Latest posts by FIRECracker (see all)
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- Friday Reader Case: Reformed Debt-Junkie Wants to Retire with Kids - November 10, 2017
Hey there readers! I’m writing to you from Berlin, Germany and one of the most surprising things here is how affordable everything is despite how many well-paying jobs there are! When it comes to expensive housing, everyone loves to say “yeah, but it’s a ‘World City’ and that’s why it’s expensive. You just have to deal with it”. Well, Berlin seems to buck this trend and we are taking advantage of it like crazy. Cheers, Berlin, for being an awesome metropolitan “world city” without the “world city” price tag.
Anyhoo, before we jet off to UK for Chautauqua, here’s our Friday reader case!
LOVE your blog! This one has to be the most thorough and easy to follow I have read. You have made it possible to dream into reality and you are truly appreciated for it.
Attached please find my current financial situation for you to analyze.
I do have a quick question for you. I am getting to your blog a bit late for the investment workshop. If I following from the beginning as of today will I still have success?
Ideally I am trying to figure out how quickly I can get to $1 million. Lucky for me I work for an amazing company with a 40% 401K match, so in addition to this, I would love to find out what’s the best way to leverage that with my current financial situation as well.
I am also dabbling in real estate so that will be another buffer but I don’t want to depend on that income yet. Ideally within the next 2 years I will have enough properties to cover my personal overheads.
I feel like I have money all over the place and none of it is properly working for me.
HELP ME PLEASE!
What caught my eye in this e-mail is this sentence “I feel like I have money all over the place and none of it is properly working for me.” Of all the reader cases we get, this is something we see over and over again. People end up struggling to pay down student loans with high interest rates, credit card debt, car payments, while having savings, trying to invest in real-estate AND the stock market, ALL AT THE SAME TIME.
Don’t believe me? Take a look at the spreadsheet AOTP’s talking about:
Okay, right off the bat, you can see AllOverThePlace’s finances kind of make you want to tear your hair out. But ignoring all the numbers that tend to blur and blend together if you stare at it long enough, let me point out exactly why this spreadsheet makes me want to set myself on fire and jump off a building:
INSANE INTEREST RATES:
21-26% interest rates on credit cards that they’re only paying the minimum on? WTF? 6.8% on 8 grand of student loans? 11.9% on the mortgage of a RENTAL PROPERTY?!
And they’re trying to INVEST?
Have you ever tried to swim with a massive boulder tied to your legs? That’s what this person’s trying to do.
There is absolutely NO POINT in investing (property or stocks) when you are paying double-digit interest rates. You’ll be lucky if you break even…which you WON’T, considering a conservative return in the markets over the long term is 6%/year on average. Which means, you’ll be regularly losing -0.8%- 20% on interest even during bull markets. During bear markets…grab some galoshes cause it’s gonna be a bloodbath.
But that’s not all…
You may remember me saying at one point that “budgets suck” and how I’m all for prioritize your spending on what makes you happy? Well, in this case, unless this person’s cell phone massages their feet and this TV/internet service also dispenses free cocaine, WHAT THE HELL ARE YOU DOING SPENDING almost $300 month on just TV, internet and phone? Do you know many space cakes you can buy with that?!
Clearly in this case the cable and phone companies are the ones getting high, not you. Read this post from fellow blogger Mr.Tako on how he saves on internet and cable.
If you add together the minimum payments for all the items in the list, you get $3145, yet when they tally their total monthly spending, they’re only getting $3526?
So items that don’t fall under debt are only $381/month? Even if I were to believe that, items like internet, utilities, and phone aren’t part of the debt list, and added together they amount to $155 + $120 + $162 = $437. That amount already exceeds $381, so there’s no way you only spend $3526/month. Unless somehow by not spending anything on food, you’re somehow making money.
Also about property taxes on the two properties you own? Or home insurance? Or how about maintenance costs?
Please, please, do me a favour. Do NOT invest in real-estate if you can’t keep your numbers straight. Seriously. Remember how I said real-estate investing isn’t simple, takes years to learn, and you could shoot yourself in the foot badly if you don’t know what you’re doing? This is exactly what I’m talking about. If you don’t keep meticulously records of all your rental property expenses, taxes you pay, etc like Paula Pant or Financial Samurai , DO NOT, I repeat, DO NOT do do real-estate investing. You’re fumbling around in the dark and have no idea what you’re doing.
So AOTP, you’re trying to swim in a pitch-black lake, with no idea where you’re going, and there’s a massive boulder tied to your leg.
This should end well….
Now, that we’ve got all that out of the way, how could AOTP get out of this situation? And is there anyway, they can get to their $1 million goal net worth? Or is it hopeless?
Well, judging but how tied down they are with all that high interest debt, and assuming that they are actually only spending $3526 a month (I highly recommend AOTP redo my calculations after they find out the REAL number), that means they would need $3526 x12 x 25 = $1,057,800 to become financially independent, thereby meeting your $1 million target.
And since they have $66,036 in assets to invest, and a savings rate of $59,501 – $3526*12 = $17,189/year or 28.89%, their TTR (time to retirement) is:
That’s 24 years from now. Yikes, that’s not so good.
BUT what if they were to get rid of the debt ASAP? See, the funny thing is…according to AOTP, the two properties they own are worth $300,000 and $110,000. If they were to sell these properties, subtracting 5% and $1000 for agent and closing fees, they’d be able to net ($300,000 + $110,000) x 0.95 – $1000 = $388,500 towards their debt!
And given that they owe -$341,842 which means they’d all of sudden have $388,500 – 341,842 = $46,658! So instead of being in massive amounts of debt to the tune of over 300K, they actually be ahead almost $59,501 + $46,658 = $106,159!
But that’s not all! By paying off their debt, they no longer have those pesky minimum monthly payments in their expenses.
That means, by getting rid of their debt, they’d be able to reduce their $3526/month spending to $2411/month (Assuming, instead of the house payments, they can now rent a place for $1570 + $155 in utilities. Again since this is an assumption, AOTP needs to redo the calculations with a more accurate number). Which means they would only need $2411/month * 12 * 25 = $723,300 to become FI. This also bring up their savings rate from 28.89% to 51.38%!
And since they’ve gotten rid of all their debilitating debt, that means their starting point is now much higher.
What does this do to their TTR (Time to Retirement?)
That’s only 12 years! Holy shit. By getting rid of all that debt, AOTP ends up shaving their time to financial independence by 13 whole years, cutting that time in HALF!
And in order to achieve this, no sacrifices had to be made. All AOTP needs to do is MURDER those debt monsters! Because just by doing that, they significantly reduced their monthly expenses AND increased their base investment amount, allowing them to become financially independent in only 12 years!
Now, I know AOTP asked about 401k and the 40% employer matching, and I would definitely advise taking advantage of that, but seriously GET YOUR DEBT under control first! Once you figure that out, then add in the 401K and 40% matching amounts to see what that does to your time to retirement. But don’t make things even more complicated until you have a handle on your finances.
So the moral of this reader case? Let’s summarize:
- Don’t invest in real-estate if you can’t keep track of numbers.
- Don’t carry tons of debt at 20% interest rate while trying to save and invest. Trying to swim with a boulder on your leg doesn’t work.
- Don’t use questionable expenses when trying to calculate your FI number. Add everything up and make sure you’re not missing something crucial.
What do you guys think? What would you do if you were AOTP?