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!
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?
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.).
So, for all the Etheles out there, food for thought?