Goal Update: Home Equity Historical Chart – Nov 2011

We closed on our mortgage refinance about a month ago, the old loan has been paid off, and we are just about to make our first payment on the new loan. Still, I always seem to go back and forth between different possible scenarios of paying down the house quickly or according the “minimum payment” as I call it. Technically, I could just about pay off the house now, if I chose to liquidate my taxable investments and empty out my emergency fund reserve.

I decided to go back and reconstruct a chart of our home equity over time, and compare it to a couple of alternate scenarios.

The red line represents our actual home equity, as a percentage of our purchase price. We use the purchase price because our home is currently worth about the same as when the bought it. An appraisal done for our refinance last month came in at 6% above our initial purchase price. Before the big refinance, we did a haphazard combination up of throwing in a few hundred extra bucks each month and one big lump sum prepayment. Currently, we’re right at 35% home equity.

Just for fun, the dotted red line is an exponential trendline of the red line. It has the loan being paid off somewhere around 2020.

The blue line represents our theoretical home equity if paid according to the normal 30-year payment schedule of our initial 6% fixed mortgage, starting from when we bought the house in the start of 2008. This would have had the loan paid off in 2038.

The green line represents our theoretical home equity if paid according to the normal 15-year schedule of our new sub-4% fixed mortgage, starting from this month. This would have the loan paid off in 2026.

I definitely still want to pay it off in under the current 15-year term, but as usual I like the flexibility. If children come into the picture, we’ll probably cut back on work and slow things down. But for now, I’m still hacking away. We hit the 401k cap already for 2011, so we have some extra cashflow.

By the way, I am only a proponent of paying extra towards your mortgage if you are maximizing your available tax-advantaged accounts like 401ks and IRAs as well as have a nice cash cushion. Although now I do think everyone should consider 15-year mortgages. Who wants to take 30 years to own a home? Most other countries don’t even offer 30-year mortgages, and the government support of 30-year mortgages here simply inflates property prices.

Reaching the “I Can Do This” Moment

Like millions of other people out there, I decided to start trying to lose weight and get in better shape on January 1st. I cut out virutally all meat and was eating tons of fresh vegetables and whole grains. I went to the gym, ran outside, or played sports with friends nearly every day. I rarely ate out at restaurants, and when I did I ordered things like steamed vegetables and brown rice. I lost 15 lbs. within the first month.

Then I hit the wall. I was still exercising almost every day, but I started to dread the workouts. Even worse, I stopped losing weight. I started eating meat again, and adding some snacking back in. I could feel myself losing willpower. I was horrified to discover I had gained weight back.

I knew I had to make some changes. I allowed myself one “cheat day” per week so that I could eat out or drink a beer. I made an exercise routine for the whole week in to be more efficient and starting doing some workouts first thing in the morning before work. I try to only have one big meal a day and the rest much smaller. I acknowledge that I have my weaknesses (like snacking while watching ESPN, and getting hungry after watching Food Network) and avoid doing those activities. I started losing weight again, at a more regular pace of 1-2 pounds per week. More importantly, it didn’t feel like deprivation.

I’ve read that it takes 30 days to break a habit. Well, it took me 30 days to perhaps break my habit, but it took another 30 days to create a new habit that I feel that I can live with for the long run. The best part is the feeling of control that I have now. I know the things I need to do to lose weight. I know the things that I could do that will make me gain weight. It’s up to me. I call this the “I Can Do This” moment.

Applications to Saving Money

Like many other folks, I draw parallels between the actions of saving money and losing weight. In dealing with food, I often tell myself I have 1,500 calories a day to “spend” and so I should get the most value from my calories in terms of flavor, texture, and hunger satisfaction.

When I thought about this, I remember the same thing happened when I graduated college and started earning money on my own. Could I pay down my $20,000+ in student loans? How long would it take? Could I still afford the things I wanted? But the paychecks started coming in, and you started having to balance what was coming in and what was going out. Some things like electricity cost about the same each month, but then you learn to deal with things like car repairs and new computers. Eventually, I reached the “I Can Do This” moment where I felt a connection between my actions and the resulting surplus I had each month.

Here are some observations about reaching this point, which you may or may not agree with:

  • When starting a difficult task, it’s good to go all out for a while even if you run out of willpower eventually. I needed that first 15 lb. loss. The same could be said about going on a “no-spending month” and saving up $500 or $1,000. I had built up something that I didn’t want to lose.
  • It’s important to see a direct connection between your actions and the results. (At least initially.) This is why I no longer like articles with “52 ways to start investing with $100″. If you’ve managed to save $100 a month, it should go in the bank. If you invest it and one day your $1,000 balance turns to $500, then it affects your emotions and motivation. You’ve just lost 5 months of hard work. With a interest-bearing savings account, the amount will always be higher than yesterday. These days it’s not much, but it’s still higher.
  • Routine makes everything easier. Make less decisions. Don’t make every single thing another mental decision. “Should I work out today?” “What about tonight or tomorrow instead?” That’s exhausting. Go to your Yoga class every Tuesday and Thursday. Every. Week. Tell everyone you’ll be there and not at happy hour. Remove the decision. Along the same lines, having money taken out of your paycheck or bank account automatically just keeps your mind from decision fatigue.
  • Keep supportive friends. Changing your lifestyle often alienates you from some of your existing friends, and they may see it as a negative judgment upon themselves. They can sabotage your best intentions with their own selfishness, so be sure to find and keep people who support your decisions.

Do you remember your own “I Can Do This” moment?

Net Worth & Goals Update – March 2011

Net Worth Chart 2011

Oh alright, here’s another net worth update. My last snapshot was about 9 months ago. I know people like the voyeurism, but hopefully my commentary will also provide some helpful insights as to achieving our goals.

Credit Card Debt
I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest (yes I know, much less recently), keeping the difference as profit while taking minimal risk. (Minimal in regards that the risk was only dependent on my behavior and not outside factors.) However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.

Most credit cards don’t require you to pay the charges built up during a monthly cycle until after a grace period of about 14 days. This theoretically provides enough time for you to receive your statement in the mail and send back a check. As this is simply a snapshot of my finances, my credit card debt consists of just these charges. I don’t carry any balances or pay any interest charges.

Retirement and Brokerage accounts
Since my last update, the broad stock indexes have risen significantly, about 25% including dividends according to Vanguard Total World Stock Index ETF (VT) that I use as a general benchmark. Although these high valuations make me nervous, I am still a believer in stocks for the (very) long run and rebalancing your asset allocation regularly. Don’t buy high and sell low.

Here is our target asset allocation. Being heavy in stocks, our portfolio bounced back significantly as well.

Our total retirement portfolio is about $360k or on an estimated after-tax basis, $318,000. At a theoretical 4% withdrawal rate, this would provide $1,060 per month in retirement income, which brings me to 42% of my long-term goal of generating $2,500 per month. These are all really rough numbers, but helpful to measure progress and visualize living off your portfolio.

Cash Savings and Emergency Funds
We are happy to hold a year’s worth of expenses (conservatively estimated at $60,000) in our emergency fund. According to my emergency fund poll, many of you readers also have substantial savings set aside, with most having at least 4 months of expenses. Very nice.

Recently I wrote about how I maximize interest in my emergency fund, including the specific banks and institutions I use.

Home Equity
I would like my house paid off in 15-20 years at most, so I’ve been putting some extra money towards the mortgage. Note that this is only after maxing out both our 401k plans, fully funding IRAs every year, and creating a one-year emergency fund. I’d like our mortgage pay-down progress to parallel our portfolio growth so that both are ready for at least partial retirement in about 10 years.

So there you have it. Mrs. MMB and I both earned a six-figure salary again last year, which combined is in the top 5% of households. We try to save a lot of it while it stays this way. :) The future is hard to see, but we’re getting there a lot faster than we thought we could.

2010 Year-End Financial Goal Progress Update

As 2010 draws to a close and the champagne is all gone, here’s an update on the status of our personal financial goals. I’ve been on the fence for a while about whether to continue our detailed net worth updates, and I’ve decided to reclaim some privacy and stop doing them in the previous format. Instead, I’d like to keep tracking our progress but in a opaque manner where I think everyone can still calculate their own and compare with us if desired. I’m not sure exactly how to do this, but here is a rough outline.

Credit Card & Consumer Debt

I think the first part of any healthy financial status should be to outline and pay off any consumer loans. We do use credit cards, but we pay our balances in full each month. We don’t have any auto loans or other forms of consumer debt.

I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest, and keeping the difference as profit while taking minimal risk. (By this I meant that the risk was dependent on my own actions.) I could have also used such 0% loans instead of other debt like student loans. However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.

Retirement Portfolio

As far as financial freedom goes, there are a number of ways to fund your living expenses without working. Pensions, Social Security, stocks, bonds, real estate, and so on. For us, I have boiled down “financial freedom” to be two things:

Part 1: Accumulate 25 times annual (non-housing) expenses

Part 2: Own my house / Pay off mortgage

I think it’s important to note that these two parts don’t necessarily have a number attached to them. Minimizing expenses are just as important as increasing portfolio size, as well as minimizing the amount of house that you “need”. More detail can be found in this post entitled A Quick & Dirty Plan To Reach Financial Freedom.

For Part 1, the basic idea is to assume that a portfolio can return 4% annually with adjustments for inflation. So if you have $1,000,000, that would create $40,000 a year. The exact implementation of this is more complicated, as there are several ways to help avoid portfolio depletion like annuities and adjusting your withdrawals during market downturns. Most folks won’t need a million dollars, though, if they have already paid off their house. For example, if your non-housing expense are only $1,000 per month, then you’d only need 12 x 25 = $300,000.

Back in July I was 33% of the way to reaching this goal. We are now 40% of the way. At this pace, we could finish Part 1 in less than 10 years, but we will likely scale back our income when we have kids. We’ll have to keep a close eye on those expenses as well.

Housing & Mortgage

Owning a house isn’t for everyone, but I think that if you are geographically stable, it can be a great way to become financially independent. Once you pay off the house, then your housing “expense” is mostly taken care of. (There is still maintenance and property taxes.)

We have owned our house for about 3 years now, having taken out a 30-year fixed rate mortgage initially with a 20% downpayment. Since I want to retire before I’m 50, I need to speed things up. Over the past year, we have made additional payments toward principal, as well as lowered the interest rate to 4.75%. These prepayments have been irregular lump-sum amounts, although I agree an automated plan is easier to maintain. The outstanding loan principal is now 67% of the purchase price. If we were to continue the original minimum-required payments, our home would be now be paid off in 21 years. This is good, as we can support that payment on one income.

Why Do You Save? A Goals Exercise

When I get a little low on motivation, I like to focus on the reasons why I want to earn more and spend less. I found this goals exercise from a financial planner’s website and have adapted very slightly below.

Essentially, you should start listing things you would do with your money. Some popular goals are listed below, but everyone should add their own, delete some, or clarify existing ones. The next step is to rank them from highest priority (1) to lowest priority (12, etc.). (I tried to add some online forms, but it’s probably best to print it out.) No ties! This will force you to clarify your priorities, and think about how you want to live your life.

______ Go back to school, further education for yourself

______ Switch to another new career

______ Start/buy/expand own business

______ Buy a new home

______ Buy a new car/boat/thing

______ Travel extensively

______ Reduce/eliminate debt

______ Set up a reserve/emergency fund

______ Save for retirement

______ Create financial independence

______ Support parents and/or other relatives

______ Contribute to favorite charity/cause

______ Create/leave large estate for heirs

______ Help fund children’s education

______ Provide for dependent’s special needs

The Perils of Pursuing Financial Freedom

The following is a guest post from Kent Thune, who is a Certified Financial Planner(R) and the author of The Financial Philosopher, where he urges readers to place *meaning before money and purpose before planning*.

altext

What is freedom? What is financial freedom? Is there a difference? Is the freedom that money apparently purchases worth the sacrifices we make to reach this freedom? Can the pursuit of financial freedom paradoxically reduce one’s actual freedom? Can freedom be bought? If not, then what does this say about the pursuit of financial freedom?

The Tail Wagging the Dog

“Life is about life and not the result of life.” ~ Johann Wolfgang Von Goethe

Financial goals are destinations; they’re not life. If you believe that life is about the journey and not the destination, it’s contradictory to believe that life now must be sacrificed for a life bought by money later.

If retirement, for example, is accomplished only upon (or in unison with) the accomplishment of financial freedom what is the purpose of life now? Are you enslaving yourself now for a perceived freedom years or even decades away?

The blind pursuit of financial freedom is often closer to slavery than it is to liberation. The ultimate example of the metaphorical tail wagging the dog is an individual who creates a financial plan and then shapes their life and behaviors to accomplish the plan; whereas the healthy individual will clarify life (non-financial) goals first, and use money as a tool to reach those goals second. The pursuit of financial freedom can actually be liberating if it is not a blind pursuit—if it is a pursuit consciously defined by the individual.

[Read more...]

The Essential Components of the Good Life

Here is YASAH – yet another study about happiness. Reader RJ sent this to me via this CBS Marketwatch article, but I highly recommend reading the actual study titled Meaning Really Matters: The MetLife Study on How Purpose Is Recession-Proof and Age-Proof [PDF].

Done as a follow-up to a previous similar study based on the research of Richard Leider, they expanded their targeted group to 1,675 people of ages 25-74. In it, they again found the following common components essential to living “the Good Life”:

  • Respondents define the Good Life in terms of the three Ms: Money (having enough), Meaning (time for friends and family), and Medicine (good physical and mental health).
  • Living the Good Life is highly related with having a sense of purpose and this in turn is interrelated with “vision” (having clarity about the path to the Good Life) and “focus” (knowing and concentrating on the most important things that will get you to your Good Life).
  • Meaning, closely associated with the importance of family and friends, remains the primary component of the Good Life for all age groups, despite instability in financial and other aspects of their life. People plan to spend time with family and friends above all else, regardless of age.

The problem is that there are often so many things in the present distracting and overwhelming us, it can be hard to maintain that sense of purpose.

Better Financial Motivator: Stick or Carrot?

We all have financial goals that we want to reach. Some of us do better with a reward attached to reaching our goal (carrot), while others may actually try harder if trying to avoid a punishment (stick). We are motivated by personal desire, by our family, by our friends… but how about a website?

For the those that need that extra bit of discipline, check out Stickk.com, which lets you create a “commitment contract” which have real penalties attached to them. For example, you could commit to saving an extra $150 each month in a separate savings account for 6 months. You could set a penalty of $250 if you don’t follow through – send to a friend, enemy, or donated to an organization that you dislike (NRA, PETA, whatever… dubbed anti-charities).

The site is serious, and started by economics professors who all agree that incentives make the world go ’round. You choose a third-party referee (input their e-mail), as well as give them your credit card information. If you don’t follow through, your card is charged!

If you do better with carrots, you can always set that up yourself. If you reach your savings goal, go out and get a manicure or a nice steak dinner.

Net Worth & Goals Update – July 2010

Net Worth Chart 2010

Time for another net worth update… last one was back in April.

Credit Card Debt
I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest (much less recently), keeping the difference as profit while taking minimal risk. (Minimal in regards that the risk was under my control.) However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.

Most credit cards don’t require you to pay the charges built up during a monthly cycle until after a grace period of about 14 days. This theoretically provides enough time for you to receive your statement in the mail and send back a check. As this is simply a real-time snapshot of my finances, my credit card debt consists of just these charges.

Retirement and Brokerage accounts
We recently converted our Traditional IRA balances to Roth IRAs, as the income restrictions were lifted this year. The choice to convert was rather simple for us, as we had non-deductible contributions that will now be able to be withdrawn tax-free. (We still owe taxes on very modest gains.)

Our total retirement portfolio is now $289,277 or on an estimated after-tax basis, $249,976. At a theoretical 4% withdrawal rate, this would provide $833 per month in after-tax retirement income, which brings me to 33% of my long-term goal of generating $2,500 per month.

Cash Savings and Emergency Funds
We are now a bit below a year’s worth of expenses (conservatively estimated at $60,000) in our emergency fund. This is after withholding some money for paying taxes on the Roth IRA conversion above, and also for undisclosed, one-time recent expenses. It’d be fun to say that we picked up a convertible or something, but the reality is much less exciting. :P

Our cash savings is mostly kept in a combination of a rewards checking account (with debit card usage requirements), a SmartyPig account at 2.15% APY currently, or in a 5-year CD from Ally Bank, which despite the long term still provides a very competitive yield even if you withdraw early before the 5 years is up. (See here for more details.)

Home Value
I am still not using any internet home valuation tools to track home value. After using them for a year and finding them unreliable, I am back to maintaining a conservative estimate and focusing on mortgage payoff. If we get some positive cashflow after retirement savings, I do want to pay it down faster.

Net Worth & Goals Update – April 2010

Net Worth Chart 2010

This month involved some cleaning up of financial affairs in order to complete our taxes as well as get back on track in general.

Credit Card Debt
I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest (much less recently), keeping the difference as profit while taking minimal risk. (Minimal in regards that the risk was under my control.) However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.

Most credit cards don’t require you to pay the charges built up during a monthly cycle until after a grace period of about 14 days. This theoretically provides enough time for you to receive your statement in the mail and send back a check. As this is simply a real-time snapshot of my finances, my credit card debt consists of just these charges.

Retirement and Brokerage accounts
After wading through way too many IRS charts, we both contributed $5,000 to a non-deductible Traditional IRA. This will be converted to a Roth IRA within the next few weeks.

In our 401k, we continue to make regular contributions. We also received recently our true-up contribution which corrected for us maxing out a bit early in 2009. Mrs. MMB also gets a bonus for maxing out, which is nice.

Our total retirement portfolio is now $289,909 or on an estimated after-tax basis, $235,263. At a theoretical 4% withdrawal rate, this would provide $784 per month in after-tax retirement income, which brings me to 31% of my long-term goal of generating $2,500 per month.

Cash Savings and Emergency Funds
We continue to keep a year’s worth of expenses (overestimated at $60,000) in our emergency fund. Most of it is kept in either a rewards checking account (with debit card usage requirements) or in a 5-year CD from Ally Bank, which despite the long term still provides a very competitive yield even if you withdraw early before the 5 years is up.

Home Value
I am no longer using any internet home valuation tools to track home value. After using them for a year and finding them unreliable, I am back to simply taking a conservative estimate and focusing on mortgage payoff. Unless rates start to skyrocket, it might soon be time for another mortgage prepayment.

Net Worth & Goals Update – March 2010

Net Worth Chart 2010

Lack of Recent Updates
Up until last December, I had done regular monthly updates of our net worth for five consecutive years. However, recent personal events made me much less interested in detailed, analytic planning towards early retirement. As a result, I have barely checked any of my statements in the past few months, other than to make sure they weren’t negative. I think I made a few trades here and there, but for the most part haven’t bought or sold any stocks to maintain my asset allocation. I haven’t even converted my Traditional IRAs to Roth IRAs like I had planned, or made any IRA contributions for 2010.

Instead, reading blogs and other financial news has simply been a recreational escape for me, and I think my blogging has reflected that. I still had fun learning about ways to save money here and there, and enjoy keeping track of other market changes and various offers out there.

However, it’s time to catch back up a bit! Here we go…

Credit Card Debt
In the past, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”. My balances are simply monthly charges that I have not yet paid in full when due.

If you’re looking for a competitive offer, Citibank is offering 0% APR for 15 months with a 3% balance transfer fee.

Income
We’re both still working, but will be taking some unpaid time off in April which will reduce income temporarily. Our monthly expenses are still much less than our (regular) income, so while we may eat into savings a bit, I expect to bounce back into the positive very quickly.

Retirement and Brokerage accounts
Near the end of last year, I had gradually moved $30,000 into a brokerage account at OptionsHouse to invest in ETFs due to their $3.95 trades. In my usual way, I then thought about switching instead to WellsTrade since I now had the $25,000 required to get 100 free trades per year. Stuff happened, the application process took too long, I got distracted, and the money is still sitting mostly non-invested. Grrr.

As stated above, besides our regular 401k contributions, we haven’t made any real moves in our retirement accounts either.

The stock market has done relatively well in the meantime, with the S&P 500 nearly hitting 1,200. Our total retirement portfolio is now $269,538 or on an estimated after-tax basis, $233,164. At a theoretical 4% withdrawal rate, this would provide $777 per month in after-tax retirement income, which brings me to 31% of my long-term goal of generating $2,500 per month.

Cash Savings and Emergency Funds
We continue to keep a year’s worth of expenses (conservatively set at $60,000) in our emergency fund. It’s still a nice warm safety blanket. I am thinking of moving a chunk of it into several separate 5-year CDs from Ally Bank, as they pay 1.60% APY (as of 10/25/13) and each would have a small early-withdrawal penalty of only 60 days interest.

Home Value
I am no longer using any internet home valuation tools to track home value. After using them for a year, I went back to simply taking a conservative estimate and focusing on mortgage payoff. After checking them again today, I am staying away. A house nearby sold recently for $500,000 but is listed at both Zillow and Coldwell Banker as being sold for $1,000,000. Needless to say, it is skewing my home value estimates!

It would seem that I am currently long on thoughts and short on action. Time to fix that.

15-Minute Resolution #5: Check the Asset Allocation of your Investment Portfolio

Here’s the next installment of my series on New Year’s Resolutions that can be done today, and not put off for “some day” in the future. We all know how that usually turns out…

Last year was definitely a roller coaster year when it came to the stock market, and you may have taken the “just don’t open the scary statements” solution. Well, it’s time to take a peek and see where you stand. I won’t pretend that recent performance has been great, but if you made regular contributions throughout, you may be surprised to see your portfolio balance higher than it was in 2007. (Maybe.)

Asset allocation is how your investments are split between different asset classes. The most generic examples are stocks and bonds, but you can also divide them further into categories like large companies vs. small companies, international vs. domestic stocks, or different safety grades of bonds. Other asset classes include real estate, commodities, or precious metals. Your mix of assets has a great impact on the volatility and expected future return of your portfolio.

The easiest way is gather all your most recent financial statements and plug your holdings into the Morningstar Instant X-Ray tool.

(If you want it to remember your portfolio, you must sign up for a free site membership.) The site will then “x-ray” your holdings and break it down by asset class:

How do I know if my asset allocation is correct?

Well, ideally you would already have set your target asset allocation, and all you would need to do is to rebalance your assets to that target. Rebalancing is a way to maintain the risk/reward balance that you have chosen for your investments, and also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). How often one should re-balance their portfolio depends on a few factors. See this post on How often should I rebalance my portfolio?

Otherwise, setting an asset allocation can be a very complex topic. I recently pondered a very general rule-of-thumb where you set your stock percentage to double your tolerable loss in one year. So if you could only stomach a 30% stock, you should only invest a maximum of 60% of your portfolio in stocks.

Here’s a big collection of my posts that I did when deciding on my own target asset allocation:

Simplified Theoretical Stuff

  1. Disclaimer and General Philosophy
  2. Consider Simply Buying The Entire Market
  3. Efficient Frontier and Modern Portfolio Theory

Choosing An Asset Allocation

  1. Deciding On The Stocks/Bonds Ratio
  2. Deciding On The Domestic/International Ratio
  3. Considering The Diversification Benefits Of Small and Value Stocks
  4. Equity Asset Allocation: Comparison of 8 Model Portfolios
  5. Investing In Real Estate Through REITs?
  6. Interim Target Asset Allocation: Looking Back & Some Decisions

…See the rest of my 2010 Instant New Year’s Resolutions here!