WARNING: Bad Debt Ahead

Helllo!~ Another week, another financial blog post. How has your week been? Mine has been going pretty well, and I am super stoked about today’s topic.

Did you know there are two types of debt? Now, I know if you’re reading this you think debt is most likely bad. That ALL debt is bad. Bad, bad, bad. But, what if I told you there is Good and Bad Debt? I mean… most debt is BAD, but there are some good guys too.

Today I want to focus in on those bad guys – the bad debt, and see what it is and how we can combat getting ourselves into it.

 

Defining Bad Debt

Bad debt, in the Personal Finance sense, is debt that has massive depreciating value or has an extremely high interest rate. A high interest rate I would consider as anything >6%, because that’s definitely worse than long term market gains. But, a mortgage isn’t bad debt and neither is a business loan (for the most part), so if an interest rate is >6% on either of those things, I would not consider them bad debt, except in extreme circumstances.

 

What is Bad Debt? – Common Examples

 

Credit Cards are the most common form of bad debt. Do you know the interest rate on your credit card? Most are >18%! This rate is significantly higher than most consumer loans. The payment schedules are also maximized so the debtor will owe as much money as possible.  Any type of balance on a credit card is never a good idea.

Cars are the second form of bad debt. How many people do you know with $30,000/yr income or $60,000/yr income with cars that are $30,000 or more? Thousands of Americans fall into this trap of having a high car payment. While the interest rate on car loans is often low, transportation costs per month should be <10% of your income. This includes gas, maintenance, registration, and a car payment. Having a car payment you can’t afford on an asset that loses thousands of dollars in value within months is never a good idea.

Consumable Goods America, and many globalized cultures value spending money and the “consumer debt”. Have you ever gone into debt during the holidays, or spent more than you planned? This is consumer debt and most things bought have no or little resell value.

“Transportation costs per month should be <10% of your income. This includes gas, maintenance, registration, and a car payment.”

 

How to Avoid Bad Debt

If you’re familiar with personal finance or the Femillionaire mindset, you know exactly what I’m about to say. If not, that’s okay! Welcome to the club.

Step 1: HAVE AN EMERGENCY FUND. I cannot stress this enough. Seriously, you need to have savings set aside for when shit hits the fan- because it will, and usually it’s a lot of shit all at once.  Just start. saving. now. Even if it’s only $15 a month, having a $100 emergency can compound into $200 very quickly when put on credit cards.

Step 2a: Be smart and have awareness of your financial situation, especially when buying a car! Buy a car that you can afford, has low monthly payments, will be paid off in 36 months, and that you can put a big, cash deposit down on. I know this is a lot and often means you won’t be buying a new car, but there are so many used cars that are only a couple of years old, have low miles and are incredibly reliable.

Step 2b: Buy a reliable car! Research which brand/years are most reliable. Generally, you can never go wrong with a a Honda Civic, Honda Accord, Hyundai Elantra, or Hyundai Sonata.

Step 3: Self Control. This is going to be one of the more challenging steps (if not the most challenging!). You can have an emergency fund and an affordable car, but still lack self control.  If you don’t have self control,  you’ll find yourself in a cycle of gaining bad debt, paying it off, and taking on more bad debt.

 

“You can have an emergency fund and an affordable car, but still lack self control.”

 

The Bottom Line

Bad Debt is, well, bad.  It’s bad for your wallet and your mental state. Avoiding bad debt at all costs should be your primary goal. If you already have bad debt, paying it off before all other debt should be your priority.

 

Have you ever had bad debt and paid it off or are in the process of paying it off? I would love to hear your stories below!

 

Female Fridays Finances financial independence

2019 IRA LIMIT INCREASES by $500!

You heard it here first folks, in 2019 IRAs are increasing their limits from $5,500 to $6,000 per year. The $6,000 contribution is based on the government’s fiscal 2019 calendar, which starts in April 2019, but you should be able to start contributing larger amounts for the Fiscal Year starting in January. Just make sure you’re 2018 IRA account is already maxed!

How Much Should you Contribute per Paycheck to Max Your IRA?

  • If you are paid monthly (12 paychecks/year) and you max it out in 12 months, you need to contribute $500/paycheck to max out a 2019 IRA.
  • If you are paid bi-monthly (24 paycheck a year) and you want to max your IRA, you need to contribute $250/paycheck to max out a 2019 IRA.
  • If you are paid bi-weekly (like me! 26 paychecks a year) You need to contribute $230.76/paycheck to come close to maxing out a 2019 IRA. You’ll need to contribute an additional $0.24 to reach $6,000. Easy peasy.

 

For me, this increases my per-paycheck contribution up from $212 to $230. I’m not quite sure if I’ll be getting a raise this year as I plan to negotiate for more PTO, way more PTO.

But, I also may not be doing the per-paycheck method anyway. I anticipate a bonus of ~$3,000 and if I actually receive it I’ll dump it all into my IRA to already have it half maxed.

 

Do you max an IRA every year? What method do you use to max it out?

 

Finances financial independence

I’m Holding on to Too Much Cash – Will I Regret it?

Too Much Cash

 

I’ve reached the point with my finances where I have options. While I can’t have everything, I can have anything if I set my mind to it. And while I lean to be more conservative with my spending habits, I do love nice things. I always have. Even while I was growing up in a house-poor household with maxed out credit cards, I wanted a Louis Vuitton. Now, I had no idea how money worked, and the important difference between saving and investing.

Where My Savings/Investments Go

Currently, I contribute $1,211/ every two weeks (or 26 times a year) to my brokerage/Roth and $500 to my HYSA. Meaning every paycheck I’m saving almost 30% as cash. This doesn’t include money I fully intend to spend, like for the holidays, my cat, or a vacation.

Right now, cash is sitting at 21% of my NW. With my current rate of contribution, cash will ultimately reach 24.4% of my NW before decreasing- assuming I don’t spend any of it.

But that’s just it, I do plan on spending this money. Just not at Sephora. hah.

Big Life Events

I call this my “Big Life Events” Fund. The general rule of thumb is if an event is >5 years away, don’t put it in the stock market. And, while I don’t plan on buying a house in less than 5 years, I do if the market retracts. And if the market goes down and my savings for a house is in the market, well, there goes my savings until the market recovers.

I want to be prepared for if/when the market takes a nose dive.

I also want to be prepared for:

  • An Emergency (duh, some of this money is my emergency fund)
  • My annual max out of pocket
  • A new-to-me car in ~2 years
  • A potential down payment on a house
  • Replacing my laptop (even though I’m kind of saving elsewhere)
  • A pet emergency
  • I have really bad teeth, over my life I’ll need ~$40k in dental work
  • A Loss of job
  • Taking time off of work if I burn out
  • etc.

For me, there is no Plan B if I lose my job. There is no safety net other than the one I create to catch me if I fall.  I was very poor once upon a time, but I won’t let it happen again.

What Cash Makes me Lose Out On

I save $13,000 in cash a year (if everything go according to plan [it doesn’t]). On this $13,000 I make 1.085% currently.

Over a decade, if I were to invest it I would come out with $192,000 at 7% return. By saving it, I would come out with $144,000, or a difference of $52,000.

$52,000 is a lot to lose out on over a decade. $52,000 could be one year earlier of committing to FIRE.

But one year earlier doesn’t compensate for a cash security net right now. Perhaps once I get to a certain number and have a more reliable care I’ll invest more of it. But for now, I’ll stay a little cash rich.

How much cash do you hold on to?

Finances financial independence My Finances

August 2018 – My Road to Financial Independence

My Road to Financial Independence 201808

 

This is the introductory post to my journey to Financial Independence. I’ll probably do these quarterly or even semi-annually, with a large one done every January for a true annual check-up.

My current goal is to fatFIRE between 45 and 50 with $3.5Million in invested assets. This does not include any equity in property or cash. With this fatFIRE amount, I’ll be able to take 3+ international vacations a year, buy whatever I want, and maintain a very fun and social lifestyle. This amount would also mean I no longer have a mortgage or am very close to paying the house off. I assume if I have a partner at this time, they’ll have their own assets or will continue to work.

This number can always change, and who knows, once I’m fully FI I may not want to Retire Early. But this is my goal for now.

My Road Map to My Current Status

September 2014

-$25k Networth

May 2015

-$16k Networth

January 2016

$0 Networth!

  • $4,500 in a 401(k)
  • $4,500 in student loans left

March 2016

  • Debt Free!
  • Salary increase to $70k, still contributing 10% to 401(k)

January 2017

  • $18k Networth
  • Emergency fund funded!

January 2018

  • $50k Networth

August 2018

  • $93k Networth
    • $18k Cash Savings
    •  $7k Checking/Savings that will be used eventually
    • $68k Invested in RothIRA, 401(k), HSA, and brokerage
    • $2K in Crypto, going to HODL this
    • Currently have 2k on my credit card (this gets paid monthly)

Current and Future Goals

I turn 25 this October and my goal by January 2019 is to be worth >$100k. Right now I’m on track to be there, I just need to be careful with holiday spending. I’m also throwing a large birthday party in October and I’ll need to monitor those costs.

My current job does not have a 401(k) and maxes my HSA for me. So I have no pre-tax savings on my income.  Of my take home pay, I invest 47% and save 19% for a total savings of 66%. I do save other monies, but it’s all earmarked to be spent (i.e. I save money to travel, but don’t include it in the 19% savings above). The cash savings above is for various things, a new car, getting my teeth done, maybe a boob job, maybe for a one-day wedding, a house down payment, etc.  This is also my emergency fund (although that is currently fully funded).

If I want to buy myself something nice and “save” for it, that money also come from elsewhere, not from my cash savings.

In 2019 my goal is to invest $45k and save $6,000 cash.  Ideally, if the markets stay stable my net worth at the end of 2019 will be slightly over $150k. But the faster my NW grows, the better. I’d love to push for $200k. I also don’t make “Net worth” goals in the short term, the market crashing is out of  my control. Most of the money from my 2019 goal can come from my main income. But, I strive to diversify my income as well. Follow those pursuits in my Extra Income category!

financial independence My Finances

Financial Independence – What it Means to Me

Financial Independence What it Means to Me

Financial Independence has Changed my Life

We all dream of the day we can retire. When we’re in our 60’s and can sit around, binge Netflix, travel, spend time with family, and most importantly- do whatever the fuck we want when we want.

This is years away, it seems like a lifetime away, and to be frank, it kind of is. You prepare for adulthood for 22 years, work for 40, and relax for, maybe 20 if you’re lucky while your body slowly shuts down.

That’s no life I want to live.

But I also don’t want to be the stupid twenty something, going into debt and blowing through cash now in order to experience everything right now and face the consequences later.

There is a middle ground, and it’s called Finance Independence / Retire Early or FIRE. Fire is the financial concept that you can have your cake and eat it, too. You can have the live you want and live it for 40+ years rather than maybe 20.

So, What is Financial Independence?

Financial Independence isn’t ‘Fuck You’ money. While it can be used as that in dire circumstances, Financial Independence is a nest egg that you have built and invested to live the rest of your life on. Now how do you do that?

Take your future expenses and multiply them by 25. That is how much you need to have invested (some people say a mix of saved/invested, but I’m conservative, so invested) in order to be Financially Independent.

So, if you need $30,000 a year to survive, you would take $30,000 x 25 = $780,000 to be Financially Independent. Note the $30,000 is the pre-tax amount you would withdraw, and from many accounts would have to pay taxes on it.

There’s a lot that goes into that $30,000 or cost of living number. This is why it is critical to track your spending and anticipate future spending (kids, kids college, moving, relatives moving in, illness, etc.).

I want to be Financially Independent so I can choose how to live out the rest of my life and spend my days. It also adds a huge security to one’s life.

<h2> What is Retire Early </h2>

It’s exactly what you think it is! Retire before 65, or more and more so, before 67. Many people who FIRE try to do so in their late thirties to late forties. But anyone retiring before 65 by choice should be celebrated as retired early.

 

I’m not quite sure if I’ll retire early once I’m at a comfortable level of Financial Independence. It’ll depend on where I am at in life, how many kids I have/want, how much I love my job, etc.

 

But, Financial Independence gives me options and freedom- and that’s what I want most. The freedom to wake up at 8am, or 9am, or 4am. The freedom to have brunch at 11am on a Wednesday or sip mimosas in a hot tub on a Tuesday morning. Life is about choices, and this is my financial choice.

financial independence