Back in San Francisco, get-to-know-you conversation seemed to follow a script. First, innocent small talk:
What part of town do you live in?
How long have you been in SF?
Then, the inevitable questions for “sizing up” someone’s money situation and their rank on the corporate ladder.
Where do you work?
How long have you been there?
Where were you before?
Finally, my least favorite question, designed to assess a person’s ambition and their level of conspicuous striving:
So, what’s next?
(The implication, of course, being that one cannot simply be content. You’ve always gotta have your next move in mind.)
As much as I loved living in San Francisco, I have to admit, I was excited to leave these conversations behind when we went cruising.
And, honestly… we have. No one asks about our careers, at least not in the first conversation. The most common question is “Where are you from?”, a benign bit of small talk that undoubtedly carries some biases and stereotypes. Next up are the cruising questions: How long have you been here? Where were you before? How long will you stay? And where to next?
But I suppose the human tendency to “size up” is unavoidable, because it happens among cruisers too. The most common approach is to ask someone about their boat: What kind of boat do you have? How old is it? How long have you had it?
When we get to this point in the conversation with new cruising friends, I see mental gears starting to turn. That’s because, as far as cruisers go, we are a bit unusual. We’re younger than most. Our boat is bigger than most. And we are certainly among the only cruisers out here on a brand-new boat.
All of which leads to a question that is both alarmingly personal and refreshingly direct:
How are you able to afford to do this, on your boat, at your age?
I suspect that people are looking for a simple answer, like “it’s my parents’ boat,” or “I sold my company to Facebook,” or even “we won the lottery.” And it’d certainly be easier to offer a succinct response that answered all the questions and satisfied all the curiosities.
The reality is, we are able to afford this cruising life because we had well-paying jobs, we created multiple income streams, we spent less than we earned, we aggressively saved the difference, we invested in the markets instead of sitting on cash, and we put the money (well, some of it) in non-retirement accounts so we wouldn’t have to wait until we are 59 ½ years old to access it. Oh, and we started with very little debt. And we don’t have a mortgage. Or kids.
Piece by piece, it’s all simple stuff. But it’s not the simple answer that most people are looking for.
Still, I think the most important parts of our financial plan can be described in three simple steps. First, create a surplus. Second, buy a piece of prosperity. Third, sell it to spend it. Some of the details are a bit unusual—it’s not stuff you’ll read in a Dave Ramsey book or an issue of Money magazine. I’ve spent 10 years researching and creating this plan, and while it’s far too early to declare success, it seems to be working (knock on wood). After all, we’re out here, we’re cruising, and we’re doing it with enough money to give us the lifestyle we wanted.
And hey, this is my first time writing about money, so thanks for reading! Here we go…
Step 1: Create a surplus
I know, I know… it’s the oldest advice in the financial planning books: “Spend less than you make.” Like everyone else, we always knew that saving was the right thing to do. And over the years, we had varying degrees of success. Sometimes we had a bunch of money left over at the end of the month; other times, we’d look back at our expenses and say, “we spent how much?!”
Eventually, two things helped us establish a strong savings habit. The first was setting a goal—to go cruising with a certain level of financial preparedness—which helped us put savings in context. We made spreadsheets to show how quickly different savings rates would get us to our goal. And we knew that every dollar saved had a double effect: It helped us build our portfolio, of course, but it also meant we were comfortable with a cheaper way of life. In other words: Save more now, need less later. (Thanks to Mr Money Mustache for making the point with shocking clarity.)
The second key to our savings habit was to keep our fixed expenses low. This is different from a lot of popular money advice, which calls for cutting discretionary expenses like restaurant dinners and the much-maligned daily latte. But these expenses have a small effect on your savings rate, and a big effect on feelings of scarcity, sacrifice, and self-deprivation. Reducing fixed expenses is more powerful because the numbers are bigger (rent, car payments, cable, etc) and the decisions become automatic: You don’t have to decide to skip the latte every day; you can decide once to cancel cable, then watch the savings add up.
We put this principle into action by staying in our one-bedroom apartment, sharing one used car and parking it on the street, going without cable, and fighting the gradual ongoing build-up of subscriptions, memberships, delivery services, etc. With this strategy, we worked up to a 50% savings rate. That’s right: Most months we set aside half of our income!
(These specific spending decisions may not be right for you—after all, everyone has a different lifestyle and different priorities. But if you’re interested in building a surplus by reducing expenses, I encourage you to look at the fixed savings you can lock in and make automatic. Don’t beat yourself up about buying coffee or going out to lunch.)
Step 2: Buy a piece of prosperity
When we first got serious about saving, we followed common advice like establishing an emergency fund (which we did) and contributing the maximum amount to our 401(k)s (which we also did). But with a 50% savings rate, we had money leftover. So I began researching the best places to put our surplus, knowing we’d want to spend it in 5–10 years when we left our jobs and started cruising.
I found great advice in the financial independence and early retirement (aka FIRE) community. While we don’t consider ourselves retired, we have similar financial goals as early retirees: To build a medium-term portfolio that can support a years-long period of reduced income. Cash savings isn’t appropriate for these goals, since it doesn’t grow. (In fact, it’s certain to lose value to inflation.) And retirement accounts weren’t right for us either, because the money would be off-limits for a few decades.
We decided to use our surplus to buy index funds in a plain-vanilla investment account at Vanguard. Using a regular non-retirement (sometimes called “taxable”) account means we can get to the money any time. And Vanguard is the best place to do this kind of investing, because their fees are very low and the company itself is owned by customers and run as a non-profit.
Stocks—via index funds that hold shares of hundreds of corporations—are the foundation of our portfolio. And that’s why I call this step “buying a piece of prosperity.” I know it’s cheesy. But when you buy shares in a stock index fund, you’re buying a piece of the wealth created by the companies in that fund. This is not just a nice soundbite or a handy mental model. This is literally how it works. Stock prices go up and down, but over time the stock itself will become more valuable as long as the company lives on.
We also bought bonds and real estate that are meant to offset rapid (and scary) changes in stock prices. For example, during the early February sell-off that caused stock prices to drop about 11.5%, our portfolio fell only 5.5%. It’s impossible to construct a portfolio that never loses value, but diversifying beyond stocks provides stability—and this is critical given the 5–10-year timeframe for our money.
Now, the point of saving money is so you can spend it later. And that was our mindset all along. Which brings me to the next step…
Step 3: Sell it to spend it
It took me a long time to find good information on how exactly to spend our savings. This sounds like a weird problem to have, I know. But most money advice is about helping people save—and there are some big questions about what happens on the other end! For instance: How often should we sell? How much should we sell? Should we wait to sell until we needed spending money, or do it proactively? Should we try to time the market, selling when prices are high?
Once again, I turned to the FIRE community for advice. Blogger Darrow Kirkpatrick was super helpful, with research on the best strategies for making withdrawals from a portfolio. We decided to sell every three months, if necessary, with the goal of keeping a year’s worth of cash in our bank accounts at all times. Here’s how it works:
- The first day of February, May, August, and November, I create an estimate of how much we’ll spend in the next 12 months. (This is pretty easy to do, since we track our spending carefully.)
- From that number, I subtract how much we already have in the bank and any income that’s for sure coming our way, like a scheduled royalty payment from my publisher.
- To make up the difference, I sell shares from our Vanguard account. (Geeky disclaimer: I haven’t yet been forced to choose one of Darrow’s well-researched strategies. So far, I’ve used withdrawals as opportunities to “clean up” our portfolio by selling older one-off stocks and funds.)
- Transfer the proceeds to our bank account, then spend it on tacos and boat parts! 🙂
I love getting nerdy about money. I love reading research and running the numbers. But after ten years of saving, and four months into the spending part of this plan, I’ve realized that these three steps are not really about theories and projections. For us, financial planning is about safety and freedom.
We knew we didn’t want to follow the default path through 40 or 50 years of professional work. But at the same time, we didn’t want to step off that path without a plan for how we’d support ourselves. We don’t have a “forever” plan, but we do have these three steps—a “right now” money plan that gives us the safety and freedom for the life we want to live today.
What about you? How do you prepare financial for big life goals? Do you take an active role in managing your money, or pay someone else to handle it? And we’re curious: Do you want to read more posts like this from Particular Harbor? Or should we focus on the travel and lifestyle updates? Let us know in the comments, or send us a message (please).