2020 Annual Budget Review
As 2020 closes out and the new year begins I like to go back and look at our finances to see how we did during the last year. I went through the last 12 months of spending in order to do some analysis and find where we can improve our monthly budget. To start out, we met our savings goal set last January of 30% of after-tax income. This year our savings rate was 32.44%. During last year's annual budget review, I stated that I thought we could achieve a 32-33% savings rate. It looks like we were spot on with our assessment. We did have one major hiccup this year (which I'm actually happy that happened). We were forced to move out of our rental home and chose to instead purchase our next home. Had we continued to rent our previous home at the same price, we would've likely achieved a 34-35% savings rate.
Here is a more comprehensive breakdown of some of the larger line items and the percentage of our after tax income they accounted for.
Dining Out: 3.84%
Home Maintenance: 2.91%
We of course had other expenses but the above mentioned ones were the highest percentages with loan payments being the highest. Everything else such as clothing, car repair, phone, cable, and electric were all under or close to 2%. Overall I think we had a good year. We increased our savings rate by 6.16% since last years annual review. Our goal for next year is to achieve a savings rate of 35%. I'll receive a couple minor pay bumps during the next year, but our housing will also be more expensive than last year due to our mortgage and home maintenance. Incremental increases each year will allow us to improve our financial position without causing pain and strife in our lives.
Here is a more comprehensive breakdown of some of the larger line items and the percentage of our after tax income they accounted for.
Dining Out: 3.84%
Home Maintenance: 2.91%
We of course had other expenses but the above mentioned ones were the highest percentages with loan payments being the highest. Everything else such as clothing, car repair, phone, cable, and electric were all under or close to 2%. Overall I think we had a good year. We increased our savings rate by 6.16% since last years annual review. Our goal for next year is to achieve a savings rate of 35%. I'll receive a couple minor pay bumps during the next year, but our housing will also be more expensive than last year due to our mortgage and home maintenance. Incremental increases each year will allow us to improve our financial position without causing pain and strife in our lives.
2019 Annual Budget Review
As 2019 closes out and the new year begins I like to go back and look at our finances to see how we did during the last year. I went through the last 12 months of spending in order to do some analysis and find where we can improve our monthly budget. This last year we spent 26.28% of our after tax income on loan payments. I consider this to be our savings rate because once we finish paying off our debt it will all be applied toward building our emergency fund, then investing in retirement, college, and car replacement. During the next year I estimate with my most recent salary increase that we'll be able to reach a 30% savings rate. Ideally we’ll be closer to the 32-33% but every year seems to bring some sort of hiccup that lowers our number slightly.
Here is a more comprehensive breakdown of some of the larger line items and the percentage of our after tax income they accounted for.
Dining Out: 4.61%
We of course had other expenses but the above mentioned ones were the highest percentages with loan payments being the highest. Everything else such as clothing, car repair, phone, cable, and electric were all under 3%. Overall I think we had a good year. We increased our savings rate by about 3.5% since I last did an annual review in March 2019. During that time I was promoted and received a significant pay raise, but it only took effect during the last 3 months of the year. I suspect that we’ll be able to increase our savings rate another 5-6% this next year just by virtue of having the entire year to take advantage of my higher salary. Only time will tell. Can’t wait to see what next year has to offer us.
Choose Your Time Wisely
I've recently started a course to train for my new job in the military. The course is comprised of four classes, each of varying length. The entire course will take about 18 months to complete. I finished the first class in October and had about 10 weeks before the second class began. During these 10 weeks the work that was required of me was very minimal. Generally I could be home most of the day with only a handful of times when I was required to work a full day. These weeks were great for allowing me time to spend with my family, work around the house, and pursue personal endeavors. Now that my second class has started the amount of time I have available for these things have been greatly diminished. Waking up usually around 5am, and returning home around 5pm gives me a limited amount of time to spend with my family and to complete tasks around the house. It has vastly reduced the amount of time I have to spend on reading and writing.
All of this has reminded me of just how finite our most precious resource is. Time to spend playing with the kids, time with my wife, time to read a book. Just as our money is finite and we must choose how to spend it, the same concept applies to granted and likely squandered much of the extra time allotted to me. Even so there was a feeling of great accomplishment during my time off. I was able to read a couple books, work around the house was never neglected, I could spend many hours playing with the kids, and I put together the first 15,000 words of a book I've been writing. Now that I've started a new class, I no longer have 16-18 hours a day to do all these things. During the week I might have five hours a night to allocate appropriately. Usually an hour is spent with the kids, another hour cooking dinner and cleaning up, then the kids have to be put to bed and preparations are made for the following day. By this time I have maybe two hours left in the evening. This time gets split between spending time with Mrs. B, reading, writing, and getting miscellaneous things done around the house. Every weeknight is a choice how to spend time. It's also a reminder of the importance of having the freedom to choose how to spend your time.
An extremely important reason for us to strive for financial freedom is so that we can have FREEDOM. Freedom to do the things we love with the people we love. Freedom to choose. Everything. To choose when you wake up, when you go on vacation, when you visit family. I have a lot of autonomy in my job, but autonomy isn’t freedom. My autonomy is limited, unless I want to risk losing my career. Freedom is truly unlimited. Today I can decide to take leave and see my family, but I’m limited to when I travel based on training schedules and the needs of the Army. Don’t get me wrong, I love what I do, and the opportunities and benefits are great. But this is just a stepping stone. Our path in the military is synced with our path toward financial freedom. As long as I work for Uncle Sam I am not free to do what I want, when I want.
But that reality is real for most people. It’s a natural occurrence when you work for someone else that you give up some of your freedom. Being financially free in and of itself is only one aspect of freedom but achieving it allows you to obtain freedom in life. When you are financially free you can choose who you work for, including no one or yourself. When you are financially free you can choose when and where to work, to include never working again if you so desire. The opportunities of people who have achieved financial freedom seems to explode because they have the ability to pursue their dreams and passions in ways unknown to many who are required to work in order to live. Working as a means to “pay the bills” is no way to live. When you have no choice but to work long hours and skip vacation so that you can afford your large home, luxury vehicle, and dining out experiences, you miss out on many freedoms in life. The great thing is that we have the ability to choose. We can choose to live with intention, to live with a clear set of goals and plans. And to know that there are others who have gone before us and accomplished our same goals should give us comfort knowing that it can be done and has been done before. I choose to spend my time how I spend my money. With intention.
Paying Off Debt vs. Investing Revisited
We had a really good month this last October. We were able to apply an extra $1,554.54 toward our debt. This combined with our usual payments brings us to a total of $2,203, or about 34% of our take home pay. Now in the beginning of November we have about $2,200 left on our auto loan from the Chevy we purchased at the end of last November when our previous SUV broke down for good. If everything goes well this month (fingers crossed) we'll officially have the car paid off by December 1st after the last monthly payment clears. Whether that will happen is uncertain though. Not only will we be travelling at the end of the month for Thanksgiving, but we also have to take the Chevy to the shop for maintenance. Last month the ABS light turned on and the dashboard started flashing an error for the StabiliTrak. Obviously it's important that these issues are resolved before we travel, but even with the car under warranty it will likely reduce our expected end of month extra loan payment. Luckily we have some money saved for travel expenses and should only have the car maintenance to worry about.
Last month I discussed our financial plan for the next 16 years and where that would lead us. I also mentioned how we are following Dave Ramsey's Baby Steps and why we are choosing to pay our debts before we start investing. One of those reasons being "...by becoming debt free we will be able to invest more while simultaneously saving for college and future cars." Now I understand how many people have argued that you should invest first, then pay off debt, with a few exceptions. Some of thoses exceptions are if you have high interest debt like credit card debt, or if you receive a company match in your 401K. Well neither exception applies to us but there was one other issue that was irking me. Many people argue that you'll actually be better off by investing earlier and paying your debt down slower. I had believed this for a while and resigned to the fact that it was more important to us to be debt free first. It was only a few weeks ago when I decided to put that theory to the test in our specific scenario.
You see, most of the time I see people making the argument to invest first, their alternative plan to pay off the debt first would push there investing back several years. I can see why this would be an issue. But in our case, becoming debt free will only take another nine or so months.. And when we do pay off our debts, it will significantly increase the amount available for us to invest. So a few weeks ago I ran a side-by-side comparison against the 16 year plan I discussed in our last post. This time the simulation would show the numbers if we chose to start investing and just pay our loans as usual. The end result? By investing what we could now and slowing our debt paydown, it would take us an extra 28 months to pay off our debt and we would hit our first $100K invested five months later. Why use $100K as a marker? Because it's as far as I went in my calculation. After a few hours I didn't see a need to persist in the extensive calculations needed to continue for 16 years. The reason why paying off the debt first works for us is because by freeing up the amount used to pay off the debt we'll effectively double the amount we are able to invest once we start. This large difference in contribution will more than offset the nine month delay in investing.
The overall end product of either decision would likely be inconsequential but the journey will make all the difference. On our current trajectory we'll be lowering our spending by eliminating debt. This will allow us to maintain a lower spending rate as we sustain our freedom from debt. So even as we invest at a later date, we'll also require less money invested since our spending rate will be lower. More importantly we'll have more peace of mind knowing that everything we own is just that. Owned by us.
Hey everyone! As we enter mid October the course I'm in is winding down and Mrs. B and the kids are away visiting family. I'm still home in NC with a lot of time on my hands. I've reorganized the garage, picked up groceries, done a fair amount of reading, and now I'm taking a break to sit down and relax... And by relax I mean go through the painstaking process of planning out the next 16 years of finances month by month. I literally sat down for probably four hours and calculated how much we would have invested for retirement/college as well as how much we would save for other items like future car purchasess. I went 16 years out to the approximate date of my retirement from the military if they keep me on for 20 years. And now I'd like to share what I've found, but first let's make some assumptions. In my calculations I assumed the following things:
1. I would promote on a normal schedule (Major in ten years (6 years from now), Lieutenant Colonel in sixteen (12 years from now)).
2. My base salary would increase by 2% each January. (This is fairly standard but some years are higher and some lower).
3. We'll maintain only one income. Though Mrs. B intends to return to work once the kids are in school, we're planning on just one income in the meantime.
4. Our investments would average at 8% (We've decided on a pretty agressive asset allocation so we understand there will be major ups and downs).
5. Tax brackets would remain the way they are now (There's simply no way we can predict future tax brackets).
Ok so before we go into our future projections lets take a look at our current breakdown. Currently we have the following:
Emergency Fund: $1,029.29
College Savings: $0
Car Savings: $0
We're currently following Dave Ramsey's Baby Steps (though we won't be following them exactly throughout). That means right now we are focusing all of our extra money toward paying off our debt. We understand the differing viewpoints on his approach but we have two reasons for sticking to it. First off is peace of mind. Becoming debt free is emotional for us. It may not be the fastest way toward FI but it means a lot to us. Secondly, by becoming debt free we will be able to invest more while simultaneously saving for college and future cars.
The first milestone we'll look at is July 2020. This is when we're expecting to become debt free. Below is a snapshot of our projected financial picture.
Emergency Fund: $2,876.70
College Savings: $0
Car Savings: $0
Our next milestone is the completion of our emergency fund. The amount we are deciding to save has been flexible over the last year or so but we're planning to maintain at least 3 months of expenses because my job is pretty stable. We're projecting our emergency fund to be complete by Novemeber 2020.
Emergency Fund: $12,528.57
College Savings: $0
Car Savings: $0
Starting December 2020 we will begin funding our replacement car fund, college funds for the kids, and our retirements. We'll maintain at least $1,000 a month for retirement, $500 a month for car replacement, and $333.33 a month for college. Afterward any extra will go toward our retirement funds. Now one caveat. The $500 a month for car replacement is a bit steep in my opinion for the long run, but I know that by 2020 we'll likely need to start considering replacing my 2007 Pontiac G6. The idea is once our car situation is a little more stable we can put less toward the cars and more toward retirement. But for this exercise we'll assume that we maintain $500 a month for the entire iteration. Below is our projected financial picture for December 2020. Following it we'll include each December until we reach October 2035, my expected retirement date.
Emergency Fund: $12,544.75
College Savings: $333.33
Car Savings: $500
Emergency Fund: $12,740.55
College Savings: $4,510.53
Car Savings: $6,500
Emergency Fund: $12,938.03
College Savings: $9,034.29
Car Savings: $12,500
Emergency Fund: $13,138.56
College Savings: $13,933.14
Car Savings: $18,500
Emergency Fund: $13,342.87
College Savings: $19,238.15
Car Savings: $24,500
Emergency Fund: $13,549.68
College Savings: $24,983.04
Car Savings: $30,500
Emergency Fund: $13,759.70
College Savings: $31,204.25
Car Savings: $36,500
Emergency Fund: $13,972.98
College Savings: $37,491.28
Car Savings: $42,500
Emergency Fund: $14,189.56
College Savings: $45,236.90
Car Savings: $48,500
Emergency Fund: $14,409.50
College Savings: $53,137.43
Car Savings: $54,500
Emergency Fund: $14,632.85
College Savings: $61,693.02
Car Savings: $60,500
Emergency Fund: $14,859.66
College Savings: $70,957.98
Car Savings: $66,500
Emergency Fund: $15,089.98
College Savings: $80,991.13
Car Savings: $72,500
Emergency Fund: $15,323.88
College Savings: $91,850.81
Car Savings: $78,500
Emergency Fund: $15,561.40
College Savings: $103,616.26
Car Savings: $84,500
Emergency Fund: $16,088.25
College Savings: $113,813.45
Car Savings: $89,500
All in all I think $1.6 million invested will be plenty sufficient especially we're earning a pension worth 50% of my base pay after 20 years in the military. We could safely withdraw 3% a year, about $48,000, and still likely watch our investments grow over the long term. And while $113,813.45 won't be nearly enough to pay for two kid's college educations, we do not intend to fully fund it ourselves. In fact, the goal is for us to spend as little as possible on their college education so that we can employ that money toward other things such as weddings, vacations, and future investments. One last note, the car savings is a look over the long term how much we may save for our cars. That doesn't mean we intend to spend that much. With this model we would be able to purchase a $30,000 car every 5 years, which in my point of view is ridiculous. My last car was $5,000 and Mrs. B's much newer SUV was $15,000 before financing. I intend to continue buying sedans and imagine i can keep my costs down below $15,000 for my next car and still be very happy. That way any extra we have in this category can be put to better use.
So that was a fun little project. I feel better having done it and will reference back to it often to see how our real progress compares to our projections. Until next time, go forth and do great things.
A Change In Mindset
Hey all, apologies again for the lack in predictable posts. I've been swamped lately with the course i'm in and haven't been able to prioritize my blog posts. Moving on.
Recently I`'ve noticed a sudden shift in my mindset around spending money. At the start of our journey toward paying off debt I was very rigid in my spending habits and that rigidity was felt by Mrs. B as well. By rigid I mean any unplanned spending caused me to have a moment, some small, some not so small. It would trigger an argument of some kind or just unwelcomed thoughts and resentments on my part. But during the last couple of months my mindset has become more flexible. It's been the result of multiple events including my recent promotion and podcasts I've been listening to. In multiple different outlets I'd heard stories and advice on slowing down toward FI so that you can still enjoy life along the way. This goes directly against a lot of conventional teachings about acheiving FI, especially for those undergoing a phase such as becoming debt free. The school of thought for those trying to get out of debt is to do it as quickly as possible. There should be no extra comforts or luxuries paid for while trying to reach debt free status. This can be difficult for people (for obvious reasons) and can put a strain on people's lives in areas such as marriages and friendships. I'm not advocating that you should continue to go all out and spend however makes you most comfortable. But there has to be a balance. We have to maintain the things we find most important in our lives otherwise we may lose sight of the reasons we are trying to achieve FI. For example, for the last few months we've maintained between a 20-25% savings rate (including all debt pay down). There are defintely ways that we could increase our savings rate such as switching phone carriers, going out to eat less, and no longer saving for vacations. But we've decided that each of these things hold some sort of importance to us. It's important to us that we have a reliable network wherever we travel. It's important that we feel we can eat out when we want to, although we maintain a $200 monthly dining out budget. And although we aren't taking any major vacations anytime soon, we feel it's important to save $100 a month to help offset the costs of traveling home to see family since we are dislocated from them. Find what is important to you and keep those. But whatever it is that you don't prioritize, cut it out and use the proceeds to fund your future.
It's interesting that I've noticed this shift because I simultaneously noticed that my rigidity has passed on to Mrs. B, although she is much more graceful about it than I was. Nowadays when something unexpected comes up Mrs. B will fret over it (largely because she thinks I will too). But recently I've become more adaptable to these sudden unexpected changes to our monthly budget. I know we have the money to cover them, and I understand now that they have minimal impact on our financial plan. In response she is easing up as well as we now have formed good spending habits. We communicate with eachother about what we are spending and we come together about once every 7-10 days to input our expenses into our master budget. We've set up our budget on OneNote so that we can pull it up from anywhere and keep ourselves on track.
Another way we've become more flexible is allowing our budget to change each month. I used to keep the budget the same each month and become frustrated when we went over budget in certain areas like gas or medical expenses. But we can't always lower these costs and instead now we simply allow our budget to flex when needed. For example, back in July we had to spend a lot more on groceries than we usually would because we had just moved and had to get rid of a lot of perishable foods that we use on a regular basis for dinners. In response we had to purchase more miscellaneous food items than we usually would in order to get ourselves back to normal. We knew that this would happen and instead of freaking out about it we simply pulled money from other categories to help cover the difference. It's funny looking back at how long it took us to make this simple adaptation but it's not at all surprising considering the rigidity we spoke about earlier.
I hope for everyone else on this journey that it continues to get easier as you continue. It certainly has for us. Mrs. B and I were just talking about how we didn't know what to put on our Christmas lists because we already had everything we wanted. A combination of being deliberate in our spending and understanding what our priorities are has helped to provide us with everything we need and then some. Tell us what lessons you've learned during your path to FI. What aspects of your lives has the journey made simpler?
The Last Two Months
Well it's been about two months since we got on and posted an update. I was just able to update our Net Worth Tracker after missing the month of June. A lot has happened since our last post including moving, Airborne school, and a wedding. But before we begin I wanted to reach back to our last post to update everyone on the status of our last Tricare snafu. We had received a bill for over $800 that should've been covered by our insurance. After making the right phone calls and filling out paperwork with information that Tricare should already have, the entire bill was covered and we ended up owing nothing. This has taught me to never pay a bill that comes from a medical center until after Tricare has received it.
Now back to the last couple months. After my last post I returned home after dropping Mrs. B and the kids off in Ohio. I began clearing post and packing the personal belongings that we would be moving ourselves. The movers came and picked up our things on May 14th. For the next five days I hung out with my dog in an empty house until it was time to fly up to Ohio and pick up the family. We all drove back down to our empty home on the 19th. The next day I took our trailer, loaded with most of our belongings, up to our new residence, picked up the key from the property management company, and unloaded everything before driving back home that same day. Luckily we only moved about five hours away otherwise this would not have been possible. The next day we said our final goodbyes and packed the last of our things. On May 22nd we officially moved out of our Georgia home and into our new home in North Carolina. The best part about moving somewhere new is when we let our dog and kids (just the oldest one for now) explore it for the first time. Their excitement as they run around is a bit contagious.
After the first day we started the arduous task of unpacking. Way back in January I scheduled the delivery of our household goods with the moving company on May 23rd. Two days before they were scheduled to deliver our stuff I received a call that they would have to postpone our delivery until May 31st. This was a problem because We would not be home as Mrs. B and the kids were going back to Ohio while I attended Airborne school. I pleaded with them and eventually scheduled the delivery for the day we returned. Unfortunately this meant that for the next week we wouldn't be able to unpack most of our goods. The next day, one day before our original scheduled delivery date, the moving company called me and asked if I would be available to accept our delivery during the next day. The day I had originally scheduled back in January! Yes I'm avaiable! I've been available that day for four months! It was maddening but we received our things as originally scheduled.
The next day we had some help arrive. Our best friends from college were vacationing in the area and came for a few days to help us unpack and hangout. They were a tremendous help and it's always great to see them, plus it gave us a good excuse to break open a couple bottles of wine. After about a week of unpacking we travelled back to Ohio to drop Mrs. B and the kids off with family before I went to Airborne school. I spent three weeks at Fort Benning, GA learning how to jump out of an airplane and land wihout breaking anything. During the last week you jump five times. Besides the first time, jumping out of the airplane is the easy part. The hard part is landing. You have so many things racing through your mind such as direction of drift, is my canopy ok?, and positioning your body so you're prepared to land. With each jump though you become more confident in yourself. Jumping out of the plane becomes a chore and landing becomes second nature.
Once I had earned my wings from Airborne school I returned to Ohio to be a groomsman in my sister-in-laws wedding. We had a great time although I must say, having two small children at a weding is very difficult. I maybe had 30 minutes during the reception where I wasn't tending to one of the them. Luckily Mrs. B and I were able to sneak in a slow dance during the night. The next day we travelled, yet again, back to our new home. Since then it's been a mixture of hanging pictures, ordering items for the house, and getting settled back into a routine. I will start training in a couple weeks but until then the Army has pretty much left me alone.
Now for the exciting part. If you've ever been in the military, or you've talked to someone in the military who's moved recently, you may know that moving (also known as PCSing) is a great opportunity to make some money. The Army will pay you 95% of what they would pay an independent contractor to move your stuff. That means if you move your things and it would've cost someone else $10,000 to do it, the Army will pay you $9,500 to do it instead. The Army also pays you for mileage, and per diem during travel days. Lastly, they pay you a Dislocation Allowance (DLA) based on rank and whether or not you have dependents. The DLA is to cover moving related expenses. Now for our move we spent approximately $3,800. But that includes our house hunting trip, plane tickets, gas between OH, NC, and GA multiple times, food, airport parking, dog boarding, carpet cleaning, security deposits, pet deposit, and more. The Army is remibursing us approximately $5,600 meaning we'll make about $1,800 for our move. In the future we'll likely make more because we won't have to travel between duty stations multiple times and our DLA will increase as I increase in rank. Why do I bring this up? Because it has helped us accelerate our journey to FI. We were able to put over $2,300 toward our debt just this last week with the extra money.
Soon I'll be promoted to Captain and will receive a generous pay increase. We plan to put every penny of that increase toward paying off our debt. Between student loans and the SUV we purchased last November, we have about $28,000 left to pay off. This puts us about $500 ahead of our projections. Next month will also be the first month that we stop saving $200 for baby related expenses as we have already purchased the majority of items we need for Little Miss B#2. Between the pay increase and the extra $200, we should have approximately $900 more a month to throw at our debts. As of now we are projecting to be debt free by September 2020 but It's possible that we could finish a month early.
My last point of discussion before signing off. Recently Mrs. B and I had a long discussion about how we should be operating our budget. We had gotten pretty lax about making sure we didn't overspend in particular categories causing us to fall behind for a short period of time. We agreed that we would go back to making sure that once we had reacheed the limit of a certain line item that we would stop. For example if we budgeted $200 a month for dining out and we had spent all of that by the third week in the month, then we wouldn't go out to eat again until the beginning of the next month. Very simple concepts sometimes prove difficult in practice. We have a new found commitment to becomeing debt free as this is by far the least exciting part of the journey to FI.
Tell us about your best and worst experiences with moving. What tips for saving money do you have? If you're military, what did you do to maximize your PCS payout?
Finding a New Home and Dealing with Medical Insurance
So this last month has been quite the whirlwind. We spent a week in North Carolina, where we are preapring to move to, looking for a new place to call home. This is only the second time that we've moved and never before have we moved in a Seller's market. The last time we moved it was February and I had found our place in January. Winter is generally very slow as far as real estate goes and the market is usually in favor of buyers. We're getting ready to move to a major military installation during PCS season. I"ve been watching rental properties for the past month or two to get a feel for what we could afford and what areas would best suit us.
The week before we took our trip I started watching the market much closer and found that homes were often taken off the maret within 24 hours of being listed. This was a major problem for us because it meant most of the homes we'd be looking at wouldn't be listed until we were already in NC. Luckily we found one property management company that wouldn't allow anyone to apply for a home until they viewed it and it wouldn't be available for viewing until our last day there. We went and looked at 5 or 6 other homes while we were there. We even applied for two of them but we were not first in line for the homes as other people had already applied. All of our chips had to go to this last house that wouldn't be available until our last day. We were extremely nervous.
On the day the home became available, we arrived at the property management company 40 minutes early so that we could get the key before anyone else. Our efforts paid off, because another couple came 20 minutes later to get the key for the same house. But we got it first. I actually talked to the couple for a while and we sympathized with each other because we were both astonished with how quickly homes we being bought/rented.
We got the key to the property, visited it, took notes on everything that needed fixed, and then returned to the property management company to fill out our application. They informed us that it would be 2-3 days before we knew if it had been accepted. The next day we left. Did I mention we were nervous? We had to leave witth nothing but an application. I knew there was no reason for our application to be rejected but still, it's not how we envisioned our trip. Luckily 2 days later I received a phone call that our application had been accepted! What a relief! I told Mrs. B that I would do everything in my power to avoid moving between May-July as these are the worst months. The house is great, it has an extra room that we'll use as a play room for the girls and it's in a great school district with an average commute to work. Best of all, we are getting 500 square feet more than we currently have for only $30 more a month, plus utilities of course.
Afterward I dropped Mrs. B and the girls of in Ohio, where our family is, and I flew back down to GA to finish clearing post and preparing our home for moving. We have decided to move somethings ourselves because the last time we moved the movers broke a lot of irreplaceable things. It really took a toll on Mrs. B. The difference between then and now though is that now we own a small enclosed trailer. Our plan is to take a load of our irreplaceable things up to the new house a couple days early and then move the rest of our things once we've officially cleared post.
Changing gears into the fun world of Tricare. Normally Tricare is great to work with as they usually send us the bill after Mrs. B has seen an off post doctor (she's on Tricare Select). The bill is usually nominal, $20-50 depending on the care provided. Back in December Little Miss B1 had a tumble down a flight of wooden stairs and we took her to the nearest emergency room to get checked out. She was fine, just scared and bumped up a bit. After 3 or 4 months I had forgotten all about it until we received the bill. It was over $800 dollars, $400 of which was for "medical supplies". I called the hospital to ask what medical supplies had been administered because I couldn't remember any. The lady on the phone told me it was for bacitracin. Bacitracin is an antibiotic ointment. I can get it for $3 at Walmart.
I explained my frustation and asked if we could get this reduced. She couldn't do anything for me but told me I'd receive a phone call in a couple days. It's been a month. The next day I decided to call Tricare to figure out why they denied coverage. I didn't receive a straight answer but they told me to fill out a Third Party Liability form and it should sort everything out. I've since filled out the form and faxed it but we won't know the status of our claim for another month or so. Hopefully it is mostly covered if not all of it.
I've never had any major issue with Tricare otherthan this one time over a year ago when it took Tricare around 10 months to send us our portion of the bill. I try to keep track of what medical expenses we're going to have, but that can be difficult when you haven't heard from your insurance in nearly a year. Luckily this isn't usually the case, but still. I find it incredible in this age of technology that I have to FAX a document and then wait over a month for it to process. It seems that they need to improve their systems and processes, but I digress.
Once the bill comes back, depending on what it comes out to, I'll likely try calling the hospital again. If Tricae pays anything more than $400 of the $800 owed, then I will attempt to negotiate the rest down since $400 of the bill was for a cheap over-the-counter ointment. Wish me luck.
What advice do you have for negotiating medical bills that are obviously overinflated? What's your craziest moving story?
Little Miss B2's Arrival
What an exciting last month we've had! We welcomed Little Miss B2 into the world on April 2nd. She's beautiful, not that I'm biased, and healthy. Mrs. B and I have had a much better experience in our second daughter's first week than we had with our first daughter. I recall that anytime Little Miss B1 was awake, she was also screaming. And boy did she wail. Often it was unbearable and there were times when I had to remove myself to gather my sanity. But Little Miss B2 is much less vocal when she's awake. She makes more squeak like noises and only outright cries on occasion, ussually during a diaper change. I'm sure it's a combination of difference in children and our experience, but round 2 so far seems much easier than round 1 was. Another difference between the two children is when Little Miss B1 was born the Army policy for paternity leave allowed for 10 days after being discharged from the hospital. Nearly two years later and the policy has changed (it's now called secondary caregiver leave) to allow up to 21 days of leave. If you are preparing to bring home a newborn I suggest reading the new policy, dated January 22nd, 2019, and speak with your S1 personnel to assist you in properly filling out the leave form.
If you checked our last Net Worth Tracker you'll see that we didn't do as well last month as usual. We were still able to put an extra $550 toward our debts but often times we can put double that amount down. We had a number of things pop up on us, all small things but they added up. We had an extra work-related dinner at the end of the month that cost us $50 as it was at a nicer restaurant in a downtown location. We purchased more clothing than we usually do in three months as Mrs. B needed some maternity clothes. I also had to take the new Chevy in for an oil change instead of changing it myself because I couldn't unscrew the damn oil filter cap. I did save us some money by fixing an odd issue with one of the headlights on my old Pontiac. The headlight would be on while my car was in motion, but as soon as I'd come to a stop the passenger side light would turn off. All I did was disassemble the head light and put it back again. It was probably just a connection issue but I tend to steer clear from electrical issues as I have never successfully fixed one. Overall we overspent in our groceries, dining out, clothing, and phone category. We upgraded Mrs. B's phone last month which nearly doubled our phone bill due to one-time upgrade fees.
Still, last month served as an example as to why we're doing what we do. Even though we overspent in a number of different categories, we still had money leftover in case of a small emergency. We could've handled a $500 car repair, medical expense, etc. without even touching our savings. Sure the month would've counted as a waste but we wouldn't be any worse off. And most months we'd be able to handle even larger financial emergencies.
Switching lanes for a moment, I decided to join the ChooseFI and ChooseFI Military Facebook group this last month. I have to say I really enjoy reading some of the posts and answering some of the questions but man does it plug up my newsfeed. Every other post is from one of the ChooseFI groups. Still I find a lot of enjoyment in being able to help answer questions or just read to learn more about how other people solve their financial dilemmas. It's something I've been doing on a smaller scale with many of my colleagues. I've gotten a reputation at work as being "the money guy" and will often be approached with questions. I enjoy answering them or, if I don't have the answer, figuring them out. The ChooseFI page is similar in that I can do the same thing but at any given point during the day. So it's possible that if you're a member of either of these groups that we've conversed recently.
Is anyone else known as the "money person" in their social circle? How has this shaped your relationships with friends, family, and coworkers?
Taking Leave and Rediscovering Real Estate
In the Army, we receive 30 days of paid vacation (known as leave) each year. This leave is allowed to accrue up to 60 days. Anything over 60 days at the start of the fiscal year is called "Use or Lose". If you don't use it prior to October 1st, you lose it. Well I knew that come October 1st, 2019 I would have 12 days of Use or Lose Leave unless I used some. I don't expect to have the opportunity to take a vacation while I'm in the middle of school, which I'll be attending for over a year starting in June. So I chose to take two weeks off of work as we prepare for the arrival of Little Miss B #2. My Leave ends on April 1st and we are scheduled for an induction on April 2nd. After we leave the hospital I have been approved for 21 days of paternity leave which won't be charged against my normal Leave days. Afterward we will be taking a trip to North Carolina to look at houses before we move.
As of my writing this I have been away from work for a week and instead have been spending more time with my wife and daughter. We typically go on a walk around the neighborhood and play with chalk on the driveway. We have a game we play inside where I chase my daughter down the hall, throw her in the air, and then run away while she chases me. Once I turn around, she runs aback down the hall and we repeat the process. Generally when I'm working I wake up at 5:40 am and go workout until 8 am. I come home to eat, shower, and get dressed in my unifrom before heading to work. Typically I get home between 5:30 and 6 pm. I'll help make dinner, feed my daughter, then play with her with whatever time is left before her 7 pm bedtime.
This last week served as a reminder as to why I am striving for FI. I know in my current profession that there will be times when I won't see my family for months at a time, and even when I am home, I see them on a limited basis. My path to FI won't be "complete" until I retire from the military. At that time I will be 42 years old and my daughters will be 18 and 16 years old. Much of my time with them will already be spent. But I plan to continue working after the military in a manner that conforms to my own schedule. Perhaps I will be my own boss. We will see, that all is still to be determined.
Since my last post I have finished two books and started a third. I finished both "Wealth, Poverty, and Politics" by Thomas Sowell PhD and "Retire Early with Real Estate" by Coach Chad Carson. I've since started "The Terminal Man" by Mehran Karimi Nasseri. I've enjoyed all three books and will post a concise review on them shortly. Most of what I read is for research and self development. "The Terminal Man" strays away from self development to entertainment as it was a book I received from my biological father and his wife who live in the UK. In the book "Wealth, Poverty, and Politics" a particular quote struck a chord with me. "Poverty occurs automatically. It is wealth that must be produced, and must be explained." I found this quote to be profound in that after reading it it seems obvious. But I would argue that millions of people in the US seem to think that poverty is the outlier, that it is somehow created by those who seek wealth. Many would consider this a sub argument under the overarching themes of income inequality and wage gap. I"ll provide more thoughts from the book and myself in my review but I wanted to explain just how important this quote is. Before I found FI or Dave Ramsey, I thought of wealth as my income. I had no understanding of how wealth was built. Quite succinctly, this quote explains how wealth is not stumbled upon. It is purposeful, and requires intent. It is not automatic such as poverty.
After reading Chad Carson's book "Retire Early with Real Estate", I'm beginning to imagine myself as a rental property owner. As of right now I can imagine creating enough income through my military pension and rental properties to live on and continue investing in order to grow our assets. The reason it sounds so appealling is because it has the opportunity to be fairly passive and create enough discretionary income for us to finance our retirement goals such as travelling. Using our tax advantaged retirement accounts will be a great bonus when we're 59 1/2, but until then we need to plan on how we are going to increase our income while working far less hours than we do currently. I absolutely believe that we can achieve FI by the time I retire in about 16 years. But I want to be more thn just FI, I want to be FI+. We're going to have 17 years before we have full access to our retirement accounts and I want to have the ability to work less and still do everything we want during those 17 years. Our current plan to accomplish this has many steps. The first steps are simple, become debt free, max out our retirement accounts, and pay off the house (Currently we rent. Buying will come later). Once we pay off our primary residence, which I believe we'll be able to do in 8-9 years, I want to begin investing in rental properties. We'll have another 7-8 years in the military to begin building our income through rental property. In this amount of time I think we could have between 3-5 properties with 2-3 of them completely paid off.
In other, less inspiring, news. It's unlikely that we will have any extra money at the end of the month to throw at our debt. I'll caveat that with this little nugget. We already have about $800 in our budget for extra loan payments. Any additional money at the end of the month is in addition to this extra loan payment. We've had a few unexpected things come up this month that have costed us a few hundred bucks. The most annoying of which is a surprise $300 medical collection from 2014. We checked Mrs. B's credit report out of pure whim and discovered that an unpaid medical bill from before we were married went to collection just last month. Upon further investigation we discovered some conflicting information that claims it went to collection in 2015, though we've never received a call or email from the collection agency. Mrs. B attempted to contact the collection agency and has yet to receive a response. We'll continue to pursue a solution to this annoying dilemma and provide regular updates.
The next time I post anything, Little Miss B #2 will have arrived. We are very excited (and very nervous) for her arrival. Luckily we will have some family in town to help us welcome her home as we simultaneously prepare to move to North Carolina.
What challenges have you faced on your path to FI? What path to FI have you chosen? (i.e. real estate, taxable accounts, retiremet accounts, etc.)
How The Path to FI is Changing Our Lives
As our first year down the path to FI comes to a close, I would like to take this time to reflect on how much has changed. From little things, such as not worrying about every purchase we make, to far larger things, such as having an expanding number of options after our time in the military, we have come so far.
A little over a year ago we were experiencing wide swings in our finances. There were highs, where we had about $7,000 in savings, and lows where we had to cut out all discretionary spending to avoid credit card debt. Just by making small changes and tracking our spending, we became intentional in our spending and found that we had more than enough to work toward our goal to become debt free.
For the time being we are patiently paying off our debts so that we can move on to more exciting things such as fully funding our emergency fund, investing, and purchasing our first home. We had a $20,000 setback in November when our 2004 Chevy Trailblazer finally became too expensive to maintain. We weighed our options and purchased a 2013 Chevy Traverse with low mileage in order to increase its life span. The whole ordeal should only set us back 10 months, but at the same time it has only made us more driven to pay off our debts (which effectively doubled). The feeling of accomplishment we feel at the end of each month is astounding. Some months we have hundreds of dollars left over to add to the extra amount we already pay toward our debt. Other months we break even and have nothing extra. These months usually involve an unforseen incident such as car maintenance or extra travel expenses. Only two months during the last 12 did we go negative so we still have some learning to do. Overall though we feel an enormous weight lifted off both of our shoulders making everyday more enjoyable knowing that we are going to make it.
Dave Ramsey said it best during one of his Financial Peace University lessons. He explains that in a situation such a car breaking down, that if you have financial problems then you will not only have a car crisis but also a money crisis. By having an emergency fund in place though you remove the money crisis and the car crisis becomes a less stressful event. Though we are not out of debt yet, we do have our $1,000 emergency fund. Plus we have plenty of money each month that we can manipulate to handle any unexpected expenses if we need to. We had to employ this tactic last November and December in order to cover the cost of repairing the Trailblazer and eventually replacing it. We were able to take the extra money that would've gone toward student loans and instead use it to cover the aforementioned expenses.
Following Dave Ramsey's lessons, finding the FI community, listening to podcasts. Doing all of these things have exposed us to so many new ideas and has expanded our thinking into our future. We won't always be in the military, in fact we plan on sticking it out just to 20 years and moving back home as soon as possible. For those who don't know, after 20 years of service, service members receive a pension worth 50% of their base pay for the rest of their life. I estimate that this would be worth around $65,000 a year in 2035. Having that money will cover the necessities and allow us to explore careers that excite us without having to worry about how much money we'll make. For me personally, I see myself becoming a real estate investor. It will provide us wih extra cash flow and provide us with life flexibility. Mrs. B is unsure what she'll be doing but believes she'll be working in the healthcare field. A year go though we weren't thinking about the future in such depth. By planning out what we want to do and laying a foundation, we can plan an appropriate path of saving, investing, and preparation. During out discussions it became apparent just how important it was to us to move home as soon as we could while maintaining our financial plan. The bulk of our family live in the same area including both of our parents. By the time we move back they will be in their mid 60s and low 70s. We enjoy spending time with our parents and understand that our current path will limit our time with them for the next 16 years until we exit the service. Becoming financially healthy will provide us the flexibility to spend more time with them once we move home.
Shortly after we retire from the military and move home we will become empty nesters. (As long as there aren't any surprises along the way). We plan to use this as an opportunity to travel more and enjoy each others company. While this sounds great, it can't be done without prior planning and preparation, something we weren't doing until a year ago. Now we are working on how we'll save to buy a home, pay for retirement, and pay to travel a good deal. Along the way we'll protect our finances by staying out of debt, being properly insured, and living below our means, none of which we were doing just a year ago. We have a lot of work to do along the way but we have a great head start and a plan to make our dreams a reality.
To recap, the path to FI has had an immense effect on our lives. Between reducing stress, becoming financially literate, and learning more about what we want in life, we have journeyed far in just 12 months. Creating achievable goals and having a plan to accomplish them is something we hadn't taken seriously until we started down the path to FI. Continuing to work toward our goals has already created a feeling of fulfillment that will only increase over time.
What are your motivations for obtaining FI? What do you wish to accomplish along the way to FI and once you reach it?
What Bloggers Owe to Their Readers
Earlier this week I was listening to one of my favorite podcasts on my way to work. It was Stacking Benjamin's episode "What Do Money Bloggers Owe Their Audience?" which aired July 20, 2018. The main take away from the episode was that bloggers should be transparent about their financial information to include income, level of debt, and frugality. They find that many bloggers preach fruagiality and will tote about a high savings rate of 40, 50, 60+ percent. What they fail to relay to their readers though is that they earn incomes much higher than the average reader. Sure they may only live on half their income, but that half may still be double what you or I make in a given year.
My goal in this post is to create complete transparency. It is in part the reason why Mrs. B and I have elected to remain anonymous, at least for the foreseeable future. We haven't yet explained our financial standing in its fullest. I will attempt to do that now.
Income when Mrs. B and I were first married in 2015: $52,440. I was earning $47,040 through the Army and Mrs. B was earning $5,400 through her part-time job while going to school.
Income now in 2019: $68,016. This is all through my job in the Army. Mrs. B now stays home raising our 18 month old daughter, soon to be big sister.
Estimated income in 2020: $77,616. I will receive a raise when I reach four years of service and another raise once I'm promoted this Fall.
Highest total amount of debt: $52,500.
Student Loans: $27,000
Mr. B's Car Loan: $5,500
Mrs. B's Car Loan: $20,000
Current amount of debt: $38,500.
Student Loans: $20,500
Mrs. B's Car Loan: 18,000
With our current monthly income of $5,668, we spend approximately $1,360 a month, or 24%, to pay off our debts. While this savings rate is hardly noteable in comparison to many savings rates claimed by some of our celebrity bloggers, this is much more attainable when taking into consideration that Mrs. B and I do not make six-figure salaries and we have a child (and a half). I'll be the first to admit that I grow envious when I here someone tell how they have an 80% savings rate with a $300,000 salary. Obviously I can't possibly hope to support my family with an 80% savings rate at our current income. We would have to live on $13,600. That might be possible for a single adult living at home, with their parents, while working from home. It is not attainable for a married couple with a dog, nearly two children, living on their own, working 15 minutes from home, sometimes much much farther.
While it is important to stress a high savings rate, it is far more important, in my humble opinion, to stress a savings rate that is both sustainable and high enough to accomplish your goals. In the podcast episode I cited above, Paula Pant, another popular podcaster, stated "...one person's frugal is another persons spendy". In our case, a 24% savings rate fills both of these criteria, and as our income gradually increases, so will our savings rate. I estimate that we are currently living on approximately $51,692, very close to what we were earning when we first married in 2015. As our income increases though, we have learned to fight lifestyle inflation in order to improve our chances of financial independence.
Up to this point we've covered income, and level of debt. We have not covered frugality. This is sometimes a touchy topic in our household, although much less often now than it was in the beginning of our journey. Mrs. B and I both come from homes that suffered from lessened income at one point or another. We both grew up experiencing a systematic draw down in lifestyle due to a financial hardship that our parents endured. We have both responded to our experiences differently though. Mrs. B use to spend up to our level of income, which has only increased since we got married. I, on the other hand, have always been more of a minimalist in lifestyle. I was a natural saver in college (at one point I had over $7,000 saved) and I paid for my first car in cash. As a result of our upbringings I have always been the frugal type, though sometimes I may stray, while Mrs. B was more of the spender. Ever since we created our budget together though, we have come closer to the middle of the spectrum. I have become more open to spending while Mrs. B has been more willing to save.
Before we go on, I would like to state that I do not consider ourselves overly frugal. Mrs. B put it best around last Christmas when she said "I don't know what to put on my Christmas list. I already have everything I want." Typically when we find something that we want, that's still within reason, we consult with each other and make sure it fits in the budget before purchasing it. As a result we are able to achieve our goals (most of the time) without feeling deprived.
The ways in which we save are small and not entirely significant. There are many more ways in which we could save considerably more, but we choose not to because we find joy in some of our spending. We save money by planning our dinners two weeks out and purchasing all of the ingredients at once. Thursday is leftover night and I take any leftovers we make to work for lunch. We have store-bought pizza every Friday because we enjoy pizza but don't want to spend $20 every week for it. We save money on groceries by planning about half of our dinner meals without meat. I'd estimate this saves us around $50 a month. We also limit our dining out budget to $200 a month. We could easily spend less a month but sometimes we want an excuse to get out of the house and going out to eat provides that excuse.
Another small way that we save money is on alcohol. We very rarely buy our drinks at the restaurant or bar. In fact this last week is the first time we've spent money to buy beer for the house in about 6 months. That's because for my 24th birthday, Mrs. B got me a beer brewing kit. For about $100 I can now make over 40 bottles of beer for about $40. So far I've made three batches of a variety of beers totalling about 120 bottles. The average beer I'd buy at he store costs about $1.50 per bottle. 120 bottles would've cost us $180. So far we've saved $60 on what I consider a great hobby. Now someone out there is thinking "But you spent $100 for the kit so you haven't saved any money." Technically that money would've been spent anyway so I don't consider it against the money saved so far. But even if I did, we would begin saving money after a couple more batches. Plus it's a fun hobby and makes for an excellent conversation at parties.
There are some things that we still "splurge" on just to keep the peace. We still pay for cable as we enjoy watching the new Food Network shows and we also have Hulu and Netflix subscriptions, though we only keep one active at a time. Whenever we're done with one, we stop our monthly subscription and switch to the other. This only saves us $10 a month but it's something and it's easy.
I'm not saying that you should try to be like us and brew your own beer and switch between entertainment subscriptions in order to achieve FI. What I'm trying to say is to do what works best for you. For us, brewing beer, reading, and watching Food Network is what we enjoy. We can save some money buy eating less hamburgers and brewing our own Starbucks coffee at home. You may have completely different preferences than us, and that's fine. as long as you are maintaining a sustainable savings rate that achieves your financial goals.
I hope that I've been transparent enough with you all. I have no problem with sharing our deep dark FI secrets. Please if you have any questions, feel free to send a comment. As for me, I want to know what you all cut back on versus what you are willing to spend a little more on?
A Month in Review
In our last post we estimated that we would be under budget for the month of January by $300-400. And we were right on the mark coming in $353 under budget. We put the money straight toward the Chevy loan so it didn't have a chance to disappear elsewhere. Out of curiosity I calculated how much of our take home pay goes toward our debts vs how much extra we put toward the debts. Our monthly payments toward debt equals 11.5% of our monthly take home pay. The total amount that we applied to our debts last month equalled 28.7% of our monthly take home pay. This number will continue to increase as we incur pay increases over the next 12 months.
I'll soon enter my fourth year serving active duty and soon after will be promoted to Captain. Both of these events will result in a significant pay increase. Since any extra money we receive will go straight toward paying off our debts, I estimate that we will use about 37.3% of our take home pay to pay off our debts each month.
After seeing that number I had a hard time imagining how freeing it would be once we were debt free. Over a third of our debt, (closer to 40% after the next pay increase in January 2020) would be freed up for investing in our emergency fund, retirement, college savings, and more.
During the past few weeks I have been hit with a dilemma. We want to retire early, perhaps between 50 and 55. My dilemma was in figurinig out how and where to invest so that we can use our money before the governement mandated retirement age of 59 and a half. Our original plan, once we begin investing again, was to invest equal amounts into my TSP account (which is a Roth 401K) and Mrs. B's Roth IRA. The issue was that I can't pull any money out of my TSP before 59 and a half without incurring a 10% fee and paying taxes on the earnings. Knowing this I thought to myself, "this can't be be most efficient method of saving for early retirement". I searched for different methods for a couple weeks before finally realizing that the answer was right in front of me the whole time. While I was trying to figure out a way to make the TSP work for me, I failed to think of simply opening up my own Roth IRA which would allow me to pull out the contributions we'd made without a fee or taxes (since this was already after-tax money). After making such a monumental revelation... It became pretty clear that this would be my best option. Any extra money that we had available to invest would be applied to my TSP.
For those out there who are familiar with the recent changes in the TSP system, I elected to remain in the legacy system and not opt into the new Blended Retirement System (BRS). This would net me a larger pension package that we would use heavily after my retirement from the military.The new BRS provides an employer match up to 5% but reduces your pension from 50% to 40% of your base pay. This would result in me receiving approximately $14,635 less each year (assuming an average annual pay raise of 2%). This money would make all the difference when planning for early retirement. Assuming I retire from the military at 43 (20 years of service) and officially retire at 55, taking the BRS would reduce our pre-retirement income by over $175,000.
I've learned recently that most people think what we people in the FI community do is, well, weird. Since beginning this journey it was common to here that to be normal is to be broke, but I still refrain from talking to my coworkers about our plan to reach FI. The topic of investing came up when one of my coworkers brought up that she had reached her goal of earning $100,000 in the stock market, including her contributions. I congratulated her, as she had been working on this for over a decade, and she told me she planned to move $90,000 to bonds and start over with the $10,000 left over. I gathered that she is very risk averse and is afraid she'll lose the money she's earned over the last decade. I explained to her that bonds weren't risk free and that it would be more advantageous to keep more of her money in stocks during the next 20-25 years until she retires.
Needless to say, I didn't change her mind. By the end of the conversation it became less about the particulars of what you do with your money and more about having a plan. If you don't have a plan in life, how can you have a financial plan? When do you want to retire? What do you want to do when you retire? How much money will you need in order to do the things you want in retirement? Without any answers to these questions it becomes much more difficult to create a financial plan let alone follow a path to reach your desired end goals. At the very end of our conversation, the script was flipped on me. My coworkers thought, "well if you know so much, what is your financial plan"? I told them simply that I plan to retire before I'm 55 without any debt, including a mortgage, and that I'll live on my pension, retirement funds, and any real estate we pick you up along the way. This answer seemed enough to satisfy them, but in my own rare fashion I continued talking. And this is where they thought I was weird. I told them that if all goes as planned I won't even have a credit score. A moment of silence stretched across the office. Then my coworker made perhaps the most predictable response, "You can't not have a credit score". I explained how you don't really need a credit score and that if everything went as planned I would eventually "lose" my credit score. Another coworker, who had been in total agreement with me up to this point, said "Sir, I was with you a hundred percent until now".
Those in the FI community are not normal some of us fall farther out on the spectrum than others. But all of us will find that most people, normal people, think we are impractical or unrealistic. Those who are unable to comprehend the magnitude of what we are trying to achieve are simply uneducated in FI. You can only know what you know, and for that I don't fault anyone for not understanding what I'm attempting to do financially. All I can do is try to educate those who are open to learning something new, different, and sometimes controversial.
What is your plan for retirement? How are you saving and investing for the future? Have you had any unusual conversations with friends, family, or coworkers where you got some funny looks?
A New Year
We're starting our 2019 strong by crushing our budget and taxes. So far I'm projecting that we'll have an extra $300-400 at the end of January to go toward the Chevy we purchased in November. Shhh! Don't tell Mrs. B but I think I might splurge on her this Valentine's Day and get her a set of earrings as a thank you. Her earrings are always falling out because we got a cheap set and they have really short posts.
We have also already completed our tax return and will be receiving about $4,200 in refunds from Federal and State taxes. Last year we received about $4,100 in refunds and in response I increased our tax exemptions. Admittedly I knew nothing about how tax exemptions worked and only increased our exemptions from 2 to 3. After this year's tax filing I decided to educate myself on how they worked so I could settle on the proper amount of exemptions.
Many people think of tax season and look forward to receiving a tax refund. The problem with this though is that throughout the year you are paying taxes and after 12 months you receive a portion of it back without interest. Let's put the same idea under a different context. If you were to invest your money and after 12 months you had earned zero interest you wouldn't be very pleased with your investment. This is essentially what we are doing when we over pay in taxes. We are loaning the government money with zero interest. A better use of our money would be to give the appropriate amount to the government and use the remaining amount to invest in a 401k (which theoretically earns positive interest) or pay off debt, which will reduce the interest we pay in the future.
As I said before, I decided it would be pertinent to educate myself. I found that a single tax exemption is equal to $3,650. My understanding is in order to calculate how many tax exemptions you need, you should use the following formula. (Taxable Income - Deductions - Taxes Owed) / 3,650 = Tax Exemptions. A discaimer, I am not a tax professional. I may be over simplifying things or this may just be what is accurate for me as a member of the military. The vast majority of my income is not taxable. I calculated my 2018 tax rate and found that it was approximately 1.86%. (3.35% after deductions). We take the standard deduction of $24,000. I'll show you the math below.
Taxable Income = $53,800
Standard Deduction = $24,000
Taxes Owed = $1,000 (This is how much I paid after my 2018 refund)
(53,800 - 24,000 - 1,000) / 3,650 = 7.89 Exemptions
Now I can't take a 7.89 tax exemption, rather I would have to take either 7 or 8. But again, I am not an expert on taxes and I did all this work myself. My exemptions for 2018 were 3 so rather than increase it to 7 I took a more conservative approach and increased it to 5, just in case I'm half wrong. My main motivation for this is so that we'll have more capital throughout the year to pay off our debts quicker. Theoretically this method should allow us to pay less in interest over time, potentially allowing us to become debt free a little sooner. I'll let you all know how it goes.
But in the meantime, we have $4,200 to burn! So what should we use it on? The answer to this question will be different for everyone depending on your current financial situation. My first knee jerk reaction was to put it all toward the Chevy. Luckily I have Mrs. B to help reel me in and focus on upcoming expenses. As I've mentioned before, we will be moving soon. In fact I just received my orders which helps detail our move. Mrs. B and I began planning the next few months of moving expenses to include gas, hotels, dog boarding, shipping costs, flights, security deposit, etc. All in all we estimate that it will cost us between $1,600-1,900 to move. Luckily the military will reimburse us for a decent portion of the cost. How much we will be reimbursed is yet to be determined and hasn't been factored into the above cost because we will still have to foot the bill upfront.
Originally we had planned to put about $2,600 toward our debts after our tax return (don't ask me how we got his number, I have no idea). This would leave us with $1,600 which would probably cover everything. We haven't decided yet but we may just put $2,200 toward the Chevy and hold onto the remaining $2,000 until after the move is complete. Then whatever is remaining will go toward the Chevy. I feel this is a well balanced approach as we still get to put a good chunk down on the Chevy and we'll hopefully have enough cash reserved for our move. Plus the extra $300-400 I spoke about in the beginning of this post should just about make up the difference we had originally projected to put down on the Chevy.
What do you think about our plan to use our tax refund? If any of you out there are tax experts, (or just have more experience than we do) what do you think about my tax exemption equation? Am I at least somewhat close or completely off the mark?
Beating The Holidays
We got back home on January 6th and the next day we sat down and closed out the December budget. It was with a great sigh of relief that I told Mrs. B we had managed to come in under budget. Shortly afterward I began working on January's budget spreadsheet. We had a few minor changes to make for the new year such as increasing our income (only about $50 this month and another $50 starting February.) We also increased the monthly amount we would put away for Christmas gifts. This was because we would have another child to gift to next year and it would help offset additional costs we hadn't forseen such as shipping some gifts to distant relatives. Additionally we planned out how we would spend the money we've been saving for Little Ms. B2.
Mrs. B just entered the third trimester and we still have plenty of things to purchase before Little Ms. B2 arrives such as a carseat, clothes, diapers, etc. There are many things we are choosing to wait to get until after we move in May such as her crib and dresser because our current home does not have room to house another baby room. Luckily we were prepared and began saving each month to offset the major expense of bringing a new baby home. We saved $100 the first month and every month since then we have saved $200 bringing us to $1700 when our little bundle of joy arrives. Based on our calculations this will be enough to cover everything we need plus most of the cost of her newborn photos.
We have very high hopes for the next two or three months. Without any major travel or holiday events, our expenses should be down compared to the last few months. Looking back at when we started this journey in March, some of our least expensive months were during the Spring. We can usually expect to drop an extra $200 in gas and another $100-$200 in restaurant expenses whenever we travel home. Those two items make up the extra $300 or so that we had last Spring to contribute to our monthly loan payments. Plus we are receiving a raise which equates to about $100 more per month. Also once Little Ms. B2 arrives we'll be able to start saving some of the $200 a month we've been squirreling away for her arrival.
On an offnote. I'm very excited to be all caught up on our story. When I started last month I wanted to include everything from when we started. This meant backtracking approximately 9 months. Now that I'm all caught up though I can focus on what's going on now.
How did you make it through the holidays? Did you maintain your financial goals or were they derailed by something? It's important to realize that we can't always stay on track, but if we acknowledge how we failed then we can improve the next time we face a similar circumstance.
A Win and a Loss
During the end of October 2018 into November I attended a specialized course to try my hand at a new career within the military. This was a critical time to be out of state and out of contact with Mrs. B. We had had a tough month with unexpected expenses popping up. We had to replace the spark plugs and an ignition coil on the Trailblazer. This would’ve cost us around $300 if we had gone to the auto shop. Instead we bought he parts and learned how to make the repairs ourselves. We ended up saving $200 by doing the work ourselves. Before I left, Mrs. B and I sat down and balanced out the budget as of Otober 22nd, 2018. With me leaving and nine days left in the month, Mrs. B had about $70 to stay within budget. Neither of us expected to come in under budget and we had already discussed options to rollover the overage to November.
I returned from the course on November 2nd, 2018, successful in my endeavors, and the next day we sat down and closed out the October budget. Mrs. B did a great job while I was gone and at the end of the month we had $6 left to spare. This was easily the closest we had ever come to zero and admittedly it made me nervous. Sitting on the couch after I realized we stayed within budget, I looked over at Mrs. B with a goofy look on my face and offered a high-five. I was excited because we successfully curbed our spending to come in under budget.
After supposedly fixing the Trailblazer in October, we prepared for a trip up to Ohio to visit our family for the Thanksgiving holiday. The Trailblazer hadn’t been showing any signs of distress but about 30 minutes into our drive the engine started bucking like a mule. After about 2 hours into our 12 hour trip, we stopped at an Auto Zone to try fixing the problem. I found a disconnected vacuum hose and was sure that reconnecting it would fix the issue. After it was “fixed” we started back on the road again with negligible improvement. Although it made us nervous, especially Mrs. B, we drove it all the way up to Ohio without any substantial issues. But we were lucky we made it.
My Father-in-Law and I tried diagnosing the problem ourselves and tried fixing a couple different parts with no success. We took the Trailblazer to the shop for an engine diagnostic and found that it had no compression in one of the cylinders, which was a new issue from the previous month. We had to take it to a specialized engine shop for further diagnostics and repair. At this point we had spent about $220. After a couple days we received the mechanics recommendation and the bill. The work would cost us approximately $3,200, just over the value of the TB if we sold it to a private seller. We decided to go forward with the repair as we didn’t really have the time to purchase a replacement vehicle. We thought this was the worst case scenario. We were wrong. After another couple days we got a call from the mechanic detailing further complications. He amended his original recommendation and instead thought we should replace the engine rather than repair it. The cost would now be $4,200. After a long discussion and a few tears, Mrs. B and I decided to cut our losses and stop the repair process. The work done would cost us $940. We made a deal with the mechanic to give us $200 off the bill and in return he would take the title and tow the trailblazer to the scrap yard. This brought our bill down to $731 and the total amount paid for the repairs was $951.
The next evening we cleaned out the Trailblazer and began a 72 hour mad search for a used SUV. I let my supervisor know he situation we were in and extended my leave for a week so we could find another car and travel back to GA. I sat down with a pad of paper and pen an began crunching numbers to figure out how much we could afford. We had to find the balance between spending less without compromising the reliability and longevity of the SUV. The more we spent, the longer it would take us to get out of debt. I knew it was necessary but the thought angered me. We were within a year of being debt free and we were backtracking. We intially decided to keep our cost at about $15,000 after taxes and fees, but found it was an unrealistic price for what we were looking for in the amount of time we had. We increased our limit to $18,000 and found 3 SUVs that fit our needs. There were two Chevy Traverse’s and one Buick Enclave, all 2013s. Chevy #1 was red, with 62K miles, needed a hitch installed , and priced at $16,300. Chevy #2 was silver, with 95K miles, had an installed hitch, and priced at 16,000. The Buick was black, with 81K miles, had a hitch installed, and priced at $15,200.
After two days of looking and bargaining, we closed on Chevy #1 for $15,500. We chose it because it had the best mileage and was in better cosmetic condition than our second choice, the Buick. The one setback was we had to install a trailer hitch and wiring which cost about $380. All-in-all we love the car, and it got us back to GA with no problems, but we nearly doubled our debt after financing it. As a result, I estimate it will take us an extra 10 months to pay off our debt (September 2020).
Our First of Many Stumbles
Well we had our first month of going over budget. August 2018 we lost sight of what we had left in our monthly budget. Now we only went over by $43 so it wasn’t a huge deal for us to apply it to September, but it did alert us to the fact that we weren’t following our budget as well as we ought to be. We spent the first few days of the month at Universal Studios Orlando with my Mom and siblings. We did very well staying within our budget with money that we had already saved up for the trip. After the trip we came home to GA for a day before heading up home to OH for 10 days. This is where our budget fell off the tracks. We had event after event planned including our daughter’s first birthday party, visiting with college roommates, and multiple dinners out. We were so busy and everything from food to gas was costing us more than usual.
By the end of the month we had spent approximately 460 on gas where usually we budgeted for $200. Normally at the end of the month we would have $100-$300 left over to put toward loan repayment. Unfortunately that was not the case this month. We still paid our normal amount of loans so we were still on track to finish on time, but it’s nice to have a little extra money to throw at those loans and pay them off early. The main take away, adjust our budget at the beginning of each month to account for increased costs of travelling. This practice applies for any known additional cost. There is no monthly budget that is perfect every single month.
During mid-September 2018 Mr. M, one of my former assistant principals from high school, reached out to me asking if I would complete a phone interview for a survey he was conducting. His research was to find out what schools and families provide to students to help make them successful. I’m not usually one to talk about myself but this whole interview required me to. I described to Mr. M, who was now the High School Principal, how my decision to go to college and become on Army Officer was largely influenced by the 2008 recession.
During the recession my father was laid off and later rehired to the same position but with a 25% pay cut. The recession had an exceptional effect on how I viewed my upcoming career choice. I soon decided that I wanted to join the military for the job security. It was a blessing that I did especially as I neared the end of my undergraduate career. Many, if not most, students were worried about finding a job let alone a career. My path had already been planned out. A few short months after graduating I would join the Active Duty ranks as a Military Police Officer. In between graduation and leaving for military training I worked two jobs and married Mrs. B. My two jobs as well as Mrs. B's part-time job that she worked during school were barely enough for us to make ends meet. By the time I left for training, we had $400 in our joint bank account and no savings.
The major take away from the interview was how my priorities now and even as a high school student differed from other students. Most wanted an exciting, high-paying, widely accepted job. I was looking for a secure, well-paying career. This idea of security has stuck with me ever since and has affected many of my decisions. It is a major reason why I follow Dave Ramsey’s baby steps instead of the many other more risky steps to wealth building.
During the 4th month since we started the 7 Baby Steps (June 2018), Mrs. B, our daughter, and I spent a week in Disney World with Mrs. B's parents and sisters. It was my first time (as well as our then 10 month old daughter) and we had an amazing time. I had a difficult time convincing myself that it was ok for us to take such an expensive vacation right at the beginning of our journey to financial independence. The fact of the matter was we had this trip planned and scheduled long before we started Dave Ramsey’s program. I can remember sitting down with Mrs. B during one of our early discussions about the 7 baby steps and her asking me, “We can still go to Disney World right? I’m not willing to give up Disney World.” Luckily we received a healthy tax refund that year which covered 75% of the vacation’s cost.
Mrs. B and I sat down and created a budget for the trip which encompassed travel, food, lodging, tips, dog boarding, and a souvenir fund. We spent the first four months of our baby steps journey putting $250 into savings each month to cover the rest of the trip’s cost. We went to Disney World and had a great time even though we had given ourselves a budget. We would keep track of everything we spent by putting notes in our phones. My Mother-in-Law thought we were a little crazy for this but it put us at ease and actually helped us stay well under budget. At the end of our trip we tallied up all the money we had spent and ended up coming in about $550 under budget! This was extremely useful because we had accumulated some unforeseen expenses. During the trip I walked into the hotel pool with my phone still in my pocket and had to replace it. Luckily we had insurance on it so it only cost us the $150 deductible. Additionally we took our dog Dexter to the Vet the day after we picked him up from the boarding facility for his annual vaccinations. This put us back another $250, an expense we failed to account for. The rest of the extra money would go toward paying off our debt, which was great, but we could’ve had my car paid off a month earlier if we had been able to put all $550 toward it. Still, Mrs. B and I did very well keeping within budget and we did it without feeling like we had missed out on anything. We simply made reasonable purchases throughout and only made minor splurges. For example, rather than buy a drink or two in the park each day ($10+ for each drink), I only bought two drinks the entire trip and had drinks back at the hotel room, with my Father-in-Law, that we had packed. We also never ordered the most expensive items on the menu and packed snacks instead of buying them in the park.
During the next two weeks following our return from Disney World, we needed to take our 2004 Trailblazer to the shop to have the brake pads swapped and the A/C checked. We had noticed that the A/C wasn’t running as cold as it should be and it was the middle of June in Georgia. Initially the auto shop clerk, an individual I had worked with multiple times before and trusted, thought the A/C would be a quick fix. She called me about an hour after giving us our initial quote of $320 for everything. Unfortunately there were more extensive issues than she had foreseen and the total after parts, labor, and taxes would be $960. That was three times the initial amount and it came as a shock. I was at work at the time and asked to speak with my wife before they started any work. I called Mrs. B and explained the situation.
We concluded that it was in our best interest to fix the issue now and avoid further complications down the road. The last thing we wanted was to breakdown on the highway and have to replace our SUV. The question became how we would reposition our money to cover the extra $960 expense. What we decided to do was take any extra money we had leftover at the end of the month and put it toward the repair. Usually this money would be added to the next month’s loan repayment. In order to cover the remaining cost we took $300 out of our miscellaneous fund for the next month as well as an additional $300 from our July loan repayment. The best part of this situation was that it was a potential $1,000 emergency, but because we were already budgeting our money responsibly, we were able to simply shift where the money would be focused during the next month. Remember that our monthly car payment was only $230 a month, but we were making payments in excess of $1,000 at this point. We were way ahead on our loan payments and could’ve decided to not make a payment that month. Technically we didn’t need to make a payment for the next year. Instead we chose to only decrease the amount enough that we would still finish paying off the car loan during the next month, when we had originally intended to. All of this showed Mr. B and I just how effective Dave Ramsey’s program is in reducing stress. This same situation would’ve caused me a lot of distress a year prior, but instead we were able to treat it as a minor bump in the road.
Affording a Home
Toward the end of May 2018, our 3rd month of following Dave Ramsey’s Baby Steps, Mrs. B and I began talking about how we would ever afford to buy a house. The conversation was spurred from a sudden constant watching of HGTV, mostly the Property Brothers. We had taken issue with our cable provider at the time and ended up receiving more channels, to include the Home and Garden channel. I had had a profound interest in one day designing and purchasing our own home, a home where Mrs. B and I could grow old together, close to family. In the matter of a week, we went from constantly watching the Food Network to mostly watching HGTV. Mrs. B had asked me how and when we would purchase a house, and at the time, I didn’t have an answer. I was unsure how we would be able to save while simultaneously working on the 7 Baby Steps.
The next morning was a Saturday and it was my turn to wake up early when our daughter beckoned. Mrs. B was still in bed catching up on some sleep when I put our daughter down for her morning nap. I took the next hour or so to sit down with a fresh pad of yellow paper and our current financial plan that had been posted on our refrigerator. I remembered that in our original plan I hadn’t accounted for the annual pay increases that federal employees received every January. I created a model that showed how much we could save toward a down payment on a home if we just used that additional money. In the year prior we had received a 2.4% increase to our base pay. Annual increases are difficult to predict, but assuming that my pay would increase by 2% each year, I determined how much we could save. I looked ahead in my projected career path and determined that we would have to save anywhere from 4-7 years before attempting to purchase a home. We wanted to time our home purchase with a scheduled permanent change in station as the Army would pay for us to move.
After crunching the numbers I predicted that we would have approximately $12,000 after four years of saving. But if we waited for seven years we would have about $39,000, well over three times as much. Mrs. B really disliked the idea of waiting 7 years to make a purchase and didn’t want to wait that long. Her thought process was “The longer we pay rent, the more money we waste.” Admittedly I agreed with her 100%, but my concern was being able to put at least 20% down on a home that we would own and live in for most of my remaining Army career. I wanted to be able to afford a home valued around $175,000 to $200,000. This target price gave us plenty of good options for homes in the location we wanted to live in. The problem with buying a more expensive home though is you have to put a larger down payment on it to avoid higher interest rates and paying for private mortgage insurance (PMI). Anytime you put less than 20% down on a mortgage you have to pay for additional insurance until you pay off 20%. The exception to this is the VA loan. We could put zero down and not worry about PMI. This seemed like a great way for us to purchase a home far sooner than expected. The main downside was the higher mortgage payment we would incur if we didn't put anything down but still purchased the same home.
I told Mrs. B the only way we could afford the size home we wanted would be to wait and save longer for the down payment. Eventually we came full circle and decided it wouldn't be prudent to save for a home while we were working on getting out of debt. It was the same rule of thought that led is to deciding not to save to replace the Chevy while working on baby step 2. Instead we would continue paying rent until we were in a better financial position to take on home ownership.
Getting Started: The First Months
Perhaps the most difficult part of this entire process occurred right away. The task of explaining my vision and plan to my wife had proven to be more difficult for me than actually making changes to our spending habits. I’m not sure she fully understood what my goals were at the time and what they meant for us as a family. At least if she did, she never conveyed any emotion about it as I did. The idea of roughing it for a few years in order to be financially set for life seemed well worth it to me. So much that the topic excited me and prompted me to take charge of our future. Mrs. B was less than enthusiastic to begin but nonetheless, we began in March 2018. While I wanted to go full minimalist, Mrs. B was more realistic and attempted to offset our need to cut things out of our life by reducing what we were spending on groceries. I can appreciate her efforts to minimalize the effects of my sudden need to save by off-putting some of the cost of food by electronic couponing. The electric coupons were nice because the money we saved was deposited into a PayPal account which became a sort of sinking fund. If I recall correctly we had about $180 after our first 3 months and we continued to use it long afterward. Looking back I know we could have cut back on a lot more things. But perhaps my wife’s stubbornness along with my persistence created a decent, if not contested, middle ground. We were able to allocate some of these funds toward the things we wanted but didn’t necessarily need.
In the end we were living with a moderate amount of comfort without putting ourselves in a money rut. I can remember Mrs. B one day before our trip to Disney World turning to me and asking, “You’re not going to tell me that I can’t buy souvenirs at Disney World right?” I looked back at her and asked, “We included souvenirs in our budget right?” A loaded question because I knew we were budgeting for $250 worth of souvenirs. She replied with a nod and I responded saying, “Then we stick to the budget.” Not sticking to the budget, or any plan for that matter, was something that frequently caused a disagreement between Mrs. B and I. She would want to spend over the budgeted amount and I would become an authoritarian and say "no", which would make her mad at me until I eventually eased up and spent the extra money. It was never for something that we actually needed and sometimes I wouldn’t give in to her pressure. This was often followed by long apologetic speeches but still I felt that I had to protect the budget we had set.
Coincidentally, the unit I was serving with at the time announced during morning formation that they would be offering a course through The Financial Peace University by Dave Ramsey. It was to be held every Wednesday during lunch for ten weeks. Our Chaplain, was going through the program himself and myself being a new-found believer in the 7 Baby Steps decided to attend. It was engaging and fun to watch which made it easier to learn. Most importantly though, it energized me to sit down with Mrs. B and discuss our financial path. After the first week’s lesson I told my Mrs. B that I wanted to have a real go at the budget and to plan our way through the 7 Baby Steps. At the time I was a 1st Lieutenant making approximately $5,000 a month after taxes. Not too bad for a 24 year old. We went through the numbers and delegated every dollar to a specific area, rent, utilities, groceries, phone, gas, etc. We had already funded our $1,000 emergency fund so we were ready to discuss paying off our debt, starting with the used 2007 Pontiac I had just purchased. Based on our plan it would take us seven months to pay off the car loan (September 2018).
Afterward we wanted to split our efforts to pay off the student loan debt, approximately $24,000, and save to replace my Mrs. B's 2004 Chevy Trailblazer.
This tactic was ill advised based on Dave Ramsey’s techniques, and we would later change our approach. Dave would promote focusing all of our energy into getting out of debt. The truth of the matter was I was scared to wait too long to replace the Trailblazer. It was our only means of traveling over 12 hours home with a baby, a dog, and a trailer in tow. Later we would find that I was right to be scared as we had to replace the Chevy rather unexpectantly. Under our current plan we would be debt free by July 2020 (28 months after we started) and we would have allocated $8,500 toward replacing the Trailblazer. This plan included pay increases due to upcoming promotions and time-in-service pay increases, but it did not include the next two years’ worth of tax refunds, both of which I intended to use toward our student loan balance. So in actuality I was hoping to have our debts paid off after 24 months. Afterward we would need another 9 months to fully fund our 3-6 month emergency fund then we would start putting money toward retirement and college funds. All-in-all the plan would take less than three years and we would be on track to financial success.
I was excited! Maybe even a little obsessive (Mrs. B would agree). I was so nerdy about it that Mrs. B and I signed our three year plan as a symbol of our commitment. Though to be fair, Mrs. B jokingly suggested that we sign our plan. March 2018 was the first month that we started using our budget. The immense emotional and physical relief was extremely substantial. For the first time we were on the same financial mindset. Without actually doing anything, other than agreeing on a budget, it was like we had gotten a pay raise. We built in a miscellaneous fund because we knew things would come up and we didn’t want them to affect the rest of our budget or cause us stress. During the first month our miscellaneous budget was about $192 and we paid about $881 between our car and student loans. We didn’t have to make any drastic lifestyle changes and we managed to come out with approximately $470 leftover. It was amazing to me that we had nearly $500 to play with during April. We ended up putting $200 toward the April car payment, bringing our total loan payment to $1,081 for April. My hope was that we would be able to maintain this momentum and continue paying more into our loans so that we could move out of Dave Ramsey’s long, egregious 2nd step into the more exciting steps. The rest of our extra money went toward new prescription insoles for Mrs. B who badly needed to replace her decade-old pair, and to baby-proofing the house against our then 8 month old daughter who was getting experimental with her crawling.
My outlook was higher than ever before. I started looking further into the future with the possibilities of foreign travel, saving for a home, and increased retirement savings portfolios. But for the time being I needed to stay grounded and focused. We had about $3,350 left in car loan debt and just paid $800 toward it. I estimated that we could pay it off in 4 months, all we had to do was squeeze about $200 more into it over those 4 months to cover the remaining $150 plus accruing interest. All-in-all my goal after that first month shifted from being debt free in 28 months to being debt free in 24 months, possibly less. My main reason for trying to remove all of our debt as fast as possible was because I stopped contributing to my retirement in order to facilitate debt removal. I was only 24 years old and it was killing me to not make contributions because I understood the exponential difference that a few extra years can make when compounding interest is in effect. Perhaps my wanting to contribute to retirement would incentivize me to pay off our debts quicker.
What is it that's motivating you to pay off your debts? Without this motivation do you think you would've ever started toward FI?
Planning The Baby Steps
We owed about $4,000 on the Pontiac and another $25,000 in student loans. We rented so no mortgage to take into consideration. The third step is to fully fund our emergency fund with 3 to 6 months’ worth of expenses. I planned to save $12,000 or an additional $11,000 to our $1,000 already saved up. This step was to ensure that we would have enough to support ourselves in case I became unemployed, an unlikely scenario when you are in the military. The fourth step is to invest 15% of our income into retirement, of which I was already investing 6% of my basic pay. Step five is to start saving for the kids college fund, step six to pay off the mortgage, and step 7 to build wealth and give generously.
I crunched the numbers to include a rough income vs. expenditures list then applied future pay increases (easy to do in the military). I created a plan to pay off our debts and start saving more. It was an aggressive plan, one that I knew would likely be disrupted by unforeseen life events. Then I sat down and showed it to my wife. She never enjoyed talking about finances, and this was no exception. She was mildly interested at best and was outwardly uncomfortable with the prospect of having to save more money. At the time we were saving to go on two vacations over the Summer and Mrs. B was worried that we would have to save less for our vacations in order to fund this plan. I explained to her that after we were settled from vacation and we had the extra cash, we would put the additional money toward paying off the Pontiac. This would amount to $430 a month plus the $230 we were already paying. $660 a month would pay off the car within 5 months. My plan went as far out as 36 months in which time I thought we could have the student loans paid off and start investing more in ourselves. My goal was to invest as much as we could as early as we could to maximize our ability to retire while we were still in our 60s.
My goal was to retire at 60 which would equate to about 38 years of working full-time. If everything went well in the military, and I was able to serve 20 years on active duty, I would start receiving a pension at 42 years of age and we would begin withdrawing from our retirement account at 59 1/2 years. Afterward I was planning on making my retirement savings last indefinitely. People ask how long you want your retirement savings to last. A hard question to answer at 24. I was in great shape, very active, and had no intentions of age or disability slowing me down in my retirement years. I often thought to myself “I’ll be done having kids before I’m 30 meaning they’ll be out of the house by 50 or so.” 50 still seemed so young to me. I wanted to live another 40 plus years so I needed to be healthy and wealthy. Wealthy enough to do the things I wouldn’t be able to do as a mid-20s parent. Mrs. B and I had dreams of traveling to different regions of Europe. I was beginning a career change in the military that could take me to many different regions of the world. Regions that might be worth visiting later on for pleasure rather than business.
Don’t get me wrong, I was proud to be a father, even as young as I was. I saw many pros with having an empty nest before I hit 50. The difficulty I knew that I would have was getting my wife on board with the plan and trying to offset the financial effects of life. Events that were coming up such as kid #2, replacing our old truck, and moving to a larger home would definitely effect my plan. But nearby rank advancement would improve funds significantly and future tax refunds would be put to better use. I was optimistic that within 5 years we would be debt free, have at least $12,000 in the emergency fund, we'd be investing at least 15% of our income, we'd be saving for the kid's college, and be on our way to building substantial wealth. Mrs. B was less optimistic than I was. My wife was used to a certain lifestyle, one that I was less accustomed to. The concepts of minimalizing and downsizing were more difficult for her to make amends with than they were for me. It would be similar to how it was for me growing up so I wasn’t too uncomfortable with the idea. Still, we had created and agreed on our plan. It would involve a little sacrifice but still allow us to enjoy our money. How well it will work? That depends on what life throws at us.
Tell us about how your first conversation with your sigificant other went. How did you approach the subject? How did they react? What advice do you have for people getting started?
The choices we have made concerning this topic have caused a lot of internal conflict for me. There are two important concepts for gaining true FI. Staying debt free and investing for retirement. Why are these concepts so important? Becoming and staying debt free lowers your monthly expenditures. Imagine how much more capital you’d have if you never had another car payment, student loan payment, etc. Becoming debt free gives you the opportunity to save so that you never have to enter into debt again. It also increases the amount that you can allocate toward your investments. Simply put, the more you invest and the longer you invest, the more money you will accumulate.
So back to the question, which comes first? Both choices may be right for you depending on your situation. Perhaps you can allocate 15% of your gross income to investing and pay off your debt within two years at the same time. If this is you, congratulations! Either you have a small amount of debt or you are winning at the income game. For us though, it is a question of which comes first. We can only choose to focus our efforts on one because our current debt load is over half of our gross income. Based on our situation, we’ve chosen to pay off our debts first. Why?
For us it’s more than just a numbers game, there is a large mental component to all of this. The ability to pay for everything in cash is powerful in two ways. It’s powerful in that you will always pay less for big ticket items such as vehicles, furniture, appliances, etc. Also it provides you with an increased amount of freedom to pay yourself first. And isn’t that what FI is all about, financial freedom?
Of course we understand there is a numbers side to this situation. We understand the opportunity cost of paying off debts with 3-5% interest rates rather than making investments with 8-11% ROI. But the ability to become debt free and stay debt free will allow us to increase our investment rate by a sizable amount. Our current monthly payments toward debt add up to approximately $590. If you invested $590 a month for 30 years with a 10% ROI, you’d have $1.3M. So by spending a couple years now to dig ourselves out of debt and position our finances so that we can stay out of debt, we can potentially improve our retirement account by $1.3M.
Additionally, once we’re out of debt, our cost of living will drastically decrease. Not only will we not have any loans to pay each month, but we’ll have cash reserves specifically saved up to purchase our next vehicle in full. We’ll use this approach toward every future purchase and it will save us many thousands of dollars over the course of our lives. How? Well first off we won’t be paying interest on auto loans and mortgages. Second, you will always get a better deal when you pay in full, with cash, than you will on credit. If you find that one sales rep won’t give you a deal, you can simply walk away and find another who is.
For some people, the variables will be different and so it will alter your decision. Some of you may have a different philosophy. Please share your thoughts and comments. Do you agree with our approach given our position, or do you think we’re way out in left field?