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:
- 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.
- 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.
- 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!
- 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.
- 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!