As 2010 draws to a close and the champagne is all gone, here’s an update on the status of our personal financial goals. I’ve been on the fence for a while about whether to continue our detailed net worth updates, and I’ve decided to reclaim some privacy and stop doing them in the previous format. Instead, I’d like to keep tracking our progress but in a opaque manner where I think everyone can still calculate their own and compare with us if desired. I’m not sure exactly how to do this, but here is a rough outline.
Credit Card & Consumer Debt
I think the first part of any healthy financial status should be to outline and pay off any consumer loans. We do use credit cards, but we pay our balances in full each month. We don’t have any auto loans or other forms of consumer debt.
I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest, and keeping the difference as profit while taking minimal risk. (By this I meant that the risk was dependent on my own actions.) I could have also used such 0% loans instead of other debt like student loans. However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.
Retirement Portfolio
As far as financial freedom goes, there are a number of ways to fund your living expenses without working. Pensions, Social Security, stocks, bonds, real estate, and so on. For us, I have boiled down “financial freedom” to be two things:
Part 1: Accumulate 25 times annual (non-housing) expenses
Part 2: Own my house / Pay off mortgage
I think it’s important to note that these two parts don’t necessarily have a number attached to them. Minimizing expenses are just as important as increasing portfolio size, as well as minimizing the amount of house that you “need”. More detail can be found in this post entitled A Quick & Dirty Plan To Reach Financial Freedom.
For Part 1, the basic idea is to assume that a portfolio can return 4% annually with adjustments for inflation. So if you have $1,000,000, that would create $40,000 a year. The exact implementation of this is more complicated, as there are several ways to help avoid portfolio depletion like annuities and adjusting your withdrawals during market downturns. Most folks won’t need a million dollars, though, if they have already paid off their house. For example, if your non-housing expense are only $1,000 per month, then you’d only need 12 x 25 = $300,000.
Back in July I was 33% of the way to reaching this goal. We are now 40% of the way. At this pace, we could finish Part 1 in less than 10 years, but we will likely scale back our income when we have kids. We’ll have to keep a close eye on those expenses as well.
Housing & Mortgage
Owning a house isn’t for everyone, but I think that if you are geographically stable, it can be a great way to become financially independent. Once you pay off the house, then your housing “expense” is mostly taken care of. (There is still maintenance and property taxes.)
We have owned our house for about 3 years now, having taken out a 30-year fixed rate mortgage initially with a 20% downpayment. Since I want to retire before I’m 50, I need to speed things up. Over the past year, we have made additional payments toward principal, as well as lowered the interest rate to 4.75%. These prepayments have been irregular lump-sum amounts, although I agree an automated plan is easier to maintain. The outstanding loan principal is now 67% of the purchase price. If we were to continue the original minimum-required payments, our home would be now be paid off in 21 years. This is good, as we can support that payment on one income.
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One of my 2011 goals in terms of finance are
Build up my credit, as i have very little history(im only 19). I only have a secured card at the moment which i got last month. So i am using that to establish history.
I also have a lot of student debt i can pay interest on to make credit look better too.
Happy New Year!
It’s your site and your free to do what you want with it, but I must say that moving away from detailed financials is a huge negative for me personally. Being able to look at hard numbers, seeing what can and cannot be done, and whether unattainable circumstances are driving your results (e.g. web site revenues) is critical to driving my own personal net worth goals.
Others will feel differently, no doubt, but I would respectfully request that you reconsider your “opaquity” in this regard.
That’s fantastic. Congratulations on all your accomplishments and goals!
What are your thoughts on mortgage leveraging and not adding more money every month/year to principal and instead putting it elsewhere?
Keep it up. Very good post. Thanks.
Hello Jonathan,
Not to sound like too dumb of a question, but can you comment a bit more on what is driving you to limit some of transparency you provide?
I completely understand the want or need to keep things a bit more private, I just would like to understand if this is due to comments from your readers (ie. I have seen items like “you make more money than me,” etc.) OR do you have concerns regarding fraud and making yourself a target?
Just curious…
Happy New Year!
Thank you,
shckr
orthros – I respect your opinions as well, but this just makes my life easier, so I’m afraid you’ll just have to do manage with one less data point in the world. 🙂 I’ll still provide plenty of why-I-made-this-decision type of posts.
AR – Paying down the mortgage is a tough one. Let’s say I have 5 years left on a 30 yr mortgage at 5% interest. If I pay down the mortgage, I’m essentially getting 5% for however long I keep paying that mortgage, whether it be for a year (if I sell early) or another 15-20 years (if I keep the house until mortgage payoff). Earning 5% with very very low risk for a few years beats out anything a bank CD can offer me. Earning 5% for 20 years is better than Treasury bonds, but might be beaten out by other *riskier* investments.
I’m definitely being swayed by the simplicity of having no mortgage or rent payment ever again.
@Jay – Thanks!
@shckr – Well, every day this blog is less anonymous. This year, I’d like to make it so I can talk about things openly with my friends and family without worrying about what they think about my income or savings etc. Comparing with strangers over the internet is easy. 🙂 Having your boss or clients know too many details can get weird.
In a way, by making things more vague online, I can be more open with the actual people I hang around with on a daily basis. Also, I am thinking about starting to blog with my real name, and share content from my other public websites.
Leverage is just a fancy way of saying you are increasing risk and also potential reward. It’s great when it works in your favor, and equally horrible when it doesn’t.
A mortgage is just a big loan. The question is – what are you going to invest in with your big loan to increase your wealth that earns more than the interest rate? What happens if it doesn’t pan out?
i actually like the current format better. good luck to you, happy new year and all the best in 2011
Not sure what you mean by “earning” 5% on your mortgage…???
Another way to think of mortgage leveraging (obviously, used with the right intention and for someone who understands money, like you).
It’s a cheap way to increase wealth
1. Low interest rate
2. Deductible interest
3. Simple interest, not compound
4. Underlying asset increases over time
5. Borrow large amounts
Once you pay the mortgage off, you basically have equity earning you 0% and it’s not liquid. Would someone rather be debt free or have the ability to be debt free?
AR: I question your assertion that the underlying asset increases over time. For many people who bought between 2006-2008 the underlying asset has decreased and in some instances will never be back to it’s basis amount let alone appreciate beyond. I’m lucky enough to not live in a place where homes have lost 50-80% of their value but our price per sq ft isn’t expected to return to 2007 levels until 2017. That’s 10 years lost trying to get back to even. Many times people (and I’m not saying you) try to be too sophisticated with things like leverage. Unfortunately, they aren’t sophisticated enough to factor in a _beta_ in their calculation and end up losing. Jonathan’s approach of paying off the mortgage is a good way to go when you factor in zero risk by having a paid off mortgage.
True. Well if you have a loan of 20-30 years, that’s fairly long term. So you can invest in the same place as your retirement. Because it’s long term, it should pan out. Done right along with a nice slush fund one can do fairly well.
“I think the first part of any healthy financial status should be to outline and pay off any consumer loans.”
In most cases I agree but if you have a 2% loan from a credit card company for 5 years pay something else off.
Certainly your blog and your right to do with it as you wish but…
1.) The posts have slowly but surely moved in the direction of revenue-generating. A recent post at the finance buff on the economics of blogging was illuminating. I was wondering why you had so many seemingly random posts on credit card offers that were not very useful (especially with regard to poor balance transfer offers – 3% minimum BT fees etc!), until I read that referral links to credit card companies pay up to $100 each! That was an eye opener. For your sake I hope that this has provided significant revenue. You should be aware that for a loyal visitor like myself, it has really decreased the quality of this blog. Of course, again according to that post at tfb, it was mentioned that regular visitors actually don’t generate click through revenue anyway!
2.) Opacity with regards to the actual numbers and $ involved is certainly your right, but it almost always detracts from the quality of the material presented. Algebra is nice, but hard to read. Real numbers are so much easier, especially for your audience 🙂
Either way, best of luck in 2011. I’ll keep stopping by here and there, and I hope you prove me wrong and this blog gets better as a result of the changes you are making as it unfortunately was less useful in 2010 than it had been previously…
I’ve only recently discovered your blog, and I’m hooked. I was actually looking for some financial examples I came across about a year or so ago through Yahoo, which I can no longer find anymore. Basically these were examples of people and families that described their current finances, and with the help of a financial planner what they were doing to meet their retirement goals. I was shocked that they published their actual finances and were quite frank about the whole thing. It sparked something in me to get a better handle on my own retirement planning– even though I have another 25-30 years. Finances are not something that is usually discussed among people, so it really opened my eyes. I had previously invested in a 401K and an IRA without understanding either or without any thought of what would happen at retirement. It’s a shame they don’t cover these better when you start them.
Anyway, I came across your blog and your examples, which kind of offered the same thing I was seeking. It helped me better understand where I am and where I think I need to be. I’ve also read a number of articles on your site. And I’ve done my own research previously and also picked up a book. I’ve since calculated my own situation and forecasted where I think I will be at retirement. I’m not sure why I never did this before, but it was extremely helpful.
This last year, I made a huge adjustment in my own planning and I think I’m on a better track.
Anyway, thank you for offering this blog and the information you provide. It’s been a huge help.
Any thoughts to altering your 4% return adjusted for inflation assumption? For retirement planning, it always makes sense to err on the side of conservatism and right now, I am not sure a 4% adjusted for inflation return does that.
Also, when you are calculating the return on paying off your mortgage, you have to remember to tax-effect the savings — paying off a 5% mortgage is more like “earning” 3.5% than 5%.
I want to preface my comments with the statement that I have been a loyal follower/supporter of this blog for many years .. and still am (for the most part).
However ..
Like ‘enoynmous’, I too have *felt* a fundamental paradigm shift of this site in the direction of revenue generation. I remember being excited to visit this site in anticipation of finding a clever way to save a buck, make a buck, or just learn a little something. The posts were welcoming, enlightening, and a portrayed a certain sense of camaraderie. Kinda like, “hey all, here’s a deal on how to stick it to the credit card companies … and have them pay you! Go get ’em!!” There used to be some really good stuff here.
But that seems to be fading away. This blog is starting to be less about camaraderie and sharing, and more about how to monetize this website. Recent posts have been lackluster at best … and there has been some mention of ulterior motive behind these posts. In fact, I recall a post which provided a link, with an asterisk alluding to click-thru revenue. There were several poignant comments .. but I never saw a response from Jonathan explaining (unless I overlooked). Makes one wonder.
Jonathan, you’ve done a tremendous job with this blog, and an even better job of creating a loyal and supportive following. I completely understand and respect your decisions to utilize your fan base however you feel appropriate. But consider the risks.
Right or wrong … you stand to offend your fan base if you exploit them for your personal financial gain. Yes, you deserve something for sharing personal information, providing insight for others to take advantage of, etc … but there’s a fine line. Posting quality/personal information (with a revenue stream) is much different than posting random/non-personal/blah information (with a revenue stream). The difference: I don’t need My Money Blog for the latter.
I’m gonna stay optimistic and keep visiting for a little longer to see how things go.
How does the 25X formula account for taxes?
$40,000 income from a $1M portfolio … would that be gross (AGI)? Just curious if 25X has that “baked in” or if it should be calculated outside.
Thanks for all the great ideas and hard work to run this blog. It’s very helpful for the rest of us who are striving towards similar goals.
@AR – I would agree to the extent that you should fund any tax-advantaged accounts like Roth IRAs before paying down your mortgage, as the tax benefits make it much more likely to generate a good long-term return.
@Daddy Paul – “In most cases I agree but if you have a 2% loan from a credit card company for 5 years pay something else off.”
Agreed, if you have higher rate balances pay them off first. But otherwise if you’re borrowing to buy stocks then you have to be careful, as with my argument with AR.
@enoynmous – I would agree that my posts have been more “deals that are easy to analyze and share” and less “in-depth analysis, tables, and write-up that takes 8 hours per post”. I think I know that better than anyone. This blog has taken a backseat to other more pressing matters, especially over the last year and a half. I could apologize for that but it is what it is. I think my priorities are were correct. Things are better now and I’m planning to spend more time on writing in 2011.
As for the “deals” posts, I try to post whatever makes the reader money. I could be a free PDF download of a book, or a credit card bonus, or whatever. If I can make money off a referral fee in the process, then yes I want to earn that referral fee. There are a lot of good credit card offers out there right now, and I’ve applied for more cards recently than any time in recent memory. I think the reader should ask “is this a good deal for me?” and if it isn’t, then just move on. I know others see hassle, but I think if you do all the “deals” I post, any one could net thousands of dollars per year. If you disagree about my opinion, leave a comment and point out where I’m wrong.
@Josh – Thanks for the kind words. I’m glad you found what I wrote useful.
@Dave L. – You could switch to 3% if you’d like, but in my opinion good is the enemy of perfect. 4% is a nice number, and as I mentioned I’m looking to partially annuitize and give up potential principal to pass on to heirs.
Yes, if you can itemize fully past the standard deduction (most people don’t) even without the mortgage interest and your tax bracket is 28%, then your after tax return is more like 3.6%. But so is the return from a taxable bond or bank CD paying 5%.
@MJ – I think I addressed some of your concerns above. First, I’m not really into screwing any company, I don’t take such things personally. In the end, I think most of us believe in market forces and if my content indeed turns to crap and doesn’t help anyone, then I will disappear. However, I do indeed try to post useful and helpful content 5 days a week and this takes a lot of energy. If you don’t think so, I encourage you to try for yourself. Take a look at any personal finance blog over 3-5 years old and see how many are left that can create fresh and innovative ideas on a regular basis. Not many are left. I often feel like I’m repeating myself, and that saps my motivation. But then I know that it will still be new for many visitors. I’m ready for the challenge in 2011, and I hope I won’t disappoint. 🙂
@Jeff – That’s a good question. The $40k is just a rough approximation and I would treat it as gross even though there are lots of potential factors. When you withdraw from a portfolio, then you don’t need to pay the ~8% in Social Security/Medicare taxes that you pay on a regular W-2 job. Withdrawals from a Roth IRA won’t be taxed at all.
Thanks for the kind words and the encouragement.
really nice responses Jonathan – I respect you for answering your ‘critics’ openly and honestly
I know you mentioned other personal issues not too long ago. Having gone through my own over the past year and now emerged better on the other side, I don’t know how you managed to continue working on this blog the entire time. My hat is off to you.
Finding good content/deals 5 days a week is darn near impossible. I couldn’t agree more.
Deals aren’t as important as education, though. If I could humbly make a suggestion:
How about a topic, once a week, in an overarching series – strictly educational and perhaps just fractionally more advanced than the usual deals/credit card offers/ dreaming of retirement/planning posts.
For instance, it might be nice to do a series of posts on fundamentals of modern portfolio theory (leaving the heavy math out) and then slowly showing how and why portfolio construction is performed by experts, including you!
Or perhaps tackling the basis of 4% SWR, the value of a pension, how annuities work, and what an early accumulator might need to look at even though the drawdown phase seems so far away…
Moving from theory to practice is something I think most readers would enjoy – and I’m sure you would too!
I’m glad you are in a good place now. I am too. I look forward to 2011 and wish you all the best.
@ hawks5999: House prices have gone down, but never stayed down. Same with stock market (perhaps some variation). Stock market has gone down, but never stayed down. Good comparison is the “lost decade” between 1999-2009. You’re absolutely right. Less risk, less reward. There’s a lot more I haven’t shared that philosophically favors mortgage leveraging. However, short term certain conditions may not favor it…short term.
@ Jonathan: Yup. Fill up that IRA and 401K account. Thanks for your comments 🙂
Hi Jonathan –
I’ve been reading your blog for a number of years, sharing it with friends, and have found it really valuable. It was also really comforting – to see your raw #s fluctuate down with the market at the same time as ours (because the market was falling) helped put it in perspective that we weren’t alone, and in general – kept me really disciplined in keeping up with my own financial health. And it is the one thing Millionaires in the Making (CNN Money’s feature a few years back before the market fell) never did that your blog offered up – ongoing maintenance and tracking of success in reaching the goals.
Anyways, I was always impressed with your transparency (and on that same note – cautious of my own if I were to ever endeavor on something similar). That being said, I wanted to offer up an idea that is a possible solution to the mixed emotions above.
You have an audience of people entrenched in your blog who probably are already tracking their financial goals and their financial health. Why not solicit a few different audience members to be anonymously featured on an on-going basis – using their #s, their goals? just an idea.
Regardless, i enjoy reading your blog and having someone to navigate financial security with, so thank you for all your posts.
LP
I see that you want to retire at 50, but with your current asset allocation, it seems you would be heavy in retirement assests that could not be touched for at least 9-10 more years after. This is a problem we are facing and recently decided to only put the minimum towards our 401k for match and still max out Roth, but otherwise we are trying to save as much cash as possible so we will have enough non-retirement money generating usable income. Any thoughts on this would be appreciated. Great blog!
@enonymous – Thanks for the helpful suggestions, I do think more structure is exactly what I need. I am also thinking of starting a separate site with more static information about personal finance, so I can see any holes and fill them in.
@AR – Another thought came back to my mind. Buying stocks instead of paying extra towards mortgage should historically have a good chance of returning more than 5% in theory. But buying bonds right now would make it a lot closer call. So paying down your mortgage can be less appealing if you are trying to buy stocks, but more appealing if you are using the money instead of buying bonds. I hope that made sense.
@lp – That’s a great suggestion! Thanks for reading.
@Ron – You are right, very good observation, and we are adjusting our asset allocation accordingly. I’ll definitely write more about it once I organize my thoughts.
@Jonathan – Thanks again for the reply. Good dialogue. Short term that might make sense, but long term it wouldn’t. This all makes it more attractive when you look long term (perhaps 15 – 30 years), especially when you consider the net rate of your mortgage and investing in stocks plus tax deferral. One of the biggest financial issues in most of this (again, considering long term) is your ability to pay the mortgage and that can be partly “solved” by having a nice slush fun. The biggest psychological issue is obviously behaviour (as one of the subscribers I think mentioned). Does someone have have the discipline to do the right thing and avoid the common mistakes that typically give this type of strategy a bad name.
Hi Jonathan,
I was also wondering about the decrease in transparency, but your reasons absolutely make sense. I am still amazed that people (such as yourself and Pat Flynn over at SPI) share as much information as you do. I’ve come to view it as a bonus.
I wondered if applying a %-offset would mask the numbers in a way that still allowed you to share something meaningful (i.e. the absolute numbers would be wrong, but the calculations would still “work”). I could even see a worst case, fee-based subscription to access your real numbers if there is strong interest.
Either way, thanks for sharing!
Great comments from everyone.
@Jonathan – I have to agree with many of the posts. Your open nature was what had me coming back and sending your blog to my friends. As well as given me some great ideas on how to specifically track my budget and change my habits. Thanks for the years of interesting content.
@orthros @Sunil @enoynmous @MJ @LP – Any other blogs you’ve been reading lately that follow Jonathan’s old format? I really miss the detailed and more personal posts that motivated me.
Curious to know what your goals for 2011 are. Mind sharing them?
I think a lot of those great deals (like 0% credit card offers, huge bank bonuses for minimal work, etc.) have dried up. You can’t really blame Jonathan for that. I have followed this site for years and will continue to do so.
“This year, I’d like to make it so I can talk about things openly with my friends and family without worrying about what they think about my income or savings etc. Comparing with strangers over the internet is easy. 🙂 Having your boss or clients know too many details can get weird.”
hmmm, something you might have considered when starting a blog the world wide web!
This was the reason I kept coming back. Certainly you do have other worthwile content, but it’s hit or miss for me and I always looked forward to tracking against a real world example.
I started this blog in December of 2004, completely anonymously, with the goal of maybe attracting 10-100 other people to interact with. The whole point of it was to be anonymous, since sharing financial info with friends can get weird.
If my monthly update was really the only reason you came back, then thanks for reading and I wish you the best. I’ll still be sharing many personal decision-making processes, but I’ll no longer be sharing the exact amount in my IRA. I do like the idea of having others contribute their own situation (anonymously) for comments and feedback. Would anyone like to volunteer?
the monthly updates is why I came by too, it was definitely the 1 thing that made you and this site so memorable and worth adding to the ol feedreader. But most of “us” probably not the type of audience that you should be caring about most, and you have good reasons for changing things, so I wish you the best of luck with all the sites.