Who the heck is ChefonFIRE???

Who is ChefonFIRE and what is he all about. For almost 20 years I have spent time in the hospitality industry, holding every position from dishwasher to owner. I spent years as a manager, owner, or consultant working for and with some of the best people in the industry and have enjoyed almost every minute of it:) Along my way I noticed that the vast majority of people in the industry from hourly to management worked extremely hard but had very little if anything to show for it. Having been blessed to have been educated about money from an early age, it bothered me to see so many people that will be destined to a life of had work with no end in sight. I believe you see this in other industries as well such as nursing, where the individual is passionate about serving others so much as to actually neglect themselves. One day after sitting with my oldest daughter who works in the hospitality industry at a concierge company, we were going over her finances as well as her plan to attend college and purchase a car. We looked at her savings account, checking account, the 529 college savings account, and even her ROTH IRA that she started. Later at work I had a casual conversation with two individuals about their boss not giving them a raise even after they had explained to him that they needed more money to live off of. I started to explain that he doesn’t pay them based off of their financial needs but based off of the contributions they make to the business and the value they add to it, but then it hit me, they didn’t need a raise, they needed someone to teach them about money, about saving part of their income and investing it, just like my daughter was doing at 16 these people in their thirties needed a financial plan.

blur breakfast chef cooking

Enter ChefonFIRE. I decided then and there to help as many people as possible to gain control of their finances and financial futures. I started this blog to educate newbies to the investing world, what everything meant and how retirement was possible for anyone. So many people I spoke to believed they needed to be rich to invest in stocks, or have a high income, most were shocked after opening a 401K and contributing enough to get the company match that they barely noticed any difference in their take home pay. For many that worked at a publicly traded company it was fun to have them purchase a share or two of their company and say now you are part owner of this company, they always smiled. For anyone that has never worked in the hospitality industry, it is a hard and unforgiving industry but if you are willing to work hard and put the time in, you can be rewarded greatly. Imaging being at every party but only you are the one serving, going out to the bar every night but you are the one cleaning it up later, cooking for hundreds of people with a hundred different expectations and preferences who complain about everything, getting burned, cut, spilled on, and yelled at, all while standing on your feet for 10-12 hours in a hot kitchen or crowded dining room. One thing I always told the young cooks or servers when talking about saving for retirement was to look at the old chef or server who had been doing it for 20-30 years, they were worn down and tired looking but with no alternative but to continue working because they were 100% dependent on the next paycheck, I would say wouldn’t you rather be sitting in the dining room eating with friends at 60 rather than working in the back?

In closing anyone can attain financial independence. The great thing about it is that it’s not about how much you earn but about how large a  percentage of your income you can save compared to your monthly expenses. So even the $10-$12 an hour line cook can take steps to lower his expenses, which will automatically increase his ability to save, all while lowering the total amount he needs to retire. In retirement you won’t need to replace income so much as be able to cover expenses. Learning this puts control back in the hands of the saver and makes saving for retirement not only a reality but a responsibility, that many feel empowered by.

I hope you enjoyed this short article and thank you for taking the time to read it.

ChefonFIRE

 

Interest…..What is it and why does it matter?

We are all familiar with interest that we pay on either a car, home, or credit card payment, but what exactly is interest and how does it work? Interest is payment from a borrower to a lender of an amount above repayment of the amount borrowed at a particular agreed upon rate. There are some shady loans that have a floating interest rate, which basically means the rate isn’t set in stone and if interest rates rise so will your loan. Basically a lender is charging you a fee to use/borrow their money. The Federal Reserve also known as the Central Banking System sets monetary policy by influencing the federal funds rate, this is the interest rate that banks charge each other for overnight loans of federal funds, which are the reserves held by banks at the Fed. All major banks have to keep around 6% of assets in an account held by the Federal Reserve and they can loan to each other out of that pool of funds. Banks have to keep a certain amount of money on hand to cover the loans they have outstanding as part of the FDIC guarantee, so banks that have excess capital can loan it to banks that are short on liquid funds, so loans made from bank to bank are from the federal funds and the terms of the loans are agreed upon between the two banking institutions and then all the loans interest rates are averaged out and that is how they get the Federal Funds Rate, or the interest rate that banks are charging each other to borrow money. Based off that rate the banks then make loans to public and private people or institutions at higher interest rates than they are being charged. If you have a great credit score then you can get what is called the prime interest rate, prime rate is what’s considered the best rate on the market, however the lower your credit score the higher the interest rate because they view the loan as being riskier. So now that we know how interest rates are determined, how do they affect us?

The term annual percentage rate of charge (APR) the interest rate for a whole year (annualized), rather than just a monthly rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate, Basically it is the yearly interest rate multiplied by the number of payments to be made in a years time, most are 12 monthly payments. There are two main types of interest

Compound interest is the addition of interest to the principal of a loan or deposit, or in other words, it’s interest being charged on interest. This interest can be compounded yearly, quarterly, monthly, or even weekly in some cases. Basically the interest isn’t paid in full each month and the next months payment is interest charged on the unpaid interest from the prior month.

Simple Interest is interest computed only on the principal and (unlike compound interest) not on principal plus interest earned in the previous period. This type of interest is most commonly used by lenders making short term loans such as for cars, When you make a payment the interest being charged is payed first and then the rest of the payment is applied to the principle loan amount, therefore the interest is paid in full every month and doesn’t add to the next month’s payment.

If you pay someone else interest, by the time you finish paying off the loan you will have paid much more than the original amount/value of the item you financed. This is why it is so important to stay out of debt. Interest is very powerful, in fact Albert Einstein said it was so powerful that it should be considered one of the great wonders of the world. This is why you want to invest in items that earn interest for you like stocks or bonds. Now I will say that there can be good and bad debt. Bad debt would be taking out a loan for a car that is worth less as soon as you drive off the lot and cost you money to keep it running, you are paying interest on something that is constantly losing value and takes money to keep it going. On the other hand purchasing a home as a rental property could be considered a form of good debt, as long as you purchase the home for less than the actual value, (below market value) lock in a low interest rate, have enough money to cover any repairs and vacancies, and are able to rent it for more than the monthly mortgage payment. In this scenario you are taking a loan on something that gives you immediate equity, (value) should continue to rise in value, and provides income, all while someone else is paying off your loan. This is in my opinion good debt and is a way to use interest rates to your advantage. When interest rates are low it is a good time to make large purchases and lock in the low interest rates. However low interest rate environments tend to drive up the cost of consumer items such as homes because more people are in the market to buy due to loans being easier to acquire.

Another way interest rates affect us as investors are through our retirement accounts. Interest rates cause the price of stocks and bonds to rise and fall, actually just the mere talk of a change in interest rates can cause stocks and bond prices to move up or down in anticipation. When interest rates go up it lowers the price of bonds issued at the lower interest rates. Bonds are guarantees from corporate or government institutions, they are basically a promise to repay the loan at a set date plus yearly interest payments for the right to use your money. So they money you receive monthly and the amount they guaranteed to repay won’t change but since bonds can be traded on the secondary market they are seen as less valuable because now that rates have gone up why would an investor buy your bond from ABC company at a 3% interest rate when they can loan money and get 5% interest now? With stocks it’s a little different. since stocks are small pieces of public companies they react differently to interest rates. It’s hard to make a broad statement because there are so many different companies form banks, to REITS, to retailers, and everything in between and all will be effected differently by a change in interest rates. In general though a drop in interest rates increases consumer spending and makes borrowing money to expand cheaper, so that usually helps most businesses. However low interest rates can and have caused inflation and that can wear away savings, especially of retired individuals living off of savings. Rising interest rates can hurt companies that require large amounts of loans such as real estate, builders, or manufacturers. This also can cause people to make fewer purchases of large items, which has a trickle down effect on many other sectors. This can cause deflation which makes things cheaper but also devalues assets as well. As we learned earlier the Federal Reserve can change interest rates and will do so to try to stimulate an economy or cool off an overheated economy.

The take away from this should be two fold. One now that you know what interest rates are and how they effect you, keep and eye on the Federal Rate and understand how it’s movement could affect your investments. Secondly know how to use interest to your advantage by locking in low rates on large purchases for “good debt” items, and buying bonds with high yield rates while interest rates are high and companies are willing to pay more to borrow your money. I hope this article was helpful, thank you for taking the time to read it.

Thanks,

Chef On FIRE……..

What are Taxes used for???

Have you ever wondered what exactly the government does with the money it takes out of your check? Let’s explore this and see if we are getting a good return on our investment.

Taxation in America is a direct result of the American Revolution around the time of 1760, in which British taxpayers revolted against high taxes and a lack of representation from those collecting the taxes. In the new country of American colonies taxes were mainly just levied against imported items also known as tariffs,  items such as whisky and glass windows were charged a tax on them to be brought into the country. There were some local taxes for the right to own property and vote but the main source of federal income was the tariffs charged to trade with other countries. The tariffs were imposed for two reasons, one to create income for the federal government to run the country and secondly to ensure an equal playing field for domestic/local producers of similar items who might be undercut by foreign producers. This was to ensure that America would have an uninterrupted supply of items necessary to survival such as wheat, sugar, meat, and wool. During the civil war the federal government enacted an income tax to help pay for the war, however they amended the constitution to in 1913 to allow for a continuance of the income tax they we still enjoy today, in fact the income tax has now surpassed the federal tariffs as the number one source of federal revenue. Fast forward to modern times and we have a wide array of different taxes such as the excise tax, estate tax, payroll tax, and many other hard to explain and hard to understand taxes. So with all of these tax dollars flowing in what does the government do with them?

All U.S. government spending can be divided into three categories, mandatory spending, discretionary spending, and interest on federal debt. America’s fiscal year runs (October 1 through September 30) and for the 2018-2019 year the  federal budget is $4.4 trillion. The government estimates it will receive $3.422 trillion in revenue (taxes), which will create close to a $1 trillion budget deficit (difference in what it makes vs what it spends) in 2019. The Congressional Budget Office estimates the federal deficit will rise above $1 trillion by 2020.

In 2019, approximately $2.7 trillion of federal spending will go toward mandatory items and $1.3 trillion toward discretionary items. Because government spending significantly exceeds government revenues, the remainder will be spent on paying interest on the federal debt.

Mandatory Spending

Mandatory spending consists of five categories Medicare and health, Social Security, unemployment, food/agriculture, veterans’ benefits;,and transportation. Social Security accounts for the largest mandatory spending allocation followed by Medicare.

This spending is considered mandatory because the programs are permanent and the government does not set a dollar amount that it wishes to spend in each of these categories. Instead, it creates eligibility rules by which individuals qualify to receive payments from the government through these programs. The only way to increase or decrease mandatory spending is to adjust eligibility requirements so that individuals receive more or less benefits.

Discretionary Spending

There are many more categories in the discretionary spending group. Over half of discretionary spending is allocated to the military, while the remainder goes to each of the following government, housing and community development, education, veterans’ benefits, food/agriculture, Public transportation, labor, science R&D , energy, and  international affairs.

There is some overlap between the mandatory and discretionary categories. The difference is that with each of the discretionary categories, the government may change how much it spends from year to year.

When all the categories of government spending are combined, Social Security is the largest expense. So if they need to make budget cuts where would they look to make the largest impact??? Better start saving for your retirement……

boy in white shirt and black track pants

I will say that even though this is only a look at federal taxation and doesn’t even take a look at state and local taxes, I still think we get a fairly good deal on our taxes. We have an amazing infrastructure with a great interstate system to take us almost anywhere we want to go, we get a free public education, ( I believe that college will eventually be free) we have great social welfare for our poor, ( the poorest American’s live better than 90% or more of the rest of the world) we have the greatest military ever known to mankind, (we are the world police) we have local police and fire departments that keep us safe secure feeling, and we have the unlimited and uncapped ability to do anything and be anyone we want to be with no limits based off of age, gender, religion, or ethnicity. We have an amazing legal system that allows us to own and enforce ownership of any kind of property, and we have one of the best healthcare systems in the world. Everyday I live in awe of what I can do as an American, I can look up anything on my phone, Ipad, laptop, or desktop, or smartwatch that I want to know, heck I can order anything I want on them and have it delivered to my doorstep in a few days without me having to leave my house. I can get a soda within a few minutes that will be cold and ready for me but that has ingredients from all around the globe, plus I didn’t have to grow the ingredients, build a factory to produce it, drive a truck to ship it, build a refrigerator to cool it, or anything yet I get to enjoy the fruits of others labor for less than a dollar. LESS than a DOLLAR…. Many countries the citizens spend most of their time and income on shelter and food. I can own parts of companies through our stock market which is one of the most highly regulated markets in the world and earn profits off of others money, labor, intellect, skill, and property without ever lifting a finger. All in all I don’t mind paying taxes, if they said I could stop paying Social security taxes and be 100% responsible for my own retirement and not expect anything from the federal government would I, YES…… but am I upset that part of my earnings go to pay for elderly peoples living expenses and healthcare, nooooooo……….

If we all start to add more value to others lives and learn to live within our means, the government debt wouldn’t be a problem. The government has a budget deficit because it has to take care of those that choose not to plan to care for themselves. If the government only had to spend on the military, infrastructure, and scientific advancements they would have a huge surplus of capital, unfortunately instead of we the citizens (we are the government) being responsible for producing our own food, teaching our own children, saving for our own retirement, and caring for those that can’t care for themselves the government is forced to do what’s right and honorable in our moral absence.

Fortunately for us the government has many tax codes and laws that allow us to pay very little in taxes if we are willing to educate ourselves and play within the rules, but that is for another day and another post. I hope this post has been educational and entertaining and if it has please be sure to share it with someone else.

Thanks,

Chef on F.I.R.E

IRA vs ROTH IRA

Trying to decide between using a Traditional IRA or a ROTH IRA? This can be the cause of a lot of debate and has caused more than a few arguments. Traditional wisdom has always said that if you are young or not earning a lot of money at the moment then you should use a ROTH to take advantage of your current low tax bracket, this is assuming that you will be in higher tax bracket when you begin taking withdrawals from the ROTH. On the flip side if you are in a high tax bracket then a traditional IRA might be better because you benefit from realizing the tax break now and hoping that you are in a lower tax bracket in retirement. For the most part this still makes sense and is sound advice for most people, however those of us aspiring to early retirement may need to look at it from a different perspective. First let’s explain the Pros and Cons of each account.

The Traditional IRA – An Individual Retirement Account is designed for anyone that wants to make post tax contributions but have those contributions deducted from their taxable income. An IRA is an account you set up at any brokerage you decide upon and invest in any type of investments you want. Currently an individual can contribute up to $5,500 per year and up to $6,500 per year if over 50, this is considered a catch up contribution amount. The contributions go in tax free and grow tax free, this is advantageous as it allows higher income earners to defer the taxes and let the money compound over time tax free. Withdrawals can be made penalty free after the age of 59 and a half, withdrawals can be made earlier than that but there will be a 10% early withdrawal fee plus taxes that are due, DON’T take early withdrawals……. In general it is best to hold index funds and stick to an investment portfolio you feel comfortable with for the long run.

The ROTH IRA – The ROTH IRA is an account that allows an individual to contribute post tax money but the money will grow tax free and withdrawals will not be taxed either. So after 20-years of compounded interest if you have a million dollars you actually have a million dollars and owe zero taxes on it. Usually a ROTH account is best for someone young or not earning a large salary yet as they will not be in a high tax bracket and could expect to be in a higher bracket later in life. The ROTH has the same annual contribution limits of $5,500 and $6,500 for someone over the age of 50. I personally love the ROTH because it gives you a lot more flexibility in retirement to choose when you take contributions, this has major benefits as you can better control your income which allows you to stay within a certain tax bracket. Let’s say for instance you want to lower your taxable income for some reason, the ROTH has no required/mandatory withdrawals so you could take out as little as you want to offset other sources of income. You could also use a ROTH to bridge the gap between early retirement and age 59.5 when you can begin taking penalty free withdrawals from a 401K or IRA. Another huge benefit is that since you technically never have to withdraw the money a ROTH account makes a great inheritance vehicle, especially since heirs won’t owe any taxes on the withdrawals either. A ROTH could be the perfect place to park a little money to help cover all the cost of hard/physical assets that will be passed on to loved ones.

In closing I don’t think it is necessarily an either or scenario but a how much to allocate to which account. If you are a high earner I think you should put the majority in the traditional IRA and maybe $500 a year into the ROTH, if you have a 401K then max that bad boy out and put any other extra funds into a ROTH. If you have children and they have earned income, mowing yards, dog walking, baby sitting, etc…. start them a ROTH and help them to become Financially Independent a decade or two earlier than you did.

From Zero to Retired A.S.A.P………

This post will give everyone the basic knowledge to get started on your path to Financial Independence, we will tackle the money, the math, the plan, and most importantly the REASON. To start with we need to define Financial Independence, Financial Independence is when you no longer need to trade time or energy for money. It is when you have saved enough financial capital to continue living the lifestyle you want without worrying about earning money. The goal is for the money you have saved and invested to be working and providing large enough returns (capital gains) that you can live off of the interest and never worry about running out of money. There is a lot of debate as to what the perfect amount to have saved to confidently walk away from your career but for simplicity and for safety we will go with 25 times your current monthly expenses. This would equate to being able to comfortably withdraw 4% of your account balance every year to live off of. This number has been studied extensively and proven to be the sweet spot. Trinity University did a thorough study of historical returns and back tested the 4% withdrawal rate, they found that it had an almost 100% success rate of insuring that the investor did not run out of money after retiring. The really interesting thing is that in most cases the investor actually ended up with more money than they started with even after they had withdrawn 4% to live off of for 30+ years. So where do we start?

The REASON- The reason for Financial Independence in my opinion is the most important part because without the why it’s hard to get motivated to even start and really hard to keep going when progress seems slow or setbacks occur. Everyone’s why will be different depending on their personal beliefs and what is important to them, for me it’s security for me and my families future. Simply saying my why is because I want to be rich is not enough, you need to really define what is important to you and connect your finances to it on an emotional level. I recommend spending time thinking about what a future of financial independence would look and feel like, how would being secure in your future and having the ability to choose to work because you want to not because you have to feel like, how would you behave or act if you didn’t depend on a job to pay your bills. What would you do with your free time, how would your freedom affect your family and friends? Once you have written down your WHY and what it means to you then we need to tackle the how.

The How – The how can be summed up very simply as getting your monthly expenses as low as possible so that you can save as much of your income as possible and so that you require very little income to live off of. So if you can imagine paying off your debts and saving 40% of your income, that means you only need 60% of your current income to actually live off. So lowering your monthly expenses speeds retirement up exponentially as it allows you to save more and at the same time require less to actually live off of.  The chart below is from the MMM website and does a great job of showing just how powerful a high savings rate can be. Below it shows that saving 5% of your income takes 66 years to be able to retire, it means you need 95% of your income to pay your bills. On the other hand a 50% savings rate only takes 17 years to reach retirement because you only need half of your monthly income to cover your living expenses. So let me say this one more time, the lower you can get your living expenses the more of your income you can save to build an income machine and the less you require to live off of.

              Savings Rate (Percent)        Working Years Until Retirement
5 66
10 51
15 43
20 37
25 32
30 28
35 25
40 22
45 19
50 17
55 14.5
60 12.5
65 10.5
70 8.5
75 7
80 5.5
85 4
90 under 3
95 under 2
100 Zero

I’m sure that many of you are saying this sounds great but who can afford to live off of only 50% of your income, unless of course you make a million dollars a year. Well the great part about this math is that it is all about percentages, so whether you earn $10.00 an hour or $100,000 a year the math is all the same. The less of your monthly income you require the more you can save and sooner you can afford to retire. In honestly if you could live with family or friends for free you could probably retire now. The first thing to do is to begin tracking your income and expenses and get a clear picture of what you have coming in and what you have going out. If you spend more than you make you have a deficit but if you earn more than you spend you have a surplus. Managing your monthly finances will allow you to better understand where you are, where you want to be, and how to get there. I have provided a spread sheet to help you calculate your monthly income and expenses and also track your net worth, net worth is the difference between what you own and what you owe. The spread sheet requires you to fill in the amounts of income, expenses, and assets. The cells highlighted in YELLOW or GREEN will pre-populate and should not need to be messed with. Start with the Net Worth sheet and enter all your assets and liabilities, then move on the income and expenses sheet where you enter your income and monthly expenses, if you enter your annual salary at the top it will automatically figure your monthly income. once you enter your monthly expenses then you can enter expenses you could probably easily do without. Next you will move on to the last sheet Retirement Plan, here most of the cells will once again pre-populate for you, the only cell you really need to mess with is the amount of years you plan to live in retirement, remember the earlier you retire the longer you will need to live off of your investments. I know this may seem like a lot of work but it’s not really that bad and will go a long way to help you get ahead. Once you have filled out all the information on the spreadsheet, you should have a good idea of exactly what you earn, spend, and can cut out to save more money. Interestingly if you can increase earnings and simultaneously cut spending your savings and net worth will start to grow exponentially. Once you start to see progress it becomes really fun, actually it starts to become slightly addictive. Albert Einstein said that Compound interest was one of the great wonders of the world, it allows your money to earn interest off of the interest and once you get a decent amount saved your money will start earning more than you do by working, that’s when it gets really fun.

Okay so we defined our why, we looked at the math behind how lowering expenses allows us to shorten the time till retirement, and we also know how much we are spending and saving. Now we need to see if the amount we are saving each month will get us to our retirement goals. There are many retirement calculators online that will allow you to run the figures but my favorite is the Simple savings calculator from BankRate. So now we now if our savings plan will work or not but where do we save the money………. Funny you should ask.

This is targeted at the standard W2 employee. Here is my recommendation for where and how to save your money. Start with your companies 401k and put in enough to get the company match, this is like free money and everyone loves free money. Next let’s move over to a traditional IRA, my personal favorite brokerage is Vanguard and it only takes about 10 minutes to open an account. Currently individuals are allowed to save up to $5,500 per year in an IRA. This money is post tax but you get a credit on it when filing taxes, so you get an immediate tax savings in the year invested. Once you max out the IRA account we can move back to the 401k. There is one exception and that is if the 401k administrator charges higher than normal fees, (greater than 1%) if this is the case please speak to your Human Resources manager and ask them to research other options, it is your companies duty to provide the best plan they can. Assuming this isn’t the case start putting in as much of your income as you can into the 401k, 2018 contribution limits are $18,500. Maxing out your 401k should be your next goal, all the money put in this account is put in pre-tax and instantly lowers your taxable income. So not only does it lower the amount of taxes you have to pay it allows that money to grow. This is especially advantageous for someone who is in a high tax bracket because once retired chances are you will be in a lower tax bracket. So if you make it to the point that you are maxing out an IRA and a 401k then you are saving $24,000 annually and also not paying taxes on the $24,000. If you have additional income to invest above this amount I recommend utilizing a taxable brokerage account. These accounts are for post tax income and have no limit to contributions, these accounts don’t have any real tax savings but they allow you to invest in anything you can imagine and as long as you keep the investments for more than a year you benefit from the long term capital gains tax rate, to learn more about these rates see my taxes page on this website.

I of course believe in paying off all debts and holding at least 2 months of expenses in cash in a savings account. All of these can be worked towards at the same time. I recommend paying off an debts with high interest rates and leaving debts associated with appreciating or income producing assets until last. I would in fact suggest that if the debt is on an asset that produces enough income to cover the debt payment that it should be moved to the bottom of the list. Also if you have a stable job and feel secure in it I think the emergency fund can be less of a priority, however you must be able to cover any unexpected expenses that might arise without having to dip into your savings or go into debt to cover them. This is not only a plan to get you to financial independence but to create generational wealth. Once you have reached what we call critical mass or saved an amount that spins off enough money for you to withdraw 4% to live off of, not only will you most likely never have to work again but you will likely leave the next generation a massive inheritance. If you couple this with teaching them how to save and live below their means, plus getting them started saving young they will be able to grow that nest egg and change the course of the family tree. Imagine a multi-million dollar account that isn’t touched for another 15 or more years after you pass away………

In a later article for more advanced investors we will discuss how to make after tax contributions to your 401k which can then be rolled over to a ROTH IRA which in my opinion is one of the best inheritance/wealth transferring accounts available. I hope this article has shed some light on the path to Financial Independence and inspired at least one person to begin that journey. Becoming Financially Independent is one thing each of us can do to not only improve our lives but the lives of those around us. We change the world one person, one house, one neighborhood, one town, one city, one state, and one country at time. Thank you for taking the time to read this article and if you enjoyed it please share it with someone you think it might help.