Career Personal Finance Real Estate

Thoughts on Becoming “Financially Independent”

This month I hit a milestone on my FI journey. I’ve become financially independent! (assuming a 4% safe withdrawal rate) In other words, I now have saved up 25x the total amount of money I spent last year.

Does this mean I can quit my job?

Technically yes, but I’m not going to.

That’s because I want my life after a traditional day job to look very different than what it looks like now and that’s going to take more than I’m currently spending.

Most importantly I want to buy a place to house hack, but given the high price to rent ratios in New York City, I won’t be able to cover the entire mortgage with rent from the other unit(s) unless I buy far into the outer boroughs. And I don’t want to do that.

That means I’ll be increasing my housing costs in exchange for the freedom to paint the walls, get a pet, garden, become an AirBnB host, do house swaps, and anything else that comes with the benefits of owning your own home.

Given the fact that my target FI number is higher than where I am now, it’s no surprise that reaching FI for my current lifestyle has been anticlimactic. But when I think about it, every FI milestone has been anticlimactic, and I’m beginning to realize that no amount by itself will ever make me feel fulfilled.

I thought that it would make me happier to know that I could walk away from my job, but that hasn’t been the case. Instead it feels like getting a “get out of jail free” card in Monopoly. Nice to have in my back pocket, but I really just wanted a house.

I wonder, instead of thinking about numbers like the first $100k or 25x spending, if it makes more sense to focus on the life events that happen like taking an mini retirement, leaving a job, or pursuing a new opportunity. After all, if money is just a tool, it would make sense that having it or the possibility of using it doesn’t bring joy, but actually using it to accomplish a task does.

Up until this point I’ve been so focused on getting to FI that I haven’t really thought about how I wanted to use it once I got there. It’s time to fix that now.

Personal Finance Real Estate Saving

Money Diaries

I love money diaries.

For those of you that are unfamiliar, these are unfiltered accounts of how people earn and spend their money. I love how much they reveal about a person, their life, and their values, no matter how much hand waving or rationalizing they do to explain certain purchases.

It’s also clear that I’m not the only one. In the past few years, there has been a profusion of blogs, articles, and videos (of mostly millennials) laying their finances bare for the world to see, which I think speaks to the demand for this type of content.

I’ve always wondered though, if there’s anything else that can be gleaned when looking at everything in aggregate. One of the richest collections of diaries is Refinery29’s Money Diaries series, which started a little over three years ago. Fortunately for me, a large portion of these diaries are written by those that live and work in the New York City area.

So, like any rational person, I decided to compile all the data from the diaries and do some analysis. It wasn’t an exact science though. I excluded some outliers like full time students and a couple at the high end (I’m looking at you, hedge fund managing director and real estate mogul) and did my best to split up the finances from diaries where finances were mixed.

Given that, these are some of the things I found interesting:

  • Older doesn’t mean wiser financially speaking. While salary generally rises with age, there doesn’t seem to be any correlation between age and what percentage of take home pay is spent on fixed expenses such as housing, transportation, subscriptions, etc.
  • Lifestyle inflation is real, but fixed expenses don’t increase in proportion to salary. It doesn’t look like discretionary expenses do either, but that’s hard to confirm since almost all of the diaries are only a week long.
  • You’re more likely to blow your budget for the week when you make less money. Even though that seems kind of obvious, I was surprised at how seldom diaries at the higher income levels went above their weekly disposable income ((Take Home Pay – Fixed Expenses) / 52 weeks) given the distribution of utilization of disposable incomes.
  • It’s easier to save when you make more money. Again, kind of obvious, but I think the interesting thing is how slowly the savings needle moves.
  • There doesn’t seem to be a heavy editorial hand in the Money Diary series. There’s a heavy tail distribution in terms of salary and utilization of weekly disposable income (defined above), which fits the general population, so it doesn’t look like they’re trying to sensationalize the series or spotlight a certain type of spending profile for the most part.

In addition, some interesting medians from the data set are:

  • Age: 27
  • Salary: $70,000
  • Housing: $1,164
  • Housing as a Percentage of Take Home Pay: 29.8%* (Assuming single filer taking standard deduction and single exemption depending on tax year)
  • After-Tax Fixed Expenses (Including Housing): $20,117
  • After-Tax Fixed Expenses as a Percentage of Take Home Pay: 42.5%
  • Percentage of After-Tax Non-Fixed Income Spent: 94%
  • Projected Yearly Savings: $2,738* (Assuming that the one recorded week represents an average for the year)

If you made it this far, clearly you’re not bored by numbers and probably have a few questions about my methodology. That’s a good thing. I will be the first person to admit that this is not scientifically rigorous and should not be taken at face value and I’d love to hear your suggestions on how to improve this analysis. That said, I hope the following will explain the reasoning behind my decisions.

Who was excluded?

  • Anyone who was a full-time student because they represent a different kind of financial population in the series
  • The two diaries that were making over a million a year and both over the age of 35 because the sample sizes were so small at that end of the spectrum and not reflective of the general population. (Because I know that 100% of New Yorkers > 35 do not make at least a million dollars a year)
  • Anyone that didn’t work in New York City because even though Northern New Jersey and Long Island are close and also expensive, they’re still different enough from the rest of the sample group.

What about taxes?

For my own sanity, I applied the tax rates for the year in which the diary was published and assumed that everyone was filing single, taking the standard deduction, and one personal exemption if applicable in that year. I also assumed that diarists living outside the five boroughs did not have to pay any city income tax.

Why are you using take home pay?

Two reasons: because some millennials receive an allowance from family, although this was not as common as the media would like you to believe, and because of the different tax rates. The most common forms of familial support came in the form of no education debt, not contributing to a cell phone family plan, and not contributing to family entertainment subscriptions.

How is it fair to use one week of spending to extrapolate to an entire year?

It’s not, but given the fairly normal distribution, I felt that the median number would still provide some color. If you work at Mint or Personal Capital, I’d love to talk to you though.

What about purchases that are clearly once in a blue moon or later going to be reimbursed in some way?

Yes, I agree that those should be taken out and adjusted, but it seemed like very little additional clarity for a great amount of work. Volunteers welcome!

What about inflation?

Yes I thought about that too, but it’s three years of data. I didn’t adjust any of the calculations for inflation, but I’ll consider it for v2.

That’s it for now, but I’m planning on revising this data. If you have any suggestions, please leave a comment!

Geoarbitrage Personal Finance Real Estate Taxes Transportation

Get Out of Town!

You’ll save on city taxes.

I hear this phrase in some form or another from every person I know that lives outside the five boroughs. I’ve always wondered though, is that just a coping strategy or is this the original geo arbitrage?

Let’s find out.

First, how much is there to actually save? New York City income taxes are graduated just like federal taxes, meaning that the first dollars you make are taxed at a lower rate than the last dollars you make. Here’s the chart for 2018:

BracketSingleMarriedHead of Household
2.907%$0 – $12,000$0 – $21,600$0 – $14,400
3.534%$12,001 – $25,000$21,601 – $45,000$14,401 – $30,000
3.591%$25,001 – $50,000$45,001 – $90,000$30,001 – $60,000
3.648%$50,001 – $500,000$90,001 – $500,000$60,001 – $500,000

*Brackets for Married Filing Separately are the same as Single

Keep in mind that these numbers are for taxable income, which is the income you have left after taking exemptions and deductions.

For these example after-tax incomes, this is how much you would pay in city taxes:

IncomeSingleMarriedHead of Household

Assuming that you need to work in Manhattan, here are the amounts you would need to be making just to offset the cost of commuting into one of the main transit hubs:

Monthly PassCostSingleMarriedHead of Household
NJTransit Bus Zone 2$109$38,919$40,845$39,417
NJTransit Train Zone 2$152$53,238$55,281$53,786
Metro North Zone 3$239$81,856$84,354$89,739
LIRR Zone 4$261$89,093$91,680$89,739
Metro North Greenwich$301$102,251$104,838$102,897

So if you’re making less than six figures a year and are still determined to save on income tax, the only neighborhoods that make sense are those along the PATH, just outside the Lincoln Tunnel, and the closest towns beyond Secaucus Junction. Any savings you’d get by moving to Westchester, Long Island, and Connecticut would be eaten up by train tickets.

If you’re fortunate to work within walking distance of the transit hubs and won’t need an unlimited 30-day MetroCard, then transit costs are essentially a wash or at least lowered by $121.

But what if you own property?

New Jersey, Long Island, and Westchester are famous for their eye-popping property tax bills. Let’s say that the average property tax bill is about $5,000 cheaper in the city (based on the figures presented here). Here are the amounts that you would have to make in order to break even on the higher property taxes:

SingleMarriedHead of Household

So what’s the takeaway?

If you’re renting, make less than $40,000 after-tax income, and don’t work within walking distance of the PATH or Port Authority, stay put. If you’re renting and make over $40,000 after-tax income or work within walking distance of the PATH or Port Authority, take the PATH or bus from Port Authority across the river and don’t go any deeper in to New Jersey if you have to. If you’re buying, stick around the city until you’re making north of $140,000 taxable income and then some if your transit costs increase as well. Obviously there are many more factors that you need to consider about your own situation before making a decision, so do your own calculations.

Hopefully this provides a good starting point for thinking about what’s best for you. I’d love to hear what other factors you considered in your decision!