Category Archives: Saving Money

Financial Planning for New College Graduates

You did it.  You earned your college degree.  Congratulations on this major life accomplishment.

Hopefully, you have a job lined-up in your field of study.  If not, don’t get overwhelmed.  Start applying and interviewing.   Before you know it, you will be working, growing your career, and earning a paycheck.

The good times are not over, but it is time to enter the real world.  By starting this next chapter of your life on the right track, you will be able to better ensure a sound financial future.  Right now, time is on your side.

As a new college graduate, I am sure the last thing on your mind is retirement.  Retirement might be many decades away, but the actions you take in the coming years will shape your financial future.  Below are the key steps that will help you to establish a plan that will guild you on your journey toward financial independence.

Step 1 – Save 15% of your salary.  Start this process of saving with your first paycheck.  It might sound like a high percentage, but this is just the first step.

Step 2 – Sign up for your employer’s retirement savings plan.  If you work in the for-profit universe, it is called know as a 401K.  If you work at a not-for-profit organization, it is called a 403B.  If you work for the Federal Government, it is a Thrift Savings Plan (TSP).  On your first day of work, go to the Human Resources office and sign up to contribute 15% of your salary to their retirement savings plan.  Increase the amount that you contribute to your retirement plan by 1% every year.

Step 3 – If possible, only Invest using low-cost mutual funds and index funds.  Avoid trying to pick individual stocks or trying to time the market.  Identify an asset allocation that best matches your age and risk tolerance.  Historically stocks have produced higher returns than bonds. Stocks, however, are more volatile.  On the other hand, bonds are less volatile but do not keep up well with inflation.  Establish a plan that uses both stocks for growing your wealth and bonds to retain your wealth during bad economic times.

Step 4 – Establish a plan to pay off your student loan debt.  Don’t fall victim to the mindset of the masses when it comes to student loans.  You attended college and earned a degree.  Hopefully, you paid attention in class and are ready to put your degree to work for you as an employee.  You attended class, possibly lived in a dorm, and most likely ate your meals in the cafeteria.  It is time to pay back what you owe.  Avoid self-pity and feelings of entitlement.  Those ill feelings will just hold you back on many levels.

Step 5 – Get a part-time job.  For those who have the entrepreneurial spirit, start a side business.  You are young and full of energy.  Now is the time for you to be working and building a solid financial foundation.  Getting a part-time job will allow you to earn extra money.  Working a couple of evenings during the week and picking up some hours on the weekend will greatly help to increase your earnings. That extra money can be used to pay off your student loans, establish an emergency fund, or open a Roth IRA.

Step 6 – Put off attending graduate school.  Unless you work in an industry that requires a graduate degree to obtain entry-level employment, put off attending for a couple of years.  Find an employer who offers tuition assistance as part of their compensation package.  That will allow you to work in the day and take graduate classes in the evening or on the weekend.

Step 7 – Write a financial plan.  A financial plan is a map.  It allows you to identify where you are at from a financial standpoint.  A financial plan is also a map that can be used as a guide to where you want to be in the future.  It helps to have a guide than to go it alone.  Financial planning is too important of a topic to not have a plan and just fly by the seat of your pants.  A financial plan is a living document that needs to be reviewed annually.  The great feature of a financial plan is that it can be amended as your plans and goals change.

Step 8 – Establish a budget.  Calculate how much you will earn every month from your job.  Write out your budget based on percentages.  Know how much of your salary will go towards housing, food, entertainment, and every other expense.  Be sure to write a budget that is practical in terms of expenses and prudent in terms of savings. In other words, always try to reduce expenses and to increase savings.

Step 9 – Keep your transportation costs low.  Transportation costs are simply an expense in your budget.  Use your budget as a guide to determine how much you can afford to spend on a car.  Keep your transportation costs at 11% of your budget.  Your budget will determine if you can afford a fancy new car or a used economy model.  Try to keep in mind that a car does not determine your identity.  It is just what enables you to travel from Point A to Point B in a timely manner.

Step 10 – Keep your housing costs as low as possible.  If you are renting, try to find a roommate or two.  Having a few roommates greatly reduces the amount you will have to pay for rent every month.  As you advance in your career and if you have a family, you might consider buying a house.  Use your budget as a guide to determine how much house you can afford.

Step 11 – Be sure that you are properly insured.  If you are under the age of 26, you should be able to remain on your parent’s health insurance.  If not, ask your employer about when you are eligible for coverage under their plan.  You are young and most likely healthy, but one trip to the emergency room could ruin you financially if you do not have proper health insurance.  Also, be sure that you have the proper amount of insurance for your car, home or apartment, and life insurance if you have a spouse or children.

Step 12 – Avoid Debt. Keep your debt to a minimum.  Avoid payday loans and credit card debt at all costs.  Having a high credit score is important because it will allow you to get the most favorable interest rates if you do have to borrow money.  To ensure you do not take on too much debt, monitor your debt with the Debt-To-Income Ratio.  Always try to keep your DTI under 16% and never exceed 36%.  In life, sometimes debt is unavoidable.  Most people will have to take out a mortgage to purchase a house.  Some people will have to take out a car loan in order to have a means of transportation.  When doing so, use both your budget and DTI to determine how much you can safely afford.

Conclusion

There you have it.  You are finished with college and ready to take on the world.  Don’t put off applying these steps.  You can start implementing some of these steps on your first day of employment.  If you start out with a well-established plan, you will be well ahead of your peers.  Use these steps as a guide and you will surely become a financial success story.

Do you agree with these suggestions?  Do you think that anything is missing from this plan?  What would you add or do differently?

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Debt: Reaching Step Zero

The first step in correcting a problem is to admit that there is a problem.  Prior to admitting that there is a problem, there is another step.  That is when a person reaches their breaking point and cannot go on living the way that they are living.  That is often referred to as step zero.  Step zero is when a person says to themselves “this crap has to stop”.  It is the breaking point.  It is the point where a person becomes willing to take corrective action.  They become willing to try a different approach of living because of a psychic change.

Have you reached the point where you realized that your way of managing money is not working?  Are you spending more than you earn?  Does all of your earnings go towards paying bills?  Do you have creditors calling you who want to be paid?  Do you have to borrow money when an emergency occurs?  Do you find yourself spending money that you do not have in order to keep up with your friends, neighbors, or relatives?  Do you feel broke even though you work hard and earn a good income?  Do you contribute any money to your retirement savings accounts?

Have you reached step zero? Do you want to change how you manage your finances?  Do you want to take control of your life?  Do you want to break away from the bondage of debt?  Are you at a point where you are totally dissatisfied with how you are living because of debt?

The good news is that there is hope.  It can get better.  It is all up to you.  It is based on your willingness to change.

Now that you have admitted that your way of managing your finances does not work, how should you start the mending process?

Measuring the Damage

Start by measuring the damage that you created.  Before you can move forward, do an analysis of what you owe.  My favorite tool to assess debt is the debt-to-income ratio.

To calculate your Debt-to-Income Ratio, see the formula below:

Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100

Example: $1000 in Monthly Debt Payments/$3000 in Monthly Income x 100 = DTI of 33%

What is considered a bad DTI Ratio?

If your DTI Ratio is higher than 36%, you are in the danger zone.  The higher your DTI Ratio is, the less money you have to cover your living expenses.  A healthy DTI Ratio is less than 16%.

Where to Start

After you know your DTI Ratio, it is time to start paying down that debt.  Start with paying off all of your bad debt.  Pay off all of your payday loans, credit cards, and auto loans.  Next, start to pay down your student loans, mortgage, and business loans if they exist.

Stop the Bleeding

Stop buying stuff you do not need on credit.  Identify what you need and only pay cash for those needs.  A few examples of needs are food, clothing, medical supplies, transportation costs, and housing expenses. Wants are fancy cell phones, cable TV, designer clothes, eating at restaurants, or any other expense that is not required to live.

Income

If you are part of a dual-income household, learn to live off of one salary.  Use the higher of the two salaries to pay for all of the household living expenses.  Use the lower of the two salaries to pay down debt.  After your debt is paid off, you can start to focus on saving money.

Get a second job.  Find a side gig to earn money to pay down debt.  If you spend your free time working, you will be less likely to spend money on stuff you do not need.

Create a budget.  A budget is a plan that allows you to break down where your earnings will be allocated based on a percentage.  For example, 25% for housing, 11% for transportation, 20% to pay off bad debts.  Once you have a budget established, all you need to do is follow it.

Recreation

Even though you have debt, you still have to live your life and have fun.  Find ways to enjoy what your local community has to offer.  Instead of going to high priced movies or amusement parks, go to local parks or free museums.  Instead of going to a high priced gym, exercise outside by walking.  Instead of going on a luxurious vacation, take a staycation.

Guilt & Shame

There is no use in feeling bad about having debt.  You have identified the problem.  Now is the time to move ahead and to make positive changes.  Having ill feelings is not a solution.

Focus on the positive and on everything that is possible once your debt is under control.  Try to take small steps and to monitor your progress.  Don’t strive for perfection.  If you have a slip, don’t beat yourself up.  Pick yourself back up and keep striving for progress.

Conclusion

Debt is similar to hiking.  Once you walk 5 miles into the woods, you have to walk 5 miles to get out.  Now that you have decided that a change is needed, it is up to you.  At this point, there is no use in looking for someone or something to blame for your debt.  You cannot change the past.  You can just pick up what is left and apply a solution.  If you learn from the situation, it was not a waste.  As you move forward, you can also use it to help other people who are struggling with their own financial issues.

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Travel Hacking: Round Two

Travel hacking is a great way to travel for free.  Travel Hacking is the practice of opening premium rewards credit cards to capture the generous initial bonus points that these credit cards offer to new cardholders.  The hack is based on getting the bonus points, closing the card before the annual fee is due, and never paying interest or carrying a monthly balance.

I first learned about travel hacking from reading The Millionaire Educator.  It sounded interesting.  It was not until I attended a Rockstar Finance Meet-Up in New York City that I really got turned on to this practice of traveling for free.

In my post Travel Hacking: Round One, I wrote about my first experience with Travel Hacking.  The first card that my wife and I opened was the Chase Sapphire Preferred Card.  We used the bonus points from this card to buy two round-trip tickets from Newark, NJ to Dublin, Ireland.

As the result of my first experience, I have decided that travel hacking will be a major part of my financial plan.  My wife and I take at least two vacations per year.  Even though I am frugal, we still have the monthly household spending to earn enough points to pay for two trips per year.

The second card that I opened was the Chase Preferred Ink Business Card.  Unlike the Chase Sapphire, the Chase Preferred Ink Business Card is a business card.  In order to qualify, having a small business like a blog or an Etsy store would qualify.  For sole proprietors who do not have a tax id, they could use their Social Security number when signing up for business credit cards.

Another benefit that the Chase Preferred Ink Business Card offers is that it does not count against the  Chase 5/24 rule that Chase has for opening new cards.  Chase only allows individuals to open 5 cards in a 24 month period from any issuing bank, you will not be approved for new Chase credit card.  That also applies for anyone who is an authorized user.  Since it is a business card, it is not counted as being part of the 5/24 rule.

The Chase Preferred Ink Business card offers a very rich benefits program.  After the cardholder spends $5,000 in 3 months, they receive 80,000 bonus points.  When you redeem those points through Chase Ultimate Rewards, 80,000 points are equal to about $1,000 towards travel.

When you open the Chase Preferred Ink Business Card, there is a $95 annual fee.  Unlike the Chase Sapphire Preferred card, that fee is not waved for the first year.  Based on the value of those 80,000 travel points, it is easy to justify the $95 for one year.

On additional spend, cardholders earn 3 points for every $1 in spending.  The 3 points for every $1 in money spent is good for up to the first $150,000 charged.  After that, cardholders earn 1 point for every $1 in spending.

My wife and I used this card for all of our monthly expenses.  We try to put all of our monthly reoccurring bills on the card.  We also use it when we go out to eat at a restaurant or fill up our car at the gas station.  It took us two months to reach the $5,000 in spend to equal the 80,000 points.

So, how did we use these points?  My wife’s birthday is in December.  She does not know it, but I booked a Western Caribbean Cruise.  While going on a cruise is exciting by itself, this cruise departs on December 23rd.  What makes that exciting is that winter is in full swing in Pennsylvania at that point, so we will even appreciate the cruise more.

I wish that I was able to report that I was able to book the cruise for free.  Unfortunately, that was not the case.  Hopefully, I will be able to share a post about taking a free cruise with you in the future.  I have not reached that level of travel hacking success yet.

What I did apply the points towards was our flight.  I have never booked a flight from Pennsylvania to Florida in December.  When I went to book this trip, I was shocked to find out how inflated the prices are this time of year.  After giving it a little bit of thought, it makes sense due to the holiday traffic and snowbirds who are flying south for winter.

The normal cost for a ticket from the Scranton International Airport to Tampa is around $300.  This flight cost $625 per person.  Our flight to Ireland was less expensive.

The total amount of points that were required to cover our two tickets were 112,000 in Chase Points.  At this point, I had 88,000 in chase points from the Chase Preferred Ink Business Card.  My wife and I also had 30,000 in points from our spending on the Chase Sapphire Preferred Card.  By combining the points from the two cards we were able to cover the airfare.

With the remainder of our points, we booked our hotel.  The cruise departs on Sunday, December 23.  We are flying down the day before.  I was surprised, but we were able to pay for one night at a 3-star hotel for only 6,000 points.  That was the only value that I have found so far on this trip.

Even though the flight was expensive, it ended up being free for us since we took advantage of our points from the Chase Preferred Ink Business Card.  Otherwise, we would have had to shell out over $1,200 for a 3-hour flight from Pennsylvania to Tampa, Florida.  It might seem expensive, but I am sure that I will be happy to be cruising the Western Caribbean instead of dealing with at best a wintery mix at home in Pennsylvania.

I am excited about the money that I will be saving on travel as the result of travel hacking.  Even though it sounds fun, be warned that travel hacking is not for everyone.  Travel hacking is only for those who are ridged and hyper-focused when it comes to managing their personal finances.

If you struggle with paying off your credit card bills every month, travel hacking is not for you.  If you do not have enough in normal monthly spend, travel hacking is not for you.  If you have to try to generate artificial spend to try to earn points, travel hacking is not for you.

Please keep your eye out for my next post in this series on travel hacking.  The next post will be about the Chase Southwest Rapid Rewards Premier Business Card.  I look forward to sharing about how I am getting free flights and to share with you about where we are planning on visiting next.

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Measuring Wealth: UAW, PAW, & AAW

How do you measure wealth?  There are many different approaches.  Do you have $1,000,000 in the bank?  Some would say that makes you wealthy.  It might unless you have excessive spending habits and spend $1,000,000 or more per year.

Another way to measure wealth is based on years of annual living expenses that you have in savings.  I once read that if you have 10 years of living expenses in the bank, you can consider yourself rich.  If you have 25 years of living expenses in the bank, you are financially independent.  Any dollar amount beyond 25 years of living expenses would make you wealthy.  That scale is logical to me.

One of my favorite ways to measure wealth was created by the late Dr. Thomas J. Stanley.  In his book The Millionaire Next Door, he introduced three categories for people to measure how they stack up as creators of wealth.  Dr. Thomas J. Stanley refers to these three different groups as UAWs, PAWs, and AAWs.

Under Accumulator of Wealth (UAW)

An Under Accumulator of Wealth or UAW is a person who has a low net worth in relation to their income.  A person who is 45 years old, earns $200,000, and does not have a net worth of $900,000 would be considered a UAW.  That formula is based on (Age * Income * 10%).

Most Americans fall into this category based on their low savings rate.  Contrary to popular belief, however, many high-earners tend to fall into this category.  Based on Dr. Stanley’s research, many Physicians are not good at building wealth and are classified as Under Accumulators of Wealth.

You might be thinking, that is nonsense, Medical Doctors are rolling in dough.  How could they not be wealthy?  Yes, doctors earn a high salary.  General Practice Physicians earn around $200,000 per year and specialists earn over $400,000 per year.  How could they not be wealthy?

Doctors come out of school with large student loans.  On average, new Doctors come out of medical school with $167,000 in student loans.  I know of one who owes over $300,000 in student loans.  Doctors are faced with social pressures that members of other professions do not face.  They are pressured to look the part.  That requires living in a fancy housing development, driving luxury automobiles, sending their children to private schools, and joining exclusive country clubs.

I am not picking on this noble profession.  Not all Doctors fall victim to those social pressures.  There are many in the financial community who buck those trends including DocG who blogs at diversefi.com.

Average Accumulator of Wealth (AAW)

An Average Accumulator of wealth would be someone who has a net worth equal to the sum described above.  A person who is 55, has a salary of $150,000 plus $50,000 in investment income, would have to have a net worth of $1,100,000 to be considered an Average Accumulator of Wealth (AAW).  If they have a net worth less than that amount, they would fall into the UAW category.

Prodigious Accumulator of Wealth (PAW)

To be considered a Prodigious Accumulator of Wealth (PAW), you would follow the same formula, but multiply it by two.  From the example above, the formula would be (Age 55 * Total Income of $200,000 * 10% * 2).  In order to be considered a PAW, this person would have to have a net worth of $2,200,000.

Age is a Factor

This formula is better suited for people who are more mature in age.  I read The Millionaire Next door when I was age 26.  At that time, I was a student but had a full-time job.  My net worth at that time was $60,000.  Based on this formula, I was an Under Accumulator of Wealth.  In order to be classified as an Average Accumulator of Wealth, I would have had to have a net worth of $78,000.

This aspect of the formula has led it to be criticized.  In its defense, not many people who are in their 20s are focused on building wealth.  Most are in college racking up debt or trying to pay off debt after they enter the workforce.

In my opinion, a person should not focus on these calculations until they are at least 15 years into their career.  It takes time to build wealth as an investor or entrepreneur.  This calculation is more about where you finish the race as opposed to where you start out.

How to Become a (PAW)

There are plenty of steps that you can take to become a Prodigious Accumulator of Wealth (PAW).  Dr. Stanley has provided a complete outline in The Millionaire Next Door.  Below are some suggestions that will help you to reach these financial heights:

–        Spend less than you earn

–        Save 15-20% of your earnings

–        Invest in equities, bonds, real estate, private businesses

–        Don’t speculate on getting rich quick schemes

–        Invest in yourself by getting a good education and keeping your skills current

–        Avoid luxury items

–        Focus on building wealth for your children

Conclusion

I am a fan of the late Dr. Thomas J. Stanley.  I remember reading about him passing away as the result of an unfortunate car accident the day after it occurred.  His research has helped to spread a message that just about anybody can build wealth if they follow some basic principles and practices.

The UAW, PAW, and AAW classifications do receive some criticism.  It takes hard work to become an AAW and very hard work to become a PAW.  As many of my readers know, I am transparent about my income, net worth, and approach to investing.  With that, we are firmly planted in the Average Accumulators of Wealth (AAW) category.  We will not be in the (PAW) category for some time.  Being an Average Accumulator of Wealth (AAW) at this point in our life has allowed us to reach financial independence and one day retire early.

Are you a UAW, PAW, or AAW?  Use this calculator to find out.

What is your opinion of the formula that determines these classifications of wealth?

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Financial Unmanageability Transcends Money

When it comes to finding ways to better manage your finances, there are unlimited resources.  There are many great books, blogs, forums, websites, and apps.  There is not a shortage of information, tools, or even professional services.  If a person wants to make improvements when it comes to spending less, paying down debt, saving more of their earnings, or learning to invest, they could find out how to do it in a matter of minutes by doing a few simple online searches.

If the solution to finding ways to improve your financial situation is so readily available, why are so many people struggling?  Yes, we can blame the marketers for always trying to sell the newest gadget.  That excuse, however, only carries so much weight.  Consumers are more educated than ever and many tune ads out.

What if the problem is more pervasive?  What if the problem is beyond simple behavior modification? What if the problem is based on unmanageability?  Yes, the inability to have mastery over your life.

If the problem is based in unmanageability, there is not a blog or app to solve the problem.  If your life is truly unmanageable, trying to get a better handle on your financial shortcomings is just treating a symptom.  To gain control of your life, it will take a little more than spending less and saving more.

Denial

Nobody truly wants to admit their life is unmanageable.  Just like nobody wants to admit they drink, spend, eat, or gamble too much.  It is natural for many people to think, I don’t have an issue with my finances and then go spend more money.  It is common behavior for people who have addiction problems or a spiritual malady to deny what the problem is.  The thought process is like a broken record that skips the same verse over and over.  I do not have a problem with my finances – go spend more money.

Resentment

To resent is to keep going back to a negative feeling.  Instead of feeling and processing those bad or negative feelings, you spend money.  Resentment is not always based on harboring ill feeling towards someone who you believe wronged you in some way.  Resentment can also be rooted in harboring ill feelings towards someone who did exactly what you expected them to do.  The problem was that you were still not satisfied.  They were unable to fill that void that exists within you.  To find temporary relief, you continue to spend and try to fill that void with an external fix.  Unfortunately, it does not last.  After you exhale out and feel relief, you almost immediately inhale the resentment back in.

It is All About You

When you live an unmanageable life, there will always be a conflict with self.  It is all about you.  You cannot be of real use to others.  Sure, you might be physically present in their life, but are you truly living in the moment?  Or are you just physically there, but mentally bound to your troubles?  When your self-centered thoughts and feelings are the focus of your existence, it is difficult to make meaningful connections with others.

Anxiety 

You are not a bad person.  You might even do nice things for others.  You believe that you are thoughtful and caring.  You spend money on the people you care about and on those who you want to care about you. Externally that all might be true, but aren’t you just doing all those things to find more relief and to feel better about your current state of unmanageability?

Do you live in fear?  Do you spend more than you earn and panic when the bills arrive?  Do you lay awake at night and worry that you will never be able to get out from under all the debt you are in?  Do you see retirement as a possible option for others, but something that you would never be able to afford?  Do you obsess over your finances in one thought, but follow it up with more spending that pushes you further away from having healthy finances?  Do you feel hopeless?

Is this fear leading to other health concerns?  Is it leading to weight gain or panic attacks?  Have you gone to see your doctor because you feel overwhelmed?  Did your doctor put you on meds to take the edge off and to help you cope?

There is a Solution

Yes, getting your finances in order is great, but you first need to get your mind right.  I am not a therapist.  I am just a guy with a personal finance blog.  If you are honesty suffering from the symptoms that I listed above, you should seek outside help.  Find out if your health insurance covers visits to a psychologist without a referral from your primary care doctor.  If not, ask your doctor for a referral to one that they recommend.  You might have to pay a low co-pay, but it will be worth it.

There are also 12-step programs.  As I stated earlier, your spending might be just a symptom of a larger issue.  There are 12-step programs for spending, gambling, drinking, and just about any other type of obsessive disease.  It is up to you to dig deeper and decide if you think a 12-step solution would be a good fit for you.

Conclusion

Don’t beat yourself up.  Don’t wallow in guilt, shame, remorse, or any other negative feeling.  The past is the past.  It is time to move on.  Pick up the pieces.  You are not a bad person.  You might have made poor decisions and you might suffer from the disease of addiction.  After you put your own house back in order, you can make amends to those you feel you might have harmed including yourself.

There is hope.  There is also help available.  It is now up to you to find the right help that will be a catalyst for positive change.

Once you get your mind right, great things will start to happen in your life.  Not only will your financial situation improve, but every area of your life will get better.  How could it not, you will be moving away from the problem and in the solution.

You will be able to better accept people and situations as they are.  You will be able to let go of the past. You will better assimilate into the mainstream of life.  You will become more useful to the people around you.  You will finally find the peace that you have been searching for all along.

As a bonus, you should be able to better budget and save money.  Your whole life will become more manageable.  Having a few more bucks in the bank will just make life more enjoyable.

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The House We Did Not Buy

Buying a house is a major decision.  For most people, it is the largest major financial decision that they will ever make.  There are many aspects to consider when deciding on a house.  Do you want to live in a city, the suburbs, or in a rural area?  Finding your dream house and neighborhood can be a major undertaking.

My wife and I have lived in our current house since we were married.  She bought the house from a relative before I was in her life.  It is nice house and we live close to many of her relatives.

The house did need some upgrades when I moved in.  It was built in 1964 and much of the house was outdated.  After I moved in, we remodeled the kitchen, bathroom, added a deck, as well as many other upgrades.

The house was about 1,200 square feet and we wanted a little more room.  We added a nice 320 square foot addition.  That addition is our sitting room and we spend most of our time in there.

The house is almost paid for.  We only owe about $30,000 on the mortgage.  The house was appraised for $226,000 in 2012, so we have a nice amount of equity in the house.

By staying in this house, my wife and I have avoided lifestyle creep.  Having a small mortgage and low taxes enabled us to have a high savings rate.  If we upgraded to a $500,000 house, we would not have been able to save 50% of our gross earnings over the past 10 years.

We are not planning on retiring until 2028.  After we retire, we are planning on buying a house on a lake because we enjoy kayaking, boating, and fishing.  We are planning on staying in Pennsylvania for 9 months per year.  For the winter months, we plan on becoming snowbirds and head south for the winter.

A major life event caused us to rethink our plan.  A close family member recently passed away following a four-year battle with cancer and other major health issues.  Watching him suffer made us think about living more in the present and not focusing on what our life will be like in retirement.

We decided to look at some houses that were for sale on the lakes that are close to where we currently live.  The nice thing about living in the Pocono Mountains is that there are many nice lakefront homes.  The region is also known for private gated communities that attract people from New York City, Philadelphia, and Boston who buy weekend homes in these developments.

We started by looking online.  What I found did not surprise me.  Most of the lakefront houses were very expensive.  Older houses that were lakefront cost $400,000 and needed upgrades.  The newer houses are much more expensive.

Our next move was to look for a house that was not lakefront but had lake rights.  This was a more modest priced market.  Houses that were only 5-years old were less than $350,000.  That was more in our price range because we would be putting about 60% down on the house.

We found a few that we really liked and decided to spend a Sunday looking at these houses.  The first few were nice but way too big.  We do not need or want 4,000 square feet of living space.

After looking at 5 houses we were starting to get tired.  It is fun to look at these houses, but also overwhelming.  Before we called it quits for the afternoon, I wanted to look at one last house.

The last house was a little less expensive.  It was listed at $258,000.  This house was in a private community that is only 8 miles from where we currently live.  It also comes with lake rights to a private 150-acre lake.  It is a serene lake that does not allow outboard motors.  Only sailboats, kayaks, or boats with electric motors are allowed.  It is also a catch-and-release lake that is stocked with bass, trout, catfish, and walleye.

For me, it was love at first sight.  For my wife, she really liked the house, but more legwork was needed before we decided.  We both agreed that we needed to do our due diligence and not buy a house after our first visit.

The next day, I called the realtor to set-up an appointment to tour the house.  The realtor was nice as well as transparent.  She gave me some interesting details about the house.  In 2010, the house sold for $389,000 and is now listed for $259,000.  I did not want to admit it, but that was the first red flag.

I asked why there was such a deep discount on a 10-year old house?  She said that the taxes doubled because of a county reassessment.  There is also a homeowners association (HOA) that charges $2,500 per year.  The total annual cost of the taxes and home owner’s association fees would be $8,200.  We now pay $2,700.

I was not happy about the major jump in taxes and fees.  It was, however, not a deal breaker.  I was smitten with the privately stocked lake.

The next evening, my wife and I decided to take a ride over to see our potential new house.  We were excited.  Our excitement, however, did not last.

We pulled into the driveway and got out to walk around the house.  It was not currently occupied by the owners.  We only took about two or three steps and we saw the neighbors Doberman Pincher as he came barreling towards us.  Luckily, the dog’s owner was in his yard and called the dog back.

The Doberman caused me great concern.  I am not afraid of big dogs, but my wife and I have a little dog.  His safety trumps everything.

I was happy that the neighbor was outside.  He came over and spoke with us.  He seemed like a nice guy.  He was young.  I would guess in his early 30’s.  We spoke about the house and of course what the fishing was like at the lake.  I asked him about the homeowners association.  He said they are not too bad to deal with, but he gets in trouble with them often.  He said that he gets in trouble with the homeowners association for driving his ATV and snowmobile at night.

On our drive home, I was still thinking about fishing on a private lake every evening after work.  At this point, my wife decided that she did not want to buy the house.  She did not say anything to me on our drive home because she did not want to bust my bubble.

That evening, I could not sleep.  My anxiety was out of control.  I did not fall asleep until after midnight.  The house was very nice, and I loved the lake.  Deep down, I knew that it was not a good fit.  All those red flags would not go away.  They kept running around in my mind.  I could not justify all of these issues.

As a member of the financial independence community, I do not like to pay taxes.  I love fishing but hate taxes.  Having my taxes go up almost 200% did not sit well with me.

The second source of anxiety was our dog.  We don’t have children, so our dog is our baby.  He currently has his own two-acre field to enjoy without worrying about being eaten by a Doberman.  I would never do anything to put him in an unsafe situation.

The third warning sign was the neighbor.  He did seem like a nice young man.  However, I am not willing to put up with him driving his ATV at night.

When I awoke, my wife said that she wanted to talk.  She told me that she loved me and wanted me to have a lake house.  I worked and saved for over two decades and she wanted me to be happy.  She just felt that this house was not for us.

I told her that I agreed with her.  There are many reasons why my wife and I have a happy and successful marriage.  We love each other, communicate well, and think alike.  If a situation is not right, it is wrong.  The house was not the right fit for us.

We could have afforded the house.  It might have caused our saving rate to go from over 50% to 40%.  That does not sound like a big deal, but I am more interested in saving and reaching early retirement than owning a lake house at this point in my life.

We have not since looked at any other houses.  It was too emotional of a process for me.  At this point, I think that we are going to stay in our current house until we retire.  I have said this before, once you become a saver, you will never be a spender.  As a saver, I will have to settle for fishing at our local state parks and public lakes instead of a private lake until we retire.  Life can be much worse.

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Travel Hacking: Round One

Until recently, I have never tried travel hacking.  As a member of the financial independence community, I have not looked favorably at credit cards.  I saw them as a way for undisciplined people to spend more than they earn.  In my opinion, I saw them as tools that banks use to hack high fees and interest payments out people who have fallen victim to materialism.

My view on credit was to only borrow when it was a must and to pay it back as quickly as possible.  Since I started working full-time, I only used credit when I needed it.  However, I knew that having a high credit score was important.

My wife and I both have high credit scores but have not borrowed much.  I once had a car loan that I paid off in my early 20’s.  When I went to college, I paid cash for my first two years and took out student loans for my Junior and Senior years.  My wife and I also took out a home equity loan to remodel our house.  That is currently our only debt.

For years, my wife and I only had one credit card.  We used it for travel, shopping on Amazon, and for other purchases when a credit card was more convenient than cash.  We have always just used a basic bank card that paid 1% cash back.

I did not know if 1% was good or not.  I was more interested in using the card when it was required and just paid off the balance every month.  At the end of the year, I would get $500 back and just use the rewards money for holiday bills.

The focus of my personal finance management and writing has been saving and investing.  My approach has been to focus on career growth, saving as much as possible, and capture average market returns by investing in index funds.  Hacking has not been on my radar.

Over the past year, I have started reading more and more blogs about people who are taking two or more vacations per year for free.  Since some of the most trusted bloggers promote it, I decided to read more about it.  It was not until I attended a meet-up in New York City where a group of bloggers from Rockstar Finance got together.  At this event, I got turned on to travel hacking and decided to give it a shot.

The idea of taking a vacation or two per year for free excited me.  We travel anyway, so why not enjoy our trips for free.  I started to do some research.  I also took the Travel Miles 101 online course.  Travel Miles 101 is a comprehensive course that explains all that a person needs to start travel hacking.  I recommend it to anyone who wants to learn more about travel hacking.

After taking the travel miles 101 class and reading many other blogs, the consensus card to start with is the Chase Sapphire Preferred credit card.  The Chase Sapphire Preferred card has a $0 introductory annual fee for the first year.  The annual fee after that is $95 per year, but as part of the hack, you set it up to never pay that fee.

So, what do you get with the Chase Sapphire Preferred credit card?  If you spend $4,000 in 3 months, you earn 50,000 bonus points.  Those 50,000 bonus points add up to some nice rewards. The redemption value is worth $625 in airfare, $625 towards hotels, or $300 in cash.

There are other nice benefits With the Chase Sapphire Preferred credit card.  A cardholder will receive 2X points on travel purchases.  When you dine out, a cardholder receives 2X points on restaurant purchases worldwide.  Every other purchase equals 1 point per $1 spent.

Based on all of the suggestions, I opened a Chase Sapphire Preferred credit card.   In order to hit the target of $4,000 to earn the points, I set up all of our monthly household bills to be charged to this card. Since it was November, it did not take long to hit the $4,000 with all of the extra holiday spending.

After I reached the $4,000, my wife opened a Chase Sapphire Preferred credit card.  We followed the same plan and used the card for all of our bills and spending.  It took us less than two months for us to hit $4,000 on her card.

Now for the fun stuff.  It was time to redeem our points.  We decided that we wanted to visit Dublin, Ireland this summer.  To redeem the points, there is a portal to access the travel section on the Chase Dashboard.  It is as easy as booking a flight on any other travel website.

We decided to fly out of Philadelphia (PHL) and wanted a non-stop flight.  Based on the value of our points, these tickets were going to only cost us about $150 in out of pocket expenses.  Before we booked our flight, I decided to check if there was a cheaper flight out of the Newark Airport (EWR).  I typed in our travel dates and a round-trip ticket from Newark to Dublin on Air Lingus was only $605 per ticket.  We booked our flights and had points to spare.  It was that easy.

I do not know if travel hacking is for everyone.  If you are not good at paying your bills every month, travel hacking might not be for you.  If you end up with a balance and have to pay the high interest, the credit card company is actually hacking you.  You also need to have the required spend to earn the points.  If you do not spend enough to qualify, you should not just spend money you otherwise would not spend to just earn points.

Does travel hacking hurt your credit score?  I have only opened two cards, so I do not have any personal evidence to share with you.  Based on many other blogs, there is minimal change and most credit scores increase over time.  The most important thing is paying your balance every month.

If you are responsible for paying your monthly bills and enjoy traveling, you should look into travel hacking.  Travel hacking also requires a person to be structured and to know when to close a card before the annual fees will be charged.  There are many great travel websites and points tracking tools like awards wallet to make the process easier.

I hope you found this post useful.  Moving forward, I will share our experience with every new card we open and hack.  Please keep your eye out for round two in the next few months.

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Should Millennials Contribute to a 401K?

No, that is not a rhetorical question.  I was having lunch the other day with my co-worker Jill.  Jill is an exceptional young woman.  Jill’s parents divorced when she was young, so she grew up in a broken home.  That did not stand in the way of her excelling in school.  She went on to earn a BA in Psychology from one of the best state universities in the country.  She is also considering going back to graduate school for a Master’s Degree in Public Administration.

Jill and I have worked together for almost one year.  Jill was lucky because she was hired just a few months after she graduated from college.  She is a great employee, person, and is highly ambitious.

She told me that she developed her work ethic as a young teenager.  She said that growing up without a dad around, she had to work to help her mom pay the bills.  Jill started working at age 14 and has always had a job during high school and while in college.

When we were talking, she told me that when her parents divorced they had an agreement to give each child $40,000 towards their college education.  Her brother went to Notre Dame and the money he received from his parents covered about one year of his education.  Jill opted for a state university that was only a 2-hour drive away from her Mother.

Jill’s education cost her parents $30,000.  Her parents tried to be fair about the dollar amount.  After graduating college, her parents also bought her a used car for $10,000.  Even though she did not get to watch the Fighting Irish play football in South Bend, she still made out well.

During our lunch, she told me that she feels bad for her current roommates.  Most come from families that are more affluent than her family. However, they all have student loan payments that cost $700 or more every month.

She asked me my opinion about her situation.  Should she feel bad?  What should she do with the extra money she has compared to what her roommates have?  She said that she did not grow up with much and does not want to waste it.

I told her that she is in a fortunate situation.  She has a unique opportunity to save a great amount of money since she does not have any debt and her only large bill is her monthly rent.  I suggested that she pretends that she has as much student loan debt as her roommates and to contribute $700 per month to our employer’s retirement plan.

She asked me “Should Millennials contribute to a 401K”?

I told her that millennials should absolutely contribute to a 401K.  I said that she especially should because she does not have any debt to pay back or major bills.  These are the reasons why she should start contributing:

  • She is 22 years old and by starting at that age, she can be well on her way toward financial independence (FI) in 15 years or less
  • Our plan offers low-cost index funds
  • Our employer matches 100% up to the first 5% an employee contributes
  • The contributions lower her taxable income
  • The money grows tax-free and is not taxed until she withdraws it at retirement
  • She can take advantage of dollar-cost-averaging
  • She can enjoy the benefit of compound interest
  • If she gets a different job, she can take the money with her and roll it over into an IRA
  • Even though I would advise against it, she can borrow against her account if need be

I explained to her that time goes by very quickly and she has a golden opportunity to build some serious wealth for herself.  Unless she lands a government job, she will not have a pension.  She will need this money to support herself in the future.

Jill has a unique situation.  She is a young millennial without any debt.  What makes her even more unique is that she is a new college graduate without any student loan debt.

If you have student loans, you should still contribute to your employers 401K account.  Even if it is just enough to get the match.  After you pay down your debt, take the dollar amount that you were paying towards your loans and direct it to your 401K.

You might not get to Financial Independence as quickly as Jill does.  You will, however, get there if you take a few steps.  If you have debt, pay off your debt and don’t create new debt.  Save as much as possible.  Sign up for your employers 401K plan as soon as you are eligible.

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Note: This post was originally published as a guest post.  The post was moved here because it was not available to be read on dollardiligence.com. That site is no longer active.

Early Retirement: Removing Barriers

Many people dream of reaching early retirement.  Few people, however, are willing to do what it takes to make it a reality.  In most cases, to reach early retirement, a person must live differently from how the masses live.  People generally don’t want to be viewed as being different from their fellows.

The masses are living for the day, spending most of what they earn, landing in debt, and are in denial about their personal finances.  They have high hopes that their financial future will be secure.  Hope, however, is not a strategy.

To reach early retirement, a strategy is needed.  That strategy will require action and more action.  The primary objective of that strategy will be to first reach financial independence.  Financial independence is what enables people to retire early.  If a person is no longer working, the money to sustain their lifestyle needs to come from somewhere.  For most early retirees, that somewhere is their passive investments.

The path to being able to retire early is full of barriers.  Many are external like being able to maintain a budget while marketers are doing everything they can to get you to break your budget and buy whatever it is they are selling.  Some barriers are mental.  The purpose of this post is to identify a few of these barriers and to establish a plan of action to avoid them.

Ignorance

Most people are unaware of what is required when it comes to planning for an early retirement.  That is even true for those who have attended college.  People who hold a 4-year degree or beyond still struggle with doing what is required to escape having to work for a living.

When it comes to establishing a financial plan, many people truly do not understand what is required.  They feel that things will just work out like they have in other areas of their life like landing a good job or getting a mortgage to buy a house.  They are generally in denial about what is required to build a large enough net worth to sustain their desired lifestyle once they are no longer working.

The good news is that once a person decides to learn more about personal finance, there is an abundance of great information.  Once a person takes that first step towards learning about budgeting, saving, and investing, they have removed one barrier.  Once that barrier has been removed, they will discover that the basics can carry a person a long way.  The basics alone might be enough to carry some people to financial independence.

Procrastinating

Procrastinating is another barrier that stands in the way of reaching early retirement.  Not knowing about a topic is one thing.  Knowing and not doing anything is another.  To reach early retirement, it takes many years of earning a salary, saving a large percentage of that income, and investing it wisely.

The longer a person waits to start this process, the harder it becomes.  That is based on compound interest.  Let’s assume that an investor needs to have $1,000,000 saved to declare financial independence.  They also want to reach this milestone by age 50.

Based on an 8% percent return, if an investor starts to save $1,800 per month at age 30, it will take 20 years to reach their goal.   If they wait until age 40 to start saving, they will have to save almost $6,000 per month.  If they started at age 22, however, they would only have to save $900 per month.

When you are young, time is on your side.  The older you get, the harder it becomes.  Don’t procrastinate if your goal is to reach early retirement.

Not investing in stocks

To receive a return close to 8%, an investor will need to have a large percentage of stocks in their asset allocation.  Based on how investments are projected to perform for the next 10 years, an 8% return might not be reasonable.  Large-cap stocks are projected to earn 6.7% threw 2026.  For that same period, investment grade bonds are projected to earn 3.1%.

The average person has the tendency to shy away from stocks.  In the short-term, they are volatile.  Over long periods of time, they are one of the best wealth building investments for individual investors.

Instead of parking your money in a money market that returns 1%, consider adding stocks to your asset allocation.  A good place to start is to look at a balanced portfolio of 60% stocks and 40% in bonds.  This allocation is popular because it provides growth from the stock allocation and the bond allocation reduces volatility when the stock market has a correction.  Another general rule of thumb is to invest (110 minus your age in stocks).  If you are age 25, you might want to consider having around 85% of your asset allocation in stocks.

Lifestyle Creep

Lifestyle creep is a form of inflation.   As a person advances in their career and their earnings increase, it is natural for their spending to increase.  As raises and promotions pile up, people have the tendency to upgrade their lifestyle.  Instead of saving more of their earnings, people buy bigger houses, fancier cars, and go on expensive vacations.

If there is lifestyle creep in your life, it is a major barrier between reaching early retirement and being stuck as a wage earner.  Lifestyle creep inflates how much money you need in your retirement account before you can retire.  In contrast, if you keep your monthly expenses low, the less you will need to be able to retire.

If you plan on withdrawing 4% from your retirement account, have $100,000 in annual expenses, you will need $2,500,000 in retirement savings.  For those who only have $40,000 in annual expenses, they just need to save $1,000,000.  The higher your annual expenses are, the more you need to have in retirement savings.

To avoid lifestyle creep, some management is required.  A solid budget is needed.  A financial plan is also a vital tool.  First, focus on the big expenses.  Keep your housing, transportation, taxes, and education costs low.  For example, live in your starter house forever, buy an economical car, live in an area that does not have high taxes, and take advantage of public schools and state universities.

If you can avoid lifestyle creep on the major expenses, you will have more money for savings.  This will also lead to less financial stress.  Instead of stressing to cover your bills that are always increasing, you will be able to better enjoy your life because there will be less demand for having to earn more and more.

Conclusion

For most people, the road to early retirement takes a long time.  It generally takes a couple decades of solid earnings, a high savings rate, and compound interest.  To achieve this ambitus goal, there are barriers that need to be identified and managed.

To be successful with personal finance, education is required.  The great news is that there is an abundance of good books, blogs, and forums that provide unlimited information.  A good place to start is the Resources page on this blog.

There is no such thing as an overnight success.  Most overnight success stories have been a fifteen-year work in progress.  If you want to be financially successful and retire early, start today.  It is not an overnight endeavor.

Without some risk, there will only be a little return.  Identify the correct mix of stocks and bonds for your situation.  Be sure to take your age and risk tolerance into consideration.

Manage your expenses.  The greater your expenses, the more money you must save and grow.  By keeping your expenses low, the less money you will need in retirement.

There will always be barriers that stand in the way of reaching early retirement.  Once they are identified, they can be managed and overcome.  Keep your eyes open for other barriers that might pop-up.  Be vigilant and stay focused and you will be sure to reach financial independence and retire early.

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