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Financial Status Update – Dec 2022

Wow, another year in the books! I started a new job with a new company, we road-tripped to the Black Hills, Yellowstone, and Grand Tetons driving over 5,000 miles round trip, our youngest turned 1, we visited family all over the state, made progress on our home remodels, and on and on.

All the while the market continued dropping [slowly but surely] over the course of 2022. Thankfully the economic floor didn’t drop out, but… average mortgage rates went from sub-3% to over 7% and, while the official inflation peaked at 9.1%, many basic necessities (groceries, energy, travel, etc) saw price increases of double digits:

*Source: https://www.cnbc.com/2022/12/29/why-egg-prices-have-been-rising.html*

But even through all that, our family is very, very blessed. And, using the extra $$$’s from the large pay bump moving companies, we continued saving and investing.

Investors should be “fearful when others are greedy, and greedy when others are fearful”
Warren Buffett, Berkshire Hathaway “Chairman’s Letter, 1986“

We maxed out two employer-sponsored retirement accounts (401k and 457b). We maxed out a Health Savings Account (HSA). We maxed out two IRA’s. We contributed to our kids’ 529 college savings plan. That’s over $55k saved and invested! BUT our Net Worth barely grew though year-over-year (~15k). Most would be frustrated and give up. But we see it as a buying opportunity. As long as we keep earning money and keep investing money, you want the downturns WHILE employed instead of early in retirement (sequence of returns risk).

So, what is our Net Worth at the end of 2022 AFTER saving and investing all this money? Drumroll, please…

Year-over-year, our Net Worth increased by $30k, which sounds decent until you see the chart below. We only adjust the value of our home once a year, at the end of December. The real estate market has been crazy this year, but we also have been making improvements to the house, so we increased the value by a conservative $19k. After all the contributions and investing in our retirement accounts, we are ONLY +$11k for the year. But remember, we’re continuing to buy even when the market is down, knowing we’re investing in living and breathing companies that continue to turn a profit, whose value (and the overall value of the US economy) will almost certainly continue rising, whether fueled by real economic growth, inflation through poor monetary policy and willy-nilly spending, or most likely a combination of both.

So, what are our plans for 2023, learning what we can from 2022’s mistakes, knowing where we want to go, and the likely continued side-ways economic picture?

Control the miscellaneous spending. We easily spend $500-$1,500/mo extra – for nice-to-have and just-in-case things, for hobbies, for whatever. It’s not wrong, but it’s eating into what we really want in the next 3-5 years. And that’s 75%+ of financial independence and maximized time with the kids as they grow so fast.

Declutter and deliberate spending on what is most valuable to us, knowing time with family is in the top 3. Lifestyle creep is real, and we certainly delayed gratification for many years. We need to find a happy medium.

Diversify our investments, including semi-passive income through Real Estate rentals.

Excel at our jobs to continue providing seed money for our investments.

Financial Status Update – Dec 2021

Nearing a milestone, you reflect on the progress and the mistakes along the way. Approaching a $500,000 Net Worth, the regrets are weighing more heavily than I expected. What if we had saved just a little bit more? Wasteful purchases over the years come to mind, plus thoughts of returning useful but not absolutely necessary recent purchases. Why didn’t we start seriously saving and investing earlier? How awesome would it be to have $750,000 instead, being that much closer to a millionaire? Our total at 55 years old would be a million dollars higher if we had. Or we could slow down the delayed gratification sooner.

BUT you cannot live life in regret, or ignore the progress. We are incredibly blessed with a growing family, comfortable house, went on a wonderful two-and-a-half week family road trip covering 5,000 miles visiting 5 national parks, have extended family in pleasant locations to visit throughout year, interesting jobs that pay well, AND a net worth that is ballooning. With a conservative annual adjustment in the value of our home to match the upgrades and appreciation, we’re right at $496k! Up $143k over the 2021 year!!

Certainly a strong bull market helped (S&P 500 up 29% YTD; VTSAX up 26%), but maxing out two employer retirement accounts + our HSA, and even some cash on the side, meant we saved ~$50k on top of saving the expanded child tax credits in 2021. And since we had some room at the 12% income tax bracket given all the deductions, we also converted more IRA investments into our ROTH IRA, so more that 50% of our retirement portfolio will be tax free now.

Thinking back to regret and feeling behind, most of our progress has been in the past few years. We didn’t cross $100k until August 2017. That is when we started being serious about saving (but weren’t maxing our account yet) and purchased a home we could add some serious sweat equity into. We didn’t cross $200k until the fourth quarter of 2019. Meaning… half of our net worth was built in less that 2 years! Basic calculations say we should be millionaire’s before 40 if we continue with our strategy; and well before 40 if the bull market/inflation continues. Don’t mind the jumps or dips below; Personal Capital double-counted once, we had some transfers causing dips when between accounts, and we only manually update home value once a year.

So, how should we make even more progress in 2022?!!

First, we need to continue the momentum with saving and investing. And also continue increasing our emergency fund beyond $20,000 just in case. Our insurance premiums are higher in 2022 + orthodontics for one child + paying off a birth of another child, all will make our net income less. BUT we are committed to still maxing out everything we can this year. We usually buy quality, so we have most of what we need now and it is lasting. Although a replacement family vehicle for our road trips is probably coming this year too. We will have some large expenses, but we currently have the income to cover them all and save, if we reduce the miscellaneous purchases.

Just as importantly, we need to add pain and barriers to spending money. Amazon and online shopping deals make the little-to-no thought purchase just too easy. As we pass $500k and have $750k in our sights, extra junk in our life means slower growth and more clutter. We’re not minimalists, and with growing kids you can only pare down so much, but we want our life to be about experiences and travel, not cleaning up and storing stuff. Having the right mindset and spending less time looking at things are the first steps. We might need to take more drastic personal steps, but we will see.

We need to step-up our overall health and fitness this year too. Between working 60+ hours every week for years, a new baby, and home remodeling projects, the quality of our family dinners and only a little cardio has taken it’s toll on our waistline and energy level. I have been making personal mental growth though; growing up lower income we finished everything on our plate and anything special (something other that roasts with potatoes and carrots, or lunch meat sandwiches) was eaten quickly and as much as I could have. Having pursued a higher income, occasional work trips, etc, “luxurious” meals are more common and I’m developing the ability to each less, enjoy each bite more, and even limit the sweets (chocolate is dangerous).

Finally, for both the excitement of it plus some mental well-being, we need to plan regular family trips this year. We have access to a family cottage about two hours away that we can spend every second or third weekend at during the summer. Another family place up North to camp at. Other family we can go stay with if on occasion. We enjoy spending time with our extended family, who loves seeing the kids, plus traveling period. I’m hoping to take a few work trips this year too, depending on COVID and travel restrictions.

A Late Start + Fear of the Unlikely

We recently found a worksheet from 2013 listing our assets when we updated our Wills. Guess how much we had to our name when we were 26 years old, made a little more per hour than fast food workers, with a second child on the way? Our Net Worth was a measly $18,000. We were living in a small rental, had one old car, and no real career direction.

We realize 26 years old isn’t that late a start, but given we are only 7 years since that “reboot”, use our example as what you can accomplish within 5-7 years, regardless of your starting age, if you’re motivated, even frustrated, with your past mistakes or inability to get ahead.

Life wasn’t handed to us on a silver spoon. We paid for our first cars and cell phones ourselves, couldn’t afford college, didn’t have a career plan, but knew we wanted a family and would work hard to carve out a life.

So we chose to continue working diligently, commuting 2 hours round trip for a whole year, and working 100’s of overtime hours to hone a marketable skill. After four years and two companies, we found a new job finally making $42,000 per year with good benefits!!! At the same time, we also picked up a second job that matched a passion plus would pad the income. Between career advancements inside both organizations, our income has grown rapidly thanks to hard work, consistent 70-80 hour work weeks since 2013, and did I mention hard work.

But from 2013 to 2020, our Net Worth has increased by 23x! Thanks to hard work, following opportunity, and saving with investing…

Besides hard work… ultimately it comes down to trust and diversification. Trusting that what’s happened historically will be the most likely future + diversification for the upsets.

We were always concerned about investing in the stock market. But with low fees and diversification (like a Vanguard Index fund), there isn’t anything else as passive with as large a potential. Sure, the stock market could fall, and even stay low for years. But over decades, that buy-and-hold compounding is so incredibly powerful. And you can and should diversify into other asset classes as well, including real estate and even multiple active income streams.

Say it with us… Timing the market doesn’t work!

There will be many times where your investments drop and keep dropping. Let’s review a few recent examples from our own Personal Capital dashboard, shall we:

In both of these timeframes, we were still contributing over $1,000 every two weeks. And yet for a month straight, we were either “losing” money or saw the zero growth. But you know what we didn’t do? We didn’t stop investing nor did we sell, fearing the worst. There was plenty of negative news, with fears of bubbles and inflation to concern us. Instead of focusing on recurring speed bumps, we remained invested in low-cost Vanguard index funds, even buying more, as we are in this for the long haul. We focus on what we can control. And yes, we are diversified into real estate and other assets too; not solely trusting in the stock market. But it would require a massive change in the structure of our government and global economy to nullify the ongoing long-term growth the stock market has seen for over a century now.

We include all this to preface next month’s Net Worth Update post where even we are surprised by our Net Worth’s growth. Sure, a long bull market doesn’t hurt, but it is our relentless saving and trusting in the method that is the main driver. Stay tuned…

Which level of Financial Independence are you at?

This article glosses over the initial struggle to get even to a zero Net Worth. Many go further into a negative Net Worth each and every month as they spend more than they earn. This article assumes you are on the right path already, but if you aren’t, use this as a goal of what is possible. Maybe reaching a zero Net Worth will take years, but at least start turning the ship around instead of digging a deeper hole. Spend less than you earn, even if only by $20 a month, to build up an emergency fund.

Negative Net Worth

Most of us start here. Between the cost of college, a first beater car, rental deposit, part-time jobs, and more, it’s hard not to start here. BUT, don’t stay here long!

Zero NW

Yay, you are debt free outside of your mortgage!!! You technically could still have auto loans, but we highly recommend not using vehicle equity towards your positive net worth.

$50k NW

It’s important to celebrate the early victories. It takes consistent effort to reach $50k. A higher income makes it easier, but the savings habits needed to hit this milestone are the same habits needed to reach a million dollar net worth. Just add in low-cost index investing and increase your savings rate over time.

$100k

The first $100k is a b*tch, said Charlie Munger (Warren Buffet’s partner) during a Berkshire Hathaway shareholder meeting in the 90’s. One hundred grand isn’t what it used to be (in fact, inflation since just 1990 has caused the US Dollar to lose near half its value where $50k in 1990 had the same purchasing power as nearly $100k in 2020). But it still is a huge milestone! Your effort and struggles have been validated. The second hundred thousand will come a little faster, and the third a little faster than that… until the compounding returns just take off.

The next levels or stages make more sense after reading FIRE Options. The RE or Retire Early part isn’t as important as the FI or Financial Independence part, in our opinion.

$250k

This is a start to solid Net Worth and the compounding returns will really start adding up. If you are in your 30’s, just this amount invested for another 30 years at 7% would compound to $1.9m without saving another cent (CoastFIRE). Sadly, a $250k NW also makes you wealthier than 67% of other Americans including many in their 60’s in or near retirement. Don’t stop here! Use the same habits to hit the next level. Your Net Worth will start growing rapidly compared to what you are used to.

Quarter FI

You might reach 25% of your FIRE goal at or before you reach $250k NW, but it’s a milestone none-the-less. Going out to eat is a rarity for us, but we are starting the tradition that for every +$100k we accumulate, we will take a date night, going out for a nice ($50-100) dinner with drinks + a fun activity. We just passed $300k NW and will hit 25% FIRE by the end of the year.

$500k

Our next major milestone (as of this writing) and one we should hit by our 35th birthday if we push. It means continuing to work 80-hour weeks between two technical jobs and saving $50k+ a year. Even if we stop saving once we hit this goal, and just make enough to live for the next 25 years until we are 60 yrs old, we would end up in FatFIRE territory with $2.7m. There are few certainties in life, so we are saving as much as we can while we know we can.

Half FI

Half-way there!!!

75% FI

Likely at LeanFI right now, where if you had to, the passive income your portfolio generates would cover basic living expenses and a treat here or there. But why stop here?! …unless you absolutely have to. It might only be 2-3 years before you are full FI.

“One million dollars!!” -Dr Evil

$1 mil

You are a millionaire! Depending on your investable assets vs money tied up into your primary home’s equity, the passive income alone would keep you above the poverty line for a family of six.

100% FI

For many, this is somewhere between $1.2 and $2 million. Congrats, you can keep living your current lifestyle without any further work. Don’t go out and buy fancy new cars or luxurious vacations, but keep your existing hobbies and find some new inexpensive ones. Stay in your budget, not withdrawing more than 3.5-4% of your invested balance each year, and you are set for the rest of your life. A really great feeling and for many, why work full-time any longer?

FatFI

You don’t have to stop working when you reach Financial Independence. Maybe you enjoy your work or have transitioned to a less stressful role (or being FI means you are less stressed because your boss needs you instead of the other way around). Maybe you are finishing up a project and want to stick it out. Maybe you want to serve your community or work with missions. Just because you are Financially Independent doesn’t mean you sit and blankly stare at a TV or get sunburn on a beach. Maybe you have kids who still need raising; a full-time job in of itself.

In our case, we are purposefully working towards a full-time job with medical and travel benefits as our kids leave for college. By our mid-40’s, we will be empty-nesters and reached FI. We could have left with LeanFI, but don’t feel comfortable with that number. And our slower path to FI is because we are raising a family and enjoying each and every year with them. It isn’t what everyone has to do, but these are our stages:

No Money, Low Net Worth = WORK + Save + Invest + repeat
Some Lifestyle, Lower Net Worth = Us right now. Keep the same habits, but actually living more than barebones. Besides a hobby or two, our “splurges” are family road trips and visiting family on a lake.
More Lifestyle, Medium Net Worth = When our oldest is 13, we should have a net worth above $500k. We won’t live high on the hog, but we will consider buying a boat (probably just rent though) plus lots more outdoor adventure and travel.
More Lifestyle, Millionaires = Kids will be in high school (and we will be ~40 yrs old). The goal is to have a manager/director job allowing more travel across the US and even internationally. There will be stress, but the higher income will lock in some FatFIRE and my wife and kids will sometimes come with, for a vacation on the front or back-end of the work trip. After working 80+ hrs per week between 2 jobs for more than 5 years, even working just 40-60 hrs a week at one job will be relaxing in its own way.
Great Lifestyle, Multi-Millionaires – After reaching $2.5m net worth, double our FI number, we will likely step into a consultant role and/or work with a non-profit in our early 50’s. We want to travel internationally, and may even partially retire outside the US. But we don’t ever see ourselves doing nothing for more a few days off here and there. But maybe our goals will change. We know we want awesome trips for our grandchild and adult children, so we can spend a lot of time with them, and to be active well into our later years.

Should I… Pay off High Interest Debt or Invest or Build an Emergency Fund?

Depending on which expert you read, you might get a different answer. Each has it’s pros and cons…

High Interest Debt, such as credit cards or payday loans, are terrible for your financial health. Paying them off and not accruing anymore is vitally important, and quickly. It’s the most sure and best investment you could make in yourself.
The longer your investment horizon, the more compounding will turn a meager start into a sizable end result. Investing for 35 years instead of 25 yrs, given regular contributions the whole time, can nearly double the money over those last 10 years. Historically, the S&P 500 will return just shy of 10% so it’s less than your credit card interest rate, but not too shabby either.
An emergency fund is necessary. Dave Ramsey says save $1,000 cash asap. Given inflation since his Baby Steps were first printed, many don’t feel comfortable until they have $5-10k or more.

So, which is the most important or which should you do first? All of the above is likely the right answer. Here is what we recommend:

Start building that emergency fund NOW. You will sleep better at night and it doesn’t have to be more than $1k until all your high interest debt is gone. Once all your remaining debt has interest rates below 10%, or if you experience a job loss or a global pandemic w/ shutdowns cripple the economy for a few months, then bump that emergency fund up to 1-6 months of bare-bones expenses.
Invest 5% of your paycheck, or more if required to get your full employer match. It’s a free 100% return and it starts building the right habits of automatic saving and investing. If you don’t have a match or even an employer plan, still contribute 5% to an IRA. It’s about building habits and early positive results at this point, not earth-shattering wealth. Automate wherever you can. We always enjoyed manually clicking transfer, but you will never save as much compared to automatic contributions. You will forget, or another bill will come up and you will promise yourself you’ll make up the savings next paycheck (but won’t).
PAY OF HIGH INTEREST DEBT and STOP SPENDING!!! If you live in a First World Country today, you live in a time of massive convenience and consumerism even for the lower middle class. No matter what you’re income level, you are only hurting yourself (and your kids) by spending more than you make. STOP IT! I know it’s hard, having years where we made less than $25k total ourselves. But you have to live within your means. TV, cable/streaming services, fast internet, mid-to-high end phones, computers, and tablets, cars more than $5k, etc are all luxuries you cannot afford until you have at least a positive Net Worth. And even then, you should still practice delayed gratification.
Increase your Emergency Fund to 4-6 months worth of core expenses (mortgage, food, etc) and your investments contributions to 15-20% after your 10%+ interest rate debt is gone.
Start paying down your additional debt, perhaps excluding your mortgage. Given how ridiculously low mortgage rates are right now, it is hard to justify paying it down instead of investing the difference. In the last 30 years, the US Dollar has lost about half its purchasing power (relative to the cost of goods and services, not other currencies). 15 years into your mortgage, the “real” value of your loan could be a 25% less of what it was compared to your income and value of your home with inflation.
Once you are debt free from everything but your mortgage, increase your savings rate to 25-50%+ if you really want to get ahead. But 20% of your income really should be the minimum that you save. There is no guarantee you will have a job until your late 60’s nor do you want to be dependent on a shrinking [due to inflation] fixed income from an underfunded Social Security.