Thursday, June 23, 2016

Back to the Rentals Plan

Looking at rentals to create long term passive income.
Roughly ten years ago I was in a very stressful job (like I am now) and climbing the corporate ladder.  It was a tough time as the company had just gone through another mega-corporate merger.  Life was full of "synergies", best practices and lots of meetings.  In one particular meeting my boss gave a short speech and gave me an award for ten years of service to the company.  It caught me off guard a little as I had forgotten just how quickly time had gone by and that it was ten years already.  I thanked him and accepted the small token company gift.  While I was thanking him one thought jumped into my mind, I better have a plan to replace my current income as there is no way I'm making twenty years.  You see as mergers came, people left.  Hundreds of them through the years.  Reorganizations and politics got everybody eventually and expecting to last forever untouched was not very likely.

Later that night I relayed the days event and my feeling on income replacement with my wife.  We spoke for quite some time and agreed that while life was good we were corporate slaves and expecting another ten years of continuous employment in my line of work was unrealistic.  I am very good at playing politics but given the state of that company, twenty years would be pushing my skills. So we embarked on our Rentals Plan.  I read everything I could and put together a great Excel tool to help me analyze rental properties and their returns.  We researched houses and I ran the numbers. Tons of numbers.  We knew what we needed to have positive cash flow, visited some properties and even made a couple of offers.  None were accepted.  We kept running into the same problem, all of these properties seemed overpriced.  What it would take to buy one would not cash flow.  Rejected we stepped away from this plan for awhile thoroughly confused and disgusted figuring I was missing some big financial secret.  Well that was around 2007.  Yes right before the 2008 crash.

Post crash everything made sense.  The housing market was overpriced and thankfully we stuck to our numbers and walked away.  As the years have gone by I have often thought of restarting this plan now that the market has normalized more.  Life however has gotten in the way.  I didn't make 20 years with that company.  I made 17+ and restarted at another company.  Additionally along the way complacency set in and while we would discuss this plan from time to time, inertia ruled the day.

As we have jumped into the pursuit of FIRE I keep looking for ways to help move us along.  We are at a crossroads in our planning.  We could take a step back from our current lifestyle and probably retire in a year or so.  To keep our current lifestyle I need a lot more passive income.  That's where the rental plan comes back into play.  If we are going to keep working another 5-10 years we need to build up as much in investments and passive income as we possibly can.  Rentals can help provide this income stream over time.  So we are on the verge of getting back into this mode.  I have brushed off the Excel spreadsheet and we are running numbers on properties and starting to set appointments. The good news is that they seem more reasonable now.  The bad news is the profitable properties are selling as fast as they list.  We are working with a realtor to get an early jump on some of these.

Are we 100% sure we are going to jump into being landlords?  No, but we are pursuing this and are going to see where it takes us.  I will keep all of you posted on how it goes.  My question for any of you is this; are rentals worth it?  I can prove it probably has a higher return on our down-payment.  I can also show in time how we can build passive income.  There are risks however and the thought of spending down some of my taxable investments is a little scary.  It would commit us to a longer time frame but with possibly higher rewards.

Time will tell whether we do this or not but we are cautiously moving forward right now.



Photo credit:  Cathy Yeulet 123rf.com

Wednesday, June 15, 2016

What happened to Generation X?

What happened to Generation X?
First let me provide a full disclaimer.  I am part of Generation X.  You know that generation associated with "latch-key" kids and raised in the 80's. The era of indulgence, video games and big hair bands. Man it was great!  Wait I digress...  I remember hearing all about how Gen X wanted everything yesterday, had an all about us attitude, and would ruin the world. We were following the Baby Boomers and our values were all wrong.  You know what happened? Not much.  Most of us have followed the Boomers into the workforce and fallen into all of the consumer traps carefully placed before us.  Houses, cars, credit cards, careers, corporate ladder, etc.  There were some changes. Corporate America changed the 40 year career complete with the gold watch pension retirement and replaced them with layoffs, high deductible health plans, 401k's and mid-life career changes.

Now that I am getting into the FIRE (Financially Independent Retire Early) crowd I am seeing the Millennial movement.  Millennial's are embracing the FIRE concept and disowning what the Boomers have preached.  Kudos' to them.  Very inspiring to see so many of them with such a clear purpose and getting out of the rat race in their early 30's (notice the hints of awe and jealousy). Seriously though I hope more Millennials follow this lead and get on board.

Sadly though I feel Generation X got lost somewhere along the way.  We aren't quite young enough to shock people by retiring in our 30's but certainly are not on board with another 20+ years in the corporate trenches.  Most of us have children approaching college age and aging parents.  Most of us have mortgages and bills and are so much further along the consumer life-cycle that it is more difficult to downsize and get our act in gear to pursue the FIRE lifestyle.

Personally this affects me in a couple of ways.  First I could kick myself I didn't get on board with FIRE much earlier in my life.  I always had thoughts about this but never really got serious about this. Sure we saved and quite a bit, but honestly did not keep our expenses in check.  As a result we have to significantly downsize our lifestyle or build up about double what we would have needed before.  I am sure there is a happy medium and we'll work to find it.  Additionally this change in our lives would have been much easier with toddlers easy to relocate than children in middle and high school with strong opinions of their own.  Not insurmountable but certainly additional challenges.  This Gen X'er and the family have started our FIRE journey and hope to be free in the next 5-10 years.  While not as impressive as the Millennial's I think it is still a worthwhile cause.

How are other Gen X'ers balancing these issues?  I know there are some out there that have embraced FIRE and are doing great.  I hope others get on board.  I just don't want our generation to be forgotten.  After all for Gen X it's all about us isn't it:)



Photo credit:  Krasimira Nevenova 123rf.com

Monday, June 13, 2016

Toys vs. Time

Great family fun and fishing boat ready at the lake.
I grew up in a relatively modest family.  We didn't seem poor but grew up very rural.  In hindsight we were poor.  I didn't mind it and had a great childhood.  We did tons of stuff outdoors and spent a lot of time fishing.  We fished probably 100 days a year and caught lots of fish.  All of this was done out of a small aluminum Jon boat.  No motor but we had oars and got where we needed to get.  We were always the smallest boat at the landing but easily held our own fishing.  I would often see the big bass or walleye boats with the big motors and wonder why we didn't have one.  As a kid I made up my mind I would have a nice big boat someday.

As my career progressed and I was able financially to look at boats I bought several.  Upgraded a few times and before you know had a boat beyond my younger self's wildest dreams.  How great life would be in this big beautiful, fast boat.  I dreamed of all the fish I would catch and how awesome the boat would be.  All of that lasted about a month.  Then reality set it.  Career, mortgages, children, bills, commitments and more.  They all limited the amount of time I would get to spend in my wonderful incredible boat.  Sadly it didn't stop at a boat.  The same could be said for other toys, ATV's, Jet Ski's, etc.  All these incredible awesome toys.  There was just one problem.  I didn't have the time to use them.

You see something crazy had happened as my life and career progressed.  I had switched over a threshold in the time vs. money equation.  In my earlier life I had lots of time, but no money.  I could fish almost any day I wanted but it may have to be from shore because I had no means to buy a boat. Now that I had the means, time was a precious commodity slipping away from me.  As time became more precious to me I wanted it to be filled with nothing but the best.  If I could only enjoy one week per summer it would be filled with all the fun and toys that I could surely afford.

As years have gone on I now see the error of my past ways and trap.  I find myself in a lifestyle I have to go to work to support... but ... because I have to work so much I don't have the time to enjoy the things I have.  It's like I'm working to support the economy, nothing more.  I work for money to make payments for cool things I don't get to use because I'm working.  It's a never-ending circular problem.  How does one get off this merry-go-round?!

There has to be a middle ground.  At least that is the plan.  What "toys" do I really want?  No, I mean really want?  Once I can answer this I will keep these items and work to quickly pay them off. Everything else in the "toy" category needs to go.  What's the point.  Now while I've come to this cold hard realization, let's just say I'm a little ahead of Mrs. iFreebies and the rest of the iFreebies family on this journey.  So these decisions will be discussed and vetted over time.  After all I started on this journey before the rest of the iFreebies family.  I need to give them time to catch up, especially when it comes to the toys.



Thursday, June 9, 2016

Credit Card Loose Ends

Finding extra money by looking for credit card "loose ends".
As we've kicked off this website and formalized our journey I knew we needed to find a better way to track our expenses.  I have tried different programs throughout the years but never really stuck with any of them.  There were always things that made the program too difficult or not insightful enough.

Well we just tried Personal Capital and discovered how great of a tool this is.  While I am brand new to this tool I am already discovering amazing things.  One of the challenges of tracking for me has been what do you do with credit card payments and charges.  I've seen several programs book these as essentially double charges. First the charge when you spend on something, then the second charge as you pay it off.  Example if you bought a new TV on your credit card in March, you would incur that charge into your monthly expenses as Electronics in March and then again when you paid it off in April.  Personal Capital handles this well and only books it when you purchase.  So far I really like this software and at some point will probably due a full review on it once I've had some more time to work with it.

Now on to the fun stuff.  As I've been going through the expenses I've noticed a few credit card charges over the last few months for small recurring payments to online services and other things that honestly I had forgotten about or really don't use anymore.  Yes, I know I should catch this in my monthly billing statements but honestly hadn't been that religious about it.  Now that I can easily identify these charges I am going through and taking care of these "loose ends" if you will.  They are small amounts, $5 here, $15 there but they add up.  So far I'm up to $42.  Since I have been spending this $42 monthly I am going to start adding $42 to my monthly investment contributions every month.  This is $502 a year that over time will add up.  At 7% interest over ten years it's an additional $7,269 added to our retirement account.  Additionally this has served as a reminder of some other online payments that I am going to reevaluate if I truly need these or not in the near future.  It will be interesting to see how much all of these loose ends of automatic payments can add up to and help us reach our retirement goal earlier.  This has been a reminder of just how much income can be wasted if you aren't paying attention to it.  I'll also continue to watch these as some of these type of payments only occur quarterly or annually.  More opportunities to tie up loose ends.

Friday, June 3, 2016

Starting Point

Our journey is about to start.
Well every good financial blog needs numbers.  Numbers are what you can use to measure and track over time to see your progress.  Before we can track though, we need a starting point.  We started this blog in late May but didn't post numbers on post number one as we had a starting point but not a month two as a reference guide.  Now we do.  Sadly as you will see we have a long way to go.

There are a lot of different ways to track this and we've given it some thought.  After looking at different scenarios though we decided on Monthly Expenses vs. Potential Passive Income.  Monthly Expenses are easy to measure and for the sake of this exercise do not include one time items.  It is more what our monthly budgeted expenses are.  For example if we take a vacation, or buy something big (not that we have those plans) it does not skew what would be, or could be our budget going forward.  Potential Passive Income is taking the sum of our investments and applying the 4% rule.  Additionally we have a second source of passive income that fluctuates month to month that we add to the 4%.  Once our passive income is higher than our expenses we could walk away from employment and feel secure in our choice.

Below is our first chart:



Now a couple of notes.  June is estimated at this point.  We know the Expenses but Passive Income is an estimate.  I will update once we finalize June but really wanted to get the chart started.  As for relative values we will call Month 1 expenses 1.0.  Everything going forward will be from this 1.0 starting point.  As you can see April and May have Expenses at 1.0 and Passive Income at .21.  This would mean we could cover only 21% of our current expenses from Passive Income (PI) if we quit working and utilized PI only.  We worked hard in May to get rid of some expenses and for June the Expense (E) number has dropped to .92.  We are still estimating PI at .21.  The movement alone though of E will put PI at 23% of our the expenses.  Still a long way to go but every journey starts with steps.

So what does this chart mean to me?  It means that despite being decent savers through the years we failed on the expense side.  The expenses must come down and the investment income must go way up.  It probably means years of hard work but at least a plan is in place.


Wednesday, May 25, 2016

The Great Housing Lie

Sample American McMansion style house (not the iFreebies house)
Being raised in a middle class home in America you always heard certain sayings; "You can be President when you grow up", "Study hard so you can get a good job", and "You should do better than your parents did".  Well these sound great.  Good sound advice for young Generation X.  The problem is they all have traps in them.

Never did somebody tell you the long shot odds at being President and the large piece of your soul you would surely lose along the way.  Nobody ever said, get a good education and start your own business so you don't get stuck in the rat race.  Doing better than your parents was always viewed as making more money and having more stuff.  That last one really sticks with me now looking back in my mid-life.  The iFreebies family has easily surpassed the jobs, income and material items  our parents.  We have all the toys and certainly "win" in the ultimate category.... that American sure-fire sign of success... how big is your house?

Seems not that long ago, just a generation or two, the American dream was to get married, buy a house, have kids and work your whole life to pay off that first house.  If you had more kids than bedrooms no big deal.  Just double them up, or stack them in whatever rooms you had and everybody was happy.  Somewhere along the way though that became absurd.  The new norm became get a house, have kids, get a bigger house.  Get a promotion, get an even bigger house.  Keep moving up house size until... who knows where it ends... and heaven forbid a housing crisis!

Looking back we fell right into the trap.  Actually that's not true we jumped gleefully head first into the trap.  We got married, borrowed as much as we could and bought a house.  Had a couple of kids, got some promotions and bought a bigger house.  Had another kid, more promotions and yet an even bigger more expensive house.  More promotions and we needed a vacation property.  Who doesn't after all.  Have the property, need the toys.  We did that too.  We deserved it.

Then we woke up.  One day while on the career treadmill we realized we were spending all of our time working to pay for stuff we didn't have the time to enjoy because we had to work non-stop to pay for it all.  What a realization.  Stuff isn't all that important.  Problem is we are so far in the trap now it's not an easy escape.  As your lifestyle creeps higher it is harder and much more painful to dial it back.

So what would I do different?  If I had that time machine I would tell my younger self to hold off buying that first house.  Save for several more years and buy a property we could afford and stay in for the rest of our lives.  Would my younger self listen?  Probably not, but I'd like to think so.

So now here we are at the start of our new journey to financial freedom and we need to start seriously dialing things back.  Will we downsize the house?  Time will tell but as we get more serious about this journey it will always be top of the ledger as the biggest monthly expense.  What would you tell your younger self about buying a house?