Month: January 2020

This year is going to be interesting for us. We’ve been tackling debt for several years, had to deal with some home repair issues, but now we finally get to focus on investing quite a bit.

High level goals for 2020:

• Max out traditional IRA’s (our income disqualifies from Roth IRA)
• Max out employer match for wife’s 401k
• Max out my 401k (no employer match)
• Remodel master bathroom in our house (badly needs it and I’ve been patching since we bought the house)
• Increase emergency fund to plan for new baby

In order to accomplish the above, we’re largely relying on automation this year. It allows us to pay ourselves first for 401K’s and savings.

We also tend to have the real and unfortunate habit of spending money if we see we can afford to, so to offset this we use automation everyday to check our spending patterns vs historicals to increase savings or investing where possible.

Our Financial Tool Tech Stack For 2020

Savings

• Digit – We use digit to pull savings daily, generally it just skims the top of our checking account compared to historical spending habits. If it finds an opportunity, it pulls the money and shuttles it into a holding account. I transfer it out monthly, but am willing to pay digit the $2 to help pull this money that we’d otherwise spend.
• Raise – We use raise to buy giftcards for discount purchasing. Raise offers 1% or more off pretty regularly, and occasionally has sales. We try to take advantage of the sales when possible to stack for savings on common stores we shop at.
• Ally – This is where our non-emergency fund savings goals live. We keep separate accounts for vacation, 529, near term savings here.
• Wealthfront – This is where our emergency fund lives. We keep it here primarily due to the interest rate we get. When we originally signed up, it was substantially higher than Ally, it still is but much less so now days.

Investing

• Payroll Provider Bank/Acct allocation – Both of our payroll providers offer the ability to send your paycheck allocation to different bank accounts. We leverage this to keep money out of sight / out of mind. It’s a fantastic tool.
• Vanguard – This is where our IRA’s live as well as our 529 and my 401k.
• Fidelity – This is where my spouses 401k lives.

Net Worth Tracking / Retirement Simulation

• Personal Capital – Useful tool for measuring net worth, cash flow, and retirement simulations.

Credit Score Tracking / Monitoring

• Credit Karma – We use this is a credit score monitoring tool. They pull 2 of the 3 major bureaus in the USA.
• Credit Sesame – We use this for credit score monitoring and credit alert monitoring tool. They pull 3 of the major bureaus in the USA and are useful because they help you understand the reporting timing of your tradelines.

Building a financial independence (FI) roadmap is key to understanding when you can act on your financial independence, how you will reach your goal, and what your goal number actually is.

It also acts as an accountability tool, and will allow you to see the downstream affects of an adjustment you make earlier on in your roadmap. Keep in mind though that a roadmap is designed to be a dynamic plan. Things may change (debt added, increased income, unexpected expenses), so just anticipate it.

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Step 1) Finding Your Number

How To Determine Your FI Dollar Target

The simple way

(total annual expenses) x (years you plan to be FI)

Most recommend a “years you plan to be FI” multiplier of 25. Your total annual expenses represent everything from your mortgage, to your cell phone bill, to your dog food costs. Sum them all up as accurately as possible.

If you don’t have this yet, no problem. To start keeping track of this number I recommend Mint.com. Another helpful tip is to build a budget that fits you.

The 25x multiplier represents 25 years worth of savings. This assumes you reach financial independence at 55 and live to be 80 years old. You may want to adjust this multiplier depending on what age you plan to achieve FI by and also due to people increasingly living longer (see figure below).

Source: National Institute of Aging

The more accurate (more complicated) way

(retirement $ account value) x (safe withdrawal rate) = years of FI

The more complex way uses what’s known as a safe withdrawal rate of 4%* (assumptions listed below). You should also decide what percentage of your current income you’d like in retirement… do you want to live on $40,000 annually? $80,000 annually? For this example, let’s assume you want to live off $60,000 annually.

*Assumptions of 4% safe withdrawal rate: 30 year retirement period, mixture of stocks & bonds, assumes >= $1 in the bank is a success. MadFientist has a great article with more details.

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Step 2) Determining Your Time Till FI

How To Determine Your Time Till FI

(required $ to FI) / (annual $ added to FI accounts) = years until FI 

You calculated the “required $ to FI” in step 1 of this exercise. Now you’ll need to figure out the average growth of your investment accounts annually. You can do this by calculating the annual increase (or decrease) in value each year, then average them based off the number of years you have been contribution.

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Step  3) Building Your Roadmap

How To Determine Roadmap Steps

Step 1) Build an emergency fund

The very first thing on your agenda should be to build an emergency fund, even before you begin paying down debt. An emergency fund acts as a place to access liquid cash in times of emergency. The term emergency is relative to each person and their situations, but examples may include an unexpected hospital stay, a car accident, etc. An emergency fund typically represents anywhere from 3 – 6 months worth of total expenses.

Step 2) Contribute to employer matched 401k’s or IRA’s

If your employer matches with 401k’s or any kind of retirement account, contribute at least up to the matching point. It is free money, and compounding interest is extremely powerful in the financial world.

Step 3) Pay down high interest debt

Generally high interest debt is considered anything > 5%. Think of it this way, the stock market on average returns ~7% non guaranteed. By paying down high interest debt, you are getting a guaranteed return, which is something you do not get from the stock market.

Step 4) Contribute to IRA’s and retirement accounts

Max out annual IRA and retirement account contributions. Depending on your income levels you can utilize these for various tax saving strategies. See Roth vs Traditional IRA for more information

Step 5) Contribute to taxable income investments

At this point, you should have some level of retirement portfolio built up between your potential employer matched accounts and your personal retirement accounts. You can examine the risk strategy of them and decide how to diversify your investments. Other investment options in this step include real estate, stock market, collectibles, website holdings, etc.

Step 6) Re-balance portfolio where necessary

Decide how often you want to re-balance your portfolio to reduce exposure and risk. Maybe a certain investment class increased significantly in % allocation of your portfolio, and it poses higher risk than you like? Re-balancing essentially takes that % allocation and redistributes it to get you back into your desired risk vs reward tolerance.

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Step 4) How To Monitor Your FI Goals And Adapt When Needed

Checking Your Net Worth

There are a variety of net worth trackers on the internet, Mint.com and Personal Capital just to name a few. These tools allow you to measure your portfolio gain & losses as well as the distribution of asset classes so you can manage risk tolerance.

Adjusting For Risk

See step 3.6 above to learn more about the concept of re-balancing your portfolio.

Around 8 months ago we finally got serious about building our net-worth. We had been out of university a few years, lived in high-rises downtown, taken exotic trips, and lots of fun. However, our net worth was still negative by quite a bit. At this point we were not following a budget, and not aggressively going after our debt.

The conversation that started it all went something like this:

1. Reaching FI: Income wise we do quite well for our age, but our net worth is still terrible. Do we want to retire and travel?
2. Spouse: Good point, and yes I love to travel!
3. Reaching FI: Well, I’m concerned we will be too old by the time we retire
4. Spouse: Let’s look into refinancing our student loans and paying them off
5. Reaching FI: *Googles refinancing student loans and learns of SOFI*, applies, and sees considerable rate decrease, gets spouse to apply as well
6. Reaching FI & Spouse: Accept SOFI quote and refinance with them

In the end we managed to reduce our interest rates by a couple percentage points cumulative, and get my spouse out of some nasty variable interest student loans.

I recently crossed the exciting line of an 800 credit score. It’s exciting, but in reality nothing has changed. The habits used to reach this are extremely easy, and really are habitual processes that you can use in your FI journey.

A credit score is extremely beneficial in getting low mortgage and loan rates to further our FI goals, potentially with the help of real estate.

The 5 habits are:

Habit 1: Start your credit building early

I opened my first credit card just before I was 20 years old, while in college. It was a simple Chase Freedom card, and I was so excited. Credit history is a big deal as far as credit score factors are concerned, by starting earlier I was able to show I have history of a positive track record.

Habit 2: Pay in full every month

This is a habit I built to help with habit 4. I pay my credit card off every month in order to not get in over my head in debt. It is often that people will let their credit just sit and accumulate. This is the trap, and this is where those $5 (10-25% fees) start hitting you. On a percentage basis this is where you the card holder lose, and where the banks win.

Habit 3: Keep your credit accounts active

I buy at least 1 item on my credit cards every few months so that they stay active. They are my longest history accounts, so it’s important to keep them active. You will have some credit accounts closed as you pay off debt (ex: student loans), but as long as those aren’t your longest credit history account you’re in a good place.

Habit 4: Keep your utilization low

See habit #2. Keeping your utilization low prevents you from getting dinged. However, a good thing about the utilization metric is it rarely permanently dings you. I have seen cases where a specific credit account is maxed our on purpose for a reason, and then paid off a few weeks later, and the credit score took a temporary drop, but recovered to slightly higher than before levels once paid off.

Habit 5: Don’t open too many accounts unless necessary

You can get into a situation where you have too many credit accounts open. I’m not a credit expert, but I just watched my account volume with reasonable expectations. Things like, 20 accounts probably seems to high. 2 credit cards seems reasonable with different rewards so I can strategically earn perks.

Recently we paid off approximately $30,000 USD of student loan debt. We were fortunate to close out an investment that we had for a few years, and have set aside the necessary amount for tax time. It’s an amazing feeling to see the accounts zero’d out now.

Our remaining debt is as follows:

• vehicle loan $16.5k @ 3.19% (positive $6.2k equity according to KBB)
• student loan $1.5k @ 3.15%
• student loan $3.3k @ 3.15%
• vehicle loan $8.5k @ 0.90% (positive $3k equity according to KBB)

Our short term plan:

• Leave debt alone, we anticipate getting higher % return than current rates owed in other investment vehicles
• Maxout IRA contributions @ $5,500 USD each for 2017 year

Our Robinhood review covers the past 6 months of personal investing experience using the app. It is an investing application that is free to download on both iPhone and Android devices, best known for their commission and fee free trading.

Robinhood is a good platform for someone that …

• wants to invest with a small balance (something that trading fees can quickly made unusable)
• doesn’t need an advanced trading platform
• is comfortable and prefers to trade through their phone or tablet
• doesn’t want to lose money on commissions and fees
• potentially wants to trade on margin
• potentially wants to trade relatively frequently

A quick look at our scoring …

Topic	Our Rating	Details
Overall	★★★★	No hidden fees, easy to use
Trading Costs	★★★★★	Free is actually free in this case. No commissions or fees charged.
Account Minimums	★★★★★	No minimum for non-margin. Margin requires $2,000 minimum due to regulations
Platform Usability	★★★★	on an iPhone the platform is very easy to use. Sleek UX, obvious buttons, etc
Platform Device Compatibility	★★	They are really lacking a desktop application. Mobile compatibility is solid though
Research Tools	★★	Minimal research tools. The news and tooling they do have does not always have the most updated info
Securities For Trading	★★★	ETF’s and stocks
Customer Support	★★★	Phone & email. Phone M-F, 9a – 6p EST
Margin Capabilities	★★★★★	Offered through Robinhood Gold
Brokerage Transfers	★	Not offered in or out currently
Personal Finance Tool Integrations	★	No current integration with Mint.com or PersonalCapital.com

My Personal Experience

At the time of initially writing this (July 4,2017), I am up 9.72% year to date and have been actively using Robinhood for around 6 months with an initial deposit of $200. My initial goal was to play around and make sure I had a sound first hand experience with their platform.

I do want to note that while my return is currently over the 7% that many people shoot for, it’s not specifically due to Robinhood. However, it has allowed me to trade profitable opportunities that may not have been on other platforms due to paying fees and commissions. This is where the real win has been for me with their platform. I cannot speak to Robinhood gold as I haven’t used it to date.

UPDATE: Referring A Friend & Free Stock Shares

Over the holidays we gifted investment advice and a funding gift to a few relatives on Robinhood. Naturally I had them sign up through our referral links to take advantage of the free shares that Robinhood provides.

The process was painless, I was notified that I had invites that had signed up, and then deposited funds. Once Robinhood notifies you of this, they present essentially 3 hidden cards to choose from in order to redeem your free share. You do not know ahead of time what the 3 options are, other than left, center, and right position. The two shares I ended up with so far are Zynga ($3.96) and Sprint ($5.65).

Update: One Year Of Investing With Robinhood: (January 2017) to current (January 2018)

I first invest $200 USD with the Robinhood app January 13, 2017. I started out by purchasing a few shares in IRM to establish a dividend baseline. From there I used the remainder to frequently trade biotechs (sometimes only holding for a few hours). For the last half of the year I have mainly played the holding game with BOTZ, MSFT, IRM. I have cheap shares with dividend cash in IDN, ALT, AUPH. My 2 free shares for referring mentioned above with S and ZNGA.

• Cash invested: $200
• Freebie Stocks (from referral): $9.61
• Portfolio Value: $273.54
• Gain / Loss:  $63.93 (+30.5%)

You can achieve financial independence via 1 of three methods:

• Increase your income
• Decrease your expenses
• Increase your income AND decrease your expenses

As FI’ers the freedom exists to achieve the end goal however we’d like to. Many try to do this by decreasing their expenses, which involves typically adopting an overly frugal lifestyle (nothing wrong with that).  However as with all things, our household strives to maintain balance between financial independence and our natural inclination for exploring and experiencing.

Rewards points have been a great way for us to increase our return on dollars spent vs managing our income and expenses. Our main form of rewards points is Southwest Airlines, which offer 2 types of credit cards through Chase Bank.

What we’ve used rewards points on

Southwest Airlines

Our honeymoon flights were 100% paid for via my Southwest credits, and we currently have over 50,000 points just by spending our credit card in place of our debit. Once caveat to this is that it is extremely important to pay off your balance each month.

We set out budget based on bi-weekly interval and will keep to budget with our credit card, then we simply pay off the balance with the cash incurred for that income period.

Let’s do some math:

$450 round trip per person * 2 people = $900 per year (1 trip per year)

Hair Cuts

I go to a relatively expensive mens salon ($35 per haircut), however my wife appreciates the consistency my hairdresser is able to provide. A key thing that they do is after 5 haircuts with them, I get 1 free. It’s not much, but the consistency keeps my loyal, and I feel like I am getting a freebie for something I would have spent anyways.

Let’s do some math:

52 in a year / 1 haircut every 3 weeks = 17 haircuts per year

17 haircuts / 5 = 3 free haircuts per year

3 * $35 (+ $7 tip @ 20%) = $105 USD per year

Groceries & Shopping

Although we don’t shop at Kroger as much as we once did (hello HEB!) due to a reduced ROI even with their gas credits, this is still a rewards win I want to point out. We are fortunate in that we have options like HEB which are competitively priced, but if you don’t you may still find gold here.

Kroger does a great thing where they give away 10 cents per gallon per 100 kroger rewards points (1 point = $1 with Kroger plus card at the time of writing this).

Let’s do some math:

$400 grocery bill per month * 12 = $4,800 USD per year

$4,800 = 4,800 kroger points

4,800 / 100 = 48 gallons per year

48 gallons per year * 10 cents off per gallon = $4.8 USD per year

Investments & Cryto Currency

Robinhood Investing App

I am a huge fan of Robinhood investing application for basic trading. It is not beefed out and currently doesn’t even have a desktop app, but they don’t charge a buy or sell fee so you can grow your nest egg portfolio much quicker. They have a referral program where you get a free share of stock if you sign up through a referral link and so does the person who referred you. To day I’ve gotten 2 shares free (1 share Zynga and 1 share Sprint).

Let’s do some math:

2 friends who want to learn investing per year = 2 free shares of stock

2 free share of stock = 1 Zynga & 1 Sprint (~$10.00 total) = $10 USD per year (excluding appreciation)

In total, just from these examples we’ve received roughly $1019.80 free per year, doing nothing beyond our normal living. Could we increase this even further by spending less on haircuts or doing a smaller vacation every two year, sure. However, without sacrificing exploration I’d say this paints a great picture of why you should be seizing the opportunity where possible.

Hey all,

This is a super interesting topic because it can be very subjective based on what your personal and/or family goals are. For example, my wife used to think paying herself first was making sure she could get a pedicure or a massage, now it has transitioned into putting the budgeted savings directly into our investments or savings (with the occasional, but less frequent pedicure or massage).

Note: You should absolutely still be rewarding yourself and your spouse, so make sure you are keeping the relationship alive and not drowning it with FIRE strictness (they may start to resent you, FIRE, and your relationship). It’s extremely unfortunate, but here is a real scenario.

PYF, The Basics…

What we’re talking about here is defining a pre-determined budget line item for investments or savings. Don’t have a budget yet? Read this advice.

1. Pay
2. Yourself
3. First

It’s been critical for our wealth increases because it is simply all too easy to spend it elsewhere if you don’t prioritize it. Paying yourself first immediately takes that cash and puts it out of sight and out of mind.

Nothing long, just a simple reminder. Hit me up and let me know how things are going on your FIRE journey!