Our Road to Financial Awesomeness

The Personal Finance blogging world is full of posts on which order you should contribute to retirement funds, the Roth vs Traditional IRA debate, even arguments about whether paying off your mortgage early makes the most financial sense. Here at Northern Expenditure, we don’t pretend to know what’s best, and we are big proponents of the best financial plan being the one you’ll actually do! If you read early retirement blogs, you know that most of these people are saving over 50% of their incomes, maxing out 401ks, IRAs, and Health Savings Accounts with savings left over to dump into brokerage funds. This is not us. First of all, we don’t love the savings percentages, because they are heavily biased toward making a lot of money. Though our goal may eventually be to hit that 50% savings mark, that would leave us a lot less to live on (for a family of five!) than people that make sometimes triple what we make. But this blog is about encouragement. Even us… a family of five that make significantly less than $100,000/year can achieve financial independence! And so can you!

Becoming financially awesome doesn’t happen overnight. And the path is different for everyone. Here’s what our path looks like:

  1. Solidifying Our Dream – Deciding to become financially independent is a mindset shift. You’ll never make it to your financial dreams if they aren’t real enough to motivate you. Step one is sitting down and figuring out exactly what your life would look like if money wasn’t a factor. Again, don’t create vague images of being rich. Those won’t get you anywhere. Money shouldn’t be a part of this vision. Instead of saying “I would be a millionaire,” say “I would like to slow travel the world with my children.” For us, this vision includes exactly that. We want to travel the world with our children. It also involves creating things every single day. That dream excites us so much that it leads us to making real changes to get there.
  2. Maxing Out Our Roth-IRAs – Do you want to know how we decided to focus on these first? The answers are very mathematical! First, the maximum allowed contribution is $5,500… which is a lot less than $18,000 for a 401k. And not having to worry about taxes in the future sounds awesome. Okay, so the reasons are based more on “feeling good,” but there’s also math that backs this up. If there are two of you and you decide to max out your Roth IRAs, you’ll be contributing $11,000/year. If this is your only savings, assuming a 7% return, you’ll be millionaires by year 29. And not have to pay a cent on it for taxes after age 59.5! This shows just how easy it is to become a millionaire if you plan to work for a full 30 years. But, as you know, we don’t plan to contribute for 29 years, and “millionaire status” isn’t our goal. Assuming that same 7% interest, we’ll be at $99,000 at 7 years and $158,660 at ten years. And all tax-free. That seems worth it, so we’ll start there. So far this year, we’ve maxed out mine and are building up Mr. T’s. We’ll max it out in January probably (still valid for 2015 through tax day in April) and then start working on maxing out for 2016. We’ll make sure we max these out before allocating funds to the next goals.
  3. Paying Off Our Mortgage – It’s worth sitting down to discuss priorities. Maybe paying off your mortgage doesn’t excite you and you’d rather build up massive amounts of savings. For us, being completely debt free sounds amazing. Right now, we have $82,600 left to pay on our mortgage. We’ve calculated that if we throw an extra $1500 at our mortgage every month with an extra $1000 on top of that with each of our PFDs, we can pay it off before the end of 2018. If we move those numbers to $1000 extra a month with $2000 the months of the PFDs, it extends the mortgage payoff date to August of 2019. We plan to start with the $1500/month extra plan with the flexibility to move to the $1000/month plan if we decide we would rather see that $500 go to savings. If we do the $1500 plan for a year and then move to the $1000/month plan, and up the PFD payments to $3000, we pay it off by March 2019. (I love spreadsheets!) Right now we’re paying an extra $800/month and will move to $1500 in January when Mr. T expects a raise (if we never see that money, we won’t miss it… though we don’t anticipate it being even close to an extra $700/month!). I also like the snowball effect and if we’re paying $1000-$1500 extra a month on our mortgage, when we pay off our mortgage, we’ll have nearly $3000/month we’ve just freed up to save without missing it at all!
  4. Increasing 401k Contributions – We’re getting the full employer match currently and we’ve recently upped our contributions slightly past that, but we’re not even close to $18,000/year here which is the maximum allowed for 401ks. With my recent 33% raise and Mr. T’s raise in January, we may (finally!) be approaching the 25% tax bracket. A detailed list of tax brackets can be found elsewhere, but the ones that apply to us are: Married filing jointly – 15% tax on income between $18,551-$75,300. 25% on income above that (the next cutoff at $151,900 may be one we never see). Since we’ll be right on the border of that 25%, it makes sense to up our 401k contributions to keep our full taxable income in the 15% range. We’ll have to wait for Mr.T’s raise to find out exactly how much we’ll have to do that, but let’s do a basic demonstration as to why this makes sense for anyone. Say our taxable income ends up being $78,000 – our taxes will be 10% of $75,300 and 25% of $2700 for total of: $8205. That brings our take-home pay down to $69,795. If we decide to put that $2700 into a 401k, we won’t miss the money because we didn’t have it before the raise, but we lower our taxes by $675, our take-home pay is $67,770 – $2025 less than if we’re paying 25% taxes on that $2700, but we get to keep the entire $2700 instead of losing $675 (though after interest is earned for years, when we choose to withdraw it, we will pay a 15% tax rate). So, we’ll make those calculations when Mr.T’s raise goes through in January and increase his 401k contributions to anything above $75,300 of our combined taxable incomes (which is hard to predict exactly since my work hours vary). There is also the possibility that we’ll still be in the 15% tax bracket. In that case, we’ll do nothing further right now. We don’t plan to max this out unless our income goes up dramatically. Right now, we have other priorities.
  5. Brokerage Account Contributions – Because one of our main goals is to have at least 3 years of expenses in a fund we can tap without penalty, we need to start upping our brokerage account contributions. This may be where that extra $500/month goes from the extra mortgage payments if we choose to move to the $1000/month option. Right now, we have a whopping $2,000 in a brokerage fund and no money specifically allocated toward this. All raises past Mr. T’s January raise will go here. Also, since I get paid hourly and my hours can vary wildly, on particularly busy months, I can send extra money here.

So that’s our path to financial awesomeness. As you can see, we’re not financially awesome yet. We haven’t yet maxed out our Roth IRAs for 2015, we only contribute a little bit more than the employer match on Mr. T’s 401k, and we currently pay $800/month extra on our mortgage. But we have an outlined plan to get there! That’s the key. And it’s one we can stick to. If you haven’t yet, figure out your path to financial awesomeness. What steps does your path to financial awesomeness include?


Accountability Friday: Last Friday through yesterday:

F(es)-No – kids sick, M(ex)-N0 – snow day for school!, T(Cam)-No – got the flu, W(Ex)-No – dead to the world, Th(Cam)-No – still recovering – All excellent excuses, however, so I still feel good about it.. and I hope to actually feel good after the weekend!

Financial Awesomeness

Disclaimer: This post may contain affiliate links which, at no cost to you, helps support Northern Expenditure and keeps our heat on in the winter. Thanks!

Previous

Introducing… Penny!

Next

First Job? $23,500 is a Magic Number!

20 Comments

  1. Great Financial Awesomeness plan Maggie! Everyone’s plan is different, but that doesn’t mean anyone’s is better than the others. There are huge variables that can alter a plan, i.e. kids, marriage, one or two incomes, owning a home vs. renting, COL, etc.

    I personally don’t have a mortgage and don’t plan to for a long time (probably at least 7 or 10 years), if ever. I only support myself which also benefits my pocketbook. Right now my tax advantaged accounts are all pretty much set on auto-pilot to max out each year, so all my energy otherwise goes towards beefing up my brokerage account. Have a nice weekend!

    • MaggieBanks

      Yes, some paths are more simple. For us, this is the one that I think will work best for us. And if we can stick to it, that’s the key! Any plan we can stick to is the plan to financial awesomeness!

  2. It is extremely frustrating to not be able to contribute fully to IRAs and 401ks, etc. The Mad Money Monster family also lives on less than $100k and one of my biggest frustrations is knowing what I should do, and actually wanting to do it (unlike most Americans), and not being able to do it. Suffice it to say, we are not maxing out our retirement accounts or putting thousands extra each month into brokerage accounts. For us, we plan to put all of Mr. Money Monster’s income (variable and unpredictable) towards paying off our mortgages (we have a primary and a rental). We’re using our best educated guess to predict his future income to hopfully reach our FIRE goal in 2021. Fingers crossed!

    Great post!
    Mrs. Money Monster

    • MaggieBanks

      Yes, for those of us with families and no large incomes, things are a bit more complicated with mortgages and choices. This is the plan we think is the best for us right now. Maybe someday we’ll be full maximizers. We’ll have to wait and see.

  3. Financial Awesomeness – I love it! Can’t wait for your ‘audacious’ feature next week to go live. 🙂 I can definitely see all of your spreadsheet amazingness at work here for your plan! I think ‘financially awesome’ can definitely be defined in a multitude of ways, considering everyone has different factors and places in life that they are at! To me, you & the rest of the family are definitely financially awesome considering you have #1 nailed down: solidifying your dream. My fiancé & I are in a different spot – currently rent vs. own, contribute high percentages to our 401(k)s and IRAs – but do not max out yet, beefing up all of our savings goals before making impulse moves, etc. Needless to say, it wasn’t until a year ago that we decided to take on our financial game plan with strength and it continues to change as the months pass by. Financial independence is in the future, but we are still working on determining what that looks like for us. 🙂

    • MaggieBanks

      As I’ve told you before, I mess with worksheets a lot. And this plan could definitely change as we go. But this one will get us there. So we’ll stick to this until we change it. I suppose we’re somewhat financially audacious. 🙂

  4. You’re already financially awesome, Maggie! Having mapped all of this out for yourselves, and figured out the income/tax levels that will trigger certain things puts you squarely in the awesome camp. Who cares what your savings percentage is? It’s not a competition, and you’re completely right that those of us with big savings percentages are likely raking in big bucks (not gonna lie — our tax bracket is over 30% which — duh! — makes it a whole lot easier to save quickly!) I have total respect for families like yours who put together a solid FI plan without two six-figure incomes to make things super easy for you. Those who brag about their savings percentage while in a $200K plus DINK household need a good lesson in privilege! 🙂

    And don’t let anyone talk you out of the early mortgage payoff plan. There is huge intangible value to being totally debt free, not to mention healthcare subsidy trade-offs that can be hugely significant once you’re retired!

    Have an awesome weekend! We’re going to get our first ski day of the season tomorrow — hooray!

    • MaggieBanks

      Thanks for the pep talk, guys. It’s always sort of hard to lay it all out there and go “here’s what we’re doing. And we think it’s great, but you might not.” I’m definitely excited to pay off the house and in just over 3 years!? That doesn’t seem like that far away! It sort of does… but we’re thinking positive. 🙂 And when I map things out in spreadsheets and such, I get so excited! Look! We can actually DO this! It’s thrilling.

  5. Great advice for mapping out financial goals! Ours also included saving for our children’s college education, something I know you have talked about. We did forgo some retirement savings to do this; however, we always make sure to at least get our employer’s matching amount and for some years we contribute to our 401K’s as well. I have to tell you though, the best thing we did, was first focus on paying off our mortgage, which we did before we turned 40. You never know what life will throw your way. By paying this off, we were able to weather job layoffs, etc with the peace of mind that we wouldn’t loose our home. Finally, like you, we have never earned 6 figures. In fact, in the last 18 years, there were only three years where we both worked full time. We just keep living below our means and being budget conscious.

    • MaggieBanks

      You bring up a good point about the kids’ education. We don’t really want to be tied to a specific education investment like a 529 in case our children decide to think outside of the box and do something else (though we’re definite pro-education around here). So, for now, our Roth-IRAs double as our investments for them. This may change. But for now, if we’re saving as much as we can, we can always rearrange where the money goes later.

      • We also didn’t want to be tied to a specific education investment in case we needed the money for ourselves for some reason. So we just invested it with the rest of our money, but knew it was designated for them (providing we hadn’t needed it). Fortunately, we didn’t need it and we could use it for college costs.

        • MaggieBanks

          Perfect! That’s our plan, too! Glad to see it’s worked out for you so far. 🙂

  6. a woman

    great estimations!! I love you are planning many directions!
    As a recommendation, at no.3 please compare the interests. If the interest of your mortgage is bigger than the interest received for savings account, then definitely redirect all the money to close the mortgage. You will close the mortgage faster( end of the 2018), and after you will redirect all the money to economy funds:
    – you will add in 2019 in you savings more than you will add, drop by drop :500 monthly with paying mortgage until august 2019 (=around 23.000)
    If the interest of mortgage is very good (and because you already are in the last years), try to invest.
    Whatever, my approach is one by one: I am not able to run after several rabbits in same time 🙂

    • MaggieBanks

      Thank you for the recommendations. Our mortgage interest is quite low, so I agree that we should probably be funneling some of that into investing. But I like the idea of throwing everything we can at it for a year and then re-evaluating. And I like the rabbit analogy. I want to chase ALL the rabbits! 🙂

  7. Kim from Philadelphia

    Maggie, this sounds like an excellent plan- very well thought out, and one that benefits your family.
    Our goals changed once we became parents. We shifted from an “amass as much as possible in liquid savings” to “pay off the mortgage and make way for working less”
    Sending in that last mortgage payment is a whoop-de-do moment. You’ll be there soon!

    • MaggieBanks

      Thanks for the encouragement, Kim. I’m pretty excited to not have a mortgage. Paying that off will be a glimpse at freedom. All of a sudden, our housing will be a whole lot cheaper and we’ll have a whole bunch of freed up money at our disposal!

  8. thats a pretty solid plan! I like the snowball effect and putting extra from a possible raise into the mortgage payoff. That’s a great way to maximize spend and then like you said free up that extra capital once the mortgage is paid off. Like us and moving to a good public school area, once daycare is over and the kids are in school’ that’s just extra $$ back in the kitty for investing other places.

    • MaggieBanks

      Yay free public school! We pay for one year of preschool for each kid and even that kills me! I’m glad we don’t have to pay for so much childcare. 🙂 we’re very, very lucky

  9. This is inspirational! I am right there with you when it comes down to trying to save more and spend less on really needless stuff that adds little value to our lives. We are newbies with frugalism and minimalism and we have recently been unplugged from the Matrix (http://www.imdb.com/title/tt0133093/). We have a few years of wisdom over you since we are in our late 40s but we have plenty of learning to do.
    My wife and I have been where you are today, each started out with very small incomes and at the same time clawed our way out of credit card debt, consumer debt and finally paid off our mortgage over a 15 year period of time. But as our incomes grew larger and larger our consumerism grew with it. Instead of staying in our paid off home and amassing large amounts of savings we moved to a much better community and a bigger house (and Mortgage) that has a great school system for our son but at a large cost.

    I wish I came across this web sites years ago. We have always been under the impression you just cannot retire till you were over 59.5 years old. Wow we sure learned something new this past year with so many great blogs on this subject. Our eyes recently have been opened wider and we are learning now through your wisdom as well as others out there that retiring earlier is in the reach of all of us. This is such a good community of people sharing such great wisdom. Thank you for all you are doing and sharing!! Mark – in MA

    • MaggieBanks

      Thanks so much for your input, Mark! I’m so glad we happened across “a better way” before we upsized our home as well. We certainly considered it! I don’t see Mr. T and I earning a whole lot more than we do now in the next seven years… I’m sure income will tick up slightly, but nothing large. But even so, I think we can make our goals and I’m excited about it!

Leave a Reply

Powered by WordPress & Theme by Anders Norén