best lives that we want to design? Not that somebody else decides, not that society decides, but how we want to spend it. And it really does start with having that savings rate. And for many of us, we come into the FI community, whether you're coming in at 22 or at 50 or 62, it doesn't matter. It's never too late to make your life better. I think that's one of the critical, critical concepts here is, yeah, you can beat yourself up all you want about past mistakes. And we all have them.

7:29And believe me, I have plenty. But where does that get you? How does that actually serve your life to beat yourself up about past mistakes? You can't fix them. You can't go back in time and undo them. So what can you do? You can make your life better starting today. And you can be honest with yourself about your personal finances starting today. And that's really empowering. And I think you're going to hear me say that word a lot of times, empowering, because that's what makes financial independence and the certain brand of financial independence that we espouse here at Chooseify so powerful. Because you actually gain control of your life one little decision at a time.

8:10And another cool thing about Fi is there's a whole list to channel Jonathan, my old co-host, of levers that you can pull, right? There are all these different things you can do to make your life better with your personal finances, with everything really. And it's actually a holistic strategy to make your life better. But let's just talk about personal finances. You could do something dramatic like I did, which was move from a high cost of living area. In my case, it was Long Island, New York, down to Richmond, Virginia, which at the time in 2006 was really a very low cost of living area. And that was a dramatic change, but that certainly set the stage for everything that came later for me.

8:53But did we need to do that? No, of course not. There were plenty of decisions that we could have made. Obviously that supercharged it, but for us, driving old cars was another major difference. Instead of at that point having$200 or$300 a month car payments, which now that's quaint, It's probably$500 to$700 per car. We drove old cars. And every month, we're able to stock away hundreds of dollars and funnel that into investments and have that money working for us to little things like, okay, instead of having a fancy cell phone carrier at$100 a month, I've had Republic Wireless and now Mint Mobile for the last easily 10 plus years.

9:39That's probably, certainly at the outset, that was$100 per month decision. And another thing we focus on here is the little things are the big things in life. Okay? So we'll get into our five number calculation and what it actually means to be financially independent. But basically, every$100 that you can save per month in recurring costs that you lower in expenses, so in my case, the cell phone, is$30 ,000 less you need in your pot of money to reach financial independence. Hear that again, every$100 a month. So for me, it was just having Mint Mobile instead of T-Mobile, which is essentially the same company, right?

10:23Mint Mobile is using T-Mobile's service. So it affected me zero. And that one decision means$30 ,000 less I need to reach financial independence. Now multiply that, right? Think about, okay, instead of eating out 10 times a month, I'm not going to deprive myself and go all the way down to zero, but what if I only ate out seven times a month? Even at 30 bucks a time, which is laughably small, that's another$100 saved basically. And that's another$30 ,000 less you need to reach financial independence. You see how the little things can become the big things. And honestly, it's a fun game. It's a fun game to be living the same middle-class lifestyle as everybody else around you, or even upper middle-class in my case, but getting wildly wealthy at the same time, just by being smart, just by understanding the rules of life, the rules of personal finance.

11:17There's no secrets. That's the cool thing. There's no guy behind the guy rules that you need some inner sanctum pass to. It's actually really straightforward. That's the cool thing. We're not trying to sell you anything here. In fact, we go so far out of our way to not make money. We have probably had over 60 million downloads on this podcast. And we essentially have had zero dollars in advertisement, except for a very short time during COVID when it was absolutely necessary. And I bring that up to highlight that all I care about is that you trust and respect what I'm saying. I'm not trying to sell you anything.

11:55There's no secret course. There's nothing. It's actually about simplicity. That's one of the through lines of my life is not paying fees and just craving simplicity. And I think that is really the hallmark of a financially independent life is building a personal finance life that just works on autopilot, that everything works. And for me, it's stress mitigation. So I'm not trying to ultra optimize everything. In fact, I leave an extra$5 ,000 or$10 ,000 in my checking account every month that could be earning interest or compounding in the market. But because I want it there to not have to worry about, oh, is this bill coming out on the 17th or is that bill coming out on the 22nd?

12:37I don't want to think about that ever, ever, ever, ever. I just want my life to work simply. And I think that's what's cool is when you build this life where there's not really that much going on. I put everything on my credit cards. Travel rewards are a big aspect of what we talk about here at Chooseify. And you can always find that info at chooseify.com slash travel. And it's a way that I can travel the world for nearly free using rewards points that I get for being smart with my personal finances, which is just this wonderful virtuous circle. So again, I put all of my expenses every month on my credit card.

13:17Of course, I have my credit card on auto pay every single month. And it just all works. It works seamlessly. I have automatic transfers set up to max out my retirement accounts and to put money into my regular brokerage account or wherever that I see fit. And that again is just the way that I crave. But this really is a choose your own adventure because a lot of people in financial independence, they actually want to get into the nitty gritty and maximize everything. And that's great. You can do you ultimately. I'm not here to speak from on high as some expert of what works for you on your FI journey.

13:56I think really the critical part is that you take action and you will hear that over and over and over again. All that I care about every single episode that we produce is that there's some actionable takeaway. Even if it's an episode that you would otherwise maybe write off as, oh, that doesn't pertain to me. I think honestly, every episode, there's some gem, at least one, at minimum, one gem that you can take away that will make your life better. And I think that's one of the things that I'm proudest of over this seven and a half year journey of 650 plus episodes is that this really builds on itself.

14:34I've went back and started listening to our older episodes and they still stand up today. So if you're finding this now in 2024 or beyond, you really can go back to episode one and start over and see all of these little things, all of these little life hacks, all of these stories, all of these interesting perspectives from our guests and our community members. Because like I said before, we've always dubbed this the ultimate crowdsourced personal finance show. And that was a grandiose thing that Jonathan came up with that I love. And it's because this is about you, our community. Jonathan and I, we're always here to shepherd and to curate and to synthesize.

15:19And I think we've been really, really good at that. And make this easy. Make it believable that you can do this. Because you want to know why? You can do this. Like I said, it doesn't matter where you're coming from, where you're starting, what age you're starting. It is never too late to make your life better. Hard stop, end of story. And you need to believe that. Okay. Because yeah, is the journey to FI going to be as easy for someone making$30 ,000 as for a physician who's making$600 ,000 a year? No, obviously it's not going to be as easy, But for most people, regardless of income, they are spending all of their money every month.

16:02So in essence, they have no net worth. They might even have a negative net worth regardless of their income. So for most people, getting that first$5 ,000 or$10 ,000 saved up is the difference between them being on that knife's edge and certainly the knife's edge of stress constantly. Because what's the biggest stressor in people's lives? It's money. Plain and simple, it's money. But what if you take action starting today? What if you take action to make your life better? And over the course of the next six to 12 months, you have five to$10 ,000 saved up, even if it's one or 2000, is your life going to be better?

16:39I think that's the easiest question in the world. Of course it is. Of course it is. When you were not living paycheck to paycheck, when you have a couple of grand saved up and every little emergency in life is not really an emergency anymore because you can pay for it. You don't have to frantically search out for $500 or$1 ,000. You have it. So that's the first step is getting some solvency. It's just trying to get to that point where every single thing in your financial life is not a stress. And I think you can go from there, obviously, to getting to the point where work is optional. And this is what the old FIRE acronym, financial independence, retire early, was really predicated upon.

17:25But I think you can take out that distraction and the retire early and just say, okay, look, when I get to financial independence, I can do whatever I want for the rest of my life. And I mean, if you're not enthused by that, I can't imagine what would get you excited. I really genuinely can. And so to talk about what is a fine number, right? So I've mentioned that previously and said we'd come back to it. I think at its very essence, 25 times your annual expenses is the most obvious way to define what financial independence is historically. Now, of course, there is nuance to everything, but I think using this as your North Star, as just something to shoot for, gives you great certainty, interestingly enough, even though it's not a precise number.

18:16and I think you can get into the precision if you want. But even frankly, myself, I don't stress about that. I really don't. And I never have. There are people, again, who have their fine number calculated down to the dollar and have their five day out into precise days of when it's going to be in 2037. Hey, again, you do you if that's your thing. Not really my thing, but everyone has to approach this how they want to. So anyway, let's start with the most important thing, which is you need to calculate your annual expenses. I talked a minute ago about the first thing being getting that first$1 ,000 or$2 ,000 saved up.

18:56I think that's the first thing in terms of stress mitigation. But if I were to tell someone, okay, look, how do you get started with FI? What's the action you can take today? It would be to sit down maybe for the very first time in your entire adult life and be honest about your personal finances. Again, we're not beating ourselves up about past mistakes. They are what they are. There's nothing we can do about it. But today you sit down and you take an hour or two maybe, and you could do it with paper, you can do it with Excel or whatever, Google spreadsheets, whatever you want. And you need to write down, all right, what are my assets?

19:32So you just go into every account you have, and it might not be that many accounts right now. And you just literally write down the balance today. Then you look for every liability that you have. So this thing, debt. So you write down your credit card balance, you write down your mortgage. So obviously then your assets, you would put your house, the rough market value on the assets if you're going to put the mortgage as a liability. But student loans, you would put down any kind of other debts you might have, medical or tax or whatever it may be. Couch payments, as Jonathan always liked to joke.

20:06And you just list them. So I'm a CPA. This is second nature to me, but it's really not that hard, right? It's just, you take all of your assets and then you subtract out all of your liabilities. If that's a positive number, then you have a positive net worth. If it's a negative number, you have a negative net worth. And like I said, it is what it is. And you can get into specifics if you want. You could put, I don't know, the market value of your cars or something. If you have car loans that you're putting as liabilities, I don't usually get into that kind of detail. I don't think it's that important.

20:37I would put your financial assets and certainly your house and if you have rental properties or something like that, I would put that as well. But this is just to get a real rough number. So that's basically, hey, what am I worth? And then you need to get a sense of, all right, what's my income coming in every month? Or if you have unreliable income or you're a contractor or some such every year, basically. And then figure out what does your life cost? And really, that's maybe the most important one is, all right, what are my annual expenses? And it's going to be pretty hard to figure out 12 months of this, but start with a month or two and get a sense of what does my life cost roughly every month.

21:16You can multiply that by 12 and maybe add some because there are always going to be certain things that pop up certainly during the holidays or just here or there and get a rough sense of what does my life cost? Okay. So our fine number is calculated off of these annual expenses. And very simply, we just take our annual expenses and multiply by 25. And that gets us our fine number. So how this works, let's say your expenses are$40 ,000 a year. So$40 ,000 times 25 is$1 million. When you reach$1 million in liquid net worth, you have reached financial independence. That's really it. And that's what's so cool about this.

21:57You're not beholden to somebody like Susie Orman who screams and yells about, hey, you need$10 million or more to ever be able to retire if you're lucky because of whatever. She makes stuff up, healthcare or this or that. $10 million? Really? Based on what, Susie? And the answer is nothing. It's just fear-mongering. But the cool thing is you can control this. And that's another theme at Choose a Vi is control what you can control. You can control your life expenses. And really, your entire financial independence number is based on your annual expenses. That's it. And like I said, there's some nuance.

22:36If you wanted to be ultra, ultra, ultra conservative, you could multiply by 33 and make that your fine number. I think that's frankly way too high because I think most of us are being conservative as it is. But again, it gives you something to shoot for as opposed to just some made up fantasy numbers by someone in the media. And more or less how this works, you might've heard of the 4 % rule, which we don't love the word rule in there. So we call it the rule of thumb, the 4 % rule of thumb. But in essence, looking at this math equation, the other side, it's okay. I have a million dollars in liquid net worth.

23:14And let's say I'm making no income. Well, I can pretty reliably pull out 4 % of that number every year. And it's actually indexed to inflation, to a smaller inflation, to a 2 % or 3 % inflation, which is historically accurate, and pull that money out. And in theory, there's a reasonable chance that that money is going to last forever. And with a very, very, very high probability, 30 plus years at the very least. So I think just looking at it like this is when you invest that money in the stock market, and we are humongous fans of low-cost, broad-based index fund investing. So I would leave you to read the book, The Simple Path to Wealth by J.L.

23:59Collins. I think it's probably the most important personal finance book ever written. And we'll give you a degree of comfort around investing that you've never had before. And that certainly includes myself, who was a CPA who theoretically should have some background with this, but really didn't. And I've never felt better than finishing the simple path to wealth. So low cost index funds, obviously nobody knows the future. Nobody can guess. Don't take anything that I'm saying as financial advice, obviously, because I cannot predict the future, but going on historical returns, it's not unreasonable to expect an 8 % annualized return.

24:38Okay. So let's say you knew that money was going to return 8 % every single year. Then in theory, with no inflation, you could pull out$80 ,000 from that million-dollar pot every single year and just spend$80 ,000 every year and the million dollars would never change. Now, of course, that's not real life because you can't be certain about the 8 % return because some years, you're going to get a 25 or 30 % return. Some years, you're going to get a negative return. That's why we're in this for the long term. But if you were certain about that, then that would be fantastic. And this would be the easiest thing in the world.

25:18But like I said, there's some mitigating factors. You can't be certain in the return. There is inflation. And again, the historical amount is somewhere in the vicinity of, we usually say 3%. So let's say you're pulling out, you're expecting an 8 % return on average. Again, you're pulling out 4%. There's 3 % to inflation that increases every year. And then you still have 1 % to play with that you actually just let continue to compound. So this again is just kind of the way to think about it conceptually. This is not like the hard and fast math of it, but that's why the 4 % rule of thumb works to a great degree.

25:56And now we've had Karsten, who goes by Big Earn from earlyretirementnow.com on the show many times. And he has an incredible series for people who are looking to dive into the numbers called the Safe Withdrawal Rate Series. And at last check, he had over 60 posts on there. And this is literally PhD level economics. And if you want to dive into that, great. I think what he's said in the past here on the show is barring a, and I'm paraphrasing, these are my words, but barring a zombie apocalypse, a 3.25 % withdrawal rate is going to be successful in virtually every case. So, okay, well, 3.25 % it is.

26:40If you're the most conservative person in the world, that might mean that you're working extra years needlessly. it might. But if that degree of certainty matters to you, then great. But I mean, again, we're talking a narrow band as opposed to somebody asks you pre-finding FI, hey, can you retire? What do you need? Do you have any idea? Most people look at you with blank eyes. That's what I would have done. I would have had no idea. But having this as a North Star gives you something to shoot for. And you can get into the precision as you get further down the line, if you so choose. I still haven't because it doesn't really honestly matter to me because I know I'm being conservative because I know I have social security coming in under 20 years and I'm probably being conservative when I calculate my annual expenses and padding it for things that are going to go down.