My Money

I shared our family’s net worth for several years down to the dollar (here’s my first net worth update from December 2004), but due to the combination of the increased popularity of this blog and the potential effect on our careers we eventually decided to stop. Instead, we switched to a ratio-based method of tracking our financial progress towards early retirement. I actually think using ratios is better than just looking at a raw net worth number, as it takes into account factors like the average home price and cost-of-living in your geographical area as well as your spending habits. Here are the three major areas that I track:

Cash Reserves / Emergency Fund

Our goal is to always have a full year of expenses in cash equivalents as our “emergency” fund. (This is not the same as a year of income. Our expenses are much lower than our income.) This is a cushion for a variety of potential events including job loss, job hatred (also known as F#(& you money), health concerns, or other unplanned costs. It also allows us to take a more long-term view with our investment portfolio since we know we won’t have to touch it.

It is our “sleep well at night” fund.

Since our cash reserves are relatively large, I try to maximize the yield. If we stuck it all in a money market fund, the yield would be barely above zero. With a bit of work, our cash earns a blended rate of over 2% annually without taking on extra risk. We used to take money from no fee 0% APR balance transfer offers and arbitrage some additional interest that way as well. Here are recent updates on where we keep our cash:

June 2014 Cash Reserves Update
March 2013 Cash Reserves Update
June 2012 Cash Reserves Update
March 2012 Cash Reserves Update
May 2011 Cash Reserves Update
January 2011 Cash Reserves Update

Home Equity

I don’t think everyone should buy a house (or more accurately, take out a huge loan on a house) as historically there have been extended periods where home prices don’t return much above inflation. However, if you are geographically stable, I do think buying and eventually owning a house free and clear can be a solid component of an early retirement plan.

If you are pursuing early retirement, I highly recommend trying to manage your loan amount so that you can afford the 15-year mortgage option (even if you go with the 30-year for flexibility). After we first maximized our tax-deferred vehicles including 401(k) and IRA plans, we put a lot of our savings past that to accelerate our mortgage payoff. Housing is very expensive where I live, so once that mortgage payment is gone, the actual income my investments will have to produce will drop drastically.

There are many ways to define home equity, and I stuck to the simple method of calculating home equity by taking 100% minus (outstanding mortgage balance / original home purchase price). We did suffer a drop in value during the housing crisis, but since then the value has rebounded. As of 2013, we paid off our mortgage! Here are some previous mortgage updates:

April 2013 Mortgage Paid Off
November 2011 Mortgage Payoff Update
February 2011 Mortgage Payoff Update

Investment Portfolio

The goal of my investment portfolio is allow withdrawals to support our expenses without needing to work. Again, income and expenses are not the same thing! I use a simple 3% safe withdrawal rate, which means for every $100,000 saved, I can generate $3,000 a year of inflation-adjusted income for the rest of our lives. I used to assume 4%, but since our target “retirement” age is closer to 40s rather than 60s, I feel that 3% is better. Even 3% is not guaranteed, but again it does provide a quick estimate of progress. Here are recent portfolio updates:

October 2014 Update (Asset Allocation / Income)
June 2014 Update (Asset Allocation / Income)
December 2013 Portfolio Update
June 2013 Portfolio Update
January 2013 Portfolio Update
July 2012 Portfolio Update
February 2012 Portfolio Update
November 2011 Portfolio Update
July 2011 Portfolio Update

My initial goal was to try and keep the home equity and expense replacement ratio about the same so that both reached 100% at the same time. However, after the arrival of our first child we decided to pay off the house first in order to lower our monthly cashflow needs. As a result, we were able to reduce our work hours to roughly 20 hours a week while our children are very young and spend more time with them. Our retirement progress is slower now, but we still manage to put away a decent chunk.

Technically we are pretty close to being able to retire, but it will take some more learning and confidence to make the jump. We still want to have more kids, so we’ll have to see how that affects our spending levels as well. Right now my rough target is to have our investment income exceed our expenses within the next 3-7 years.