In this interview, the second in a two-part series and the season four finale, host Jim Markus continues his chat about the FIRE (Financial Independence, Retire Early) movement with Diania Merriam. You can listen to Frugal Living with Jim Markus on Apple Podcasts, Spotify, Amazon, Anchor.fm, iHeartRadio, or anywhere you go to find podcasts.
The First Steps To Financial Independence
According to Merriam, the first step is “deploying the gap”. She explains that in order to attack your debt, you need to know and get as comfortable with the amount of money you’re spending each month as you are with the amount of money coming in.
Once you have the full picture of your finances, you can begin to analyze and optimize your spending. After getting that debt paid off, you can begin investing and having your money do all the hard work for you.
Is the FIRE Movement for Everyone?
Absolutely. Merriam shares that at her event, the EconoMe Conference, she saw passionate people of all races and genders. This is not a movement reserved for rich white men, it’s for anyone that wants to learn and grow their financial knowledge to ultimately live a life where they control their finances and aren’t being controlled by money.
For more information about the FIRE Movement, we recommend adding ‘The Simple Path to Wealth: Your road map to financial independence and a rich, free life‘ by J L Collins to your reading list.
Read a Transcript of This Episode
This is Frugal Living. <music> Welcome back to Frugal Living. We’re talking with Diania Merriam about her journey to financial independence. Without further ado, here’s part two of our conversation. <music> You have used some incredible sales skills to get where you are. You’re not the first person I’ve talked to in the FIRE community who has a sales background. I have a sales background. That’s where I was when I got into this kind of lifestyle, and meeting other salespeople were the ones who turned me onto this. Is that an overrepresented field in this community? Like, are there more salespeople that are financially independent minded?
I don’t think so. I mean, the stereotype is that it’s all white tech guys, right? Or all high-income people. But I think it’s really hard to get an archetype of the kind of person that would be interested in this. Because if you look online, you know, you can see the most popular bloggers are like white man tech guys. Right? But then when you meet people in person, if you come to the EconoMe Conference, it is, like, a smorgasbord of demographics. We saw every single race. Even my speaker lineup, I usually have over half as women, right? Because men really predominate this kind of topic. I mean, it’s not what you think, and it’s not what you assume when you just look at the online landscape. When you actually start going to in-person meetups, it’s a very different story being told because I think most people that are pursuing financial independence aren’t online blogging about it. They’re living their lives. And so looking at the bloggers is just not a good representation.
Perfect answer. And you’ve kind of hit on some other things there too. We’re gonna see a little bit more confirmation bias when we’re online looking for stories about the people who are more likely to be online sharing their stories. But I wanna get back to this because it’s the most striking thing you’ve said so far, and you’ve said some amazing things. But you put on an event, which by all accounts was a wild success. It’s taken a loss during the first year of $40,000, which isn’t at all unusual for a business. But this is your event. Why aren’t you freaking out about $40,000?
I certainly went through a period before the first event when I realized I was gonna take a huge loss. And I had a number of mentors that I met along the way in event production. I remember this one mentor was basically like, “You need to know what your breakeven point is, like, all the financial modeling around it. And if you get to… You know, a certain date is your cutoff date. If you don’t sell enough tickets by that date, you gotta cancel the event. You can’t let yourself take this huge loss.” And, you know, I had that in my mind for a while, like, “Okay, I mean, there’s the business aspect of creating something. If the financials don’t work, they don’t work. If there’s no demand for what you’re selling, then it’s probably dead in the water. Right?” So there’s that aspect that I had running in my mind. But then the other aspect of it is creative expression. I wanted to create something that I was really proud of. I wanted to take a bet on myself. And the way I rationalized it was, “Okay, so 40 grand. I don’t have any children. I don’t plan to have any children. But if I were to decide to have a child, it’s gonna cost me a hell of a lot more than 40 grand over 18 years. Right?” And so I looked at EconoMe as, like, my baby. I got this opportunity to create something and I’m gonna do it. And if I never make up that 40 grand, well, then that’s just the cost of me having my baby. Right? And I had to make peace with that. Now it will be profitable in the long run, but at the time that I was making peace with it, I didn’t know if I was gonna do another event. It was hard. It was the hardest thing I’ve ever done in my life. I had a lot of questions like, “Am I gonna keep doing this?” And then after the first event, when I got to look at this thing I created, and I was just so incredibly proud of it, and it was so well received and I’m like, “I have something here. I have something really special here. I’m gonna keep going.” But I had to, kind of, recognize that it was a risk, that there was a possibility that I would never make back that 40 grand and be okay with that. That’s the decision you make when you pursue entrepreneurship. You know, and it’s an interesting dynamic because when you think about financial independence, you know, I work so hard to save 60% of my income and reduce my expenses. And I was so careful about money that to make this decision to be comfortable with losing 40 grand seems like a diversion from that, right? It seems like I wouldn’t be able to tolerate it, but I just had to, kind of, put it in perspective that I could always make more money. But I felt like I was in a privileged position to take a risk on myself, especially when you consider that my income was higher. I was in the six figures. I was saving 60% of my income. When I took that 40 grand loss, it was basically after I had already fully funded my tax-advantaged accounts at $29,000. That 40 grand is what I would’ve put into an after-tax brokerage to sit there for many years while I waited for financial independence. So you could either look at it as a loss if I were to decide to shut down the business. Or, it’s an investment that I made in my own business versus making it in the stock market. It really is all a matter of perspective. But I do think I had to be comfortable with the loss and I had to believe that even if this didn’t work, I trusted myself enough that I can always make more money.
To be comfortable making an investment in yourself of $40,000, to be comfortable potentially losing that money, you have to be saving aggressively. You have to be using tax-advantaged accounts. First, what are your steps–aside from, you know, the obvious life changes of cutting out going out–what are the first steps you made? The, kind of, boring hammer stuff. What did you do first?
So the first thing I did is focus on debt payoff, right? And so whether you’re paying off debt, whether you’re saving an emergency fund, or whether you’re investing for the long term, all three of those things I put into the category of deploying the gap. All of that money to do any one of those three things comes from the gap. So the first thing you gotta do is make friends with the gap, right? And the way you do that is by first growing a lot of awareness around it. Most people know how much money they make. Most people can tell you in two seconds what their income is. But most people can’t tell you what are your yearly expenses? Most people don’t know. So I think the first step is tracking all of your spending and becoming extremely knowledgeable about what your expenses are. What are your fixed expenses? What are your discretionary expenses? What are your spending patterns? And start analyzing those, start questioning those, start trying to be resourceful about those. Right? Think when it comes to reducing expenses, it’s really beneficial to focus on the big three of housing, transportation, and food. If you focused all of your efforts just on those three things, then you don’t have to analyze the cup of coffee here and the pair of shoes there. So I think optimizing those three is probably the best place to start. And then obviously you wanna grow your income, right? And that’s career progression. That’s asking for raises, that’s overperforming at work, all of that good stuff, side hustles, all of that great stuff. My income, I did get significant raises during this time that I was figuring out my money. But all of that went to my savings rate, right? I did not let lifestyle, kind of, come in and take away all those raises. And I put them all towards growing that gap. So when it comes to deploying the gap for as far as debt payoff, the first thing I did is run that credit report. I needed to look at my debt collectively because I knew I had debt. I knew I was, like, making minimum credit card payments. But I didn’t know it was $30,000. Once I had that wakeup call, I was like, “Oh, okay. I gotta do something about this.” And what I ended up using was a debt reduction calculator. There’s tons of free ones online. If you just Google, like, debt reduction calculator. And what that allows you to do is you plug in all of your debts, plus their interest rates, plus their minimum payments. And then you tell that calculator how much money you have each month to throw at this? You can’t be accurate if you don’t know what your gap is, right? That’s why you have to know that gap, be very comfortable with the gap so that you’re putting good information into this calculator. And then the calculator will show you two scenarios. You can either do an avalanche strategy for debt or a snowball strategy. Dave Ramsey, people love snowball, right? And it’s because you start with your lowest debt, you attack that aggressively and then you move on to each higher debt. The good thing about that is it keeps you motivated, but it will take longer for you to pay it all off because you’re not paying the highest interest first. So that’s what avalanche is. You start with the highest interest debt. And I found the calculator really motivating. It kind of solved that motivation gain that you get from snowball because I could with a click of a button see that it was gonna take me an additional year to pay off my debt if I went with snowball versus less time if I went with avalanche. And so that helped my motivation to keep going. But the calculator makes it really easy. It’s like throw this much at this one. And then you’re watching it go down and down. And anytime you get a windfall, you just plug it into the calculator and it recalculates, like, where you should put that windfall. And it’s just fantastic. So debt reduction calculator. And then once you’re outta debt, especially the high-interest debt–I will say that student loan debt is a totally different animal. There’s a lot of different payment options. When it comes to high-interest credit card debt, you want, like, your hair is on fire, figure it out right now. But when it comes to student loans, that is a whole ‘nother animal. There’s an amazing speech from the first EconoMe Conference from the student loan planner named Travis Hornsby. His company has advised on one dollar out of every thousand dollars of student loan debt in the US. They are extremely knowledgeable about student loan debt. And he’s did an amazing speech at the EconoMe Conference that’s available on the YouTube channel. It’s called Student Loans Never Need to Hold You Back. And he goes through the very different strategies that are just mind-blowing. So highly recommend that if student loans are an issue for you. But after that, then I focused on saving my emergency funds while also fully funding retirement vehicles. So that’s, at the time, 19,500 in my 401k, 6,000 in a Roth IRA, and then 3,500, about that, in HSA. And so I prioritized all of that. And then anything after that, especially after I got my emergency fund done, just got thrown into an after-tax brokerage. And the book I highly recommend that helped me come up with this plan is called The Simple Path to Wealth by J. L. Collins. It’s very popular within the FIRE community. Every book I’ve read about investing totally intimidated me before this book. And so this book helped me come up with that whole plan. And the best thing about the Simple Path to Wealth is it’s so simple. I manage my own investments because I have a 100% stock portfolio and I invest it in VTSAX, which is a total market index fund, low-fee index fund. And it’s, like, set it and forget it. I just don’t think about. And so what I love about deploying the gap is that debt payoff and saving your emergency fund, it’s almost like checkboxes, right? It’s like once they’re done–Yeah, maybe you have to tap into your emergency fund every now and then, but then you just replenish it. But once those two things are done, now it’s all just about investing. And then you just automate it. And it’s, like, you just stop thinking about money so much.
Can we talk a little bit more about your automation? Like, this is a conversation that comes up a lot. Especially if you’re outside the FIRE community, If this is your first time hearing about financial independence, retire early, like, as a community or as a concept, it can be bewildering the speed with which we’re talking about some of these topics. I’m with you, I do the same kind of investing. But I’m going to ask you to explain it as if I know nothing. What’s the thought process behind putting it out into the world and how do I do it?
Investing is super important because your money can always work harder than you can. And so I only have a certain amount of hours in the day to work, but my money can theoretically work 24/7 if it’s invested in the market. And the reason we wanna invest is because we want to harness the power of compound interest. We’re not only the money that we’re investing makes more money, but the interest earned on that invested money makes more money. So compound interest is this, like, magical thing where if you’re just investing in a very passive way, your money could theoretically double in, like, seven to ten years, right? Your money will never be able to do that in a savings account. And so I know investing can be really scary, but the alternative is even scarier. The opportunity cost of not investing is even scarier. I think one of the things that’s super helpful to get your head wrapped around investing is the idea of volatility. The stock market is volatile. It is like a roller coaster. You’re gonna see it go up. You’re gonna see it go down. But if you’re investing for the long run… Warren Buffet says, like, don’t buy anything that you’re not willing to hold for 10 years. Right? You’re investing for long periods of time. And over the long run, historically, the stock market has always gone up. And if you’re investing in total market index funds, not stock picking, you’re basically saying, “I don’t wanna pick which stocks are gonna do better because I don’t know. So I’m just gonna buy all of them in an index fund.” <music>
When we say the stock market historically has only gone up, what you’re saying is you’re not doing a basket full of your favorite stocks that you’ve done a bunch of research on. You’re saying, “Look at ETFs or mutual funds that track the market.”
Yeah. I’m just buying the whole thing. I don’t know what’s gonna do better. Right? But I know if I buy the whole thing, that is always going to go up. And so I think that, you know, when you talk to a financial advisor or someone maybe that wants to manage your investments, the reason why you’re paying them is because they’re telling you that they’re gonna beat the market. A lot of investors, they wanna do better than the typical market returns, which let’s just say average between seven and 10% over the long run, right? Considering inflation, maybe it’s closer to seven, 8%. So I don’t need to beat the market. I just wanna match the market. And so I don’t have big ambitions about investment returns. They way I make up for not trying to beat the market is purely the amount of money I’m putting in. So think of it this way, let’s say a really savvy investor. You know, that guy who’s like, “I just made a 50% return on this obscure investment.” Right? And he’s bragging about it, right? So he puts a hundred dollars and makes a 50% return. He ends the year with $150. I put in $150 and I only make a 10% return. I’m still making out better than him at the end of the year, simply because I put in more. And when it comes to investing, you can’t control the stock market. It’s gonna be riding that roller coaster, right? You really don’t have that much control over returns. But the thing you can control is how much money you’re putting in. And you can control how consistently you invest. You can control how early you start. So if you focus on the pieces that you can control–all that volatility, and the up and down, and the stock picking, and all that–you don’t have to play that game because you’re not trying to beat the market. You’re just trying to match the market. And you’re trying to do it in a way that is as simple as possible and that’s easily managed.
Very well stated. When I see the market dip, I get very excited because that means my investments that I’m buying are cheaper. I was going to buy them anyway. I was willing to pay more for them. The market went down, I’m buying at the lower price. Like, when COVID hit, a lot of people saw, you know, a 30% drop in the market and then started pulling money from their retirement account thinking, “Ahh, it’s the end of the world.” The rest of us in the FIRE community maintained, or in my case increased at that point because the prices for investments were cheaper, and then the returns following it were incredible. And I think my favorite thing about this type of conversation is we’re taking emotion out of it. Don’t invest in the market if you need that money tomorrow.
Right. So I have what’s considered a more risky portfolio that it’s 100% invested in stocks, right? Stocks are a lot more volatile than bonds, but they also potentially grow a lot more than bonds. So a lot of people will have an asset allocation, which really just means what percentage of your portfolio has stocks, what percentage is bonds. Some people, you know, at my age would choose 80% stocks, 20% bonds. I’m 34, right? I went with a hundred percent stocks because I’ve got a really strong cash cushion. So I’ve got about a year of expenses sitting in cash, not growing. A lot of people criticize me for this. “Oh, you’ve got this money sitting here not growing.” But in my mind, every pool of money you have has a job. My investments, their job is to make more money. My emergency fund or cash cushion, that money’s job is to be easily accessible and liquid that I can tap into at any time. I don’t wanna risk having to sell my investments at a loss because I need access to money. So for me, a hundred percent stocks make sense because I’m not gonna touch it for a very long time. And I don’t wanna have to rebalance every year. So what happens when you have stocks and bonds is you wanna maintain that allocation of 80% stocks, 20% bonds, or whatever it is. So now you’ve gotta rebalance every year. That means you’ve gotta look at your portfolio. That means when you see that dip because we’re on a downturn or a market correction, you’re gonna freak out about it, right? You have the potential of doing that. But I think it’s important for people to remember that when everyone’s running around yelling about how they lost money, what they’re really seeing is a natural flow of the stock market, the natural roller coaster that should be expected, and that you haven’t lost any money unless you sell. What you’re seeing is paper losses. Just like when you see it go up, you’re seeing paper gains. What it’s showing you is if you sold everything today, this is how much cash it’s worth. The strategy is to just leave it alone and let it do what it’s gonna do over the course of 30 years. And it’s gonna be there for when you retire. I think the best strategy is to just invest and not look at it because then you’re not going to have that emotional reaction to seeing it dip. And again, this is all about perspective. Another thing that really helps me is I look at the money that I’m investing. First of all, I don’t need it anytime soon. Right? And also I look at it as a tax that I’m paying to my future self. That money in my mind isn’t actually mine. It’s someone else’s in the future. And so I don’t have so much of an emotional connection to that money. When I’m seeing it, you know, go to that roller coaster in the stock market, I’m like, “Oh, that’s some future person’s money. That’s not mine.” I don’t have any emotional connection to it. So it makes it easier to just let it do its thing.
That’s awesome. And it’s a wonderful way of, kind of, repositioning the old phrase “Pay yourself first.” Stop thinking of yourself as, like, pay your current self first. What you’re saying, and I totally agree, is “No, pay your future self first.” Like, you’re setting that aside for you, not now, but you way in the future when you’re gonna need this. And those gains are the reason you’re doing it now. You’re very good at clearly articulating some very complex subjects. So thank you so much for this.
Well, and also I would say, like, I got this all from just obsessively reading about money, you know? So reading Mr. Money Mustache, again, that book, The Simple Path to Wealth. It’s really good in helping to, kinda, frame this stuff. A lot of this is a matter of perspective. And I think a lot of people, it’s hard for them to invest for the future, like, retirement. You know, I just spoke at this event over the weekend for college students and they just, like, did not care at all. This is very refreshing to talk to someone who actually cares. But, you know, for them, they’re 20 years old, to talk about retirement, it just is so obscure. Like, it’s so far in the future, it’s hard to care about it now. And I think for me, I realized that saving for retirement is not something that only benefits me at 65. What I ended up doing is I front-loaded my retirement savings. So I saved for about five years that 29 grand a year. And before that I had been, like, matching my 401k. Like, just what is that? 3% I was contributing just to get the match. But you know, those five years was the bulk of my retirement savings. And I reached a status, which is known as Coast FI. And so that means that I had enough in my retirement vehicles–in my 401k, my Roth IRA, my HSA–that if I didn’t contribute one more dollar, it would grow through that power of compound interest to what I need at 65. Right? And so I actually quit my job a year ago because I don’t need to make a six-figure salary. My expenses every year are, like, 25 grand. So it gives me a lot of options to work less, to make less money because I have to save less. I’m already done with my retirement savings. So I’m getting the kind of autonomy over my time in my thirties that most people don’t dream to be able to have until they’re in their sixties. And so there’s a huge benefit to prioritizing it early. It does not only benefit you when you’re 65.
Totally agreed. The best, kind of, backhanded compliment I’d ever received was after leaving sales… I was doing what you were doing, like, aggressively saving for retirement, putting myself into a position where I was free to make these types of choices. I left sales because I wanted to be a writer, but I was a terrible writer. So I needed practice. And I started taking freelance gigs for, you know, a penny a word, so I could get feedback immediately from an editor so I could become a better writer. And I did, and I lost 90% of my income during that time. But because of what you’re saying, I didn’t worry about it at all. It was exactly what I wanted to do. And it put me into an industry I wanted to work in to use time how I wanted to work. And that compliment that was given to me was, “Jim, you’re the busiest unemployed person I’ve ever met.” And I was like, “Yeah.” I mean, like, I can’t argue with that. Like, I love what I’m doing now. So I will always seem like I’m working to you. But to me, this is a dream.
I like to call it fun employment.
It’s what you wanna do. And it’s in many cases, in your case and in my case, it’s a business. You’re doing your own thing. You’re building yourself and you’re investing in yourself as opposed to all of your work going toward someone else for potentially a much higher salary.
I mean, I think that self-employment is almost this milestone that we exercise on the path to FI. That most people don’t recognize this opportunity, right? Like, I have thought running my numbers, I was set to reach financial independence, which is defined as having 25 times your yearly expenses in your investment portfolio, where you can live on that for the rest of your life. A 4% withdrawal rate, which I know the 4% rate is, like, up for debate right now. But let’s just say good rule of thumb to have, right? That’s a target for many people who are striving for financial independence. And I was projected to reach that by 40 years old if I had stayed on my current path, you know, with my W-2 job. And so, you know, I had recognized that I had reached Coast FI status, that my expenses were pretty low and easily met with a little bit of work. And that the reason why I wanted to be financially independent is to have full autonomy over my time. And I actually don’t have to wait until I’m 40 to have that. I could have that now with self-employment. And it has just been such an adventure to be able to have a lot of control over the work I do, how many hours I work, who I work with, you know, to not have anyone to answer to except myself, you know, to literally do whatever I want with my time. It’s extremely freeing. I mean, it’s an adjustment, right? Like, it took me a while to get comfortable with it. But it’s the benefit of self-employment, especially when you have a good buffer. Right? I had about two years of living expenses liquid. One was in my emergency fund. The other was in an after-tax brokerage. And so two years of living expenses liquid to, kind of, be my safety net because self-employment is like feast and famine, right? It’s like you’re trading the security of a steady paycheck for the uncertainty where your future income might come from. And so that can be really scary. But having that safety net of the emergency fund and, you know, the after-tax brokerage, if I had to tap into it, I could. And it’s funny ’cause we’re so concerned about what could go wrong. And I found that I’m just a year in. So I just came across my year anniversary of self-employment. And my burn rate, so much slower than I budgeted for. I had budgeted for like 3000 a month just as, like, worst-case scenario. I ended up coming in closer to 2000 a month. I had a windfall of a big tax refund about a month into me leaving my job that I did not anticipate. And that’s because I took such a huge loss on my first conference. And then I had all of this freelance work come to me that I had not anticipated. It’s part planning, part good planning, but partly just when you close one door and you leave space in your life for opportunity to come in, you now have the space in your life to seize that opportunity. And that to me has just been incredibly freeing. And the fact that I went from, you know, my salary at the time that I quit was I was bringing in about 135 grand a year. Um, doing my tax return right now, it will be a hundred grand less than that. And the fact that my income came down a hundred grand yet I saw no change in my lifestyle, that to me is freedom. That to me is the power of frugality. It’s an incredible opportunity. And I think if more people could wrap their head around just the simple mechanics of acquiring that hammer, get through that quickly, and now you can focus on what you’re gonna build.
I left this talk energized. The FIRE movement isn’t exactly new at this point, but it’s something worth talking about especially with a frugal community like ours. If you wanna connect with us, check out frugallivingpod on Instagram or Twitter. Thanks again to our magnificent guest Diania Merriam. This episode was edited by our audio editor intern Genny Blauvelt, and I’m Jim Markus.
More About This Episode and Frugal Living
To hear more episodes about the FIRE movement, check out the latest episode of Frugal Living and check back soon for season five. Frugal Living is a podcast for smart consumers. How do you spend less and get more? The show, sponsored by Brad’s Deals, features interviews, stories, tips, and tricks. Jim Markus hosts season four, out now.
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