I’ve set the habit of picking a theme for each financial year. Last year, it was “progress, not perfection.” This year, it’s optimism over cynicism. It’s a very strange year to focus on optimism, and there are more important things happening than a single household’s personal finances.
The pandemic is one thing, but I’m encouraged by the Black Lives Matter protests and growing conversation about racism in America. I’m hopeful it leads to change and progress in eliminating the unacceptable disparity in racial outcomes in America.
I’m distracted by more important things. Yet, it’s part of our financial plan to conduct quarterly reviews, and I pride myself on consistency. So, I’ve written up our financial review for the second quarter!
Our Financial Review
Quick Overview: As part of our financial plan, we follow a process to set effective financial goals. We have a financial independence target. Each year, we set annual goals, and then build medium- and short-term actions to help us achieve our annual targets. The short-term actions are updated each quarter.
We discuss our progress monthly, but do a formal review quarterly. This is that review.
Here’s the color system we use for our goal reviews:
|On Track+||We’ve either already met the goal or are on track to do so and have added something.|
|On Track / Done||Exactly as it sounds. We’ve taken the necessary action to get there by year-end. Or, it’s already done.|
|Not Yet||Actions that we haven’t yet taken, or need to adjust to reach the goal.|
|At Risk||Uh uh. We won’t make it without significant changes.|
From time to time, we also just change or adjust a goal or action due to a change in circumstances. This isn’t bailing on a goal, but adapting in the face of new information. Goal 4 in this review is the biggest example of that.
Note: We focus on actions rather than just the goal and result. Atomic Habits by James Clear, and Thinking in Bets by Annie Duke are two books that drive our approach. Consistent action and avoiding “resulting” matters a lot – especially in a chaotic market.
Here are the goals we set for 2020, and the actions we said we’d take.
|2020 GOALS||DESCRIPTION||REVIEW PLAN|
|Long Term Goal||Financial Independence by July 2022||Check net worth quarterly, reevaluate goal in Dec. 2020|
|Goal 1||Max out tax advantaged investing accounts||Quarterly|
|Goal 2||Brokerage Investments of $24000||Quarterly|
|Goal 3||Create long-range housing plan||Quarterly|
|Goal 4||Create a rental house security fund of 6 months gross rent||Quarterly|
|Goal 5||Implement consistent meal prepping||Quarterly|
|SHORT TERM GOALS|
|Short-term goal 1||Implement Meal Prepping 3x a week||May – June|
|Short-term goal 2||Make our second (of two) annual Roth contributions||June|
|Short-term goal 3||Move to rental house / eliminate rent||May|
|Short-term goal 4||Calculate new barebones budget||June|
|Short-term goal 5||Exit quarter two with six-month emergency fund||June|
How Did We Do in Quarter 2?
Annual Goals for 2020
|Goal 1 – Max Out Tax Advantaged Investments||On Track|
Last year, for the first time ever, we maxed out all our tax-advantaged options. This is an area where educators actually have some financial independence advantages. In our case, we have four tax-advantaged options: 403b, 457b, Roth IRA and I’ve got an HSA option.
We’ve made both our Roth IRA contributions in the first half of the year. The remaining contributions to our 403b and 457b are all automated. So, barring a job loss in the second half of the year we’ll make this on cruise control. That’s an amazing total of $96,000 with this year’s contribution limits.
|Goal 2 – Additional Brokerage Investments of $24000||On Track.|
This one wasn’t on track in the first quarter as we focused on paying off our mortgage, moving back into our rental, and dealing with a hefty tax bill. We got back on track in the second quarter.
The pandemic closures led to even lower monthly expenses. Fortunately, we kept our jobs and have a healthy emergency fund so that savings could go right here.
We have an automated $500/month into a Fidelity international equity fund. That’s accounted for $3000 so far and will automatically account for another $3000 in the second half of the year. At the end of the first quarter, we made a $5000 brokerage contribution. Last month, we were able to put $10,000 into our brokerage account.
So, that’s $18000 of the $24,000 so far. With our lower housing expenses now, we should end up exceeding this goal. But, don’t count your contributions before they’re hatched..er, made.
|Goal 3 – Develop a Long Range Housing Plan||On Track +|
We crushed this goal early by deciding to move back into our rental property. In the second quarter we completed our rehab and moved. We’re now living mortgage free and will spend the next three months calculating our new actual living expenses.
We’ll live in the rental for at least two years to gain access to partial capital gains forgiveness, then decide what’s next. My best guess is we’ll eventually (sometime in the next 2 – 5 years) sell this place and move somewhere a little farther out and less expensive. We’re settled for awhile though!
|Goal 4 – Create a rental house security fund||No Longer Applicable|
We removed this goal in Quarter 1 after making the rental decision. We chose not to add another goal given the state of the world.
|Goal 5 – Implement Consistent Meal Prepping||Not Yet|
Progress! Sadly, this has been a goal for the past several years. We failed it last year, and failed it badly in quarter 1. In quarter 2, even with the closure and move, we made some progress. We’re meal prepping for three days a week now. It’s not yet consistent, and requires more will than habit but we’re starting to get there.
I’m hopeful this will be on track by next quarter and starting to become routine. Three days a week is the right number for us now. We can increase it later.
Short Term Goals
Our short-term goals are quarterly actions explicitly linked to achieving the long-term goals. If we do these, we are very likely to meet our annual goal and therefore meet our long-term goal.
After each quarterly review, we set new ones for the next quarter. So, how did we do in Quarter 2?
|Short-Term Goal 1 – Implement meal prepping for at least 3 meals / week||Met|
As I mentioned above we did this! It still takes us effort, so I think it will remain a goal for Quarter 3.
|Short-term goal 2: Make second Roth IRA contribution||Met|
We made a Roth contribution of $6000 in Vanguard for TFI. We’ve fully funded our Roth IRAs for the year!
|Short-term goal 3: Move to rental house / eliminate rent||Met|
The move is done. We’ve moved often enough that moves go smoothly for the most part now. Just two weeks later we’re mostly settled in and comfortable. Best of all, with no rent and no mortgage our cash-flow situation is great and my haunting feelings of financial insecurity are at an all time low! I’m interested to see if that’s a long term outcome.
|Short-term goal 4: Calculate new bare-bones budget||Not Met|
We’ve done this, though with a low degree of confidence. There are still a number of unusual moving parts, including the recent move, first full month in house (new utilities), how closure impacts work expenses, etc.
Still, we calculated we could live securely on $2500/month and our target lifestyle is $4000/month. Over the next three months, we’ll dial these in to actual amounts.
Our bare bones is probably close to $2100, but we prefer to be conservative in our estimates.
|Short-term goal 5: Exit Quarter 2 with emergency fund (6 months expenses) intact||Met+|
We have six months expenses in an emergency fund. As I’ve mentioned before, we had considered drawing our emergency savings down to three months. Covid-19 convinced us that six months expenses is the right amount.
Quarter 3 Short-Term Goals
I’m almost afraid to say this, but we have hope that Quarter 3 will be a little more calm for us. There are no major housing moves left. Our work is on summer break. TFI doesn’t work, and doesn’t get paid, in the summer.
I’ll continue to work but it’s at a different pace during summer months. This one will be harder than usual – We are working hard to figure out how to re-open more effectively in the fall!
I’ve also got some furlough days this summer as part of our budget downfall. It won’t impact our financial plan much thanks to mortgage freedom.
Our hope is we can settle into the new house, get a bit of a routine, and let our finances continue to roll mostly on autopilot. We do have one decision to make in Qtr3: We put a chunk of money into a 1-year CD last summer as part of our housing plan. That CD is at 2.5% and nothing even close is out there today. So, we’ll have to decide how to allocate the funds once the CD matures in late-July. We’ll add that as one of our goals.
Here are our short-term goals for Quarter 3:
- Short-term goal 1: Implement meal prepping for at least 3 meals / week (Yes, we’re keeping this until it’s routine!)
- Short-term goal 2: Invest funds from matured CD
- Short-term goal 3: Make $5000 in brokerage contributions
- Short-term goal 4: Track expenses and finalize actual new monthly costs
- Short-term goal 5: Refinance second home (in process)
Net Worth Review
We calculate our net worth during our quarterly review. I use personal capital to easily track my net worth for free (affiliate link), if I want to glance at it. I deleted the app during the market craziness and have lost this habit.
Every quarter, I prefer to sit down and go through everything by hand. This gives me a better feel for my overall financial picture. I do it using a spreadsheet I’ve kept for several years now.
The last five months have made me very grateful that I’m an index investor following a pretty straightforward, mostly automated, buy-and-hold strategy. We continued to invest throughout the market craziness.
Quarter 1 was a wild time and our net worth dropped. The drop was less that we’d expected because we happened to be holding a fair bit of cash due to our housing situation and we’d continued to contribute heavily in the first part of the year.
In Quarter 2, our net worth increased by almost 10% and is now at it’s highest level ever. The increase was due to market returns and continued investment.
We are at 85% of our FI target and on-track to hit it within two years if things remain relatively stable.
I continue to be amazed by the change in our circumstances from just five years ago. We were still struggling with lifestyle inflation and had no financial plan. Now, we’re in control and making fast progress. Clear financial goals, deliberate action, and these check-ins help. Thank you for reading!