A Trajectory of Infinite Wealth

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.

conservative

optimistic

mixed

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…

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A Very Happy Balance Sheet

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:

balance sheet

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.

 

 

2.5X my start salary in 4 years

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.

Screen Shot 2017-09-09 at 09.46.32Screen Shot 2017-09-09 at 09.46.39

A few of my traits:

  1. 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.
  2. 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.
  3. 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:

  1. 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.
  2. 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.
  3. 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).
  4. 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.
  5. 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.

Our Money Map

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.

Screen Shot 2017-09-07 at 22.40.42.png

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:

Screen Shot 2017-09-07 at 22.24.34

Love that everyone uses their own style to build the map! What does yours look like?

Luxe Strategist

Budget on a Stick

Ms. Adventure Rich

Othala Fehu

MinaFI

Working Optional

Apathy Ends:

The Frugal Gene

Credit (High) Score

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.

credit score

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.

The Airbnb Challenge – Converting the Living Room into our Bedroom

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.

Continue reading “The Airbnb Challenge – Converting the Living Room into our Bedroom”

The Wonderful World of Credit Card Churning

We have been using credit cards for all our purchases for a very long time.  We always pay off the balance every month and never buy any more than what we would anyway, so there has been no cost to do so.  And other than the shear convenience, with cash-back on every purchase that all of our credit cards offer, we have made a few hundred bucks every year.

But then there’s credit card churning which is on a whole ‘nother level.

Continue reading “The Wonderful World of Credit Card Churning”

Sparky in Trouble!

Sparky is the name of our car, it’s a 2013 Chevy Spark and I like it quite a bit.  It’s small (just under 12 foot long) so it can fit in basically any parking space.  It seats 3 passengers, so if I do need to drive anyone other than EC Aunt, it can.  It gets fantastic gas mileage (I’ve been averaging over 38 miles per gallon consistently).  It tells me when it needs an oil change, which has been about 3 times per year, and in general it doesn’t require as much maintenance as other cars I’ve owned.  However, recently, I ran into a problem with its battery… Continue reading “Sparky in Trouble!”

2016 in Review

Happy New Year!  One of my favorite annual pastimes is to review the previous years and find out how we did financially and I’m happy to say that 2016 was a very frugal year!  EC Aunt and I have only been out of college since 2012, and there’s a huge difference in our costs from then and now, so I really am only able to compare our expenditures from the last 4 years, but this year we managed to spend the least!

expenditures

This does exclude buying a car in 2016 which I prefer to distribute over several years if possible (assuming that I will be able to continue to drive it during that time).  This does include the cost of my previous car which we did not keep very long, so it’s cost was pretty much entirely in 2014, although we did have it for a bit in 2015.  These expenditures also do not include some costs of buying our house incurred in 2013 such as the closing costs on the house.  The biggest concern for costs not shown on here regarding our path to financial independence is the lack of health insurance, which I currently receive as a benefit through my employer.

Trends:

A few trends that are noticeable for the past few years is the decline in transportation cost, an increase in bills, a fairly consistent expenditure on food, a huge decrease in shopping this year, and a large decrease in vacation.

The transportation costs have been reduced primarily from getting a more efficient car, a slight drop in average price of gas, and the fact that EC Aunt’s work now provides her with a monthly pass for the public transportation.  I would expect once we retire that this cost would actually be even lower since the primary expenditure in this category is the cost to get to and from work.

The increase in our bills over the last few years are primarily due to moving into our townhome in 2014 and starting to pay for our HOA in addition to the other bills we already had and again increasing in 2015 and 2016 as we started to rent out our spare room.  Although I feel like these numbers are high, we’re better off in this position overall since the cost to lease would be higher than the cost to own and we’re actually making a decent amount of money on the house through renting out the spare room and the appreciation of the value of our home.  I’m really not sure how this category will be affected by retiring.  It depends on what we plan to do, and we haven’t quite yet figured it out.  I believe we will sell our home due to the high costs of bills such as the HOA, but whether we buy a new home, or rent, or just travel around for long periods with short rentals to break up trips is still up in the air.

Food costs have been relatively stable, and although we spent quite a bit less on fast food and restaurants, we spent a bit more on groceries this year.  This cost would also be quite variable in retirement depending on how much we travel and when we settle down again.  Traveling generally would make this cost go up quite a bit I expect, but it depends on where we are traveling since the cost of food might also be lower or higher in certain countries.

The decrease in shopping is almost entirely due to a huge cut-back from EC Aunt.  After getting her new position, she has decided that working for money is too hard and it’s easier to just not spend it!  The expenditure was especially high in 2015 for this category as well since EC Aunt bought a new MacBook Pro, an expensive LV purse, and an IPhone 6s…  Of course, she’s still using these, so their cost should carry over a few years as well.  She also cut back on buying clothes this year, although I don’t think her sense of fashion has suffered for it!  We also cut back a bit on our entertainment spending, opting for less expensive activities like clamming on the coast and playing Pokémon Go, heh!

The last major category that we can control actively is vacations.  In 2016, we simply did not travel as much as the last few years.  A big part of this was that EC Aunt felt she was traveling a bit too much with her new job and didn’t want to do it as much.  We were also both very busy with work and finding time to plan out a longer vacation is difficult.  There’s also the fact that we really want to spend more time in each location when traveling but when work is waiting for us to return to, it’s difficult to really enjoy the time we travel.  Of course once we retire, I expect this to be the largest portion of our budget so, this trend is not something I expect to maintain, nor do I want to maintain this low amount.

The only other trends worth mentioning would be the difference in the cost to lease and mortgage interest and property tax.  In 2013, we didn’t have a full year of a lease, so the cost was quite a bit lower for these categories.  We did buy the house that year, but the first payment was not realized until 2014.  Of course, if we continued to lease, the price would have gone up as well, so I’m pretty happy about buying when we did.  Over the last few years, we have been paying off our mortgage at a very accelerated rate.  We owe about $32,000 currently.  This has brought piece of mind and a greatly reduced cost of interest which of course has many pros and cons.  A considerable portion of our expenditures though is our property tax which has been going up and up every year and will go up even further now that Seattle has passed a major expansion to the public transportation system…  Still, as mentioned before, we’re better off owning the house than we would be to lease, so it’s just the cost of living and working in a growing city and really can’t be avoided.

The Breakdown and Its Impact on Financial Independence:

On average in the past 4 years, we have spent just under $28,000 a year, with a high of just under $34,000 and a low of just under $22,000.  Using the 4% rule (ignoring whether or not it is completely valid), we would need at least $550,000  using the low, $700,000 using the average, and $850,000 using the high number.  Furthermore, the high number might not actually be high enough for our retirement since we plan to travel more, we plan to have a modest budget at around $40,000 per year to cover everything, which would allow us a great deal of freedom, but would leave us plenty of room to fall back into super-frugal mode if anything goes badly.  For this, we would need $1,000,000!  So, to be extra sure, EC Aunt and I are shooting for a net worth of a bit over $1,000,000 in our retirement accounts in addition to the house.

balances

Our Progress to our Goal of Financial Independence This Past Year:

This year, we managed to save much more than previous years, not only because we were able to reduce our spending, but also due to the fact that we just made more money.  EC Aunt and I both maxed out our 401ks for the year, saving $18.000 each.  My company matched me $3210 for the year, contributed $3100 into my HSA, and a 401k bonus of $6,100.  Ending the year with a balance of just under $73,000 in my 401k, an excellent gain from my starting balance of $37,200.  We also contributed the remaining amount allowed to max out the HSA with an additional $3550 for a total of $6,550 contributed for the year, putting the final balance at $23,500, up from the starting balance of $14,470.  EC Aunt put in $18,000 into her 401k and received a match of $2850, she also started a Roth IRA, maxing it out for the year, ending her retirement accounts at $84,000, up from their starting balance of around $52,100.  We paid off a great deal of the premium on our mortgage this year!  We started the year with a principal of right at $100,000 and now we’re down to $32,000!  We also started a brokerage account this year which has a balance of $41,500!

In total, we managed to save just under $170,000 for the year, an amazing feat!  We also gained around $16,500 from growth of our accounts.  I expect that we should be able to maintain this rate of savings for the next few years, putting our timeline for Financial Independence at 5 years without any gains!  As long as the markets don’t crash, we could achieve this even sooner!  Here’s to 2017!  Hope it’s a wonderful year!

Uber Frugal Month Challenge – Homework Part 1

ECA here!  One of my fav FI bloggers Frugalwoods is leading the Uber Frugal Month Challenge. We have been very frugal people to start with. I am participating to learn some more frugal tips and share our knowledge with other people. If you would like to participate as well, you can join read all about it in the link above.

Mrs Frugalwoods left us homework, and I will be doing them here in ER Uncle. Continue reading “Uber Frugal Month Challenge – Homework Part 1”