This is something that I recommend to everybody trying to do better financially regardless of where you are at in your financial journey.
Every year I make sure that I take the time to set up financial goals; realistic ones! Based on what I know, meaning my incipient financial literacy, and what I have experienced in terms of my investments’ performance I start each year setting some new expectations for the new year.
Last year, just like the previous years, I surpassed my goals, which is totally fine and it actually boosted my confidence. With that said, I still keep myself grounded and continue to base my expectations on my real numbers.
Last year was truly exceptional with a 67% net worth increase. Part of that increase was a 50K legal settlement, but even without that windfall the increase would have been 48%, which is still amazing. Especially for a household of 2 adults and 4 kids living on one teacher’s income.
For this year this is how I see things going down…
My paper-pen planner is all I need to figure out the year.
First, I start with a very broad and general appreciation of 3% of the total amount of our real estate assets, including the home we live in. That’s the first big number at $39,300.
Next is our tax return that usually comes at around 10K. I get a lot of deductions because of the 4 kids, and all the morgage interest we pay. I am starting to think about changing my witholdings so that I can invest the money right away instead of loaning it to Uncle Sam for free.
Then, there is the break-down of the rental income. We have two rental properties, and we just bought a vacation rental in Michigan. We are in the process of figuring out how much we could rent it for. It seems like, according to market prices, we could rent it somewhere between $1,800 to $2,300 per week. So, I calculculated the rental income of this properrty at $1,850. We get about 10 weeeks out of the whole summer season and we are planning on using it for 2 weeks. 8 weeks will pay for the mortgage, and even at the lowest rate we should be left with about $900; maybe for unexpected expenses.
Finally from my teacher salary I manage to save $716, which was originally our student loan payment and after paying it off we repurposed the payment into our savings pot/bank. That amounts to $8,592 yearly.
Investments: I haven’t really put much effort into my 403B plan(Same as a 401K) because we have focused more in real estate investing. Why? Because I like the idea of building more cash flow and the leverage you get with real estate investing. My current balance is $74,441 in FSKAX(Fidelity Total Market), VTASX( Vanguard Total Market), FXAIX ( Fidelity SP500), and very little FXNAX(Fidelity Index Bonds). However, I think I am getting to my limit of how much property managing I want to do. From now on, I will use the cash-flow from our rentals to fuel my 403B plan. Once I hit 100K, I will move on to build up a 457 fund, in case I retire early, quit my job and want to access some of the money earlier than 59 1/2.
All this income comes to a total of $84,911, or 20%. This is how much I am hoping to increase my net worth in 2022. I will be more than thrilled if I shattered my goal/prediction like I have done in the last 3 years. We’ll see!
I just realize I have a disparity between my Mint and Personal Capital net worth. Mint shows $412K and Personal Capital $437K. I am not that concern about it. Mint lately has given me a lot of issues synching with Zillow, so I may consider going by my Personal Capital net worth of 437K instead.
If you read this, I hope this gets you excited about the power of getting a hold of your finances. The hardest thing is getting to the point of starting, committing and wanting to do it. Once you start everything falls into place.
If you have any question or I can be of any help I will be more than happy to share ideas with you for free. Just drop a comment below.
First off, let me tell you this: You won’t find anything here that will fix your debt problem in an instant. There is no magic wand. There is no secret. Likewise, there are no smoke and mirrors trying to sell you anything. Usually, my posts are a personal snapshot of my finances with enough information to help somebody else. Just like when people are trying to lose weight, there is no magic pill or secret that will take you there. What really makes a difference in reaching your goals is the subtle changes you make on a daily basis. Small changes compound and yield the best results!
In June 2018, after catching up with the FIRE movement( Financial Independence Retire Early) movement, my wife and I started looking at all our debt and liability. Things that we could do to be in a better position financially. Now, let me backtrack 4 years ago, when we had about nine thousand dollars in debt with one of our credit cards, plus a student loan on my wife’s name that had started at 27k in 2003 and it had barely changed 15 years later when we still had 22K to pay. In other words, our starting point was -9K at 25%, and -22K at 6.5%. My teacher’s salary kept going up every year but somehow we always found ourselves gasping for the next tax return to pay down debt. Not long after paying the card, more debt started accumulating again and before we knew it we were back in the same situation- repeating the same vicious cycle. Sounds familiar? To add more stress to our financial situation our neighborhood was pushing us out and we were determined to find a better school environment for our kids. If we sold, we would have ended with about 5-6K in our pocket. Instead, we decided to move and rent out our house for at least a year. A year turned into two and recently I just survived my first 42 months as a landlord. Anyway, we moved and life was great. The rental was cash-flowing about $500 a month after expenses, but we were still in the same financial predicament fighting off debt. After getting in touch with the FIRE community, things started to change. In June 2008, my wife and I sat down and started looking at our budget. Not only going through the motions of looking at how much we are spending, but we were trying to find where the holes of our financial vessel were. Where was the money going? What could we cut to save? What debt could we pay fairly quick to free some of our precious cash coming in? After getting rid of some ludicrous expenses like cable and a magazine subscription we realized that we had a decent amount of cash coming in but somehow was disappearing in miscellaneous expenses. We started a spreadsheet that accounted for every single penny and decided to charge against the pesky credit card and student loan debt. We transferred the credit card debt to another credit card with no interest for 24 months. With help of our tax return, we paid the card off fairly easy. At the time, the monthly payment of our student loan was $235 monthly. We cut the cable saving $150. That was right away allocated as an extra payment to the student loan. We decreased my 403B contribution and started paying $716 monthly towards the student loan. In my calculation, the student loan would be paid in January 2020. We automated 2 different withdraws to be transferred to our loan holding bank. From there, we would manually make the transfer at the most convenient time for our finances. We kind of made that account work as an emergency fund as well. We would pool some money there and then make the principal payment.
I Failed!
You can’t imagine my disappointment when I was about to make what was supposed to be my last transfer! My wife reminded me that we had put our Christmas expenses on the card! At some point, between driving the kids here and there, lessons and just the demands of tending to a family with 4 kids our communication failed; my fault. I had calculated and planned this moment for almost two years and it was not happening. My wife felt guilty. I probably overreacted with my frustration, although I reassured her it was not her fault but mine. But I just had a terrible feeling of failure! I felt defeated.
I went to work that day, tried to forget about it and then resumed to strategize how to pay the $1000 extra I didn’t account for. I started thinking about all the interviews in podcasts where people talk about the importance of being flexible in the pursuit of FIRE and how important it is to keep enjoying life, as well as the importance of not damaging relationships on the way.
With all those thoughts in mind, I reassessed the situation and realized that I was still in a terrific situation. I could not pay the whole loan off when I expected it but I am still very close. I took a couple of extra responsibilities at work to make extra money and I am still able to reach my goal next month! No big deal.
Wait! I failed but I am actually winning
In my moment of doom and gloom, feeling like a total failure I logged into my Personal Capital account looking for answers. I was looking at all the reports and started reflecting on it. Our net worth is about $210K at the moment! Hold on a second!- I thought. I may not have paid the student loan…BUT we have increased our net worth from -31K to 210K in a matter of 4 quick years! What? That is super fantastic! I still can’t believe it. 210K! Yes, it is mainly equity. But remember, I was going to move out of my first home and walk away with 5-6K. Nothing! No debt. Other than our mortgage and YES! The pesky student loan that will be obliterated and announced on Twitter for sure very soon. So help me celebrate that one!
How we did it?
First and foremost, you need a budget. Everybody needs a budget regardless of how much money you make. Distribute your money according to your needs. Define what is a want and what is really a need. Cable is not a need! Lattes and eating out are not needs. They are privileges- expensive ones. You can still have them, but understand that they are impacting your investing capability. Are they worth it you working more hours of your life so that you can afford them? Only you can decide that, but be mindful of the trade-off. Once you have your budget, determine your purpose. What are you trying to accomplish? Maybe retirement or FIRE is your ultimate goal? What other goals or milestones do you need to reach for that final goal to happen? I like to call this my financial GPS. I need to know where I am financially and where I want to go. Without one or the other, I am lost and likely to get lost in debtland. Check the course often, reassess and keep on going. You won’t reach these goals from one day to another, but every day you will be in a slightly better financial situation. More importantly, as you plow through and you implement some of these strategies you will continue optimizing your system and pave your way to reach your goals and beyond. Be flexible and forgiving with yourself. Don’t get fixated on the goal. Focus on your strategies and system you have created to reach your goals. The rest will fall in place. Automate as much as you can. Schedule those monthly withdrawals to pay off debt or invest. Remember, “out of sight, out of mind.” Don’t wait for the month’s left-over to allocate it or find a purpose for it. Pay yourself first, and pay everybody else with the rest. Do not wait to determine your financial goals. It is never too late to plan your financial goals, but it is also never too early to plan and define your journey toward financial independence. I truly hope these words get to someone looking for a change in their finances like I once was. I would love to hear your story or struggle. On my end, I am already planning my next financial milestone but that will be coming soon in another post.
Well, I have been away for quite some time but the family keeps me busy. Having 4 kids at home in the summer is not an easy task and my wife couldn’t do it all by herself, as well as it wouldn’t be fair.
My family and the summer have kept me away from the keyboard but I am still chugging along on the FI road; I can’t believe the year is already over the June hump. Many times I find myself wishing time to pass by quick just because I am thinking of all our financial milestones I will hit on the way but I am trying to correct that mindset; time is our most valuable asset after all.
Anyway, I will give you my net worth update and then add few more personal things in a separate section so you don’t have to read it if you don’t want to.
A Picture is worth more than a thousand words?
Well, not many thousands here but at least some. Here is where we are at and significantly better than a few years back:
:
It may seem like not much for many people but this really blows my mind. All the way unitl 2017 we were living from paycheck to paycheck, paying down credit cards and bills, gasping for the next tax return to pour it into our credit card balance and pretend to be out of debt for few months or weeks…
Now we have managed to be credit card debt-free through the whole 2018 year and 2019. No debt other than our mortgages and the pesky student loan we are battling.
Still from paycheck to paycheck
We are still from paycheck to paycheck with the exception that now our money doesn’t go to somebody else’s pocket as soon as I get paid but rather to ourselves. We are trying to always pay ourselves first. What do I mean by that? Well, we are easily having extra $800 each month after paying all our bills, but instead of using that extra money to eat out more or buy more things we are taking it straight to the most pesky debt we have, which is our 22K student loan. We have managed to pay almost have of it between last year and this year and hope to be done by 2021. Each month, religiously we take $300 out of my first paycheck and $416 from my second paycheck. Usually we save them up for a couple of months and then dump all that money on the student loan balance. That way the money saved up can be partially emergency fund.
The current balance of the student loan is 11K. By continuing making the same payment the balance should come down to about 8K. I am not that concerned about the interest we are paying; it used to be 6.5% but we lowered it to 4.75% by taking a home equity loan against our rental property.
In the worst case scenario our tax returns are usually around 10K, which should be more than enough to completely pay off this loan and remove those $716 from the debt ledger and potentially go back to fund my 403B.
Maximizing earnings
One of the key factors to position yourself in a good financial situation is to minimize your spending and maximize your earnings as much as possible. Widening the gap between income and expenses will pave your way to FI.
If you make a lot of money but you spend just as much as you earn, your net worth will go nowhere.
In the case of teachers the opportunities to maximize earnings are not quite as easy and usually require extra credit hours at an approved college or institution.
In my case, this year I was able to max out my salary after taking 8 credit hours of coursework. The investment was $900, but this small investment will bump up my salary for almost 6K, leaving me a couple of thousands short of the magic 100K! Woot -woot!
New savings
We will be enjoying some new savings once I start my school year. We finally decided to switch from PPO health insurance to HMO. The difference is about half price. I used to pay $220 bi-weekly(went up to $280) and now I’ll be paying only $122 per paycheck to cover my whole family of six people.
My car insurance used to be $100 and I was able to slash it down to $48 eliminating things I really didn’t need such as coverage for my car in case of collision with an under insured motorist a fault. I did this because I really don’t care about fixing my car in case of collision. It would be cheaper to buy another used car.
I also had some supplement health insurance in case of a collision with an under insured motorist at fault, which supposedly would cover medical expenses. My regular health insurance would be enough to cover hospitalization expenses, so I got rid of that.
I am estimating about $4K savings in health insurance and about $624 in car insurance, which I will most likely allocate to pay off our student loan.
The biggest optimization
Almost 4 years ago my wife and I took the biggest leap of faith trying to get out of the neighborhood we were in. If you have read some of my other posts you may know the story. We had to make a choice between selling our house and pocket maybe 5K after owning this house for about 12 years or rent it out for at least a year and make more than that with a positive cashflow of $500 per month.
So we moved out to an awesome area and became landlords. We have rented our first home to the same tenant for 42 months. We were scared to death at first because the only calls we could get were Section 8 recipients and we have heard horrible stories about Section 8 tenants. We had no option. We screened our tenant the best we possibly could and it was overall a pretty good run. The only hic-cup was a rent increase moratorium imposed by Section 8 to landlords due to funds cuts.
We weren’t able to increase our rent for almost 4 years and we were opting for the security of having a tenant that was always on time with the rent at the expense of some more income. However, nothing is forever and this summer I received the infamous call from my tenant explaining that after getting married she would no longer qualify to receive assistance. According to the tenant they couldn’t afford rent even when I didn’t increase it for almost 4 years.
Luckily I put a lot of effort on building an emergency fund that would cover a potential vacancy and repairs. As they started looking for a new place I also started to look for a new tenant. In the process I realized that rent has simply skyrocketed in the area. According to my area rental market I should be able to collect about $500 extra a month, which would leave me with a positive cash-flow of about $850 monthly. From 3.7K annually we were getting, now we will go to 9.9K!
Unfortunately, my tenant changed her mind and decided they wanted to stay with me after realizing they couldn’t find anything cheaper. Sadly, I had to say no. That sent things in a down spiral of nastiness and rudeness but at the end things worked out and she is willingly moving out after a few threats of evicting her. I felt sorry for the family but I can’t subsidize housing for someone who thinks that honeymooning in the Bahamas and going to Disney is more important than affording housing for her family.
This is a huge move for our family! We plan to use all those savings to continue investing and paying off the mortgage of this rental before we invest in another property.
Summer 2019
This summer was outstanding. We took a a trip to northern Michigan to bask in the sun and enjoy the unsalted, free-shark waters. We took our camper (used) up there and spent about ten days enjoying each other’s company. I have not calculated the total cost of the trip but I am estimating close to $1000 including gas, food, ice cream and a few eating outs with the fam. We did lots of biking, kayaking, hiking, paddle boarding, fishing, etc. Most of the things for free except for our ice cream nights which ran for about $24 for a family of six people; totally worth it!
In the next two weeks the whole situation with our rental should unfold. Old tenant moving out, new one moving in, Section 8 inspection, and sometime in between I will need to lay down 600 Sq Ft of laminated flooring to replace the rental’s beaten up carpet.
Wish me luck!
Found this awesome Traffic Master floor for $0.49 at Home Depot
In the meantime, I just sewed a couple of holes in my old work shoes and I am just ready to start a brand new school year. I would love to squeeze another year out of my old Sketchers 🙂 My older kids don’t stop saying “why don’t you just buy yourself some brand-new shoes?” They don’t get it yet.
Saving my shoes for another year of rumbling at school
I would love to hear about your summer. How are your financial goals for the year panning out? Are you hitting your financial milestones?
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