2019 is almost a wrap, and it’s been a great one financially! My big-but-attainable goal has been a net worth of a million by my 40th birthday (March of 2023). This year, I earned more than ever, and transiently reached my goal, until it was knocked just below 1M by a large estimated tax payment and a change in the value of our home. Once I surpass that goal, the next will be a net worth of 1 million excluding equity in our primary residence (which currently contributes $310k). Here’s a run-down of my financial goals for 2020. As with my last financial goals post, I hope this inspires you to write down all of your own goals: the big, the small, and the incremental ones. You’ve got this!
For all the times I’ve read about the importance of one’s savings rate, I never calculated my own. The most straightforward way to do this is as a percentage of gross pay, as explained in this run-down by The Wall Street Physician.
Honestly, our savings rate looks low, because we’ve been spending on investments, with the aim of building passive income. So while 401k contributions can clearly be categorized as savings, buying a rental property or paying extra principal on our primary mortgage is harder to call “savings.”
In 2019, I put $100k down to buy a rental property, a duplex in my neighborhood. I have pre-paid $48k on the duplex since purchase and $20k on our mortgage, for a total of $68k in mortgage curtailments. If you count mortgage pay-down in our savings rate, it comes to 36.7%. If you don’t, our savings rate is an unimpressive 20.6%. In any case, it’s informative to know our rate right now, as we aim for long term financial success. Maybe one day we’ll soar into the savings stratosphere, like some of my super-saver blogger colleagues!
You can contribute to a health savings account (HSA) each year you are enrolled in a high deductible health plan. This works best for our family. We avoid using the funds for medical expenses, using it instead as a stealth IRA. The tax-advantaged HSA will enjoy an increased contribution limit in 2020 of $7100 for a family. We save this money for a health emergency. If we’re lucky, the funds will grow, and be withdrawn tax free as health expense reimbursements during early retirement!
I’m the sole employee of my own S-corporation, which means I can contribute to a retirement account as both an employee and an employer. Since there’s a yearly adjustment of contribution limits to account for inflation, my 401k contribution will likely surpass the $56k I contributed last year. If I remain self- employed, it must be done!
My two-year old serves as a model for my website, so he earns income for this work each year (although he thinks he’s paid in bananas). I put his earnings into a custodial Roth IRA, so it can grow for the next several decades. Since his income as a toddler is so low, it will never be taxed. Meanwhile, paying him counts as a deduction for my business. Once he is ready to access the money, he will be able to withdraw the it tax-free! With all the benefits of the Roth strategy, I plan to do it throughout his childhood.
Speaking of the little boy in our lives: he starts Montessori school in January. We hit the jackpot with a school located right between our home and the hospital. As a by-product of this change (from part-time nanny care), we will save hundreds of dollars each week. What will we do with the extra cash flow?
I was burned by the first local CPA we used. He was a nice guy, and signed his emails with smiley faces, but unbeknownst to us was billing us for each question, when we thought we were on a flat fee schedule. I received a surprise bill in October for over $1000, months after I thought we were paid up. Since then, I’ve used a tax preparer in the Bay Area, recommended by a friend. We have access to them over the phone and via email, but I’d like to find someone who can do higher level planning in person, and at a fair price.
To retire, you need a nest egg of at least twenty-five times your annual expenses, which allows for a safe withdrawal rate of 4% per year, although some say you should aim for more. I am learning the ins and outs of this kind of planning from Dr. Cory Fawcett’s book, “The Doctors Guide to Smart Career Alternatives and Retirement.”
To know what “25x” is, what our target retirement number is, we would need to know what our yearly expenses are. What if I stopped working so much and relaxed more? We’d need to figure out what yearly expenses might look like if we had more time to travel, or if we needed to help a parent in the future. That’s why I want to pad our estimated yearly expenses a bit.
Looking at this long list of goals, it’s no surprise that I’ve put off looking for a new car. Who has time for consumer spending when there are so many financial goals to tackle?
How do you approach financial goals: timidly, cautiously, or voraciously? Let me know in the comments 🙂
Peace and Happy Holidays to you and yours,
The path can be riddled with failures, even if you're doing it right. In this recording, I share some of my gaffes with you.