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Man reflection lake

Earlier this year, Jess and I decided to refinance our mortgage. Rates had dropped to an all-time low. We were able to perform a cash-out refinance and maintain the same monthly payment at a better rate. We would restart our 30-year mortgage, but we’d have a lot more cash to use to invest.

The plan at the time was to invest in real estate. We had been saving for several years so that we could buy a property in Providence, RI. This is something that I have been thinking about and preparing for many years. The extra cash would allow us to buy a property this year if/when the right property came on the market.

Then COVID happened, and we decided to hit pause on this plan. With new cases and deaths continuing to rise, I suspected that it would impact the rental market. This wasn’t the right time to jump into real estate for us.

You know what they say about the best-laid plans. This was the pattern for 2020. Being forced to change our plans and going with the flow.

Even with fewer adventures, a lot has changed for us in the past year. Over the past several days, Jess and I spent time reflecting on 2020. We’d like to share our most important reflections from the year.

2020 Financial Update

We made plans for our annual finances at the beginning of the year. We didn’t think we’d be able to move the needle on our savings rate. Jess was working part-time and we were uncertain if we would generate any extra revenue.

Savings Rate

We pay attention to our savings rate because it has a direct correlation to the length of our working careers. While we aren’t seeking to retire as soon as possible, we are pursuing freedom. Savings rate is one of the important metrics we pay attention to. Savings rate is the amount you don’t spend (AKA save) as a percentage of your household income after taxes.

As we mentioned in our post on how we manage our money, each year we plan out our savings rate. This year, we planned on saving 58% of our income.

This target was similar to our actual savings rate from last year. So, the plan was to maintain our spending and income, while we focus on building up the side business.

The plan worked, and then some. With the additional income from the side business and slightly lower expenses, we were able to increase our savings rate to 63%.

A 60%+ savings rate is nothing to sneeze at. It’s especially remarkable given the context of our intentional decision to slow down two years ago when Jess went back to work part-time. I can hardly believe that we have since increased our savings rate in the two years since that decision.

It’s not as hard to believe when I stop and think about the two drivers of savings rate: income and expenses.

Income

From 2018 to 2019, we actually decreased our income by 5%. This year we increased our income from last year by 23%. Part of this is resulting from now generating income from our side business and receiving another raise. But it’s a little overstated.

This increase is overstated by the timing of my end of year bonus. My employer updated the timing of the bonus, so I didn’t receive one last year but did this year.

Regardless of the reason, it’s still a nice increase year over year. This increase in income provides us more resources with which to buy our freedom.

Expenses

The other part of the equation for savings rate is understanding how much we spent. In last year’s report, we had made a sizable drop in our annual expenses. This year, the decrease was lower at about 2%.

This does have a few asterisks next to it though. Our expenses decreased by 2%, but we also made some large one-time purchases in 2020, including:

  • New Kitchen Appliances
  • New hot water heater

If we didn’t have these expenses, we would have decreased our spending by 12%. But we did have these expenses, and that will happen from time to time.

We were able to lower our expenses in other categories to still have a net decrease of 2%.

You would think that travel was one of the categories where we had lower spending, but it was actually pretty similar. The primary reason is that we updated our vacation plans after COVID happened to rent a cabin in Maine. It’s much easier to travel hack a hotel/resort and airfare than it is to rent a cabin from a private owner. So we had fewer destinations but spent similar amounts.

We decreased our spending across several categories, including:

  • Food – We used to eat out with friends at least once per month. This no longer happens. While we will still order take out, it’s not very common. We are preparing most of our meals these days. We also save money on groceries by using ugly vegetable delivery. We have also reduced impulse buys with fewer trips to the store.
  • Entertainment – We also don’t pay much for entertainment anymore. This used to mean going out to the movies or other activities with friends like doing an escape room. COVID has eliminated this for us. Instead, I’ve gotten into hobbies like disc golf and video games.
  • Mortgage – An unexpected benefit of refinancing our mortgage was that we actually skipped one month’s payment. This should never be the motivation for doing a refinance, but it was a nice benefit.
  • Pet – We used to pay for professional grooming every 8 weeks for our dog. With COVID, we learned to do this ourselves. While we aren’t the best at it, we can do a good enough job. It also takes us less time to do it ourselves than it did to drive to and from the groomer (once to drop off, and once to pick up). We decided to keep doing it ourselves after they opened up again.
  • Insurance – We shopped our insurance policies earlier this year. We were able to decrease our insurance premiums a little bit without making changes to our plans.

There were other savings that I didn’t cover, each contributing a little bit of savings. This year meant a little bit of savings in many categories to make up for the huge increases in home improvement/maintenance. Our plan was to maintain our spending from year to year and we were able to do just that.

Net Worth

Our net worth increased 25% from January 1, 2020 to today. We surpassed the 18.5% increase in 2019.

Like last year, the two main drivers of this increase are a high savings rate and a strong stock market return. With a larger amount invested in the stock market, we were able to see a larger increase even with a smaller investment return. As of writing this, the YTD return for the S&P 500 is 15.4%.

We don’t set goals for our net worth because we prefer to set goals on inputs, or things that we can control. You can’t control if the stock market goes up or down, but you can control how much you save.

We track our net worth because it is a great indicator of wealth. As it increases over time, it’s an indicator that you are moving in the right direction.

As we gamify financial independence, we also use it to motivate ourselves. We celebrate milestones along the way to stay engaged in building wealth.

Invested Assets as a Percentage of FI Target

Financial independence is often defined as having 25-33 times your annual expenses in your investments. Reaching this milestone of wealth would allow you to safely withdraw 3-4% of your balance each year without depleting your balance.

Last year we had about 6.5 times our annual expenses. This year we have about 9 times our expenses. Based on our updated savings rate and income, we are about 32-37% to FI, an increase of about 11%. This means that we could cover about 32-37% of our annual expenses following a safe withdrawal rate.

Timeline to Financial Independence

Even though we aren’t trying to get to FI as quickly as possible, we are keeping track of it as another way to gamify financial independence. This is another progress bar for us on the path to financial freedom.

Last year we were about 8.5-10 years away to FI. Now, we are 6-7.5 years away from FI. This is exciting not only because we are moving in the right direction, but also because the pace is picking up.

How’s that for irony? With our intentional shifts to slow down, our pace at which we are reaching FI is actually increasing.

In the past 12 months, we’ve removed about 2.5 years of our journey to FI. This update to our timeline to FI is also due to changing our plan with regard to real estate. Instead of holding a large amount of cash to buy a property without financing, we’ve decided to put some of that cash to work in the stock market. More on this later in the post. This means that our investment balance went up “overnight.” It also has a large impact on the timeline to FI calculation (also known as the NPER calculation).

We’ve not only increased our quality of life, but we are improving our financial picture at the same time.

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Even though 2020 was a challenging year, we had a strong financial year. Here’s a quick recap:

financial wins
  • Savings Rate: 63% (increased from 56% in 2019)
  • Income: +25%
  • Expenses: -2%
  • Net Worth: +25%
  • Percentage to FI: 32-37%
  • Timeline to FI: 6-7.5 Years

Things we Learned in 2020

1. You can’t control everything

I’ve heard and seen this phrase so many times over the years. I have come to appreciate its meaning even more in light of everything that happened this year.

COVID-19 disrupted the world that we knew. The Coronavirus killed hundreds of thousands of Americans and millions worldwide. There is very little that I can do to change that beyond wearing a mask and staying home as much as possible. As much as I would like life to return to normal, it’s beyond my control.

Instead, I spent my time and energy at work ensuring that my organization would survive this financial crisis. This as a result helped ensure that I would continue to have a job. Jess spent her time split between work and working on the blog and the coaching business.

We focused on what we could control.

The same is true when it comes to other areas of our lives, including finances. You can’t control what the stock market does. There will be days that it drops and many more days that it goes up.

This was also true for our goal of buying a rental property. COVID-19 disrupted our plan to buy a rental property and I’m now glad that it did.

2. It’s important to focus

Buying a rental property is something that I’ve been reading about for many years now. I was attracted to the stories of individuals who used rental properties to generate cash flow. This passive income is a great way to provide financial freedom.

Since we invest heavily in the stock market, I liked the idea of also dabbling in real estate. For me, it wasn’t that it was a better investment, but a different one. Instead of a capital appreciation play, it’s a cash flow play. Rental income would provide immediate cash flow without having to touch the initial investment. If we were to leave our jobs, we could cover a part of our expenses with the net rental income. Otherwise, we would have to withdraw from our investment accounts.

This seemed like a good strategy to support our goal of financial freedom.

With COVID-19 disrupting real estate investing in the short-term, it forced me to reconsider this part of our plan.

Did we really want to buy and manage a rental property?

With us trying to build an online business, do I have the time to do this?

These were some of the questions that started to stay with me in the middle of the year. I slowly came to grips that buying a rental property is not the best option for us for a few reasons.

  • I already have a very demanding job. While I no longer am putting in 50-60 hour weeks, it is very mentally demanding.
  • My time is precious. I hardly have time or the energy to put in a lot of time on the blog. The blog continues to grow (thanks in large part to Jess’ work on it) and the work required is continuing to grow.
  • If we were to buy a rental property, it would be a distraction. It would take time and energy to manage, and the best use of my time would be better spent on other things.
  • What we are doing is working. Our wealth is growing without having to use much mental energy. We have created an investment strategy that requires no ongoing management. We invest through automatic transfers several times each month, and we don’t have to think about it. We do check in on the balances throughout the year, but aren’t forced to make to spend time on it.

It’s easy for me to get distracted with things and try to do too much. I’m trying to learn from that and focus. I’d rather do a few things well.

3. Financial Freedom is Incremental

The most important lesson that we learned in 2020 was that financial freedom is incremental. Too many people think of financial freedom as all or nothing. You either have enough assets to cover your expenses, or you don’t.

Our path to FI is not this black and white.

Our path to financial freedom is a journey filled with steps inching us closer to the destination. It’s not striving for a financial balance, but the ideal life. Making the journey as remarkable as the destination has been our motto for the past two years.

Incorporating our LLC and Jess quitting her job to take the business full-time made this belief more real. It’s one thing to talk about, it’s another to actually take these steps forward.

This year was a transformational year for Jess as she transitioned to entrepreneurship. It has also been transformational for me.

I remember a key moment for me when I began to understand that financial freedom can be incremental. It was right after we decided to invest the cash that we had been saving for the rental property.

It immediately shot up our investment balance. I started to understand how much progress we are making toward financial freedom. For the first time in a long time, I could see where we could be in 2-3 years.

While we won’t reach FI in 2-3 years, we will likely be close to it. If business income continues to grow to covers our expenses, we could actually coast to FI. This would mean that I no longer need to work at my job.

I really enjoy my job. I enjoy the type of work that I do day in and day out. I work with great colleagues and am contributing to a great cause.

I feel fortunate to do what I do.

This context helps convey the magnitude of this realization. Admitting that I wouldn’t need to work at my job is a big step for me. A BIG step.

2020: A Year of Challenges and Progress

It’s too easy to depict 2020 as a horrible year. There has been undeniable challenges. A lot of sickness, pain, and loss. But it has also been another year where we have learned more about ourselves and our ideal life. And we are steps closer to building the life of our dreams and financial freedom.

What did you learn from 2020?

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