Financial and location freedom for families. In 3 years or less.
Category: Money Management
We’re working towards financial freedom. How we save, invest, and spend is a big part of that. Read about what we do to save more, invest better, and spend wisely in alignment with our values (family, travel, and FI).
Ahh, January. What can I say about my least favorite month? You’re cold. You’re long. You’re at the beginning of the year and don’t really contain any fun breaks or holidays (not forgetting about you, MLK Jr. Day and Presidents’ Day, but you’re not quite as fun as say, Spring Break).
We have made it through our first January in North Carolina, and I have to say, although we didn’t suffer through -14F temps like we did last year in New Hampshire, it was still pretty darn cold most days.
I struggled to keep up with Lucy the dog’s massive energy, and tried to walk her each and every day, even as my fingers and nose protested bitterly in the wet and chilly 20F temps of the early morning.
We eeked out another small gain with our net worth this month. We’ve definitely seen a difference in our net worth growth with me not working (it’s been slower!).
The i401k (also known as the Individual 401K, one participant 401k, or Solo 401K) is the 401K plan for Independent Contractors or sole proprietors. Just as a traditional 401K offers myriad benefits for employees like tax deferred retirement savings and the benefit of lowering your tax bill, the i401K plan was set up to offer the same benefits for independent contractors and individual business owners. The IRS defines it here.
Tax Savings for Independent Contractors
Since I’ve worked as an independent contractor for several years, the i401K allows me to contribute in two ways:
as an employee, making salary-deferred contributions of up to $19,000 in 2019
I started this blog in 2017 (okay, technically it was the end of 2016) as a three-year experiment. I planned to spend 2017, 2018, and 2019 with a very focused goal in mind–to double our net worth and become location independent. In an absolutely shocking turn of events, our family became location independent last year, mid-way through the experiment.
Our location independence looks a little different than I envisioned, but it’s been a great decision for our family. We live in one place, in an idyllic small town in North Carolina just north of Charlotte. Mr. ThreeYear and I both work remotely. Our kids attend the great public schools here, and we travel as much as we can during breaks and summer. Most importantly, we are close to our family and the weather is a lot warmer.
Now that we’ve reached one goal (and it was, truly, the main goal), where does that leave us in 2019? Of course, we still have to double our net worth, and unfortunately we have almost 50% more to go, due to losing equity in our house and a market downturn at the end of last year.
But, because we know that we’ll eventually reach that goal, and it’s not quite as pressing now as it was when we thought we’d be leaving our jobs for several years, what should be our focus in 2019?
Each year of the experiment, I’ve picked a theme, a “word of the year,” before it was a thing.
In 2017, I picked one new habit each month to get better at, so we could improve our productivity with investing and earning.
In 2018, I focused on spending 20% less, each and every month, at the grocery store, so we could save more.
In 2019, I thought about a lot of behaviors we could focus on. We want better relationships, better health. But we still struggle with over-spending, too. And our spending experiments have worked pretty well to change our behavior.
So 2019 is the year for money experiments.
Each month, we’ll perform a different money experiment to see how we do.
Over the last several years, household debt across the world has been slowly increasing. That debt includes mortgages, car loans, and credit card debt. China’s household debt now stands at 49.1% of GDP, relatively low compared to many developed nations, but worrisome because of its 30 percentage point increase in the last decade. Shockingly, Switzerland leads the world with household debt at 127.5% of Gross Domestic Product. That means, for every $100,000 of GDP a household produces, they hold $127,500 in debt!
The average citizen in Switzerland, which has traditionally been an extremely wealthy country, has substantial assets (net worth) underpinning this debt, or at least four times more assets than the average American.
Even so, Switzerland, as well as nine other economies including Canada, Finland, and Australia, have debt levels that are high and rising quickly, at a pace that mirrors that of the US right before the housing bubble.
About nine years ago, when Mr. ThreeYear and I began to wise up about our finances, we visited a financial planner and filled out a detailed survey. We didn’t have many assets to speak of, at the time, since we’d just gotten out of debt, but if the dude had been wise, he would have nurtured the relationship with us because he could have had very good future clients. He was not and we now manage our own investments, a scenario I am more than happy with.
Even so, it was interesting to hear his predictions that we’d need about 80% of our income at retirement. Where did that number come from? In the years that followed, as I filled out online retirement calculators, I heard the figure repeated.
Then, I began to learn more about the 4% rule, the oft-cited retirement rule-of-thumb (based on the Trinity Study) that cites evidence that if you withdraw 4% of your portfolio per year in retirement, adjusted annually for inflation, then your portfolio should easily last you 30 years (or more). Another way to look at the rule, popularized by the incontrovertible Mr. Money Mustache, is that you’ll need 25 times your annual spending invested in order to retire. This rule assumes that you’ll keep your spending relatively level in retirement, that is, you’ll spend a similar amount in retirement as you do now.
In Monday’s post, I shared the things Mr. ThreeYear and I have done that I consider our best money moves. They were the habits or disciplines we adopted that have served us the best over our fifteen years of marriage. BUT, we’ve also made our share of bone-headed money moves, and today, you get to hear all about our very worst money moves of the past fifteen years.
Buying Expensive Cars to Repair
When I was pregnant with Junior ThreeYear, we had two cars–a Jeep Cherokee Mr. ThreeYear bought after we moved to the States (used, because with two exceptions, we’ve only bought used cars) and an Acura Integra. This was the car my parents gave me, brand new, because I got a scholarship to college. It was a two-door coupe, standard, leather seats and CD player (rare at the time). It was such a good car. But we thought that because I was pregnant, we needed to get rid of the Acura and get a bigger car for the baby. So we went car shopping, and found a used BMW X5. I remember being transfixed because it had built-in shades that you could pull down in the back.
Our neighbor, who had just traded in his Audi, warned us that foreign luxury cars were expensive to repair, but we brushed him off.
Instead of trading cars with Mr. ThreeYear, I sold the paid-for, gas-sipping Acura and bought this BMW for about $16,000 (financed). For the first few years, the car needed a few repairs, but nothing too terrible. BUT, three years in, just when we moved to New Hampshire, it started to fall apart.
Junior ThreeYear and I were on the interstate when all of a sudden, the car just slowed down. It wouldn’t respond to the gas. I managed to pull over on the side of the road before it completely died. We had it towed, and luckily, it wasn’t the engine, but it was something else that cost $1,000. Meanwhile it had stranded a pregnant me and my not-yet-three-year-old son on the side of the interstate!
We only had two mechanics in town, and the honest one didn’t work on BMWs, so we had to take it to the shady one (who was later incarcerated for dealing meth. Lovely guy). Long story short, the BMW cost us around $7,000 to repair that year before we wised up and traded it in.
Mr. ThreeYear and I will have been married for fifteen years this May. During that time we have done a lot with our money, good and bad. Today, I’ve detailed our best money moves in our decade and a half together, and on Wednesday, I’ll share our worst money moves.
Contributing to Retirement from the Beginning
Even though Mr. ThreeYear and I didn’t max out our retirement accounts from the beginning, we did contribute to them.
While I don’t remember the exact percentage that we contributed in the early days of our first jobs in the US (in Chile, I contributed a certain portion of my income to retirement because there it’s mandated by law), I believe it was enough to get the full company match (for him) and a few hundred dollars a month (for me).
We continued contributing to the accounts in 2008, until we adopted Dave Ramsey’s method of paying off debt. We stopped contributing to retirement for 18 months while we paid off our $38,000 in debt. Once we paid our debt off in late 2009, we began to again contribute to retirement accounts again. When we moved to New Hampshire, we again took a short break while we saved up a house downpayment, since we sold our Atlanta home at a loss in 2010. Finally, when we moved into our New Hampshire house in 2012, we started maxing out Mr. ThreeYear’s 401k (because I wasn’t working), and then started contributing heavily to my 401k once I started working.
Maxing out our 401ks is the single best financial move we’ve made, in my opinion. We’ve lowered our taxes, increased our yearly investments, and decreased our spending (because that money is no longer available to spend), all in one fell swoop. I tell friends and family members who don’t know where to “start” on their personal finance journey to start there. In my opinion, for someone who has spending issues, it’s even more important than paying off debt, because of the effects of compound interest and time (plus it forces them to spend less).
It’s still hard to believe that almost another entire year has passed. As I was looking through my posts, I saw one I’d written last year about this time, and I thought it would be great to share again.
The funny thing is, our money moves this year are almost exactly the same as last year’s. We’re creatures of habit, for sure!
The biggest difference between this year’s end-of-the-year money moves and last year’s is that last December, we paid off all non-mortgage debt so this year, we have nothing to pay off. It feels amazing, and has felt amazing since we did it last December. We feel so much more in control of our finances this year, in large part because we keep more of our money and are able to save and invest more.
I’d love to hear your end-of-the-year money moves! Let me know in the comments!
While we’re still over a month-and-a-half from the end of the year, we know that soon, December 31st will be upon us, so the ThreeYears are currently working on end-of-the-year money moves to make sure our finances are in good shape.
Here’s what we’re doing to close this year out:
1. Contribute as much as possible to my i401k
Since I’m self-employed, I have an i401k (if you’re interested in the particulars of opening one, read this post). I am playing catch-up with my contributions since we had so many cash goals that we funded with my income this year. So, in the final quarter of the year, and in the first quarter of next year (or at least until we file our taxes), I’ll be contributing a lot to my 401K. Even though the market is high now, I don’t want to miss the tax contributions of these contributions. I estimate we’ll save several thousand dollars on our taxes if I reach my contribution goal for the year.
2. Fulfill our outstanding financial obligations
We’ve got a few outstanding financial obligations, including completing our yearly pledge with our church. We usually wait and pay the majority of our pledge in the fourth quarter of the year, when our cash flow’s better (as a teacher, I don’t get paid in the summer and it takes a month or so after school starts to begin getting paid, so our income rises in October, November, and December).
I also have to pay my fourth quarter taxes for income earned from September through December. I have until January 16th, 2018, to file the taxes, but I’ll probably go ahead and pay what I estimate I’ll owe before the end of the year. I set aside 20% of my income as it comes in, in my business account, so that money is ready to send in anytime I decide to pay the bill. Continue reading “5 Money Moves We’re Making Before the End of the Year”
Wow! It’s almost December, which means we’ve got just one month left of this year. This year has definitely been an eventful one for our family.
This month has been a good one. We’ve been surprised by how cold it’s gotten in Charlotte during the fall (it’s been in the 20s this week in the mornings, but it does warm up to the mid 50s or 60s during the day). The boys both seem to have gotten into a groove at school, I’m running now with a running group, and Mr. ThreeYear has been regularly playing tennis.
Last night, we went to our town’s downtown Christmas celebration via trolley! We parked in a parking lot at the edge of our neighborhood and the cutest little trolley picked us up. The boys actually got to ride standing up in the back of the trolley as we cruised the four miles downtown.
Once we got downtown, there were carriage rides, vendors, a Christmas tree display, bands playing, and Santa Claus. The boys and my niece, who was with us, had a blast. It made me so glad we decided to move to this town, because it’s ridiculous how festive and involved our town is. We are freakin’ Mayberry over here. I absolutely love it.
If you’re just joining, our family of four is on a three-year journey to double our net worth and become location independent. Since we’ve achieved the latter goal, we’ll be primarily focused on the former in each of these reports going forward. Each month, I record our progress on our net worth and our spending. Last year, we increased our net worth by 32% over the year before. This year, we tried to increase it by more than 65% from where we started in December 2016. Even though it looks like we’ll miss our target by a wide margin, we’re keeping our goal in place to see how close we can get in 2019. Continue reading “November Net Worth Update”
Hope you had a wonderful Thanksgiving! I’m back after a short break. This past week, I was at the family beach house for Thanksgiving. I had every intention of posting, but my computer battery had 15% life left (and doesn’t work when it’s not plugged in to the charger due to an unfortunate coffee spill a year or so ago) so I had to take it in to the repair shop.
Guess what? New battery, $169.99, guaranteed for 90 days. PLUS, the computer now works if it’s not plugged in! It’s a MacBook Pro, so no way was I going out and buying a new computer for $1500. The fact that we could replace the battery relatively inexpensively AND it now works better was an awesome surprise this Thanksgiving!
While at the beach, I was helping my parents put together a budget for the first time. They’re not budgeters, and while they have investments, real estate holdings, and a pretty high net worth, they’ve never really had to think about controlling their expenses because they’ve enjoyed high incomes for most of their adult lives.
I could tell the experience was stressful and painful, especially as they kept thinking of new expenses to add to the total.
The First Budget
I remember the first time Mr. ThreeYear and I budgeted. It was right after I’d found The Total Money Makeover back in 2008, and I was trying my hand at estimating our monthly expenses.
I had a similar reaction as my parents. A little bit of panic. Shock, that we could spend so much, and disbelief that we’d ever be able to save anything, since we currently spent everything we made! Continue reading “Drinking My Coffee Black”