Boston Gal's Open Wallet

Jane - I really like this post. Creating a "financial road map" helps to keep your eye on the prize. The prize being financial security. Goals are meant to be realistic but challenging. So what if you fail at a few. That just gives you something to strive for in the next five years. I look forward to following your journey. Good luck!

 

Hi Jane, I've been lurking for some time - I really enjoy your blog.

Regarding this post, have you seen the article from Consumer Reports Money Advisor of July 2006, "Check Your Retirement Readiness"? It summarizes some formulas of Charles Farrell, a financial consultant, who states he advises his clients to have saved 12X income and pay off all debt by age 65 in order to retire comfortably. To get there he provides ratios of savings and debt to income; savings increase and debt decreases.

At age 40, you're supposed to have 1.7 times your income saved, and debt at 1.25 times your salary.

I thought I was doing pretty well, but not according to his ratios. At 45 (me) he says have 3X one's salary in savings, and that debt is only supposed to be the same as one's income. I am not bad on the debt side but do not make the savings end (only 2X income). I am saving 12% into retirement, my company matches at 8%, and I fully fund a Roth, have a brokerage account, etc. - but this is not enough if one believes this formula.

The jumps by age 50 are pretty steep - 4.5 times income saved, and only .75 of one's income in debts.

I think this is a pretty draconian formula, and if one has hopes of increased earnings throughout a career, I am not sure how he indexes that - but food for thought.

Boomertoo

 

If I were to assume you have a good mortgage rate on your investment condo (say 6% or lower), wouldn't you maybe better off investing that money in something like a Vanguard Total Market (VTI or something) in hopes of earning the market average 8-10% or so?

Another idea might be to save up money to purchase a 2nd investment property. It's a little risky, but it seems that there may be a buying opportunity in the next couple of years.

 

I hope when you say buy a new car that means new to you. New cars are the biggest waste of money in the world.

 

I really liked this post too. People so often get focused on one goal that they neglect the others.

Thanks for sharing

 

Obviously everyone has their own feelings about debt but as long as your mortgage interest rate is not high and it is tax deductible at the margin it is pretty cheap money - you should be able to think of something that will have a higher after tax yield to invest in, and so why be in such a big hurry to pay it down?

 

Great to have a definite medium-term plan. Thanks for the post.

My question is: are all your goals financial? Or do you apply such rigor to the non-financial side of life?

Though I'm a firm believer in fiscal responsibility there is certainly a place for non-financial goals in one's life.

 

Thanks for the kind words Single Ma :)

CB - I have not seen the Consumer Reports article you mention, but looks like I am going to have to go pick it up. I will have to give the article a read and respond in a post - looks like a lot of good (but potentially depressing) info.

Hi Lazy Man and Money - I feel that I have been hanging onto that condo mortgage because it was relatively cheap and the monthly payment is not that big of a deal. However, one of my long-term goals is to minimize my monthly fixed expenses. Retiring the condo mortgage gets one more monthly payment off the books. Plus, the tax write-off is not that big since it is a small mortgage - plus I have never been a big fan of paying interest just for a tax write-off. In the end I save myself more money by not paying interest at all.

I am conflicted about purchasing another property. I worry about putting too much of my money and energy into one sector (real estate). Does not mean I won't do it, just being careful is all.

Hi Anonymous - Not sure if my next car will be a new or used one. My current car was purchased new in 2000. If it lasts for 10 years I will be thrilled. With the current glut of used cars out there, some good options are available now. Who knows what the car market will be like in the next few years? I just hope whatever I purchase I can do it with cash - avoiding a car loan.

Hi Gigi - Thanks for the nice comment :)

Hi Moom - paying off the condo mortgage is partly a psychological thing. Knowing that I am down to just my primary home mortgage is a huge thing. If I am still single and childless at 40 and have very low fixed monthly expenses and some decent side income streams (rent payments) I may be able to indulge in a mid-life career change or take a year off to smell the flowers, or take flying lessons - or who knows? I will continue to invest in my retirement accounts and another goal is to invest and grow my taxable brokerage account. I just like the idea of doing both - getting rid of debt AND growing assets.

Hi Brett - No, not all of my goals are financial. Just the ones I tend to list and share on this blog. I have not yet gone through the exercise of listing my personal 5 year goals - but I am sure I will soon - I just plan on putting those in my journal and not online :)

 

Hi Jane,

I agree with Lazyman in that I think it would be best to build your stock market exposure. You already have roughly 1/2 of your assets in real estate and only about 10% in stocks and bonds (from what I can see anyway). While this has been a great move in the last 5 years, is it almost always much better to be diversified in the long term. Stocks and bonds have handily beat residential real estate returns over the long-term and local property markets can be quite volitile (for example, Boston's condo market's 40% price decline in the early 1990s). With leverage, this could really hurt and whipe out a lot of equity. Obviously, this type of drop can happen in the stock market too, but a well-diversified portfolio of stocks, bonds, REITs, convertables, floating rate funds, etc. should return 8-10% a year and add diversity to your portfolio. If you do think more real estate is the way to go, have you considered REITS instead of buying another property. Buying residential REITs such as Equity Residential or Avalon Bay give you exposure to the market while at least providing geographic diversification. I personally wouldn't want my entire retirement based on the historically volitile Boston housing market, especially by buying at the historical peak (based on both price to rent and price to income ratios: http://neweconomist.blogs.com/new_economist/files/HSBC_frothfindingmission.pdf page 46)

 

Jane, this is a great post.

You inspired me.

 

I agree with the comments about diversification. Don't bother with a third property in this market. Start putting your money into large-cap mutual funds and index funds -- then forget about that money for the next 20 years (absent the recommended annual rebalancing, of course).