260K saved and officially an Average Accumulator of Wealth

As of today, my first net worth goal has been achieved. $260K saved. The breakout looks like the following:

41% – Taxable Account

37% – Thrift Savings Plan (Government 401k)

22% – Roth IRA

According to the Millionaire Next Door, I am officially an Average Accumulator of Wealth. In the book, they give you an equation to determine where you net worth “should” be. The equation is:

(Age * Pre-tax Income) / 10

Plugging my own numbers in, this means that I should have (31 * $85,000) / 10 = $263,500. An Under Accumulator of Wealth (UAW) has less than the number produced by this equation whereas a Prodigious Accumulator of Wealth (PAW) has twice this amount. Critics of this equation state that it is biased against young people who cannot even hope to come close to achieving this kind of net worth early in their lives. For example, a 23 year old just graduating college and making $60,000/year should already have (23 * $60,000) / 10 = $138,000. While this is true, implementing good savings habits early on can catch you up pretty quick. Next goal for me is $500K by 35 and $1 million by 39. Happy saving.

 

 

How to effectively track your financial goals

Personal finance is a lot like working out. In order to see results, you need to be consistent. Also, just like physical fitness, it is important to have an idea of where you are and where you want to go. Having a long-term financial goal on a simple spreadsheet can help motivate you and provide a snapshot, year-to-year, of whether or not you are on track.

In order to show how this works in real life, I’ve shown an example of the tracker that I am currently using to map my goal of being a millionaire before the age of 40. If you have a hard time seeing it, simply click on the image to get a larger view. It only takes a few minutes to set up in Excel and is an extremely valuable personal financial tool. As you can see, my tracker is broken down into goals (highlighted in green) and my actual investment values (highlighted in yellow). On the right side, my savings breakdown shows the three accounts that I regularly put money in (Thrift Savings Plan (401K), Roth IRA, and my taxable account).  Once you’ve decided what you can realistically save in these accounts, the value(s) can be linked to the contribution values shown in Column B. In this example, I plan on increasing my contribution by approximately 3% each year, although if I get a promotion I can increase the amount by more (assuming that my standard of living remains the same). We also have to make an assumption on what the stock market will return in the coming years. Warren Buffet has stated that he expects the market to return approximately 7% in the long run. So each year’s goal value is based on (previous year’s balance * 1.07) + current year contribution.

The reason I have my net worth broken down into total net worth and taxable account is because the money in my TSP and Roth IRA won’t be touched until I’m much older. Since I plan on retiring in my 40s, this only leaves me with access to my taxable account until I’m 59.5. Although there are ways of getting money out of these accounts without incurring a penalty, it is best to leave your money in there as long as possible to let it grow. It is always a good idea to deplete the taxable account before touching your tax deferred accounts.

Once you have all the values plugged in, you can play with the amounts and see how additional contributions will affect your overall net worth. If you also have an understanding of your expenses, you can pinpoint the exact point in which you will have achieved financial independence if you assume a 3-4% safe withdrawal rate. The good thing about this tracker is that it will remind you of what you are saving for month-to-month, year-to-year. Once you have determined what you need to achieve financial independence, you only need to input actual contribution amounts and values at the end of each year and compare it to your goals. If you come out behind due to a weak stock market year or haven’t hit your savings goals for one reason or another, you can adjust the calculations to reflect how much more you need to save in order to get back on schedule. For a copy of the spreadsheet and calculations, you can download the Excel file in the link below.

Financial Goals

 

Get more from your travels by DOING

As my trip to Portugal comes to an end, I have had some revelations regarding how I have been traveling. I am disappointed to say that I have not been true to my nature and have resolved to make some changes in order to make my trips more fulfilling.

1. I don’t take any pleasure in going to different countries to see things. If you visit Sydney, you will probably go to see the Opera House. If you go to Beijing, you will probably make a stop at the Forbidden City. In Portugal, there is no lack of museums and cathedrals to check out. So you end up going to these places, having a look around, and snap a few photos in front of them. Have you really experienced anything unique or amazing? You’re just another tourist in a foreign country checking out the same structures in the city everyone else has. Do you really want to pay thousands of dollars to do that?

2. I’ve lost interest partying in other countries. I enjoy drinking and partying as much as the next guy, but I’ve come to realize that partying in other countries isn’t really all that much better than partying back at home. Sure, the people and environment are different, but the bars and clubs you go to are generally the same wherever you go. Feeling like shit and not wanting to do anything the next day doesn’t help either.

So if you don’t go to a country to see things or party, then what’s left? For me the answer is going somewhere to DO something. Doing somthing, by its nature, suggests that you are undertaking something physical in nature. When I think back to my most memorable trip thus far, the one moment that instantly springs to mind is hiking into the volcanic craters of the Big Island in Hawaii. The crater was one of the most peaceful, serene environments I’ve ever experienced in my life. At the end of the hike, I will never forget approaching a second, massive crater within the crater I was already in. These are the moments that make my travels truly an experience to remember. Whether its hiking, rock climbing, or another activity I am passionate about, I believe that making my future trips revolve around that particular activity is the best way to truly get the full experience out of my travels. I discovered a site called ClimbHotRock.com that makes 8 month expeditions around the world simply rock climbing in those locations. Although this may seem like a narrow focus, if this is an activity that you love doing, what better way of experiencing the country is there? It would certainly be more memorable than staying in the city and staring at buildings.

So how about I put my money where my mouth is? I’m going big on my next trip. In December, I will be flying to Nepal where I will be doing a 19-day expedition to Mount Everest base camp. Time to be true to myself and experience life in a way that fulfills me.

 

 

Why losing $28K in the stock market doesn’t phase me

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”

-Warren Buffett

This month, my net worth decreased by approximately $28K. There are those who might believe that this is cause for concern. However, a smart investor is not swayed by the short-term ups and downs of the market. He understands that the nature of the stock market is volatile and that in the long run, there is still no better vehicle for building your net worth. 

So, how should you react to the current market crisis? I’ll tell you what you shouldn’t do. You shouldn’t be like everyone else and withdraw all your money or stop investing. In fact, you should be happy that the stock market is on sale and that shares are cheaper than before. To sell or stop buying after a market crash is to violate the principle of buy low, sell high. Instead you end up selling low and by the time you get back in the stock market, you will most likely have missed a fleeting window of opportunity to recoup your money.   I believe that you should take the following actions:

1) Continue to invest as if nothing happened.

2) Continue to live your life.

Don’t worry about what the market is doing right now. You’re investing for the long term.

 

How I picture retirement

In the book, The Art of Non-Conformity, Chris Guillebeau talks about writing out your idealized, perfect day and taking the steps necessary to achieve it. For me, the perfect day looks a little something like this:

I wake up naturally in the morning without the aid of an alarm clock.  I prepare myself a cup of coffee, sit outside and enjoy the moment. In silence, I visualize how the rest of my day will look like.  I will have a few things that I want to accomplish, but will not pack my schedule with too many competing priorities. I will have a hobby that peaks my interest at the moment and will spend a few hours working on it. If I discover a new hobby that I want to try, I will. I might also spend some time volunteering or on a freelancing project to earn a little side cash. Part of the day will be spent reading and doing some sort of physical activity whether it is hiking a new trail, taking a leisurely stroll, or doing a short, high-intensity workout. In the evening, I sit around with a few friends or acquaintances conversing through the night.  When I picture this perfect day, a few recurring themes come to light.

1) My time is finally my own. I set the times that I want to do things and no longer work on someone else’s schedule.

2) My priorities are finally my own. I am free to discover new hobbies and have new experiences as I see fit. I am no longer constrained to engage them only on the weekends or during non-working hours.

3) My idealized vision needs to be realized sooner rather than later. 65 is too late.

In order to reach this goal, one needs to have achieved a certain level of financial independence.  Achieving this and, consequently, being able to live my perfect day is my vocation.

 

Want to become a millionaire in 20 years? Hang in there for military retirement.

The military has a pension system that can’t be beat. For those of us who hang in there for 20 years, you receive an immediate annuity upon retirement. But exactly how much would you need to have saved in order to pay yourself an equivalent retirement amount? In order to find that out, we need to determine the present value of a graduated annuity, which is what a military pension is. It grows with inflation so that your buying power isn’t eroded as time passes. To calculate the present value, a few factors have to be defined and a few assumptions have to be made.

Let’s assume that I decide to retire after 20 years and I make it to the rank of Lieutenant Colonel. According to the military retirement calculator, an O-5 retiring at 20 years in 2011 would receive $45,358 (PMT₁) before taxes. Further, let’s assume that if I retire at 44, I will live until age 90. This gives me 46 years (N) in retirement. I expect the inflation rate (g) to be approximately 3%. Finally, I would expect an equivalent lump sum to return approximately 7% per year (i) in the stock market if it was invested. Using all this information, I plug it into the following equation:

PV_GA=Pmt₁/(i-g) [1-((1+g)/(1+i))^N]

= 45,358/(.07-.03)[1-(1.03/1.07)⁴⁶]

=$937,409

As you can see, the present value is just shy of $1 million before taxes. Although only a small percentage of the military stay in for 20 years, I think this is a consideration that shouldn’t be taken lightly for obvious reasons.

 

Defining financial independence one expense at a time

True freedom comes from achieving financial independence. However, it can be hard to define what financial independence actually is. Is it some nebulous number like $1 million? How do you actually know when you’ve become financially independent? There is a simple way of determining this number and it can be done in pieces. When I finally decide to drastically cut my income in semi-retirement, what is my biggest fear? I would say that my biggest fear is drawing down my saved income too fast and ending up destitute. So, in order to at least survive, I need to be able to cover housing expenses and food. I am a big proponent of retiring outside of the US and having my dollar go further. The Philippines comes to mind. Using that as an example, I can rent a modest one bedroom apartment for approximately $400/month or $4,800/year. Assuming that I cook most of my meals, I estimate monthly food prices to be approximately $200/month or $2,400/year. Total for food and shelter = $7,200/year. What do you need to save in order to produce income of $7,200/year? Most people will tell you that 4% is a safe withdrawal rate whereas 3% is an absolutely safe withdrawal rate. According to FIRECALC , there is no period in history in which you would have depleted your savings by withdrawing 3%.  What this means is that I need between $180,000 – $240,000 saved and I have food and shelter covered for life. Obviously there are probably a few more things to consider such as health insurance, recreation, and other costs. This is just a start. You will also need to adjust your numbers accordingly depending on where you want to live. Assuming that you semi-retire instead of fully retire, even a modest income can drastically decrease the amount of money you need to save in order to achieve financial independence. Using a 3% withdrawal rate as an example, earning $500/month, or $6,000/year,  is equivalent to having saved $200,000.

Saving is difficult. However, if you view every dollar you save putting you one step closer to eliminating one expense towards retirement, it is a powerful feeling.

 

Getting Married and Having Children Doesn’t Make You an Adult

I recently read an article on WSJ.com entitled, “Where Have the Good Men Gone?” In it, the author laments the fact that today’s men seem to be stuck in an extended adolescence characterized by actors like Seth Rogen in “Knocked Up”. The men of today are less likely to achieve the milestones that characterize adulthood, such as “a high-school diploma, financial independence, marriage and children.” After I was done reading her feminist rant, I felt the need to defend our sex.

First off, let me say that I wholeheartedly agree that there is nothing positive about the man who still lives with his parents well into his 20s/30s, who watches TV all day, plays video games, and has no motivation in life. I doubt anyone would dispute that. It becomes clear that the author’s main purpose for writing the article is to berate men who have a different opinion of what becoming an adult means. To her, transitioning into this phase involves getting married and having children which will, in turn, magically transform you into a responsible grown-up. If you delay this process too long or don’t decide to follow this path, you must be Jack Black or Adam Sandler in “Billy Madison”.

In the book Work Less & Play More by Steven Catlin, the author uses the term “Tradition Acquisitions”. Tradition Acquisitions “are made by people who don’t think for themselves” and “anyone who robotically conforms to societal standards.” If your acquisition was partly or wholly due to societal pressure, you have made a tradition acquisition. This goes for buying a house, getting married, or having children. Societal norms have a big impact on how we think, whether we like it or not. I do not look down on people who made the decision to get married and/or have children. If that is what they truly want in life, more power to them. I wish them success. However, those who get married and have children simply because it’s expected of them without questioning whether they really want it or not have been duped into making a tradition acquisition. I leave you one of her absurd quotes: “Single men have never been civilization’s most responsible actors; they continue to be more troubled and less successful than men who deliberately choose to become husbands and fathers.”

I, for one, do not need marriage and children to tell me I’ve grown up. There are many successful people who live perfectly happy lives without either. Don’t let this author or anyone else ever pressure you to conform just because it’s expected of you.

 

Review of The 4-Hour Body by Tim Ferriss, Part 1: Diet

Some of you may be familiar with Tim Ferriss, author of The 4-Hour Workweek.  For those of you who aren’t, he’s quite an interesting character.  He’s constantly experimenting with life hacking techniques, or getting the maximum results with minimal effort.  That should not be confused with laziness, but achieving the desired effects without unnecessary expenditure of time and effort.  His new book , the 4-Hour Body, is an expansive 570 page book on achieving muscle gain, fat loss, rehabilitating and preventing injuries, improving sex, and a host of other topics that cannot all be covered in one blog post.  I will simply have to break my review down into a few parts.  In this post, I’ll talk about what he advocates in order to achieve the greatest amount of fat loss.

In his book, Tim promotes a diet called the Slow Carb Diet.  In essence, this is nothing new.  It is simply a variation of the Paleolithic Diet that I am a strong proponent of. The Paleolithic Diet is also known by other names such as the Primal Blueprint or the Cavemen Diet. The idea of Paleo is that our bodies are genetically conditioned to eat what our ancestors ate, a diet consisting of meats, vegetables, some fruit, and healthy fats. Specifically, Tim advocates the following rules:

1. Avoid “white” carbohydrates – No bread, rice, cereal, potatoes, pasta, tortillas, or food with breading. If you want to get technical, carbohydrates get converted to glucose by your body, which then has to produce insulin in order to get it out of your bloodstream and into your muscles and liver in the form of glycogen. Since your body can only hold a small amount of glycogen in proportion to the carbs consumed by the average American, the rest gets stored as fat.

2. Eat the same few meals over and over again -  Eerily, I talked about this in an earlier post and I swear I didn’t copy him.  He probably copied me   Anyways, this also makes sense.  In the Paradox of Choice, Barry Schwartz talks about how we are inundated by an unlimited amount of choices every day in today’s society.  Go into a typical supermarket and you have to make a decisions between dozens of brands in every imaginable category.  Limiting yourself to the same few meals not only makes your trip to the store shorter, but will also save you money and the mental energy of having to navigate this sea of possibilities.  It also makes it easier to stick with your lifestyle change (I don’t like using the word diet because it connotates a desire only to make a short-term change in your life, often for superficial reasons.)

3. Don’t drink calories – I would personally rank this one as high, if not higher than not eating grains.  In a world in which most of us are fueled by sodas and energy drinks, most people should be aware that replacing those calorie-laden drinks with water (or black coffee if you need a buzz) would dramatically improve their health.  In Tim’s Slow Carb Diet, milk and fruit juice are out as well.

4. Don’t eat fruit – Slightly different that Paleo here, which allows some fruit.  However, Tim suggests that the fructose in fruits can get converted to fat even more efficiently than carbohydrates.

One more rule, and one that most of you will love…

5. Take one day off per week – Use this “cheat day” to eat whatever the hell you want.  ANYTHING.  This can include pizza, ice cream, fries, or all the doughnuts you can stuff in your face. The idea behind this that “spiking your caloric intake in this way once per week increases fat-loss by ensuring that your metabolic rate doesn’t downshift from extended caloric restriction.” Keep in mind that making every day a cheat day doesn’t work.  Once a week.  This also helps you stay on track, in a way, because you have something to look forward to and not constantly in deprivation mode (Woe is me, I can’t eat that…). Tim suggests that you still eat a sensible breakfast high in protein and binge from lunch to dinner so that you don’t completely go off the deep end with this.

If you want the short version of this diet, it’s essentially Paleo with a cheat day. Easy. My own experiences with Paleo have been outstanding. Everyone knows I eat a shit-ton of food.  However, I still weigh 135 lbs because I also eat very clean.  As long as you eat the right things, I believe that there are no restrictions as to how much you can or should eat. So go out there, eat and be merry.

 

How reading has changed my life

About a year and a half ago, I canceled my cable subscription and gave my TV away.  I had decided that nothing that I was watching had really provided me with anything of substantial value in my life.  In fact, all those hours I had spent in front of it had only taken away time from activities I could have spent learning something or improving myself.

Watching television is kind of like eating potato chips.  You tell yourself that you are only going to watch for one hour or eat “a few” chips.  Before you know it, you’ve spent 3 hours watching TV and have killed about half the bag of chips.  With television gone, I found I had much more time to myself after work instead of feeling like there weren’t enough hours in the day.

I am now quite a voracious reader of books, both self-improvement and non-fiction.  Every book I read opens my mind to ideas I had never considered or educates me on periods of history I had little knowledge about.  For example, I am currently deployed to Afghanistan, but knew embarrassingly little about the country.  After reading Ghost Wars, the voluminous, Pulitzer Prize winning book about the CIA and our history in Afghanistan, I developed a much clearer understanding of all the events leading up to our current occupation here.  Like an addiction, each book leads me to explore other titles, which I make a note in my head to read in the future.  Although I could do better at applying more of the techniques I learn about, even if they are not implemented, they are now additional tools that can be recalled and applied to my life as necessary.  Any topic that you can imagine has been addressed by many people in great detail and opening a book is like taking someone’s life work and gaining all that knowledge in the span of a few days.  To me, this is invaluable and will continue to shape my view of health, fitness, finance, personal relationships, and life for years to come.