Author Topic: Frequently Asked Questions  (Read 42098 times)

matchewed

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Frequently Asked Questions
« on: July 27, 2013, 02:02:21 PM »
First a note: This is not intended to take the place of good old fashioned learning (books). This is one of many resources you should use to get the answers you need. As with any advice and information given over the internet, this is given over the internet. And as such inherits all the wonderful can of worms that information and advice can have when it's given over the internet. Take all this with a grain of salt and educate yourself. Knowledgeable questions will lead to better answers. Those questions will come from some basic knowledge.

You will notice many answers have a common theme of “depends on your circumstances.” That is because it... well it depends on your circumstances. Hopefully the conversations in the links will help you narrow your answer down.

Any sort of investing advice given in this does not guarantee performance or returns.

If you disagree with any of this, GREAT!!! Put up a thread and outline why. Remember to back up your opinion as all these threads have tried to do the same.

General Topics

Common acronyms (FI, RE, AA, SWR …)

I'm just going to be lazy and link to someone who has already done it (thank you Jeb whoever you are). Feel free to PM (private message) me if you don't see one and I'll add it below.
AA – Asset Allocation
PM – Private Message
SWAMI - Satisfied Working Advanced Mustachian Individual

How do you calculate a Savings Rate?
The quick and dirty answer to this question is how much money do you save as a percentage of take-home pay. It starts to get more complex as we introduce various factors; such as income streams, pensions, pre-tax savings...etc.

This topic has been started with MMM's post about “The Shockingly Simple Math Behind Early Retirement” and has been covered several times in the forums.

How do I use the MMM calculation to calculate years to FI if my net worth is not zero? Or, what are the best retirement calculators?

Yay calculators. They're the best we got until something better. Run all of them, play with your assumptions, this will help you understand what the various factors in saving for retirement and actually retiring.

How does this work if I'm not making 60K+ etc?

Just the same. Many people will say that you should focus on increasing your income and I'm not saying that isn't true, it will work. But your % savings works regardless of your income level so cutting your expenses is just as effective. If you're stuck, for whatever reason, at a lower income this can still work.
I consider myself a walking example of this at a 40k income. Now I am single and that helps but it has been the drive to save money by reducing the big expenses such as housing, transportation, and food (roommates, bicycle, and not eating at restaurants) that gets me at a >50% savings rate.

Should I rent or buy?

Which costs less based on your circumstances? Go with that one.

My SO is not on board. What should I do?

Divorce.

Seriously though, love, communication, and patience can work wonders. This journey is a lifestyle change if you're used to the typical US/European/Australian lifestyle. And all lifestyle changes take time.

Here is MMM's post and some forum posts to browse through.

What are the most likely ways to reduce your budget?

As mentioned before, if you hit your big ticket items (usually housing/transportation/food) you will have the greatest impact on your expenses; get a roommate, buy a bike, learn to cook, whatever solution you can come up with. Reducing the big items is the most effective way to reduce your expenses.

Now some people don't want to tackle the big things and like those aspects of their lifestyle. That's fine you can still have an impact on your budget but you will be forced to focus on the small items. Stop buying coffee at the coffee shop, bulk shopping, bring your lunches to work...etc. The “small items” may not even be small. How much do you pay for internet/television/cell phone? All of these can be optimized.

Here is MMM's spending as an example.

If you think you're already frugal and can't cut anymore but are still spending $40k+ go ahead and start a new thread and post your budget. We'll be more than happy to give some love taps (read facepunches) on your budget. :)

What is a "safe" SWR?

.00000001% That should be safe enough.

According to the Trinity study that investigated safe withdrawal rates, 4% has become commonly mentioned in most financial circles.

The true answer is going to be whatever percentage you're comfortable with. This is one of those risk based questions. If you're conservative you will want to go for a smaller SWR, if you're not conservative or have a larger than necessary “stache” greater than 4% is possible.

Other forum topics on the standard withdrawal rate. And MMM's take.

How can I make more money with side hustles?

Here are some ideas.


What will I do when I retire/should I continue to work because I like it?

Live life/yes if you want to. And a shout out to Nords' related post on his site.

How do I handle my debts?

Pay them off. The general advice is to pay off ASAP whatever is more than what you can reasonably expect from investment returns within the same period. I'm personally a rather debt averse person so I would say to get rid of any debt but I can see the math behind keeping low interest debt and investing for a better return on your money.

Should I count on Social Security or inheritances or other future earnings?

Social Security? Hahahahahahaha no.

Just kidding. Social Security will be there if you have put into it. It may not be the same, it may not be the amount promised today (it won't be), but it will be there in some way shape or form.

Should you factor these things into your plan? That is up to you. The various calculators do ask what you expect from Social Security, inheritances, or future earnings. Try a few different scenarios, understand the impact these future dollars will have on your plan and act accordingly.

Investing

Should I pay off my X% interest rate mortgage?
This question really boils down to should I pay more than what is required to pay for my mortgage?

The answer is all up to you and your circumstances. There will be several factors to consider. Factors such as time left on the mortgage, the interest rate on the mortgage, and what you can expect to get as a return on an investment over that same time period. Mathematically speaking if you can get a return on an investment which is more than the interest rate on the mortgage it is financially optimal to do so. This does not take into account the emotional aspect of truly owning a home. There is no requirement to own a home free and clear to FIRE. You can just factor in mortgage/rent payments in your FIRE budget. There are several topics which have covered this.

MMM's take on it runs through a couple of those factors as well.

Should I pay off mortgage or invest?

See the should I pay off my X% rate mortgage question as it is essentially the same question.

Where should I save my [short term] money?

Depends. Often times people want to know what can give them a 10% return for the next year as they save up for a house. This does not exist in a repeatable form.

When saving money for goals you have to consider the framework of the goal. Is the goal far away, such as traditional retirement? Then you can put in in less liquid investments which provide higher returns. Is the goal in the near future, such as a plan to put a downpayment on a house in the next 1-2 years? Then a more liquid but lower return may be better. Please see these posts which have covered these subjects.

Where should I put the money for my house down payment over the next X years?

Depending on your risk tolerance and timeline, you can have a couple options:

(1) Keep it in a savings account.
  • Good if you're going to make your purchase within 1-5 years
  • You will not earn any interest but that's not your goal if you're planning on buying a house soon
(2) Put it into a low cost index fund
  • Good if you're going to save up money over a longer period of time such as 10 years
  • You will hopefully keep pace with inflation and maybe exceed it

Personally, I wouldn't wait more than 5-6 years to save up for a down payment on a house.  In the United States, if you have to save for more than 5 years to put a down payment on a house, you should probably either (1) jack up your savings rate by cutting expenses or raising your income, (2) move to a part of the country that has more affordable housing, or (3) be satisfied with knowing that if you want to stay in this expensive area, you should probably rent instead of own. [Written by birdman2003]

What do you do if you don't want to invest in Wall Street?

Before we cover what to do if you don't want to  invest in Wall Street let's cover the why. Give it a read. There are some important questions about the ethics of pursuing FIRE which you should answer for yourself regardless of your feelings towards Wall Street.

These topics cover how to reduce the bad in the path towards FIRE.

Should I invest in my 401k?

Yes. Tax deferred investments have a big impact on time to FIRE. This is all based on some assumptions. madFIentist has a good post outlining the assumptions and the results. Your case may be different but it may not be.

MMM has also covered this topic, and it has been asked in forum topics in the past.

The general answer has almost always been yes.

I'm not eligible for a Roth IRA due to my income. I've heard of a Backdoor Roth IRA... sounds dirty what's the deal?

This is the deal.

Should I try to time the market?

Probably not. It's probably best to stick with index fund investing.

What does everyone see in Vanguard, anyway?

They deal with index funds primarily which are low cost and give market performance which is better than most mutual fund managers can provide. How much is most? I'll link to an article titled “Why Vanguard Sucks.” If you didn't read that the author's major point is that only 10% of mutual fund managers have been able to beat Vanguard. He proceeds to do some other terrible analysis outlined in a table below (it's terrible because he averaged the fees instead of applying the actual fees of each fund to their respective fund, and no data). But that is irrelevant he already made the big point. Ask yourself this, can you pick that 10%? Or do you want to go through the company that can beat the other 90%?

There are several other reasons to like Vanguard but their fund performance being based off of the indexes combined with low fees made them a game changer for the common (wo)man investor looking to retire. And read the articles in the link to jlcollinsnh's site. They're good for beginners.

Transportation

Where do I buy a bike?

Craigslist. Find a used bike that is in your size and suits your needs. Read Bakari's guide.

What gear do I need?

Feet. Or maybe not.
Either way here is the holy grail for bicycling. It's a bit interesting to navigate so if you don't want to research here's a good forum post.

I'm a beginner bicycle commuter, what do I need to know?

Don't be a dick. But that goes for more than bicycling. I'm going to link back to Bakari on this one. And Sheldon Brown again.

What's the true cost of: owning and operating an older car/owning and operating a new car/Leasing a car?

I'm not going to answer this directly. The actual costs are covered better than I could do in other places.

Buy used, no loan if possible.

Communications

How can I reduce my communications costs?

Thank you I.P. Daley. You should thank him too.

More links from the hard work of I.P. Daley
http://forum.mrmoneymustache.com/share-your-badassity/communications-tech-son-of-the-superguide!/
http://forum.mrmoneymustache.com/share-your-badassity/communications-tech-discussion-thread-1/
http://www.techmeshugana.com/ - His own website

Misc.

Please turn off the tapatalk spam. There should be an option in the settings to do so.


And thank you fellow forum members. Your guys questions and answers are what mostly populate this.

Any feedback is welcome. If there is a question you feel I missed feel free to ask it.



*Edit - 11-7-13 - Link to common acronyms was broken and now fixed, ty Mr. Minsc.
*Edit - 7-31-14 - Updated to include definition of SWAMI and a plea to end the Tapatalk labels.
*Edit - 8-19-15 - Updated to fix links, remove dead links, and add additional links for communication/cellphone section.
« Last Edit: August 19, 2015, 06:26:58 AM by matchewed »

daverobev

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Re: Frequently Asked Questions
« Reply #1 on: January 07, 2014, 10:21:14 AM »
A few thoughts:

Cars
What car should I buy?
If you live in a high density urban setting, if at all possible, none; look into a car sharing company or just rent when you need.

Assuming you DO need a car, then the least expensive (purchase price + maintenance + running costs). This will vary depending on what you do.

Infrequent journeys? A large, cheap to insure car might be best - Buicks depreciate like crazy and are cheap to repair and insure, for example.

Family of three or less? Honda Fit/Jazz. Four? Pontiac Vibe or Toyota Matrix. Five? Mazda 5. Six? Minivan.

In terms of utility, a hatchback beats a sedan. But if you don't care, Civics and Corollas are solid, uninteresting cars that are cheap to run and maintain.

Saving
What should I invest in?
Saving is for short term goals. Investing is for long. Bearing that in mind, short term saving should be zero risk (cash savings accounts where the deposit is insured, at the highest rate of interest available). For retirement/long term, the lowest cost index funds you can find. Each person should (probably) figure out their own risk tolerance (but keep in mind this is about FEAR; if you aren't retiring for 15 years and the market takes a dump, "you should not care"! If you are retiring next week, you should probably be more invested in things that will smooth out the bumps better).

A good very basic, very arbitrary default is 60/40 for stocks and bonds. The bonds should be in the country you intend to retire in, as their fluctuations will sync with inflation, generally. The stocks can be geographically diversified, but for many people the most important thing to do is to get this thing rolling. A large chunk in your own economy, ESPECIALLY where there is a large amount of multinational activity, is fine. Ensuring you have some investment in the developing world is a good thing but at the end of the day, if you do 60% S&P500/40% government bonds (for an American) it'll be okay (probably, don't sue me). For a Canadian, the need to get stuff outside Canada is greater - look at the sector map for the TSX 60 and you'll see why (>70% in 3 sectors!). Look into Couch Potato portfolios for your country.

The point is that you don't need to follow the stock market to do this. You don't need to be an expert on IPOs, options, shorts. You open an account, you set up monthly or biweekly deposits and purchases, and let it run. Every 6 months or year you take a look, see if your asset allocation is where it should be, and if not fix it. That's all! There are even single fund solutions where all the rebalancing is done internally (Canada's ING Streetwise funds - they have a higher MER but if you're a procrastinator it is a really easy solution).

Real Estate
Should I buy an investment property?
It's less passive than Couch Potato investing. Especially if you are going to manage the rental - find and screen tenants, etc. Tenant laws vary (drastically), as do rates of return. There are lots of things to factor in, like maintenance, repairs, insurance, vacancy. Houses can COST YOU MONEY, where an index tracker can only go to zero (and is unlikely to do so, unless the whole country it tracks goes kaput).

Two rules of thumb for North America are the 50/2 rules - namely, 50% of gross rents will go to expenses, and that you should target 2% of purchase price as gross rent a month (So $100k property should rent for $2k) - these ARE rules of thumb, more useful for multi-occupancy places *generally*, and for cashflowing properties not capital appreciation.

These rules won't work well in other countries (eg the UK, where the tenant pays 'council tax' rather than the US and Canada where the owner pays 'property tax', and generally the costs of things are different).

Buying a property for appreciation is rather like trying to time the market. Are prices in the 'major cities of the world' going to keep outpacing people's ability to earn? It's impossible - 'to the moon' always bursts at some point. But nobody knows when. Is London overpriced? Is Toronto? Mathematically, yes; but something is worth what someone else will pay for it. There is nothing 'wrong' with buying for appreciation but you really need to do your homework. The same is true for cashflow. IMHO cashflow is "safer" as, every month, you are left with some extra money available; when buying for appreciation, your mortgage might go down a bit, but if the expenses are greater than the inflows you are carrying that property - it is a net drain on your finances (until you sell).

Where do I start?
Pay yourself first. Open that investment account, and set up an auto contribution. Yes, obviously pay off debts first. Anything > 6% is probably worth paying off before investing. At 6% or lower, I'd hedge - invest some, pay off some.

MAKE SURE you take any employer match on any pension stuff. It is ABSOLUTELY free money. It is the best return you can get - even if you have to invest in crappy funds for a couple of years before transferring to a low-fee ETF or fund.

Cut the bullshit! You do NOT need new clothes (charity shops/thrift stores are good places if you DO need some clothing), a new games console (get a used one with a bundle of games), a new TV, etc, etc, etc. A $200 refurb laptop will browse the internet quite well.

What do you need?
Food, shelter, warmth, entertainment.

Food? $50 a week per person is LOTS unless you are really on a strict diet, or a real organic believer. Try to grow some of your own - even on a window ledge. Processed food is generally unhealthy - too much salt and fat. Buying prepared food is not about the cost of the ingredients, it's about the service. It costs a lot to run a restaurant - to keep it looking nice, air conditioned, and staffed! You already have a kitchen where you can do all that yourself. It'll save you huge amounts. Pasta and sauce takes 20 minutes - tinned tomatoes, onion, two or three vegetables (peppers, broccoli) plus mushrooms, some basil and oregano and a little grated cheese.. yum! 50c? 80c?

Shelter? Close to work if possible, as small as possible (cheaper to heat!). I think the MAX rent a person should be looking for is 30% of their take home pay.

Warmth? Jumpers/sweaters and blankets are good! Check for drafts, make sure your windows are sealed tight in the winter. Turn down the hot water tank.

Entertainment? Assuming you're already getting 'the internet' then you should be ok. Use the library. Netflix is pretty good (there is a new $7 option for one screen at the moment), but we will *probably* not keep it past the free month (sorry Netflix!).

What is nice to have?
Mobile/cell phone - prepaid. $10 a month or less is easily achievable. Use free texting and calling programs when you are on wifi. Buy a more expensive, 365 day airtime voucher if such a thing exists. I buy $45 of airtime every 6 months, and use Skype, Fongo/Dell Voice (Canada only I think), and TextPlus now. Perfect? No, but still better than just the landline of 20 years ago.

What can you cut?
Depends on how much of a mess you're in/what your goals are. If you want your child to have piano lessons, go for it - but perhaps work it out as an either/or with the new car. 'The problem' isn't responsible, informed credit use. It's people going crazy and allocating 100% of their incomes BEFORE the important-but-far-off stuff (retirement).

Sure, a new car is nice. It's got bluetooth and a backup camera and it uses less fuel than the previous model! But if that's stopping you doing any retirement savings, then no... the bank might let you, the car dealership might let you, but let's be honest - and I know this'll be a shock - but they don't have your best interests at heart. Really.

YOU need to take care of you. We'll help (with advice).
Lending Loop p2p lending in Canada; $25 bonus after funding $1500

Great Canadian Rebates good extra sign up bonuses on credit cards, among other things

catccc

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Re: Frequently Asked Questions
« Reply #2 on: October 03, 2014, 02:06:00 PM »
Can I add?  This seems to come up once a week or so:

How I can access my 401K, IRA, and other retirement accounts without incurring hefty penalties if I retire early?

There are several methods for this, the most popular being:
- through the use of a Roth IRA Pipeline (converting funds to a Roth on a five year timetable)
- IRS rule 72(t), aka SEPP (Substantially Equal Periodic Payments)

more details here, and all over the internet:
http://www.mrmoneymustache.com/2011/11/11/how-much-is-too-much-in-your-401k/



MOD EDIT: More links are above in the first post under the title "Should I invest in my 401k?"  This MadFIentist guest post on JLCollins blog is my favorite explanation: http://jlcollinsnh.com/2013/12/05/stocks-part-xx-early-retirement-withdrawal-strategies-and-roth-conversion-ladders-from-a-mad-fientist/
/END EDIT
« Last Edit: October 03, 2014, 02:22:25 PM by arebelspy »

solon

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Re: Frequently Asked Questions
« Reply #3 on: August 18, 2015, 06:07:20 PM »
How do you calculate a Savings Rate?
The quick and dirty answer to this question is how much money do you save as a percentage of take-home pay. It starts to get more complex as we introduce various factors; such as income streams, pensions, pre-tax savings...etc.

This topic has been started with MMM's post about “The Shockingly Simple Math Behind Early Retirement” and has been covered several times in the forums.

Having trouble following these links. Can someone post the links where people are talking about calculating saving rates?

MDM

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Re: Frequently Asked Questions
« Reply #4 on: August 18, 2015, 07:07:36 PM »
Having trouble following these links. Can someone post the links where people are talking about calculating saving rates?
These have the old site URLs.  Make the following changes in the URLs:
http://www.mrmoneymustache.com/forum/ask-a-mustachian/shockingly-simple-math-question/ to
http://forum.mrmoneymustache.com/ask-a-mustachian/shockingly-simple-math-question/
and you should get what you seek.

matchewed

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Re: Frequently Asked Questions
« Reply #5 on: August 19, 2015, 06:27:14 AM »
Fixed, thanks :)

MDM

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matchewed

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Re: Frequently Asked Questions
« Reply #7 on: October 07, 2015, 07:55:27 AM »

BarbeRiche

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Re: Frequently Asked Questions
« Reply #8 on: November 01, 2015, 02:07:01 PM »
I've seen a few members with their FIRE totals in their signature just like this one :

08/02/15                                       02/02/16
Fire Totals:                                   Fire Projections:
-$4k/month - 87.4% Funded             135.0% Funded
-$5k/month - 69.9% Funded             108.0% Funded
-$6k/month - 58.3% Funded             90.0% Funded
-$7k/month - 50.0% Funded             77.1% Funded
-$8k/month - 43.7% Funded             67.5% Funded
-$9k/month - 38.9% Funded             60.0% Funded


Just wondering, do you guys use total NW or just investments account without home equity and other stuff that can't be withdrawn?


Thanks :)

matchewed

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Re: Frequently Asked Questions
« Reply #9 on: November 01, 2015, 03:54:34 PM »
I've seen a few members with their FIRE totals in their signature just like this one :

08/02/15                                       02/02/16
Fire Totals:                                   Fire Projections:
-$4k/month - 87.4% Funded             135.0% Funded
-$5k/month - 69.9% Funded             108.0% Funded
-$6k/month - 58.3% Funded             90.0% Funded
-$7k/month - 50.0% Funded             77.1% Funded
-$8k/month - 43.7% Funded             67.5% Funded
-$9k/month - 38.9% Funded             60.0% Funded


Just wondering, do you guys use total NW or just investments account without home equity and other stuff that can't be withdrawn?


Thanks :)

It all depends on how you choose to measure it. So the true answer is one or the other based on your needs/preference.