Posts Tagged ‘FIRE’

Price’s Law and Why the Early Retirement Community Will Not Harm the Economy

Square root employee?

The FIRE community has been educating the public in attaining financial independence and early retirement for a decade or so now. Whenever the topic arises it is sure to be followed by the exasperated rebuke, “We can’t all do this! Who will do the work if we all retire at 30? The economy will fail.”

The argument has a sort of logic on the surface. If everyone retired by their 30th birthday there could be a problem. A 50% savings rate could crush the economy! Right?

Or maybe not. A high national savings rate doesn’t harm the economy! The United States had a double digit savings rate in the 1950s and the economy roared. China and many other nations with vibrant economies have high savings rates. A low savings rate seems to be the real problem. In the U.S. we struggled more as our savings rate declined to its current low single digit home.

High savings rates don’t kill the economy; it provides a massive pool of ready capital to invest in infrastructure and future economic growth. No wonder our road, bridges, water and sewer works are subpar. The government decided it was good for the economy short-term to spike growth by encouraging excess consumption. As the savings rate kept declining less money was available for high speed rail and advanced internet services. And don’t even think of fully funding roads and upgrading the electric grid.

 

Price to the Rescue

Derek J. de Solla Price discovered an inverse relationship between how many people actually do most of the work in a given setting. Price discovered the square root of a group did half the work and the remaining members of the group did the other half. If you have a business with 10 employees, then 3 were doing half the work.

Here is where it gets scary. If you have 100 employees, 10 are doing half the work and 90 the other half! As an organization grows, incompetence grows exponentially while competence grows linearly! As the organization grows to 1000, thirty-two are doing half the work with 968 doing the remaining half! This is why it is so hard to grow a very large organization and keep it large.

Price’s law is visible in corporate America. In 1928 the Dow Jones Industrial Average expanded to 30 stocks. Of all the stocks on the original list, only one is still there: General Electric. The other 29 companies are either merged, bankrupt, dissolved or significantly smaller firms. Current financial difficulties at General Electric could soon remove the remaining holdout from the original Dow-Jones stocks. In less than 100 years every single one is off the list!

You don’t need as long a timescale to see Price’s law in action on the S&P 500. Of the ten largest stocks in the S&P 500, most were not on top a decade ago. Companies like Kodak, Sears, and Xerox are nowhere to be found at the top of the list, yet they were the crème de la crème at the height of the Nifty Fifty days of the early 1970s. A damning fact is the average stock in the S&P 500 spends an average of 30 years there. That’s it. Some make it longer, other less. But 30 years is all the leaders can manage on average to stay on top. This is why we buy index funds instead of individual stocks. Individual companies come and go, but as the economy keeps climbing, so does the size of the index.

 

Faulty Thinking

A quick reader might be thinking of how to game this information to her advantage. A few ground rules are in order before we get cute.

According to the U.S. Bureau of Labor Statistics, on January 1, 2016 the U.S population was 322,810,000 and 157,833,000 were in the Civilian Labor Force. You read that right. Forty-nine percent of the total population is in the labor force! As you can see, a very large number of people are not engaged in any kind of formalized labor. Children, the disabled, military personnel, incarcerated and the retired are not part of the labor force.

Running 157,833,000 through a square root calculator gives you around 12,500. At first blush we might be tempted to believe 12,500 people are doing half of all the formalized work in the U.S. with 157,820,500 doing the other half of all the work. Now you know why you’re so tired. You’re one of the 12,500!

Except it doesn’t work that way. As much as you may want to believe you’re carrying an unfair labor burden (and you might be), the truth is far more than 12,500 people are doing half the work of the country.

Price’s law works wherever there is creative productivity. It is certainly possible a mere 12,500 people are providing half the creative productivity as long as you narrowly define “creativity.” Elon Musk is a hyper productive individual. But you can’t discount the workers building the cars!

While Price’s law works wonderfully when applied to baskets scored or city sizes or a single business, it fails to adequately disclose who is productive nationally. If only 12,500 provide half the nation’s GDP there are not enough producers to have at least one productive employee per successful company.

No, the Civilian Labor Force is not “creative productivity” and therefore we should not apply Price’s law. Price’s law explains what happens within an organization. Again, if you have 10 employees, 3 are doing half the work. Thirty percent of employees are kicking out half of the company’s creative production. It could be tax returns or widgets. The percentage contributing to half the company’s production declines to 10% when staff increases to 100. The bigger the company grows the worse it gets.

The Pareto Principle appears more generous in stating 80% of results come from 20% of the inputs. In other words, 20% of employees are doing 80% of the work; 20% of clients are providing 80% of the profits; and so on. In the end Price’s law and the Pareto Principle are explaining a similar reality.

 

 

Price is Saving the FIRE Message

Back to where we started. The FIRE community message is you can save half or more of your gross income, invest in index funds and retire early, some as young as 30. And then the economy drops off a cliff and nobody is around to get the work done.

Except Price told us what we needed to know! If 30% of the people in a small business with 10 employees are doing half the work, 70% aren’t getting shit done! And business owners, tell me I didn’t just hit the nail on the head.

Square root kitty?

If so many people are unproductive it is easy to have fewer people in the work force and still get all the work done. What we need to do is train employees to be like the minority producers (the square root guys).

How can we do that? First we need to look back at our error in assuming you can apply the square root of the entire nation’s work force and conclude 12,500 people do half the work. A business can be just like the national work force. If you have one huge group within a company Price’s law is going to crush you.

But then explain companies that are large? How come some outperform for very long periods of time?

The solution is simple. By breaking a huge company into smaller groups you can increase the number of productive people. A major corporation can act and perform as nimbly as a smaller company by organizing human resources appropriately.

Of course another issue arises. If some schmuck in accounting can’t get off dead center, how will a smaller group make her more likely to increase productivity? And the answer is: it doesn’t. Merely cutting a larger group into smaller groups will not have a meaningful effect on overall productivity of the firm. Unless you organize the smaller groups to focus on specific tasks.

Large groups tend to get less done because they take on too much. By breaking tasks into smaller sizes handled by smaller groups you can unleash before unrealized creative powers. And there is an example that proves it.

 

The Richest Guy in the Room

Just as the largest companies don’t stay on top forever, neither do the wealthiest people stay on top of the Fortune 500 list of wealthiest people on the planet. The 1% churns. A lot!

Don’t get me wrong. Warren Buffett was the richest guy on the planet for a while. Now that Jeff Bezos jumped in front, Warren isn’t looking for gainful employment to put food on the table. Bill Gates was on top for a while. Back in the day Rockefeller was on top. What I’m saying is the list changes for people just like businesses.

The insight Price gave us and the understanding we have of the Pareto Principle allows us to better use our human capital. People are the most important resource. But an employee struggling in a large group is far more likely to excel in a smaller group.

You’ve experienced this yourself. You go to a conference and attend a breakout session where 10 people are in the audience. A significant percentage of the people participate by asking questions and adding additional information. If the room fills with 50 people a smaller percentage get involved. The bigger the group gets the more likely you are to keep quiet. A few step forward, but fewer than in smaller groups.

Also, productive people in one setting will be less productive in a different setting. Smaller groups only work if effort is applied into providing the right environment in the smaller group so more people become interactive producers. This is the solution to the problem presented by detractors of the FIRE community.

 

The FIRE Community was Right All Along

It is possible for people to save more and invest the difference without killing the economy. We can be just as productive as a nation, as a company, as an individual. Even more so if we apply only a small amount of effort.

Reaching financial independence at an early age does NOT harm the nation. Quite the opposite; it makes us tremendously stronger! A nation wallowing in debt loses vibrancy. So do companies and people!

Fewer people need to work when the ones who are working are more productive. The end of formalized work doesn’t mean the end of productivity. Early retirement frees times to explore new ideas. Some of those ideas are the Tesla’s of tomorrow.

Spending down household savings accounts for conspicuous consumption does provide short-term economic growth. Then again, snorting cocaine gives you a high that doesn’t last either.

FIRE is the only way.

 

 

Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Investing Alternatives When Index Funds are Unavailable

Note: This post is not intended as personal or personalized advice. It is provided for informational reference only and is the opinion of the author.

Anyone who has been around the FIRE, leanfire, FI blogosphere, podcasts and book tours know the demographic is heavily invested in index funds and for good reason. Active management’s record tends to be unflattering compared to index peers and with a heavier expense ratio for opportunity to enjoy underperformance.

People serious about building wealth as quickly as possible learn the index fund trick early on. But there are times when index funds are not an option.

Back in the 1990s I was a securities broker with H.D. Vest Financial Services down in Dallas as my broker/dealer. Broker/dealers have an obligation to monitor their brokers so they require all investments of brokers placed though the broker/dealer. Back then it meant actively managed funds only and the expense ratios were a heck of a lot higher back then. There was only one redeeming grace in the deal: all mutual fund trades were commission free with the exception of 12(b)1 fees which generally were 25 basis points of the account’s value. In a way all mutual funds looked like no-load funds for me.

My net worth grew significantly slower during my tenure with Vest. Actively managed funds with heavy fees caused underperformance. My choices were also limited. The worst part is the rule extended to my other businesses and immediate family. Mrs. Accountant and the girls couldn’t invest elsewhere either. Vest even wanted to know where I had money in the bank and a list of all income properties and loans. It was a pain in the tail. Now you know another reason why the dream of schlepping securities wore off fast.

 

Normal People with Abnormal Choices

Stock brokers aren’t the only people with restricted investment choices. Work retirement plans hold a large percentage of all investable funds in most households. 401(k)s and other work retirement plans are notorious for limited choices. The choices are frequently laden with fees driving down performance.

Matching and the ease of regular investing make work retirement plans the best options even when the choices are bad. I’m asked to help clients make the best choice in their 401(k) more than any other request. Most people are clueless to the jargon used to help employees invest their contributions and employer matching wisely.

In my stock broker days my investments were exclusively growth & income funds. Before I knew about index funds front-brain I already knew a basket of successful growing companies throwing off an increasing dividend was a solid decision. The advantage I had was the large basket to choose from. I had my pick of thousands of funds so I had options, even if they were limited to actively managed funds.

Now we need to learn how to pick the best investment from a limited pool. The right choice in your 401(k) could shave years needed to retire and add tens of thousands of dollars to your account value.

 

Needle in a Haystack

Employers offer more retirement plan options than ever before to limit their liability. However, most employers aren’t licensed to give financial advice so they steer clear. Large employers may bring in an investment advisor, but these advisors may not have your best interest at heart and they may not have the time to know you well enough to give quality advice.

Your best defense is knowledge. Certain choices tend to better than others. Specialized funds are almost always the worst choice as they usually have higher fees and are not broadly diversified. Sector funds are a good example. I know of no reason anyone would want a gold fund in their 401(k) portfolio.

International and aggressive growth funds also tend to have higher fees. They can outperform, but they still have a higher mountain to climb to offset the higher fees. All else equal, the lower a fund’s fees the better the long-term results.

Realistically there are only a few acceptable choices for most 401(k) investments. Money markets are out because you have no chance of growing your nest egg. Bond funds are a poor choice in a low interest rate environment and only a small percentage of the portfolio should be in bonds if you are approaching retirement and rates justify a modest investment. Company stock is not diversified and if your employer does poorly your job and retirement are both at risk. Insurance products are almost always the worst of all choices. That leaves broad based funds.

Acceptable choices (in this accountant’s mind) include: growth & income, growth and international or world funds. It is my opinion the largest investment in most 401(k) portfolios should be a growth & income fund when an S&P 500 index or total market index fund isn’t available. Growth & income funds will be the closest choice to an S&P 500 index fund and G&I funds tend to have lower expense ratios than other actively managed funds.

I’m content with one investment in a 401(k). A G&I fund is a diversified choice, grabbing a large slice of large growing companies. But it looks too barren to be correct so people want more. More isn’t always better.

Growth funds are similar to G&I funds with the exception that they can hold non-dividend paying stocks. Amazon is a large growing company that doesn’t pay a dividend. A growth fund can own Amazon; a G&I fund generally cannot.

You may also wish to have international exposure. BP (British Petroleum) is more likely to be in a world or international fund. (Some G&I funds may hold BP.) Toyota is another example. International funds have higher fees due to higher trading costs and travel expenses for the active managers.

G&I funds have the lowest expense ratio of my group followed by growth funds. Fees play such a large role in long-term performance that I have an allergic reaction to more than 10% or so of a 401(k) in an international fund.

If you can’t stand a simple G&I fund in your 401(k) there are a few mixes I approve of:

70% G&I; 20% growth: 10% international, or

80% G&I; 10% growth; 10% international, or

60% G&I; 25% growth; 15% international

Of course you need to modify to your personal situation. (I have to say that for liability reasons. Personally, I can’t think of a better mix than the first choice I offered unless index funds are an option.)

 

A Plethora of Choices

Studies have shown more choices aren’t always better. If you have a dozen choices in your 401(k) you are more likely to take advantage of the 401(k) than if it had 20 choices. The more choices added might reduce employer liability, but it also discourages employees from taking advantage of the 401(k) due to the apparent overwhelming nature of setting up the account.

I’ve seen this first hand in my office. Some employer retirement plans offer a small number of choices, but some come to a rabbit hunt with a bazooka! A hundred choices aren’t needed to offer employees quality choices!

When the stack of papers to sign up for a 401(k) plan exceeds an inch employees are lost. Even I need to spend time digging through the papers before providing reasonable options. Here is what I look for when reviewing employer retirement plan options.

First, most choices are junk. I dump all the specialty funds and insurance products. I’ve yet to see an insurance company fund outperform. The gold and bitcoin funds are removed from the list, too.

Next I separate my choices by investment house. I like Vanguard and Fidelity. If I’m unfamiliar with the investment house, but like the fund option I need to dig deeper. I want to feel comfortable with the investment house as well as the mutual fund.

Then I separate further into categories. I pray for at least one reasonable growth & income fund in the lot. If not, I have to settle for a growth fund.

Last, I review expense ratios. Once again, the lower the fees the higher the chance the fund will perform better. The change in the total stock market value is reflected in all investor accounts, minus fees. Unless you can prove you can outsmart the market, fees are a good determinant of return comparable to the overall market (peers). (Don’t even start with me. Even the pros can’t beat the market consistently.)

From my list I usually pick the fund with the lowest expense ratio with attention paid toward which investment house runs the fund.

 

The Final Choice

Employer retirement plans are often the best tool a person has to accumulate significant wealth. Many employers match contributions at some level. The money is tied up so it is difficult to withdraw; this prevents impulse decisions from ruining your plans. Employers are providing more choices than ever. This is a double edged sword. Move past the psychological deer-in-the-headlights response to a large number of options and hone the list to a workable few choices and then make the choice! Employer retirement plans also make it super easy to invest on a consistent and regular basis, the true foundation of any retirement plan.

Lack of an index fund as an option is no excuse to not invest in an employer retirement plan. Many people face the same problem. I did back in the 1990s and made the best of it. My current net worth would be well into the seven figures lower if I took a pass when I sold securities because of restrictions. The bank would have been a much worse choice.

Of course, you need to modify my suggestions to your personal situation. I think you will find the best choice for you will be very similar to what I propose. No choice is the absolute worst choice! Without investing you will never reach your retirement goals or financial independence!

It’s your life. You can get serious with whatever choices you have or work forever.

 

Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. Quickbooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Peer Street Review

Show me the money!

Note: I no longer recommend Peer Street. This post is only for reference.

Building wealth is simple when you understand the rules. Spending less than you earn provides seed capital for investments. Index funds provide the opportunity for superior growth with reduced risk due to diversification across the broad economic spectrum.

Once you have the basics it becomes clear you need additional cash management tools to serve your financial needs. Short-term cash for emergencies or living expenses are best held as bank deposits or in high-yield accounts like Capital One 360 or Discover Savings.

With long-term investments set in index funds and short-term needs covered by liquid money market type products it’s time to fill in the remaining gap. And there are some reasonable alternatives paying a respectable rate of return.

Business owners understand the need for liquid fund to cover seasonal fluctuations. In my office tax season fills the coffers used during the slow times of the year. November and December are traditionally slow in the tax industry while expenses tend to be high. Some year-end tax planning brings in some revenue, but the cost of mailing organizers, employee training and property taxes take an ax to the budget. This is the gap I refer to above.

Individuals face the same gap. Planning for a vacation or allocating funds for property taxes are an example. Individuals may also become uncomfortable with the level of the stock market. Selling index funds to store in a money market at a percent or two doesn’t make sense and becomes painful when the market continues climbing.

I never encourage market timing. However, there are times to take some chips off the table. Example: As you approach retirement (or if you are in retirement) I always recommend keeping about two years of living expenses in cash. If the market keeps climbing you can fund living expenses with dividends or small index fund sales. When the market has a temporary setback you can use the liquid funds to live. This assures you never have to sell at a market low! If the downturn becomes prolonged you can stop reinvesting dividends and capital gains to fund expenses. The goal is to never find yourself forced to sell in a down market.

Investing Gap Funds

Money market funds and online savings accounts at Capital One and Discover are good tools to store excess funds in retirement, for future investments or to pay large one-time expenses. The interest rate is low, but better than nothing.

For several years I used Lending Club and Prosper (notice I don’t include links because I no longer recommend these options) to serve as a high-yield investment for such funds. Then we had the Lending Club fiasco I was out the door. Where there is smoke there’s fire. I could be wrong, but I’d rather be a living coward than a dead hero.

Enter Peer Street.

Another bright idea.

Lending Club and Prosper issue unsecured loans you can invest as little as $25 in. The goal is to spread your investment over as many loans as possible to avoid one bad loan destroying your portfolio. There are lots of loans that default as borrowers have no skin in the game.

Peer Street offers loans in a similar fashion to the Lending Club/Prosper model with a few notable exceptions. Peer Street loans are backed by real estate with loan to value (LTV) typically below 75%. Borrowers have skin in the game!

The minimum investment is $1,000 per loan. This is still a micro loan, but not nearly as small as the $25 minimums at Lending Club or Proper. Since there is something backing the loan (real estate) the risk is likely much smaller. (Loans backed by assets default at lower rates than unsecured loan with rare exception.) You can still—and should—spread your investment funds over several loans to mitigate risk. (More below.)

Most Peer Street loans are short term (6-24 months) and generally yield 6-12% over 12 months. Peer Street periodically has very short loans (one month) that yield a lower rate, but more than Capital One or Discover currently. This can be a powerful cash management tool.

The short-term nature of the loans makes it easy to ladder your portfolio for consistent cash flow and liquidity. A small investment can provide a steady stream of available cash while earning a higher than average yield.

How I Use Peer Street

I don’t like to over-commit to any investment. My style is to dip my toe in the waters first and then stepping slow into the shallow end until I’m comfortable.

I started investing in Peer Street a few months back. Every loan I invested in is for the minimum: $1,000. So you understand my style, I currently have $6,000 invested with intentions of reaching $100,000 over the next year or two. As long as the wheels don’t fall off (remember the Lending Club issues) I’m happy. I’ll never put everything into Peer Street, but I will invest enough to move the needle eventually.

Every week or two I’ve been adding another $1,000 or so. Peer Street reports interest income and loan maturity funds on the 15th and last day of the month. The money appears in my account a few days later. I use this opportunity to add new funds to my account to bring the cash balance back to $1,000 so I can invest in another loan.

My slow approach is for two reasons. First, I can sample how Peer Street works before committing a level of funds that would hurt if I misstep. This allows me to acclimate to the investment. Second, the slow approach means I have loans spread out over a wide range. In a few months I will have loans maturing practically every month. Coupled with the interest stream I’m in a good position to benefit from the investment.

Investing in income properties can be a lot of work with plenty of risks. Peer Street makes real estate investing easier, smoothing the income ride along the way.

Taxes

Interest income is taxable. Landlords have several tax advantages due to real estate ownership. Peer Street investments are loans and income is treated as ordinary income. If you are familiar with Lending Club or Prosper you will find reporting Peer Street income looks a lot the same. The main difference is loan losses. Lending Club/Prosper have a lot of loans that default. This can play havoc on your tax return in some instances. Peer Street has had a few loans default, but according to a conversation I had with a Peer Street consultant on the phone, investors lost no money. The LTV metric does offer a level of protection to investors. (Loan losses would be handled in a similar fashion to Lending Club should they occur.)

Recommendations

Time for a reality check. Most loans offered on Peer Street hover around 7%. Yes, the sales literature says you can pull up to 12%. Real world experience says you will have plenty of opportunity to invest with a 7% return. Some loans are lower, more are higher. Loans paying 8% or more require a strategy.

Peer Street allows for automatic investing of funds in your account. What I do is keep $1,000 in the account and set the parameters of the auto-investing feature at 8% or higher, LTV up to 75%, loan term up to 60 months (I don’t mind a longer term investment, but you may wish to tighten this parameter) and $1,000 max per loan.

Peer Street sends an email when they invest in a loan automatically. If you don’t like the look of the loan you have 24 hours to cancel from time of notification.

New loans are available most business days. The higher interest loans usually are filled with automatic funds. The 7% and 7 ½% loans are frequently available for manual investing.

 

There you have it, kind readers. No fancy stories today. This is an idea I’ve been working personally on a small scale for a bit and wanted to share it with you. As a reminder, the links in this post are affiliates. Peer Street graces your favorite accountant with $30 for every new account I send their way. I have affiliate links for Prosper and Lending Club, but do not include them because I no longer support their programs. I’d rather be safe than sorry.

I can’t make a real recommendation for you personally since I don’t know you personally, along with all the relevant facts. My only recommendation is to take it slow if you find Peer Street appropriate for your portfolio. No heroes; just another nice product to handle funds living in the gap.

Inequality is Welcome in the FIRE Community

Inequality isn’t all bad. I think we can agree Mrs. Accountant is smoking hot while yours truly is a bit drab. Then again, if you have a tax issue you probably want the drab guy.

Kurt Vonnegut, Jr. published Harrison Bergeron in 1961. His short story illustrated the ultimate end of inequality as only the humorist could. Today we think of inequality in term of race, gender or income. Vonnegut knew this was only background noise to the real issues of inequality.

In Harrison Bergeron the attempt to erase all inequality is taken to a whole new level. Beauty, strength and mental capacity were also dished out in unequal portions to the masses. To compensate, the beautiful wore grotesque masks; the strong wore heavy weights to hold them back; and intelligent people were hit with a mental pulse of sound every twenty seconds to dumb them down.

Inequality is all the rage today. We demand income inequality between genders and race. On the surface it all seems good and honorable. Beneath the hood something else might be at play.

In Vonnegut’s story Harrison has a keen mind and wants to use it. He breaks free from the shackles holding him to the lowest level of mediocrity. The government action is swift. Harrison is killed, along with his newly discovered girlfriend of tremendous beauty. The government snuffed out inequality before anyone could feel infringed by another’s superiority in anything.

The inequality debate isn’t completely about levels of pay or rights. In many cases it’s about more about “me”. Groups of people demand more because they think as a group they have a better chance for more as individuals.

As we saw in Harrison Bergeron, erasing inequality doesn’t always lead to desired results. Making everyone the same lowers the bar for all involved and it doesn’t have to be that way.

The Joy of Inequality

Inequality is in part a choice. A woman may choose a lower annual income to garner more free time with family or to have a child. Men are starting to join that movement, asking for more paid leave, even if it means a lower salary or fewer other benefits, to spend time with family. On the surface, again, it appears—if you only consider annual wages—that an inequality has arisen between employees with a family and those with a smaller family or fewer family issues.

The perceived inequality is actually an increase in quality of life. What one person desires is completely different from that of another. Offering family leave has less value to someone with a small or no family. Those with family, young parents for example, might find family leave the largest inducement an employer could offer.

Another benefit growing in popularity is student loan reduction. Some companies now offer young employees additional services to help them reduce their student loans. The benefit is worthless to those with no debt.

Inequality can be unfair. Some is a conscious choice. Working part-time or a side gig fits the temperament of some people better than a stress filled, high pressure environment. Some thrive on pressure. It isn’t unfair to pay people in the high pressure jobs more. Putting a mask on the beautiful, weighing down the strong and interrupting the intelligent doesn’t make things more equal!

True income and wealth equality comes at a heavy price. I discussed in the past the only ways income and wealth became more equal historically: war, famine/plague, revolution and societal collapse. Walter Scheidel does a better job of fleshing out the details in his book, The Great Leveler.

The FIRE Community and Inequality

A powerful movement in our society today is the FIRE community. Their dedication to financial independence (FI) and the ability to retire early RE), or at least at a reasonable age, is making headway into previously cherished traditions of lifelong labor in the organized workplace.

From the beginning the FIRE community understood wealth and retirement was not a product of equality for all. Most of the inequality was either by choice or slight in nature. Some members of the community powered their way through to FI as fast as possible to engage the life they wanted. Others took a slower route. The gap year or years became part of the lexicon. Net worth became an interesting discussion in closed quarters.

What surprises the most is the range the group holds as FI. Some say a couple hundred thousand should do it. Others still want to pack the crate with several million. One unique animal in the crowd bows out well before FI to take a slower pace the remainder of her life. Part-time work or side hustles fill the gaps.

A millionaire roundtable meeting at FinCon17. All were not equal while all were equally welcome.

As a community it is felt: to each their own.

The FIRE community is special! Judgment is withheld when matters of finance come to the fore. If somebody is happy never engaging in a full-time serious career, nobody thinks twice about it. A few eyebrows are raised when a member want to work like a dog until death do him part. But desire to continue working doesn’t revoke membership.

The original Star Trek series has a unique underlying philosophy connected to Mr. Spock and the Vulcans called IDIC. It stands for Infinite Diversity in Infinite Combinations. The novels covered the topic more than the television series. What was meant by IDIC is that the more diversity, the more combinations of different people, makes us stronger.

A glaring example is shown us by the recently departed Stephen Hawking. Hawking was a genius on every level. Unfortunately, life didn’t give him an equal measure. His body suffered from a degenerative disease. His mind more than made up for it. Could you imagine Hawking in Vonnegut’s story? Society would be forced down to Hawking’s physical level while Stephen’s mind would be throttled to the lowest mental member of society.

Inequality can make us stronger. What we need to eliminate, or at least reduce, is discrimination. Race and gender is not a crime. Sexual orientation isn’t either. These are the hard problems to solve. Inequality, income for example, is not always bad.

Underpaying people is a form of discrimination. The FIRE community doesn’t discriminate. The FIRE community example is to accept all people from all walks of life. Workers should be paid a fair wage and provided a safe environment. That doesn’t preclude dangerous work. Risky jobs are secure when the company treats the team as family.

The FIRE community is the most diverse of any I know. It has the Vulcan IDIC philosophy. Color of skin doesn’t matter. Religious beliefs, or lack thereof, don’t affect membership. Both genders and in-between are welcome.

You will find people deep in debt taking their first steps toward financial freedom in the community and those with millions in investments. Side hustles abound. Travel is indicative while accepting those who prefer the closed quarters of home. The homebodies experience the world through the eyes of the world travelers. Once again IDIC turns weaknesses into strengths.

Vonnegut showed us the foolishness of demanding equality in all things. Too much inequality can damage the whole. But Inequality isn’t bad in and of itself. There is nothing wrong with accepting less, an unequal portion, for the same job. In my profession there is the free VITA tax service. There is also plenty of room for professionals to earn a living too. This is not damaging inequality.

As a society we need to embrace inequality. Differences force us to think in new ways. Those on the lower end may not enjoy the process. I get that. But it is rare to find a genius in the lap of luxury. Elon Musk is from South Africa; Steve Jobs had a difficult early life. Equal didn’t make them stronger. Inequality did.

Why I’m Retiring the Day I Graduate from High School

Today we have a special guest. My youngest daughter, Brooke, is 18 today. I have two daughters and I managed to keep them alive until adulthood. In my mind I’ve done my job. There is some trepidation, however, which will become clear in a moment. I raised my girls to the best of my ability. They’re fine young ladies. But their path to financial independence is a unique one.

Brooke is finishing up her senior year of high school and has some pretty big plans. I asked her to share her story. She listened to me talk around the house for years. She can repeat my financial rules with perfection. I think you’ll hear a bit of dad in her voice. Enjoy.

 

Why I’m Retiring the Day I Graduate from High School

By: Brooke Schroeder

I’m different. I’ve always been different. I was born with a big disadvantage. Before I was a year old I had more surgeries than most people in a lifetime. At twelve I started taking over a dozen medications. Pill after pill is cut and placed in a dispenser like that of a 90 year old man.

I’m on the right standing with my sister, mom and dad. We had our picture taken in Kentucky a few minutes before the total solar eclipse.

Dad picks on me that all the pills I take are a meal in itself. My parents are supportive, but they have no idea how much of a pain it is to be sick all the time.

I’m also different from my family in other ways. My sister wants to travel the world and teach English (more on that later). My dad hates traveling past the mailbox at the end of the driveway. He says he wants to build a wall around the farm. When Trump came out with his wall on the Mexican border dad said he needs to talk to Trump and see if he could get a section built around the farm.

Everybody in the family reads a lot except me. It’s not that I don’t read, I just don’t want to do it twenty hours a day!

My mom stopped working a normal job when she was around 30. My dad is a workaholic. He gets crazy ideas and can’t help himself.  He has the farm and his tax office. Then he writes his blog. He is always starting a business or doing something. And he reads more than my teachers at school. He reads everything. You would think it would get boring after a while.

There is one trait I share with my family: frugality. My dad is tight with money; I mean real tight. I’ve seen my dad pass on an ice cream cone just to say he didn’t touch the money in his pocket for the entire month. Like I said: tight.

I try not to spend too much money either. I certainly spend less than my friends. Every dime I earn goes into an index fund. My first money when I was a baby was invested. It wasn’t much, but it got the account opened.

After the eclipse we visited a botanical garden. It was research for me.

While everyone else is reading I head outside. When not working with my hands I play with computers. I’m not 100% sure yet, but I might go to college someday to learn more about IT. Too be honest, I’m in no hurry to go to college. I like school and get good grades. My friends are there too. As graduation approaches I already miss them.

My friends all have plans. A few plan on getting married. Many are going to college. I guess some will buy a home and car and all the other stuff that messes with your happiness in life. The kids at school don’t share my frugal ways as much as I do.

I started working for my grandparents when I was like eight or nine. My dad has an accounting business and I help out over the holidays getting organizers ready to mail, but my heart is outside an office. My grandparents (dad’s parents) have a landscaping business. Digging in the dirt doesn’t bother me and once I learned a few tricks of the trade there can be real money in it.

When I was younger I worked summers and weekends landscaping. Winter was either a few hours at dad’s office or homework. The money was slow during the school year back then.

I’m milking Bess for all she’s worth. Free is better than any car I could buy.

My dad was adamant I save most of my income. I stuffed my Roth IRA and regular Vanguard account every year. After all these years I have amassed $487,916.12. (My dad made me look it up because he says it’s impressive.) The stock market had a lot to do with it too.

The last few years my income exploded while my expenses stayed near zero. I use my dad’s old 2000 Honda Accord with duct tape holding on the spoiler in back. My plan is to milk that car until it dies. Dad picks on me he is kicking me out on my 18th birthday, but I’m staying. Free rent is good.

The income part has grown nicely over the years. I discovered I could find plants and supplies and sell them in projects for a lot more. We also have a 10 acre farm where I grow trees, flowers and other landscaping plants.

My sister is going to China this summer to teach English and is staying with a host family. I decided to not go to college, at least not right away. After graduation I plan on visiting my sister in China for two weeks. After that I have a few landscaping gigs I need to get back to.

Here is one of the first trees I planted. Dad isn’t taking care of it as you can see weeds and the need for mulch. It’s hard raising good parents.

When summer winds down here in Wisconsin I hope to live someplace warmer in the winter. (Dad keeps the house 60 so I have plenty of motivation.) I’ll probably travel the southern U.S. mostly this winter and the Mediterranean the next winter. It is hard finding people my age to travel with, however. They all have to work jobs.

So that is the plan my dad wanted me to share. I saved and invested. My investments are now big enough so that I don’t have to work after I graduate from high school. Like my sister, I like to travel and see stuff. I give my parents credit for teaching me how money works. I’ll probably always do some landscaping work on the side. If you know what you are doing you can make a year of income in a few summer months. Just finding one big rock a rich person wants in their yard can bring over a thousand dollars!

My dad isn’t kicking me out no matter what he says. If he does I’m still not leaving. My health is reasonably good right now, but with all the medical stuff I deal with it is no guarantee. People with my condition usually live to their 40s at most. Medical technology will probably let me live a long, normal life. But just in case, I saved so I didn’t have to waste time with a demanding career. There might not be enough time for me to do it the normal way so I’m making the most of the time I have.

 

This is where dad swallows hard. I’m so proud of my girls on one hand and sad they are living their own life of which some will be without Mrs. Accountant and me. Brooke is 18 today. She has a plan. I taught her all I know. I hope it is enough.

 

 

Church of FI

Sunday service at the Church of FI.

Back in the old days the FI (financial independence) community was a different place. Advice was simple and straight forward. King Solomon reminded us to avoid lending or borrowing. Nearly half the parables of Jesus have to do with money and wealth.

The simple message sold well. So well in fact it became ingrained in religious dogma. The goal was honest. Work hard, save and you will enjoy your old age.

The old school in the Church of FI made the most of a basic message. The advice and values were handed down generation to generation. It lasted for one simple reason; it worked!

The early FI community didn’t have a cool name to draw a crowd. Solomon had proverbs and Jesus had parables. Short stories with a powerful message were the perfect device to hand down important information through the ages.

The early days of the Church of FI are similar to the early days of Christianity when there was a Catholic church. The learned may recall the word catholic (little c) means universal. The Catholic Church was therefore the universal church of God. There was one message, one literal scripture, one true triune God. The FI community for millennia was also an all encompassing philosophy.

Some philosophical movements contained the truths of FI, but had other motives. Sophists, Epicureans, Christians, and let’s not forget the Stoics. But that isn’t what our story is about today. Today we will explore what happened to that FI community of old and how is survived (so far) to become the cult classic so loved by business media outlets everywhere.

The Eve of Reformation

If something is working fine, break it to see what makes the darn thing tick. You know, like killing the goose that lays the golden egg so we can mass produce the goose.

For thousands of years the perfect FI message did the job it was intended to do. But as the Industrial Revolution convinced man he could do better a more scientific approach was needed. By the early 20th Century intelligent men were popping the hood to figure out how the goose laid that darn golden egg.

The path to the FI temple is filled with obstacles.

In 1926 George Clason gave us The Richest Man in Babylon. The story resonated because it basically outlined the same message from the ages. The message delivered in parable was also comfortingly familiar to the more religious time. The story of how a rich man saves money boils down to “Pay yourself first”. It worked back then and works now! Our ears find familiarity in stories advising to save first and spend what is left rather than the foolish other way around.

Now that the ice was broken it was time to dig deeper into the details. Dale Carnegie showed us How to Win Friends and Influence People in 1936 followed by Napoleon Hill’s Think and Grow Rich in 1937. Hill also did something unheard of up to his time. He researched his topic by interviewing the wealthiest people of his time: John D. Rockefeller, Charles M. Schwab, Henry Ford, Thomas Edison and more. The scientific genie was out of the bottle. The goose lived and we now knew a bit more about how those golden eggs were produced.

The scientific revolution in wealth creation brought a new wave of FI leaders willing to spill the beans. Ben Graham published The Intelligent Investor in 1949 and the world has never been the same. Graham’s great disciple is none other than Warren Buffett who proved you can do very well stuffing your money in equities.

More and more books and seminars were to follow. No one had a clue a schism was on the horizon in the FI world. The Reformation was here. The Catholic Church would survive, if smaller, and would never be the only game in town to protect souls, ah, financial fortunes ever again.

Ninety-five Theses

Ever since the reformation of the FI community took place scholars have debated what caused the schism. Some say it was boredom, others our advancing way of life and technology. Me, I say it was the internet.

Before the internet you had a limited avenue to spread your message. Printed material and word of mouth dominated. Television and radio allows for a broader audience, but these forms of media needed a message with mass appeal. Save money! The majority of people didn’t want to hear it. Besides, you can’t take it with you.

(Yes, kind readers, the tone of this post has changed. I set the scene and now my warped sense of humor is bubbling to the surface where I wanted to end from the very beginning.)

Ointment for the anointed.

The internet changed everything. Never before could a young man see a naked, ah, sorry wrong story.

The internet allowed every niche an audience. If you had an interest in conspiracy theories you could now spend all day on YouTube and websites conspiring until you bleed from every orifice. And people didn’t mind since you were comfortably locked in your mother’s basement.

A lot of false starts dominated the early internet days. Several blogs found a following in the FI community, kind of.

You see, the blogs weren’t true canon. The Church of FI had a specific set of rules handed down by God to Moses and passed along to us. The internet gurus were NOT following the rules. They added something to the text! HERETICS!

What is it they added, you ask? RE! Yes, RE, as in retire early. This was the greatest sacrilege in the history of FI! FI was now FIRE to many, as in hell FIRE if you get my drift.

Wealth was always important to the Church. (How else you gonna toss some coins into the plate on Sunday if ya ain’t got nothing to toss in?) Work ethic ranked nearly as high as wealth. This crazy notion of retiring was heresy. Work was good for the soul. Retirement was for old worn out people. To retire before you were practically dead was more than the Church could handle. It was time for a few excommunications, as if that ever worked.

Protestant Explosion

The ninety-five theses were spiked to the church door for the world to see. A few fearless crusaders broke from the catholic church of FI to create the FIRE community. We’ll call them Lutherans in honor of Martin Luther and his behavior back in 1517.

The Lutherans embolden a whole new crew of people predisposed to FI thinking, but preferred a less rigid orthodoxy from the catholic faith. These crazy religious fanatics took the RE thing the nth degree. Most loved the RE idea, but needed something to fill the empty spaces. A large number wanted to fill their days with a side gig or start a business. In essence they traded one job for one they could be boss in. They became the person they loathed at their day job.  These guys are the Baptists and Episcopalians of the FI world.

The Church of FI mascot.

Then we got the true whack jobs who thought they would gallivant around the world. These FIRE people couldn’t wait to break out of their cubicle and get on a plane/boat/car to go someplace else. This group splintered fast into even more sub-sects of the shattered FI religion. One group traveled the world; another enjoyed travel closer to home in an RV or even ditched a terra firma home for the RV. Most FIRE community travelers found ways to hack the system with credit card rewards. Travel was virtually free and certainly cheaper than living in a normal house. These folks are the FI communities Mormons and Jehovah’s Witnesses.

I saved the best for last because it is the smallest (and newest) sub-set of the fragmented FI world. Yes, these are the people who reach FI, refuse to quit, keep working their day job or business and enjoy home life with nary a thought given to travel.

Your favorite accountant falls into this last category, I’m sad to say. Travel is punishment to me and my kind (grammar police can send their comments to. . .). I wake up early, excited to get to the office. I love my work life and am fulfilled by it. I create value in my daily duties and as a creature of habit prefer to keep doing what I’ve always done. I guess that would make me the Westboro Baptist Church of the FI world.

My kind is wont to carry signs outside FIRE conferences where they make their travel plans and other such acts of sacrilege. We picket airline counters and RV centers wearing burlap on a regular basis. We’re a fun bunch of guys when you get to know us.

We also think we’re purists! Our Westboro Baptist Church is closer to god and the real FI community of antiquity. We work hard at our job or business and come home to our farms and workshops to build stuff with our hands. We think we’re better than you and we are! Dammit!

Our Diverse Community

(The meds kicked in so we are back to our serious voice now.)

I hope my attempt at humor made you smile. The humor part of this post IS a parable of sorts (in a sick religion). The FI community is more than just a bunch of frugal people working to improve their minimalist skills. Members of the Church of FI have different levels of comfort along the frugal scale. Some bike everywhere while some stay attached to their car habits. Some are minimalists living with virtually no belongings. Others try to live on a set amount of money each year; say $25,000 or less (U.S dollars, living in the U.S. or traveling).

Conferences and meet-ups are now everywhere! You can meet fellow FIers around the world. Very few weeks exists anymore where you can’t attend a FI/RE gathering.

Unfortunately there is one part of the community who will not be there. Yes, the Westboro people love the community and its values, but would rather stay at home with family and local (versus loco) friends. If you plant a FI gathering close to their home they might attend. Maybe.

The FI message didn’t always reach the masses in the past. The message may not have resonated. With the FI schism we are a more diverse group than ever. All races, creeds and genders are represented and welcomed.

As we open our doctrine the old canon is expanded. FI/RE had a slash between them in the past. The catholic church didn’t care much for the protestants and the same applied in the return direction. Soon we realized we all worship the same god: FI. The catholics (FI) and the Protestants (RE and all their cousins) are back together as one (FIRE).

It’s a wonderful place, our faith. All are welcome.

The next time you hear a knock at the door, answer it. When you open the door it might be two young people who say, “Can we talk to you about our faith in financial independence and early retirement?” Do yourself a favor, let’em in.

 

(I know how easy it is to offend writing a post like this one. No offense was meant to anyone’s religious faith. Please enjoy the humor and consider the message. It’s important enough for me to stop picketing airports.)

The FIRE Community is Killing the Economy and Society

[Note: This post  is intended as an in-your-face response to complaints against the FIRE community. I’m getting plenty of email telling me how wrong I am only to hear what I said at the end of the article.  Read to the end! I explain why all the negative comments on the FIRE community are wrong and how the community is saving the economy and societal values, not destroying them. I could have written more to clarify, but I was over 2,000 words already.]

 

Members of the FIRE (financial independence/retire early) community might want to sit this one out. It’s going to get rough and I’m naming names!

 

The concept we now know as the FIRE community has been around for a long time under different names. Frugality and minimalism come to mind. Talking with grandpa they held many of these values 70 plus years ago without a fancy name to make it cool. Many of the personal habits of members of the FIRE community sound very familiar when reading the ancient Stoics: Marcus Aurelius, Seneca, Epictetus.

Guys like Jacob Lund Fisker (Early Retirement Extreme) and J.D. Roth (Get Rich Slowly) put frugality on the map. J.D. made getting out of debt and financially independent cool!

Then Pete (Mr. Money Mustache) showed up the game changed radically. Pete resonated with his “I retired at 30 and doing fine” message. It struck a chord. Some loved the idea and took to it like ducks to water. Others called BS and think Mustachians are ignoramuses.

As a part of this community I’ve had one serious gripe since the beginning. It’s easier to show what I mean.

Would You Like this Person?

What kind of person would you want to work for? Someone dedicated to doing good work and is a team player or someone saving and investing every dime so she can blow this place the first chance she gets?

Employers and those with a side gig, who would you rather have as a partner or employee? The dedicated individual or the guy itching to scream out the door?

What about friends? Or a mate!

That’s the unspoken problem of the FIRE community. They are terrible employees, friends, co-workers, mates and even business owners. As a group their goal is to amass barely enough to pay the bills with a frugal lifestyle and dump the rat race to dick around all day!

Before we start pointing fingers, let me share a story.

Before I stumbled upon the FIRE community I was frugal. The community attracted me due the similar philosophy.

With decades of experience in the accounting profession running my own practice I started to burn out. Like traditional employees I started to feel drained and wanted a different path.

Over the years I set up countdown clocks to mark the date and time I planned my exit. As each date approached I chickened out. The thought of selling my business made me nauseous. What I really loved would be gone so I stayed. I also convinced myself I could milk the business for a lot more cash than a mere sale.

What an idiot I was!

I stayed at the desk for a few more dollars when I wasn’t completely happy with what I was doing anymore.

My introduction to the FIRE community was Mr. Money Mustache. I drank it in like a desert rat.

I also concocted an idea to have my cake and eat it too.

The DIY tax program you see on this blog was something I always wanted to make viable. My goal was to meet Pete and strike a partnership with him.

Pete, the ever gracious man he is, said no. Buuuuut! He was willing to give my business a push, including the DIY tax program. All this activity also meant I needed to start a “real” blog in the demographic as there was a growing demand for my opinion. (Ah, yeah.)

I had no idea what a 5-10 million pageview blog could do to my tiny office in Phuket, Wisconsin. I planned on some added emails, expecting most of the action to hit the tax software and the blog. Well, two out of three ain’t bad!

Ill prepared, my business suffered under the strain. I lost clients as fast as I added them. I stood the real chance this would spiral completely out of control and grant me my dream of retirement whether I wanted it or not.

Every skill I possessed was no match for my epiphany. For the first time my little world was exposed to a much wider audience.

After serious soul-searching I realized I was doing exactly what I wanted to do. It was enough with the countdown clocks and retirement. I’m an accountant, dammit! And account I shall do.

The opening of this post I mentioned what kind of business you would like to patronize or the kind of employee you’d like to hire. When my left foot was pointed to the door it showed in my performance and attitude.

My original thought to milk the business for all it was worth came tumbling down when new clients poured in. New clients expressed concerns with hiring my firm if I was soon to quit. I had to lie and say I was going to stick around when my heart said otherwise.

Once the BS was scrubbed from my gray matter I had to get serious if I was to save my baby!

Once my attitude changed the results followed. Slowly I turned the corner. I wore out countless employees and killed myself working seven days a week during tax season. There were no other alternatives. I screwed up bad and if I wanted to salvage my practice I had to get serious PDQ.

Stepping Back from the Edge

I’m glad to announce the corner has turned! The client list is growing and we are getting work done in a timely manner for the first time in years. Business is good and getting better. It’s not the economy, it’s my attitude!

Employees are finally staying and enjoying their work. The workload is heavy but not drowning the entire team. Technology I refused to consider in the past has been implemented, saving hundreds of man (actually a lot of woman) hours.

Accuracy is up, stress is down. What looked like it would collapse a few years prior was starting to be fun again.

I blame it all on Pete because taking responsibility for my own actions is too much to ask. (That’s a joke, kind readers.) Pete made it look easy. (Michael Jordan makes a layup look easy but I didn’t think I could do that without effort or practice.) There was actual work involved.

Pete sold me on an idea. The people calling BS on Pete had a point, in my opinion. We can’t all do this! The economy would collapse! Chicken Little was never so proud.

Then I started thinking about what Pete really did.

Pete called it retirement, but it wasn’t a dead retirement! He had a rental property at the time. Played with a construction business for a while until he experienced partner problems. And eventually started his very successful blog.

Retirement didn’t mean checking out of life for Pete! Sure, he spent more time with his family, the important stuff. He also became extremely efficient with his time.

He produced value for the economy and society in ways he never could have if he didn’t retire from the path he started on as a young adult!

Killing the Economy or Saving It

A frequent complaint against the FIRE community is that everyone can’t do it! Somehow spending less than you earn would destroy the fabric of the universe. The sun would dim; birds would fall from the sky. Hey, look! There goes Chicken Little again.

The oft repeated complaint is stupid at its best! When has saving and investing ever been bad for the economy? Ever?

The age you retire has nothing to do with how the broad economy will perform! And virtually all members of the FIRE community don’t bow out of life when they hit their magically arbitrary number they consider wealthy.

Pete had a property and business early on. Later his blog added millions to the national and worldwide economy with no end in sight. Now he opened his MMM HQ in his hometown as an education and social center of his community. Not bad for ol’ lazy bones taking the knee of early retirement at 30.

New Kid on the Block

There is a new kid on the block taking the FIRE community to another level. Gwen (Fiery Millennials) took the retirement knee at 27 with 200 grand in assets! What the hell is the matter with that kid!? (Gwen, if you’re reading this, don’t ditch me now. You know I’d never throw you under the bus.)

Gwen’s announcement caught the eye of MarketWatch (I’m jealous). Gwen started to feel my Mr. Money Mustache moment.

People thought Gwen was insane. And she is!

But when you think about it . . .

There is a certain accountant in the room who ditched traditional work in his early 20s after a whopping 14 months on the job to start his own practice. And I had less than $200k at the time! Yes, my $150k or so went further back then, but Gwen has something I didn’t at the time: real estate.

You see, Gwen accumulated a couple hundred K and recently purchased her second rental property. (I read on social media the deal didn’t close so she still has only one property to the best of my knowledge.) Investment property can produce enough free cash flow to live a frugal lifestyle with a very low net worth! Small amounts of investment property can leverage to a very comfortable income stream.

The new kid on the block was taking a path reasonably similar to your favorite accountant’s. By my late 20s I owned income property too.

Now comes the serious question. From the viewpoint of the world at large (according to the numerous negative comments on her MarketWatch article) she is nuts and it never will work. She will fail if some of the comments are to be believed. And she isn’t a contributing member of society anymore!

Okay. Let me ask this. When has providing shelter for families not been a benefit to society?

Ooooh! You didn’t think of it that way. Well, maybe you should.

If every business owner or investor waited until they were 100% financially secure and sound before taking a risk the economy would be screwed!

This concept of only traditional working environments producing value is flawed. Richard Branson runs a coterie of businesses technically under the Virgin brand. The work is done by thousands of employees. Branson’s job is to formulate ideas and to promote the businesses. He doesn’t book passengers on his airline, yet I bet we agree he adds serious value.

Steve jobs never wrote a line of code yet built from the ground up the largest company on the planet in the computer industry.

Imagine the same reasoning applied to Jobs or Branson and it becomes silly fast. Of course Jobs provided value before his early death. Of course Branson provides massive value around the world.

And so does Gwen, early retirement and all.

Retire and Travel

We can’t end this discussion without mentioning the folks who retire early and travel the world.

What a lazy good-for-nothing group of miscreants. To have the audacity to save and invest so you can cash in your chips before the clock strikes 40 and gallivant across the continents is the height of arrogance.

Travel isn’t in my blood so I can feel that way at times.

But when you start to think about it. . .

Traveling and sharing your adventures so others can enjoy their more limited adventures is actually providing value! Travel blogs are not new. Mark Twain wrote several travelogues. I think we can all agree Twain provided incredible amounts of value to society.

I admire those who can slow down more than I can. Elon Musk runs even faster than me.

It comes down to personality types. I speak out against travel because I don’t want to do it personally. But if you want to travel you should!

There is nothing wrong with following your bliss. The world is a better place for it. Imagine how boring this place would be with thousands of weaselly accountants running around and no one else.

Pete continues to expand his impact on his community. I still stamp out tax returns and advice at a rapid clip. J.D is back at the helm at Get Rich Slowly. Jim Collins is a force behind Chautauqua.

Source: The Washington Post

The economic miracle of the 1980s wasn’t the Reagan tax cuts; it was business creation. Small businesses were started at a rate of over 700,000 per year in the early 80s. Job growth and wage increases fueled that economy.

Today we struggle creating 400,000 businesses per year. The FIRE community is the only one I know of that encourages people to step out of their comfort zone, leave their job and start a side gig.

Side gigs are what we call business creation. Tomorrow’s business leaders are the people leaving their job today to think about a new path in life. Every business with rare exception started as a side gig. Apple started in the garage of Steve Jobs. A common story.

The FIRE community is not killing the economy or destroying society. Far from it.

They are the saviors. Our only hope.

How Recent Tax Law Changes Will Destroy Your Wealth (Unless You’re Already Rich)

It started with a simple request for an update to my personal net worth.

Over the years I’ve been mum about the subject, only exposing myself due to the Rockstar Finance Net Worth Tracker. I’m still undecided about discussing my *exact* net worth publically. It’s really nobody’s business and is only public because I write a personal finance blog.

(As an example: Recently I was told point-blank if this blog failed it would be no big deal since I could always do something else and I’m already rich enough. This remark was a jab at the hopeful opportunity to watch something I enjoy crumble. If I really felt that way I would never have started the project.)

The reader kept the emails coming fast and furious when I dodged the net worth question. I had a duty, I was informed, to share my personal life — details and all — since I was a business owner and have a semi-successful blog.

There was a hint of humor beneath the requests so I delayed blocking said intruder. Eventually we started a civil dialog with some serious questions about the current tax law and how it might ripple through the economy.

A week ago I was working in the barn and began formulating a post using many of the questions my intruder asked. I worked myself into a frenzy until it started coming out as a rant. I went to the house and took notes on all the topics I wanted to cover.

So this is it. I promised my intruder a nice post covering a large portion of his questions he had surrounding the TAX CUT AND JOBS ACT. Some of this is tongue in cheek so don’t take this post as hard and fast predictions of the near future.

Then again, I do have a point.

 

Doubling the estate tax exemption is industrial strength stupid. All this worry about farmers and small businesses losing a lifetime of work due to estate taxes is the dumbest thing ever thrust upon the people.

With the old tax law only a few thousand estates were subject to the estate tax in any given year. Now even fewer will pay the tax.

You can count the farmers subject to the estate tax on your fingers with fingers left over! Some small businesses pay an estate tax, but even that is rare.

What the adjustment to the estate tax did was line the pockets of the uber-rich!  Even this blog with a very wealthy readership will not have much to worry about when it comes to estate taxes!

It’s time to stop calling the estate tax a death tax. It’s not a death tax; it’s a welfare tax!!! We keep hearing politicians complain about welfare draining the public coffers. Well, the estate tax is the biggest welfare tax there is.

I see some raised eyebrows. Let me explain. The estate tax is not a death tax; it’s a welfare payment to all the people getting a free ride due to the genetic lottery.

I don’t care what they do to the estate tax personally, but stop calling it what it’s not!

 

No amount of tax cuts will offset the accelerating wealth accumulation at the top. As the top keeps more due to lower taxes there is less available to spread around to the middle class. The middle class pie gets smaller and smaller as the middle class gets squeezed like never before.

Tax cuts don’t trickle down. And stop with the politics. If trickle down worked it should have leveled some of the income inequality by now. Remember, President Reagan came up with the idea back in 1981.

Tax cuts can stimulate the economy, however, and have been used as a tool to spur the economic growth on a regular basis in the past.

The latest tax cut is a bit weird. Normally the government lowers taxes to encourage economic growth when the economy is sputtering or in recession. This time we spiked the Kool-Aid after six or seven years of modest economic growth.

Cutting taxes with unemployment at a 4-handle (unemployment is 4 point something percent) could actually harm the economy as interest rates and inflation could accelerate destroying any gains from the tax cuts.

Time will tell.

The labor participation rate will collapse if a technical corrections bill doesn’t fix the myriad problems with the latest tax bill. Savers will be able to exit the workforce faster and the FIRE (financial independence/retire early) movement will make it easier than ever for people to check out early, further exacerbating the labor shortage.

Also, the tax code now punishes added payroll expenses significantly since if you didn’t spend on payroll the extra profits are barely taxed (big corps) or you get 20% of profits as a deduction without spending a penny (small business and landlords).

There is no doubt in my mind any increase in the labor participation rate will be short-lived. Also, businesses are more incentivized than ever to lay off workers at the first hint of slower demand.

 

Automation is cheaper than ever with bonus depreciation increases. Include the 20% business income deduction and I foresee plenty of staff reductions.

The automation was coming regardless. Now we don’t have time to adjust as the changes will come faster. Once installed the jobs are gone forever.

Major corporations will benefit most as the cost benefit calculations will favor more automation up front. Wal-Mart is a perfect example recently announcing a few bonuses and a higher internal minimum wage while experimenting with over 200 of their stores by replacing all cashiers with automation. Total payroll expenses to Wal-Mart will probably fall. So much for their altruism.

Don’t be fooled by the token pay bonuses either. Many companies are giving a one-time $1,000 bonus to select staff. This is less than a 2% temporary pay increase. If you paid attention, many of these companies announced a few days later layoffs which will reduce payroll by more than the bonuses.

Big business and the very wealthy know exactly what they’re doing (to you).

Now we get to my net worth. Know this, your favorite accountant will do rather well in this environment. Complex tax laws are always good for people with tax knowledge and a pulse.

We came into this story talking about a certain someone’s net worth. Here I confess I might have adlibbed a bit. The issue was net worth, but more to the point, how much was I going to haul home with all the tobacco company shares I own?

It’s true I own a lot of shares in tobacco companies. Unfortunately only my Altria shares will benefit from the tax cuts. Foreign tobacco companies — Phillip Morris International in my case — will not see a benefit from U.S. tax rate reductions for corporations since they derive all their profits outside the U.S.

This led to a discussion on how many shares of Altria I own. Ah, a lot.

Let’s look at what Altria might do to my net worth. The tax reduction could increase their reported earnings by about $2 per share from the tax reduction alone. Assuming a 10 P/E ratio this will eventually be reflected in the stock price increasing $20 per share. Bad news, kind readers. A twenty dollar increase in MO’s share price will get me a bit more than two-thirds of a million only.

Altria also likes to distribute about 80% of profits to shareholders. Currently MO pays 66 cents per share per quarter or $2.64 annually. Eighty percent of an additional $2 profit increase due solely to tax reductions is $1.60 extra per share per year for me (my favorite person) in dividends.

Your favorite accountant expects the tax reduction for Altria to add a bit north of $50,000 per year to his pocket on top of the current dividend. Not bad for a broke farmer in 1982.


On December 26th my net worth crossed the $14 million mark. Here, less than a month later, I reached $15 million. It took 14 years to amass the first million (age 18 to 32). Now I’m bumping off a million in less than a month. I can’t wait for the day I can brag I lost a million between sunup and sundown!

I am sooooo smart! I doubt anyone has seen their net worth climb in the current environment.

(Okay, the last part is total BS. I didn’t add my stuff up the day after Christmas. A back of the envelope calculation says I’m getting close to $15 million, however. Yes, even your favorite accountant can’t resist looking as his stash when it’s growing so fast. I keep reminding myself, “This too shall end.”)

 

This tax cut is different than the 1981 cut. Inflation and unemployment were double digits back then; now we have inflation and interest rates near zero with a 4 and change unemployment rate. Dropping a line of crack will not solve a meth heads issues! Stimulating an economy after 7 – 8 years of modest growth with the labor force fully or nearly fully employed is asking for problems.

At least I’ll be okay. I’m not so sure about you.

I could offer solutions, but there are none I can think of. There will be pain a head. You might want to keep that job for a while and eliminate debt. (Always eliminate debt.) For a few years (as long as the economy holds) it will be easier than ever to build a significant net worth and retire early (if that’s your goal).

Don’t worry. The government will print and borrow enough money to fund the upcoming inflation tax.

This entire post is opinion, of course. Many of these questions have come up again and again so I feel it is easier addressing them here for everybody to enjoy, ahem.

If any of these predictions comes true I take full credit.

If I’m off, let it be known I was only predicting the future and we all know the best we can do is guess at the future.

 

(Note: The light-hearted nature of this post is due to the flu epidemic affecting the nation. Some people are down and out. Your favorite accountant has been only modestly lucky so far. Some days I feel great only to spend several days so tired and exhausted I can barely think. Since I’m writing at a down point I felt it best to leave the serious discussions for a day when my head doesn’t feel like a balloon. There are actually people who follow my advice! Best to assure the advice has a reasonable chance of being right.)