A Better Financial Freedom Yardstick?

A key theme from the popular book The Millionaire Next Door is the simple formula to benchmark your expected net worth.

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten.

This is what your net worth should be. As an example, a 30yr old person making $100k/year should have a net worth of $300k [(30 x $100k)/10].

I've recently had in my head that I like a different simplified measuring stick a little better:
Take 3-5% of your net worth and compare that to your annual expenditures.

This in my mind gives you a better indication of where you are at relative to your expenses and risk tolerance. I think that 5% is an aggressive withdraw rate that has a reasonable possibility of wiping out your net worth over 30 years and 3% as a conservative withdraw rate that has a high probability of lasting 30+ years so the range gives an indication of where you are at depending on risk tolerance.

For us our current net worth is $855k and a 3-5% withdrawal rate would be $25.6k-$42.7k/year. Our typical monthly expenses currently run approx $5k/mo or $60k/yr including our mortgage.

I know that if I can get our annual expenses to near the $25.6k-$42.7k/year range or increase our net worth so that our expenses of ~$60k/yr are at the low end of the withdrawal range I have a reasonable view that I'm financially free. We are clearly shooting for the latter with our $2million net worth goal. With a $2 million net worth goal we would be in the $60k-$100k/yr range.

The Total Cost of a Speeding Ticket

I got my first speeding ticket in about 10 years last year. It was just a dumb move on my part as I wasn't paying close attention to my car's speed.

I paid $139 for the ticket after court costs and other fees. I expected my next insurance bill to be slightly higher, but wasn't sure what to expect.

Our annual car insurance bill in 2012 went up $172.05 to $963.17 for my wife & I. I believe 100% of the increase is due to my speeding ticket as I can't find any other indication of a rate increase, but I guess there is a chance some of it is a rate increase.

I did a quick search at it looks like a speeding ticket typically affects your insurance rate for 3-5 years. The premium due to the speeding ticket might decline a bit each year, but I haven't found anything from my insurer that would indicate this so far

My estimated cost for this speeding ticket:
$139 for the ticket + 3 years of $172.05 increased insurance premiums = $655.15. Speeding is expensive. This is good motivation to keep my speed well in check going forward.

January 2012 Net Worth Update (+$29,888)

Assets	Dec-11	Jan-12	Change	%
Cash & Savings	$ 27,882.26	$ 27,618.74	$ (263.52)	-0.95%
Taxable Brokerage Accts	$ 158,906.63	$ 164,890.42	$ 5,983.79	3.77%
Roth IRAs	$ 82,652.93	$ 86,835.15	$ 4,182.22	5.06%
Pre-tax Retirement Accts	$ 272,245.83	$ 287,564.04	$ 15,318.21	5.63%
Stock Options	$ -	$ -	$ -
ESPP	$ 921.38	$ 1,097.09	$ 175.71	19.07%
Property #1 - Rental	$ 160,000.00	$ 160,000.00	$ -	0.00%
Property #2 - Rental	$ 128,225.00	$ 128,225.00	$ -	0.00%
Property #3 - Primary	$ 300,000.00	$ 300,000.00	$ -	0.00%
Property #4 - Rental	$ 163,000.00	$ 163,000.00	$ -
Receivable (Payable)	$ -	$ -	$ -
Other Assets	$ -	$ -	$ -
Total Assets	$ 1,293,834.03	$ 1,319,230.44	$ 25,396.41	1.96%
Liabilities
Credit Card Balances	$ (2,257.51)	$ (1,831.02)	$ 426.49	-18.89%
House #1 Mortgages	$ (79,417.95)	$ (75,944.62)	$ 3,473.33	-4.37%
House #2 Mortgages	$ (8,260.85)	$ (8,181.65)	$ 79.20	-0.96%
House #3 Mortgages	$ (250,693.34)	$ (250,329.16)	$ 364.18	-0.15%
House #4 Mortgages	$ (121,807.51)	$ (121,658.78)	$ 148.73	-0.12%
Rental Deposits	$ (5,902.72)	$ (5,902.72)	$ -	0.00%
Additional Tax Liability	$ -	$ -	$ -
Other Liabilities			$ -
Total Liabilities	$ (468,339.88)	$ (463,847.95)	$ 4,491.93	-0.96%
$2million Goal Progress*	$ 776,187.49	$ 805,711.65	$ 29,524.16	3.80%
Net Worth	$ 825,494.15	$ 855,382.49	$ 29,888.34	3.62%

Highlights for January

We like to take advantage of 0% APR balance transfers and other credit card offers for free money. We are actively looking at taking advantage of new credit card arbitrage opportunities.
We are in the process of earning 50k in Chase Rewards (or ~$500) on a new Chase Ink credit card offer after we spend $5,000 in 3months. We are using Amazon Payments to maximize our credit card spend to qualify.
Our properties are listed on our balance sheet based on their cost basis, not current market value. I believe real estate is too illiquid to list based on recent sale transactions.
We made another significant principal payment in our Rental #1 primary mortgage. Our current focus has been to pay off this mortgage loan to improve our monthly cash flow. I'm hoping we can regularly paydown approx. $2,000/mo which should eliminate the mortgage in less than 2 years. This will be our default investment for free cash each month unless I see a much more attractive opportunity.
January was a strong month for us driven primarily by stock market gains. We already grew our net worth about 40% of what we did in all of 2011 ($72k) so we are off to a good start. Our taxable investments did slightly worse than our benchmark (VTI) in January. I'll post additional details of our investment activities in January later this month.
I gave some thought on how we would react to a job loss to minimize our financial hit.

Reducing Financial Impacts of a Job Loss

My wife was recently notified that the preschool she teaches at for a few hours a week is shutting down. It got us thinking about a more difficult scenario for us - the loss of my job. Given its by far the most significant income we have we'd be in a world of hurt rather quickly if something happened.

One of the things we have been working over the years is to expand our multiple streams of income as this is by far the best way for us to divert a potential disaster. Reduced reliance on a single income could be a huge safety net for us. However I recognize we are not in a comfortable position yet.

Ideas for Immediate Actions to Minimize Financial Impacts From a Layoff:

Cut Cell Phones: We'd take a hard looking at canceling our cell phone plan or at a minimum put them on reduce rate suspend to minimize expense.
Reduce Internet: Internet ranks up their with food and energy in our household so not sure we could cut it out completely, but we could reduce our service level a bit to cut our bill.
Discretionary Spending Lockdown: Change our spending mode to only purchase basic groceries and gas. Get family agreement we aren't going to spend money on anything else till we get in a better position. Would need a better long term plan but this should be a reasonable immediate reaction I think.
Eliminate Eating Out: All meals made at home for the time being. Again long term would likely need a better plan, but think this is a reasonable short term action.
Switch to High Deductible Insurance: We are currently on the most expensive health insurance plan through my employer because my wife and I regularly need medical care for chronic conditions. We'd take a hard look at switching to a high deductible plan recognizing we'd likely need to make some sacrifices in terms of the level/regularity of care we current receive.
Stop/Reduce 401k Contributions: With a job loss comes the immediate need to conserve cash and with any remaining paychecks I want to maximize our incoming cash. I think if we were faced with a job loss the immediate needs are more critical than long term. I would at a minimum drop my contributions down to the company match level and might cut further if we thought we needed to.
Stop Roth IRA Contributions: We currently contribute roughly $800/mo to our Roth IRAs. Again same as 401k - our immediate needs become key and I would stop contributions to conserve cash until our income situation recovered.
Cut Additional Principal Payments: I would shift focus from eliminating debt to retaining as much cash as possible and not paying anything above the minimum debt service payment required.
Cut Back Thermostat: This would be a tough adjustment for the family, but I'd propose we cut our thermostat back to say ~60/winter, ~80/summer. It would be tough on all of us, but I think we could manage and I would need to negotiate a family agreement to make this sacrifice to minimize our energy bills.
Reducing Driving Trips: Today we run errands as they pop up because we are busy. With a job loss I'd think we should really focus on optimizing and planning our trips to avoid additional gas expense.
Stop 529 Contributions: I'd immediate pause our 529 contributions until our income situation improves. It is a cash conservation measure and I would look to make up lost ground when our income situation improves.
Drop Umbrella Insurance Policy: I'd be willing to take more risk in the name of conserving cash and look at dropping our umbrella liability insurance policy until our situation improves which would save us about $200/yr.
Stop DRIP Investments: We put $25/mo towards a Connoco DRIP. I'd immediately stop our DRIP investments until our situation improves.
Collect all dividend payments: A temporary income boosting measure - I'd switch all our dividends to cash payments vs dividend reinvestments.
Change Witholding on Remaining Paychecks: As a short term cash boost I could alter my witholding to boost incoming cash. This could cause longer term pain if not planned properly and we end up owing the government more money, but this tactic could help with short term from a cash management perspective.

Making the Most of Time
The one positive of a job loss would be additional time. I am currently very time poor and I believe it would be critical to use the newly found time wisely to minimize our income loss and focus on restoring our major source of income.

Other than putting sharp focus on the job hunt, I could see these areas as potential opportunities to invest time:

Have wife expand her side income (tutoring/preschool teaching) while I take on more housework.
Invest labor into increasing energy efficiency of our house to reduce expenses (ex additional air sealing, etc)
Expand our garden to grow more of the food we eat.
Part time jobs - I hopefully wouldn't hesitate as a stop gap to pick up a lower paying part time job.
Sell stuff on craigslist - It would be a good time as any to do some serious purging in the house and try to raise a little cash from those items we want to get rid of.
Extreme couponing - I enjoy doing a bit of extreme couponing, but its not something I spend a lot of time doing currently. I could invest additional time in tracking coupons/sales to further minimize our food expenditures.

Any other ideas you would add to these lists?

Reduce Home Energy Costs

Regulars readers know over the past couple years I've had some focus on trying to reduce our household energy costs. We moved into our current home at the end of 2008 and it didn't take long for me to realize we bought ourselves a money pit when it comes to energy usage.

We current live in an approx 2,600 two story traditional single family house on a crawlspace foundation with a 1994 gas pack HVAC downstairs and 2003 heat pump upstairs. We also have a circa 1994 electric water heater located in the crawlspace and a well for our water. My wife stays at home with my daughter during the day, otherwise our energy usage profile is probably very typical for an average American family.

Our energy improvement efforts began soon after we moved in and received our first utility bills. Heres a high level summary of our energy efficiency efforts:
2009

Weatherstripping of exterior doors
Installed programmable thermostats
Replacing nearly all light bulbs in the house with CFLs
Sealed electrical outlets

2010

Smarthome system pilot (07/2010-11/2011) which allowed us to have an equivalent water heater timer
Added additional insulation and weatherstripping on our attic hatch

2011

New energy efficient refrigerator (replaced ~1998 model, which may save an est. $100/yr from per energystar website)
Partial air sealing efforts in attic and garage with caulk
Air sealed a major gap around a plumbing duct that was sending conditioned straight into our crawlspace
Added 10 rolls of additional R30 insulation over our cathedral ceiling and 2 story foyer in attic
Wrapped water heater blanket on side of water heater
Water pipe insulation in crawlspace
Converted gas pack fuel from propane to natural gas (~$1k investment)

2012

Resealed HVAC ductwork with mastic
Additional weatherstripping on attic hatch to fully seal door
Rigid foam board insulation on top of water heater

Annual Home Energy Costs
Recently I totaled our total electric, propane, and natural gas utility bills by year to see if we could notice a significant improvement in our energy cost:

Our Annual Home Energy Costs
2009	$ 2,797.77
2010	$ 2,992.30
2011	$ 2,685.78

Initially I was surprised that there hasn't been more of a noticeable energy savings looking at our utility bills. So I dug in a little further to understand our energy consumption which turned out was pretty consistent with our energy costs.

	Electric Kwhs	Propane Gallons
2009	14308	937.82
2010	16427	956.93
2011	14809	833.38

I've mulled it over a bit more after trying to explain the lack of obvious progress by offsetting factors like our expanding household, average temperatures, energy costs rising, and the onsite storage vs pay at consumption with propane which results in lumpy propane consumption and costs. I also need more years to get a better measure of overall improvement as many of the improvements in 2011 were done towards the end of the year and won't have a full impact on our annual energy costs till 2012 is complete.

I'm still just as focused on getting a significant long term improvement in our energy usage, but its clear it is going to require a lot more work to get there - there is no silver bullet.

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