The most financially disastrous thing we ever purchased hasn't been a jet ski or a boat. It hasn't even been the very expensive Toyota Tacoma, or the numerous other cars we've gone through over the years (6 in 5 years). No other item in our lives has put us in more debt and costs us more monthly and annually, than this freakin' house.
"Well, you have to live somewhere, so suck it up, Buttercup."
It's incredibly easy to fall into the housing trap. There is a plethora of misinformation floating around about owning vs renting. Period. As if those are the only two options. Let's talk later about housing options and the one that will work best for us, but, first, lets concentrate on why we all think owning a home is such a great investment.
We fell for all the so-called money 'gurus' telling us what a great investment real estate is for the middle class. The big hook for this scam: Real estate always appreciates. The appreciation of our house has been slower than the money we've put into it for maintenance, taxes, insurance, and interest. From talking to other homeowner's, we've found this to be true across almost all homes.
Our house is pretty old, and although it had been remodeled in the few years before we purchased it, we quickly found areas of neglect that had been covered up rather than repaired. We are still in the process of finding and replacing all these areas, so our total costs of owning this home aren't anywhere close to being completely calculated, and until we are finished, we have no idea what the total cost of keeping it standing will be.
That's right, keeping it standing. We haven't even been able to spend our money on areas where we want to, like a new kitchen or bathroom remodel. We've had to do things like replace the roof that wasn't installed correctly, and replace the aging heat pump, and remediate mold because of the previous roof that leaked.
"When you rent, you are paying someone else's mortgage, plus making them rich."
I thought I wanted the "American Dream," and a key component of that dream is owning my own home. A little piece of 'Murica I get to call all my own.
It's a trap. I knew it was as I was signing the paperwork at the closing table, but I couldn't think of a way out of it. We all laugh at people for falling prey to obvious scams all the time. Yet I still allowed myself to fall prey to the most obvious, and biggest scam of them all: Homeownership. Now I'm stuck to a geographic location, and stuck to a job for the rest of my life. Thirty years is a really long time to owe money on something.
In many cases, renting is the best option.
"What about equity!?"
Home equity is a sham; in most cases. If you pay market rate for a home, you are losing money, no matter how long you keep it. Gone are the days, in most areas of the U.S, of purchasing a home and selling it for 500% more 30 years later. Kari and I looked at a waterfront house earlier this year that we really wanted to buy. The sellers purchased the home in 1980 for $80,000 but were losing it in pre-foreclosure in 2019 for $400,000. The home needed extensive work. The after repair value (ARV) would be around $500k, but would need about $200,000 to get there. So now a buyer has $600k in a $500k home. Plus taxes, insurance, landscaping, maintenance and another $100k+ remodel that will be needed to sell it in 20 years, you would have eaten up all the "equity" in that home if it sells for 20% more than the purchase price. Barring a huge market bubble, or millions in renovation/rebuild, that home will not be worth $2 million in my lifetime.
"This sounds terrible! What about those options?"
They say sometimes you have to hit rock bottom in order to realize you ever messed up in the first place. My rock bottom was a mortgage, a couple of car payments, and some consumer debt. I never got in over my head, but I wasn't moving in the financial direction I wanted to. Instead, I was fleecing myself into believing these things were making me happy. Rock bottom was realizing the things I owned were owning me, and they were delaying my real happiness: goals.
My goals are simple: 1. Make my money work for me so I don't have to have a job, and 2. Travel while spending time with my wife, family, and friends on my schedule, not my jobs schedule (vacation/sick days).
I did some math and figured out how much earlier I can reach this goal of early retirement without all my stuff holding me back. Sure, I'd eventually get there with all the nice things, but I'd be too old to enjoy retirement; or dead. I'm not putting my life on hold to obtain this lifestyle, by the way. I'm just declaring enough is enough and cutting things out of my life that are not carrying me towards my financial and life goals. We still travel, eat out often, and have fun. We've always been responsible with our money, making sure to contribute to our retirements and ensure we have money left over every paycheck so we aren't living paycheck to paycheck. But that's how employees think. Now we are thinking more like investors, and less like employees. In other words, we are thinking like wealthy people.
If you read this blog post, you know I sold the cool truck. That was one step in the right direction. Now we are halting putting any more money into the house, while we pay off our consumer debt.
What does this have to do with other housing options?
Housing is our biggest expense. Our house is old, and we got it for cheap compared to the area we live in, but what we save in mortgage payments we spend elsewhere on maintenance and general upkeep. So here are some options we were looking at:
So buying a new home was quickly struck from our list. The huge downpayment, plus the huge mortgage and additional costs just to move in made existing homes look much better to us.
That's another positive to renting: You can move any time you want! Either wait for the lease to expire, or pay the penalty and move early. It's completely up to you when you just walk away from that situation. My mortgage holder pisses me off? Too bad.
The water heater goes out in your rental? Call the landlord. You are out a few days without hot water while they work it out. My water heater goes out? I'm out a few days without hot water AND I pay well over $1,000 to have it replaced. A rental's roof leaks? Call the landlord. My roof leaked and it cost me $20,000 to have it replaced, plus a year later my bedroom is still torn apart and unusable due to the damage that insurance won't cover. So I have about $20,000 more work that needs to be done in there.
This is what rock bottom looks like, y'all.
"But paying rent is making someone else rich!" So what!? Every time you spend money you are making someone else rich. You buy groceries, you are making the grocery store owner rich. You buy a car, you just sponsored the dealership owners' next yacht. You aren't going to get rich owning a home, so why not make some rich dude pay for all the repairs to your house so you don't have to?
"So if owning a home is making me poor, and I can't get over the fact that paying rent is making someone else rich, what are those options you keep teasing me with!"
You want to get rich owning a home?
What did we decide to do?
Living on a boat has it's challenges. This is why homeownership isn't for ONE of us (hint: it's me, Aaron!). Kari loves living in a house. She loves living on a boat, too. But she loves living in the house more. For one, she has pets; 2 large dogs and a cat. And they don't get along. Also, our pets are aging, so getting the two big dogs on and off the boat for walks is going to be difficult in the coming years.
For us, the only show stopper to moving onto a boat is the pets. Moral of the story: As awesome as pets are, they keep you poor. Don't get pets. If you have them, don't be an asshole and give them away. Keep them, love them, give them a good life with comfortable beds (the expensive ones) and lots of treats, then don't replace them when they unfortunately pass away. That's Aaron Johnson's guide to pet ownership.
"Uhhhh, you still live in a house that is costing you tons of money. What is your plan to save money until you get the boat?"
Man, we really struggled with this one. I lost lots of sleep, and there were some times I was ready to just give up and accept my fate that I'd made a huge mistake buying this house, and now I would be stuck with it. But, in despair comes mans most creative achievements. In my rock bottom, I got creative and figured it out.
Step 1. Stop working on the house. We replaced the roof and the heat pump at a combined cost of about $40,000. Luckily, we have roughly $70k in equity today. Put no more money into the house, for now.
Step 2. Pay off debt. Minimize expenses, spend no more than $2,000 a year on vehicles, and pare down so we can retire on much less pay. The less monthly income we need, the quicker we can retire.
Step 3. Save, save, save. Invest in our retirement accounts, mutual funds, and index funds. Maybe even buy some real estate and become landlords. We aren't sure about that yet. Somewhere during this step, we lose our pets to old age (NOT looking forward to this. It's gonna suck). When that happens, we move on to step 4.
Step 4. Fix the house on borrowed funds, then immediately sell. Repay the borrowed funds at sale so we minimize the interest paid on repairing the house we don't even want anyway.
Step 5. Buy that boat! This could come between steps 3 and 4 if the pets live a long time and we have enough invested. We aren't trying to live the lifestyle of the rich and famous, we only want to finance our minimalistic lifestyle without the need for employment or sitting on the street corner with a cardboard sign. Although I'll sit on the corner in the Virgin Islands with a cardboard sign before I ask my employer for their permission to go on vacation when I'm 62 years old.
Step 6. Continue saving and investing until we have enough to retire early. Sail away. Spend the summers (hurricane season) in the Chesapeake Bay, and winters in the Caribbean being pirates or mermaids. I haven't decided which one I want to be. This is when Chesapeake Wanderlust will reach its peak.
Y'all are awesome! Thanks for reading, please leave some feedback in the comments. Go do something today that makes you happy!
August 10, 2019
We just made a HUGE decision. We decided to put our earned income to work for us.
What in the world does it mean to put your income to work for you?
For several years we have studied the lifestyles of couples (and singles!) who are living debt free. As with many people that are frustrated with being committed to the "norm," we started listening to Dave Ramsey. From there, we dove down a rabbit hole of information, influencers, and shining examples of people quite a bit younger than us that have made it, or are well on their way to retiring early. People are retiring as early as 35! Yes! RETIRING!
We've had our doubts, for sure! In almost every YouTube video we watched or Podcast we listened to, the people were living in vans or areas of the country, or the world, where it costs MUCH less to live than where we do. It's almost like they have zero responsibilities. As romantic and tempting all of those options sound, we can't do it! We can't live in a van because we have two large dogs and a cat. Plus, we don't want to live in a freaking van. We certainly can't move to the mountains of West Virginia and live off grid in a tiny home, or even an inexpensive real-home. As awesome as that would be, we are tied to our desk jobs in the DC area.
Other factors were equally discouraging. Not only are our housing costs higher than most of the people in this movement, although our housing costs are quite low for the area we live, we aren't making as much money as some of them. Many people desiring to retire early are business owners. Our situation is like most other peoples. We are comfortable in our jobs, and we earn enough that it would be crazy for us to leave to start a business. Unlike some of the other employed people in the early retirement world, we actually enjoy our jobs. Still, we were surprised to learn many young couples are making this work on much less income than what we earn. Despite earning less income than us, they are saving more than we are. That's where we are messing up.
So we can't use the old line, "we just don't make enough money!" We do make enough money. It's not about how much money we earn. It's about the money we SAVE. Obviously, higher earnings can directly contribute to higher savings, which in turn can contribute to an earlier retirement. But the trick to making our money work for us is to live not WITHIN our means, but well BELOW our means and save, save, save. No matter what our earnings are. THIS is how we plan to make our money work for us!
To get started making our money work for us, Kari and I followed Dave Ramsey's advice and made a budget. Let me tell you something about budgeting: It's freaking hard. Our first attempts were miserable failures. We ignored all the warnings about budgeting being difficult. Until you make that first budget, I mean a real budget, you honestly have no idea where your money is going or how difficult it really is to figure out how to track it.
For example, our first mistake was underestimating how much we were spending on things like gas for the cars and groceries. We had to guess on how much money to leave ourselves for pocket money, which many times we guessed too low. Making a budget is a lot of work. That's why successful businesses hire people specifically for that role and hold regular budget meetings. Unless you are incredibly wealthy, it doesn't make sense to hire a CPA to do your budget for you. Taxes, yes. Budget, no.
Not to sound like a Boomer (which I'm not a Boomer), don't be lazy. You just have to figure it out. This is one of the few Baby Boomer philosophies I've found that still work with the younger generations. "Don't be lazy. Grow up, work hard (on this goal), and figure it out."
Although we are still growing up and still figuring it out as we go, after a few pay cycles, we had a self sustaining budget. All of our bills are on autopay, we have a small emergency fund set up so we don't have to rely on credit cards, and we have been able to put away money for "normal" retirement and save for vacations and fun stuff.
But we still aren't financially independent. We aren't anywhere CLOSE! Being on a budget, and living within our means hasn't been enough. We've realized the secret ingredient to FIRE (Financial Independence, Retire Early), which is what we really want, is SACRIFICE. That word is in bold and caps for a reason. Dave Ramsey says it best, "If you will live like no one else, later you can live like no one else." He is telling us to make sacrifices now. Learn to NOT live within your means, but BELOW them!
We thought we had it all figured out. A few years ago we began contributing to our retirement accounts at work. We have been making payments on student loans, two cars, a mortgage, a couple of jet skis (you gotta live!), and some work we've done on the house. In addition to our retirement accounts, we've been able to contribute to a high yield money market account. If we kept this up, everything but the house would be paid off in 10 years, the house would be paid off in 15, and I might be able to retire at 55, followed by Kari a few years later. But that is relying solely on our retirements from our jobs, what we call "normal" retirement.
The problem was, the money market account and emergency fund have always been eaten away by unexpected expenses. That money is meant for investments, but a dog gets sick, then the other one. The roof needs to be replaced, the heat and air conditioning died, mold grew in our bedroom (which led to a whole host of other very expensive problems). The list goes on and on. This means we essentially have nothing in savings, outside of our retirement accounts.
Retirement accounts are useless and a pretty bad investment strategy for someone that wants to retire early, so even though we are putting money in them, we don't count that money as savings. We say it's useless because I'll be damned if I'm working until 75. That's ludicrous! I want to see the world and spend all my time with my family, not working and being dependent on a job for the rest of my life just to make payments on things that aren't getting me any closer to my goals.
Our goals for FIRE involve saving cash for easy access, investing in markets and businesses, purchasing a rental property portfolio, and maybe even starting some businesses of our own that can we can run remotely. The cash flow from all of these sources will provide us enough income to quit our jobs and live the life we want, like no one else.
We want a boat (not a yacht), and to travel the world on it. We don't want our vacations to follow someone else's schedule (I'm looking at you, jobs). We want to live on our time, not vacation time, and spend as much time together as possible. If we ever have children we don't want to miss a moment with any of them. We don't want our jobs and nice things with monthly payments telling us when we can have time with each other and travel.
So we looked at our budget again to see where we could make sacrifices to save more. 'Nice things' should have been a category in our budget. It would have made it easier for us to find the extra money we need in our savings column of the budget. The first sacrifice we made for an early retirement? The nicest nice thing we have:
I sold my one year old truck.
Last year we were seduced by a beautiful, brand new Toyota Tacoma. If you follow us on Instagram, you've probably seen it. We had heard all about the reliability and great resale value of the vehicle, but what really sold us was the leather interior, premium JVC audio with subwoofer, moonroof, power everything, and all the bells and whistles that screamed to everyone that saw it, including us, "WE ARE SUCCESSFUL!"
What other purpose does a vehicle serve? If it's flashy, the owner is successful (aka, rich), if it is practical, the owner is middle class, if it is crappy, the owner is poor. Of course none of these are true, they are all stereotypes. What is the net worth of the lawyer driving the Porsche? Most would look at him in his $1500 suit and waterfront home and assume millionaire, right? Statistically speaking, you would be very wrong to assume any real amount of accumulated wealth with that person.
One of the best books I've read is The Millionaire Next Door. This is a great book that explains the correlation between high income earners and high spenders. Cars and houses don't make you wealthy. In fact, they do the opposite and will keep you middle class forever. I don't want to be middle class forever, I want to be independently wealthy and not have to worry about a job. Getting there will take sacrifices. My sacrifice is to drive a beater for the rest of my life. Being independently wealthy doesn't mean yachts and mansions and trust funds. It means living BELOW your means!
I plan to spend about $2,000 a year on cars for now on. That includes purchasing and repairs. I came up with $2,000 based on three things: 1) it's something I've done before, so I know it's possible, 2) I don't want to ever spend any more than $2,000 a year owning a car ever again, and 3) it's a practical number for me. I consider $2,000 as below my means. $2,000 is a small enough percentage of our combined income that we can still meet our goals for FIRE. For others, it may be more or less, it all depends on your income and how quickly you want to reach your goals. I would much rather put that money towards life experiences with my wife and family, and owning a boat!
Here's the logic (or illogic, however you want to look at it) that led me to this decision.
We purchased the Tacoma in June 2018 with $5,000 down and made 12 payments of $586.45 throughout the fourteen months or so we owned it. All maintenance was included since it was under warranty, and I won't consider any other costs of ownership, like gas.
$5,000 + (12 * $586.45) = $12,037.40.
I spent over $12,000 in ONE YEAR on a CAR! Factoring in insurance, I paid another $900 for it. To me, I threw away almost $13,000. To me, I look at this and think to myself that I could have $13,000 more in my money market account than I do right now. If cars are your thing, spend your money how you want. I still have a jet ski. But I want experiences. The only experience this truck gave me was at a red light I could look at the guy next to me and think to myself, "My truck is nicer than his." This isn't the person I am, and it isn't the type of experience I'm looking for. I'm not going to lay on my death bed thinking about the cars I've owned. I'm going to lay on my death bed remembering the good times I had sailing the Chesapeake Bay with my wife and seeing the world. I'm going to think back at how crazy we were for riding a Sea Doo ALL OVER the Chesapeake Bay! That's fun, man! It's L.I.V.I.N.! Sure, I'll think about road trips, but I won't think about the car I was in.
I'm going to do some math to show my $2,000 justification for selling a new truck. I'm not any good at math, so let's say we agreed to pay $40k for it, although the final sales price was a little more.
$40,000/$2,000 = 20 years.
I would have to own the Tacoma for over 20 years, without any repair costs, to make up for spending $2,000 a year on beaters. I won't even want that truck in 20 years, even if it hasn't needed any repairs. For the future we are planning, we won't need cars. In the words of Doc from Back to the Future, "Where we're going, we don't need roads!"
A lot of new cars today are about $30,000.
$30,000/$2,000 = 15 years
$20,000/$2,000 = 10 years
$10,000/$2,000 = 5 years
Can a $10,000 car go 5 years without repairs? The more I spend on it, the longer I have to own it to make up for the $2,000 rule of thumb. In my recent search for a new vehicle, cars are very expensive. I'm not sure a 20 year old Jeep Wrangler for $10k will last another 5 years without major repairs needed.
This doesn't mean I have to spend a max of $2,000 on a car, then throw it away if it needs repairs in less than 12 months. If I can find a really good deal on a $10,000 car, you bet your ass I'll buy it. I'd rather not spend any more of my precious time working on a beater than I would mowing the lawn. But I'll work on a beater before I make the mistake of ever spending more than $2,000 a year on a car again. I'll just be stuck with the $10,000 car for a very long time.
What I haven't mentioned, yet, is that we still have a new car. Dave Ramsey acts like anyone can drive a beater, but he's wrong. Sorry, Dave. We had no need for two new cars, but we live in a rural area where public transportation and Uber don't exist, and we still make trips, both for work and pleasure, that require one reliable automobile in our household. My $2,000 a year formula actually does factor in the peace of mind of driving a reliable car. For example, in December 2017 we purchased a new Volkswagen Jetta. Here's the math on it:
Volkswagen was going through some hard times with the diesel scandal, so they were selling gas cars for dirt cheap. We got a mid-level Jetta, brand new, for $17,000. The payments are $263 a month, insurance is about $70 (which is well over $2,000 a year), no down payment. Going by my $2,000 rule, we will have to keep this car problem free for at least 10 years, which we plan to do. I don't mind extending the time we have to own the Jetta if a repair is needed that pushes us over $2,000 a year in 10 years. We drive less than average miles a year, so making this car last 10 years free of needing repairs beyond normal maintenance is possible. It's a practical car that meets all of our wants in a vehicle, so we will have no reason to get rid of it before it is completely dead and has to be sold to a junkyard.
Where's the sacrifice?
I grew up without much. My mom did a superb job with what she had. She was very resourceful and provided very well for us. But we didn't drive the nice trucks my friends parents had (I grew up in Texas), and we didn't have a nice house (we lived in a necessary house that happened to be a trailer). We did get a go-kart for Christmas one year, and motorcycles another. But they were old, and didn't run for very long. I got really good at working on small engines; I was being resourceful with what I had!
But it bothered me we didn't live like other people. Yep, we didn't live like the Jones', and I was bothered by that. So when I grew up, I worked hard to make good money. I bought a house, and I've had some nice cars over the years. I was trying to impress 16 year old Aaron and the neighbors. I was not trying to impress 30-something Aaron that is resourceful and knows better.
Now I'm 40 and behind in the retirement game. I wanted to be retired at 40. But I also wanted to make good money, own my own home, and have nice cars. I had to experience those things in order to realize they weren't what I wanted. Now I'm scrambling to fix those mistakes so I can quit my job and live the life I want.
I loved the Tacoma. I'd always wanted one. They are nice trucks, and this one was especially nice. I received compliments on it almost every day, which made it even more difficult to get rid of. Not only did I like it, I was receiving positive reinforcement from complete strangers on nearly a daily basis that THEY liked it, too.
It was fun to drive, it was convenient having a truck, especially as a homeowner. No restrictions on when to make runs to the hardware store or dump. It was comfortable. It was safe. The safety factor was another one that was hard for me to get over. Beaters are not as safe, and there is something to be said for that. It had a great stereo system, something I've always wanted in a vehicle but have never had. It had every option available on a Toyota Tacoma, except for some of the off road options offered that I would never use.
I loved driving this truck. It made me happy. It didn't break the bank for me to dish out $650 a month for it, so it made me happy that I could "afford" it. Driving with the moonroof open made me happy. Watching through the auto dimming rear view mirror as the back window opened at the touch of a button made me happy. The feel of the fancy interior made me happy. I truly enjoyed driving this truck, and now I'm driving an old Jeep Compass with the check engine light on and a broken air conditioner. Instead of playing on the water next weekend, I'm going to have to take it apart and try to remedy the check engine light so I can get it to pass emissions testing in October. But, I'm $650 closer to my goal of sailing away with my wife forever, and that makes me even happier than the Tacoma.
For now, I'll use the money from payments and insurance to help pay off other things we can't get rid of, like student loans and loans for repairs to the house. After that, we will make that money work for us. It'll go into a high interest money market account to save for our first investment property.
There's a lesson in here, what is it?
The tl;dr version: We fell in love with a new truck after driving a few beaters, bought it, realized that was stupid, sold it, driving beaters again. Will be retiring early by living BELOW our means instead of WITHIN them.
We are an adventurous couple exploring the Chesapeake Bay by boat, paddle board, jet ski, and whatever other means necessary!
Friends Of chessie
For the best in Chesapeake Bay liveaboard lifestyle and reviews on boating products, visit our good friends at Lifesaport (hint: say it out loud).