4 Big Financial Mistakes We Made on Our Road to FIRE (& 4 Things We Got Right)

Sure, my wife, Allison, and I were able to retire in our early 40s.  And yes, that was a pretty big accomplishment for us (and anyone, really).  We were working toward retirement by our mid-50s, so we were pleasantly surprised to be able to do it 10+ years ahead of schedule.

When we retired we had never heard of the acronym FIRE (Financial Independence / Retiring Early), we didn’t know what the 4% Rule was, and we were unfamiliar with Roth Conversion Ladders.  We just worked our butts off and saved our earnings, then did the math and realized we had more than enough money to cover our living expenses until we could later tap into our retirement funds.

But of course our path to early retirement was far from perfect.  We made a few big financial mistakes along the way that certainly cost us time and money.  Looking back now, I can identify four big things we got wrong.  If you avoid these missteps yourself, you’ll be well ahead of the game.  

Fortunately, we also got a few things right.  I’ll show you four big financial moves we made that worked in our favor, and ultimately helped us achieve FIRE much faster than expected.

Mistake #1:  We Started Late

Allison and I didn’t start investing until we were in our late 20s.  I talk about how I slacked off in my 20s in one of my more popular Quora answers -- Has anybody slacked off their 20’s, but became successful in their 30’s or even 40’s?

After college, we both decided to have fun for a few years working in bars and restaurants in NYC (we met at a restaurant in Times Square).  We moved to San Francisco on a whim and continued working in various low income jobs.  I even tried my hand at acting -- you can see my amazing thespian skills in the 1999 Indy horror film Prey.

Needless to say, none of these jobs offered a 401(k) program, and we weren’t making enough to invest in our own IRA.  I spent most of my 20s paying off student loan and credit card debt.

Lesson:  Start investing as early as possible.  With the power of compound interest, time is your biggest ally.

Mistake #2:  We Diversified Too Much

This is an interesting mistake, because diversification is typically a positive thing when you’re investing.   You don’t want to put all your eggs in one basket, because if that basket breaks, you’re kinda screwed.

So the conventional wisdom is to add variety to your assets.  For example, instead of putting all your money into US Stocks, you should also put some in International stocks, US bonds, and International bonds.  You can also diversify with real estate by buying a home, investing in rental property, or investing in a REIT fund.

When we did finally get higher paying jobs that offered 401(k) programs and we started investing, we didn’t know where to allocate our investments.  So we ended up picking lots of random funds without really looking to see what they consisted of.  We thought the more funds the better, because that meant we were diversifying.

But what ended up happening was that our overall portfolio was out of whack -- we were over leveraged in certain areas (large cap US stocks) and under-represented in others (small cap US stocks, International stocks & bonds).

We also worked at a number of companies over the years, so that meant opening up a new 401(k) each time, adding to the “over-diversification” problem.  We ended up with way too many brokerage accounts with a wide variety of funds in each.

While that may not sound like a huge problem, it made it very difficult to track and understand where we were investing our money.  It’s only recently that we’ve begun consolidating them into more manageable investment vehicles that we can track more purposefully.

Lesson:  Sometimes it’s better to keep things simple.  Rather than trying to invest in a dozen different random funds, try picking three or four that will give a nice well-rounded portfolio.  

Mistake #3:  We Ignored Expense Ratios

This mistake dovetails from the previous mistake.  Because we had so many funds in a number of different brokerage accounts, we weren’t looking at the details of each fund close enough (although I will admit that Allison was better at this than I was).

Besides the overall makeup of the fund and historical performance, the biggest factor to evaluate is the expense ratio.  This is simply how much it costs for all of your fund’s fees and expenses.

Obviously, the lower your expense ratio, the more money you get to keep for yourself.  So how much should you be willing to pay for these fund expenses?  Here’s a pretty good breakdown I found recently from a Financial Independence Facebook group I belong to:

< 0.10 Exceptionally cheap
.10 - .50 modest
.50 - .90 pricey
.90 - 1.5 expensive
> 1.5 Crazy expensive

Because Allison and I weren’t paying close attention to our expense ratios, most of our funds had more than a .50% expense ratio, and some were over 1%.

Just like with Mistake #2 over-diversifying, it took us awhile to realize we were paying more than we should for most of our investments.  We’ve since gotten almost all of them below .20%, but we left quite a bit of money on the table with 15+ years of higher expense ratios.

How big of a mistake is this?  Consider that Tony Robbins considers it one of the top five biggest mistakes an investor can make.

Lesson:  Always look at your expense ratios when evaluating your investment funds, and try to keep them below .50% (at least).

Mistake #4:  We Bought Too Much Real Estate

We bought our first home, a very modest 1-bedroom condo in Oakland, back in 1999.  It was a really big deal for us at the time, even though it was only $186k, a tiny fraction of the cost of a home in the Bay Area now.

Our goal was to live there for a couple years, and then trade up for a nicer place in San Francisco, where we worked.  We figured we would live in that home for 5 years or so, and then finally settle into whatever our dream home might be.

As it turned out, we ended up buying and selling six more properties over the next 18 years.  We chronicled our Real Estate odyssey in the blog post “How We Turned a $20K Down Payment into a $1 Million Paid Off Home.”

So, while we eventually ended up in a good place (a paid off home in an area we love), our path getting here was far from perfect.  In hindsight, we should have kept to our original plan of trading up twice, instead of six times.

The problem is that you end up paying so much in RE agent commissions, taxes and fees, moving costs, etc.  And this is not to mention the hassle and stress of the whole process.  

At one point, we ended up with multiple properties, because we bought a new home before selling our existing home, right when the big housing crash hit at the end of 2008.  That forced us to be landlords managing rent-controlled units for several years until the market eventually recovered.

Lesson:  Unless you want to be a professional house-flipper, it doesn’t pay to continually buy and sell new homes.  You may end up costing yourself more in fees and heartache than the thrill of a new home is worth.

Now for the positive news...  

Here are some of the good moves we made to put us on a fast-track to FIRE:

#1:  We Automated Our Investments

Although we started investing a little late and didn’t pay close enough attention to where and how we were investing, we did one thing that was beneficial:  we automated all of our investing.

The easiest way to automate is with your company’s 401(k) plan (if you have access to one), because the money is just taken right from your paycheck.  If you opt for a traditional 401(k) (instead of a Roth), then the investment is pre-tax and even less noticeable to your take-home pay.

After Allison and I maxed out our 401(k) contributions, we then set up automated IRA contributions from our bank account to our investment brokerage.  We set the automated investments to occur every week, which allowed us to also take advantage of dollar-cost averaging.

And finally, after we maxed out our IRA contributions, we set up automated investments into a taxable account.  We started doing this about 12 years ago, and the balance in that account will be more than enough to live on until we can start withdrawing from our retirement accounts.

Lesson:  It’s really easy to set up automated investments.  Once you do, you can essentially set it and forget it, and let compounding build your nest egg.

#2:  We Lived Frugally

Allison and I have always lived frugally.  With the exception of the occasional splurge on a fancy restaurant or trip abroad, we keep our day-to-day expenses really low.  Rather than spend money frivolously, we invested any extra money that we had or used it to pay down our mortgage.

I wrote an article detailing how we accomplish this:  “How We Live Comfortably for Under $3K per Month in the Bay Area.”  It’s not too hard to reduce your costs if you can identify the places where you’re spending more than necessary.

We never feel like we’re denying ourselves any happiness by living frugally.  In fact, living this way brings us more joy and satisfaction.  It feels good not to waste your hard earned cash, and you begin to really appreciate the wonderful things in life that don’t cost a lot of money.

Lesson:  You can save yourself thousands of dollars a month if you are mindful about how and where you spend your money.  By living a more frugal lifestyle, you will have a much easier time getting to FIRE, because you won’t need as much money to cover your yearly expenses.

#3:  We Built a Lucrative Side Hustle

I’ve created a few different side businesses over the years, but there was one in particular that was very lucrative for us.  From about 2002 - 2009, I had an affiliate marketing business that I simply called DR Marketing.  It didn’t need a fancy name, because I was just a middle man.  

Leveraging my marketing skills, I promoted affiliate offers on Google Adwords.  I would create ads on Google for sites like Match.com or OKCupid and earn commissions for every lead I delivered.

Unfortunately, I wasn't able to keep this side business didn’t last due to changes made by Google and heavy competition in the space.  But while it lasted, I was earning close to (or sometimes more) than my regular full-time job.

This added income stream helped us bolster our earnings and investments, and helped us get to FIRE much faster than we would have with only our regular jobs.

Lesson:  Look for opportunities to earn extra money, especially when you’re young and have the energy and determination to do it.  There are all kinds of ways to make more cash -- for ideas, check out our Increasing Your Income page.

#4:  We Remained Calm During Bear Markets

We survived a lot of ups and downs since we first started investing in the late 90s.  The two biggest were during the first dot-com crash of 2001-2002 and the recession of 2008-2009.

While we may not have been investing experts at the time, we had done enough research and read enough finance books to know not to panic and sell in a downturn.  So, both times, we just hunkered down and never stopped our automated investment strategy.  Thanks to dollar-cost averaging, we ended up buying a lot of stock at a discounted price during those years.

Lesson:  It’s virtually impossible to time the markets, so don’t even attempt it.  Sure, you can make a few tweaks and adjustments if that makes you more comfortable, but don’t make any big moves when the markets are volatile.  Follow the age old wisdom of buy and hold.

Bonus Move:  We Paid Off Our Mortgage Early

As I mentioned in previous blogs, we were able to completely pay off our mortgage a few years ago (thanks to Mistake #4).  For us, this was the final catalyst to our life of FIRE.  It drastically reduced our expenses and eased our minds about not going back to work.

Not everyone prescribes to the philosophy of paying off their mortgage.  With interest rates at all-time lows and the ability to write off your mortgage interest, many folks would prefer to put that money directly into investments.

Our thinking is that it’s good to do both things -- continue investing, but also pay down your mortgage at a faster rate than the typical 30-year plan.  Even with tax write-offs, carrying a mortgage means you’re still paying a lot of extra money to your bank.

So there you have it…

It doesn’t take rocket science to achieve FIRE, but if you avoid some of the big mistakes we made and make a few of the right moves, you’ll be well on your way!