I was really impressed with an article I stumbled on to in the Atlantic about an author who decided to be open and honest about his financial state. It turns out he is like a majority of the US population: Broke and one problem away from financial disaster. While I found it somewhat depressing that a man at his age is so “stuck”, without any retirement savings, and no end in sight for his working career, I also appreciated his candor and detailed descriptions about the choices he’s made. I highly recommend it!
Also fascinating are the comments at the end of the article. There were so many contributions, that the Atlantic created a whole separate “Notes” article about some of the comments that were left.
As I browsed through the comments, I found one that spoke to me. It was about a community college art teacher that decided to devote a whole lecture on the subject of basic personal finance (even though it had nothing to do with the subject he was supposed to be teaching). While I’ve known these things for many years and they’ve helped me to build a sizable nest egg, it was still worth looking over again. He covers both concepts and basic “spend less than you earn” type stuff. He was shocked to see that it was the most attended, well received class he had ever taught and it was optional for the students. It just goes to show this stuff needs to be taught in schools at a much more detailed rate than it is now.
Well, we continue to make progress on our journey to financial independence. I’ve got it in my head that I’m going to check out of the working world in 5 more years. This month’s update to our net worth gives me confidence we just might be able to pull it off.
Here’s where we are at for August 2016:
Net Worth: $1,220,637
Overall we had roughly an $18,000 increase from July. Since I didn’t do a full post in July when I updated the side bar, I think it was actually higher than an $18K gain because I did do the July update later in the month. (I can’t remember when exactly).
When I look back at the June numbers, we saw an increase of over $42,000 over the last two months. I’m very happy with those figures. I’m going to try to be more consistent going forward to make sure I update the numbers right around the first of the month.
The major areas of gains for us were in our investment and retirement accounts. I haven’t been paying attention too much to the market but I think we had a bit of an uptick lately huh? Always happy to see that, although I still think we are going to see a correction sooner than later. Time will tell. (I’ve always been more of a sky is falling kind of guy). We also booked a small increase in our home values, although that was only $5000 and I think we are still being pretty conservative on our home’s worth.
This stage of saving and investing is proving to be as boring as you might expect. Once you have everything on autopilot, there really isn’t a ton to do each month when it comes to your finances. Updating our net worth once a month is about as exciting as it gets.
I had a fascinating conversation with a neighbor of mine this weekend. I had been helping him trim some of the bushes and trees around the house and we decided to sit down and take a rest in the shade for a bit. My neighbor, (We’ll call him John), doesn’t actually own the house. He is living with his brother’s family in the house due to not being able to afford a place of his own. John is 70 years old and never went to college. He is divorced and has a couple grown children and grandchildren. He has absolutely no savings or investments and is living off a low amount of social security.
Previously John and I have talked about money and he has asked me numerous questions. This weekend he asked me much more pointed questions wondering how someone that is 45 years old ends up in my situation. I had previously told him that I always pay cash for my vehicles because I don’t like debt. He also knows that we own our second home without a mortgage and that I intend to retire around the age of 50. As we sat in the shade, one of John’s first questions was how I ended up “being a saver”. I told him that there were a few influences that sent me down the path I’m on. The first was watching my parents suffer through the stress of struggling to pay the bills. Our family owned a business when I was a kid and I helped work in the business from the time I was about 11 years old. I would often go to work with my Dad on Sunday’s and sit behind the counter to keep him company. By the time I was 12, I was actively helping customers. I remember when I was about 13 years old. I was sitting in the back office with my mom as she was paying some of the bills for the business. I remember the stress in her voice and the concern in her eyes as she stacked bills in the “can pay” and “can’t pay” piles. I knew that she also had a similar approach for the bills at home. At 13 years old I remember feeling the stress of how they could pay all those bills. I swore I never wanted to own my own business or stress about paying the bills when I grew up. John was nodding his head while I told the story and said that he too grew up in a house with very little. He still didn’t understand how that sent me on such a quest to try to live the opposite of that.
It was really kind of a surreal conversation because I couldn’t help but think that my future would look similar to Jack’s if we weren’t actively saving and investing for our future. If anything, it makes me even more motivated to continue on the path we have in front of us.
A couple months ago I was sitting in yet another ALL DAY MEETING with a few of my peers at work and saw something that shocked the hell out of me. I was sitting behind my coworker who is probably about 55 or so. The way we were sitting was somewhat sideways looking forward to a big LCD display that had the meeting content on it. Because he was between me and the LCD screen I happened to be staring straight at the screen of his laptop whenever I looked down.
This guy, we’ll call him “Bob” decided to bring up his 401K account through our internal website. While I tried not to look, I couldn’t help glancing in his direction a few times. At one point he brought up his asset allocation screen that showed where his money was invested. I was SHOCKED to see that he had 100% of his $700,000 retirement fund in the company stock. Now this isn’t some kind of tiny company stock. Think Fortune 100 blue chip stock. Regardless, I couldn’t believe Bob had his entire retirement account in ONE stock. Our company stock has been relatively volatile compared to the overall market and frankly we are always one bad news article away from wild swings in the price. If Bob was 25 I wouldn’t really have thought twice about it (although if he was 25 and had a $700K retirement account I probably would have left my wife and tried to marry him). Unless he’s planning on working to 75 or 80, I just can’t comprehend why he’d think it was a good idea to have zero diversification in his retirement account. Of course maybe this account is a small portion of his overall net worth and I’m just imagining the horror that might be, but statistically, I think he’s probably just got all his eggs in one single basket.
I was messing around with one of the tools on the MadFientist site and when I punched in all the numbers it said I could retire in 5 years at 50 years old! I’ve somewhat been obsessed with the idea of “early retirement” and keep up with all the new posts on the Reddit /r/financialindependence subreddit. While, compared to a lot of people on that subreddit, 50 isn’t exactly groundbreaking for a retirement age, I know that it’s pretty darned early compared to most people.
I used the figure $60,000 as a retirement income and only used my investment account totals (as opposed to my total net worth with assets like houses etc) and was surprised to see that it calculates I only have 5 more years. That assumes that neither my wife or I work once I turn 50, which would not be the case. My wife actually likes her job and is expecting to work about 5 years longer than I do. That will give us the safety buffer of living off her income for 5 years and letting our investments continue to compound. We also will have the added benefit of getting our health insurance through her job.
So, my five year horizon is giving me hope and helping me hang on at work, even though I’m not very excited about my job. (And yes, it will be very hard to walk away from a job that pays over $100K per year.) I think what I’m most excited about is getting through the next five years and then knowing that I could pull the trigger at any time. As the saying goes, “I’m just one bad day away from retirement”. At this point, I’m 5 years and 1 day away from a bad day!
I’m a completely irrational human being. I often find myself fretting/obsessing or just plain paying waaaay too much attention to small expenses and then freely throwing around a few hundred dollars on *want* items without a second thought.
A great example of this is my reaction when I opened a toll summary statement to see that my wife had driven in the express carpool lanes three times last month. These are the lanes on the road that you have to pay a variable toll to drive in depending on how bad traffic is. We’ve always done well staying out of those lanes but my wife had been driving a carload of kids back from a camp and just couldn’t stand the thought of sitting in traffic any longer than she had to. Unfortunately the price of admission on that particular day was $10.00!! Basically a frugal guy’s version of a dagger to the heart. It KILLS me to spend money on things like that. To add a tiny bit of a shove to the dagger, she apparently enjoyed that trip so much, she decided to use the lanes twice more last month, luckily at a cost of $.50 a trip. I guess I have such a strong emotional reaction to a small charge like this because a) it’s not worth it to me and b) I see it as an unnecessary tax that we can easily avoid. Yes, I know we could spend lots of time discussing what our time is worth (and believe me, my rate is much higher than the $10 toll), but regardless, it’s still something I hate paying.
Compare that to the ease at which I willingly hand over a couple hundred dollars for things like a new Stihl weedeater or a new electronic gadget and it does make me look like an idiot. The phrase “penny wise and pound foolish” has entered my head a zillion times. What I’ve had to try to do is step back and look at the big picture. We’ve never really budgeted for “misc” type stuff each month, but in a sense, we are spending a few hundred dollars a month on just plain miscellaneous stuff. As a percentage of our budget, it’s really not much and should probably be expected. I think the most important aspect of this is that we are using cash, not accruing any debt and are meeting all of our other financial goals. Regardless, it’s really tough sitting here with the dagger poking at my side.
I finally stumbled on to someone at work that is looking at retiring early like I am. I was shocked when her date was two years sooner than mine (we are the same age). It helps that her husband is older than she is and already qualifies for a pension and has a large 401K. She will also qualify for a pension at 55 but she’s looking to retire before age 50!
We only had a short conversation about retirement but I look forward to talking more with her about it. She mentioned that they’d been to a financial adviser and I was thrilled to hear that she used a “fee only” adviser to avoid all the conflicts of interest with the other types. While we haven’t gone to an adviser yet, I’ve been considering it in the next couple years.
I was able to share a few things with her that she wasn’t aware of including that our 401K plan now lets you invest after tax dollars (up to a max of $53,000 a year including pretax) and then lets you do annual ROTH conversions. For us it would allow us to drastically increase our ROTH contributions, although I haven’t even taken full advantage of ROTH’s because we never set one up for my wife. That’s currently the number one thing nagging me in the back of my brain. It’s been foolish for me not to have started a ROTH for her. I found myself justifying by saying that I wanted to get more money put in post tax accounts to help us live during the years before we turn 59.5 even though I KNOW I can access all the ROTH contributions before 59.5. You know how sometimes you just make stupid decisions and can’t explain it? Yeah, this is one for me. My goal for this year is to correct that.
Time flies when you’re having fun and apparently money piles up too. We have seen some very good gains in our net worth over the last 10 months. Overall it was an increase of over $150,000. That’s more than $15,000 a month, which is more than we make by far. We are starting to see the rewards of compound interest for sure. I’ve also been keeping an eye on dividend income. I don’t know why I never spent more time paying attention to dividends but now that our balances are larger, it’s awesome to see that money paid in to our accounts every quarter. I’ve been aggressively transferring excess income in to our brokerage account by using automated transfers. It’s much easier to pay yourself first consistently when the transfers happen automagically!
I’m starting to think more and more about an early retirement. While I won’t be setting any records in that territory, it’s starting to look more and more like I’ll be able to check out of the rat race at around 51 years old. I’ve chosen that as my target because my daughter will be heading off to college (using funds from a 529 account we’ve been building for years). I expect my wife will work a few years longer than me since she’s a bit younger and that will help us continue to compound our investments that much longer. I’d like to get our net worth as close to $2M as we can before I retire but I’m not going to make that a mandatory requirement.
I’m also spending a lot more time on our after tax investment accounts. Looking back, this was the single biggest mistake I made during all of our years of saving and investing. I had always been somewhat scared of the tax requirements on after tax accounts but it’s not nearly as tough as I thought (especially now that brokerages have to track my cost basis).
Anyway, that’s the quick update on our net worth. I’m hoping to get to $1.25M by the end of the year. We’ll see how it goes.
Just doing some quick analysis of our saving progress. In my handy dandy net worth spreadsheet, it shows we are saving 31% of our gross income in our 401k accounts and additional payments to our mortgage. We put an extra $200 towards our mortgage balance each year just to help speed up the payoff a bit. While many will argue we should be directing those funds towards our investment account, I can assure you we are also contributing a decent amount to the “after tax” investment account as well. The goal is diversification and moderation with all of our money.
Overall we have about $237K left on our mortgage with an estimated home value of $380K. That’s our only debt and has an interest rate of 3.75% so we aren’t too worried about it. When we decide to quit working, we’ll sell our primary home and move to our other house that is paid for. The good part of that plan is we’ll be able to invest the equity from the house sale and have zero tax liability on it. That combined with our other “after tax” accounts will help us manage our pretax withdrawals to maximize tax efficiency.
Another statistic that I keep an eye on, although it’s not nearly as important, is what I call our “net worth savings rate”. This includes all dollars that we put towards all of our accounts. That savings rate is 47% and includes things like my daughter’s 529 account, all the 401k contributions and additional mortgage payments and also includes what we are putting in our after tax accounts. I’d like to get this up to over 50% but we’re pretty happy with the current overall progress.
At this point, we are really on autopilot. If we were to stop contributing to all of our accounts today, we would just have to wait longer to retire comfortably. We are continuing to aggressively save because, a) we don’t need all the money we make to live day to day and b) we’d like to have the option to retire earlier than the traditional age.
Here is a view of how our net worth has changed over the years. The dates are somewhat random and just happen to be the times I took snapshots of our finances through the years: