No matter how you found your way to The Motley Fool, the odds are high that if you're reading our articles, listening to our podcasts, or checking out some investment options, you're at least somewhat thinking about your plan for a comfortable retirement. After all, our mission statement until recently was "Helping the world invest -- better," and one of the biggest things anyone invests for is their old age. But what if you don't want to wait until you hit your 60s or 70s to fully enjoy the fruits of your labors? If that describes you, you're not alone: A small but growing community of people in this country are coalescing under the acronym FIRE, which stands for Financial Independence/Retire Early. They're living on less, saving much more, and preparing for -- if not full retirement -- a point where they have sufficient resources to feel fully in control of their lives.
In this episode of the Motley Fool Answers podcast, hosts Alison Southwick and Robert Brokamp have invited Jonathan Mendonsa and Brad Barrett, creators of the ChooseFI website and podcast, to explain how even folks with ordinary incomes can reach financial independence decades ahead of the traditional timeline.
A full transcript follows the video.
This video was recorded on Oct. 09, 2018.
Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert and snappy dresser here at The Motley Fool.
Robert Brokamp: Alison... Hello!
Southwick: In this week's episode we're going to learn all about the FIRE movement, which stands for "Financial Independence/ Retire Early," and we're getting help from Jonathan Mendonsa and Brad Barrett, the two guys behind the popular ChooseFI website and the ChooseFI podcast. All that and more on this week's episode of Motley Fool Answers.
Southwick: So, Bro, what's up?
Brokamp: Well, Alison, a giant in the financial advisory business is retiring. Chances are most investors don't know the name of Harold Evensky, but he's a pioneer in the world of research-based financial planning. It's pretty safe to say that there's no advisor who's won more awards or accolades than Harold Evensky. He's so respected that one of his clients is psychologist Daniel Kahneman who won the Nobel Prize in economics and is considered one of the fathers of behavioral finance. So if a guy's that smart and he's going to Harold Evensky, you might think he must know what he's doing.
Harold just turned 76 and he gave his final speech last month at a conference in San Diego, and the speech was summarized by Robert Huebscher for AdvisorPerspectives.com. There's a lot of good stuff in there, but I'm just going to highlight four key takeaways.
No. 1 is expect lower future returns. Evensky recommends that after fees, taxes, and inflation, investors should expect to earn just 2% a year on average over the next decade. So not over the next year, or two, or three years. We don't know. But over the next decade we should expect pretty low returns.
Now he's not the only person to predict that the markets will provide below-average returns, but it's particularly notable coming from him because for a very long time, some of the financial planning software that is most commonly used by financial advisors relied on Harold Evensky's predictions for their return assumptions, so his predictions are fairly well respected. In his speech he emphasized that in a low-return world managing fees and taxes is even more important than ever, which brings us to No. 2.
And that is be both active and passive. The debate of whether investors should try to beat the market or they should just stick with index funds rages within the financial advice business as well as without. What does Evensky recommend? He says you should do both. He was actually one of the early pioneers of what became known as the core and satellite approach to investing.
A core of your portfolio should be index funds. It's clear that they outperform most active strategies, but more importantly, very low cost and very tax efficient. Then once you have your core in index funds, you can do what he called satellites in your portfolio. Try for more aggressive strategies. Try for a little more active management. See if it works out. It could work out, but not everything's riding on those. And make sure you do it in your IRAs, because generally active strategies are more tax inefficient.
No. 3 is don't invest money you need in the next five years. That may not sound particularly insightful. Everyone knows to keep short-term money out of stocks, but the actual size of that cash cushion differs by whom you ask. Even I'm a little squishy about it. I tend to say if you don't need it in the next three to five years. Some people say in the next one to two years, so I think it's significant that someone like Harold Evensky is saying five years is really what you should be targeting. If you need that money in the next five years, it should not be in the stock market, especially if you're retired, because that's generally the length of an economic cycle.
And No. 4, the last one, is give annuities a fresh look. Like many experts, Evensky derided annuities for years, and I did that as well. But that's changing, mostly because the cost of annuities has come down so much. And by annuities, he's generally talking about what are known as single premium income annuities. You hand over a large lump sum to an insurance company and they pay you a check for the rest of your life. Regardless of what's going on in the stock market with interest rates, the economy, and how long you live; you know you're going to get that check in the mail each and every month.
Generally speaking, the research is that you should wait until you're age 70 to do it, because the longer you wait, the higher your payout. It's based on life expectancy, but 20% or more of a retiree's portfolio could be in annuities and that would generally replace what you would otherwise invest in cash and bonds.
Those are just four takeaways from Evensky's final speech. There's plenty more from that presentation and from the many speeches he's given over the years as well as the many academic papers, articles, and books he's written. If you're looking for some good, evidence-based financial planning, just google his name and you'll come up with some pretty solid stuff.
And finally, I'd like to say that after spending decades of helping other people retire, I wish Harold Evensky the best now that he finally gets to retire all on his own.
Brokamp: Everyone is seeking financial independence -- that day when you can kiss your boss goodbye and spend the rest of your days doing whatever the heck you want.
Southwick: What are you doing to your boss?
Brokamp: Kissing. Kissing him goodbye.
Southwick: Should I just warn Andy Cross about what's coming?
Brokamp: Platonic. In a platonic sort of way.
Southwick: OK, fine!
Brokamp: Anyways, for most people that day comes when they retire which happens between the ages of 62 and 65 for most Americans. But there's a growing movement of people out there who are challenging the traditional timeline. They're giving the boss the old sayonara smooch -- do you like that? I just made it up -- while they're in their 50s, 40s, or even their 30s.
So, how is that even possible? Well, today we have two people who have done it themselves and now make it their mission to teach others how to do it, as well. So, welcome to the show Brad Barrett and Jonathan Mendonsa, co-founders of the ChooseFI website and podcast.
Jonathan Mendonsa: Bro, thanks so much for having us on!
Brad Barrett: Yeah, really appreciate it! This is exciting!
Brokamp: Let's start by letting you guys introduce yourselves and tell us a little bit about your embracing of the FI lifestyle; FI, again, standing for financial independence.
Mendonsa: My name is Jonathan and I have been a fan of the financial independence community since 2012 where I first stumbled onto a little-known blog called Mr. Money Mustache. That led me down a very deep rabbit hole which convinced me that I could handle a large percentage of my finances myself and, in fact, it was in my best interest to learn just a little bit about personal finance. About building a financial ground game.
That rabbit hole increasingly steered me toward the financial independence community; this idea that I could claim control of my financial life not just in my 60s and beyond, and not just in my golden years, but frankly my best years of life [my 30s, 40s, and 50s]. And along with that came this idea of optimizing my life around value, jacking up my savings rate well beyond maybe the standard 5% or 10%. Indeed, in my own life, I at one point was touching closer to 70-80% and what that has allowed me to do is build the life that frankly I can get incredibly excited about and I couldn't even have imagined as little as maybe five, six, seven, or eight years ago.
Barrett: I'm Brad Barrett. I'm a CPA by trade and I've always been a natural saver. I think whereas Jonathan describes himself as the "reluctant frugalist," it's a means to an end for him. He wants this freedom that financial independence gives, but I've always been the saver just from the very beginning. I don't know why. But my wife and I lived at home for a couple of years before we got married. We had probably like a 90%+ savings rate and we made very intentional decisions that have led us to this point of financial independence.
We drive old cars. Oh, poor us! We have these cars that get us from Point A to Point B but, as Jonathan would joke, they're not very impressive to put it mildly.
Mendonsa: We call it Golden Boy, but this 2003 Honda Civic that we drove down in today...
Barrett: But it does drive, and it drives wonderfully. Like I said, we made these decisions. We moved from Long Island, New York where we lived our entire lives and we moved to Richmond, Virginia where probably the house and the taxes are one-third of what we would have spent on Long Island.
And was that an easy decision? Was it easy to leave our families and our friends? No, of course not, but it was in service of this goal, which is to have a wonderful life that we could enjoy so my wife could stay at home with our kids, which she did. She was a stay-at-home mom. My youngest is now nearly seven, and Laura's been a stay-at-home mom for nearly 10 years.
It's amazing, but this life that we planned out at 25 or 26 has come to fruition. I left my corporate job as a CPA three-and-a-half years ago now, and I work full-time on this podcast.
Brokamp: We've talked about this, before, on previous episodes, and we talked about it in terms of what's been known as the FIRE movement which stands for Financial Independent/ Retire Early. You don't have the "R-E" as part of your website. I'm curious. Was that deliberate and do you guys consider yourselves retired?
Mendonsa: I am definitely not retired and I think that is a huge point to make. I do think it was intentional, but I don't think we, at the beginning when we picked our brand name, were quite aware of how much that resonates with us. That this is about FI for us. We are part of the FIRE community. We love the FIRE community. And frankly I'm grateful for the acronym. I think it gives people something to latch onto. I think that when you see this idea of retiring early, you click the article. You want to find out a little bit more.
But very quickly what you find out is that financial independence is about control. It's about designing a future that you can get excited about. And if that gives you the option to choose retirement because you hate your job, or it just gives you the flexibility to build a career that excites you, or maybe you can move across the street to an employer that treats you better; it puts control on your side of the court and I think that's what's so attractive about it.
Barrett: We basically say that it's not what you're running from. It's what's you're running toward. It's designing this life that you can enjoy. We get a finite number of years here on the planet, and to live them working a job for decades just to afford a fancy car, or a fancy house, or maybe to go out to dinner a couple of extra times a week wasn't a trade-off that I was willing to make.
Again, to your question, it's not about retiring early. I feel like that has almost become a distraction for a lot of people. It's about accruing that power in your life to make decisions that serve you and to not be stuck in a job. If that boss says, "Hey, you need to come in an hour early," you have no option because your entire life is going to fall apart within like 30 to 90 days for most people who live paycheck to paycheck. Or someone who gets a flat tire and literally that $200 expense they have to put on a credit card. So for me it's about saving money. It's about accruing power in my life to make the decisions that I want to make.
Mendonsa: And imagine being in a situation, even in your early 30s, where your employer needs you more than you need them. Those individuals that are able to carve that out; those are the ones that inevitably get raises. Those are the ones that are able to carve out unique working situations. Work from home. Those are the ones that are able to -- even before they choose early retirement -- build a working environment and create a company culture, even if they're the pioneers. They're the ones that are able to act as a vanguard for a better-working environment. I think it's a benefit to people that will never retire early to still pursue financial independence.
I'll give you an example. I was a pharmacist. I was a pharmacy manager at a retail pharmacy and the way I got this job was that in my early teens I googled. Googling was still a relatively new thing. I actually heard the word "Google" in my senior year in high school. I remember that.
But I googled "top ten paying professions in the United States" and pharmacy came somewhere near the top of that list. And then I went to undergrad for four years, and then got a four-year doctorate.
Southwick: Based solely on that Google search.
Mendonsa: Man, Google is powerful. It's had an effect on my life. I am a professional Googler. But at the end of this eight-year stint I graduated with pharmacy school. I had an entry-level six-figure income and also a little side effect; $168,000 in student loan debt. And then I started working in this job that I had been pursuing for the past eight years and paid them off aggressively. I talked about that 70% savings rate. Most of that just went to paying off my student loan debt.
I paid it off in about four years getting back to broke. Getting back to broke at the age of 32. And I continued this aggressive form of savings and I had roughly $100,000 saved up because I'd also been doing my 4% match.
So along the way I decided to start this little podcast with my friend here, Brad, and it blew up. And what happened was because I was doing this in the context of no debt, I had slashed my expenses to the bone and on top of that, this little start-up that we had developed was starting to just cover all my bills. There were some very interesting things that happened, and I'm just telling all of you this to demonstrate how powerful it is to have this sort of financial ground game.
So a documentary about our community, which is going to get aired next year, wanted to come to town and film with us for a couple of days. On top of that we were going to go to our first conference. It's a big networking conference for people that are in our community. And then on top of that we wanted to go visit my [wife's family] for a couple of weeks. Now, she's from Zimbabwe. We had not seen them in several years.
We wanted to go do all of this. Like there's so many things you want to do in life. And what was keeping us from that? Well, it was my job. I'd get a total of about 20 days a year to take off and I have to divvy that up between paid and sick leave. It's very structured. I went to my boss and said, "I have this, this, and this." I laid it out. "And I just don't see any way that I can keep all of this going. I simply cannot do it. I've checked our company policies and there is a way that you can give me an unpaid leave of absence. I need three weeks. I need three weeks, unpaid, so that I can do all of this. I can't keep doing both."
To which my boss said to me, "I don't think it's in our best interest to let you do that. I don't think it's in our best interest to let you take this leave." To which, in the context that I just told you, I was able to say to him, "I don't think it's in my best interest to stay."
And that's a situation you get to make because you're not saddled by student loan debt. That's a situation you get to make because you have a strong financial ground game. That's the power of financial independence and not even reaching it. I wasn't FI when I did this. I was on the path to FI.
Brokamp: It seems to me that the essence of financial independence -- whether it's what you guys are doing, or even someone who I think many people credit for being one of the first, Vicki Robin and Joe Dominguez in their book Your Money or Your Life [I know you guys did a great interview with Vicki Robin] is basically transforming your relationship with spending. Being more deliberate about spending and appreciating what choices you no longer have if you're spending too much. Was that a difficult transition? It doesn't sound, Brad, that was as difficult for you...
Southwick: For Brad it was a joy.
Barrett: Absolutely a joy!
Mendonsa: My buddy, here, is an aspiring minimalist. He'd have one suitcase, one 2003 Honda Civic, and live out of hotels.
Barrett: And a laptop. That's all I need.
Mendonsa: Life is so simple!
Brokamp: But I'll add to that that you're both also married, so it's not just...
Mendonsa: I said aspiring minimalist. It's hard to be a true minimalist...
Barrett: With two kids it's not so easy. For me, getting your expenses under control doesn't mean deprivation. I think this is the crucial part. Financial independence is not about deprivation -- it's about choices -- so we say that there are hundreds of different levers you can pull. There are hundreds of different choices you can make in your financial life, but you have to take action.
I don't care which ones you choose. You don't have to sell your house and move into an apartment, and you don't need to sell your car, but you are going to need to make some choices to get money saved up so that you can have that little bit of power in your life. And it starts from the very beginning, like Jonathan said. It's the path to FI.
This is not binary. It's not zero or one. So when you save up, if you're living paycheck to paycheck and if you have $2,000 in the bank, your life is dramatically better than it was. So I think this starts from the very beginning.
Mendonsa: I am truly a reluctant frugalist. This does come naturally to me. Like my easy path is just not spend money. Well, you guys can relate to this. I have a board game list. There's like 300 more board games on this list that I want.
Brokamp: We at The Fool are big board gamers. That's why he brings that up.
Mendonsa: But I think I want something more powerful, so let me just paint another picture for you. I was getting a lunch with Brad early on when we had first met, and I am bringing with me this entry-level six-figure income; I think somewhere near $120,000 depending on the year. And I'm very happy and very proud of this income that I have.
But what I became very clear on, after I met Brad, is that it's not about how much you make. It's about how much you save. I had this great income, but all of it was either going back to student loans or, in many cases, it was going to finance a car. It was going to finance a big house. It was going to finance consumer debt. And frankly, all this stuff you purchase you don't have to use because in many cases you're in a job you don't like.
Contrast that with Brad, as this natural frugalist, because he has put all of his savings toward buying his freedom. I'm at work all the time. Every other weekend. Nights and weekends. He spends all of his time at home with his family. And suddenly that FOMO -- that fear of missing out that maybe would be used to get you to buy something new -- I wanted to buy the ultimate luxury. I wanted to buy a perpetual moneymaking machine that would allow me to spend my time with those I love.
You mentioned my wife. I want to spend my time with my wife and my son. That's where I want to spend the time; with the people that I value. And I don't want to just do it when my son is 20 or 30 and we're trying to reconnect. I want those best years. I want to watch him growing up and I want to be able to say when I want to go home and visit my wife's family in Zimbabwe we can do that. We can make that a priority. And we can build work. We can build everything else around that.
So I think what this does is this is a reprioritization. If you think about what it is you actually value and you build that list out, I think you will find that it's rarely the consumables. It's very rarely how much crap we all own. In many cases that is just a really poor substitute for quality time and that's what this gives us.
Brokamp: In the earlier days of when I first discovered this whole movement many years ago, many of the people I came across were people like Vicki Robin or other people who, frankly, didn't have kids. But more and more it does seem like people are doing it. They're able to raise families while living this. Do you feel comfortable with any of the trade-offs you might have made, or do you feel like this actually hasn't been that difficult?
Barrett: I have two young daughters. I have 10-year-old and a nearly seven-year-old. I think they've lived this wonderful life of abundance because we spend time with them. What do kids want? They want time with their parents. And I'm not at work all the time. I'm there at home so when they come off the bus, I'm there with them. We come home. We run home. We play board games. I mean, I'm playing board games at four o'clock on a Wednesday. How crazy is that?
It's almost hard, honestly, for me to imagine that this is real sometimes. Seven years ago when I was working in an office, this would have been impossible. My daughter Anna knew me in the pre-FI days and the post-FI days and now she's getting to, I guess, experience this life where I am there all the time.
So to me, I don't know what the trade-off is, honestly. I search for it, and it's almost like it's hard to imagine sometimes what people are spending money on. What they prioritize over spending time with family and friends. So for me it's such an obvious choice. Like what am I giving up? A 2018 BMW as opposed to my 2003 Civic? And you mean I get to spend all this time with my kids and watch them grow up? That's so obvious to me. I couldn't even fathom anyone making the other decision when it's presented to them in that manner.
But sadly, people don't think about that. You go through life. You see what the Joneses next door are doing, and you emulate it, because sadly we don't have financial education in this country. People don't learn how to do this. They don't learn what it means to spend all your money. So I guess I'm fortunate that on some level I was this natural saver.
But I think what's beautiful about what we're trying to do in the FI community is we're trying to open people's eyes to the fact that this is possible. I'm just a regular guy. There's nothing special about me. I just happen to be a saver. And even if you aren't that saver -- even if you've made mistakes in the past -- you can start today and take action. So we talked about those levers? Make some choices that will provide you some space. Will provide some savings rate and move forward from there.
Brokamp: One thing some parents might think about is college. At some point either you may decide to save for college or not, or some parents will decide that kids are on their own for college. What's your take on that?
Mendonsa: This community is a crowdsource community. It's one of those where best practices rise to the top, and we find that while you and I might have trouble thinking of a single solution for our kid; as a whole [as a collective group of people], there are ways to do college more intentionally. Smartly. There are ways to do college for less.
So if MSRP [to grab a term from the car industry] for college is estimated at $300,000 for my two-year-old to go to college when he's 18, there are plenty of people who have a plan to do it for less $40,000. There are plenty of people that have a plan to do it for nothing, because they know how it works.
And I can think of several examples that have risen to the top which I would be happy to share with you; most notably in Virginia. In Virginia, we have guaranteed admissions programs in like 23-plus public universities.
Barrett: The University of Virginia and William & Mary, so we're talking top-tier universities. Essentially you go to a Virginia community college, you get your two-year associate's degree, and you check a number of boxes.
You need a certain GPA, but it's not a 4.0. [I believe it's a 3.4 that's in the contract]. This is an actual contract between the Virginia community colleges and the Virginia university system. So you look at this contract for UVA and you take X number of courses. You get a 3.4. You are guaranteed admission to UVA. UVA is one of the top 25 universities in the country.
Now as a high school senior, you need a 1500 on the SATs. You need a 4.2 GPA to get into UVA. Well, if you take the somewhat unconventional choice to go to community college, you are guaranteed admission to UVA. So you go for two years at a tiny fraction of the cost [even as compared to a public university], get your associate's degree, go in as a third-year student in UVA [or William & Mary, James Madison, or any of those Virginia universities] and finish up your two years and you've got that degree from that university. That's amazing. That's essentially half price right there.
Mendonsa: And that's just an anecdote for the Virginia area. There are all sorts of little outlier events, but they don't necessarily have to be outliers. They're outliers because we're not talking about them as a society. We're not highlighting them for our community.
There are certainly public programs that I would like to see expanded. There are things that I would like to see done to make college more affordable for everybody. But when you're talking about what I can control for my kid -- with what I can do now -- you need to also look at the scholarship side of things, as well. There's an app called Scholly. There's scholarship.com.
I know an individual in our community, and what they did for an entire summer is they looked at the common threads between all of these different scholarships? Are they merit scholarships? Are they based on your ethnic background? Whatever it may be, realizing that there were these common themes, he said there's probably seven different types of scholarships. He created a template for each one of those different types, and once he had the templates, then he just rolled through 10 applications a day. He was getting like 10% to 30% acceptance rate.
Think about just doing that instead of a summer job. Is that an option? If you start looking at your ROI, it so vastly outperforms your minimum wage job that you got over the summer, it's truly insane. There's a caddie program [a Caddie scholarship] if you act as a caddie while you're in high school. You can get a free ride to Purdue. I think that's called the Evans Scholar Program. There's a firefighter scholarship. There's the HOPE scholarship if you're down in Florida or Chattanooga. It's based on the lottery system.
I say all this because you couldn't possibly write that down and act on every one of these, but what if you had a community of people that were not just doing it, but documenting it with other people in the community and best practices rose to the top? And you said, "You know what? If you're in Tennessee, this is what you should be looking into. If you're in Virginia, this is what you should be looking into."
Can we solve the problem as a society from this particular podcast platform? Maybe not. But can we highlight for our community what options are available so you can take ownership of it? Instead of saying, "$300,000. $300,000," what if we could just bypass college altogether. This is all, "Hey, college is going to happen." But right now we know that society is trending increasingly away toward either a gig economy, a "what have you built economy," or one where you look at trade schools.
Trade schools in your traditional sense, but also what about software engineers? We know that you can self-teach this stuff and we know that plenty of people, if you have taught it to yourself, are willing to give you that first shot. And we know that once you have your first job, your degree rarely matters.
In fact, an individual I was talking to is a CEO of a start-up. He doesn't want me to name his name, because he doesn't want to be behind this, but I'll put it out there. He says, "I'll be honest with you. Having an MBA actually holds you back a little bit, because I want to see what you have built. I want to see that process." And so we have got to understand that the rules are swiftly changing beneath our feet and not just assume that it's college at all costs. Not just assume that it's $168,000 in debt for everybody.
Barrett: So I think to summarize that it's just looking at the problem differently. I think this is how we view the entire FI community is look at your life, look at these issues, look at these problems, and just think a little bit differently. Unconventional thinking can get you further in life and this is a perfect example.
Brokamp: Got you. What about healthcare? That's a tough one. Obviously most people get it through their jobs. There was a report today in The Wall Street Journal saying that on average, an employer pays $20,000 a year for that, and that doesn't include the deductibles and the copays. From what I understand of your story, you're also looking outside the box for how you handle that. How do you do it for you and your family?
Mendonsa: This is a great question just because it's one that affects us very dramatically as we are now, essentially, entrepreneurs. I can tell you that there are several strategies in place and also let me preface this by saying that this is a disaster. This is truly a disaster. There is no good answer here.
I would love to tell you that it's just going to work. If college was a problem, this is a freaking iceberg. But having said that, you work with what you can do. There's a couple of options that are out there.
One of them is the ACA is still intact. If you are a low-income individual, even without an employer, you will likely be eligible for ACA subsidies. I know an individual that has a small start-up that he created post-work. He makes roughly $40,00-$60,000 a year [somewhere in that range] for his family of five. The subsidies are in place. It's $300 a month. You can control your tax rate to some degree if you're one of these individuals because you can then load up your 401(k), still taking care of your retirement which then drops your AGI, when then will likely increase your subsidy amount, so that's one possibility.
Let's say that you're in the situation where your business has done very well. You have a lot of income. In that situation you're just going to take it in the face, or let's say that you are retired with $3 million, $4 million, or $5 million in assets. You have a wonderful problem. If that is your situation, you're going to take it in the face and, like you said, it's just a line item that you're going to have to budget for. If you're willing to get outside of that normal paradigm you can look at something like health shares [health share ministries]. There are some disadvantages of health share ministries.
One, it's not technically insurance. Not everybody is eligible for it. Two, there's something that's called balance billing that I'll let Brad talk about it briefly, but let me just go away from the cons and talk about the pros.
In many cases you have up to $1 million in damages that are covered for roughly $450 a month for a family. I think you've also got to think about healthcare as there being three different types. There is preventative, there is maintenance, and there is acute. Who is going to be the healthiest person? The person who has low-level stress constantly and because of that overeats, under-exercises, or an individual that has reclaimed bandwidth in their life and is actively taking care of themselves. But from a mental state, a physical state and otherwise, as a whole, if you look at the FI community [and I have not data to back this up] but I would put my money on the fact that as a whole the FI community is healthier than a cohort which doesn't have the bandwidth to take care of themselves. That's one additional thing to keep in mind.
Barrett: As Jonathan said, there's truly no good answer, here, but one thing he slipped in there is if you're on the ACA, or even if you're using a health share ministry, this is a line item in your budget, and you just have to deal with it and plan accordingly. I think that's the background. I wish there was some great answer. I wish we had some amazing hack for this. We simply don't.
What my family has done is used LibertyHealthShare for almost four years, and it's worked exceptionally well. As Jonathan said, it is not insurance, so there are definitely downsides to it. The biggest is that the hospitals and doctors do not have a contract with this health-sharing ministry, so they're not legally obligated to take what in essence is that negotiated rate. We all see that. There's the rack rate, there's the negotiated rate, and that's what the insurance company generally pays.
I've had an instance where I've been actually balance billed by the hospital. Let's say a procedure cost $10,000. The normal standard repayment is $3,000. They bill me for the other $7,000; but incredibly LibertyHealthShare [and this is anecdotal of course] hired a team of lawyers. They negotiated it and they paid the remaining amount. So I was not out an additional dollar. Again, in my very anecdotal experience, it's been truly wonderful.
Brokamp: Let's get down to more practical stuff. Let's say someone's listening. You really have their interest piqued. What are the first few things they should do to put themselves on the path to an FI lifestyle?
Mendonsa: Let's take a look at the simple equation. What you earn minus what you spend is equal to the difference of the gap. We want to grow the income, we want to decrease the expenses, and we want to figure out how to optimize the difference. Those are three different strategies with virtually unlimited options around them, and you need to look at where you are on the spectrum.
What is your problem? Is it you have great income? You've got a decent baseline but you just don't know what to do with the difference. Let's talk about that.
Let's say that you are just paycheck to paycheck on $100,000. Let's talk about that. We've got to figure out what individual we're actually talking to. The FI community is really good on the spend less side of things and we're really good at the optimize the difference side of things. I think that in this particular conversation, this is probably where we can add a lot of value.
I think that earning more is great. I think all of us should look at earning more. I think it's a great opportunity, but it's a little more nebulous. Like what am I going to do tomorrow? Let's talk about career hacking. Let's talk about alternative careers. Let's talk about moving across the street. Do a start-up. Do a side hustle. I think just for the sake of this short conversation we should say that that's great. Let's focus on earning more, but let's just set that to the side and let's focus on the other two; spend less. And Brad, there's a bunch of really cool levers that you can pull almost immediately to kick that savings rate into gear.
Barrett: For me, it's the big line items in your budget. Again, we don't want to live this life of deprivation, so we can talk about cutting out Starbucks and avocado toast, but to me that's beside the point. It's how do you design that life that things that you buy actually matter?
For me, it's housing makes up probably about one-third of people's budgets. Cars somewhere in the vicinity of 15-20%. I think you can look at those immediately. Obviously, that's a big decision for many people. Moving is not something you take lightly, but if it matters $1,000-plus dollars a month, maybe it's worth looking into.
I think some really simple ones are food. People just hemorrhage money on food. For me it's about being intentional. My family cooks basically all of our meals, and our meals cost about two dollars per person per meal. That sure beats going out to the local grocery store and even just getting the prepared food there for $10 a pound; not less going out to dinner for whatever plus drinks plus tax and tip. I think you can save many hundreds of dollars per month just on food, alone. I think to me that is the simple low-hanging fruit.
Just looking at subscriptions. I think looking at your phone bill. My phone bill through Republic Wireless costs me under $20 a month. I have a regular smartphone. You wouldn't know I'm doing anything crazy. I'm just a little more intentional. So it comes back to that; intentionality. I don't download YouTube videos and podcasts when I'm off Wi-Fi. That is literally the only thing I give up, otherwise I have a perfectly functional normal human's phone. I just don't do those couple of things. Is that like a "oh, poor me, cry me a river" type deal? Or is that, "Wow. I'm saving $1,000 per phone line per year." It's an obvious choice once you're presented with it.
Again, it's those kinds of things. Cutting the cable, etc. We could talk about this ad nauseum, but there are these items to look at.
Mendonsa: I don't want to belabor this particular side of things, but just to point out how powerful this is. We talked about the car earlier in the conversation. If you are to do the math on the true cost of car ownership; if you are to basically look at the difference between buying that brand new car and financing a new car for life vs. just having, frankly, one new car, paying it off and sticking with it for years and years and years until it disintegrates into dust in your driveway, the difference is $1 million. I mean, it's that truly incredible.
If you look at something that's a powerful idea called house hacking, it's a big word for basically saying you buy either a single-family home or a duplex or triplex. You'll stay in one room and you rent out the others hopefully with enough to cover most or all of your rent, so you live for free. Imagine just simply living for free. Cutting that line item for your budget. And then if you want to compound that, we know that between your home costs and your transportation costs that's 50% of most people's budget. If you then moved your house that close to your job and you could bike, walk, or very easily go to work, suddenly you have cut your expenses by 50%.
You then put that into the other side of the equation, the life optimization side. For instance, if you have a 1% savings rate, that means it takes you 100 years to replace that one year of expenses. If you have a 50% savings rate, we know that you can get to a point where working is optional within 10 to 15 years using the power of compound interest. That's how powerful it is.
So when you look at your life -- when you look at this as a puzzle -- and you say, "I can focus on any aspect of this, but what do I want to do now?" You don't have to do everything, but my friend, you're going to have to do something. And that's the really cool part of this. Let's just get a little bit better every single day.
And we see this. I was talking to an individual the other day and his name is Chris. He says, "Guys, I found your show last fall, and I was just drifting. I don't know what I was doing. It's so obvious. My net worth has tripled." And there's no hook to this. There's no upgraded mastermind class where now you're going to get the real secrets. It's just stupid simple. Just do it! Just do something each day to put yourself in this better situation!
Brokamp: So some people who are considering this lower-cost lifestyle might think, "Oh, that's fine, but then from now on all my vacations are..."
Southwick: I get to have no fun ever!
Brokamp: We're going to be at the tent at the KOA, but that's not necessarily...
Mendonsa: I have been to KOA, but it was a long time ago. I didn't know they were still out there.
Brokamp: I actually love camping, but the point is that's not necessarily true, and Brad you, in particular, are sort of this ninja in terms of finding ways to see the world for free.
Barrett: Yes, it's been quite a journey for me, no pun intended.
Barrett: My wife and I have earned, I think at the last count, like 2.5 million miles in points by just being very intentional about our credit card spending. Again, kind of going through the entire FI life, it's living a very optimized financial life. And part of that for me, personally [and, of course, every person is different], but for us we put all of our expenses on our credit cards. We pay them off clearly on time and in full every single month. That's the crucial part of this. If you're not one of those people, just please stop listening.
Southwick: Stop listening right now! We're done!
Mendonsa: So everybody just leaned in to listen more closely.
Southwick: I totally agree with that. I do that!
Barrett: So table stakes, but what we do is we open up very targeted credit cards and earn these massive sign-up bonuses. You'll see, obviously, different advertisements. Spend $3,000 in the first three months and earn 50,000 American Airlines miles, or some such.
Well, if you can redeem those for any type of reasonable value, you're going to get probably $700 to $1,000 in value from that one credit card sign-up, and that's just using your normal spending. In that case it was $3,000 of your normal spending on this card, instead of using the other card that you were getting 1% back, which would be $30. Here you're using this very targeted card and getting $1,000 in free travel.
Now, we've done that over a period of many years -- over probably seven years at this point -- and like I said earned this massive amount of points and miles that we've turned into real travel. So my family of four, and actually the four grandparents, came with us to Disney World. So instead of it costing $4,000 approximately for the hotel, which we stayed on-site, four round-trip flights, and the park tickets, we spent about $150. On one trip.
Mendonsa: And talking about real travel, going back to my story, if you remember that interaction I had with my employer where I said, "Hey, I want to take my wife home to go visit her family," travel rewards had a profound impact on my wife for this very reason. Travel is expensive, and when you marry someone from another country, you're baking that in. The family is important and travel is just going to happen.
Southwick: Put it in the vows.
Mendonsa: Virtually. We're staying here in the States, but I promise we'll come back and visit you guys every couple of years or so. And pre-Brad, I was very happy with my 1.5% cash back card where I would get maybe $30-40 to spend. $40 and cash rewards. But post-learning about this and how to implement and benefit from it, it would have cost my wife and I probably $3,000 to go visit her family for two weeks in Zimbabwe. I did all of that using points and miles.
And I want to emphasize how valuable this is, because it's not just that I got the flight for free. If you think about it, in a past life I would have had to pay that same $3,000 for those two air tickets and I would have paid for it with post-tax dollars.
Cards and points are non-taxable. The way they're structured, spending that you were having to do with post-tax dollars and you're benefiting from whatever marginal tax bracket you find yourself in, and not only are you not having to spend the money on it, but then you're getting the travel with tax-free benefits. That is incredible, and this is one of the things that allowed me to just take that line item that was travel in my budget, and just take it completely out.
This is about getting more for less. What if we can get more housing for less because you're using a form of house hacking. What if we can get the same college experience for less? What if we can go and get a better job than we could have just following the traditional college course, and what if we can travel around the world for free? It's been well-documented that this is possible.
Brokamp: Obviously, we'll give the caveat that that means that you pay the bills off, of course, because if you're not paying off you're maintaining a balance...
Southwick: I've been like that.
Brokamp: ... and all that stuff. Some people might have concerns about how it affects their credit score, but you guys have been doing this for years and I'm going to bet that you guys have pretty good credit scores.
Barrett: Yes. I think my credit score started at like a 792 and the last time I checked within a month it was 811. I would say everyone who's hearing this, you need to look at your own life and figure out what works for you. My wife and I have these wonderful credit scores. We said, "OK, this sounds good," but it was a trust-by-verify type situation. "We're going to dip our toes in and see if this works." We have that margin where even if our credit scores plummeted 50 or 70 points, nothing bad would have happened. We had a home. We weren't going to buy anything on credit. There was no risk here, for us, at all.
I've worked with many thousands of people who have been using this similar strategy and I've yet to hear of one person whose credit score plummeted. I think I can speak again anecdotally but with knowing tens of thousands of people who have done this that it really doesn't impact you all that much, but you are going to see, just in your normal course of life, intra-month swings.
Right before you pay off your credit card, your utilization is going to be slightly higher than the day after you pay it off. So regardless of what credit card you're using, your credit score fluctuates. I think you'll probably see a 20-point plus or minus, but if that's within that margin of safety for you, then I see no downsides here.
Southwick: What level of frequency do you find that you guys are opening and closing new credit cards?
Mendonsa: We both, I believe, try to keep it just as simple as possible. To go back to Brad's point, I think it really helps to understand just what credit card companies actually look at. That's been publicly documented and there may be some other factors, but they look at utilization. So if you have a card with a $10,000 limit and you're only using $100, you're not really utilizing your card. That's a positive thing.
The age of your credit. If you have a card that you opened 10 years ago and you still have it, or you have a student loan that you've had forever, that's a positive.
And there's a few derogatory marks. For instance, if you don't pay your bills on time, that's a really bad thing. That's what would hurt you, if anything. Like he said, table stakes for this is make paying your bills on time and in full.
To your other question, I will open a card and I will then just put all of my normal spending on that card until we've reached this certain minimum spend and gotten the reward. Then maybe my wife will open another one. Usually it's going to take us a couple of months to get through a minimum spend on a card.
There are people, I'm sure, that are incredibly aggressive with this. I'm not trying to have 20 million points, but this is a way for me to replace spending that I was already making, putting regular stuff on a card, and then using that to give my family a wonderful trip once or twice a year. And we just have this extra stash of travel that we can use when we need it. Maybe one year we use more, maybe one year we use less but it offers us freedom and flexibility. Where in the past maybe I was looking at this from this one-dimensional place. "I'm sorry, honey. We can't go visit your family because we're paying down our student loans."
Southwick: Once again, for our listeners who want to learn more, you guys are at ChooseFI.com. And then your podcast, if they just go to iTunes and search ChooseFI are they going to land on you?
Barrett: Yes. Just ChooseFI. We publish every Monday and Friday.
Mendonsa: And there is an episode on our podcast where we really went into depth on what this would look like for an individual that wants to get started with this. It's Episode 9 of our podcast. I think it's actually our most downloaded episode of all times, so it would be a wonderful place to start if you were to say, "Hey, that sounds really cool, but I think I need a little bit more information before I really dive into that." Go check out Episode 9 of our podcast.
Southwick: Thank you guys so much for joining us!
Barrett: Yes, this is a blast! Thank you!
Mendonsa: So much fun!
Southwick: Well, that's the show! I want to thank Jonathan and Brad for joining us once again! That was a good chat!
Brokamp: It was!
Southwick: Our email is Answers@Fool.com. Drop us a line. We always have a mailbag episode coming up around the corner to answer your questions. Also you can still send us a postcard from your travels around the world. Our address is 2000 Duke St., Alexandria, VA 22314. The show is edited emblazonedly by Rick Engdahl [because of the FIRE community].
Southwick: There we go! For Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Alison Southwick owns shares of DIS. Robert Brokamp, CFP owns shares of SBUX. The Motley Fool owns shares of and recommends GOOGL, GOOG, SBUX, and DIS. The Motley Fool has a disclosure policy.