Category: Investing for Teachers

Teaching and F.I.R.E… is it even possible??

The short answer is yes, but it might not be as early as you hope it is.

In 2014, like so many others in the the Financial Freedom movement, I discovered the ways of Mr. Money Mustache. If you’ve never heard of him before, do yourself a favor and check out his blog. It is fascinating. He shows the math on the possibility of early retirement. He was able to retire in his early 30’s in part due to his savings rate and his investment into index funds. He is definitely on the Mt. Rushmore of the F.I.R.E. movement, and I continue to read every new post that he publishes on his blog. F.I.R.E. (Financial Independence and Retiring Early) is an intriguing concept… Save way more than you spend, put those savings dollars to work for you, then once you have enough saved up retire from work and live off the dividends and interest you are generating. Thousands of Americans today are working towards this idea of financial independence, meaning they have enough money saved up that they no longer require income from a job to pay their lifestyles. Is it possible for teachers to achieve this pie in the sky dream? The answer is yes. 

Working towards financial freedom as a teacher​

The whole idea for this blog was born out of the financial independence movement. How can we make smart money choices in order to become more independent. We quickly found out that teachers have some unique roadblocks when it comes to achieving financial independence that many of the popular FIRE writers weren’t addressing. That’s where we come in with our experience and insight. We also prefer the idea of financial freedom over financial independence, due in part to a chunk of your retirement being controlled by the state. 

Step 1 – Spend less than you earn. Budget. It’s not a difficult concept but a very challenging practice. You need to spend far less money than you earn if you wish to ever be anywhere close to you financial freedom. The big time FIRE writers boast a savings rate of 75%! Quite frankly, that isn’t achievable as a teacher. Yes, inevitably someone will post a case study where someone was able to achieve this by living in their buddy’s spare basement room and eating nothing but ramen but living a comfortable lifestyle has some baseline costs. For example, after taxes I typically bring home about $2,800 a month. Of that, $500 is auto-invested into a variety of accounts. So roughly an 18% savings rate. Not great but I was also stupid and bought a new car recently (it’s sweet!) but that payment has eaten up the other $500 that I would typically be investing. I have found that I can live very comfortably (I probably go on vacation too much and spend too much money at breweries) on roughly $2300 a month. The difference between us teachers and the rest of the FIRE community is that our salaries will never start out at the same lucrative level that other industries do. Because of that, even though we have the frugal part down we can’t get the same savings rate they are able to achieve. So an early 30’s retirement is nearly out of the question, but our date can be earlier than what the government tells you it has to be. It just won’t be as shockingly early as some of our other FIRE friends.

Step 2 – Put that Money to work for you. If you have all of your life savings in a savings account at your local bank right now, that is okay. At least you have money saved up! However, if you choose to leave all of it there, you will be missing out on hundreds of thousands of dollars long term. The stock market is an intimidating place to look at when you are first starting out. I know I was scared to put any money in anything until I had a good friend point me in the direct of index funds. Index funds are much safer than betting on a particular company’s stock, instead they are a small slice of 500 companies or more worth of stock. With index funds, you are betting not on the success on a single company but on the longer term success of the market. Much safer and tested and true over the course of decades. The rate of return is variable, but many of the models consistently have index funds returning 7-8% per year. That’s better than the typical fraction of a percent interest you are probably earning in your savings account. So keep money in your savings account (I like to have roughly $2,000 cash on hand for emergencies) and start putting the rest to work for you. Here at Teachers’ Stacking 10’s we like and use Vanguard as our brokerage site. We don’t get any commission for saying that we just believe they have an easy to use interface, low expense ratios and a trusted reputation.

Step 3 – Repeat each month. Once you save more than you earn and start putting that savings to work, you are well on your way to financial freedom and ahead of many of your peers. As you become comfortable with it, try to increase your automatic investments. I am at the point now where I can comfortably live off of $2,300 a month, so whenever my paycheck exceeds that amount, I just automatically put it into my Vanguard account. Over the course of several years, this adds up and pretty soon your interest and dividends are quite significant.

Step 4 – Retire! As your compound interest continues to grow exponentially, you will reach a point where the interest in your accounts exceeds the cost of your lifestyle. At that point you may be ready to retire. On paper it really is that simple. In reality there are definitely some things you need to consider once you approach that date (health care, pension, social security, etc.) but we’ll worry about these once you get there. This concept or rule is considered the 4% rule. Once your lifestyle cost = 4% of your invested wealth in theory you should be capable of living of your interest and dividends. So for me, living off of $2,300 a month that magic number would be $690,000 ($2,300 per month x 12 months x 25). That’s the goal. Does this mean once I have $690,000 saved up I can retire off of that forever? Probably not, but it does mean I have some freedom, it means that I can easily cover my planned monthly expenses forever. 

That’s it. The shorthand on how to achieve Financial Independence and retire early. Like I was saying there are some other variables that complicate matters; pension, social security, health insurance. All of those things are nuanced pieces to the puzzle but to start out, just focus on those first two steps and repeating them: Save more than you spend. Put that money to work for you. You’ll be shocked at how fast that wealth can accumulate. Maybe not as fast as your early 30’s but fast enough that you’ll have freedom in your finances and in your career. 

Keep Stacking!

So you know you should be budgeting and saving money. The question is what is a realistic savings rate for you and your family? And where should that money be going?

What is a “Savings Rate”?

First, to define a term – Savings Rate – a percentage of your income that you are able to tuck into long term storage. Don’t think of your savings as an amount each month but instead think of it as a percent. In reality, the precise number you save each month means much less than the percentage of your check you stash away.

Take the following example into consideration. This is a famous example used in the book that first put me on the path to financial freedom, The Millionaire Next Door.

Mike earns $50,000 a year. He is able to save $10,000 into his retirement accounts, a savings rate of 20%. Mike’s lifestyle has adjusted to live comfortably on the $40,000 a year the he currently budgets.

Joe earns $500,000 a year. He is able to save $100,000 into his retirement accounts and live off the $400,000 he has left to budget. Also a savings rate of 20%.

On the surface joe will have far more money in his retirement account than Mike does. This can be deceiving. Since Joe is used to the $400,000 a year lifestyle both men will reach financial independence at the same time. Reaching that 4% rule and being able to live off their accounts. So you see your savings rate is more important than the amount you put away.

What should my savings rate be?

So what is an ideal rate? Well… For sure it is more than 0%. Life throws situations at us where at times we don’t have the luxury of saving up. The key is during those moments is to buckle down and fix the problems or make the changes necessary to get above the 0% savings rate. Don’t feel bad or embarrassed if this is where you are currently at. It’s normal. People just don’t like talking about it. The key is to keep moving and keep working in the right direction. Choose and work towards a positive savings rate. It won’t happen overnight, but slowly you will become more financially savvy and you’ll be in the black. Once you are in the positives, automate some of those savings so that you no longer have to mentally focus on them. So how much should be going there…

Your first step should be to get a savings rate that is equal to your school’s 403b match. This is an automatic 100% guaranteed return because your school is putting in that same amount you are putting in. For most teachers, we do NOT get a “robust” match from our schools. It’s usually not the same as the private sector.  Most private sector jobs will match a percentage of an employee’s salary. The standard match is usually 3%, and in some cases, even up to 8%! Most schools do not match a percentage of salary, but usually have a flat dollar amount that they will contribute. As an example, our district will match up to $750 to our 403b. For me, that’s 1.2% of my salary, so my first goal is to save 1.2% of my salary into my 403b.

From there, it’s all about increasing that rate over time. A very easy way to increase this rate as a teacher is to take a portion of your salary increase each year and budget that directly towards your savings rate. Ideally, you would allocate 100% of any yearly salary increase to your savings rate, but that’s just not realistic. Inflation, especially in today’s economic environment, is a real thing. A realistic goal might be to allocate 25% or even 50% of any salary increase to savings. If you do this each year, your savings rate will grow a an incredible rate. Let’s look at an example of a teacher just starting out.

You just signed on to teach high school science at a starting salary of $45,000. Your district will match up to $1,000 of your 403b contributions. You decide to make that your savings for the year. Your savings rate your first year is 2.22%. Not great, but hey, it’s a start. Let’s fast forward 5 years. Your salary is now $53,000. You started your career contributing $1,000, but you’ve decided to allocate 25% of any raises towards your savings rate. Your salary grew by $8,000, so you have added $2,000 more to your contributions giving you $3,000 going towards your savings. In five years your savings rate has climbed from 2.22% up to 5.66%! Let’s go ahead another 5 years. During this time, you were able to get your master’s degree, so your salary has jumped up to $65,000. You continued to allocate 25% of any raises to your savings. This adds another $3,000 to your savings giving leading to a total savings of $6,000. Your savings rate has now grown to 9.23%! By year 15, your salary has climbed up to $73,000, and you are at the top of your district’s salary schedule. You have added another $2,000 to your yearly savings. Your total savings is now $8,000 a year. Your savings rate is a very solid 10.96%. If you would have allocated 50% of your raises, your savings rate by year 15 would have climbed to over 20%! Take it one step further. By year 5, you have gotten your expenses in line and you have no reason to grow them. You decide to allocate 100% of any future raises to savings. In year 15, your savings rate is a whopping 31.51%!!!

Where should I put these savings?

Everything that we have talked about to this point has focused on saving money in your 403b. This is a great option because it is a pre-tax option. Is it always the best option? That is for you to decide. One thing that is important to point out is that your 403b is not easily accessible until you reach retirement age. A portion of your savings should go into after-tax saving’s accounts, or you will run into a problem called “liquidity”. Liquidity is a term that means your ability to quickly access your money. As was pointed out earlier in the post, there are times when you will need access to cash. It could be to purchase a home, pay for kid’s college, replace a water heater, or buy a vehicle. These are events that happen in every person’s life, and you will need to be prepared for them. Too many Americans have good-looking retirement accounts, but they have no access to money so they can’t afford to pay for that new water heater when theirs breaks. This is why part of these savings should be put into an emergency fund in a savings account or a brokerage account. 

In Closing

Saving money is not something that comes natural to most people. The thrill of spending money and buying that next shiny toy is designed to give you that shot of dopamine that most people crave! It takes planning, patience, and vision to see the big picture and build toward the future you want. Hopefully by following the information we’ve shared with you, you are able to build your own vision for your future and make it become a reality, and as always….

KEEP STACKIN!

Today we are going to look at some of the myths of investing. These are secrets that will allow you to create your own wealth and retire with a great nest egg!

Myth 1: Investing is difficult.

That’s what the financial services industry wants you to believe! They make their money off of your hard-earned income because investing is “way too complicated for you, the common fool.” If people realized how simple investing can be, the financial services industry would take a huge hit. It benefits them GREATLY to convince you of this!

Myth 2: You need a financial advisor.

Yes, according to government regulations on 403b accounts, you must use a financial service and their local advisor. But by following our recommendations, you will be the one calling the shots and telling your advisor where your money will be invested. Think about it…. Who has more at stake with your hard-earned money? I guarantee that answer is YOU! Beware! Your financial advisor will use scare tactics to make you believe that you need his advice. Erroneous! You put together a solid retirement package that fits your goals. 

When I took control of my financial future 18 months ago, my financial advisor tried to convince me that I was in the correct investments. When I looked at what he had invested my money, I found that I was losing 1.65%/year of my money to fees!! Those are ridiculous rates! My advisor tried to say that the funds were great because they had earned 16.5% the previous year. But I knew that the market had returned 17%! The fund hadn’t even matched what the market returned, AND I had lost 1.65% of that amount to fees! My advisor is a nice guy, but I am in charge of my financial future, not him!

Myth 3: Investing is gambling.

I will start by saying that investing does involve risk. Your account value may go down sometimes. That’s what the market does. It goes up and it goes down, but look at the all-time trajectory of the stock market below. It ALWAYS goes up! That’s why the stock market is a long game. It’s not like gambling where you are trying to get rich quick.

Myth 4: You must use your 403(b).

Your 403(b) can be a great tool for you to grow your wealth and build a strong retirement, BUT you don’t have to use it. That being said, you MUST contribute up to your school’s match. That’s a 100% return on your investment, but after that, you need to analyze your financial situation and plan to make sure that you are investing in the proper accounts. Remember, you can’t access the funds in your 403(b) before age 59.5 without a 10% early withdrawal penalty. Always check to see if your district offers a 457 plan. If so, they have significant advantages over the 403(b) plan.

Myth 5: You have to research stocks to invest.

Teaching 6th grade and coaching football takes up a LOT of time. I don’t have time to research individual companies and find which ones are solid investment choices. I’m guessing you don’t either! That’s just fine. There are ways of investing that don’t require you to buy stocks in individual companies. There is this great investment vehicle called an “index fund”. It’s like buying a little bit of every single company in that fund. You spread out your risk over many companies. We will talk in detail about index funds in a future post.

Myth 6: Putting money into savings is investing.

Saving money is ALWAYS a good thing, but it is not the same as investing money. Even though putting money into savings is very safe, you are actually losing because the current savings rates of just over 2% do not even keep up with inflation. You HAVE to put your money to work for you in the market. Think about it, you work hard for your money. Isn’t it time to get your money working for you???

Myth 7: You have to be an active investor to make money.

People believe that you must constantly buy and sell stocks to make money. That’s true, for your financial advisor or brokerage. Every time you make a trade, you are paying them a fee. You are also creating capital gains that you have to pay taxes on. Setting and forgetting your investments will make you much richer than constantly monitoring and changing your investments. This passive investing is the way to a rich life!

Myth 8: You can time the market.

The market goes up. The market goes down. And nobody knows exactly when these swings will happen. Some financial advisors will beat the market average one year and come up well short the next. The most famous person that has been able to consistently beat the market is Warren Buffet, and he has access to information and buying ability that the average investor doesn’t have. Even he says that the best thing the average investor can do is passively invest in low-fee index funds to grow their wealth.

Myth 9: Investing is only for “rich” people.

This myth is kind of a self-fulfilling one. Most people who aren’t considered “rich” have parents who weren’t “rich” themselves, so the concept of investing money was never talked about as they were growing up. They may have learned about the importance of savings, but they don’t realize that saving money actually is losing money. Even the top savings accounts only pay just above 2%, so you aren’t even matching inflation at that rate. Invest that money into low cost index funds and watch your money grow over time!

Myth 10: Stocks are a get rich quick scheme.

We’ve all heard stories of people that bought a company like Amazon at $2/share, and now are multi-millionaires. There are actually many more stories of people that gambled on those kinds of stocks and lost their entire investment. The stock market is a long game. You stay patient and “play” it for 15 to 20 to 40 years, and you will make money! If you find yourself chasing those get rich quick stock tips that you will find all over the internet, press pause and remember that these people make their money by getting suckers to pay for their “hot tip”! Don’t be one of those suckers!  

Keep stackin!