The road to my financial independence began past year with self-awareness, education, discipline, and most importantly, financial literacy. These elements combined gave me the focus, drive and sense of direction to invest in my future and ultimately leading to a better life. I’m not there yet because I’m relatively new to investing, but I see the light at the end of the tunnel and I feel strongly I can get there. The past year, I focused on two key areas that impacts my personal finances and retirement; reducing expenses and building assets.
In less than one year, my wife and I were able to get rid of $170,000 in debt and gained $186,000 in assets.
Getting Rid of My Highest Monthly Expenses
#1: Selling the House (-2800/month)
Our house was the biggest expense and the longer we held onto the house, the more debt we would have piled up each year. We had to get rid of the house even at a loss in order to get ahead. We significantly lowered the listing price to $155,000 from $170,000 (started from $199,000).
The move was more strategic than desperation. At a lower price, a new realtor, and bit of luck we’ve gotten several offers and sold the house at $149,000 with $7,000 out of pocket payment to the bank at closing. Even at a big loss it was far better than $30,000/ year the house was costing us. In fact, the 9 years I owned the house, I have paid out to the Bank over $145,000 in mortgage. At one point my mortgage was $1,800/month before refinancing!
Selling our house meant we got rid of $2800/month in expenses!
- Mortgage – $1100
- 2nd Mortgage – $1000* (I was paying more toward principal)
- Utilities – $400
- House Up keeping (old house) $300
This proved to me my house was not an asset that I was led to believe. Then can you guess whose asset that was?
- My wife’s asset
- My parent’s asset
- Bank’s asset
- Government’s asset
#2: Move Out of Chicago (-1750/month)
Living in Chicago and away from home meant my wife and I were having two sets of living expenses. Starting with small studio apartment that’s nearly the cost of my mortgage in Cincinnati, separate groceries, eating out more than usual, and traveling back and forth between the two cities. When I moved back home to Cincinnati, I was able to save about $1600/month.
- Chicago Rent + Utilities – $1150
- Travel/Gas – $600 -> Reduced to $400 (Gas is still expensive)
- Living in Chicago Expense $1000 -> Living in Cincinnati Expense $600
#3: Pay Off High Interest Credit Card
I really didn’t have much credit card debt last year but I now have over $20,000 in Credit Card debt. On the surface it may look to be a bad thing but it’s actually a good debt in the context and terms on which I spent the Credit Card. I’ll need to explain later.
#4: Pay As Little As Possible In Student Loan Payment
My wife’s student loan started at $53,000 few years ago. Then we got it down to $38,000 because I was determined to pay this off as quickly as possible, so at times we were paying $1000/month toward principal. I felt all debts were equally bad and the bigger the number, it carried heavier burden.
However, the financial education led us to conscious decision that it’s ok to have student loans. In my mind, if there’s one debt you can keep, its student loans. It’s typically lower interest rate that allows some flexibility on loan payment. We consolidated to a 20-year plan with low starting payment. It’s a staggered plan which the monthly payment grow over time but it starts the first two years at a lower payment of $200/month, then year three and four $300/month, so on and it caps at $500/month.
Before consolidating our loan, our minimum payment was over $500, now it’s starting at $200. As you can see this payment plan gives us more flexibility. With lower monthly payment, we can choose to pay more toward principal, but we aren’t obligated to pay more each month. Also we can take the same money and pay off higher interest rate credit card or put more toward retirement account.
Long story short, we cut our monthly expense by roughly $3,500/month between selling our house and me moving back to Cincinnati. Now that extra savings is being invested toward our future.
The past year, I spent a lot of time studying subject of investing and ways of making passive income which includes stocks, direct marketing, Internet marketing, affiliate programs, real estate, etc. and I wanted to try it all and eventually I believe I will but I decided to first focus on area that I felt most comfortable with which was real estate investing. I’m relatively good with my hands and I do like working on home improvement projects and real estate can have tax benefits when carefully planned, so it was no brainer for me.
I was very excited about the path chosen and eager to get my first investment property. But first I had to find the opportunity. I already had general location in mind. I started out watching the market and zeroing into the specific area I wanted to invest. Far as price range, that decision was made for me because I didn’t have much money to begin with. I mostly looked into bargain priced housing, foreclosures, and HUD homes.
There were plenty of deals out there, but good deals are gone fast. I soon realized there are lots of seasoned real estate investors (with cash) that have the inside scoop. So by the time you see the listing on a great piece of property and/or by the time you go through your due diligence process, often times it’s too late. Also you get out bid.
I had to adapt and make quicker evaluations and business decisions. I wanted to get to a point to that I could recognize good deal from bad even from far away, since I was still Chicago.
My concept was simple
- Find the investment
- Make offer
- Then find ways to fund it
When I was back home on the weekends every chance got I did house hunting, I walked the streets, talked to the neighbors, and tried to get a better feel and validate my chosen location. Over time I start to get better at recognizing different aspects of the homes from repairs to property tax, zoning, etc. to help narrow down to potential properties to invest. These skills eventually came with time; I’m always trying to improve on this process.
Also, it’s really important to have good people you rely on that can make or break a deal. Fortunately I had good standing relationship with my realtor and bankers that ease the process at times.
As of today, my wife and I have three investment properties. Two of which we purchased in 2013. We also grew our contribution to 401k and started Roth IRA.
House #1 – 3bd/1ba
Purchase Price: $25,000 Cash Purchase
Market Price: $60,000
This is a blue-collar, working class neighborhood that’s quiet and peaceful. Great location that has everything you need within close proximity. It’s quarter mile from shopping, food, movies and best of all Home Depot. Also, it has an easy access to the highway.
House #2 – 2bd/1ba
Purchase Price: $18,500 Cash Purchase
Repairs: $12,000 and counting
Market Price: $100,000
Four streets from town square. It’s one of those go jogging and walking your dog neighborhood. This house is seven doors down from my parent’s house.
House #3 – 2bd/1ba
Purchase price: $71,500 – Bank Financed
Market Price: $100,000
Current mortgage balance: $40,500
this is my parents home. They live in it, they pay for it, they take care of it, but we used our name to buy it because they didn’t have the best credit. Both of us benefit from it, because they have ownership and they are paying it off at cost (at 3.5% interest rate), my wife and I benefit from the tax write offs and equity that we can leverage as needed (more on this later).
Retirement Accounts – 401k/Rollover & Roth IRA
Nest Egg: $48,000
My Balance Sheet March/2013 vs. March/2014
Below is a rough Asset/Debt details. I realize you may not care about my expenses, but as I mentioned in my intro blog, I am documenting these for my own reflection.
|March 2013||March 2014||Key Difference|
|Debt (-$230,000)||Debt (-$60,000)||170,000 Debt Removed|
|Monthly Expenses||Monthly Expense –||Key Difference|
|Assets||Assets ($160,000)||Key Difference|
My wife and I are just as poor as we were a year ago. We barely have $1000 in our checking account with $16 in our savings. But we are simply cash poor. The key differences from a year are:
- We got rid of bad debts and gained good ones
- Sold our house at a loss. YES! My wife and I were trying to sell this house for years. So we are glad to get rid of our biggest expense and we were able to purchase two investment properties, which we own right but we do have $22k in credit card debt.
- We grew our asset column. We went from 3-used cars in February 2013 to 3-investment properties with over $160,000 in assets in those homes in a single year. We now have 4-used cars. 2 of which are piece of shit.
- Invested into Roth IRA and increased 401k contribution, we were able to Max out our Roth IRA for 2013 and 14 and we increase our contribution to 401k.
- I am somewhat financially literate or at least 200% smarter then where I was a year ago and I’m able to make better decisions with my money.
I realized few things through my finance journey
- Keeping more money in your pocket starts with reducing your expenses
- But don’t keep your money in your pocket or in the bank but keep your money moving, invest and grow your asset column
- Build Passive Income – I don’t how yet, but I’ll be working on it.
- I feel empowered by this whole experience of financial journey. I’ve gained tremendous confidence with my finances and I’m no longer afraid to admit that I want to be rich because I feel that I can find a way to get there.
I’m able to help others starting with my family. The past year, I’ve setup and started to manage my parent’s retirement plan, which they basically didn’t have a year ago aside from my mom’s 401k. My parent’s went through some financial turmoil in the past, which they haven’t recovered. It’s bad, but it has to start somewhere. Luckily for my parents, they at least have social security benefits and son that have some financial education.