Christmas 2019 was unique for our family, with weather predictions in the mid 50s on Christmas Eve and Christmas Day, we decided to go camping. We packed up our trusty pop-up camper and headed our recreational property about an hour and a half away.
We had a great time completely off the grid, just the three of us with no outside distractions except for some Christmas music from a distant radio station. We hiked the few miles of trails we have, played in the creeks and spent time around the camp fire.
Our Christmas Eve dinner was venison chili with a corn bread topper. We enjoyed the campfire as the meal cooked in our dutch oven. We finished with a banana and chocolate s’mores desert before retiring into our camper.
We ended the evening watching a few old cartoons from our childhood, a couple of episodes of The Flintstones and The Jetsons prior to some light reading before retiring for the night.
The trip was definitely one to remember and we enjoy spending as much quality time together as possible, especially with our daughter while she is young. One of the greatest drivers for our financial independence goal is to maximize these types of experiences on a whim. Currently we have to squeeze these trips into weekends, vacations and holidays.
After returning home from our trip and with several more days off of work, it was time for one of the most important financial activities we do as a household. Each year during the Christmas to New Year’s break, we plan for the next year’s finances. I wrote about this process in greater detail in an earlier post Annual Financial Planning. We believe having a good financial plan for the year ahead is one of the most important factors that has led to our current financial position.
The three components of our financial plan
Income: This includes the both of our incomes. We do not yet incorporate interest on savings/CDs or dividends in our after-tax bucket. Our dividends are currently automatically reinvested.
Expenses: The essential and superfluous expenditures we incur each month. We track each expense in Quicken so it is easy to see what our actuals have been over the past 12 months.
Savings: We always abide by the pay yourself first methodology, which we have been doing even prior to knowing that pay yourself first was a “thing”. The difference between our income and expenses automatically gets put into some sort of savings.
How we plan
A quick review of the process, we begin by reviewing each expense category in Quicken over the previous 12 months. We calculate the average the monthly cost of each expense and then add in a factor of growth, aka inflation. Inflation isn’t always the same in each category, so we refer to prior year over year increases. Since 2011 have been using this process so we can easily calculate the increases to get a more accurate inflation rate for each category.
These are the categories we currently track expenses for:
The 2nd step is to then understand our income after taxes. We review our previous year’s paychecks and update any insurance changes after the 1st of the year.
The 3rd step is to outline our financial goals so we know how to allocate our savings.
The final step is to automate all of the money that is remaining after expenses so that our goals are funded. To ensure this happens each month and the money isn’t left to be freely spent, we use a few different methods.
For retirement funds, the savings are automatically deducted from our paychecks.
For other savings, we use recurring automatic transfers that are set up via direct deposit from our paychecks to the different savings buckets. All of these transfers are also tracked in Quicken so we ensure the money goes where it is intended.
Our personal goals for 2019
As we get closer to our “financial independence, work optional” number, our plans are changing to prepare our finances for our future life.
Goal #1: Maximize all tax advantage accounts. To the greatest extent possible we will maximize our 401k, 403b, 457 and HSA. I estimate that the deposits we make into these accounts will save us over $10,000 in taxes next year.
Goal #2: We have decided to finally kick the mortgage to the curb. I wrote about my back and forth struggle about paying down the mortgage in “Our Debt Position” post . In mid 2018, we had the funds to pay it off but instead put the money into after tax investments. Our mortgage interest rate is only 2.75% so I sought out higher gains elsewhere. Owing anyone money is just not something we want to have over our heads anymore so this is the penultimate goal for 2019.
Goal #3: After the mortgage is gone, which we estimate will completed in May, all remaining money will be put into our after-tax investment account. This account will fund the mainstay of our first few years of early retirement expenses.
Goal #4: Keep our expenses on track. We have done a pretty good job minimizing cost in all categories without feeling like we are depriving ourselves, so we just need to keep that up. As I have written before, minimizing expenses has a doubling effect, you expense goes down and if you save the difference, your savings goes up by that amount.
Our 2019 Savings Rate
Your savings rate is the key to your financial independence timeline. As we project our income and expenses for 2019, our calculated savings rate is 66%. That savings rate is slightly lower than our 2018 rate of 72%. The drop in the savings rate is entirely due to plowing all possible funds into the mortgage thus that money is not adding to our savings.
The average American household currently saves only 6% of their income, well below the 10%-15% I often see recommended. If you have a goal of early financial independence you need to raise your savings rate as high as possible, 50% or higher should be the goal.
We believe that you must have a plan in order to reliably reach your goals. By setting down at the beginning of the year, understanding our cash flow, expenses and automating what is left over to achieve our goals, we assure ourselves of having a good chance of meeting them. Hopefully you will take the time to understand the basics of your family’s business in order to better your chances of reaching your goals.
“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” ~ Pablo Picasso