An Average American Family (Part 2 – Improving Financial Literacy)

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Not So Average

Financial Literacy.

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!

  1. Mortgage – $1100
  2. 2nd Mortgage – $1000* (I was paying more toward principal)
  3. Utilities – $400
  4. 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.

  1. Chicago Rent + Utilities – $1150
  2. Travel/Gas – $600 -> Reduced to $400 (Gas is still expensive)
  3. 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.


Real-estate Investing

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

  1. Find the investment
  2. Make offer
  3. 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.


Our Investments

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
Repairs: $6,000
Market Price: $60,000
Rent: $800-$900/month

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.

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House #2 – 2bd/1ba

Purchase Price: $18,500 Cash Purchase
Repairs: $12,000 and counting
Market Price: $100,000
Rent: $800-$900/month
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.

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House #3 – 2bd/1ba

Purchase price: $71,500 – Bank Financed
Repairs: $5,000
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
  • $150,000 in mortgage
  • $15,000 Home Equity
  • $50,000 student loan
  • Rest was credit cards or other small debts.
  •  $37,000 student loan
  • $22,000 loan/credit card
  • Sold my house
  • Reduce Student Loans by $13,000
Monthly Expenses Monthly Expense – Key Difference
  • $1,100 Mortgage
  • $1,035 Studio Apt in Chicago
  • $400 utility
  • $1000 student loans
  • $1000 Line of credit
  • $600 Gas/Travel
  • $1000 Living Expense
  • $500 House upkeeps (repairs)

 

  • $250 utility
  • $300 student loans
  • $500 Gas
  • $1000 living expense
  • $2000 – $3000 on investment properties (repairs + property tax).
  • $2000 Loan/CC Payment
  • $1000 toward Roth IRA (both wife and I)
  • Got rid of monthly mortgage + utility cost
  • Got rid of Chicago Expense especially Travel and Rent
  • Gained property fix cost
  • Gained higher monthly payment toward Credit Card
Investments/Retirement Investments/Retirements Key Difference
  • $22k in 401k
  • $48k in Roth IRA/401k
  • Maxed Roth IRA
  • Raised contribution to 401k
Assets Assets ($160,000) Key Difference
  • 3 used cars ($18k)
  • No other real assets since house was bank’s assets
  • House 3 – 48k owed
  •  4 used cars ($14k)
  • 3 investment properties
    (market value)

    • House 1 – $100k
    • House 2 – $60k
    • House 3 – $100k
      (- 40k owed)
  • Invested in 2 foreclosure properties
  • Market value 160k
Note Note  Note
  • I had high expenses, very little toward retirement and next to nothing in assets.
  • I was in trouble and headed down the wrong path
  • I sold my primary home, which was my biggest debt/expense
  • Reduced monthly bills
  • Decide to pay the lowest on student loans
  • Started investing in Real Estate and growing assets
  •  

Summary

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.

Final Word

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.

I hope I didn’t bored you too much.  Please be sure to comment, it would mean a lot!

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Jona Hyun

My name is Jona Hyun. I'm an user experience and web designer by trade and a student of investing by passion. I am relatively new to the field of investing and I am pursuing to become a smarter investor. I am currently investing in Real Estate and looking to broaden my investment knowledge and portfolio.

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11 Responses

  1. Ajay says:

    Great job starting this blog. My wife and I had this awakening almost 2 years ago. We try and live within our budget as much as possible . We were able to refinance our mortgage to a 15 yr loan by raising our payments up only by $100. Our goal Is to get rid of stupid debt, the next few years and then maximize savings. Our end result is to have no debt and have a financial stable future. For us having the budget and agreeing on the budget has been the key!! Good luck and keep the posts coming!!

  2. Juli says:

    Great story, Jona! Thanks for sharing.

  3. Angelo says:

    It’s always refreshing to read stories like this. As a disciple of effective money management I salute you. Especially nice work on selling that house. It must have been very freeing feeling.

  4. Chris says:

    Great to hear about your positive experiences! Keep up the writing AND the good decision making!

  5. Jona Hyun says:

    Hi all, thanks for reading and for your encouraging words. Ajay, I hear you brother, keeping and managing a budget is a challenge but it’s definitely a good habit.

  6. Danielle says:

    Your balance sheet is so great and honest! What a rewarding thing to do–and to keep doing to keep yourself accountable through the years. I’m sure we could all benefit from a similar exercise!
    I also enjoyed your honest thoughts on student loan debt. Most people know it’s considered “good debt”, but it still sucks seeing those 5-digit numbers in black and white!
    I look forward to continuing to follow your inspirational journey 🙂 Keep writing!

  1. March 16, 2014

    […] NEXT: Part 2: Not So Average American Family: Financial Literacy […]

  2. November 13, 2014

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  4. September 24, 2017

    […] Most properties are cash purchases through creative financing and private lenders, but no hard lender and never a mortgage – I try to stay away from mortgages. Most properties, I own outright and but I do have some debts. But I consider them good debts because they are manageable and I am using it toward investing. If you want to learn more about how I got started, please read my earlier blog post.   […]

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