Emergency Fund

2017 Goals and Quarterly Updates

/ humblefi / 2 Comments

NOTE: Fourth Quarter, 2017 Update….on 12/22/2017

I started my humble journey towards Financial Independence in 2014. But, I really did not have any formal goals for 2014. I just wanted to create multiple passive income streams, protect my family with life insurance, etc. I established what Financial Independence means to me and what the goals were. I accomplished all the implicit goals I had for 2014.

For 2015, I was a little bit more formal about goal setting and set my 2015 goals and updated my progress quarterly (here). In addition, I also tracked my progress via a Monthly Progress Report (here). At the end of year 2015, I reviewed my progress towards FI and I was happy to have reached and/or exceeded most goals I set (here).

For 2016, I achieved most of the goals I set out for myself (here). The two goals where I failed badly are: Keep eating expenses under $200 per month & Estate planning. I will try again this year i.e. in 2017.

The Financial Independence criterion for me (2017) are:

Financial Independence Criterion
Emergency Fund $60k (as of 2017)
College Fund $80k
Passive Income Streams $4000 per month
Retirement Fund $900k
Roof for our Family $750k….HCOL area 😦
Medical Fund $100k
Life Insurance To protect my earning years…..

For 2017, I have thought about the following goals to get me closer to the above financial independence goals. What is the current status of the goals:

  • Ones in Red are not complete
  • Ones struck-through are complete

Financial Goals

  1. Keep scouting for a possible home/multi-family residence/rental real estate
    1. 03/31/2017        Visited many open houses…single/multi family…prices still crazy
    2. 06/30/2017        Visited two open houses….prices even more crazy this quarter…
    3. 09/30/2017        8 more….we finally know what we want….need the $$$ now 🙂
    4. 12/31/2017        0 homes….prices shot up & pushed most houses out of our budget
  2. Contribute $15000 towards Home Downpayment Fund
    1. 03/31/2017           $10272/$15000            $4728 remaining
    2. 06/30/2017           $13772/$15000            $1228 remaining             
    3. 09/30/2017           $16701/$15000            Done..but price rises outpacing savings 😦
    4. 12/31/2017           n/a
  3. Contribute $3600 to 529 College Fund 2 
    1. 03/31/2017        $305/$3600 done                     $3295 remaining (behind…)
    2. 06/30/2017        $1966/$3600 done                   $1634 remaining 
    3. 09/30/2017        $3467/$3600 done                   $133 remaining
    4. 09/30/2017        $3600/$3600 done                   $0 remaining
  4. Contribute $3000 to 529 College Fund 1
    1. 03/31/2017        $605/$3000 done                    $2395 remaining (behind…)
    2. 06/30/2017        $1767/$3000 done                  $1233 remaining
    3. 09/30/2017        $2427/$3000 done                  $573 remaining
    4. 12/31/2017        $3000/$3000 done                  $0 remaining
  5. Contribute $16k to Passive Income Streams (stretch goal of $24k) 
    1. 03/31/2017        $10150/$16000                       $5850 remaining ($13850 for stretch)
    2. 06/30/2017        $29970/$16000                       $0 remaining 
    3. 09/30/2017        n/a
    4. 12/31/2017        n/a
  6. Max out 401k contributions for both me and my wife ($36K total)
    1. 03/31/2017        $10489.19/$36K                     $25510.81 remaining
    2. 06/30/2017        $19774.94/$36K                     $16229.06 remaining  
    3. 09/30/2017        $33890/$36K                          $2109.47 remaining    
    4. 12/31/2017        $36K/$36K                              done
  7. Keep eating out expenses under $200 pm
    1. 03/31/2017       $358.61                                      Way above budget…
    2. 06/30/2017       $401.83                                      Out of control 😦 
    3. 09/30/2017       $301                                           Pulled in the expense some…
    4. 12/22/2017       $273                                           Pulled in the expense a little…
  8. Start and finish Estate Planning (Will, POD beneficiaries, Caretaker for children, etc)
    1. 03/31/2017  No progress yet      
    2. 06/30/2017  No progress yet
    3. 09/30/2017  Set up an appt with a financial planner….will discuss and decide
    4. 12/31/2017  Financial plan done; Will, POD, etc next year

Personal Goals

Starting this year, I am trying to track some personal goals. Without adding all the details and boring everybody, I will try to keep this simple. I am hoping tracking this in my blog will keep me motivated to reach my goals. Here they are:

  1. Health Body goals (healthy eating, gym visits, popping multi-vitamins, etc)
    1. 03/31/2017       21.4% success rate  ….nothing but improvement ahead 
    2. 06/30/2017       17.1% success rate ….oh boy…eating too much/no exercise…. 
    3. 09/30/2017       20.0% success rate….behind on flossing, popping vitamins mainly
    4. 12/30/2017       14.1% success rate ….no exercise…. 
  2. Simplify Life: Donate unused books once a month
    1. 03/31/2017       0/3 done                                
    2. 06/30/2017       3/3 done
    3. 09/30/2017       2/3 months done….got my kid to donate old books 🙂
    4. 12/31/2017       2/3 months done….books donated to two libraries  
  3. Simplify Life: Donate unused (old and new) clothes once per quarter
    1. 03/31/2017       1/1 done 
    2. 06/30/2017       1/1 done
    3. 09/30/2017       3/3 done….this time, it was clothes, toys and garage junk!!
    4. 12/31/2017       1/3 done…big kids toys cleanup done; waiting for donation  
  4. Simplify Life: Shred all unnecessary documents once a month
    1. 03/31/2017       1/3 done
    2. 06/30/2017       2/3 done….only 10 folders left…even found 10 year old docs! 
    3. 09/30/2017       1/3 done….a few more folders done….cabinet is so empty now 🙂 
    4. 12/31/2017       1/3 done….did not get to work on this much this qyarter 

Possible candidates for 2018 Personal Goals

I decided to start this section in the last quarter of 2017 (Oct-Dec) so that I can capture possible candidates for Personal goals in 2018.

  • Get together with a Financial Planner and checkpoint the overall state of our finances.
    • My goal was to generate $1000 pm in dividend income and then purchase our primary residence. I am close to the former but way behind the latter.
    • So, I want to set a plan for the next five years and getting a plan review from a qualified professional is timely now.
  • Prepare to find a new job with a better compensation package.
    • To support the house purchase, I need something more that the salary. I would like to add some additional options like a better bonus option, stocks, etc
    • This means I need to do really really well in the interviews…need solid preparation before I look into the market.
  • Get into a PE class of some sort and get my health in order.
    • Need the disciple of a class to help my will power.

How to prepare for the next recession?

/ humblefi / 13 Comments

For the past few months, I am seeing some excesses in the market that has brought back memories of past boom+bust cycles. For example,

  • A 2bed/2bath condo sold for a neat $1mil,
  • A 3bed/2bath townhome list for $850K and sell for $1.2mil…I am not joking about this 😐
  • I saw many people jumping in to buy $70K cars
  • I saw people bid more than $100K over the list price to buy a very old home
  • ……

The above observations remind me of previous boom cycles and I felt that it was time to revisit lessons learnt from past boom+bust cycles. Hence this post. Hope it is useful for you. If you have lessons of your own to share, please do so…it would be much appreciated.

Boom+Bust cycles

I have faced two official recessions OR you can say a few bubble-pops in the last two decades of my life.

  • Economy was doing well..here comes the dot-com bubble pop in 2001
    • This was officially a recession
  • Economy was doing well..here comes the market tank due to the Iraq war
    • This was officially not a recession, but job losses were the same…..
  • Economy was doing well..here comes the real estate bubble pop in 2008
    • This was officially a recession

Before each recession, there is a period of bubble formation OR economic prosperity….pick your poison 🙂 One could go back in US economic history and one would find the same repeated pattern of BOOM and BUST cycles.

  • 2004 to 2007: Boom time; Bubble pop in 2008-2010
  • 1994 to 2000: Boom time; Bubble pop in 2001-2003
  • 1983 to 1991: Boom time; Bubble pop in 1992-1994
  • ……..

The current Boom cycle has been on from 2010 onwards…I.e. we are more than due for a Bust real soon…..can we benefit from this knowledge? If you are interested in how I plan to benefit, please read on.

What did I see or not see during these cycles?

  • For the 2001 bubble pop, I had no idea this was coming…I was a finance newbie and really did not even know what 401K meant. But, I did see a lot of job losses around me, close friends getting hurt bad and I myself barely scraping through..more luck than anything else….it was a very stressful time.
  • For the 2008 bubble pop, I could see it coming and did take some decisions like moving to a more stable job, creating an emergency fund, etc. But, I did not predict the severity of the recession….again, it was a lot of job losses around me and it was again a very stressful time. I was fighting so hard to retain my job and stay afloat that benefiting from it did not come to my mind.

But, since I was no longer a financial newbie, I was fortunate to be around people who, on hindsight, proved to be financial geniuses. I was not smart enough to financially benefit form the lessons at that time, but I plan to do so in the next recession. Here are some examples of a common patterns I saw during the boom+bust cycles.

  • A person I know dumped $150K into the stock market, in the worst of the 2008 bust cycle and by 2014, he had more than doubled…infact almost tripled his investment. At that time, I thought he had nerves of steel to do that but on hindsight, he was just making use of the recession. He has now officially retired and working part time just for the social connections.
  • A person I know, a financial newbie, bought a home in 2008, under pressure from family since a baby was on the way. She really hated the idea of buying and came up with all financial reasons not to…but, a relative who happened to be a real estate agent convinced her otherwise and  even dropped the commissions for the purchase. Her house is now $500K past the purchase price and she stopped working to spend time with the baby. She now looks like a financial genius and the relative loses no chance to rub it in.
  • A couple of people I know bought houses at the peak of the boom cycle in 2000, 2004 and 2007. They went through a lot of suffering with undervalued houses…especially with the threat of job losses hanging over their head. It took many many years to break even and some have not yet done it still.
  • Job loss means loss of two important things as well: Health insurance and Life insurance.
    • COBRA insurance premiums for a family of 4 can cost as much as $1900 per month
    • No job => no life insurance => no protection for family

What did I learn from these cycles?

The lessons I learnt can be broadly classified into the following points:

  • When you see excesses in the market, then it is a forewarning of an upcoming recession.
  • If your only source of income is shaky, then it is hard to take risks and benefit from the recession/bust cycle.
  • Big items (houses and cars) should always be purchased in a recession or bust period. A mistake make in either of the two can take years and years to recover from…especially the house.
  • Make yourself very valuable to your company….but at the same time, be prepared to interview for a job at any time

My plan for the next recession

An often heard sating is: Attack is the best form of defense. For the next recession, I plan to attack it with a goal to benefit from the recession, rather than take it lying down. Based on the lessons learnt from past recession cycles (previous section), here is the action plan I have implemented since April of last year.

  • Lesson: When you see excesses in the market, then it is a forewarning of an upcoming recession.
    • Action plan:
      • Watch for excesses in the market
    • Results:
      • I am already seeing the excesses in the housing market and luxury items.
      • Now, I am sure we are entering the first stage of a bust cycle.
  • Lesson: If your only source of income is shaky, then it is hard to benefit from the recession/bust cycle.
    • Action plan:
      • Create an emergency fund.
      • Develop passive income streams and take out the reliance on income from work
      • Remove reliance on life insurance from the place I work.
    • Results:
      • Starting last year, I have designed and implemented a Passive Income Plan
        • On average, it will pay me roughly $500 per month.
        • Of course, this is not enough to replace my income. But, it does take care of food expenses for the family.
      • I have a 12 month Emergency Fund to take care of any temporary loss of income
        • When the income source is shaky, it is hard to take a risk like buying a house.
        • But, if you can survive for a year without a source of income, the confidence to take a risk is very high.
        • Hence the one year emergency fund.
      • I bought Life Insurance coverage to protect my family.
        • Until last year, my life insurance was provided through my work.
        • But now, life insurance is independent of my work…so, even in a loss of income scenario, my family is protected.
  • Lesson: Big items (houses and cars) should always be purchased in a recession or bust period.
    • Action Plan:
      • Have patience to wait for the next recession to buy
      • Create a good down payment fund that is big enough to reduce the monthly payments
      • Learn how to evaluate a house
    • Results
      • The highest amount of pressure to buy a new car, a new house, etc comes from peer pressure. I can take it, but my family has a hard time dealing with it. I have managed to convince them to stick with my plan until now…they have sacrificed a lot over the last couple of years. Now, I have to deliver on the house at least in the next recession.
      • I have reduced my investments a bit to start accumulating $300 more per month into my home down payment fund. When the recession strikes, I will be ready with my home down payment.
      • I am learning how to evaluate a house for purchase by doing the following:
        • Watch home inspection videos on you tube
        • Watch how pricing is done by reading articles on the net and videos as well.
        • Watch how to not get fooled by real estate agents.
          • A staged house sends warning bells ringing in my ears now….
          • For example, I found a common trick of using undersized furniture (bed, chairs, etc) to make the room look bigger.
          • Damn…these real estate agents are good huh 🙂
  • Lesson: Make yourself very valuable to your company….but at the same time, be prepared to interview for a job at any time
    • Action Plan
      • Be rated near the top 20% in your company
      • Constant Preparation to make yourself ready to take a job interview on any day.
    • Results:
      • I have been working very hard to produce more things at work…but it has been slow digging. Likewise for my interview preparation.
      • But, now that I have plans in execution for all the other lessons, I will concentrate on this action plan for the rest of this year.

If you have read this far, then you really are a patient soul. Hope this info was useful in some way. Any tips you can share, please do leave a note in the comments section.

Emergency Fund

/ humblefi / 2 Comments

Why an Emergency Fund?

There are many events in life that cannot be planned for. Let us consider some examples:

  • My close friend used to work for a company that closed down without a hint as to this event happening. This happened when the market was in the dumps…but he was able to ride through it because he had some money stashed up. It was not that he planned to have an emergency fund..it was just that he was not financially aware on what to do with that money.
  • My colleague at work had mom continuing to stay in another (home) country. Mom was suddenly diagnosed with a fast acting cancer. My colleague dropped everything and left to take care of mom. Mom lived for another 6 months, but she got to spend the last 6 months with my colleague and died in peace. If my colleague did not have an emergency fund, my colleague could not have afforded those 6 months without pay…6 months that gave my colleague peace for the rest of life.
  • One of my other friends lost a job unexpectedly. His company was doing okay, but they canned his entire product line. He was given two weeks to search for a job inside the company, but it was a time of job freezes every where and he could not get any. Since he had two kids, the COBRA insurance payment for the entire family turned out to cost almost 1900+ dollars! This was a total surprise to him as well as me. Did I say that rent is expensive where I stay? His total monthly expense was almost $5000 per month. He was out of a job for almost 6 months and that is 30 grand right there.

So, for reasons like the above, I wanted to have an emergency fund that will at least give me and my family some months without pay in the event of any emergency. This is especially important since we do not have any relatives or friends that can support us financially.

Size of the Emergency Fund

Having decided to build an emergency fund, the question that arises next is…how much?

  • From seeing my family’s expenses and from seeing what my friends had gone through, I think a minimum of $5000 pm is an absolute necessity.
  • A year’s worth of expenses is what is recommended everywhere.I have nobody I can rely on to host me and my family. I am it.
  • I have a pre-existing health condition for which insurance would be almost impossible to get. So, I added $1000 in addition to account for a high cost insurance.

Considering all that, I decided to have 12 months of expenses for my emergency fund i.e. $72000.

Where to keep the Emergency Money?

Having $72000 in a Bank of America account was earning brutally low interest rate. Based on a tip from a wise soul, I came across Smarty Pig, a FDIC insured online bank that was providing 1% interest for the money. So, I decided to move the emergency fund into a Smarty Pig savings bank account.

Status of this Goal

Done!