Your Greatest Financial Decision

There is always discussion in the FIRE community about the way to pick stocks, the way to travel hack, or the way to reduce your overall expenses to more easily obtain financial independence. This is the “meat and potatoes” of the FIRE community, and like most of you, I really enjoy people’s thoughts, opinions, struggles and successes here.

I wanted to take the time today, to talk about what I believe is the most important financial decision that you will ever make, especially if you are seeking financial independence. That decision is your choice of spouse/partner.

I can’t tell you how many times I have heard/read interviews of FIRE folks, and they answer back “my spouse is more frugal that I am.” It’s that level of frugality, working together towards a goal that enables most of us to hit out financial independence goals, especially those who hit it in the 30s and 40s. There is a common theme you often here about folks dating/marrying – that you end up with your opposite (you are outgoing and they are more laid back, you like to spend and they are frugal, etc.). If you run into this and don’t discuss it before you get too serious, it could lead to all sorts of problems in the long-term relationship. In terms of FI, it could derail your plans.

There have been stories of prospective spouses who have called off the wedding, due to finding out how much in debt their partner is in. Depending on where you live, you could be responsible for some of the debts, and at a minimum, excessive debt by one of the partners will impact their ability to contribute to the finances of the couple.

Like many of you, I was lucky enough to marry someone who is more frugal that I am. I was always the one who ran the checkbook down to the lowest amount possible – even as I was automatically saving money in my 401K and IRA. My wife likes cash, so she has a significant amount of money in a savings account (not even CDs!). Still, this keeps her stress down, and I just treat that as our emergency fund/cash reserve and put my money entirely into other investment vehicles.

It’s worked for us for 31 years (with some bumps), but we certainly wouldn’t be where we are now (33 months away from FI) if I had married a “spendy” woman. I have friends and coworkers with spouses that like to spend (both male & female) and it certainly causes stress and affects their relationship.

So make sure you talk about finances to your prospective spouse, and ensure you are both on the “same sheet of music” in terms of your financial goals.

One last thing – if you are already married, and you’ve got significant money invested saved, and you overhear your spouse say “It costs $40, but I am not sure I want to pay that much” – give them a big hug and tell them you love them. They are helping you on your way to Financial Independence.

Mr. 39 Months

So what is your savings rate?

And what is the trend of our savings?

I finally got the savings bug big-time around the age of 36, in the year 2000. Up till then, I had only invested money in the 401K to meet a company match (typically 3% – 4%). I was focused on increasing my income, in order to pay for the normal things of life, as I understood them (house, car, etc.). By 1999 I had finally reached the point where my salary was paying for everything, without incurring additional debt.

Then in 2000 I scored a major pay increase (about 20%) when moving to another company. At the same time, the market tanked, and the money I did have in a 401K/Roth IRA seemed to evaporate overnight. I knew then, that I had to really get serious.

At that time, the word was to save 10% of your income – but I knew that since I was starting late (age 36) I needed to add more. I started around 10%, but immediately pushed to max out my 401K. The goal was to get to 20%, and eventually higher.  Note that this is on the gross pay (i.e. before taxes are taken out) so it gets harder as you make more money.

Year Savings Rate 5-year Trend
2000 9.9%
2001 10.5%
2002 12.5%
2003 14.5%
2004 16.5% 12.8%
2005 18.4% 14.5%
2006 18.2% 16.1%
2007 16.3% 16.8%
2008 14.6% 16.8%
2009 21.7% 17.9%
2010 21.6% 18.5%
2011 31.1% 21.1%
2012 16.2% 21.1%
2013 19.9% 22.1%
2014 19.2% 21.6%
2015 25.4% 22.4%
2016 29.8% 22.1%
2017 30.1% 24.9%

After ten years, I had paid off almost all my debt (just house) and was saving around 30%. I took a slight dip in 2012, because I took a pay cut my company’s 401K didn’t allow me to put in very much. I chose to concentrate on paying down the mortgage and getting debt free.

Well, I’m finally back to 30%, and based on some monetary movement, I should be able to bump it up to 40% in 2018. I’m proud of my trend over the last 17+ years, and the fact that I’m set to be financially independent (without counting on Social Security) in 2020.

So how has your savings rate trend been?

 

Mr. 39 Months

 

Diminishing Friendships in Retirement?

I was listening to one of my financial podcasts, Stacking Benjamin’s, and on one of their recent shows, and their guest was talking about early retirement and issues that many folks don’t think about. One of the more interesting ones (and one that I have thought about a lot as I get closer) is the social aspect of work, and how that might leave a hole when a person retires.

For most folks it is the people at work who form their social circle (outside their immediate family). These are the folks they see every day, talk with at the coffee machine, and discuss last night’s TV show or game. You get to know their families, trials and tribulations, and life stories. These people are the “village” you have to live in for 8+ hours a day – and it is often the thought of leaving these folks (and moving to another “village”) that keeps people in the same job for years. I know that is one of the major things keeping my sister-in-law still working.

It has been noted that folks often have a hard time getting new friends (or keeping old ones) as they age. People drift apart, both geographically and in their interests. Men often have a particularly difficult time of this, and sometimes have no friends they can turn to in their later years.

I’ve joined several organizations (outdoors, woodworking, professional society) in order to try and get out. As I look to achieve financial independence, I know I am going to have to work hard to be more outgoing, and seek stronger friendships with folks in my interest groups. It won’t be easy – but it is a challenge worth the trouble.

How are you folks preparing or working on this?

 

Mr. 39 Months

Financial Update – Disaster File

 

If you remember back in July, I realized that I had to update our personal files, or our “Disaster Files.” This was the files showing investments, wills, titles, etc. Often folks do this once every so often (many times after a family member passes away) and then let it lie fallow till the next “emergency.” Yep, I was one of those folks, having not touched it since 2013. In my previous post I attached a couple of helpful documents that I hope folks find useful.

It’s been a bit of a “slog” as I have worked my way through, but here is where I am at the beginning of the 4th qtr.

No Description
1 Update Master List from 2013
2 Send Master list to Mrs. 39 Months
3 Price out updating wills
4 Redo filing cabinet with Master List & Disaster file #1
5 Household budget folder (budget goals, income statement, balance sheet, income/expense forecasts)
6 Housing Information (Title, insurance, receipts for work, property taxes)
7 Online passwords
8 Location of keys to safe deposit box – Mrs. 39 Months drawer
9 Credit records: Resolution of past debts (auto, home)
10 Home Insurance Policy
11 Net Worth’s 2009 to present
12 Annual updates for Jan 1, 2017 into investments
13 Investments (list of accounts, goal planning, annual balance sheet)
14 Taxes: Tax records for previous year, current year documents
15 Personal background info (Education, personal history, resume)
16 Credit: Resolution papers of past debts, credit card names, numbers & 1-800 number
17 Health insurance (Booklet from work, health history, medications, etc.)
18 Life Insurance (Insurance policies, etc.)
19 Safe Deposit: Title to Mrs. 39 Month’s auto, DD214, NY and KY marriage certificate, letter of last instructions, copy of will, personal property inventory, negatives of personal property, passports, old passports, Mrs. 39 Months’s birth certificate, Mr. 39 Months’s birth certificate, Mr. 39 Months’s SS card)
20 Letter of Last Instructions
21 latest credit report
22 Auto Info: Insurance coverage, policies, auto registration, repair/maintenance records
23 Instruction letter (where to find everything, computer passwords, etc.)
24 Setup dates for regular updates to the files (so I never have to do this again) – Jan 1 of each year

The hardest one to date what the letter of last instructions. It is here that you really start feeling your age and realize that it could end. You need to determine funeral arrangements, where to be buried, etc. It really does make you think. Still, it’s done and I have it in a fairly obvious place in the house, and have let key folks know where to find it.

So what do I have left?

1 Updated list of personal property
2 Pictures of personal property
3 Guarantees & warranties (appliances, cars, etc.)

The pictures of personal property actually might end up being a video (room by room) and description. Often these are better than just pictures. Guarantees & warranties may be something that I just start assembling as we purchase items, and stick in place.

I will probably start working on these in the New Year, as part of my “Jan 1” plan. I hope you folks are also doing some of the “slog” work that you need to do for FI.

Good luck!

 

Mr. 39 months.

 

 

 

 

 

Investment update – October 4, 2017

Okay, 33 months left till Financial Independence!

Overall, my investments were up $11,752 for September, a gain of 1.26%, which isn’t too shabby. Big gainers appeared to be Small Cap funds and the S&P500 funds. Internationals did OK as well. The bond funds and REITs continued to underperform, though not significantly enough to drive my results down. I remain happy with my current allocation in my 401Ks/IRAs:

  • 30% Bond intermediate Index Fund
  • 17.5% S&P 500 Index Fund
  • 17.5% Small Cap Index Fund
  • 17.5% International Index Fund
  • 17.5% REIT Index Fund

My father’s Inherited IRA, which I set up with an eye towards income, has returned 3.3% in dividends on an annual basis, and has gone up 0.9% for the quarter. While not as big a move as the S&P, Small Cap and International, I believe this portfolio is a lot more “stable” so I will continue to experiment with it for income.

 

My “fun money” account, which I use to try to value invest, has pretty much stayed even. The values have dropped somewhat, but this has been offset by dividends. I’m still excited about the potential for growth here, as some of my picks are dramatically undervalued. I just have to be patient.

 

Hope your October trick or treating goes well!

 

Mr. 39 Months.

Quarterly Update – Oct 1, 2017 (end of 3rd qtr)

Well, its early October, three-quarters of the way through the year, and another opportunity to compare my goals for 2017 to what I’ve actually done, both financial and personal/other. A lot of folks don’t like to do this sort of thing, but as an engineer and amateur financial junky, I actually love taking a look at these sort of things. Even when I’ve had a bad quarter (or bad year) I like to look at the numbers and see what my situation is, and the future outlook.

Ok, I’m a numbers geek.

So how am I doing in comparison to my goals for 2017 (the ones that I listed on April 30th)?

My Goals for 2017 (some financial, some not):

 Put in $33,000 in tax-advantaged accounts throughout the year. Grade A. I have put in $28,150 so far this year (including some bonus money) and am on track to hit my goal by December.

  1. Put in all bonuses, gifts, and our previous house payments into regular accounts (estimate of $26,000 year): Grade A. I have put in $22,375 so far this year, and I am on track to hit my goal by December.
  2. Increase dividend income from our investments to $18,000/year (and reinvest them): Grade B. I have $13,680 in dividends so far this year. Going to be touch and go to see if I hit this, but it looks like I am on track to hit $18,240.
  3. Get Passive income up to 65% of living expenses: Grade B. I am currently at 67.3% for the first 9 months. . To hit the goal I have to hope for some major dividend payouts in December.  We do continue to keep our living expenses low, though we did have to spend some money on home repairs which bumped it up a bit.
  4. Beat at 6% growth rate on our net worth: Grade A. I am at 8.64% so far, with three quarters of the year gone by. Even if the markets come back with 0 growth for the rest of the year, I’m good. Remember that the majority of my investments are in an allocation of 30% bonds, 17.5% REITs, and 52.5% stocks (split evenly between S&P500, Small cap and International)
  5. Begin attending local real estate investment association meetings, to learn about and begin preparing for real estate investing in 2018: Grade D. Went to first meeting in July, but haven’t joined the group yet. The last two months work has interfered with my ability to attend. Not sure when I will start investing in it, because all you hear right now is that the market is too hot. We will see. My goal here is to start studying and learning.
  6. Start a blog (i.e. this one). Grade A. Done
  7. Fitness: Increase weight lifted by 10% over the year. Grade D. Currently appear to have hit a wall, as I haven’t gone up hardly any for the last 3 months. Hurt my shoulder about a month ago, and that has set me back, and business travel has hurt me in September. Need to work on this.
  8. Average 3 hours of cardio each week. Grade D. Currently only averaging a little over 1.
  9. Go on an international trip. Grade D. Wanted to do something bigger this year, but Mrs. 39 months job situation killed chances for larger trip. Plan to go to Quebec or Montreal in October or November.
  10. Visit one national park. Grade D. Again, job situation hurt this. Have never been to Ellis Island, so may try for this.

So in looking at this, I think I am tracking well for the first nine months, with a lot of non-financial items coming up short.  Still got some work to do (especially in terms of personal fitness).

How are you doing on your goals for 2017?

 

Mr. 39 months

Thinking about starting a You tube channel? Think Save Retire has a good post on it

Think Save Retire has an excellent post on what you need to start a YouTube Channel. It goes over how to set up, equipment, and content.

Want to start a YouTube channel? Here’s what you need to get started

 

He goes through all the equipment, the setup and the processes.

I’ve often thought about setting up a YouTube channel for financial advice to recent graduates. Not sure  how successful it would be, but it would be fun.

 

Mr. 39 months

Great post on the 10 Commandments of Early Retirement at the Retirement Manifesto

 

Excellent post on the commandments of Early Retirement.

The Ten Commandments Of Early Retirement

It goes into a lot more detail, but the top ten are:

  1. Start Early
  2. Save 20% or more of your money
  3. Increase your income
  4. Live modestly
  5. Invest in stocks
  6. Track your progress
  7. Manage your own wealth
  8. Optimize taxes
  9. Save big $ in after-tax accounts
  10. Delay social security

Not a bad list, and one you should publicize to folks you want to help.

 

Mr. 39 months

Stock Evaluation 2 – Benjamin Graham method

In my first post, I talked about some of the rules that Benjamin Graham used to sort through the stocks to identify. Back in June, I used the decision criteria from “The Little Book of Value Investing.” I used these to identify seven potential stocks at the time, and saw which stocks matched the most criteria (shown in green)

 

OTEX TSN PAG LYB GILD SYMC ALK
Name Open Text Corp Tyson Foods Inc Penske Automotive Group Inc LyondellBasell Industries NV Gilead Sciences Inc Symantec Corp Alaska Air Group Inc
Dividend Yield 1.4% 1.4% 2.3% 3.7% 3.0% 1.0% 1.2%
Greater than $2B market value $8.81B $17.99B $4.40B $37.21B $91.62B $17.85B $11.96B
2-1 ratio of current assets vs liabilities 3.3 1.8 1 2.2 1.9 1.8 1.7
Positive earnings in each of last 10 years 5 5 5 5 5
Paid a dividend at least 20 years, raised over last 20 years No Yes Yes No No
Increase their earnings per share by at least 1/3, over 10 years Yes Yes Yes Yes Yes
P/E of 15 7.4 13.8 13 10.1 7 9.2 14.8
Price-to-book of 2.5 or less 2.52 2.33 2.51 6.12 5.43 4.52 4.18

 

The next step from there was to look through the stocks, get information and try and see which ones you understand. It does you no good to evaluate a company’s performance if you don’t really understand what they do. Warren Buffet is well known for not investing in technology, because he doesn’t really understand it. He understands Coca Cola, Geico insurance, etc. – so that is what he invests in. In this case, I understood OTEX, Tyson, PAG, Lyb and Gilead, so I chose to concentrate on them.

Graham had a formula for determining intrinsic value. Value = E * (2g + 8.5)  * 4.4/Y

  • E = current earnings per share, after taking out dividends
  • G = annual earnings growth – with 5 percent figured as a “5”. Typically for young, growth companies he used 10% growth, while using 6% for companies in a mature industry
  • 8.5 is the base P/E ratio for a stock with no growth
  • Y is the current interest rate, represented as the average rate on high-=grade corporate bonds

An example would be a company with a current earnings of $2.30, a growth rate of 10 percent, and a corporate bond rate of 6 percent. The intrinsic value is $2.30 * ((2*10)+8.5) * (4.4/6) or $48.07 per share

 

When I took the list above, using this equation, I came up with the following intrinsic value

Intrinsic Value OTEX TSN PAG LYB GILD
Earnings w/o dividends $0.75 $3.93 $2.69 $6.58 $7.13
Growth rate 10% 6% 6% 6% 6%
Bond yield 3.7% 3.7% 3.7% 3.7% 3.7%
Graham’s Value $25.42 $95.81 $65.58 $160.41 $173.82
Current Stock $33.48 $62.50 $51.88 $91.80 $72.06
Variance ($8.06) $33.31 $13.70 $68.61 $101.76

After this analysis I took the opportunity to look through Gilead’s annual reports. While their stock price had dropped dramatically, their overall economic position was strong, and they had a lot of excess cash. By the time I ended up deciding on the stock , Gilead had actually dropped to $66.46 (almost $6 less than my original analysis).  Using Graham’s numbers, it appears to have a tremendous amount of “up” (it had a P/E ratio of 7, or if inverted, a yield of 14%!). Since I purchased it in late June 2017, it has gone up to $83.27 (a 25.3% jump). Supposedly, based on it earnings, it could go as high as $173.82. I will have to keep track of it going forward.

In August and September, using the same concept, I’ve purchased TAHO (a mining company) and CSS (consumer products) both selling below book value, and seemingly underpriced. While I haven’t gotten a big “jump” on either (TAHO up 6% in 2 months, CSS up 2% in 1 month), they are both doing fairly well. I will keep them until they come close to their intrinsic value – which may be several years.

What systems do you guys use to pick stocks or mutual funds?

 

Mr.39 Months