Financial Independence: Methods, Mindsets and Cloth Diapers

The Something Awful Forums > Discussion > Ask/Tell > Business, Finance, and Careers > Financial Independence: Methods, Mindsets and Cloth Diapers

Swingline: Jul 20, 2008

No Wave posted:

It's not really bullshit. In most cases you won't gain much from doing the more expensive thing, but sometimes you will. Following new '70s music closely in the '70s was probably way more exciting than researching it now, and being into SNES in its prime was something way different from going back and playing the games now even if you can get them all for free more conveniently online today. The early days of WoW were really, really cool. New stuff is cool and neat and and it's really fun to see how the envelope is being pushed. There isn't an easy and free way to be on the cutting edge of anything, but maybe it suggests that you should find some way to have your career address that desire instead of/in addition to your leisure.

There's a weird socratic strain in the FI movement that, taken too far, constrains FIers rather than liberating them. DO attempt to understand why you want to spend money on something - DON'T assume that your reasons and inner motivations are bullshit or just plain wrong. The solution is never to settle for the milkmaid and claim she's just as good as a princess (paraphrasing, but I guess we'd call that classist now).

Agreed. There's a middle ground where you're not living with craigslist randos at age 60, but also not dropping $6/day on starbucks and buying a new car every 3 years. FI when done right just involves scrutinizing your expenses so that you're only spending money on things that really have value to you, which is very subjective. Sometimes dropping $100 at a bar is downright dumb, sometimes its worth every penny - depends on the context. But in general, everyone has wasteful spending that does not make them happier to cut which will lead to substantially earlier retirements than the standard age 65.

# ¿ Feb 21, 2015 02:43

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# ¿ May 2, 2024 06:55

Swingline: Jul 20, 2008

What's the FI consensus on renting vs buying? Could it ever make sense to rent forever (assuming of course you invest the cash flow you would save from buying/maintaining a house/apartment). Seems like it could make sense in high-property prices and high-property taxes areas like NYC metro. Buying a home just seems like a never-ending money pit to me unless you happen to be very handy (which I am not).

# ¿ Mar 9, 2015 00:26

Swingline: Jul 20, 2008

shrike82 posted:

Doing an MBA's really brought home how financial (in)dependence distorts people's incentives and emotions. A top tier 2-year MBA costs 200 grand including living expenses and potentially half a million once you include the opportunity cost of foregone salary. With most of the students leveraged to varying degrees, there's a lot of pressure to seek out high paying jobs regardless of their personal interest in the field.

I honestly don't get the point of going back to school to get a job you hate.

The answer is most people don't know they'll hate the job until they get it. Most people (including myself when I was in school) think high paying job in big city = exciting, challenging (in an interesting/fulfilling way), prestigious, respected. Then they get there and realize high paying job = stress, no life, insane hours, unrealistic expectations, sleep deprivation, unhealthy lifestyle, boredom, taxes and cost of living that make your high pre-tax compensation seem tiny.

Swingline fucked around with this message at 19:22 on Apr 18, 2015

# ¿ Apr 18, 2015 19:18

Swingline: Jul 20, 2008

When calculating how much I need in an emergency fund, should I include projected unemployment benefits? For example, my cost of living is ~$2500/mo and unemployment benefits in my state would pay ~$1500/mo for six months if I were ever laid off. So, its the difference between needing to save $6,000 or $15,000 to cover six months of living expenses. Since I rent my apartment, don't own a car and have health insurance with a low out of pocket maximum, my emergency fund is pretty much just for if I ever lose my job, in which case unemployment benefits kick in.

# ¿ Jul 18, 2015 16:10

Swingline: Jul 20, 2008

fartzilla posted:

Question about how I should be looking at dividends in my savings plan.

I went into 2016 with a goal to save a set amount this year, say $X. I'm maxing out my 401k, putting as much as I can in a Roth, a small amount in a regular savings account and the remainder in index funds in a taxable account. All of these contributions will add up to $X by the end of the year.

My taxable account generates dividends, which I've been leaving as cash in the account and incorporating into my mutual fund purchases each payday (basically reinvesting them), so actually the total amount of cash I'm adding to my investments/savings is $X + dividends. But I'm starting to wonder if this is the best approach, since my budget is pinching me a little tighter than I was hoping and my taxable account contributions dwarf my dividends.

So my question is, if this were you, would you look at the dividends as additional income on par with your paycheck which contributes to your set $X savings goal, or would you look at them as part of your investments, like I've been doing, such that investment purchases at the end of the year are $X + dividends?

While you're still in accumulation phase I think you should 100% separate your investments (including dividends) and your employment income - so yes always reinvest and never spend them, and don't consider them income. Think of dividends as simply the second component of investment returns, with the first being capital gains. You would never sell 2% of your portfolio a year as a second source of income while still employed, right? A 2% annual dividend (other than the tax implication) would be the same thing as doing that if you don't reinvest it. Your investment accounts should be a black hole where money goes in and then never goes out until retirement.

Consider that from 1929 to 2012, the S&P 500 had a total return of 9.4% annualized. 4.2% (almost half!) of that was from fully reinvesting dividends. So if you're spending any/all of your dividends, you are crippling your portfolio's long-term expected return.

Source: http://www.advisorperspectives.com/commentaries/loomis_41812.php

# ¿ Apr 10, 2016 21:05

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# ¿ May 2, 2024 06:55

Swingline: Jul 20, 2008

fartzilla posted:

Thank you, this was basically what I was thinking when I originally planned this out so it's good to hear I was on the right track. But what would you recommend that I do about taxes?

For comparison, say I realized a capital gain in my brokerage account. I would set aside some of the profits to compensate for the reduction in take-home pay after adjusting my withholding. I would feel justified in doing this because the tax portion of my gains was never really mine to begin with, and no matter where the money comes from it's still a chunk out of my net worth. Additionally, I don't feel like there's any way I can budget for the capital gains tax because, while I know what I'd like to do with my investments this year, it's hard to say what will actually happen.

I feel similarly about dividends. Is this a bad attitude to have? Should I accept the slightly lower take-home pay and budget as though I have a "black hole maintenance" category?

If your taxable account is generating meaningful capital gains before retirement, you're probably doing something wrong. Index mutual funds/ETFs are incredible tax-efficient as a result of low turnover, and therefore very rarely have noticeable capital gains distributions (in contrast to actively managed funds). Since you are still in accumulation phase, you shouldn't be selling anything to generate capital gains either. If your taxable account portfolio gets out of balance due to market swings, rather than rebalancing by buying/selling funds (as you would in a 401k/IRA), you should simply redirect future contributions to the underweighted fund(s) to get back in balance without realizing capital gains. If you find that you regularly need to cash out of your investments for emergencies or big purchases, then your financial plan is out of whack (I.E. emergency savings bank account is too small / you should be saving for major purchases like a home with something besides stocks).

To answer the question about dividend taxes, ideally the tax bill would be small enough so that you can adjust your W-4 withholdings down (from 2 allowances to 0 or something, or if you're already at 0 you can tell your employer to withhold an extra $25/paycheck or whatever to cover your estimated taxes) to still get a small refund at filing time. If your taxable account is so large that this is not possible, then yes you can set aside money from every dividend distribution to pay the tax bill (shouldnt be more than 15-25%, depends on your tax bracket). For reference, even for a $100k taxable account earning 3% in dividends, that's only a ~$600 annual tax bill assuming you're in the 20% dividend tax bracket. Hopefully the bulk of your investments are in 401ks/IRAs.

Edit:
One other thing to note is that you should put your international equity funds into taxable accounts, and US funds into your 401k/IRA due to the foreign tax credit. So if you have a $200k portfolio among all accounts, $100k taxable $100k 401k/IRA, and are targeting 60%/40% US/Int't equities, put the $80k of int'l funds based on that target in your taxable account.

Swingline fucked around with this message at 02:49 on Apr 11, 2016

# ¿ Apr 11, 2016 02:44

The Something Awful Forums > Discussion > Ask/Tell > Business, Finance, and Careers > Financial Independence: Methods, Mindsets and Cloth Diapers