Spring Cleaning vs. Spring Spending

Good morning! When I previously tried to write this article, my finger slipped and hit the publish button while in the beginning stages of my first draft. It’s definitely not a best-case-scenario for any writer. Lol. This time around, I’m hoping the final draft is what ends up in your Inbox. Thank you for reading… again!

Spring Cleaning is a phrase we’re all familiar with. Some families take it to the extreme … scrubbing every wall, every bit of exposed tile grout, and even the front sidewalk. Others use Spring Cleaning to motivate themselves to get rid of excess by de-cluttering every room. And then, there are the Spring Cleaners who take this time of year to organize, organize, organize by color-sorting bins in the pantry or clothes in the closet, separating mini craft items into jars, and making the laundry room more accessible. Quite possibly, your family does all OR none of the above during this season of sunshine and renewal.

However, there’s one thing that every family likely has in common during the Spring season: an increase in spending. Data shows that this time of year is HUGE for retailers. Unfortunately, I don’t need research to prove this trend to me because I’ve noticed the spending binge in my own household. I’m definitely not alone; this article and associated charts clearly illustrate the significant Spring spending increase across the country. The Wall Street Journal has also predicted a further increase in spending this year, leading into summer.

So, how does a family that’s eager to take advantage of the better weather and longer days minimize this Springtime splurge?

Take Inventory as You Clean

Taking inventory comes up often in my articles… because it works. Just as tracking every dollar helps you save money and tracking calories helps you lose weight, taking inventory reduces your tendency to collect unnecessary items while out running errands. It’s your hedge against impulse purchases. Imagine yourself walking into Target. Do you gravitate toward the dollar spot right away? If so, being hyper-aware of how many coloring books, floral-covered journals, blue tooth headsets, and tiny vases you already own will hopefully make the idea of picking up another one, even if it only costs $3 or $5, cause you to groan rather than grab.

Make a “Needs” and “Wants” List with a Specific Budget

As you clean and organize each room, make a list of your family’s needs and wants. Maybe you’ll recognize that you need to replenish your supply of shampoo and soap while scrubbing the bathroom. Maybe you’ll notice you’re out of cinnamon and baking soda as you re-organize your spice cabinet. Maybe it’ll dawn on you that your kid’s mattress is nearing its 8-year expiration date. Write these items down on a “Needs” list and estimate what they’ll cost you. Then, do the same with “Wants” in each room, such as a new set of bath mats, an upgraded blender, or a neutral set of sheets to cover that new mattress. Based on your monthly budget, assign an amount you’re willing to spend on these Wants. Keep your lists with you, and then when out shopping, stock up on the Needs and vow only to buy the Wants if a current sale puts them within your set budget. You might even jot down in which month you should buy the Want items based on the best time to buy.

Redecorate as You Clean

Make Spring cleaning a lot more fun and interesting by redecorating your home with the items you find tucked away in cabinets, closets, and even your holiday bins. You could also make use of the crafting and paint supplies you uncover to update and/or create your own home decor. Involving yourself in a project, especially if you get to repurpose your own possessions, can give you a true sense of pride and accomplishment, while also salvaging the cash in your wallet.

Sell, Sell, Sell

Sometimes, a Spring shopping spree is just what the doctor ordered. It’s fun! You get out to see what the stores are offering and come home with new things to refresh your space and your spirit. Even the most frugal folks can identify with that! However, if you don’t want to sacrifice your savings rate by splurging on Spring goodies, unload your stuff in a big sale first. As you de-clutter, separate your items into categories, such as adult and kids’ clothing, kitchenware, sports equipment, tools, toys, baby items, linens, etc. Then, identify the best options for selling the items in each category depending on where those items will garner the most traffic and the highest prices. For example, if you have designer clothing items in good condition, try selling through Poshmark. If you have unique collectibles, eBay might be your best option. If you’ve accumulated dozens of products that you’ve never opened, an Amazon shop could give you the highest return. Tools and kitchen items will likely receive a decent amount of interest on your neighborhood Facebook page or Nextdoor site.

But if you have a large variety of items that span multiple categories, a well-advertised, old-school garage sale will earn you hundreds, if not thousands, of dollars to put toward that shopping spree. I just recommend that you pay yourself a percentage (to go toward investing/savings) at the same rate you save from your monthly income (10-25%) before you hit the stores.

I hope this beautiful time of year gets you out and about enjoying the changes this season brings, not just into the stores taking advantage of the advertised sales. However, if you do find yourself drawn to your favorite retailers, let us know what tricks you use to spare yourself from falling into the Spring spending trap.

Too Much Cash: A Good Problem to Have

The pandemic of 2020 has had many unexpected effects on everyone’s finances. One way or another, I’m guessing your financial life has changed since March of 2020.

Unfortunately, many people lost their jobs, their businesses, and their ability to pay their rent or mortgages. It’s been devastating to hear these stories. Thankfully, there’s been relief over the last year in the form of higher and extended unemployment benefits, moratoriums on evictions and foreclosures, stimulus money from the government in the mail, and help from several charitable organizations. I know there are many people still struggling, for whom I pray and have added more in our personal giving budget to go toward.

For many others, though, this past year has allowed them to reassess their spending habits and make major changes toward saving. It’s allowed many to sell their homes for significant profits and/or finance a home with unprecedented low interest rates. Additionally, after its initial fall, the stock market has left many people with realized gains far beyond what they’d imagined.

Because of these significant changes in 2020 that have carried over into 2021, many Americans are finding themselves with a really good problem to have: too much cash and what to do with all of it. Most personal finance experts believe that keeping extra cash under your mattress or sitting in a simple checking/savings account for a long period of time is equivalent to losing on an investment or burning a percentage of that cash in your fire place.

Due to inflation, your dollars today will be worth significantly less than in the future … and I’m not talking about the distant future. According to the rule of 72, at an average 3% rate of inflation, your cash today will be worth HALF its value in 24 years (72/3 = 24). So, if that money you have lying around isn’t making you more money (at a rate greater than inflation), it’s essentially making you less money. Therefore, you need a plan for that cash.

If you’ve unexpectedly found yourself in this position of holding onto money in excess of your emergency fund (or specifically saving for a large purchase), it’s time to figure out where to put it. My husband and I are in this boat with you, so I’ve done a bit of research to determine our best options for what to do with that surplus in the bank account…

Invest in Index Funds

We have seen over 20% returns in the past couple years on our VTSAX (Vanguard index fund) investment. In addition to our monthly contributions, we often invest our family budget surpluses in this index fund through our joint brokerage account (after our ROTH IRAs have been maxed out). This might be the easiest way to invest, and it’s truly passive. But we still have a large cash cushion that we haven’t dumped into an index fund because we’d prefer to diversify and …

Buy Real Estate

I’m not going to lie to you. Buying real estate in this hot 2021 market is TOUGH. We’ve lost out on 5 deals in one town over the past 3 months. However, we’re determined to keep trying, so we have a significant amount of cash set aside to meet our goal of closing on 3 doors this year. Now that we’re already nearing the end of the first quarter of this year and entering the really busy real estate season, though, we recognize that 3 doors might be a pipe dream. So, maybe we can remain involved in real estate if we …

Become a Hard Money Lender

A return of 7-12% sounds pretty promising. This is what most private money lenders charge investors for doing a financing deal without using a bank or typical lender. The hard/private money lender is responsible for vetting the investor he/she is lending to, doing the underwriting, setting the terms of the contract, providing a large lump sum, and chasing the money if it’s not all paid according to contracted terms. So, although private money lending is considered passive income, it still requires quite a bit of work upfront and the possibility of following up afterward if terms are not met. This option still sounds good to us, and we may move forward with the steps to get started soon, but we’ve also thought that another way to diversify our portfolio might be to…

Back a Business

We know of several businesses who have struggled during the 2020 shut-downs, but the ones that have stayed afloat have incredible ideas for reaching more customers and expanding their online presence. They have the plans, infrastructure, staff, and products, but they may not have the funding. With a loan from a local independent investor, like ourselves, they can hit the ground running and pay a contractually-agreed-upon return on our investment when their business plan pans out. This may be one of the riskier ways to invest our cash surplus, so we’ve also considered that we could …

Turn a Fun Purchase into an Income-Producing Asset

Our family often talks about owning an RV for extended road trips or a temporary homeschooling adventure. However, we will not make a large purchase like this without a plan to rent it out when we’re not using it. We could either park the RV on land and rent it out via Air BnB or we could offer our super cool ride to friends and friends of friends at a reasonable rate so they could experience their own road tripping adventures.

Here are a few other ideas to turn a personal purchase into an investment:

  • If you’re buying a heavy-duty truck for work, hunting, or family use, consider renting it out to others to haul items or complete their own home projects.
  • If you’re buying a cool woodworking tool to build furniture or make unique decor as a hobby, consider offering the tool up for a fee to people nearby to prepare for their own projects. (Or sell extras of your creations.)
  • If you’re buying a fancy snow cone or cotton candy maker for a party, use it in the future to sell goodies at local festivals or near the neighborhood pool (with a permit).
  • If you’ve decided to splurge on a commercial-grade carpet cleaner after too many pet and toddler accidents, rent it out to neighbors for a lower fee than what the stores charge. Make your own non-toxic cleaners to go with it as well.

(For each of these ideas, check with your insurance agent regarding coverage/liability before renting out your assets.)

Sometimes, the idea of someone else using an item that’s special can leave us a little unsure, so another option is to …

Invest in Self-Growth

A great way to spend extra cash is to develop more skills that allow for greater income potential in the future. This might include going back to school, taking unique online adult courses, or paying a mentor to teach how to advance in a specific career. These are exciting options and definitely worthwhile if you know you’ll put the skills learned to use right away. My husband and I would love to learn more about renovating an historic home and doing a remodel mostly ourselves. However, we’re quite overwhelmed with raising four kids and keeping up with our current schedules, so this may not be our best choice currently.

There is one investment option, though, that we’ve both agreed is the best for personal growth, community improvement, and living out truths we take seriously, which is to…

Give Generously

I recently heard an amazing sermon by Mike Todd of Transformation Church. He speaks eloquently and passionately about being a purpose-chaser rather than a paper(money)-chaser. He said in his sermon, “God doesn’t have a problem with paper; he just wants priority!“ Our opportunities, finances, and blessings are the fruit after we’ve given His purposes priority.

Most believe that it’s better to give than to receive, and many also believe that true rewards (whether they be money or something even more valuable) only come after you’ve given from your heart. Therefore, this may be the best use of a cash surplus.

There are dozens of other ways to invest your extra cash, and because personal finance is truly personal, each person will likely have a different idea that resonates with him/her. The main thing to remember, though, is that while it’s a huge accomplishment to have saved a large sum of money, you don’t want it sitting around losing value for too long. Every dollar needs a job, and hopefully your surplus can provide more value to you in the future.

9 Easy Steps to Buying an Index Fund

I’ve been asked several times, “How do I get started in investing?” Usually, my response includes several follow-up questions, such as, “What are your investing goals? What’s your risk tolerance? How much money do you have to invest? Have you started first with your employer’s 401K? Do you have debt? An emergency fund?” and so on. There can be dozens of factors to consider.

Then, I recently came to realize that many of my friends were simply asking how to take the steps to open an investment account and contribute to it. Most had already decided that they wanted to invest a certain amount in the stock market but didn’t know how to actually start a new account (outside of 401K investing). Hopefully, the 9 steps below can be helpful to those who are looking for a literal answer to that initial question.

The guide in this post is specific to opening a Vanguard account because it’s the brokerage firm we use, but the process is likely the same or similar for other firms/banks.

Why do we choose Vanguard? We consider it to be the leader in low-cost index fund investing. After all, John Bogle, the founder of Vanguard, was also the inventor of index funds. Vanguard makes investing easy and has several options for mutual and index fund investing. If you’re more interested in trading stocks, options, and ETFs than taking the simple path to wealth, those trades are commission-free. Vanguard also has great customer service, including agents who will answer even the most amateurish questions and will gladly walk you through every step if you get stuck while navigating the website. For all of these reasons, my husband and I have both our ROTH IRA’s, as well as a joint brokerage account, with Vanguard.

Other highly-recommended brokers include Charles Schwabb and Fidelity, which also carry a wide variety of funds and low fees for many of them. (We have investment accounts in both of these brokerages and a few others due to past employer offerings, but we are slowly transferring balances on accounts with higher fees to Vanguard. We’d like to consolidate and reduce fees as much as possible.)

If you’re ready to purchase index funds, here’s your guide on how to do it in 9 steps or less:

1. Have your bank account info available, including routing number.

2. Go to Vanguard.com and select the Personal Investors page.

3. Click on “Open an Account”, then select “Start Your New Account”.

4. Follow the prompts and answer the questions on subsequent pages.

5. Determine the type of account(s) you want to open based on tax advantages, income limits, and contribution maximums.

  • The max contribution for an IRA each year is $6,000 for under age 50 & $7,000 for over age 50.
  • Simple rule of thumb: Traditional IRA‘s give you a tax deduction now, but you will pay taxes on the withdrawals in retirement. ROTH IRA‘s require contributions from earned income and do not give you a tax deduction now. But they allow your money to grow tax-free and allow you to withdraw the earnings tax-free in retirement. Also, you can withdraw ROTH IRA contributions (not earnings) before age 59 1/2 after owning the account for 5 years. (So, if you contribute the max for 5 years, you can withdraw the $30,000 penalty-free as soon as that 5 years ends, but you can keep your interest earnings in the account.)
  • Brokerage Accounts, also called Taxable Accounts, General Investing Accounts, or Non-Retirement Accounts, have no contribution maximums, no income limitations, and also no tax benefits on the interest you earn or the sale of funds. You are subject to taxes on all of it the year you receive the money. These can be joint or solely owned.
  • The other available options are investment accounts for children or small business owners. More on those in a later post.
Types of investment accounts

6. Provide personal and banking info.

7. Complete required paperwork and send it in.

This may take several days for a response.

8. IMPORTANT: When you receive confirmation of funding via email, go back into your Vanguard account to select funds to invest in.

Index funds are recommended very often in the Financial Independence Community. VTSAX is one of the most common ones and allows you to be invested in ALL 500 companies of the S&P 500. Read more about index funds here. Index funds track almost identically over time, so don’t stress too much about which one you choose.

Keep in mind that an index fund is a 100% stock investment. If you’d like to limit your risk a bit and balance out your portfolio, you can invest in a bond index as well, which pays monthly dividends. (We reinvest ours.) Many investors believe that the closer you are to retirement age, the higher percentage of bonds you should hold in your portfolio to minimize risk. (Reminder – lower risk usually means lower return.)

If you’re still not sure how your investment portfolio should be balanced, Vanguard can walk you through a risk assessment quiz to determine asset allocation for your target portfolio before you choose your investment funds. You can also view how different portfolios have performed over the last 94 years.

9. Buy!

Follow the prompts to buy the funds you’ve decided to invest in. You’ll select the desired fund(s), choose the dollar amount you want to invest, and designate where you want the money to come from (likely the bank account you uploaded).

If, at any point, you’re stuck or not sure what step to take next, open a live chat with an agent, read FAQ’S in the margin, or call Vanguard customer service.

Voila! You’re invested in the stock market! Hopefully you’ll watch your money work for you! My husband and I have seen 30%+ returns in the last couple years. These gains are unusual as we’re still in a bull market. Fluctuations are to be expected, but because we plan to keep our money in these funds for over 10 years, we feel good about riding the waves.

For a more in-depth guide to getting started with Vanguard, go here.

Everything written in this blog is based on personal experience. It is not professional advice and should not be taken as such. Personal finance is personal, and decisions should be made based on analysis of individual situations, as well as risk tolerance and financial position. 

Should I Add My Children As Authorized Users to Build Their Credit Scores?

Something popped up in my Instagram feed that led to a chain reaction this morning. I saw this post on @female.in.finance and took a screen-shot right away.

It seemed like a great idea, but I needed to analyze whether there were potential negative consequences and if it was worthwhile to add my children at their current ages (13, 10, 5, and 3). I’m willing to “play the credit score game” to help my children build credit by the time they enter adulthood but not at the expense of my own credit. So, the research began.

After posting this idea to two personal-finance Facebook groups, there were more questions than answers, but there were also several young adults who said that their parents utilized this strategy when they were teenagers, resulting in a credit score of 800+ for most of them by the time they were 18.

I then called the customer service numbers on both of the credit cards I carry. One is a Southwest Airlines card through Chase Bank, and the other is a Hilton Honors card through American Express. I notified the representative that I’m considering adding my children as authorized users on the card and had a few questions. The table below shows the questions I asked, as well as the answers from each bank.

Questions to Ask Before Adding an Authorized User

QuestionChase AnswerAMEX Answer
How many authorized users can I add?UnlimitedUnlimited
What is the age minimum?None13
Can I set a credit limit or spending limit?Same credit limit as primary ownerCan set spending limit (min $200) – some charges do not apply to spending limit, such as gas station charges
Is a credit inquiry required for responsible party or user to add them?No, SS # not even requiredNo, but SS# required for reporting purposes
What information is reported to credit bureaus?Payment history is reported ONLY for responsible party, not authorized user (Child will just be listed as “authorized user” on account)All payments history will be reported to credit bureaus on both responsible party and authorized users. Authorized users are considered “active”.
Will there be an additional annual fee?NoNo
Are there additional benefits for adding an authorized user?Not at this timeFor some cards, there is a promo offered to accrue additional bonus points after reaching sending amount on additional card. But it’s not currently available on this account.

Here is some additional information for Discover card users as well:

Authorized users for Discover Card
Minimum age: 15. Reported to credit bureaus on authorized user’s behalf: yes. Max # of authorized users: 5

Conclusion

Adding a child can be beneficial to his or her credit IF:

  • The primary responsible party (parent) is fiscally responsible with his/her credit card account by making payments on time, limiting debt accrual, and using credit cards responsibly (only paying for items for which you have the cash to back them up).
  • The primary responsible party has a credit limit of a few thousand dollars or more.
  • The credit card company actually reports payments made under the authorized user’s name/social security number.
  • The child learns key aspects of financial literacy and understands the pro’s and con’s of credit card use before having access to the actual card.
  • The account is monitored regularly, checking for fraudulent charges and ensuring that all payments are made on time. (Don’t just open an account, leave the card in a drawer, and never check the statements.)

Potential Problems:

  • If the account is not monitored or paid on time, this could hinder the child’s credit score, rather than help it.
  • Having excellent credit at a young age could allow for someone to qualify for credit or a loan that he/she is not personally or financially ready for. A child needs to be taught the fundamentals before applying for any loans, credit cards, or housing on his/her own.
  • If a child has access to the credit card or its number, he/she may rack up charges not approved by the parents, and the primary responsible party is liable for those charges.

What I Decided to Do

I added my 13 year old to my American Express card as an active authorized user. I set the spending limit to $200, and I denied access to cash from the card. I confirmed that it would not have an effect on my credit by going through the process of adding her as a user, as there would be no credit inquiries or credit checks to make this addition. She will not have access to the physical card until she has a job of her own and has been taught responsible use of the card.

If you’re looking for the right card for yourself and/or your family members, check out this post on Choosing the Right Card.

I would love to hear your stories related to this decision as well. Did it help or hinder you when your parents used this tactic? Have you done it for your own children? Why or why not?

I found that opening up this conversation in Facebook groups this morning led to multiple opinions and mostly positive reports of how parents helped their children in this way. I’m hopeful it’ll lead to positive results for our family as well.

Fuel your FIRE

Financial Freedom in 2021! Take Action: Day 30

Wow! We made it to Day 30! I calculated that I’ve written (and you’ve read) over 25,000 words in the last month. That’s enough words to fill 1/3 of a novel, and all of them were about saving money and investing for the purposes of financial freedom.

But why?

In my post titled, What Does Financial Freedom Mean to You?, I summarized what motivated me to jump on board with the FIRE movement:

“Financial freedom allows the ability to let go

of maintaining a specific image; of an addiction to other people’s lives; of the shackles of material goods; of the restrictions placed on me by others; of saying ‘yes’ when I want to say ‘no’; of saying ‘no’ when I want to say ‘yes’; of negative relationships; of working to achieve someone else’s dream.

It provides the option to linger

with a baby in my arms; in bed all morning with my husband; on the floor in my kids’ playroom as they set up a tea party; at church after service or maybe on a Wednesday; on a restaurant patio with a friend; at a beautiful beach all day; in my sister’s living room catching up on a favorite TV show; at my mom’s house sipping coffee; at my children’s favorite museum; on the hiking trail or in the river at a state park.

It affords the privilege of indecisiveness

on whether to build a forever home, buy an investment property… or both; on whether to volunteer in local church ministries, start the business I’ve always dreamed of… or both; on whether to do travel homeschooling, keep my kids in public school… or both; on learning to play golf, participating in an over-40 soccer league… or both; on whether to write a book, start or podcast… or both.

It commands the responsibility to give

financial literacy lessons to my children; personal finance advice to the young and old; donations to charitable organizations; more time to important projects; opportunities to the underprivileged so that they can break the cycle of poverty; gifts to my church; more of me to those I love.”

It’s this final paragraph that makes the FIRE movement especially appealing, not just for myself, but for the entire community too. I recently heard that while others might see an individual’s push toward financial independence and early retirement as a selfish, greedy move, the truth is that most people in the community want to use their freedom for greater good.

Those who’ve reached FIRE write blogs to help others improve their money situations. They host podcasts and share the best tips available. They write books to make investing easier. They teach classes for free to the under-privileged, under-educated, and under-represented. They run fix-it clinics, start buy-nothing sites, and inspire minimalist movements. FIRE people don’t keep this to themselves; they share what they know and encourage others to make the best use of their money as well.

Consider the type of people who truly subscribe to the Financial Independence Retire Early life. These people are often intelligent, motivated, educated, persistent, goal-driven, risk-tolerant, and innovative. When people with these qualities are freed from the daily grind, their talents can then be put toward philanthropy and changing the world we live in.

Take action today on Day 30 by determining what fuels your FIRE and decide what good you could do in the world if earning a regular paycheck was no longer a top priority.

Thank you so much for going on this 30-day journey of action steps toward financial freedom with me! I truly hope it’s been helpful and that you’d be willing to share these tips with others.

I invite you to subscribe to this blog and follow Frugal_with_Four on Instagram. I’m looking forward to sharing so much more on living this frugal yet wonderful life with you.

Thanks for reading!!

You Get What You Give: Budget for Giving

Financial Freedom in 2021! Take Action: Day 23

We make a living by what we get. We make a life by what we give.

– Winston Churchill

Everyone knows that it’s better to give than to receive. Most people have aspirations to be charitable and sacrificial in their giving, but many times, a lack of funds gets in the way. When prioritizing saving, investing, tuition, insurance, and the other necessities of life, charitable giving often gets bumped out of the budget. So, how can giving become a priority as well?

Quotes about Giving and Generosity for Kids - InspireMyKids
15 Inspiring Quotes About Giving | SUCCESS

Start Small

If you find that it’s hard to include giving as a part of your budget, then start with a very small amount and make a plan to increase it each month. If you start with $10 in January by cutting out one lunch at the local deli and then increase it by $10 each month by eliminating one small thing from your spending, you will be able to give $120 in December to a charity or needy family around the holidays.

Include Giving in Your Annual Budget

In Take Action, Day 4, it was recommended that you create an annual budget before allotting the remaining balance to your monthly spending. Include Giving (as a percentage of your net income) in your annual budget. If you have a church or specific charity that you give to regularly, automate those payments during your budget planning.

Give Time

If you want to give sacrificially, but the money just isn’t available, give your skills, talents, and time. Set goals for how much time you’d like to volunteer each month and then plan to increase that each month. Consider offering a solution to an expensive problem a charity, religious organization, or neighbors in need may have, such as legal advice, building/home repairs, lawn service, or web design.

Support Local Business without Spending Frivolously

Share their posts. Take a picture in front of their shops and tag them on social media. On a small business day in Facebook groups, choose one friend’s business or a local restaurant to give a testimonial about each week. Offer your advice or skills to help their business grow.

Give Thoughtful (Yet Affordable) Gifts

Find ways to give thoughtful gifts to friends and family without spending much (or any) money. Shop your own home first for items you’ve bought and rarely or never used. Write out a thoughtful note and invite them to do an outdoor activity with you. Drop off food. Re-gift a gift card. Make a fun goody bag with snacks and small items. Get creative and DIY something. For more ideas, check out these meaningful gifts.

To take action today, make a list of skills or services you could offer to a church or charitable organization. Set a goal for the financial contributions you’d you’d like to make by the end of 2021 and to which organizations. Also, find a box and label it “Gifts for Others”. As you do spring cleaning, receive gifts you’ll likely not use, or find unbelievable deals on small, useful items, add them to the box. Then, when it’s time to get a gift for an upcoming birthday or special celebration, you’ll have an easy (and free) place to shop.

Cover Your Ass-ets: Choose the Right Insurance Coverage

Financial Freedom in 2021! Take Action: Day 22

Let’s talk insurance. No one wants to pay for it, but no one wants to live without it either. All the hard work we’ve put into planning ahead for the betterment of our family could be completely wiped out with one disaster, diagnosis, disability, or death. This is why having an emergency fund as well as the right amount and right types of insurance are so important.

Life Insurance

Choosing the right type and amount of life insurance can be very tricky. Those who sell it have gotten creative in marketing the different types, not only as insurance but also as an investment. I prefer to look at insurance for what it actually is: protection of my assets. It is separate from my investments.

When doing an assessment of life insurance, a good question to ask is, “If I die, will a loved one need my income replaced to be able to survive or will a loved one need to pay another to take on my familial duties?” If you are a working parent or spouse, and your family depends on your income, life insurance is a must. If you are a stay at home parent, and your family depends on the work that you do at home, then life insurance is also a must. (The working parent would need to pay a caregiver to take on your responsibilities.)

I’ve heard that a good rule of thumb for deciding on the amount of life insurance to buy is to double your annual expenses, and then add a -0-. So, if you’re able to live on $50,000/year, double that and add a -0-. That would equate to a $1,000,000 policy.

Life insurance plans offered by employers may not provide enough coverage for your family. It is likely that a supplemental plan will be required to reach the benefit amounts mentioned above.

There are also many other considerations regarding which type of life insurance is the best choice. When in doubt, many personal finance experts recommend sticking with term insurance. Keep in mind that you only need to carry life insurance until you no longer have people dependent on your income and/or until you’ve reached a level of wealth allowing you to self-insure.

With all this being said, we know that any dollar amount will not take away the extreme emotional loss of a family member. Life insurance can also allow for some peace of mind and money for grief support during such a devastating time for a family.

Health Insurance

It’s outrageous, I know! We spend $15,800 per year on premiums to cover our family… and that’s on a high deductible group healthcare plan. If we had chosen the lower deductible plan, we’d be out an additional $2,000. We’re covered through my husband’s employer, but what we pay on premiums each month is nearly what I net from my part time job. But because our family’s health is an incredible asset, we pay to protect it.

I’d prefer to pay a lot less to protect this asset, but we haven’t found a way to qualify for less costly options. If anyone has any advice in this area, I’m all ears!

However, if you meet certain income qualifications, there are great options on the health insurance marketplace (healthcare.gov). Unfortunately, open enrollment has closed for the year, but if you have experienced a life-changing event, such as marriage, having a baby, or losing your job, you can still purchase a plan, hopefully with significant discounts.I am probably not the best person to be offering advice in this area because we spend an arm and a leg on this type of insurance, but I do believe that keeping an up-to-date health profile on your family can help you determine which plan is the best choice for you. If you rarely go to the doctor and each family member has good health overall, you can opt for the higher deductible plan and save a few thousand dollars per year. My husband and I have to reassess each year which plan might be best due to the health issues our family is currently facing. A couple years ago, we calculated that we spent well over $23,000 on premiums and medical care due to a baby with asthma and a new Crohn’s diagnosis for our eldest child. Thankfully, we have been able to get both conditions under control, so we are able to go back to the less expensive, higher deductible plan. So, be sure to review the options offered by your employer each year rather than just renewing what you’ve always had.

One more tip – be sure to look into whether you’re eligible for an HSA. This is one of the best ways that you can get a little bit further ahead in investing for retirement.

Disability Insurance

As mentioned in the post, Take Action: Day 1, your ability to earn an income is one of your greatest assets, and you buy insurance protects assets. Therefore, it would make sense to cover yourself in case of disability.

According to statistics, you have a 1 in 4 chance of becoming disabled during your working career. Employer benefits usually only pay 40-60% of salary, on which you still have to pay taxes and high insurance premiums. These policies are often short-term, meaning that you’d have to apply for government assistance after that term ends, and Social Security disability claims often take years to process and to be awarded. (Minimum time is 3 months for processing claim and then many end up in court.)

Many people choose to supplement their company disability coverage with another plan to cover at least half of their annual income (or the amount NOT covered by the company plan benefit).

Homeowner’s/Renter’s Insurance

Here we are with another asset that needs protection: your home and/or rental property. Thankfully, you can really shop around to find discounts and opt for higher deductible plans to lower your premiums. I’d recommend using a broker who can shop around for you.

Car Insurance

Again, you can find a broker to shop around for you and get you the maximum discounts. Consider a higher deductible, less comprehensive coverage for older vehicles, and reduced rates for safe driver record, career/company affiliations, and bundled insurance packages.

Umbrella Insurance

This is pretty much insurance for your insurance. Yep, that’s a thing. Also called Liability Insurance, it’s a relatively affordable way to protect you from the “extras” that your insurance policy may not cover, including lawsuits for additional damages.

This list of types of insurance includes all of the ones highly recommended. There are many other types not mentioned here that may protect some of your personal or professional assets.

However, some insurance options I tend to steer clear of are:

  • Rental Car Coverage: My own car insurance and travel credit cards have sufficient coverage.
  • Mortgage Life Insurance: This is life insurance for the purposes of paying off your mortgage if you die. Instead of paying for a rider or additional policy, just make sure you have adequate life insurance coverage as mentioned above.
  • Identity Theft Insurance: Keep tabs on your accounts and set security alerts for each of your cards and accounts to protect yourself without buying an insurance policy.
  • Credit Card Payment Protection: Your disability or life insurance policies should help to cover credit card payments in case of an emergency. Also, don’t forget that emergency fund you’ve had saved up.
  • Long-Term Care: This one is a toughie! I’m currently of the mindset that my husband and I will be able to self-insure for future long-term care (think assisted living or nursing home), but I have been debating buying a policy for my father. Long-term care insurance is often recommended for people who have too much money to qualify for Medicaid (which is only used toward nursing home care) yet not enough money to pay all expenses out of pocket. And the expenses are HIGH! I’m honestly still on the fence about what to do, but for now, we’re considering other investment options to accumulate cash toward long-term care if/when it becomes necessary.
  • Travel Insurance: With the current liberal cancellation policies for airfare and hotel stays, it’s not necessary. When cancellation policies are a bit stricter, I take each trip case by case. More expensive travel or further-away destinations sometimes warrant a travel insurance policy, especially when kids are involved. The risk of illness goes up when traveling with a large family.

Today’s action step is to review your insurance plans and policies. Consider whether you really need each policy you have or if you need to add more. Determine whether you have adequate coverage based on your family’s financial situation. Then, shop around for the best rates

Consider Real Estate Investing

Financial Freedom in 2021! Take Action: Day 21

Don’t wait to buy real estate, buy real estate and wait.

– T. Harv Eker

My husband and I just started our real estate investing journey by closing on our first rental property last year. We decided that because we were starting late in life on maxing out our retirement accounts, we needed to add real estate investing to help us reach FI a little faster. I read, researched, and studied several free resources, such as the Bigger Pockets Podcast and books from the library, for almost a year before we purchased our first (non-primary) residence.

It was not a quick process, and finding our second deal in today’s competitive market is proving to take longer than we had planned as well. We’re determined to add two more properties to our portfolio this year, but we’d rather pass on several good deals than buy one bad one. So, we’ll continue to follow Gary Keller’s advice in The Millionaire Real Estate Investor: “Persistent Effort, Patient Money”.

Although we’ve decided to slowly start with buying rental properties, there are many additional options and opportunities in real estate investing. It can be as easy as selecting a fund through your online broker or putting a couple hundred dollars into a pre-vetted deal on a crowdsourcing website like Fundrise.

Today’s action step is to read about these 5 ways to get started in real estate investing. Determine whether any of these are worth adding to your overall investment portfolio and retirement plan. If so, make a list of resources to dig a little deeper into your preferred method. I highly recommend the book and podcast linked above.

Know Your FI Number

Financial Freedom in 2021! Take Action: Day 19

Whether you plan to retire early or work until the Lord takes you home, it’s helpful to know the magic number you’re aiming toward to no longer be dependent on a regular paycheck to pay your bills and live a full life. Your FI (Financial Independence) number is the amount of net worth you need to support you for the rest of your life moving forward.

The breakthrough Trinity Study published by three professors from Trinity University in 1998 determined a safe withdrawal rate* from stock portfolios despite the fluctuations of the market, and the conclusions they made have had a huge impact on retirement planning. Their research produced the “4% Rule” mentioned in yesterday’s post. What this means is that if you can estimate your annual expenses for when you plan to retire (or when you’re hoping to reach that state of financial freedom), you can multiply that yearly amount by 25. This is a simple way to calculate your FI number.

Here’s an analysis of how I’ve calculated my family’s FI number:

  • Anticipated Retire Early Date: January 1, 2030
  • Family Status (at that time): 2 children graduated from high school, 2 still in grade school
  • Potential Side Income: Real estate investing (monthly cash flow)
  • Estimated Annual Expenses: $70,000
  • Expenses Remaining after Side Income: $70,000 – (10 homes * $3600 cash flow) = $34,000
  • Required Net Worth: $34,000 * 25 = $850,000
  • FI Number (with RE investing): $850,000 … almost there!
  • FI Number (without RE investing): $1.75 million … NOT almost there!

There are so many variables, right? But that’s ok. The analysis is the the fun part. It’s a game to see how low you can get your expenses by paying off debts and cutting unnecessary spending. There are also so many ways to earn a passive income to offset your anticipated annual expenses and decrease your FI number; real estate is just one of them. What’s important is that you continue to keep track of your expenses and net worth with intentionality. If you do that, chances are that you’ll reach FI much sooner than planned.

In the example above, I conservatively estimated owning 10 doors in our real estate portfolio at $300/month cash flow, but our goal is to own 20, and maybe our average cash flow will be even higher than that. If so, we may be able to cover ALL of our anticipated expenses through those investments. We may also downsize our home with fewer children living with us or we may decide to do traveling homeschool, which will decrease our living expenses, and therefore, our overall annual expenses.

The point is that things will change; the future is unknown. The good news is that you now have a framework and an easy way to calculate your FI number even as income, expenses, and investments change.

Another aspect to consider is that many believe that the safe withdrawal rate is now higher than 4% and closer to 7%. This would significantly reduce how much you’d need in your nest egg. At a safe withdrawal rate of 7%, our FI Number (without real estate investing) drops to $994,000!

Today’s action step is to calculate your FI number. It’s ok if you have a few different scenarios with a few different outcomes. Just doing the calculation will give you a ballpark to aim for and get you in the habit of doing the math as things change. There are FIRE calculators online that you can use to find your FI number while taking into consideration your side hustles, higher or lower withdrawal and return rates, as well as anticipated expenses. So… what’s your number?

*The safe withdrawal rate (SWR) method calculates how much a retiree can draw annually from their accumulated assets without running out of money prior to death.

Financial Literacy: Talk the Talk

Financial Freedom in 2021! Stay on Track: Day 18

There are a lot of vocabulary and buzz words associated with personal finance, and the lingo can sometimes shy people away from engaging in money conversations or asking important questions about their investments and debts.

The next few days will be focused on investing strategies. Here is a *short* list of basic key words related to investing so you can be ITK:

  • 401K – A qualified plan established by employers to which eligible employees may make a salary deferral. Always invest up to at least the company match percentage. It’s free money!
  • 529 – Tax-advantaged savings vehicle designed to save for the future costs of higher education. It can be used for the education of any family member, even yourself.
  • Annual Percentage Yield (APY) – The real rate of return earned on an investment, taking into account the effect of compounding interest.
  • Bond – A debt instrument where the issuer (borrower) promises to pay back the lender (bond purchaser) at a specific rate over a certain amount of time.
  • Capital Gain (Loss) – The amount of money made (lost) between the purchase and sale of some investment.
  • Certificate of Deposit (CD) – A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate, and can be issued in any denomination.
  • Diversification – A risk management technique that mixes a wide variety of investments within a portfolio.
  • Dividend – Sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves).
  • Inflation – A rise in the general or average price level of all the goods and services produced in an economy. (Average is 3% annually.) This is why not investing is riskier than investing, according to many experts.
  • Investment or Brokerage Firms – A business whose main responsibility is to be an intermediary that puts buyers and sellers together in order to facilitate a transaction. Brokerage companies are compensated via commission.
  • Index Fund – A mutual fund with a compilation of assets constructed to match the performance of a specific market index, such as the S&P 500.
  • IRA (Traditional) – An account in which an individual may set aside earned income in a tax-deferred savings plan for his or her retirement.
  • Mutual Fund – An investment fund that pools together investors’ money to purchase a diverse portfolio of holdings. These funds are actively managed.
  • Opportunity Costs – Real or potential costs associated with missed opportunities based on choices made.
  • Roth IRA – An individual retirement plan that bears many similarities to the traditional IRA, but contributions are not tax deductible and qualified distributions are tax free.
  • Rule of 72 – A method used in finance to quickly estimate the doubling or halving time through compound interest or inflation, respectively. For example, using the rule of 72, an investor who invests $1,000 at an interest rate of 4% per year, will double their money in approximately 18 years.

Many of the definitions above came from https://financeintheclassroom.org/student/vocabulary.shtml. Another fabulous resource that goes more in depth is this glossary of terms.

In addition to the terms above, the following buzz phrases might come up during your personal finance journey:

  • 4% Rule – States that you can withdraw 4% of your portfolio each year in retirement and not run out of money. It was created using historical data on stock and bond returns over a 50-year period.
  • Financial Freedom – Control over finances instead of them having control over you.
  • FIRE Movement – Acronym standing for Financial Independence Retire Early. Committed participants strive for a >50% savings rate, diverse investment portfolios, and retiring much earlier than expected, often in their 30s.
  • Savings Rate – Measurement of the amount of money, expressed as a percentage, that someone deducts from their income to set aside as a nest egg or for retirement. Calculate yours here.

Today’s action step is to look up any additional terms related to finance or investing that you’ve heard but never fully understood. Also, calculate your savings rate and then answer the question, “What would financial freedom mean to me and my family?”