Recently, I heard a story about outraged caused when insurance companies in the UK charging a higher premium for customers who had a hotmail email account. Which got me thinking about how insurance works, its purpose, and how insurance companies work. And for all intents and purposes, it’s kind of a scam.
The entire point of insurance is to pay a small amount now to reduce risk of a large payment later. Of course, insurance companies still make money. So how then, can they take money from you, and pay out your expenses, but you still somehow save anything? The answer is, you don’t. Unless you are one of the few people who end up spending the money paid in, you will spend more money paying insurance premiums than you will ever use. And worse, you don’t get to reap the benefits you could have had by putting that money to work for you.
My favorite insurance to avoid is collision coverage for your auto. I do have liability insurance (but perhaps I should consider self-insuring there too). I drive a cheap car, but even an expensive car should give similar (if not even better) results. I currently pay about $560 annually for my insurance. I got a quote to see how much it would cost to get comprehensive coverage with a $1000 deductible. This would cost $444 more. So, is that worth it? Well… My car is probably worth about $6,000 according to Kelley Blue Book, and after the deductible, I could expect to receive $5000 if I totaled the car. Alright, so $444 to get $5000 sounds alright, but realistically, how long should I expect before I actually total the car?
Forbes had a pretty good article on this which gave an expected time between accidents of 18 years. OK, so then, $444 x 18 = $7,992. So, I should expect to pay (if I’m an average driver and let’s be honest, I’m much better than average!) about $8000 in premium before I get that payout of $5,000. Ouch. So I’m paying $3,000 over 18 years for the peace of mind to not lose $6,000 in one year. But, it’s worse than that! Ignoring the fact that the car is constantly losing value and therefore the payout would be lower, I would be missing out on any gains that money would have.
If I put $8,000 aside and get at least 4% returns after inflation, I would be sitting on $19,250 in 18 years! So, by not buying the coverage, I’m $11,250 better off. Other insurances work the same, but the amounts are greater and may be out of reach. If you, for some reason, have an expensive car, the amount you would need to bank would be higher. Medical and house insurance would also cost more. Of course, not everyone has that amount of money lying around, but if you do, you should definitely do this.
Another weird quirk about all of this is that insurers charge higher premiums to those who they believe are a higher risk. This makes perfect sense, of course, but in our world of big data, it is getting easier to show a clearer and clearer picture of exactly how much of a risk it is to insure specific individuals. And with this newfound certainty, insurers have nothing to gain by charging you a lower amount than they *know* they will have to pay out. So, the cost of insurance as time progresses certainly will approach the cost of whatever loss you are insuring against (plus profit for the insurer to pocket)!
Knowing this, I think it makes the most sense to self-insure when possible. On the long term, you will come out on top, but it requires diligence, planning, and a wealth of resources that might put this just out of reach.
So, expenses are fun to track and they do matter for long term retirement plans as we need to have a really good handle on how we spend our money, but here’s the real fun, the fruits of our labor, and our long-term money making machine! We managed to save nearly $233,000 and our investments grew over $34,000 on top of that! This figure includes employer contributions to 401ks and HSAs, our pre-tax contributions to these accounts, and our post-tax contributions to appropriate accounts.
#1 New Jobs, Higher Salaries.
The easiest way to save more money is to make more money. ECA had her first full year at her new job, and I also received a large bump in income when I switched as well. We expect that our salaries will go up further thanks to ECA’s bonus structure and me working a full year (and probably receiving a raise as well).
#2 No More Extra Payments on Mortgage
The last few years, we put most of our money towards the house. It was probably not the best idea at the time, but hey, it was safe and we can finish off that loan anytime we please now. We’re keeping it around though since it’s such a low cost for a decent chunk of money that will do better elsewhere. This did improve our net worth of course, so it’s not like that money is just gone! Not until our house value crashes, at least! But, by putting more money into our brokerage instead of the house we were able to take advantage of…
#3 Massive Growth in the Markets
Our performance has been phenomenal. We don’t do anything complicated with investing (just index funds), but this past year was outrageously profitable. The growth translates to about $35,000 this year, which is considerably more than our expenses for the year. I doubt that this can continue forever, but I have my fingers crossed it will persist for another couple of years. Some of this growth is taxable though, which reduces the true gains a bit here. We don’t plan to touch anything in our investments until after we retire, so capital gains are not an issue, assuming the 0% bracket remains, but any gains on our 401ks or HSAs will be taxed when we finally pull it out, or backdoor convert it to Roth accounts.
#4 A Few Lucky Coincidences
Sometimes, you just get lucky. When I left my previous employer, they paid out my unused vacation hours (which was expected). In addition to this nice bonus since I had so many hours banked, I also somehow received a cash bonus from profit share, and a 401k bonus months later. Totally unexpected there!
Estimations for 2018:
I doubt we will see any drastic improvement for our savings in 2018… It should increase due to ECA’s bonus becoming vested, and general raises, but it’s not going to jump up like it did this year. We went from a contribution of $170k to $233k, about a 37% increase in savings. I don’t think that’s sustainable year-after-year.
Still, I’m super happy with our results this year. I think we far exceeded our expectations and our wildest dreams!
Should old expenses be forgot, and never brought to mind? Should old expenses be forgot, and auld lang syne? It’s time to say goodbye to 2017, but before that, it’s that time again to review our expenses and gains! On our path to financial independence, this was our best year yet! We’re also getting a clearer and clearer picture of where our money goes and where it grows.
Bills & Utilities: $6,454
There’s a very unsettling trend in our bills and utilities. Year-over-year, we’re seeing a marked increase, nearly doubling since 2014, the first full year we were in our home. It’s hard to say where this one is going because e
ach year has been pretty different. In 2013 we were in an apartment until November, 2014 was the first year in our house, in 2015, we started doing Airbnb, last year, we had a long winter.
The cost is really not bad when broken down further. This year, we spent about $540/month on all bills and utilities. Since our house is no longer considered “new”, our home insurance rate went up, but is still hovering around $45/month. Our HOA bill has gone up to $180/month. And we pay a fee for the sewage for a new construction of $150 quarterly, or $50/month. Internet costs us about $40/month after it’s all said and done. Cell phones cost us about $20/month since I don’t pay for one and ECA has Ting (it’s super cheap). The remaining $205/month is split between our electric, gas, trash pickup, and water bills. So, overall, our bills are reasonable and it’s hard to see where we can make any meaningful difference in any of these amounts considering we really only have control over the utilities, and they only represent about 1/3 of the costs.
If I had to guess, I would expect costs in this category to flatten out, but continue growing, probably around 5%-10% per year.
Our costs of food, including groceries and eating out has stayed rather consistent over the past 5 years. It just ebbs and flows, but is hovering right around our average of $4,000 per year which comes out to just around $340 per month. This figure may also include some non-food items since I’m too lazy to track and split the costs of non-food grocery items. It also includes all our fast food and restaurant expenditures which came out to be $224 and $247 this year respectively, or around $19/month and $21/month respectively (our target is around $50).
I expect this cost to raise slightly over time as the costs of food goes up, probably just above inflation or around 2-3% per year.
Big drop this past year thanks to the new job! Sparky has been going strong without any major trouble. Unfortunately, I did have a fender-bender this year which reduced the car’s value (my fault, and only cosmetic damage, yes, I have liability insurance too), but since I have no intention of selling it anytime soon, that doesn’t really factor into our costs. Of course, just like last year, I haven’t captured the total cost of the car which we bought with cash back in 2015 for just under $10,000. I’m hoping that it lasts me at least 10 years total, but we’ll see exactly where and how that goes.
I’m betting that this coming year, we’ll see a drop in this cost since I will be working the whole year at my current employer and last year, 1/3 of the year, I was still driving a ton. This category has a large chance of volatility though depending on gas prices and the chance of catastrophic loss of the vehicle.
Our housing costs consist of the interest on the mortgage and our property tax since all of the utilities are covered above. Since we mostly have payed off the mortgage, our interest is very low, just under $740 for the year. Our property tax has been steadily increasing, at $3,769 this year, up again from the last two years. We will pay off the loan in about 10 months our standard payments, so I expect that we will spend about $250 in interest this year. Our taxes will probably go up again, so I expect to pay around $3,900 in property tax. I would assume that this will continue to grow at its current rate at about 5%-10% per year considering Seattle’s propensity to vote to tax itself. Well, I have voted to agree to some of those in the past, so I can’t complain too much!
Shopping & Entertainment: $3,634
There’s very little rhyme or reason to this category. Sometimes, we want to buy something, so we do. Sometimes that thing is expensive. This year was my turn. I bought a VR headset and a computer powerful enough to use it, together costing about $1500. It’s awesome though and I’m glad that I did it. The rest of the $2000 was mostly another $175 or so on video games, $200 in miscellaneous things we’ve done just for fun, but the rest was pretty much all clothes (mostly ECA’s clothes :P). So, we probably split this category 50/50 this year!
This category is one of the hardest to predict, but it’s also one that we have the most control over. If I had to guess, I imagine it will be lower next year. We could also practically eliminate this category if things ever did get rough. I imagine it will continue to ebb and flow due to the way we use technology, we probably will continue to spend every 4-5 years to replace our existing equipment and upgrade. So, I expect to see a sinusoidal pattern with peaks about every 2 years where either I buy something or ECA buys something big in the peaks. Over the long term, it should average out to about what we have been spending and will track with inflation.
This category is the strangest right now as this does not necessarily reflect the true costs of the vacations, but instead what we paid out of pocket. This past year, we got into credit card churning pretty hard, both opening a Chase Sapphire Reserve as well as several other cards. Through these rewards, the vast majority of our costs were covered since we used those points for airfare and rental cars. This was by-far the best way to use these rewards since Chase offered a 1.5x bonus when used for these expenses than what we would have received as cash and we planned to take the trips anyway.
Overall, this category acts a lot like our shopping & entertainment. It’s completely discretionary and the cost varies just based on what we want to do. I expect this to go back closer to average over the next year, perhaps increasing if we decide to go somewhere expensive.
Summary: $23,016 spent in 2017!
Bringing our average annual expense to around $26,800. At this rate, we could maintain our standard of living with one of us working 40 hours per week with an after-tax income of $12.90/hour (without any savings). Or, using the 5% rule, an account of $536,000 would suffice. Of course, any more we gather will allow us greater flexibility, and the freedom to increase our lifestyle if we desire. Either way, I think we’re on fire! Happy New Year! Here’s to a wonderful 2018!
I’ve been thinking a lot lately of how much money we would need to retire. How can we guarantee that our expenses will not suddenly shoot up? How likely is it that our investments will continue to provide enough returns for our expenses? What if advancements in medical technology vastly expand our life expectancy? Can we, or should we rely on government assistance such as social security should our wealth run out?
I started to create something that I call a 70 year plan, assuming that we would live for 70 more years. This plan allowed me to tweak a lot of variables such as annual returns on growth, inflation, etc. And it showed me pretty quickly that tweaking different variables at different times would drastically change our outlook. A lot of scenarios showed me one thing that I think is worthy of pursuing though, infinitely growing wealth.
It seems to be the case that most people plan their retirement for what they think they will need and very little more. To me, this is short-sighted at best and dangerous at worst. I for one would not want to end my days in abject poverty, and I have no qualms about not spending all the money I’ve made throughout my life. This is why, my current plan will be one that has an infinitely growing trajectory.
The way to achieve this is obvious. We simply need to ensure that our expenses never exceed our growth. This needs to take into account inflation, taxes, market fluctuations, etc. to work. The biggest impact would be a long recession in the economy. If this occurred early on in our retirement, it could ruin this plan. Fortunately, we are young enough that if this were to occur, we could go back to work. Other than that, most everything can be addressed through mitigating risk, diversifying assets, and keeping our discretionary budget in check.
I plan to refine this a bit more into something a little more fun and useful, but for a simple test, I have run a few scenarios. I assumed a starting annual expense of $50,000. If I assume a low growth of 5% per year and an increase of expenses of 3.2% per year. It would take a starting net worth of $2.8M to last forever (well at least 4,000 years). A more optimistic outlook of 7% growth and 2.6% increases gives a starting net worth of only $1.15M! And a More moderate one of 6% growth and 3% increase in expenses means we’d need about $1.7M to start.
The surprising thing for me was how low these numbers are. It’s well within reach to pursue these levels of wealth and live within these means. Even if we don’t get to spend all that money, we can leave a lasting legacy that never ends!
It seems to me more likely that society will end in some disaster or the very essence of what money is will change before this runs out. After all, a lot might change in the next 300 years…
After 5 years of cultivating wealth, as of today (9/12/17), ECA and I are millionaires! Well… at least on paper (and being very generous with estimations on a few points).
Here’s the breakdown:
Almost all of these figures are the present market value of our assets, in other words, what is shown on the account balance pages. There are two exceptions to this. The value of the car is based on the Kelly Blue Book value for selling directly to a buyer (assuming it’s in good condition) and the value of the house is the high-end that Zillow estimates, so it’s unlikely that we would actually be able to sell it at that price if we sold it right now (and we would have expenses, reducing what we receive).
Still, we are right on the precipice, and in a few months, we will definitely be there (barring any huge market crashes). Still, thanks to diligence, hard work, and a little luck I’m really happy with what we’ve accomplished in 5 years!
The experience of crossing over this level of wealth is a bit surreal to me. Growing up in rural southern Indiana, it was a big deal that someone was a millionaire and it was common for us to talk about what we would do if we had a million dollars. Now that I actually do have it, I know the answer. Nothing. I would and will continue to do exactly what I have been doing.
This year marks our 5th year post college. Can’t believe I have been an adult for 5 years. ER uncle did a quick estimate on our net worth and for the first time we crossed the 1 Million mark. Yay, 7 figures! This totally deserves a shot out and I need to urge UR uncle to write a post. This is after all, his blog.
Last night I was bragging to my dad that even though I did not follow the path he had planned for me, I still have a pretty good career path. My biggest achievement is not that my salary grow to 2.5X where I started. I am particularly proud of the fact that I did it in a way that’s quite effortless. It’s just like I am living my life as usual–and boom!–I get paid a lot more. My life philosophy has always been maximizing return on effort. I did it through finding a path that works for me.
A few of my traits:
- I am not entrepreneurial and don’t want to think about work the moment I step about of the office building. This eliminates any opportunity to build my own business which I believe is the quickest way to get rich 🙂 I know that the first 2 years of startup can be rough, you are pulling in a ton of effort with very little return to set the business ready for the boom. Being a business owner would give me too much anxiety.
- I am very stereotypical Asian (good with numbers) and learns very fast. This drives my decision to go to MBA full time while working full time.
- I am pretty down to earth and reliable at my work. I admire the people who can speak 150% for the 100% work they do. Those people automatically get more credit and advance in their careers faster. I am unfortunately not one of them. I tried my best to represent the most I can but it does not come natural to me.
My 5 year career journey:
I interned in a great company and loved the culture (read more about my college jobs here). I received a pretty good offer at the end of my internship. A year later, I finished college and started my first job with $65K annual salary.
For the first almost 4 years, I stayed in this great company. I enjoyed the people I worked with and really appreciate the growth opportunity the company provided.
I was part of a leadership development program where we rotate 3 different roles in 2 years. The program provided a ton of support and picked great people managers for us. I was promoted at the end of the rotation and landed my “permanent role”.
I always know MBA is the next step for my career as my BS is in Engineering and I don’t want to wait. I love the company so much, so there is no way I would leave then. Why not do both? Work and study. I got my MBA and an MS degree while working full-time from 2013-2015. The cost was $62K (maybe slightly lower considering the tax deductions).
I really wanted to get promoted again before start looking for a new company. By the time I graduated with my MBA, I have been working for 3 years and didn’t want to move to a new company and still be in entry level positions. I know the best chance is to be promoted as I am staying in the team that people know my work. I stayed 18 month in the permanent role and got promoted within the role.
By this time, I was able to move to a different company with 79% salary increase and landed in a position with bigger scope and more senior title. 2017 is the first year I become a people manager. I so appreciate the switch as this new company opens a new horizon and now I am aware of so much potential I wasn’t aware before.
Something maybe helpful for you:
- Most good college job hires are done together with the end of junior year internship. Securing a good junior intern and perform well is crucial. In order to do that, you need to have a pretty good sophomore intern/research experience. College is like a marathon, so if you spread out your effort and start planning from Freshman, you will land a pretty good job.
- Get into a well structured company with good culture. Learn and grow in the first years. I did not think that much about my pay at the time. It is more of a time of experience accumulation and knowing the payback will come later.
- Working full-time and going to school full-time may sound daunting. It is really not. Totally doable and I won’t even describe it as hard if you don’t have kids. Start it today and worse case is you cut back on hours and do it slower.
- Listen to you lecture at 2X speed
- Always use your work project for school project (change out the details so you are not in trouble).
- Even though switching jobs gave very quick bump in salary, I do believe that some timing is better than others. Sometimes jumping very often can result in several lateral moves and delay the actual advancement.
- Switching companies is good. The decision to do it and make the change is unsettling when you are in a very comfortable position, but the pay bump makes it worth it. Most importantly the new perspective it provides makes it worth it even more.
EC Aunt here! I discovered there is this thing called “Money Map” from The Frugal Gene. I really loved the rainbow-colored map Lily built and decided to build our own. Cuz I really love building excel charts. I once built an excel chart explaining how we organize all the cupboards in our kitchen.
Income Line: Mainly plain old paycheck for ER Uncle. Paycheck and RSU for me. I am a minimalist so I do sell things I no longer use (clothes, beauty products, etc) but the side hustle income is very small. We rent our our spare bedroom suite on Airbnb for fun and money.
Pre-tax Line: We both max out our 401K ($36K total per yr) and our joint HSA ($6750 per yr). We no longer qualify for any IRA anymore ;(
Tax Line: We are at 33% bracket based on our AGI and sadly we don’t have very much deductions. Fortunately Washington State does not have income tax yet. Our Airbnb income is taxed for income and self-employment. Good news is for self-employment tax, my employer paycheck maxed out on the social security portion, so we are only paying for the medicare portion. We withhold additional tax through our paycheck.
Bank Line: We love combining our accounts as much as possible to keep things simple.
End Flow Line: We use credit card for 99% of our spend. so much more convenient vs carrying cash. We keep some money in our savings account as emergency fund.
Below please see a summary of all accounts:
Love that everyone uses their own style to build the map! What does yours look like?
Being a personal finance nerd, credit score is something that has always fascinated me. All of how we behave financially is boiled down to a single number for the sole purpose of determining the risk when lending us money. Trying to maximize this number is kind of fun. Like trying to achieve a high score in a video game. But other than that, I feel that we, as a society, put too much focus on a credit score. After all, in my entire life, having a high credit score has really only been important once. And more recently, my view and approach to my credit score has turned from something worth preserving to something not worth even worrying about.
When we bought our home in March of 2013, ECA and I had a good enough credit to get a rate of 3.375% on a 15 year mortgage. And although the loan cost us basically nothing (considering the growth we’ve seen in the stock markets these past few years), we began to pay down the mortgage as quickly as possible since we absolutely abhor being in debt. This may not have been the best use of our money, but it felt pretty good to get the mortgage down from about $230K to about $20K in around 3 years.
Since then, my credit score has continued to improve. I’ve even started to churn credit cards, opening 5 in the past year, and not seen any impact to the score. Unfortunately, I wasn’t checking my score very often before, so the data isn’t great, but since Chase has started what they call their “Credit Journey” where you can get your TransUnion credit score for free with weekly updates I’ve been following a bit more closely. I started this back in February, where my score was 808. After opening a couple of cards somewhat rapidly, my score did actually dip down to 800 at one point, but it very quickly raised back up.
This service gives a few other interesting data points such as your current outstanding credit balances, your credit utilization (although mine says 0% so, that’s not quite right), your available credit, how many accounts you’ve opened in the past year (7 for me), how many inquiries in the past year (5), and the depth of your credit (only 7 years, well, I am only 30 after all).
There’s also a score simulator where you can simulate what different things might do to your score. Which there’s basically nothing I can do to really raise my credit score. Paying off all the cards would increase it by 3 points apparently! Although I already pay them all off every month anyway…
Due to the value we gain from churning and the fact that we have no intentions to get a big loan anytime soon, thinking about my credit score basically has no effect on my behavior. I used to want to get it higher, but I would gladly trade points on my score for real money, something much more tangible. The only reason why my score is so high is because I’m a safe bet to give loans. Save a catastrophic event, if a bank gives me money, they’ll get it back. Of course, the only reason is because it’s worth it to pay it back since it costs me less. It would do me no good to default, or to not pay off my credit cards each month. I guess it’s just a mutually beneficial situation: banks win and I win, high score achieved.
ECA and I have been hosting on Airbnb for nearly two years now. We have a townhouse with two bedroom suites upstairs which works very well since we don’t need to share a bathroom. We have been managing everything, and cleaning the room between guests to maximize our profits. Last year, we grossed around $20,000 and after considering extra expenses such as utilities, we made around $16k before taxes.
Which really got us thinking, what if we could expand this? Considering our expenses, if we were able to double this amount, we could theoretically maintain our lifestyle off of the income from Airbnb alone (although we don’t plan to do this), and if nothing else, we could make a considerable amount of money. So, we set out to convert our living room into a third bedroom and try to open our suite on Airbnb.