Yearly financial checkup and (financial) New Year’s Resolution: A path to FIRE (financial independence retire early)
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| New Year’s upon us; time to set your goals for the coming year! |
F. Scott Fitzgerald: “It’s never too late to become who you want to be. I hope you live a life that you’re proud of, and if you find that you’re not, I hope you have the strength to start over.”
As I write this post during the week between Christmas and New Year’s, I can’t help but think things over. 2021 was a great year for our pack (my wife, myself, and our Pomeranian Toby), and also a challenging year.
2021 was a great year as we successfully lived through our first full year of early retirement, happy and unscathed! We didn’t argue over how we should live our retirement, nor where we should live for a month or longer.
Things worked out fairly smoothly. We tackled an AirBNB problem (noisy neighbor) head on during the month of April in Claysburg and we managed to not pull each other’s hair out during couple’s spats! All in all, we got through major/minor problems together and came out on the other side relatively unharmed.
2021 was also a challenging year, as my mother-in-law passed away after fighting complications from multiple strokes. Add in the arrival of always evolving new Covid-19 variants to the mix, and it was a year like no other that we lived through…
One thing became absolutely crystal clear: We saw, yet again, how fragile our lives are and how we should cherish the things we care about, each and every day. Living through the pandemic and its ever changing variants, definitely changed our perspectives on life. It was one of the reasons why we retired early so we can concentrate on what matters the most, which is pack/family/loved ones and doing things we dreamt about, namely traveling.
In terms of our financial checkup, I can proudly say we came out ok there as well. We found out our monthly budget worked out well. There were some months where we went over our budget, but luckily, other months, especially where we stayed at one place for 3 months, helped balance the budget for the year.
Our biggest question going into our early retirement had been about the budget. Without living through our retirement, we weren’t really sure how it would all work out…
Lucky for us, things worked out just fine. There were some things that we did well vs not so well. For example, the things we did well include:
- Not shopping much except on food; between August 2020 until end of 2021, we spent around $40 total on clothes for ourselves for example
- Didn’t eat out much except when we treated our family; most were takeouts
- Booking 3 months at one place ended up saving us money on gasoline as well. After the first month of heavy driving, the next 2 months would feature less driving…
- Staying with our family for 4 months out of the past year helped with our budget
- Turning vegan since June (2021) meant we ate less takeout food as vegan choices were very limited or nonexistent at most restaurants…
Things we didn’t do so well include:
- Buying too much alcohol (myself more so than my wife) in the month of December thanks to the holidays
- Buying too much groceries and other items when shopping at Walmart. For some reason, it’s more difficult to control our spending there vs at regular supermarkets, as Walmart sells everything!
- I spent too much money on gambling when I took our parents to casinos.
In terms of our net wealth, I’m happy to report that the rise in the stock market and the bond market since our retirement, helped us out. We were expecting around 4-5% growth in our municipal bond fund and around 8-10% growth in our mutual funds/index funds, which is considered about average for both.
We did better than we expected!
For the upcoming year, we hope to do the following better:
- Spend less money gambling (myself)
- Try to spend less at Walmart
- Watch out during the month of December, as our spending got little bit out of control thanks to beers, and Christmas related items
- Continue discussing budget and finances together throughout the year
Now that we’ve covered our finances for the past year and our plans for the upcoming year, we recommend you all do the same. Here are our recommendations:
- Check your budget for the past year to see if you were able to keep to your budget (or close to your budget)
I’m sure, like us, you had months where you went over and months where you went under your budget. Average it out and see how close you came to it. If you came under your budget, then congratulations! You did great.
If you didn’t, no harm done as long as you didn’t go over by a crazy amount. What’s a ‘crazy amount?’ Something like 10% over your budget for the entire year would qualify. Look, no one’s perfect. Just do best you can to get near your budget.
We all have to work at it to get better, and remember, life will always happen to make balancing your budget difficult. Control what you can control. Some outside factor that comes out of nowhere, like a car accident during a winter storm, is something you can’t control. Have an emergency fund to use for these life happenings.
- Regularly sit down with your significant other to discuss budget and finances
Even though my wife and I are retired, we still get together to discuss these things to this day. Budgeting is just too important to not give it the proper attention that it deserves!
Discuss how you did for the month/year, what you didn’t do well, and what you can do better. This process is similar to what soldiers or pilots all do when they debrief on a mission. They’re trying to figure out what went right and what didn’t, so they can learn and be better at what they do.
Own up to what you did, and try to learn from any mistakes. At the end, we’re all trying to be better at this…
Regularly discuss how your net wealth is doing. Lay out your liabilities (car payments, mortgages, credit card debt, student loans, etc.) and also your assets (retirement accounts, brokerage accounts, savings accounts, positive equity on your home, etc.)
The goal is to figure out how to get wealthier by reducing liabilities and growing your assets. Pay down your debt, while increasing your assets.
- Create a financial plan for the year 2022 together
Remember, everything will work better when you write down what you plan on doing. Plan on paying down, for example, extra $4,000 per year to your mortgage, in writing, rather than nonchalantly saying to each other that you should pay down something.
Plan on increasing your contribution to retirement accounts by certain percentage in writing, rather than just talking about it. Everyone has great ideas on how to become financially independent, but only few can actually achieve it. Why?
Because only the select few can actually hold themselves accountable for their actions. It’s not easy planning, THEN following through on that plan. If it was easy, then everyone would be financially independent.
When planning to become financially independent, try to win the war, even if you lose the little battles throughout the year. By that, I mean, you should try to do most things right, like paying down your debt and contributing to your retirement accounts. Even if you don’t hit your goals every month (or even the yearly goal), as long as you’re headed in the right direction, then you’re doing good.
Keeping yourselves accountable each month and each year is really important. Without a plan and a commitment to go through with the plan, financial independence won’t magically happen…
- Is it time to reevaluate your investment choices in your retirement accounts?
If your current investments are doing well, then leave them as they are. If they’re not, then consider contributing to a different investment option. You don’t need to sell what you already have. Just stop contributing to the one that’s not doing well, then contribute to the one you want to try. I’ve done this multiple times throughout my accumulation phase, building up my 401k.
What worked when you started may no longer work now. For example, at one time, you may have been more conservative with your investments, selecting bonds or money market funds in your portfolio. Now though, you may want to take on more risks as the rate of return on these investments are paltry.
Always research the funds to figure out at least 4 things: time in existence, rate of return, fund rating from third party (Moody’s, Morningstar, etc.), and expense ratio. I tend to look for a fund that has been around for awhile, has a good track record, has a good third party rating, and has a low expense ratio.
- Raise your contribution rate on your retirement accounts as much as you dare!
Raising 1% yearly is ok. You want to do better, and not just do ok. If you’re already contributing 10% each paycheck, raise them by at least 1%, but don’t stop there. Push yourself and see how high you can go!
I raised my contribution rate from 3% (first year) to 24% by the time I retired. Aim to raise this as much as you can. It’ll be a fun challenge to see how much you can actually put aside each paycheck. Once you do that, your paydays will all be great days, knowing your net wealth is increasing!
Sometimes, raising your contribution rate is more a mental hurdle than anything else. Usually, you’ll talk yourself out of doing this because it feels difficult to live on less money in your pocket each paycheck. Break through that hurdle and adapt. You’ll be amazed how you’ll still survive with less money each paycheck.
- Periodically check your net wealth progress!
Your financial checkups should be a regular, ongoing thing. Always sit down with your significant other (or yourself) to check the status of your net wealth.
By checking your net wealth, you’ll be motivated to keep going.
In conclusion:
Path to financial independence is taken one baby step at a time. It requires doing the right thing each day, each week, each month, and each year. Even if you’re not perfect (no one is!), try to do the right thing most of the times. As long as you’re headed in the right direction towards your goals, then you’re fine.
Remember, reaching financial independence is a long game. Don’t be caught up in every little thing/hurdle that gets in your way, but rather focus on the big picture. Pay down debt, increase your contribution, budget religiously, then good things will happen over time.
Keep doing regular ‘maintenance’ of your finances so you can successfully plan/commit to your goals each month/each year.
Thank you all for reading, and good luck in your journey to become financially independent!
Jake
Wandering Money Pig
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