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*.


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. 😛

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 – 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.

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!

15-Minute Resolution #4: Automate Your Emergency Fund

It’s Friday, so here’s an easy slam dunk resolution involving emergency funds. If you’ve done any sort of financial reading lately, you know that many folks recommend having at least 3-6 months of living expenses put aside. Given the current high unemployment rates, I personally wasn’t comfortable until I had 12 months of expenses. Not only could you lose your job, but there could be unexpected health expenses, car repairs, or whatever. But that’s not the main point here.

The easiest way to build your emergency fund is to put it on auto-pilot. Your task for today is to schedule an automatic, repeating monthly transfer of $100 into a savings account.

Just about every savings account available allows you to set up an automatic monthly transfer from your checking account. Here is how to do it with Capital One 360’s Automatic Savings Plan. I just chose $100 as a round number, but change it as you like.

(Perhaps you’ve already got a healthy emergency fund. If so, then you can apply this resolution to another specific savings goal, like a new car fund or in our case a pet healthcare fund to replace costly pet insurance.)

Instead of telling you more reasons to do it, I’m going to try to counter any reasons NOT to do it.

  • Don’t wait until tomorrow. It won’t get any easier later on, only harder.
  • Don’t open up a new account, if you already have one available. If you don’t, one of the fastest applications I’ve seen online is at Capital One Consumer Bank. Takes less than five minutes.
  • Don’t worry about interest rates. It doesn’t matter if your savings account doesn’t earn as much interest as some of the top accounts. This can all be changed later.
  • Don’t worry about not being able to keep it up. Start with as much or as little as you feel comfortable. It doesn’t matter if it’s $100 or $1,000. I don’t even care if it’s $10.

The hardest part is starting. You can always change your mind later, it’s still your money. But hopefully, in several months you’ll wake up to a big chunk of money you didn’t even realize you saved.

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

15-Minute Resolution #2: Start Spending Consciously

Alright, now for a 15-minute 2010 Resolution that doesn’t make you spend less, just better. Huh? Achieving financial success doesn’t mean pinching every single penny all day long and watching your net worth ticker inch upwards. It means spending money on what you enjoy, and not wasting it on things that you don’t (like credit card interest).

An interesting exercise to help you focus is to list ALL your voluntary expenses, and then organize them by priority. When I say voluntary expense I mean that you should generally ignore bare expenses like rent for a single room and basic food. This is not a rigid exercise, but mostly to get you to think more about spending consciously. Again, don’t spend more than 15-minutes on this.

What is your most important expense?

What is your LEAST important expense?

For example, your list might look something like this, from most important to least important:

  • Mortgage on my dream house
  • Yearly travel
  • Monthly iPhone Bill
  • Dining Out
  • Daily Starbucks
  • Rounds of golf
  • Cable TV
  • Beer & Alcohol

You might think, well everyone is going to put housing first. No, in fact it may be at the bottom. Maybe you live in a luxury downtown urban condo right now, and would rather save $1,000 per month and share a 4-bedroom house with a bunch of friends and spend that money on private French lessons and wine. Only you know!

Now write down your list and place it somewhere visible. Make it your computer desktop background if possible. Next time you spend any money, you’ll think twice about whether you’d rather allocate it to something more important to you. You can now finish the rest of the 2010 with a better frame of mind.

In addition, the next time you run into a money hiccup, you’ll know what to cut first before dipping into savings or *gasp* stopping your 401k contributions.

See all the 2010 Instant New Year’s Resolutions here.

15-Minute Resolution #1: Save More For Retirement

Do you feel you aren’t saving enough for retirement? Worse, do you feel like what you should be saving for retirement is some huge number you’ll never reach? I think such daunting numbers are what kept a lot of my younger co-workers out of the 401k plan completely.

How about 1% then? Let’s see how much 1% is for a household with a single earner making $50,000 gross per year. For simplicity, let’s say they live in a state without income tax like Texas. If you are paid bi-weekly, putting away $500 pre-tax annually (1%) into a Traditional 401k amounts to an additional $19 reduction per paycheck. If you do live in a state with income tax, the actual paycheck difference will be even smaller.

I know that even this may be hard for some families, but keep in mind this money is still yours and you’re just using the 401k or IRA container to save you taxes. Now, if you’re convinced that you can handle this (and I hope you are), then go right now and either fill out the proper form from Human Resources or go online and submit for a change. As for the investment choice, if you are undecided consider just going for the target-date option for now until you learn more.

Most importantly, increase your contributions by 1% today! Now you can say in 2010 you started saving more for retirement.

Fine Print
I kept things simple above so you don’t get bogged down. You might be satisfied with your current contributions, or you might want to put away more than 1%. Even better, you might get a matching contribution from your company, which will boost your savings even further. On the other hand, what if my 401k has horrible investment options? Or what if you don’t have a 401k/403b at all? You can start an IRA with just a $50 per month commitment with a low-cost provider.

What about Traditional vs. Roth? Check out this Video Post: Roth IRA vs. Traditional IRA.

You may find that if you haven’t maxed out your Roth IRA for 2009 or 2010, then you may want to do that instead of the 401k because Roth IRA contributions can be taken out at any time without penalty (but not earnings).

See all the 2010 Instant New Year’s Resolutions here.

This Week: 15-Minute 2010 New Year’s Resolutions

credit to Bill Waterson

This time of year, it is trendy either to make New Year’s Resolutions or to talk about how resolutions are stupid. I know, because that’s what I usually do…

I thought I’d try something a little different this time – something I was going to call the “instant” resolution, or “single serving” resolution. The idea is that this is not something huge that you’ll have to tackle over an entire year, but something significant that can be done today and then you’ll be done!

So I’m going to put up one per day this week, and challenge you to finish it in that day. They won’t be earth-shaking or surprising. The goal is gradual improvement and motivating action, not becoming some super-saver overnight. I hope it works!

2010 Instant Resolutions

  1. Save More for Retirement
  2. Start Spending Consciously
  3. Check Your Free Consumer & Credit Reports
  4. Automate Your Emergency Fund
  5. Check the Asset Allocation of your Investment Portfolio