Home Exchanging: A Great Way to See the World

Since 2013, we have exchanged our Arlington, VA home 8 times (with several more planned exchanges foiled by the pandemic). We exchanged with families in Paris, Barcelona, Montreal, and Iceland, to name a few. With the world opening back up, this is a good time to share what is great about a home exchange experience.

What is a Home Exchange?

A home exchange is an (informal) agreement between two families to exchange their homes free of charge. While there is no money exchanged, the online platforms charge an annual membership fee. These platforms facilitate exchanges between members. We joined HomeExchange.com, which is one of the larger platforms, but there are several other choices (e.g., Love Home Swap, People Like Us, Home Link, etc.).

There are four primary types of exchanges:

  • Simultaneous – exchange your home with another family during the same dates
  • Non-simultaneous – exchange your home with another family at different times (commonly used by people with second homes or other places to stay)
  • Hospitality exchange – host a family while you are still home, to be reciprocated at another time
  • Points exchange – stay in a family’s home (often their second home, or while they are elsewhere) “spending” points generated through the platform

A home exchange can also include an exchange of cars, lawn care, and pet care. When exchanging cars with the Prague family, we each agreed to pay the other’s insurance deductible if we had an accident. Neither of us had an accident and it was great having access to a free car for the two-week period.

While exchanging with an Irish family, we mowed each other’s lawns. We’ve fed fish and watered plants, too. We haven’t cared for dogs or cats, but that’s possible if you wish–you and your exchanging family are free to set the terms you’d like.

What You Can Save in Money

Here is a quick rundown of our exchanges and a rough estimate of our savings for buying similar lodging, food in restaurants, and extras. Note, getting an AirBnB with a kitchen would similarly save on vacation food costs. You can adjust your numbers based on what you expect to save.

Estimates of savings from home exchange over traditional hotels

Another way to increase value is to build up exchange points through your online home exchange platform. Under HomeExchange.com (the site we use), we earn exchange points for letting families stay in our home while we are away visiting family or taking some other vacation. We also earn points hosting families in our ground floor unit while we are home upstairs.

These points add up quickly and can fund additional travel when you are unable (or prefer not) to do a simultaneous exchange. You can see we have used our points for two exchanges, and we have enough saved up for a third trip.

The True Value of Home Exchanging

While saving approximately $26K for these 9 trips is fantastic and great for our budget (we also started using credit card travel rewards points in 2016 to offset our airline costs), we found the most valuable part of home exchanging is being better immersed in local culture and farther away from the tourist traps.

Our homes were located in neighborhoods, not hotel zones. We frequently met with the exchange families or their relatives and friends during our stays and shared many meals with them. We received local advice on the best restaurants, tips for getting around and what to do and see. One of our best experiences was touring Prague with a well-known Czech glass artist to include a visit to his glass studio in a communist era building.

At Czech glass artist Jiří Šuhájek’s studio in Prague

In Lismore, Ireland, we enjoyed Irish music performed by a local family in a tiny pub. It was a Thursday night and wasn’t intended for tourists–just local people sharing beloved old Irish tunes together. Our kids were invited to try out the traditional instruments, and an older gentleman at the bar broke out in a moving song. He sang and danced right from the heart, and we, far from the beaten tourist path, were there to see it.

Enjoying a meal with our exchange family

The nature of home exchanging encourages slower travel, because we want to take advantage of our free lodging. By limiting our city/country hopping, we delve deeper into the local area, getting to know neighbors and local shop employees during our stay. We don’t see as many cities that way, but what we see we see really well, and those deeper memories have lasting power.

What Exchangers are looking For

While home exchanges are available almost everywhere on the globe, there are more in some regions. Home exchanging is very popular in European countries, so we receive many offers from Europe. We also find that South American and British Commonwealth nations (such as Australia and Canada) are well represented, as well as European and Commonwealth expats living in other countries.

Exchangers are often looking for exchanges in NYC, other major U.S. cities with public transportation, beaches (e.g., CA and FL), swimming pools, or locations near other interesting U.S. touristy areas (e.g., major National Parks). That being said, there can be interest in out-of-the-way U.S. destinations, especially if the exchanging family has already been to the U.S. on a previous trip.

Being near DC, we find that many exchangers have either already visited NYC and want to see some place new, or they want to connect a trip to NYC with a long stay in DC.

Tips for Successful Home Exchanging

Getting started:

  • Shop around for the home exchange online platform(s) that best fit your needs. While we use HomeExchange.com, there are others you may prefer.
  • Create a great profile for your family and your house. You may not be in Manhattan, but many locations in the U.S. offer something cool and interesting. Be sure to explain how close you are to great sites or what amenities your home features. A well-written home profile will increase your exchange opportunities
  • Take great, well-lit photos. Lead with a cover photo of the outside of your home looking its very best. Follow that with the best features of your house, such as a great deck, pool, view, or balcony. If you lead with a picture of a bedroom, even if it’s really nice, viewers will assume there is little appealing about the outside of the home. After outside shots, follow up with sparklingly clean and tidy interior photos.
  • Listing more beds will help, as larger families are looking for more space.
  • Personalize it. If you welcome kids, point out the toys or other kid-friendly features of your home. Our huge tub of Legos was a big hit for a visiting 3-year-old!
Use photos that capture the best features of your house (view from our deck)

Tips for getting an exchange:

  • Send out lots of exchange queries. When we want to go to a particular location, we send out 40-50 requests. The platform populates your last response, so you can send out a volume of requests with relative ease.
  • Be flexible. We were trying hard to get an exchange in Montreal when we received an offer to go to Prague. So, we went to Prague. The next year we were trying to go to Budapest when we received a great offer in Montreal. So, we went to Montreal. If many places seem appealing, you’ll land in an appealing place.
  • Expect similar exchanges to your home. We are in a close suburb to DC, so we tend to get offers from families who live in similar proximity to their city centers. Our couple of downtown exchanges took a lot of queries (and rejections) before we landed them.
  • If you get an offer from a desired Asian location, take it. There are far fewer opportunities to exchange in Asia. We had just locked in our Barcelona trip when we received a great offer from Hanoi, Vietnam. “Missed it by that much!”
  • When you get an offer you are interested in, set-up a Zoom or Facetime call to “meet” the other family. You can see quickly that they are who they say they are and their home is what they posted. You can line up the details and discuss expectations. For example, we usually mutually agree to leave sheets and towels in the laundry room, and each family will wash their own when they return home. This makes the last day of both our vacations a little smoother. If there will be a car exchange or fish to feed, this is a good time to talk it over.
  • Keep lines of communications open. We share a guide to our house and our local area with lots of tips for great things to do and places to eat. We have helped our exchange families buy concert tickets, reserve hard-to-get museum and historical site tickets, and provided them DC Metro system cards. Families have left us gourmet treats from their area, maps, and small souvenirs. It’s part of the fun of home exchange to extend warm hospitality to each other.

No, They Won’t Steal (or Break) Your Stuff

When we share our stories of home exchanging we often hear, “But aren’t you worried about them taking (or breaking) your stuff?”  In short, no. We have had wonderful experiences with every exchange. No broken or missing items. Our house is always left clean and tidy. Even so, we do take a few minor precautions to make the exchange go smoothly:

  • Facetime call in advance with the other family to build a good relationship (see tip above). Be open and honest about any questions you have. Follow up with emails. The family will quickly turn from strangers into friends.
  • Put away valuables or breakables like laptops or car keys (if not exchanging cars).
  • Let your neighbors know what’s going on. We usually have a neighbor with a spare house key meet the exchange family (if we had to depart before their arrival). Our wonderful neighbors have enjoyed hosting the visiting family with an American-style BBQ.
  • Using our Kwikset locks, I easily reset the house locks to a separate set of keys just in case one is lost during the exchange. I then set the locks back when I get home. While no keys have been lost yet, it’s good to know it wouldn’t be a problem.

Even if you did arrive home and found something unimaginable, say, your sofa had a large red wine stain and your dishes were broken, it would still cost far less to replace or repair than what we saved on our vacation. Anything worse than that would be covered by our home insurance, minus the deductible. It would take a lot of theft and damage to offset the $26K (and counting) we’ve saved so far. Since we buy durable and functional things and our money is invested in stocks and not collectibles, it’s easy for us to relax, knowing our original Van Gogh won’t be ruined. And I believe that even if we did have a Van Gogh, it would be fine. We’ve found the people interested in this style of travel to be thoughtful, careful, and generous. It’s going to be a great exchange. 

Conclusion

Home exchanges are a great way to travel, both for saving money and getting a more in-depth experience away from touristy paths. It is based on trust and hospitality. I hope you will find the same joy exchanging your home as we have.

P.S. If you decide to try out HomeExchange.com, you can enter our referral code “launa-2837c” and you and I will each receive an additional 250 exchange points if you join and establish a house profile. Whether you use the code or not, please leave a comment if you are going to give it a try, or you have a great home exchange story to share. I’d love to hear about it!

A toast to your first (next) home exchange!

Calculating Functional Net Worth

Net worth is a key measure of building wealth. I have been calculating my net worth since 2011 so I can see my progress over time, and it’s a really useful tool.

Many people are familiar with calculating their net worth: you add up the value of all of your assets (e.g., stocks, bonds, real estate, and savings*), subtract your liabilities (mortgage, loans, and credit cards),  and the difference is your (hopefully positive) net worth.

Of course, you may have other assets that are harder to account for in this formula. For example, a military pension. My military pension provides valuable monthly income and I believe it should be included in my net worth, but it doesn’t lend itself easily to asset valuation.

How to Calculate the Functional Net Worth

How do we calculate the value of a pension—or other benefit that provides monthly income (or reduces expenses)—and include that in our net worth? This is where my handy functional net worth calculation comes in.

To calculate the value of my pension, I use the 4% rule. This rule, first proposed by William Bengen in 1994 and validated in a 1998 Trinity University Study, is based on historical investment return research.

They found that investments in a combination of stocks (50-70%) and bonds (30-50%) historically returned 4%, annually adjusted for inflation, without running out of money over a 30-year period.

But Why Calculate the Functional Net Worth?

Before I get into the formulas, I’ll briefly explain why I believe Functional Net Worth is useful.

Many personal finance books, articles, and podcasts in the FI arena make the assumption that most assets are invested in stocks and bonds and real estate. Advice around diversification, spending limits, and other guidance often relates to a percentage of total assets invested.

But if I include additional assets, such as my military pension, I can treat the pension asset as a very stable (i.e., low risk) part of my portfolio. I can invest the cash portion of my portfolio in higher risk investments (e.g., stocks) as a result with less need for investing a large portion in lower-risk bonds.

When I view my entire net worth to include my stable (and inflation adjusted) military pension, the remaining portion of my investment portfolio can take on more risk.

Military Pension

Here is my calculation formula for my military pension:

annual gross pension income*25 or ((monthly gross pension income)*12)*25)

On my Excel spreadsheet the formula looks like this:  =((XXXX*12)*25)

where XXXX is my monthly gross pension income

If monthly pension income is $3,500 per month, the calculation would be ((3500*12)*25) and would result in a pension value of $1,050,000 – yep, if you have a military pension paying you $3500 gross per month, you are a millionaire in my book.

This formula takes the annual gross income (before taxes) and multiplies it by 25, or multiplies the monthly gross income by 12 and then by 25.

Tax Exempt Benefits (e.g., VA Disability)

For tax exempt benefits like VA disability payments, the formula is a little bit more complex to account for the tax savings.

annual gross disability income*25 or ((monthly gross pension income)*12)/tax rate)*25)

On my Excel spreadsheet the formula looks like this:  =((XXXX*12)/0.YY)*25

where XXXX is my monthly gross tax-exempt payment and YY is the tax rate subtracted from 100 (e.g., for 22% tax bracket the number would be 0.78, for 12% it would be 0.88).

If your monthly disability payment is $2000 per month in a 12% tax bracket, then the calculation would be =((2000*12)/0.88)*25 and would result in a disability value of $681,818. This number would be higher if you are in a higher tax bracket.

Military Healthcare Benefits

This same formula (minus the low annual TRICARE premium, if applicable) also works for calculating the net worth value of the military retiree lifetime healthcare benefits. To estimate this value, I estimate what I would pay for commercial healthcare, either through an employer or the state exchanges (adjusting for any subsidies I may qualify for).

With my military income, rental property income, and retirement account income, I wouldn’t qualify for much (if any) subsidy. For a $1500 unsubsidized monthly healthcare premium (using a 22% tax bracket), the functional net worth value would be ~$576,900.

Conclusion

Calculating functional net worth, not just net worth, is a very useful exercise for military retirees and others with pensions or disability payments.

By adding the projected value of pension income and other high-valued benefits into my net worth, I am able to better identify what portion of my FIRE number needs to be investments.

I can also better manage the risks of my investments over time. Seeing the equivalent investment amount, I would need to provide similar inflation-based income, as my pension and health care benefits, is a valuable marker of the progress I have made toward achieving FIRE.

* I don’t include cars, furniture, clothing, or other household items in my net worth calculation, because I view them as depreciable expenses that will sell for much less than I purchased them for and will generally need to be replaced when sold.

The Meaning of “Millionaire”

When host Regis Philbin asked his game show contestants and audience “who wants to be a millionaire?,” he tapped into a belief many of us learned as children, that a million dollars was the pinnacle of financial success. 

I grew up on the rural eastern side of Washington State, and many people I knew were (and still are) ritual lottery tickets buyers. Almost every week since the 1980s, these folks have purchased $1 to $5 of lottery tickets. They are buying the hope of becoming a millionaire.

Author Morgan Housel in his book The Psychology of Money asserted that “[w]hen most people say they want to be a millionaire, what they might actually mean is ‘I’d like to spend a million dollars.’ And that is literally the opposite of being a millionaire.” This statement helps frame a common misconception of what it really means to be a millionaire.

The common image of a millionaire is someone who owns some amazing stuff – high end sports car, mansion, designer clothes, annual golf club membership, First Class airfare, Rolex watch, nice boat, snowmobiles, etc., etc. But that image doesn’t account for living expenses. In day-to-day living, it just doesn’t work that way.

To illustrate this point, I decided to calculate how much money I have earned–and spent–in my 54 years of life (so far). I pulled up my taxable earnings from the online Social Security statement, then I added conservative estimates of military housing allowances, military pension, and other income sources. (Note that I did not include my wife’s earnings in this thought experiment–just mine.) Since I started working in high school (37 years ago – 30 years of full-time work), it turns out that I have earned over $3.6 million before taxes. Taking out an average of 15% tax (a very rough estimate of my lifetime tax rate to date) leaves me $3.1 million. Wow! I must be crazy rich!

Ah, but alas, I do not have $3.1 million in the bank. My wife and I have been good savers, but we still spent well over $2.5 million over those 37 years. We don’t own the glitzy stuff I mentioned. We have an ordinary house (with a mortgage), very used cars (19 years and 8 years old), clothes purchased with function and durability in mind, furnishing and appliances I have repaired and maintained, and my $28 watch is a trusty plastic Timex. No Rolexes here.

A lot of high-end stuff is purchased on credit. Our choice to avoid such purchases also means we’ve avoided consumer debt and its high interest rates. Excluding a lean period when I paid my way through college, I have never since carried a credit card balance or taken out any payday or other consumer loans. I paid off my student loans in my first year of full-time employment. (I recognize that college tuition has increased so much that I would need to dedicate more time and resources to pay off a comparable amount of debt today.) Other than our first car out of college (paid in full in two years), we have only paid cash for our (few) cars over the years.

So where did the $2.5 million go? Living life. Mortgage payments, food, transportation, raising kids, and other middle class life trappings. Some highlights that come to mind: we bought a $3500 used pop-up camper and enjoyed numerous fun family camping trips; we traveled abroad for two weeks each year over the 9 years before the pandemic, using home exchanges and travel rewards hacking to keep costs down. We paid our two kids’ college tuition (in-state rates). Once, with my wife’s parents, we enjoyed an amazing 5-star meal at the Inn at Little Washington for their 45th wedding anniversary. Nothing too exorbitant (except maybe the 5-star restaurant – but hey, it was a 45th anniversary!). Spending a million, or two and a half million in my case, over four decades is just not the same as the popular image of a millionaire – being rich.

So, $3.1M minus $2.5M… you might be asking, where did the remaining $600K go? I saved and invested it. Not very good investing, mind you, during the first 19 years (spoiler: we lost money), but in the last decade I got a little smarter and much luckier. Today my net worth is over 7 figures. Wow, a millionaire, right? But what about the plastic watch, old cars, and ordinary house (no master bath or garage)?

It was a tradeoff. Yes, I could have spent that $600K on unnecessary stuff. Instead, I decided to save and invest. I’m a millionaire because I have a million dollars of net worth. A major lottery win, big inheritance, or sensational entrepreneurial idea aside, it takes saving and investing, not spending, to become a millionaire and to stay a millionaire.

Since I didn’t trade that $600K for stuff, what did I trade it for? Time. I will spend most of this money saved to buy back years of my life without working. My investments will pay me enough every year to forgo having to work an additional 15 years from traditional retirement age. Since I’m retiring early, at some point in the future I may no longer be a millionaire (but I will have enough). Instead of a million dollars, I’ll have years of memories of pursuing my interests and spending time with my family.

We all have the same 24 hours a day, and the older I get, the more precious those hours feel. I’m choosing not to spend 40+ hours a week working to pay off debt as I buy more stuff for the garage and attic or spend it some other way. Instead, I will live my same simple, mostly frugal life with more hours every week to spend with family and friends, to learn, to explore, and to just be.

In a way, I feel like I won the lottery.

Taking the Leap — Living The FIgh Life

On August 28, 2020 at 5:47 pm, at age 52, I declared my financial independence (FI), packed up my personal belongings and left my GS-15 job at the Department of Defense after 9 years of civil service and 20 years of active duty. How was I feeling? As you can see from the below video, I felt great.

My financial path to this point started long ago with frugal living, focus on savings, and 28 years of investing (not always smart investing, mind you). Before we discovered FI, my wife and I travel hacked with home exchanges and credit card hacking, cut the cable cord, eliminated our home phone, switched to much cheaper cell phone plans, minimized subscriptions, drove old cars (2000 and 2003 respectively), but my FI journey can be clearly measured from just 2 years and 5 months before when I laid out a 5-year plan to quit my job for good and go to graduate school using my Post 9/11 GI Bill. 

In April 2018, my son and I were touring a college campus on the last day of a week-long trip to the Pacific Northwest. On our trip home, I made a quip about not wanting to go back to work. My son, then a senior in high school, asked me, “why don’t you quit?” I told him that I didn’t have enough money to live on, and since Social Security was unreliable, I expected to work until I was 70. But he challenged that reasoning. “Why not live in another country where it’s less expensive?” he asked. This simple question was the beginning of my rethinking the parameters I had always accepted for how much money I needed to live. 

I began searching for inexpensive countries for expats and found a long list that I could afford to live with good healthcare. One question led to another, and I was figuring out how much I needed to save to stop working. I had the Post 9/11 GI Bill benefits that would expire in 8 years, so I set 5 years as my goal to quit and go full-time to graduate school.

From that state of mind, it didn’t take long for me to find the FI community. I initially discovered The Money Habit blog and then the ChooseFI podcast that introduced me to numerous people thinking differently about money and time. I read their blogs, books, and articles, binged thousands of hours of FI-related content. I started closely tracking my spending with Mint and set-up numerous spreadsheets for monthly spending, cash flow scenarios, and how we would pay for our kids’ college after I quit. 

Seeing the numbers changed everything. The more I learned and shared with my wife who pretty quickly came on board, the more we extricated unnecessary spending from our budget, and the faster our FI date came. I didn’t need 5 years. It now became more of finding the best way to offramp from work and begin my new life. In the Fall of 2019, I applied to graduate school. 

Taking the Leap (my son is on the rock waiting to jump next)

Taking that calculated leap of faith to quit my job was exhilarating and reminded me of the time I jumped off a rock cliff on the North Shore of Hawaii. In 2017, we took a family vacation to Hawaii to visit where my daughter was born at Bellows Beach, Oahu, in the early 2000s. (She really was born at the beach, as we had a home birth on Bellows Air Force Station.) It was a great trip for so many reasons, but a highlight for me was a spur-of-the-moment decision to jump into the ocean from “The Rock” at Waimea Bay at sunset. 

Tourists and locals jumping from “The Rock” — there was also a strong current warning sign — Photo Credit

When jumping off the rock cliff, I had to trust that others had successfully and safely made the leap. I had to understand the risks and determine that I was prepared physically and mentally. Leaving my career 15 years earlier than the traditional social security age required me to trust my numbers and recognize that many others in the FI community had already made this leap–I wasn’t alone. This community was more than  great ideas to optimize investing, spending, taxes, safe withdrawal rates, and so much more. I found a community of support I could trust. 

I found virtual mentors in Brad and Jonathan at ChooseFI, Paula Pant at Afford Anything, Joe Saul-Sehy at Stacking Benjamins, Brandon (a.k.a., the Mad Fientist) at the Financial Independence Podcast as well as their inspiring guests. I also read articles on blogs too numerous to list (shout out to Carson at Early Retirement Now), and read a pile of personal finance books, such as Vicki Robin’s Your Money or Your Life, J.L. Collins’ The Simple Path to Wealth, and Kristy Shen and Bryce Leung’s Quit Like a Millionaire. Each of these helped me confirm my numbers, but more importantly they helped me break loose from cultural constraints that were deeply ingrained in me.

I found my identity was closely wrapped up in my career, and it was hard to tell others (and myself ) that I would soon be unemployed. “What will you do?” was the common response. Being a graduate student helped me make the change by providing an acceptable transitional identity. “I’m going back to school,” I told people. I did two semesters during the pandemic, then decided I was done. Now I have developed the mental freedom to just say “I am financially independent.” Am I rich? no. But am I wealthy? More than I can count.