Pillars of FI

The Prime Directive:

Avoid debt, spend less than you earn, and invest the difference wisely.

“Giving will bring you joy, saving will bring you peace, and living on the rest will bring you  freedom .”

– Andy Stanley

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The Rules of Engagement:

• Rule #1) Never lose money. – Warren Buffet
• Rule #2) Never forget rule number one. – Warren Buffet
• Rule #3) Never risk your own money or your own time when you don’t have to.
• Rule #4) Challenge the presuppositions of the masses if you want to get different results than the masses.
• Rule #5) Successful people play to win, poor people play not to lose.
• Rule #6) Pay the tithe (if inclined), then yourself first, then and only then pay bills/expenses. – What is worse your future self gets cheated out of your current earnings or your cable company does not get what they want to charge you this month?
• Rule #7) Never forget in bad times, what you knew to be true in good times.
• Rule #8) Forgive yourself of past mistakes and choices and carry forward from right where you are at. Today’s starting point is right here and today’s start time is right now. – Every saint has a past and every sinner has a future.

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My Pillars of FI:

“Weapons of Mass Reduction”

Table of Contents:

Pillar I: Tax Optimization – 14.2% of Gross Income
Pillar II: House Hacking: Affordable Housing – 33% of Take-Home Income
Pillar III: Transportation – 17% of Take-Home Income
Pillar IV: Crush Your Grocery Bill – 13% of Take-Home Income
Pillar V: Savings Rate & Frugality
Pillar VI: Investing and Rate of Return
Pillar VII: Hack Your Day Job
Pillar VIII: Side Hustles
Pillar IX: Real Estate
Pillar X: College Hacking
Pillar XI: Travel Rewards
Pillar XII: Read More, Learn More
Pillar XIII: The 4% Rule
Pillar XIV: Building Multi-Generational Legacy Wealth
Pillar XV: Grow, Teach, Give, Enjoy, Live

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Pillar I: Tax Optimization

14.2% total effective tax rate or 38% of the marginal median American gross income

Many people believe they fall into a set, fixed, infallible, unmovable tax bracket based on their income level. While that is what the masses are cooed into believing, that could not be further from the truth or at least not the conclusion of the matter. The reality is that companies like GE and people like Donald Trump actually get tax credits rather than making tax payments. It is not because they are acting illegally. This is because they take advantage of many of the thousands of legal tax credits, write-offs, subsidies, and exemptions that exist in the 73,954 pages (according to Business Insider)  of the IRS tax code. The good news is, you can too.

Your tax rate starts with your gross (total) income then deducts customary and obvious deduction to arrive at your Modified Adjusted Gross Income (MAGI) and that value determines your tax bracket. This can be calculated in minutes for 98% of Americans and has the highest return for the time invested. That is where the average tax advisor stops and collects their fee and moves on the next tax client. After all, they have to do 90% of their work in a few short months of the year before the tax filing deadline.

The average tax advisor has read a fraction of the IRS tax code. The average person reads a page in 2 minutes (according to ExecuRead) so I would take you a mere 2,465 hours to master the tax code with perfect memory and retention (73,954 pages *2min/60min/hour.) Sounds daunting, doesn’t it? I hear you. Lucky for us people have gone before us and put together consolidate resources to help us focus on the most commonly applicable and advantageous portion and rules of the tax code. Such as the MadFientist and Tax-Free Wealth.

With these resources, it is much more achievable to drop from the 22% marginal federal tax bracket to the 12% bracket for example. That’s 10% of your income just in federal savings, did you get that much in your raise last year? Your specific tax situation will vary but that is a lot of loot to keep on your side of the ledger and thus, it earns its spot as the first pillar of FI. Consider that if you land in the 22% federal bracket (annual income over $38,701 single, $77,401 Married or $51,801 Head of Household in 2019) there is also 6.2% Social Security tax, 1.45% Medicare tax and for example, let’s choose a state tax of 6% and local tax of 2%. That totals 37.65% tax…ouch.

Thinking critically, with 73,954 pages of tax code don’t you think you could find a dozen tax credits, write-offs, subsidies, and exemptions that apply to your specific scenario that you could take advantage of? If you are silly enough to say “No,” let’s pretend for a second that you work for Elon Musk in some strange Martian location outside the US, earning foreign “Mars Bars” income that was not taxable in US dollars and you have aliens babies that do not qualify for the child tax credit. Then you cannot take advantage of any of the tax reductions… You still have savings rate and tax-advantaged accounts to max out, such as the 401k, IRA, 403b, 457, self-employed retirement plans, etc. You still have lots of option to reduce your MAGI on your path to Financial Independence so you can save up for Martian University for all those little aliens of yours.

You have a choice, give your hard-earned dollars over to government or learn a little about tax law and evoke your rights within the tax law to simply keep your hard-earned dollars as soldiers on a mission to earn you more money for your future wealth through investing. All you have to do is listen to a podcast or read a book or a blog to save, most likely, a double-digit percentage of your income for yourself.

Pillar II: House Hacking: Affordable Housing

33% of the average American’s take-home income

Behind taxes, housing cost is typically the largest expense for Americans. National data indicates that average America spends 1/3 (or 33%) of their paycheck on housing expenses and some even over 50%. For this reason, housing costs earns its position as the second pillar of FI.

Assuming that you have already started hacking your taxes the house hack is the next most critical place to address to keep those hard-earned dollars on your side of the ledger. Remember that the two biggest after-tax expenses account for half of the average American expenses.

So the reality is if you just get those two right you can drink all the lattes you want and still crush the financial independence game. Remember that these two are closely tied together by your daily commute.

Housing 33% + Transportation 17% = 50% of the average American’s expenses

There is no reason you couldn’t reduce or eliminate your housing expenses. And if done right even make money on housing. Turning your largest liability into an asset is exactly the kind of decision that gets you to financial independence.

9 Ways to House Hack

There are several ways you can go about house hacking. Which cheat codes you apply will depend on age, phase of life, single vs. married, kids vs. no kids, cleanliness preference, social or introverted, etc. There is no one right answer for everybody but if you read this list below and apply a house hack that works for you, you will catapult yourself to financial independence. Some people couldn’t conceive living with family, for others, it would be a blessing.

1) Move in with Family

Move in with your parents, sibling(s), or extended family. This one can be powerful and eliminate hosing expenses and draw you closer to family. That is of course, as long as you get along with your family. This is especially powerful if you are still young and single. This can be an optimum strategy to save up for your first down payment or pay off those student loans after college.

2) Roommate(s)

Either rent with multiple roommates to reduce costs or better yet, buy a big house with lots of bedrooms and rent them out to eliminate costs and even make money! One of my friends bought the biggest house he could get financing for after he started his first professional job. It was a huge five bedroom house that would ensure he would be house poor for many years to come. Except for one thing, he bought the house with the intentions of renting out the other four bedrooms to roommates of his choosing. He reserved full control in vetting who got to live there. If they were too rambunctious or unclean they did not have the option to renew their lease. The roommates not only paid his mortgage those years but made him money.

When he eventually got married roommates started moving out and the bedrooms were ready to be filled up with kids. His career progressed to make the payments much more affordable by himself with each pay raise.

If you are already a homeowner and you don’t want to sell yet, rent out a room or two and use the money to offset a decent portion of housing expenses.

3) Part-time Roommate(s)

If you want to date the idea of roommates but not marry into a long term commitment consider this option to try it on for size. Or if you don’t want full-time roommates just rent on certain days or for a short duration. Airbnb and VRBO have made this very easy. Heck, you can even rent out just a couch. This strategy can be excellent for a young professional who travels a lot and is not home all the time. There are a few acquaintances of mine that are making more part-time doing Airbnb with an extra bedroom than they would otherwise make with a full-time roommate. If you live close to an airport or a tourist attraction you will definitely want to look into this option.

4) Multi-Family Rental

Want the ability to rent out your residence but still want the peace and privacy of your own space? Consider purchasing a duplex, triplex, or quadruplex, living in one of the units, and renting out the others for a profit. Your tenants pay the mortgage for you! My Friend Coach Carson did this for a long time and made a profit from his primary residence. He turned his biggest liability into a cash flowing asset.

5) Live-in-Flip

Buy a home that needs a little TLC. Stay for at least two out of five years (to take advantage of the homeowner tax rate) then move out, selling the house for a sizable profit. This is the strategy that Mr. & Mrs. 1500 used to scale up their net wealth (I don’t say net worth because no amount of wealth with ever determine your worth) over the years.

Remember there are varying levels of rehab depending on you skill set, willingness to life in a construction zone, or ability to invest in contractors.

• The Updater – move in ready and livable but the wallpaper, shag carpet, and yellowing appliances will be strong motivation to update room after room.
• The Rehabber – This project will require you to replace most of the home finishing’s and may be unpleasant to live in at first. You may want to tear down to the studs and repurpose space allocation or remove walls to open up spaces. This property has a higher return on investment.
• The Pyromaniac – light a match, turn your back and walk away. This home may be easier to demo and rebuild from the ground up but typically has the highest return on investment. You might need to prepare to live in a tent in the back yard.
  
  

6) Live-in Rent

This strategy follows all the same guidelines as the live-in-flip but instead of selling the house at move-out, you can rent it out. Compared to the purchase price these rehabbed homes typically rent out at a premium given all the renovation you did. This one can be a great way to have a tenant cover your mortgage and make a nice profit on top. This strategy can be doubly powerful when combined with the BRRRR method (Buy, Rehab, Rent, Refinance, Repeat) With this strategy you can pull all your money back out of the house to reinvest elsewhere, say in the next rental. Be careful not to over-leverage beyond the zone of safe expected returns.

7) Landlord

Have Kids? Like your school district? Love your current home? Live biking distance from work? This strategy is for those that moving out may not be practical at your current phase of life. This one is straight forward so I will not belabor the point. Own one or more traditional rental properties to increase your passive income.

8) Downsize

The old adage is true “buy utility and rent luxury.” Downsizing is a very viable option for most Americans. It is all too common today to see people buy a home for the maximum they are approved to finance and live house poor for decades. Americans seem to be in this childish cold war of “my house is bigger than your house na-na–nah-boo-hoo” competition. This is the same competition that forced the Jones’ and their neighbors into bankruptcy. Would you rather have net wealth to brag about or square footage that in reality, you are borrowing from the bank?

Secondary home costs add up to more than you want to know. Consider the taxes, insurance, lawn care, pest control, home maintenance, furnishing costs, etc. of a larger home. These secondary cost by themselves seem insignificant but they often add up to 50% to 100% of the mortgage cost. Do yourself a favor, combine all of you secondary housing cost and total the bottom line. I will likely lose a dozen reader due to heart attack from this exercise. Stop buying stuff you don’t need to impress people you don’t like with money that you don’t have!

9) RV Living

Feeling adventurous? Ditching the traditional stick or brick house entirely and hit the road. This lifestyle is great for people who can work remote or love adventure. This house hack does not have to be permanent. I know a couple that did this for a year then parked their RV behind their new house after settling back in. They spent a couple hundred to landscape around their new RV parking spot to add an outdoor table with umbrella, string lighting, and a fire pit in front of their RV. By renting out the RV behind their house they earned a profit above the RV cost. They blackout dates for the 2 weeks a year they want to use it for vacations.

Pillar III: Transportation

(17% of the median American income)
Buy Used Cars – or Used Bikes

Pillar IV: Crush Your Grocery Bill

(12% of the median American income)

Kill the Dine Out Dollar Drain

Pillar V: Savings Rate & Frugality

Earn More Than You Spend so You Can Invest the Difference Wisely

Pillar VI: Investing and Rate of Return

One of the Biggest Levers We Have to Pull. Make Sense of the 401 Chaos

Pillar VII: Hack Your Day Job

We have talked about the frugal side of the equation and cutting major expenses. Now we need to talk about the other side of the equation. The easiest and most practical way to build your nest egg is to build your current income.

Pillar VIII: Side Hustles

A little additional income in the short term can make a huge difference over the long term.

Pillar IX: Real Estate

Once you have built a perpetual money-making machine you will want to diversify. Real estate is a great way to do that.

Pillar X: College Hacking

Why go to college in the US? The outrageous price of a U.S. degree is unique in the world. And the education quality is one of the lowest of first world contraries. In other words, you are getting a fraction of education for several times the price. The US collegiate education is one of the worst valves pushed on mass America. Geo-scholastic-arbitrage. Plus you get a fun free adventure, cultural exposure and look more valuable than the standard student units annually pumped out of the American college machine.

College teaches you a lot of false premises of the real world that lead to failure.

1. Don’t make mistakes – never learn from someone that has not made a lot of mistakes?
2. Don’t cooperate because cooperating is cheating. You can win on your own so why would you want to learn on your own. In the real, people that ask for help are the winners.
3. There is only one right answer. And it is the one the teacher gives you. – wrong test different solutions and some will work well under test.

The business world and technology have changed quite a bit in the last 200 years of the country but the college system has remained the same. Is it now obsolete? Currently, in America, you have the same income expectancy from trade school as you do from most four year college degrees.

This is a good resource to read if you are interested in learning more. Why is College so Expensive in America?

Pillar XI: Travel Rewards

Still want to travel in retirement

Pillar XII: Read More, Learn More

via audiobooks you can now learn while you…commute, workout, mow, work, fold laundry.

Pillar XIII: Savings Rate & the 4% Rule

The 4% Rule also known as the Trinity Study, a 70-year study that attempts to determine “safe withdrawal rates” from retirement portfolios that contain stocks and thus grow (or shrink) irregularly over time.

Read More…

Pillar XIV: Building Multi-generational Legacy Wealth

There comes a point where your perpetual money-making machine will continue to grow for longer than you will.

Pillar XV: Grow, Teach, Give, Enjoy, Live

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