2018 is just around the corner. If you recall, 2017 was dedicated to immolating our last remaining student loan. With that goal quickly approaching the Heartland on Fire household is turning our sites to aggressively increasing our savings and investments for the upcoming year. So, if you want to see the game plan and hold us accountable at the year’s end keep on reading.
Feel free to predict the outcome in the comments below. I’m hoping to circle back periodically to check on progress and provide a “year in review” post in the winter of 2019.
Goal
Financial Independence!!
2018 Goal
Take a substantial step toward FI. Set a baseline for future years.
This statement is incredibly vague. How do we define this “substantial step”?
Setting a goal for a specific net worth increase is appealing, since I believe that FI is when we can live off 4% of our investments. However, with several years to go before FI really enters the picture our investments will tend to be on the aggressive side. As such, I anticipate a fair amount of volatility in our next worth, year to year.
The same concern rises when trying to measure success by setting an investment return benchmark. The market may be quite lower at the end of 2018 (indeed many are forecasting this). With our time horizon I don’t want to judge our success or failure by the whims of the market.
So, what can we control? What can we measure?
Our Savings Rate
Increasing our savings rate captures all the key components of pursuing FI:
- Decreasing spending
- Increasing Income
- Optimizing… both Investments and Lifestyle
In 2017, our savings rate (not accounting for student loan paydown) was a paltry 6.2%!! Whew… that stinks!!! However, when you add in the student loan payments the value jumps up to 28%. Better, but still far from where we need to be.
For 2018, I’m setting my sights on a minimum savings rate of 32%
Known Roadblocks
It’s always a good planning practice to capture any potential obstacles to your objective. So, let’s do that here.
Daddy needs a new (3-4 year old, new to me) ride. My truck is over a decade old and loading my growing kids in the back seat every day is a drag. Plus feeding the beast’s mighty thirst at the pump (can you say 15-16 MPG?) gives me heartburn. However, if I “buy right” I may be able to help our cause moving forward. I’ll cover this in a separate article.
Disney. World. I have two little princesses and one grown up one that are dying to get to Disney. This year represents the last year the youngest can get in for free. So, we’ve decided to bite the bullet and make this happen. I know what you’re thinking, that a big vacation is a big departure from traditional FI living, but remember we are striving for a balance…and my wife won’t back down on this one so, I lose.
Options & Strategy
Savings and investing can be accomplished in numerous ways. I won’t enumerate them all in this article. Below is a list of the options we’ve used before and those we are currently considering. I imagine this list will change in subsequent years.
Employer 401k plans – We’ve both participated in our company’s 401k plans with 2017 being the outlier (my wife did not participate so we could pay down the student loan more quickly). However, we’ve never come close to maxing out the contributions here. Investing with pre-tax dollars is an excellent strategy, provided your plans have good investment options and low fees. Both of ours do. This will serve as the backbone for 2018’s plan as we attempt to max out our contributions this year.
Traditional or Roth IRAs – I’ve long-contributed to a Roth IRA, and my wife and I have rolled over 401k and 403bs from past employers into both Roth and Traditional IRAs. Again, these are tax advantaged accounts, so there will be some role in 2018 here. My current thinking is to replace my Roth contributions with Traditional IRA contributions, since I will have more control over taxes in retirement (they are based on spending, rather than earning). Due to the known roadblocks and considering that unknown “real life” moments are bound to happen, I won’t likely max out my contributions here.
Taxable Investment Accounts – Just regular mutual funds, ETFs, or stocks in a non-tax advantaged account. Why would we consider this? Well, we are hoping to have the ability to retire early, so some funds may need to be withdrawn prior to IRA ages without penalty. We could always look at just taking the hit on the IRAs or using other strategies like a Roth Ladder or SEPP (Substantially Equal Periodic Payments) to access that money sooner. A great post on this topic can be found on the Mad Fientist blog HERE. However, we also have two daughters who may get married and we could end up moving, or investing in real estate, so having some money that’s easy to access is desirable. So, there will be some funds earmarked here.
Employer HSA plan – Now this one is interesting. I have a high deductible health plan through my work (the kiddos are on the wife’s plan). With the HSA I have the option of investing the balance once a minimum threshold of $2,000.00 is achieved. Since the money invested is pre-tax, earnings are tax free and withdrawals (for qualifying expenses) are tax-free at any time, this is very attractive. Further, after age 65 you can withdraw the funds for any purpose and be taxed on the gains, like a traditional IRA. Another great Mad Fientist article covers HSAs can be found HERE.
Real Estate – There is a plethora of ways to make money in real estate. Several of them are attractive to me. However, home prices are rising rapidly in my local area, reducing the number of “deals” available. Fix and flip is particularly interesting with the rising home prices, but it requires a substantial amount of capital. The savings in the taxable account may eventually cover this need. We currently rent out our old house. We’ve been successful in increasing rent for the upcoming year by $50 per month, but with a new tenant and aging home it’s hard to budget for much impact here. The plan for 2018 is to stay the course with the rental and accumulate capital for a future venture.
Requote Insurance – We’ve been with the same insurance carrier for both home, auto, and rental for a LONG TIME. It’s possible, likely even, that there is some unmined savings here. 2018 plan is to get several quotes and; hopefully, reducing our premiums. Unfortunately, I will probably have a higher auto premium with a newer car purchase which could offset some of the savings.
Lifestyle Optimization After some deep thinking, I am prepared to better allocate my time and money to maximize my happiness and minimize my spending. It’s hard to pin down what a potential dollar amount could be. Also, I will consider optimizing spending for other household needs and maybe I can stumble onto some more stock market beating returns.
PLAN SUMMARY
For 2018, we will make substantial progress toward FI by increasing our savings rate to a minimum of 32% of our earnings. We will accomplish this by:
- Maxing out our 401k contributions
- Maxing out my HSA plan contributions
- Contribute to a Traditional IRA
- Contribute to a Taxable Account
- Mine savings from lower premiums via competitive insurance quotes
- Seek out addition savings resulting from optimizing our lifestyle and spending patterns.
So, what’s your plan for 2018? Am I missing any golden opportunities? Let me know in the comments section.