What if You Started Investing in Retirement as a Baby? The Power of Compound Interest

Typical advice in the personal finance space is to start investing as early as possible. Let the 8th wonder of the world, also known as compound interest, do its thing. This advice usually applies to recent college graduates to encourage them to get money into retirement accounts as soon as possible.

For simplicity, let’s say this window opens at the age of 25 and closes at the retirement age of 65. This would allow 40 years for your money to grow. Using the visual below as an example, you can see the power of compound interest on display. The main takeaway from the chart is Susan ends up with more money than Bill even though she only invests for a period of 10 years while he invests for 30 years. They invest the same amount of money every year and the only difference is Susan starts investing at the age of 25 (and then stops after 10 years) and Bill starts at the age of 35 and invests until retirement.

Chart assumes 7% growth rate. Souce: business insider via jpmorgan.com

Think about that for a minute. This really is a huge difference. Bill has to invest for TWENTY more years than Susan with his late start, and he will still end up with less money at retirement.

I have seen dozens of articles similar to this one associated with the above graph. However, I’ve seen very few that recommend starting to save for retirement even earlier. After additional research, the Google machine returned a few articles discussing starting investing as a baby, though similar content is rare.

Back to the graph above, let’s add someone else into the mix along with Susan, Bill, and Chris. Let’s say Johnny was born in the year 2018.

Upon Johnny’s birth, someone in his family made ONE $5,000 lump sum payment into a retirement account. For consistency. assume a growth rate of 7% and a retirement age of 65.

By making ONE payment of $5,000 when Johnny is just a tiny baby, he would have nearly $500,000 at the age of 65. Little Johnny’s money would be worth a multiple of 100 times just by placing it in an account and letting it sit there making an annual return of 7 percent.

To reiterate, Bill would have to make 30 payments of $5,000 starting at age 35 to have roughly the same amount as Johnny after making only ONE payment.

I get it that this is an oversimplified example since it doesn’t factor in inflation. For example, the purchasing power of $5,000 in the year 1982 (35 years earlier) would have been $1,946. With that being said, this still demonstrates the amazing power of compound interest. Even an investment of $1,946 would be worth nearly $200,000 at the age of 65.

Why isn’t this topic discussed more broadly? Well, I’m not sure though I can speculate.

• Babies don’t read Business Insider articles (or personal finance articles in general). Therefore, the audience for personal finance articles is usually adults anywhere from recent college graduates to retirees.
• It’s weird to think about your newborn baby getting to retirement age. It just is.
• Similarly, 65 years is a really long time away and most parents only have financial responsibility for their children through college.
• Most parent won’t live to see their children turn 65. Nobody wants to think about that.

To summarize, if you have a few thousand dollars laying around and a child on the way consider throwing that money into a brokerage account and let it grow until your little bundle of joy reaches retirement age. I know that most people don’t have that kind of money available, and that really wasn’t the point of this blog post. The purpose was to show how important it is to start investing in retirement early, weather that is at age 1 or age 25. If a person takes only one thing away from the personal finance world, it should be an understanding of the power of compound interest.

Thanks for reading!

 

Why Goal Setting is Important: 2017 Year in Review

Paying off debt is hard. Not because it requires any type of special skill, but because paying off debt requires a tremendous amount of discipline. Paying off debt is kind of like watching grass grow. If someone were ask you to sit outside and watch the grass grow it would be incredibly easy and boring, yet would require a lot of discipline to stay focused. Okay, so maybe that wasn’t the best example but you get what I’m saying. Now, if you could trade grass clippings for financial freedom, it might be worth the effort.

From a debt pay down standpoint, 2017 has been our most successful year yet. It has also been the least exciting when it comes to spending money. In the past we’ve almost always spent money on a big ticket item or two that prevented us from aggressively paying down debt. Sometimes the purchases were necessary such as when our HVAC system went out, other times not so much such as buying a wave runner (yes, really), taking a nice vacation, or purchasing a newer used car.

I mentioned in my blog post last week that my wife and I sat down last year and actually wrote down our goals. I believe that goal setting is one of the most important things you can do to achieve success. While we kind of had goals in the past, the process of sitting down and actually writing out our goals made a big difference.

The goals have been in my wallet all year, and have been pulled out several times to review throughout the year. Many successful people will even go a step further and place their goals in a place visible every day. I may do that in 2018. The focus on this blog post will be reviewing our 2017 goals to see how we did.

The goal sheet took a beating from being in my wallet all year

Goal 1: Close gap of $42,851 by year-end 2017

This goal needs a little more explanation. For the past several years our debt pay down goal was to have enough money in savings to pay off the mortgage. It wasn’t until mid-2016 when we decided to commit to paying off the mortgage as opposed to just having the money in savings to cover it. Before then our goals weren’t as focused which often resulted in spending large chunks of money from savings to make purchases that didn’t contribute to our debt pay down goal.

At the beginning of 2017, the balance on our mortgage was $93,041. We also had about $50,000 in savings that had taken years to accumulate. Therefore, the spread between these two numbers was $42,851.

So how did we do this year?

Well, we came really close to hitting this goal but fell a little short. We knew going into the year this would be a really aggressive goal to achieve. The end result is an overall reduction of $36,861 (86 percent of the goal). Even though we fell a bit short, I’m still proud of our progress this year.

In March 2017 we took a huge step in our commitment to pay off the mortgage and moved more than $30,000 from savings to the mortgage.  Therefore, with the money from savings combined with debt pay down, our mortgage was reduced by $62,041! The remaining balance on our mortgage heading into 2018 is $31,000. You can probably guess what one of our 2018 goals will be.

Goal 2: Achieve Positive 2017 Performance Review at Work

This goal is related to my career which I don’t write about too much here on the blog. My organization has a typical performance review process where we receive a rating at year end on our overall performance. Doing well in my career is very important to me and I’m happy to report this goal was met this year. I have been off work all this week and have had the chance to reflect on the year. While it was stressful at times, the work is rewarding and I feel like I grew a lot professionally.

I am fortunate to have a job that is challenging, rewarding, pays well, and offers decent work/life balance. I have written before that the goal of achieving financial independence is not to quit my job. I would love to work at my organization for a long time even if I’m able to achieve financial independence. However, I also know that factors outside of my control could impact my future job security. I never want to be the person whose life is ruined by a layoff. I want to be the person who leaves knowing I’m not going to lose the roof over my head because someone else made a decision that my position wasn’t needed anymore.

Goal 3: Find Opportunity to Volunteer for Personal Finance Consulting 

This goal was surprisingly harder to achieve than expected. With an educational background in finance and more than 10 years in the financial services industry, I thought finding a volunteer opportunity of interest would be easy. I will admit that I didn’t put as much effort in to this goal as possible, though at the same time did pursue several opportunities. My end goal with volunteering is to help families who need financial advice, either through my church or other organization.

I have had the opportunity to volunteer this year through organizations such as Junior Achievement and INROADS. Therefore, I would still consider this goal mostly complete even though I will continue to look for opportunities that more closely align with my goals next year. 

What I’ve learned, which should be obvious, is the volunteer opportunities I’m most interested in are made available through relationships. Providing personal finance counseling isn’t something that an organization will let just anyone do. I’m working on building better relationships through my church and other organizations to get more involved.

Goal 4: Double the Amount of Charitable Donations

The goal this year was to increase charitable contributions from about 3 percent of take-home pay to five or six percent.  We completed this goal and now give away between 5 and 6 percent of our take-home pay every month. Giving is important to us and at some point it would be great to be successful enough to give away more money than we take home in a year. 

Our goal in 2018 will be to increase charitable donations to 10 percent of take home pay. I think everyone should have a goal to give away 10 percent of their income to causes you believe in. This doesn’t have to be related to tithing or any other religious affiliation. I have come across content recently discussing the magic of giving at least 10 percent, and I want to experience that as well. I regret not giving away 10 percent early in my career when it wouldn’t have been much money. Now that we make more money, it would have been a big leap to go from 3 percent to 10 percent this year, which is the reason for the more gradual increase.

Goal 5: Complete 12 weeks of P90x3 

Remember several years back when P90x was all the rage? More recently Beachbody came out with the trilogy, P90x3. Without going into details, P90x3 is similar to the original P90x program, but all the workouts are only 30 minutes. My wife and I successfully completed the 12 week P90x3 program this year. Exercising and eating well, which I’m not always great at, can help to achieve personal and professional goals. I’m a believer that diet and exercise are the best medicine for developing a strong immune system, having more energy, and reducing stress and anxiety.

Goal 6: Find a Preschool for DS3

First of all, DS3 stands for Darling Son, Age 3. It took me a while to figure out this lingo commonly used in internet forums. When we were setting goals, DS was only 2 years old and finding the right preschool was a high priority. We ended up enrolling him in the public school system where we live and are very happy with the school and teachers. For those that may be curious, even though its a public school preschool program we are still paying $600 per month. This was much cheaper than some of the private preschools that charged $1,000+ for full day programs. We feel like the program he’s enrolled in is just as good if not better than some of the other places we researched.  Regardless, kids are expensive!

Summary

Overall we did really well this year. Even for the goals we didn’t meet, we came really close. Sitting down and writing out our goals made a huge difference. We ensured our goals were a mix of personal and professional which is important to keep balance in our lives. I’m excited about sitting down to set our 2018 goals and am already thinking of what can be added to the list. Regardless, we plan to keep the goals simple so they can fit on a small sheet of paper, yet aggressive so we are challenged. We have baby number two expected in March 2018 and that alone will make next year fun and exciting.

Thanks to all who have taken time to follow this blog on social media, through WordPress Reader, or by subscribing via email.

How did you do on your 2017 goals? Comment below to share!

 

 

 

 

 

 

 

That Time When I Backed Out of a $70,000 House Flip

Around this time last year my wife and I sat down at a restaurant and discussed our goals for 2017. It was the first time we actually sat down and talked about our goals together. While we had discussions in past years about saving money and paying down debt, we didn’t have much focus or direction.

While paying down debt remained a priority in the beginning of 2016, I was easily distracted in the pursuit of other interests. For example, even though we started the year focused on paying down the mortgage the focus changed a few times and eventually we found ourselves with a rental property under contract. The plan was to use a combination of savings and home equity to make a “cash” purchase on the property and then refinance after six-to-twelve months.

The asking price of the property was $89,000 and we eventually got it under contract for $65,000. We knew the property needed some work and then the inspection report raised additional concerns. The front porch was separating from the house, there was termite damage in the basement, and siding on the outside of the house needed to be replaced. This didn’t include all of the cosmetic work needed as the house hadn’t been updated in decades. It would have been a huge undertaking for someone like me with little experience fixing up homes.

Due to my lack of experience, I was planning to partner with a contractor I had invested with in the past. A couple years prior I invested $10,000 into a flip project with this contractor. This was a significant amount of money as I still had more than $100,000 in debt and only $20,000 in total savings not including retirement. He purchased two homes using mostly his own money and a smaller percentage of money from a few small investors such as myself. The first house was flipped and sold within 6 months for a decent profit and I was paid nearly $1,000. Not a bad return on my money for being a silent investor. The second house took almost another year to sell and we didn’t receive any additional profit though my initial investment was paid back in full. In the end it wasn’t the best investment, but we got our money back with a small return so I was willing to give the partnership another shot, especially since he was a really good contractor.

Back to the original story, I’m not sure what the rehab cost would have been on the property I had under contract in 2016, but our best estimate was about $30,000 to flip and $10,000 to $20,000 to rent.

I ended up backing out of the deal for a few reasons including not being comfortable with using equity from my personal residence, concerns that had surfaced with my potential partner, and the results of the inspection report. I knew this was probably still a good deal and I hated backing out so late, but going through the process made me realize how unfocused I was in pursuit of financial independence. I’ll admit, once I had the house under contract I started to think of all the things that could go wrong and fear set in as well.

After we backed out of the deal, the house was purchased by a flipper who fixed up the property and resold it. According to Zillow the selling price of the home was $134,750, and was sold less than a year after I had it under contract for $65,000. The pictures of the listing confirmed that a lot of work went into the house (see below). I doubt the rehab cost anywhere near $70,000, so there was likely a large profit made from the flip. Therefore, the title of this blog post is a bit misleading as the overall profit was much less than $70,000, though if I had to guess the profit was still well into five figures.

Before and After Photos of the House

On the surface this was huge missed opportunity. Though I don’t regret it (for the most part).

My wife and I have been at this debt payoff game for more than five years now. One of the reasons why it has taken so long is the lack of focus. We have always been pretty good at saving money. The problem is I have shiny object syndrome and have changed direction several times. Unexpected costs have come up for our own home such as a new roof or HVAC system. Other times we have overspent on cars, a bathroom remodel, or vacation. Once you get good at saving money, it’s really hard to stay disciplined to not make a big purchase. It takes years to build up a decent amount of savings, and only a small moment of weakness to spend it. 

After backing out of the contract we made a firm decision to go all-in to pay off our mortgage on our personal residence. We have done really well since then to keep our focus and have made outstanding progress. As of mid-2016 our mortgage was just above $100,000 and we are sitting here at the end of 2017 approaching the $30,000 mark. A big chunk of pay down was the result of a decision we made to apply $30,000 from savings to the mortgage. I had never made such as large payment, so it was kind of surreal to take $30,000 that had taken years to save up and have it be gone to the mortgage in the blink of an eye.

Our focus remains on paying down our mortgage and once we accomplish this goal, we will move onto something different. Maybe we will take another swing at rental properties, maybe we save up money to fix up our current house, maybe we will save money and start looking for a new home in a similar price range, or maybe we will start dumping a bunch of money into retirement or index funds. Regardless, we will pick one goal and have complete focus on achieving it, whether that goal is directly related to our pursuit of financial independence or doing what is best for our family (e.g, looking for a home in a better school district).

The fear factor is a real thing as well. I’m sure if we get back into the real estate game at some point the first deal will be scary and the same doubts will creep in. However, not having to use equity from my personal residence to fund a purchase will allow us to be more accepting of the risk. More than likely, we will take advantage of loans the next time around so we only have to put up 20 percent of our own money. I know that good deals may be tougher to come by without using cash, but taking a loan will allow us to get into the real estate game quicker without risking our current home.

Our goal going into 2018 is to become completely debt free before my 37th birthday in October, and hopefully sooner. Even though financial independence is still a ways away, I am looking forward to not owing money to anyone (at least for a while).

My College Side Hustle: How I Find Great Deals at Garage Sales to Resell for Profit

 

It has been a while since I was in college. I’m in that weird age range where I’m sometimes considered an old millennial and other times a young member of generation X. I grew up in the dial-up generation where America Online (AOL) was king. My eBay account was created pre-2000 and I played online poker on sites such as Full Tilt and Party Poker. I was the in last graduating college class year before Facebook became mainstream around 2005 and my MySpace profile was all kinds of awesome (not really).

I played baseball in college, which was like a full time job. We had 6:30 am weight lifting sessions three times per week, a full day of classes, baseball practices or games, and then homework. It was a great experience that I wouldn’t trade for anything, but finding a normal college job was challenging. My parents helped pay my rent, but I was on my own for spending money. To my parent’s credit, they would have helped me more financially but I wanted to take care of myself as much as possible.

Therefore, I had to come up with a creative way to make extra spending money. The term side hustle wasn’t a common phrase back then, but that’s what I was looking to do instead of a typical job.

One way I made a extra money was by playing online poker. I wasn’t the best poker player, though was decent enough to where I made a single $30 deposit and was able to pull out a few hundred dollars every couple months without ever having to make another deposit.  I could win pretty consistently at small- and mid-sized $5 and $10 tournaments, but wasn’t good enough to play at higher stakes. I ended up making my final withdrawal the week before Full Tilt poker accounts were frozen and narrowly missed having several hundred dollars inaccessible for months or years.

My other side hustle was reselling items on eBay. This is where I made most of my side hustle money in college. I hear a lot of people talking about retail arbitrage these days. Retail arbitrage is where an individual purchases an item at a low cost, usually from a retail store, and immediately checks a site like Amazon or eBay to determine if it can be resold at a higher price. This is basically what I did on eBay, except I did this before smartphones.

My niche was garage sales and dollar stores. Since I couldn’t immediately look up an item on my smartphone, I ended up wasting a lot of money on junk from garage sales that had no resale value. These losses became less frequent as I gained experience in my specialty areas.

My successes at the dollar store involved VHS tapes and computer games (I told you this was a long time ago). My best run ever was when I stumbled upon an old computer game called Total Annihilation. The game was selling for $1 at a dollar store called DEALS and was reselling for as much as $40 on eBay. I drove to every DEALS location in Southwest Missouri and ended up purchasing about 50 copies of the game. For someone who was used to being a broke college student, I lived well the next few months. I was able to take a break from Ramen noodles and ketchup spaghetti.

Most of my dollar store and garage sale purchases were smaller wins. A lot of VHS videos purchased for $1 would resell for $8 to $10 on eBay, which was still a decent profit. At garage sales, I usually did well with items such as video games, board games, VHS/DVDs, athletic equipment, and sports memorabilia. I once came across a copy of a rare Super Nintendo game called Mega Man X3 that I purchased for $5 and resold for $200.

I will still occasionally get the family up early on a Saturday morning and go to garage sales. My wife buys books for her classroom, my three year old buys a few toys, and I keep an eye out for items that I can resell on eBay.

The eBay market is much more competitive these days. eBay fees are higher, the market is more saturated with large companies, and free shipping has almost become the standard. The margins for retail arbitrage will continue to shrink as companies wise up or more re-sellers enter the market. However, people will always have garage sales to quickly get rid of their junk. With a little experience and patience you will come across the right items to make money. Below are a few tips to make decent money by reselling items found at garage sales on eBay.

Pick a few specialty areas and get to know them well

Even in the age of smartphones, there is an advantage to picking a few specialty areas and knowing those areas really well. For example, my main specialty area was video games. I got to the point where I knew the rough price range for most any game. Sports games typically didn’t sell very well, while role playing games would usually turn a profit. Even with smartphones, having specialty areas will allow you to move quickly through garage sales and identify the items that are more valuable.

The one exception is I always pay closer attention to new or sealed items even if they are not in my specialty area. I have stumbled upon a few garage sales where unopened wedding or baby shower gifts are available for cheap. Electronics, cooking accessories, and toys in the original packaging can do really well in the resale market.

Seek out Neighborhood Garage Sales

Finding great deals at garage sales is all about volume. You need to be able to move quickly from house to house. Once you have experience, as soon as you walk up to a garage sale you’ll know if it is a dud or potential gold mine.

Going to a site like Craigslist and searching for key words such as “subdivision”, “annual”, or “neighborhood” can quickly point you in the direction of the larger sales in the area. I have found that upper middle class neighborhoods are the most profitable. Low income areas have more junk while high income areas have fewer sales as I’m assuming they donate more to charity to avoid the hassle of a garage sale.

Show up Early!

Most anything decent at a garage sale will be gone before 10 am, if not earlier. There will be others out there looking to resell items so it will be important to beat them to it. You may also be able to catch sellers the night before setting up their garage sale. Getting there the night before or too early in the morning can be disrespectful, so I tend to wait until the official starting time to show up. More aggressive garage sale veterans may disagree with my thoughts on not showing up before the official starting time.

Focus on Smaller Items for Simpler Shipping

Shipping can be a huge pain if you run a smaller operation. Now days I tend to focus on purchasing items that can fit into an large yellow envelope. For example, DVDs and  Video Games are easy to prepare and ship. Don’t get me wrong, if I come across a larger item where the potential profit margin is significant, I will buy it. However, the margin has to be worth it to go through the extra hassle of shipping a larger item. Many eBay vendors are moving to free shipping, so it will be important to keep shipping and packaging costs to a minimum. Items such as DVDs and video games are usually light enough to be shipped first class and you can package them in a basic bubble wrap envelope that can be bought in bulk.

Utilize Your Smartphone

This goes without saying, but take advantage of your smartphone when looking for items to resell. I usually have the eBay app up with the proper filters (e.g., completed items) as I browse garage sales. For new or used items with a bar code, you may be able to scan using Amazon or other apps for a quick price check. Most people don’t seem to care if you are looking up items on your phone, though I’ve found it does make the negotiation process more challenging. I also think it’s rude if you are spending too much time hovering over items searching for every little thing on your smartphone. This goes back to the point of having a specialty area that allows you to quickly identify items that you can quickly search on your smartphone. Don’t be too obvious, but also use it as a tool to keep you from making poor purchase decisions.

Make an Offer

The majority of the time garage sale hosts are willing to take less than the original price. Don’t waste your time negotiating 50 cent items down to 25 cents. However, negotiating a $20 item down to $10 can make a big difference. People also seem to be more willing to lower the price if you are purchasing multiple items. Negotiation is a great skill to have in many aspects of life, and going to garage sales is a great way to practice this skill. Also, I’m not going to lie, having my three year old with me seems to help with the negotiation process for some reason.

Conclusion

If you are in a decent sized rural or metropolitan area, I believe there are opportunities to make decent money reselling items on eBay. The market is certainly more competitive today than 15 years ago, however, people still get rid of valuable things at garage sales all the time. If I could be successful before smartphones, you certainly can with the assistance of your iPhone. Get out there and find your Mega Man X3.

If you have questions please leave a comment and I’ll respond as soon as possible.

Thanks for reading!

 

Finding a Passion for Financial Independence

Back when I was in graduate school I had someone ask me what I wanted to do with my degree upon graduation. The person who asked me this question was someone who seemed to have everything figured out. His question caught me off guard. I didn’t want to say “I don’t know”. I, too, wanted to appear that I had everything figured out. So I totally made up an answer.

I can’t remember exactly what I said, though it went something like this:

“I want to use my education to help people; to help people get out of debt.”

He looked at me and said, “Wow, I’m glad you have it all figured out, I have no idea what I want to do.” His honesty was refreshing and I felt guilty for not saying something similar instead of making something up.

Back then I hadn’t ever heard of the term financial independence. My mindset was still in the mode of ‘make money to buy more stuff’. After that discussion I started to question how it would even be possible to make money helping families get out of debt. I could get into debt consolidation or other related field, though the more I thought about it the less interesting jobs in that area sounded. I didn’t give this conversation much thought for many years, though it remained in the back of my mind.

It took my wife and I about five more years before we had an awakening of sorts to get off the financial treadmill. Even though I didn’t have any clue what I was talking about during that conversation several years back, it makes me wonder if there was something deep down that came out when I answered that question completely off guard.

I believe that we are all put on this earth with a purpose. I have come to realize in my older age that my purpose is to help people think differently about money. I want to help people see that there is a true freedom in being debt free and financially independent. I’m not exactly sure how I will end up fulfilling this purpose though something tells me in time it will become more apparent.

One of the reasons why I’m on this pilgrimage is to ‘walk the walk’ before I can ‘talk the talk’. Before being able to teach people about financial independence, I first need to experience it myself. I mean, who am I to give advice on financial independence when I’m not even financially independent myself?

In a few days I’ll be making another mortgage payment which will get my remaining debt down to about $36,500. By the end of the year I’m hoping to get the balance below $30,000 with a full payoff sometime in 2018. I’ll then be shifting my focus from aggressive saver to an aggressive investor.

Until then, I’m planning to share my random thoughts on personal finance topics on this blog. I’ve already covered such as paying off your mortgage, the Dave Ramsey program, and student loans.

I’m not sure exactly how I’ll fulfill my purpose, though something tells me it starts with this blog. Even if nothing big comes from this, it will be fun to look back on it one day and relive the journey.

When we started this journey we were on a single income, still accruing student loans, and nearly $200,000 in debt. We’ve come a long way and I can’t wait to begin the next chapter soon.

 

Is College Worth the Investment With Student Loans?

Even though it may not be the sexiest topic, student loans are a hot topic in the personal finance world today. There is a lot of discussion around the impact student loans have on millennials, the housing market, and the overall economy.

College tuition continues to rise faster than wages and inflation which can’t be sustainable long-term. Total student loan debt is more than 1.4 trillion and the average graduate leaves school with debt of $38,000, on average. Most individuals who graduate with a degree will likely be okay in the end. However, there are a lot of former students who go to school for a few years, rack up tens of thousands of dollars in debt, and end up with nothing to show for it. These are the individuals who will likely be hit the hardest when it comes time to pay back their student loan debt.

Regardless, I believe that college is absolutely still worth it as long as you are reasonably smart about it. The pay gap between college graduates and non-college graduates is significant and continues to grow.

I’ve mentioned in previous posts that my wife and I have paid off nearly $50,000 in student loans since 2011. What I haven’t mentioned is our student loan debt was all from my wife’s college experience. I know what you’re thinking, she must be one special person if I still married her with all of that debt (and she is!) 🙂

I graduated with my Bachelor’s and Master’s degree with zero college debt and had very little help from my parents along the way. I did it by working hard to find or follow scholarship opportunities while also getting a little lucky. With that being said, what I’ve learned is hard work and luck seem to go hand-in-hand. My college career took a non-conventional path that included stops at two different community colleges, transferring to a small state school for my undergrad, and then enrolling in a different state school for graduate school.

Even with some luck, I also did what many do not. Instead of having my mind set on an out of state private or big name university, I followed the opportunities that were presented. I didn’t end up at my dream school(s), but in the end I don’t think that mattered much. College is what you make of it, and you can have a great college experience at most any school with the right attitude.

What I’m also finding is the further you get away from college the less the name of the school on the diploma matters anyway. I will share my college story in more detail at some point, including how I went to school for six and a half years and barely paid a dime of tuition from academic/athletic scholarships and internships.

My wife took a more traditional route to her undergraduate degree. She briefly went to a small private university that charged a ridiculous tuition. Fortunately she transferred after her first semester to a more reasonable state school. She still ended up graduating with about $25,000 in student debt and then went back to school after deciding to get her teaching certificate which cost another $25,000. It was all still worth it as she’s been a teacher going on six years and loves it.

To reiterate, even with $50,000 in student loan debt it was still worth it because she has a job that she loves. So keep this in mind as my thoughts below are not for shaming anyone but are suggestions that should be taken into consideration when determining the cost/benefit of college.

From personal experience and years in the workforce, below are a few general thoughts I have on college and student loans.

Consider Going to Community College 

Here’s a little secret, nobody cares if you went to a community college after you graduate from a four year university. I know community college isn’t the full college experience. I know the statistics show the dropout rate is higher at two years schools compared to four year schools. And if you can afford to pay or have scholarships for a four year university as a freshman, then by all means go there. However, I’m not sure if it’s worth going into debt at the tune of 5 to 10 times the amount when in the end the name on your undergraduate diploma will be the same. Community college allows a much cheaper option to get through your first two years of college. I know that community colleges are not available in every state, though there are some states where community colleges are completely free!

The Name of Your College Doesn’t Matter as Much as you Think

Let’s get this out of the way, there definitely are schools where the name on the diploma is important depending on your field of study. Ivy League schools are incredibly expensive, though if you are smart and ambitious enough to make the cut then it may be worth taking on six figure debt. Additionally, if you are in a niche field it may also pay off to go to one of the top schools in your field. I would argue the main benefit of going to a top school isn’t education but the network you build as an alumni. It’s up to you to decide if that’s worth tens or hundreds of thousands of dollars in debt.

For the vast majority of us, the name of the school you go to doesn’t matter all that much in the long run. I wouldn’t go so far as to go to an online or non-accredited school. However, if your school is accredited then more than likely its not going to make much of a difference between a private university where tuition is $50,000 per year. The name of the school you go to may help you to get that first job, but the further you get away from college the less the school you went to matters. After five years or more hiring managers want to see experience and a history of results.  What gets people promoted mid-career is a history of achieving results and the ability to build effective relationships.

Scholarship Money is Everywhere

You may not be able to get the scholarship or grant you want at your top school. Though I’m willing to bet about anyone who works for it can get a decent scholarship or grant at a college somewhere. There are billions of dollars in federal grants left on the table every year. My brother went to college on a bowling scholarship. My wife got thousands of dollars off her tuition after her aunt wrote one short letter telling her story. You may not get those scholarships at your dream school, but you also need to consider if it’s worth passing up free money to go into tens or hundreds of thousands of dollars in debt at your favorite school.

It may take some hard work to get that scholarship or grant, but the payoff can be huge. I ended up getting a 5th year scholarship as I needed to go an extra semester to complete my undergraduate degree. I was one of the only student athletes to apply for the scholarship and ended up getting it mostly due to lack of competition. There were dozens of other students who could have benefited from the scholarship but they either didn’t proactively seek it out or didn’t put the work in to complete the application.

The Bottom Line

College is still a good investment, the name of the school usually doesn’t matter much for most of us, and if you work hard you can find scholarship or grant money.

When I look around I see way too many kids who are getting buried in student loan debt. Going the community college route, not getting stuck on expensive schools, and working hard to find scholarships can make a huge difference.

In the end, the root of the issue is the overall lack of financial literacy taught in K-12 schools, which results in kids and parents making poor financial choices when it comes to college. We need to do a better job of setting expectations with high school kids and their parents when it comes to financial literacy and student loan debt. A better understanding needs to be developed on just how much money fifty or a hundred thousand dollars really is.

The data show a college degree is usually well worth the investment over the long run even for those of us who ended up having to pay for student loans. However, if there was a way to leave college with less debt wouldn’t that lift a huge burden as you’re looking for a job, buying a house, or starting a family? Hopefully this blog post gave you a few things to think about if you or your child needs to make a decision about college soon.

 

 

 

 

 

 

 

 

Following the Dave Ramsey Plan (not really) to Financial Freedom

As mentioned in my initial post, when we started our journey in 2011 to pay down the nearly $200,000 in debt we had accumulated it started by reading several different personal finance books. One book that had a lot of influence was Dave Ramsey’s “Total Money Makeover”. This book, along with others, helped change the way we looked at money. Money was no longer for purchasing stuff, but for buying experiences and freedom.

The Dave Ramsey plan is a simplistic, and in some ways extreme, way to pay down debt. Dave caters to the masses, many of whom have little financial literacy. He is an outstanding communicator and does an excellent job getting his message across to a large audience. Overall, I love Dave Ramsey and his message and am grateful that he helped change the way that I looked at money.

Below are a few general principles that are taught by Dave. Some we follow closely and others not so much.

Follow the “Baby Steps” to Financial Freedom

If you are not familiar with Dave’s “baby steps”, you can click here for a quick overview. The baby steps have basically been our goals for the past several years. When we had seven different student loans totaling nearly $50,000 we paid them off one-by-one using the debt snowball method. Once we paid off the loans and cars, we immediately started saving for the emergency fund. Now, here we are several years later on baby step 6, so close yet so far away from getting the mortgage paid down ($38,000 remaining).

Use a Zero-based Budget to Take Control of your Finances

Budgeting is at the core of the Dave Ramsey plan. It’s such an important part that he has developed an app (Every Dollar) to make budgeting easy. Honestly, if we were better at budgeting we’d probably be out of debt right now. We’ve tried budgeting and hate it. It doesn’t work for us.

Instead, we tried to come up with a simplistic alternative to budgeting. Several years back my wife and I sat down and wrote down all of our general expenses minus entertainment and other discretionary expenses such as going out to eat. From there we agreed to a savings rate that we wanted to hit every month (this is now the money we’re using to pay down the mortgage). Therefore, as soon as we get paid, a certain amount of money goes to pay off the mortgage.

Every once in a while we have to make a lower mortgage payment or pull some money out of our fully funded emergency fund, but for the most part we pay ourselves first every month (well, technically, we pay the mortgage first every month). We then pay all of our other bills as soon as possible. Whatever is left is ours to spend on whatever we want. We had been doing this for years, and then came across the term “anti-budget” that I believe the blogger/podcaster Paula Pant came up with at affordanything.com.  Most of us don’t want to budget, so why not take a much simpler approach?

There is No Good Reason to have a Credit Card

Owning a credit card requires a certain amount of discipline. If you are someone that absolutely cannot control your spending and will be tempted to run up credit card debt, then you probably shouldn’t have one (or many). However, I can think of a few very good reasons to have a credit card.

• A strong credit rating is important. Besides the obvious uses for credit ratings such as taking out a loan, your credit rating may also be reviewed when applying for a job. Additionally, even the most passionate followers of Dave may at some point need to take out a loan (15 year mortgage, of course) to purchase a home. Your credit rating can make a huge difference in your monthly payments. In my opinion, the complete disregard for credit ratings is the most dangerous omission from Dave’s teachings.
• Have you ever tried to travel without a credit card? It is doable though can be a huge pain. I occasionally travel for work and if you use a debit card be prepared to have a large hold put on your account upon check-in. Also, it can sometimes take weeks to get reimbursed through your employer.
• The points and rewards can be a nice perk. Dave often says that nobody gets rich on hotel or airline points, though if you are responsible you can get complimentary airfare and hotel rooms. I know there are studies about the psychological aspect of spending more when you have access to credit cards, but if used responsibly I have a hard time passing up free airfare and hotel rooms.

Married Couples Should have Combined Checking Accounts

I get the logic behind this one, but also come from the approach of “if it ain’t broke, don’t fix it”. My wife and I are both pretty independent individuals. I don’t want to be worrying about every $5 cup of coffee or the occasional expensive clothing purchase. As long as she’s not using credit to buy those things, then I think a certain amount of financial independence is perfectly fine within a marriage. My wife and I have been married for more than seven years and have yet to have had a fight over finances. It’s a non issue for us, so why change things up? We talk about finances (me much more than her) and are aligned on our goals. We have ground rules in place such as not accumulating credit card debt that can’t be paid off at the end of the month. We discuss any larger purchases of roughly $250 or more. And the anti-budget approach gives us both some money that we can spend on our own each month without being tied to a budget or asking permission from each other.

Giving is One of the Most Important and Rewarding Aspects

I could not agree more with this statement. Even as we are paying down debt we make a point to give a certain amount of our income to charitable causes. The amount we give now isn’t as high as we’d like, and we plan to at least double our contributions as soon as we reach baby step 7. There are so many worthwhile causes to give to in the world and I can’t wait to be able to give more. There is little in life that is more fulfilling than helping a person or cause genuinely in need. One of the reasons I am passionate about pursing financial freedom is not to be able to quit a job but to be able to give more. Baby Step 7 is all about turning from aggressively paying down debt to investing and giving, and I am very excited about both.

To Summarize… 

I love the overall concepts that Dave teaches. It just so happens that I’ve highlighted a few things that we have done differently in the pursuit of financial freedom. Personal finance is a little like dieting or working out. There is so much conflicting and restrictive information out there that it can be paralyzing. If you have some level of financial literacy and discipline you should be able to take the Dave Ramsey plan and make it your own.

 

 

 

Should we pay off our mortgage?

The path to financial freedom can be challenging. Our story is not one of those “I paid off $200,000 in debt in two years” kind of story. I am envious of people who have the discipline to pay off large amount of debt in a short period of time. However, for most of us the reality is that life and temptations sometimes get in the way of our goals.

For example, when the transmission went out in my 2005 Pontiac Grand Prix I could have worked hard to find a decent vehicle for much less than I paid for my newish car. I ended up getting a 2013 Hyundai Sonata for about $16,000. Even though we were in debt payoff mode, we took out a loan to finance the purchase. This just goes to show how easy it is to stray from the path. We ended up paying off the loan in about a year, but it definitely set us back.

Then there was the rental property we almost purchased in 2016. Once we became debt free besides the mortgage, we turned our focus to buying rental property. We actually had a house under contract though ended up backing out after the inspection. In hindsight the inspection wasn’t that bad and the deal overall was pretty good. However, two things spooked me. The first, was we were planning to fund the purchase and repairs on the rental house with a home equity line of credit (HELOC). The plan was to purchase with the HELOC (to take advance of the benefits of being a cash buyer) then refinance into a traditional mortgage. Not a bad strategy overall, though the thought of something going wrong with the rental and impacting our personal residence scared me. Additionally, I planned to work with a partner on the deal and there were a few red flags that were coming up regarding this individual. In the end, even though I probably missed out on a good deal I think the correct decision was made to pull out.

After the rental house deal fell through we decided to buckle down and throw everything we could at the mortgage. We have loosely followed the Dave Ramsey plan throughout our pilgrimage. I’ll admit, if we followed his plan more strictly, we’d probably be out of debt already. However, we don’t do great with restrictive plans so there’s also the possibility that we would have burned out and be in a worse place today than if we would have followed the plan exactly.

I’ll use a future blog post to provide additional detail around the aspects of the Dave Ramsey plan that we followed and the aspects we haven’t. For this post, I thought I’d discuss one of the more controversial aspects which is baby step 6. Baby step 6 in the Dave Ramsey plan is to pay off your personal home mortgage. I’ll admit that I’ve struggled with the right decision here at times, hence the pursuit of a rental property purchase without the mortgage on our personal residence being paid off.

The argument against paying off the mortgage, especially in our low interest rate environment, is that your money may be better spent investing elsewhere. For example, the interest rate on our personal residence is 4 percent and we could potentially take the additional payments we’re making on the mortgage and invest it in stocks, rental property, or a business that generates a return higher than 4 percent. If our situation was different and I was early in my career with a large mortgage, we may have been more inclined to try to build up passive streams of income to cover the cost of our mortgage.  There are also tax benefits for having a mortgage for those of us who itemize deductions. I’m sure there are other arguments though these are the ones that I seem to hear the most.

The argument for paying off the mortgage is in a lot of ways more behavioral than fundamental. What I mean by this is the peace of mind of not owing anyone a dime of debt can provide the freedom to make certain decisions that you may not otherwise be able to make when you are in debt. For example, if you don’t have any debt and work a job you hate, you may be able to move to a job that pays less and is more fulfilling. There is also the argument that paying off the mortgage is basically a guaranteed 4 percent return on your investment. There is nowhere in the market place where you can get a 4 percent return on investment with little to no risk.

Last year (2016) we took a step back and thought through all of the pros and cons of continuing on with the Ramsey Plan through baby step 6, or to shift our focus to other investment options. We decided that we were going to get laser focused on getting the mortgage paid off for a few reasons.

The first is that we felt we had a realistic chance of paying the mortgage off within a relatively short period of time (2 to 3 years) if we really focused and started making aggressive payments. Since we have paid down the rest of our other debt and have done a decent job preventing lifestyle creep despite making more money today than in 2011 when we started our pilgrimage, this was a realistic option. I know this is not an option for everyone, though the steps we’ve taken to pay down student loans, car payments, and other debt has given us this flexibility. With my wife working full time for the last few years and me being fortunate enough to receive a few promotions at work, we were well positioned to take on this challenge. If we were in a higher cost of living area and we didn’t think it would be realistic to pay off the mortgage in a short period of time, I would potentially reconsider as I wouldn’t want to hold off on investing in passive streams of income for too long.

The second is from experience it can be really easy to use money that you plan for investments in other large purchases. For example, looking back a big reason why I ended up purchasing a $16,000 vehicle instead of something decent for $5,000 or $6,000 was because we had built up a decent amount of savings that we planned to use for investments. Well, instead of investments it ended up just going into the purchase of a better vehicle. On paper, this was a foolish decision given our goals. However, we are human and fell into the temptation of a nicer car. Whenever I hear someone say that its silly to pay off the mortgage early because of being able to get higher returns elsewhere or to take advantage of the tax benefits, I also question where that additional money is really going. For those of you more disciplined than me, it may very well be going to investments that generate a higher than 4 percent return and provide passive streams of income. However, my guess is that for most of us its going to lifestyle inflation, nicer cars, home remodeling, etc.

Keep in mind that baby step 4 of the Dave Ramsey plan is to invest 15 percent in retirement accounts, which we are doing. So even though we aren’t investing in real estate or stocks outside of our work retirement accounts, we have been making contributions at least up to the company match since starting at our jobs. I just don’t want people to think that we are completely ignoring investing opportunities as we are paying down the mortgage.

We are currently making quadruple payments on the home mortgage. By sticking to this approach, we should have the house paid off by next summer. We have an aggressive goal to get it paid off by March 2018 when baby number two is due. I’m not exactly sure where the money will come from, though its not a bad thing to set stretch goals.

Thanks for reading!

 

 

The Pilgrimage

Pilgrimage: journey, especially a long one, made to some sacred place as an act of  religious devotion

So let’s break this down. Anyone who has pursued financial freedom knows that it’s more than a trip or adventure. There is no easy path (unless you are a trust fund baby) and the vast majority of us have a huge upward climb to get there. The math can be relatively easy for individuals who make an average to above average wage. The hard part is resisting the temptations that are in front of us every day. Even harder is sticking with something for a long period of time and delaying gratification. It is all of these things, and that’s part of the reason why I landed on the term pilgrimage for this blog.

The pursuit of financial freedom is definitely a journey, and for most of us a long one. Once you get there I’ve been told it most certainly is a sacred place. The act of religious devotion part is debatable, though if I thought long enough about it I’m sure I could come up with something intelligent. There are more references to money in the bible than just about anything in life, so while the purpose of this blog is absolutely not to worship money, I do believe that money can allow us to lead a more purposeful life regardless if our calling is of religious devotion or not.

Our financial pilgrimage started back in 2011. And here we are today still on the journey six years later.

Our journey has been filled with ups and downs. Good decisions and questionable decisions. Happiness and frustration.

I’ve read all of the books. It all started back in 2011 reading books such as Dave Ramsey’s Total Money Makeover and Robert Kiyosaki’s Rich Dad, Poor Dad. Both piqued my interest, though I was left at a crossroads of deciding to payoff my debt or aggressively starting to purchase assets.

Our situation in 2011 was not as dire as many people in the United States. We had a six figure mortgage, about $50,000 in student loans, two modest car payments, and a few other small loans. All together, my wife and I were in debt about $200,000. My wife had quit her job a few years before to pursue a career in teaching, which meant two more years of student loans. That also meant we were living on one income until she reached her goal and found a teaching job in September 2012.

Given our situation we were at a crossroads. Do we continue down the path of debt like most of the people we know? I was approaching the age of 30, my wife a few years younger. Looking around my friends and family were starting to drive nicer cars, buy bigger houses, and take nicer trips. I had a good job, so we should enjoy all of those things as well, right?

Then we started having issues with our house. Both of our showers were leaking into the outdated basement. We didn’t have much in savings so had to go to the Bank for a home equity loan to make repairs on our home. More debt…

Somewhere during that process we realized that wasn’t the life we wanted to live. Working hard to buy more stuff, to impress other people that we didn’t care much about, all while being indebted, did not sound like our idea of the life we worked hard to achieve. Thankfully we came to this realization when we were only $200,000 in debt.

Today is November 6, 2017 and we are close to paying off all of our debt. The student loans, cars, and other small loans are all paid off. We have also been working hard to pay off the mortgage, which has just under $40,000 remaining. Paying down the mortgage during the past few years has been by far the biggest challenge. There are no small victories along the way like when a student loan or car payment is paid off. It’s just one massive loan that seemingly takes forever to chip away at.

I’m starting this blog to share our story. To share the ups and downs over the past six years. To share satisfaction and struggles with paying off debt. To share my unique views on financial literacy and financial freedom which is a combination of many of the great people that I’ve learned from through books, podcasts, and conversations. And hopefully soon, to bring you all along on our journey as we transition from aggressively paying down loans to aggressively investing in pursuit of financial freedom.

I know too many people in their late 20s and 30s who make really good money, but choose to go deep into debt to buy nice cars, big homes, and expensive vacations. They work jobs that are unfulfilling, yet are stuck because quitting means not being able to pay back their lenders. That is who I hope for my audience to be for this blog. The people who are middle to upper middle class where reaching financial freedom can be a realistic goal. Back in 2011 I stopped thinking about money and debt as a way to purchase stuff. I started thinking about how to use money to achieve a more purposeful life.

As for me, I just turned 36 years old and am married with a three year old boy and another baby on the way. My wife and I are both born and raised in St. Louis, MO.