I came to realize that while I have a financial independence day in the future, how I am getting there is not so clear to many of those who stop by to read my financial journey. Where I have come from might be just as unclear, so I wanted to take some time and share with you the details of my Financial Independence Day plan to retire early.
About 5 years ago, I was living in Miami working part-time and spending full-time money. While my future Mrs. Even Steven was away visiting family, I went over my finances and realized not only was I deeply in debt, but it was clear that very shortly I could not make the payments each month, a decision had to be made. You see when you don’t have a full-time job and you are doing everything you can just to make all of the payments, something has to change. This wasn’t an easy decision, you see I was walking away from my future bride and it this point and I didn’t have a choice. Let me say that again, I had to walk away from my future bride because I did not have a choice financially, that’s something I find really hard to say, but it is a reminder of where I have come from. I put myself in a bad position financially, I didn’t wake up and find myself in over 100K in debt, no sir.
In 2010 around this time here is what my life looked like financially:
- Student Loan Debt-Private and Federal
- Personal loan to my parents
- Credit Card debt
- Mercedes Benz loan
I want to give a good picture of where I was in assets. I owned zero property, nothing nada, the closest thing I had to an asset was my depreciating 2005 Mercedes-Benz, which of course the Kelly Blue Book value was equal or less than the loan I owed to the bank, so yeah I owned zero. Everything in my life could fit into my vehicle and in 2010 that was not much. The only exception and a small one at that, a couple thousand dollars from my 401K rollover from the years I worked full time before 2010.
Net Worth: >Negative ($100,000)
It’s greater than $100,000, but I can’t even give you an exact number. I was too ashamed to keep track of how great my debts added up to. While you don’t need to share your net worth with the world I consider it a must for your own personal tracking and goals, I highly recommend Personal Capital.
I might go back and check the totals, but honestly today I don’t care what debt I had 5 years ago. I care about our future and the plan we have to reach financial independence. That’s why I write on this blog, to hold myself accountable, to show others that you can be almost completely down and out, barely holding a job or making money, and thinking the next step is to just stop paying your bills, because you do not have a choice financially. Change can happen it all starts with you.
From 2010 to 2012, major things began to occur and this was not on accident, things had to change.
- I moved to Chicago
- I started working full time at a 9-5 job
- I sold my Mercedes Benz
- I got married
- I paid off my credit cards
- Bought owner occupied rental home
- Rented out Florida property
In 2012, we were making major moves financially. Adding the wife’s financial picture to Even Steven Money certainly helped the household. Mrs. Even Steven brought into the marriage only a couple things, but all of it was great:
- No personal debt
- Paid off vehicle
- Florida home with mortgage
- 9-5 full-time job
I think one of the things that Mrs. Even Steven Money brought to the household is an aversion to risk, which matched great with my want and need for risk. Some of why I was deeply in debt is because I did not value money. I wasn’t worried about student loans because I would get a big time job straight out of college. I went through a lot with my personal and financial life, so what does that mean? It means “I deserve a Mercedes Benz”, I worked hard for it or I went through a lot I should get something nice. I didn’t value money, today I fight for every last dollar.
We had lived in Chicago together for one year and rented to get more familiar with the city. We were making great strides financially, but not anywhere near where we should have been.
Our plan started in April of 2013, it was the first time that we decided to make an extra payment on our rental property in Florida. That was the day that I had the outline of a plan, I didn’t know for certain and today I don’t think for certain is the word choice I would use, but we started on our path financial independence to retire early in a little over 7 years.
The plan is simple and is very similar to my Early Retirement Blueprint:
- Pay off all personal debt
- Pay off all rental property
I had a rough outline that said if I get rid of all my personal debt and then pay off all of our rental property, the rental income will be greater than our expenses. In a way, it’s my own Financial Independence Real Estate Hack. I’m not going to sit here and tell you I had everything figured out, in fact, I still don’t think I have it all locked in. That’s ok, I actually built in my plan options to get ahead of our financial independence date, so I can save extra money in cash and investments. I hear the term buffer used when referring to the 4% rule or other examples of how to make sure your plan if full proof. This is precisely what I have done, I built in my personal debt for the end of the plan, essentially taking the snowball and moving from the Florida Rental>Chicago Rental>Personal Debt, this way while my last debt payment is planned to be completed in 2020, I have other plans;)
Some of you who invest in the stock market and have a plan to use the 4% rule based on the value of your stock market portfolio may wonder why are we paying off our rental home, couldn’t that money be used and put in the stock market to earn more money? First let me give you the 3 simple reasons we are paying off our rental home early.
- Wife on Board-Mrs. Even Steven Money was on board with paying off the Florida rental home early
- Simple-If we pay off the home early, we decrease expenses and increase cash flow
- Interest Rate-Currently stands at 5.375%, which means we are getting a good rate of return and immediate return on our money
The big difference in an age-old argument should you invest or pay off your home, is we are essentially doing both. We are getting 5.375% on our money(before taxes) and when everything is paid off, our mortgage goes to $0, but the income spikes to the exact amount of our mortgage payment which amounts to approximately $1100/month or $13,200 per year. Using the 4% rule and reverse engineering the number you would need $330,000 to reach that number for 25 years. Here are a few differences in paying off your mortgage vs paying off your rental.
- Decrease your expenses to $0 in principal and interest, however, your cash flow increases by this exact amount once you pay off the mortgage
- This can be done with as little as 3.5% down when you live in the property
- If you are able to make the mortgage payment, then add the rental income as an extra payment(exactly double your P and I), the mortgage is paid off in less than 10 years
Plus let me ask you a question. If you owned a rental property that made a small amount of profit that was bought at a great price and your wife doesn’t entirely drink the kool-aid, but really wants to pay off the mortgage, would you say “hell yeah let’s pay off that mortgage” or would you try and talk your spouse into investing the money into the stock market?
Rock Bottom Budget
Most people look at one part of the equation for financial independence. The side most commonly dissected is I need 25x my expenses to retire early and the assumption is that those expenses are built in stone. So if I have $40,000 a year in expenses then I need 1 million dollars or 40,000 X 25 years=1 million dollars. Our plan takes a look at all the factors included. We look at our expenses for the year and see $40,000, but realize that our mortgage(s) also make up this number. So what if we can eliminate a mortgage that makes up $1,100 of that, which would bring the number to $26,800 in expenses which would take the needed number down to $670,000. For me, that sounds fascinating, interesting, and insert all of your great sounding adjectives here. By eliminating the mortgage payment, we have reduced our total needed by $330,000. We all have a budget, but when we reduce or eliminate our fixed costs, it’s what I like to refer to as our Rock Bottom Budget, I believe everyone has one. A few years ago I started out with car payments, credit cards, etc and my expenses and “fixed” costs were so high, but over time I have reached a new Rock Bottom Budget because those payments have gone away. This is what is also included in the plan, over time the Florida property will only have taxes, insurance, and maintenance. The principal and interest payment will be down to zero, while initially this amount will go to either our Chicago property to pay down the mortgage looking for the same result or in a constant battle we have with our decision making progress and our game plan as we get closer to FIRE this could very well get put towards one of those opposite of fancy, index funds.
Today I have knocked out “fixed” payments to my car loan, credit card(never pay the minimum), and student loans. In December of 2016, the Rock Bottom Budget reaches a new low as we pay off the Florida home. Imagine canceling out your mortgage payment for a minute? For most people that frees up over $1,000 of monthly expenses. What’s mathematically crazy for us, not only do we cancel out $1,000 of payments, we receive an additional $1,000. Let me say that again because very few people have this in their financial arsenal so it may be foreign to them. Before we were losing $1,000 towards principal and interest and like many of us out there with a mortgage, this amount if we paid off our mortgage would stop being an expense. That sounds great right?!?! Ours is even better we don’t have to pay $1,000, but we also receive $1,000 in income, so for us that is a $2,000 swing. We essentially go from -$1,000 to +$1,0000 when you own an investment property and pay it off, for those of whom own a home without rental income it goes from -$1,000 to zero, which is great, but mathematically insufficient for many who choose to invest.
After we reach our goal of paying off the Florida property, the original plan was to take the $1,000 and apply this directly to our Chicago mortgage. This is the property we live in and also rent out today which acts as a house hack, a phrase made popular by the crew over at Bigger Pockets. As we apply additional payments to the mortgage we will pay off the home in May 2020, a date that I can say with certainty I look forward to. Simple right. We take whatever rent we receive from this property and once again make extra payments towards the balance till it does the exact same thing as our Florida property, the $1,000 payment goes down to zero and increases by $1,000 which is the amounts we receive from rental income. This has been the plan from day one, I anticipated we would finish paying off our Chicago property and look to travel the United States visiting friends and family over the course of the next year or two all the time the rental incomes were coming in and our house hack which had no mortgage or rent to speak of acted as our home for 12 months out of the year, but was more than likely lived in for 3-6 months. I couldn’t wait………………..
For some of us crazy budget loving, index fund promoting, Warren Buffett/Charlie Munger impersonating, house hacking strategists, our spouses come along for the ride. Most of them, they are happy that we are happy. We tell them over and over about how great the budget is looking, the money we are saving, and how the future looks so bright. They smile and are just happy you are not blowing your money on fast cars and anything else that costs loads of money that they really don’t understand why we like. Then one day and your day may be different than mine, but they realize that the plan is working. Mrs. Even Steven saw me paying off my credit cards, car loan, and credit cards, while this entire time the mortgage is making the way to zero and the 401K is making it’s way up the thousand dollar ladder all of the time. I know because we keep track of it all on Personal Capital. They don’t say it out loud initially, but they ask themselves if the plan is actually possible? Then they want more info, you know that spreadsheet you built out over a year ago, yeah they want to know how it all works with real numbers. You show them the budget and the debt repayment plan, then they say well what about investments, cash savings, and taxes…….oh that’s on this tab, you say with a big grin:) then they ask about moving to Florida, oh my goodness, moving to Florida, you didn’t account for any of that!!!!!! Wait a minute, maybe I did;)
The Florida Curveball
Mrs. Even Steven more than anything wants to be closer to her family and move back to Florida. So after we pay off the Florida property and are in a better position financially, we are going to seriously consider moving to Florida. We need certain things to be in place, but 3 years ago I wouldn’t have even considered this as an option. In 2017, we are going to take a serious look at moving to Florida, but the plan didn’t initially account for this. We came to an agreement that these things need to be in place to make a successful move.
- FL home paid in full
- Both jobs either allowed to work from our new residence or set up with new jobs
- Chicago rental income from our personal unit is equivalent to our Florida home
As you can probably imagine the job outlook will be a major factor in our potential move. We will reduce our budget by a full mortgage payment, which does bring our budget down to a new Rock Bottom Budget it has not seen before, however, we still need to bring income to the table. If we have secured jobs or our company allow us some flexibility with working from a remote location, we still need a place to live. The plan is to use the rental income from our unit in Chicago to obtain a similar apartment or house, we are estimating $1,200. We won’t be living a life of luxury, but I don’t think this will be an issue in our search unless we start looking for ocean views and luxury living standards. This will keep us exactly on plan with our FI date of May 2020. We do have other options, but I see them as the less desirable.
- Live with our in-laws for 6 months to 3 years-Saves money, but gives up privacy, etc
- Live in the newly paid off Florida property-Costs money, slows down the FI date
The plan is flexible in this matter, but I don’t want to go into a crazy amount of scenarios, I’m going with the attitude to stay flexible and look for what makes us both happy. My ideal plan would be to live 6 months in Florida and 6 months in Chicago, providing the best of both worlds, while I think we could pull this off with the house and living situation, this would slow down our FI date and would be a pretty tough pitch to our employers. We will see, I know the Madfientist thought he was out the door a little while back and they offered him a dream situation which was hard to pass up.
Buffer and The Last Year
As I have mentioned a few times it’s important to have a buffer so your plan will not fail. Some of this is being flexible and some of this is having money you do not count on in your FI calculations. Here are a few examples that are not accounted for, that will give us just that.
- No raise, bonus, or promotion
- Rental income will not increase
- Paying off my personal debt is calculated as my final payments while I make this a priority today
- All 401K, IRA, etc is not included in my FI calculations, instead it is a bonus intended to be used later
- All Cash and Taxable investments are not included in my FI calculations, instead they are intended solely as a buffer
As you can see these items above are items that could change our FI date and the amount of money we have in different accounts across the board. I did not include these because some of them are difficult to project, for example if I included the calculation for a raise, I should consider including the cost of living increase as well. As many of you know a raise or bonus is not guaranteed and while you personally may be having a great year, your company may have done the opposite, bonus gone. If you talk to a co-worker who received a promotion, there are 5 more people who were passed over, so this is even harder to account for, especially the promotion it relates to dollars and cents.
What this all led to over the last few months is a decision to not move my FI date any more. I started out with October 2020 and after making big student loan payments, brought the date the much closer. My plan or my goal is reach FI in May 2019 a full year ahead of my original date used today of May 2020. The goal is one of those Big Shoot for the Stars type goals, but why not, I paid off my student loans because I made a big goal just like this. During the last year, we plan to practice Early Retirement. What does practice Early Retirement mean?
It’s a work in progress, but the idea is to shift our budget to exactly what our rental income will provide while still maintaining our 9-5 jobs. The money from the 9-5 job will go directly in our cash and taxable investments during that entire year. Since our 9-5 jobs are much larger than our rental income, we plan to build up a 1-year rolling cash account.
For example from May 2020-May 2021, we will actually be using money accumulated from May 2019-May 2020 to pay our expenses.
This will prevent us from being reliable on if the renter pays on the 1st of the month or doesn’t pay for 2 or 3 months. It will also prevent any immediate sales of stock to cover any shortages. This should have us looking at our budget in a 12-month calendar rather than month to month.
That’s our plan. I don’t look at our plan as something that is set in stone and cannot be moved to fit our wants and needs. I look at our plan as more of a sketch, you might draw a nice kitchen for your home, but realize that it no longer fits who you are and what your plans are. That’s perfectly fine, remember it’s a sketch, not a finished product.