Barlotti in Boston II

[Barlotti]

I got rid of more stuff. An IKEA bookcase, a couple baskets, some articles of clothing. I'd like to take another inventory, but that will have to wait for another day.

I'm surprised at how easy it is to give things away. Yesterday, I gave away some 3.5 inch screws and bolts. Today, I Craigslist-posted my old gas range (with pilot lights), and there are plenty of people who want it.

My place finally feels "right" and not overcrowded. There are certainly things that I want (for example, I'd like to get one of those incredible pressure cookers and get rid of my rice cooker, I'd like to replace some clothes with more versatile items), but no hurry. I've got everything I need.

I think now that I'm nearly done with minimizing, I'll commit to improving my health. I'm often tired, and I think it's on account of poor diet and inactivity. I'll start off by committing to walk/jog/run at least 10 miles a week. Yesterday and today I've walked about 5.6 so 4.4 more miles to go!

[Barlotti]

As usual, I've been hmmming and hawing about what to do with my money -- invest or pay off mortgage? It's slightly ridiculous to pay down a mortgage with 2.49% interest rate, right? (I need affirmation because the idea of paying off mortgage is emotionally appealing right now.) The mortgage is a 5/1 ARM. If there is a time to pay it down, it would be August 2017.

I emailed someone the following (regarding continuing to invest in lieu off paying down mortgage) and would like to post it here so I really internalize it (or at least remember it):

Right now, I've got $10K in a Commodities ETF, which I'm relying on as "emergency fund". I'm glad I have that investment because while stocks have been creeping along or losing value, investors have been putting their money into the commodities markets. I don't want to liquidate my sole exposure to the commodities market if I can avoid it.

I think what I'll do is put the $12K I save between now and January in a Vanguard stocks/bonds balanced index fund in a non-retirement investment account. That fund should be relatively lower risk since it's balanced between stock and bond investments, which have low correlation coefficients. That should provide me with an alternative "emergency fund".

[llorona]

Are you comfortable with the amount of cash you've got on hand for an emergency fund or whatnot?

2.49% is an amazing interest rate! What happens after August 2017?

[Barlotti]

Well, I generally don't have more than $500 to $1K cash on hand for emergencies, but my life is pretty predictable (it's just me and my cat). If I really need to, I could liquidate assets. I've gotten a late start to investing for retirement (I started in earnest when I was 37 and am now 38), and I'm feeling a lot of pressure to catch up ASAP. Right now, I have an aversion to holding a lot of cash. Maybe next year I'll feel better about building up cash reserves.

In August 2017, my mortgage interest rate will reset to 2.75% at minimum and 4.5% at maximum (pegged to some U.S. Treasury index -- I think the 1 yr T bill). Every year after, my mortgage interest rate will reset and will increase no more than 2% every year and may reach a max rate of 7.5%. If I pay down my mortgage to $100K before the first rate reset in August 2017, even in the worst case scenario, my 5/1 ARM will do better than a 30 year 3% fixed rate mortgage. Also, my monthly cash flow will be comparable to what it is now, even in the worst case scenario.

I bought my place in 2012 and thought 2.49% was a great rate too. Incidentally, I shared the info with a friend of mine who 6 months later (after she purchased a condo) told me that she'd gotten 2.25% on a 7/1 ARM. Kinda cracked me up. As a caveat, this friend makes more than twice what I do, bought a condo worth two to three times the value of my condo, and has $60K lying around to pay income tax in anticipation of receiving income from non-preferred shares in private equity. So maybe it's an apples to oranges comparison.

Note to self: If you want FI in 7 years, in 2015 you need to reach 70% savings rate. This means living on no more than $1580 each month.

[Gilberto de Piento]

Well, I generally don't have more than $500 to $1K cash on hand for emergencies, but my life is pretty predictable (it's just me and my cat). If I really need to, I could liquidate assets.

I thought I was brave going from $10,000 to $5000 in my emergency fund recently. You are putting the "extreme" in ERE!

[Barlotti]

@Gilberto, love it! I'm being EXTREME! I got the idea of going without a cash emergency fund from one of Jacob's posts. To paraphrase, he said, "why not put your emergency fund in a brokerage account with a limit sell order?" or some such...

[jacob]

I said that?! If so, I'd like to retract it!! What I do remember suggesting is using a credit card as an emergency fund under the assumption that emergencies rarely happen and if they do happen, an 80% savings rate will pay it off quickly, alternatively, you could sell assets (but you might not want to).

[Barlotti]

@Jacob: I probably misunderstood. Sorry about that. What I remember is a post about emergency funds, which also mentioned placing a limit sell order on an asset (for example, at 10% depreciation). It was my first brush with limit sell orders, which caused me to read up on said topic. After learning more, I didn't place a limit sell order on any of my assets because if an asset's value plunges, it could sell heavily depreciated. Now that I know a bit more, would enjoy re-reading that post, but don't know where to find it. I think I read it in June or July off last year? Who knows, the post may be a figment of my imagination.

[jacob]

http://earlyretirementextreme.com/i-don ... -card.html
http://earlyretirementextreme.com/when- ... luous.html

[Barlotti]

@Jacob Thanks! Egad, I clearly don't understand stop or limit orders. I'm going to do some reading.

NEW 2014 AUTOMATED SAVINGS PLAN
Editing this post again. Sometimes I feel like writing, and will edit a post rather than make a new entry.

MY ONGOING EXPLORATION OF MINIMALISM, HARDLY
I'm editing this post again and adding more stuff. I inventoried my belongings after the minimization push: 1048 items not counting foodstuff, not counting my car or the stuff in it, and not counting sundry painting supplies in my basement. I would guess I own up to 1150 items.

[Barlotti]

I've decided to refurbish an old entry to track my August 2014 expenses.

I spent about $2,917 this month. I feel good because it's less than I spent last month, but am mindful that I need to halve my spending if I want to be FI in 7 to 8 years.

mortgage $1,127
dining $432
household $384
auto $183
utilities $170
clothing (cosmetics) $148
groceries $129
health & fitness $94
entertainment $80
bank fee $67
miscellaneous expenses $57
home repair $20
medical $20
pets $6

In accordance with YMOYL, I am going to comment on what spending was worth my life energy and what spending was not.

First, the spending I regret. My spending on eating out was high even though I spent about $90 treating friends to lunch and don't regret doing so. I spent too much in the "auto" category, and specifically on parking. The health & fitness spending was on massage and related tips -- cancelling membership in October. My entertainment spending was too high, mostly on Amazon on demand videos. I spent about $33 on cigarettes under miscellaneous expenses -- haven't smoked in 3 weeks. $67 in credit card finance charges. This is a total waste. I've transferred about $3.5K in credit card debt to another credit card with 0% APR on balance transfers until September 2015. I'll pay the debt down every month until it's gone.

Second, the spending I feel good about. The mortgage is worth it. This should come down by $50 next month because my PMI will be cancelled (yay!). The $90 treating my friends to lunch -- worth it. Spending $148 on summer cosmetics -- worth it. $6 on my pet -- worth it.

[Barlotti]

I'm refurbishing another old journal post. Using it for my September net worth calculation. I've been writing a lot lately, and want to streamline my journal a little.

Assets
home 188,000
investments 87,961
pension 3,292
checking 1,132
subtotal 280,385

Liabilities
mortgage 141,477
heloan 14,308
credit card debt 3,811
subtotal 159,596

net worth 120,789

My net worth has increased $6,642 since last month. I saved $2,800 after tax and $544 pre-tax this month to reach a savings rate of about 66%. I transferred my credit card debt to a 12 month 0% APR credit card, which I will pay down monthly.

Last night, I started using Morningstar portfolio tracker.

I've been walking a couple miles from where I work along Boston's harborwalk to a redline T station. It's a beautiful walk. Today, I found a nice stretch by the Intercontinental hotel and also the Children's museum.

And I made myself what turns out to be a nice meal from stuff lying around. Penne pasta with tuna, mayo, mustard, red pepper, and shredded cabbage. I love cabbage. Cheap, versatile, and keeps well.

I'm going to see how long I can go without spending more than $2 per day on my comestibles. I've got plenty of staples, rice, flour, quinoa, beans, lentils, canned diced tomatoes. I just need to buy myself some veg now and then.

[Barlotti]

Well folks, the month went by in a hurry, and I just didn't get around to calculating my net worth. Here goes...

Assets
home 188,000
investments 85,529
pension 3,292
checking 750
subtotal 277,571

Liabilities
mortgage 140,040
heloan 14,205
credit card debt 5,150
subtotal 159,395

net worth 118,176

My net worth decreased by 2,613. Mildly depressing. There are good months and bad months.

Here's my spending for the month of September
Household (including condo fee) $382
Vacation and travel $346
Dining $339
Auto $205
Charity/Donations $125
Groceries $101
Utilities $68
Health and fitness $59
Entertainment $48
Bank fee $42
Misc. $22
Pets $20
Medical $13

Total spent $1775

[Barlotti]

Assets
home 188,000
investments 89,694
pension 3,292
checking 785
subtotal 281,771

Liabilities
mortgage 140,040
heloan 14,050
credit card debt 4,090
subtotal 158,180

net worth 123,591

My net worth increased by 5,415. I added $2K to "investments" outside of my 403b. The rest of the increase was due to stock market gains and 403b contributions.

Here are October expenses
mortgage $2,851
auto $399
dining $289
groceries $163
household $82
health & fitness $59
cash $53
gifts $39
misc $37
vacation/travel $37
entertainment $34
bank fee $26
work related $10

total expenses $4082

Well, the spending I regret is on parking in the "auto" category. Last year, I spent about $34,910. This year, I seem to have spent $38,850 already. Something's not adding up in terms of the numbers that ye olde personal finance software is giving me, but I think it's safe to say, I'm not meeting my savings goals. I really should be able to live very, very comfortably on $30,000 per year. I should make that my goal for 2015. I'm just not good at extreme savings, and I haven't figured out my psychology on this point.

[Barlotti]

I've been listening to "The Millionaire Next Door" on youtube, and although I feel like I know way too much about the car buying habits of millionaires, I really appreciate the break down of who is a good saver and who is not.

The metric involves taking your annual salary and multiplying it by one-tenth your age to get your denominator. Then, you take your actual net worth and divide it by your denominator. If the resulting number is 0.5 or less, you're a UAW (or an under accumulator of wealth). If the resulting number is between 0.5 and 2, you're an AAW (or an average accumulator of wealth). If the resulting number is greater than 2, you're a PAW, the elusive positive accumulator of wealth.

I did the calculation based on my current income, and the result was disheartening. $123,591 divided by 330,600 is 0.37 and this definitely puts me in the UAW category.

But I don't think this is a great representation of my savings ability considering that I've made less than $25K annually (sometimes far less) for about 10 of the 16 years I've been "working". My average annual salary over the past 16 years has been about $41,750 and if I use that in my figuring, I should take my net worth of $123,591 and divide it by $158,650, giving me 0.78. I figure this puts me in the AAW category, if not now, than in the next year.

In my view, PAWs are prodigious. Averaging an income of about $42K annually for the past 16 years, I would need about $317K saved now to qualify as PAW. That's astounding to me even though having perused this blog, I'm no stranger to extreme savings. It will take me at least five more years to reach PAW!

Based on what I've gleaned from the audiobook so far, here's what I've got going for me.
My mortgage was less than two times my pre-tax income.
I don't care about status symbols.
I'm not into "stuff".
I'm frugal-ish. (Or is it that I'm frugalicious?...)

[Gilberto de Piento]

I think the formula you described is overly simplistic. Two issues I see are that it doesn't take into account the time you've been working or your progression in salary.

For example, I've had a real job only since age 26 since I was getting an education before that. The formula says I'm an underaccumulator since 102,000/(0.1 * 70,000 * 34) = 0.43. In order to be a positive accumulator I would have to have saved 476,000 since 476,000(0.1 * 70,000 * 34) = 2. This would be 59,500 per year in the eight years I've actually worked, or 85% of my income, and this still doesn't account for the problem that I haven't always made 70,000 per year.

I haven't read the book so maybe they discussed these issues.

[bottlerocks]

That formula definitely does not suit younger people or people whose salaries have recently increased. I would have had to accumulated >$457600 to be an overaccumlator, which is >$100000/year since I've been in the workforce, which is over twice what my average net salary has been. 457600/(0.1*88,000*26) = 2.

However, if my salary stayed flat over the next 10 years, 633600/(0.1*88,000*36) = 2 seems much more reasonable to me, maybe undershooting just a bit. Substituting average net in for current salary seems like it could be more meaningful for young and/or fluctuating careers.

[jacob]

No they didn't discuss it. Basically, the rule is just a crude rule of thumb. It doesn't work if you just started in your career or if your salary is still growing exponentially or if your salary just dropped substantially.

If you think about how their equation works, it basically makes you a PAW if you've had a savings rate of 20%(*) for most of your working life under the assumption that you've been working most of your life (that is, you're an old person) and that your wealth has grown as fast as your salary increases. IOW, in the long run, the requirements to become a PAW are fairly easy by ERE standards.

(*) That's a lot by normal person standards.

[Barlotti]

@Gilberto and bottlerocks: Glad I'm not alone.
@Jacob: Perhaps by ERE standards, getting to PAW in a short period of time is easier than getting to PAW over a long period of time? Depends on how a person feels about their income-generating work, and their lifestyle.

***************************************************************************
I was thinking of flying to Seattle next week in order to attend a long-time friend's first ever book signing for the first book in a series. She's gotten some good reviews from the Library Journal and Publisher's Weekly, and my book blogger friend who read an advance copy says it's well written. The first book in her next series is being published by St. Martin's Press in hardback next year.

And then I remembered my savings goal...

I could consider this situation in a few different lights. One view is that I'm sacrificing an enjoyable life experience (seeing my friend at her first book signing) to reach a certain number that's in my head. But that feels uncomfortably Scrooge-ish to me. Another view is that I didn't plan well enough, or exhibit enough self-control to be able to both attend the book signing and reach that certain number in my head (which can also be classed as an enjoyable life experience). Somehow, this view seems a bit more... constructive.

In the end, I probably won't go to Seattle for another reason -- I'm ridiculously busy at work and spending $400 on airfare and over ten hours in the air for a weekend trip just doesn't seem worthwhile. But I've gotten a good reminder of the value of spending and saving with intention. Perhaps if I'd thought about a Seattle mini-vacation in October, it would have been easier not to drive and park so much.

[Barlotti]

Small though it is,
it's mine,
and welcomes me with margarene colored walls and knocked about table and catworn sofa.