RPF_0007_-_Strategies_to_Achieve_Financial_Independence_at_an_Early_Age_-_an_interview_with_Brandon_the_Mad

00:00:00.000 | Welcome to the Radical Personal Finance Podcast. I'm your host, Joshua Sheets, and today I'm

00:00:07.000 | very pleased to welcome Brandon, the mad scientist, to the show. Brandon, welcome.

00:00:14.000 | Brandon Sheets Thank you very much. I'm really excited to

00:00:16.080 | be here and I'm really happy to be on this side of the interview for once. It's going

00:00:20.640 | to be nice and relaxing rather than trying to be the interviewer and worrying about asking

00:00:25.440 | questions.

00:00:26.240 | Joshua Sheets Exactly. It is definitely more nerve-wracking

00:00:30.040 | to be on the interviewer side because you're trying to produce a quality product instead

00:00:33.320 | of just simply going with the flow and sharing your story. So hopefully it'll be fun for

00:00:38.360 | you.

00:00:38.680 | Brandon Sheets Absolutely.

00:00:39.480 | Joshua Sheets For those of you who don't know, Brandon does

00:00:41.840 | record a podcast, an occasional interview podcast mainly, at least those are the episodes

00:00:47.080 | that I've heard, and he writes a blog at madscientist.com. I highly encourage you to go and check out

00:00:55.880 | his writing and his show. I've actually, Brandon, I just interviewed Paula from affordanything.com,

00:01:02.880 | and I first heard her off of your show and went and enjoyed her website because you had

00:01:09.960 | found her. So thanks for that connection there.

00:01:12.280 | Brandon Sheets Oh, that's cool. Yeah, Paula's great. I'm

00:01:13.920 | actually hopefully going to be meeting her in October and look forward to talking to

00:01:18.080 | her again, but I'll look forward to hearing that podcast because, yeah, I had a great

00:01:21.960 | time speaking with her.

00:01:23.280 | Joshua Sheets Cool. So just a little intro for people.

00:01:26.920 | Today's show, I'm hoping, Brandon has a number of good articles, and I'm going to walk through

00:01:31.120 | some of his articles, and I'm hoping that today's show winds up being fairly meaty.

00:01:36.280 | So we'll get to know him a little bit and find out a little bit about his story, but

00:01:40.840 | then we're going to walk through some of the strategies that he's using to pursue his financial

00:01:45.480 | goals. He's written some excellent articles. All those articles that we're going to reference

00:01:49.040 | will be in the show notes. I'd encourage you to go and look at some of the numbers and

00:01:52.420 | things in his writings, but it's very accessible. He's explaining some detailed concepts in

00:01:57.320 | a very accessible way, and so I just encourage people, go and read it, but don't expect today

00:02:03.400 | to be fluffy. We're going to try to give you some useful strategies that you can implement

00:02:06.680 | immediately.

00:02:07.940 | So first off, though, Brandon, sorry for a generic question, but tell us a little bit

00:02:13.040 | about yourself and a little bit about your financial journey. Where'd you start from?

00:02:16.940 | How long have you been interested in financial independence? Where are you at in your progress?

00:02:22.400 | Kind of just give us a little bit of background so we can understand who you are and where

00:02:27.080 | you're coming from.

00:02:28.080 | Sure, yeah. I'm 31 years old. I studied computer science in college, and I actually studied

00:02:38.320 | abroad in Glasgow, Scotland when I was a junior. When I was over there, I met a Scottish girl

00:02:44.560 | and came back to the States for my senior year and graduated, and then I moved to Scotland.

00:02:50.920 | So we spent about four years living over there, and then I brought her over to the States,

00:02:56.120 | and then we just got married last year. So after 10 years of being together, we just

00:03:01.880 | got married.

00:03:02.880 | Congratulations.

00:03:03.880 | Thank you. Yeah, married life's been good. We just had our one-year anniversary there

00:03:09.440 | just a little bit ago last month, so yeah, things are good with that.

00:03:16.240 | As far as when did I start my journey to financial independence, I've always been quite frugal,

00:03:25.800 | and I've always loved looking into money. Even as a kid, I couldn't wait till I had

00:03:32.920 | a portfolio to manage and have money to do things with and watch it grow. So I've never

00:03:41.360 | been a big spender. But the actual journey itself to financial

00:03:46.680 | independence probably maybe three or four years ago. I came across Early Retirement

00:03:53.640 | Extreme, which is � I just listened to your episode on his book review, which was excellent.

00:04:00.520 | I came across his blog, and it was only then that I really thought, "Whoa, that's actually

00:04:06.360 | possible." Up until that point, not spending a lot of money, I would take off six months

00:04:12.560 | at a time. In between jobs, I would quit. Obviously, moving between America and Scotland,

00:04:18.880 | that gave perfect opportunities just to go do fun things in between those times.

00:04:25.120 | So I always used my money for freedom in that sense, but it was never a focused goal to,

00:04:31.280 | "Okay, I'm going to just work really hard for this time, and then I'll have freedom

00:04:35.360 | for the rest of my life." It was always like, "Work a bit, have a bit of freedom. Work a

00:04:39.040 | bit, have a bit of freedom."

00:04:40.240 | >> Trevor: It's really interesting how a lot of times there has to be some kind of catalytic

00:04:46.640 | event like reading a story like Jacob's or reading something or hearing somebody or talking

00:04:54.680 | to somebody. This show is not designed to be the Early Retirement or Early Financial

00:05:02.400 | Independence show, but I'm enjoying some of these conversations because by realizing how

00:05:08.000 | quickly it is possible – Jacob's story is excellent. He gives a very good, detailed

00:05:14.680 | kind of defense that it is possible and you don't have to be some investment wizard

00:05:19.480 | to accomplish that goal. But by realizing what's possible, I believe that all of us

00:05:24.400 | can look at our specific goals and understand what's important to us with a much bigger

00:05:29.960 | realization of the parameters that are possible. Not all of us are going to pursue Jacob's

00:05:36.040 | lifestyle. I'm probably not going to pursue your approach, but I learn from everyone's

00:05:40.920 | approach. I think that's one of the goals I have for this podcast is to help people

00:05:46.240 | be exposed to stories and conversations with people who are doing it and seeing how they're

00:05:52.240 | doing it so that we can start with our own goals and say, "What do we want?" and

00:05:56.360 | really feel confident about setting those plans. It's neat that that was a transformative

00:06:02.840 | event in your life as far as his writings. I'm sure that would make him feel good.

00:06:06.920 | Oh, absolutely. It completely changed everything. As you said, I definitely don't plan on

00:06:14.000 | living this style of life that Jacob does, but he's shown me what's possible as far

00:06:20.920 | as just making choices that make you happy rather than just doing what everybody else

00:06:26.920 | seems to be doing. I'm sure I could have continued doing what I was doing so far as

00:06:33.920 | just working a few years and then going off and having a great time for a little while

00:06:38.640 | and then working a few more. But I definitely like the new plan of just working really hard

00:06:44.920 | and then having the rest of my life to do as I wish.

00:06:50.480 | And the working in breaks thing I think is a very valid strategy. It's actually a

00:06:55.560 | strategy that I'm more interested in than some of the other strategies. It makes sense

00:06:59.120 | to me to spend a number of years working at a project and then to spend some time working

00:07:03.640 | on a different project. Even with the more normal US-American career path, all of us

00:07:10.600 | – I guess the articles you read say that all of us are going to have multiple careers,

00:07:15.000 | multiple jobs in totally different fields. So that type of approach works well.

00:07:20.200 | But I'll give you a quick bit of insight. I don't think I'm betraying anything personal,

00:07:26.080 | but I kind of chuckled. After I reviewed Jacob's book, I reached out to him via email. I shot

00:07:31.960 | him an email and asked him for an interview. He was very kind, but he made a comment in

00:07:37.560 | his note. He said, "I don't really think much about early retirement anymore." He

00:07:45.240 | declined the interview for right now. I'm hoping in the future he'll do it. But he

00:07:48.320 | said, "At some point I may come back and start thinking about this stuff again, but

00:07:51.760 | I'm not really active in thinking about it or planning for it. So I don't think

00:07:56.760 | I'd be a good resource right now."

00:07:59.280 | I had to laugh because for many people, my belief is that by pursuing a strategy like

00:08:06.120 | his and a strategy like you're pursuing, it can set you free to kind of, instead of

00:08:10.640 | worrying about money and making all the decisions about money, then you can make decisions based

00:08:17.160 | upon what you're really interested in.

00:08:19.000 | So Jacob, my understanding from his blog is he's currently working. He's doing some

00:08:23.240 | sort of trading up in Chicago, I think. But he's doing it because it's something that

00:08:28.680 | he's interested in, not because he has to. I thought it's so interesting that once

00:08:32.520 | he's achieved financial independence at a young age, he kind of just forgets about

00:08:38.040 | it. Instead of it becoming this huge monumental thing of, "I've got a plan for this,"

00:08:41.920 | it's just simply life. I thought what a cool testament to, I would love it if many

00:08:48.360 | young people would pursue a strategy like you're pursuing. I believe that free of

00:08:53.600 | some of the financial baggage and the concerns and the money troubles that a lot of people

00:08:58.680 | face, I think we would have a far more productive society of inventors and scientists and teachers

00:09:04.480 | and people sharing and helping society grow because they're in a position to pursue

00:09:09.760 | things that they're really interested in and passionate about instead of just pursuing

00:09:13.160 | things to earn the money that they need for this week.

00:09:15.640 | Oh, absolutely. Yeah, the fact that Jacob's gone back to work is just, yeah, he's doing

00:09:21.240 | exactly what he wants to do. I know he really hates that he called his blog, Early Retirement

00:09:26.240 | Extreme because the retirement word has so much baggage associated with it, which is

00:09:31.720 | why I definitely try to save financial independence as much as possible because I have a whole

00:09:37.920 | list of jobs that I'm looking forward to pursuing after financial independence. I'm

00:09:45.480 | sure I could do it now and I'd still be living a happy life, but I think there's

00:09:50.440 | something about getting a degree in something and then feeling that you need to maximize

00:09:57.200 | that investment of time and money. It's like, "All right, well, if I use my degree

00:10:01.360 | to then achieve financial independence, then I can go do all these other fun things that

00:10:06.020 | I'll get paid for, but really I'll be going there just to learn something new or meet

00:10:10.840 | new people or have new experiences." That, to me, is the best part of financial independence

00:10:17.680 | is the option to do that. I have no desire to just sit and watch TV all day. I expect

00:10:25.480 | I'll probably be even busier after financial independence than I am now, but it'll just

00:10:29.960 | be on things that are very important to me and things that keep my brain occupied and

00:10:35.920 | happy.

00:10:36.920 | >> Trevor: Yeah, absolutely. Walk us through, and this is going to be a little bit personal,

00:10:43.520 | but since you wrote it and published it in public, I don't feel bad about asking you

00:10:47.960 | through it. You sat down at some point over the last couple of years and really spent

00:10:53.520 | some time trying to envision and create your perfect life, as you put it. Walk us through

00:11:00.480 | what that looks like for you, and I'm sure it'll change, so don't feel like you're

00:11:03.640 | lumped into a corner here, but walk us through the process of how you sat down first and

00:11:08.600 | started working on it and then what you think of, with you and your wife, what feels like

00:11:13.360 | and looks like the perfect life for you guys.

00:11:15.320 | >> Tom: Sure. Yeah, no, this was a really, really good exercise, and I definitely encourage

00:11:20.040 | anyone to do it. It's actually a lot harder than it sounds. You think you know what you

00:11:26.480 | want, but when you really sit down and try to picture three months of something that's

00:11:32.120 | the same and doing the same thing, it's like the stuff you thought you wanted to be doing

00:11:38.080 | may not actually be the stuff you actually want to be doing. It was definitely a really

00:11:42.920 | cool exercise, and yeah, it sort of came from ... It was just a natural progression, I think,

00:11:49.680 | once I knew that, okay, freedom's the number one thing. That's what I'm working towards,

00:11:55.560 | just saving up the money, and then I'll have the freedom to do whatever I want. But then

00:11:59.680 | it's like, all right, well, what do I actually want to do? If work factors into that, then

00:12:05.480 | why not account for that and start my perfect life sooner? You know what I mean? So rather

00:12:11.520 | than think, all right, I just got to save up X amount of dollars so that I can spend

00:12:15.760 | Y amount every year, if I'm going to be working part-time doing something that I enjoy, I

00:12:22.080 | should probably try to factor that money in. So yeah, for a good few months, we just kept

00:12:28.960 | talking, my wife and I, just talking about different sorts of plans and what's really

00:12:34.940 | important to us. So yeah, to sum up where we are right now, we realized that the things

00:12:42.720 | that make us happiest are being around people that we love and doing and trying new things

00:12:48.880 | that are challenging. So since her family's in Scotland, my family's in America, we're

00:12:55.640 | never going to be able to live somewhere where both of us are completely happy as far as

00:13:00.760 | being able to see all the people that we want to see. So we thought, all right, well, let's

00:13:06.200 | think about this. We can spend a few months here and there if we need to. We're going

00:13:12.720 | to have the flexibility to do that. So yeah, we came up with what we call the 363 plan,

00:13:19.840 | which means that we're going to spend three months in America just traveling around, seeing

00:13:26.920 | my friends and family and staying with them and spending some good quality time with them.

00:13:32.480 | We're going to go spend six months in Scotland to see my wife's family and our friends over

00:13:39.800 | there. My wife will then work during that six months, which I'll come back to and talk

00:13:44.640 | about. And then we'll spend three months somewhere else in the world. We'll establish a base

00:13:52.000 | somewhere in a region that we want to explore. And then we'll try to live like locals as

00:13:57.760 | much as we can and just do little side trips outside of there and maybe try to learn some

00:14:03.240 | languages and pick up new skills when we're abroad. So that's where we stand right now.

00:14:11.600 | And we're actually planning for that first year of the 363 plan.

00:14:17.000 | I'll come back to my wife working. I write about this in a couple of posts actually,

00:14:25.240 | but the entire 10 plus years we've been together, we've had separate finances. I've obviously

00:14:31.840 | been pretty extreme in my savings rate ever since we met. My wife hadn't been that extreme.

00:14:41.840 | She was quite a normal person before all these ideas started rubbing off on her. It always

00:14:49.280 | just worked best for us to have separate finances because then that way we're both contributing

00:14:53.920 | equal amounts to the bills, but then I can go off and save the rest of mine and she could

00:15:00.120 | spend it or save it or whatever she wanted to do with it.

00:15:04.000 | So she's actually not going to be financially independent, which is why we are going to

00:15:10.480 | be living in Scotland for six months so she can work and see her family. And she enjoys

00:15:17.680 | her work a lot more than I think I do. So she's not too sad about it. I'm not too sad

00:15:23.000 | about it because I love spending time in Scotland.

00:15:25.560 | What type of field of work is she in?

00:15:27.600 | She's an optometrist. So she'll be able to easily pick up, they're called locums in Scotland,

00:15:34.280 | which is I guess just like, you know, if a practice needs an extra optometrist for a

00:15:39.480 | week or a day or a weekend or something, they can just call these people that don't have

00:15:43.480 | permanent jobs somewhere and they can just come in and sub in for a week or whatever.

00:15:50.880 | So that works out quite well.

00:15:51.880 | Yeah, that's really neat. And I want to riff off of that for a second because is she currently

00:16:00.680 | working a full-time practice where like it's her practice or she's currently doing some

00:16:04.720 | sort of occasional employment?

00:16:06.940 | She's working full-time. It's not her practice but she's working as an optometrist at someone

00:16:11.820 | else's practice. But yeah, she's full-time and she will be until we make our move abroad

00:16:19.580 | at the end of next year.

00:16:21.580 | Okay. So you mentioned for both you and for her in your article you've mentioned that

00:16:27.300 | you are working towards being able to live off of your investment income but you're also

00:16:33.360 | interested in building up sources of income that allow you to not depend on your investment

00:16:37.560 | income so much. And I think and also even just what you said about your wife's potential

00:16:43.940 | income in the future of doing a part-time. It's such a valuable strategy is that there

00:16:48.700 | are many ways, I think there are many ways to financial independence. One way which is

00:16:53.420 | maybe kind of the ultimate is to be in a position where the income off of your investments will

00:16:59.860 | flow in and support your living expenses. That's awesome.

00:17:03.140 | For young people, it's perhaps a little bit daunting. You can also set up a lifestyle

00:17:08.440 | that's a part-time or seasonal employment. So if this is like you said of six months

00:17:12.420 | a year working at something like that, if you develop the skills, I've seen what comes

00:17:18.400 | to mind right now is accountants who work during tax season and arrange their living

00:17:24.980 | expenses that they don't need to work year round. I think you're in software developers,

00:17:29.960 | people who can work anywhere, writers. There are so many careers that can be done on a

00:17:35.320 | seasonal basis if people seek that out. That's such an important strategy for people to understand

00:17:40.840 | what their skills are. And then it may be that the right move is to move into a corporate

00:17:45.920 | 50-week a year position or maybe the right move to take those skills and build something

00:17:50.540 | up that's able to be done part-time.

00:17:53.440 | Part-time is actually something I'm going to be investigating. I think the more and

00:18:00.920 | more I think about it, the more and more it makes sense to maybe transition into financial

00:18:05.280 | independence that way. It's probably a big change, obviously, and there's probably

00:18:14.600 | a lot of weird emotions that go along with it. It's mostly exciting, but I'm sure it's

00:18:18.920 | going to be a little scary as well. The idea of working part-time really appeals to me,

00:18:27.920 | one for tax purposes, just to maybe rather than just work a full year as your last year

00:18:34.760 | before financial independence, maybe just work two half years, save a bunch of money

00:18:38.760 | on taxes and then slowly work your way into a new lifestyle. That's not a big change,

00:18:44.320 | a drastic change from what you're doing.

00:18:46.360 | I completely agree, and especially in the Internet age, there's so many more opportunities

00:18:53.160 | to do pick-up part-time work or even just work 20 hours a week doing something or whatever,

00:18:59.920 | take half the year off. There's many, many options, which is very nice in this day and

00:19:05.400 | age.

00:19:06.400 | You see people doing this at every level of wealth scale. You see people doing this that

00:19:10.760 | are maybe just getting started, whether it's your stereotypical surf bum. I'll pick on

00:19:16.400 | surf bum because I think they're neat people. You spend six months waiting tables so you

00:19:20.760 | can spend six months surfing. You see it if you read the literature and talk to people

00:19:25.400 | who are very wealthy, who have very high-profile corporate jobs, things like that. Most CEOs,

00:19:34.360 | if they retire from working a company, don't simply quit and stop working. Most CEOs have

00:19:41.760 | other projects that they do. I always enjoyed reading Jack Welch, who was the CEO of General

00:19:48.280 | Electric. He writes columns for one of the Business Week magazines. He records a podcast.

00:19:56.320 | He's active in consulting projects. A lot of times you'll have a CEO who will retire

00:20:00.360 | from a leadership position in a company and that person will serve on boards. They'll

00:20:06.480 | serve on three or four boards where they're earning an income.

00:20:10.320 | You find a lot of times that there's more to work than just money. The money is obviously

00:20:17.200 | really valuable, but there's also a certain fulfillment. There's also a certain activity,

00:20:23.000 | feeling like contributing to society. Those things are very valid, but many times people

00:20:29.360 | don't realize that it's available sooner than later. It's not just something that you have

00:20:34.640 | to do from 65 to 75. It's something that you can do from 30 to 40 if you want to. That's

00:20:41.280 | up to each individual's goals. I think it's neat that you guys are factoring that into

00:20:45.320 | your planning.

00:20:46.320 | Mad Fientist Absolutely. What you said about work is definitely

00:20:48.520 | true. It's actually amazing. It's something that I didn't expect out of pursuing financial

00:20:56.920 | independence. As I get closer and closer to that goal, I'm enjoying my job a lot more

00:21:02.040 | and more because I know I'm not going to be stuck in there doing the same thing for 30

00:21:06.680 | years. As I get closer to the end, I actually really do enjoy what I'm doing. Especially

00:21:14.720 | now that I'm to a point where it'd be fine if I just wanted to quit. I don't get angry

00:21:23.880 | as much as all the annoying office stuff that goes on. I just do my own thing. I still do

00:21:30.160 | good work, but I don't deal with all the bullshit that usually goes on just because I don't

00:21:35.680 | have to. If they want to fire me, they can fire me. It's sort of like that office space.

00:21:44.320 | As that guy cared less and less, they liked him more and more. That's honestly what I'm

00:21:47.960 | finding. I'm not doing all the ass-kissing that everybody else is doing and all the normal

00:21:54.520 | stuff. I'm just doing the work that I enjoy. My bosses are happier than they've ever been.

00:22:03.680 | It's a weird thing. It's a very cool perk of getting close to financial independence.

00:22:10.920 | Like I said, I'm enjoying my job more than I have in a decade.

00:22:15.800 | That's awesome. Now, you were talking about your wife. You said that she's not a scientist,

00:22:22.520 | but you also said that maybe she's changing a little bit. What are you finding as you

00:22:28.560 | guys spend more time together? Are you finding that she's becoming attracted to your lifestyle

00:22:33.920 | more and more? Is she changing to that? What are you finding as the path there?

00:22:39.720 | Absolutely. It's actually a very big surprise. I have a post on my site called an unexpected

00:22:46.680 | guest post. I was just up one night. I was writing an article. My wife said she was going

00:22:53.960 | to bed, so she just kissed me goodnight. She's like, "There's something on my computer that

00:22:57.880 | I want you to read." I was like, "Oh, okay. What is it?" She's like, "Just read it."

00:23:03.800 | She went off to bed. I tried to finish the article that I was writing, but curiosity

00:23:09.720 | quickly got the better of me because I was like, "What could this possibly be?" So, I

00:23:15.080 | read. It was just this letter to me that was just talking about her feelings. I think she

00:23:23.640 | said she got up in the middle of the night one night because she had so much on her mind,

00:23:27.280 | and she just started writing this. I was sleeping, so she just typed this out on her computer.

00:23:33.720 | It was like I got to watch the light bulb go off in her head as far as why I'm doing

00:23:41.280 | this. Like I said, we've been together for 10 plus years. For that entire time, I've

00:23:46.680 | been the same, just watching my money very closely, not buying a lot of stuff, trying

00:23:55.120 | to save as much as possible. Like I said, she wasn't like that, so she didn't really

00:24:01.040 | understand it. We always had separate finances, so I never tried to force her to do anything

00:24:08.160 | that she didn't want to do. We never really talked about it.

00:24:13.480 | Ever since I started writing on The Mad Scientist, she's my editor, so she gets to read all my

00:24:20.520 | articles before I post them just to try to snag any misspellings or anything like that.

00:24:25.680 | So yeah, I guess it started to sink in. Doing the podcast and interviewing other people

00:24:31.000 | that had pursued financial independence, she got to hear from other people besides me saying,

00:24:37.680 | "This is why I'm doing it as well." We also got to meet up with Jim Collins from

00:24:42.320 | JLCollinsNH.com. I interviewed him for the podcast, and he actually lives quite close,

00:24:47.880 | so we met up with him and his wife and had some good dinner conversations about this

00:24:53.320 | stuff. I think it just started to gradually click.

00:24:57.440 | Like, "Oh, he's not just doing it because he's a cheapskate. He's doing it because

00:25:02.040 | he wants to let his money grow and then use the interest off the money to actually do

00:25:09.080 | what he wants without working." So yeah, it started to sink in, but it wasn't

00:25:13.840 | until we really started planning out our perfect life that she started realizing. Because like

00:25:21.040 | I said before, she loves what she does. She loves working. So to her, it was like, "Well,

00:25:26.240 | why shouldn't I buy something that I want? Because I'll make more money, and I always

00:25:32.080 | like my job, so making more money is not a problem for me, so why not just spend it?"

00:25:38.120 | But when we started seeing that, "Look, this could actually give us six months for

00:25:43.200 | you of not working at all, spending more time with friends and family than we do now, seeing

00:25:48.440 | more places than we see now while still allowing you to be an optometrist," then it really

00:25:54.760 | sunk in. And yeah, now she's just totally behind the

00:25:59.760 | idea. Her spending has completely changed. She wasn't going crazy before, but she's

00:26:07.240 | definitely more conscious of what she's spending her money on and when. So yeah, that's one

00:26:17.280 | of the biggest benefits of actually starting to write about this stuff, was that yeah,

00:26:21.200 | I think it really got her on board, and now we're in this together, which is great.

00:26:27.120 | >> Trevor: Yeah, and it's neat that you can share that story, because a lot of times when

00:26:32.520 | people talk about financial planning, many people see frugality and saving and investing

00:26:41.920 | as a sacrifice, and they see it as a sacrifice of something that they want. I thought I enjoyed

00:26:49.000 | that. Next, we're going to go to your triple value of income article, because I thought

00:26:53.880 | that was a good way to talk about it, but I'll set you up for it.

00:26:57.880 | I think the people who are, many people who are frugal, and many people who are pursuing

00:27:03.680 | strategies like you are, don't view it as sacrifice, but they view it more as a way

00:27:09.920 | for them to get what they really want. My philosophy, personally, is I think, I just

00:27:15.240 | recorded a show on the ultimate smart person's guide to spending money. How I started that

00:27:23.920 | show is I said, "When is it okay for you to spend money?" My answer is, "Whenever

00:27:27.880 | you want." It's your money. You can do what you want with it. I don't think there's

00:27:32.440 | anything necessarily better about saving it versus spending it, but the key is that are

00:27:38.560 | you saving it because you want to save it, or are you spending it because that's what's

00:27:41.840 | important to you? My favorite example that I've thought for years about was, and I've

00:27:49.600 | mentioned a few times on the show, was Chris Guillebeau's example of, "Would I rather

00:27:53.720 | travel to 100 countries, or would I rather drive an SUV?"

00:27:59.160 | Many people say, "I would love to travel. I want to travel, but I can't afford to

00:28:03.520 | travel." Many people drive SUVs. I believe many times no one's ever asked them, "Have

00:28:09.960 | you considered that you actually want to drive the SUV? If you do, get the SUV. Do you want

00:28:16.680 | to visit 100 countries? If you do, here's a way that you could achieve it." Probably

00:28:20.920 | for you, I dare say that being frugal and saving and investing a large percentage of

00:28:27.080 | your income is not necessarily a sacrifice, but it's a way for you to achieve what's

00:28:30.960 | more important to you than the current gratification of spending money.

00:28:35.200 | Absolutely. That's a perfect way to say it. Paula from Afford Anything, she has a really

00:28:39.640 | cool article on that. I forget the name of it, but I'll send you a link afterwards.

00:28:45.040 | It talks about how when she said she was going to go travel for two years, all of her friends

00:28:49.200 | were like, "How can you afford that? What are you talking about? What are you doing?"

00:28:53.520 | Yet all of her friends were going out and buying a $30,000 SUV, and nobody was saying

00:28:58.200 | to them, "Whoa, how can you afford that? What are you doing? How do you do that?"

00:29:03.840 | There's all these things that society has just ingrained in our mind that are normal.

00:29:11.360 | Most people probably, if they actually sat down and realized how much it was costing

00:29:15.720 | them and what they were giving up to do it, they might think differently.

00:29:22.440 | You're absolutely right. It's not a sacrifice. Actually, the more and more that I cut back

00:29:28.640 | – I started as frugal, but now with the goal so close in sight, I'm still dialing

00:29:34.960 | more and more back. As I do, I'm getting happier and happier. I feel freer, less stressed,

00:29:42.560 | less worried. It's got to the point where I'm thinking, rather than keep whittling

00:29:49.840 | down to reach the sweet spot, at this point, I may be better just giving up everything

00:29:56.960 | and then only picking up the things that I really miss. That may be more efficient to

00:30:02.880 | get to the sweet spot that way. It's not hard. With such an amazing goal in the finish

00:30:12.540 | line so close, it's so easy not to go out and spend a bunch of money on stuff that's

00:30:17.480 | not important to me.

00:30:19.600 | You mentioned the triple value of income article. That's actually where it all started pretty

00:30:24.960 | much. My mom, I was speaking to her one day and something came up and I said I wasn't

00:30:34.040 | going to spend any money on it or something. She's like, "Why don't you just go out

00:30:37.160 | and buy something to make yourself happy?" I thought a lot about it and I'm like, "That

00:30:44.320 | would not make me happy." I wanted to figure out a way to explain it. I started thinking

00:30:51.800 | and I'm like, "If I spend the dollar, then it's gone and I have this thing that I'm

00:30:58.280 | probably not going to be that into in a few weeks. Or, if I keep the dollar, that dollar

00:31:03.360 | is going to actually be worth X amount when I actually spend it, depending on if I put

00:31:07.720 | it into a retirement account or if I put it into a normal investment account."

00:31:13.760 | I wrote the triple value of income post to show that, if I forget the numbers I used,

00:31:21.600 | but say you make $100,000 a year, that $100,000 is actually only worth $80,000 to you because

00:31:28.120 | you have to pay $20,000 in tax. But if you instead funnel a lot of that into tax advantage

00:31:35.240 | accounts, then you're getting the full value of your dollar plus all of the interest that

00:31:40.360 | you would accrue while it's in those accounts. It seemed like a really good way to explain

00:31:48.960 | why I don't feel like I need to spend money because I'm just delaying my gratification

00:31:54.240 | for more gratification later for the same dollars.

00:31:59.920 | >> Trevor: It's interesting because I think if you find people who really enjoy saving

00:32:07.160 | and investing and building their money, a lot of times it's their hobby. It's something

00:32:12.080 | that they derive a lot of benefit out of. The benefit is either the fun of it or the

00:32:17.480 | benefit is what it can get them in the future. I want to walk through, because I really enjoyed

00:32:22.920 | that post, some of the specifics of how you – and I'm not sure if you can pull it

00:32:29.120 | up on your screen. If not, I can read it to you. Walk through the numbers that you used

00:32:35.600 | regarding spending, investing, retirement contributions, employer match, and investment

00:32:40.320 | income and how that multiplied. This is a really valuable concept for me. I think of

00:32:46.040 | it as stacking functions, which is a permaculture concept, stacking as many functions as possible

00:32:51.840 | and getting maximum use out of the dollar. Walk us through your actual numbers that you

00:32:55.880 | used in that post.

00:32:56.880 | >> Trevor: Sure. I got it up. I have it in front of me. I obviously didn't take into

00:33:03.440 | the time value of money or anything like that. It was more just an exercise to show how much

00:33:08.680 | value you could extract from – I think it was $100,000 salary. As I mentioned before,

00:33:18.400 | if you spend all of that $100,000, you're going to at most probably get $80,000 of value

00:33:24.600 | out of it because of all the tax you're going to have to pay. It's probably even

00:33:28.320 | more than that. That was just a – what am I trying to say? It was a rough estimate of

00:33:38.600 | the tax.

00:33:39.600 | >> Trevor: Yeah.

00:33:40.600 | >> Trevor: Yeah. Just assuming that, just assuming an effective tax rate of 20%, you're

00:33:46.080 | only going to be able to buy $80,000 worth of stuff. Then I thought, "All right. Let's

00:33:54.520 | go another direction." If you instead invested one of those dollars that you earned, you'd

00:34:04.080 | still only be getting $0.80 of value out of it because you would pay tax on it. But then

00:34:08.960 | assuming you left it grow for 10 years earning the 7% average stock market rate of return,

00:34:16.640 | that dollar would actually be $1.57 when you came to spend it, which would provide – oh,

00:34:24.800 | yeah. But you would then have to pay tax on that. Oh, no. The capital gains tax. Assuming

00:34:30.960 | capital gains tax. You'd roughly have like $1.45 of value out of it.

00:34:37.240 | If you invested for 10 years rather than just spending it as soon as you make it, you're

00:34:41.720 | actually going to get $1.45 instead of $0.80, which is quite a big difference, especially

00:34:47.680 | for only 10 years of waiting. But you can actually do better than that. There are lots

00:34:54.360 | of tax advantage accounts that you can utilize, which is something I like to focus on because

00:35:00.960 | that's a very easy and surefire way of getting more bang for your buck.

00:35:10.280 | The next section I talked about are retirement contributions. If I instead took one of those

00:35:17.560 | dollars and rather than spending it and getting $0.80 of value or investing it and getting

00:35:22.120 | $1.45 of value in 10 years, if I instead put it into my 401(k), then I'm initially still

00:35:32.000 | getting a dollar's worth of shares because I'm not paying tax on that dollar. Then again,

00:35:39.000 | spending the same rate of return, after 30 years, I would end up getting $6.70 worth

00:35:45.120 | of value out of that dollar. $0.80 as opposed to $6.70 is a very big difference.

00:35:52.960 | I then talked about most people who work full-time have an employer match for their 401(k). The

00:36:00.920 | first 5% or whatever gets matched by the employer. If I had that, that initial dollar, I wouldn't

00:36:10.320 | get taxed on it. My employer would match me, so that would turn into $2 right off the bat.

00:36:15.760 | Then if I invested it until standard retirement age in 30 years, it would be $13.39.

00:36:29.080 | That initial $0.80 that I could have just spent and then been bored with whatever I

00:36:34.640 | bought, I instead can put that in my 401(k) and then get $13.39 of value from that single

00:36:42.240 | dollar. I'm not going to need $13.39 for that dollar probably by the time I'm 65 or 59.5

00:36:49.480 | or whenever I decide to take it out. I could instead live off the interest from that dollar.

00:36:56.920 | I worked it out. Assuming a 3.5% yield, I could get $0.80 every two years. Every two

00:37:10.440 | years, I would be getting the same amount of value out of that dollar as I would have

00:37:14.280 | got if I would have just spent it and then lost it forever back when I earned it.

00:37:19.400 | Adding all of this stuff up using all of the various contribution limits at the time, the

00:37:26.640 | contribution limits have actually increased. This was 2012, maybe I wrote this. Totaling

00:37:33.320 | all of that up, if you maxed out all of your 401(k)s, your IRAs, your HSAs, and then you

00:37:42.960 | only spent $25,000 a year and then invested the rest in taxable accounts, you'd end up

00:37:50.800 | getting over $249,000 of value as I've described it out of that $100,000 salary that had you

00:38:00.600 | spent it all, you would only get $80,000 of value.

00:38:03.880 | You've given yourself three times as much salary without having any more work to do

00:38:11.760 | or working more hours or doing anything else differently just by intelligently making sure

00:38:21.400 | those dollars are actually going to work for you over the long run.

00:38:24.800 | >> Trevor: I'm going to add to this with a philosophy that I think is important because

00:38:30.920 | what I like about this is you said you're 31. This is so important. I feel this is so

00:38:36.480 | important when we're 30 years old. It's a little different if you're later in life.

00:38:43.800 | The reason why this is so important is that money has a much greater utility at a younger

00:38:48.720 | age than at an older age. My favorite name for this, I'm going to borrow from Joshua

00:38:57.280 | Kinnon who calls it the red ring problem. The red ring problem is getting rich too late

00:39:03.520 | in life. I'll link to an article that he wrote on this in the show notes so people

00:39:06.960 | can read his article. The red ring comes from a video game and the idea is that basically

00:39:12.800 | near the end of the video game, you can find this red ring that increases your ability

00:39:18.300 | hugely and makes the game extremely easy. Life is kind of like that. The red ring problem

00:39:25.080 | is what's the point of saving money or investing money if I'm only going to get to enjoy it

00:39:28.960 | when I'm too old to care. This is so valuable at an early age to do these types of hacks

00:39:37.840 | or whatever you want to call them, optimization strategies at an older age is going to change.

00:39:42.960 | The value of your dollar at 30 years old where you can turn the $100,000 into a value of

00:39:48.880 | $249,000 is crucial to building wealth in the early age. It's going to be different

00:39:54.800 | if you were 70 years old. The $100,000 at 70 is probably more useful for rational expenses

00:40:05.240 | rather than the $249,000 at the age of 110. You can't ignore the concept at 30, otherwise

00:40:13.120 | you never get to enjoy those higher dollars.

00:40:15.880 | Absolutely. Very, very important. The earlier you start, the easier it is. That's definitely

00:40:23.720 | the case.

00:40:24.720 | There's no right or wrong here, but I like the fact. I have a good friend of mine who's

00:40:34.040 | a little bit older. It's interesting with your $100,000 example. This good friend of

00:40:40.800 | mine, he's older, he's quite wealthy. Most people would consider him to be quite wealthy.

00:40:47.240 | He has a boating habit. I live down here in Florida. He lives in Florida as well. He really

00:40:53.920 | enjoys large expensive boats. He has a boating habit that costs him in excess of six figures

00:41:01.000 | a year. It's a nice boat and he enjoys it. With this in excess of six figures a year,

00:41:08.260 | he actually continues to work part time so that he can support that boating habit.

00:41:13.480 | To me, the reason I'm bringing this up is because, just to hammer home for the 83rd

00:41:19.000 | time, either one of these is fine. At this stage in your life, at 30 years old, the $100,000

00:41:25.800 | for you is to get the triple value and to build it up in the future because that's

00:41:29.720 | more valuable. For my friend who's in his late 60s, for him the $100,000 is far more

00:41:36.200 | better served. He gets far more value out of it by allowing him to enjoy a luxurious

00:41:42.760 | lifestyle on the water. You've got to do it in an intelligent way. At a younger age,

00:41:49.320 | I think most folks, it's so valuable to understand the math between what you've laid out and

00:41:54.800 | understand how by working that math at 30, it puts you in a position at 40, 50, 60, and

00:42:01.400 | 70 where you're able to enjoy the utility of that for a much enhanced lifestyle.

00:42:08.680 | Mad Fientist Absolutely. I couldn't have said it better

00:42:11.920 | myself. Your friend with the boat, that's something I've been thinking about as well

00:42:16.320 | recently that I thought it would make an interesting article. I assume he owns his own boat and

00:42:25.200 | he still spends $100,000 a year?

00:42:26.800 | J. MoneyLine Correct. That's not the acquisition cost.

00:42:29.360 | That's the running cost per year.

00:42:31.640 | Mad Fientist I don't know anything about renting boats,

00:42:34.960 | but I imagine you could probably rent a pretty amazing boat for $100,000 a year. Not obviously

00:42:42.360 | for the entire year, but whenever you wanted to use it and not have to deal with all the

00:42:47.520 | other garbage of keeping it and all of that stuff. I imagine you could probably do it

00:42:52.560 | for less than $100,000, but maybe obviously you wouldn't be able to just think, "Oh, I'm

00:42:57.680 | going to go on my boat right now," and then go on it. There's obviously trade-offs.

00:43:03.240 | A lot of people's very expensive hobbies and things like time shares and things like that

00:43:08.360 | where you're only using it a bit or RVs and things like that. I wonder if they've thought

00:43:16.120 | about renting before, just go ahead and buying and did the numbers as far as you could probably

00:43:22.400 | rent some pretty cool things and then not get sick of them.

00:43:26.840 | J. MoneyLine Yeah. You're going to love my Smart Persons

00:43:30.640 | Guide to Spending Money show because here would be a couple different ways that you

00:43:33.960 | could do it. I'm not a boating person, so I'm with you as far as I would usually rather

00:43:39.520 | rent stuff like that because I would enjoy it. Now, it's challenging to hit the boat.

00:43:47.720 | Again, I'm down here in South Florida. We're talking about a 45-foot type of sport fishing

00:43:53.800 | boat. To charter one of those, you can charter it and you can go out and you can charter

00:43:59.200 | it for the weekend. You can charter it and you can do it and you can have a lot of fun

00:44:04.560 | on that.

00:44:05.560 | But you can also flip it around and for the right situation, somebody with a boat like

00:44:10.280 | that, if somebody has a business, that boat can be an extension of their business, something

00:44:15.800 | that they use to entertain clients and something that they can use to entertain customers and

00:44:21.800 | clients. It could also be something where it's a business in and of itself.

00:44:25.640 | So you can buy the boat if you have the cash to buy the boat and you can turn around and

00:44:30.400 | you can charter it out yourself. Well, because you're charting it out yourself, number one

00:44:34.600 | is you can turn it from an expense into potentially an income or you can use it as a – how do

00:44:41.920 | I put this appropriately? You can use it as a business which is designed to be profitable

00:44:49.840 | but allows some of your expenses to be absorbed by the business side of the tax code.

00:44:57.880 | Absolutely.

00:44:58.880 | At some point in the future, I'm going to do a detailed show on tax planning but one

00:45:03.600 | of the most valuable things for people to do who are interested in luxuries is if you

00:45:07.520 | have a luxury that you enjoy and this is something that's important to you, whether it's big

00:45:11.400 | boats or racing cars or something like that, one of the most beneficial things you can

00:45:15.440 | do is you can say, "How can I take my luxury and how can I turn it into a business?"

00:45:20.000 | So if I enjoy operating a boat, it's very possible that I may enjoy operating the boat

00:45:23.760 | and being out on the water just as much if I have five paying clients on board with me

00:45:28.960 | versus me just simply being out there with just myself or with three or four of my buddies.

00:45:35.560 | By taking something like that and turning it from an expense over into a business and

00:45:39.600 | by running it in a business-like manner, following the tax rules very carefully, keeping good

00:45:44.000 | records, you can take and you can legitimately turn the expense and move it over onto a business

00:45:51.680 | return where you have basically just like you would enjoy instead of spending your money

00:45:57.680 | in a taxable world, you can take that expenditure which would cost you $0.80, which would cost

00:46:03.720 | you $0.10 if you were doing it in a taxable world to turn that expenditure into an $0.80

00:46:09.360 | expenditure in the business world.

00:46:11.840 | There's a lot that you can do with it.

00:46:14.800 | If you keep good records, you can use your business assets and you can use them for both

00:46:20.560 | on the business side, but you can also get the personal enjoyment out of them as well.

00:46:24.640 | Mad Fientist That's great.

00:46:26.080 | I'm definitely excited to listen to your Smart Spending Money podcast because that's an excellent

00:46:32.600 | strategy and that's an awesome way to have an expensive hobby.

00:46:39.360 | David Steinberg The key is knowing what the rules are and

00:46:44.240 | knowing what you want.

00:46:45.400 | I personally have zero interest in ever pursuing that course of action because I don't enjoy

00:46:49.560 | voting that much, but for somebody who that's important to them and they want to do it,

00:46:54.080 | look for a way to do it intelligently and look for a way to stack these functions on

00:46:58.600 | top where instead of having something be a large expense, can you make it into an income

00:47:06.640 | stream.

00:47:07.640 | There are lots of ways that people can do that and do it very intelligently.

00:47:15.200 | Mad Fientist That's exactly what we plan to do.

00:47:18.160 | Travel is our biggest passion.

00:47:21.280 | Definitely we don't have many hobbies, but we love to go and see new places and experience

00:47:25.760 | new things.

00:47:27.320 | Travel was probably my biggest expense of my 20s.

00:47:32.720 | We're flipping that around and we're going to use it to come out further ahead than if

00:47:36.960 | we didn't travel because like I said, we're going to go and spend three months plus at

00:47:44.200 | these different places that we've always wanted to go and see, but we're going to live like

00:47:50.360 | locals so we're going to be able to get apartments rather than hotels and the flight cost will

00:47:56.000 | be minimal not only because I'm quite good at travel hacking, but just because it's one

00:48:03.680 | flight over three to six months rather than most people take one flight over one or two

00:48:08.720 | weeks for their vacations and that obviously jacks up the price of the trip.

00:48:13.720 | Plus there's just tons of cheap but very interesting places to live in the world that we're going

00:48:19.440 | to end up spending less money day to day living there than we would living in the States or

00:48:25.080 | in Scotland.

00:48:26.080 | So yeah, we're trying to turn our biggest passion not into a business but use it in

00:48:32.920 | a way that it will actually help us financially as well.

00:48:36.120 | >> Trevor: Absolutely.

00:48:37.120 | So let me go to your article there on travel hacking because this was a great article.

00:48:42.280 | The trip that you recently did is you recently took a trip and you flew from Boston to Ireland

00:48:48.960 | and used some strategies and I think the strategies will be a little too detailed for the air,

00:48:54.240 | but in the article you flew from Boston to Dublin and then from Dublin to Glasgow and

00:48:58.800 | you stayed a couple nights in a five star London hotel and your total out of pocket

00:49:04.080 | cost was how much?

00:49:05.800 | >> Chris: Less than 150 each for all of that.

00:49:09.240 | >> Trevor: And that would have been purchased at retail would have been about 2000 bucks

00:49:13.840 | each, something like that?

00:49:14.840 | >> Chris: Let's see, that would have been over a grand each definitely.

00:49:21.080 | A Boston to Dublin flight usually if you're lucky you can get it maybe for 7800.

00:49:27.160 | At the time when I booked it, I record everything I do just to see how much money I'm actually

00:49:33.920 | saving.

00:49:34.920 | So at the time I think two of those tickets would have cost 1692.38.

00:49:43.960 | So we ended up saving 1450 by using miles.

00:49:49.480 | So yeah, that would have been over 1600 just for the flights from Boston to Dublin because

00:49:53.680 | it was summertime, it's America to Europe, that's not a cheap trip.

00:50:01.400 | And then from Dublin we went to Glasgow because that's where my wife's family is, but my sister

00:50:07.160 | was studying abroad in London at the time so we wanted to stop in London.

00:50:11.120 | So yeah, a one-way ticket from Dublin to London and London to Glasgow, that would have been

00:50:20.320 | over 200 bucks each or close to 200 bucks each I think.

00:50:24.800 | And then two nights in a five-star hotel right in Leicester Square, it was gorgeous, it was

00:50:29.600 | beautiful.

00:50:30.600 | The actual cost of the room was 974 for two nights, but we didn't pay anything.

00:50:41.600 | We used miles, I'm trying to see here.

00:50:43.920 | Oh yeah, I wrote on the post that we saved 240 because there's no way we would have spent

00:50:48.600 | 974 to stay in a five-star hotel had we been paying.

00:50:52.440 | But yeah, the actual cost of that room for two nights on that weekend that we were there

00:50:56.840 | was 974.

00:50:57.840 | So yeah, the only thing we did pay was tax on the flights and absolutely nothing on the

00:51:08.440 | hotel.

00:51:09.440 | So yeah, it was less than 150 each and it was an amazing trip and it was cheap once

00:51:15.960 | we got there obviously because we were just staying with my wife's family.

00:51:18.880 | Yeah, it was amazing.

00:51:21.080 | So yeah, travel hacking is one of those hobbies that you mentioned earlier that saves you

00:51:28.560 | money but it can be a hobby.

00:51:31.640 | It's actually a lot of fun and there's lots to it and could keep you occupied for a while

00:51:38.320 | and there's nothing better than waking up in a five-star hotel and seeing all the people

00:51:44.360 | around you and thinking that they spent a fortune and you didn't spend a penny.

00:51:50.360 | This article, the travel hacking using the credit cards and the miles and the points

00:51:54.880 | is something that it's a topic that fascinates me.

00:51:59.120 | I am not actively doing it but it fascinates me.

00:52:02.640 | I'll give you a book that I just finished that you may, I don't know if you read or

00:52:07.520 | not, but the author of that book goes through some of his deals and how he did them.

00:52:12.120 | The book is called Get More, Spend Less and the author, I think his name is Brad Wilson.

00:52:16.800 | He writes at bradsdeals.com.

00:52:18.800 | Have you heard of that book?

00:52:19.800 | No, I've not.

00:52:20.800 | It sounds interesting though.

00:52:21.800 | Check it out.

00:52:22.800 | I think you would enjoy it.

00:52:23.800 | I think you would enjoy it because he goes through some of his deals and his deals are

00:52:31.200 | like yours, incredible.

00:52:34.360 | He goes through some of his, he's pretty hardcore about it, very extreme and you'll love his

00:52:40.320 | story and I'll do a review on that book at some point here.

00:52:44.440 | Also, the recommendation for anybody listening that wants to read a good book that on your

00:52:49.880 | site you give some good resources to the Flyer Talk forums and to some blogs that teach about

00:52:55.400 | this but it's definitely a good way to exploit the system a little bit right now.

00:53:00.320 | It's great and it's going to be very important to us because like I said, once we get to

00:53:05.160 | these really cool places, it's going to be cheaper living there but getting there could

00:53:09.320 | be expensive but using these travel hacking techniques and currently I'm just building

00:53:16.420 | up my balances big time in preparation for all the travel that I plan to do in the next

00:53:21.360 | whatever decade or so.

00:53:25.200 | Using those to make the travel between these interesting places very cheap is just going

00:53:31.880 | to make the benefit of travel even greater for us financially.

00:53:38.120 | There are lots of great resources out there and it is very addictive and it's very important

00:53:44.000 | to know how to use your miles just as much as it's important to know how to get the miles

00:53:50.200 | that you need.

00:53:51.200 | I think using them is even more important because even though I flew from Boston to

00:53:55.560 | Dublin for such a little bit of money and not a lot of miles, the way I did it is very

00:54:02.440 | unknown, the way I used the miles and the way that I did.

00:54:07.320 | I spent less than half the amount of miles that normal people do when they try to book

00:54:12.280 | America to Europe flight and I paid probably a third or a fourth of the taxes that some

00:54:19.880 | people have to pay.

00:54:22.480 | So yeah, just following some good blogs and checking out Flyertalk and reading about it

00:54:28.280 | and you can really just extract some incredible amounts of value out of these things.

00:54:32.600 | >> Trevor: I also want to point out how these functions stack, like how this is a part of

00:54:38.840 | the strategy.

00:54:40.400 | Many people discount flying on points because of blackout dates, because of when they can

00:54:46.440 | fly.

00:54:47.440 | Many people discount travel but if one is financially independent and one has flexibility

00:54:53.560 | over their schedule, then number one, you can fly either at the cheapest time, so you

00:54:58.400 | can take those Wednesday flights or the Saturday afternoon flights that are just simply inexpensive.

00:55:03.560 | You can fly at the seasons when a lot of people can't fly, so you can avoid the summer season

00:55:09.440 | when everyone's out of school but you can go on the shoulder season between the high

00:55:14.480 | season and the low season and you can get really, really great values or you can pursue

00:55:19.360 | some of the, you can take the award tickets on the dates that they're available.

00:55:24.200 | So you can be flexible on that and you can afford to slow down.

00:55:27.920 | So like you said, one of the major expenses of traveling, when most people think about

00:55:31.920 | traveling they think about, "I've got this two week vacation that I have to take."

00:55:37.600 | You call it slow travel but if you have this two week vacation, let's say you're going

00:55:40.880 | to take a two week vacation to Europe, well let's say you pay retail and you got a thousand

00:55:45.400 | bucks each for a plane ticket and then because you're there for two weeks, you have to do

00:55:49.760 | this, you have to pack everything in every single day.

00:55:53.960 | You've got to have rental cars while you're there.

00:55:55.920 | You've got to stay in hotels while you're there.

00:55:58.160 | You can't take a one month apartment rental instead of staying in a hotel.

00:56:03.200 | You can't slow down enough to use public transportation instead of having your own car.

00:56:07.720 | Because of the time pressure of being fixed on this work 50 weeks a year schedule, you

00:56:13.440 | wind up spending seven, eight thousand dollars on a two week vacation to Europe where if

00:56:19.080 | you are financially independent and you can slow down, you can take that exact same amount

00:56:23.080 | of money and stretch it out over a couple of months just because of your flexibility.

00:56:28.200 | So the functions stack on top of each other.

00:56:30.000 | >> Trevor: Oh absolutely.

00:56:31.000 | You're not cooking for yourself.

00:56:32.960 | You're not doing anything.

00:56:33.960 | You're just spending money just as fast as you can pretty much just to have a good time

00:56:39.160 | and you will have a good time.

00:56:40.520 | But as you said, seven or eight grand, that could easily sustain somebody for an amazing

00:56:46.720 | year in Central America or Southeast Asia or South America.

00:56:51.840 | That could be a whole year of learning Spanish and learning how to cook and going to the

00:56:57.760 | local markets and things that make travel really special that just don't cost a lot

00:57:03.640 | of money to do.

00:57:04.640 | I know I could live for a year on some of the budgets people have on their one week,

00:57:12.520 | two week vacations here in the States.

00:57:14.520 | >> Jon: It's interesting.

00:57:17.400 | I think this is a US American concept that in our culture is not so well understood.

00:57:23.040 | When I was in college, I lived in Costa Rica and I did a research project with a business

00:57:27.360 | school that I was studying at.

00:57:28.760 | I did a research project for a Costa Rican eco-tourism company.

00:57:33.920 | We prepared a report on American tourists, British tourists and German tourists.

00:57:42.520 | It's very clear when you look at it that as Americans, we would go to Costa Rica for a

00:57:48.200 | one week vacation and we would want everything carefully programmed in that one week.

00:57:55.720 | Every single day from morning to night, there are activities and we don't have a lot of

00:57:59.680 | time so we're willing to spend a significant amount of money on those trips.

00:58:05.480 | We would want everything planned out in advance of the trip.

00:58:08.920 | When we go up, when we show up, we know what our itinerary is.

00:58:11.920 | Every moment of every day is scheduled and we've got it all planned out.

00:58:16.560 | The British tourists would come.

00:58:18.360 | They would want their itinerary planned out but they would usually come for about a month

00:58:22.200 | instead of a week.

00:58:23.200 | They would stretch the time out longer and they wouldn't want everything planned out

00:58:28.000 | every day.

00:58:29.000 | They would want to make sure that they had some down time to figure it out.

00:58:33.080 | I'm using generalizations to make my point but these are pretty accurate.

00:58:37.320 | The German tourists would show up at the airport without a single plan, without a single booking

00:58:42.960 | but they would be there for two months.

00:58:45.000 | They would get to the country.

00:58:46.000 | They would get to Costa Rica.

00:58:47.000 | Then once they were there, they would figure out what they wanted to do, when they wanted

00:58:50.560 | to do it.

00:58:51.560 | They would spend half the money that the Americans spend in a week over a two-month vacation

00:58:55.680 | while they're there.

00:58:56.680 | It's crazy.

00:58:57.680 | It's a dramatic cultural difference between the cultures.

00:59:02.720 | It's the adventure and the not knowing and the uncertainty that makes travel so rewarding

00:59:07.160 | when you look back on it.

00:59:09.480 | My wife and I lived in China for three months and obviously didn't learn too much Mandarin

00:59:14.640 | in that time.

00:59:16.360 | We would just hop on a local bus, try to find our way to some very remote, weird, small

00:59:22.760 | little village in China.

00:59:26.480 | We wouldn't know exactly when the bus was coming back, if it was coming back.

00:59:32.680 | It's just fun.

00:59:33.680 | It's the adventure.

00:59:34.680 | That's what makes it.

00:59:35.680 | If you want to have just normal life, eating the same things you eat and doing the same

00:59:41.440 | things you do at home, then save a lot of money and just go to the next town over.

00:59:46.760 | Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host

00:59:50.760 | of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.

00:59:53.760 | He is a licensed financial professional both in the U.S. and Israel.

00:59:56.760 | Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,

00:59:59.760 | SIFMA.

01:00:00.760 | Accounts carried by National Financial Services LLC.

01:00:01.760 | Member NYSE/SIPC, a Fidelity Investments company.

01:00:02.760 | His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered

01:00:03.760 | at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.

01:00:04.760 | Disclaimer: This document is a transcription and/or an educational article.

01:00:29.280 | While it is believed to be current and accurate, divergence from the original is to be expected.

01:00:58.800 | The original podcast can be heard at https://sites.google.com/site/goldsteinradioshows/.

01:00:59.800 | All information on this website is purely information and should not be used as the

01:01:00.800 | sole basis for making financial decisions.

01:01:01.800 | The opinions rendered herein are those of the guests, and not necessarily those of Douglas

01:01:02.800 | Goldstein, Profile Investment Services, Ltd., or Israel National News.

01:01:03.800 | Readers should consult with a professional financial advisor before making any financial

01:01:04.800 | decisions.

01:01:05.800 | Please see the complete disclaimer at https://sites.google.com/site/goldsteinradioshows/.

01:01:06.800 | Also, check out our website at www.profile-financial.com (03) 624-2788 or (04) 524-0942.

01:01:30.800 | All information on this website is purely information and should not be used as the

01:01:59.800 | sole basis for making financial decisions.

01:02:00.800 | The opinions rendered herein are those of Douglas Goldstein, Profile Investment Services,

01:02:01.800 | Ltd., or Israel National News.

01:02:02.800 | Readers should consult with a professional financial advisor before making any financial

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01:02:05.800 | All information on this website is purely information and should not be used as the

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01:08:12.320 | All information on this website is purely information and should not be used as the

01:08:41.320 | and I always wondered, I could see myself doing this

01:08:43.240 | for quite a while, but I was like,

01:08:44.720 | wonder if I'll get tired of it.

01:08:46.600 | And they've just loved it.

01:08:48.600 | They always thought they'd settle down somewhere,

01:08:50.180 | but they just keep finding new places they want to go

01:08:52.820 | and traveling between them.

01:08:55.040 | And like I said, they had half a million for both of 'em,

01:08:59.920 | and I think they have more now than when they started.

01:09:02.940 | So it's very, very inspiring.

01:09:05.920 | So yeah, I'll look forward to hearing them

01:09:08.820 | on your show as well.

01:09:10.460 | I gotta reach out to 'em first,

01:09:11.560 | but at some point I will.

01:09:12.520 | So, all right, three strategies

01:09:14.200 | that you write articles about.

01:09:15.600 | And I want to go over these strategies

01:09:17.960 | because I think they're valid things,

01:09:20.040 | but a lot of times people don't understand

01:09:22.720 | kind of how this can work.

01:09:24.620 | Number one is you talk about traditional IRA

01:09:27.840 | versus Roth IRA.

01:09:29.220 | And at some point in the future,

01:09:30.440 | I'll do a show where I go through the details

01:09:35.440 | of the rules on each individual account

01:09:38.660 | as far as the traditional IRA and the Roth

01:09:40.680 | and all of the details of when you can take money out

01:09:44.240 | and the contributions and the advantages

01:09:46.360 | and disadvantages of most people.

01:09:49.040 | I'm gonna summarize though, in a sense,

01:09:52.000 | most people are, if you read popular financial literature,

01:09:57.000 | you'll generally find that most people will say

01:09:59.120 | that one should always choose to participate

01:10:00.960 | in a Roth IRA before participating in a traditional IRA.

01:10:04.380 | And again, there are lots of reasons to this,

01:10:06.720 | but I want to talk about just the taxes.

01:10:08.120 | So to explain for people, with a traditional IRA,

01:10:12.240 | you are able to make a contribution to that account

01:10:15.060 | prior to paying income taxes.

01:10:17.280 | The money grows with no taxes assessed on it year by year.

01:10:21.160 | And then upon distribution,

01:10:22.800 | the account is distributed without,

01:10:25.720 | excuse me, the account is distributed

01:10:28.440 | and that money is taxable income to you.

01:10:31.120 | So you pay the tax on the backend.

01:10:35.520 | The advantages to a traditional IRA

01:10:37.280 | is purely focusing on the tax,

01:10:38.760 | not focusing on any of the other aspects of it,

01:10:40.480 | which I'll cover in a future show,

01:10:41.960 | is that when you earn a dollar,

01:10:43.760 | instead of investing 80 cents of that dollar,

01:10:46.040 | because you pay 20 cents of tax,

01:10:47.920 | the full dollar goes into the account.

01:10:50.000 | And the idea is that potentially in the future,

01:10:52.680 | some people feel that if the tax rates hold constant

01:10:57.620 | and if you have a lower income in retirement,

01:11:00.200 | that you'll be paying taxes at a lower rate.

01:11:02.800 | The Roth IRA, if you earn a dollar,

01:11:06.880 | you go ahead and pay tax now,

01:11:08.800 | and then you invest the 80 cents,

01:11:11.320 | the money grows tax deferred,

01:11:12.800 | and when it comes out in retirement,

01:11:14.760 | the money comes out completely tax free.

01:11:17.540 | Now there are other advantages and disadvantages

01:11:19.520 | between the two accounts.

01:11:21.220 | Many people feel that the Roth IRA is a better approach.

01:11:26.080 | And usually the reasons that they'll feel that way

01:11:28.540 | is either because of the flexibility,

01:11:30.440 | because of some of the distributions that you can take,

01:11:33.200 | the distributions that you can take now,

01:11:36.460 | or because of the, well, they run the numbers and say,

01:11:40.520 | well, I've got all this tax free money.

01:11:42.800 | Most people don't realize that mathematically,

01:11:45.280 | if tax rates are constant,

01:11:47.360 | and if, so if income tax rates are constant,

01:11:50.840 | and if your income is constant,

01:11:52.760 | and if your investments return the same amount,

01:11:54.920 | if they're invested identically,

01:11:56.360 | you'll have the exact same amount of money

01:11:58.560 | from a traditional IRA versus a Roth IRA.

01:12:01.620 | So if you invest 10,000,

01:12:03.720 | well, let's use $5,000 into the traditional IRA,

01:12:06.280 | and you do a pre-tax, it grows a certain rate of return,

01:12:08.560 | and then you spend the tax dollars in retirement,

01:12:11.380 | versus the Roth IRA,

01:12:12.880 | you'll have the identical amount of money,

01:12:14.440 | they're mathematically identical.

01:12:16.160 | So you're basically playing with two variables.

01:12:18.320 | Number one, what income tax rates are,

01:12:21.020 | or number two, what your personal tax rate is.

01:12:24.200 | So you have a strategy, however, that is very unique,

01:12:28.240 | and will be appropriate for people to consider

01:12:30.800 | if you are looking forward to,

01:12:33.720 | if you're planning on lowering your income,

01:12:36.960 | your earned income at a very early age.

01:12:39.400 | So walk us through your strategy,

01:12:41.440 | and why you say to start with a traditional IRA,

01:12:44.200 | and walk us through your strategy of how to do that,

01:12:47.480 | and how that works in an early retirement context.

01:12:50.480 | - Sure, sure.

01:12:51.920 | Yeah, this is one of the main reasons I started the blog.

01:12:55.280 | I love the math behind all of this stuff,

01:12:57.560 | and I didn't see that there was,

01:12:59.960 | there's a lot of advice out there,

01:13:01.960 | but not a lot of it pertains to people

01:13:03.880 | that are pursuing early financial independence.

01:13:07.400 | Most advice is geared towards people

01:13:08.960 | that are working to 65, and doing the standard thing.

01:13:13.000 | So yeah, this is a chance for me to dive into the math

01:13:18.400 | from a financial independence perspective.

01:13:20.680 | And yeah, before diving into it,

01:13:24.280 | I just wanna make the point that a lot of people

01:13:28.200 | focus on trying to eke out another 1%

01:13:31.440 | over the index, and they spend all their time

01:13:35.200 | picking stocks, and doing all this stuff

01:13:37.160 | that may help them, but in most cases it won't.

01:13:41.200 | But then they ignore things like taxes,

01:13:43.440 | and fees, and transaction costs,

01:13:45.760 | and diversification, and things that are in their control

01:13:50.520 | they don't focus on, but then they try to make the money

01:13:53.040 | on things that they can't control.

01:13:55.240 | So taxes are a huge deal, and if you can minimize them

01:14:00.240 | then you're gonna be able to meet your goals much sooner.

01:14:03.080 | So I just wanted to get that out there

01:14:04.200 | before I dive into this.

01:14:05.400 | So yeah, as you said, a lot of people

01:14:09.560 | do contribute to a Roth IRA.

01:14:12.020 | Some people I've heard, 'cause they wanna diversify

01:14:18.760 | the types of accounts that they're contributing to.

01:14:21.160 | So since a lot of people have a 401k,

01:14:22.840 | which is sort of like a traditional IRA,

01:14:25.360 | and all the same attributes that you mentioned,

01:14:28.800 | they figure, well, I'll put some money into the Roth IRA,

01:14:31.560 | and then that way I have some tax-free withdrawals,

01:14:34.500 | and I have some taxable withdrawals, and things like that.

01:14:36.680 | But yeah, for someone who is pursuing

01:14:38.920 | financial independence, we're in a very unique situation

01:14:43.360 | where we're probably not gonna make

01:14:46.240 | as much as we make right now.

01:14:48.060 | I know for me, I will never make this much,

01:14:51.680 | because even if I get a job that pays this much,

01:14:55.280 | I'm not gonna work 100% of the year

01:14:58.720 | to get that wage, I'll maybe do 50%,

01:15:02.320 | or just work a quarter of the year, or whatever.

01:15:04.600 | So I know that I'm not going to make as much as I do now.

01:15:09.040 | So that already is one benefit

01:15:11.560 | of going traditional over Roth,

01:15:13.240 | because the tax that I'm paying now

01:15:16.920 | on my last dollar of income is a lot greater

01:15:19.960 | than the tax that I would be paying

01:15:22.140 | when I'm withdrawing from that account.

01:15:25.040 | So that is already a benefit.

01:15:28.100 | I personally like to take benefits

01:15:32.700 | that are available instantly.

01:15:33.920 | So I would much rather have the tax break now

01:15:37.600 | and have more of my money working for me

01:15:40.360 | than put it in a Roth and then get

01:15:44.580 | that nice tax-free withdrawal later

01:15:47.860 | on a lesser amount of total money.

01:15:50.720 | Because every dollar that I put in

01:15:53.700 | into a traditional IRA, I'm getting 100 cents of value

01:15:57.300 | to buy the shares.

01:15:58.140 | So as I mentioned before, and as you just said,

01:16:01.560 | if it's a Roth, I'm actually only putting 80 cents

01:16:04.580 | worth of shares in the Roth,

01:16:05.860 | because I got taxed on the 20 cents

01:16:07.940 | before I could even buy the shares.

01:16:11.620 | So that extra 20 cents worth of shares

01:16:13.860 | is just gonna compound and grow

01:16:16.580 | over the 30 plus years I have it in the account.

01:16:19.340 | And that is going to far exceed, I think,

01:16:24.020 | any downside to having to get taxed on that income later.

01:16:28.860 | But there are also very nice loopholes

01:16:33.860 | that not many people take advantage of,

01:16:38.680 | but only because they don't live the sort of lifestyle

01:16:41.260 | that I plan on living.

01:16:43.500 | So there's a way to actually convert

01:16:47.860 | your traditional IRA and 401(k) into a Roth IRA.

01:16:53.620 | It's, you can, do you want me to go into that now,

01:16:58.100 | or do you want me to, are we gonna come back to that?

01:16:59.780 | Yeah, okay. - No, go ahead.

01:17:01.220 | - So yeah, so just to give you an idea of my strategy,

01:17:04.260 | I actually can't contribute to a traditional IRA

01:17:06.820 | because of my income limits,

01:17:08.100 | but my 401(k) acts in a similar way.

01:17:12.020 | So say, so I currently max out my 401(k),

01:17:15.620 | so that's 17,500 bucks a year that goes into my 401(k).

01:17:20.140 | So that's pre-tax money, so that means that's not taxed,

01:17:22.980 | so that lowers my taxable income by 17,500.

01:17:26.540 | So already I'm saving thousands of dollars on tax

01:17:31.460 | that would have been taxed on that.

01:17:33.320 | I then contribute that to my 401(k),

01:17:37.140 | and I will continue to max that out until I stop working.

01:17:40.500 | So at the point I stop working,

01:17:42.460 | I can roll that 401(k) directly into a traditional IRA,

01:17:46.580 | 'cause like I said, they're both similar types of accounts,

01:17:49.140 | and when you leave your job,

01:17:50.520 | you can roll that over into a traditional IRA.

01:17:54.100 | So once it's there,

01:17:55.460 | I can gradually convert that to a Roth IRA,

01:18:00.620 | and the way that works is,

01:18:03.860 | since you weren't taxed on the 401(k) or traditional IRA,

01:18:07.440 | you then have to pay tax

01:18:08.980 | when you convert a traditional to a Roth.

01:18:12.500 | But if, as Joshua mentioned,

01:18:16.280 | my expenses are gonna be very low,

01:18:18.900 | my income's gonna be non-existent,

01:18:21.680 | so, well, besides the small amounts

01:18:25.660 | that I'm drawing down on getting some dividends

01:18:28.520 | and capital gains and things like that,

01:18:30.900 | but it's gonna be below the threshold

01:18:33.660 | that I'm even going to be taxed.

01:18:35.780 | So it's possible to, I think I worked out my numbers,

01:18:40.340 | it's possible for me,

01:18:42.460 | once I reach financial independence,

01:18:44.000 | to transfer over $9,000 a year

01:18:48.340 | from my traditional IRA to my Roth IRA

01:18:52.520 | and not get taxed on a single penny of that transfer.

01:18:56.220 | So then, since I have 30 years to transfer everything,

01:18:59.720 | by the time I reach standard retirement age of 59 1/2,

01:19:04.020 | I should have hopefully been able to convert

01:19:06.700 | my entire 401(k), my entire traditional IRA

01:19:09.840 | that I funded back when my income was lower,

01:19:13.480 | I should be able to transfer all of that money

01:19:15.240 | into a Roth IRA and not pay a single tax on the conversion,

01:19:18.560 | which would then result in all of that money

01:19:20.620 | being completely tax-free,

01:19:21.840 | because it's tax-free going in,

01:19:23.700 | it's been growing tax-free,

01:19:25.880 | and then it'll be in a Roth IRA when I withdraw it,

01:19:28.780 | so then it will be completely tax-free at withdrawal.

01:19:32.080 | So that is a great way

01:19:34.680 | to have completely tax-free retirement money legally

01:19:39.200 | and not go to jail.

01:19:42.520 | - Yeah, and this is a strategy,

01:19:45.840 | the only place that this strategy,

01:19:47.640 | like this strategy is an excellent strategy,

01:19:49.880 | the place that it works is if you're planning on,

01:19:53.640 | either if you're planning on having your income

01:19:56.080 | drop down to an extremely low level

01:19:58.880 | or if it happens for you by accident,

01:20:02.800 | maybe through a layoff,

01:20:03.760 | maybe through a medical condition, something like that.

01:20:06.480 | So this could either happen by plan like you're doing

01:20:08.760 | or it could also happen for people

01:20:10.600 | who are, just it happens through circumstance.

01:20:15.600 | But this is really valuable

01:20:17.720 | because the strategy that you're using,

01:20:21.340 | by taking your upfront deduction,

01:20:22.920 | you can generally get,

01:20:24.480 | this is all income-dependent,

01:20:25.840 | so again, this is not tax advice,

01:20:27.600 | you've gotta consult your own tax advisor

01:20:30.000 | who can walk you through the actual, for your situation.

01:20:33.440 | But conceptually, if you can cut your income down

01:20:35.760 | through 401(k) and IRA contributions,

01:20:37.920 | that'll help you to get into a lower bracket.

01:20:40.160 | It may help you to qualify for some more

01:20:41.880 | of the income-based either tax credits

01:20:44.960 | or deductions that are available to you.

01:20:47.580 | And by paying very, very low taxes now,

01:20:51.720 | and then like you said, dropping your income out,

01:20:54.200 | you can then do the conversion into a Roth

01:20:56.960 | and by picking it up little by little,

01:20:58.960 | you can do this at a very, very low cost or nothing.

01:21:03.960 | And in addition to it, by being at a low income level

01:21:09.800 | in, I don't know whether to call it retirement

01:21:12.680 | or financial independence under your plan,

01:21:16.120 | if you can keep underneath the brackets,

01:21:18.480 | if you can keep underneath the 15% bracket,

01:21:20.720 | you can conceivably get to a point

01:21:22.140 | where you pay $0 of income tax

01:21:24.800 | because you have a low amount of earned income.

01:21:27.400 | Any dividends and taxable accounts would be taxed

01:21:30.760 | and capital gains could be at a 0% level.

01:21:33.280 | And then also, with doing this strategy

01:21:35.880 | and by carefully regulating how much income you pick up,

01:21:40.640 | it can result in a very low tax bill.

01:21:42.200 | But this is not something that,

01:21:44.880 | generally a CPA is gonna point out to somebody.

01:21:47.080 | It's generally something that you need

01:21:48.120 | to understand at first and then ask your CPA

01:21:50.340 | or yourself if you run them yourself,

01:21:52.440 | how much income you can pick up.

01:21:55.180 | I heard you say one thing.

01:21:56.020 | Let me give you one quick interesting workaround, Brandon.

01:21:58.360 | You may or may not know, and obviously,

01:22:00.680 | I doubt you wanna disclose your income,

01:22:02.220 | but do you currently, so you said you currently

01:22:04.280 | participate in a 401(k) but you're not able

01:22:06.000 | to participate in an IRA because of the income limits?

01:22:08.480 | - I am able to participate in a Roth, not a traditional.

01:22:12.080 | - Okay, so generally, you might wanna consider

01:22:14.720 | doing what you're doing as far as going ahead

01:22:16.160 | and participating in a Roth now.

01:22:17.860 | But for people who are beyond the Roth contribution limits,

01:22:22.040 | one interesting thing that has existed

01:22:25.560 | for the last couple years is anybody at any level of income

01:22:29.120 | can contribute to an IRA, period.

01:22:32.420 | It's just simply that you can't deduct those contributions

01:22:34.960 | on the front end if you're not,

01:22:38.320 | you can't deduct those contributions if you're not,

01:22:40.200 | if your income is underneath a certain amount.

01:22:42.120 | So anybody, even if your income is,

01:22:43.900 | we'll call it half a million a year,

01:22:45.480 | you can, this is relatively unimportant

01:22:48.200 | at half a million dollars a year,

01:22:49.320 | but you can do what's called a non-deductible IRA,

01:22:53.160 | and then you can do a conversion into a Roth.

01:22:56.020 | So even though there are income limits for a Roth,

01:22:58.240 | if you're over those income limits,

01:22:59.600 | those income limits generally are, let me see,

01:23:01.480 | probably about, yeah, north of $180,000 basically,

01:23:06.400 | depending on what you're,

01:23:11.280 | whether you're married and all that stuff.

01:23:12.960 | But if your income is over that,

01:23:14.080 | you can still pursue some of the strategy

01:23:15.800 | and get into a Roth that way.

01:23:18.080 | Other kind of things I wanna touch on,

01:23:20.440 | 'cause hopefully we're not making this too confusing,

01:23:22.840 | it's a little bit difficult to do in an audio format.

01:23:25.400 | Even if you are pursuing early financial independence,

01:23:29.240 | it still is valuable to consider using these types

01:23:31.800 | of retirement accounts.

01:23:32.960 | And by having the money in the Roth,

01:23:34.680 | there are too many people,

01:23:37.600 | the rules are generally with retirement accounts

01:23:39.280 | that you can't get the money out

01:23:40.360 | until you're at least 59 1/2 years old

01:23:42.280 | without paying penalties on it.

01:23:44.160 | Well, there is a rule, once you have money in the Roth IRA,

01:23:47.480 | that after you've done the contribution

01:23:49.840 | and the money has been in there for at least five years,

01:23:52.520 | you can withdraw your basis in a Roth IRA,

01:23:56.080 | which is the amount of money that you've contributed

01:23:57.960 | and paid tax on, which under our example

01:24:00.400 | would be a low amount of money,

01:24:01.780 | but it's happening each year.

01:24:03.220 | After five years, you can go ahead

01:24:04.600 | and withdraw those contributions

01:24:06.080 | and use them for current income,

01:24:07.440 | even if you're before the age of 59 1/2.

01:24:09.880 | - Exactly, and that's a huge point.

01:24:11.320 | And that's, 'cause I get a lot of questions,

01:24:13.560 | it's like, wow, you're putting so much money

01:24:15.760 | into your retirement accounts,

01:24:17.260 | but you can't get at it until you're 60, 59 1/2.

01:24:20.280 | And it's like, how are you gonna fund

01:24:22.520 | the next 29 1/2 years of your life,

01:24:25.160 | 28 1/2 years of your life?

01:24:26.840 | And it's like, exactly that strategy

01:24:30.400 | is what I plan on using.

01:24:32.000 | And I've seen it referred to other places

01:24:34.600 | as a Roth IRA conversion ladder.

01:24:36.920 | And you're exactly right.

01:24:40.480 | So currently all that money is growing.

01:24:44.640 | So those, say I only put in $5,000 into my 401(k)

01:24:49.640 | and I let it grow for 10 years

01:24:51.800 | and now it's $10,000 or something.

01:24:54.440 | When I do the conversion,

01:24:55.960 | the whole 10,000 acts as my contribution.

01:25:01.280 | So then I could potentially withdraw

01:25:03.560 | that entire amount after five years,

01:25:05.920 | which is a great, nice little side benefit

01:25:09.680 | of even taking your gains and accessing them beforehand.

01:25:14.680 | So yeah, in my case, like I said,

01:25:17.120 | so assume that I am gonna,

01:25:20.640 | once as soon as I achieve financial independence,

01:25:22.640 | I'm gonna start converting $9,000, say, per year

01:25:27.640 | from my traditional IRA to my Roth IRA.

01:25:31.640 | So that means after five years of doing that,

01:25:34.800 | then every year from then on out,

01:25:37.280 | if I continue doing that,

01:25:39.120 | I'll be able to just withdraw $9,000 to live off

01:25:42.200 | of tax-free every single year from that account

01:25:45.240 | until I, well, until whenever,

01:25:49.360 | until my money runs out, really.

01:25:50.880 | So yeah, so if you can come up with,

01:25:54.800 | as long as you have enough in your non-retirement accounts

01:25:58.200 | to fund five plus years of your lifestyle,

01:26:02.400 | then you can then sustain yourself potentially off the rest,

01:26:07.400 | paying little to no tax.

01:26:10.080 | So yeah, sure, if I needed to live off of 15,000 a year,

01:26:15.080 | then I could transfer that amount every year

01:26:17.480 | and create my $15,000 Roth IRA ladder

01:26:20.760 | and pay a little bit of tax on it,

01:26:22.400 | but I think I can, if I live on less of that,

01:26:26.040 | then it makes sense to convert less,

01:26:27.480 | and then that way I'm not paying any tax.

01:26:29.920 | - Yeah, and there's some beautiful things to the Roth,

01:26:34.920 | is that because there's no,

01:26:36.920 | if you have a lot of money in a Roth IRA

01:26:39.920 | and you're past the ages where you can take it out,

01:26:43.280 | there's no, if you have a huge portfolio inside of a Roth,

01:26:47.400 | you can take out a huge amount of dividends per year

01:26:50.320 | and continue to have an effective tax rate of zero.

01:26:53.920 | So if you have a lot of money in it, you can do that.

01:26:57.520 | There's one other one that I wanna point out

01:26:59.680 | in addition to what you said

01:27:00.640 | that a lot of people simply aren't familiar with.

01:27:03.280 | There's a rule called the 72T distribution.

01:27:08.280 | So the IRS allows you one way

01:27:10.480 | to get money out of retirement accounts

01:27:12.840 | before the age of 59 1/2 without paying penalties,

01:27:17.640 | and it's if you do it under what's called

01:27:19.160 | a series of substantially equal payments.

01:27:21.360 | Now, this is extremely dangerous for most people

01:27:23.520 | because most people aren't in a situation where they are,

01:27:28.280 | most people aren't in a situation where they have

01:27:32.560 | so much money that they can start taking money

01:27:35.420 | out of retirement accounts before 59 1/2.

01:27:37.840 | But in the context of an early retirement strategy

01:27:40.040 | like you're pursuing, if you have the money in a Roth IRA

01:27:43.600 | and you've got that contribution done

01:27:45.400 | starting at really any age,

01:27:48.520 | if you take the money out under a table,

01:27:50.680 | an amortization table that is equal payments

01:27:53.520 | that are expected to last over your lifetime,

01:27:55.920 | then the money can come out before the 59 1/2 deadline

01:27:59.380 | without paying the penalty taxes,

01:28:02.160 | and in this case, without paying any taxes.

01:28:04.760 | Now, the disadvantage, if you ever stop the money

01:28:07.440 | before 59 1/2, then you owe the penalty tax.

01:28:10.360 | And so this has to continue for your lifetime.

01:28:13.140 | But in the right situation for the right scenario

01:28:16.240 | for an early retiree looking to use these accounts

01:28:19.320 | for early tax savings and later tax savings,

01:28:23.160 | if the rules continue as they are now,

01:28:25.180 | there are some ways of using the money.

01:28:27.880 | - Absolutely, that's a great point as well.

01:28:30.320 | And I'm not sure if I'm going to do that

01:28:32.720 | just because I'm hoping that maybe I won't even tap into

01:28:37.720 | that money and just let it grow tax-free,

01:28:40.400 | but yeah, that's an excellent way of knowing

01:28:42.540 | that you can get out that money

01:28:44.800 | without going through a Roth conversion ladder

01:28:48.320 | or anything like that, so that's an excellent point.

01:28:50.840 | - Yeah, and you also want to choose carefully

01:28:52.320 | what assets you put into a Roth IRA.

01:28:55.200 | So generally, if you're gonna have

01:28:56.940 | both capital gains assets and income assets,

01:29:00.640 | so capital gains assets, usually stocks,

01:29:02.720 | and income assets, such as bonds,

01:29:04.760 | you would usually want to put your income assets

01:29:09.360 | inside of your retirement account.

01:29:11.400 | So you could have a scenario,

01:29:12.880 | by using some of the things that you're pointing out,

01:29:15.200 | you could have a scenario where you have

01:29:16.560 | a taxable brokerage account that holds your stock portfolio

01:29:21.000 | if you're gonna have an asset allocation

01:29:25.200 | that's gonna include both stocks and bonds.

01:29:27.480 | You could use the brokerage account

01:29:28.640 | to hold your stock portfolio, which with your low income,

01:29:32.560 | if you can keep under that 15% income limit,

01:29:35.160 | which is kind of the numbers where you're at

01:29:36.860 | with your low income, you can effectively have

01:29:39.280 | a 0% capital gains rate and very favorable dividend rates.

01:29:42.800 | And then with your income investments

01:29:44.680 | inside of the Roth IRA, that would allow you to use

01:29:49.120 | corporate bonds instead of municipal bonds,

01:29:50.840 | pick up a little bit of extra yield,

01:29:52.600 | and then you would be able to have that income

01:29:56.680 | coming out of your portfolio on a tax-free basis

01:29:59.240 | by using your Roth.

01:30:00.440 | So there's a lot of little, not a little useful tools here,

01:30:02.860 | which maybe we'll cover in more detail in the future,

01:30:05.980 | but for the right scenario, your strategy

01:30:09.200 | to start with IRAs and 401ks,

01:30:12.520 | especially if they're deductible now,

01:30:14.680 | and then pursue the conversion strategy

01:30:16.960 | if your income is low in early retirement,

01:30:19.700 | then it's a powerful strategy.

01:30:24.700 | - Yeah, and I just ran some numbers

01:30:26.080 | just to give people an idea, 'cause it's not,

01:30:28.400 | you're not eating ramen on this plan.

01:30:31.960 | Like I said, assume you convert 9,000 a year,

01:30:35.520 | you can still live off of 30 plus thousand

01:30:39.960 | of dividends and long-term capital gains

01:30:42.160 | and still not be taxed on any part of that convert,

01:30:44.920 | that $9,000 conversion.

01:30:46.280 | So we're still talking big numbers here.

01:30:48.460 | Like you could have an amazing life

01:30:50.800 | living off of your 35, 30 grand worth

01:30:55.360 | of whatever your investments are returning

01:30:57.840 | and you're drawing down on them and dividends and things,

01:31:00.700 | and still do 9,000 every year,

01:31:04.440 | converting it into a Roth.

01:31:05.800 | So it's, yeah, the tax code does seem to favor

01:31:10.800 | early retirees, which is quite nice.

01:31:14.400 | And the amount of money that you can actually save

01:31:18.820 | by implementing some of these strategies

01:31:20.920 | is so much more than you're gonna get

01:31:23.340 | if you try to beat the markets

01:31:24.720 | or try to find the star mutual fund manager

01:31:28.180 | and things like that.

01:31:29.020 | So your time is much better spent learning the tax code

01:31:32.960 | and learning some of these little tricks and loopholes

01:31:37.960 | and taking advantage of these types of accounts.

01:31:42.280 | And you're gonna shed years and years off of your retirement

01:31:46.100 | and not get any more risk.

01:31:48.880 | Whereas if you're just trying to pick stocks

01:31:51.960 | and beat the market, yeah, you may knock a few years off,

01:31:55.600 | but you may add a couple decades

01:31:57.160 | and your risk is much higher.

01:32:01.380 | Yeah, we wanna use every one of these things.

01:32:03.540 | So, and by the way, obviously,

01:32:06.420 | anytime you're talking about financial stuff,

01:32:07.900 | it probably doesn't need to be said,

01:32:08.900 | but I'll say it anything.

01:32:10.100 | This is all situation dependent.

01:32:11.780 | So hopefully people can just use these ideas

01:32:13.780 | and then look at your situation

01:32:15.380 | and consult somebody who's qualified

01:32:17.340 | and properly credentialed to give specific advice.

01:32:22.340 | But maybe some of these ideas would help each person

01:32:25.340 | to figure out their specific situation,

01:32:29.380 | 'cause neither of us is probably qualified

01:32:30.820 | to give specific tax advice.

01:32:32.860 | - Absolutely, yeah, that's always worth mentioning.

01:32:36.020 | But yeah, at least you have something to go and talk about

01:32:39.500 | and ask about.

01:32:40.400 | - Now, the next strategy of the three

01:32:43.940 | is you have what you call the ultimate retirement account.

01:32:47.660 | And this is a type of retirement account

01:32:49.960 | that most people don't have a clue about.

01:32:52.700 | So walk us through a summary of what you consider

01:32:55.700 | to be the ultimate retirement account and why.

01:32:57.580 | - Okay, yeah, so as I said,

01:33:00.060 | I love taking advantage of tax advantages up front.

01:33:03.940 | I know this is gonna be probably the most I'm ever earning,

01:33:08.700 | so I want to lower my tax burden now

01:33:11.380 | as much as I possibly can,

01:33:12.860 | 'cause then that means more of my money's working for me

01:33:15.060 | over a longer period of time.

01:33:16.780 | So yeah, the ultimate retirement account in my mind

01:33:20.740 | is the HSA, which is the Health Savings Account.

01:33:23.820 | Now, this is an account that people can contribute

01:33:27.500 | to if they are currently enrolled

01:33:29.700 | in what's called a high deductible health plan.

01:33:33.220 | So if you aren't, then you won't be able

01:33:37.340 | to get the tax advantages of contributing

01:33:39.540 | to this type of account.

01:33:40.900 | And the contribution limits are much lower

01:33:43.980 | than things like 401(k) and even IRAs.

01:33:47.340 | So you're not gonna get too much bang for your buck,

01:33:50.000 | but it is definitely a good way

01:33:53.540 | to lower your taxable income

01:33:56.860 | and getting lots of the benefits

01:33:59.060 | of both a traditional IRA and a Roth IRA.

01:34:02.540 | So to explain how this works

01:34:06.580 | and why it is so beneficial to contribute to,

01:34:09.860 | so the idea is that you can contribute,

01:34:12.980 | I think it's 32.50 in 2013,

01:34:16.500 | I think the contribution limit is.

01:34:18.060 | So you can contribute up to 32.50 a year,

01:34:21.740 | and that is pre-tax, so you're not taxed on that income.

01:34:25.260 | And you can then invest it,

01:34:28.100 | depending on the people that are holding your HSA,

01:34:33.780 | some have better investment options,

01:34:35.740 | others just have a savings account or equivalent.

01:34:40.260 | Mine, I can invest in broad-based, broad-index funds,

01:34:45.220 | stock market index funds, things like that,

01:34:47.020 | that have low expense ratios.

01:34:48.320 | So I treat it just as another investment account.

01:34:50.900 | So the idea is you can put this money in

01:34:53.340 | and then use that money for medical expenses

01:34:57.340 | without paying any tax on it.

01:34:58.620 | So that means that if you spend 200 bucks at the doctor,

01:35:03.140 | that $200 is completely tax-free.

01:35:05.280 | So already you're better off,

01:35:07.940 | because no doubt you're gonna have something,

01:35:10.700 | some medical expense in your life

01:35:12.420 | that you're gonna have to pay for,

01:35:13.460 | and it's much better to just pay for it with tax-free money

01:35:16.860 | than it is to pay for after-tax money.

01:35:19.320 | So that's the main idea behind the account,

01:35:23.380 | is to allow you to pay for healthcare expenses

01:35:26.420 | with your own money and not pay any tax on that money.

01:35:31.420 | So my idea is, though, there's a little,

01:35:36.700 | it's not a loophole, I guess,

01:35:39.740 | but it's just part of the rules.

01:35:42.500 | You don't have to take out that money

01:35:47.860 | as soon as you pay for the health expense.

01:35:49.960 | So for instance, say, like I said,

01:35:52.200 | I had a $200 doctor bill.

01:35:54.620 | So yes, I could take that $200 out of my HSA,

01:35:58.120 | hand it to the doctor, and then that's it.

01:36:01.040 | I just used tax-free money to pay for it, which is great.

01:36:04.620 | Alternatively, I could pay for that

01:36:09.700 | with $200 out of my wallet that's,

01:36:12.880 | you know, I've already been taxed on, it's just my cash,

01:36:15.660 | and then I can leave that $200 sitting in my HSA

01:36:18.680 | for the next 40 years to grow tax-free,

01:36:23.000 | and then I could take out that $200 tax-free.

01:36:26.560 | So this is another way that I'm saving

01:36:29.200 | for my early retirement.

01:36:31.940 | So it's sort of acting to me like a combination

01:36:37.120 | of a traditional IRA, a Roth IRA,

01:36:39.680 | and an early retirement IRA,

01:36:41.080 | because every time I spend money on a doctor,

01:36:43.600 | I'll keep track of it.

01:36:45.780 | That money will continue to grow tax-free,

01:36:48.020 | and then say when I'm 49, I'm like,

01:36:50.340 | oh man, I really need $200.

01:36:52.660 | Then I can take that out tax-free

01:36:56.220 | and keep all of the investment earnings

01:36:59.000 | that have accumulated over those 19 years,

01:37:02.980 | and those will continue to grow.

01:37:05.140 | So it's like,

01:37:06.120 | so yeah, it's like I've been calling it the super IRA.

01:37:11.660 | And the best thing is,

01:37:12.920 | so you may be saying, oh, well, that's great,

01:37:16.540 | but what if I don't have $3,200 worth of medical expenses

01:37:20.280 | before I turn 60 or something?

01:37:23.300 | The good news is that that account

01:37:25.560 | then just converts into a traditional IRA.

01:37:29.000 | So at that point, you could then do the conversion ladder

01:37:34.000 | that I already talked about,

01:37:36.120 | or you could just pay tax on the withdrawals

01:37:39.280 | just as you would a traditional IRA.

01:37:41.180 | And at that case, at that point in your life,

01:37:44.740 | you may not have to pay any tax

01:37:47.100 | just based on how much income you are,

01:37:49.540 | you actually need to survive.

01:37:51.820 | So yeah, at the worst case, it's just a traditional IRA.

01:37:55.500 | At the best case, it's a super Roth

01:37:58.020 | where it's a traditional IRA

01:38:00.060 | 'cause you don't pay tax going in.

01:38:02.140 | It's like a Roth IRA 'cause you don't pay tax going out,

01:38:04.660 | and it grows tax-free,

01:38:06.240 | and you can withdraw some of the money

01:38:09.100 | prior to your standard retirement age,

01:38:10.520 | so you can use it in early retirement as well.

01:38:12.600 | So that's, I hope that summarized it.

01:38:16.160 | My post on it's probably a lot more eloquent, but.

01:38:18.700 | - Yeah, this should give people just a teaser.

01:38:22.540 | 'Cause the HSA for early retirees is,

01:38:25.460 | and I've pointed people a couple times to your article

01:38:27.700 | 'cause it does do a good job of kind of explaining it.

01:38:30.900 | Most people aren't so familiar with HSAs,

01:38:33.380 | and most people don't know about the fact

01:38:35.880 | that they can take the money out

01:38:38.340 | and spend it on any expense after the age of 65.

01:38:42.020 | So now you're gonna go ahead and pay income taxes,

01:38:45.180 | ordinary income tax rates after that time,

01:38:47.580 | but that's identical to a traditional IRA,

01:38:50.060 | but most people aren't familiar with that.

01:38:51.920 | And people oftentimes get these confused

01:38:55.260 | with flexible spending accounts, FSAs,

01:38:57.860 | which have to be spent each year,

01:38:59.940 | and they don't realize that the money

01:39:00.980 | can accumulate inside of the HSA.

01:39:03.660 | My encouragement is this is a good way

01:39:06.200 | of stacking functions.

01:39:07.760 | For early retirees, you're likely going to,

01:39:11.960 | legally now with the changes

01:39:14.700 | in US American healthcare law,

01:39:16.720 | you're gonna need to maintain some health insurance.

01:39:19.680 | And by the way, one caveat,

01:39:21.560 | it's a little unclear at the moment

01:39:23.240 | what with the implementation of the,

01:39:26.660 | what do you call it, Obamacare,

01:39:29.120 | Patient Protection Affordable Care Act,

01:39:31.000 | whatever it is, with changes in health insurance,

01:39:33.400 | the future of high-deductible health plans

01:39:35.100 | is a little bit uncertain,

01:39:36.340 | and then the future of health savings accounts

01:39:37.980 | is a little bit uncertain.

01:39:38.820 | Doesn't seem like anything alarming,

01:39:41.180 | but keep it, if you're listening to this

01:39:42.940 | a year, two, three years from now,

01:39:44.320 | which is July of 2013, check the current rules,

01:39:47.300 | 'cause this may have changed since then.

01:39:49.900 | But the flexible spending accounts,

01:39:52.420 | people, you have to spend those each year,

01:39:54.500 | or you lose the money.

01:39:55.680 | That doesn't occur with the health savings account.

01:39:58.100 | So the health savings account

01:39:59.260 | gives you an upfront deduction,

01:40:00.460 | and one way to add to your case

01:40:03.140 | for a super retirement account,

01:40:05.520 | unlike contributions to IRAs and Roth IRAs,

01:40:08.740 | my understanding is that health savings accounts

01:40:11.660 | are not subject to Medicare and Social Security taxes.

01:40:14.700 | - Absolutely.

01:40:15.540 | - So in a traditional IRA,

01:40:17.320 | although you don't pay current income taxes,

01:40:19.840 | your money, you still have to pay

01:40:21.480 | Medicare and Social Security taxes on the income.

01:40:23.820 | With a health savings account, you don't.

01:40:25.700 | So that's an extra savings.

01:40:27.400 | The money can accumulate.

01:40:28.520 | Most people aren't familiar with how much,

01:40:31.060 | how liberal the definitions of what health expenses are.

01:40:36.060 | So check the IRS website.

01:40:38.740 | There is a, I'll put a link to it,

01:40:41.360 | I think it's publication 502,

01:40:43.420 | where you can check the IRS lists

01:40:47.360 | of what qualifies as an expense.

01:40:49.960 | But even things like, the ones that always interest me

01:40:52.260 | is I wear contacts.

01:40:53.580 | Contacts and contact solution are qualified.

01:40:57.720 | Some prescription drugs,

01:40:58.900 | it used to be that over-the-counter drugs were covered,

01:41:00.880 | that rule changed a few years ago.

01:41:02.860 | Even things that maybe traditional health insurance

01:41:05.340 | doesn't quite cover fully,

01:41:06.580 | things like chiropractic adjustments,

01:41:09.100 | other types of alternative medicine may be covered.

01:41:13.900 | Check the IRS rules.

01:41:15.660 | So there's a lot of flexibility to it.

01:41:17.340 | Plus, the fact that people are paying with your own dollars

01:41:20.200 | allows you sometimes with your healthcare provider

01:41:22.820 | to negotiate a discount, a cash payment discount

01:41:27.540 | that doesn't necessarily go through the insurance claim.

01:41:30.420 | And sometimes you get better deals because of that.

01:41:32.820 | So when you start stacking current expenses,

01:41:35.420 | current things, on top of your ideas

01:41:40.100 | about delaying the distribution

01:41:42.420 | and also taking it as retirement,

01:41:44.660 | it definitely bears looking into.

01:41:46.140 | And it's one of those valuable places

01:41:48.140 | that people can stack their benefits

01:41:50.020 | if they're able to arrange their financial affairs

01:41:53.220 | in such a way that they can make the contributions.

01:41:55.420 | - Yeah, and you made some great points about the FSA,

01:41:57.860 | because that, I actually just got an email

01:41:59.660 | from a reader recently, and he said,

01:42:01.860 | "I got this money, I'm about to dive into

01:42:05.780 | my health savings account,

01:42:07.100 | but I was reading the fine print,

01:42:09.420 | and it said that you need to use this

01:42:10.780 | before the end of the year, or else you'll lose it."

01:42:12.460 | And I hurried up and emailed him really quickly,

01:42:14.300 | and I was like, "No, no, that's an FSA,

01:42:15.980 | that's a flexible spending account,

01:42:17.420 | and you will lose it, so definitely do not

01:42:20.740 | put all your money in there

01:42:23.780 | if you don't think you're gonna spend it within a year."

01:42:26.460 | And then he wrote back, and he's like,

01:42:27.800 | "Yep, that was an FSA,

01:42:29.020 | and it looks like I don't have an HSA to contribute to,

01:42:32.060 | so that's very, very important,

01:42:35.540 | because yeah, you will lose the money

01:42:37.340 | out of a flexible spending account,

01:42:38.700 | so make sure you check that first."

01:42:41.300 | And your Medicare, that was also a great point,

01:42:46.300 | that'll save you another, what is it,

01:42:48.020 | 7.5% or 7.65% or something,

01:42:51.740 | that you would have had to pay on that money,

01:42:54.940 | so that's definitely another excellent benefit.

01:42:58.200 | - Yeah, and to your reader there,

01:43:00.680 | this is a suggestion to listeners,

01:43:04.480 | an HSA is generally, the HSA account

01:43:08.180 | is something that generally,

01:43:09.580 | most places you'll wanna set up yourself.

01:43:12.100 | So your employer may offer you

01:43:14.580 | a high deductible health plan, which is HSA qualified.

01:43:18.260 | If that's the case, they may not,

01:43:20.060 | generally an employer doesn't say,

01:43:21.500 | "Here's who you have to use

01:43:22.740 | for your health savings account."

01:43:24.180 | You can go out and research and find a provider

01:43:26.820 | that will do it outside of that.

01:43:29.000 | So if you have a health insurance plan

01:43:31.340 | that's a high deductible health plan,

01:43:32.860 | that's HSA qualified, you can still open the account.

01:43:36.480 | It generally won't be something

01:43:37.880 | that is deducted off of your pay stub.

01:43:40.240 | So speak with your human resources department

01:43:42.160 | and ask about that.

01:43:43.000 | Number two, for early retirees who don't have an employer,

01:43:46.160 | this is still possible with an individually owned

01:43:49.400 | high deductible health plan.

01:43:51.040 | So as long as your plan is HSA qualified

01:43:53.520 | and your health insurance provider will let you know that,

01:43:56.240 | you can use an HSA bank or generally they're offered

01:44:00.040 | by banks or sometimes brokerage companies

01:44:01.880 | and you can research what would be the best provider.

01:44:04.940 | Then you can open this type of account on your own.

01:44:09.600 | There are a lot of acronyms in health insurance,

01:44:11.360 | don't get them confused.

01:44:12.320 | There's HSAs, which is health savings account,

01:44:14.480 | FSAs, which is flexible spending accounts,

01:44:16.560 | HRAs, which are health reimbursement accounts.

01:44:19.120 | Each of them is unique and has their own advantages

01:44:25.080 | and disadvantages and their own implementation.

01:44:27.240 | But hopefully this will give people

01:44:28.240 | a little bit of information to talk to their HR people

01:44:31.520 | or research further on their own.

01:44:33.460 | Anything else on the HSA, Brandon,

01:44:37.400 | before we go on to the last thing I wanna talk about?

01:44:39.000 | - No, no, I think that covers it.

01:44:41.000 | And then yeah, those are all really good points

01:44:42.720 | that you made.

01:44:43.560 | And yeah, as always, take a look

01:44:46.760 | and see if it'll work out for you.

01:44:48.460 | But yeah, it could be very beneficial

01:44:53.240 | for people that are planning on early retirement

01:44:56.600 | and are just trying to minimize their taxes

01:45:00.080 | in the last few years that they're working.

01:45:02.960 | - Absolutely.

01:45:04.320 | Free Ivy League degree.

01:45:06.080 | - Right, yep.

01:45:07.560 | - Talk me through this, what are you doing?

01:45:08.760 | - Yeah, I'm currently one class and a thesis away

01:45:12.620 | from getting a master's degree.

01:45:14.760 | This is something, you know, I--

01:45:18.840 | - What's your degree? - I'm sorry?

01:45:20.320 | - What's your degree gonna be in?

01:45:22.080 | - Yeah, so it's a complete 180

01:45:23.800 | from what my computer science bachelor's

01:45:26.640 | science degree was.

01:45:28.360 | So the, I have to say first,

01:45:31.360 | first I'm working full time,

01:45:32.460 | so there's only, at the institution that I work at,

01:45:36.760 | there's only a few programs that you can do part time,

01:45:39.720 | and this is one of them.

01:45:40.540 | So I'm getting my master's of arts in liberal studies,

01:45:44.320 | but my thesis is actually gonna be on,

01:45:46.260 | I actually just was emailing my thesis advisor this morning

01:45:50.680 | about my proposal, but it should be something

01:45:53.520 | that would be interesting to both of our listeners.

01:45:57.440 | So hopefully it'll result in some pretty cool research,

01:46:00.880 | but yeah, no, it's a master's of arts.

01:46:04.480 | I've always thought I would go back to school.

01:46:07.560 | I've always wanted to try grad school,

01:46:10.120 | but there's no way I would want to pay for it

01:46:13.080 | because I currently don't need any other qualifications

01:46:16.720 | to reach financial independence,

01:46:18.280 | so there's no way I was gonna set myself back 50K

01:46:21.880 | just to go back to school for a bit.

01:46:24.960 | But yeah, no, my wife and I moved to an area

01:46:28.880 | where there's an excellent university close by,

01:46:33.200 | and I decided, at the time I was working remotely

01:46:35.720 | for a financial company, and so yeah,

01:46:40.200 | once we moved close to the Ivy League school,

01:46:43.480 | I was like, well, let me look into it,

01:46:45.640 | see if there's any programs that

01:46:48.000 | I could complete for free as an employee.

01:46:52.360 | So there was, and it sounded interesting

01:46:54.960 | and something that I hadn't done before

01:46:58.280 | 'cause like I said, I was computer science,

01:46:59.920 | so I was just doing math and science and programming

01:47:03.720 | pretty much my entire undergraduate career,

01:47:06.480 | whereas this one's much different,

01:47:08.440 | lots of reading and paper writing

01:47:10.280 | and discussions and things like that.

01:47:12.160 | So yeah, I thought it'd be worth it,

01:47:14.880 | so I decided I was gonna go for it,

01:47:18.000 | and so I just kept an eye on the job boards for the school,

01:47:21.680 | and then as soon as one popped up that was what I do,

01:47:26.200 | I applied, got it, and yeah,

01:47:28.840 | I'm less than a year from graduation,

01:47:31.320 | which feels great 'cause it's been,

01:47:34.120 | doing it part-time is quite difficult,

01:47:36.280 | working full-time and then trying to do papers

01:47:41.920 | and read tons of books and all this sort of stuff,

01:47:45.120 | and since I'm doing it part-time it took over,

01:47:48.200 | I think it'll be just under three years

01:47:49.640 | that I'll complete it in,

01:47:50.840 | and I have less than a year left,

01:47:53.640 | so I feel like I can see the light at the end of the tunnel,

01:47:56.200 | and yeah, it's been great,

01:47:57.600 | and I highly recommend it for anyone

01:47:59.480 | that wants to go back to school.

01:48:01.120 | I think that people could even get undergrad degrees

01:48:05.240 | by going this route.

01:48:08.720 | I'm not sure on that, but I think that that's the case,

01:48:13.000 | but you could definitely get a graduate degree,

01:48:14.960 | and yeah, it's been very fulfilling.

01:48:18.840 | - Yeah, this can be,

01:48:21.400 | and the reason I wanted to talk about this

01:48:23.120 | is education is, many people's one of their major expenses,

01:48:27.760 | and people are very passionate about education.

01:48:30.320 | Some people passionately believe

01:48:32.000 | that without formal education your future is doomed,

01:48:36.480 | and some people very passionately believe

01:48:38.520 | that if you go down the route of formal education

01:48:41.000 | your future is doomed,

01:48:42.240 | so there are a lot of strong feelings on it,

01:48:45.240 | but you and I don't know what's right for people,

01:48:48.640 | but if people are interested in formal education

01:48:51.440 | the approach that you're pursuing

01:48:53.480 | is one that can add a lot of benefits,

01:48:55.640 | and so I've thought a little bit about some different ways

01:48:57.760 | that you can leverage these,

01:49:00.400 | and again, this may just be a couple ideas in here

01:49:03.240 | for people to pursue on their own

01:49:07.320 | and see what's right for them.

01:49:08.720 | Number one is that exactly like you said,

01:49:10.700 | many universities, if you're working for that university,

01:49:13.700 | will give you either discounted

01:49:16.080 | or completely free access to their classes.

01:49:19.280 | Usually it's a cap of a certain number of classes,

01:49:21.640 | and I think that can be done at undergraduate levels,

01:49:23.720 | graduate degrees, and even masters and PhD type of work,

01:49:28.720 | and so the other thing is that by working at a university

01:49:32.080 | a lot of times the university

01:49:33.080 | may be a very enjoyable work environment,

01:49:36.060 | so rather than somebody working at a job

01:49:37.800 | that they don't like, that's very stressful,

01:49:40.380 | and then going out and taking on student loans

01:49:42.920 | to pay for a degree,

01:49:44.160 | it may be worth looking into working at a university

01:49:48.320 | and then using the discounted courses as a way to do that,

01:49:51.080 | and by lowering your taxable income,

01:49:53.120 | it's possible that you may be able

01:49:56.000 | to simply have a lower tax bill

01:49:58.480 | if you're earning a higher income

01:50:00.000 | and you go to a lower income,

01:50:01.120 | rather than having to pay for your income

01:50:02.680 | with taxable dollars,

01:50:04.320 | you're getting a valuable fringe benefit.

01:50:07.380 | A lot of times also universities

01:50:09.820 | offer generous benefit programs

01:50:11.220 | that go beyond their salaries,

01:50:12.780 | so universities sometimes offer very generous

01:50:17.660 | retirement programs with generous matches,

01:50:20.060 | generous health insurance,

01:50:21.580 | so if you look at the total value of a compensation package

01:50:24.940 | and include into it the dollars of your degree,

01:50:28.860 | that what you would be paying for the classes

01:50:30.520 | if you were paying for them out of pocket,

01:50:32.420 | it could be compelling.

01:50:34.300 | - Those are all excellent, excellent points,

01:50:35.860 | and that was some of the things that I had to consider,

01:50:40.020 | 'cause like I said,

01:50:41.100 | I was working for a big city financial company,

01:50:43.900 | I was working remotely,

01:50:44.960 | so I had a lot of flexibility as far as that's concerned,

01:50:48.060 | and I was making good money,

01:50:50.020 | and it was a decrease to go and work for the university,

01:50:55.020 | but if you add up all the benefits,

01:50:57.980 | like the tons of paid time off,

01:51:00.700 | lots of holidays, great retirement benefits,

01:51:03.880 | and healthcare and things like that,

01:51:05.600 | and if you do add all those up,

01:51:07.560 | it is pretty similar to what I was actually earning

01:51:10.760 | as a pay-by-the-hour consultant,

01:51:14.080 | which is pretty impressive,

01:51:15.560 | and then when you factor in the educational benefits,

01:51:19.360 | then it totally blows it out of the water,

01:51:22.320 | 'cause right now I think it costs

01:51:27.320 | over six grand per course,

01:51:29.960 | and I'm taking four courses per year,

01:51:32.640 | so that's another 24 grand of value

01:51:35.080 | that I'm extracting from being employed by the university,

01:51:38.260 | and as you said, it's much lower stress,

01:51:41.020 | it's just a totally different environment

01:51:43.580 | from corporate America,

01:51:45.200 | like it's much more rewarding as well,

01:51:49.440 | and I'm helping some of the smartest kids in the country

01:51:52.680 | get a degree rather than helping the bottom line

01:51:55.520 | of some financial company,

01:51:58.240 | and I actually enjoy my work a lot more,

01:52:01.240 | and yeah, it's great getting a salary,

01:52:04.780 | and going to school,

01:52:06.960 | and most of my classmates are paying 50 grand a year,

01:52:11.240 | and not getting paid, so.

01:52:13.660 | - Yeah, and in addition, for early retirees,

01:52:18.520 | I think there's some other benefits.

01:52:19.960 | I'm familiar with some friends of mine

01:52:21.880 | who worked at a university,

01:52:25.160 | but also by being students and working at the university,

01:52:28.600 | had access to some university housing,

01:52:31.720 | and that housing is provided,

01:52:33.360 | they needed to pay for it,

01:52:34.360 | but it's provided at a discounted rate,

01:52:36.280 | or they can negotiate that

01:52:37.660 | as part of their compensation package,

01:52:39.640 | and so if you have university housing,

01:52:42.440 | that can help when people are looking

01:52:44.840 | to decrease their expenses substantially,

01:52:46.720 | 'cause generally it would be less

01:52:48.480 | than maybe what you could find

01:52:50.120 | in the miles around the university.

01:52:52.120 | In addition, again, stacking functions,

01:52:55.060 | if you are living and working on a university campus

01:52:58.080 | where you're getting your education,

01:52:59.560 | it's probable that you can lower

01:53:01.120 | some of your other expenses,

01:53:02.360 | such as transportation expenses.

01:53:04.380 | Many college students will ride a bike to class,

01:53:08.160 | and so now instead of having to ride a bike

01:53:10.220 | 10 miles across town for a commute,

01:53:12.080 | you can simply walk to your job,

01:53:14.560 | that lowers your expenses.

01:53:16.240 | Also, things like entertainment.

01:53:17.860 | In the university system,

01:53:19.400 | college students generally aren't the most affluent.

01:53:22.440 | There's plenty of free and cheap entertainment

01:53:24.520 | that's really interesting

01:53:26.060 | that would allow people to live

01:53:27.380 | an extremely enjoyable but lower cost lifestyle,

01:53:30.800 | and people forget about this a lot of times,

01:53:33.860 | that it's not just something

01:53:35.480 | that you can only do at 20 years old.

01:53:37.620 | Some friends of mine were doing it

01:53:39.580 | in their mid-30s with kids,

01:53:41.360 | and still able to live in,

01:53:43.280 | they weren't living in the dorms

01:53:44.400 | with the 18-year-old freshman students,

01:53:46.560 | but they were living in on-campus housing,

01:53:48.100 | working there, both spouses worked at the university,

01:53:53.540 | and it's a compelling situation financially

01:53:56.380 | if you can start to stack those functions.

01:53:58.580 | There's a way to get a degree

01:54:00.280 | and get an expensive education

01:54:02.100 | without necessarily going the retail route.

01:54:04.300 | Just to go into details for a second,

01:54:07.620 | my friends who were,

01:54:10.360 | both spouses were working at the university,

01:54:12.660 | earning the income.

01:54:13.940 | When you take on the fact that you have a couple of kids,

01:54:16.260 | you're living and working on a university campus

01:54:18.700 | where you have entertainment, low transportation costs,

01:54:22.020 | low housing expenses.

01:54:23.780 | When you take the kids,

01:54:25.060 | and you take relatively low income,

01:54:26.660 | but a lot of value for the income,

01:54:28.500 | and you start to run that through the tax code,

01:54:30.900 | you can qualify for the child deductions,

01:54:33.540 | you can qualify with a generous 401(k) or 403(b)

01:54:37.300 | as the case may be, retirement accounts,

01:54:39.660 | you can qualify for refundable earned income tax credits.

01:54:43.220 | I mean, it's a substantial, substantial financial gain

01:54:47.780 | for the right person in the right circumstances.

01:54:49.780 | - Absolutely, and you forgot one of the best things

01:54:51.420 | is the university library.

01:54:53.060 | There's just, you could just keep yourself entertained

01:54:56.180 | for decades with the amount of stuff that's in there.

01:54:59.180 | They got DVDs, CDs, they got tons of books,

01:55:02.140 | and yeah, you're absolutely right.

01:55:04.260 | There's a lot of fringe benefits

01:55:06.380 | of working for a university that could, yeah,

01:55:10.580 | make it very worthwhile for someone

01:55:12.380 | that's thinking about going back to school.

01:55:14.340 | And yeah, just in case anybody questions anything,

01:55:18.020 | I use 401(k) synonymously with 403(b),

01:55:22.180 | but I actually have a 403(b)

01:55:23.500 | since it's a non-profit entity that I work for,

01:55:27.340 | but yeah, same type of thing, same account pretty much,

01:55:30.260 | but yeah, just in case some of your more,

01:55:33.420 | your listeners that are listening very closely,

01:55:36.900 | then I don't want anybody to think that,

01:55:38.300 | hey, how's he have a 401(k) if he works at a university?

01:55:41.380 | - That's true.

01:55:42.820 | And then two other things, just to add onto that,

01:55:45.020 | two other ideas that I've had, and if you have any others,

01:55:47.700 | the nice thing about universities

01:55:49.020 | is many times the universities have programs of,

01:55:52.860 | either whether it's study or employment,

01:55:56.100 | where they're working together with other schools

01:55:58.420 | that are in other places in the country

01:55:59.820 | or other places in the world.

01:56:01.340 | And so if somebody has an interest in world travel,

01:56:04.740 | it may be that by pursuing their education

01:56:06.980 | at a foreign university, when I was younger,

01:56:09.460 | I considered studying at University of Hong Kong

01:56:13.100 | 'cause I was interested in living there.

01:56:14.740 | I didn't pursue it, but it could be that

01:56:16.900 | by being a student in an international context,

01:56:19.420 | you can take some of those things

01:56:20.740 | that you talked about earlier with travel,

01:56:22.940 | you can combine it with earning an income

01:56:24.660 | and combine it with educational value,

01:56:26.780 | and now you've stacked so many functions

01:56:28.580 | on top of each other that you've got

01:56:29.660 | a really powerful, really powerful scenario.

01:56:32.780 | - Absolutely, yeah, studying abroad in Glasgow

01:56:35.620 | was one of the, yeah, the best years of my life.

01:56:39.660 | And I met my wife over there

01:56:41.180 | and completely changed my outlook on everything.

01:56:43.300 | So yeah, that could be a very fun

01:56:46.180 | and rewarding thing to do.

01:56:49.140 | - Yeah, and then the last one,

01:56:52.180 | and then we'll wrap up, is that just to remind people

01:56:54.960 | that a lot of times, this isn't necessarily

01:56:56.740 | just limited to university level.

01:56:59.460 | Many times, if somebody's looking for a way,

01:57:01.560 | whether it's private school, many private schools

01:57:04.220 | for elementary and high school students

01:57:07.140 | offer similar programs, and it could be

01:57:09.620 | that if somebody, something that my parents were able to do,

01:57:14.180 | or that my parents did that allowed me

01:57:16.300 | and some of my siblings to attend a private school,

01:57:18.580 | it could be that instead of two parents working

01:57:21.300 | at higher income jobs, it could be that

01:57:24.200 | with one of the parents switching to working

01:57:27.620 | at either a university so that their children

01:57:30.960 | could go through college, or whether it's,

01:57:33.540 | 'cause this is also a strategy for kids,

01:57:35.260 | that if you have children that you need

01:57:36.460 | to put through university, the same type of program

01:57:38.420 | can apply to parents and their children's students.

01:57:41.300 | Or at high schools, you can get a significant discount

01:57:44.620 | up to 100% on tuition, and if that lowers your,

01:57:48.340 | again, if that lowers your tax bill,

01:57:49.700 | because you have a lower earned income,

01:57:51.380 | if that allows for you to pursue some

01:57:55.660 | of these other strategies that we're talking about,

01:57:58.060 | consider it, and consider if some of these strategies

01:58:00.060 | might help you to achieve your financial goals sooner.

01:58:04.180 | - Definitely, great advice.

01:58:06.300 | - Brandon, what did we miss?

01:58:07.140 | Anything else you wanna add?

01:58:08.340 | That's about it as far as what I had

01:58:09.580 | on my list of things to talk about.

01:58:10.900 | Anything that we missed, or any--

01:58:12.500 | - No, that was great, I really, really enjoyed it.

01:58:15.460 | Yeah, that was, like I said, I was looking forward

01:58:18.100 | to being on the other side of it,

01:58:19.380 | and it was a lot easier, so you did a fantastic job,

01:58:23.060 | and I had a great time, so I appreciate you letting me

01:58:26.820 | come on and talk about some of this stuff.

01:58:29.540 | - Yeah, well, keep it up, and I like to encourage people

01:58:32.860 | to sign up and read your blog and listen to your podcast.

01:58:35.980 | Things that's interesting that I like is that

01:58:39.820 | you're not there, you haven't achieved it, right?

01:58:41.860 | So you're not technically financially independent yet.

01:58:44.100 | - That's correct, yep.

01:58:45.420 | - You're working down the path, and a lot of times,

01:58:47.460 | if people are interested in goals similar to yours,

01:58:50.460 | you're gonna develop a community around your site

01:58:53.980 | and around your blog and podcast

01:58:55.420 | of people that are pursuing similar goals,

01:58:57.820 | and that can be really encouraging,

01:58:59.260 | is for those who are interested in those types of goals,

01:59:01.540 | to talk with one another, to encourage one another,

01:59:04.780 | to brainstorm ideas, and it's also fun sometimes

01:59:08.740 | to see people working towards their goals

01:59:10.740 | and just simply follow them on the path.

01:59:12.540 | I can guarantee, probably with a pretty,

01:59:14.700 | I feel pretty confident that your plans

01:59:17.020 | and your ideas are gonna change,

01:59:18.300 | and you're gonna find out that some of the stuff

01:59:19.820 | that you've probably even said in this podcast

01:59:21.460 | doesn't work for you three years from now,

01:59:23.540 | but you're gonna find some new stuff that does work for you,

01:59:25.980 | and that's okay.

01:59:27.580 | You're probably more likely, you're more likely

01:59:29.260 | to achieve your goals 'cause you're working

01:59:30.540 | towards something rather than just simply floating on by.

01:59:33.740 | - Absolutely.

01:59:35.260 | - Keep up the good work on your blog and on your show,

01:59:37.540 | and I promise I'm not following you around

01:59:40.060 | interviewing all of your guests.

01:59:40.900 | - Yeah, that's all right.

01:59:42.100 | Like I said, I picked them for a reason

01:59:43.620 | 'cause I really like reading their stuff

01:59:46.100 | and wanted to hear more from 'em,

01:59:47.320 | so even if you take 'em all, I'll still be listening

01:59:51.380 | 'cause like I said, I'll like to hear anything else

01:59:54.580 | that they have to say about it,

01:59:55.740 | and you'll probably ask different questions than I did,

01:59:57.760 | so yeah, feel free to go for it.

02:00:01.180 | - Yeah, for sure.

02:00:02.020 | I'm trying to get, when it's available,

02:00:04.060 | I'm trying to get Jim Collins from GL Collins NH on here

02:00:07.260 | 'cause I want to talk about,

02:00:08.220 | I love some of his writings on real estate,

02:00:09.900 | and I think he has a good way of talking through that

02:00:12.020 | in some of his articles he's written,

02:00:13.300 | so I'm hoping to get him on here to talk about that.

02:00:15.740 | - Oh yeah, yeah, I'm actually planning on just having

02:00:18.660 | a call with him right after this, not a podcast or anything,

02:00:22.240 | so I'll put in a good word, and I'm sure he'll be on your

02:00:25.340 | show in no time, but I know he's busy over the next

02:00:27.800 | few months traveling and Ecuador and stuff,

02:00:31.180 | but yeah, now I'm actually, I sometimes help him

02:00:35.320 | with some of the more technical stuff of his blog,

02:00:38.020 | the computer side of it, so I'm gonna call him

02:00:43.020 | right after I finish speaking to you,

02:00:44.620 | and no doubt look into something computer related,

02:00:47.980 | so I'll be sure to mention that I had a good time.

02:00:50.900 | - Awesome.

02:00:51.940 | Well, that has been another episode

02:00:53.300 | of the Radical Personal Finance Podcast.

02:00:55.220 | Today talking with Brandon, the mad scientist.

02:00:57.060 | All the links to these articles that we've referenced

02:00:58.980 | will be in the show notes, and I'll put links

02:01:00.340 | to your podcast on iTunes and to your website.

02:01:03.540 | Encourage people to get over and enjoy some of your content.

02:01:06.520 | If you have questions or anything that you'd like

02:01:09.080 | to talk with Brandon again in the future,

02:01:10.320 | put notes in the comments section, and who knows,

02:01:12.480 | maybe we'll have him back in a year or two

02:01:13.680 | and see how he's doing on his journey.

02:01:15.800 | So thanks again, Brandon.

02:01:16.640 | - Hey, my pleasure, Joshua, take care.

RPF_0007_-_Strategies_to_Achieve_Financial_Independence_at_an_Early_Age_-_an_interview_with_Brandon_the_Mad_Fientist