The worldview of financial independence and early retirement has been under assault recently. Suze Orman proclaimed to the world her hate for the FIRE movement on the Afford Anything podcast and set off a firestorm that culminated in a Washington Post article and a belated apology in the form of back-stepping her comments; seems she misunderstood the FIRE movement before passing judgement. (Or, perhaps, books sales were involved. Just throwing that out there.)
Foolish Idealist Returns to Employer
rather than Financial Independence/Retire Early.
What precipitated the rebuke was a simple one-month market decline. December 2018 was the worst stock market performance by most broad indexes since 1931. And the death of the movement was declared and a new acronym was created with the hope of replacing the Old World Order. What has so far been the shallowest of bear markets (defined as a 20% or greater decline from a recent market top) has heralded the end of times once again. And we barely (pun intended) entered bear market territory!
It is true the market could once again turn lower and inflict pain on the foolish. It is also true I’ve been critical of the FIRE community myself a time or three. And don’t think for a minute I didn’t catch hell for it too, only on a smaller scale. (Guys, you know when you link an article on Reddit, the web host—that would be me—can see it. I heard the nasty things said about my pedigree.)
As critical of the the FIRE community and the movement as Orman, Dogen and a certain wealthy accountant who shall remain unnamed are, the movement is never going to die! That’s right. The FIRE movement has grown large enough it can make the economic needle wobble now and again and that makes some people nervous. But the movement, the community, will never die.
Who Started the FIRE Movement?
Modern acolytes can be forgiven for thinking Get Rich Slowly, Early Retirement Extreme or even Mr. Money Mustache kicked this whole thing into gear. The truth is the concept of the FIRE movement has been around for a very, very long time.
Retirement, or at least the ability to to live a hedonistic lifestyle, appeals to many people. Age has nothing to do with it. Punching a clock working for the man gets old real fast when you don’t have perspective. Until you realize how useless life becomes when you spend each day creating no value and have no real reason to live do you begin to understand. Then the job looks more appealing. Or starting a business. In either case you get real interaction with people on a similar mission and it brings the spice back to life. (Redditors, fire up your engines!)
But I contend, as I often have in this blog, that retirement had nothing to do with the FIRE movement. It was never about retirement; that was the dream sold to get victims in the door. FIRE has always been about wealth, about independence and freedom. People never wanted to be retired like and old worn out machine. They wanted meaningful activities. Financial independence allows the freedom to choose and that is what people really wanted all along.
And still they keep searching because they don’t understand what it is they really desire.
The beauty of the FIRE lifestyle is it encourages elimination of debt and all the stress it brings and investing intelligently in index funds with a long-term time horizon. Without debt you can withstand a lot of economic instability. Every minor wobble in economic activity has the debtor soiling his, ah, well . . . We’ll leave it at that.
People hate living paycheck to paycheck and love the idea they can choose their destiny. FIRE delivers on that promise. And the concept is not a modern one.
Benjamin Franklin spoke often of money and wealth. In a way he was the father of the American FIRE movement. But if you go back 2,000 years you can read the parables of Jesus and see that over half his recorded teachings involve money and wealth. But even that isn’t the beginning! Proverbs in the Old Testament teaches plenty of lesson about money. I don’t want to go all religion on you, but I do want to point out that the teachings of the FIRE community are not new.
In fact, if you want to know who actually started the FIRE movement you have to go all the way back to Grog, the caveman, as he taught around the evening campfire. He would say to the young and old, “No debt!” Grunt. “Debt bad. Invest in community coconut index fund.”
As funny as I might think I am, man discovered these principles early on. Shakespeare peppered his verse with financial wisdom. Every religion I studied speaks about wealth, debt and money. Great leaders in business from the beginning of time had to acquire the skills of the modern FIRE community if they wanted to survive.
The truth is the FIRE movement discovered some of the oldest lessons of the species and dressed it up in contemporary clothing. Nothing wrong with that. Except some, the snake oil salesmen, don’t get it because they are peddling large loads of manure and they need to discredit the wise to move today’s load of. . .
The FIRE movement is not dead; it is evolving. A long bull market in stocks has lured many new converts. Secretly they kept their debt while plowing at least a bit more into index funds. As long as the elevator raced higher on the back of a SpaceX rocket things would be good. Besides, you saw how Elon Musk developed rockets that gently land themselves, ready for instant reuse.
A short market decline will not end the FIRE movement. The Great Depression didn’t kill the philosophy of the FIRE movement, though it had different names back then. The worse the economy the stronger the FIRE message appeals! Mild economic downturns and market corrections will not slow this animal down. If the economy and/or stock market get vulgar the FIRE community message will evolve as it should.
“It was the worst of times, it was the best of times, it was the age of wisdom, it was the age of foolishness. . . ” wrote Dickens to begin A Tale of Two Cities. Things haven’t changed much in 160 years. It doesn’t end any better either. (You can read the book to understand what I mean.) Things are good right now. Jobs are plentiful, prices relatively low and many investments have moved significantly higher over the past decade. But government, corporate and personal debt are all at record highs, some precipitously so. The best and worst of times. Especially when you realize the debt will be a harsh slave in the next economic cleansing, same as the last.
The best is ahead of us! The longest bull market in the U.S. lasted a decade, starting in the early 1990s until the current bull market. To put this in perspective, the two longest bull runs in the market happened in the past 30 years. The vast majority have no idea what it was like prior to 1980. For the old guys who do, we take extra caution to keep debt low, if we use the acid at all, placing our wealth in a broad mix of businesses throwing off a steady stream of income. We know there are no guarantees, but we structure our financial lives to withstand a very strong storm.
FIRE of the past was about frugality (it always was about frugality) and retiring from enforced labor due to financial condition. This is changing to something more valuable for the acolyte and society at large. Retirement is becoming less the goal and creating value the new mantra.
It’s not about work to fill the day; it is about fulfilling work. It’s about creating something of value, something we can be proud of. Curing a disease, building an advanced rocket or electric car is part of the New World Order inside the FIRE community.
We discovered it was easy in the modern world to save money and invest it. We discovered how easy it was to build a massive net worth, negating the necessity of work. But we also discovered it left us empty.
The modern incarnation of the FIRE movement is young, made up of millennials who thought the dream of retiring at 30 would make their lives meaningful. They now have the experience to know that was a lie.
Travel has been a massive draw for many entering the FIRE lifestyle. What was discovered is extended vacations or a gap year are perfect for exploratory travel. Then, when the road turns weary, there is a home where people gather most days of the week to create an even better world. Call it work; call it your business. Call it what you want.
Social media is filled with people in desperate need of financial help. Maybe it’s a tax issue, or debt or other unique challenge. A few weeks ago I saw in a private Facebook group a young lady who was worried about the market. She put the down payment to a home they wished to purchase in an index fund last June and the fund was now down 25%, or $20,000 for her. She wanted advice. Many offered. I said: If you put a home down payment in the market what you are saying is you will buy your home five or more years in the future. Any sooner and you should not have put the money in the market. It was shallow comfort, I’m sure. But if I’m lucky I helped two or three people thinking of making the same mistake.
Orman was wrong. So are most people inside the movement!
The FIRE movement is nothing to hate and the people inside the community should grow some thicker skin. It is said: Of which much is given, much is expected. Those in the community have built a larger fortune than most. Jealousy is a given, especially from those unwilling to take the simple steps outlined for thousands of years by one FIRE community after another.
People will hate you for being rich and hate you for being poor. I’d rather be hated for being rich; it’s less painful.
The modern FIRE community has a gift unlike previous FIRE movements. We are not limited to the few wise locals living the FIRE (or whatever name it was called in the past) lifestyle. We are a worldwide movement, community. The internet has made us legion. We have a massive support group and an awesome responsibility to our world, our community, our family, ourselves.
We have a gift we must share! A market decline, even a large one, will not unravel the FIRE movement. I disagree with Dogen and the MarketWatch article. We don’t need another acronym to identify with responsible financial activities.
The basics make us great. Michael Jordan wasn’t great because he could make the three-point shot (though he was darn good at it, too); he was great because he mastered the basics, like the layup.
Money basics are not that hard and work extremely well. Teach your children, family and friends. Teach your community and share with the world. Together we can make a difference; together we can change the world.
The FIRE community will have its challenges and may soon go under a different name. For those in the know, we know exactly what the message is. It is as old as Grog and his nightly chat around the FIRE.
Remember to share the same message with your children around the hearth.
It is our future. Our only hope.
More Wealth Building Resources
Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.
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?
Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.
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 reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.
Yesterday was April Fools’ Day; it was also Easter. I couldn’t bring myself to pull a prank on the day celebrated by Christians of Jesus’ resurrection. But today is fair game!
To lighten the mood as your favorite accountant traverses the bowels of the late stages of the current tax season I decided to publish something fun. (Well, it was fun to me.) Be forewarned. After two months of sleep deprivation there is something seriously wrong with my head. While I think this is funny, you may not. Of course this doesn’t belong published on a personal finance blog. That’s why I published it.
Have fun with this, kind readers. The tax season finish line rapidly approaches. Nothing scares the bejesus out of you like the mind of a stressed accountant. That’s why it’s so entertaining!
If you pay careful attention you might find a few hidden gems you can secretly use yourself to save money. I won’t say a thing if you don’t.
- One Sheet of Toilet Paper per Event
Sheryl Crow popularized this awesome method to reduce bathroom waste. Not only do you save money, you defend the environment. Considering what TP is used for, limiting TP use might be the least of Mother Nature’s concerns. Mass extinctions have started over less traumatic events.
Once word spread, Crow backtracked on her original recommendation. I’m not buying it! Crow is a one sheet of TP per episode type of girl. I can see it in her eyes. I fully endorse this time honored way to reduce spending by implementing this practice in my household. My team isn’t nearly as psyched as I am. Might need a motivational rally.
- One Set of Clothing When You Travel
I ran across this several times now. If I ever hit my head and decide to take up world travel I’m going to use this idea. As a light packer when on the road this idea resonates with me.
The process is simple. You only need one or two sets of cloths when on the road. You shower with your clothes on, lathering up and rinsing off without the hassle of undressing and dressing! After walking around for half an hour your clothes are dry anyway, except in the tropics where if you started with dry clothes they’d be wet within a half hour.
Think of all the luggage fees you don’t have to pay anymore.
- Steal Hotel Soap
Sure, your moral compass makes this sound horrible, but stick with me. I personally keep partially used hotel soap. Why waste a good product! The goal here is to outright steal the stuff or keep using every bar of soap at least once so your conscientious is soothed. Either way, you can save $3, maybe $4, every year with this one simple habit.
Remember, it’s easier to ask for forgiveness if caught than to ask for permission.
- Don’t Change/Launder Your Clothes
Before you retch, hear me out. We all know people wear clothes longer between washes as they age. Heck, grandpa wore the same sweater for 22 years before it disintegrated off his back! As a responsible blogger I will NOT ask you to go that far.
What I’m suggesting is a planned attack on laundry. If the shirt or pants you wore today isn’t visibly dirty put it to the side for a day or two and wear it to work again. (Don’t wear the same thing to work for a week straight. Co-workers will notice and file a complaint. Yes, I know the smell is all in their head, but who needs the hassle.)
Underwear and socks are another issue. I always go for the sniff test. It’s important you do this right. You can’t just pull off your shorts and bury your face in them (as much fun as that sounds). Walk outside to acclimate your olfactory nerves to freshness before returning to undertake the sniff test. (Note: put on another set of clothes before walking around outside. I’m sure I didn’t need to say that except for maybe 20% or so of readers. If you get arrested for indecent exposure I’m not bailing you out.)
Guys, don’t do the underwear/socks sniff test in front of the wife and kids. Dad, let mom handle her own sniff tests. (I warned you at the outset this would cross the line. You, of your own free will, traveled this far. Don’t blame me.)
The few simple steps outlined here should cut laundering expenses 80% or more in most Western households.
- Cut Your Own Wood and Cook Outside
I joke I cut my own wood and cook meals outside as soon as weather permits here on the family farm in NE Wisconsin. My 10 acres of the world has enough trees to keep the stove hot all summer.
Country living makes it easier for me. City living still has opportunities for people willing to think outside the box. Let’s just say every city I’ve ever been to has a t least one park with trees. Need I say more?
If the cops show up you didn’t hear it from me.
- Free Hot Water for Showers All Summer
This frugal idea is an itch I want to scratch so bad it hurts. The concept is simple. Buy a couple hundred feet of black garden hose and place it on the roof of your house. A few strategically placed nails should allow you to spread the hose out for full exposure to the afternoon sun without the hose coming off the roof.
I was this close to using this money-saver when I had calves. I could have used the God-given hot water to mix the milk replacer for the little guys. Mrs. Accountant caught me with the ladder and the whole plan crashed to the ground.
Summer is once again approaching. Late afternoon hot showers are on the menu. (If Mrs. Accountant doesn’t catch wind of my little plan.)
- Reusable Toilet Paper
Before anyone says a word, this is a real thing! They (whoever “they” are) call it “family cloth” and you can buy it on Amazon. Once again we have an opportunity to save the environment and money!
Now I know what you’re thinking, my frugal friends. You think I added an Amazon link to these reusable butt wipers to cash in on the craze. And you’re right. I don’t expect to see sales for any of these things, but if I do I’m calling you out. Got it?
- Don’t Flush Until It’s Full
Remember grandpa again. He always said, “If it’s yellow, let it mellow; if it’s brown, flush it down.” It’s a time honored practice preserving the family budget since Julius Caesar took over in Rome. Don’t go against a tried and true method of frugality.
I’ll let you decide when to use the little lever on the side of the toilet.
- Get a Gym Membership so you don’t have to Shower at Home Ever Again
This one is just plain stupid, as George Carlin would say. Why else would you have a membership? To work out! Really! If I wanted to work I’d get a job. I belong to the gym for the steam room, fellowship (because I don’t attend church as much as I should) and the free showers.
I’m not going to say I never shower at home, but it’s rare. I visit the gym three or four times a week and shower when I’m done steaming, ah, working out. Every time! This saves on the water bill and the cost of heating the water. Smart people like me is why so many gyms go out of business after a few years. Hey! Don’t blame me. They signed the contract too.
- Don’t Wash Your Hands after Using the Bathroom
Speaking of George Carlin, I’m not alone when I don’t shower every day or not washing my hands after every visit to the restroom. Check out the YouTube link of George explaining when you should and should not wash your hands. It makes perfect sense to me. (I wash after every bathroom visit, for anyone wondering.)
Bonus: Eat Your Pets
As I researched this post I found a few really neat ideas to save money I haven’t used to date. This one really resonated because I’ve done it!
You see, growing up on a farm we understood the value of treating our animals right. Then, after an appropriate amount of time we ate them. You call it hamburger; we called it Blackie or Bess. You call it a chicken wing; we called her Cluck.
Rabbits and other critters graced the menu periodically, too. I wanted to finish this post with an antidote about eating the family cat, but due the rude description in my notes Mrs. Accountant used her veto power to prevent me from sharing that frugal idea with you. You’ll have to figure it out on your own. If you’re as frugal as I think you are you’ll know what to do.
Okay, before I sign off I want to reiterate this is all fun and games. No animals were hurt in the production of this post. Tax season is wearing me down and I’m not normal anymore. My publishing schedule will be lighter until the finish line. Details are available on the Where Am I page.
I also promise to get serious, too. No more pu—, ah, cat jokes.
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.
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.
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.
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.
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.
Countless blogs and websites provide lists on how to save money. Turn out lights, turn down the heat in winter and the library are good ideas. Mr. Money Mustache has a strong drive to bike. On several occasions he has published on the benefits of biking. Biking is good for your health and cuts energy use. Reducing or eliminating what he calls a “clown-like car habit”, you cut spending by serious coin.
Like many readers I undertake a number of these ideas. I keep my house 60 degrees F in the winter. To keep warm I wrestle Mrs. Accountant and the kids to keep them away from the thermostat. I use natural lighting whenever available.
The farmstead is a whisker more than 15 miles from my office. I bike about 100 days a year. The savings are modest, but noticeable. A 30 mile round trip costs me about $15 according to the IRS mileage rate. My vehicles are purchased used and run for a couple decades before they are replaced so my vehicle cost is less. I estimate my real cost per mile is closer to 30 cents. This means every bike ride to the office allows me to keep an extra $9 in my pocket, tax-free. (You don’t pay an extra tax for not spending money.)
A Lesson from Walmart. Yes, Walmart
Back around 2008 Walmart started to examine its energy costs. The idea was to offer affordable compact fluorescent light bulbs (CFLs) to customers; the thought being CFLs lasted longer so Walmart would soon have more shelf space for other products. The energy savings customers experienced would likely be spent at Walmart on other items.
The discussion eventually turned internal. What if Walmart used CFLs in their stores? One idea was to replace incandescent bulbs with CFLs in the ceiling fans on display. Of the 3,230 stores Walmart had at the time, the average store had ten ceiling fans. Each ceiling fan had four bulbs.
Each bulb produced a minor savings, but when the Law of Large Numbers took hold Walmart stood to reduce their utility bill $6 million per year! Management had an easy decision.
Since then Walmart has expanded their energy philosophy to include utilizing as much natural lighting as possible and electric semis to deliver products to stores around the U.S.
CFLs cost more than incandescent bulbs upfront, but the longer life of the CFL (8-10 times as long) and energy savings more than cover the initial capital outlay. Total savings from reduced energy use is several times the entire upfront cost.
Lesson from a Humble Accountant
My memory is slipping with age. I can’t remember the exact year I transitioned to CFLs and later LEDs. What I can share is how I determined when it was a good idea to make the switch. Regardless the exact date, I was an early adaptor.
We will focus on my office to keep the discussion simple. I used the same thought process to transform my lighting at home.
Lighting is an important consideration in a tax practice. Eyes get tired easy enough looking at a computer screen all days and trying to decipher smudged and faded documents. Security lighting and signage are also important.
The outside of my office building is covered by floodlights and security cameras. The entrance light is always on. Security lights and the sign are on a photovoltaic trigger. This means the two lights at the entrance are on 24/7 and the sign and security lighting average 12 hours of operation per day — more in the winter, less in summer.
I forget the exact wattage used so I’ll stick with 100 watts per bulb when incandescent bulbs were used. My research showed an equivalent CFL used only 26 watts. Each hour of operation used 76 fewer watts per unit.
The hourly savings didn’t amount to much. However, when a light is operating an average of 12 hours a day 365 days a year we get 4,380 hours of annual use. 4,380 hours of use times 76 watts of reduced energy consumption per hour equals 332,880 fewer watts used per year. Reduced energy consumption of 332 kilowatts times $.12 per kilowatt and we save 39.84 per unit! We have twelve units.
The lighting replacements paid for themselves in less than a year! And they lasted longer.
Inside the office we have 40 of those 4-foot tube CFL bulbs. We use as much natural lighting as possible, but we still operate half the light banks most days.
The typical office uses what is called a T12 linear fluorescent bulb. Each bank has two or four bulbs. T12 bulbs use 40 watts.
Offices are turning to smaller T8 bulbs. The length is the same but the diameter is a bit smaller. T8s kick out the same light as a T12 and tend to last somewhat longer (modestly in my experience), using 32 watts per hour.
The office has on average 20 lights on each day for 10 hours. Two-hundred lighting hours using 32 watts instead of 40 watts reduces electricity usage 1,600 watts per day or 320,000 watts on a 200 day work year. (I cut the work year to adjust for reduced summer hours.) 320 kilowatts time $.12 adds to a modest $38.40 in saving per year.
T8s are easier on the eyes and don’t fade as much as T12s. You might remember seeing one side of these linear bulbs in an office turning black. This happens as the bulbs ages. The bulb still works, but output is reduced. T8s have fewer problems with dimming as they age. For accountants this is a blessing for our eyes.
Security lighting has since converted to LEDs which use even less energy. We’ll forgo the math to keep the story moving. Lights with heavy use are worth the extra cost of LEDs. Security lights, the sign and the entrance are LED lights. LEDs also weather the outdoors and cold better.
LEDs have one additional advantage. Incandescent and CFL lights blast light in every direction. LEDs focus with a narrower footprint. This means our security lighting is brightest where we want it.
No More Complaining
You can hear the groans when Mr. Money Mustache reiterates once again the necessity of biking over an automobile. The complaints follow fast on his heels. You can’t haul stuff with a bike. (MMM proved that wrong.) It’s too cold, hot, dark, rainy, blah, blah, blah. You can’t bike where I live because of the piles of snow, or, it’s too far to bike.
MMM doesn’t buy the complaints and neither do I. Small changes can add up to big savings. There is a point of diminishing returns. As my office lighting energy use has declined, every additional capital expenditure to reduce energy use further has less bang for the buck. With security lights now using 12 watts per hour of operation I need to focus elsewhere to reduce energy use.
Driving sucks a lot of cash out of the pocket. Lighting can put a few dollars in your pocket per month; biking can keep hundreds in the First National Bank of Wallet. My commute is a hefty 30 miles round trip. If Pete knew this we’d need the paddles to bring him back. (Don’t walk into the light, Pete!)
Even driving an older vehicle squanders $9 per commute, or $45 per week, or $2,340 per year. (I think I’m going to be nauseous.) Biking when the sun is shining (as I do) cuts perhaps as much as $1,000 per year from my transportation budget!
It’s true. Our frugal efforts alone will not change the world. At best it will allow us a lifestyle with a smaller carbon footprint. A couple thousand tax-free dollars doesn’t hurt either.
Where it starts to add up is when we work together as a team. When thousands and millions start adopting better choices in lighting and transportation the numbers become mind-boggling.
An unenlightened major corporation like Walmart was able to shave $6 million per year off their energy bill. The number is already big enough to make a difference.
Now it’s your turn to join in.
Save yourself, save the world. Love frugal without giving up a thing.
Compare LED prices at Amazon. A few minutes of math could lower your energy bill.
[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.
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.
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.
There are times thinking like an accountant determines how much of your hard-earned money you get to keep and how well your investments perform. Money isn’t the only thing accountants think about either. Time is more important than money by a long shot and plays into the equation every time.
This past week my oldest daughter asked if I would be helping with her tuition for next semester. I lollygagged as I didn’t want to think about it at the time. My daughter persisted, finally mentioning she wanted me to know about her tuition if I wanted to use a credit card to accumulate bonus miles or cash back.
Every year I generate cash and miles equivalents of around $10,000 per year. The whole family knows my love of these bonuses since they are tax-free and nothing motivates a tax guy like a five figure tax-free benefit.
I shrugged at the suggestion of getting another credit card for a bonus. Yes, tuition is nice spend to generate lots of cash back or miles. I did just that earlier this year. But I didn’t feel like it anymore.
Another credit card with a required spend would be a nice added bonus. However, I only undertake the process when I feel like it. Some days I am in full hack mode and other times I could care less. Since I don’t need more miles and the kitty is full, my desire is based solely on thrill.
It comes down to time. Tracking spending on a certain card takes a small amount of time. The rate of return is high, but I don’t want to do it! Call me a spoiled child (in the comments, please), but there are times my time is worth more than another $400 tax-free.
Earlier this year I went crazy on the system. I used several new cards to generate thousands in cash, free hotels rooms and miles. I hate traveling and business travel will take years to consume all the benefits I amassed this year. Like I said, I went ape.
I also discovered selling tradelines a year or so ago and decided that looked like fun (if not tax-free). After mild research (and a few hiccups) the ride started producing a revenue stream. The numbers were nice, even if taxable income.
Selling tradelines requires more time tracking each card involved and assuring you have at least something on each card involved. It started becoming a pain in the tail real fast. The money wasn’t worth it after a while. (My attitude changes over time. When I stop enjoying the process I go do something else; when my deviant nature bubbles to the surface I am all in. Until it grows old again.)
There is a danger in the FIRE (financial independence, retire early) community. We tend to research to the nth degree as we seek to maximize results with minimal risk.
But minimal risk may not be acceptable risk! As I went crazy on selling tradelines I ended up with one credit card cancelled. (Don’t cry for me. Plenty more where that came from.)
The danger part of tradelines was wasted time. Owning a business means I have plenty to spend on. Putting a few transactions on a dozen cards started being a real time consumer, however. If I didn’t have a tax practice and blog to manage I might find the time expenditure acceptable.
With tradelines you need to track when an authorized user is added to the card and when to remove them. More time is needed to track your payment so you get paid for the hassle investment of time.
The money is good, no doubt. Selling tradelines on a few cards can add a few hundred to the mad money account. A dozen cards can reap up to a thousand every month; sometimes more.
A good accountant would milk this thing for all it’s worth. I’m not every accountant.
A bird in the hand is worth two in the bush they say. And they are wrong! Free money from credit cards is a lot of fun, but your time is more precious! I will still harvest tradelines and credit card bonuses when I feel like it, but this is the boy in me playing. It isn’t maximizing results.
Or maybe it is! Picking every bone clean that happens in your path is insanity! Not only is time precious, but what you could do with that time can easily make more. Life is too short to waste on every hack. You must be careful which hacks you pick and choose.
Harvesting credit card rewards and selling tradelines at least makes you money as long as you don’t increase spending. The real danger comes when you only consider maximizing rewards in other areas of life.
Drugs might provide lots of utility as long as you realize it costs money and a piece of your soul with every purchase/use. An alcoholic drink now and again is fine for most people. But if you get confused with mild stimulants you can get in deep quickly. The jails are full of people who maximized pleasure without concern for long-term consequences.
Not to mess with your head, kind readers, but sex is good a few times a week, too. Seven times a day might sound funny, but you can do real damage. You don’t want to milk every last ounce of utility before you end the activity. (Bad choice of words.)
And now we get to the real risk of maximizing results applicable to everyone in the FIRE community. Every accountant knows (or should know) leverage is the best way to spike results. Public corporations do it all the time. XYZ, Inc. adds a pile of debt, buys back stock and watches earnings per share skyrocket.
Until it doesn’t.
Leverage is a double edged sword with the edge cutting you enjoying the advantage. You see, leverage has a built in cost. Interest is owed on each leveraged dollar, win or lose. Break even is a loss with leverage.
Investors figure this out early on. A thousand dollars can buy $2,000 of most listed stocks. If the stock increases 10%, your return is 20%, minus interest owed on the borrowed money.
Here is where it gets bad. If the investment declines the loss is also magnified! A 10% decline is a 20% loss on your original money, plus interest owed on the borrowed funds.
The worst part is staying power. Everyone knows broad market declines happen. Everyone should know the market always comes back given enough time. When you use leverage you don’t have unlimited time. Interest is accruing every day you have an outstanding balance on the loan. The market can outlast you when you use leverage.
Without leverage, all you need to do is wait. An individual stock might go down for the count. It happens. But the overall market is a reflection of the long-term growth trends of the whole economy. In time the market will reflect the continuing growth in technology, productivity and economic growth.
And only the unleveraged can outlast Mr. Market.
Most people use leverage at a far greater level than what is allowed to buy stocks, bonds and mutual funds.
I can hear your screams of innocents. You don’t buy stocks or mutual funds on margin* (good to hear), sell your tradelines (maybe you should) or use credit cards with or without rewards and bonuses (why not?).
However, I bet you borrowed money at least once in life on an investment virtually guaranteed to lose money: a vehicle loan. Ah, but that’s different, you say. No it’s not, says your favorite accountant.
Leverage is leverage. And leverage accentuates gains and losses. An auto loan creates the same leverage a stock investment does. The only difference is the size of the loan and the guarantee the asset will decline in value.
There is another leverage I bet most readers have used: the mortgage. But how can you afford a home without a mortgage, you protest? You might not. I’m not even asking you to buy your first (or any) home without a mortgage. What I want you to think about is the amount of leverage you are taking on and the potential consequences.
Real estate tends to be a good investment, except for 2008. As bad as the housing market was in 2008 and thereabouts, the only people who lost their home to the bank had a mortgage. Usually leveraged to 100% or more.
Some leverage can be a smart move, but leveraging any asset or investment to 100% or more is begging to have your head handed to you.
Think of it this way. You buy a $100,000 home with $3,000 down. (We will ignore closing costs and other items that muddy the water.) If the value of your new home goes up 3% the first year you doubled your equity in the home. A mere 3% decline and your home has no equity. None. Zero.
In most cases you are okay as long as you are current on your payments. That is a whole different issue. What does happen when you have no equity in your home is it requires you to come to closing with cash to sell the darn place. It removes the selling option for many people.
Massive leverage is common historically in real estate. In my office landlords are the number one group to declare bankruptcy. They are also the same group who has the highest net worth. What’s up with the dichotomy?
It all comes back to leverage. Those who abuse or overuse leverage find themselves in too deep to wiggle. When you lose the ability to move financially you are in death spiral. Even if you survive there will be significant damage done.
The Efficient Frontier
I hear business owners and those willing to cheat on their way to FI brag about a method they discovered to generate massive income and net worth growth. Before the words are out of their mouth I know they read a news article on using leverage to spike returns. The article probably highlighted a major corporation using leverage to maintain and grow returns.
With rare exception it ends badly and our victims need to start over or at least re-walk part of the path toward FI.
Accountants love to talk about efficiency and maximizing returns. And it is true I want you to think like an accountant. But just because thinking like an accountant is a good thing doesn’t mean accountants never have stupid ideas. Abusing leverage is one of these ideas.
I would never, repeat, never recommend a client to borrow funds to invest in the stock market. This includes option strategies to spike investment returns.
(Side bar on options: Options are not bad in and of themselves, but most people use them wrong. I have no problem using an option to buy a stock a lower price and collecting premiums or replacing a sell order with a covered call. However, if you use an option to buy stock you must have all the cash on hand. Otherwise you are only disguising massive leverage. The bad kind.
If you don’t understand options you have no idea what I just said. That’s okay. Someday I’ll write a post on options and the incredible risks to the foolish as well as using options as a hedging tool for your own investments. Stay tuned.)
Back to our show. A car loan is leverage and not the good kind either. I understand a loan is sometimes necessary. When this is the case you must make your leverage a DEBT EMERGENCY! When you have debt on a wasting asset all nonessential spending stops until the debt is gone.
The home mortgage is a bit different. I make exceptions to the rules for mortgaging a property, but only after careful consideration. Once again, remember 2008. It never happens until it does.
If your accountant tells you to leverage your business or investments, take caution. When he (a woman would never recommend such a stupid strategy) explains how leverage maximizes your gains, grab your wallet and run like the wind. Your accountant didn’t lie, but the risk assumed to take such a strategy is insane.
If your accountant, or anyone else, encourages excessive leverage on real estate or business, or any leverage on an equity (stocks, mutual funds, et cetera) position, remember the words of the dearly departed George Carlin:
“Do you know how you can tell if you have a stupid kid? Take him to the curb in front of your house and stand him there. If you come back in two weeks and he is still there you have a stupid kid.”
And a stupid accountant.
* borrowed money
Today we have a special guest post from Josh Wilson of Family Faith Finance. Josh’s idea for an article is one I would’ve written if I’d thought of it. I talk about using credit cards as a tool to better manage your finances and those juicy bonuses they offer, tax-free. But what if something goes wrong? Identity theft drips from the newsfeeds. Unauthorized charges happen.
There is a way to protect yourself. Most readers are aware of their credit card’s dispute process. But if the dispute goes wrong there are still options short of arbitration. Josh gives us the basic framework in disputing a credit card charge or issuing bank’s action before moving to a powerful tool to resolve the worst problems with lenders. I’ll let Josh tell the story.
How to Complain To Your Credit Card Company
While credit cards aren’t a prerequisite, they’re a great tool for emergencies, recurring payments, cash management, to build credit score and for bonuses. Usually having a credit card is no big deal, either, but then life interferes? Having a complaint against your credit card company is normal and if you do you’re definitely not alone. The most common complaints about credit card companies include: billing disputes, identity theft, and account closure.
When you have an issue with your credit card service it’s best to work directly with the issuing bank first before seeking arbitration or help from a third-party advocacy group. Contacting a credit card company to file a complaint can seem daunting, but most complaints can easily be handled with some research and a phone call. The process is similar for most credit card companies, but there are a few things to remember when filing a credit card complaint.
- First, it’s going to take some work. You are going to have to make phone calls, write letters, send in copies of bank statements and more to deal with a fraudulent charge on your credit card or other credit issues. Just be prepared and make sure you have everything organized.
- Second, you must document everything. It will make the process much easier. To keep good records, use email, record your phone calls and print two copies of all paperwork you send them.
Let’s review the process of filing a complaint with your credit card company:
Evaluate the charge or discrepancy. This is the first step if we’re looking at billing mistakes or potentially fraudulent charges. You want to make doubly sure that you didn’t simply forget about a charge you did make. You may have to look up the location or call various merchants when trying to figure out if you made a purchase there.
Contact the merchant or credit card company. Once you have your information together you should contact the merchant or credit card company. If it is for a fraudulent charge you should first contact the merchant to dispute it. If they can’t or refuse to remedy the error, contact the credit card company and alert them. [TWA Note: I would report a fraudulent charge using the bank’s online portal and let the bank deal with the issue. I wouldn’t call the merchant.]
Mail paperwork. More than likely you will be asked to send in some information to the credit card company. This is usually handled with a fax or scan, but may require a hard copy snail mailed. Most banks don’t require paper complaints, but if required, send in a copy, keeping the original documents for your records.
Play the waiting game and appeal if necessary. Once you’ve sent the information you need to wait while the company does their own research. Sometimes your dispute is denied. If that is the case you can appeal, asking for an explanation as to why the dispute was denied. However, most credit card companies will require you to appeal within 10-14 days of receiving your verdict on your initial complaint.
What happens when the credit card company is unwilling to resolve the issue? This occasionally happens and it’s not your fault. You can do everything right and the company may decide you are liable. Luckily there’s a government agency designed to handle this, namely the Consumer Finance Protection Bureau, which is designed to assure financial institutions follow the laws and treat you fairly. They have a process where you can file a complaint against a financial institution if you have a problem with your credit card, mortgage, student loan or any other issue involving a lender.
How do you file a CFPB complaint?
The CFPB has a unique process for filing a complaint. Once a complaint is filed they become a liaison between the consumer and financial institution.
- You file your complaint on their website. You can log in to check or update the status at any time.
- The CFPB reviews your complaint and all the documents you provided them.
- They contact the financial institution on your behalf to settle the dispute.
- The credit card company responds to you and the CFPB.
- Your complaint is updated when it’s resolved and the CFPB publically publishes the results.
Whether you file a complaint with your credit card company or with the CFPB, you shouldn’t be anxious about addressing an issue involving your credit card, student loans, mortgage, or any other loan.
Living a frugal lifestyle sometimes lends to a false sense of security. We take all the financial precautions to increase our savings rate and invest in broad-based index funds. Before long the net worth starts reaching for the stars and we feel good about ourselves.
Now, we decide, might be a good time to get a second car or trade for a new one. Moving to a smaller home, across town or to another state or country, sounds tempting and easy to do with your nest egg growing faster than you are spending.
Your habit of caution is well defined. There will be no stupid tax in your future! Careful planning leads to good decisions. You look before you leap.
Then it happens and you never even saw it coming. You paid a stupid tax without even realizing it was there.
How the Government Robs Smart People
Smart people know how to avoid spending half their income on taxes. They fill their retirement accounts and use index funds for non-qualified accounts to keep the tax burden low. Using the tax code can really put a dent in your income tax liability. But the government has insidious ways to pry your hard-earned cash from your wallet.
Selling an old car and buying a new or newer vehicle has an obvious hidden cost: sales tax. When you sell your current vehicle the government collects some coin from the buyer; when you buy a replacement vehicle the government collects sales tax from you. In Wisconsin, where your favorite accountant lives, the sales tax is 5% with most counties tacking on a ½% or more. (I am aware a few counties have a 5.6% rate, but we are trying to keep this discussion clean.) If you buy a $10,000 car you are required to pay at least $500 in sales tax, more in most counties. The value of the car hasn’t changed, but your net worth took a 5% ding on the purchase price. New vehicles are even worse with the higher selling price and non-tax fees crammed down your throat by the dealership.
Buying a piece of real estate is the worst. We will use your favorite accountant’s state in our illustration.
Sales tax isn’t due on the purchase of a home, rental property, land or commercial property. (Can you imagine paying sales tax on a $400,000 home?) There are far worse things than sales tax when it comes to purchasing/selling real estate.
Local governments love when real estate changes hands. In Wisconsin there is a $3 per $1,000 transfer tax. Don’t forget title insurance and both the buyer and seller get a bill.
As a seller you pay realtor fees or pawn your property pro se. If you go it alone you will invest time and money advertising the property and running to show the property. You still need an attorney (and last I checked they still invoice for their time) to handle the legal documents when you have a buyer.
Rather than bore you with the myriad fees associated with real estate I will stop here. All you need to know is real estate, as the buyer or seller, has lots of fees/taxes connected to the transaction.
The transaction fee is the most voluntary tax of all. The more you spend the more you pay.
Reducing spending and saving/investing a majority of your income has many financial benefits. We hear plenty about reduced taxes based on retirement accounts. What none of this savings rate considers is the amount of money wasted on merely the transaction.
Taxes are not the only culprit! Sure, the government has its hand out whenever an asset transfers. But so do sales reps, attorneys, and (gulp) accountants. Everybody gets a piece of the action. You have no guarantee on how the new asset will perform for you. The rental property could sit vacant; the new car could be a lemon. But all the, ahem, professionals are getting paid. If you ask me to consult on a transaction know up front I am the only guy in the room guaranteed a profit.
Reducing the Tax Grind
Taxes will consume over half of everything you earn in a lifetime if you are not careful. Income and sales taxes are only the beginning. Payroll taxes take a bite and realized capital gains put a grin on Uncle Sam’s face. Before you blink, when is the last time you filled the tank on the car and thought, “Oh yeah, I just paid an excise tax.” Excise taxes are everywhere and hard to spot for a reason. It makes it easier for the government to get more of your wealth.
Property taxes are relentless. If you rent the landlord adds the property taxes to your rent; it’s built in. If the landlord didn’t include this major expense she would be broke quickly and the new landlord will not be so lax.
And did you forget you pay corporate taxes, too? You do. Corporations include their tax liability in their cost structure and pass it along to customers. The end user get stuck holding the bag.
Even when you die the government takes a slice in the form of the estate tax. It never ends even if you do!
You can fight back and regain control of your financial future. We have discussed visible (income, et cetera) taxes at length in the past. Now we want to gut the terror of the hidden tax: the transaction fees.
Fee’d to Death
When a simple phone bill has more individually listed fees than you actually make phone calls it is time to consider fees, transactions fees and how they affect your wealth.
We will focus on the two big ones: real estate and vehicles. Of course you already know if you increase your savings rate you will automatically reduce the transaction fees chewing into your life. Buy less stuff; pay less sales tax. You understand the concept.
Cars are a different story. Transportation is a necessary part of life. Even people who bike and walk everywhere they can frequently also own one or more vehicles. And each vehicle owned is a wasting asset.
The more often you buy a vehicle the more often you pay the stupid, ah, hidden tax. If you buy from anyone other than a “for sale by owner” there will be a profit built into the price. This doesn’t make the seller a bad person, just a business person who will survive.
No matter who you buy from you will pay a sales tax. Every sales tax paid is an instant reduction of your net worth. I have a powerful allergic reaction to any event that molests my net worth. There are times I come out swinging it is so bad.
There are two things you can do to massively reduce the transaction costs with vehicle ownership: buy as few vehicles as possible over a lifetime and pay less for the vehicles. Finding the lowest priced reliable vehicle to get the job done for the longest period of time creates the greatest savings. When I buy a car it will be in the family for a very long time. Most of my vehicles are purchased 2-5 years old and I run them for another 15-20 years. I don’t care what they look like! They only leave the family when they no longer can do their job.
A typical sale of an auto in my household is purchased by a local kid looking for a vehicle to enter into the local demolition derby. “Gi’me five hundred bucks kid and this beauty is all yours.” They buy it every time.
You may also consider forgoing vehicle ownership. Ride sharing and public transportation coupled with a good bike can keep transportation costs low. For those few times you need a vehicle for a longer trip I suggest renting. There are still transactions costs, but they tend to be minor in these situations compared to auto ownership.
The other big purchase that chomps a serious chunk out of your net worth is real estate. It drives me crazy when I see clients think they can trade houses like day-traders trade stocks. Of course you can make money flipping houses, but the transactions costs will kill you. Remember who is always guaranteed to turn a profit: the professionals (sales rep, et cetera). One bad deal and it all goes south quick.
Before someone points out I flipped a few houses over the years I want to point out I never went into an investment property with the intention of doing a quick sale for some easy greenbacks. We bought many properties and improved them all. If a rundown property cleaned up nice and we were offered a price we couldn’t refuse, we didn’t refuse.
I own homes like I own cars: for a very long time. I’ve lived on my current farm for 22 years. Before that I owned a home in town and before that I owned a mobile home because I didn’t want to live with my parents anymore. As far as I’m concerned, the mobile home was a vehicle (it has a license and everything) and is a wasting asset. The home in town was nice, but I always wanted to move back to the country where I could raise animals and till some land.
Warren Buffett still lives in the home he bought in 1958. Smart man. Bet he has money.
I’m not telling you you can’t buy a car or a property. If you want to own income property you have to buy it first. There is also nothing wrong with owning your residence. All I am pointing out is that you want to own as few of these big assets for personal use over your lifetime. Doing this one simple lazy thing (not buying/selling/trading your car/house on a regular basis) could increase your net worth by a million dollars or more over a lifetime if invested in an index fund.
Or, you can keep doing what you always do. My brethren in the legal and sales fields are happy to take you money.
So am I.