35 yr old wake up call

[Bert Cooper]

Hello all,

Found this site a couple of months ago after getting burned out at work and have been obsessed with it ever since. 35 and single here.

I always thought I had my head on straight with my finances and was doing pretty well, but I've really gotten a wake up call this year, especially from reading this forum and seeing what you guys are doing.

3 things led got me here:

1) I started using Mint last year, which gave me an all-up view on my finances that I've never had. I could really see what was happening, without having to go through mail and track things manually, which I'm notoriously bad at doing.

2) I saw dramatic increases this year in one of my employee's 401k (he's open about it), who makes quite a bit less than me, which caused me to finally get off my butt and open a 401k at my current employer...a few years after I started, and a previous attempt that I didn't see through.

3) I got seriously burned out at work and really started to question my priorities and longevity as a workaholic with no life, realizing that I can't do this forever, yet I've got squat saved for retirement. I was googling around for some therapy and sympathetic reads and found some of your threads about how miserable some of you are at your jobs. The concept of working stiffs like me retiring early was new to me and I'm blown away with what you guys are doing.

Some history:
-Haven't tasted success in the market. I put money to a Roth for 3 years, in 2005-2008. It dropped big in the recession and is only now back to where it was when I started. VEIEX, VGHEX, VGSIX, VGSTX

-Had a 401k 10 years ago for a few months, had 10% taken out, couldn't handle the reduced income, so I stopped. Regret.

-Spent years working for startups, with no 401k. One was actually profitable, now VC'ed, but haven't seen anything from it yet (no longer active in it). Hoping it gets bought in the next couple of years.

-Got scared away from market during 08-09 recession, and subsequently missed the major climb since then. Big regret.

-Not seeing the market work for me and doom and gloom abound, I focused my energy on getting rid of student loans, staying out of consumer debt, paying down mortgages, improving income, improving cash flow, reducing interest.

Current NW is nipping at 500K
260K rental equity, 40K mortgage balance, 2.875%
100K primary residence equity, 560K mortgage balance, 3.7%
60K MM emergency fund
20K cash
13K Roth
7K 401k, will max out for the first time this year
6K IRA

Income: 20K rental, 140k w-2, 20-30k 1099

Current goal is paying off the 40k mortgage this year. Considering starting automatic investments/DCA but leery with the market being high at >15K. That'd push out paying off the mortgage, which I'm trying to finish to help with short-term cash flow concerns. I know that's not the best long-term play.

Job fear is driving most of my decisions these days, which is making me paranoid. I work at a marketing agency (which is inherently volatile). I'm highly valued, but industry changes in the tech world have caused me to lose my footing a bit. My specialty has changed dramatically and I'm trying to navigate it which is stirring the politics pot a lot. I've got my fair share of both fans and detractors. I've spent most days over the past year or so thinking "what if my job is gone tomorrow". This caused me to start the emergency fund, aggressively pay off the rental mortgage, and really get a grip on my cash flow, thinking I might have to accept a lower salary to stay afloat if things go really bad, which has effectively taught me to LBYM. Cash flow has been king.

Also contributing to that is the realization that a lot of your guys' success has had to do with stable high-paying jobs, seeing mine as not stable, and realizing there are few people over 45 around there. I also think it would be difficult to replicate my compensation in this area (not verified). I know I could if I moved, but that would be difficult with my houses here.

I always figured I would work to 65, work hard, start a business or two, and retire rich. But, you guys are turning the dream into a reality, and getting there early even. Really impressive stuff. I have a lot to learn.

 

[Badger]

... a lot of your guys' success has had to do with stable high-paying jobs...

Not by a long shot. Just so you know.

I don't have the knowledge or the expertise of a number of folks here so keep reading other posts. But enjoying life and my career while still being frugal and LBYM has allowed us to retire a few years earlier than traditional. Our final combined income at retirement was quite a bit less than half of what you are taking in now with a few lean times over the years. We didn't start until we were 38 with a net worth of about 100k.

I can't offer technical information or sophisticated investment suggestions but what helped me the most was to understand 2 things: the difference between Need and Want and to pay myself first (save/invest) before the rest of the bills.

From my perspective you are in pretty good shape as long as your skills are in demand. Good luck and welcome to the forum.

Cheers!

 

[pb4uski]

I would not be in any hurry to pay off a 2.875% mortgage early. I would divert those funds to investing. If you have money to invest but are concerned about the recent market highs, I favor value averaging.

Bulk up your savings/investing program and shape up your job skills/job security and you should be all set.

Don't be afraid to move if necessary. You can always sell or rent your house and/or the rent house if it is too hard to manage from a distance.

 

[ER Eddie]

500K net worth at 35 with a 180K salary is way ahead of most people, so you're on target for ER.

If you want suggestions, I'd say think about moving to a more modest residence. You're single and living in a 660K house, with 560K still owed. That's a big drain on your ability to save/invest for ER. Most of your mortgage payments (which will go on for a decade or more) is just paying off interest on a half-million dollar loan. If you were to live in something more modest (150K house, say), you could pay it off quickly and then have all that money available for saving and investing, vs. just paying the bank. That could radically accelerate your available income and pace toward ER.

Of course, that would depend on your willingness to choose to live in a more modest house/neighborhood. It's all a matter of choice. You have a great income. But the ability to ER depends largely on 1) the amount of money you spend and 2) the amount of money you save. If you manage those factors effectively, you'll get to financial independence and the ER option well before most people.

 

[siamond]

Agreed, you are actually in a decent shape for your age. As to the rocky road of your finances, I think you'll find very valuable lessons in there, and this will help you a LOT in the future.

Yes, your house seems rather oversized, unless you have big family plans. I'd also suggest you move to a smaller house, taking advantage of the fact that mortgage rates are still very low, try to find a way to get a cheap/fixed 15-years loan, and then just let it happen with regular monthly payments.

More importantly, as many of us did, you seem to be in the trap of trying to time the stock market. Forget it. Nobody can. Nobody. And yet it is so crucially important to invest in the market for the long run... So the absolute key advice here is: read a good book about passive investing. Do very solid homework about it. And then an ER plan will materialize by magic... I mean it!

Good luck!

 

[jclarksnakes]

Before you tell us that you live in a very high cost of living area let me point out that somebody is living in your 300K rental house right there in the same area. You have some fears about the stability of your job. If I had those fears the 660K McMansion would already be gone and I would be living in something a LOT less expensive. BTW, your computation of net worth is suspect. With 600K in debt and less than 500K in assets your true net worth is less than zero.

 

[Ready]

Before you tell us that you live in a very high cost of living area let me point out that somebody is living in your 300K rental house right there in the same area. You have some fears about the stability of your job. If I had those fears the 660K McMansion would already be gone and I would be living in something a LOT less expensive. BTW, your computation of net worth is suspect. With 600K in debt and less than 500K in assets your true net worth is less than zero.

If I'm reading the figures correctly, he has two homes worth a combined $960K, plus $106K in cash or other liquid investments. And he has $600K in debit. So $1066K - $600K would be $466K of NW.

I would probably ignore the equity in the primary residence though, so I might suggest a more realistic NW is $366K.

 

[BizzyC]

I've heard it said that the worst thing that can happen to a person is that the first time they go to Vegas, they win a lot of money, because then they get it in their head that that is just what happens all the time.

Your investing in the stock market may be kind of a parallel. You happened to get unlucky on the timing, and then thought it was all bad all the time.

If you've been reading for a few months you've probably seen some the topics on diversification (stock, bonds, real estate, precious metals, etc.), asset allocation, rebalancing, dollar cost averaging, etc. You're still young and you have plenty of time to let the market work for you, especially in a 401k where it can grow tax deferred.

 

[jclarksnakes]

If I'm reading the figures correctly, he has two homes worth a combined $960K, plus $106K in cash or other liquid investments. And he has $600K in debit. So $1066K - $600K would be $466K of NW.

I would probably ignore the equity in the primary residence though, so I might suggest a more realistic NW is $366K.

Rereading the original post I am sure you are right.

 

[pb4uski]

If I'm reading the figures correctly, he has two homes worth a combined $960K, plus $106K in cash or other liquid investments. And he has $600K in debit. So $1066K - $600K would be $466K of NW.

I would probably ignore the equity in the primary residence though, so I might suggest a more realistic NW is $366K.

Concur on the 466 NW vs 500, but IMO, primary residence equity counts towards net worth and need not be ignored.

 

[nash031]

I would not be in any hurry to pay off a 2.875% mortgage early. I would divert those funds to investing. If you have money to invest but are concerned about the recent market highs, I favor value averaging.

I would agree with this - why the rush to pay off this mortgage at such a low rate?

You have a great emergency fund to cover job fears, so that's out of the way.

Priority numero uno for me in your situation would be to max out my tax-advantaged accounts (IRA, 401K) every year. Then I'd build the funds in my taxable accounts ASAP. If you're turned off by expensive equities right now, at least get the cash in those accounts so you have the opportunity to buy when value presents itself.

You've got better income than most on here, I would bet. The key is just making it work for you. Agree with others there's some LBYM that might need to happen here, but that could largely depend on your timeline for retirement. If you're thinking 40s, you need to really ramp up your savings rate in assets other than just your real estate.

Just my $0.02.

 

[daylatedollarshort]

I agree with the other posters about considering living in a less expensive house if you want to ER, especially if your job is not stable. Even if you live on a high cost of living area where $660K just gets you a normal size house in a mediocre school district, then I'd consider moving to a condo or townhouse.

Here is a good link on the subject from one of the Millionaire Next Door authors -

Avoiding The Money Pit

"Most of the self-made millionaires I have studied have one thing in common: They were able to build wealth precisely because they never lived in a home or neighborhood environment where their domestic overhead made it difficult for them to build wealth.......There are nearly three times more millionaire households (1,138,070 versus 403,211) living in homes valued at $300,000 or less than there are millionaires living in homes valued at $1 million or more. The data strongly indicate that this ratio of "wealth-building productivity" is inversely related to the market value of one's own home as well as those of one's neighbors."

 

[Ready]

Concur on the 466 NW vs 500, but IMO, primary residence equity counts towards net worth and need not be ignored.

True in terms of calculating net worth. I was thinking more about deciding if you have enough to be FI, and if you include equity in the primary residence you may be overestimating your ability to live off your assets unless you plan on selling the residence to capture the equity.

 

[pb4uski]

I agree in terms of excluding primary home equity from the nestegg. The benefit of the home equity is more subtle - no rent but the costs of home ownership.

 

[nash031]

I agree in terms of excluding primary home equity from the nestegg. The benefit of the home equity is more subtle - no rent but the costs of home ownership.

I kind of follow the Millionaire Next Door/Stop Acting Rich theme of "augmented" net worth. Equity in your home has value - either you sell and you get the cash (minus whatever fees for selling), or you pay it all off eventually and your expenses go way down. Now, it's not a liquid asset, but it's still a part of your "worth".

I track both my "net worth" in terms of cash accounts as well as my "augmented net worth" which includes home equity. I am attempting to reach FI by my "net worth", in which case the "augmented" portion will just be gravy at some point.

 

[pb4uski]

I think of it similarly but differently. I look at my cash and investments as one pile that is what I rely on for retirement (my nestegg). Add to that my home equity, value of cars, boat, other toys, etc. and I get my net worth.

 

[Accumulating Wealth]

I think that rental property is going to be a sweet asset for you in terms of early retirement. $20k a year in income already and that will only grow with time especially after the mortgage is paid off. I think of it like a pension with a COLA.

 

[Bert Cooper]

Thanks for all the comments.

It makes sense to me to include my residence in NW, but yes I think it's separate from retirement funds. Mint calculates the NW for me, which I'd never done before (well since a personal finance class in college, on paper). It's a fun metric to look at, but I really want to get it growing at a faster rate.

Since finding the forum, I've bumped up the 401k contribution from 6% to max it out this year. I also realized that I can still add 4.5k or so to my IRA. Yesterday, I just setup Vanguard to take care of that automatically over the rest of the year. Going in STAR and LifeStrategy Growth. This will a good LBYM test for me.

Paying off the rental mortgage--that's more for me to sleep at night with my job fears. It's a goal that I can see achieving soon, and will lower my monthly overhead. It's near sighted; I understand it'd be a better long-term play to invest as much as I can now and pay that off slowly. Still trying to decide between paying that down or opening a taxable account. We'll see how the next few months go with the job.

The primary residence--yes, it's way, way more than I need. More than anyone needs really. Part of it was ego I'm sure, but the driver was finding a depressed property with some investment potential (it was foreclosed and stripped). I've been fixing it up over the past 3 years, doing most of the work myself. I just barely refi'ed to get that rate and remove PMI. It is a drain...lots of maintenance, taxes, and the mortgage. I enjoy it, it's nice and semi-secluded, which gives me some peace, but I see the downsides. I've been planning on selling in it in a couple years once I finish it, home values rebound, and the area fills in a bit (growing a lot right now).

 

[Bert Cooper]

6 month update!

Current NW is at 564K, as reported by Personal Capital (started using and love)
340K rental, 263K equity, 37K mortgage balance, 2.875%
680K primary residence, 124K equity, 556K mortgage balance, 3.7%
71K MM emergency fund
20K cash (operating accounts)

Investment portfolio worth: 60.8K
23K 401k, maxed!
13K Roth (it refuses to grow...bad fund choices?)
15K IRA (already contributed 3K for 2014)
8K taxable

Income: 20K rental, 150k w-2, 20k 1099

Watching my portfolio grow is really fun! Especially when I see just a year ago, I only had a 13K Roth.

 

[papadad111]

Dont be too discouraged about being out of the market. The fact that you have been paying down debt is a good thing and probably better than keeping money in the bank (under a mattress returns, basically have been the same in the past several years).

1. Live below your means. You are way too far into ego land and you'll never get there unless you ratchet down the spending and trying to impress others.

2. If you do lose your job, and say you hit the skids with one of your renters, that emergency fund will go pretty quickly with the sizeable mortgage payments that you have... probably be gone in 6 months or so on your level of spending

3. Ditch the fancy car... (guessing you have a sizeable car payment too...probably a 3-series BMW or c-class Mercedes)...

 

[RISP]

Current goal is paying off the 40k mortgage this year.

Hi Bert, welcome to the forum. Wouldn't it make more sense to attack the more expensive mortgage on your primary residence first?

 

[Meadbh]

Hi Bert, welcome to the forum. Wouldn't it make more sense to attack the more expensive mortgage on your primary residence first?

I disagree. The $40K mortgage on the rental is a tiny amount compared to the mortgage on the residence. Paying off the $40K is achievable quickly and will have an immediate benefit on cash flow……which can then be directed towards paying down some of the much larger mortgage on the primary residence.

 

[RISP]

I disagree. The $40K mortgage on the rental is a tiny amount compared to the mortgage on the residence. Paying off the $40K is achievable quickly and will have an immediate benefit on cash flow……which can then be directed towards paying down some of the much larger mortgage on the primary residence.

Why worry about cash flow with the kind of income Bert has? 1. The goal as I understand it is to increase NW. 2. One way to do that is to eliminate debt. 3. With that premise, it makes most sense to start with the debt with the highest interest rate, no?
Besides, lowering the mortgage balance on the residence will also reduce interest payments, which means more money can be used to pay down the mortgage, right?

 

[Bert Cooper]

Dont be too discouraged about being out of the market. The fact that you have been paying down debt is a good thing and probably better than keeping money in the bank (under a mattress returns, basically have been the same in the past several years).

1. Live below your means. You are way too far into ego land and you'll never get there unless you ratchet down the spending and trying to impress others.

2. If you do lose your job, and say you hit the skids with one of your renters, that emergency fund will go pretty quickly with the sizeable mortgage payments that you have... probably be gone in 6 months or so on your level of spending

3. Ditch the fancy car... (guessing you have a sizeable car payment too...probably a 3-series BMW or c-class Mercedes)...

Agree on all accounts. My original post was from 6 mo ago. Lots of changes in habits since then.

My Roth still bugs me, I thought at the time that emerging markets and REITs were depressed, so I started there, they're barely above what I bought them for 6 years ago. Can't decide to switch them out for something else or just keep them. I'm not buying anymore REITs or emerging though.

I did have an awesome car, a 545i w/6-speed, paid off though. It was getting time to replace it this fall and I had a really, really hard time not replacing it in kind. Eventually, I broke free from the golden handcuffs and am now in a 25K VW. People around me have been very surprised by this as I've been extolling the virtues of my BMW for years, and still don't get the decision to go down market, but I don't care. The VW is still decent and it's inline with my FIRE goals.

 

[Bert Cooper]

Hi Bert, welcome to the forum. Wouldn't it make more sense to attack the more expensive mortgage on your primary residence first?

Yeah, that was from 6 mo ago. I've switched gears a bit since then. I listened to what some were saying after I posted this and put off paying the rental mortgage off. I instead have focused on my portfolio. My goal was to hit 50K by the end of the year, but I barely hit 60K. I've still been making double payments on the rental mortgage still, but that's a lot less than I was.

My current goal is to hit 110K in the portfolio this year.

Also, this year, I'm looking at selling the big house and either moving into my old house (killing my rental income) or getting a centrally located condo that would be less than half the price of what I'm in, with half the commute and a fraction of the upkeep. I don't like the idea of killing my rental income, but I really, really like the idea of being mortgage-free.