You might be wondering why there is some wood planks in the header picture. This relates to my Next Year’s goals that I am setting. We bought our first home about 6 months ago in May and when we went to use the almost-brand-new oven they had in the place, it smoked out the entire the house. This has led to 6 months of ripping out our entire kitchen and installing new cabinets, flooring and countertops and while the insurance on our new home helped, it didn’t cover everything and we had to do quite a bit out of pocket. That kind of puts a damper on savings lots of money but we are finally through it all. But that is a side note. Let’s get to the interesting parts.
Recently I read an article that talked about emergency fund needs. This link goes to a writer Early Retire Now who talks about the necessity for a $1,000 or a 3-6 month’s of savings saved in a emergency fund account. Only for emergency funds. I feel that this article falls a bit away from those who are struggling and leans more towards those who have good credit card limits, Lines of Credit available against their houses, and good cash flow to be able to pay everything off rather quickly if their cash account doesn’t have enough. But nonetheless, it shouts a few great points that I will sum up during this Portfolio Update article.
- Most “emergency” expenses, you have some lee-time before you actual pay the bills. Ex. If you have a car repair you know has to get done soon, or you have a medical something happen, you have an idea that the issue is there as well as with medical, it takes some time to get the bills out so you can save for it.
- The interest rate that you are usually getting on your savings accounts are usually pretty low. They mention about 0.50% which I think is pretty low compared to some High Yield Savings Accounts that offer around 2% but just lowered to about 1.85% or so. They comment that it isn’t hard to beat that in the market and that you could be sitting on several multiples of what you would have earned once you have to pay for it.
- The money that you have sitting around in a emergency fund is usually pretty sightly and makes you feel like you have more than you need. Often times, you move towards spending when such a high amount is sitting in your bank account.
I think I agree with all of these. It was pretty cool to read and you should definitely read deeper into the article when you have a chance. While there are good points, I also think that there are some good counterpoints.
- There is a sense of security to having your money close and readily available. For those who aren’t able to stash away a lot of money into investments that payout, build tons of equity in a home or having the cash flow to pay off credit cards or HELOCs quickly, the idea of paying for something big can be scary and we don’t all have the confidence that our investments will grow or be available to fill that security blanket idea.
- While I don’t think Dave Ramsey’s plans work well for all people, I do feel that if you are deep in the ruts of debt or you have never had any education on finance, that this is a great start. build up a thousand dollars. That teaches you to spend less than you make and to put it somewhere and don’t use it in case you need it. Then you move on to bigger principles.
Because of this article and others, as I’ve been contemplating how to better fund my retirement as well as be prepared for life changes such as my wife leaving work to be a mother or to find a different job, I have made a few changes that I think are better for the overall health of our family.
We have been aggressively paying down my wife’s student debts. Easily 25% of our paychecks go to putting out that forest fire. We were down to about $2,200 and on our usually pay day, I decide to take a bit of Dave Ramsey’s advice and use extra cash beyond my emergency fund to try and finish off all consumer debt. I sent my wife enough to cover pretty much everything left and she covered the remaining balance. Now, a week later, when we get out paycheck next week, we will have a lot more extra cash flow going forward as well as much peace of mind. As well, once the debt is paid off, the real fun begins. Positive growth instead of combating negative interest.
The second change I made involved the part of the article that mentioned spending habits when you have a large sum number in your account. Now I am already very frugal and.. well, my wife already knows that I don’t like spending money on much. But I decided to drop my emergency fund down to the basics. Now my High Yield Savings Account (HYSA) has a minimum balance of $1,000 so it doesn’t make sense to drop it to $1,000 if I can’t use it in emergencies because of that. So I dropped it to about $1,500. And I took the remaining amount (which would be the extra that puts us up to around 3 months of bills) and I invested it.
What I think pushed me to take this lump sum and toss it into my investments was the fact that my Roth IRA can only be funded to $6,000 a year. That amount even if I maxed it out each year, would still not be a lot of money. And while I am not going to hit that this year, I think it is important to make up as much ground each year as I can so that I don’t lose out due to the limit to maxing it out each year. So I will be behind a bit this year but I feel great in knowing that I upped my amount closer to the maximum amount. Next year I will max it out for sure.
The best part of throwing in the extra money is that once it showed up and pending a transfer of cash, the M1 Finance account already had allocations to put it into. It took all my percentages and it divided it up to even things out. I was so happy and it takes the stress off of trying to buy exactly what is the least valued stock in my portfolio and then make a stock order, leave some money left over because I can’t buy another full stock… I am loving my experience here so far.
So here are my financial goals for next year:
- Finish paying off our car. I could technically do it now or significantly dent the debt, but our payment is so low at $78/month that we won’t accrue more than about $274 in interest over the life of the loan except that we will probably pay it off after about a year of owning it. That should mean only like $80 of interest which is worth us getting the loan and getting a $4,000 price cut on this used car which we needed to replace.
- Max out my Roth IRA. With a $6,000 limit, you have to put in about $500 a month for 12 months. $500 x 12 = $6,000. That means that I will set up a recurring deposit for 2 days out of the month and that should satisfy everything I need for that account.
- Pay down our house a bit. We got a mortgage this year for our first home. We only had to put down 3% because we are living in the home and we went with a loan type that works well with how we feel about the housing market. Right now, we are at about 95% loan to value which means we have about 5% equity in the house. Obviously, this is because for the first several years, you pay a lot of the interest part of the house and then later, you pay more principle.One trick that we use to build up extra to put towards principle, and therefore equity, is that we have a separate account that is just for the mortgage. Each paycheck we each put in what we talk about to cover the mortgage but it doesn’t always line up as 2 paychecks every month, sometimes, it is three. We also have auto-pay for our mortgage with our credit union. This usually ends up with us having a bit of leftover in the account after the auto-pay happens. Currently it is a few hundred bucks. After some months of paying it, there is sometimes up to $1,000. Once we are around $1,000 in the account, I usually just put that towards the principle. While this is a good move, I’d love to up that amount and get down to maybe around 90% equity by the end of next year and then hit that 80% equity number in 2021 so we can take off the PMI that we pay each month. It isn’t a lot that we pay for it, but it reduces our monthly expenses we need to cover by about $70 and that is a nice relief.
- Start contributing more to my 401K at work. hopefully about 10% as opposed to 6%. Currently I put in enough to get my company match and then I put my money in other places like my Roth IRA, paying for countertops, big car repairs, emergency fund. Next year should only have a few big items.. like possibly a baby and possibly a dog. Yeah, I know. Those are pretty big. I will try to make this all happen.
- Start investing in a taxable brokerage account. Yep. As much as I’d love to max out my 401K and my Roth IRA, if I am going to retire early, I will need income that can cover my expenses before I hit 55. Probably about 10-15 years worth. Enter the taxable account for dividends that will pay for expenses through distributions and payouts.
- Possibly save up for a down payment for a rental property. The Rental Property market isn’t the best right now, but some recurring income could be better than none. And while I may not be able to fully build up a 20% down payment with all of my other goals, I can sure work towards it. Even having 2 rentals when I retire could be enough to cover most of my expenses if we are able to pay off our house.
- Save for a baby and a dog. Ha. These will eat into everything. We don’t have either of these, but the eventuality will happen and it will be good to save for. Luckily, I have 9 months to save for any baby that might show up. The dog could happen any time though.
Hopefully these give you good simple ideas of what you might save for in the future. I think most of these will be doable now that we have thrown almost everything we have at my wife’s student debts.
What is/are your big 3 goals next year? Replacing a car like we did this year and you need to pay that off? Starting to invest? Don’t know how to open a Roth IRA? Here is my link for M1 Finance. https://mbsy.co/CLlcW. If you have any questions about the process, feel free to comment or to reach out to me on Twitter @youngbudgeteer. Always happy to help and I appreciate all of you who read this. Have a great night!