I received a message from Ethele, a fellow Networth IQ member.
I love this question because it is a chance for me to review all the basics of the 7million7year Philosophy – so new reader, or ‘old hand’, I encourage you to really study this post and all the links that I have included!
Ethele asks:
I was wondering if you can give me some feedback on my plans for moving from Money 101 to Money 201. At worst, I figure I’ll learn I was silly to ask 🙂 I’m still in the early 101 stages, but want to build a good plan for moving to 201 so I am ready to take advantage of opportunities as they arise.
Our situation: I only recently got out of debt and bought a house. Due to the expensive area we live in where the bubble bursting hasn’t been felt very strongly, we spent $370,000 on our home. We got a 0% down loan, and are paying PMI. Our NetWorth is currently growing by $1.7K / month, mostly from my J.O.B. I am 25, married to a stay-at-home-parent, with two kids. Seeking an additional income from my husband isn’t a sensible move right now (he’s anti-J.O.B., has low earning potential, and is not very ambitious), but I am hoping to get him involved in our Money 201 strategy when we get there (and after the kids start kindegarten).
My current plan for getting through 101 is:
1. Build a small 2 month emergency cushion (by 2009) and invest 6% income into a 401(k) to get the employer match (6 months)
2. Pre-pay on our mortgage until we have 20% equity in our home (about 4.5 years with current rates of extra income – but will probably be accelerated by raises and bonuses).
3. Refinance our home, get rid of PMI, lower our payments.
4. Grow our cushion so we have 6 months expenses (should take about 6 months or less) and can take risks. Maybe have this additional cushion money do some light work, but nothing too risky.
5. Start investing our extra income (I’m still fuzzy on how – index funds? Risk just means we might stay in 101 a little longer – or less long, if we get lucky) and grow until we can invest in a Money 201 strategy – leaning towards rehab / flipping or a rental property, so probably 20% down plus a little more to invest somewhere besides real estate. This will probably take another three years or so.Is this what a transition to Money 201 should look like?
Firstly, I responded to Ethele to let her know that I can’t give direct/personal financial advice: (a) it’s not legal – I am not a licensed financial adviser, more importantly (b) how could I possibly have enough information from just one e-mail to know enough about Ethele’s capabilities, hopes, desires, and true financial status to make any reasonable recommendations?
But, I can make some general observations that may assist us all:
Making Money 101 is the basic stage of getting your personal financial house in order … it is the ‘meat and potatoes’ of almost all personal finance blogs that I have read, so why would I bother to even talk about it here?
I agree!
If your plan is to work your entire life; save only via your 401k and buy (then pay down) your own home aiming to retire on $1 – $2 Million when you are 65 then you need read no further.
However, I feel that my audience wants more … they have a ‘big dream’ … they want it now (well, soon’ish) … and it requires fuel – lots of it (money!) – and lots of free time, to boot!
If that’s you, Ethele, then we DO need to revisit Making Money 101 in this blog, because we need to explode some of the myths that will hold you back from your goal of being rich … even before we get to Making Money 201.
Myths like: building a cash emergency fund; paying down our mortgage; diversifying through Index Funds.
So, Ethele, if you are planning to Get Rich Slowly, this isn’t the blog for you … and your plan looks excellent!
However, if you are planning on getting rich(er) quick(er) then you are still on the right track, with a few somewhat controversial tweaks that you may want to consider:
1. Do the math on the 401k + employer match against what you can achieve elsewhere. I have no problem with any answer that you come up with.
2. By all means keep a couple of months of expenses in the bank, but can you find something better to do with 6 months worth of expenses than having it just sit in CD’s: Can you pay down consumer debt? Can you put down a deposit on an investment property? Can you finance renovations to increase rent on something you already own?
3. Can you find a better investment than a diversified Index Fund (by all means use this option over bonds / Mutual Funds, if that’s all that’s available to you inside your 401k)? Maybe Rule # 1 Investing by Pete Town will get you interested in the stock market, or you can consider some of the real-estate options mentioned in #2., above?
4. Does your house fit into the 20% Rule? This is not a measure of % equity that you hold in your own home, rather a measure to ensure that you are always investing at least 75% of your net Worth (as measured by Networth IQ), allowing 5% for other purchases (cars, furniture, etc.).
By doing this, you are indeed transitioning to Making Money 201 … are you sure you need to – and are mentally ready to – make that transition?
So, for all the Etheles out there, food for thought?
Actually, AJC, you can give direct personal financial advice. You don’t have to be licensed. If you do not charge for advice, you are not subject to the licensing requirements. Look up the securities regulations (either SEC or your state regulations) and you should find an explicit definition that includes charging for advice.
No charge = No need for license
@ Sue – Will you represent me 😉
Anybody, licensed or otherwise, would be foolish to attempt to give direct personal advice on the scant information available via e-mails … financial planners take a complete ‘history’ for good reason. But, we can (and do) use these types of questions to illustrate aspects of how to get rich(er) quick(er) for the broader audience, so these types of questions/comments are VERY MUCH appreciated!
“However, I feel that my audience wants more … they have a ‘big dream’ … they want it now (well, soon’ish) … and it requires fuel – lots of it (money!) – and lots of free time, to boot!”
I think this *is* me, but the issue is that I haven’t defined my dream. It isn’t the standard, “Retire at age X and live like a king” style of dream – I’m happy with a modest lifestyle. But I want to have (a) time to volunteer and (b) money to support others in volunteer and charitable work, and I want to change the world through this work.
I think I’ve been confused by all the focus on retirement (like in your magic number article). Retirement is exceedingly easy for me; I could probably have everything I need in a 401(k) and IRA by the end of a couple of years, let it sit for 30 years, and be done with retirement planning.
What I should have been defining is how I want to change the world BEFORE then, how much time this will take, how much money this will take, how much I can earn mid-dream, when I want to do it, and if I will have time after this to get all the resources for the rest of my life (retirement), or if I will need to start getting ready for retirement now as well.
So . . . when I start thinking this way, I see that most of my dreams are best accomplished in my 30s and 40s, maybe early 50’s. That’s where I’ve been messing up. I should worry less about retirement, which is a low-resource period when I dream about my life. I should worry more about ages 30 to 45, when I want to accomplish my biggest, most time-and-money intensive dreams. I don’t intend to be retired during this time, but I would like to cut back my hours at work so I can give time as well as money, and so I can spend more time with my husband and children.
The trick for us is that we are essentially just starting out. So I need to go from just over $0 to (magic number for my mid-life dreams) in 5 years. This isn’t too scary, since I will be earning during mid-life still – just not as much. But it is still ambitious – and when I reduce hours at my job, I will need either fewer expenses, or a passive income / savings to cover the gap between expenses and job income.
Thanks, you’ve helped a lot by making me question if I should even be trying to get rich(er) quick(er). Yes, I should – but now I know what I need to know to figure out how much money, how fast. My magic number is just going to take a little more work to figure out, since it’s not just “get here and then stop active earning”.
@ Ethel – I’m so glad that you came back to read this and leave your comment because it addresses a false premise: retirement … it’s not an amount on a date set by your employer (or society norms), it’s a date that YOU set to do what you need. In your case, the critical date is your so-called “mid-term” date (and, associated amount), with a second cut at it based upon the date that you actually intend to stop work altogether.
Check out the posts from the last 2 to 4 weeks on http://7m7y.com … you will find some interesting exercises to help you sort all of this out. Good Luck!
Great food for thought. On Monday I’m going to look into withdrawing my 401(k) to buy my first property.
@ Josh – I’m not recommeding that anybody withdraw their 401k to make other investments; merely that you run the numbers and understand why YOU have one … and, the 401k can be a good “in case all my plans go belly-up” safety-net, so is there any way you could do both? If not, then you have a tough, but important, decision to make …
I think I will use it (my 401(k)) as basically a savings account until there is enough money to launch a real investment such as RE.
I don’t know if this is considered doing “both” but I do consider this an easy decision if I’m going to take the idea of early retirement seriously.