Category: General FI

2022 Q1 FI Progress, Inflation and Breaking My Market Addiction

Post author By Mr. MFI
Post date April 23, 2022

I’m a big fan of experimenting and trying new things so I’m going to try something new for this latest post. Earlier this year I became more transparent on the blog in posting how we crossed over the 7 figure investment account number and saving over $100,000 last year.

Recently, I wrote about keeping a cool head and on track when the markets start getting volatile (in the downward direction). I’ve noticed a lot of people struggling in this aspect. New investors worried about losing money in the market and stressed by their account balances going down even when they’re actively adding to them!

This post is going to be the start of quarterly updates to our financial situation including the change in account balances. Hopefully it gives some people comfort to know that they’re not alone and the encouragement to stay the course investing in their future.

I’m also going to use this post to talk about some additional small topics. Updates on topics that I’ve previously written about and have taken action on. Things going on in the financial world. Things that are on my financial mind.

2022 Q1 Financial Update:

In my article about the retirement tax triangle, I talked about the benefits of investing in all three of the retirement account types: taxable, tax free and tax deferred. I “eat my own cooking” so to speak, and actually do track my accounts in that way. You’ll see the breakdown of our finances into those account types.

Q1 Total Investment Account (-$37,100) Value Changes:

I like to start at the high level and go deeper into detail so here’s the overall change in value. Current investments is all our invested assets.

Net worth includes our house but assumes that it’s sold. Why? I haven’t written about this yet but right now we’re aspiring to one day to sell everything and tour the US in an RV for potential relocation spots.

Q1 Account Contribution Summary (+$41,985):

Taxable (+$16,700)
Tax Free (+$4,754)
Tax Deferred (+$15,585)

In Q1 our overall investment accounts were -$37,000. Ouch. And that’s AFTER contributing $42,000 into them. In other words a net -$79,000. That’s more than the average US household makes in a year.

That $42k was aided significantly by an annual bonus received in March so that won’t be the norm for Q2-Q4.

That’s how it goes sometimes with being an investor. Losing money, even if on paper, generates pain and emotions. Those can be pretty intense when you’re early in your investing career and not used to them.

I know it’s not what you want to hear, but you have to really experience that pain and control your emotions if you want to grow as an investor. You can’t learn about it in a book or from a story that someone tells you. You need to feel it yourself.

How do you stay the course when it feels like investing is just lighting dollar bills on fire? Look at history to remind you. The S&P500 has gone through periods of tough times but over the long haul, it has always had positive returns over 15+ year periods.

S&P500 historical chart from Macrotrends

Q1 Net Worth (-$17,800) Value Changes:

News flash – the housing market is still bananas. We own a very modest 1,500 square foot “starter home” in a moderate cost of living location. Our housing prices here in western NY state generally don’t boom or crash but they’re resumed their insanity since the start of 2022.

Our home value went up almost $18k and we paid down $3,200 of our mortgage. I had been overpaying more on the mortgage in Q1 but now that the market has had some more substantial drops will back off that. I’ll invest more in our taxable investment account instead. I ran the numbers on pre-paying my mortgage vs. invest in this article.

The Zillow Zestimate change over the last 3 months has been an $18,000 increase or over 10%! Crazy. Rising mortgage interest rates is really pushing people to try and get into a house is what I’m guessing.

At some point the increased mortgage rates will make buying at elevated prices unaffordable and I think prices will come back down to earth a bit. A 30 year mortgage at 6% has a monthly payment that’s about 40% higher than a mortgage at 3%.

Taxable Accounts Value Change (+$4,150):

Here are our contributions to these accounts this quarter.

Q1 Taxable Account Contributions: +$16,700

Brokerage – Added $5,500 to the account.
iBonds – Bought $11,500 between funds that had been sitting in cash and from new income.
Crypto – removed $5,300 from Stable coins to put back into HYSA’s for our travel fund and part of our emergency fund. Added $5,000 to BTC and ETH.

iBonds had been on my mind even before writing this detailed all about iBonds article. Mrs. MFI had some emergency fund cash sitting in a 0.01% savings account so we put that to work. We had more than enough EF cash if I were to lose my job so we were comfortable putting it into iBonds.

I decided to dial back the risk a little and take some of our sinking funds out of stable coins. I have a 75% written article on stable coins to discuss the level of risk there. They seem low risk in theory but just because you can’t see the risk, doesn’t mean that it isn’t there.

We contributed $16,700 and saw the overall taxable account values go up $4,150. Ouch.

Tax Free Accounts Value Change (+$4,754):

Q1 Tax Free Account Contributions: +$9,700

Cash – Removed $10k to buy iBonds. Added $5k back into the “cash” category from stable coins as a part of our travel fund and emergency fund.
Roth IRA – Added $12k. Executed back door contributions to max out both Roth accounts.
HSA – Added ~$1825 in contributions. Also moved $2k that was stuck in Mrs. MFIs HSA bank account. We’re both setup to max our HSA contribution for a combined total of $7,300 for the year.

In total we added about $9k to this category but it’s only up $4,700. Because our HSA’s are our retirement healthcare fund, we don’t need them for 25 years so they’re invested 100% in stock indices (VTI and VXUS). The

Tax Deferred Accounts Value Change (-$46,000):

One caveat to the tax deferred contributions. We are saving after tax dollars into the Mr. MFI 401k to perform a mega backdoor Roth contribution in 2022. That account will get more than $20,500 contributed to it but the after tax portion will get rolled out in November 2022.

Q1 Tax Deferred Account Contributions (+$15,585):

Mr. MFI 401k – $6,750 in my contributions. $3,710 in company contributions.
Mrs. MFI 401k – $5,125 in her contributions.

These accounts are a little heavier on bonds at a roughly 70% stock / 30% bond split. Both got hit hard and dropped in value.

Financial Topics On My Mind:

Breaking My Addiction To Watching Markets Daily:

In a recent article I talked about methods for avoiding investing mistakes. One key method was to stop watching the markets every day. I personally struggled with this one a lot.

I got into the habit when I was trading futures and Forex. Futures trade 24 hours a day from Sunday at 6pm EST to Friday at 6pm EST in my markets.

Determined to fix this, I’ve successfully stopped my daily watching and have now fallen back to looking at the market on the weekend when they’re closed.

Yes, I still have the urge to check during the week if I catch a piece of financial news. Yes, I’ve had a couple of slip ups. But, it’s a vast improvement from the 4-5 times a day that I was routinely looking at the market.

Roth 401k vs. Traditional 401k:

Mrs. MFI and I are both currently maxing out our 401k accounts with traditional 401k contributions. We both have the option to contribute some percentage as a 401k if we choose.

In my tax triangle article I noted that I was considering flipping over some or all of our contributions over to Roth since we were heavy in our traditional 401k accounts.

Account percentages in February 2022

Right now any contribution that I changed from traditional to Roth 401k would be taxed at 24% given our highest marginal tax bracket. We’re piling money into a Roth due to the mega backdoor but with $50k+ being contributed to our tax deferred accounts annually it won’t make up any ground.

My thinking at the time was that in 2026 the tax brackets will reset higher so better to take the tax hit now with a Roth 401k and in 2026 I could flip those back to t401k. I don’t like to do these types of changes without more analysis though so I’m staying the course for now.

I’ll do the analysis in a future article but I think we’ll have plenty of low income years between age 55 and 67/70 to draw down those tax deferred accounts while keeping our effective tax rate low.

Inflation, Interest Rates and Bonds:

Inflation. Everywhere you read in 2022 everyone is talking about inflation. They just released the April 2022 CPI report and it showed 8.5% annual inflation increase.

The stock market is going down so people don’t want to put money there. Interest rates are rising so intermediate term and long term bonds are getting crushed. People have discovered iBonds once again so they’re becoming very popular with a May 2022 annualized rate of 9.62% but they have low purchasing limits at $10k/person/year.

This period is indeed painful, but it will get better. The beauty of bond funds is that they constantly have bonds hitting maturity with new bonds being purchased at the new, higher interest rate. Over time, the yield to maturity will get higher and higher until interest rates level off and eventually drop.

If you need bonds for stability because of your risk tolerance and timeline, then hold bonds. Don’t let short term interest rates influence your asset allocation. Don’t let the interest rate risk tail wag the dog.

Taxable Account – Stay with Vanguard, Move to Fidelity, Move to M1 Finance with ETF’s

In my most recent article about mutual funds and ETFs, I contemplated the idea of moving to ETF’s to avoid the risk of taxes after the Vanguard target date fund incident of 2021. That kills my ability to automate my investments though with Vanguard since they’re pretty behind the times technology wise.

Since I only invest in passive index based mutual funds I think the risk is low of some special tax bomb event. Vanguard does let you flip from mutual funds to equivalent ETFs without selling your holdings.

So, the plan for me is to stay with mutual funds for now so I can keep auto-investing. When we get closer to switching from accumulation to drawing down I’ll likely migrate that account to ETFs and then move it to Fidelity for simplicity. We’ll likely collect all our funds there for ease of management.

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Tags FI Update, Financial Updates, inflation

General FI Investing

Our 2021 FI Progress: Joining The Double Comma Club

Post author By Mr. MFI
Post date January 23, 2022

BLUF: Fueled by a massive bull market and a high savings rate in 2021 our invested assets grew by over $275k. We officially joined the double comma club having over $1M in invested assets.

In a previous article, I covered how we saved $140,000 last year in 2021. Today I’m going to dive into where we stand with our investable assets and how that tracks to our overall FI number.

I’ll cover where the investments are located from an account type perspective (brokerage, 401k, crypto). However, what we’re invested in from an asset allocation perspective will be a topic for another post. In general we’re 75/20/5. 75% stocks, 20% bonds, 5% cash and crypto. Mostly invested in low cost mutual funds.

It feels a little odd to be writing about our financial progress last year right after a few weeks negative volatility (week ending Jan 21st, 2022) in the stock and crypto markets.

It’s pretty minor from my perspective, but some people that have recently enjoyed 25% returns last year are freaking out! Some newer investors are getting their first real taste of dealing with their emotions when things aren’t going up. Welcome to investing.

The Tax Triangle

The US tax system is complicated with lots of rules, exceptions and nuance that can bite you. It’s important to understand the taxation of your investments on the way out because that directly impacts how much you need to have to be FI. I wouldn’t recommend trying to use the Wesley Snipes accounting method.

The tax triangle refers to three different groups of investment accounts that each receive their own tax treatment: tax free, taxable and tax deferred.

Tax Free – No taxes due on the withdrawal of this money as long as the correct rules are followed. Examples: Roth Accounts, HSA’s used for qualified medical expenses.
Taxable – Gets preferential long term capital gains (LTCG) tax treatment for qualified dividends and assets held longer than a year and a day. 0%, 15% and 20% LTCG taxation rates in 2022. Examples: Brokerage accounts, crypto brokerage account.
Tax Deferred – Was saved pre-tax on the way in. Taxed as ordinary income when withdrawn from the account at your marginal tax bracket. Examples: t401k, tIRA, 403b, 457b, TSP, etc.

I introduce this idea briefly right now because that’s how you’re going to see my investible assets bucketed.

How I Track Progress

There are two main tools that I use to track our financial progress right now: personal capital and a spreadsheet.

Personal Capital (PC) does a good job of connecting to each of my accounts, aggregating that data and keeping it current. As account security has gotten tighter it does get a little more annoying as every month or two I need to resubmit credentials. You’ll see a few areas where I didn’t do that for a while and the charts look flat.

However, I also like to be able to see where that money is stored according to the tax triangle to help me see the amount in each area and what that breakdown in percentage wise. That information helps me understand if I need to make a change as to where to direct future investment dollars.

2021 Investment Account Values

Without further ado, here are the details! I’m going to use January 1st 2021 to January 15th 2022 as the period of review here because I took a snapshot of the accounts on January 15th. There are also a couple of bugs in the personal capital data so the chart dollar amounts don’t quite line up with my spreadsheet data but the spreadsheet data is right.

Summary Data

I think it’s easier to start with the high level summary and then dive into the details from there.

Current Investments (no house) is all of our investment accounts and cash but excludes our home equity. Net worth I’ll explain later in the article.

Breaking this down to the tax triangle, here is the distribution of those investment by tax treatment.

We have a situation that’s not uncommon – we’re heavy in tax deferred accounts. I’m still comfortable with contributing to a t401k because we’ve got a plan to draw down or Roth convert a good portion of that money when our income is much lower.

Some CFPs refer to this as the tax planning window between retirement starting and social security (SS) payments starting. Our tax planning window will likely be between ages 55 and 67. Income from jobs will have stopped and social security won’t have started so we’ll be in the lowest tax brackets.

Total Investments and Cash Accounts (+$275,500)

A strong saving year plus a strong market year where the S&P500 gained 26.9% contributed to great gains overall. The +$275,500 is the total change in account balance. In other words, it includes both contributions and investment gains.

There’s a $15k mistake here because one of Mrs. MFI’s accounts wasn’t synching right and the value that personal capital charts see is “frozen” in time. So, the PC amount below should be +$261k for the year in investments, but then add in the cash accounts and we’re in the $281k range. I’ve rounded numbers all over the place for simplicity so the numbers don’t perfectly add up.

Tax Free Accounts (+$83,300)

Cash, our Roth accounts and our HSA accounts make up our “tax free” accounts. Savings account interest is taxed as ordinary income but the amount being made here is trivial so I put it here.

Including HSAs in this bucket might seem a little unsual. HSAs could actually be put into a couple of different places. As I covered in this post, the money coming out of an HSA is tax free when used for qualified medical expenses. Right now I’m planning to use it for that purpose including long term care.

After 59.5 years old you can withdraw from an HSA for non-medical expenses and it will be taxed as ordinary income. If I wanted to plan on that outcome we could stick it in the tax deferred bucket to plan for ordinary taxation on that money.

Cash (+$20,000)

Cash listed here is cash held in non-investment accounts so it’s not part of the $1.19M listed above.

Why so much cash? Well, there are three high level sub-buckets:

$10k – Old vacation funds – My employer changed vacation systems from an accrued system to “unlimited.” I have $10k stuck there until I separate from service.
$10k – Checking/Sinking funds – I have a number of sinking funds in my YNAB managed budget. They’ll get spent eventually.
$25k – Mrs. MFI savings – She feels good about having a decent amount in her savings account. We’ll get some of that invested soon but her feeling good is more important here than the financially optimum approach.

Roth Accounts (+$54,500)

We only started contributing to Roth accounts 6 or so years ago so we’re playing catch up here. I’m very fortunate to have a mega backdoor Roth (MBR) capability using my work 401k and have used that to maximize what the IRS will let me put into a Roth account. I’ll keep doing that as long as I have the income and the politicians don’t kill that option.

My work 401k makes the MBR a little tricky so I only plan to do one transfer a year. MBR #1 below is the transfer of funds accumulated in both late 2020 and early 2021. MBR #2 was because I was worried about the Build Back Better Act killing the backdoor so I proactively did a second transfer just to be safe.

Due to some poor planning by me, we were potentially going to run into an issue of making too much money to contribute to a Roth the traditional way. As such, I backed out Roth contributions by re-charactizing them to an IRA and then backdoored them back into Roth a month later.

Health Savings Accounts (HSA) (+$8,800)

As I covered in this post, HSAs are awesome if you’re on a HDHP. Our accounts are quite new and small so they aren’t compounding much…yet. We continue to max them out and pay for medical expenses out of pocket so they should be north of $100k combined in about 7 years.

Mr. MFI HSA Investment Account

Mrs. MFI HSA Investment Account

Taxable Accounts (+$58,000)

Our two taxable accounts are a traditional brokerage account mostly invested in stock index funds and a new crypto brokerage account.

Brokerage (+$44,500)

The traditional brokerage contributions were lowered in priority as I was shoveling money into the crypto account when the prices started to fall near the end of year.

Crypto (+$13,500)

In late 2021 I decided that I had stayed out of the crypto space for long enough and started buying Bitcoin and Ether to diversify a bit into that space. I also moved some cash funds into stable coins to learn how they work and see how safe those 8% returns really are. I’m much more motivated to learn once I have some skin in the game.

Bitcoin peaked in price on November 8th so I timed that perfectly to “buy high”! The price has steadily dropped since then so I’ve been dollar cost averaging all the way down. Still waiting for the bottom! I have a small amount of crypto in another account besides what’s shown in this chart.

Tax Deferred Accounts (+$134,200)

Since these accounts are our oldest and largest it should come as no surprise that they saw the biggest jump in value. We put $50k into them courtesy of maxing them out plus employer matches and they saw another $84k in growth. That is some sweet compounding gains.

Mr. MFI 401k Accounts (+$89,200)

Mr. MFI 401k part 1

Mr. MFI 401k part 2

Mrs. MFI 401k Account (+$45,000)

Mrs. MFI 401k

Net Worth – Post House Sale

Net worth is a financial measure that takes into account all assets that you own minus liabilities. However, it doesn’t take into account the cost of liquidating fairly illiquid assets like houses. That’s a very real cost that you shouldn’t ignore.

In our case I wanted to account for those costs in a simple way so I’ve deducted 10% of the home value from the remaining equity number. This is 6% for realtor fees and another 4% for other expenses related to selling the house like repairs, moving and storage fees.

Our house went up in value like almost everyone else in 2021 and we paid down a good chunk of our small remaining mortgage. Since this is a primary residence and the capital gains are less than $500k it will be tax free for us as a married couple.

That $130k extra is what you see in the net worth (house sold) line. I haven’t included our paid off cars in our net worth. They’re only worth about $20-25k total and will keep depreciating.

Progress To Our FI Number

Those numbers are great, but where does that put us on our FI journey?

What Is Our FI Number?

Like the status of a dysfunctional relationship, the answer is complicated. All of these calculations involve taking an educated guess at your future retirement expenses and then applying your desired safe withdrawal rate to that.

Changes to your plan for family, lifestyle, location, healthcare and a million other variables make this a constantly moving target. My advice? Don’t drive yourself crazy trying to get it in the ballpark until you’re a year or two from retiring. Below is my current snapshot but I know this plan will change.

Retirement Expenses

Our expenses from last year were $55k, but I need to know our retirement expenses. I’ve added $5k as a health insurance placeholder for now.

I’ve also added an average 10% tax expense since we’ll have to pay taxes on most of the money coming out of our accounts. Don’t forget that the 4% rule of thumb didn’t take into account taxes! That’s an important line item that you need to have in your plan.

A 10% effective tax rate should be a good educated guess since we currently have a 15% effective tax rate on our ~$250k combined income. Taxes will likely go up but on $60k in income we’ll likely have an effective tax rate of less than 10%.

For those reasons, I’m using $66k/yr as our projected retirement expenses right now.

Our FI Number(s)

The FI community likes to use the 4% rule of thumb as their measure of hitting FI. Many debate if a 4% safe withdrawal rate (SWR) is too conservative or aggressive.

Regardless of where you fall in that debate, the initial study was based on a 30 year retirement. I’m planning on a ~45 year retirement from 50 years old to 95 and you just can’t extend the timeframe 50% longer and assume that the same SWR will be successful. For those reasons we’ll shoot for a 3.33% SWR which is 30x your annual expenses.

Another idea that I’m playing with is whether to add an additional bucket of fun money. An extra $200k (or some other number) that can be used to spend more in your early “go go” years when we’ll have more energy to have ridiculous adventures.

One thing to note is that this rough calculation assumes zero social security or other income in “retirement.” I need to refine this and see the impact of adding in some income.

Tracking to Our FI Number

With our $66k retirement expenses and a 3.33% SWR, how are we tracking to FI? We’re at $1,248,000 currently in relation to a $1,980,000 FI number which puts us 63% of the way to our FI number! That’s 18.9x our projected retirement expenses.

Thanks for reading! Where are you on your path to FI? How was your 2021? Drop a comment below.

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Tags FI, Financial Independence, yearly summary

General FI

2022 Plans and Blog Focus

Post author By Mr. MFI
Post date December 29, 2021

Photo by Bich Tran on Pexels.com

BLUF: Blog posts are going to get more technical in 2022 as I increase my technical knowledge and investigate the possibility of becoming a financial advisor.

It’s been a interesting year of blogging, FI knowledge growth and self reflection about what the future holds. It’s funny how we use this arbitrary calendar year dividing line to often reflect on the past and decide to change our ways in the next year.

Things I Learned In 2021 – A Future In Financial Advising?

Photo by mentatdgt on Pexels.com

In my recent post about my blogging year in review I went into the details of what I learned from blogging. What I didn’t mention in there is that through the process of blogging and expanding my financial knowledge a future side hustle or career 2.0 option has peaked my interest. Fee only financial coaching / advising (no asset management).

This feels like the best of all worlds to me. I’ve always enjoyed coaching and teaching others. I currently do that at my current job when it comes to providing career advice and general guidance. Through the blog I’ve tried to do a little bit of that by explaining complicated financial topics like the mega backdoor Roth in easy to follow ways that include lots of examples.

Helping others really lights me up so the idea that I could make money and help people is really appealing to me. The other piece to this puzzle is that I’d really like a location independent option to earn money. Mrs. MFI and I are interested to hit the road and see all that North America has to offer. A remote only service like financial advising would allow that.

What Comes Next in 2022?

So what do I do next? I still am 5-6 years from FI and am far from being able to just up and quit my day job. My plan is to try and test out this financial coaching thing on a friends and family level while I study for my series 65 exam. Passing that exam would be one large step towards the possibility of charging clients for a service.

In the meantime, another way to focus on that goal is to start focusing the blog on more technical topics. In 2021 I wrote a fair amount about happiness and mindset topics but what resonated with readers the most are my more technical articles. Staying more technical would also force me to ensure that I know a topic backwards and forwards before trying to explain it in a blog post.

So, going into 2022 you can expect more technical topics. Since I’m personally 5ish years out from FI there’s a lot to cover in asset allocation, asset location, tax diversification, safe withdrawal rates and a drawdown plan. If you have topics that you’d like to see covered please contact me at contact@managingFI.com to met me know.

General FI

First Time Blogger Year 1: The Cost, The Time, The Takeaways

Post author By Mr. MFI
Post date December 19, 2021
4 Comments on First Time Blogger Year 1: The Cost, The Time, The Takeaways

BLUF: I learned a tremendous amount about blogging, internet businesses, social media and myself in my first year with ManagingFI. It reinforced the idea that there is no better way to learn than to just start and do it. The lessons you learn along the way are by far the most valuable.

Why Did I Start A Blog?

Around this time last year (November 2020, to be exact) I finally decided to take some action and give this blogging thing a try. I had been interested in personal finance and investing for many years but had never blogged. Ever. It was also hard to ignore influential FI sites like Mr. Money Mustache that exploded making big money.

Why try a blog? Honestly, I was interested in building skills around online businesses where you could make money and be location independent. That’s a long term goal for Mrs. MFI and I since we love travel. I stumbled across websites like Empire Flippers where you can buy cash flowing web businesses and that was intriguing. But how on earth can I expect to run an online business successfully when I have no experience building or managing websites or online businesses?

Clearly, I needed to build skills and I’m a big fan of finding low cost and low risk ways to do that. Blogging seemed like a logical place to start.

My Experience When Starting

As mentioned in my about me page, I hadn’t done anything related to websites since the early internet days and I did the really basic stuff like make a personal web page. I’m a computer engineer, yes, so I know my way around a computer and have programming experience in my past.

However, there’s a big difference between that and starting up a website and learning a completely new space like blogging. I’m trying to drive home the fact that I was very much a rookie when I started. I didn’t know anything about wordpress. I had never purchased a domain.

I should probably also mention that I never wrote anything creatively! Before I started blogging I would have told you that I’m “not really a creative person”. I would have said I was a left brain person.

Left Brain vs. Right Brain

I thought of myself as a fairly good communicator from my professional experience presenting and e-mailing a lot. I’ve done some mentoring and teaching informally along the way but I had never written an article on a topic.

My First Year In Review

Lets dive into the details of what happened in that first year. How much did it cost, how much money did I make, what kind of traffic did I have and what did I learn from the experience.

What Did It Cost?

This is highly variable depending on who you host with, the quality of service and the wide range of services and plugins that people will try to sell you. You can spend a LOT of money if you really want to.

Domain Registration & Hosting – $169.83

Like many first time bloggers I went with a low cost hosting option and used BlueHost. You get price breaks for multi-year hosting so some of these costs are for 3 years and some are for 1 year.

Some added details:

Basic Web Hosting – BlueHost providing you server space on a shared server and e-mail. This is very basic hosting and their lowest tier of server speed.
Domain Name Registration – Cost of registering ManagingFI.com for 1 year.
Codeguard basic – a backup option for restoring your site should it get hacked or corrupted.
Domain privacy – This lets you hide your personal information from a general WhoIs domain lookup.

Blog Logo – Fivrrr – $40.75

At some point, you need a logo. Not the most critical thing in the world but I decided to get one. Fivrrr is an amazing resource to connect you with independent contractors that offer various services.

I had no concept of what I wanted. The graphic designer looked at my site and I told him a little about the content and in a few days I had a whole about 10 different options. A steal for $40 in my book and far better than I could have ever done.

USPS PO Box – $134

Why does one need a PO Box for a blog? Well, only if you want to build a mailing list and don’t want to put your home address. You’re required to have an address on your e-mails and since I use a low cost MailChimp service they don’t provide an address. Some higher end mail list services will provide an address for you but I didn’t want to pay for that.

Canva Subscription – $145.95

I am not a graphic designer. I’m an engineer with no background in Illustrator and can only do the very basics in a program like photoshop. Honestly, I don’t have the motivation to learn either.

However, I wanted to be able to make nice looking diagrams, charts and cover photos. Canva really has a great selection of photos for me to pull from and it makes it super easy to create professional looking graphics. It’s money well spent in my opinion.

I tried the monthly subscription at first to make sure that I was going to use it regularly and then purchased the $120 annual subscription.

If you like what you see and want to support the blog, consider using my referral link to check out Canva.

FaceBook Ads – $117.38

Somewhere along the way I took a small course on FaceBook ads and started to play around with them to see how effective they were at driving traffic to my blog. I didn’t put a ton of energy or money into it but I did experiment with them to see how well they worked to drive views, clicks and engagement.

The thing is, when your website doesn’t have a product to sell or generate revenue from traffic, there’s really no point in paying for ads. In the top ad below ($50 spent) it linked to my article on making $265/year buying groceries. If anyone signed up for that card with my affiliate link I’d get $75 in rewards (per card open).

I figured, I just need one signup to cover the cost! I went big with $50 in ads. 409 link clicks and 0 signups later it just became another payment towards my online education.

Podcast Mic – $57.23

You’re probably wondering why I’m listing a podcast mic with my blog costs when I don’t have a podcast. Well you see, there’s a story to tell here.

I connected with another content creator along my journey during a creator webinar conference and they were interested to interview me on their podcast and talk about my happiness dividends article. Me, trying to be professional, decided to buy something better than a webcam mic to use for the event.

Long story short, I got ghosted. That creator pushed the interview date due to getting Covid and then they went completely radio silent to my repeated messages. It really disappointed me because I was excited to both be on a podcast and talk about one of my favorite articles. On the plus side, that creator did introduce me to Canva which I’ve been happily using ever since.

Total Cost: $665.14

If I really wanted to go bare bones I could do without the PO box, ads and Canva subscription and do the first year for about $360. Going forward I don’t plan to do ads so annual cost should be about $350/yr on average unless I decide to upgrade my hosting service or pay for plugins.

How Much Money Did It Make?

This is a short section, $0! Well, technically I earned a Marcus referral bonus of an extra 0.2% APY for 3 months. On the $7k that I had in there at the time that was $3.50! Guess I shouldn’t quit my day job just yet.

To be fair though, a blog doesn’t just magically make money. You need to put effort into driving traffic to it and then add advertising, get sponsored, get affiliate income or sell a product. I didn’t pursue any of these in year 1 so I can’t expect to make income.

How Much Time Do I Spend?

It’s basically a part time job to run a blog if you put the effort into it. Many of my articles require research, running calculations, making graphics and creating examples.

On average I say it’s 6-8 Hours on a typical article. 10-12+ Hours on really detailed articles with lots of visuals, calculations, references or research.

For example, this article on downsizing was a 6-8 hour one since it was more storytelling about our experiences and what has happened.

While this article on HSA’s was a LOT of research in the IRS documentation to ensure that I had my information right. That was definitely a 12+ hour article.

Outside of this is the time to do any kind of website changes or fixes. For example, when WordPress last updated it broke my pop-up e-mail list signup. On average I spend 5-10 hours per week writing content and doing work on the website to publish content every 2 weeks. I created 30 articles in my first year.

Blog Traffic

The big question – how much traffic did the site get? About 22,000 page views and 16,000 visitors in the first year. I honestly have no idea if that’s “good” or not. About 60 views a day on average.

As you can see though, it’s very inconsistent. Early on the blog had very few visitors. During my best month of August it had over 4,000 views or 132 a day on average. During that month I happened to post some articles that really resonated and I was picked up by some FI e-mail newsletters.

Where does the traffic come from? For the most part, a lot of hustling and sharing on Facebook. I post my content in about 6 different FI / personal finance groups that allow it. I also reference my articles when helping answer other peoples questions.

As you can see, FB dominates my referrers. Search engines are slowly starting to pick up my content and funnel visitors but that takes a long time. It took a solid 7 months before I hit 50 search engine referrals in a MONTH. I’m sure there is more I could be doing for search engine optimization (SEO) but that hasn’t been a big focus.

Monevator, Apex Money and the Montley Fool picked up articles in their newsletters causing some small traffic spikes.

E-mail Lists

They say that an e-mail list is important because no matter what you own it and have that as an audience. I use MailChimp combined with a pop-up form to get signups. It took 4 months to get my first subscriber and since then 1-2 a week on average.

What Did I Learn?

“If you build it, they will come”…is bullshit.

The internet is a big place with a lot of content. You don’t just make content and hope that people will find it. You have to make good content that people find useful and want to read first and foremost. The won’t just magically find it on their own. Search engines take a long time to find your content. You need to get the content in front of people.

FB FI groups has been the main method is me spending a LOT of time answering peoples questions and supplementing my written answers with an article. It takes a long time and really good content before other people start sharing your content for you. Even a year in this doesn’t happen very often for me.

Perfect is the enemy of done.

You can ALWAYS spend more time proof reading, polishing, adding more details or adding another example. I really struggled early on with worrying about putting content out there with typo’s and other mistakes. It actually used to stress me out and then I realized nobody really cares. Get it 80-90% and hit publish. You aren’t writing for the NY Times. It’s good enough.

Don’t report on pending legislation

This article on the backdoor Roth possibly going away has been a major source of stress. I really believe in putting out accurate, well researched content. Well, in a rush to be “early” to report something I learned that I didn’t know as much as I thought about the US legislative process.

I had to keep adding updates since it’s still an ongoing situation and I was stressed because I didn’t want to mislead people. I updated various parts of the article as things developed but needless to say I’ll never be doing that one again.

Keep Going. When One Door Closes, Another One Will Open

Remember how I got ghosted on that podcast? Well, I kept creating and opportunities continue to present themselves. I’ll be talking about that same happiness dividends article next month at this live FI event in Irelend in January. Just note that it is starting at 5PM GMT (Ireland time).

Click here if you’d like to buy a ticket for either the live event or the replay.

I’m more creative than I thought.

You have no idea if you’re actually creative or not unless you put real effort into actually trying to create something. There are many different mediums out there so don’t have that self limiting belief.

Blogging is not get rich quick. It takes a long time to build momentum so make sure you love what you’re writing about.

I didn’t have this illusion of get rich quick. However, it’s a lot of time invested and some people may rip your content apart. Just like a diet or physical training you need to be consistent and “put in the reps”. It’s going to take a long time to make money and you need to focus on actually monetizing.

You can get addicted to website views just like social media.

This was a big surprise but it makes sense in hindsight. The same dopamine inducing behaviors that happen on social media carry forward to content creation. It’s exciting when something you wrote takes off and goes viral. It’s hard to not want to sit there and look at the views.

It’s also hard to not let that views data skew what you write about. This article on FU money really resonated and had my most views ever in any one day. It’s easy to think about why people liked that article and consider writing more things that might cause a similar response. That’s a slippery slope to me as the blog could quickly become another job that you don’t enjoy if you’re writing it for the approval of others.

In Conclusion

Quite a year it was. It reinforced that there’s a lot to learn by doing so keep doing new and challenging things. I’ll keep writing but I’ll also keep experimenting with different ideas.

If you are new to blogging or interested in starting and have any questions don’t hesitate to reach out at contact@managingFI.com. I’d be happy to help where I can.

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Tags blogger, Blogging

General FI

Couples Finances: Should They Be Separate Or Joint?

Post author By Mr. MFI
Post date October 24, 2021

BLUF: There’s no one sized fits all advice for whether you should combine your finances or keep them separate. What’s important is that the couple trusts each other, is aligned on their long term financial goals and have a plan to manage the day to day money. If you get that right I don’t think it matters if you merge your accounts or keep them separate.

For better or worse, money is a large part of life. A lot of our time and energy is spent working jobs to make money and then spending it in some way to live. It’s a source of emotions in our lives. Stress when we don’t have money and gratitude and happiness when we have enough to be free to do as we’d like.

Many of us want to share our lives with another person through some form of a relationship. Only naturally then, at some point during your life, there’s probably going to be a crossroads where your life is going to be combined with another persons in a relationship. But what about the money?

Relationship Finance Decisions

There are many decisions to be made when joining two peoples lives together and one common source of stress and potential conflict is how their financial lives should work as a couple. It’s not surprising as there are a lot of decisions to make and questions to answer:

Should you combine all your bank accounts?
Should you have a common checking account that all paychecks go into?
How do you split responsibility for paying the bills? 50/50?
Does each person get their “own” money? If so, how much?
When do you have to ask for permission to spend money?

I come at this topic from a unique perspective because Mrs. MFI and I actually have ZERO shared accounts even though we’re married. Some would call that crazy and not the way that a married couple should handle their finances. I would challenge that idea and say that there’s no one size fits all approach to making a couples finances work.

This article is going to explore this topic of finances in a relationship. I’ll talk about how Mrs. MFI and I make ours work and walk through a framework for thinking through how to make things work best for you in your own relationship.

Our Story: For Richer or Poorer, Our Finances are Apart

It’s by pure coincidence that I happen to be writing an article about combining financial lives around our wedding anniversary. Mrs. MFI and I started dating in our early 30’s and were married around 35 years old so we had fairly established financial lives as individuals at that point. I was divorced at 30 and had gotten used to paying for a house and everything in my financial life on my own. Mrs. MFI had her own apartment, job and savings when we started dating. As a product of her upbringing she’s always been quite frugal and saver.

Mrs. MFI eventually moved into my house which naturally brought up the conversation of splitting bills, what she should pay and it should be paid. There’s an important variable in this equation though. I make a lot more money than Mrs. MFI. Probably 2.5x as much as her at the time. All the bills were in my name and I was on top of the bills so she would write me a check for about 1/3 of the household bills and I paid the other 2/3rds.

A Strategic Decision To Maximize Our Savings

My mom dying, our marriage and Mrs. MFI’s strong saving habits really pushed me to start saving more and got us talking about the right choices for our future. I was geeking out more with personal finance which included learning more about retirement accounts, investing, compounding and tax optimization.

After learning more about the benefits of a 401k, Roth’s and HSA’s we decided that it should be a goal to try and max out all of these accounts. There was a catch though. For Mrs. MFI to do that it would be about 60% of her gross income! She’s quite frugal but it wouldn’t have been possible (or reasonable) for her to do that while paying 1/3 of the household bills let alone other personal expenses like car insurance, gas, vacations, etc. We were making $150k together at this point so there was substantial tax savings to be had by maxing out those pre-tax buckets.

We made the team decision that to reach our long term goals, I would take on all of the household expenses, gas, insurance…etc. Basically everything short of Mrs. MFI’s personal spending and gift giving. After that our accounts and responsibilities looked like this:

Mrs. MFI being an independent person had a really tough time with this. She felt like a mooch at first and maybe a little bit to this day.

However, this move has really accelerated our retirement savings and saved us a ton in taxes from the 22% tax bracket. $19,500 for each 401k * 2 and $3,600 * 2 for each HSA. Saved us ((19,500 * 2) + ($3,600 * 2)) = $46,200/year. At the 22% tax bracket if we took that as income and just saved it in a brokerage account we would pay $10,164/yr in federal tax on that money and only be putting in $36,036 ($46,200 – $10,164).

Our Split Finances Continue

From there on out it made even less sense to get a joint account. I’m on top of the bills paying everything that is our living expenses and Mrs. MFI is basically saving and investing 90% of her gross pay. Sure, we could both dump our paychecks into a joint checking account but it wouldn’t buy us anything at this point. Our system works and we trust that each of us are doing our part to work towards are larger savings goal of FI.

Our brokerage account is the one account that has a mix of money that we have both contributed towards and that will eventually get turned into a joint account. That’s just a paperwork change at this point.

Mrs. MFI is an authorized user on my Amex Cash Preferred that we use for 6% back on groceries and 3% back on gas as well as my Citi DoubleCash. That lets her easily charge normal household spending to those cards which I manage and pay.

A Framework for Relationship Finances

In figuring out what works for us I’ve realized that what works for each couple is going to be different. Each individuals money behaviors and mindsets are a complex mix of the world that we grew up in, what our parents taught us and the financial experiences that we’ve had along that way.

All of those things make each individual person have a unique perspective on money management. By extension each couple is going to need to figure out the individual approach that works for their team of two.

To help you come up with a system that works for your household here’s a framework of questions to walk through to help figure this out for yourself. This helps to ensure that you have a plan for the role that each person will play, how you will manage the day to day expenses and how all of that contributes to your long term goals.

Understand each persons long term goals.

It’s important to talk through what each partners long term goals are so that you can figure out a plan that will work for both people. If one person wants to retire early and the other person wants to live for the day spending everything then there’s going to be a lot of financially induced conflict in the relationship.

Talk through the specifics of what each person wants and any goals that they have. What does your dream life look like? If you think you want to travel the world being nomadic then you may make very different decisions along the way than if you want to buy a huge house near your kids and have all the grandkids come over.

Having a long term goal gives you a north star to guide your decisions and keep you tracking to something. It can certainly change over time, but you need to work towards something.

Discuss how each persons spending wants and wishes

Every person is going to have certain things that they like to spend their money on. Some people like horses. Some people like fast or fancy cars. Some people like elaborate vacations and travel. Some people like fancy clothes, jewelry or watches. Some people love personal care treatments like skincare, hair, nails or massages.

As the Afford Anything podcasts says, you can afford anything but not everything. For items that are major cost drivers in the budget each person needs to be able to put their desires on the table so that you can come up with a line in the budget for it.

Understand each persons strengths and weaknesses and figure out your money roles

Both people have a vested interest in the finances of a relationship. However, not everyone is good at the different skills required to track spending, pay bills on time and get money invested.

See if one person is more suited for one or multiple of these roles. If one person is already good at it and wants to do and the other doesn’t then it’s an easy decision. If you want to split the role that’s fine too but often one person likes to take the lead.

Keep accounts separate or have joint accounts?

Most will come into a relationship with their own checking and savings accounts at a minimum so you need to discuss if you’re going to have separate accounts or join them. The main place to start is with a checking account as you need to decide if you want all bills paid from one joint account, completely separate accounts or some hybrid.

If you aren’t sure where to start, begin with something easy and talk through how it would work. If you opened up a joint checking how much of each persons paycheck would go in there per paycheck? What expenses will be paid from that account?

Create a plan for how things will work day to day, week to week. Talk through it in detail!

It’s really important to have a common understanding of how the finances are going to work on a day to day and week to week basis. How much of each persons paycheck will be put towards the household bills? Will each person be expected to save a certain amount? Does each person get their own spending budget of money that they can do whatever they want with no permission required? Is their a dollar amount for a purchase where the couple is expected to discuss it before the purchase is made?

Give things a try!

Don’t spend forever agonizing over each detail only to never really get started. It’s okay to not get a perfect understanding of how things will work at the beginning but be prepared to track your spending and talk through and questions that come up regarding spending that the other person has.

The faster you can come up with a system that works for both people, the faster that you will have a system that just happens so each person knows what to expect. Jumping in and getting started will expose any holes in the plan. Predictability = efficiency and conflict avoidance.

Make a plan to meet regularly to talk about what’s working, what’s not.

It’s important to meet regularly, probably weekly at first, to review the spending and how the system is working. That gives each person an opportunity to see how things are going and discuss any issues. As you find a groove you can meet less often but I’d recommend at least quarterly.

If something isn’t working, make a change and repeat.

Plans are great but they’re just a starting point. Don’t be married to a plan no matter how much work went into it. If something isn’t working anymore, sit down and figure out how to change it!

The Framework – Applied to Our Situation

I think it’s helpful to see an example of the framework in action so here it is applied to Mrs. MFI and I.

Understand each persons long term goals.

Fortunately Mrs. MFI and I are on the same page that FI so that we have security and the option to leave our office jobs and travel is very important to us. We both love to travel so we’re working towards some period of time to try out nomadic living and see where we might want to live more permanently someday. Upstate NY has a lot of snow and not much sunshine so we’d like to move away from that. Oh, and the awful taxes (we pay $5,600/yr in taxes on a $150,000 house).

Because of that FI and nomadic goal we’re downsizing a lot of our stuff and being very careful about what we buy. Fortunately we’re not that materialistic anymore so that isn’t a huge challenge.

Discuss how each persons spending wants and wishes

The largest line item of spending for us both is travel. We budget about $6,000 a year for vacation. Our entertainment budget is about $3,600 a year and it’s mostly stuff that we do together. I enjoy spending money on fitness related events like running races and the shoes that go with them. Mrs. MFI spends money on craft related things.

Understand each persons strengths and weaknesses and figure out your money roles

It’s probably not a huge surprise that the guy writing the personal finance blog is taking the lead on the household finances. I’m the CFO and Mrs. MFI is chairman of the board in our two person company. What does that mean? She has oversight of the budget, the spending and how we’re doing to plan and I’m the one making it happen. I track the spending using YNAB, budget with YNAB, calculate our FI number and leads our travel rewards efforts.

Keep accounts separate or have joint accounts?

As previously mentioned, we have basically separate everything for our accounts. But each person knows about all of the accounts and can see what’s in them whenever they want. There are no hidden accounts.

Create a plan for how things will work day to day, week to week. Talk through it in detail!

Each of our paychecks go into our individual checking accounts. I handle all of the household bills from my checking account and use YNAB to manage the spending and budgeting every two weeks. I also pay our credit cards that are used for the household expenses every two weeks. We have a single account travel fund that all travel expenses come from.

We each have savings accounts that make up the more liquid portion of our emergency fund although most of it is invested in our brokerage account. You can read about my 3 tier emergency fund here.

If either of us are going to spend more than $100 on something we talk to the other person about the purchase unless it’s a gift.

Action Steps:

Walk through the framework with your partner and answer each question. If there’s disagreement – great! Get it out on the table and figure out a compromise. Better to figure out the issues early on.
Meet regularly and check in with each other. How is it going? It’s critical that you’re honest with each other if something isn’t working.
If something isn’t working, make a change! Life changes. People change. Your plan and systems are going to need to change based on the season of your life. Don’t resist change, embrace it.

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Tags finances, relationships

General FI

Downsizing Our Life at 40: Playing with Minimalism

Post author By Mr. MFI
Post date October 10, 2021

BLUF: The researching, acquiring, maintaining and disposing of stuff that wasn’t making us happier wasted valuable time and money. In becoming intentional with our spending and downsizing our stuff we’ve simplified our lives, taken back time and sped up our path to FI.

It feels really strange to think that at 40 years old we may have hit the peak of our accumulating things. It goes against the grain of everything in our consumerist US culture. The blueprint for the classic American dream is something along the lines of:

Buy a new car
Buy a house
Fill house with stuff
Upgrade your cars
Get a bigger house
Upgrade your stuff inside the house
Buy a vacation house
And on, and on, and on.

Always reaching for more stuff. However, a combination of learning about these people called minimalists, learning about FI principles and the 2020 pandemic really started to shift our mindset about what our American dream looked like.

A Change In Perspective

2020 really was an interesting year in the ManagingFI household. You see, I found the concept of FI at the end of 2019 and I dove down the rabbit hole of podcasts, YouTube videos and blog posts.

This video from Mr. Money Mustache was one of the most influential in making me step back and think about stuff and what would make me happy. It’s also the first video that I showed to Mrs. MFI about FI to help try to explain to her this “financial independence” craze that her husband was now obsessed with learning about.

In true MMM style it was an over the top PowerPoint showing how ridiculous the pursuit of more can be if you just keep scaling it up. This point hilariously shown below by illustrating that if a mansion, Benz, Bentley and butler makes you happy then even more of each will obviously make you happier!

Credit Mr. Money Mustache from his World Domination Forum talk

Somewhere along the way I came across the concept of minimalism as well since some people simplify their lives massively to reduce expenses and reach FI.

A Vision of Our Future and Stuff

In the process of being exposed to all these different concepts and points of view I was starting to form a few different hypotheses:

We don’t know where we want to retire to but know that it isn’t NY (the tax state). We should travel around and try living in different places when we’re FI.
Spending money on stuff wasn’t making me happier and would make FI harder to reach.
The researching, acquiring, maintaining and disposing of the same stuff that wasn’t making me happier takes up my time.

The idea of traveling around and living different places evolved over time. We’ve always loved to travel and in 2017 Mrs. MFI and I took a 2,000 mile RV road trip across the southwest in this sweet, sweet ride.

It was our first RV experience and it planted the seed that this method of exploration could be for us since we expect to have a dog. By 2019 that seed of future nomadic living via RV life was starting to grow. Mrs. MFI was getting more onboard and interested in the idea and we took a look at what was out there for RVs. We found out that you can spend a lot of money on an RV and get one that’s even fancier than our house.

I should point out that this nomadic vision is still many years off in our mind at this point since we didn’t really know what was possible for FI or early retirement. I was tracking our spending to some degree but I hadn’t learned about the 4% rule or figured out what our FI number was. We just knew that downsizing and hitting the road in some form was something of interest in the future. That was our general direction.

Questioning “The Stuff”

I’m not quite sure where I would fall on the scale between minimalist and …maximalist? when it comes to stuff. Mrs. MFI is pretty simple in her needs and has never been much of a shopper. I was never shy about spending money but I generally dislike clutter.

I’m not one to waste a lot of money on decorations, clothes or furniture but I did buy quite a few technology items and gadgets along the way. The most absurd example of this along the way was probably this 50″ plasma TV. I bought this on sale during black Friday in 2005 for $2,000. Yeah, absurd. On the plus side I still have that TV along with a ham of a dog 🤣.

During the 2020 pandemic as we were stuck inside I started to realize that the things around me were often not adding value to my life. On the contrary, many of these things were causing me to spend my precious life researching, buying, maintaining and eventually disposing of them.

Things like this DeWalt table saw. Purchased brand new for $500 and probably used 5 total times as you can see by the fact that it still looks brand new. How many hours did I spend researching which one to buy and where to buy it? How much time did I spend buying it, getting it home and putting it together? How many hours of work did I do to pay for it? All of that for it to spend 99% of it’s life sitting on the shelf in my garage. What a waste.

The Corvette

Over the years I had become a “car guy” enjoying autocross, drag racing and speed in general. I had a motorcycle for many years and after selling it I was itching for something fun. We were saving a fair amount of money at the time but pre-FI we didn’t have a goal with our money so buying this wasn’t an issue. I found a great 2009 C6 Corvette in New Jersey and drove down, bought it with cash and drove it back in one epic day.

I loved the car. It was a 6-speed manual with 430hp of head turning, pin you into your seat with acceleration, adrenaline inducing fun. It was a beautiful looking car that I probably bought as much for the “look what I have / look at me” factor as I did for the performance.

The corvette came into focus in 2020 as one thing that I both loved and hated at the same time. I was working from home 90%+ of the time so I was hardly driving period, let alone the Corvette. Mrs. MFI is not a flashy person and felt uncomfortable in it so we often didn’t take it together. If I wasn’t sure of the safety of the area that we were going to or I didn’t know the parking situation I wouldn’t take it for fear of scratches, dings or vandalism. Having 3 cars means 50% more inspections, oil changes, repairs, tires, brakes and car insurance premiums. I was fortunate to have a big enough garage to store it during the harsh NY winters but I had to play a game of car Tetris every spring and fall to do it.

The final straw was probably in the summer of 2020. I just got the car back from the shop and they forgot to do the oil change that I had asked them to do. It shouldn’t have been a big deal, but it was just another thing to do that I didn’t want to deal with. It put the wheels in motion in my mind that this wasn’t worth it anymore. I decided that it was time to make a change and with that, I sold it shortly before my 40th birthday.

There are days when I miss having it of course. But, on the whole I do think that my life is happier for having sold it. I’ve reclaimed a lot of my time and money and simplified my life.

Everything Must Go! (Okay, not everything)

Mrs. MFI actually led the charge in downsizing our stuff long before 2020. She got interested in the idea of decluttering your life and embarked on a “40 bags in 40 days” challenge. The challenge is to do just that: remove 40 bags of “stuff” from your house in 40 days. On the surface it sounds absurd, but even in our modest 1,500 square foot house she was able to accomplish the feat.

In the summer of 2020 Mrs. MFI and I both hopped on the idea of taking a hard look at our stuff and asking ourselves a variety of questions:

Why am I keeping this?
Have I used this in the last year?
Am I going to use this in the next year?
Is holding onto this thing making my life better?
If I get rid of it, could I rent or buy this again if needed?
When we go mobile, would I keep this?

With that in mind, we start to sell and give away a variety of stuff. We sold things on eBay. We sold things on FaceBook marketplace. We gave things away using our local buy nothing group (which is fantastic if you’ve never heard of it). Things that couldn’t be sold were given away to Goodwill. We sold 40+ things for $3,200 not including the Corvette in 2020!

Letting go of stuff is actually a really hard thing to do mentally at first. I think the longer that you own something, the easier that it is to become attached to it. It’s easy to fall into the trap of “I might need this someday” and default to holding onto something that you haven’t touched in years.

For that reason we kept it simple and started with the very easiest stuff that we were the least attached to mentally. As we got into the process of letting go I felt momentum building and I was able to let go of things more easily. There’s still plenty of harder choices in the future as we get closer to downsizing out of house but we’ll cross that bridge when we get there.

Impact Of Downsizing Our Lives

This shift in mindset from accumulation to downsizing and simplicity has really had a number of different benefits. Once you latch onto the idea that less is better, you become a lot more intentional with your spending. You really think about purchases and the necessity of them before bringing them into your life.

Time Saving

Photo by Tima Miroshnichenko on Pexels.com

There are a number of ways where we’ve observed time savings from being more intentional about what we buy and also downsizing our stuff.

Research Time: The less you buy, the less time you spend researching online. I’ve also become less concerned with finding “the best” of everything and just choosing something that’s good enough.
Buying Time: The less you buy, the less time you spend and physically going to stores to buy, return and exchange things.
Maintaining Time: The less you own, the less there is to break and be maintained. I’m sure I saved at least a day a year of time getting rid of the Corvette. This is especially true of electronic things that have to be configured or break easily and mechanical things that require regular maintenance.
Upgrading Time: Once you “must” have something in your life it’s easy to either upgrade to the better thing or replacing it over time to keep up with trends. These days there’s no shortage of tech toys like this: computers, tablets, smart watches, Amazon Alexa/Google Home, smart home devices, vacuuming robots, electric cars, 4k TV’s and on and on and on. All of that takes lots of energy and time.
Disposal Time: Eventually everything must go. Whether it goes in the trash, must be recycled, is sold or is given away it all takes time. Everything that you bring into your life you’ll eventually have to spend time and energy to do something with it.

Speeding Our Path To Fi

A funny thing happens when you become more intentional with your spending because you don’t want to accumulate extra stuff. Your spending goes down! As I detailed here, we’ve dropped our spending progressively through the years on various spending categories. This is especially true of my shopping category which was $5,700 in 2018 and is on track to be $2,000 in 2021. If spending goes down then obviously saving and investing can go up.

Additionally, if you have some sweet stuff to sell in downsizing then you’re going to generate additional money that can be invested. Selling the corvette and all that stuff allowed me to stuff a huge extra chunk of money into our taxable brokerage account. Thanks to the crazy bull market I have some substantial unrealized gains from that car.

Quite the financial swing when you factor in all the money saved in maintenance, insurance and depreciation. I saved 44% on my insurance with dropping the corvette being a big part of that.

Lower Stress

This one is harder to quantify but I find that having less clutter around the house is just more relaxing. It’s easier to clean. There’s less to be put away or moved around. It’s easier to find the things that you do care about.

When you have less stuff there’s less to break or be maintained so my to-do list of things on a recurring basis has dropped as well. No more car Tetris!

Action Steps:

If you have a lot of clutter, consider doing a 40 bags in 40 days challenge. Challenges are a great way to get and keep you motivated.
If you have things packed up in boxes from the last time that you moved, start there. If they aren’t sentimental, why are you keeping them?
Walk around your house and look for things that you haven’t used in a year and don’t plan to use in the next year. Is this adding value to your life?
For clothes, try the reverse hangar trick to see what things you haven’t worn in a year to consider getting rid of them.

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Tags Downsizing, Minimalism

General FI

Budgeting: Financial Planning On A Small Scale

Post author By Mr. MFI
Post date August 22, 2021

BLUF: Budgeting is financial planning at the monthly level. It lets you manage your way through the variability of life while staying on track to hit your long term goals. Don’t let it control your life though. Your plan needs to adapt to life, not the other way around.

Just don’t budget and you don’t have to worry about your spending. End of article! Just kidding, that doesn’t work. A plan to ignore reality only works in the short term before reality comes back to smack you upside the head. Reality can hit pretty hard, too.

I resisted budgeting for a long time. Each year I did a little bit of work at the end the year to summarize my annual spending in Excel. I tried expense tracking in Excel for 3 months since I knew it well and it was painful. Even for me, a lover of spreadsheets. When I found the You Need A Budget (YNAB) product it was a 2 for 1 deal that did both expense tracking and budgeting. I’m the type of person to go all in and give something a try. So I did!

This article is going to cover how I zero based budgeting with YNAB, the benefits that I’ve discovered since I started budgeting and some tips for you as you embark (or continue) on your own budgeting journey.

If you don’t know much about expense tracking I suggest you start with my article on that topic first and then come back here. Expense tracking is the foundation on top of which budgeting is built.

What is a Budget and Budgeting?

A budget in its most basic form is a financial plan over a period of time but most commonly a year in personal finance. This financial plan includes how much we plan to earn, spend and save. Having a plan gives you the day to day flexibility to live life while month to month you have a north star helping to keep you on track to your overall goals.

Budgeting is the process of creating and executing that financial plan. It’s figuring out in advance of money arriving how you plan to save and spend that income. If you’re reading this blog you might very well have some larger financial plans for how you’ll get out of debt, reach FI or just save X amount this year. Budgeting is financial planning but on a smaller scale since it has monthly and annual time horizons.

Zero Based Budgeting

Zero based budgeting is creating a plan for every dollar that comes in via your paycheck or whatever income source you have. It may sound intimidating but with a tool like YNAB it’s much easier. You plan for how those dollars will be assigned for savings, spending that month and larger expenses that will happen in future months. Don’t worry, this will make more sense when I get into some examples.

Tracking Spending vs Budgeting

Sometimes people talk about tracking spending and budgeting as if they are the same thing. They are NOT!

Tracking Spending – You spend money without any awareness of how much you could spend. You record the transactions and categorize them after the spending is done.
Budgeting – You have a plan for how your income will be spent before you actually spend the money. As life happens and money is spent you tweak your budget as needed on a month to month basis to try and keep the overall spending for the year to your plan.

Basic Information You Need To Start

Photo by Anete Lusina on Pexels.com

One of my goals with this article is show how you can make budgeting work for you and encourage people to give it shot. Before I get into the specifics of how I work a budget on a monthly basis I’m going to go over what you need before you get started yourself.

All of the pieces of information below feed the basic formula of income = savings + expenses. You don’t need to know exact numbers for each area but you do need at least an educated guess.

Calculate Your Annual Income

You need to know roughly how much money you make in a year so that you can make a plan for have much you can realistically save and spend. If you’re a salaried employee that gets paid every 2 weeks then you get 26 paychecks a year. If you get paid $3,000 a paycheck then that’s $3,000 * 26 = $78,000 take home pay a year.

Measure or Estimate Your Annual Expenses

Here is where tracking your expenses or at least doing an annual spending summaries comes into play. You need to know roughly what your expenses are for a year. Not only that, but for each budget area where spending is variable like groceries or entertainment you need to make a guess at what you want to spend per year.

That’s why it’s critical to have expense tracking down first to feed into your budget plan. More details in how to do that in the tracking spending article. In my case my 2021 spending target was $52,000. If you have no idea just get 3 months of data and use that to forecast what a year might look like.

The 3 month look with give you the common expenses but make sure you capture all the annual and semi-annual expenses. It’s these infrequent expenses that usuaully surprise people and throw off their spending if they aren’t planned. Taxes (property, school, income), insurance premiums (car, life, umbrella) just to name a few.

Come Up With An Annual Savings Target

Why come up with an annual savings target? It’s far too easy to just spend what you want and try to save the leftovers. I’m a big proponent of the “pay yourself first” approach to saving. Figure out what you can save each month and then setup a system where savings is required to be “paid” just like a bill.

In the image below you’ll see that I even arranged by category groups so that savings comes first. That’s not by accident, it’s to reflect my priorities. When I allocate monthly I go top to bottom and the savings accounts get “paid” first before I move to my core expenses.

Using the example so far, we’re taking home $78,000 in income and have expenses of $52,000. That leaves $26,000 ($78k-$52k) that could be used for savings.

Setting Up Your Budget Plan

I’ll warn you now, getting a budget setup the first time takes some work. It’s the hard part but once you’ve done it the work and time required month to month and year to year is very little.

Defining Budget Categories

This is already done! When you started tracking your spending you defined the buckets that you would use to track that spending. All we do now is use those same exact categories to use for our budget and plan for the spending that will happen in those categories.

Breaking Down Expenses & Saving Monthly

Most budgeting is handled monthly so the first task to project how much you need to plan for each month in that budget category.

The Extra Paycheck “Problem”

The first topic to touch on though isn’t really a problem, but can cause headaches. It’s the fact that budgeting is monthly but paychecks are usually every 1 or 2 weeks. Because of that the frequency of your pay isn’t consistent each month.

In our example of getting paid $3,000 every 2 weeks you will technically take home $78,000 a year. Divided into 12 months that’s $6,500/mo on average. Life isn’t average though. Cash flow wise you’re going to get $6,000/mo for 10 of those months (2 paychecks) and the other 2 months you’ll get $9,000/mo (3 paychecks).

To avoid having a problem on a monthly basis I simply make sure that the targets that I set for my budget monthly fit into the $6,000/mo guaranteed income. When those extra paychecks come they go towards larger annual bills or additional savings.

Breaking Down Expenses

I’m a big spreadsheet guy so I used that to figure out my 2021 budget. Using my expenses from 2020 as a guide for what was reasonable I came up with a yearly target for each category and then let the spreadsheet calculate the monthly equivalent. If you want to make the numbers easier make sure your yearly expense values are easily divisible by 12 or you’ll end up with odd monthly values. Ex. Round $1150/yr to $1200/yr so that it’s $100/mo instead of $95.833333333333333333333333333333333333.

It’s important to do this with ALL expenses. One place where people often mess up with their budget is to not include annual expenses because they aren’t a consistent bill. My taxes, for example, are $5,600 a year but are

Breaking Down Savings

You rinse and repeat the same process with savings goals which should be easier because there are usually few buckets to deal with. For example, if you want to max out your IRA for the year that’s $6,000 or $500/mo.

Setting Your Plan On Autopilot with YNAB

You now know how much you need to save and spend monthly in each category to stick to your budget. Time to put those details into YNAB so that each month you don’t need to remember what your goals are supposed to be.

Setting Spending Targets

Things like groceries are expenses that happen each month but the exact amount spent is going to vary. YNAB lets you input a target spending amount and will remind me to save $500 each month for groceries and other household consumables (toilet paper, paper towels, shampoo). If you allocate $500 to groceries and only spend $450 that month, YNAB will roll over the extra $50 to the next months grocery budget. You can either budget another $500 to build some buffer or only budget $450 more instead of the usual $500.

Sinking Funds / Monthly Savings Targets

If you have infrequent expenses like auto repairs you need to plan for those as well. A sinking fund is a temporary savings bucket to be used for expected future spending like car maintenance. It won’t happen every month, but you’ll need the money at some point. I plan for $600/yr so that’s $50/mo.

YNAB has a savings target option which expects you to save a target amount each month. This is what you’ll use for both sinking funds and savings goals.

Saving For Big Bills / Goals

Budgeting for big, long term expenses and goals can be the most challenging. YNAB makes this easy by letting you set a dollar amount and a date that you need the money. Then, it calculates how much you need to budget that month to stay on track towards that savings goals.

For example, my property taxes are once a year in February and are a big bill. YNAB has calculated that I need $309.72/mo from now until then to hit that goal. If an unexpected bill came up and I couldn’t save for this one month it would automatically recalculate the new monthly amount for me.

Monthly Budgeting In Action with YNAB

Bad Robot on Twitter: ""Everybody has a plan until they get punched in the mouth." - Mike Tyson #BRQuoteDuJour @MikeTyson http://t.co/aRMvffAuFo"

Having a plan is great, but life happens and nothing goes to plan. Life is messy and your spending will never align exactly to your plan. I think this is a point of frustration that causes some to give up on budgeting. Hang in there! To me this is where having a good tool like YNAB can let you roll with the punches and stay on track. Did you see what I did there? 😉

Overview

Zero based budgeting means that when you get paid it’s time to give those dollars a job. In the example below we were paid $3,000 and those dollars need to be assigned for our planned expenses in September. “Planned Spending”, also called Assigned, is how much you want to budget towards each category for that month. Actual spending tracks the real spending that occurred.

As I assign dollars it subtracts them from the “ready to assign” bucket automatically. If categories have funding goals then as I hit that goal YNAB will tell met that I’ve fully funded that category for the month.

An example of rolling with the punches. Usually I budget $250/mo for fun and entertainment. In June I had a big healthcare bill ($654) that was unexpected. As a result I only budgeted $50 to fun and entertainment that month as I needed the $200 to cover my healthcare.

Because I had been saving $250/mo previously in my fun budget and not using it I had a lot in the fun sinking fund. I spent $691 for fun in June, only allocated $50 in new budget money to the pot and still had $796.62 available to spend. That’s the power of sinking funds, planning ahead (budgeting) and having software like YNAB to let you adjust on the fly.

Other budgeting methods

There are a LOT of budgeting options out there that are well covered in other articles so I’ll let you explore those on your own if you don’t like zero based budgeting. One of our favorite finance shows forces people to use cash in jars to manage their money. That’s also zero based budgeting but in a very rudimentary way. YNAB is essentially a fancy digital jar system that works across all bank accounts and credit cards.

https://youtu.be/S3ivBN1o2TY?t=579

Benefits of Budgeting:

There are some benefits of budgeting that I’ve noticed along the way that I wanted to share.

Stress Reduction

Having a budget with all these little sinking funds for infrequent expenses reduces the worry that I’m not going to have the money if something pops up. These little sinking fund buffers also make it easier to cover one area that might blow up unexpectedly in a month without having to go into debt or my emergency fund. I just shift spending from one area to another.

Satisfaction of Hitting Little Goals

There’s some odd satisfaction that I get from assigning money to each category every month and seeing YNAB tell me that I’m “Funded” or “On Track” with my plan. It reinforces to me that I have a plan and I can check the box because I hit the plan for that month.

No Guilt About Spending Money

One area where frugal people sometimes struggle is that they have guilt about spending money. I think budgeting helps with that guilt in that once the money is in the budget it’s a part of my plan to spend it. In July I spent $1,045 on Elton John and Tom Segura tickets. It fit into my budget so even though they’re the most expensive tickets I’ve ever purchased I didn’t feel guilty one bit. Okay, the $700 in cash back rewards that I used helped too.

Less Worry About Stolen Accounts

With YNAB I see all the spending, real time. I don’t worry about a card being stolen because I’ll see a fraudulent charge as soon as YNAB imports it. I no longer have to look at credit card statements to make sure everything looks right a month after I spend the money.

Advice When Budgeting

Don’t choose an overly aggressive budget to start. Choose something that you know you can work within without deprivation. Worst thing you can do is get frustrated and quit because you can’t make the numbers work. For example, my spending budget is $52,000 for the year but I have an extra $3k of unplanned income in case something comes up. I think leaving a buffer of 5-10% of your annual budget as unassigned money helps you psychologically to deal with surprises. If no surprise expenses happen then you just have extra savings.
Life is unpredictable, expect your budget to flex and change. Have a plan to start but don’t be afraid to adjust that spending plan as the year goes on. Maybe you’ve found a way to save on your food budget and can lower that target. Maybe you’ve picked up a new great hobby that you love but costs $100/mo. DO IT, just make it work with your budget. Whatever you do, don’t be a slave to your budget.
Don’t worry about chasing perfection. If something doesn’t quite balance perfectly or some expense is unaccounted for don’t let it worry you. If it’s a small dollar amount that’s in the noise, leave it in the noise and don’t worry about it. It isn’t worth your time to chase perfection.
Don’t budget for the extra paychecks month to month. I covered this earlier, but if you get paid 2x a month most of the time don’t plan on those extra paychecks into your normal monthly plan.

Action Plan:

If you haven’t started tracking your spending and want to budget, start there first!
Estimate your annual expenses, income and savings goals and then break that down into monthly amounts.
Use a program like YNAB to create budget categories and assign amounts that you’ll be targeting. Build slack into your budget, especially if you haven’t done this before.
Start tracking to your budget! Don’t be hard on yourself if you were way off with some estimates and have to change your plan. Your plan needs to adapt to your life, not the other way around.

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Tags budgeting, YNAB

General FI Saving

FU Money: A Life Changing Concept That Goes Far Beyond Finances

Post author By Mr. MFI
Post date August 8, 2021

BLUF: Having one years worth of expenses in accessible money can change your life. It can reduce financial stress, increase your confidence at work and provide the courage to take entrepreneurial risks.

There’s a magical thing that’s happened to myself and Mrs. MFI over the past 18 or so months. Over that period of time we’ve learned about the concept of FU money, implemented all pieces of the formula and have been able to feel the impact that it’s had on our lives. It’s had a really positive impact on our lives so I’m excited to share the formula for FU money that’s allowed us to reduce our life stress, manage uncertainty better and increase our confidence at work.

If you’ve been around the FI community you’ve probably heard about this idea but I think there’s a little more to the story than just saving a chunk of money. My goal is help you understand the formula that worked for us and give you the tools so that you can let FU money transform your world like it did ours.

Oh, side note. Hopefully it’s obvious that FU stands for f*ck you. If that bothers you and you want a family friendly version call it Freedom Unrestricted money. There’s going to be some swearing along the way via a fun video with J.L. Collins so skip that if it bothers you. Consider yourself warned!

What is FU Money?

Photo by Andrea Piacquadio on Pexels.com

The basic premise of FU money is very simple. FU money is having enough money to be able to get fired from your job or quit your job and be able to cover your normal life expenses until you find another gig. The “FU” part coming from the theoretical situation where your job or boss asks something of you that crosses a line. You financially could say “FU” and quit. You could also apply it in a situation where you don’t have an issue with your job but you want to give some kind of entrepreneurial activity a shot.

I will put my manager hat on and add the disclaimer that I don’t recommend telling someone FU when you quit or quitting in a disrespectful way in general. Ever. It might feel good in the moment but it’s almost impossible to repair a burned bridge when you leave a place on bad terms.

Depending on your location or industry if you burn a bridge it could have unintended consequences for many years or for life. You never know how word will get around if you go out in a blaze of glory causing it become difficult or impossible for you to get hired again. Your old company could put you on their do not hire list. Your old manager or management chain could change companies and recommend you not be hired if you applied to their new company.

The FU Money Formula

Having a heading that says “money formula” implies that there’s some math headed your way! Well, actually there’s almost no math but the formula part has more to do with the fact that to feel the impacts of FU money requires a few conditions to be met.

Knowing How Much You Need

How much money do you need to have FU money? Well, it depends. If you’ve used this article to calculate your emergency fund based on a job loss then you know how much money you need to survive until you find another job. If you want to plan for a worst case situation of quitting and therefore getting no unemployment benefits then leave out unemployment.

You need to know how much your life costs in order to know what it costs to cover that life without income. If that sounds like too much work then an easy rule of thumb is to have at least 1 year of living expenses in accessible money and you’ve got FU money. You understand what a year of expenses costs by tracking your spending.

Location, Location, Location

Here’s a key part of FU money that I didn’t get right until much later in life. You MUST have that FU money in a place that’s accessible now, not in retirement. It feels so obvious to write that I almost feel stupid doing so, but I didn’t experience any of the benefits described in the next section until the money was accessible. Not in a 401k, 403b, TSP or other account that’s harder to access until 59.5 years old.

Where should you put the money? Well, much like most of my emergency fund I keep my FU money in a brokerage account largely invested in stock index funds. It lets my money stay invested and continue to grow more aggressively. Sure, there’s the possibility of a market crash when I want to use my FU money but I look at both of these events as tail events. What’s less probable than one tail event? Two tail events overlapping in time.

You’re welcome to put your FU money other safer places like a bank account, high yield savings account (HYSA), CD or money market fund. A Roth account is also acceptable although I prefer to not touch that and let that money grow tax free. After all, you can’t just replace Roth contributions that you withdraw.

In Summary:

You generally need at least 1 years worth of living expenses in an accessible location to have FU money and start to feel it’s true benefits.

The Unexpected Benefits of FU Money

I didn’t intentionally go after accumulating FU money, it just sort of happened by accident. We starting tracking our expenses with YNAB and ran our emergency fund scenarios to know how much we needed to cope with a job loss. We then started investing in a brokerage and Roth account to have more accessible cash for the potential of early retirement.

When all those things came together and we realized that we had FU money, there were a number of other psychological benefits that we started to feel that impacted our lives in very unexpected ways. I talked with Mrs. MFI and she echoed feeling the same benefits that I’ll go through below.

Peace of Mind and Stress Reduction

Photo by Nataliya Vaitkevich on Pexels.com

As humans I think we naturally have fears of the unknown. The unknown normally associated with losing a job is how will you pay for everyday life and how long will you be without a paycheck? Not understanding how long you could survive without your job would be stressful for anymore.

Having FU money removes the fear of the unknown. You’ve run the math, you know exactly what would happen under various scenarios and you have the money to take care of your needs.

With FU money, you can sit back and confidently know “We’ll be okay”.

There’s something about knowing that you have your basic needs of life covered no matter what happens with your job that makes life and job stress just melt away. Life is uncertain and sometimes what happens with your job is out of your control. But FU money is something that you can control.

On the Job Confidence and Honesty

If you’ve ever watched office, then you know the classic scene where Peter interviews with “The Bobs.” I’ve included the clip below because it’s awesome and worth a watch even if you’ve seen it many times before.

https://youtu.be/j_1lIFRdnhA

What is different about Peter from the normal W2 worker? He has no fear about losing his job at this point in the movie. In the movie it’s because he’s hypnotized to not care and worry about his job. However, in the real world Mrs. MFI and I have found that having FU money has provided some of the same benefits.

Mrs. MFI has begun to stand up for herself when crappy co-workers treated her poorly and made for a poor working environment. FU money decreased her fear and worry about being trapped in a poor situation where she couldn’t say anything for fear of losing her job.

In my job FU money has provided me with the confidence to speak up when I see things that aren’t right but other are too scared to talk about. Even in the most ethical work situations there are plenty of people afraid to help point out a mistake to a superior out of fear. I’ll speak up with tact but that fear factor is gone for me.

I also began making decisions to fix things that were in the best interest of the company but were gray areas policy wise. Instead of asking for permission for anything uncertain I just made the decision.

FU Money: The Courage Creator

Did your grandfather take risks? I guarantee he did it from a position of f*ck you.”
J.L. Collins recreating “The Gambler”

To take a major financial risk like leaving a steady job to pursue starting a business is a scary idea. A steady paycheck is a safety net and you leave that behind for an unknown period of time to start a new business where income may be zero or inconsistent for some period of time.

FU money eliminates the risk of not being able to pay for life expenses while you don’t have income in the pursuit of a passion. In that way, FU money can provide the courage to pursue a venture that you really want to do but has risk associated with it. It could be the difference between living the life that you want and living a life of regret for not giving your idea a shot.

Action Steps:

Tracking your spending so that you know what your life costs for one year.
Calculate how much you need to survive a job loss. If you want to assume the worst case of quitting then don’t include unemployment insurance in the calculation.
Start saving FU money! The key is that it’s NOT locked inside a retirement account like a 401k/403b/TSP. This could just be an extension on your emergency fund that’s stored somewhere that it will provide you growth and interest. For us, that’s both a brokerage account and a Roth account on top of some normal high yield savings accounts. Most of our FU money is invested.
Celebrate reaching it and small milestones along the way! Knowing that you have 3 or 6 months of expenses is empowering too.
Enjoy the glorious psychological benefits.

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Tags FU Money, Saving

General FI

Net Worth vs. FI Number: Two Important but Different Measures

Post author By Mr. MFI
Post date June 20, 2021

Photo by RUN 4 FFWPU on Pexels.com

BLUF: Net Worth and your “FI number” are two very important but unique financial measures to track. Net worth is a single number to track wealth building. Your FI number defines a finish line for wealth building to know when you have enough.

If you hang around FI groups long enough there are likely three very important metrics that you’ll hear discussed: annual expenses, net worth and your financial independence (FI) number. The three all are related and contribute to answering the main question we care about: how much do I need to retire? Back in January, I discussed how I was tracking my expenses to understand my annual expenses and cut areas of waste. I’ll deep dive into tracking expenses soon since that is a key to understanding your annual spending.

Net worth and your FI number are wealth related metrics but they aren’t the same thing. This article will dig into what they are and how to measure each one.

What is net worth?

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Net worth is quite simply a measure of the wealth of an individual or company. The math isn’t complicated with the formula being: Net Worth = Total Assets – Total Liabilities.

Unlike your FI number, net worth and how you calculate it is a standard thanks to the accounting profession. There isn’t a debate about how you calculate it and what is an asset and a liability is standardized by the accounting profession. I’m sure there’s lots of nuance when calculating net worth for large, complicated businesses but it’s straightforward for most people.

What is an asset?

“An asset is anything of value or a resource of value that can be converted into cash.”¹ It’s all your accounts that already are in cash like bank accounts and investment accounts. It’s also anything tangible that you own that could be sold and turned into cash. Your car, your house, a business, land and fine art just to name a few examples. A few more examples below:

All bank account balances
All retirement account balances (401k, 403b, 457, Roth, traditional IRA etc)
Property value
Car value
Business value
Leisure vehicle value (boat, RV, motorcycle…etc)
Antiques / collectibles / fine art
Anything that you could sell for cash

What is a liability?

A liability is something a person or company owes, usually a sum of money.² All those places where you owe money and make payments? Yup, those are liabilities. Some of the most common liabilities are listed below:

Mortgage
Car Loan
Student Loan
Personal Loan
Business loan
Credit card debt
HELOC balance
Family member loan

Net worth calculation examples:

Your net worth is how much money would you have if you sold everything you owned, turned it to cash and then paid off all the debt that you could with that cash. Lets take simple example from a teenager that has a cheap car worth $2,000, they have $1,000 in the bank and they owe their parents $2,000 for loaning them the money for the car.

Assets = $1,000 cash + $2,000 car = $3,000
Liabilities = $2,000 car loan to parents
Net Worth = $3,000 in assets – $2,000 in liabilities
Net Worth = $1,000

How to track your net worth

There are many options to track your net worth. Since the calculation is simple you can use a piece of paper, a spreadsheet or a variety of programs out there. The thing about net worth is that the number is very dynamic. The more assets and liabilities you have, the more you have to update to get your current net worth. That’s why I prefer using a program that can pull in account information automatically.

Net Worth Tracking Using Personal Capital

I, like many other people, use personal capital (PC) because it’s free and it allows you to easily add all your accounts so that your net worth can be updated automatically. Mrs. MFI and I have 8 different investment accounts, 7 bank accounts, 12 credit cards and our mortgage. That would be a pain to try and grab the latest numbers from each even on a monthly basis.

This is a good time to point out why PC is a nice free service. Well, it’s free because the free net worth tracking that they offer gives them an easy way to find potential clients for their money management services. They can “see” how much money you have an when your investible assets exceeds $100k you get a phone call from them for a free consultation. That $100k number will likely change over time but they have given me a call periodically as my net worth continues to grow. I just ignore the voicemails and they don’t call me back for months.

Here’s the summary sheet showing net worth, total assets, total liabilities and totals for sub groups like cash and investments.

Aside from seeing the numbers real time you can see a graph of total net worth, any sub-group or any individual account over time. That’s a nice way to see the progress that you’re making over time to keep you motivated whether you’re paying down a debt or building an investment account.

Manually Tracking Net Worth with Personal Capital

There are many people out there that do not feel comfortable about storing their account login information in services like PC. You may want to read this article to understand everything that is done to protect your data. Since this free service is their funnel for feeding their money maker, the money management business, they have a vested interest in keeping your credentials safe. That said, you can still use the program to do the math for you and give you pretty graphs while manually inputting the data.

Net Worth Tracking Using A Spreadsheet

The same calculation that personal capital is doing automatically you can do using a spreadsheet. An example of what that might look like is shown below. The downside is that it takes more work. Where I can open up personal capital and let it update net worth automatically, you need to pull up every account balance and manually input it into a spreadsheet. All of these numbers are dynamic so they’ll change monthly at a minimum.

Add up all your assets, Add up all your liabilities. Subtract liabilities from your assets and net worth is what’s left.

What is Financial Independence?

Before we dive into a discussion about what an FI number is, let’s recalibrate on what it means to be financially independent. It’s about cash flow ultimately. To be financially independent means that you have some combination of assets that throw off enough cash to pay all of your monthly living expenses month after month for the rest of your life. That’s what it means to be financially independent. That could be passive business income, rental real estate income or a stock/bond portfolio.

Since business and real estate income are straightforward in figuring out FI (does the income that it generates exceed your expenses) I won’t discuss those areas in depth.

What is your FI number?

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Hang around any FI or FIRE communities and you’ll hear people talking about their FI number. Since many people use stock and bond investing through retirement accounts and brokerage accounts as their way to reach FI, they’re looking for a dollar amount that they need in those accounts to be FI. That total dollar amount in all cash and investment accounts that is able to sustain them until they die is their FI number. This is important because it defines the finish line for us. The point at which we have “enough” and no long need to worry about earning more money. Cue the picture of someone hanging out in the hammock usually on a beach.

Exactly how much you need for that FI number is an interesting topic. People want certainty in life, especially with their money, because it’s a terrifying though to run out of money when you’re old. Unfortunately, the future is uncertain and so we can only talk about the future in terms of probabilities and what is likely to happen.

How to Calculate your FI Number – Rough Target

If you read my article on the 4% rule then you could probably have guessed that it would be the basis for the rough target FI number. A study of past market data highlighted that if you invest in somewhere between a 50-75% stock and 50-25% bond allocation then history has shown that your money has a very low probability of running out in 30 years if you withdraw 4% a year. Withdrawing 4% per year to cover your living expenses means that you need to save 25x your annual living expenses.

For example, if your annual living expenses are $50,000 then your rough FI number would be $50,000 * 25 = $1,250,000.

It’s important to start here because it’s an easy number to figure out once you know your annual expenses. It then gives you a north star to work towards. Because your FI number is a multiplier of your expenses, I hope that you immediately see the power in reducing your annual expenses. Not only does it allow you save more, but every $1,000 less in annual spending is $25,000 less that you need to reach FI. Whoa.

Your FI Number – Advanced Considerations

It would be great if the rough number was sufficient to figuring how much you needed. It would also be great if that number wasn’t dynamic. Unfortunately, neither of these things are true! Time to go into the more advanced considerations when figuring out your FI number. The good news is that you can start thinking about these over time and only start to factor them as you get closer to making a substantial life change like leaving your job.

Your Retirement Expenses vs. Your Now Expenses

Photo by Nextvoyage on Pexels.com

You know what your current annual expenses are, but those are irrelevant unless you’re going to live exactly the same in retirement than you are living now. If you’re retiring early the one item that’s almost certain to go up if you live in the US is your health insurance cost. Many people with W2 jobs have some of those costs subsidized by their employer.

Are you planning a radical life change after you hit FI? Selling everything and hitting the road to be a nomad? Buying an RV and traveling around the country? Buying a vacation house to spend more time near the ocean? You’ll need to project the expenses for the live you WANT to live and make sure your FI number is based off of those expenses. If your future expenses are lower than today then it’s important to know this or you’ll end up working longer than you have to. If future expenses are higher than today then that’s even more important to plan into your FI number.

25x Might Not Be Enough for Early Retirement

The 4% rule is based off of a 30 year time horizon. Data shows that men in the US who make it to age 65 will live on average until age 83³. Women who make it to age 65 will live to close to 86 years old on average⁴. If you’re retiring anywhere in the standard 62 to 65 year old range then the 4% rule is likely far too conservative for you unless you have a history of very long life in your family.

However, if you’re reading this blog you probably are on a path to stop work earlier much sooner. Unfortunately, the probability of your money lasting until you die decreases if your retirement length increases. Early Retirement Now re-did the trinity study but increased the data set (1871 to 2016) and also showed 40, 50 and 60 year time horizons. The 4% withdrawal rate doesn’t look so safe if you expect to spend 40, 50 or 60 years in retirement. 3.5%, however, had a 99% probability of success at 50 years for a 75% stock allocation.

Mrs. MFI is pretty risk averse and so even though our retirement period is likely to be in the 40 year range, I expect her to want to be around the 3.5% withdrawal rate. 29x expenses is a 3.45% withdrawal rate so that’s our target.

Taxes, sigh

Since we all hate taxes this is one that’s a little too easy to bury your head in the sand and ignore. However, it needs to be factored into your FI number unless you have a strategy to legally avoid taxation. All of your tax deferred retirement accounts like a 401k, 403b, tIRA will be subject to taxation as ordinary income when you withdraw the money. Yes, if you’re savvy and very tactical in your retirement plans you can dodge some of those taxes through Roth IRA conversions. However, since life is dynamic I think it’s prudent to plan on having to pay those taxes as normal when figuring our your FI number.

How do you do this? Reduce your current investment balance by the rate of taxation expected. For example, for a married couple that withdraws $60k from their 401k in 2020 the effective tax rate is roughly 10%. If that’s where you expect your annual expenses to be then take 10% off the number in all tax deferred accounts.

For example, if you need $60k annually to live post tax and all your wealth will be in 401k accounts then you need more than $60k * 25x = $1,500,000. $1.5M is what you’ll have pre-tax but after being taxed 10% you’ll be left with $1.35M. You’ll actually need $1.5M / 0.9 (10% tax) = $1.67M in those 401k accounts to net the $1.5M post tax amount that you need.

If you live in state with state income tax you’ll need to factor that taxation in as well. Yeah, taxes suck.

Action Steps:

Figure out your net worth using either Personal Capital, spreadsheet or another means. I think this is the most important metric as it tells you if you’re building wealth over time.
Calculate your rough FI number. If you are working on lowering your expenses, see how lowering them impacts that rough FI number.
Start thinking about the future and how your life in FI might change your expenses. Have a discussion with our spouse if you have one about what you want that life to be life.
If you haven’t thought about tax considerations for tax deferred retirement accounts it’s time to start figuring that into the equation.

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Sources

Tags 4% Rule, FI Number, Net Worth

General FI Investing

Should You Use Extra Money to Prepay Your Mortgage or Invest?

Post author By Mr. MFI
Post date April 11, 2021

BLUF: The decision to prepay your mortgage or invest will end up varying based on each individuals mortgage parameters, risk tolerance and goals. 2-4% mortgage rates make stock investing a better historical performer than prepaying your mortgage. However, you need to run the numbers AND consider other intangible benefits to arrive at what’s best for you.

Prepay Mortgage or Invest: A Common Quandary

I see this question posed all over personal finance forums and social media platforms. How the question is phrased depends on the person but usually goes something like this: “My mortgage is less than 4% and the market historically returns 7-8% on average. Isn’t it better to invest instead of pre-paying my mortgage?”

Alternatively, I’ll sometimes see hardcore investors bashing those that are paying off their mortgage early because they’re “making a poor choice” or are “leaving money on the table.” The conversation revolves around borrowed money being cheap and those long term investments outperforming the mortgage on average.

It’s very normal to want to want to make the “best” decision and I realized that I had never seriously considered this question in my situation. I always do the math as a part of my decision making process so this article will show my numbers, my process for evaluating the options and give you my thoughts on other considerations if you are faced with this decision.

Our situation:

Mrs. MFI and I have a cute little 1,500 sq/ft split level house here in NY (image above) that only cost me around $130k to buy near the peak of the housing boom. With a low purchase price, a refinance in the middle after my divorce and some overpayments along the way we only have $45,529 left to pay on my 30 year mortgage at 3.625% Before you hate us for that mortgage only costing $456 a month, consider that our property and school taxes are more than $456/mo. Sigh, thanks NY – the tax state.

Aside from my mortgage we’re debt free! Having crushed my old debts and consumer ways there is a part of me that would love to pay off the mortgage and have no debts. However, we’re also saving hard to reach financial independence and that includes after tax savings in a brokerage account as we’ve used our tax advantaged options. As such, we have about $1,000 a month that could either be used to make additional principle only mortgage payments, invest in our brokerage account or some blend of the two. What should we do?

The Comparison Approach:

If the 30 year mortgage is taken to term with no additional payments it will be paid off in March 2031, just under 10 years from today. With that being the baseline case of do nothing extra and stay the course I came up with a variety of options that I could do between now and 3/1/2031 which is the end of the time period for the study.

Comparison options:

Option #1 – Pay the normal mortgage payment ($456). Invest $1,000/mo into a brokerage account until the end of the study (3/1/2031).
Option #2 – Pay the normal mortgage payment ($456) plus a $250/mo principle only payment. Invest $750/mo in a brokerage until the mortgage is paid off (4/1/2027). At that point invest the full $1456 ($456+$250+$750) into the brokerage until the end of the study (3/1/2031).
Option #3 – Pay the normal mortgage payment ($456) plus a $500/mo principle only payment. Invest $500/mo in a brokerage until the mortgage is paid off (8/1/2025). At that point invest the full $1456 ($456+$500+$500) into the brokerage until the end of the study (3/1/2031).
Option #4 – Pay the normal mortgage payment ($456) plus a $1,000/mo principle only payment. Invest $0/mo in a brokerage until the mortgage is paid off (1/1/2024). At that point invest the full $1456 ($456+$1,000) into the brokerage until the end of the study (3/1/2031).

The comparison data in tabular form.

In all of these cases I have the $456 monthly mortgage payment and $1,000 extra to use to either pre-pay the mortgage or invest in stock based index funds in a brokerage account. In cases where the mortgage pays off earlier than 3/1/2031 (the end of the study) I apply the extra money to the investment account.

The great unknown in all of this is the investment return of the stock market over the next 10 years. I took three different average returns over the 10 year period and used that to calculate the brokerage returns. The four values used were -3.8% (worst 10 year period in S&P history since 1928^[1]), 0% (a lost decade), 7% (long range historical average), 13% (a continued raging bull market).

Resultant Data:

What information did I want at the end to help with my decision of which option was better? There were a few things:

Mortgage Payoff Date – I wanted to see where in time this would fall so I could see if I might be at FI before the mortgage was gone.
Mortgage Net Worth Change – This would be important if we were calculating a timeframe where the mortgage wouldn’t be payed off such as 5 years. In my case, all cases pay off the mortgage so it’s $45,529 for each.
Brokerage Account Net Worth Change – How much would that brokerage account balance change for each method? The account is already in use so I’m looking at the change in value not the absolute value.

The Process:

How did I do this? I use two main spreadsheets. First I used a loan amortization schedule spreadsheet (widely available for free on the internet) that let me include monthly principle only payment amounts. I made a sheet for each option. That sheet provided me with certain pieces of information that I cared about including number of remaining payments, remaining interest paid for each option and the date of the mortgage payoff. Well, it at least gave me the data to calculate remaining payments and interest paid.

The second spreadsheet I used is a compound interest sheet that included an option for regular deposits. I created one of these sheets for each option and varied the investment timeline. I had to take the mortgage payoff date calculated from the amortization spreadsheet to then input into this sheet the right time for the investment per month to flip to the full $1456.

The Results:

I’m honestly surprised by the results. What surprised me the most was that there really wasn’t a massive financial difference to the brokerage account balance between any of the options due to my small mortgage remaining and my short time horizon studied.

My small mortgage balance and 3.625% APR only results in a $6,372 difference in interest paid between option #1 and option #4. The biggest delta was between option #1 and option #2 dropping by $3,555.

Take the “average” 7% market return situation. There’s a $9,500 difference over a 10 year period between the extremes of option #1 and option #4 or $950 a year. Not exactly an amount of money that would keep me up at night with a fear of missing out (FOMO).

Option #1 puts the most into the brokerage account so it’s most susceptible to market gains (and losses) based on average annual return variation. Pre-paying a mortgage is locking in a guaranteed return on your money at a rate equal to your mortgage interest rate. For that reason option #4 fluctuates the least with returns.

The easy way to think about this is that if the average annual return of the stock market is greater than your mortgage APR then investing more will always result in a financially better outcome over mortgage pre-payment.

The surprising thing that I learned in calculating the numbers and thinking through this is that mortgage interest doesn’t really matter. In my case no matter what I’ll spend $1,456 a month. What matters if I want the best financial outcome is what makes my net worth grow the most over time for that $1,456. That means house value – mortgage remaining + change investing account balance over the investing timeframe. In my case all options decreased my mortgage by the full loan amount remaining of $45,529 so I didn’t show it.

A typical loan amortization calculator will show the interest paid.

Loan amortization calculators can lead you to focus on this as well showing you large interest numbers over the life of a loan. It’s easy to add a $500 extra payments and see that interest drop dramatically. What you don’t see is what your brokerage account value would do over time if you chose to invest that $500 for comparison.

My Decision:

Drum roll…I’m going to pursue option #2. This option keeps my brokerage contributions high while accelerating my mortgage payoff by 4 years. While it’s not important to have this house paid off by FI I am interested in the psychological impact and would like to accelerate that some.

The $4,250 brokerage account difference between option #1 & #2 is trivial to me so it’s a good balance between investing and accelerated paydown. Coincidentally, 80/20 (stock/bond) allocation is our investment plan so option #2 is very similar. Option #2 is $750 (stock) / $250 (mortgage) and mortgage pre-payment is almost bond like with a 3.625% return on my loan.

Things to Consider for Your Decision:

We all have our own unique situations to consider so my decision might not be the right one for you. Here are some things to keep in mind when contemplating this decision for you.

If your mortgage APR is less than 7% and you have a 20+ year investing time horizon then investing in the S&P500 has historically always done better, on average, than prepaying your mortgage. The S&P500 returned 7.3% on average over all 20 year periods from 1928 to 2018^[1].If the market returns 7% on average and your mortgage APR is 3% then you’ll make 4% more on average, compounding, over your investing life on any money that you invest in the S&P500 index instead of pre-paying your mortgage. Is it possible for the market to underperform your 3% mortgage over 20 years? Absolutely. But on average it won’t and since none of us has a crystal ball that’s the best that we’ve got.
Try not to fixate on mortgage interest saved when projecting what prepaying a mortgage will do for you financially. Look at overall net worth and factor in how your money would grow if you invested the money instead of paying down the mortgage.
Keep your big picture goals in mind. Eliminating a mortgage payment will drop your monthly expenses so it’s advantageous to have that happen before FI / retirement if you plan on staying in the house. It will influence your FI date so see when you want that mortgage gone and the impact of the reduced expenses on your FI number.
There’s a freeing feeling to being mortgage free (or so I’m told). Remember how good it felt when you paid off your car loans or when you were free of credit card debt? It’s hard to put a price on the feeling of not having a debt hanging over your head. Or the pride felt in knowing you own that house outright.
Pre-paying your mortgage is choosing a guaranteed return on your money of your mortgage APR assuming your house value is stable. If you are more conservative when it comes to risk tolerance then mortgage pre-payment will likely be a more attractive option.
You don’t have to choose the mathematically superior (most rational) choice that nets you the most money in the end. There are many reasonable choices on the spectrum between invest everything and don’t prepay any mortgage and invest nothing while aggressively paying off the mortgage.
It’s much harder to get at wealth that’s tied up in your mortgage. You can refinance it out or take out a HELOC but there are costs involved. If it’s sitting in your brokerage account it can serve as an emergency fund and is far more liquid.

Action Steps:

Make sure you understand your mortgage APR. How does that compare with 7%?
Download a mortgage amortization calculator and compare a mortgage prepay option to an investment option. Consider in between options like invest half and prepay half.
Make a decision and implement it into your budget.
Automate the investments and pre-payments to make it easy to stick with your plan.

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Have you done this analysis before? What did you choose and why? Comment below!

Sources:

FourPillarFreedom.com. Here’s How the S&P 500 Has Performed Since 1928. https://fourpillarfreedom.com/heres-how-the-sp-500-has-performed-since-1928/. Accessed 4/11/2021.
FreddieMac.com. 30-Year Fixed-Rate Mortgages Since 1971. http://www.freddiemac.com/pmms/pmms30.html. Accessed 4/11/2021.

Tags invest, mortgage, prepay mortgage