Digging out of a financial hole: 18 months into our financial independence journey and 2019 goals

not climbing ropes

Looking back at our 2018 goals, we accomplished all but one-ish:

Wins are fun, so I’ll start there. In 2018, all three of our properties have increased in value! According to both RedFin and Zillow, they’re up. That’s a satisfying – and easy – lift in net worth on Personal Capital. But there are some big variations in values between those two and I’m going to look into why. Expect a post on that.

So, the hole. I feel like it’s been slow progress on debt reduction, but looking at the past 18 months since we’ve started down this path, we’ve reduced our debt by $42,901. That comes to $2,383 per month. That’s a lot of money! This includes our consumer debt, home equity line of credit and mortgages. All of our optimizing has really paid off – it  truly is the aggregation of marginal gains.

jan 2018 debt reduction review

Keeping up the momentum in 2019:

  • We’ve just consolidated our final two credit cards into one 0%, $0 transfer fee card – it’s under $15k, so we’ll knock that out quickly.
  • Then ramp up the HELOC payments and transfer some of the balance to a 0% APR to ease the interest being charged (>$200/month – UGH).
  • The car payments are 1-2%, so we’ll let those loans run their course. These monthly payments will avalanche to …
  • Increase payments on the lowest of the three mortgages; I will re-map the payment schedule once we’re at this point.

All too often though, we (probably me) fall off the FI wagon and succumb to big spends. Some we plan on, others are not planned. Planned on:

  • 2018 Income Taxes: With the changes in tax laws, we think we’ll be paying around $3k. This wasn’t planned on, but now we know, so I’m calling it planned. This was due to the new property tax deduction cap of $10k.
  • Summer Camps: we enrolled before November to take advantage of the early bird discount (saves $30 per week; with 2 kids for 8 weeks, that’s a savings of $480)
  • Finish exterior painting: about $800 remains
  • Little League: travel team + regular season = >$1000. The payments are spread out, but still, it’s a lot of money for a kids sport and that doesn’t include equipment!
  • Monthly expenses for after-school childcare and music lessons will remain the same through June.

I wonder what large unplanned spends we had in the past 18 months? I’m sure there are many – look for that post in the near future!

What is a Health Savings Account (HSA)

The future of health care is unknown.

With the HSA contribution limits increasing in 2019 and on the heels of ChooseFI’s recent episode (finally) focusing on this, I thought it was time to refresh.

What’s changing with HSAs?

  • In 2018, individuals can contribute up to $3,450; this is going up to $3,500 in 2019.
  • In 2018, families can contribute up to $6,900; this is going up to $7,000 in 2019.

We are on my husband’s HSA plan because his employer contributes $2,000 per year into the HSA. This is amazing. His employer was just acquired by another firm; so fingers-crossed that this benefit remains in place.

Why are HSAs fantastic?

It’s the triple tax savings.

  • Your HSA contributions are 100% tax deductible or pre-tax if made by payroll deduction.
  • Your withdrawals to pay for qualified medical expenses, including dental and vision, are tax-free.
  • The interest earned on your account is tax-free.

Finally, the best part, you keep it. It’s not like an FSA where you use it or lose it. Your HSA contributions can stay in your account and continue to grow tax-deferred year over year without limit. And the account stays with you if you change employers.

Using Your HSA

HSA dollars can be used to help pay your health insurance deductible and qualified medical expenses, including those not covered by the health insurance, like dental and vision care. They can also be used to pay health insurance premiums when you’re between jobs, as well as for long-term care premiums and Medicare premiums.

Non-qualified medical expenses withdrawn before the age of 65 are taxed at your income-tax rate, plus 20%. Ouch. Avoid that.

After the age of 65, you can withdraw from your HSA funds and be taxed at your income rate.

Our FI Family Plan

Continue to max out our HSA. We hope to retire prior to the age of 65.  But health care is a huge concern and unknown. Not knowing the state of health care and what coverage will be available to us, this will serve as a safety net for medical costs. Otherwise, I’d like to hold onto it – and all my health care expense receipts – and withdraw tax-free, whenever I want.

I love this simple calculator!

Travel Hacking from Philadelphia: Our Next Steps

Fresh off our first travel rewards trip, I am planning our strategy for our next travel hack.

Our first travel rewards trip was to the Bahamas.

We used Chase Ultimate Rewards and Chase SW miles to fly from Philadelphia to Nassau (with 1 stop in FL). From Nassau, we caught a puddle jumper to Eleuthera Island and VRBO’d a house on the beach. Yeah, we still spent money, but a ton less ($3,480 less) than full price. Traveling with two energetic young boys for multiple days, we definitely prefer the space, kitchen and privacy of a home versus a hotel room.

Other expenses included a car we rented from the home owners, the $5 per gallon gas and eating out; taxes are 12% and a 15% gratuity is typically added. Not complaining, just the facts.

bahamas
Stand-Up Paddle Boarding at Sunset, Bahamas, Nov 2018

It was our first time there and a great trip. We all swam, snorkeled and stand-up paddle-boarded from the house at least once a day.  The kids had plenty of space inside and out and, after a long day of sight-seeing and beach hopping, we enjoyed our own private showing of the sunset on our beach each night with drinks in hand and a beach fire. Definitely a great vacation and even better knowing we saved so much on flights.

So moving on to our next trip … or trips. I’m exploring two tactics:

  1. We know we want to keep up with Southwest Air miles because of their low redemption threshold and abundance of domestic flights from PHL to friends we want to see in Denver and Dallas. With that, my husband will open and use a Chase Southwest Air card to take advantage of the 60k mile bonus (which is 10k more than the bonuses offered via my referral) and build on the base of miles we already have.
    Goal: Denver Ski Trip in December 2019 plus a guys weekend in Dallas at some time. The flights from Philly to both cities are direct on SW Air.
  2. I am going to segue from the Southwest Air card to a Chase British Airways card and take advantage of the 100k bonus offer. Philadelphia is our nearest airport and it’s a hub for American Airlines. I finally believe what I’ve been told: you can transfer British Air Avios miles to American Airline miles. Goal: International family vacation in 2020. 

I’m a bit concerned about spreading ourselves too thin with the spend thresholds required for the bonus miles and companion tickets. I suppose I could analyze the heck out of our spend and map out what this will really look like, but I haven’t. I’ll say I’m 88% sure this plan will achieve these goals.

A takeaway here is to follow a path that works for you. This doesn’t follow any path as discussed in the FI community. I had to look at what made sense for our family, our goals and, most importantly, what works with our closest airport, PHL.

Why You Should Care About Expense Ratios

Think small

While I understand the basics of what expense ratios are – fees, so the lower the better – I have a hard time explaining what they are and their impact on your money. I’m not a financial professional, so this may be over simplifying. And please, someone, correct me if I’m way off.

I’m going to pretend I’m explaining this to someone who doesn’t want to understand investments, but perhaps should (mom!).

The first official definition I see is from Morningstar:

The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

What?! Am I supposed to know what 12b-1 fees are? The first line says it best: it’s the annual fee charged to shareholder. That’s you, the account holder.

But I don’t see it on my statement. How am I paying this fee? 

Nothing is free. Your investments are managed by people and companies that are in business to make money. Mutual funds and exchange-traded funds (ETFs) bundle their fees into this “expense ratio.” You’re not going to see this as a line item on a statement of your account transactions, but they have an impact on your investment returns.

What are these expense ratio fees for? 

There are different costs with managing different funds and these costs are paid for (at least partly) through the expense ratio fees. These may include paying the fund manager, custodial services, record keeping, legal, marketing, auditing, accounting, etc. Basically, paying the machine that keeps the firm running.

Do I have to pay this? 

Yes, but you have some control in how much you choose to pay.

How much are we talking and how will it impact me? 

Expense ratio fees can range from 0.01% to 2.5%. To any retail shopper, this sounds like small potatoes, but over time, these rates can have a big impact. I searched for a calculator for this example, but found the results varied, so take this just as an example. I used the SEC’s Tool for Comparing Mutual Funds. 

Say you invest $10,000. Assume an average annual gain of a 10% over 20 years:

  • With 0.91% expense ratio = $11,241 in costs; Balance = $56,034
  • With 0.04% expense ratio = $536 in costs; Balance = $66,739

That’s over a $10,000 difference! This is a really simplified example with no additional contributions and without consideration for a host of other factors. But you can control this $10k difference and it only takes a few minutes.

So, what can I do?

Let’s look at your retirement account and see where it’s invested. With Vanguard, I can easily see the expense ratio by fund. Since my IRA is a mash up of multiple 401k roll-overs, my account was invested across over 10 different funds. I have gradually sold them, in order of highest expense ratio, purchasing low cost index funds instead (VTSAX). I’m down to these six (look at that Fidelity at 0.01%!):

I don’t sell them all at once because there’s a $50 fee for making more than one of these transactions within 60 days. And since I’m no good at math, I’m not going to calculate the impact of these waiting periods, I’m just avoiding the $50 hit.

To trade the high expense ratio funds for lower expense ratio funds, I follow the steps from my Vanguard account: 1) buy and sell and 2)  Trade an ETF or stock. I trade “all” of the high expense account. Once that transaction goes through, it will be held in my money market fund until I add it to my VTSAX fund.

I tried to keep this simple, but it’s not a very simple subject for the non-fiscally minded. And I know I don’t know anything – I’m just scratching the surface here.

Booking our First Family Vacation with Chase Rewards

We’re just dipping our toe into the travel optimizing pond here and I was a bit nervous. It required opening AND using a credit card, so if that makes you nervous, don’t do it. We had to be disciplined and used the card for most purchases and a few large purchases, like summer camp, to maximize points earnings.

Here’s what we did, as well as a few mistakes we learned from:

  • We both opened a Chase Sapphire Preferred card and spent the required $4,000 (each) easily within three months to earn 50,000 bonus points (each). Lesson learned: We forgot to have my husband use my referral code when he applied, missing out on 10,000 bonus points.
sailing on the delaware
Sailing on the Delaware River, pining for the Bahamas
  • We set a goal: get enough points to get our family of four to the Bahamas or any Caribbean island over the week of Thanksgiving. Of the Chase rewards travel partners, Southwest was clearly the best option with the lowest amount of points required: I estimated 140k – 150k points for our family, however November travel dates were not released when we were planning.
  • Searched for the best deal: Southwest didn’t release their winter travel dates until May 31, so we knew we had to earn the required points by then. When the flights were available, we had 133,775 total points earned. I used Southwest’s low fare calendar to find the best combination of dates that would give us a 5- to 7-day Thanksgiving vacation with our points, but I kept coming up short.
  • Transferred points from Chase to Southwest: you can’t book Southwest through the Chase portal, so a points transfer is required. This was pretty easy. I transferred 73,000 Chase Rewards points to my Rapid Rewards account and it appeared immediately. I then transferred 60,000 of my husband’s Chase Rewards points to my Rapid Rewards account and when it didn’t appear immediately, I had a minor freak out. When transferring from Chase, you have to enter the cardholders name on the Chase site, plus a Rapid Rewards number. I used my husband’s name with my Rapid Rewards number and when the points didn’t appear, I assumed that using his name with my Rapid Rewards number was a big mistake. The Chase customer service was absolutely great and while we were talking through how to course-correct, the points appeared! I just needed a little patience.
  • Purchased additional Rapid Rewards: Since we didn’t have enough, I purchased 7,000 rapid rewards points for $134 to give me the points required to book our trip.
  • Booked it! It was a rather smooth process despite my human errors. Here’s the breakdown:
    • Earned Rewards: 133,775
    • Purchased Rewards: 7,000 ($134)
    • Total Redeemed Rewards: 139,776
    • Taxes and Fees: $463
    • Total: $597 = $149.25 each!
  • Versus Actual Costs: Flights: $3416.16 +  Taxes/Fees: $664.16 = $1,020.08 each. We saved $870 each – that’s $3,480! There’s no way we would have or could have spent that. And these prices are already higher than they were when I booked just five days ago.

Another thing I learned from the Marla Tanner interview on ChooseFI is that you can, in fact, redeem British Airways miles through Chase. I tried to figure this out online and couldn’t, so thank you Marla for teaching me that you actually have to call the airline. I will keep that in mind, but I think we’ll stick with Southwest for now because our next travel goal is a rocky mountain ski vacation.

A huge thank you to ChooseFI for teaching us how to travel for less!