When any kind of movement gains traction the “experts” come out of the woodwork. It seems that anyone working toward FIRE, Financial Independence Retire Early, suddenly knows exactly what you should or shouldn’t do with your money, your hobbies, which car you should drive, which job you should take, how much you should spend on groceries and on and on.
Are you maxing your 401k? No? You’re a fool.
Do you have a high deductible health plan so you can have a Health Savings Account (HSA)? No? What’s wrong with you?
You bought a new car? What were you thinking? Now you’ll never retire!
I call this thinking the cult of perfection. The thinking that you have to have the highest savings rate, the most beloved investment (VTSAX is God), be the most tax efficient, and use every trick in the book (mega backdoor Roth anyone?) to reach financial independence and retire early, or you’re going to fail.
Don’t join the cult of perfection. Instead, simply understand the rule of consequences, the rule that each decision has an affect and the affect is sometimes large but often quite small.
Here are five examples of “mistakes” I made in my journey to financial independence and early retirement that had no, or very little, affect on me.
- I invested in some high fee mutual funds.
The mutual fund of choice in the FIRE movement is Vanguard’s VTSAX. Index funds in general are the best choice for investments as their fees are very low, 0.04% in the case of VTSAX. The other benefit of index funds is that they are tax efficient generating less dividends and capital gains than actively managed funds.
Sometimes you don’t have the best options in a 401k and have to make the best choice that’s available. In one of our 401ks we chose a fund with a fee of 0.69%, still low but not index fund low. That fund also generated huge amounts of dividends and capital gains, which, if it wasn’t in a 401k, could have resulted in a higher tax bill.
But it’s not all bad. The cult of perfection says I wasted money with a comparatively high fee but the rule of consequences says I made the best choice from the options I had. And, it’s noteworthy to point out that the fund with the high fee has generated a return on investment (ROI) of 123% so this mistake wasn’t much of a drag on our ability to reach financial independence.
2. I bought a new car.
I’ve only owned three cars since I got my license at age 17 and each one was purchased brand new from the dealer. It’s not whether you buy new or used that matters, it’s the value you get from the car that has the most affect on your finances.
My first car only lasted five years before it nearly fell apart. Back in 1987 when I bought my Hyundai Excel, Hyundai was not known for their quality. When I traded that car in five years later I got $50. Talk about a bad financial move.
In 1993 I bought my Honda Civic hatchback and, being known for quality, that car lasted 10 years and I could have kept it even longer but it wasn’t the most comfortable or luxurious car. Two things, comfort and luxury, that anyone pursuing FIRE should avoid anyway, if you listen to the cult of perfection.
In 2003 I paid cash for the car I still have, an Infiniti G35 6mt coupe.
The cult of perfection says buying a new car is wrong but the rule of consequences simply says get the most value you can from a purchase and you’ll be fine. Trading in a car every few years for a new one or, worse yet, leasing a car every few years, has the consequence of never ending payments that will siphon money out of your savings.
3. I had an expensive hobby, boating.
Even among people who aren’t trying to retire early a boat is looked at as a waste of money. What does boat stand for? Break Out Another Thousand.
While I’ve only had three cars in my life, I’ve also had three boats and all were bought new. The first was an 18 foot Bayliner, the second a 25 foot Chaparral, and the third, my current boat, is a 28 foot Chaparral. I won’t even mention the various Jet Skis and Wave Runners.
The cult of perfection says that if I give up this expensive hobby I could increase my savings rate and reach FI much sooner. The rule of consequences says that I understand the trade-off I’ve made and that if I give up the things that truly make me happy what good is financial independence?
4. I never maxed my 401k.
Let me drive the cult of perfection crazy by adding to point #4 that I never maxed my 401k even though I could have easily done so. I was once told by one of the cult members that “It’s fine to use both [taxable investment accounts and non-taxable like a 401k], as long as you’re completely maxing out the better one first.”
One complaint about the FIRE movement is that you need a high income to join and statements like the one above only add to that impression. The fact is that a lot of people can’t max their 401k and save in taxable accounts. I’d recommend that they do both rather than putting everything into a 401k or IRA.
It was about balance and flexibility for me. I wanted more options such as the ability to buy rental properties which would have been more difficult if all my money was tied up in a 401k. When I started my business in 2012 I could have used IRA money to fund it but it would have been more work and came with fees I thought were excessive. I was glad I had the taxable investments to use instead.
In spite of ignoring the cult of perfection’s advice, I was still able to retire at age 48.
5. I didn’t take advantage of a backdoor Roth IRA.
When you earn too much to contribute to either a traditional IRA or a Roth IRA the common advice of the cult of perfection is to do a backdoor Roth contribution. This is easy, they tell you, there’s no reason not to do this, they say. But reality is a bit different.
First I saw little benefit of tying up money in an account that is difficult to access before age 59.5 without getting a tax benefit up front. (And before the cult flames me, yes, Roth accounts are both easier to access and harder to access than traditional IRAs — those details are for another post) Now, the cult of perfection will point out that all the growth will be tax free, and that’s true, but I still didn’t see an overwhelming reason to do it.
The other reason I avoided the backdoor Roth was because of the pro-rata rule. If you have one or more IRAs with pre-tax contributions then post-tax Roth conversions are limited and the rules are just too complex to make it worth it, for me.
The rule of consequences says to choose simplicity over complication. What I missed out by not using the backdoor Roth option did not affect my ability to retire early. Did it, possibly, affect the amount of taxes I’ll pay? Yes, but the amount of taxes is not so much that it makes a difference in my ability to FIRE.
The point of all of this is that the pursuit of financial independence should have the goal of reducing stress, and yet, it seems that all the worrying about whether you have the lowest expense ratio, the highest savings rate, the best deal on a used car, etc. is adding stress. The truth is that there is a lot of wiggle room on the path to financial independence.
This is why I’m working on a new book about financial independence based in reality rather than perfection. It’s fine to learn as much as you can, to know and understand the optimal approaches, but there is no need to hit a bulls eye with every decision you make.