2015 Mid-Year Financial Independence Report Card

Financial independence is one thing I’m just as passionate about as credit card churning and maybe even more so.  I discovered both around the same time last year and have found that they fit quite well together for our lifestyle.  They may seem contradictory on the surface as financial independence encourages you to save money by not making unnecessary purchases while churning on the other hand seems to encourage spending a lot of money on credit cards to earn free travel.  Instead of indulging in wasteful spending, we’ve found a balance which allows us to earn signup bonuses with our regular spending and subsidize our travel expenses.  Travel is one thing that we both value a lot and would be doing with or without miles and points paying the way.  We may have added a few trips (at least) since we started churning cards, but overall we’re actually spending LESS on travel because the majority of it is covered by the signup bonuses we earn.  Plus, the large number of credit cards actually allows us to save money on everyday expenses through category bonuses such as 5% back at restaurants last quarter, 6% back on all of our grocery purchases via the BCP, and 10% back on Amazon via Discover this quarter!  All of this helps us work towards our goal of Financial Independence by 40.  While we’ve laid out a plan to save 25 times our yearly expenses in the next 15 years, it probably wouldn’t pan out if we don’t periodically check in on our progress and adjust if necessary.  The goal of this post is to review our progress over the first half of the year, so I’ll be going over our savings, expenses, bonus income, and more to see where we stand.

Keeping Expenses Down

The only possible way to save money is to spend less than you bring in, and the only way to become financially independent way before the standard retirement age is to spend WAY less than you earn.  While some people have a plan to live crazy minimal lifestyles to earn faster and then adjust upwards later, Becky and I have chosen to find a spending level we’re comfortable at and spend approximately the same amount now that we will after reaching our investment goals.  One of the most important factors in seeking financial independence is finding the spending level you intend to cover with passive investment income.  In order to keep that number down, it’s important to identify the spending that is truly important to you versus the spending that is wasteful and doesn’t provide any actual benefit to your life.  This is a very personal decision and the answer will vary with every person, but it may be the most important factor in finding the right balance between spending and saving while retaining your sanity.

We set out approximately a year ago with the goal of saving at least 50% of our income and are right on track through the first half of 2015 with an overall 54% savings rate.  This rate lines up almost perfectly with our timeline as shown in MMM’s Shockingly Simple Math.  Each month varies pretty heavily in spending depending on what non-monthly bills are due and whether or not we make any large purchases, but the average spending level is right where we want it to be.  Here’s a chart showing our spending versus our income:

Our combined income and spending since the beginning of 2014.
Our combined income and spending since the beginning of 2014.

As you can see, the last 6 months expenses have stayed sufficiently below our income and average out to about a 54% savings rate.  The first large spike in expenses was us buying a house and the second smaller bump around November 2014 was the purchase of an engagement ring (luckily she said yes!).  Our income is rather inconsistent because Becky has an hourly position paid bi-weekly which means she gets an extra paycheck a couple months out of the year while tax refunds and bonuses cause rather large spikes.  The green line at the bottom is how much our investments are earning based on the 4% rule.  It’s kind of exciting that recently it became possible to see some white space underneath it!  Once that green line surpasses the red line, we’ll be able to call ourselves financially independent.

Avoiding Debts

While Becky and I put all of our spending on credit cards (only our mortgage and gas bills can’t be paid via credit card with no fees), we always pay the card off in full after the statement posts and haven’t paid a dime in interest.  Our only debt is the mortgage which we are putting extra towards each month as we try to get up to 20% equity (we purchased the house with only 10% down) so we can remove the wasteful PMI part of our monthly payment.  After tax-advantaged investment accounts, getting our home equity to 20% is the number one priority and is where our extra savings will be going later this year.  At our current savings rate, we should be able to remove the PMI within the next year or two, so that’s one of our major goals in the near future.

Boosting Our Income

I’ve done a few things to help boost our regular income in the first half of the year which has brought in a few extra thousand dollars.  As our expenses are already pretty consistent, all of this extra money can be invested and help speed up the time it takes to reach financial independence.

$890 from Bank Bonuses

As I detailed in my Mid-Year Churning Update, Becky and I have opened 5 new bank accounts this year to get cash signup bonuses for a total of $890 so far.  We’ll have to pay taxes on these bonuses, but will still come away with a decent amount of cash.  While most of them were one time bonuses, the Santander one specifically is now set up to earn $20/month automatically which will hopefully continue well into the future.

$224 from Credit Cards

In addition to earning a ton of miles and points towards free travel from credit cards, the signup bonuses frequently offer statement credits as well.  After subtracting out all the annual fees we paid, we still came out a couple hundred dollars ahead.  We could focus more on cash back if we wanted, but are currently sticking with large travel bonuses that we’ll be able to use in the future for mostly free trips.

~$1,500 from Gift Card Arbitrage

Back in February of this year, I started buying and selling gift cards to earn some money while generating credit card spend and have done pretty well so far.  This profit hasn’t been realized because I keep reinvesting in the business by buying more cards, but I’m this far ahead by my calculations.  The jury is still out on whether or not I’ll continue at the pace I’m at.  While the profit is decent and the credit card spend is extremely helpful towards earning free travel, it is a time sink that involves dealing with customer service a decent amount which I don’t enjoy doing.  I can see myself stepping back from the more risky opportunities and sticking to the easy money makers in the future.

Invest Efficiently and For The Long Term

Saving is the first step, but actually putting that saved money to work is the more important step for achieving financial independence.  The earlier the better is important to take advantage of compound interest over many years and automation helps take any hesitation out of it.  Both of our 401k’s and the HSA max out over the course of the year directly from our paychecks, so we don’t have to think about those contributions.  The IRA’s on the other hand are done manually and so far we’ve only maxed one of them this year, maxing the other is something we should do soon and re-emphasizes the importance of automation.  Something left up to a manual action can be delayed and sometimes missed completely if you’re not diligent.

We’re sticking to a 55/35/10 split in our investments between us stocks/international stocks/us bonds which are all represented via the low-cost index funds we have access to.  This split is broadly diversified and requires little to no intervention to maintain.  The only time I adjust anything is once or twice a year to rebalance to the desired split based on which type has performed ahead or behind the others.  The following chart shows our net worth since the beginning of 2014:

Our Net Worth growing since the beginning of 2014.

Each segment is stacked on top of the one under it, so the top of the blue part represents our total net worth and the different colors show how that net worth is divided among home equity, cash, and investments.  You can see the point in July of last year where we cranked up the % contribution to our 401k and started to grow our investments significantly.  The amount held in cash is our emergency fund along with the amount we have split between bank accounts and rotate through with our regular spending every month.  The top of the green line represents the amount we actually have invested which is what we’re trying to grow.  I don’t plan on counting the equity of our primary residence towards financial independence because we won’t be able to generate income from it and the cash will always be a safety buffer, so the goal is to grow the green investments part to 25 times our annual expenses.  This allows us to live comfortably completely off of the passive income via the 4% rule.  The top of the investments segment currently sits at 8.7% of our FI goal.

Sit Back And Ride It Out

Rome wasn’t built in a day and our financial independence won’t be earned in one either.  We have all the basic pieces in place and now just have to keep it going for the next 10-15 years in order to reach our goal.  Things will definitely change in that time frame and our timeline could move a few years in either direction, but the money we’re investing now can only help us going forward.  While financial freedom is constantly on my mind, I consider enjoying the journey just as important as the end goal.  For now, our primary goal is enjoy life to the fullest by seeking out new challenges and opportunities to further our growth both mentally and physically.

9 thoughts to “2015 Mid-Year Financial Independence Report Card”

  1. This is an interesting post. Clearly you’re making good progress toward your goals. I’ve been skeptical of MMM, quite honestly, and don’t really find that frugal approach as enticing. I focus more on increasing my income. Eventually I see that as biting me, because I’ll be outside of being eligible to contribute to my Roth IRA (and lets face it, taxes are likely to go up, not down), but I suppose that’ll be a good problem to have.

    1. MMM is definitely a little extreme for my tastes, but a lot of the stuff he talks about is still sound financial advice. Increasing your income is almost as beneficial as reducing your spending, but only if you don’t increase your spending at the same time your income goes up. This is the standard treadmill that everyone gets caught up via lifestyle inflation and never get ahead of the game. Reducing spending has a double effect because you save more AND need less to be FI, but you can only cut spending so far, increasing income is theoretically boundless. The key is identifying what spending actually adds value to your life and what you wouldn’t even miss if it went away.

      Also, it’s always possible to contribute to a Roth IRA regardless of income level. Google “Backdoor Roth IRA” for more information.

  2. Great post Noah. I am 25 (same age as you, I think) and you are motivating me to get my act together. I have $3000/$5500 put in my Roth IRA, I should max out my $3350 HSA with contributions and employer contributions, and am saving 10% of my salary in Roth 401k with 4% match. My next goal is to max out my Roth IRA by the end of the year and slowly ramp up savings in Roth 401k. Any advice you can share with me about my strategy? Ideally I would love to max out my Roth 401k, but that might be a stretch. Thanks for your help!

    1. Sounds like you’re well on track and way ahead of most people our age. I initially started out contributing to a Roth 401k as well, but switched to a Traditional 401k last year. Have you put much thought into which works best for you?

      The question people usually associate with the decision is “Do you plan on making more in the future than you do now? If yes, go Roth. Otherwise Traditional.” For someone like me who plans to retire well before the traditional retirement age, that question no longer applies. The basis of that question is based around spending the majority of your income, but someone saving a large % of their income needs to look at it a different way.

      The real question you should ask yourself is “Are you making more now than you will SPEND in the future? If yes, go Traditional. Otherwise, Roth.” As I’m currently making more now than I can ever see myself spending annually in the future, Traditional was an easy choice. The power of shutting off your income earlier than your 60s and living off of your investments actually allows you completely avoid most of the taxes you would pay up front with the Roth contribution.

      This is one of the best articles on the subject (in regards to people seeking financial independence or early retirement): http://www.madfientist.com/traditional-ira-vs-roth-ira/

      Other than that, keep ramping up savings as long as you can still live a comfortable lifestyle. I’m not one to suggest living bare bones just to save a little extra, so find a level of spending that let’s you live happily and still reach your long-term goals.

  3. Noah – Looks like we have an FI journey and credit card churning in common. I’m interested to read more about the gift card arbitrage. It looks like you made some decent money from that and with your overall income boosting strategy. It’s unfortunate that the bank bonuses are taxed, part of the reason I don’t even bother anymore and that’s what’s great about great card rewards being tax free. You have a very admirable savings rate and should be on your way to FI in no time!

    1. Hey Jeff, thanks for reading! Here’s my introduction post to gift card arbitrage, nothing has really changed since I wrote it: https://moneymetagame.com/churning/my-latest-get-rich-slow-scheme-gift-card-arbitrage/

      Credit card bonuses are definitely worth way more than bank bonuses 90% of the time, but most don’t pull your credit so they work pretty well together. Plus, the fully automatic ones like Santander are just free money for as long as they allow it.

      Thanks for the kind words.

  4. Maybe I am slow but how do you figure 10% off at Amazon right now? I only see 5%?

    1. Discover had a deal where they will double all the cashback earned for 12 months. I believe it’s still available for new customers, but not anymore if you’re an existing cardholder. I called in to register right after it was annouced and they happily enrolled me in the promotion. So essentially, all the bonus categories are now 10% and all other spending is 2%. It’s definitely one of the better deals so far this year.

      Here’s some more detail:

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