Psst – Before I start today’s post I want to let you know that I have an awesome guest post over at Millennial Boss, all about managing stress and resentment as the female breadwinner. Stop by and check it out!
Money details. Something that’s commonly discussed in the personal finance blogosphere, but almost never in real life. Why are people so interested in what other peoples money situation looks like? Specifically because money is the last taboo. We don’t talk about how much we earn. We don’t talk about how much we save. And we certainly don’t talk about our net worth.
Except online, and usually only if we’re anonymous. Usually if someone’s not anonymous they go more with ranges or percentages, and not with dollar amounts. And that’s cool. The way I see it, the more real information out there, the better. Not so you can compare yourself against someone else – that’s not the point (and that’s why I don’t talk savings rate). But so you can see how someone else out there tracks and analyzes their money.
There’s a lot of information out there about the “right” way to do things. The right way to look at your net worth. The right way to track your budget. But the only real right way is one that works for you. If you love spreadsheets, awesome! Want something more automated and on auto-pilot, grab an app! It’s about what works, not some theoretical perfect way to do things.
That’s actually what I love the most about finding the personal finance blogging community. It’s full of real people, talking about the real ways they handle money. One way might resonate with you and change your life. Hopefully, I can be that person for someone.
So here’s an in-depth look into how I analyze my financial picture. A warning, this article is long. But it’s chock full of good information, graphs, and spreadsheets. A personal finance nerds dream come true, I know.
Although I’ve worked my entire career in corporate IT, I was an accounting undergrad and have an MBA. I’ve thought very serious about becoming a CPA or CFP but ultimately couldn’t make the financial sacrifice to step out of IT in order to do so. As the breadwinner (and now sole income earner) the needs of my family come before the things that I want. So instead, this and the blog are how I indulge the part of me that loves all things finance.
Money Goals – What I’m Striving For
The first step in any good financial plan is all about getting to know your ultimate goals and dreams. This isn’t just about the dollars you need, but why you’re looking to achieve your goals. Collecting money for the sake of just watching zeros pile up in your account won’t bring you happiness. Having a goal in mind-what you’re ultimately doing all of this for-is key.
I’ve talked before a bit about my quarterly net worth process, so I won’t go into the details here about how I come up with the numbers. But I will share the breakdown of how I analyze how I’m progressing towards my goals.
I have three primary goals I’m working towards, in this order:
- Pay off my mortgage
- Save for my three boys college
- Achieve financial independence (FI)
Why this order? The goals feed off one another. Paying off my mortgage frees up quite a bit of monthly cash flow, both making it easier to achieve goal #2 and making it so I need less in total for goal #3. My FI number would be quite a bit higher if my savings and investments needed to cover a mortgage payment in addition to living expenses. As someone who put myself through college, I want to help my boys go to a good school, while also not spending all my money on college. After all, colleges don’t give you aid if you don’t feel like saving. And once those goals are set I can focus on goal #3, ultimate financial freedom.
Unlike many bloggers, I do not currently have a specific FI number. I realize it’s going to take several years, at least, to reach goals #1 and #2. In several years, a lot can change. Inflation can rage out of control-or deflation can come upon us. The market could crash or continue its amazing bull run of the past nearly-ten years. Health insurance costs could continue to skyrocket, be brought under control, or we could have a single-payer health care system. It’s all totally unknown. So until I’m much closer to my goal timeframe, I won’t have a specific dollar amount. I do have a current amount in mind based on the 4% safe withdrawal rate, but I know that’s subject to significant change over time.
I don’t just look at the bottom line number. No, instead I look at the bottom line number, various subtotals, and breakdowns of my investment mix.
College Savings In Depth Analysis
For example, here’s a few different ways I look at my kids college funds.
My oldest son, only four years away from starting college and eight years from finishing, is about half of the total college funds I’ve saved so far. My ten year old isn’t too far behind, with about 40% of the pie. The little guy, at two years old, is sitting at around ten percent. This is obviously because the years they will start/end college are different. I’m going to need more in four years for my 14 year old high school freshman, while I still have sixteen years left until the two year old starts college.
When it comes to saving for college, if this is a goal of yours, start early/save often has to be your mantra. Even very small amounts each month over time will add up significantly if invested over eighteen years. Your kids will toss away those toys, stop playing with those games, and outgrow their fancy clothes – but a gift of college savings will stay with them. Trust me. My 14 year old remembers exactly zero of the things he received as gifts the first five years of his life. Even since that time, there are only a few things that stand out as having withstood the test of time. But he’ll certainly remember needing to pay back student loans. Think of that before someone purchases you (or you buy!) an adorable expensive baby outfit that they’ll outgrow in two months.
What else do I look at? How about the investment type mix.
One note, individual stocks are not actually zero, but they round down to zero. My oldest son has one share of Nintendo, and my middle one share of Disney. I use these one shares in companies they know to teach them how stocks work with a company they understand and are interested in. I’ll write a post about that sometime.
You can see the bulk of the funds are in 529 plans, followed by savings bonds and then stock funds. Savings accounts are just a small fraction of the total. When investing for a long-term goal, having funds in stocks is the way to go. But as you approach the goal, you need to ramp down the volatility with a more stable investment mix-like savings bonds.
What does my actual college plan look like? Well I need a certain total by the time my kids end college in order to meet my end of the college compact. Here’s the progress I’m making towards those goals right now.
In total I’m about 62% done with my oldest, 50% with my middle, and 12% for my youngest. My goal for this year was to try to get to 70% for oldest, 50% middle, and 20% for youngest. So I have some ground to make up for oldest/youngest, but my middle son is set for the year.
Also, remember that you don’t have to have every dollar in their funds at the moment school starts. Those payments will be spread over four years. Since I already have enough to cover the first few years, I could cash flow the rest during college if I wanted to. But because I have the three boys, I prefer to finish up the oldest as fast as possible, then let his ride while tackling the younger ones.
How have their funds tracked over time? Take a look at the last ten years.
My middle son was born in 2007, and the little guy in 2015. You can see what happened to their college funds during The Great Recession. Basically, nothing. They went down as fast as (or faster than) I could put money in them. The bull market tear has done a lot for it, though. My ultimate goal with each of my boys is to fund four years at our flagship state school. Extra funds not used will be disbursed in accordance with the college compact.
Mortgage In Depth Analysis
The mortgage is much, much simpler to analyze. Why? Because there are only two numbers to consider. How much is left on my mortgage; and how much I have saved in my mortgage payoff fund.
Why do I have a separate fund rather than paying off the mortgage early every month? It’s a security thing. Remember, I’m the family breadwinner and sole income earner. If I pre-pay the mortgage, I can’t get that money back out of the house if I were to lose my job or suddenly need to take a drop in income. So instead, I squirrel the money away into a mortgage payoff fund and wait until it hits an amount equal to the remaining balance of my mortgage. Once it does, I will send a single large payoff amount to the mortgage company. I want to have this done in five years, but my secret stretch goal is before I turn 40 – in December 2019. I’m sure you’ll keep this secret, right internet?
What does this look like now? Lets see.
Here’s the answers to a few common questions I see around the internet, and how I personally address them. I have also attempted to pre-answer your criticism of my plan, so you don’t have to ask in the comments. Of course, if you have criticisms that I didn’t pre-answer, go ahead and leave them. I’m all for healthy discussion/debate.
- Question: How do you figure out how much your home is worth?
- Answer: I don’t. This is the purchase price when I bought the home 11 years ago. I used to use Zillow but the value went up and down waaaaay too much. So I use purchase price to value my home instead. I could ask a realtor for a real appraisal, but I’m not selling anytime soon and frankly I don’t have time for that.
- Question: Why is your house so expensive (if you’re from the South/Midwest) / so cheap (if you’re from Boston/NYC/California)?
- Answer: I live in the suburbs of Connecticut, the land of high taxes and expensive homes. We’re not CA-level expensive, but we’re much more expensive than most of the country. Plus I bought right as the housing bubble was cresting. This was great for selling my condo-not so great for buying a home.
Starting Mortgage/Current Balance
- Questions: When did you get this mortgage? What type is it? Is this your first mortgage?
- Answers: This is a 15 year mortgage opened in July 2013. I purchased the home back in 2006 with a 30 year mortgage, and once before refinanced when rates dropped. This 15 year is at 2.75%, and the principal drops with each payment are astounding.
- Question: Wow, how did you get $90k in equity by 2013 if you bought the house in 2006? I thought that your husband lost his job and nearly died during that time.
- Answer: The bulk of this came from the sale of my condo, where I made a $65k profit in a mere five years. I bought the condo three months after I turned 20, right at the bottom of the last real estate crash and before the real estate bubble. I sold it in 2006 and bought this house. The rest of the reduction came from paying the mortgage every month for seven years before we got to the 15 year mortgage.
- Question: Wait a minute. Back up to that last answer. You mean that it took you seven years to pay down $25k, but in the four years since you refinanced, you’ve paid it down by $65k????
- Answer: Yes. This is the power of a 15 year mortgage that no mortgage broker or salesperson will ever tell you about. We have never sent in an additional principal payment (because I hate my mortgage company. Plus that job loss thing). And look what happens
- Question: Isn’t it stupid to have a 15 year mortgage? Couldn’t you just get a 30 and pay it like a 15?
- Answer: No. It doesn’t work like that. Short answer is that a 30 year, with its higher interest, amortization schedule, and longer term, can never be paid the same way a 15 year can. See this article for more.
- Question: Where do you keep your payoff fund?
- Answer: In a high-yielding savings account.
- Question: Isn’t that earning hardly any interest? Shouldn’t you put it in something else
- Answer: Yes, this is true. However, since this is a short term, 3-5 year goal, there aren’t many completely safe options. I would rather sacrifice some growth and achieve security here. I have other investments fully invested into the market, which balances this out.
- Question: Isn’t it a really stupid idea to pay off a 15 year mortgage at 2.75%? That’s almost free money! Shouldn’t you just arbitrage the interest rate and earn more investing? After all, stocks are returning like gangbusters?
- Answer: Now, come on. CMO is anything but stupid. I’ve carefully weighed my goals, dreams, and the pros/cons of this specific approach. Given my bread-winning and sole income earning status, college goals, and desire to achieve financial independence by my 40’s, getting rid of this thing once and for all (and soon) is what makes sense for us.
- But you know what? It doesn’t need to be your goal. We can have different goals. That’s OK. That’s the personal part of personal finance.
- Question: Shouldn’t you sell your home and move into a tiny house?
- Answer: With three kids? No, thank you.
In Depth Total Net Worth Analysis
As I mentioned, I break my net worth analysis into a few major categories. They are:
- Retirement funds
- Investment funds
- Cash and Cash Equivalents
- College savings
- Home equity
How does this one break down? Lets see.
The bulk, 54%, of my net worth is tied up in retirement funds of various types. Home equity, cash and cash equivalents, and college savings are roughly equal. Non-retirement investments are a smaller portion overall.
Oh, and you’ll notice there’s no mention of debt. I have none outside the mortgage.
Progress Over Time
I thought this would be a fun thing to share. As I’ve mentioned before, I’ve been seeking financial independence for 20 years now – ever since I was a teenager reading The Wealthy Barber in the library (plus of course the other books that changed my financial life). I’ve had multiple net worth spreadsheets over those years, and unfortunately I’ve lost the earliest ones I did starting around the year 2000.
BUT fortunately the one I do have goes back to 2007. Yes, you read that correctly. I have an entire decade of net worth statements to see financial progress over the years. Are you skeptical about compound interest really working? Think that it sounds good in theory but real peoples money just doesn’t work like that? Then take a look at this.
That’s right. I started with $X back in 20017, and today my net worth is six times that amount. You’ll notice that it took six years to get from X to 2X – from 2007 through 2013. This was the time of the Great Recession. If you take a very close look, you will see the total net worth unchanged the first two years of that time. Why? Because the markets were going down so fast and furiously that the money I was putting into my investments was barely enough to keep pace.
Even though the market crashed significantly during this time, my net worth doubled in five years. Then to double again and get to 4X, it was only three more years. Today I’m sitting at six X, so it looks like it will double again pretty soon if the market keeps it up.
That, ladies and gentlemen, is the power of time and money compounded.
So Whats Next?
Investing and financial independence is a marathon, not a sprint. Sometimes I see younger folks get excited about FI and RE, and then get frustrated at their “slow” progress. If you’re expecting a get-rich-quick scheme or a way to retire in five years, this isn’t the right blog (although there are other great ones that cover that). Given my rough start and everything that’s happened, and the fact that I have a family of five I’m supporting on one income, I must be more of a “slow and steady wins the race” type of person.
So I’ll just keep on plugging away, going through every quarter to tally up what’s happened and analyze it. I’ll see if I’m on track toward my goals and adjust as needed. And I’ll keep modifying my FI number based on what’s going on in the world, and my life. Life throws you many unexpected twists and turns, knocks you down and knocks you around – but you just have to keep on going and keep marching toward what you want to achieve.
So I want to know (and if you’ve read this long, thanks!), what do you think of this style of financial analysis? Do you have any other questions I didn’t address? Let me know in the comments.
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19 thoughts on “Peeking Behind The Financial Curtain: CMO Talks Money Details”
Wow–so much fun to peek behind the curtain and see some of the details of your goals. I actually just linked to your college compact article in my post today. I think it’s a great idea for parents and helps put some parameters around the hows, how muches, and whys, of saving for college. I am jealous of your 2.75% interest rate! Ours is a full point higher than that. But I agree; I love our 15-year mortgage and how fast our principal goes down with each month’s payment. I understand why you keep your mortgage payoff in cash. When you’re ready to pay it off, will you be able to transfer it all to your mortgage company? That will be hard having so much in cash and then not. I think I’d have a hard time with the emotional ramifications–but then again, you’ll have a paid-off house!
I know, that 2.75% rate was a bargain! I’ll be able to mail a certified check to the mortgage company once I have the payoff amount ready. You’re right, it will probably be hard to have so much cash and then not. But I’ll still have an emergency fund, and I can see just how fast cash builds up when I don’t have a mortgage payment (thanks to that mistake I made a few weeks ago, no mortgage payment until the end of November). And by having the separate account, if I change my mind and want to invest it instead, I can. I know I’m much more risk averse than many people, and it’s a direct result of my husbands illnesses. I’ve seen the worst that can happen, and can say for certain that a paid off house would have taken a huge amount of stress off that situation. Thanks again for linking to the college compact, it’s one of my favorite articles!
Great post. I love the graphs. I paid my house off in my mid forties. Having $0 debt will feel awesome.
Yes I’m looking forward to it! I’d love to enter my 40s with a paid for house.
Hi Liz, great post! I like the line you’re walking between revealing too much information and too little information. One idea that you have here is the FI multiple plot. Very cool! In that one plot you did exactly what everyone else does with their networth plots but without actually saying what you make 🙂 Great idea!
A quick question about your college funds. How did you estimate how much college would cost when they get there? It seems wildly unpredictable.
Also, have you thought about using your Roth for college savings? It looks to me that 529 plans are often limited in their fund choices. Roths on the other hand have lots of choices and it looks like you can withdraw for education. I believe it doesn’t have to be your education either. Of course you can always hire your 14 year old to make some money helping with CMO and thus let him have his own Roth too.
I would never use a ROTH for education. The 529 plans have very good options (especially vanguards) and the ROTH space is better used for my own retirement. I also wouldn’t encourage my kids to use a ROTH for education. It’s much better left to compound for long periods of time, not the very short time horizon of college. I actually have a post coming up about how I’m planning to get my kids started saving for retirement, once they have jobs.
For college, I actually target the current cost of attending the target college and adjust it every year with the cost of attendance. That’s why my goal is so specific, so as the cost changes I can adjust my goal accordingly.
That’s a great approach. I think I’ll be borrowing it :).
Like you I love the 15-year mortgage. I was always a fan of the 30-year with extra payments, then I ran the numbers. The 2.75% interest rate we have too also helps. 🙂 Great progress, Liz!
Isn’t the 2.75% rate the best? And the 15 year is so amazing, the principal just melts away.
Very interesting post showing how you deal with different goals simultaneously.
Recently, I’ve got a significant chunk (for me) of money in short term holding, and it reminds me of your mortgage payoff money. I’ve got $9k that’s been waiting since June to pay Jack’s tuition bill next month. I’ve also got $9k for Jill awaiting tuition bill in Aug 2020. More money is already accumulating because we’ll steadily put $30k in the teacher summer unemployment and JS Jack college 18/19 fund before June.
I went through the recession with you, and have a healthy fear of market drops. This money is kept in bank accounts earning between 1.2% and 0.1%. I want a way to increase the yield on this money, but don’t know how to do it safely. If there was a chunk with low interest as a one-time thing fine, but I will cycle through this situation over the next 6 years. I feel like there must be safe, liquid, higher yield option, but I haven’t found it yet.
Have you looked into ibonds? If you’re looking out at least a year they may offer a slightly higher rate. You lose 3 months of interest if you cash in within 5 years but the higher rate may offset that.
That could work with some kind of rolling ladder type system, especially with JS Jill’s bill a couple years out. I’ll have to do some research. Thanks for the great suggestion CMO.
That’s exactly what I was thinking. You could also do a CD ladder, since you need stability and a guarantee the funds will be there.
A 5 year CD at Discover only gets you 2.32% these days. Not worth the commitment to me.
The ibonds have been returning at least 2.48% with less commitment. Might be a winner.
Solid plan Liz. Paying off the mortgage will free up a large amount of money every month. It is awsome that you will be able to help your three children with college. Great post.
I love posts like this about how others think about their finances. They are a great source of info and give me more ideas for thinking about my finances.
Great job on how you’ve set everything up too. Very clean and clearly aligns with your FI goals. Looking forward to reading more!
Thank you for the in-depth lookie see. You made me rethink my mortgage note options.