Beginners guide to Financial independence
2019 was the year I began to plan for my future. I will explain my experiments and what I’ve learned from each way to save and grow money. I will also link to my short list of the excellent blogs and podcasts to follow to get up to speed quickly.
“F.I.” or “F.I.R.E.” movements (Financial Independence Retire Early) is a method and lifestyle adjustment so that you can retire in as few as 10 years. If you’re clever, maybe sooner, or if you only do some of these things more than 10 years but less than the typical 30 years or more of working. A young 28 year old coworker and fast friend told me he was on track to retire at 35 years old. I was 37 at the time. I jumped in and learned everything I could in a short amount of time and began the process to set up my life around these ideas. Regardless of whether I hit the 10 year mark or not it’s getting me on track to be less of a work slave and also actually be able to retire or simply do more of what I love some day.
The premise is simple: Save around 70% of your income, invest anything greater than next months rent, get rid of as many expenses as possible, reduce consumption, add other forms of income, ideally something you enjoy. Some of the prominent bloggers such as Mr. Money Mustache suggest a holistic approach so as to maximize happiness and health in the present while also cutting back on your personal impact on the environment such as keeping a reliable and efficient car for as long as possible, living near your work and riding a bicycle to work.
#1 The easiest way to invest.
(my 2019 results: 7%)
This was my lowest return option yielding only 6%-7% this year. In fact this is shamefully low but I will continue to use the Acorns App - The best feature they offer is called, “Roundups.” You link your credit cards and bank account. Every time you use any linked card they round up the the nearest dollar and invest it into a set of diversified ETFs from your bank. They also offer triple round up and 10x round up. I started with $1 round-up until I got comfortable with the app and the investments they offer. It costs $1 per month and you can get all of your money out at any time. It’s very easy to work with and I consider it a beginners way to invest. If you’re doing nothing start here. Later you can learn a bit more and try some other things.
Here's the Acorns Diversification:
I chose aggressive since I'm planning to do this for the long term.
Here's what "Roundups" look like:
Acorns has some great tools for wrapping your head around what you need to do to be able to do to meet your goals. A common goal in the FIRE world is 1 million to 1.4 million. Research the 4% rule for more info. If you’d like to get $5.00 (and also give me $5.00) to start out with you can use my invite link:
Acorns also offers other services for a total of $2 and $3 per month but I opted to try out some other ways in 2019. Read on to learn more…
#2 The simplest way to invest.
(my 2019 results: 10%)
Mr Money Mustache (MMM) is the guru in this F.I.R.E. space. My young friend was inspired by MMM. His basic approach is to put all of your money into a single low cost index fund. An index fund simply tracks a group of stocks. He suggests one that’s called Vanguard Total Stock market “VTI” and “VTSAX.”
This is how and Index works: Each company in the USA which is traded publicly is represented in this ETF (Electronically Traded Fund) approximately to their proportion of the market. If Microsoft represents 10% of the USA market then 10% of VTI and VTSAX are 10% Microsoft stocks. It’s simple, diversified and gains about 10% each year. It also happens to be one of the lowest fee funds in the world. 0.03% ($0.30 per $1000 invested). It was the lowest in the world until recently.
Vanguard made their name and reputation following John C. Bogle's method of smart low-fee index funds. It’s still a solid choice and continues to rise as the economy does well. For about 100 years this kind of investment would still track 10% rise even through the great depression if you simply left it there invested and didn’t sell low like so many did. At that point there was a very short stock market history. Now we have over 100 years of consistent data to show that it’s pretty stable. All companies are fighting to grow. You’re investing in the United States in a sense.
Acorns invests in five different ETFs to mitigate risk including VTI. The yield is lower but less risky even with aggressive setting on.
In 2019 there was big shift in this low fee ETF fund space. There are now a number of funds that copied Vanguard and created a total stock market EFT that has $0.00 and 0% fees. The most ambitious one was Charles Schwab. They also just bought Ameritrade. Big changes there. It’s probably a good idea to research which is best for you. Fee free sounds pretty great but they have no track record for the total stock market copy they've created. Based on their reputation and allocation it will likely do just as well and track the same. Vanguard has decades of records with low cost ETFs. Read some articles from Mr. Money Mustache to wrap your head fully around this approach to investing. It's simple. Just put all of your money into this one fund and expect 10% or so gains on average.
#3 The stupidest way to invest
(my 2019 results: 1%)
I tried to do what everyone I read said you shouldn’t try. I bought individual stocks. I used an app called, “Robinhood.” It’s a great way to understand the market and how it works, follow trends, keep track intimately of what certain companies are doing. There is a lot of money to be made this way but also a lot to lose. The beauty of an index ETF is it’s already diversified. I tried investing in companies I think are great and have a great potential for the future such as Tesla. I bought a couple shares and it immediately sank. I lost about 50% for those two shares over a couple months. It aggravated me beyond my comfort zone. The FEC went on the offensive to take the company down because of the CEO’s tweets. There was a lot of drama that had nothing to do with running a company but it really affected stock price. That was a good lesson for me. It actually affected the stock price a lot more than a pretty accurate tweet they were litigating about. They were litigating that tweeting was done to manipulate the stock price ironically...but I digress.
Public perception plays a huge role in the day to day trading of a company. It feels like an absurd game. It's not good to pay attention to daily activity. If you invest in individual stocks only choose stocks that you believe will do well for decades not just months or years. This is a good reason to simply go with an index ETF like VTI. Set it and forget it. Don't let emotions play a role in your future prospects.
Eventually the Tesla stocks did rise and when they finally got to about 20% above my initial cost (double what the VTI index does per year) I sold them only to have the stock skyrocket to double my initial investment (100%) which of course also aggravated me. I invested in about 25 different stocks in 2019 with a decent amount of research for each one. About half tanked losing about half of my investment and the other half have continued to rise which left me with an over all 1% gain over a year. I have sold some stocks that rose slowly, matched VTI or did nothing in a year. Now I’m left with a bunch of dogs that continue to fall and a few tech stock which have broken records continuously all year. I believe most of the dogs will rise again in 2020 and some in 2021. I’ll hang onto them to see what happens. I’m slowly selling off the stocks and putting that money into something more diversified like VTI and Acorns EFTs and funds.
Using Robinhood is a great way to learn by putting some of your own money in the game and on the line. I will do less and less of it but consider putting only a small portion of your available cash into this app or a similar one for educational purposes. It’s fee free which is why I suggest trying it. Also if you use this link we both get some free random stock. So far I’ve gotten a few free shares this way which is a nice free gift for both of us.
Robinhood is launching something called "Fractional Shares." It's similar in a way to Acorns "Roundups." Instead of spending $1200+ for a single Google share. You could put $10.00 into Google. That's an interesting option worth following.
#4 Micro-finance - Micro-lending - High returns
(my 2019 results: 14.8%)
This is one that has grown on me. The premise is simple. Many people have credit card debt with high interest rates around 35%. They want to pay this down and reduce the fee so they turn to this bank called, “Lending Club” to get a lone for between 6% and 26% depending on their credit rating and history. 26% is a lot better than 35%. This is risky because I’m lending to this person money who I don’t know. I’m barely comfortable lending a friend money.
The way to get around this is to lend small amounts to many people to spread out the risk. They suggest $25 loans with a starting investment of 200 “notes” as they call them. That’s $5000 to start. I started with 100 notes at $2500 and weekly bought more until I hit 200. Since that kept working and money kept coming in each month as profit I kept it going until now I have 500 notes. 437 of those I paid for with my money. 63 of those were free, bought with interest made on the original principle. If I had taken that as cash I would have made a profit of $1575.00. Instead I will make 14.8% on that cash for another few years resulting in another $700 for doing nothing.
They grade the notes as ”A, B, C, D.” I read this great Harvard thesis investing with Lending Club. They suggested that the risks of A and B are nearly identical so there is no benefit in lending with a low % return with A grade notes with only 6% - 9% returns. B notes range from 10% to 13%. C range from 14% to 18% and D range from 18 to 26%. They suggested that you could simply choose all B grade notes and never look at it again as they are low risk and decent return. I initially did that but I don’t recommend it. There’s a smarter way to do it.
I then read some articles to vet each individual note by a few key criteria. After my initial 100 B grade notes I chose a new strategy. So far following this method I have only had one note default and charge off (it was one of the original B grade notes) out of now 500 notes. 21 notes have been fully paid off and I have reinvested those returns and all interest earned as it tallied in the app. I have consistency gotten 14.8% returns over the year with my method of vetting each note. The app charges 1%. I’m really making 16% but they take 1% off the top. It’s simple and I do it once per week and I will continue to do it. It takes about 10 minutes once per week to select and buy 10 notes.
My allocation is about 40% B grade notes and 60% C and D grade notes.
4 key things not to compromise on:
- DTI (Debt To Income) ratio, 30% or less
Some suggest not to buy a $25 note if DTI is over 20% and some say none over 30%.I have gone with none over 30% with success so far.
- Don’t take a note if they have any history of past delinquencies on a loan
I agree and never take notes with any past record of delinquencies.
- Some suggest a low percent of Revolving Line Utilization. (% of available credit spent)
I think this only matters if the amount is high and income is low.
I have read a stat that people are 7 times more likely to repay a load if this percentage is below 50%. I have no proof of this statistic but I look at these numbers and decide for each note.
Sometimes it’s near 100% but the note I’m helping fund is for the same amount. They are trying to pay it all down with lending club. So then I think it’s safe.
I think this doesn’t matter. People are trying to figure out their finances. It’s common and normal.
- I prefer that someones “Monthly Payment” is 10%-20% of their listed “Ind. Gross Income.”
For example: their income is $5000/month and monthly payment is $500 to $1000.
Those are the criteria to look at. It doesn’t matter how much the total note is for or the duration (36-60 months). You’ll get paid each month with a portion of your principal and interest. Give it a try. I think it’s solid and still tied to the big credit bureaus. My only concern is what happens during a recession. There is little data for this because the economy has been growing and bull since this was invented. I bet more people would default so maybe your +14.8% would drop to +6% or so while the market dips to -3% or -5%. It may prove to be a good way to diversify for your future. It also may prove very resilient to market fluctuations as more people will be trying to consolidate debt as the economy tightens and shrinks. Only time will tell. Until then you can get $14.8% following the above method.
That’s what I’ve learned. Give something a try even if it’s just Acorns.
Here's my short list as a place to start to get up to speed. Listen to the Mad Fientist and read Mr. Money Mustache. There are many more. They will introduce to you them :)
Financial Independence Podcast
Mr. Money Mustache