The Cheat Codes of FI

For those of you following along, you know I've been a bit busy lately. In addition to my own music, podcast, and software projects, I've also been popping up on other people's podcasts. A few weeks back I sang a few bars of Michael Bublé on The FI Show with Justin and Cody, and I just appeared on the What's Up Next podcast with Paul and Doc G as well. But being away from the blog has given me some time to reflect on FI, and the length of the journey itself.

It took The Wife and I roughly 5 years to reach financial independence. For others, it can easily take 10, 15, and even 20+ years. We know that the only variable that actually matters in terms of the math is your savings rate, but there are a ton of factors that influence this figure. How much debt are you starting off with? What career do you have? What's your income? How big is your family? Where do you live? How hard are you willing to work?

We all have individual preferences and constraints that guide our decisions. Some people want to go slower, easing their way into the financial independence journey. Others want to go faster. Some have the resources to go VERY fast but choose to go slowly out of comfort or family priorities. Others really DON'T have the resources to go as fast, but work like crazy and make it happen anyway!

But what, dear reader, if you want to get to FI as quickly as possible, throwing all caution to the wind? What if you could somehow apply a few ‘cheat codes' to your life and really jump ahead in the game? The truth is, such codes actually exist! There are five heavy-hitting areas of your life you can optimize to radically increase your income and decrease your spending, giving you the most bang for the proverbial buck.

The Cheat Codes of FI

Allow me to introduce the “cheat codes” of financial independence. I didn't coin the phrase; other bloggers in the FI space have written about cheat codes before. The problem is most of these posts are too short, vague, click-baity, or philosophical to be helpful.

I wanted something concrete and actionable, just as when I wrote my Milestones of FI post. When you Google video game codes, you don't want someone describing something obvious like “avoid taking damage.” You want to learn that you need to press A-B-A-C-A-B-B during the opening credits, or hold down on a white block for five seconds to find the next whistle.  This is what this post attempts to achieve.

But first, a word of caution: just as in video games, cheat codes aren't for everyone. Some folks are completionists and want to explore and collect every item along the way. Others want to take it slow and enjoy the journey, and I'd argue that this is the healthier option. But for those of you who want to reach the end credits of your traditional working career as fast as possible, this is the post for you!

Get ready, because we're about to skip straight to world 8!

There is a catch, however. When people ask me if there's a sure-fire (FIRE?) way to ‘get rich quick', I usually hesitate and respond with “yes, but… you're not going to like what you have to do!” No, I don't mean robbing a bank or anything like that. It's just that the cheat codes we're going to discuss here are hard to execute, and absolutely not right for everyone.

But boy, can they skip you ahead in the game! If any of these seem too extreme, simply ignore and move on to the next cheat code, until you find one that works for you and your family. Are you ready to level up?

House Hacking

DIFFICULTY: Moderate to Advanced

SAVINGS POWER: 5/5

DATE JOEL UNLOCKED: March 2014

ABILITIES ACHIEVED: Transformed housing from the most expensive budget line item into a source of income

TOTAL VALUE SINCE CODE UNLOCKED: > $100,000.00

Housing is usually the largest line item in most people's budget. For many, it can make up 30% to even 50% or more of their total expenses. House hacking attempts to flip this convention on its head, and take those expenses down towards zero. Or, better yet, earn you money instead of costing you each month!

My favorite part of walking through IKEA is getting ideas on how to live effectively in smaller spaces!

The Cheat Codes

  • The Family Man: move in with parents, siblings, or extended family to reduce or eliminate housing costs.
  • The Roomie: Move in with multiple roommates to reduce housing costs.
  • The ‘Be Our Guest': Rent out a room (or two) of your house and make enough money to cover your housing expenses. (Airbnb and VRBO are perfect for this)
  • The Multi-Family Man: Purchasing a duplex, triplex, or quadplex, living in one of the units, and renting out the others for a profit. (Your tenants pay the mortgage for you!)
  • The Live-n-Flip: Move into a home that needs some TLC, stay a year or two fixing it up, and move out, selling for a sizable profit.
  • The Landlord: Manage one or more traditional rental properties to increase your passive income. (Just be sure not to rely too much on leverage, as it can come back to bite you!)
  • The Small & Mighty: Downsize into a small apartment or tiny home to reduce housing expenses.
  • The Road Warrior: Ditch the traditional house concept completely and live in an RV like my friends recently did!
It's less traditional, but RV living could shave years off of your working career.

What Cheat Code(s) Did WE Activate?

The Wife and I lived with family for free for a few years while we rented out our own home (The Family Man). Some friends thought we were crazy, and it did test our sanity a bit, but it was well worth it in the end. This hack shaved YEARS off of our time to FI, allowing us to live rent-free AND pay off our (then underwater) mortgage at the same time.

Our property made for a pretty terrible rental, missing the 1% rule by a mile, but this hack was still effective (The Landlord). On most properties, this strategy should bring your cost down to zero, or even earn you a monthly profit. Figuring out how to live for free, even for just a few years, can really speed up your savings! Anything to reduce living expenses goes a long way.

Years later, we sold our rental and used the profits to pay off our primary residence. We now pay an ‘equivalent rent' of only $300 per month, covering taxes, maintenance, and insurance. Our latest cheat code? Serendipitously, a friend we met at CampFI years ago recently moved to town for work and needed a place to live. We happily rented out our guest room for a few months, making a small profit to live in our own house (The ‘Be Our Guest')!

Housing costs before cheat codes: $1600 per month.

Housing costs after cheat codes: $300 per month (we actually profit $200 per month when renting out our guest room).

Interested in-house hacking? Here are some links to get you started:

A word of caution, however. Getting into real estate can be a very effective way to house hack, but it's not always a cake-walk. I've posted here on the blog about our adventures in real estate and our house purchase fails, so I'm not here to sugar coat anything. Was it an effective cheat code? Yes. Was it a pain in the ass? Also, yes.

Transportation Hacking

DIFFICULTY: Moderate

SAVINGS POWER: 4/5

DATE JOEL UNLOCKED: December 2014

ABILITIES ACHIEVED: Reduced automobile, fuel, and related costs by over 50% while simultaneously reducing commute time

TOTAL VALUE SINCE CODE UNLOCKED: ~ $30,000.00

Most people severely underestimate what they spend on transportation. As I lamented in my post The Car Problem, the average car costs $10k per year just to own, not even counting the cost of the car itself. It's not just cars, either: if you live many miles from where you work, other public and private transportation options can be just as expensive. Most Americans pay between 20 and 35% of their take-home pay on transportation, making it second only to housing in terms of opportunity for hacking. It’s no wonder finding money to save for investing is hard!

Traffic jams cost you a lot more than time…

The Cheat Codes

  • The 5K: Move as close to where you work and play as possible. Aim for a morning commute of 3 miles or less!
  • The ‘Every Day is Leg Day': Walk or bike to work instead of driving. MMM is a big proponent of the magic life-changing habit of bicycling.
  • The Carpool: Consider carpooling with friends and family, and reducing the number of cars in your household down to one, or even zero!
  • The Uber Cool: Consider up and coming private options, such as Uber and Lyft's new monthly subscription plans that could save you money over traditional car ownership.
  • The Man With The Plan: Plan and consolidate your trips into weekly or monthly outings when possible.
  • The Home Body: Negotiate with your employer to work some (or all!) days from home, or a closer location to home. Depending on your job, this could save significant money!
  • The Smart Car: If you must buy a car, be smart and research car buying on Fiology before you buy.

What Cheat Code(s) Did WE Activate?

After the car accident, The Wife and I decided not to buy a replacement vehicle and instead became a one car household (The Carpool). Reducing down to one car eliminated the insurance, registration, and maintenance costs associated with the second car. Carpooling also helped reduce our fuel consumption as well, as at least 5 miles of our commute was in the exact same direction every day.

A few years later, we moved much closer to work, reducing our commute to less than 15 minutes and shaving even more off of our fuel and maintenance costs (The 5K). We also found significantly cheaper auto insurance, dropped collision and comprehensive coverage, and raised our deductibles to the maximum allowed. Here's how we did:

Transportation costs before cheat codes: $600 per month

Transportation costs after cheat codes: $160 per month

We discuss these cost savings in more detail in our Savings Snowball post. Transportation and fuel costs are significantly larger than most people realize. I'm convinced the assumption that middle-class households ‘deserve' two new cars in the driveway is the very thing preventing the average American from accumulating significant wealth.

If you drive a car to commute to work, take a look at the sprinkling of fuel and car-related costs on your monthly statements. Is there any other expense category with so many transactions, each so expensive? The only one that even comes close is perhaps… food.

Food Hacking

DIFFICULTY: Advanced

SAVINGS POWER: 3/5

DATE JOEL UNLOCKED: October 2015

ABILITIES ACHIEVED: Learned to cook restaurant quality meals; cut grocery budget in half, and total monthly food costs by a factor of five

TOTAL VALUE SINCE CODE UNLOCKED: ~ $35,000.00

Food is usually the third most expensive category, after housing and transportation (in our case it happened to be even more expensive than transportation, but we'll get to that in a minute).

The Cheat Codes

  • The Special: Limit eating out at restaurants and fast food to once per week, or even once per month, primarily on special occasions.
  • The Chef: Learn to cook food you actually enjoy. This took us quite a while to learn…
  • The Day of Cooking: Make Sunday a “cooking” day, and prepare lunches and dinners for the entire week. The 8-quart InstaPot has helped us with this significantly!
  • The Potluck Master: Don't use eating out as a way to curb boredom! Opt for potlucks at home with friends instead of nights out at bars and restaurants.
  • The Part-Time Vegan: Consider reducing your meat consumption. Meatless Mondays are a great way to start!
  • The Smart Foodie: Switch grocery stores to cut your food bill in half! Check out this Fiology lesson on food for even more hacks.

What Cheat Code(s) Did WE Activate?

Before our turnaround, we spent a ton of money on food- well over $1000 a month! Coffee shops, bars with friends, eating at restaurants twice a day, convenience foods from luxury supermarkets… if the game was spending money, we were winning. But, this just meant we had a TON of low hanging fruit to work with.

When we turned things around, we switched from Publix to Aldi for our grocery shopping and cut our bill literally in half (The Smart Foodie). We stopped eating out at restaurants every day, and learned to meal plan for lunches and dinners throughout the week (The Day of Cooking). We started keeping emergency pizzas in the freezer for days with low motivation, and carefully tracked our food waste to try and become more efficient.

The grocery store you choose matters!

We also started hosting weekly potlucks, brunches, and game nights with friends at our house, with our own food (The Chef), which was significantly cheaper than frequent nights out on the town (The Potluck Master). In addition, we reduced our meat consumption (The Part-Time Vegan), which was a significant win for our wallets as well as our waistlines. So, how'd we do?

Food costs before cheat codes: $1000 per month

Food costs after cheat codes: $400 per month

We discuss these cost savings in more detail in our Food Savings post.

Let me clarify something here. This process was NOT easy. Of all the habits we’ve changed over the years to become more financially fit, this was the hardest. As a couple who didn't know how to cook well, it took a significant amount of practice, patience, and teamwork. The rewards, however, speak for themselves.

Travel Hacking

DIFFICULTY: Moderate

SAVINGS POWER: 3/5

DATE JOEL UNLOCKED: March 2016

ABILITIES ACHIEVED: Reduced travel costs by more than 50%, BOGO flights, more free hotel stays than we can use

TOTAL VALUE SINCE CODE UNLOCKED: ~ $50,000.00

Of all the cheat codes on the way to FI, travel hacking gets the most coverage in the blogosphere. This is likely because many bloggers receive payment for recommending certain credit cards, but travel hacking is a legitimate way for you to save tons of cash on travel every year.

The Cheat Codes

The Giant Wallet Dude(tte): Take advantage of sign-on bonuses. Many credit card companies offer generous bonuses to get you to sign up, sometimes offering between $500 and $1000 in incentive when you meet certain sign on conditions. Most commonly, you need to spend a few thousand dollars on the card within a few months of opening the account. Depending on the type of account, rewards can be applied to airfare, transportation, hotels, parking, and more.

The BOGO Flyer: The Southwest “Companion Pass” – lets you bring a designated companion along on every flight, for free! For couples, this effectively cuts your airfare costs IN HALF, and if done correctly, you can alternate earning the pass with your spouse every two years so the pass can last essentially forever!

The Slow Ride: The concept of ‘slow travel' – where you wander the world slowly, living like a local in exciting new locales. Depending on the country, your cost of living during slow travel can be considerably cheaper than where you currently call home. Even better – often times you can rent out your home while away, potentially paying for the entire trip!

What Cheat Code(s) Did WE Activate?

Before we knew about travel hacking, our plane tickets were often purchased at full price, on a whim a few days before traveling. This is not an affordable way to travel! These past few years, The Wife and I have gradually reduced our frequency of travel, and started credit card hacking to travel smarter (The Giant Wallet Dude). We also plan trips at least a few weeks in advance to help avoid the premium that often accompanies short notice travel.

I was initially pretty skeptical about signing up for a bunch of credit cards, but I decided to get into the game slowly by adding one card every few months. The Mad FIentist actually has a travel hacking email course that does exactly this, and I get an email every few months telling me which card to get, and when. It's pretty fantastic, and reduces decision fatigue on my part. You can sign up for this email list in the 'email series' section of this post.

I've also started opening new cards a few weeks before large expenses occur, when I can predict them. A perfect example: property taxes are due every November here in Florida, and are usually a few thousand dollars. This is the ideal time to search for those outstanding sign-on bonuses! And I recently found that American Express now gives a ‘temporary line of credit' for the 1 to 2 week period where your card is in the mail, so you could theoretically use this tactic even for unexpected large expenses.

The Southwest companion pass. It's kind of a big deal…

One of the best cheat codes in this space is the Southwest Companion Pass, which gives us buy-one-get-one-free airfare for almost two entire years. And if we time it right, when my two years are up, The Wife can earn another companion pass and we can keep the process going indefinitely (The BOGO Flyer)! With just a little expense planning, you can cut your airfare expenses IN HALF. How's that for a cheat code?

Just make sure you are responsible and PAY THESE CREDIT CARD BILLS IN FULL at the end of every month. If you can't, or worry you won't be able to, skip this cheat code completely. The second you pay interest on this stuff, you lose the big boss battle to the credit card companies. GAME OVER. (You remember my rant on debt, don't you?)

So how effective were these cheat codes for us? Let's look at the savings:

Travel costs before cheat codes: $1000 per month (average)

Travel costs after cheat codes: $150 per month (average)

Because these savings are dependent on specific deals available at the time, as well as the frequency that you travel, your mileage (pun intended) may vary. We discuss these cost savings in even more detail in our Savings Snowball post, so check that out if you want to dive deeper.

Ready to give travel hacking a try? Here's everything you need to get started:

Income Hacking

DIFFICULTY: Moderate to Advanced

SAVINGS POWER: 4/5

DATE JOEL UNLOCKED: September 2014

ABILITIES ACHIEVED: An 18% raise, two free graduate degrees, a (brief) stint in the six-figure club

TOTAL VALUE SINCE CODE UNLOCKED: > $100,000.00

On this blog, I tend to focus more on lowering expenses than increasing income, and that's what this post has focused on as well. I usually tell people: if you have an annual household income above $50k, lowering your expenses is usually more effective than hustling for more income. The four big cheat codes we've discussed so far (housing, transportation, food, and travel) can theoretically cut your expenses in half in only a month or two… it would be hard to find a side hustle that can double your income in a similar amount of time.

If you have a household income on the lower end of the spectrum, however, it could certainly be worth the energy to hack the income side of the equation.

The Cheat Codes

  • The Horizontal Tango: What do you do for work? Can you shift into a parallel field that has higher earning potential? Is there a related industry you could shift into? Have you browsed the jobs section of your local newspaper, Craigslist, career fair, etc? MMM has some great tips on how to stand out compared to others when interviewing for something new.
  • The Side Hustler: Can you add a side hustle to increase your income? Preferably something you're good at and enjoy doing.
  • The Social Butterfly: Can you network with others who have careers with higher growth potential? Can you become a more essential member of your team?
  • The Hopper: Can you switch to a competing company in the same field? It's been shown that switching companies every two to four years can have a dramatic impact on salary growth (and your résumé).
  • The Smarty Pants: Could you go back to school (perhaps night school) or get a certification that could make you more valuable? If you already have a low income, continued education might be completely free thanks to need-based grants, such as the Pell grant. With the right degree or certification, you could potentially double or triple your income. Is there any way to get your current employer to pay for your continued education?
  • The Tax Ninja: One straightforward way to give yourself an effective raise is to max out all available pre-tax investment accounts, lowering your taxable income and therefore letting you keep more of your gross income
  • The Ramblin' Man: Could you move somewhere new? Geographic arbitrage, both domestic and international, can significantly improve your income. Are there lower cost of living areas you'd be willing to work? Moving to a LCOL area is a quick way to give yourself an “effective raise”, even if your salary doesn't actually increase.
  • The Money Chaser: Another variation of ‘The Rambling Man', but this time with the strategy of following the highest salary instead of the lowest cost of living. Are you willing to move somewhere new to grow your paycheck? I have a family member who was a bank teller and decided to move wherever there was a need, as long as there was a pay premium. He lived in interesting places: New Orleans, Miami, North Carolina… After a decade of this strategy, he was making six figures.

A Note on Cost of Living

I have friends and family who live in very high cost of living areas like the DC Metro Area, LA, the Bay Area of CA, and Manhattan. I understand the appeal, but the cost to live in these areas is really high! If I wanted to live in California, I'd have to work many additional years, because I just wouldn't be FI there.

This isn't necessarily a bad thing if you love your job and working a few extra years doesn't bother you. But if you're trying to reduce the number of years to FI, moving to a lower cost of living area is a GAME CHANGER. As a point of reference: I live in central Florida. My ~2000 square foot house cost ~$200k, and it's paid off. Gas here costs ~$2.40 per gallon. Eggs are about 60 cents. And there's no state income tax.

What Cheat Code(s) Did WE Activate?

Income hacking is an area The Wife and I excelled at even before our Financial 180. We both worked really hard in high school to earn scholarships for our undergraduate degrees. We also chose to attend state schools, so our scholarship money went much further. (This, combined with the fact that we are extremely lucky to have parents who pre-paid our college meant we had no student loans after graduation).

We decided to pursue degrees in software, as it is currently in extremely high demand, and the pay is competitive. After graduation, we moved to a low cost of living city within a few hours drive of family (The Ramblin' Man), and got software jobs with great benefits, including company paid graduate education. I ended up completing two graduate degrees (Industrial and Systems Engineering, and an M.B.A.), all on the company's dime (The Smarty Pants).

“The Hopper” in action. Notice the effect of my last two job hops, in gold, on my salary.

I've also hopped between companies a few times in my career, on average once every five years (The Hopper). Not only is this beneficial from an income hacking perspective (each hop netted me a ~18% raise), but it also helps build a stronger résumé and gives you fresh new experiences along the way. You can see the effect two job hops had on my salary in the figure above. And remember: if you find yourself with an offer from a competing company, negotiate!

Additionally, I've kept my eyes open for opportunities to grow my salary whenever possible. During my working career, I'd work hard and do a good job, rating myself highly at review time. I'd network, and then solve problems for people to make their lives easier, making myself a more valuable, and subsequently well paid, employee (The Social Butterfly). And I took the opportunity to max out my 401k, IRA, and HSA in order to reduce my taxable income and give myself more of my own gross income (The Tax Ninja), effectively letting Uncle Sam give me a raise.

End Credits

TOTAL YEARS WITH CHEAT CODES ENABLED: 5

AREAS UNLOCKED: HOUSING, TRANSPORTATION, FOOD, TRAVEL, INCOME

CHEATS ENABLED: The Family Man, The 'Be Our Guest', The Landlord, The 5K, The Carpool, The Man With The Plan, The Special, The Chef, The Day of Cooking, The Potluck Master, The Part-Time Vegan, The Smart Foodie, The Giant Wallet Dude, The BOGO Flyer, The Side Hustler, The Social Butterfly, The Hopper, The Smarty Pants, The Tax Ninja, The Ramblin' Man

TOTAL VALUE OF CODES SO FAR: > $500,000.00 (WITH COMPOUNDING)

Housing, Transportation, Food, Travel, and Income. These are the five heavy hitters, and with the proper cheat codes applied, they can potentially double or even triple your savings rate in one fell swoop, getting you to that magic 50% savings rate, or higher. The thought process behind every one of these cheat codes is essentially the same: How can I take something expensive that I need or want and flip it around so that I somehow MAKE money instead?

Remember that none of these are easy. They are simple, but hard. Most of these strategies will require you to sacrifice something you don't want to sacrifice. But they will help you get rid of your debt and start saving money quickly. These strategies, while hard, are very effective. These cheat codes have saved The Wife and I over half a million dollars on our journey!

Note that you don't need to leave these cheat codes enabled forever if you don't want to. Some of them can be turned on temporarily to help you get out of debt quick, or skip ahead a few levels early on in the game. For example, after five years with all the codes enabled, we started eating out at restaurants once a weekend instead of once a month, and The Wife got a second car. Don't worry – we know the codes well and can turn them back on if we ever need to.

As I said at the beginning, this is all optional! If you like your job and your work life balance, you don't have to change a thing. I recently sat down with a couple at Camp FI who felt stuck at a 40% savings rate and wanted to ‘breakthrough' to something higher. After reviewing all of these cheat codes with them, they looked at each other and realized they weren't willing to try any of them. They had a pretty sweet work-life balance already, and didn't need to raise their savings rate any higher! They left understanding that a 40% savings rate was right for them, and that they didn't need to raise it just for the sake of racing others to the finish line.

I hope these codes are helpful for those of you on your journey who do want to speed things up, however. It's taken me years to curate all the info packed into this post. If you know other major cheat codes that I've missed, let me know in the comments and I'll add them in. That way, this post becomes the go-to resource for people who say they want to “get rich quick”.

Good luck playing the game. Let me know which boss battles you get stuck at, and which of these codes have worked for you in the comments.

Adventures in Real Estate

It's been a busy month for the FI180 household! My wife had a birthday, I wrote a guest post over on the FireyMillenials blog, a mustachian friend from Warner Robins made a visit, and we got to record an episode of the ChooseFI podcast, scheduled to air later this month.

But perhaps most exciting for the wife and I, April marked the end of our decade long adventure in real estate! As you may recall from our previous post on how NOT to buy a house, we blindly purchased our first home in 2007, right before the big real estate crash. Less than a year after our purchase, our home was valued at only 40% of its mortgage balance, with a $1,614.96 monthly payment that contained exactly $0 of principal.

When we started our Financial 180, we knew we needed to cut our losses and figure out an exit strategy. Unwilling to walk away from our financial obligations, we decided to buckle down and pay off that mortgage as fast as possible, while simultaneously renting the property out and living with family to increase our pay down even further. Two years later, we were able to pay the mortgage off, but we still had a poor performing rental property on our hands.

Last week, we finally closed the book on this house from hell and sold the property. It was a wild ride, and we’ll be taking a nice break from real estate for a while.

First, Some Numbers

OK, here's the damage report:

Principal $168,990.00
Interest $102,060.00
Taxes $19,560.00
Insurance $9,960.00
HOA $17,760.00
Maintenance $5,020.00
TOTAL EXPENSES $323,350.00
Rents received $46,305.00
Sale Proceeds $129,113.00
TOTAL REVENUE $175,418.00
NET -$147,932.00

So… yeah. We didn’t do so well in our decade in the real estate market. We ended up selling the property for $40k less than we purchased it for, and we were only able to recoup about 14% of our expenses in collected rents. The property was simply a poor performing rental. While mortgaged, it was nowhere near cash flow positive. Even when fully paid off, the expenses were still more than half the revenue. With high HOA fees, low rental income, and an expensive sticker price, this property was a good lesson of what NOT to look for when choosing a rental property.

Perhaps it isn’t quite as bad as it looks on paper, however. We did live in the property the first few years, so some of those expenses would have gone to rent if we lived somewhere else. Also, it’s important to keep in mind, when we purchased this property we never considered how it would perform as a rental. Like most of our clueless friends, we assumed we would sell it a few years after buying and pocket a few thousand bucks of appreciation. And you know what they say about assumptions…

So, why did we sell at a loss? Why didn’t we continue collecting rent and wait for the property value to continue increasing? So many reasons… let’s start with our rental experience.

Lessons in Landlording

NOTE: Names have been changed to protect the innocent. And the guilty.

When we first embarked on renting out our property, we decided to go with a property manager. Our first property manager, Kate, was wonderful. She was sharp, professional, and kept great communication between my wife and I and our tenants. She helped us find our first tenant, Dave.

Dave, a middle-aged engineer with a wife and one kid, was the definition of the perfect tenant. He took good care of our property, paid on time each month, and rented for multiple years with no issue. He was easy to get a hold of by phone, and never had an issue with the occasional inspection. On the rare occasion where I’d need to enter the property, I’d give him a day's notice and everything was fine.

Ironically, Dave looked bad on paper. He had a very low credit score, because he walked away from a large mortgage after the crash. He also had pets, which worries most property owners. But in actuality, Dave was as good as it gets. After a few years of bliss, Dave had to move on though, and we got a new tenant, Steve. Unlike Dave, Steve had great paperwork. Awesome credit score, no pets or kids living with him. He even claimed to be a self-described ‘neat freak.’ We were sold.

As you might have guessed, Steve turned out to be a horrible tenant. He was perpetually ten to twenty days late with paying his rent, nearly every single month. While this worried us a bit, he always paid the late fees, so we allowed it to continue. A few months later, things got worse, and twenty days late turned into over thirty days.

A Perfect Storm

It was around this time that a perfect storm started to brew. Our favorite property manager Kate left for another broker, and our property was handed over to a different manager, Shelly. Shelly already had dozens of other properties she was managing, so she was swamped. She didn’t know our situation. No personal touch. In fact, she often got details about our property wrong and didn’t communicate well. She took our late rent problem and made it worse.

This past November, the very first time Steve was late more than 30 days, Shelly encouraged us to wait another month and see if he would pay. Possibly due to his track record of late payments, but also probably because she didn’t want the hassle of starting the formal eviction process. When December rolled around and he was two months late, Shelly told us not to evict someone right before Christmas. She played into our emotions, and so we waited.

When January came, I contacted Steve directly and made him an offer. If he left by the end of the month, I wouldn’t file a formal eviction on him; he just needed to get out so I could re-purpose the property. In the county I live in, a formal eviction means you can’t rent again in the county for five long years, so I considered this a very considerate offer.

He assured me that there was no need to worry, however. The money was coming. He even sent me a screenshot of his PayPal balance showing funds that were ‘on hold’ from eBay sales. Shelly persuaded us to give him a few more weeks (this is an example of a bad property manager). Contractually, I had to continue paying money to Shelly each month for that bad advice, regardless if rent was collected or not (this is an example of a bad management contract).

Enough Is Enough

When February came around, my patience was gone. At this point Steve was over 90 days late and over $3000 behind on rent, not even counting late fees. I tried to get in touch with him, but he had changed his phone number. I told Shelly we needed to file for the eviction. “Sorry Joel, I can’t file for the eviction until you mail me a check for $250 for the associated fees.” This was puzzling.  “Can't you take it from Steve’s security deposit?” I asked, frustrated by the situation. “No, we can’t touch that money yet.”

My property manager telling me it's OK the rent is 90 days late
My property manager telling me it's OK the rent is 90 days late

So I mailed the check and waited. Weeks went by with no news. I finally realized that the best way to get this management company to move their ass was to incentivize them. “As soon as we get this property vacated” I said, “I want to put it on the market for sale. No new tenants.”

Suddenly, things started moving. When the judge took too long to sign required paperwork, the management company visited the property to find that Steve had already abandoned it. The power was off, the water was off, and there was a fridge filled with rotting food and garbage all over the house. The smell was apparently so offensive that instead of asking me if I wanted to clean the property, Shelly decided to hire professionals to do it, at a cost of $700, without confirming with me first.

Perhaps the strangest experience for me in this adventure was the damage to the property. It was beyond bizarre. Steve stole our smoke detectors, our air vent registers in the ceiling, our fire extinguisher, and an interior bathroom door. He also removed many other doors from their hinges, and ripped up the tracking system for the closet doors. Not the biggest expenses to fix, but still, so very bizarre!

A Postmortem

In the engineering world, after a project fails, we have a meeting with all stakeholders involved to understand what went wrong, and what we would do differently in the future. We call this lessons learned meeting a postmortem. For those of you in the real estate game, here's our lessons learned.

I should have seen the warning signs. Unlike our good tenant Dave, Steve never wanted us to enter the property. It would usually take 5 minutes of loud knocking and repeated phone calls just to get him to answer the door, and when he answered, he would only open it a crack so I couldn’t see inside. When I came over to put up hurricane shutters before the big storm we had last year, he wouldn’t let me inside, and raced to the back of the house to close the blinds before allowing me access to the back patio. When I told him we’d be back the next week to take the shutters down, he assured us he could handle the task himself. Five months later, when he abandoned the property, the shutters were still up.

Sure, this was partly our own fault. The signs were all there. Why weren’t we inspecting the property more frequently? Well for one thing, the house is a forty minute drive south of where we currently live, so trekking out there every weekend to spy on our tenant was not high on our to-do list. Also, we hired a property manager to take care of this for us, so we could relax a little bit on the weekends after spending fifty hours working jobs we don’t enjoy. The management company held quarterly inspections (or at least, they said they did), and never notified us of anything unusual.

Additionally, things went so smoothly with our previous property manager Kate that we didn’t even realize all the things she did on our behalf. Kate didn’t take crap from anyone. She solved small problems all the time, most of which we didn’t find out about until after they were already resolved. She felt like a team member who was looking out for our property for us. This is how a good property manager should feel. Otherwise, why else would you give up 10% of your revenue?

Our new property manager Shelly didn’t do much of anything, other than call us to tell us that while we wouldn’t be getting a rent check each month, we still owed the management company money. She made no attempt to familiarize herself with our property or our situation. For example, I told her numerous times that Steve had only been renting from us for a few months, and yet she’d often say “give him a few more weeks on the rent… he’s been a good tenant with you guys for years, hasn't he?”

Summary

Real estate has been an adventure for us. I haven’t even told you about the crazy time we had selling the property. The insane buyer who wanted us to hire a licensed contractor to change some light bulbs, and show her an invoice. The drama with the property appraisal coming in thousands of dollars less than our contract price, and the buyer wanting to walk. The crazy closing costs that consumed over 11% of our sales price, which itself was only 80% of our purchase price over a decade ago. While a lot of people made good money in real estate over the past decade, my wife and I were not among them.

Enough complaining though. These are sunk costs. The past is behind us, and we’re finally done with that property. No more late night phone calls. No more giant HOA payments. No more pleading with tenants for rent payments. Much of our misfortune was due to bad timing, impatience, and lack of due diligence on our part. I still think we learned a lot during the process, and the lessons are probably worth the money we paid in on our real estate ‘investment.’ Besides, with a savings rate of over 80%, we're able to afford a six digit mistake like this and still make it through ok.

So the big question… why did we sell at a loss? If we had waited and rented for a few more years, couldn’t we have recouped our losses? Well, possibly. But we already waited over a decade. There are no guarantees the property would go back up to its bubble heights, either. There’s an equal chance the values will drop again in the next few years. Plus, we were tired of late rent payments. We were tired of being under contract with our crappy property management company. We were tired of all the work that went into fixing up and cleaning the property between tenants.

In the years since finding the FI community, we’ve embraced the passive “Simple Path” to wealth that Jim Collins describes in his stock series and book. These are genuinely passive ways to build wealth. While real estate is an equally valid (and potentially even faster) way to build wealth, it is not truly passive. Even when we had our excellent property manager Kate, it was still work. And we don’t want more work at this point in our lives. We already sit in cubicles 50+ hours a week at jobs we don’t enjoy. Time is the thing we are short on; not money, and certainly not work. So for right now, I am happy to report that we are taking a nice long break from real estate.

In FI, we'll likely have plenty of time for DIY projects, and will likely jump back into the real estate game. The wife enjoys it more than I do, spending hours browsing Zillow and scheming about various housing projects. With time and planning, I could see us buying four or five small rentals in FI, and diversifying our income stream. With all of our lessons learned, I could see us successfully skipping the property manager and doing everything ourselves. But for now, we want to keep things truly passive, and unlike Steve, Vanguard has never been late on a dividend payment.

There’s one more thing we haven’t discussed though. One other big reason we wanted to cash out now, even at a loss. The truth is, we have plans for those home sale proceeds… On the next Financial 180!

The Dark Side of Interest

Money may not grow on trees, but it does still grow, completely passively. It's the nature of compound interest that your money is always making you more money, and that new money in turn is making its own money, and so on. You may not notice it on small scales, but it is always there, working in the background.

Suppose you had one million dollars to invest in a low-cost index fund earning an average annual return of 7%. If you let it grow, you’ll have 2 million dollars in ten years. That’s right- a brand new one million dollars was created, completely passively. You didn’t do anything- you just left the money alone for 10 years! But it gets better: while it took ten years for your money to grow the first million dollars, it only takes five more years to grow the next million. And three years to grow the million after that. That’s the exponential nature of compound interest, as we first explored in our post on the early retirement equation.

Another example: A single dollar is worth more than you think. Almost everyone in first world countries can scrounge up a single dollar per day. My wife’s grandmother is 96 years young. If she started a dollar a day habit at age 16 and invested in low-cost index funds, she’d have $3 million dollars right now, and could use it to leave quite a legacy. Or, she could have started drawing on and enjoying her first million over thirteen years ago. It’s never too early to start investing. Yesterday is best, today is a close second. This is the power of compound interest.

The Force Is Strong

I like to think of this compounding as a force that pushes money away from zero. The more money you have, the more interest it earns, which in turn grows additional interest. Over time, the force becomes so strong that even large unexpected expenses and market downturns aren’t enough to bring your balance to zero.

This is great if you’re an investor, but it's a nightmare if you're in debt. Remember that interest is a two-way street: while investors earn interest, debtors pay interest. That same force that keeps the investor afloat is accelerating debt holders in the opposite direction. Instead of your dollars working FOR you and earning you more money, each dollar paid towards interest is working AGAINST you. This makes less money available for saving and increases the likelihood you’ll take on more debt, pushing you exponentially further in the negative direction!

Debt (or, the absence of debt) can therefore be thought of as the force behind the common saying that the “rich stay rich while the poor stay poor.” Debt is the barrier that makes it so difficult to switch sides and go from paying interest to earning it. Let’s look at a visualization:

Compounding of $2500 per month invested (blue) vs. debt (red) at a 7% annual rate
Compounding of $2500 per month invested (blue) vs. debt (red) at a 7% annual rate

Here, I’ve taken the annuity equation, assuming a 7% annual market return, and plotted it in blue, to show an investor's gains over time. I took the same equation and flipped it over the X/Y axis and plotted it in red, to show a debtor’s losses over time. The X axis shows time in years, the Y axis shows dollars. Compound debt is no joke: It’s the entire business model behind credit cards!

As you can see, when you're on the debt side, everything is backwards. Every rule of thumb we know about FI runs in reverse. When you hold debt, not only are you literally making someone else rich, but it’s as if time is moving BACKWARDS for your money! That’s why I plotted the years as negative on the red side. This is a visualization of the opportunity cost of your money: the time you are losing by not investing, or equivalently, the time you’d need to invest to get out of the debt hole.

To me, this red part of the curve is like the Upside Down dimension in ‘Stranger Things’. It’s a bizarro land where everything is eerily familiar, but opposite. Even our beloved 4% rule has an alter ego here: most banks use 4% to calculate the ‘minimum required payment’ option on your credit card statement. It's essentially the dark side of the FI force. Let’s use an example to see just how dangerous this can be:

Suppose I have $30k of credit card debt, at 20% interest, compounded daily. If I only make the minimum payments required, it will take 18 years and over $50k to pay off this $30k debt. And this makes the huge assumption that we aren’t adding any more debt on for those 18 years. But that’s a horrible assumption, as all credit card companies know: the more you pay in interest, the less cash flow you have available, and the more likely you’ll need to take on new debt to fund future purchases!

It’s quite a vicious cycle, which is why many of us stay on the red side of the curve our entire lives. According to statistics from the federal reserve, the average American household has over $16k of credit card debt! How did this become the norm?! How did we all, collectively, move to the dark side?

If you take a look at what percentage of the average American budget goes toward interest, you might be shocked. Let’s do an example following two fictional young couples and see how their debt choices influence their wealth over time.

Couple 1: Jill & Ben

Jill & Ben are in their early twenties and recently graduated from college. Jill worked hard in high school and received good grades, earning a partial college scholarship. She took on part-time work to help fund the remainder of her expenses. Jill shared an apartment with three other roommates to keep her expenses low. She was able to graduate school without any student loan debt. Her partner Ben also avoided student loan debt, in his case by filling out the FAFSA and qualifying for the need based Pell grant.

Jill always avoided credit card debt. She pays her bills off at the end of each month, and avoids buying anything she can’t immediately afford. Ben had a few hundred dollars of revolving credit card debt, which Jill encouraged him pay off before they built an emergency fund together.

Jill didn’t need a car on campus, saving her extra cash during her part-time employment. She purchased a used Honda Fit for $3800 cash following  graduation. Ben lives close enough to bicycle to work, so they are a one car household.

Jill and Ben both work and play in the city, so they decided to rent a cozy two bedroom apartment together downtown. The rent is a bit high, so they decide to find roommates to keep costs reasonable. Because they have no monthly debt, they have plenty of free cash flow to save each month. They want to save for a few years and buy a small home with a 50% down payment.

In the year following graduation, Jill and Ben pay $0 per month towards interest, and after finding roommates, $700 per month towards rent. They have enough slack in their budget to save almost 50% of their income for the future, setting them up for a working career of about a decade.

Couple 2: Jack & Kim

Jack & Kim are also in their early twenties and recently graduated from college. Jack didn’t apply for any scholarships in high school. He tried filling out the FAFSA, but got frustrated and gave up after a few hours of paperwork. He didn’t want to work: he was convinced that even a part-time job would affect his grades. Jack rented a luxurious studio apartment with no roommates, because he hated the thought of sharing a bathroom.

Jack relied on student loans to fund his college years, and graduated college with $45k of debt. He jokes that at least he did better than Kim, who graduated with $65k in student loans. Together the couple owes a $110k in student debt at 5% interest, which they'll repay over 15 years.

Jack and Kim also accumulated $20k in credit card debt over the years. It started in college, and crept up gradually. Cash flow always seemed tight, particularly with their large student loan payments, so they needed to put large purchases on credit more often than not. Their credit card interest rate is 18.9%, compounding daily, which is relatively average in the industry. Paying the minimum, it will take over 16 years to pay this debt off, assuming they don’t charge any new expenses to credit, of course.

Jack's first purchase out of college was a new Ford F-150 Super Duty for $33k with dealer financing. Sharing the passion for luxury, Kim purchased a new Lexus IS Turbo for $37k with dealer financing. Both agreed to 5% interest paid back over 60 months. Jack feels strongly that his truck is part of his identity, and argues “what good is money if you can’t spend it on things you enjoy?”

After graduation, Jack and Kim bought a new house in the suburbs, about 25 miles away from the downtown area where they work. With almost no money down, they took out a $350k home loan at 5% interest, fixed for 30 years. The couple believes strongly that “renting is throwing away your money”. They pat themselves on the back for only borrowing $350k, even though the bank approved them for a loan as high as $500k.

Let's figure out Jack and Kim's consolidated monthly interest payments using this nifty debt calculator. It lets me enter in detailed credit card, auto, mortgage, and student loan debt, and rolls it up into one consolidated view:

Consolidated payment schedule for all of Jack and Kim's debts
Consolidated payment schedule for all of Jack and Kim's debts

As seen above, in their first year following graduation, Jack and Kim start off with over $2,500 per month in total interest payments, exceeding the principal on their debt. While they both enjoy good salaries, they have no slack to save any money. Jack even stops the 2% 401(k) contribution his company signed him up for by default. He needs every dime he earns. Times are tough, and life is expensive. Jack and Kim end up needing to put more and more of their purchases on revolving credit. If they stay on their current path, they will still be in debt 30 years down the road.

Analysis

OK, I know, my example couples are a bit contrived. I intentionally paired together two spenders and put them head to head against two savers to show the stark contrast between the two. And the debt carried by Jack and Kim is above the national average. But I know there are plenty of people in these shoes, who may not understand the long-term consequences of the decisions they make when they're young.

At their worst, Jack & Kim were spending almost $2500 per month on interest. That's more than my entire FI budget, just on interest! And interest is intangible… it's money you spend to stall paying more money. It's robbing Peter to pay Paul. You can see how this use of debt can quickly trap you in the red for life. Add in the principal, and the couple is paying almost $5k per month towards loan payments. Somewhat surprisingly, I found that only about a third of this debt is mortgage related.

Total debt for Jack and Kim... 'more than 30 years' is a long time
Total debt for Jack and Kim… ‘more than 30 years' is a long time

Though he may not know it, Jack is spending 40% of his budget on interest. I’d wager most folks with credit card debt, auto loans, mortgages, and student loans are in a similar boat, with a very large portion of their take home pay going towards interest every month. If this is the norm, it suddenly makes sense when people say they can’t save any money. How can you save when all your extra money goes to interest? I understand why so many people think I'm eating dog food when I tell them I live comfortably on less than $30k a year!

What’s the opportunity cost here? If Jack and Kim were investing their $2500 per month in low-cost index funds, they'd have $3 Million in 30 years. Or, they could reach FI long before that: with a 40% savings rate they'd be free after a working career of only two decades.

Instead, in 30 years, Jack and Kim will still be in the rat race, wondering why they can’t seem to get ahead. They'll still have their overpriced pre-assembled collection of construction materials. They'll still have auto loans, using up numerous new cars over the years with their long daily commutes. If their attitude towards money doesn't change, they'll still have as much debt as they did 30 years prior, if not more. Contrast this with Jill and Ben, who will be financially independent by the time they reach their 40s.

The Cost of Impatience

This story is all about the cost of impatience. Unlike Jill and Ben, Jack & Kim purchased a house before they saved any money. They purchased shiny new cars they couldn’t afford. They used credit cards to buy things they didn’t have the cash for. I’m not trying to pick on Jack. Ten years ago, before my financial 180, I was pretty much him! Jack had more options than he realized, though. He could have waited and saved up. He could have lived with parents or roommates for a few years. Kim could have driven a used car. It only takes a few years to get onto the blue side of the curve and get your snowball moving in the right direction.

But we live in America, where you can have almost anything you want, as soon as you want it, whether you can afford it or not! Jack & Kim's decisions weren’t necessarily bad, it’s just that they had huge associated costs they may not have understood when they made them.

I wish my first mortgage had this warning...
I wish my first mortgage had this warning…

Instead of financial warnings, it’s like we’re still living in the old days where marketing departments advertised cigarettes to children on the Flintstones. Debt is cool! All your friends are doing it and living large! Convenient payday loan offices are popping up at every corner across the nation! At least interest rates are relatively low right now, historically speaking. The examples I give in this article will only get worse in the future as interest rates rise.

Summary

Debt can still be a powerful tool for businesses to purchase assets with a reasonable payback period, like factory tools and other infrastructure. Know what isn’t an asset? Luxury cars, exotic vacations, and weddings. Televisions and fancy over-priced houses. When you use debt to buy things you can't really afford, you have a full-blown debt emergency!

Hey Jack & Kim- it’s not too late! If you want out of the rat race and in on the good life, put your expensive house on the market ASAP. Downsize to something small close to work. Sell the cars and share a used Honda. Start paying your loans down like crazy- throw all your newly liberated dollars at them. Learn to cook. Take control of your monthly bills and shopping expenses. Then, when the debt fire is out, come on over to the blue side of the graph. Figure out how many years you want to work, set up an automatic savings plan and relax. Congratulations are in order- you just cut your working career in half.

I do understand that some of you really are just scraping by. You're down on your luck, have family issues, and might be earning close to minimum wage. But remember a key point here: if you don’t have enough money for savings in your budget, you don’t have enough money for interest, either! Get rid of the stigma of  living below your means, driving older used cars, or living with parents or roommates for a few years. Be patient and save for purchases that actually make you happy. These are not the traits of the poor.

These are the habits of future millionaires.

 

Extra Credit!

Try it out for yourself: plug in all of your debt into this calculator. Include your mortgages, cars, loans, credit cards, etc., and calculate what your total monthly interest payment is. Then divide this by your total monthly expenses and multiply by 100 to see it as a percentage of your budget. Does the percentage surprise you? Let me know in the comments!