The Day I Learned I was a Millionaire

It was May 1st, 2015.

It was a long, hard day at work, at the end of a long hard week. I was still at work, but at that point, just killing time waiting to pick up my wife at the airport once I got the call. So, to kill some time I started running the numbers for my monthly net worth tracking sheet.

Even before I started entering the numbers in, I knew there was a good chance this would be the month. This milestone, while still extremely significant, had begun to become a bit of an inevitability. With my investments making more money for me “while I slept” and my savings on autopilot, I knew it would happen sooner rather than later.

After I entered the final number into the spreadsheet, there it was at the bottom of the page. Total Net Worth = over ONE MILLION DOLLARS!

The Double Comma Club!

I had done it!

It felt pretty damn good, I’m not going to lie. So what did I do to celebrate?

I drove to the airport, picked up my wife shortly after 8pm, and we then drove to Chick fil’A for dinner. No Dom Perignon, no lobster dinner, no fireworks and cake. Just a simple fast food meal. Not healthy, not extravagant, but tasty!

Maybe in the next few weeks I’ll do something big to mark the occasion. Just as likely though, I won’t. After all, we didn’t get to this point by blowing all our money on $200 bottles of bubbly.

The reality is also that it is likely to be a fleeting experience. Much of our wealth is tied to the markets, and while this is a good thing, it does mean that we are subject to the whims of Mr. Market. Right now he’s been in a good mood for the last five years. Surely at some point he’ll turn sour and we’ll see our net worth decline.

Still – it’s a good feeling.

A very good feeling.

The Freedom 40 Plan still has 3 years to keep on adding to the pile too. unless we decide to change the plan that is….which is always a possibility…moving to Central America, Southeast Asia or some other low cost of living place is looking more and more appealing to me every day….

What to do with too Much Cash?

Ms. Freedom 40 and I are at odds with one another.

Well, not really. But, we do have an issue we can’t seem to agree on.

As you can see from my last monthly net worth update, we have $142k sitting in cash. Most of this is earning a piddly 0.75% in our “high yield” CapitalOne360 savings accounts (formerly ING Direct). The situation has been like this for months now. Maybe even a couple years.

It wasn’t always the case though. We took great efforts to build up our cash savings over the years. We both agreed that having an emergency fund was super important. Depending on the financial adviser you listen to, you might hear advise telling people to stash away anywhere from 3 to 12 months of expenses in an emergency fund. In the past, I think we’ve leaned towards the conservative (safe) end of that range, looking to have a year of expenses covered by our savings. That said, I’m beginning to reconsider this logic due to a couple of reasons.

1. Low likelihood. The likelihood of a big emergency where we would need to tap into this much cash is pretty low. If something really bad did happen, we have plenty of liquid cash on hand. We also have access to credit, families who would be willing to help, and numerous assets that could be sold if needed.

2. The opportunity cost. This is the biggest reason for me. By keeping all this cash in savings we are missing out on lots of opportunities to invest it in ways that would help us work towards financial independence much quicker. If I had my druthers, we’d spread some of this cash across a variety of investments. Stocks, bonds, Lending Club, CDs?

But alas, Ms. Freedom 40’s current position is that she really likes having that money there and knowing that it is available at a moments notice. “What if I decide to quit my job?” This is the “F-You Money” thinking in the equation. I get it. In some respects, I feel the same way. However, I think I consider my “F-You Money” a bit more broadly, to include taxed investments as well.

That said, I do believe that stock valuations are high right now, and it’d be great to do some bargain shopping in the event of a correction/crash. In 2008 I was wishing I had the money to invest in what was clearly the buying opportunity of a life time, but alas, I just didn’t have the cash.

Based on the recent cash flow analysis I did, our annual expenses are right around $110k. This is based on our current spending though. In the event of a big emergency, like losing a job, we would obviously cut back on our expenses considerably.

So, even by a very conservative measure it seems to me we should seek to get our cash holdings down to about $110k. So, that’d mean moving about $30k. I think I might be able to convince Ms. Freedom 40, but it’ll require some more conversations…

Perhaps we could do something like this –

$5,500 Backdoor Roth contribution

$5,000 Lending Club

$10,000 Taxed Investment Account (S&P 500 Index)

$10,000 Taxed Investment Account (Tax Exempt Muni Fund)


First Quarter Cash Flow

I’ve tracked my Net Worth on a monthly basis for a long time now. However, I’m much less consistent about tracking my cash flow. I tend to do it only once or twice a year, which really isn’t to helpful.

Net worth is an important metric for sure, but cash flow is also very important. It helps us see how and where the money is coming in, and how it’s going out. Knowing these things can help us reduce expenses and maximize ways of bringing in more cash. It’s the later that I’m looking to focus on in the coming months.

Primarily, I’m trying to build up my passive cash flow from a fairly insignificant amount right now, to something a bit more impressive. This way, I think I can feel a little more comfortable with my own FIRE dreams.

I tallied all my information to come up with a quarterly number. I may start tracking this monthly, but for now, I think quarterly is good. On a month to month basis there can be some weird gyrations due to things like pay check schedules or big purchases. Over the course of a quarter, they level out somewhat.

2015 Q1
Freedom 40 Household Salary (Net) $32,831.00
Savings Account Interest: $249.52
Dividends $517.11
Lending Club $9.84
Real Estate Rents $5,250.00
Parking Reimbursement $648.00
Other: $0.00
House Mortgage: $7,800.00
House HOA Fees $2,450.00
Rental Mortgage $4,209.00
Rental HOA Fees $789.00
Credit Cards $10,040.00
Electric Bill $469.44
Insurance (House, Rental, Cars) $378.00
Car Pymnts $1,173.00
Active Income: $32,831.00
Passive Income:  $6,674.47
Total Income: $39,505.47
Total Expenses: $27,308.44
Cash Flow: $12,197.03
Annualized Cash Flow $48,788.12
Income / Expense Ratio (Goal = 50%) 69%
Percent Passive Income (Goal = 50%) 17%

Some Notes:

Household Salary ($32,831) – This is our take home pay. It doesn’t include 401k contributions, HSA contributions, taxed earnings, etc.

Credit Cards – We both pay these off every month, carrying no balance and never paying interest. We both use our cards to purchase just about everything because it is very convenient, and the CC company actually pays us to use them (cash back / points). Despite my Step Dad’s old school beliefs, I think paper money is slowly dying.

Income / Expense Ratio (Goal = 50%) – This is an interesting number. The way I think about it, for every dollar I earn, I’m spending this amount. So for this period, I’m spending .69 cents for every dollar. A goal of spending only half of what I take in every month is aggressive, but it is something to shoot for. (If I included 401k here it’d be quite a bit easier…)

Percent Passive Income (Goal = 50%) – This is a really aggressive goal, but I love the idea of half my total income making its way to me through no significant effort on my part! To get this number up, I’ll need to find ways to bring in a lot more passive income!

So what do you all think? How can I get these numbers up?

Tax Time!

I finally finished up my taxes last week, a full 7 days ahead of the deadline! For most people doing your taxes is not much fun, and I’d say I’m in the same boat there. Some observations after completing this years taxes.

  • The system is way too confusing! The fact that all of us have to spend hours filling out complicated forms, or pay others to do this for us is ridiculous. The whole system at times seems to be engineered to keep accountants and tax lawyers employed. It’s like a big jobs program. All the various deductions, credits, formulas, exemptions, etc. are just mind-boggling and crazy! Why can’t we just have a simple rate for everyone! Wouldn’t there be a nice simplicity to that?
  • Boy am I glad I own a house! Without it, I’d be paying the government a whole lot more! The mortgage interest deduction is one of, if not the biggest tax benefit in the U.S. While I may believe the whole tax system should change, I’ll keep taking advantage of this guy as long as it is around. If I were a betting man, I’d say that’d be for about forever.
  • Getting a refund is awesome. Even if rationally I know it means I gave the government an interest free loan over the last 12 months. I still like getting those refund checks! Speaking of which, what do most people do with these? I’d imagine the average person spends it on new clothes, a vacation, or something like that. I usually invest it in the stock market.
  • The system is rigged against the wage earner. I’m still in the ranks of the salaried employees of the world. I work hard every day for my money and I earn well. For all my efforts, the government rewards me by taking a hefty chunk away. My invested money however, the money working for me – much of it is taxed at only 15% (Qualified Dividends), or in some cases not at all (Tax Free Muni Bonds)! Long term capital gains are taxed lower too. I’m working hard to get my money working even harder for me so I can stop working so hard!
  • We’re very fortunate. Through this process, our adjusted gross income for the year is revealed. In my view, It’s a big number. I work hard and the Mrs. works hard too. We live a good life. It’s fair that we should pay taxes to help our country do the things it needs to do.
  • It still hurts! Good God, do we pay a lot into the system! Do we get things out of it? Yes. Do we get as much as many others? No. The fact that we pay in enough taxes to employ someone with a pretty decent salary for a year is a little crazy on one level.
  • We seem to be taking advantage of the system in place. As mentioned, we’re doing well. That said, despite being in a fairly high tax bracket, our effective tax rate is a little under 17%. I’d love to get that lower, but thank you home interest deduction, 401ks, HSAs, etc!

What observations to others have at this time of year regarding taxes?

Vanguard vs. iShares (ETF Fees)

As I’ve mentioned before in the blog, I’m a big fan of index funds and ETFs tied to them. In the past I’ve used iShares a lot, basically because they have a lot of products, easily accessible information on a well organized website, and low fees. In short, I like them and have been really happy with their products. Others tout Vanguard a lot, and I have nothing against Vanguard, I’ve just tended to go with iShares a bit more so far.

However, I recently noticed that my iShares U.S. Real Estate ETF (IYR) is charging a fee of 0.45%. This is pretty low in general, but compared to many of their other products, it is quite high. So I checked on the comparable Vanguard offering and was surprised to see that VNQ is charging a management fee of only 0.10%! This is a pretty huge difference! I went a bit further to look at the holdings in each portfolio only to find that they are nearly identical. There a re a few differences, but not many. Also, with Vanguard you’re holding a basket of 141 stocks, whereas with iShares you only have 113. So a bit more diversification with Vanguard.

At any rate, I’m going to be slowly changing these holdings from iShares to Vanguard. Just goes to show you that you need to keep your eyes out for the best deals and be mindful of what’s happening out there!

Monthly Net Worth Update – April 2015

My primary goal is to have the freedom to retire at age 40.

I am still working out the details of how much money I want to have in early retirement, and thus, how I want to live in early retirement. As such, I am also still working out the details about how much money I need to save in order to enable my early retirement.

I’m a big believer in completing monthly net worth updates as a way to stay on top of your financial situation and work towards your goals. I will share my monthly net worth updates here.

April 2015 –

2015.04 - Freedom 40 Monthly Net Worth Update

March was another decent month. The markets continued to keep chugging along. Not doing amazing, but not tanking either. This single factor continues to have the biggest impact on our net worth growth or decline.

We reached a new all time high of $994,406! SO CLOSE to the big $1 Million milestone! If things keep going well and we’ll be in the “double comma club” soon!

Net Worth Notes:

Cash (-$8,147): This continues to be considerably higher than I would like. While having an emergency fund is important, we have too much money here at the moment that is doing little for us. I’ll be looking to invest up to $75k of our cash in the next few months. The challenge with that is where. I’ve considered another rental property, but haven’t seen any worth while in our area and I’m also just not sure I want to deal with that additional hassle. The market is another option, but it’s been so hot for the last several years, I feel like it has to come down sometime soon. I’d like to have money on hand to take advantage of a market decline, but I also recognize the folly in trying to time these things. I’m torn!

Taxed Stock Account (+$16,327)This month I reallocated $10k from savings to investments within this account. In addition, I made the regular $4k contribution here.For the last year I’ve been pumping $4k per month into this. It primarily consists of ETF Index funds, including some tax-free munis. I intend to continue funding this at the same level (or more) for as long as possible. There may be a need to reallocate some funds here to more tax favorable investments (e.g. munis, growth stocks, less dividend holdings). Also in this bucket is a small amount invested recently in a LendingClub account.

Retirement Accounts (+$6,476): This consists of my 401k, Trad IRA and Roth IRA, as well as Mrs. Freedom 40’s 403b, and two Roth IRAs. We maxed out the 401k/403b the last two years and will do so again this year. We make too much to directly contribute to a Roth, but I did a backdoor conversion last year and may do so again this year. We’re only able to do this for Mrs. Freedom 40 at the moment unless I roll my existing Trad IRA into my 401k. I used to be a big believer in the Roth, but now I’m a little torn on it based on this great article on the Great Roth Controversy by GoCurryCracker.  

Rental Property ($0): This is a 2BD/1BA across the street. We used to live there and rent it out now. I updated the approximate value at the beginning of 2015 and will probably not change this until early 2016. I plan on holding onto this asset for a long time. Currently, this creates nearly $0 cash flow, but the tenants do pay the mortgage every month!

Home Value ($0): As with the rental, I updated the approximate value at the beginning of 2015 and will probably not change this until early 2016. We have no plans of moving in the near future. If we do, there is a strong possibility that this will become a rental property.

Other (+$269): this consists of two cars, some gold and silver coins, and my HSA. I may separate the HSA in the future, but for now I’m fine with it here.

Home Mortgage (-$668): This just keeps going down a bit each month as we make our regular automatic payments. I used to put a fairly substantial amount of money towards additional principal payments, but I now believe it is better to invest this money as I should be able to get a better return than the 4.375% on the mortgage and I can have access to the money if needed.

Rental Mortgage (-$359):  Pretty much the same deal here as our home mortgage. Keeps going down a bit each month. While we’re not making much (if any) money on the rental now, here we can see we are getting a benefit from our tenants paying our mortgage. This one is at 4.5%.

Other Loans (-$171)This includes 2 Student loans Mrs. Freedom 40 has. Both are at 1.875% so I firmly believe in making only the regular payments and no more. We can put our money to better use than paying these down. This also includes my car loan which is at a whopping 0%. I could have bought my car in cash, but instead I financed at 0% and will have that money working for me in the market instead.

Here’s what our Net Worth looks like over the past 12 months. Thanks to continued dedication to savings and lots of help from the stock market, we’ve seen great growth!

Let’s hope it keeps going!

2015.04 - Freedom 40 Monthly Net Worth Update (Last 12 months chart)

Investing Outside the U.S.

I continue to believe that the US equities market is overvalued. Granted, I’ve thought this since July 2012, and clearly have been wrong, but after seeing it go up so far so fast, I just have to believe that at some point soon there will be a big correction.

So, if this is my bet, where do I put my investment income? Well, to be honest, much of it is sitting on the sidelines for the moment, waiting for some values that I believe will appear. In 2008 I was sitting around just wishing I had some cash to invest, knowing the market would recover. I’m not expecting anything close to the collapse we had then, but I don’t want to be caught in a similar situation. Seeing values everywhere and having no money to invest. Let me tell you. That sucks.

Looking around and thinking from a long term perspective, I noticed that international and emerging stocks are considerably lower than they were just a few months ago. Everyone knows about the woes in Europe that seem to just keep getting worse. In addition, there continues to be more and more talk about a slowing of the Chinese market. These things have certainly contributed to seeing some of the internationally focused ETFs slip a bit. So, there might be some value here? At any rate, I’m a pretty firm believer in the fact that the real growth markets in the next 25 years are going to be in Asia, not the US or Europe.

So, with some of these things in mind, I recently made the following picks. I’m holding these funds in a taxable account, so my plan is to hold them for at least 1 Year. Then I’ll evaluate and determine where to go. However, holding onto them for a longer time-frame is certainly a distinct possibility.

All of my picks are iShares ETFs.

DVYE – IShares Emerging Markets Dividend Index (Invests in emerging market companies with a history of increasing dividends)

IEMG – iShares Core MSCI Emerging Markets ETF (Emerging markets stocks)

IXUS – iShares Core MSCI Total International Stock ETF (World – excluding the US). Hopefully these will all move in the right direction! I guess we’ll see :-)