As referenced in our first post, the Why of the FI Old Guys, we came upon the concept of FI in July, 2018. This blog was launched in January of this year. We thought it would be useful or interesting to understand what we’ve done in those first six months in pursuit of our FI paths. Many of the items below will be detailed in much greater depth in future content.
OG2: From my perspective, it’s as simple as ‘retain all of your income’. That means stop spending money and earn all you can. This clearly is an oversimplification, but gets at the root of every successive step. Eliminating the outflow of cash is the simplest and easy step. Now, I didn’t say it was emotionally easy, just that terminating non-essentials from a technical perspective isn’t difficult. The second step is assessing your income and debt (if you have any). The third and remaining steps all involve longer term planning.
Step 1: Going Frugal-ish
We eliminated Netflix, Apple Music, the twice monthly house cleaning service, the lawn service, reduced the country club membership, curtailed eating out by 90%, changed our grocery shopping strategy to include Aldi/Lidl/coupons/discounts, altered the Costco and Amazon habits, changed dog food, cancelled YMCA, cancelled Bootcamp, started mixing our own liquid hand soap, reduced cleaning product costs, severely reduced holiday and general gift spending. One of the more odd items was cable. I’ve been ready to cut the cord for several years. This was less for the cost savings and more about behaviors. We simply don’t watch much live TV outside of news and sports. I was all hot to trot when I called the two available providers. Our current provider Comcast was ruled out immediately. They had no interest in working with us on the internet and phone (phone is for my wife’s office). Verizon was interesting. We ended up rolling with an $80/m package that included basic cable, internet and phone. This was the least expensive route. Eliminating cable didn’t reduce our costs given their packagings of products. We received an additional $10 off both our cell phones and this package since we have Verizon both. In our particular case, my wife’s company provides about $170/m reimbursement for internet and her cell. This helps tremendously when viewing our out of pocket costs for these services. I wish I had kept a running list, as I’m certain many other line items are being left out. My wife and I were bought in to the concept and making changes so rapidly, there was no thought to documenting and this blog wasn’t even an idea yet.
To be clear, we didn’t cut everything to the bone. There was some negotiating. Yes, we belong to a country club. [Insert *Internet Howler Monkeys here] Yes, we kept our membership. However, this wasn’t a static decision. With the elimination of the maid and lawn crew, we justified the monthly cost on balance. For us, the country club is less about any sort of status and more about having access to a beautiful facility, pool, golf and more. Our youngest is an avid golfer and when you start to add up what it would cost at a muni for as much as he plays, the club isn’t that much more. However, we did make some changes to our membership level. Basically we downgraded to a Social membership for my wife and I, while creating a Junior membership for our son. Yes, this is not the most FI of choices. But, it’s a conscious decision on activities we enjoy as a family, within our community and time with friends. There were other small items that we switched to the least expensive version possible, but ultimately switched back based on functionality. More to come on these later.
Step 2: Status Report
After the cost cutting, we had to see where we were financially. If it wasn’t obvious from the country club blurb, we’re very guilty of lifestyle inflation. It should not come as a shock that such inflation didn’t stop with the country club. We have debt. At the time it was to the tune of $178k. Yep, $178k. What? We could ‘afford’ it right? Clearly our view has pivoted on that concept. Honestly, it’s very unnerving making this information public for the very reason that it is the norm to keep personal finances extremely private. Nonetheless, I am very publicly proud of our turnaround and future path.
What is our debt? $40k was credit cards. Yeah, we should have learned our lesson 20 years ago when we first got married and created the same problem, but we just let this creep back into our lives over time. Fortunately, due to some other variables, we eliminated this right off the bat.
Cars & Houses
Next, $48k in car loans, there are 3. The remaining is all tied to a loan used to finish purchasing our family’s beach home. That was a split ownership situation where we were buying out one half and then the other half owner decided he wanted out. In order not to lose the home altogether, we financially maneuvered to retain it 100% for ourselves. Again, more content to come later. We still have a mortgage on our primary house, but we have no intention of paying that off early. The rate is below 4% and we don’t see the justification for doing so at this time. Thus, our BIG goal for 2019 is to eliminate this debt entirely. It’s ambitious and will require vigilance. This effort though, sets us up to continue the same ‘savings rate’ in 2020 and beyond. You can do the math.
Add to this, we also determined to unclutter our lives of unused stuff. We’ve given ourselves a year to get this done, although we’re closer to 75% complete at this point. Add this to what’s above, took us through October. The closing on the beach house was a monumental paperwork and time suck, but it got done. All this time I’m also cramming in the ChooseFI podcast, which I caught up on by Labor Day weekend. That was 200 hours in 2 ½ months.
Step 3: Planning for the Future
This brings us to November. I finally felt like I could appropriately devote enough time to tackle tracking our spending. This led me into many adventures. First, my wife has always managed the day to day bills. For over 20 years she has taken on this task. I declared that since I was pushing for all of these changes so ferociously, I would take this over for her. Mind you, she’s been on board with the FI path choice, but I’ve been the one spearheading the charge. This led to my first exposure to Google Sheets. Coming from a Windows work world meant getting comfortable with not only my Mac (which I bought used years ago), but the differences between Excel and Sheets. For the past 2 months, I have tracked every single dime. My spreadsheet columns are simple: Date, Method of Payment (Exact Credit Card, Cash, Bank), Place, Category (Food, Utilities) and Amount. I truly believe doing this every month for a minimum of a year is absolutely critical. This will allow one to capture quarterly, annual or other charges that don’t come up every month. Doing this allows for month over month comparisons, etc. Other than food costs, we’ve done well. The holidays didn’t help, but we’ll do better next year. We didn’t have enough time or the wherewithal to prep the extended family on expectations and our new path. That being said, my wife did an excellent job curtailing costs compared against previous years.
Debt Tracking & Planning
The next tracker spreadsheet was for the debt. It’s not complicated. I simply laid out in rows the payments for the cars and loan by month, in order of highest interest rate and projected the pay down based on our additional applied funds. Right now everything goes through August of 2020. Wait… didn’t I say our goal was to have this completed by December 2019? Yes, that is correct. What I haven’t done is bake in any bonuses from our jobs or net profit from renting the beach house. Since the bonuses are not guaranteed and we don’t have a full year of historical rental income to base future projections, these were not included. Reasonable expectations are that these 3 items will be able to pull back the payoff to the end of this year.
Next are all the other levers. Taking advantage of a Health Savings Account. The timing was excellent as my annual open enrollment for health benefits where I work was in October. I elected the plan with the HSA and opted to max out my pre-tax contributions. With debt on my our ledger, this may cause some faces to wrinkle. Keep in mind, I’m retiring in 7 years, thus I will only have this short window to contribute to this account. The plan is to max the contributions during those years, then let it ride. It will be our 90 year old fund. I say that kiddingly, as the real plan is to never touch this account for ourselves. This will roll to the next generation if everything goes to plan.
One of the things we’ve always done well is maxing out our 401k contributions. 20+ years of that has been one of the smartest things we’ve done. But there’s always more that can be done. I’m very fortunate to have one of those 401ks that allows for after tax contributions and also allows an in service withdrawal once a year. In my case, the post-tax contribution can be between 2-20%. In November I elected 2% and will keep it that way through 2019. The primary reason was to see how the Mega backdoor Roth contribution will work mechanically. When the debt is paid off, the contribution will immediately be increased to 20%.
More and more retirement accounts
Some other odds and ends include setting up a series of accounts for our 7th grader, Checking, Roth IRA, etc. He now has earned income as an employee of the LLC that owns the beach house. This is a vehicle for him to contribute to his Roth IRA. Additionally, we’ve implemented a monthly allowance where any non-family involved items he wants, he is to pay for. Whether that’s a video game, movies, candy, whatever. Next, 50% of allowance and any other money he receives immediately goes to retirement savings. The hope is that he’ll carry this savings mentality throughout his life. It’s actually pretty cool to see him snap a picture of a check from the grandparents and see it instantly deposit it into his checking account. Whether it’s his allowance or shifting of funds, it’s all done electronically. He’s quite proud to tell folks he has a debit card. I keep telling him it’s cooler to tell people you already have a financial retirement plan laid down.
Credit Card Hacking
As an aside, despite our up and down history with carrying credit card debt, our credit is excellent and we’ve cemented to no longer carry a balance, ever. We have taken to credit card/travel hacking and have already completed the first two legs of the Chase Gauntlet with the Chase Sapphire Reserve (wife) and Chase Sapphire Preferred (me). That’s over 100k Chase Ultimate Rewards points in a couple of months. The Chase Ink Reserved is next on our list.
Moving on to 2019
The firehose analogy applies whole heartily to my first 6 months pursuing a FI path. At times I felt as though I needed a breather. Other times, things couldn’t move fast enough. Now that I’ve typed it all up, it does seem like a lot in a short period of time. The machine is set. It’s already almost boring comparative to the past 6 months, to just sit back and watch it run. This year will also bring about a need to make concentrated efforts on creating memorable experiences for the family. No spending and save-save-save mindset is a mental grind on the rest of the OG2 family and I need to make sure to prove that we can enjoy life as though not much has changed.
OG1: OG2 and I have very similar lives but finances are certainly different between the two of us. That said, the basics are the basics and we both were looking to make foundational changes to enable our approach to FI and that is what these first six months have been.
The cornerstone of FI is to maximize tax advantaged savings and then invest to yield better returns…allow your money to begin working for you. We spent these first months reorganizing all of our existing 401Ks, HSA and other accounts. First was to simply move them to Index funds and then was to do whatever possible to max them out for 2018. Because I am over fifty, I also wanted to take advantage of catch-up allowances. To accomplish this, we literally upped our 401K contribution rates to over 30 percent of our pay for the last four months of the year! Not easy, but we got it done.
I want to pause and emphasize the crucial value of maxing out every tax-advantaged account that you possibly can. I genuinely had not appreciated this prior to my FI adventure and I suspect many others are in a similar state. I had the impression that we could not afford to reduce my paycheck by contributing more than 10% to my 401k. I failed to understand a few things.
My first failure was to not fully weigh that every dollar placed in my 401K is a whole dollar while every other dollar earned is only about 72cents by the time it arrives in my paycheck. Additionally, and critically, it is also a dollar that is removed from my taxable income for the year! Not only am I saving for my future but I am minimizing how much I need to give away in taxes.
My second failure was the perception that putting a greater percentage into my 401K would dramatically impact what I take home. Quite the opposite is true and this took a spreadsheet to show me how it really plays out. Speaking for myself and my wife, we were surprised how much we could put in without dramatic impact to our take home pay.
To meet the goals by the end of the year required sacrifice and planning. To meet future goals will require a plan and we believe that we have a good start. Maximize all tax-advantaged accounts and get better at spending so that we can get better at saving. The first part is already established and 2019 begins with us critically understanding our spending to find any efficiency that will help with future savings. We feel it is a sound plan and we are sticking to it.