Welcome to the first post in my Financial Independence Update series! If you don’t know what the purpose of this series is, please read this first. This being the first post in the series, I will cover the entire first half of 2018, so it might be a longer one. Every post after this will cover one month, with the next post covering July.
I want to follow this particular format in these posts:
- Main Goal(s). This will talk about my main financial goal(s) that I set out for the particular time period.
- Ups and Downs. This will be a general reflection of what went well, what did not go well, and some improvements I am looking to make.
- Financial Picture. This is not a net worth update. In this section, I will talk about how I deployed my cash in a way that improved my financial situation and why I did it the way that I did.
- Looking Forward. In this last section, I will talk about what I plan on doing going forward. This can include how I plan on deploying cash, any changes in my strategy, or any significant expected changes in my financial situation in general.
Primary Goal: Cash For Investments
Before the start of 2018, my wife and I sat down together to discuss our financial picture and goals for 2018. Having just paid for our entire wedding in cash, it was clear what our main goal should be: build up a significant cash portfolio. The purpose of this cash would be to purchase real estate in the Columbus, OH area. I am a firm believer in the power of rental property as a means to financial independence.
Secondary Goal: Tax Advantaged Retirement Accounts
The goal was to max out retirement accounts to reap the tax benefits. Currently, my wife and I each have a 401(k) through our respective employers. We also opened up Traditional IRAs and planned to max those out.
Tertiary Goal: Debt Reduction
The only debts that we carried at the start of 2018 were two low interest auto loans (2.99% and 3.69% interest via Lightstream) and student loans (all below 5% interest). We figured that making the minimum payments made the most sense since we could earn higher returns by investing in rentals.
Ups and Downs
The first half of this year had plenty of ups and downs. While progress towards financial independence exceeded my expectations, I found myself reversing the order of my goals.
A couple of months ago, I started to become fearful of my local real estate market. Houses were staying on the market for a bit longer than usual, price reductions were a bit more common, and interest rates were on the rise. I felt like the local housing market was approaching a peak and was hesitant to enter.
I was holding onto the most cash I have ever had. My strict budgets were being stuck to, and I achieved a savings rate of over 50%. Over the course of 6 months, this caused my net worth to increase by around $45,000. This increase is largely due to my savings rate.
The first half of the year also saw significant debt pay-down. Within the first 6 months, $42,000 of debt was eliminated. Additionally, all auto loans were paid off in these first 6 months. The only debt I hold onto now are student loans.
In terms of investing, I was contributing to my 401(k) and maxing my employer’s stock purchase plan (ESPP).
Towards the beginning of June, my wife and I decided to become more risk averse. Given the changes in the local real estate market, we decided to take the stockpile of cash we accumulated and pay down debt. With that, we left ourselves with a dismal cash position. In additional, we decided that we want to prioritize debt pay-down over investing.
I would usually not consider paying down debt to be a “negative” on the road to financial independence. The reasons I consider it to be a negative here is are following:
- Low interest rates. With the auto loans having low interest rates, this money should have been invested. Mathematically, this move did not make sense – it was a psychological move.
- Not enough cash. Using almost all of our cash on hand to pay down our debts, we left ourselves with almost no cash. I am not too concerned with this since we have a high savings rate.
- Not maxing out tax advantaged accounts. Again, mathematically this does not make sense. This was a psychological move that was intentionally made to accelerate debt pay-down.
All in all, this first half exceeded expectations. The positives far outweighed the negatives.
To recap the ups and downs section with actual numbers, here is how my financial picture changed from January 1 to June 30 of this year. Keep in mind that these numbers are tracking changes, not the current values.
- Net Worth: Increased by $45,622
- Assets: Increased by $2,697
- Debt: Decreased by $42,925
The first half of this year has been a financial blessing. Hard work and discipline has significantly improved my financial picture and brought me one step closer to financial independence. Although, what good is reflection without analysis and improvements?
Looking forward, we are going to continue to make debt pay-down a priority. We are willing to sacrifice higher returns for peace of mind. In July, we are planning on making another significant payment on student loan debt. From there, we will enroll in auto pay and use the majority of our leftover funds every month to pay down this debt.
In terms of investing, there will be no change. Contributing the minimum to my 401(k) makes financial sense to get the “free money” (employer match). I will also continue investing in my ESPP because the discount is too good to pass up.
Finally, in terms of budgeting, the wife and I have decided to loosen up a bit. We are on the fast track to FI, but feel like we could spend a bit more money on ourselves. Stay tuned for the July update to see just how these budget changes worked out!
I really hope this has given you a bit of a glimpse into my financial independence journey. As stated earlier, I want to use this to show you how I am going about it in real time. Using this, I hope you feel inspired to continue or even begin your own journey. Let me know in the comments!