The Journey

By Matt Miner

Is there anyone so wise as to learn by the experience of others?  Voltaire

At a sidewalk table on a warm July afternoon, I sat across from a business school classmate.  The cicadas were working overtime.  We had cool beverages in hand.  It was Friday and folks were walking past, headed for their July Fourth weekend.

I hadn’t seen James since 2009 and we were talking about what we’d been up to in life and work since then.

“You paid off $225,000 in business school debt in three and a half years?” he asked.  “That’s an amazing strategy.  I’d love to hear about the tactics.”  Yes, MBAs really do talk this way.  And I’d wanted to tell the story.  Our strategy and tactics were jaw-droppingly simple:

Strategy:  KILL THE STUDENT LOAN DEBT!!!  We have a debt EMERGENCY!!!!  I have been one of the drone people!!

Tactics: Don’t spend money!  Earn more money!  Send the difference to the student loan people!

We executed our strategy from August 2010 to March 2014 using a variety of tactics.  Since then I’ve wanted to tell the story in the hope that it may help someone avoid my mistakes.

To sum up, our life had gone like this so far:

Normal American --> Ridiculous Disaster Zone --> Let’s try something different --> Hey, it’s working!

In a graph, here’s how Normal American looks:

Normal American

The Normal American Plan is Horrible!

Income ramping nicely (this was always my financial goal; and while income is important, how much you earn is not nearly as important as how much you keep).  Assets (home equity and retirement accounts at this time) growing along with it.  But wait!  What’s that curve on the top of the graph?  Debt is growing faster than income and assets!  And Net Worth is lagging, and then going the wrong way!  But I thought this was OK, because my income was growing.  In fact, at this time in my life I wasn’t even calculating my net worth because I didn’t think it was important.  I just thought I’d earn more money whenever I needed it.  Easy-peasy, right?

Business and management are my vocation.  My goal in my twenties was to grow my income as a manager in someone else’s business.  With that as a goal, there was an obvious path for me.  We were headed to fancy-pants business school at Duke’s Fuqua School of Business.  This led to the Ridiculous Disaster Zone.  Here’s how that looked in a graph:

Ridiculous Disaster Zone

Even worse than Normal American

Hey, my personal LBO worked awesome!!  Net worth is now negative 284% relative to when I started my work life, and debt is now 436% larger!  I more than wiped out five years (2002 – 2007) of accumulated assets in 2008 alone!  My income was on the rise, but I had no particular plan for our family’s money.

But then, something happened in 2010.  My cousins Caleb and Charlotte gave us a gift.

The  Total Money Makeover  book was big for me.  My wife already had all this stuff on lock.

The Total Money Makeover book was big for me.  My wife already had all this stuff on lock.

We were ready to try something different.

I do not endorse Dave Ramsey’s advice across the board, but I give credit where it’s due: The Total Money Makeover, coupled with a readiness to do something different, presents a powerful get-out-of-debt strategy.  After August 2010 something new began happening.  Not only was income growing, assets were growing, and debt was decreasing.  And our net worth started heading in the right direction.

No more normal American!!

Hey, it's working!

We lived through these changes pretty intensely and every kink in those lines tells a story: We moved to a rental house in 2011, thereby eliminating our mortgage, to have more resources to put toward debt repayment.  The debt increases in 2012 & 2013 are where moved back into home ownership and mortgage repayment (two different homes, one in 2012 and one in 2013 with a job change).

2014 was a great income year, so we moved ahead rapidly.  In 2014 we finished repaying the $225,000 in total debt that we had as of May 2009.

In 2016, which is trending to be our lowest income year since 2011, we are still able to increase net worth, albeit more slowly, because we’ve set the family’s cost structure at a much healthier level than it was before 2010.

It is ridiculous that it took until 2012 for my net worth to get back to where it started in 2002!  Certainly I had grown in experience, relationships, education, and ideas.  But I did a decade of work with no financial gain.

But now we had a vision, a strategy, and specific financial goals.  We weren’t going to let the next decade be like the past decade.  No more trading fifty or sixty hours a week for a financial stalemate.  No more letting interest steal our income.  No more “buying stuff we don’t need with money we don’t have to impress people we don’t like.”

My wonderful wife Charity already had a healthy, conservative view on spending.  She experienced some big challenges in her childhood and knew that while it was fine to hope for the best, we’d be well served to plan for the worst.

I, on the other hand, saw little reason to be conservative with money.  Everything had always gone relatively smoothly for me in my work and in my life.  The people I looked up to in business seemed to live pretty fancy lives.  I wanted what they had in meals, clothes, and travel.

But on our debt repayment journey, my whole perspective on the use of money and its place in our family’s life changed.  Instead of viewing money mainly for purchasing stuff and experiences, I came to see money as most useful for buying one thing: Freedom.

The tactics we use are basic but comprehensive (Hat tip to Joshua Sheats and Radical Personal Finance).  They can all be grouped along these lines:

1.       Increase Income

2.       Decrease Expenses

3.       Invest the difference wisely

4.       Protect what you can’t afford to lose (and self-insure everything else)

5.       Optimize everything

Each of these topics deserves multiple full-length posts, but for this article, here are the Cliff’s Notes.

Increase income

We doubled our family’s income when I emerged from business school; we had nothing to complain about on the income front.  My main opportunity to increase income during our debt repayment years was to build the best career I could, as fast as I could.  Additionally, my company’s relocation package was very generous, so the faster I moved from job to job, the more relocation pay I could earn.  We were motivated to do this, and moved four times in five years with generous relo benefits.  But moving that frequently was not sustainable for us over the long haul.

In early 2013 I was recruited to my present job.  I worked together with my new employer on our agreement, and the end result was the opportunity to live where we wanted, and to trade some of the “security” I had with my corporate gig for greater participation in the ups and downs of a smaller company in the same industry.

Now that we’re settled in one place and in a particular job, my focus on increasing income looks different.  First, it’s about growing in my own job, where I’m paid a fraction of the profit my department generates.  Second, it is about growing side businesses like consulting and writing.  Third, it’s about growing passive income from financial investments, which at this point consist of stock mutual funds.  In the future we’ll add real estate to our investments.

Decrease expenses

Expenses for consumption are 100% under your control.  Every spending decision is a choice you make.  You are 100% responsible for your cost structure.

You may not feel as though your expenses are 100% under your control.  In certain cases, by contract, they are not (alimony, existing debt obligations).  However, these contractual obligations are the result of previous decisions you’ve made, and though you cannot un-make them, you can learn from these experiences as you make decisions in the future.

Until you embrace the fact that you have 100% control of your future consumption choices, you will not make the progress you should in controlling expenses.  And controlling expenses is incredibly powerful.

For salaried employees, expenses are paid with after-tax money.  If you drop from a $99 / month cable package to a $39 / month internet only package from the same company, you decrease your monthly expenses by $60 in after tax money.  This means you have actually reduced the burden on your income by $60 / (1 – your tax rate).

If your marginal federal income tax rate is 25%, and your marginal state income tax rate is 5%, you have just freed up $60 / (1 – 30%) = $85.71 in income per month, or $1029 per year.

Assuming you were not maxing out your 401(K), if you add this amount to your 401(K) investments at a 7% nominal return, it will grow to $2023 in 10 years.  If you continually invest an incremental $1029 per year over the course of 10 years, you will have an additional $15,206 socked away in your 401(K).  And this is just for optimizing one line in your budget!

To further demonstrate that expenses for consumption are 100% under your control, imagine that instead of buying internet at home, you went to the library or only used internet at your work?  You can add $9884 to the $15,206 above.  So while you may still choose to have internet at home (we do, for $39 per month), just be aware that if you made a different choice you could add $25,090 to your net worth in your 401(K) after ten years.  A halfway-house solution, providing all the convenience of internet at home with a still lower price, would be to invest in a more powerful router and split the cable internet bill with your next-door neighbor.

Imagine if, instead of the cable bill, we talked about dropping your monthly mortgage interest expense from $990 dollars per month (a $297,000 mortgage on 30-year note at 4%) to $390 per month (a $156,000 mortgage on a 15-year note at 3%).  This is $162,345 in net worth in your 401(K) over ten years using the same assumptions outlined above.

Instead of assuming that your cost structure is fixed and unchangeable, look for optimizations in every category of your budget.  I promise, especially if you’re just getting started, you have expenses you can reduce or eliminate if you’re willing to be flexible and creative.

Consumption expenses are 100% under your control.

Invest the difference wisely

The first rule of investing is: Never invest in anything you don’t completely understand.

The second rule of investing is: You have to be strongly committed to your strategy.  And you cannot be strongly committed if you don’t completely understand your investments and how they work.

The third rule of investing is: If anyone tries to sell you something despite your reservations about the investment, run far, far away!

I’m not suggesting that advisors shouldn’t make money through selling products, but it is their job to be good teachers, and it’s your job to have the discipline and confidence to follow the first rule of investing.  If you leave your investment capital (your savings) in a checking account for a few months while you get educated about investing, any returns you miss will be vastly outweighed by not getting rolled for your hard earned money, and by the fact that you’ll have the mental strength to stick to your strategy through market gyrations and over the long haul.

I use a passive index fund strategy.

I have some finance background, and was reading Eugene Fama and Ken French way back in 2001 as an undergrad finance student.  I have been investing in index funds since I opened my first ROTH IRA in 1998.  This topic deserves a lot of attention, but since this post is already pretty long, let me keep it brief.  For an overview of the theory behind this style of investing here are three resources:

The Bogleheads Forum

Burton G. Malkiel’s A Random Walk Down Wall Street Stock Series

Protect what you can’t afford to lose (and self-insure everything else)

Bottom line, you need the following insurance:

1.       Disability insurance for your income, assuming you need your income.  For anyone not yet financially independent, their earned income is their most valuable financial asset.  If you earn $120,000 per year and assume the 7% rate of return used above, the value of your income in perpetuity is $120,000 / 7% = $1.7M.  We could get fancier with our calculations based on career length, taxes, and inflation assumptions, but the figure above is roughly illustrative.  In this scenario, you need disability insurance unless you already have financial investments in the $1.5M to $3M range.

2.       Health insurance, or a gameplan for healthcare costs.  Unless you are prepared to go bankrupt or on Medicaid, you need health insurance or an equivalent plan like the cost-sharing ministries that exist.

3.       Life Insurance equal to ten to twenty times your income minus wealth you already have.  For example, if you earn $120,000 and have already saved $500,000, you should buy at least $1,000,000 in term coverage.  Here’s why: If you take $120,000 and use $80,000 as a reasonable estimate of your take-home pay, you have $6667 available each month.  After your death, your family will have $1,500,000 in wealth.  Using a 4% safe withdrawal rate, this is $60,000 in annual income, or $5000 per month.  With proper planning, an income of this amount, realized from investments should generate a very low tax bill.  Your family then can either find a way to make up $1567 in monthly income (much easier than making up $6667), or can cut their budget by that amount.  Or you can buy $1.5M in life insurance instead of $1M.

4.       Homeowners’ insurance is a contractual requirement if you have a mortgage.  Shop for rates and service, read online reviews, and consider having a high deductible if you have your fully-funded emergency fund.

5.       Auto insurance is required by state law.  Shop policy options and don’t insure things you can easily afford to replace on your own (windshields, towing, etc.).  These are often “margin enhancing” for the insurer.  This means they are a financial loser for you.

6.       Don’t insure “stuff”.  Instead, have a big cash cushion.  Phone insurance?  Cordless drill insurance?  Take a pass on these junk insurance products.  These policies exist exclusively for the profit of the retailer who receives a kickback to sell the policies, and for the insurer who makes a profit on the underwriting.  Rest assured if you ever try to make a claim it will be a laborious process!  Take care of your stuff and, if you break or lose something, replace it.

Optimize Everything

This blog is about designing independence in your life by optimizing everything including business, earning, spending, investing, and lifestyle.  I’d love to hear from you by e-mail on particular topics, questions, or case studies related to any of those items.  Happy Independence Day and thanks for reading!

Matt Miner

July 4th, 2016