Overreaction leads to Underperformace

Have you ever heard of the Dalbar study? This company does an annual study that looks at the impact of investor behavior on returns. What they’ve found is that over time not only do mutual fund investors underperform the market, but they also underperform the underperforming mutual funds. Wow…that’s a lot of underperforming.

This underperformance is attributed to picking the wrong mutual funds and getting in and out of the market at the wrong times. Since it is impossible to time the market, I would argue that it is always the wrong time to be getting out of the market.

Here’s an example of a chart Vanguard put together using data from the Dalbar study:

source: Vanguard

What do YOU do when the market gets scary?

The answer to this question should be “nothing” or “buy more”. Sadly, research shows that many people do exactly the opposite. Selling everything when things are scary can feel good and provide a sense of safety in the short term. These same people will buy back in ‘when the coast is clear’, which typically means prices are much higher than when they sold in the first place.

For your long-term investment strategy, sitting out of the market is the one big mistake that you can’t afford to make. With craziness looming in North Korea and other parts of the world, it would be easy to self-justify getting out of the market right now. But when do you get back in?

Do you remember how Greece’s economy was going to destroy global markets? How about the fiscal cliff and government shutdown? Oh, and let’s not forget about the debt ceiling or the flash crash. For eight years the market has continued to rise, quickly recovering from any number of fear-inducing events. Over longer periods of time, short-term declines aren’t even noticeable.

It can best be summed up by a chart I have framed on my desk at work from Behavior Gap.

The Value of a Financial Advisor

I am a Do-It-Yourself investor. I think most anyone can successfully manage their investments without a financial advisor. Financial advisors will point to the chart above and argue that you need to have your accounts professionally managed to protect you from yourself. While there may be some truth to that, I think all you need is someone who can talk you off the ledge.

Even though I am a DIY investor, I have a financial advisor. He is someone I used to work with and trust his judgment and integrity. He doesn’t manage my accounts, but I get free dedicated access to him because of the size of my accounts. We talk a few times a year and he helps validate that I’m still on track to reach my goals.

If I ever were considering selling everything, he would (hopefully) be able to talk some sense into me and prevent me from making that huge mistake. The real value of a financial advisor is when they can remind you of your long-term goals in times of short-term uncertainty.

March 2017 Net Worth Update

Wow, is it really April already? Hopefully, you avoided getting pranked too badly on April Fools’ day. Here in the DIY house, we don’t really like playing jokes on each other. We spent the day doing some spring cleaning of the garage and playing with the kids. As we enter a new month, it’s also time for another net worth update. In March, our net worth increased to $651,050. 

NET WORTH DETAILS

CASH

Our cash went down a bit this month, but it’s mainly because we did some large charitable giving. The largest chunk of this was our monthly tithe paid in March for February, which was a big income month. Additionally, we made our annual donation to our alma mater. With all that, I’m actually surprised that it only went down as much as it did.

We are working on growing our cash cushion but do have some decent size house project expenses coming up that will slow that down. These projects include a backyard fence and small kitchen remodel. Whenever we do projects we plan to do them without taking money out of our savings account .

INVESTMENTS

The market was essentially flat for the month of March, so our investments didn’t really change other than monthly contributions.

We still haven’t made the final payment for our hospital visit, which will come from our HSA included in this total. The only reason we haven’t paid it yet is that there has been some confusion on who we owe what since it depends on the timing of when claims are submitted whether we pay 100% as part of our deductible or 20% after our insurance kicks in. I think we’ve figured it out, but we had to get refunds from doctors who we paid in full but then didn’t need to since they took their sweet time submitting the claim and ended up getting paid mostly from our insurance.

What a mess. I really hate dealing with doctors’ offices. Thankfully they are used to this confusion and aren’t in a hurry to get paid by us and they won’t send the repo man looking for our baby if it takes another couple of weeks.

CARS

I crossed over 200,000 miles in my Corolla this month! It was a bit anti-climactic but does feel like a pretty big accomplishment in delayed gratification and proper maintenance. We’ve been prepping/planning for a replacement vehicle for a little while now, and I had been thinking that something like a used Lexus was in my future. When I did a little bit of shopping, though, I found that I can actually get a brand new Corolla for cheaper than a 5-year-old Lexus. We aren’t pulling the trigger anytime soon, but I’m now leaning towards a newer, less luxurious car when that day comes. Either one would be a huge upgrade from my current vehicle.

I walked through this logic the other day while carpooling with a co-worker who suggested I get an even more expensive car brand new (they don’t make ‘em like they used to, right?). Rather than give him a sermon on FIRE (Financial Independence, Retire Early), I just nodded and said: “hmm, something to think about”. I’m not going to change his mind and he’s not going to change mine. We can still be friends, but we are at different stages in life/career and don’t have the same early retirement goals. He earns ~4x as much as me, drives a $100,000 car, and is already at the age that I plan to be when I have the option to retire.

HOUSE

Nothing too exciting here other than continuing to pay a little extra on the house each month. We plan to kick this into overdrive once our cash balance gets a bit higher, but we are only paying $600/mo extra until then. A house down the street is for sale and they are asking $490k, so $450k doesn’t seem unrealistic. In the years since moving here, I’ve learned that many of the same features that attracted us to our neighborhood are qualities that continue to attract buyers (proximity to great schools, large lot size, neighborhood amenities, traditional architecture, etc.), which helps houses to sell quickly.

529s

We first started funding our 529s about a year ago and I haven’t included them in our net worth figures. I still don’t plan to even though it is all technically still ours, but I will track it here. It is worth including to show what we have been saving and how that amount continues to grow.

We add $200/mo and have it allocated 100% towards equities. I know this won’t be enough to fully cover college, but we are torn on how much support to provide. I had limited financial support for the first half of college but was on my own entirely for my MBA. My wife was completely on her own for her entire degree. She finished with no debt and I had some debt for undergrad, but we planned and saved aggressively to finish my MBA with no debt.

I know all about the rising costs of education, so hold the hate mail. I also believe that there will always be a way to get the education you need without debt. We’re savings towards our kids’ college, but don’t want to have it all in a 529 so we preserve flexibility on how much support we provide.

So that’s it. Another good month of building our net worth, and we’re still on track to hit our 2017 goal of $700,000. Given the strong 1Q gains, we should get there if our return for the rest of the year is >3%.

Book Review – Black Edge

I just finished reading Black Edge, by Sheelah Kolhatkar and I give it a 4/5 star rating.

The book focuses on the hedge fund industry and insider trading, specifically at SAC Capital. SAC Capital started in the early 1990s by Steve Cohen and has enjoyed ~30% annual returns for more than a decade. Black Edge outlines some of the methods by which these massive returns were generated.

What exactly is Black Edge?

White Edge refers to information that gives some advantage but is already publicly available. Gray Edge refers to information that is not widely known and could influence a stock price once widely known. Black Edge, however, is information that is clearly illegal to share or to trade while in possession of the information. In this book, traders would try to get Black Edge like detailed quarterly earnings and drug test results.

On Wall Street, traders are always seeking some type of edge. A great example of this can be read in this article from the Wall Street Journal a couple of years ago. Did you know you can subscribe to a service that will fly a helicopter over oil storage facilities to measure inventory levels with advanced cameras? These subscriptions can cost over $300,000 per year, but can be worth millions to traders.

This book also talks about ‘Expert Networks’ used by SAC to get access to company insiders. These networks allow individuals with expertise to tap into a network that will pay them handsomely for consulting. Investment management firms can use these experts to refine their models and assumptions. These conversations are supposed to avoid discussion non-public information. It’s a pretty good arrangement on its face but it opens the door for information to be shared that shouldn’t be. Those who might want to profit from knowing something big before anyone else can use these networks to their advantage.

The Bottom Line

The story is very well researched and written and provides a window into a secretive area of the market. Although I read it for entertainment, I still tried to learn something. My takeaway was yet another reminder that I have no business picking individual stocks and competing with folks like this. I’ll just stick with index funds for the bulk of my investing.

Evaluating Life Insurance Needs

It’s that time of year again, where I get the invoice for my annual life insurance payment and re-evaluate our life insurance needs. This year is a little different than previous years because we also welcomed our fourth child into the family last month.

WHY HAVE LIFE INSURANCE?

To me, the purpose of having life insurance is to provide for my family in the event of my death. It is no coincidence that my policy payment occurs in the same month as my oldest child’s birthday. Prior to having children, the only life insurance I had was whatever was offered free through my employer (4x salary plus $50,000). While that was certainly generous, as a newly married couple it was actually more than we probably needed. My wife had a good job, and either of our incomes was enough to support us both. When we found out we were expecting our firstborn, we knew that we wanted to have more coverage.

During my wife’s pregnancy, we were saving 100% of her income and our plan was for her to be a stay-at-home parent. We wanted to have enough life insurance so that if something were to happen to me, she would be able to continue to stay home with our children at least until they finished high school. If something were to happen to her, the plan was (and is) for me to move closer to family, but still to have some life insurance to help cover childcare costs that we currently aren’t incurring.

At the time, our household expenses were under $50,000/year and we settled on 20-year term life insurance policies of $500,000 for me and $250,000 on her. This, in addition to my employer provided plan felt like plenty of coverage. I have since moved on to a new employer but still have life insurance provided by the company equal to one year of my salary. It’s worth pointing out too that the death benefit of life insurance policies is not taxed, so 100% of the benefit actually would be received as cash.

RE-EVALUATING OUR NEEDS

Each year when we pay our life insurance bills, we ask ourselves if we still feel that we have the right amount of coverage. So far, that answer has always been yes. As our family has grown, we’ve been able to keep our expenses pretty well contained and we’ve continued to save and grow our net worth.

Although much of our net worth is tied up in retirement accounts and home equity, if I were to die Mrs. DIY$ would sell the house and be able to access my retirement accounts without any penalties and would have a net worth over $1M. We are targeting to have more than $1M in net worth before we fully retire, but this would be plenty of cushion to allow her to sustain the household long enough to get all of the kids grown and then some. She hasn’t been in the workplace since becoming a mom but looks forward to being able to re-enter the workforce at some point in life, so this would not be a burden if she weren’t left with enough for an immediate lifetime retirement.

SIMPLE ADVICE FOR CONSIDERING WHOLE LIFE INSURANCE

Life insurance salespeople will sometimes argue that buying term life insurance is throwing money away and that you should consider whole life insurance for the savings and investing benefits. To that my simple rule of thumb is this.

“Don’t invest using and insurance product and don’t expect insurance from an investment product”.

If you can remember that one simple rule, you’ll avoid significantly overpaying for life insurance and also have more realistic expectations from your investment portfolio.

To the life insurance salesperson who says we’re wasting money on term life, I’d add that we have 14 years left in our 20-year policy and my policy costs $365/year. I’ll be thrilled if 20 years passes and I end up having flushed $1 a day down the toilet for that time, but my mind is at ease knowing my family would be taken care of should the awful happen.

February 2017 Net Worth Update

February has been a busy month in the DIY$ household. We welcomed a new baby into the family, had family visit from around the country, and even found time to take a trip to the beach with our newborn (it felt crazy, but turned out great). It was also a great month for us in the net worth department. As I alluded to in last month’s update, we were expecting February to be a great month and it certainly did not disappoint. We ended the month with a net worth of $646,721, an increase of over $35k.

NET WORTH SUMMARY

CASH

Our cash went up substantially, largely due to year-end bonuses that paid in February. We’ve been working on increasing our cash savings, and this helps us get closer to our new goal. We haven’t fully decided how high we want the balance to get, but it’s probably somewhere around $50,000 so long as the potential for a new vehicle purchase remains on the horizon. We also just had a baby and haven’t seen all the bills, but we should be able to cover those expenses using our HSA which is included in the Investments category.

INVESTMENTS

Our investments grew from good stock market performance as well as extra large 401k contributions with the accompanying company match from my year-end bonuses. The S&P 500 notched a 3.72% gain during the month and our largest holding is IVV, which is responsible for over $10k in gains. I added some very small speculative positions in NLY and MORL through my Robinhood account but this won’t move the needle in either direction.

Nearly all of our investments are in no-load mutual funds or ETFs that our brokerage firm allows us to purchase with no trading fee. I do place occasional trades but have opted to use Robinhood for most transactions that otherwise would include a transaction fee. In early February, Schwab announced that they were lowering their trading cost from $8.95 to $6.95. This was definitely a win for consumers but the price seemed selected only to be able to say they were cheaper than Fidelity who has been offering trades for $7.95 for several years.

Over the weekend, I was poking around on the Fidelity website and noticed that they were no longer comparing themselves to Schwab, opting to only compare to companies that charged higher commissions like E*Trade and TD Ameritrade. It seemed a bit shady, so I called them out on Twitter and got the typical canned response.

Yesterday I noticed that Fidelity had lowered their trading cost to just $4.95. Not to be outdone so soon after gaining the lead in the race to the bottom Schwab quickly announced that they would be matching Fidelity at $4.95, temporarily calling a truce in the price war. I don’t see myself trading more often just because trading commissions are lower, but $4.95 certainly feels a lot cheaper than $6.95 or $7.95 and should be a win for investors.

CARS

Sadly, this isn’t going to be where I tell you that I hit 200k miles in my car. That update should be coming soon though since I just hit 199,000! While reading through Twitter it sounds like Corolla’s are pretty popular in the FI community, and hearing other stories of immortal cars gives me confidence that mine will be able to make it to 250,000 miles or more. I did go to a used car lot that specializes in the type of car I’d like to replace my Corolla with, but only because I’m not normally in that area and I successfully avoided giving myself a case of car fever.

HOUSE/MORTGAGE

This month, we finally got our mortgage balance under $200k, woo-hoo! It was always part of the plan to throw a good chunk of my bonus at the mortgage and even though $199k is still a lot of money, it’s a psychological boost to pass that threshold. This month my oldest was asking me if we could buy something like a 4-wheeler and I explained that I would love to have those types of toys, but not until we pay back the money we borrowed to buy our house. To help visualize what this meant, I created this chart that showed how far we’ve come and how far we have to go.

Each red square is $1,000 we have still to pay back. The green squares show how much equity we’ve paid off, including our original down payment. The yellow squares are market appreciation since we purchased.

My projection is that we’ll have the house paid off before the oldest is 12 years old, which would be perfect timing to get a 4-wheeler.

Some thoughts on Bubbles and Student Loans

“The market can stay irrational longer than you can stay solvent” – John Maynard Keynes

These words from the famous economist John Maynard Keynes come to mind whenever I think I see some type of bubble in the stock market or elsewhere. The saying refers to the risk of taking a short position, or betting that a particular investment will go down in value. When you simply purchase an investment, your risk of loss is your purchase price and your potential gain is unlimited. When taking a short position, you profit as the investment loses value and lose as the investment gains in value. In shorting, your gains are limited to the point that the investment goes to $0 but your risk of loss is unlimited.

Michael Lewis’ book turned movie, The Big Short, popularized short selling by showcasing investors who won big betting against the U.S. housing market in 2008. The Greatest Trade Ever showcases other traders who made even larger gains on similar types of trades. One thing that was common between both stories was the serious risk of insolvency many of the investors faced as they continued to pay premiums waiting, and waiting, and waiting, to be proven correct. They knew that the housing market couldn’t continue rising indefinitely, yet it continued to defy their predictions almost to the point that they (and their investors) could no longer handle the continued losses.

FINDING THE NEXT BUBBLE

It seems like every week I come across an article predicting the rise of another bubble. There’s the ‘Auto Loan Bubble’, the ‘Housing Bubble’ (again), and don’t forget the ‘Student Loan Bubble’.

“An investment in knowledge pays the best interest” – Benjamin Franklin

For hundreds of years, this mantra has been repeated in this country and for the most part, I tend to agree. Education can be the key to a better life and can allow for significantly higher lifetime income. What is missed from this simple quote though, was clarified by John Adams who said:

“I must study politics and war that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.” – John Adams

Interpreted for our day and age, I take this to mean that education is great, but don’t study something that doesn’t have a financial return unless you don’t need a financial return. If you build a legacy sufficient to sustain the next generation, then by all means, allow them to study something they love that may not pay the bills, because you’ve got that covered for them. If you don’t have this luxury and do actually need your education to provide a return, then you need to study something that has value in the marketplace.

TOO MUCH OF A GOOD THING IS BAD

Where we run into problems is the belief that an education is worthwhile at any cost. I recently was reading about the astounding levels of debt the average dentist owes. The author of this article finds the average dentist just starting out has an average of $450,000 in student loans with an income of just $120,000 without even taking into consideration the cost of buying into a practice or other borrowing such as a mortgage. Add it all up and it’s not difficult to find a dentist with over $1,000,000 in total debt. An income of $120,000 sounds great, but it doesn’t go very far with debt levels approaching 4x annual income.

Is this a new thing? One of my favorite fiction authors, Michael Crichton, started his career going through Harvard Medical School (which later helped him as a writer for the hit TV show E.R.). While he was a student there, he wrote Five Patients where he walks through the hospital visits of 5 hospital patients in the 1960s. The book was first published in 1970 and I read it 40 years later in 2010. Even though the book was 40 years old, I was surprised how relevant some of the stories were and was shocked that some of the same problems that existed in the medical field then, persist to this day. I specifically remember that he highlighted that in order to enter the medical profession one had to either come from a well-off family or have a strong tolerance for high levels of debt.

I’ve been saying for years that it doesn’t make sense that students are able to borrow as much as they do and that reform is imminent, yet for years I’ve been proven wrong. Thankfully I haven’t made any investments based on that theory. If people have been saying this as far back as 1970 though, are we truly close to the bubble bursting?

January 2017 Net Worth Update

We’re off to a good start of the year here in the DIY$ household. We had a few large expenses come in this month, but still ended up growing our net worth by $8k to $610,843. We set an ambitious goal for 2017, and as good as this month was, we’ll need some even better future months to get to the goal. Fortunately, January is likely going to be our lowest income month of the year and we had some larger expenses that don’t happen every month. Let’s break it down:

CASH

Our cash balance basically didn’t move at all this month. We paid our normal extra towards the house, but also had some big expenses like our semi-annual car insurance ($800), and 2 new tires for my car ($200). Our insurance bill actually went down a little bit, but that’s only because I took full coverage off of my Corolla. I figured we’re at the point now that we can self-insure the cost of the car, since insurance would likely not give much more than $2,500 if it were totaled.

I don’t know about you, but whenever I have to pay for maintenance on my Corolla, it actually makes me happy. I probably shouldn’t be happy that I had to spend $200 to get 2 new tires, but I really was thrilled because I knew how cheap that was compared to what I would be paying if I drove some other cars. Not only were they cheap, but the tires I was replacing had been on for nearly 4 years and just barely could still pass the ‘penny test‘. Ever heard of it? Take a penny and stick Lincoln’s head in the tread in your tire. If his hair doesn’t get covered, you need new ones.

Just a few days prior to getting tires, I was talking to a co-worker who drives an expensive Italian sports car and lamented that he had to get new tires pretty much every year and they cost over $2,000 for a new set of tires. Hearing stories like that make me love my little cheap car and gives me additional motivation to defer an upgrade.

The coming months should boost our cash balance as we expect some bonuses to come in as well as a raise at work and our tax refund. We finished our taxes for the year and I’m pleased to report that we planned our taxes to the point where our federal refund was only about $600. I prefer to not let the government sit on my money interest free, and this was much better than in previous years when our refunds have been much higher.

INVESTMENTS

The market continues to rally, boosting our investment portfolio by nearly $8k. We didn’t do anything more than our normal monthly 401k contributions and actually decided to take a break from additional IRA contributions while we focus on paying off our house. Between my contributions and employer match we are still adding 15% of my pay to my 401k, so feel that we’ll still be on track to reach our long-term goals even with temporarily reducing our retirement contributions.

One item worth noting is that we have an HSA account that I include in the total for the investments category. It’s currently all in cash and we had some baby related expenses that we pre-paid in January out of that account and expect to use it for the rest of the labor and delivery bills we’ll get in February/March. Eventually I’d like to invest funds within the HSA and cover actual expenses out of pocket, but until the house is paid off or the balance starts to be substantial we’ll be using it for current medical expenses.

CARS

Did I mention that I love my car? Stay tuned for a special announcement when I hit 200,000 miles later this year. The value of our cars moved in the expected direction this month but part of me thinks my wife’s car is undervalued. I saw a dealer selling a very similar car to hers that only had a few more bells and whistles and they were asking more than double the value KBB assigns to her car that I use here. I’m ok using the lower value here though since we aren’t selling so it doesn’t really matter.

HOUSE/MORTGAGE

I don’t have anything special to report on this front, other than the fact that we’ll be making a big extra payment on the mortgage very soon to get the balance under $200,000. Not sure why I’m so excited to see that ‘2’ go down to a ‘1’, but it’s a fun milestone to reach. We’ve got some house projects we’re planning on doing this year but are in a holding pattern right now until the baby is born.

 

We’ve come a long way and still have a ways to go, but as always, it helps to look back and reflect on the progress we’ve made to this point.

 

 

We created our own Sabbatical

Throughout my career I have had jobs with varying degrees of schedule flexibility and work/life balance. When I first entered the workforce, I was able to take two weeks of vacation per year and am now at a point where I get 4 weeks per year. The one thing that has been consistent across any job I’ve ever had is that it has been difficult to take vacation for much longer than one week at a time. I’ve always been envious of jobs that allowed for significant amounts of time off, but always thought that type of flexibility was only for people like teachers or professors.

There are, however, several employers in a variety of industries that still offer sabbaticals. For example, Charles Schwab offers 4 week sabbaticals every five years. Intel has a program that offers any US based employee an 8-week paid sabbatical every seven years. I even know people at Intel who have combined their sabbatical with all of their vacation and turned their sabbatical into 12 weeks. These programs sound great, except I’ve never worked for an employer that had a similar benefit.

So far in my career, the longest vacation I’ve taken has been 11 days (7 work days and 2 weekends). Oh yeah, except for that one time that we created our own 8-week sabbatical…Allow me to explain.

THE SETUP

In 2012, I was in my last year of a part-time MBA and was working full-time as a financial advisor. I knew that I wanted to transition to working in corporate finance and was using the career center at my school to get interviews with big name companies that were coming on campus to recruit. Throughout Fall 2012, I interviewed with 15-20 Fortune 100 companies and ended up accepting an offer right around Thanksgiving 2012 to start in June of the following year. Most of the time you receive a job offer you would be expected to start soon, but hiring through school campuses tends to be different since students are hired contingent upon finishing their degrees. I was looking forward to the new job but wasn’t in a huge hurry to start since I would be taking a pay cut and would need to sell my house and move to another part of the country.

Over the next few months, I continued on at work like nothing had changed and outperformed expectations while making sure I did not make any promises I couldn’t keep (ie, I knew I would be leaving and didn’t want to promise anything I couldn’t fulfill). We narrowed down where we wanted to start looking for houses in the new area and listed our house for sale. My boss at the time had an idea that I would be leaving the company when I graduated the following Spring, but I hadn’t let him know the details until that end came closer as I had fears (with basis) that he would be forced to fire me if he was given formal notification I had accepted another offer even though it wasn’t from a competitor and there was no conflict of interest. If I were let go before the end of the year it would have been unpleasant as I wouldn’t get my year-end bonuses that made up a decent portion of my total annual income.

In that job, roughly 75% of my income came in the form of quarterly and annual bonuses so if I quit without working an entire quarter I would be leaving a good chunk of money on the table. Since I was expected to start the new job in June, I decided that it didn’t really make sense for me to work for April and May (meaning 25% of my normal pay), so we decided that I would give my formal notice on April 1st.

QUITTING

Leading up to that date, I think everyone in the office knew I was leaving except my actual boss. There are times when I regret not telling him, but I had seen too many people walked out when providing notice that I really didn’t want to risk it. When I finally dropped the news that I was giving two weeks’ notice, he wasn’t surprised that I was leaving but was surprised that it was then and not three months later. My fears of being walked out did not come to pass and over the next week or so was able to help transition my clients to the advisor I felt would be best for each of them individually.

Leading up to quitting, we had put our house up for sale and were under contract and timed it so that our closing date was also my last date of work. My new job came with a relocation package that provided movers who packed up all of our things and kept them in storage until we found a new place to live, which allowed us a ton of flexibility. If I ever have to move again I will definitely make sure to get a similar relocation benefit or else I’ll pay for it myself. We packed up my little Corolla with everything we would need to live for 8 weeks for me, my wife, and our two kids (ages 5 months and 2 years), and we set off on a fantastic adventure.

THE TRIP

Our first day of our trip started with a real-estate closing. All our things had been packed up so we stayed the night at a friend’s house and showed up the next morning to finalize the sale of our house. We had been aggressively paying down the mortgage so were excited to get nearly $90k of cash out. We didn’t need any of this money for our trip since we had pre-paid some of the more expensive parts and I would still be getting paid bonuses and commissions for the next two months, but it was a huge relief knowing that we had signed what we needed to sign and could embark on our massive road trip and never have to look back.

Over the next 8 weeks, we spent a week on the west coast of Florida, then a week on the east coast of Florida, then a third week at yet another beach in the Florida panhandle (we like the beach, ok?). We liked the last beach so much it has become our new favorite and we’ve been back a few times in the intervening years. Since we were travelling before school was out, most everywhere we went we were able to get good deals on places to stay and we mostly had the beaches to ourselves. After about the two week mark I started to forget what day of the week it was and it was AWESOME. I was able to catch up on my reading, exercise, and overall not be tied to any schedule for anything. The only thing that I kept track of was Sunday, where we ended up visiting a new church in a new part of the country pretty much each week for this entire time.

If you haven’t been to Miramar Beach FL (near Destin) in the off-season, you’re missing out

When our time in Florida was up, we headed across the country again to pay visits to some of our scattered extended family before ending up at a family members’ house that we made our home base for the last few weeks. At pretty much every stop we visited with cousins, parents, siblings, or grandparents and were able to see most of our extended families. By this time, I think I had also memorized the audio of at least a half dozen Disney movies that we had playing in the backseat for our kids, so it was good to have a few weeks with no long drives planned.

Our last big hurrah was a trip to Mexico where we brought some other family with us to spend a week at an all-inclusive resort near Cancun. This particular resort came highly recommended from good friends and I had never been to a resort like it so I didn’t have a reference point to know how it compared on price. I booked the trip and didn’t think much more about it until we got to the resort and realized that we had booked a huge suite with spectacular ocean views. Had I done some more research I may have downgraded our suite to something smaller without an ocean view, so for once I’m actually glad I didn’t do more research. These views made the entire trip.

Sunrise was always amazing

Sunset wasn’t bad either

The kids spent a lot of time napping, but we totally didn’t mind staying within our suite while they did so.

Many nights I just sat out on the balcony and read with the sound of the ocean in the background. It was heaven.


 

BACK TO REALITY – RECAP

Eventually we had to get back to the real world and start my new job, requiring yet another cross-country drive. I made the drive alone and my family flew to join me a month later when we closed on our new home (I lived in a hotel for that first month and visited them on the weekends).

From the time I quit my job to the time I started my new job, we drove nearly 7,000 miles in 8 weeks and were in 17 different states. We visited most of our extended family members throughout the country and spent around $7,000 on hotels and airfare, $1,600 on gas and car repairs (brakes, tires, oil changes), and $1,500 on food/groceries. Because I waited until April to give my resignation, our income for these two months was more than enough to replenish our savings for all these expenses, and the time off to rejuvenate allowed me to prepare well and start fresh at my new job.

This trip gave me a taste of what early retirement could look like and has encouraged me in the years since to continue to save aggressively towards that goal. If I didn’t have another job lined up, the trip wouldn’t have been nearly as enjoyable since we hadn’t achieved financial independence yet. We still haven’t achieved financial independence, but our net worth has more than doubled since this trip and only needs to double two more times before I’d feel comfortable retiring for real.

I’ve heard the phrase that you should ‘Retire Early and Often’ which I guess is what we did (minus the often part). As much as I loved it, I’m not sure we’ll be doing anything like it again. As time passes, I’ll just have to weigh the benefit of taking another sabbatical/mini-retirement against delaying my true full-retirement date. I’m only about 15 years away from being able to fully retire. Some days that seems farther than others, but most of the time I feel that I can ride things out until then and have made changes that will help prevent my burning out.

$233,000 to raise a child? Not mine…

CNNMoney recently posted an article stating that it costs over $233,000 to raise a child citing a report from the Department of Agriculture.

In our house, I can tell you right now that I don’t expect us to spend anywhere near that amount to get our kids raised and through high school. We have three children and the oldest is about to turn 6 and so far, we aren’t on track to spend that much for all three let alone for each one.

Just for kicks, I went back and looked at our household expenses in 2010 (the year before we started having kids) to 2016 (when we had three kids at home). Here is what I found:

  • Our total out of pocket housing costs are roughly the same. We live in a larger, more expensive home but aren’t making as much extra principal payments. Interest and taxes are around $200/mo higher. Even if we didn’t have kids, we would have upgraded houses from where we were living in 2010 so any increases really can’t be blamed on them.
  • Auto expenses are up $65/mo, mostly from having insurance on 2 vehicles instead of 1 and my longer commute increasing gas. We don’t shuttle our kids all around town to participate in every possible activity and we would have purchased a second whether or not we had children so this is also unaffected. Yes, we have an Expedition for carrying a lot of people but even if we had no kids our second vehicle would be a large SUV or pick-up truck with similar ownership costs.
  • Utilities are up ~$150/mo, mainly due to electricity, garbage, and needing pest control in our new home. We moved to a warmer climate, use the air conditioning a lot more throughout the year, and consider pest control a necessity where it wasn’t before. Garbage pickup is just plain more expensive in our new area, we aren’t paying any extra for having more trash. So again you can’t really attribute this to having kids. Are you seeing a trend here?

To be fair, there are a few areas we do spend more:

  • We now spend $375/mo more on groceries and restaurants. $125 of this is related to eating out, something we pretty much didn’t do at all before we had kids, but only because we were paying huge tuition bills for my MBA. Since whenever we do eat out our kids don’t actually eat anything (darn the pickiness), almost none of this increase can be pinned on them. The $250/mo increase in groceries is probably mostly due to having more mouths to feed (and diapers, which we file in this budget category).
  • In 2010 we lived in a house we had built just a few years earlier so our home improvement projects were mainly just cosmetic and very inexpensive. Now we live in a house that is a bit older and came with a long list of things we’re working on changing to make it our own. In 2016, we spent $12,000 more than 2010 on home repairs, maintenance, and furniture. Can we blame this on kids? Not really. Maybe $500 for the whole year was furniture for the kids’ bedrooms, but we would have furnished rooms as a guest bedroom, office, man cave, etc. if we didn’t have kids. I used to have an affinity for high-end entertainment systems that I no longer purchase/own so you could make an argument that kids are saving me money in this area since I would want to be buying much more expensive home entertainment equipment if I weren’t worried about kids destroying things.
  • We spend $575/year on life insurance now that we didn’t have before we had kids. When it was just me and my wife, no one truly depended on my income so we didn’t bother getting life insurance. As soon as we started having kids, we took out a term life insurance policy on each of us and we pay the premium annually right around the time of our oldest child’s birthday.
  • Our clothing expense is up $70/mo from 2010. A lot of this is from kids’ clothes, but we’ve increased spending on clothing for ourselves as well. We were spending very little on clothing for ourselves while we were paying grad school tuition each year.
  • Travel/Entertainment is up $4,000/yr from 2010 to 2016. We would undoubtedly travel even more if we didn’t have kids, it takes so much energy to go anywhere with our little people. So whatever we spend on travel for them, I feel like we would spend that and maybe beyond on ourselves if it were just the two of us. I like to be able to show our kids new places and to have them experience new things, but all of this definitely falls in the discretionary category and wouldn’t be what I consider a core cost required to raise a child.
  • We put $200/mo into a 529 last year. We wouldn’t do that if we didn’t have kids, but it also isn’t a cost that will help ‘raise’ them as outlined in the study since really it is intended for use after they are supposedly off on their own.
  • Our charitable giving is up $7,000 from 2010. Again, not because we have kids.

The way I see it, our expenses are up roughly $600/mo more now on things that I consider directly attributable to the (three) children. Multiply that out 18 years and you get $130,000, or roughly $43,300 a child…a fraction of the amount stated in the article. Even if you assume the costs double (as things will certainly get more expensive as they get older), it’s still nowhere near the costs they assume. Any other increases in our expenses are for things we would have done whether or not we had kids. This also ignores the substantial tax credits we receive each year for each child.

The study assumes that you need to purchase a larger home with an additional bedroom for your child but I question that logic. We owned two separate three-bedroom homes before we ever had our first child, and simply converted one room to be a nursery when we were expecting our first. We didn’t go out and buy a larger house just because we were starting a family. We wanted to own a home whether or not we had children in order to build equity and to stop sharing walls. Our current home is somewhat larger than we would buy if we had no children, but if we had a smaller home it would likely have more expensive finishes and furnishings instead of a more ‘kid-proof’ décor and more square footage.

Lastly, the author cited that one of the big expenses for raising children is child care, which averaged $37,378 per child. The way I read this, they are referring to direct costs paid for child care, something that we do not pay at all. I understand that this is a very large expense for many households and that $37k might even seem a bit low, but we are fortunate to have created the option for ourselves that my wife is able to stay home with our children. This option is not without a cost. Although we don’t pay anything out of pocket, the opportunity cost of my wife not working is substantially more than $233,000 over 18 years. If she were still in the workforce I have no doubt that her income would exceed $100,000/yr but we have made the conscious decision to allow her to stay home and raise our children.

In conclusion, I think the author and the study completely miss the point. Kids can be as expensive as you let them be, but don’t have to be very expensive at all. If you’re trying to raise kids the way you see others are doing on social media, you can easily get caught in the modern day version of keeping up with the Joneses and think that raising kids is extremely expensive. I recently read Rachel Cruze’s new book Love Your Life, Not Theirs where she talks about how to gain contentment and avoid the trap of comparing ourselves to others, and I think the concepts are extremely applicable to this.

I know people who are so intimidated at the cost of having children that they significantly delay having them, and others who go so far overboard saving for future college expenses or spending obscene amounts of money on activities that they can spend significantly more than this article alleges. I’m glad we waited a couple of years after we got married to have kids, but I’m also glad we didn’t wait much longer. It was important to us to be financial stable, but if you wait until you feel 100% ready, you’ll do nothing but wait. On the other hand, if, when you do have kids, you lavish every extravagance on them you’re not doing them any favors either. All things in moderation.

2017 Goals

With 2016 now in the rearview mirror we’re now looking forward to 2017 and have set some new goals to build upon the progress we’ve made in 2016. As I was contemplating goals, I heard Dave Ramsey’s podcast where he outlined seven areas of life to have goals that help with overall personal development. Those areas are:

  • Career
  • Personal Finances
  • Spiritual Growth
  • Physical Health
  • Intellectual Growth
  • Family
  • Social Relationships

 

I generally tend to have goals in most of the categories anyways and thought that I would share some of my 2017 goals that are relevant to the topics discussed on this site.

INTELLECTUAL GROWTH

I read 57 books in 2016, a little more than one per week. When I track my reading, I do include audiobooks but do not include books I read with my kids or my scripture study. Some books are very short and can be read in one sitting (like this one), others take several weeks (like this one) I use Goodreads to track my reading and try to read roughly 50/50 fiction and non-fiction. In years past, I have read as much as 75 books in a year and as few as 57.

My goal for 2017 is to read 52 books in the year. Given my historical trends this is not an extremely lofty goal, but that indicates my desire to continue to read a lot combined with the knowledge that I have other things I would like to take care of. I just finished book #3 for 2017 so I am well on my way. One thing I would like to do this year is to focus on reading books that are already on my ‘to-read’ list (currently over 100) instead of some more random titles that I may come across.

CAREER

At work I was promoted within the past year and would love to get another promotion, but don’t plan on that happening this year. It is typical within the company I am with to wait at least two years to be promoted to the next level from where I’m at and I certainly have aspirations to do so when the right thing becomes available. I have some things I am working on that will help me by going above and beyond and have also recently taken on some additional responsibilities that offer significant visibility within the organization and will help develop some skills that will be valuable throughout my career. I won’t get into specifics, but my goals focus around some projects at work that have the potential to save several million dollars (for the company) as well as branching out and doing well on some special projects that are outside my normal job description.

PERSONAL FINANCES

We ended 2016 with a net worth just over $600k. We’ve spent some time going over our budget and are now setting a goal to achieve a net worth of $700,000 in 2017. Just like last year some of this will depend on market gains but not as much as last year. If we don’t get there simply because the market doesn’t cooperate, I’ll still consider it a success if we stick to our plans for the amounts we earn, save, and invest. Here is a breakdown of how we think we can get there:

As you can see, we do need some growth in our investments and real estate to get to our number but other than that the numbers all seem very doable. I’d love to be able to pay more towards the house but am pleased that we will easily get the mortgage balance below $200,000 soon. Some things that could have an impact on this goal are expenses related to another baby we are expecting soon, home improvement projects planned for this spring/summer, and travel expenses. All of these things are budgeted for outside of these figures but the actual costs may vary from our estimates, which will impact the amount of cash savings or extra mortgage payments we’re able to make.

We have goals set up in other areas as well but wanted to share these publicly for additional accountability and insight into our decision making. Best of luck to all in your 2017 goals and endeavors!