05 Mar

Financial Independence – How We Saved $1M

Amanda and I have accomplished something that always seemed so big and so very far away. A dream summarized as “Let’s save up enough money that we don’t need to work anymore!”  We want more free time in our lives, and have achieved financial independence in order to get it.

Well, how much did we need to save? To find out how much you need to become financially independent, you first need to know what your expenses are. Tracking our finances with Mint.com over several months, we feel comfortable with a monthly spend of $3,300/month or $40,000 per year. This is all-inclusive: shelter, food, gas, everything. Using the assumption that a 75/25 balanced portfolio of stocks/bonds will grow at an average rate of 7% (calculated in several studies, namely this one: Trinity Study), this allows us to skim 4% off the portfolio for living expenses and the remaining 3% is assumed to be lost to inflation.

$40,000 is 4% of what? $1,000,000.

“WOAH!” – Benjamin Franklin

We’ve really worked hard and have been lucky enough to save up a portfolio worth $1,000,000. Moving forward we plan to live modestly on the equity growth of this portfolio. We have always been decent savers, but have made this a serious goal for the last three years. How does somebody save up this much money? Did Amanda rob a bank? Did Travis sell drugs on the internet?

The summarized answer is: we reduced our cost of living, ramped up ‘reasonable’ savings rates to ‘aggressive’ ones, and then hustled to make money and achieve the goal. All earnings outside of our current monthly spend have gone straight to Vanguard Mutual Funds with low MER’s (fees), maxing out our 401k’s and IRA’s (american-speak for RRSP’s & TFSA’s). Every bonus or raise was purposely channeled toward this one goal. Purchases are always thought about long and hard, and delayed if possible. Often it’s realized that the magical desired item isn’t really needed to be happy after all!

Taken as a screenshot of our Mint.com account, here is our monthly spending for the year 2014:

2014_spending_chart

You can see that spending for this trip down south ramped up in October / November. Here is the table showing the numbers:

2014_spending_table

Note that this shows our monthly expenses for everything except our two-story rental home in North Oakland, CA which we’ve lived in for the last six years – this is an additional monthly cost of $2,200/mo. So our total cost of living for 2014, including our rented home, was $47,576. Moving forward, our budget is $40,000 – which is one of the reasons why we’re moving away from the very expensive San Francisco Bay Area.

For our savings, in June 2012 we started checking our Mint.com balance every month and would update a spreadsheet to track our progress. Here is the chart showing the growth of our portfolio over the last few years of aggressive saving and cutting expenses:
savings
We’ve been really fortunate to have pretty great careers,  and we were able to reach our goal more quickly with our combined incomes.  Also, we’ve had awesome families who’ve taught financial responsibility from a young age. Really,  anyone at any salary can build wealth – all it takes is time and discipline. I hope by sharing the above details others are inspired to attempt similar goals!

One blog that has been a strong inspiration is Mr. Money Mustache (MMM), and we owe a debt of gratitude. His blog demonstrates that financial independence is not only attainable at any age, but that living a modest life and reducing consumption is also good for the planet – and everyone living on it! If you’re not already familiar with his blog, I highly encourage you to check it out: MMM.

  • Congratulations! We are on a simliar track and look forward to reading about your travels – Costa Rica is one of our absolute favorite places and hope to return someday. Enjoy!

    • Travis

      Thank you!! We’ve been in Costa Rica for a few months now and have been loving the beach!

  • Samwise Gamgee

    If you don’t mind, can you please share the funds you have chosen to invest

  • james

    Really proud of you guys! Keep selling those drugs! Joke!! But I am seriously proud 😀

    • Amanda

      Don’t you be getting us in trouble with any foreign police, now! The protein powder we have in the car already looks suspicious…

  • Flyingaway

    If many people buy the idea of “living a modest life and reducing consumption is also good for the planet”, soon your assumed 7% annual return of your portfolio will be in trouble.

    • Travis

      No way! Soon robots will be manufacturing and doing everything for us, so we can all just sit back and relax!

      • Jonathan Evans

        Travis, this is very true. But as a shareholder where does revenue come from when all consumers have no income due to robotic labor? It will be the biggest disruptor since agriculture displaced hunting and gathering. I think the answer is unknowable currently. BTW…I just discovered your blog and find it very interesting.

        • Travis

          It’s definitely a fun problem to think about. Some of the basics of life and our economy are food, shelter, safety, transportation, education, and entertainment. In my opinion, if most or all of these are provided for “free” due to automation, that should make life plentiful and easy for almost everyone. Thank you robots for growing my food, building our homes, policing our streets, and driving our vehicles. The internet is already a great source of education and entertainment, and I imagine that there will always be value and reward in creating new entertainment for others. As far as revenue goes for shareholders of corporations, I would guess that they’ll be the first to receive reward for increased automation.

          The big question is, as more and more people lose their jobs to automation – will society ensure that the wealth is distributed evenly, or will money and power flow to only a small percentage of us? Our governments may become even more plutocratic than they already are! Either way, hopefully we’ll be around to watch it all go down!

  • Colin B

    This is so awesome Amanda – I can’t believe I’m only coming across it now! Gonna follow from here on out!

    • Amanda

      Happy to have you following along, Colin!!

  • Jamie

    Your numbers are amazing. What sort of percentages were you saving in that 2.5 year period?

  • Matt

    Hi – I found your blog from Reddit and I am really enjoying it. Especially this post! I am currently struggling to reduce my month to month costs (also living in the Bay Area). I was shocked to see your extremely low monthly costs. Excluding rent, my average costs come out to exactly double yours, $3,400. Your average cost during 2014 comes to ~$28/ person/ day (1,700/30/2), which seems so low given taht food can hit a big chunk of this. Please tell me the ways. What sacrifices did you make? Appreciate your help!

    Also, thought of another question – if you channeled all of your savings to a 401k, how will you use it for a living (assuming you’re not at the retirement age to avoid withdrawal penalties)?

    • Travis

      Hi Matt – thanks! When we started optimizing our expenses, we read pretty much all of the MMM articles for inspiration. You can start with these ones if you haven’t already read them: http://www.mrmoneymustache.com/category/mmm-classics/

      For us, the big ones were: increasing energy savings at home (no AC, using furnace sparingly in winter, drying clothes outside), cutting our grocery bill by shopping in bulk, using bicycles instead of car for errands, and cutting out restaurants was huge. We were probably going once or twice a week and that was immediately stopped, apart from the rare special occasion. That was a sacrifice, but it’s rewarding to cook healthy meals at home and know exactly what you’re eating!

      It’s definitely doable in the Bay Area, even with high housing costs slowing us down… Good luck!

      Note: For the 401k, you can avoid early withdrawal fees by doing what’s called a “Roth IRA Conversion Ladder”. Here is a good summary here: http://rootofgood.com/roth-ira-conversion-ladder-early-retirement/

  • You do not state how old you are (that I could see), but I believe the 4% rule was meant for a retirement of 30 years. Good luck in your travels, hopefully the number all work out, or you have a back up plan.

    • Travis

      Thanks! We’re in our early thirties, and we’re aiming to live on 3-4% of our portfolio. Whenever the markets dip, we’ll tighten our belts. We’re pretty responsible and are confident the numbers will work for us!

  • guitarfan29

    “We’ve been really fortunate to have pretty great careers”

    Well, there is your answer, just like it is for most of the other bloggers in this niche. They worked in gentrified fields making gobs of money that the VAST majority of the population can only dream of. The rest is rather easy to do, when you consider most of us live in poverty. About half the country now in fact.

    Your “expenses in hipster land are more than what a great swath of america makes. Now, what you of course, was sensible. But let’s be real, that income is derived from a stock market whose industries largely rely on the vast numbers of indentured servants that make up us poor folk, otherwise known as, most of america.

    Most of these bloggers, come out of the hipster gentrified technobubble of san fransisco. Where people get sweet cushy BS jobs at google and facebook. Most of us could only DREAM of having the “burden” of a nice 9-5 office job. Because most of us make minimum or low wages getting cussed, screamed, and spit at in retail and other service industries.

    You joke about selling drugs, but that is precisely what most of use would have to do to even equal HALF of your combined income. The miracles I could work with your level of cash, seriously. I don’t even know what its like to make 30,000$ gross. Please tell me what it is like to be in the upper upper percentile. I assume it’s glorious.

    Your advice boils down to: be fabulously fucking wealthy*, and then cut back on expenses, save and invest it.

    *kind of the key part.

    • Travis

      guitarfan29, I appreciate your feedback! I truly feel your angst, and from a political point of view your argument is exactly why I support a Universal Basic Income. That point aside, I think for the millions of people who are about to start or finish their schooling, or for the millions who have already started their careers and are making a decent income, the basic advice of “save as much as possible so you can become financially independent sooner” is a great message worth celebrating. However, I respect your right to disagree!

      • guitarfan29

        So let me start off by saying, I do *not* disagree that fundamentally, people who can, should live simply/below there means, save and invest, despite my misgivings about the investment systems broader issues and implications. The hard truth is the vast majority of the country lives at, below, or marginally above the woefully conservative poverty level. So reading this advice largely from young professionals working in incredibly rare jobs with gentrifying companies, is a bit disheartening, to say the least. Those profits in the markets are made on the backs of the poor.

        I want to meet at a point of agreement, I think basic income is the way to go as well, as we further move into a society where work is automated, and we have to redefine what work, contributions to society, and overall lifestyle mean. It’s gonna be pretty messy going forward.

        I have the possibility of falling into a slightly better source of income (nothing remotely like your insane levels of income), some of this will be supplemented by my good friend who shares my goals, and has a nice cushy job. I would like to save this and put it into investments. Most of what I read involves not going for “total return”, but for dividend/income based approaches, and even then, there is debate about going for dividend “growth” vs high yields.

        From what I have gathered the stock pickers seem to achieve higher yields than folks going for a simple etf fund. The idea of managing that constantly though makes me feel queasy, which is why the funds seemed a lot more tolerable. The two I have looked at most are both vanguard funds, VIG and VYM. VIG being the lower yield 2%, grower, and VYM, being the higher yield, both are listed as 4/5 in terms of risk on vanguards site. I have been trying to figure out what feels more appropriate. Does one invest the maximum into a roth ira using one of these funds (like VIG for growth), and then put the rest in a taxable account to grow income? (despite the tax disadvantages that brings.

        Thoughts?

        • Travis

          It seems likely that soon robots will be doing most of the work around the world, which will leave most of us to focus on whatever hobbies and pastimes bring us the most happiness. The hardest part will be ensuring the wealth created by robot labor is equitably distributed among the world population (as noted, Universal Basic Income should accomplish this!)

          Until then, working hard at a career that the current economy rewards and putting your savings into a Lazy Portfolio (https://www.bogleheads.org/wiki/Lazy_portfolios) is the way to go. Experts generally recommend keeping things simple and using broad diversified index funds in your portfolio. To get started, you may want to simply open a Vanguard account and put your money in Vanguard Total World Stock Index Fund (VTWSX). Hope that helps!

          • guitarfan29

            I think it’s highly, highly debatable how soon automation will take over, and even if it does, it could very well become as much dystopian and a further means of control as it could the other way. I would argue the kind of meaningful automation you allude to won’t come nearly fast enough for those of my generation or possibly even the following one. (it is inevitable though).

            I have been looking at dividend based funds rather than broad market funds that focus on total return and require you to harvest your principal capital to live on. VYM happens to give one of the highest out of the vanguard funds. There is argument about going for yield vs total return.

    • JB

      and what you wrote is likely why you won’t end up as “fabulously fucking wealthy”…you’re angry, jaded and envious of others. you can do one of 2 things: 1) see how you can change for the better, using advice like what this blog is giving or 2) whine about your lot in life and point out how terrible others are who have more than you…it’s your choice…but your bitterness does you absolutely no good

  • Gwen

    This is a really basic question, but what do you eat that keeps you in budget? I find groceries to be my biggest expense in the areas I could cut back on if I can figure out how and still enjoy meals. Thanks.

    • Amanda

      Hi Gwen!
      We definitely spend most of our budget on food. We splurge on fresh vegetables and meats, but try to buy in-season/local and cheaper cuts of meat (like pork instead of beef, or chicken thighs instead of breasts, or roasting whole chickens -super easy!- and having leftovers).
      Before we started traveling, we did most of our shopping at bulk stores (Costco), which is helpful if you have the storage space (freezing large packages of meats/fish). We also bought many of our non-perishables (cans, grains, baking supplies, spices, etc.) on Amazon. If you do a comparison, it’s more affordable than in-store prices (and free shipping >$25). You pay a premium for pre-made foods, so if you can find the time (which is always hard), making meals from scratch on weekends (slow cooker or large pots) and freezing leftovers or using as lunches all week long.
      Any tips for us?? I’m constantly looking for new, creative ways to stretch our food dollars… 🙂

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  • Sherrie Lam

    hello, I’m interested to find out your average savings return from the chart, it looks way more than 4% to me. Are those all Index funds? Thanks

    • Travis

      Hey Sherrie! Yes, you’re right – during those years shown on the savings chart (from 2012-2015), not only were we saving like crazy, but the market was also giving nice returns for those years as well. Our portfolio was (and still is) a diversified mix of index funds that looks something like this fund: https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT

      • Joey J Oberle

        Hi there. I am self Employed and starting to think about my retirement now. I am 36. I am thinking of opening a ROTH IRA account and using this fund for it. https://personal.vanguard.com/us/funds/snapshot?FundId=0122&FundIntExt=INT
        The Max Contribution per year is $5,500. Since I am self employed I do not have a 401k. Could you suggest all the ways I should be investing and what accounts I can be funding? I am planning to save a lot of my income per year. Thanks so much!

        • Travis

          I do love that Vanguard LifeStrategy Growth Fund (VASGX) and would recommend it to anyone. If you plan on one day achieving early retirement and think you’ll be in a low income tax bracket in the future (lower than your current bracket), then it may be smarter to use a Traditional IRA Account (instead of Roth).

          I’m not a financial expert, but if you’re self-employed you do have additional retirement saving options. Do some research on SEP-IRA vs Solo 401(k) plans and see which one works best for you. Whichever one you pick, you should be able to setup the account with Vanguard: https://investor.vanguard.com/what-we-offer/small-business/compare-plans

          Good luck Joey!

          • Joey J Oberle

            Hey Travis Thanks so much for replying. So I just opened up a Vanguard Target Retirement 2040 Fund
            https://personal.vanguard.com/us/funds/snapshot?FundId=0696&FundIntExt=INT
            This is For my ROTH IRA. I can max it out at $5,500 for the year.

            Then for a SEP account I am thinking of opening a Vanguard LifeStrategy Growth Fund. Do to my tax bracket, it looks like I can contribute Only around $3,000-$5000 per year, Around.

            Then for Extra income for the year I was thinking of opening Brokerage Accounts. The Core Four.
            *Vanguard Total Stock Market Index Fund Investor Shares
            *Vanguard Total International Stock Index Fund Investor Shares
            *Vanguard REIT Index Fund Investor Shares
            *Vanguard Total Bond Market Index Fund Investor Shares

            My question to you is, Do you think this is Overkill?

            Is having too many accounts bad? Or is this a good Strategy?

            I am looking to Save aggressively, so after I max out my ROTH and SEP I am looking for additional options.

            Thanks so much for your help its greatly appreciated!

          • Travis

            Looks like you’re on the right track! Boggleheads does a good job breaking out the lazy portfolio options: https://www.bogleheads.org/wiki/Lazy_portfolios

            Note that the three different portfolio options you listed are almost identical:
            – Vanguard Target Retirement 2040 Fund
            – Vanguard LifeStrategy Growth Fund
            – The Core Four

            This is perfectly fine, but if you want to simplify as much as possible you could just pick Vanguard LifeStrategy Growth Fund – the only downside is that it’s MER (management expense ratio) is a little bit higher than if you picked the separate funds yourself like The Core Four does. For a beginner, I think the simplicity is worth it, but it’s up to you.

            One last comment: if you do end up picking The Core Four strategy, you might want to consider putting the REIT fund inside your Roth account (since every quarter it pays a lot in dividends – and if you have it in a normal taxable account, you’ll have to pay taxes on those dividends, even if you auto-reinvest them).

            Good luck!

          • Joey J Oberle

            Hey Travis Thank You again!
            So do you think I should choose the Vanguard LifeStrategy Growth Fund Instead of the Vanguard Target Retirement 2040 Fund for my Roth Account?
            I will include the REIT fund inside my ROTH as well.
            Since the ROTH IRA is a Max of $5,500. How much money should I contribute to my Vanguard Target Retirement 2040 Fund and the REIT fund inside my ROTH? 50/50?

            What should I use to fund my SEP account then? I think I will be able to put around 5k-6k per year into that.

            On a side note, I was looking into Paul Merriman’s ultimate buy-and-hold portfolio
            http://paulmerriman.com/ultimate-buy-hold-strategy-2016/

            This would be:
            S&P 500
            U.S large-cap value stocks
            U.S. small-cap blend stocks
            U.S. small-cap value stocks
            U.S. REITs funds
            international large-cap blend stocks
            international large-cap value stocks
            international small-cap blend stocks
            international small-cap value stocks
            emerging markets stocks

            I want to add these 10 Stocks Into my Portfolio as well. I think I will choose ETF’s for these.

            My question to you is What should I put into my SEP account. Maxed out at around$5k-$6k per year?
            What should I put into a Taxable account?

            Thanks so much for your help Travis! I really appreciate it.

          • Travis

            You’re on the right path Joey! If you really want to get into specifics, you’ll just need to do a bunch more internet research (you’re already doing good on this). Honestly, my recommendation would be to keep it simple at first and just pick Vanguard LifeStrategy Growth for all your accounts – this will save you the effort of trying to re-balance your portfolio periodically (since the fund does it for you). But if you love the research and don’t mind maintaining your accounts periodically, then you can definitely make a more complex portfolio work for you.

            For Amanda and I, we found that Traditional IRA/401k options make more sense than their Roth counterparts, but you’ll want to confirm what works best for you with your own additional research. Same for deciding the order of which accounts to “fill up” first – if you have an S-Corp, you potentially have more flexibility for additional tax savings. Congratulations and good luck!

          • Joey J Oberle

            Thanks for your help!

  • Lindsay

    Hi – I’ve just discovered your blog and I’m very excited because you seem to have similar travelling goals as my husband and I do – yay! 🙂 We have only JUST begun our journey to financial independence but one of our biggest concerns is guestimating how much to budget for our extended travels once we are no longer working… One blog I found said he budgetted 20% of his yearly spend to travelling. I just wondered how you guys have done it? Thanks in advance 🙂

    • Amanda

      Hi Lindsay! Happy you found us. Instead of setting aside a specific chunk of the budget for “travel”, we just try to live by our monthly budget. We found long-term rentals abroad to be the most cost-effective (cheaper when you stay longer). So with housing cost fixed, using Mint.com we know how much we spend on average on food/entertainment/etc., the balance is flexible. One month might be high to pay for flights somewhere, the other months cheaper when we hunkered down at home on the beach in Costa Rica. The same flexibility applies to meeting our annual budget target. If we’re planning a more costly trip later in the year (we’re trying to get to Europe sometime), we’ll have to make sacrifices and watch the monthly budgets earlier in the year. Advance planning helps a lot, as well as tracking your spending while traveling. Email me if you have more specific questions!

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  • bugaboo

    Why didn’t you invest in a Vanguard payout fund? https://investor.vanguard.com/mutual-funds/managed-payout/#/

    • Travis

      Hrmm, interesting Vanguard Fund, thanks. Seems like a good one for anyone who wants a completely hands-off approach, but you’re probably paying a little bit for the convenience of not having to manage your own withdrawals – the MER is 0.38%.

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