Jan 7, 2016

Where I’m at and where I want to be – A financial confession

I’m a financial editor and reporter, but nobody knows what a mess my finances have been. It’s time to come clean: I'm pretty much broke - but not for long.

My financial situation has suffered from 10 years of contingencies and neglect. That’s a brief explanation of what you’re about to read.

My wife and I graduated from college in 2008 with around $36,000 in student debt. Jobs were hard to come by – it was a terrible time to enter the professional workforce, especially for someone with a political science degree – useful but worthless – and a graphic/web design degree – valuable but relatively useless in central Kentucky.

Today, we’re still at negative net-worth. We still carry around the same amount of student debt, after a long period of forbearance, and we’ve tacked on $7,500 of credit card debt on top of that, in addition to a car loan with around $10,000 outstanding on it.

We have around $4,000 in cash to work with. Another $2,000 in savings accounts. Another $20,000 in retirement accounts.

$12,000 of that total is in the Templeton Growth Fund in my wife’s 401(k), generously started for her by her parents several years ago. We have not touched it, even as we sagged financially, but the fund has failed to perform.

Another $5,000 of our retirement is in my former employers’ 401(k)s waiting to be rolled-over or converted to a Roth account should our income really start to grow. This money is all placed into target-date funds set for a retirement some time between 2045 and 2050 (I was born in 1981 – I now want to retire in 2051). These funds have performed well over time and are currently balanced at around 90 percent equities and 10 percent bonds. I’m more aggressive than that in general, but I see no reason at this point to incur the fees with rolling over and transferring the accounts – I’m likely to keep them and not add any principle investment to them.

A little over $1,000 is in my current employer’s 401(k) plan, and I’m adding 9 percent of my personal income to that twice a month – 5 percent from myself, four percent in an employer match. Right now that money is 92 percent in equities, eight percent in bonds, with future contributions averaging in more equities than bonds at a 94 to 6 percent allocation. The core of this 401(k) is in the SchwabS&P Index (SWPPX).

I have around $1,700 in another RIA formed from a rollover – a former employer had defaulted me into a money market account, when I realized I took the money to Vanguard and immediately bought VOO (which is Vanguard’s S&P 500 Index ETF) right after the Aug. 24, 2015 stock slide - which was a good time to get into the market.

I also started a Roth IRA, which currently has less than $100 in it, but I’m contributing to it at a rate of $5 a week.

I’m giving you rough estimates. I know the exact numbers because I keep track of them using Vanguard’s great tools, Mint.com, and my own obsessive checking and re-checking. I’m essentially a passive investor who looks in on his accounts every day. I just like knowing the numbers.

The big numbers I track daily are not the value of my investments, or even my income and spending (I’ve gotten this part of my family’s financial life under control, I think), but my net-worth – which sits around -$18,000 right now – and my cash flow versus consumer debt (money in bank accounts minus total outstanding credit card debt) – which sits around -$1,000 right now.

This year, I would like to improve both of those numbers. I would like to get my net-worth up to at least -$9,000, and I would like to get my cash flow minus consumer debt to around $3,000 (a net gain of $4,000) by the end of the year. This still isn’t a great place to be for a 35-year-old middle class guy, but goals should be reasonable and measurable.

How do I get there?

The first thing I see is that my biggest debts are student loans. However, these are also my lowest interest debts – the monthly payments on that $36,000 only come to around $330, which is a bite out of my income, but feasible – the problem is that the $330 doesn’t really put much of a debt in the principle amount of the loans because of the extended period of forbearance my wife and I experienced. So I’m not really improving my situation by tackling student debt at this point.

The car loan is also fairly low interest, and the payments are only around $250 a month. Again, a substantial amount of our income, but not enough to kill us. It would be nice to pay the car down so I can get more generous insurance rates (and not be required to hold full coverage) but it isn’t yet a priority.

The credit cards have interest rates that almost double the rates of our auto loan and are even more expensive when compared to the student loans. As far as debt is concerned, these have to go first.

This debt is held in two accounts – one with about $5,000 that is being assessed 12% interest annually, and one with $2,500 that is being assessed 14% interest annually. I’m currently paying around $150 a month (net after the finance charge is covered) to pay down the larger account, and around $120 a month net to pay down the smaller. $270 a month times 12 becomes $3,240, that will bring me more than 80 percent towards my cash-flow goal and 30 percent towards my net-worth goal.

Clearly, the cash-flow goal is the easier to tackle, and at the rate I’m paying my bills, I’m going to have some excess cash on top of my credit card payments. While some people might argue convincingly that this excess cash should go to additional payments to reduce my debt, I’m not going to do that at first. I’m going to save – not in a retirement account or by buying investments, but in a savings account – for an emergency or rainy-day fund.

Most experts say that a rainy day/emergency fund should come to 3-6 months worth of spending. My long-term goal is 3-6 months of our net earnings, which comes out to about $31,000. Keep in mind that we have around $2,000 in our savings right now, so I have $29,000 to go until I hit that goal.

Right now, I’m saving around $260 per month in cash, or $3,120 per year, comfortably. That means, under ideal conditions, I will improve my net cash flow by $6,360 this year, far exceeding my goal. I’m on track, no changes needed there. Furthermore, that $3,120 gets me another 30 percent towards my net-worth goal. I only need to cover $2,640 to improve my net-worth to $9,000.

Luckily, I’m socking money away in retirement accounts, too, so let’s see if those cover the gap. $5 per week comes to $260 a year in my Roth IRA – I just need $2,380 more. As it turns out, I’m putting around $330 a month into my employer 401(k) when the match is included. That’s another $4,000. I’m going to exceed my net-worth goal for the year barring any major emergencies.

I’m only 35 –my retirement is still 30-to-35 years away. I am planning for that retirement and I have an idea of how much I should be saving (more than I am now) – but with our current levels of debt, our small nest eggs, and with 30 years of market uncertainty to weather, I can’t use retirement assumptions to make a year-long financial plan.

I have to start short-term and tackle the financial issues in front of me now – stabilizing my cash flow and eliminating my debt while building a buffer of savings – then I can ramp up my investments. This seems like a way that millennials and middle-income people of my generation who may have fallen behind or who may have lost hope for their financial futures can effectively plan and work their way out.

I’m not a financial advisor or a planner, I have no certifications or formal education in finance, and I am not qualified to give you advice. I am not suggesting you go out and buy a ton of VOO or SWPPX just because that’s where I’ve planted the first seeds of my retirement.

Note that I didn’t cover my actual monthly household income and expenses – I’m sure you can come up with an estimate from the information I’ve revealed here. The next financial plan post I write will cover how I itemize my expenses and income, whether I will end up with a greater surplus than I’ve envisioned here at the end of 2016, and whether I will increase my debt payments, my emergency savings, or my contributions to my Roth and 401(k) accounts – or spend a little bit on my wife and I - as a response. Afterwards, I’ll bring it all back down to earth with a very sobering look at my savings rate, why 9 percent isn’t nearly enough for a 35 year old, and how I'm going to get back on track.

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