Tag Archives: investment

Taking Stock

Since reaching the milestone of being debt free last year, my husband and I have been in a state of limbo. Right before paying off the last of our debt, we were one synchronized team, attacking a mutual goal with an unrelenting fervor. After that final payment, sure, we felt good, but we were left asking ourselves, “now what?” And quite truthfully, we had different opinions about where to go from there.

For example, I really wanted to use a financial planner. One that I trusted, that wouldn’t try to sell me products just to make commissions, one that would help with the planning aspect of our journey and would help establish our investment and saving goals, educate us, and would guide us through tax issues. I had someone all lined up.  We even had her come to the house and answer our questions about her services.  While my husband was willing to listen and be polite, he went into the meeting with the preconceived notion that there was really no way that we would end the meeting with him wanting to hire the financial planner.  You see, he had done some reading. Particularly, Bogleheads Guide to InvestingHe also listened to a lot of Dave Ramsey.  A lot of Dave Ramsey.

These advisors pointed out that financial planners cost money. And they emphasized that the amount of money that you will spend on the financial planner, even if it is only a small amount, could ultimately cost you hundreds of thousands of dollars due to not being able to invest that money and letting compound interest do its work.  This is a hard point to argue against.

While going through this process, what I realized was that we kept confusing an investment plan with a financial plan. Our financial plan was already taking form.  We would no longer take on debt, we would live conservatively, we would continue to decreasing our monthly expenses and work on maximizing our savings.  We also had definite retirement goals (dreams, really).

So, as outlined above, my husband and I already agreed on the financial plan.  However, it was the investment plan that confused and frustrated us.  We had no idea what to do with the money we were saving.  In the end I agreed to allow my husband to act as our investment planner. Does he have a degree in business, accounting, economics, finance, or any other business or investment related sector? No.  It’s in English, actually.  But, he’s a smart man (except when it comes to finding something). And, well, I do have a degree in economics, so I figured we could figure this out together.  He was willing to do the research.  I was willing to trust him (and cross check his data).

I am going to admit, though, that one of the biggest reasons that I was willing to have us muddle through our own investment plan was that the plan was not going to be complex. Very basically, our plan is to focus on very low-cost indexed funds with moderate risk, such as one would find with Vanguard or Fidelity. In fact, we ended up buying a fund of funds.  While a traditional indexed fund is already diversified in stocks, a fund of funds is diversified in stocks and bonds.  So we don’t have to worry too much about whether to buy municipal bonds, high yield bonds, junk bonds, or U.S. bonds.  We are not looking for the next get-rich investment.  We are not looking to discover something new that we need to invest in now, before the opportunity passes.  We are just looking for a good, somewhat safe place to grow our money with low costs.

This does not mean that we do not have  a lot of questions and many moments of indecision.  We do.  Fortunately, in this day and age, the internet provides a lot of really good information, as long as we can sort through what is genuine advice and propaganda.  And we have discovered that we are much more intelligent about investing than every day before.  While new questions continue to pop up, we continue to learn the answers.  Obviously investing can get incredibly complex, and, honestly, our investment plan is slightly more complex than outlined above.  As we understand more, the types of investment practices we can conquer expands.

I am glad we took this route.  Had we gotten a financial planner, we would not have been forced to learn all that we have.  We would have relied on someone else to tell us what we should be doing and we would not have understood half of it. Now we are taking control of our own (future) financial independence.

The lightbulb moment: negative net worth

About four years ago, my husband and I went to see a financial planner. It seems we had finally been making enough money to cover all our debt and start accumulating savings. We had a nice little nest egg of about $20,000 and thought that we needed to go speak with someone about how invest this money. And I have to tell you, we felt that we had real wealth and that this wealth would only grow.

A funny thing happened though when we met with the financial planner. He pointed out all of our debt. Now, he didn’t necessarily have an issue with debt, but he highlighted a loan we had taken out for my husband’s big boy toy that was higher than the others at around 8%. If I recall, his advice was to try to refinance or roll this into a home equity loan to get a lower rate. On top of this debt both my husband and I had car loans, student loans and together we had a mortgage.

Going into this meeting we thought we were being conservative because we were living below our means and didn’t carry over credit card debt. I just took for granted that my twenties and thirties were about acquiring “stuff” and that naturally meant taking on debt. It’s what everyone else did, and we thought that because we didn’t buy the biggest house or the fanciest cars that we were being fiscally responsible.

My husband’s light bulb moment at that meeting was the realization that he not only had no wealth, he had substantial negative net worth. My lightbulb was that there was really no point in saving this money when we had debt we were paying interest on.

While we both arrived there a little differently, the conclusion was the same: we needed to get rid of our debt before we could even start thinking about saving for our future. We joked that we had more actual wealth the day we graduated from high school with a minimum wage job but debt free.

At the time of this meeting with the financial planner, about mid 2009, we owed over $100,000 in student loans between the two of us and had a mortgage of around $190,000. My car had a five year loan that was a half year from getting paid and my husband’s car was leased. We had also that unfortunate loan for my husband’s little hobby for about $50,000.

It was daunting. While we both made really good salaries, we had never considered paying much beyond the monthly amounts. We never thought we could do what we did, especially not as fast as we did it.

We went with the good ol’ snowball method: tackling your smallest debt first and then progressively attacking each subsequently sized debt. However, first, my husband sold his toy. We then took our savings and paid off my car early. This all happened fairly quickly and immediately freed up several hundred dollars a month.

The feeling was immediately empowering. We tackled my student loan, then dealt with my husband’s car, then his student loan. I have to admit it was frustrating at times to throw big chunks from bonuses and such at these loans. There were still things I wanted. Nice things. Expensive things. And throwing it at the loans didn’t actually result in any tangible returns.

As we were nearing having only the mortgage remaining we made a strategic move to change our loan from a 30 year fixed to a 15 year fixed. With interest rates so low, the new payments were roughly the same as before, but soooo much more money was applied to principal every month. Unfortunately with the real estate market being what it was in 2010, our house didn’t appraise high enough to get rid of PMI. Nonetheless, while we were paying about $115 before on PMI, the amount on the 15 year loan was only about $40 a month. And even though it was only $40, we made ourselves familiar with the rules regarding getting rid of PMI as soon as we could.

This strategy often meant living paycheck to paycheck because any money left over at the end of the month was thrown at the mortgage. It was a delicate balancing act to calculate how much we needed to have in checking to pay any bills before the next paycheck. Sometimes we would have only $1000 to our name.

When we had paid down about $80,000 after refinancing, we changed our strategy a bit. We decided to keep paying our normal monthly payments but to keep the money we would use to pay off the house set aside in a separate account. This would accomplish a couple of different objectives: We would have a savings account in case of emergencies and we would have a stash of cash in case we wanted to move, which was always on the back of our minds.

So this account grew and grew. When we got close, we threw everything we had into it. And requested our payoff amount. When I went into the bank to send the wire transfer, I wanted to tell everyone that we were paying off our house.

It took a little while longer than I thought it would at the bank, but all in all, around half an hour to send off the money. Just over $100,000. That hurt a little bit. Spending that money. All at once.

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Those were the texts we sent to each other that day and the next. It started to feel good. Knowing that next month we would not have to pay the house bill! It was like getting a $1500 raise a month !

So that was the first part of our story. I truly believe that any one can do it. I will admit that my husband and I, as attorneys, made really nice salaries. Really nice. But along with that, came the student loans, debt that a lot of people do not carry to the extent we did. Or, you may not own a home and have less to pay off. Everyone’s story and situation is different. But the first thing you have to do is stop. Just STOP. Figure out everything you own and owe. Make sacrifices and start tackling those loans. One at a time. As you pay one off, you will have more to throw at the next one. You may get there faster or slower than we did, but you’ll get there. Start now.