The beginning of a new year is usually kind of slow and somewhat filled with uncertainty; especially when you are in debt. My family and I used to land in December with at least 2-3K added to our credit card and gasping for the relief of a still far-away tax return.
This year that is not the case and I am extremely proud about it. I feel in charge of my finances! Empowered because I feel like I know what I am doing and nothing is left to serendipity. It has not been all roses and certainly my wife and I have had some moments of tension but here we are. We even managed to get a brand new roof on our home without any financing and credit cards are still clear.
More importantly though, we have come up with a plan to hit some serious financial goals in the near future.
In the past few years, I have been contributing regularly to my 403B. However, if you have read anything about how much money you need to retire and reach FI without consuming your savings, you may be familiar with the 4% rule; which basically says that you need to save enough money through investments so that you can safely withdraw about 4% of your savings yearly. In a nutshell, if you want 40k a year you need about a million dollars. Another way to look at it is by saving 25 times your yearly expenses, which will add up to the same amount. 25 times 40k= a million dollars.
Well, in my case and my situation reaching an amount of a million dollars by just investing in the market is not very likely; plus, as I have said before, in ten years I want to be ready to call it quits with my job if I want to and potentially dive into other endeavors and interests of mine. Including sharing more with my family.
In order to do that, the most likely way to do it is through real estate; especially since we already got our feet wet as landlords. We have been renting our first home for three years now and what once seemed to be a mystery of life I can sincerely say it has been the best financial decision and risk we have embarked on as a family.
We not only profit through the rent, but we also benefit building up our property’s equity and shelter our hard earned cash through the art of yearly depreciation.
For a while, we had thought about using some equity as leverage to buy another property but we have discovered through this financial journey that we are conservative investors and would prefer a more secure path. We like to sleep well at night.
So far the only debt we have is our home and rental mortgage. Plus a pesky 22K student loan that has been juicing us for a while (easily 13 years) in $300 monthly payments.
Therefore, the plan is the following: I already dropped my 403B contribution from $600 monthly to only $100. We are increasing our student loan payment from $300 (minimum payment is $268) to $716. Added to that, we are putting 5K down from our 10K tax return. The other 5K will be stashed away as an emergency fund for our rental. By March next year, we will kill the student loan using part of our tax return, and free up the cash we were using towards it. Finally, we will be able to buy a brand new car!!! Just kidding.
After paying that debt we will have $1016 free and clear available for our next debt pay-off: Our rental. The mortgage balance on that property is 122K. By next year after we are done with the student loan we will add the $1016 each month to the principal and regular payment plus a little extra from the monthly rent cash-flow. I calculated our payments at $2600 monthly so that we can pay the mortgage off within 5 years.
This coming school year 2019-2020 I will be getting another raise of about 6K, after finishing 8 credit hours in course work.
Once the property is paid, we will save $1218 in monthly payments. There will be about 21K free and clear coming in from rent, plus $1016 saved from the student loan we would have already paid off. All this combined, would total approximately $47,000 yearly, extra. That is incredible! Literally, it is hard for me to believe that this is at my reach in relatively a short period of time. As a teacher, the only source of income and father of four, this is like having a second job while sleeping.
For this reason, I have given up on the idea of continuing pouring my income into the market for now. I would need to save over $1,000,000 to draw that kind of money from the market. I still have a small contribution going to my 403B and I am planning on using my yearly salary raises to increase it, but for now, due to my age (45), the most efficient path to building wealth, in my opinion, is through real estate.
At the time of reaching these goals, I would still have 4 more years before I reach 55 and I am able to retire( taking a huge penalty). At this point, I will re-assess my situation and explore the idea of getting 2 or 3 more properties in the same area.
I feel that by having the safety net of the first property, saving and acquiring some other properties should not be difficult every other year.
January never excited me this much, but 2019 certainly is different!
Any word of wisdom is welcome in the comment section. If you have any question about your particular situation I would be more than happy to share my opinion or point you in the right direction to look for answers.