Since 2004, I have tracked our family’s net worth using three major areas – cash reserves, home mortgage payoff progress, and investment portfolio.
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 higher rate 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 is my most recent interest rate survey plus update on our cash reserves:
Best Interest Rates for Cash Reserves – Updated November 2014
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 so that you pay off the mortgage when you want to retire, be in 15 or 30 years. Housing is very expensive where I live, so once that is taken care of my investment portfolio will only have to produce enough income to cover the other expenses.
As of 2013, we paid off our mortgage!
The goal of my investment portfolio is allow withdrawals to support our expenses without needing to work. 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. Here is our current portfolio asset allocation:
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.
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.