So, you got some extra money laying around

Mr. Money Moustache isn't actually retired. He's "semi retired". He has a home building business. Which is probably what everyone would do in his shoes. He no longer NEEDS income from employment so he can essentially give the middle finger to doing anything except for what he really enjoys and wants to do for income. It's the perfect situation because essentially you can be top tier at whatever it is you want to do, charge premiums for your work, and make out like a bandit simply because you don't actually need the income.

Thanks for linking that by the way. It's changed my train of thought and made me re-think my stance. I've always been able to save but not even close to as much as I should be on my salary. I've also considered my mortgage "appropriate" debt and not done anything outside of make bi-weekly payments to cut it from 30 years to 19 years. I now plan on dumping enough money towards it every year to have it payed off in 4, which I think is feasible.

I've already canceled my cleaning service, decided to stop dining out almost completely, putting my home brewing gear into actual use, and started using betterment.com.

Previously I had been saving over time to purchase another house. The plan was to save a 20% down payment for a high end rental property. Now I'm going to pay off the only debt I have (my mortgage + 31k in school loans) instead. And then buy my next rental property once I have the savings to do so at about 50% down.

Deathwing_sl said:

What I can't figure out what's the best way to "spend" it. My student loans are paid off but my wife still has some, they're ~5% interest but we've been paying them off for ~3 years already. I know loans are interest front loaded, so I don't know if paying extra on loans we're already 30% into is worth it.

Click to expand...

What do you mean by loans being interest front loaded? How long you have been paying on a loan is completely immaterial when the question is whether to make larger payments toward it.

The only thing to make sure is that if you send an extra payment (i.e. the same amount as usual, but with a separate check), you have to note that you want to apply it to principal. That has nothing to do with interest/principal, but you have to make sure they don't consider it a pre-payment of your next month's bill.

I'd actually do that, because it's a 5% risk free rate of return, which you're not going to get anywhere else.

wormie_sl said:

He means that the interest that would accrue over the life of the loan is collected by the lender before the principle. Its not 100% interest, 0% principle but its close for quiet some time.

Click to expand...

I googled this and it looks like it's actually a common misconception of how fixed-payment loans work. The monthly payment (principal + interest) is fixed. So in the first year, you pay interest on $10,000 debt, whereas as you make payments, your principal decreases and with it the interest (e.g. 5% on $10,000 is more than 5% of $5,000). However, that has nothing to do with how payments are allocated between interest and principal. Paying larger amounts early ends up saving you more only because the interest rate compounds over the remaining duration of the loan. It will at any time save 5% per year.

Deathwing_sl said:

You're right, I was confusing "front loaded" interest with extra payments being more effective earlier in the loan. But saving X% per year regardless of when is a good perspective, thanks.

Click to expand...

Seems to be quite common a misconception, so I'm glad we got to clear it up! I'd make extra payments toward that loan if you can, because 5% risk free (i.e. guaranteed) is impossible to beat. The stock market returns about 9% on average, but in any given year it can drop a lot (as much as 50%) or gain a lot. So there's considerable risk involved with investing there. When making these kinds of decisions, the usual goal is to come up with some kind of risk-adjusted rate of return that tries to account for the difference. I'm not going to pretend to know how to do that in this case, and the calculations are for sure at best approximations that don't take into account risk preferences (i.e. how well you sleep after having taken on substantial risk), but intuitively, I can't see how you'd beat 5% for sure.

Another thing to remember is that compound interest works in your favor both when saving and when making extra payments on a loan.
Say you have a $50k loan at 5% on a $500/month fixed payment. Do nothing but make payments and you will have paid it all back in just under 11 years, with a total of $14800 interest paid.
Drop an extra 10k on it today, while keeping the monthly payment the same, means you pay back the remainder in 8 years and 2 months and your total interest paid comes to $8750. Over 6k in interest saved.

You need a pretty substantial stock market return to turn 10k into $16k over 8 years, with much greater risk (6% return needed every year over 8 years)

I suppose that's true. Still, it's quite amazing how quickly interest can add up over time. I wouldn't trust myself to not spend the invested money or the interest over that time so I'd probably still go with paying down the loan.

Except that you're literally throwing money away based on risk. Putting the money into paying off the loan early is guaranteed to save you X amount of money. Investing that money is not even close to guaranteed to earn you X%.

I forgot I had posted in this thread and didn't check it until today. While my goal is retirement at 42, like Khane said, it's more like what Mr. Money Mustache has which is semi-retirement. I basically want financial independence where if one day I decide I don't want to go to work anymore I can walk away immediately. It's very possible that I'll turn 42 andwantto continue working. If I do, there's no issue, right? But if I don't, I can walk away and find something else to do. Or I can sit around and do absolutely nothing.

There are definitely some concerns, and Deathwing covered a few of those.

Health insurance is the big one for me, as my wife has a chronic condition. Hopefully the ACA takes care of that, but I'm unsure of what our future medical expenses will be. But I've taken that into account with my age 42 retirement; by then we should hopefully have enough to pay it out of pocket.

Social Security isn't a concern at all. I believe the latest "we don't do anything differently with SS" report had it paying around 75% of the current rates until I'm into my 100's. I've slashed that even more in my calculations. Really, my wife and I will be throwing a lot of savings into a regular investment account that we can draw from at any time. This will float us until 59. I've run some worst case type scenarios, and in those we basically expend that entire fund by the time we can start drawing from retirement accounts (SS, Roth IRA's, 401k's, government pension). In the non-worst case, that fund basically never goes to 0. I tried to be as pessimistic as possible, so even things like capital gains taxes, I calculated them at current income tax rates. Is that likely? I highly doubt it. But if it happens, our age 42 retirement should be sufficient.

splorge_sl said:

no one living off 24k per year gets to call themselves rich.

Click to expand...

I calculated our current expenses and we live off about $34k right now. That's with us basically not caring about how we spend our money. We even spent almost $8000 on an Alaskan cruise in August for our 10th anniversary, where we didn't take anything out of savings to pay for it (also took several other trips including driving the PCH, a few nights in San Diego, and a Vegas trip in December). I don't know that we could get by on $24k, but Americans (or maybe Westernerns) spend an absolutely retarded amount of money on stupid shit. I've got an income now where I have everything I could possibly want.

Also, regarding eating out, which is one of those things Americans spend an exhorbitant amount of money on, I agree with Deathwing. I hate eating out because I feel like there's no value there. I can pick up the ingredients to make something myself for a quarter of the cost and more than likely prepare it in the same amount of time I'd spend waiting at the restaurant. It's a bit more work for me, but I'm also not paying the markup on the food, the wait staff, cooks, and overhead of the restaurant. I've actually come to enjoy cooking now, too. Oh, and I don't have to worry about the hygiene of strangers preparing my food.

Deathwing_sl said:

$34k and nothing left for want? How is that possible when that one cruise is more than 25% of your yearly budget?

Click to expand...

Learn how to travel hack and credit card churn/manufacture spending. He shouldn't ever have to pay for a vacation again (outside of minimal fees for airlines and hotels) if he does it right.

If you have no debt $34k is actually a lot of money to spend in a year if you think about it.

$1200 rent
$250 utilities
$110 car/rental insurance
$350 medical/dental insurance
$60 gas
$400 food
$100 phones
$300 misc spending (fun shit?)

That's about $33k, plus there's other spending like medical copays that come up often (wife's medical condition) and pet stuff. All in all it's like $33-35k a year. We're looking at moving somewhere cheaper too, which will save quite a lot.

I don't know, maybe you spend significantly more than $300 on random shit a month?

Our combined gross income is about $80k, for reference.

I was just showing how you can easily live on that much money.

My age 42 retirement goal allows us to withdraw $40k a year after taxes, which leaves plenty of room for cars.

As far as a house, that's definitely a goal. As you can see, I said we have $80k gross income right now. What's left over after retirement goes into other savings for a house and car. This is actually a point where I joke with my wife, because she has a fund foreverything. We've got a car fund, emergency fund, fun fund (which we never use, but is supposed to be for big trips...I'm trying to convince her to just throw that into our early retirement fund). A larger portion of our extra savings is going to start going towards this early retirement. I feel like we kind of screwed ourselves in our 20's by going with conventional wisdom. We saved a lot of money, but it all went into traditional retirement accounts that we can't touch until our 60's. My viewpoint has shifted now into putting money into something more accessible (not necessarily liquid). I'm willing to sacrifice taxes on earnings for that accessability (although I will say our IRA's are both Roth, so we'll have plenty of tax free money at actual retirement age).

Anyway, back to the housing thing...I will probably end up using a VA loan. While I'd still like a down payment, it's not really necessary (no PMI with VA). Really, I just want the house paid off as fast as possible. But our goal is to move and buy a house for still significantly less than the $1200/mo rent we're currently paying, even factoring in taxes and insurance.

I live about 3 miles from work, and the wife about 1. The $60 for gas is pretty bang on. Food we pretty much shop once a week and it averages $100.

Our utilities average about, electric: $120, water: $60, trash: $15, gas: $15 (in the winter, our gas goes up to around $80, but our electric goes down significantly), internet: $50. I cancelled DirecTV a few months ago and got an HD antenna and download everything else.

I should make a correction on the car thing, which I posted above. We have a car fund, so basically anything car related comes out of that. It's essentially savings, but it could probably be budgeted as an actual item. I'd be guessing on this number though, so I'd go with $50 a month or so.

Vacations he was semi-correct about. For my work, I do a good amount of travel (about 6 weeks the last 2 years, 3+ months next), so I've got an assload of hotel rewards. That's where a lot of our miscellaneous money goes, however. We're not big consumers. We go clothes shopping maybe once a year, and maybe spend $150-200 each. We drive high mileage used cars. I'm big on Priceline. For our Alaskan cruise, I booked a 4* hotel in Vancouver for about $100 (plus taxes and whatnot). I'd say one of our biggest expenses is travel, but that's where most of that $3600 a year goes. We just do it smart. For instance camping in the Sierras. Basically just cost for a camp site, food, and gas.

My wife put together a budget for us a few weeks ago (after I brought up the Mr Money Mustache stuff) and she came out to about $40k a year in expenses. But she also went retarded on it with stuff like $166/mo for co-pays, $100/mo for the dog, $500 for random bullshit, and bumped our food budget up to $500 just in case. She did the budget to figure out how much we could actually save per year into the early retirement fund. I let her have her budget and just said let's try to shoot for significantly less than that. I know we'll come in under because she way overshot some of those things.