If you want to make God laugh, tell him about your plans. – Woody Allen
In my previous post, I mentioned my goal of achieving financial independence (FI) by 2025, but I truly believe that, ultimately, my plans are in God’s hands. With that being said, I also believe that if we are good stewards of the things that God has given us, he will cause us to prosper.
Today, I’m going to discuss my personal strategy and the current state of affairs in our household.
Goal: To achieve FI by 2025. So how much exactly do I need to save? It’s different for everyone, but it will depend a lot on spending habits. Mr. Money Mustache provides a good guideline which I mostly agree with: If you can save 25 times your annual spending and have it working for you, that should be enough to live off forever, assuming you have no debt. Using this formula and assuming spending of about $3,000/month or $36,000/yr, we would need about $900,000 saved up and working for us. I set a goal to have a net worth of $1M by 2025 and also set a goal to pay off the mortgage by 2020.
Income: My wife and I both work in fields related to what we studied in college. My wife has a Masters in Information Systems, and I have a Bachelors in Chemical Engineering. We have an income that makes our goal challenging yet attainable even while living in NoVA.
Housing: Our housing expense is relatively low compared to our income, so it is easier for us to pay extra towards the principal each month. We are currently in the first year of a 7/1 ARM at 3.25%. As a realtor, I would never recommend an ARM to any of my buyer clients as they would bear the risk of much higher rates after the 7th year, but my goal is to pay off
most or all of the mortgage within 7 years or to move before the 7 years is up by 2020. A 7/1 ARM is an adjustable rate mortgage that has a fixed rate for the first 7 years and can adjust every year thereafter. It is amortized over 30 years, but of course, you can always pay it off early, which is what we are trying to do. Currently, we have a little under 180k left to go.
Cars: This tends to be another major expense for most American households. We own a 2012 Toyota Prius and a 2015 Subaru Outback, and both were bought new and were paid off relatively quickly. Buying new cars was a luxury for us. I know it slowed us down in reaching our goal, but what’s done is done. I was willing to pay a premium for safe, reliable transportation. I hope to keep these cars for at least another 10 years. Completely avoiding car payments during this time will help us reach our goal.
Childcare: This is a large expense for us. We have a nanny who lives with us and watches our son for 4 days, from Monday to Thursday each week. The total monthly expense is about $1400-$1500/month. Since my wife and I are both working, there’s not too much we can do here right now in terms of reducing the cost.
Giving: I believe the most important budget item for our family is giving. Dave Ramsey’s final lesson in Financial Peace University about giving changed my life. It’s called The Great Misunderstanding. He explains what the point of getting out of debt and building wealth really should be from a Christian perspective. He explains how we are asset managers for the Lord, and giving makes us more spiritually mature and less selfish, which in turn makes us more likely to prosper in relationships and in wealth. Giving has the power to change people’s lives. We regularly give to our church, missionaries overseas, and local charities as well as any other needs we see.
Food: Eating out is an area we struggle with. We used to go out to eat almost every day, and we still eat out more often than we would like to. When we meet with friends, we usually meet at a restaurant and share a meal together or meet at someone’s house and eat restaurant-bought food. I believe there is value in spending time developing relationships, so in most cases, I believe it’s money well spent. As we are tracking our spending this month, we are making an effort to at least cut back on spending on ourselves by buying groceries and cooking at home more often. We noticed that it is MUCH less convenient preparing food, cooking it, and cleaning up afterward, but it does save a LOT of money. Convenience is expensive.
Entertainment: We don’t have to worry about this as much. With a 1 year old, we don’t have as much opportunity to go out and spend money. However, once in a while, we pay our live-in nanny to watch our son in the evening, and we may go out to watch a movie or have a dinner date.
Stuff: We have A LOT of stuff. We are trying to be more intentional about what we buy and what we keep. We try to donate clothes often and give away items that we don’t use anymore. I sell a bunch of stuff on craigslist, and I sell books on half.com.
Savings: We are currently putting away about 15% of
each of our incomes my wife’s income into retirement plus her employer match and maxing out my TSP. Most FIers and early retirement gurus emphasize saving and investing closer to 50% of your income or more. This is an area we will need to quickly ramp up.
Here’s what I think we’ll need to focus on to achieve our goal:
- finding additional streams of income
- putting as much as we can afford towards our mortgage
- once the mortgage is paid off, invest as much as we can
This is my personal strategy for my family. Of course, everyone’s strategy will differ depending on income, debt levels, expenditures, and goals.