Month: November 2018

This is a continuation of a monthly theme where I document what media I am currently consuming.  In addition to sharing books, articles, and podcasts that some may not be aware of, it will help keep me honest and ensure that I continue to consume more and more information myself.  Here is this month’s entry.

What am I reading?

This month I am doing another re-read of a book that I have previously consumed but one that I have decided to read over and over as time permits.  That book is A Simple Path to Wealth by J.L. Collins.  This book had a very positive impact on my investing when I first read it.  My initial foray into investing came with my first “real” job that carried a 401K plan.  I don’t necessarily count this as I quickly viewed the menu of funds available and picked a few with no real thought into what I was selecting.  Shortly thereafter, a friend took on a job as a stockbroker.  He and I sat down, and I decided to invest some money with through him.  At that time, I selected a few individual stocks that represented companies that I had heard of and which would be easy to look up in the daily newspaper.  This did not necessarily go very well and at that point, I decided to learn more about investing.  I dove into newspapers, books and television programs all designed to improve my prowess at stock picking.   I spent countless hours researching and immersing myself in the world of Wall Street.  The net results were mediocre at best.  This book was not my first introduction to index fund investing but it was certainly the easiest explanation of the benefits.  I have since dabbled in index investing and have been quite happy with the results.  This book is an extremely easy read.  The author has a very conversational way of writing. The author first wrote an extensive series of blog posts on this topic, which can be found at www.jlcollinsnh.com if you don’t want to commit to the book.

What am I listening to?

Another favorite podcast that I am enjoying is The Money Guy Show by Brian Preston.  Brian is a fee-only financial planner with extensive experience in the field.  He blends that experience with a folksy charm that makes most topics very approachable.  I don’t always agree with his advice, but he has a great way of explaining his logic that you cannot help but understand, even if you don’t fully agree.  I have also been going back and listening to the entire backlog of shows, since the show began all the way back in 2006 and am finding that his advice has largely held up.  There have been a few items where his advice may not have been the best, but he has acknowledged those and taken full ownership of them.  One such item was his stance that he did not need a very large emergency fund since he has an untapped Home Equity Line of Credit on his home.  I have personally agreed with this logic in the past and both Brian and I quickly learned that this stance did not hold up during the housing bubble bursting in 2008.  My line of credit was quickly slashed by my bank and that available credit dried up very quickly.  Something similar happened to Brian and he has since become more supportive of building a safe emergency fund.

What am I watching?

As I predicted in my last post, my baseball team fell short of the title this year.  While I did pay attention to the remainder of the playoffs, it did not dominate my watching as much as before.  During the past month, however, my television viewing has still been consumed with sports.  This time around it is football.  My son is 10 years old and played tackle football for the first time this year.  It was a great experience and has sparked his interest in the sport tremendously.  In years past, I have tried to get my kids (and my wife for that matter) to have an interest in college or NFL football.  They have resisted.  But now that my son is playing the sport and learning all the rules associated with it, he has become extremely interested and watches every chance he gets.  This has presented some solid father-son bonding moments that I am going to capitalize on as long as they last.

If you follow any financial independence writers, you will often hear talk about savings rate.  The underlying principal getting a head is simple… spend less than you earn and invest the difference.  That “difference,” when stated as a percentage of your total income is your savings rate.  So, simply stated, if you earn $5,000 per month and save $2,500 of that, you have a 50% savings rate.  The higher your savings rate, the better your chances are of reaching your financial independence goals.  Fifty percent is a figure that is often tossed around but some folks in this space celebrate rates as high as 80% or even higher.

My current struggle is in figuring out how to determine my own savings rate.  What figure should be used for income—Gross or Net income?  How deep to you go in calculating exactly what is considered savings?  There are some obvious items such as 401K contributions and money that I have auto-directed to my investment accounts but then what?  Do I consider the portion of my mortgage payment that goes to principal as savings since this is paying down a debt?  These questions have bounced around my head so often that I wind up being paralyzed by them and unable to commit to calculating this figure.  Thus far I haven’t done this.

So, for this post, I am committing to coming up with a number.  It may not be a perfect number, and some may argue for a better way to calculate the figure but at least I will have a starting point.

I will use percentages in order to maintain privacy.

 

Total Monthly Gross Pay:	100%
Taxes Withheld:	22.59%
Other Withholding's:	5.05%
401K Withholding's:	12%
Amount diverted to Investment Account:	6.75%
Amount diverted to Savings Account:	22.52%

 

This simplistic calculation does not dissect each payment to determine if a portion is savings versus expense.  But using this very quick calculation I can see that the last three entries would be considered as my current savings rate.  So, adding those three items gives me a current savings rate of:  41.27%.  This is certainly not as high of a rate as I believe I can achieve, but I will consider it a victory at this point in my journey.

Do you calculate your savings rate?  If so, how do you go about this?  Feel free to discuss in the comments.  My challenge to myself will now be to explore ways to push that rate above the 50% mark.  Seeing the number printed in black and white definitely adds to my motivation to tackle that goal.

 

Friday was my most recent payday.  I had some expenses to be paid out so before doing so I quickly checked my bank account to see if my paycheck had hit my account yet and ensure that there was enough money in the account to trigger the payment.  I was surprised to see that my paycheck was a little larger than normal.  I logged in to my company’s payroll system to check my pay stub and see what might have changed.  A quick analysis showed that the 401K deduction was smaller than normal.  I scanned the Year-to-Date column and noticed that I have maxed out my 401K contributions for the year.  This is the second year in a row where I have done so but also only the second year I have EVER done so.

Since being eligible for a 401K, I have always put 10% in and have not wavered from that.  I assumed that 10% was a huge portion and would be more than enough to cover my retirement.  I asked around to a few family members and friends and quickly found that 10% was much more than most, if not all, of them contributed.  This reinforced my beliefs that I was ahead of the game.  Once I began diving into personal finance topics I learned that 10% was probably not going to get it done, especially not if I wanted to retire a little earlier than the norm.

Once I had that realization I began and systematic program of increasing my percentage withheld.  I started by increasing my contribution by an additional 1% each year on my birthday.  This worked well and was easy to remember since this was a nice little birthday present to myself.  The other thing I noticed was that my take-home pay before and after each change was not significantly different.  It definitely did not impact my cash flow as much as I expected.  So, what I decided to do that that point was to increase my percentage every few months.  I add an additional 0.5% or 1%, then adjust to that amount for a few months before doing my next increase.  Amazingly, I have barely noticed the difference.

Now that I have hit this major milestone two years in a row, I am motivated to do even more.  My new challenge will be to see if I can hit this milestone even earlier in the year next year.  Additionally, now that my paycheck is more than usual since that money is no longer deducted, I plan on automatically moving that money to some different savings vehicle.  For now, I have set up an auto-transfer for that amount from my checking account to my savings account on each payday.  As that amount accumulates, I will deploy it in another vehicle to maximize its impact.

I have decided to talk a little bit about an important anniversary that falls on this date.  I struggled with the idea of whether this fit into the blog’s theme.  This is something very important to my life and wanted to write about it.  I have not really focused on the financial aspects of this event but decided to do that here for multiple reasons.  First it would allow this discussion to fit into the theme of this blog.  Also, it would allow me to dive into how the financial impact of these life events played into my later decisions to take my personal finances much more seriously.

Seven years ago, I received a phone call from my wife.  She explained that she saw something strange but didn’t think much of it.  I encouraged her to contact her doctor to be on the safe side.  She did and went in to see her doctor.  Her doctor ran some test and found some alarming anomalies.  She referred us to a surgeon to perform some exploratory surgery.  That surgery resulted in something nobody ever wants to hear…. There were cancerous cells present.  This led to a second surgery, this one to remove all the effected cells.  That second surgery was seven years ago today.  That marks the time when my wife was officially cancer-free.  There was one additional surgery one year later as they found some strange results on a test and performed surgery to remove that.  It turned out that it was not a re-occurrence but merely some scar tissue.  Following the second surgery, there were many months of radiation treatments and therapy sessions and fear!  What there was not was a single moment of feeling sorry for herself.  My wife is an amazing woman and I cannot imagine having to have gone through this.  She is a fighter and she handled herself in a way that not only took the fight to the cancer but set such an incredible example for my children on how you handle adversity.

This is a story that I tell every year on this anniversary.  I always focus on her strength and resilience, as I have done above.  However, since this is a personal finance blog, perhaps it makes sense to also discuss the impact this had on our finances.

Shortly before this diagnosis, I lost my job.  At that time, I decided that I would try consulting.  I was the only income earner in the family at that time and therefore our health insurance was tied to my employer.  Upon losing my job, I investigated COBRA coverage.  This was a smaller company with some large claims in it’s past so insurance coverage was not very affordable.  COBRA coverage was available but not at a price that I could afford so we purchased insurance on our own.  We had a conversation about this and decided to get a high-deductible, catastrophic plan.  We justified this decision by saying that “we are young and have always been mostly healthy.”  I had savings at that time as well as stock market investments.  I felt that we would be able to handle anything that came our way.  This theory was put to the test almost immediately.  When deciding on the path forward, we never gave money a thought, we pursued what we felt were the best options as recommended by our doctors.

Right around the time of the second surgery that I celebrate above, the bills started to roll in.  Our insurance coverage was excellent and performed as we expected.  This is not an entry to tell a horror story about big insurance.  However, with a high deductible plan, a large portion of these bills was our responsibility.  We dipped into our savings and paid these off.  We got to the point where we paid our maximum out-of-pocket for that first year.

We felt like the worst of the financial impact was behind us and we survived it without depleting our savings.  This optimism was short lived and very incorrect.  Following that surgery, there were months of radiations treatments and appointments with many specialists, all who contributed to the excellent care that my wife received.  Those bills came rolling in and we quickly hit out maximum out-of-pocket for the second year in a row.  We did, however, finish up radiation treatments that year so we felt that we had weathered the storm, even though we had run through just about all of our savings and investments.

Then, as I mentioned above briefly, there was a test in that next year that revealed some tissue that the doctors were not happy with and they wanted to perform a third surgery.  This surgery went smoothly and returned the greatest news we had ever heard in that it was not a re-occurrence of the cancer but scar tissue.  This successful surgery and excellent news were followed by even more bills and visits to specialists.  For the third year in a row, we hit the maximum out-of-pocket spend on our insurance program.  Unfortunately, we had run through all our savings but by that time, my consulting work had picked up and was steadier and we were able to pay our obligations without having to take any extreme measures.

I have not previously looked at this time in our lives through the lens of our finances and doing so today has shown me one thing…. The financial portion of this was significant.  But not significant enough for me to view it, even with the passage of time, as a hardship.  I never considered the costs or impacts on our finances as we considered treatment options and even looking back and seeing that this caused us to run through all of our savings and most of our investments, I have absolutely no regrets as I can write this and say that today marks the seven year anniversary of that all-important surgery that allowed my wife to be cancer-free.