“Money is like gasoline during a road trip. You don’t want to run out of gas on your trip, but you’re not doing a tour of gas stations. You have to pay attention to money, but it shouldn’t be about the money.” –Tim O’Reilly
You’d think I’d have found time to write this while “snowbound in Tahoe”, but my priorities then were jigsaw puzzling, snowshoeing, and cooking good food from scratch, full stop. In truth, Stephanie did most of the jigsaw puzzle, because I had begun puzzling over something else: where to live once she had chosen Fresno State for grad school.
We’d already surveyed several apartment complexes, so we had a good sense of the quality and price points available. But still I found myself asking the question, what if we bought a place? How would 3 years of rent compare to the costs unique to buying a house (i.e. real estate agent commission, property tax, homeowner’s insurance, closing costs, etc.)?
My back-of-the-envelope and admittedly flawed analysis (“flawed” because I assumed both a flat stock market and a flat housing market; also I didn’t foresee the extent of the renovations we’d take on, nor can I predict the impact they’ll have on a future sale) suggested that we’d throw away more money renting over three years than buying, even without any price appreciation. So I started looking at listings, got in contact with an agent, and we found ourselves in contract on a house while still in Tahoe.
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
When we sold our condo last October, I invested 100% of the proceeds in Schwab’s S&P 500 index fund (SWPPX). It was pretty exhilarating to watch it climb in value practically every day, all the way through January 26th, at which point it had increased by 12.3% in only 3 short months. Since then, it’s been no less exhilarating to watch it drop precipitously in value, essentially retreating back from whence it came, in only 2 short weeks. This seemed like the perfect opportunity to contrast the volatility of value against the stability of ownership. Though the market has risen and fallen dramatically over the last 4 months, I still own the same number shares—in fact I actually own almost 2% more than I started with, because I reinvested the dividends and capital gains that were paid out in mid-December.
Percent Change of S&P 500 Index Fund Value vs. Shares
I’ve been writing these annual reports for 11 years, starting in 2006. But if you looked only at a graph of my investment contributions over the same time period, you might assume that I’ve been really serious about saving only during the last 4 years. And there might be some truth to that.
Investment contributions from income by account, 2006–2017
The trigger for the change, counterintuitive as it may seem, was Stephanie quitting her job in 2014. My reaction to this voluntary reduction of our collective income, coupled with an indeterminate timeline (we thought 8 months—if Stephanie completes her graduate program as planned, it will be 8 years!), was to impose a savings-based austerity program on my income. I increased my 401(k) contributions, I funded both of our Roth IRAs (through “the backdoor”), and I invested “The Rest” in my brokerage account—starting in 2014 and continuing every year since.
The first time we discussed selling our condo with any seriousness was in the middle of our eleven hour flight from Paris to San Francisco. That was Friday, August 18th. I remember feeling nauseous the next day—as we reunited with our home of almost six years after several weeks away—questioning why we would choose to forsake its many comforts, not to mention the dining nook renovations we’d only recently completed. On Sunday, jetlagged and up before sunrise, I wrote down the pros and cons of selling, trying to make sense of my conflicting thoughts.
The list in favor was overwhelming. The tidied up version now appears self-evident; corralling so many disparate emotions to get to this point was anything but:
Liquidating the equity in our condo should give us the money to pay for Stephanie’s grad school tuition (circa 2019–2022).
Renting should reduce our cost-of-living in the interim, allowing us to further bolster our savings while also making it easier to relocate if Stephanie attends a school outside of San Francisco.
Both of the above greatly reduce our dependence on my single source of income, should that change in the interim, or as a result of relocating.
Having lived in our condo in the Mission for almost six years, we were getting a little bored; in retrospect, while all the reasons above were cold, calculated, and driven by economics, this one we feel on a day-to-day basis. It wasn’t until after we moved that we realized how much we needed a change of scenery and routine.
Last year I started tracking all of our monthly expenses against our income to put a number on how much we had leftover to save. Considering that we’ve tried to curb unnecessary and excessive spending since Stephanie quit her job in 2014 and went back to school in 2015, I was still shocked to discover our total cost of living at the end of 2016. After taxes, 29% goes to the mortgage and related expenses while another 38% supports our lifestyle, which leaves 33% to save. We are fortunate to be able to save a third of our net income for retirement—a rate I’ve deliberately worked to increase over the last 3 years—but when measured against the “financial independence” yardstick, not-so-early retirement sits over 20 years away. Update: I revised the percentages and the graph below using more accurate values available after I did our taxes—and it shaved 3 years off of my working life.
That said, early retirement is not my goal. I’m not sure what my goal is. Periodic retirement? Work hard for a handful of years, step away, and then return—unconstrained by prior comforts, habits, and expectations. When viewed from that perspective, those unfathomable 20 years start to look more attractive: a series of several jobs (seeking that ever-elusive purpose), punctuated by sabbaticals of adventure and self-discovery.
