FireDog

Planning for Inflation

February 7, 2021February 7, 2021 by FireDog, posted in Personal Finance

Have you ever noticed that each year the cost of most goods and services increases? I have also noticed, especially with food and other household consumables, that portions seem to go down, packaging gets flimsier, and services are reduced as prices increase. This is the consumer outcome of annual inflation. Company expenses increase and shareholders expect more value from their investment. This drives up the need to corporations to grow their profit margins. In the United States, annual inflation averages around 1.5%. Between 2000-2020 inflation has been as low as -.4% and as high as 3.8% per year.

If you are fortunate enough to work for a company that provides annual pay increases, you may have noticed that these increases generally fall in-line with the respective years’ inflation rate. Some organizations refer to this as a Cost of Living Adjustment or (COLA). Companies that do not offer this benefit may experience more employee turnover, as employees seek opportunities elsewhere, for higher paying jobs to offset inflation.

While earning compound interest will help to rapidly increase your savings and investments, the same holds true for the reverse effect of compound inflation, requiring more money for the same goods and services each year. As you are planning your expense budget during your working years, and through your retirement years, it is important that you factor in for inflation. As a conservative estimate, most planners will factor in a 2% inflation rate. Since we can’t tell the future, this is a safe estimate but probably on the aggressive side. I recommend using between 1-1.5%. Keeping in mind that some of your future expenses may need to be adjusted through reduced spending to offset inflation factors.

Below I have included a table which shows the effect of inflation on annual expenses over a thirty year period. As you can see, the compounding nature of inflation can produce drastic changes in your annual spending needs over time.

If you start out expecting to spend $60,000 per year in your budget, with inflation compounding over thirty years, you can expect to need $92,398.83 to maintain the same lifestyle based on 1.5% inflation. Most of us will not have the same spending patterns during our retirement years, as our needs will change over time, so keep that in mind when you are planning for your future. Again, this table is merely to show the impact of compounding inflation on spending, and the importance of factoring for inflation.

Disclaimer: I am not a licensed financial planner or tax expert. Any views expressed are my own and based on what I have learned on my financial journey. Please do your own research before making important financial decisions.

Reducing Your Monthly Expenses

October 11, 2020 by FireDog, posted in Personal Finance

You will never get out of debt by paying the minimum on your credit cards. If you have loans or debt with a higher than 7% APR, I recommend you focus on paying this down as quickly as possible. So, you might ask, where do I start?

1. Analyze your spending. I recommend Personal Capital, but any expense software will work.

2. Create three budgets; current spending (your current fixed and variable expenses), planned spending (adjusted spending targets), retirement spending (how much you need for retirement if this is your objective).

3. Reduce your expenses and focus on paying down debt. I used a snowball method to pay off some smaller balances and then use those dollars to attack higher interest balances. When you have reduced your debt, then apply this money to increase your savings and investments.

After analyzing your spending for a few months, you may be surprised at where your hard earned dollars are going. Here is the breakdown of my spending (from net income) for comparison, not including savings/investments. These are not exact figures, but will give you a general idea.

As you can see, the mortgage is our biggest expense, followed by groceries, and general expenses. The high cost of automobiles coupled with full coverage insurance and regular maintenance/repairs, is also a major drag on the budget.

From a mortgage perspective, we recently refinanced to take advantage of the lower rates. We didn’t reduce our payment, but we were able to get a shorter term mortgage for basically the same monthly cost. We plan to have the mortgage paid of by the time we retire, or very nearly after early retirement.

We have had several automobiles over the years, but have always bought used, and generally keep for 6-10 years. If you have a good driving record, it is a good idea to get new insurance quotes every few years. There are several online sites which will help you find the best rates for your situation. Due to COVID, our stops at the gas pump have been far between, so we have seen some savings there.

I made the decision a few years ago to “cut the cord”. Right after this became a popular way to save money, we shutoff our DirecTv service, which we had for years, and made the switch to Hulu Live. This cut our monthly television expenses in half. We have since added on a few premium channels, since we aren’t leaving the house much for other entertainment, such as going to the movie theatre.

Recently, I reviewed my current cell phone usage, and since we aren’t leaving the house much do to COVID, we made the decision to switch to a T-Mobile prepaid plan. We were able to keep our numbers and reduced our monthly cell phone costs by 7x. We just completed our first month with the new service, but no issues so far. We will continue to monitor our usage and adjust as needed.

Utilities can also be a drag on the budget. You can reduce your monthly utility bills by switching to low cost lighting. We use Hue smart bulbs, which have a higher upfront cost, but long life span and added benefit of integrating with our smart home. A few years ago, I also switched out the old HVAC thermostat for a modern version with scheduling capability. During the summer months, keep your outside HVAC unit clean and clear of weeds/debris. Make sure all windows and doors remain closed as much as possible during extreme temps and have a good seal. If you are able to adjust your hot water heater temperature, this will also help to reduce your energy bill.

While these small adjustments may not have a huge impact month to month, you will see significant savings over time. For reducing debt and increasing your savings/investments, every dollar counts!

401k and IRA Rollover

September 2, 2020 by FireDog, posted in Personal Finance

If you leave your company, what do you do with your 401k?

You have a few options for your 401k if you are separated from your company. There are advantages and disadvantages for each option. We will discuss the pro’s and con’s below.

1. You can leave the account in place to grow.

2. You can rollover your old 401k to a new 401k.

3. You can rollover your old 401k to an IRA.

I have had a few instances of leaving the old 401k in place as I was happy with the tools, investment options and rate of return I was experiencing. I was also a little lazy about transferring the money. Some 401k providers make it difficult to move the money as you get bogged down with paperwork. Some also require your spouses signature and Notary stamp before you can start the transfer. If you do leave your old 401k in place, keep an eye on the fees. Fees can increase over time and can often be much higher to begin with. In most cases you will also no longer be able to contribute to your old 401k.

A rollover of your old 401k to new 401k can have a few benefits. You are able to manage your money easier using a single platform, and you get the added psychological benefit of looking at a bigger number each month. Again, beware of fee’s as your new provider may have higher fees than the old 401k provider. Also, make sure you are happy with your investment choices. Some 401k providers only provide a limited number of investment options to choose from. Choose wisely.

The most popular option is to rollover your 401k to an IRA. Since your 401k is made up of pre-tax dollars, you will want to open a traditional IRA to transfer your money into. These dollars will continue to grow in a tax deferred manner, just as your 401k has grown. As long as your funds are deposited within 60 days to the IRA, you will not pay any taxes or penalties at the time of transfer. Most all brokerage firms offer a traditional IRA. These accounts also offer the most flexibility in terms of investment options and can provide very low fees. In some cases, no fees at all.

For rollovers, there are two types to be aware of, the direct and indirect rollover. If your account providers have a direct rollover option, this is usually the quickest and safest path. The current provider will take care of transferring the funds to the new provider either through a money transfer or check. An indirect transfer requires that the current provider sends the dollars to you, usually via a mailed check made out to the new provider. You are then required to send the check to your new provider. There is inherent risk with this method and generally takes longer to get your dollars reinvested. Not to mention the double transfer of your funds which can get lost in transit. This has happened to me and is a nerve wrecking experience to say the least. You are only allowed to do 1 indirect rollovers per 12 month period. You can do as many direct rollovers as you want in a year.

I am not a certified financial planner or tax adviser. I am happy to share my learnings and experiences. Please do your own research before making financial decisions.

Budgeting for Good Times and Bad

May 7, 2020May 7, 2020 by FireDog, posted in Personal Finance

At the time of this writing, we are still dealing with a global Covid pandemic. Each day new information comes out about record breaking jobless claims and extraordinary unemployment numbers. People in the millions are claiming unemployment, and some for the first time, as companies of all sizes struggle through this downturn in the economy. I have been fortunate enough to maintain my job, so far, but we never know what tomorrow might hold.

My youngest daughter owns her own photography business, which has been hit hard by this economy and the social distancing edicts set forth by our government, in an attempt to flatten the curve and save countless lives. She does not pay into the unemployment coffers and is therefore not eligible to receive this benefit, like many other Americans.

During this time it is more important than ever to have a budget. Actually, you may want to create three budgets.

1. What’s my actual spending?

2. What’s my target spending?

3. What’s my absolute necessity spending?

I recommend using a spending tracking application such as Personal Capital to help you evaluate your monthly spending patterns. This will be important in creating your budget. Each dollar should fit into a spending category. As you track your spending on a monthly basis, you can begin to get control of your finances. It is important to know where your dollars are going, in order to understand which areas of spending give you the greatest opportunity to tighten your belt.

This reduced spending should be used to pay down high interest debt, increase your savings, or grow your investments. Another important aspect of the budget is to understand your spending patterns not only now, but also in retirement. This is especially important for early retirees. In order to calculate your financial Independence goals and spending needs in your retirement years, you will need to track your spending.

I have provided a link to a budget template spreadsheet in the tools section of this blog. Please feel free to use it to help categorize your spending. It is not an all encompassing budget, but should be easy enough to help you get started, in the event that you have never created a budget before.

What if a Pandemic Wipes Out 30% of the Stock Market?

April 24, 2020April 24, 2020 by FireDog, posted in Personal Finance

We are living in truly remarkable times the likes that none of us have ever seen. The year 2020 will definitely be one for the history books. Towns and cities around the world are experiencing mandatory stay at home orders, businesses have been forced to close and everyone is practicing social distancing to avoid spreading Covid-19. The US Stock Market has experienced some of it’s sharpest drops in modern history. The US government has released trillions of dollars in stimulus and financial aid for families and businesses. Millions of people have lost their jobs and have been forced to file for unemployment benefits.

In light of all this darkness there have been glimmers of positive. On a daily basis you can find stories of people helping people, appreciation for our medical practitioners and first responders, some of the lowest levels of smog ever reported in our major cities, and a resurgence of wildlife.

While our world may never be exactly the same, there is a definite sense that this too shall pass. I think we all realize the strength of the human spirit and how time and again, we have been knocked down only to get back up stronger. There is no doubt that our economy will do the same. Throughout history we have seen it drop and recover stronger.

It is during these times of hardship, the true importance of having a diversified financial plan is important. Always have a safety net to rely on. Keep six months of bills in a high-interest easily-accessible savings account. Make sure you are credit worthy. While I do not condone running up your credit cards, during these times, you may need some credit to get to your next paycheck. If you have fallen on hard times, contact your creditors and mortgage company. Many organizations understand that these are trying times and will work with you. The most important financial advise I can give is to stay the course. If you are financially savvy, and willing to take the risk, you can pull out of the market during a downturn, but you will be trying to time the market to get back in. The easiest path is to ride out the storm, not stress, and realize that it has always recovered.

Above all, take care of yourself mentally and physically, so you can be there for your friends and family. It’s easy to drown in all the bad news. If you are feeling overwhelmed, find a healthy distraction. Play games, read, watch a comedy, call a friend. If you are in the fortunate position to be able to work from home, realize how lucky you are, and make each day count. If you are able to give back, there is no greater time, and plenty of need.

Death and Taxes

April 18, 2020April 23, 2020 by FireDog, posted in Uncategorized

They say there are only two things certain in life…

I’m not anti-tax. I believe we should all pay our fair share. The issue being what’s considered fair. Should the very wealthy get the biggest tax breaks? Should the very poor pay no tax? Should the heaviest burden be placed on the middle class? If you follow politics you will get a good sense of how these questions divide us politically and socially.

One of the biggest drains on retirement income, besides the unpredictability of medical costs, is taxes. If you can maintain a low cost lifestyle in retirement, you can live off your retirement accounts nearly tax free.

There are three types of investment accounts; taxable accounts, tax deferred accounts and tax exempt accounts.

Taxable Accounts

Taxable accounts include brokerage accounts which are also known as individual taxable accounts. These are funded by after tax dollars and there is no limit on your contributions. Since you have already paid taxes on these dollars, you are not required to pay any additional tax on your distributions. However, you must pay taxes on any gains you made on these dollars known as capital gains. There are two types of capital gains and are taxed differently. Any gains you realize on distributions which are less than twelve months old are considered short-term capital gains and are taxed at a higher rate, as high as 37%. Any gains disbursed after twelve months are considered long-term capital gains and are taxed at your standard income tax rate. You will also be taxed on dividends. Dividends are generally taxed on an annual basis at your standard tax rate for taxable accounts, and would not incur additional taxes at the time of disbursment.

Tax Deferred Accounts

Tax deferred accounts, a type of tax advantaged account, are funded by pre-tax dollars. These include accounts such as your workplace 401k or standard IRA. Since you do not pay taxes on your initial investments, gains or dividends until you start to take disbursment, there is a limit on annual contributions. These limits are currently set at $19,000 or $25,000 for 401k if you are over 50, and $6,000 for IRA’s or $7,000 if over 50. The requirements on when you can begin your disbursments without additional tax penalties is currently set at age 59 1/2, at which time your disbursments would be taxed at your standard tax rate. It’s also important to note, if you are separated from your current employer at age 55, you may also be eligible for penalty free withdrawals from their sponsored 401k. If you roll these dollars over to an IRA, you are not eligible to withdrawal at age 55 without an additional tax penalty.

Tax Exempt Accounts

Tax exempt accounts are also a type of tax advantaged account and are funded with pre-tax dollars. These accounts include your Roth accounts and grow truly tax free. You may withdrawal your contributions at any time, but since you pay no tax on disbursements, including gains after age 59 1/2, there are limits on contributions. Contribution dollar limits are set the same as your standard IRA and your total IRA contributions cannot exceed these limits annually. There is also a limit on who is eligible based on annual household income. Since these limits can change from year to year, I encourage you to check these limits each tax year. A big advantage to the Roth for early retirees, is the ability to rollover funds from your tax deferred accounts to your Roth account penalty free, as long as you wait 5 years to dispurse these dollars. This is known as a Roth Ladder.

The Roth IRA and Roth Ladder

January 3, 2020April 23, 2020 by FireDog, posted in Uncategorized

Maybe the most powerful tool in the retirement toolbox is the Roth IRA. That said, there are a couple of drawbacks we will discuss first to get them out of the way.

1. There is an income limit for the Roth IRA. The limits can change year to year so I advise you to check these limits before opening your IRA.

2. There is a maximum annual contribution for the Roth IRA. Again, these limits can also change year to year so best to know the rules. If you open an IRA and break the rules, you can face stiff financial penalties.

Now, for the good stuff…

The Roth IRA is funded with after tax dollars. This allows the IRA to grow truly tax free as opposed to a traditional IRA or 401k, which is funded with pre-tax dollars, and are considered tax deferred accounts. When you withdraw funds from the tax deferred accounts, you must pay taxes on your contributions and possibly your gains, especially if you are planning to retire before age 59.5.

During early retirement, chances are you will have the bulk of your monetary assets in your 401k. If you withdraw these funds before age 59.5, you are taxed at your current tax rate, plus an additional 10% penalty. To avoid this penalty, you have a couple of options. If you are 55, and separate from the company sponsoring your 401k, you can begin early withdrawal without penalty. If you are not yet 55, or maybe have multiple 401k accounts from previous employers, you can do what is called a Roth Ladder.

In order to build your ladder, you will first need to have a good understanding of how much you need per year in retirement. I advise you to track your spending for several years before retirement to understand your spending needs. This is also a good way to reduce your spending habits by understanding where your hard earned money is being spent on a monthly and yearly basis.

After you have a good handle on your annual finances using Personal Capital, You can calculate your future needs including inflation and taxes. I have included a link to my favorite spreadsheet here. If you are anything like me, this will give you hours of enjoyment running through “what if” scenarios. This spreadsheet will help you build a plan for your Roth Ladder as well.

The basis of the Roth Ladder is a sort of loop hole in the tax rules. Basically, you can transfer assets from your deferred accounts into your Roth account, before your official retirement age of 59.5, and not have to pay the 10% penalty. The catch is, you can’t touch the funds for 5 years. There is no max limit on how much you can transfer, unlike the contribution limits I explained earlier. During this 5 year period your contributions and transfers will continue to gain value with your investments.

To better explain the Roth Ladder, let’s say Joe retires at age 52 with the following assets:

Joe has calculated his annual expenses in the first year of retirement, and is using an 8% rate of return with a 4% withdrawal rate from his retirement accounts. Using the retirement spreadsheet, adjusting for annual increases and reduced spending to help offset some of the inflation costs, Joe comes up with the following personalized Roth Ladder.

The good news for Joe is that by controlling his spending, and having a little luck with the markets, he will be able to maintain his lifestyle and increase his wealth or increase his annual spending, should he choose to.

The bad news, remember when I said you can’t touch your Roth conversions for at least 5 years? Well, Joe will have to fund at least his first 5 years of retirement before he can tap into his Roth account. Also, you can’t change your mind after you have started the transfer. The best advise is to wait until late in the year to analyze your spending before beginning your annual conversion.

More good news for Joe, he has built up a significant brokerage account which can sustain him for the first 9 years of his retirement. Here is what Joe’s ladder looks like through age 78.

Keep in mind that your conversions are taxed as income at your current tax rate. If you want to start your conversions before you retire, you will need to calculate in this additional income for tax purposes, along with your salary. Obviously this is not a popular choice for most early retirees.

There is also an option to stretch out your conversions over a longer period of time to reduce your taxable income. For this option, it may be best to complete your conversions before age 70 when the mandatory withdrawals kick in for tax deferred accounts. The spreadsheet can assist with this scenario. Feel free to run the options and see what works best for you. Here is what Joe’s ladder looks like by spreading his conversions before age 70:

How Much Money Do I Need to Retire?

December 25, 2019April 23, 2020 by FireDog, posted in Uncategorized

How much is enough? This is a great question and a lot of folks smarter than me have tried to do the math. Most people in the FIRE community use the rule of 25 or 33, depending on how early you plan to retire. This rule states that you should take your expenses and multiply that number by 25 to figure out what your financial independence number should be. So if your annual expenses are $50k per year, 50000×25=1,250,000. Now, don’t get me wrong, this is a lot of money. But consider what this number will look like with taxes and a 2-3% inflation rate over 25 years. Nobody knows exactly what the future holds so we must rely on data from the past.

The next formula you should be aware of is the 4% rule. This rule states that if you use the rule of 25 to achieve your FI number, you can safely withdrawal 4% of your retirement savings and never run out of money. This rule is also referred to as the Trinity Study in the personal finance and FIRE community.

Now I am going to go out on a limb here, so bare with me, and keep in mind that these are just my opinions. Please research on your own and draw your own conclusions.

The rule of 25 is a great target, but can I retire on less? That was a rhetorical question, but feel free to ask yourself the same. Personally, I feel pretty confident that I have kept my lifestyle such that I could, but each person needs to evaluate their own situation. With respect to the 4% rule, I feel like this is a bit conservative, but may be designed that way to insure success. Based on the market conditions of recent years and inflation rates, my personal opinion is the safe drawdown rate is somewhere between 5-7%. I look forward to testing this theory out someday myself. As I stated before, do your own research and draw your own conclusions.

How Should I Invest

December 25, 2019April 23, 2020 by FireDog, posted in Uncategorized

As I stated in a previous blog post, I don’t have the risk tolerance or patience to invest in individual stocks. I have a handful of stocks in an old rollover IRA, but I do not actively trade them. They were all bought when the market was at a low, around 2009, and I have just held them. The majority of my investments are in 401k or my Betterment account. You may be wondering why I chose Betterment? I evaluated several investment platforms and found the simplicity and features of Betterment to be more to my liking. For those of you who may not be familiar with Betterment, it is a Robo-advisor platform. For people like me, who don’t want to spend hours and hours evaluating and tracking investments, Betterment asks you a few questions and then selects the best investment portfolio for you. It also has tax loss harvesting tools built in which will select the best options when you start your withdrawal process or need to sell for tax purposes.

Betterment uses a mixture of stocks and bonds to help flatten out the bumps when the market is volatile. Based on your years till retirement and risk tolerance it will advise you on the right mix for your situation. It will also auto adjust your mix as you get closer to retirement. Since I have the majority of my retirement savings in 401k, and use my Betterment account for early retirement savings, my risk tolerance is a little higher on this platform. I maintain a 90/10 split between stocks and bonds with no auto adjustment. I may change my tune if market conditions change. Betterment does a good job of allocating my investment into multiple Exchange Traded Funds (ETF’s). These ETF’s allow you to invest in multiple companies with a single stock purchase. Betterment also reinvests my dividends and takes care of rebalancing my portfolio.

Should I Gamble My Hard Earned Money in the Stock Market?

December 25, 2019April 23, 2020 by FireDog, posted in Uncategorized

Chances are that you will not reach financial independence, early retirement, or any retirement without investing. Of course there are always exceptions to this like winning the lottery, owning multiple rental properties, being an entrepreneur, inheritance, etc. None of these apply to me. So in my case, the best option is to invest. Now, I’m not a day trader and don’t have the risk tolerance for picking individual stocks. I believe in the tried and true method of buy and hold. The downside to this strategy is it takes time, so start now.

In an earlier post I recommended saving in your companies 401k. Even if you hadn’t yet paid off your high interest debt. The reason for this recommendation is based on 2 things. If you aren’t taking advantage of your company match you are leaving money on the table. The second reason is time. There is a well known equation called the rule of 72. Basically, divide 72 by your rate of return and that will tell you how long in years, it will take for your money to double. So, for this example, let’s say your average rate of return is 10%. Your investment will double in 7.2 years.

At this point, if you have eliminated your high interest debt, and have built up your safety net, I recommend you re-evaluate your 401k contribution. Make sure you are at least getting the full company match. Most companies will match up to 6% so check with yours to verify.

The experts will tell you to get the match in your 401k and then start investing in an IRA. There are multiple IRA choices out there so I recommend you do your research. The 2 most popular IRA’s are Traditional and Roth. A traditional IRA is funded with pre-tax dollars, like your 401k, your investments will grow tax free. Depending on your tax situation at retirement, you will have to pay taxes on your distributions. A Roth IRA is funded with after tax dollars and also grows tax free. With a Roth IRA, depending on your tax situation at retirement, you may only have to pay tax on your capital gains (the money you made from your investments). Again, I am not a tax expert so I recommend you either hire one or do your homework.

For my personal situation, I have an excellent company match and I am very close to maxing out my 401k. For 2020 the max contribution is $19,500. If you are age 50 or older, there is an additional catch up contribution eligibility of $6,500. I’m not quite there yet but getting closer every year!

Since I want to retire early, I try to invest any extra money after all the bills are paid, into my Betterment taxable account. Again, I can access this money at any time as long as I don’t withdrawal the gains. Since we live within our paycheck, I use my year end bonus to max out my Roth IRA and put the rest in my taxable account. For year 2020, the max IRA contribution is $6,000 or $7,000 if you are 50 or older. There are several rules around IRA contributions, so I advise you to research this topic further before starting your IRA.

I’ve Paid Off My High Interest Debt…Now What?

December 25, 2019April 23, 2020 by FireDog, posted in Uncategorized

Great! So, no more credit card debt or high interest loans? Don’t cut up those cards just yet. If you have taken my advise from the previous blog post, and are using Personal Capital to track your spending, you should be seeing cash positive numbers. But what do you do with this sudden windfall of cash? Well, you have a few options. First, since you have spent all your extra money on paying off debt, there is a good chance that your safety net needs some attention. While your savings account is a great place to store money for easy access, most savings accounts have such low interest rates that your money is not working for you. It’s time to put your money to work.

Most financial experts recommend 3-6 months of living expenses in an easily accessible savings account. I keep 2 months of expenses in a high interest savings, at just below 2%, for my wife’s peace of mind mostly. The rest is invested in a Betterment taxable investment account. In the event of an emergency. I can withdrawal these funds tax free as long as I don’t touch the gains. It may take a few days to sell my positions and transfer the money, so this is not what I would consider a fluid account. Remember earlier when I said, don’t cut up the cards just yet? I have a high available balance and can use my credit card to pay for an emergency, then pay the balance from my Betterment funds transfer. Betterment also has a Safety Net account which might be more appealing to you.

Make sure you are tracking your spending and following your budget at this point. It can be very easy to take your extra cash and go blow it on something shiny. Keep thinking needs vs wants. Now, that said, don’t cut off your nose to spite your face. You deserve to treat yourself. That doesn’t necessarily mean to run right out and buy a new car. Figure out what makes you happy, without running up more debt. For me, it’s taking a day off and mindlessly vegetating in front of the television, or taking my wife out for a nice lunch. Find a balance and enjoy the successes of your hard work!

Get Out of High Interest Debt

December 25, 2019April 23, 2020 by FireDog, posted in Uncategorized

One of the first steps to financial independence is freedom from high interest debt. Notice I didn’t say freedom from debt. Contrary to what some say, debt is not all bad. For example, I have a low interest 15 year fixed conventional mortgage on my primary residence. There are plenty of other sites out there with detailed analysis on paying off the mortgage vs investing. For sake of argument, using simple math, pouring everything into a 4 percent mortgage to pay it off early, will not net you the financial gains of taking those extra dollars to pay off high interest credit cards and loans or investing in a balanced portfolio. We will discuss this in more detail in a future blog post.

Credit cards are also not the enemy. Don’t overspend and pay off the balance each month. If you are like me, and occasionally use shopping as therapy, maybe leave the credit cards at home that day. Without some debt, your credit score may suffer. I also find using cash is difficult to keep track of my spending. Since all credit and debit transaction are electronic, it’s much easier for me to track and budget.

So, the $1million question, how do I get out of high interest debt? There is no secret pill or fairy dust. You could win the lotto, but the odds are against you. That doesn’t stop me from playing for fun when I have a couple extra buck in my pocket. 🙂 If you are struggling to pay your bills, I wouldn’t advise the lotto!

The hard truth is, you have to evaluate your spending and make some hard choices. I highly recommend using the Personal Capital App to track your spending. How much are you spending on needs vs wants? Where can you trim the budget? Can you make smarter spending choices? Depending on the severity of your situation, this could be as simple as cutting off the expensive satellite subscription, which I did, to as complicated as selling your house and renting or downsizing.

For my debt situation, I reduced my monthly expenses, consolidated my high interest debt into a lower interest line of credit from my bank and changed jobs for a higher income. If changing jobs isn’t an option for you, consider a side hustle. There are plenty of websites out there with examples of side hustles and one may work for you!

I am fortunate enough to get an annual bonus. We don’t count these dollars as part of my salary, so we don’t rely on the bonus for expenses. The first 2 annual bonuses went straight to paying down the high interest debt. For us, we used the snowball method. We paid off the lower balances first and used the extra monthly savings to pay extra on the larger debt. Financially it makes more sense to pay off the higher interest debt first, but psychologically, the snowball worked better for us and helped to keep us motivated. Moral of the story, do what works best for you, but do something. Don’t wait or hesitate. Start today!

The Financial Freedom Journey Begins

December 22, 2019April 23, 2020 by FireDog, posted in Uncategorized

I was raised an Air Force brat and spent my youth moving from public school to public school, never making friends for too long. Back in those days there was no social media or Internet, so long distance friendships weren’t really a thing.

I wasn’t very good in school, so when graduation day came around, while most of my friends were planning their university move in day, military career, or joining the family business, I was relocating once again with my family from Florida to Arkansas.

My father was career military and raised his family of 5 on an enlisted airman’s paycheck. He lived the same cycle of debt most military families experience, which feels like just above the poverty line.

My parents always bought us what we wanted, whether they could afford it or not. big Christmases, big birthdays, Boy Scouts, sports, it all went on the credit card. When I started working, my fathers advise was to save 10% of my income in savings. Of course that advise never stuck and I continued the same cycle of high interest credit and frivolous spending.

When my wife and I started our family, we already had a decent amount of credit card debt and had been upside down on fancy cars we couldn’t afford. We were renting a 2 bedroom duplex, had 2 Schnauzers, dual income, no savings and bought pretty much whatever we wanted. When suddenly, one day my wife announced to me that we were having twins. After I picked myself up off the floor, the fancy sports car was quickly traded for a 4 door sedan and we were all set with our family of 4, one boy, one girl, one income. We were settling into our crazy life of double bottles, diapers, strollers and no sleep. Not quite done yet though…two months later…pregnant again. The 4 door sedan was soon replaced with the mini van and the 3rd car seat was added for our youngest daughter. I like to jokingly say that I finally figured out what was causing this condition and put a stop to that funny business!

I was working a factory job with good health insurance but barely making ends meet. I’m not too proud to say that we were on WIC and thankful for family who helped us as much as they could. 401k and savings were the furthest from our minds, but that didn’t stop us from running up the credit card. I can remember driving an hour to Memphis to buy my first Packard Bell computer and charging it to the Sears card at what was probably 18% interest while making minimum payments. I can’t even begin to imagine how much that computer actually cost me with interest.

At some point I did move into IT as a Desktop Technician and saw a small salary bump. I began contributing 2% to my 401k plan, probably because, if I didn’t, my company was going to force me to contribute 5% through auto-enrollment. Of course I could never afford that much, right?

When I left that job I made one of the deadly sins of personal finance, and cashed out the 401k. NEVER DO THIS! Not only did I end up paying the income tax, but there was also an additional tax for early withdrawal which reduced my year end tax return significantly.

So, long story short kids, invest in your company 401k and do your best to get the full company match if they offer one. These are before tax dollars and you will not miss the money, as much as you might think. NEVER cash out your 401k. If you change jobs, you can rollover those funds to your new 401k or to a traditional rollover IRA. If your 401k provider doesn’t support direct rollovers, you are allowed 1 cash rollover in a 12 month period. You must deposit those funds into your new retirement account within 60 days or face the dreaded early withdrawal penalty.