Credit Card Debt
If you’re a new reader, let me start out as usual by explaining the credit card debt. I’m actually taking money from 0% APR balance transfer offers and instead of spending it, I am placing it in high-yield savings accounts that actually earn 3-4% interest or more, and keeping the difference as profit. Along with other deals that I blog about, this helps me earn extra side income of thousands of dollars a year. Recently I put together a series of step-by-step posts on how I do this. Please check it out first if you have any questions. This is why, although I have the ability to pay the credit card balances off, I choose not to.
Retirement and Brokerage accounts
Apparently this was the worst June since the Great Depression, with the S&P 500, Nasdaq, and Dow all losing around 9 to 10% last month alone. But it was only the worst June, not the worst month ever. Our overall portfolio didn’t fair quite so poorly due to our diversification into international stocks and bonds, but still sank nearly $7,000 in one month.
However, I remain confident in the fact that a globally diversified portfolio will perform adequately well over my time horizon of 20+ years. Add in the fact that shuffling investments around only serves to worsen my chances, and you get my same old brilliant plan of… doing nothing. I seriously had to skip over half of my financial magazines this month, with all their suggestions for “recession-proof” stocks.
Cash Savings and Emergency Funds
Our mid-term goal is to have $30,000 in net cash put aside for emergencies, for example if both of us find ourselves unemployed for an extended period and even have to start paying for things like health insurance on our own. We are now nearly 80% there at $23,810. After this is done, then I will focus on more contributions to my Self-Employed 401(k) plan at Fidelity. My timing just happened to work out well so far, with us accumulating cash while the markets are dropping.
Home Equity
Another tiny ~$500 of loan principal paid off. Since this is a “bad” month, I decided to pile on and reduce our estimated home value by 6%. Six percent is the approximate amount charged by a real estate agent, so we might as well count that in. I don’t like how our net worth is overly affected by such home value guesses, and am looking for a better way to measure our progress towards financial freedom.
You can see our previous net worth updates here.
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Way to stick in there regardless of the market – seems as if your diversification has buffered some of the losses you may have had otherwise.
On a side note, shouldn’t your asset total be in red?
You could use Zillow to estimate the value of your home. http://www.zillow.com. It updates somewhat regularly based on recent home sales in your neighborhood. For some properties their Zestimate is pretty good, but sometimes they are way off. It just depends on where you live.
Did you include your contributions in the changes to your portfolio value?
I am curious to know how much of your gross income (percentage) you are striving to save.
yikes. i’m confused about all the green numbers, shouldnt they be red?? glad i have my tsp funds mostly in G!
Your home value dropped by 6% ? What area do you live in.
Are you considering adding to your stock holdings now that stocks are so ” much cheaper” than one month ago? Or do you just like the safety of cash?
I agree with the valuation of your home. I started doing that a few months ago myself.
I don’t include my home equity in my net worth, but I do track it separately.
S&P/Case-Shiller publishes a useful (if you live near a major metro area) home price index that I use to track my home value. I choose the “Tiered Price Indices”, which gives me an Excel sheet with index valuse going back many years (each metro area is on its own worksheet – so make sure you select the right tab).
I just adjust my home purchase price by the percent change in the current month’s index from the index in the month I bought the house. I also adjust my original home value (my cost basis, if you will) by any significant renovations I do. This at least keeps my expectations somewhat in line with reality.
http://www2.standardandpoors.com/portal/site/sp/en/us/page.topic/indices_csmahp/0,0,0,0,0,0,0,0,0,1,4,0,0,0,0,0.html
I’m sure you’ve already considered it, but…..
You could just ignore the mortgage & home value while you’re tracking your progress. Just make the monthly house payment whatever it needs to be in order to have the house paid in your time horizon. Your ‘financial freedom’ target would just become $xxx,xxx,xxx.xx AND the house paid-off.
Just another useless suggestion.
How about this very unorthodox way of valuing your home.
Let’s say you wanted to rent a house, how much would it cost to rent your own home? My home would probably run me about $2500 a month. Now if I divide this by 6 (which is where interest rates have been running about for many years now). Now I take this number, 416.6 multiply by a thousand, and that amount ($416K) is a good low estimate of my home’s value. Most realtors would probably try to sell my home for more (maybe 50K more), but I bet this would be the real number I’d end up with.
Over time rents go up, so with this calculation you could come up with a somewhat reliable value. What do you think?
just curious, what is your 2008 YTD return (1st half) on your retirement portfolio?
mine is -3.5% ..better than stock market ofcourse but close to a 60/40 allocation of say a vbinx (i believe vbinx has returned -4.9% ytd)
i benefited from higher cash and some commodity exposure i invested in 2006.
Not sure if I agree that you should include the 6% as a liability against your home for the same reason you probably shouldn’t include the theoretical appreciation as it is a real asset that you have not realized a gain or loss on – and will not until it is sold. There are several things that might happen in which 6% is not the true cost against the equality – (1) the home appreciates to cover the 6 percent and (2) you use the same agent to buy your next home providing you with a discount.
I think you have the same problem when doing “home improvements” that are to increase the value of the home. What % of the home improvement do you count towards an appreciation of the home?
Whichever method you decide, you might want to go back and reflect that gain/loss (e.g. the 6%) from the first couple of months instead of dropping it in during one month after owning the house for 2-3 months.
No student loans or car payments?
i’m guessing you live in cali, florida or vegas. and if you are your probably gonna lose another 10-15%, and thats if youre lucky.
things are gonna get worst for your IRAs and 401k’s. of course it depends in what funds you specifically have your money in, but if your long indexes in general, especially US focused stocks, youre gonna have a lot more pain.
7% drop is terrible, of course it was the worst June since the great depression in the US markets, but longer term its gonna get worst.
i put all my family’s retirement funds 100% into money market around november, and will transfer it all into gold next month when i change accounts.
nobody wants to move their money down 20% year to date, but the risk in our economy is too high not to do it.
many banks will fail, the economy will weaken like never before, and events in the financial sector will cause the markets to panic (whether justifiably or not) and possibly crash.
yeah its crazy, but when it happens in the next year or two, i’ll hit you up and tell you told you so.
by the way, love your site.
@russ – No.
Hi there! I just found this site and I love it! I can’t stop reading it 🙂 I am learning so much, Thank you!!!
Oops, forgot to make the negative numbers red last night. Fixed now.
Student loans are paid off. We paid cash for our cars (’95 and ’01 model years).
Cheo and Tim – I think we are in close opinion. I do wish to track my home value because it does matter, but in the end all I really want is a paid-off house which simplifies my cashflow and retirement picture.
mimi – I think that’s perfectly reasonable, but perhaps a bit too much trouble for me.
PB – I will need to calculate my YTD portfolio soon. It’s a good time since half the year has passed.
House – Your points are all valid, and point out the difficulty in accurately valuing one’s home without actually trying to sell it.
I recommend you listen to this story from NPR and reconsider your buy and hold approach:
http://www.npr.org/templates/story/story.php?storyId=92140779
Take it from a full-time real estate investor, the first 15% of your perceived market value of your house will go up in smoke when you sell it. If you own only 1 house and bought it at market value within the past 3 years, chances are you will lose money when it’s time to sell it. You shouldn’t count any equity in this house as part of your networth at all.
I applaud you for trying to improve your wealth but your way of doing things is too typical and conventional. You’re not gonna go far earning 4% to 5% on a few bucks from your credit cards.
To stand a chance of being successful, you need to be an absolute expert at something and practice it everyday or find an audience and teach your expertise to. Better yet, do both.
For instance you know a little bit about BT using your personal credit card but did you know that you can set up a company (LLC or Corp) and can set up business credit cards where these cards won’t be reported on your crecdit report? You can then use these business credit cards and do what you do without having it ever negatively affecting your personal credit scores. And if you learn how to be an expert private lender, for instance, imagine how much more you can make.
Working hard in this society or any society is not enough. You need to learn to work smart.
I’m 2 years older than you and started doing real estate only about 6 years ago. I quit my job 4.5 years ago and never looked back. I made myself and expert in buying and selling houses and continue to learn new techiques and ideas each every day. I stumbled across your site about 2 weeks ago and actually been learning many things about BT from you. I then applied a few of your techniques along with mine and actually went back and looked at some of the business credit cards that I applied for over a year ago. I called these companies up and asked for credit line increase along with BT or Cash Advance promotion. Within 2 weeks, I now have about 150k of business credit for my business.
From you, I learned things like how to get the actual cash from these business credit cards. Things like you can transfer money from some of these credit cards directly into your checking account and these credit card companies actually are ok with it. I also learned to start looking for these promotional checks that they send to me once in awhile. I’m very open minded when it comes to learning.
If you wish to learn more, email me. I’ll give you a few pointers free-of-charge. I know, many people have contacted you talking the same kind of bullshit. Don’t worry, if you ever hear me making any proposal to you or asking for even a penny, I’ll pay for your plane ticket to my city so you can come kick me in the face. What I may ask you is the best way to start a blog or something similar so I can teach people what I know. I like to pass along pearls of wisdom to my fellow human beings. I’m thinking of setting up an actual web site with my own design but having a ready-made template like you have may be good as well.
Sincerely,
Brian
in Texas the seller also has to pay the title policy. Not sure if it is like that in your state as well. If so you should adjust your 6% expense for selling your house to 7%.
my approach to home value is to record the purchase price as an asset, and track the mortgage(s) as a liability. to do otherwise, in my opinion, is a waste of time.
1) unlike stocks or other asset classes, there is no way to reliably determine the home value until the home is sold. attempting to do so is purely speculation.
2) while paying down the amount of the liability does reflect a real change in net worth, any increase in home value is likely to never be realized, as it will likely be rolled over into the next home.
3) including a speculative, volatile value makes it much harder to get a clear picture of the progress of your other, more measurable assets.
this treatment also emphasizes for me the fact that a home is just that, and not an investment, though others may feel differently.
Dave: thanks for the link. Very interesting conversation.
Jonathan: it would be interesting to see interest from cash savings broken out separately so as to compare with losses from investments, especially in light of Dave’s link.
Hey Jonathan, your idea to do nothing is a sound one. I’m doing nothing as well 🙂
Dave’s link is about market timing. It not anything new. Sometimes it works and sometimes it doesn’t.
Shoulda sold stocks and switched to gold. Shoulda sold gold and switched to oil. Shoulda sold oil and switched to coal.
Or
Shoulda sold stocks and bought a house. Shoulda sold the house for a bigger house. Shoulda bought three more houses. Shoulda sold them all for gold.
The problem is that you gotta time that beat perfectly.
Justin, Timing is not as difficult as you think and it doesn’t require timing to be done “perfectly.” I sold 1/2 my equities back in January and the remainder in May. Was my timing “perfect”? Hardly. I still took a hit with losses compared to the market’s “peak.” However, had I just bought-and-hold compared to making just those two transactions, I would have been a lot worse off today than I am now.
Congrats Jonathan!
I’ve been a big fan of your site for years. It is so great to see you meeting all your goals!
Timing is difficult because the best and worst always come as spikes rather than a linear flow. Naturally, those spikes’ sizes are relative to their risk category.
Dave, agree with you. You do not have to be perfect in your timing for it to be beneficial, just directionally correct.
Justin,
Again, I think you’re misunderstanding my point. “Perfect” timing is certainly difficult if you are trying to capture the “best” and “worst” of the market.
But if all you are trying to do is capture the directional flow of the market (as Bronco says) then it’s not that hard.
Again, just take a look at the market over 2008. Like I said, I sold off half in January and half in May. Was my timing “perfect”? Absolutely not. Was I able to capture the spikes? Again, no, not perfectly. Am I killing the market right now? Yes.
I guess I don’t understand your statement that the “best and worst” do not come as a “linear flow.” The broad based markets are all clearly linearly flowing to the downside right now.
Jonathan, you are numbers are truly impressive for a 30-yr old. I wondered if the statement for was you and your wife – you use ‘our’ for cash and savings but not for credit card money making etc. If so could you please care to qualify all stuff with a ‘we’ instead of an ‘I.’ (say, our financial health etc.on the top of the numbers.)
One possible way to value your home is to take the price you paid for it (or your best estimate of fair value on that day), divide by the case shiller home price index for the bay area when you bought it (from standard and poors, you can find the data on their website) then multiply it by the same index from the latest month.
simple, objective, easy to adjust on a monthly basis, and as accurate as any method.
The primary reason is that I don’t share the exact breakdown of our income between my wife and I is that this blog is no longer as anonymous as I would like.
Honestly, it is relatively easy for regular readers to figure out our total income. Hint: Look at our emergency fund.
just got a great 0% no fee balance transfer from Capital One good through October 2009. Even though you can only get 3.3-3.5% in a MM these days, with a 30k transfer, I’ll make an extra $1k over the next year.
when will these banks learn?