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019, Can’t Win Big Without a Strong Offense

Offense or Defense? How do you budget? Are you even watching your money? No matter what goals are trying to be achieved, it’s not likely to happen if no one is watching the money. An awareness of what’s going on with your finances is essential. What’s coming, what’s getting paid, and what’s going on with any remaining money. If money isn’t told where to go, it can’t be maximized towards your goals. It will slip through your fingers.

Having a great offense:

Playing offense would be knowing the money coming in for the month and designating each dollar where to go. Send it to pay for a bill, an expense, maybe pay down a debt, or put into savings or investments according to a plan. Yes, a plan is important too. Without a plan, spending is just random and not targeted towards a specific goal. Just like in football, there’s always a plan for both offense and defense. Time is put in to study how to play the game and maximize chances of success and winning. Finances are no different. Plan and have a great offense. Then execute as close as possible to that plan.

Goals (SMART goals) are key. SMART goals can be it’s own blog post. But the essence is Specific, Measurable Achievable, Relevant, and Time based. If goals are created using the SMART structure, they tend to be met more frequently. There’s a saying “If you aim at nothing, you’ll hit nothing every time”. So set SMART goals, plan to achieve them, and track them. That’s a great offense. Have short, medium, and long term goals. Just as mountains can’t be climbed in one giant step, goals can’t be met in one giant step either. Daily decisions move towards weekly, weekly move towards monthly, monthly towards yearly and on an on. Some will be met, some will be missed, and some will be excepted. But in general, you’ll be closer to where you wanted to be than if you just wandered through life.

Take an active role in keeping expenses down to a minimum. Often it’s difficult to make more money at a typical job quickly. Generally workers have to wait for an annual raise or an even less frequent promotion. That should be part of the plan too. But cutting expenses can yield immediate results. Decisions to buy one item over another could be the difference between spending a little money or a lot of money. Each of these decisions move you closer or farther away from your financial goals. Lots of small good decisions lead to big wins. Lots of small bad decisions lead to big losses and mistakes. To make a Smoking good decision, you have to be prudent, intentional, and consistent. Prudent, intentional and consistent purchasing is a great offense for personal finance.

A defensive budgeting perspective is much different. Some find themselves trying to make their dollars last to the end of the month. They may not be tracking all their expenses throughout the month. They may be struggling to come up with rent money. Maybe it’s emptying the change jar to keep the lights on. Whatever the situation, budgeting (or simply paying your bills on time) seems to be a struggle.

These struggles are real. These struggles stem from a lack of planning and poor execution. Not paying attention to the details and being on offense for your personal finance will surely lead to you playing from a defensive position. Defensive budgets are plagued with creeping expenses that go unnoticed until it’s time to pay the light bills. It’s trying to just get through just one more day, week, or month. It’s living paycheck-to-paycheck. That’s a defensive position.

There’s balance to this game. Sometimes there will be unexpected expenses that force you to go on the defensive posture. But if it is happening every month, you’re losing the game. Stop playing defense and make choices that get you back on the offensive drive.

Personal finances are not a game to be taken lightly. Families depend on security. It’s the most basic need. By playing offense with your budgets and directing your money, you’ll win a lot more frequently financially. Paying attention to your incoming bills and expenses and outgoing money will show you the play book for the month. Make choices that support moving into a better position today and in the future.

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018, Do Your Part

Recently, I’ve been reading about “doing your part”. I heard something similar on a podcast. I’ve even come across it while reading about stoicism. Do your part is a pretty common saying that is often said, heard, or read. Do your part.

What stoicism teaches is that you can’t always control the outcome, but you can control your attitude and what you do. Do the things you can do, but don’t fret on the overall outcome. You did your part in whatever process, thing, or endeavor you participated in with your time. So be proud and content that the part you can control, you controlled.

An example of this was in our recent mid-term elections. Several ads were about doing your part to get out and vote. So, a lot of people got out and voted. Some may have voted for the candidate who was actually elected. Some may have voted for the candidate who wasn’t elected. However it played out for your candidate(s), you did your part and should be proud of that. You can control whether you voted or not. But you alone couldn’t control who won the election.

Another example is my nephew’s recent retirement from the Air Force Reserves. He did his part. He showed up every time he was called. He answered with a job well done. But I’m sure everything didn’t go as he planned. (I know my military career didn’t. I wanted different jobs, other promotions, and many other things.) So, I’m sure there were things in my nephew’s military career that didn’t go as planned either. But he did his part each and every time he was called. Whatever didn’t go as planned didn’t affect his attitude or cause him to quit.  Subsequently, he was honored with a well-earned retirement ceremony after 20 years of service. He couldn’t control every step along the way, but he did his part and was rewarded.

Of course I was thinking about how this applies to personal finances and, believe me, it applies to personal finances very soundly.  Personal finances can be controlled. I know, there’s a million reasons, excuses, explanations, or whatever that easily surface. But you must do your part. Perhaps you had hoped to contribute more to your 401K, IRA, Roth or savings account. Maybe you didn’t exactly reach a certain financial goal. Maybe your interest, dividend, or return didn’t meet your expectations.

The only thing that can really be controlled is what you contributed. Returns, interest, etc. can’t be controlled. Contribute what you can, when you can, and as much as you can towards your personal financial goals. Progress will never go exactly as planned. You can’t control exactly how all the other factors work out, but you can control what you contribute. Without contributions you’ll never meet your goal. Goals may be met far beyond your expectations or, they may be less than expected. That part can’t be controlled. If outcomes of investing could be controlled, there would be a heck of a lot more rich people in the world.  So, do your part and contribute to your financial future.

What else can be done? Due diligence is what.  Proper research and an education in financial matters can be controlled. A choice is made to either learn more about personal finances or watch TV, play video games, surf FB, or whatever other mind numbing tasks occupies your time. Do what you have to do and become well-educated on personal finances. Controlling your education can help you minimize your losses over time.

Whenever possible, do your part.  Things won’t always work out exactly as planned but if you do your part you at least have a shot!  If you don’t do your part, failure is guaranteed. Just DO YOUR PART.

017, Just Start Doing Something

Where are you on your journey to FI? If you haven’t started yet, get moving towards something! Marathons start with that first step. FI is very similar. It starts by doing one step. Then continue taking steps to get you closer to the finish line or further down the path. Just keep stepping towards the goal. Marathons and FI can’t be done in one step either. Only through consistent steps along the path will you ever get to your goals.

So, if you have already started that’s great! You can’t finish what you don’t start. But if you haven’t started, get going! Even if you are unsure of exactly what steps you need to take, take a step. It could be paying off debt. It could be starting a savings account. Maybe start an IRA or a Roth IRA. Maybe it’s enrolling in your company’s 401k, 403b, or Thrift Savings Plan. Just take a step.

Don’t wait until you understand every aspect of personal finance before you begin. Some people can or will try to analyze every aspect so hard that they never start. They may be afraid to make a mistake. That’s the “paralysis by analysis” often referred to from time to time. Don’t let that become a road block towards starting. Someone who starts with sound basics such as the big rocks mentioned in other posts here will be just fine. Suppose only 80% of the goals are met. That’s still way better than sitting at the starting gate!

Once you are stepping, keep on keeping on! Every month try to do what you did last month as the minimum. Take another step. Keep on stepping. Maybe automate an extra car payment. Maybe automate an amount to go into that savings account, IRA or 401K. Keep on adding to what you did last month.

Another good pattern to get into is to increase your savings a little at a time. For example increase maybe 1% contribution to your saving each month or quarter. Maybe put 50% of a raise, bonus, or tax refund into savings instead of spending it. Increases like these will also help you get a bump in progress. Every little step helps and adds up over time.

You should also learn more detail about each of the areas of your personal finances. Read an article or two a week to gain more knowledge. Maybe read a financial blog or listen to a podcast. Perhaps you go to the library and check out a book. If you are not a member of the local library, you should become one. It’s a great source for resources. If you don’t like reading, check out an audio book!

In a year’s time, the results can be surprising. Say the goal was to increase savings 1% per month. It was a tough month so only eight 1% increases were possible throughout the year. That’s still 8% more than in the beginning of the year. Maybe a goal was two articles about finances per week was the goal. Again, the year was tough and only one per week was able to be completed. That’s 52 articles read in the year! Not too shabby.

The point of the post is to start doing something to get to a better financial position. Once started, continue to get more knowledgeable and increase forward progress. After a period of time, through small steps the progress made will be significant.

Take that first step, that next step, or that higher step. Just get going an keep on keeping on!

016, Mentorship

We all start out with a “blank slate”. This is a pic of one of my 7 grandkids. Yes, they all came into the work with a blank slate.

According to Merriam-Webster a mentor is a trusted counselor or guide. This word is is usually thought to be someone who helps you with their career. These are generally older people who have been around for a long time. They are also usually considered successful in their fields whatever that may be.

But mentors come in many different types. There are apprentices, journeyman, and masters in career fields. There are elders in churches. There are parents, grandparents, aunts, uncles, and other family members. To become a chef, you have to pay your time and work under a chef. Mentoring relationships are all around you.

I’ve heard on a few podcasts that you are the average of the 5 people you spend the most time with. There’s even a Ted Talk about it. It makes sense on a basic level.

Take an inventory of who you spend the most time with. Are they helping or hurting you when it come to your financial goals?

I have had many mentors over the years. Not all were helpful for my financial health.

By no means am I saying that all of the people you hang out with should be mentoring you in your financial journey. Maybe you will be the mentor. You should try to have at least one friend that is like-minded about financial independence. If all the people you spend time with are deep into the consumerism lifestyle and not supportive in financial independence, it will be a lot harder to stay motivated. They won’t understand what you are doing. They may not believe in the concepts you are trying to apply. Being around like-minded people in the financial independence area will help and support you. You can ask questions or get asked questions. You can debate the finer points and differences. But both of you will be coming from a solid place in finance.

Luckily, there’s the financial independence community. While reading blogs on financial independence there are frequently posts stating that the blog is the only place they can talk openly about their finances and be supported. If you don’t have a real person around to talk to, try a blog. You can join Facebook groups too. Lots of folks are supportive in the Facebook groups. You can use some of the social media to augment your local friends. Maybe you can even find local groups that have meet ups, lunches, or dinners.

Whatever you do find a friend, neighbor, family member or social media to help you on your journey. The more time you spending talking, thinking, or doing financial deeds, the more mature you become in financial independence. So, if you need a mentor, find one. If someone needs a mentor, be one. It doesn’t matter that you may not have all the answers. If you don’t know, think of it as an opportunity. No one knows everything! You just need to listen and learn. Never stop learning. But being a mentor or mentee in financial independence can be a very rewarding endeavor.

So, if you don’t have have a mentor, become a mentee. Everyone’s slate starts out blank. Fill your slate with the good stuff, then pass it along.

015, Lucky # 7

Awe…ain’t she cute!

Hopefully you noticed that my posts were less frequent lately. It’s true. The blog has taken a back seat for a over a week now. But I haven’t. I’ve been busy with preparing for a new grandchild.

Last week, the Mrs and I were on edge because the due date for the newest bundle of grandkid joy was on Wednesday of last week. We had prepared our work that we would leave at minutes notice and subsequently be out for a couple of days.

Well, that text came early Thursday morning. The water had broke and contractions started. So we hauled off for the 4 hour drive to be with the kids when the new grand baby arrived.

Clover Selah was born around 1030 am. Momma and baby girl are fine. She weighed in at 9.1 pounds and was 21″ long. That’s a keeper!

The Mrs and I spent 4 days down there to help where we can with getting Clover settled into the new world. Clover is grandkid #7.

So, that’s what we’ve been up to. What would PawPawFi be without the grandkids right? I mean the Paw Paw does come before the Fi part.

Hope all is well with y’all. If you have something you wanted me to cover, please let me know. I’ll get back to writing real soon.

014, Opportune Cost of a Couch

When you don’t invest, you also loose all compounding interest you would have made from the investment. That doesn’t sound all that bad until you look at the numbers in detail. So, let’s look at this in more detail.

Let’s consider a $1,000 gift, a tax return, or just $1,000 you saved at some point in your life. If that money is blown, you not only don’t have the $1,000 from before, but you’d lose all the compounding interest. Still, that doesn’t seem like it’s enough for Average Joe to show restraint and invest in his retirement. So what right? It’s only a grand.

Twenty year old Average blew his $1,000 on a new couch and a great meal at some high dollar steak house. He’s young, working hard and deserved the best. He deserved to splurge with his new found extra money.

Twenty year old Smoking Joe, on the other hand, heeded advice he had heard that investing early is the surest way to maximize his money. So, he invested his $1,000 in a tax sheltered retirement account in a low cost mutual fund with a 10% return over the last 20 years and forgot about it. He never added any money to his investment.

What is the total impact at retirement? A lot. The compounding interest on investments has a massive effect over 20 and 40 years. So much so that at age 60, Smoking Joe could withdraw over $1,800 every year and theoretically never run out of money by implementing the 4% rule withdrawal model. The 4% rule will be covered in a later post. For now, just trust me that it works.

That $1,000 invested at age 20 is literally a $45,259.26 decision. At age 60, Average can’t even remember what his couch looked like. But Smoking on the other hand can buy 1.8 new couches every year if he wanted. That $1,000 is a big decision when looked at with the opportune cost model.

Now, fast forward just a decade. Average and Smoking were sitting at a park watching their kids play. Average said his old couch is 10 years old and he needs a new one. Average was bragging that he bought a good quality couch 10 years ago and it served him well. He went on to say how he had spent his $1,000 tax return on a brand new couch. Smoking commented that he invested a $1,000 tax return at the same time and it was doing fairly well. Curiosity got the best of Average and he had to ask Smoking how the investment did. Smoking pulled out his phone and showed him a the balance of $2,593.74.

Impressed with this, Average was determined to get in on some of this investing. He decided instead to invest $1,000 he had for the new couch immediately and nurse that couch a little longer until he could save up for a couch. So, that’s what he did.

Jump ahead another 10 years. Now Average and Smokey are sitting next to each other at a kids sporting event. Average was proud that he had followed his friend Smokey’s investing advice. Average was telling Smokey that his $1,000 had grown from that initial investment to $2,593.74 just as Smokey’s had done a decade earlier! Again curious, Average was curious about Smokey’s investment. So, again, Smokey pulled out his phone and showed Average his $1,000 had grown to $6,727.50.

This can go on and on, but I summarized how $1,000 will grow from age 20 to age 60 below in a chart. You can see that by delaying 10 years, Average’s investment would be only $17,449.40 versus Smokey’s $45,259.26. That 10 year delay for Average’s investment cost him more than half of what it could have been had he invested earlier.

You can check my numbers here.

The above examples shows the power of compounding interest. It’s a very powerful tool that you should take advantage of as soon as possible. The earlier the better in the long run. If you miss the early opportunities, you’ll have to put a lot more of your money away to have the same wealth that you would have if you invested earlier. A late start is still much better than not starting at all. So, don’t delay in getting started.

That $1,000 couch can cost you $45,259.26 in your retirement. Was it worth it?

013, Mortgaging a House

architecture clouds daylight driveway
Photo by Pixabay on Pexels.com

So, we covered ratios in the last post. The focus of that post was to show you the basics of a ratio for buying a house. Now you know and understand the ratios that are recommended in relation to your income. You understand that the 20% recommended down payment is the minimum you should put down on a house. Let’s run through a few examples to show you the impacts of a few scenarios. Sometimes a picture is worth a lot of words. In this case, the picture will be a spreadsheet. Before we get started, here are some of the areas we’ll cover.

I ran all of the calculations through Mortgagecalculator.org. It has the most complete variables necessary to truly capture all of the costs. Be wary of the bank calculators that only show principle and interest. While that’s a big portion of your monthly rate, it’s not the whole picture. So, I’m going to lay out a few things in this post to help you truly capture the total costs you can expect.

First, there’s the purchase price. You may hear people say things like “I paid $200,000 for the house”. They are referring to the purchase price. By the end of this post, you will know the cost of the house will be much more than the purchase price… unless you pay in cash.

Then there’s the down payment. You’ll want to put 20% or more down on a house so you avoid paying PMI (Private Mortgage Insurance). Remember that’s where you get to pay for the bank’s insurance in case you don’t make good on your money. That 20% should be your minimum. You can put down as much more as you want.

Next comes taxes. You can’t get away from taxes. Taxes can be a considerable expense…especially in Texas, where I’m writing this post. What Texas loses in income tax, they make up for in property taxes.

You’ll also want to have insurance. This isn’t the PMI insurance. This is the homeowner’s insurance that you pay for things like a hail storm that trashes your roof, fence, etc. The bank will require you to have insurance if you finance. If you pay in cash, it’s a good idea to pay just to protect your home from an unexpected diseaster.

What we’ve covered above is referred to as PMTI. PITI is simply Principle, Interest, Taxes and Insurance. Everyone will pay those when financing a home. But don’t forget or confuse PITI with PMI. Remember PMI is that insurance for the bank that you get to pay. So, the total monthly cost will be PMTI plus PMI. The less you put down the more PMI’s cost goes up.

In order to show the differences in PMTI plus PMI, I’ll set a few variables so you can see the impact of the changes. I’ll also randomly choose Grand Prairie, Tx as our city of choice to nail down the exact taxes for a property. Limiting the variables should help you see the long term impacts to your finances for the choices you make.

The house will be a $200,000 house in Grand Prairie, Tx. The interest rate is going to be set to 4.33% which is fairly close to the current rate. Your rate will likely vary somewhat based on down payment and your credit score. So, 4.33% is good for illustration purposes. The property taxes for Grand Prairie are 2.921736% of your home value or $5,843.47 every year. That amount will be divided by twelve and added to your monthly payment. Homeowner’s insurance is set at $1,000 per year. Again this will be broken down and spread across your monthly payments. The three scenarios will be putting 5%, 10%, 20% down for your down payment.  The Term will also be either a 30 year or 15 year fixed rate mortgage.

Price Down Pmt % Down Term (yrs) # PMI Pmts Montly Pmt Total PMI Pd Total Int Paid Cost for House
$200,000.00 $10,000.00 5% 30 79 $1,592.98 $7,679.17 $149,698.07 $357,377.24
$200,000.00 $20,000.00 10% 30 71 $1,539.23 $5,325.00 $141,819.22 $347,144.22
$200,000.00 $30,000.00 15% 30 40 $1,485.40 $2,833.33 $133,940.37 $336,773.70
$200,000.00 $40,000.00 20% 30 0 $1,364.90 $0.00 $126,061.53 $326,061.53
$200,000.00 $10,000.00 5% 15 37 $2,086.49 $2,929.17 $68,666.11 $271,595.28
$200,000.00 $20,000.00 10% 15 26 $2,006.69 $1,950.00 $65,052.11 $267,002.11
$200,000.00 $30,000.00 15% 15 14 $1,926.89 $916.70 $61,438.10 $262,354.80
$200,000.00 $40,000.00 20% 15 0 $1,780.42 $0.00 $57,824.10 $257,824.10

Take a good look at the chart.  Study it for a bit and see if you can find the Big Rocks.

The first thing I see is that the final cost for the house could be anywhere from $257,824.10 to $357,377.24.  So, depending on how you set up financing for your house, you could pay a lot more.  Maybe this would help with some perspective on just how much that is.  Let’s say you make $57,000 per year.  If you are inefficient you would work for more than 3 years just to pay for the interest and PMI if you put minimal down and finance for 30 years.  You’d only have to work for one year to pay for the interest if you put 20% down and got a 15 year mortgage.

The second thing I see is that by far, the biggest difference in what you pay in interest is determined by the length of financing.  The longer you finance, the more you pay in interest.  Many folks say that they will finance for 30 years and pay early.  Statistically, they don’t though.  So, if you are in that small percentage, you’re likely not. I tried that and didn’t do well.  It wasn’t until I locked myself into the 15 year mortgage that I actually stuck to it.

The last thing I see is more of a reflection.  Being in the military, I’ve never truly owned any houses. I mortgaged them.  So, I’ve pretty much have been paying interest for most of my adult life.  While I did make money on every house I’ve mortgaged, it was done through improvements, etc.  I’ve never run the numbers, but I’d be lucky to break even considering all the interest I paid.  I wonder if I would have come out cheaper if I only rented and paid cash for a house.

So, as you can see from the chart above, there’s a lot of ways you can buy a house. This post points out a few different ways and for many different lengths of time.  Use this information and the thoughts to do it as efficiently as you possible can.  In just this one example, it could mean you save about $100,000.  What can you do with $100,000????

You now have the tools to make an efficient decision. Don’t be Average!