Last post, I mentioned some of the things we learned meeting a licensed financial professional.
I discussed there were many dozens of financial solutions we undertook to set us on a better path. Here are some of the major ones. Items in blue were how we shifted existing money, green, positive steps we took, and items in black other steps we took. Feel free to skip to any sections that interest you. This is a long piece.
Re-financed our house
For many homeowners, if you own a house for any length of time, take a look into re-financing. Depending on how the loan was financed, you can reduce interest costs and potentially reduce principal payments. Interest rates for 15-year and 30-year mortgages are lower than they have ever been.
According to this Forbes article, there are about 18.9 million homeowners that have not re-financed, and would benefit from taking that step. They would benefit to the tune of saving about $300 per month on average. That’s significant savings. We can take that savings, and use it to boost our savings fund, pay down higher interest debt, or invest. It’s not free money, but it’s pretty close. If you can afford it, ask your mortgage professional to see how much your payment changes if you keep your current term, instead of taking a longer mortgage. That’s another way to reduce your interest paid.
Our re-finance saved us $500 a month cash, and saved us another $500 a month in interest payments we didn’t have to pay. It was very beneficial for improving our finances.
Boosted our credit score<p value="<amp-fit-text layout="fixed-height" min-font-size="6" max-font-size="72" height="80">Before you refinance, boost your credit score. Many people are aware of their credit score. They are not aware the impact the change in your credit score can have on reducing loan costs. Not only can you reduce your refinance costs, you can reduce the cost of other loans in your name. This might be one of the cheapest things you can do to reduce your lifetime interest cost. Services like <a rel="noreferrer noopener" href="https://scorenavigator.com/" target="_blank">ScoreNavigator</a> can tell you when to pay down debt, when to take out new debt, how to correct errors on your credit report, simulate the impact of taking out new debt, and generally boost your credit score. We first used this service on our debt management plan. This is a US service, there may other local companies that do something similar where you live.
Reduced our 401k contributions
Not everyone has a 401k. In these times, not everyone is earning what they want either. It’s unfortunate due to the pandemic.
If you do work and have a 401k, there are some bad things and some good benefits. The bad things we will discuss in future posts.
One of the good benefits is employer’s generally match some level of your 401k contributions. In our case, we were putting aside 13%, well above the level of employer match. When we looked at our level of returns over the past few years, we had too much in cash and not enough invested. Our returns were low. After speaking to my wife, I said it made sense to temporarily reduce our contributions, and use our savings to pay off high interest credit card debt. Once the debt was paid and savings built up, we could add more to our retirement plan.
We reduced our contributions to 3%, the minimum necessary to get the match. Not only did we reduce to 3%, we switched from a Traditional 401k to a Roth 401k. How come, you may ask? The Roth 401k employee contribution pays tax up front, grows tax-deferred, and is withdrawn tax-free. There are not many ways to generate tax-free income in retirement. With the level of taxes having a good chance to rise higher given the level of national debt, how fast it is growing, and budget deficits that run in the trillions, this seems like a sensible idea.
Shifted our retirement money to fixed-index annuities
Part of our strategy with our retirements was switching old 401k’s and IRA’s to fixed index annuities. The word annuity generally results in people running away, fast. Most people don’t realize Social Security is a type of an annuity. No one I know of would say no to Social Security income when they got older. Let’s back up a step. What is an annuity? Here is the definition from Investopedia.
In the case of Social Security, those series of payments you make are funded from payroll taxes. You receive disbursements when you retire. What is a fixed-index annuity? This is an annuity where there are certain indices to choose from. They can be popular indices, like the S&P 500 or Nasdaq, or custom indices. There are two key points. For most fixed-index annuities, there is a floor. Any principal added or interest gained is yours, forever. In exchange for this protection, your upside is limited by some degree. Insurance companies don’t directly investment your money in the indices, like you would with index funds, mutual funds or etf’s. Instead, they park most of the money in bonds, and use options to gain leverage.
Why is this important? Very simple. In the past 20 years, we have had three major wipeouts in the stock market, 2000-2002, 2007-2009, and 2020. For the 2002 and 2007 drawdowns, not only did most lose money, more importantly, we lost years of time to get back to even. Sequence of returns risk is very real. If you were retiring close to those time frames, the shock loss of much of your nest egg in a few years may have led you to postpone retirement, or lead a less comfortable one. With guarantees not to lose money with fixed-index annuities, and potential for upside, you can plan on how much income you need to retire. That’s why we made the switch, among many other reasons I’ll discuss. Peace of mind, guarantees on not losing money, opportunities to grow the money and retirement alpha sounded good to us.
Increased our life insurance coverage
Most Americans are underinsured. And I bet, most people in the world are underinsured. The recommended amount of life insurance is 10x to 20x your income, for each partner. Why would I urge people to increase your life insurance coverage? This year is a stark reminder by COVID. The unexpected becomes expected. Our good health last year may not continue into good health next year. We want to make sure we can take care of our families, if something were to result in a sudden loss of income.
But smilingdad, only 3% of term insurance policies pay out, you may tell me. And I would say, you are right. It still makes sense. Most people say I don’t like paying insurance premiums and losing the money. They miss a key point. Let’s say you take out 500,000 in term life insurance for 30 years. You are a 45 year old female with decent health. One quote I got has a yearly cost of $870.
Let’s do a quick comparison. Apologies for the math!
$870 * 30 = 26,100 cost over 30 years. 97% of the time, the money is lost. That means if we look at a large group of people, they can expect to lose $25,317 per person.
3% of the time, the person makes use of their term insurance. They will receive a benefit of $500,000, for an expecgted benefit of $15,000 per person. Subtracting the expected loss from the expected benefit gives us a real cost of -$10,317. That’s not an a small amount of money. If we divide that by 360 months, this works out to a cost of $28.66 per month. For less than a dollar a day, your family is protected in case something happens to the main earner. They can continue to live the life they were living before. This is less than a morning breakfast or coffee. Too often, I have seen families on GoFundMe, asking for money to pay expenses after someone dies. It’s unfortunate and sad. That family will never be the same financially. How much is your family worth to you? Everyone will say their family is valuable, but how much they are willing to protect them tells a different story.
Therefore, we were underinsured and as part of fixing our finances, I made sure we were properly protected. In fact, we have too much life insurance now, which we are working to fix.
Created a plan to be debt-free
As multiple, recent posts have mentioned, we needed a plan to be debt-free. To estimate when your debt-free date happens, you need to know how long it will take to pay off your debt. The debt that takes longest to pay off determines your debt-free date. Our original debt-free date was 27 years, the time of our primary mortgage. Once we were debt-free, we could shift that money to future savings and investments. It wasn’t going to be easy. We’re still in the middle of it. I expect the plan to take a full 10 years to complete. We had all kinds of debt. Mortgage debt. Car debt. Student loans. Personal loans. Credit cards.
Part of that was re-financing, to ensure more of our money was going towards principal, and less towards interest. Another part was temporarily reducing our 401k contributions. The 401k return we were getting was consistently lower than any credit cards. That was our primary focus, to pay off one credit card, and use the snowball technique to attack the second. I am happy to say almost all of our credit card debt is gone (for the third time, it’s been a painful journey).
To help make that stick, we cancelled the number of credit cards we had from 8 to 4. It was too easy to get a balance transfer, or pretend to use another card with no balance while another was racking up interest. We kept the cards we had the longest or had specific benefits (like 5% off on Amazon, or travel points) and cancelled the rest. Keep in mind, your credit will take a hit when you cancel credit cards. That’s where a solution like Score Navigator comes in handy.
The question of which debts to pay off, when to pay them, and how much is not an easy one. I hope to create a tool that makes it easier for all of you. That tool can help you determine your debt-free date. Thinking about your debt-free date will help frame your spending and investment decisions.
Last, I realized being debt-free helped us with risk reduction. There is age discrimination in the US. People that are in their 50’s or higher find it harder to get back into the workforce. They may need to take care of older relatives, help with their adult children, or suffer medical problems. This may lead to a forced early retirement. Having less debt gives you more options, including one spouse leaving the workforce early.
Tracked all of of our expenses
I have mentioned tracking all of your expenses in posts many years ago. Part of our debt-free strategy is finding all the leaks in your finances. The average family may have 100’s of tiny leaks in their income. Some expenses are once a month, like streaming services. Others are one-time, annual expenses, like home insurance or property taxes. Do a full audit of your expenses. You will be surprised by the items you are paying for that don’t provide any value to your goals. Those can be safely reduced or eliminated. Others, you may be over-paying, and cheaper, better alternatives may exist.
Our goal is to not make ourselves miserable about paying off debt. We want to find a good balance between enjoying life and having a plan to be debt-free. We have been miserable before, and frankly any progress we made on our goals was offset by how bad we were feeling. We want to feel good about our progress. By taking these simple measures, we were able to increase our savings and how much we could set aside to pay down debt.
Diversified our investments
Our switch to fixed index annuities and permanent life insurance gives us a steady base to accumulate retirement income. We took the opportunity to re-evaluate our entire portfolio. Here’s a good question to ask yourself that Tom Hegna asks people. Is your income more like a stock or more like a bond? If your income has a lot of ups and downs, your income is more like a stock. If your income is more steady, your income is more like a bond. If your income is like a stock, you need more steady elements to offset and give you safety. The opposite is true if your income is like a bond. You want riskier, higher return elements to offset your steady income.
Our move to conservative elements in our income and investments suggested we should move to higher risk solutions for the remainder of our portfolio. That’s what we did. I calculated an 11% rate of return, every year is feasible. Keep in mind that is well above what most people expect. We moved some of our money into small caps, an index tracking the Nasdaq, even some investments in Tesla stock. This would not have been possible before we re-evaluated all of our finances.
Non-traditional ways to save money and do good
My fellow writers on Cleantechnica have been on fire the last week. There were a lot of non-traditional ways listed on how to save money and move towards greater sustainability, not only for your residence but the overall world. Many of the tips equally apply to rental units and landlords. Sustainability includes using less electricity, less water, more EV’s and more renewable energy. Simply stated, it’s getting more for less. Here are a few of the posts I liked. They are so good my next blog might be discussing all the below posts in greater detail.
Electrify everything and save tons of money
Top 4 DIY Energy Efficiency Upgrades
Don’t Buy Tesla Solar Until You Read This Article — Solar Buying Guide
Top 5 Habits You Can Get Into That Improve Your Home’s Efficiency
Downsize Your House & Cut Your Costs In Half. We Did It!
The future home
Given the movement of the entire world to renewable energy, slowly in some places, or faster in others, it is very conceivable future homes will be all-electric.
The High-Performance All-Electric Home
Here’s a good one on the march towards renewable energy.
Renewables: A Decade of Progress Toward a Clean Energy Future
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