180 In Depth – Part 1

Welcome back! The last few posts here discussed our Financial 180 at a high level, but today I want to discuss some of the nitty gritty details. Let’s dive into this graph of our net income:

Figure 1: Our Net Income: 2010 to 2016

The green portion of the graph shows our annual income, and the red portion our expenses, for the years 2010 – 2016. The black line traces our net income through the years. Between 2012 and 2015, we aggressively increased our savings rate from around 8% to over 80%, and the turnaround in the direction of the black line is striking. Let’s break this down into periods of time for a more detailed analysis…

2010 – 2011: Living Paycheck To Paycheck

In these years, my wife and I were simply spending all of our money every year. We weren’t taking on substantial new debt (we already financed the house, cars, furniture, etc. by this point), but we weren’t saving anything either. We were barely staying in the green. For these years, our net worth stood still. Apparently in the United States, where we live, this is the norm.

According to CBSNews:

“38 percent of the more than 3,200 full-time workers nationwide who took part in an online survey said they sometimes live paycheck to paycheck. Another 15 percent said they usually get by this way and 23 percent said they always do, according to findings released Thursday by job-search firm CareerBuilder.”

This story from NPR is just as bleak:

“If a financial emergency struck — say, a health problem or a car that needed repair — would you be able to come up with $400? According to the Federal Reserve Board, 47 percent of Americans would have trouble doing so — they would have to sell something, borrow money or simply couldn't pay.”

Think about that for a minute. Almost half the nation is in such a delicate financial balance that they couldn’t handle a single unexpected $400 expense. This is scary, because that means Americans are spending every dime they earn. It means that a $400 unexpected expense is going to go on an interest-bearing credit card with a revolving balance, to eat up even more of the dollars that the average Joe doesn’t have! (It's quite a vicious cycle, but as I'll discuss in part two of this series, there are plenty of ways to break free, or even prevent this situation in the first place.)

2012: Negative Net Income: Living Beyond Our Means

So what’s worse than spending all of your money? Spending money you don’t even have. 2012 was one of those years for me. I got engaged to my wife, flew to the Philippines to celebrate with her family, then planned a very lovely albeit extravagant wedding with over 100 guests at the happiest place on earth.

Yeah, our wedding was extra fancy. This actually happened!

Now let me clarify something: I don’t regret the beautiful memories we made, by any means, but I now know we could have made things just as magical for a fraction of the cost! By the end of the year, we had spent well over six figures… once again. In fact, we spent almost $20K more than we made that year. Our net worth decreased in lockstep. Time for our turnaround.

2013 – 2016: The Financial 180 Begins

In 2013, you can see things start to turn around, and by 2015, things really pick up speed. As our expenses decline, our net income climbs. What is even more impressive is the snowball this created after just a few years. Take a look at a how the value of our assets change over time:

Figure 2: Our Asset Growth: 2012 – 2016

The growth in years 2013 and 2014 are more modest, but things really move exponentially in 2015 and 2016. So much so, that by the end of 2016, our passive income contributed to gains in our net worth nearly as much our earned income. This crossover point is significant. It means that in 2017, my dollars will be working harder than I am!

Disclaimer: the markets have been doing well the past few years, and I don’t expect growth to continue at this pace forever. In fact, the current bull market has had an unusually long run, historically speaking, and stocks are probably overdue for a decline. This is a normal and healthy part of investing, and I’ll be ready to buy more when the market goes on sale.

So how were we able to increase our savings rate from 8% to over 80% during these years? We needed to take the very large, vague goal of ‘turning our finances around’ and break it down into smaller specific, achievable changes to our spending and investing. What kind of changes did we make, specifically?

Find out in Part 2… on the next Financial 180.

Our Financial 180

In 2007, I graduated college with a degree in computer engineering, took a job with a fortune 500 company, and bought a brand new house. For the first time in my entire life, I felt like an adult. With this new paycheck coming in every two weeks, I could have anything I wanted. And as luck would have it – I had expensive taste!

I decided my first purchase would be a $3500.00 HDTV. I added a PlayStation 3 and assorted accessories to the shopping cart, and raced back to my new house to get everything set up.

That night, as I sat on the floor in that empty house, watching the Simpsons on my new TV, my girlfriend (now wife) convinced me that something was fundamentally wrong.

I glanced over to her. She looked beautiful in the glow of the giant TV.
“Yes my darling?”
“We have no furniture.”

She was right. In all of the excitement of my spending spree, I somehow forgot furniture! No problem. I reached for the credit card, and a quick $10K later, our entire house was filled with high-end furniture. Fancy leather sofas, king size beds, the works. It felt great- for the past five years I'd been a broke college kid, but now, I was a respectable grown-up.

Over the years, my spending habit got worse. By 2012, we were spending six figures a year on… stuff. Two brand new cars at $25K a piece? That seemed normal. A $40K wedding and a fancy Bahamian honeymoon? Sure that was expensive but we could afford it. $13K in restaurant spending in a single year? We liked to think of ourselves as food connoisseurs. Besides, why shouldn’t I treat myself? I was putting a full 6% into my 401(K) every year to get my employer match. So I continued my adventures in spending.

WARNING: Eating out thrice a day is hazardous to your wallet

Before I knew it, my life had become quite full. Food and water delivery services, monthly massages at the spa, fancy dry cleaning bills, season tickets to various entertainment venues, expensive martial arts hobbies. You name it, I had it. But as my life, and subsequently my bank statements filled up, I wasn’t getting any happier. It was actually the opposite- I was more stressed than ever before! But I just couldn’t put my finger on the problem.

In 2013, I decided changing employers would shake things up and give me a much-needed morale boost, so I jumped to another big firm in the area. The pay bump and new faces helped a bit, but within a few months, I was unhappy once again. What was wrong? I spent thousands of dollars on toys the previous year. Why weren't Amazon purchases fixing my problem?

What I needed was a way out. You'd think a high tech job would be interesting, but over the years I realized it’s all the same: write yet another version of an already existing widget for a program that's behind schedule and over budget. Changing jobs didn't help: new code, new cubicle, same prison sentence. The fluorescent lights taunted me as I stared at the blue skies outside. I couldn't go out and enjoy it: I was always too far behind on my tasks. I tried coming to work earlier, staying later, working through lunch. Nothing helped. I was trapped.

It was around this time that a friend pointed me to a blog called Mr. Money Mustache. He thought it might help give me some perspective on money, so I glanced over a few posts. “What an interesting website” I remember thinking at the time, unaware that my life was about to change very, very quickly.

A Crash Course in FI

A few weeks later, the wife was in a terrible car accident. She was visiting her mom down in south Florida when a sheriff's officer ran a red light with no sirens and T-boned her in an intersection. The Honda was totaled, but thankfully she walked away with only minor injuries. Soon after, the insurance company sent us a check for $10K- the depreciated value of the $25K car she purchased new just a few years earlier.

That night, as we sat on the fancy leather sofa in our filled-to-the-brim-with-stuff house, my wife once again convinced me that something was fundamentally wrong.

“Yes my darling?”
“We need to stop spending our money.”

Once again, she was right. We binged through a dozen MMM articles together that night. The strange concept of financial independence – the idea that someone could save up enough money to retire in less than ten years – it consumed me. I worked out the math for myself. I checked the numbers twice, looking for a mistake. It was real – FI was a way to escape the daily grind. A way to add control and meaning back into our lives. We took the $10K insurance check and put it into Vanguard instead of buying a second car. It was a new financial beginning for us.

As we began slashing our expenses, we quickly realized that most of the luxuries we purchased to make ourselves happy were superficial. The new house and cars, the fancy furniture, it’s all a sham. None of it actually brought us any long-term happiness. After a few months, the shininess fades, and you're back to square one. It’s called hedonic adaptation.

The things we sacrificed for those luxuries, though- the once-in-a-lifetime trips, the ability to control our own schedules, having free time to spend with friends and family- these things really did contribute to our happiness, if only we had time for them! Once we figured this out, we worked hard to increase our saving rate as much as possible.

Figure 1: Our Financial 180

We turned it into a game: every month, we'd look for one improvement we could make in our budget. Before long, we got pretty good at saving money! The results were dramatic. By 2015 we cut our expenses by two thirds, allowing us to max out our 401(K)s and pay down our mortgage. In the years that followed we saved over $300K, and are now on track to reach Financial Independence sometime in the next two years. (Update: less than five years after our financial awakening, we reached financial independence!)

I do want to make something clear, since this story sounds like sunshine and lollipops so far: turning things around was not easy. It didn't happen overnight, either. It was gradual, and we made a TON of mistakes along the way: Buying a new home worth less than half its mortgage; Six-figure annual expenses and lifestyle inflation; Sizable wedding, travel, and new car expenses; No investment knowledge whatsoever… the list goes on.

Although daunting, we were determined to work together as a team to turn our finances around and learn as much as possible. We devoured the FI blogs. We read every book we could find on the subject. We trimmed our spending month by month and tracked our net worth as it grew. This helped form a mission statement for my blog: to document our journey, and help as many people as possible save up their own FU money, replace fear with flexibility, and avoid all the mistakes we've made in the past!

If We Can Do This, You Can Too

Why did we pursue Financial Independence? To spend more time with family, and less time at unfulfilling jobs. To pursue creative endeavors, with no pressure to turn a profit. To live our lives the way we want, on our own schedules, without the need to worry about money ever again.

So that's our story! Well, the big picture, at least. There's still a ton of details I've glossed over… What was our spending breakdown before and after the 180? How were we able to lower our spending so significantly? What if you don't have an engineering salary? All this and more … on the next Financial 180.

A New Beginning

Hey there, I'm Joel! A few years ago a simple question changed my life: “How many years do you want to work?

I thought I knew the answer. Most people retire in their 60s and 70s, while some people work really hard and finish in their late 50s. Anyone who retires earlier than that either inherited some serious money, or got wealthy launching a successful Silicon Valley startup, right?

Around her 30th birthday, my wife was in a serious car accident. She only had minor injuries, thankfully, but the car was totaled. After the ordeal we were shaken up, and had a heart to heart about how precious time is. We discussed our careers, and how they left us feeling unfulfilled. The thought of spending thirty more years in a cubicle every day deeply troubled us!

When we eventually discovered the Financial Independence community and read about people retiring after less than a decade of work, we were excited, but had some serious financial issues to resolve:

Although daunting, we were determined to turn our finances around and learn as much as possible. We devoured the FI blogs. We read every book we could find on the subject. We trimmed our spending month by month and tracked our net worth as it grew. This helped form a mission statement for my blog: to document our journey, and help as many people as possible save up their own FU money, replace fear with flexibility, and avoid all the mistakes we've made in the past!

Our hard work paid off. Within five years of starting our journey, we reached financial independence! What does this mean in plain English? It means work is now optional, and we can spend our days doing whatever we want, no longer a slave to the 40+ hour workweek! We can spend more time with friends and family, working on health and fitness goals, or working on creative endeavors, with no pressure to turn a profit.

About Me

So who the hell am I to give you financial advice? Well, I could try to impress you with my numerous graduate degrees and M.B.A., but honestly, these credentials didn’t keep me from spending my money like a lunatic, so they won’t help you either. What I have to offer is experience and perspective. I’ve been poor, and I’ve been wealthy. I’ve been spendy, and I’ve been stingy.

Don't I look cool in my $5 sunglasses?

The point is, no matter what financial mistakes you’ve made, I’ve probably made them too, or at least something similar. Through my posts, I’ll share with you details of my household’s finances from the past decade, the mistakes we’ve made, and how we fixed them. I’ll cover topics ranging from real estate and investing to expenses and my views on debt. Most posts will have at least one juicy example of how I did things exactly wrong, and then how I managed to turn things around. I am pretty passionate about this stuff, so stick around for some great new posts every few weeks.

How did we go from broke college kids to six-figure spenders, and how exactly were we able to turn things around? For that, you’ll need some backstory… on the next Financial 180.

Dive Right In!

New around here? Check out all our posts chronologically, or browse through the specific topics that interest you:

There's nothing else I can trim from my budget!

Are you sure? We found over $1,000 per month hidden in ours. Read our post 180 In Depth – Part 2 to see how we turned cutting back our expenses into a game.

I enjoy shopping and won't give that up!

You don't have to stop shopping… you just have to shop smarter! Tricks like the 72-hour rule and cart-free shopping help immensely. Read our post Monthly Savings: Shopping for ideas.

Food is expensive; there's just no way around it.

We thought so too… and then we cut our grocery bill in half. Knowing where to shop and what to buy is key. Read our post Monthly Savings: Food for the tricks we learned, like our $3 rule, and a breakdown of item costs across different stores.

You can make money quicker and easier with real estate!

Quicker? Maybe… easier? Well, before you dive into the real estate world, read about our six-figure losses and our ‘renter from hell' in our posts How Not To Buy A House and Adventures in Real Estate.

I Don't make as much money as you, so I have to work longer.

Surprisingly, the length of your required working career isn't determined by how much you make, but rather, how much you save. The more you flex your frugality muscles, the more you save, and your required number of working years reduces. Want to figure out how many years you have left? Read our posts How Long Will You Work? and Why You Can't Retire.

Investing is too complex for me to do on my own.

That's a popular misconception that makes a lot of money for the investment advising industry. Investing doesn't have to be any more complex than opening a bank account and choosing a fund. We walk through this in detail in Investing Can Be Simple.

I have the discipline to take on debt responsibly.

Debt is the Ying to compound interest Yang, a force that accelerates your money into the red. It's surprisingly easy to accumulate and surprisingly hard to get rid of once you're knee-deep. Read The Dark Side of Interest and You're a Hazard To Your Money for more on this.

What if I go too far and become a miserable cheapskate?

Being frugal is different than being cheap. It can actually be a good exercise to push your frugality to the extreme for a few months to test your limits, but there are natural boundaries you'll encounter that should stop you from going too far. For me, it was living with my in-laws, and the experience left me ready to jump out of my skin. Read about it here: Frugality vs. Sanity.

There's no way I can reduce my driving expenses.

This is a hot topic, but in the style of Mustachianism, I don't believe driving is a necessity. I believe driving is a LUXURY and we can all do more to trim this expense down. Read The Car Problem and FI is Hard for more ideas, including how we spent five years as a one car household.

But… I like my job!

Financial Independence doesn't require early retirement, and isn't an all or nothing concept; It's actually a smooth continuum of increased benefits along the savings journey. Some of our most popular posts, The Power of FU Money, The Milestones of FI, and Are We FI Yet, discuss this in detail!

Why would I put my money in a 401(k) I can't touch until I'm 60?

Contrary to popular belief, the money you put into tax-advantaged accounts is yours to access at any time, and there are numerous ways of doing so fee-free! Read Don't Fear the “Penalty”! to figure out how.

I'm too afraid of <healthcare, recessions, asteroids> to pursue FI.

The best way to face your fears is to better understand them. In Replacing Fear With Flexibility, we discuss these hot topics in great detail.

I'll never get my <significant other> onboard with FI; so why try?

You'd be surprised what people would be willing to try when they wrap their heads around the concept of never having to work for money again. Why not do a ‘trial run' to test the FI saving waters? Check out my Interview With ‘The Wife'! for how my wife and I deal with differing opinions on money.

If FI is so simple, why isn't everyone doing it?

FI may be simple, but it certainly isn't easy. It requires significant financial muscle and is guaranteed to push you out of your comfort zone. Read about how we tackled the ‘big three' expenses in FI is Hard.

Happy saving!



Disclaimer: I'm not an accountant, financial advisor, CFP, or fiduciary. I'm just a guy, typing stuff on the internet, hoping to help you avoid financial mistakes I've made in the past! This blog doesn't give specific financial advice; it's just me documenting my lessons learned. I'm not liable for any losses incurred from the use of the free information provided on this blog. Please read our privacy policy for more details.