Financial Status Update – Dec 2020

2020, what a year… Part of me wants to skip the details, but I know in a few years we will all look back and scratch our heads. COVID-19 started in China, initially was concealed so it quickly spread globally, and the panic and concern caused rolling shut-downs and economic hurt the world over. Still looking for data, however at least 50% of the US workforce had to have claimed at least 1 week of unemployment during this time. Stimulus checks, employer loans, extra federal dollars when claiming unemployment… You have to where a “mask” everywhere, even a piece of cloth. And many are either working from home or not working because their businesses/employers are shuttered. This caused shortages for most things, even toilet paper early on. Most people are shopping online with malls and physical stores far emptier than years past. Plus, a very contested Presidential election with very different ideals from each side.

Debt Free!

We didn’t have much left; just a zero interest Home Depot purchase from the home remodel. That is paid off and we are deft free aside from our home mortgage (~70% LTV) and the credit cards we track our purchases with, get cash-back, but pay off each month.

One of our two vehicles is having issues, so we are deciding between purchasing another budget vehicle or down-sizing to a single minivan, mainly since we are working from home now. Given very low interest rates, we may likely take out an auto loan, but pay off in 2 years, just to conserve cash now, or but that is still up in the air.

But it is a great feeling to be debt free and keeps our minimum monthly expenses lower.

Looking at this S&P 500 graph, you can see the large dip in March and April 2020. You can even spot it on the long-term chart. We kept invested, and adding to our investments during the dip, essentially buying stocks on sale. Between inflation, the US Federal Government supporting the economy with more debt, and the US Workforce and Businesses all needing to make money to stay afloat, it will continue to climb.

Net Worth

Even with all this, our Net Worth steadily grew this year. In fact, we surpassed even our streeetch goal of $320k; which was a 25% or $64k increase. We committed to maxing out both our employer retirement accounts + the HSA, and hoped to save additional money into our IRA’s. Weeks of unemployment made it difficult to calculate percentages needed to max, but we got close. We did max out the HSA. And we even moved some “left-over” money from a cash-out refinance, from all the home remolding we had done, into our Roth IRA’s near the market bottom in April.

Our Net Worth would be even higher, but with all the uncertainty, we did spend $1-2k stocking up on common items plus a few “capital expenditures” that gave us a safety net.

2020 Net Worth graph from Personal Capital. The dip/rebound in December is from our CARES Act withdrawal. We had a lot of money in our 401k and wanted the contributions more available in a Roth IRA if 2021 is no better than 2020. We also converted some IRA $’s into a Roth IRA.

But a $83k increase between contributions and investment returns is awesome! So excited to see our hard work paying off! Maybe we can duplicate next year, but we will see how it works without a stock market plunge [hopefully].

After a very conservative increase in our home’s value from remodel projects in the kitchen and bathrooms, our final Net Worth figure for 2020 is… [drumroll please]

The most important take-away from this whole year, and it’s the same story as in 2009-2010, is to maintain your income, save as much as you can, and stay invested. When everyone is panic selling, you are slowly but steadily buying more VTSAX or a quality total stock market index fund. To be honest, it’s what you should do every month and every year, the stock returns usually are much higher though because you are buying stocks on a sale.

Advice for My Younger Self

Reaching your mid-30’s, you think about all the successes and failures from your 20’s. What seemed a roller coaster ride filled with uncertainty is now a recent memory with an obvious path. When my younger brother graduated high school, I gave him some life advice from my own experience. To be honest, I don’t remember what it was, but I don’t think it was very clear in my own mind yet, nor actionable for him.

Now with younger cousins graduating high school, I have a much clearer recommendation that would have answered, for me at least, the age-old question of…

“What do I want to be when I grow up?”

Like most, I couldn’t afford college without taking on debt from day one, and my parents had no financial ability to help. Sure, I would have worked a part-time job, but it wouldn’t have come anywhere near close to covering tuition after paying to live a bare-bones “lifestyle”. And since I didn’t know what I wanted to do, spending $60k or more on a 4-yr degree had an unknown ROI.

Instead… I spent ~6 years, with a young family, working near the poverty line in call centers and odd-n-end jobs before eventually becoming low-to-middle class. In what became a career path you couldn’t have made up, I started at a machine shop part-time that my buddy worked at, then moved to a full-time calibration job another friend was at (even working months worth of extra hours in overtime, we still did not surpass a $40k income; I even slept in my car one night because I worked a 16 hr day followed by a 14), then I interviewed and landed another calibration job making ~40% more (~$42k/yr thanks to learning everything I could at the previous job for 3 years), and have now moved internally in that company switching to improving business systems and processes. While at this company, I completed my Bachelors with them paying for most of it. I need another bump or two in title and several big bumps in pay to get where I need to be, but I’m so blessed just to be where I am at given my starting point.

So, what am I encouraging my own flesh-and-blood high school graduates to do?

Unless you have the financial means and interest to attend college right off the bat for an engineering, medical, business, etc degree that has a real Return on Investment (ROI)…

Find a Trade or associate-level Profession that has a decent barrier to entry, takes two years or less to get started, pays decent during summer internships or on-the-job training, and has a higher pay in years 2-5+.

In the medical world, this could be a Tech (radiology, ultrasound/sonographer, etc), a RN, a Dental Hygienist, or even a EMT/Paramedic + FireFighter. As long as you keep your certifications/licenses current, often you can even jump in and out of the workforce, or work part-time, depending on other family or life responsibilities.

For Trades/Apprenticeships… electrician, HVAC, machine operator, etc + even the legal and financial occupations.

Sales… As a 18-22 yr old, an inconsistent income doesn’t hurt like it does when you have a family and mortgage. Couch surf if you have to, but Real Estate, among others, requires just a few years of learning the ropes, getting certifications, working under a Realtor, etc before you start making good money. Do it while you’re young, energetic, and have nothing to lose.

Here’s Why… A barrier-to-entry means not everyone can apply to the current job postings and the pay will be higher. 1-2 years of training means you will have marketable and transferable skills, even before your first job. And, the training will often introduce you to paid internships or first jobs. Don’t worry that this isn’t your dream job or not what you want to do in your 40’s. It may open your eyes to a career you hadn’t thought about, give you hands-on experience for a future job, or just be a source of interesting small talk when you’re older. Today, employers and society are all but expecting you to have several careers during your life and many in the workforce change jobs every 2-3 years. Regardless, this starter career will finance the training for your “real” career!

After 3-5 years when you are making a decent middle class wage, and have a better idea of what you’ll see as meaningful work, fund your “next” career. Still work at your current job, but attend college or additional classes. Some examples… An electrician but want more, get an Electrical Engineering degree (or work-to-own the company you are currently employed at from the aging owner). A RN and like it, go for a BSN then a specialty to make six figures. Or switch completely, but use the current income to fund the training and then even be a part-time extra job going forward. A FireFighter/Paramedic can be a Real Estate agent or electrician too. A Dental Hygienist will often work only 3-4 days a week, during the day, so the off days, evenings, and weekends are free for other endeavors.

Save and invest 25% of that income + train for your next “real” career with College and/or more industry training and certifications

You’re young and being cheap is ok. At this point, $10 is a lot of money and can even be two whole meals from Taco Bell or McDonald’s. $100 means you can buy just about anything you want, or only have to save for a few months maximum. Having a thousand dollars in your bank account basically means you are rich! KEEP THAT MINDSET. Treat yourself to a little bit, but do not increase your lifestyle dramatically. Save a ton and invest now in a passive S&P 500 or Total Stock Market index fund. Work and study 60+ hours a week; you have the energy and them some. By 25 yrs old, you will have made $150k+ combined, have almost $50k in savings/invested, and be ready for your next career.

[Link to] Need vs Comfort vs Luxury

Don’t let lifestyle inflation get you until you are in your 30’s with a Net Worth of $500k, with much of that invested.

If I would have done this, we would be 5 or more years further ahead of where we are now…

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.

What Should I Include in My Net Worth?

Your Net Worth is all of your Assets minus your Liabilities. In other words, all your money + equity – your debts. The Net Worth value is important to track, even if just once a quarter, to make sure you are building wealth. A doctor making $300k/yr could have a low Net Worth if they spend 99% of their income; whereas a teacher could have a higher Net Worth than that doctor if they save $10k over the year. Your Net Worth quantifies how well you are converting your income into wealth, as opposed to luxuries that have no value after they are used. For many, equity from the home they live in is a large chunk of their Net Worth. This isn’t bad, per se, but it means only a smaller portion of your Net Worth is being productive (i.e. earning interest).

Here is what to include in your Net Worth with examples:

Cash – The balances in your Savings + Checking accounts that aren’t already spent, Cash in a safe or safety deposit box (or under your mattress), savings in your HSA or FSA, money owed you that you realistically expect to receive soon, etc

Subtract Debt – Credit Card balances, auto loans, and other lines of credit

Investments – Retirement accounts (401k, 403b, 457b, 529, IRA, etc), investments in your HSA, brokerage accounts, Robin Hood, WeBull, peer-to-peer lending

Real Estate, minus any mortgages or loans – Take a fair appraisal and subtract your mortgage balance. Zillow may or may not give you a realistic value. You could compare estimates from Zillow, Redfin, and ReMax to get in the ballpark. Personally, since we have only owned our home for a few years and want to be conservative, we’re using the last official appraisal. Not required, but do be conservative and honest here. We also don’t update this value but maybe once a year or two as we want to see the organic growth of our Net Worth from frequent saving and investing, not frequent “artificial” increases from our home value jumping around.

Precious Metals – This shouldn’t be a huge chunk of your portfolio, but some is usually good. Gold and Silver aren’t the best investment nor even the best hedge against inflation, but it’s part of not keeping all your eggs in one basket. There are times when gold is worth it’s weight in, well… gold. For example, some Jews fleeing Nazi Germany sewed gold coins into their clothes knowing they could restart their lives elsewhere (rather than having German Marks in say Japan or Argentina).

? Vehicles – IF using conservative values and mostly offseting loans, in our opinion. To be honest, the only reason we included our vehicles’ value in our Net Worth is because Personal Capital automatically added the loans (update: when we had the loans, but they are paid off now). Because vehicles decrease in value each year and we only buy reasonable ones (currently <$10k) we actually need, we wouldn’t sell them unless we were destitute because they get us to and from work and family. When a car loan was in Personal Capital, we added a manual asset offsetting the loan. This manual asset was always less than the actual value of the vehicle. In our opinion, the Net Worth should be about growing your passive investments and overall wealth; not having expensive luxuries that decrease in value but look valuable on paper. Would you rather have $200k “equity” in a super car or $200k in a 401k? Unless your net worth is >$2-5 million depending on your other lifestyle choices, the 401k is the correct answer.