Wednesday, May 28, 2014

Budgets - Part 2 the end of the summer, I should have reached all the short term budget goals I've been working on for the past several months. The question then becomes what are my new goals? If it were up to me, getting a Tesla would be the main goal, but I think I'd have a hard time getting my wife to agree to that. Instead, I have come up with the list of goals below. I have not yet allocated specific amounts to them yet, because I won't have any exact figures to work with until my house has been refinanced and all the dust settles from all the other financial transactions that have been going on this month and last.

Master Bathroom Remodel - We remodeled part of our house two years ago and the next area we want to remodel is our master bathroom. Hopefully, the profits from my apartment investment will provide enough funds to pay for this.

Regular Savings - I need to get back to putting 15% of our income into a savings account for emergencies. We have to have some funds available for unexpected expenses or even impulse purchases. This is non-negotiable.

Appliance Replacement Fund - The death of our refrigerator last December really threw our finances into chaos. An unexpected $3,100 expense right at the holidays was not a pleasant surprise and I'd like to avoid that happening again. I plan to accumulate $3,000 in an emergency fund to be used when other appliances die. Our house is 10 years old and  some of the appliances are starting to show their age. The next one to fail I think will be our washing machine. Even if it doesn't fail, I'm thinking I might start replacing appliances anyway. Ten years is a long time and I'm sure all sorts of improvements in both performance and efficiencies have been made since I last bought the appliances so a 10 year replacement cycle might be prudent. We replaced our dishwasher 1 or 2 years ago and, of course, we just replaced our refrigerator. I think our ovens probably won't need replacing, so that leaves our washer and dryer and our second refrigerator as the remaining big ticket appliances. There is no rush to save this money and I plan to build up this fund over several months to a year.

Tesla - Last on the list, but first in my heart. As my spreadsheet shows, I should be saving at least $134 a week towards this and that's just to save the down payment in three years. It's not even taking into account saving the rest of the money I'll need to invest to cover the auto loan. Clearly, I have a long way to go and as the lowest priority goal, this one frequently gets put off when other needs arise. This is one reason why I have been particularly vigilant about funneling all "non-regular" income, such as bonuses, gifts, or online income towards this goal.

So by the end of the summer, I hope to have a budget in place for all these things. It might be a month late, because I do foresee some additional expenses looming. For example, although our cruise is paid for and it is "all-inclusive", anyone who has ever been on a cruise knows you always get a bill at the end for a bunch of stuff that wasn't included. This is usually a couple hundred dollars. We also have a trip to Las Vegas. While we usually win... Sorry... My wife usually wins. I usually lose.. Anyway, while we usually return with most or all of the money we go with, we will still need to pay for meals during the trip and possibly the room, depending on how we get comped. Plus gas for the drive out there.

If I had a Tesla, I wouldn't need to pay for gas!

Wednesday, May 21, 2014

Budgets - Part 1

If I was single and living by myself, I would be much more aggressive about saving for a Tesla. However, being married and having a child means my priorities have to change a bit. Although my wife likes the Tesla, she does not burn with white hot desire to own one like I do. So when it comes to budgeting money, compromises must be made.

Where We Were

We're just coming out of a several month period of aggressive savings and debt reduction. Towards the end of last year, we had some pretty big expenses. We took a trip to New York for Thanksgiving. Then Christmas came around, along with all the bills that entails. (For one gift, we replaced my daughter's several year old computer to the tune of several hundred dollars.) Mid-December, our refrigerator died unexpectedly and we spent $3,100 on a new one. Next month, we're taking trips to Las Vegas and a 1 week cruise to Alaska, so we were saving for those during that time as well.
In my head, I had a rough estimate of a budget and how much we spent on various things, but it wasn't until I signed up at that I realized exactly how much we were spending. For example, in March, we spent $407 on eating out at restaurants. That's pretty high and we made an effort to cut back on that. As a result, in April, we only spent $72 eating out. We spent $96 dollars on dry cleaning in February. I made some changes to try to bring that down, such as dropping our laundry off on Tuesdays, when our cleaners offers a 15% discount, instead of Mondays. I also started making a conscious decision to wear shirts that could be washed at home. As a result, in April, our dry cleaning expense dropped to $56.

Between the New York trip, Christmas, and the refrigerator, we had racked up about $5,000 in credit card bills over two different cards, with interest rates of 15.9% and 11.9%. As the saying goes, when you find yourself in a hole, the first step to getting out is to stop digging. So we cut back on pretty much all unnecessary expenditures and diverted all our extra cash to the credit cards. We normally deposit 15% of our paychecks into a savings account. Because the savings account is only paying about 0.5% interest, it made more sense to send that 15% to the credit cards for an instant return of 15.9% or 11.9%.

On top of that, I was also saving $175 a week and putting it towards the cost of our cruise and our Las Vegas trip. After all of our other expenses, such as our mortgage payment, grocery bills, and utilities, were paid, we didn't have much left over.

Where We're Heading

Those several months of austerity paid off. Our credit cards are now paid off. Our cruise has been paid for and we've reached our budgeted goal for the Las Vegas trip. I'm finally seeing the light at the end of the tunnel. I've added on one more goal - I want to have my wife's car paid off. (Mine is already paid off.) We still owe about $4,400 on that and the monthly payment is $383. By redirecting our 15% savings plus the $175 a week that was going towards the other goals towards her car loan, I estimate we'll have that paid off by the end of June.

That will free up another $383 a month. Plus the 15% plus the $175 a week. Additionally, I have a real estate investment that is due to close mid-May - although it's already been pushed back one month - and once that is closed, I plan on refinancing our mortgage. That should free up another $150 or so a month.

Big things are on the horizon. By the end of summer, I should have about $2,500 a month in freed up cash flow. The next step is deciding how to deploy that, which I'll talk about in Part 2.

Friday, May 16, 2014

The Oatmeal Tesla Comic

If you haven't seen this yet, go check it out! This is why I want a Tesla!

The love this guy has for the car makes me certain I'm going to have tough time holding out and not buying one the second I accumulate enough for a down payment.

Wednesday, May 14, 2014

Goal Progress: May 2014

At the beginning of each month, I'll post an update on my goals, including a brief discussion of any notable events that might have occurred during the previous month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

As this is the first entry, there's not much to report. The chart below shows my savings since the start of the year. I should note that, to date, all the funds I have saved have come from money outside of my or my wife's regular paychecks. So that means I've only saved money that has come to me from a couple sources: ad revenue from my blogs, income from the online classes I've published, any money received as gifts, and any bonuses I might receive from work. I actually started saving way before January, but I just chose that as the starting point for this chart.

Last update: May 1, 2014
Last value: $4,881
Percent of Goal:  4.28%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month: none.

Friday, May 9, 2014

The Calculation Spreadsheet

In order to figure out how much money I'll need to save and invest in order to have a passive income stream that covers my car payment, we need to do a bunch of calculations and there's no better place for doing a bunch of calculations than on a spreadsheet! (But don't worry. As I promised last time, there's lots of little bunnies in this post to soothe you.) Being the nice guy that I am, I've made a spreadsheet just for this task and have shared it as a Google doc. You can view a read-only copy here, but here's a screenshot:

Let's look at what this shows. First, the blue cells are data that you enter. Car price and down payment should be self-explanatory. Cell D5 is the resale value of my current car, which I will be selling when I get my new Tesla. Cell D7 is where I enter how many years I want to take to save up the down payment, which is used to calculate how much I need to save per month and per week.

Cells B15 though B17 are the various tax credits that are available to buyers of all electric cars. The Federal tax credit of $7,500 is only available until Tesla has sold a certain number of cars. In truth, by the time I buy my Telsa, this credit will likely no longer be available. The next two credits are state tax credits that Arizona, where I live, offers. Currently, Arizona has a reduced car licensing fee of $25 per year for electric vehicles. On an expensive luxury car like the Tesla, this represents a significant savings, as the tax is normally based on a percentage of the value of the car. I figure that over 5 years, this will save me $4,800. (Arizona lets you pay vehicle tax 5 years in advance, so I can license the car for 5 years for $125 total.) The last tax credit is a $75 credit that the state provides to people who install an electric vehicle charging station at their house. Note this doesn't have to be available to the public. It can be in your garage and for your use only.

Don't hide, little bunny. The math isn't that bad.
The values in cells B21 and B22 are figures for the auto loan you will be getting. The interest rate I used might be slightly lower than what someone else might be able to obtain because I work for a credit union and get an employee discount. The values in these cells are used to calculate the monthly loan payment figure given in cell B25. This calculation assumes you will be putting all the money you get from selling your old car (D5) towards the purchase of the Tesla.

Moving back to the top right portion of the spreadsheet, you'll see cells G3 and G4, where you can enter your yearly gasoline and oil change costs. I've been tracking my expenses using for some time now, so these are my actual expenditures for 2013. My current car is a Prius, which gets between 48 and 52 miles per gallon, so my gas expenses are probably lower than someone who has a gas-only car. The oil change cost shown actually includes all service-related costs, not just oil changes. This is a valid value to use in the calculations because not only does the Tesla not need oil changes, it also does not need tune-ups, spark plugs, air filters, timing belts, etc. Basically the only service costs a Tesla will have are the costs for tire rotation and balancing. And most places that sell tires will provide free rotations.

Cell G8 was used in the past to include the "Ranger Service" option from Tesla, which was basically a roadside assistance plan on steriods. If anything went wrong with the car, they would come out to you, give you a loaner vehicle, and take your car back to the shop for repairs and repair it for free. This used to cost $600 per year, but it is now included in the purchase price of the Model S.

Cell G9 is the cost for the electricity used to charge the car. This is based on $5 per 230 miles and 15,000 miles per year, which is what was referenced in the web article that the text in the spreadsheet links to. This does not include the free charges you can get on trips by using Tesla's network of SuperCharger stations. Use of this is free with the purchase of the car (or at least, with the version of the car I want), so in actuality, my electricity cost might be lower.

Cells G11 and G12 take gas and oil costs and the electricity costs and show you how much money you will save per year and per month by switching to a Tesla.
Almost done, I promise!

Cell G18 is where we enter the rate of return of our passive investment. Using this, the spreadsheet calculates how much money we need to invest at this interest rate to generate a monthly return equal to the loan monthly payment in cell B25. This amount is shown in cell G19.

And finally, the last two cells of the spreadsheet, show the total amount of money you need in order to buy the car. Cell G26 shows how much you need to buy the car using just a loan and no passive investment. In this case, I'd need just over $19,000. Cell G27 tells me that, in order to buy the car with only the downpayment and the money from selling my old car, I'd need $113,925. Of that, $94,571 (cell G19) needs to be invested at 9%, which will cover the auto loan payment. The remainder goes towards the purchase of the Tesla.

So this tells me that I actually need to save MORE than the price of the car in order to be able to purchase it and not have any payments. Some of you might say "Why not just save $96,770 and buy the car?" Remember what makes passive income so magical: once my car loan is paid off, I'll have both the car AND the $94,571 and it will still be creating income for me! So in effect, I'll have purchased a $100,000 car for only about $35,000 - my down payment and whatever I sell my old car for!
We made it!

And We're Off!! I've created this blog to track my progress towards my goal of owning a Tesla Model S. I'm doing things a bit differently than most people, however. Most people would save up enough for a down payment on the car or perhaps even the total cost of the car, then go out and buy it. Not me.

I've been investing in real estate for over a decade and one of the most important things I've learned from that is the power of passive income. For the purpose of this blog, I will define passive income as income you receive from invested money. It's money that your money earns, not you. The example most people are familiar with is interest earned from money in a bank account. Other examples are income from a rental property, interest payments made to you on a loan you made, and dividends from stocks. These are all instances where your money earns more money for you. You get that money whether or not you are working, on vacation, sleeping, or whatever. It's completely passive on your part.

There are many ways to get rich. One of those is to buy assets that generate passive income. If you do this long enough, you'll eventually accumulate enough assets so that the passive income they generate will exceed your living expenses. At that point, you no longer have to work for income, which is most people's definition of "rich."

The Tesla Model S is an expensive car. As of this writing, the version I want with the options I want lists for $96,770. That's a big chunk of change. If I had that money sitting in a bank account, I could buy the car. But everyone knows what happens to the value of a car over time - it drops. So by buying the car outright, I've traded a huge lump of cash, which I could use to generate income, for an asset that will go down in value as time goes on. Even if I took out a loan to purchase the car, I'm still spending money that I earned (non-passive income) on something that will decrease in value. This is Not Smart.

Instead, I want to use investment income to pay for the car. There is some amount of money that, when invested, will generate monthly income equal to or greater than the amount of an auto loan payment. All I need to do is collect my investment income each month, then send it in as my auto loan payment. No net money out of my pocket! As a bonus, I can make the car payments whether or not I have a job. But the best part of this is that after the car loan has been paid off, I'll have BOTH the car and the lump of money I have invested! Score!

The trick to performing this financial magic is finding an investment that provides you with a high enough consistent rate of return and that is also safe enough so that your principle is not lost. Let's look at a couple of options:

  • Savings Accounts: If you've checked your bank statement lately, you've probably noticed banks are paying virtually nothing in interest right now. Currently, a 5 year $100,000 certificate of deposit, typically the highest paying savings vehicle a bank or credit union offers, is only paying 1.2% interest. That means if you invest $100,000, you'll get paid $100 per month in interest. If you figure your car payment will be around $700 a month, you'll need to invest $700,000 to cover that payment. Clearly, this is not the way to go.

  • Dividends from stock: Many publicly traded companies pay dividends to their shareholders. Looking at the top dividend paying stocks in the Dow Jones Industrial Average (as of the day I'm writing this), AT&T is currently the highest paying one with a dividend yield of 5.15%. The dividend yield of a stock is defined as the yearly dividend amount paid per share divided by the price per share of the stock. For example, AT&T is currently paying a $1.84 dividend and the stock price is currently $35.76. So 1.84 / 35.76 = 0.51454, or 5.15%. But there are some problems with this. First of all, companies are under no obligation to pay out a dividend. They may decide to reduce their dividend or cancel it altogether. The dividend yield is also dependent on the company's share price. So if you bought some AT&T stock today at $35.76, your money would be earning 5.15% interest. But suppose 6 months from now, AT&T is trading at $42. Now, the dividend yield, assuming the actual dividend amount remains at $1.84, drops to 4.4%. And let's not forget you have to pay commissions whenever you buy or sell a stock. If you are trying to save money over an extended period and you make frequent purchases of stock, your commission costs will likely eat up any profits you might get from dividends. Furthermore, the changing stock price will make it very difficult to earn a consistent rate of return. So this isn't the best option either.

  • Real estate: This is, in my opinion, the way to go. Perhaps this isn't surprising since I've been investing in real estate for so long. In this case, I'm not talking about renting property, but rather hard money lending. I've done over 30 hard money loans and am still doing them. I receive a 9% return on my investment with these loans and they are secured by real estate (meaning I'm listed on the mortgage as a lender and I can foreclose on the property should the borrower not pay). I'm not going to go into all the details of hard money lending here (after all, I've been blogging about that for 10 years here), but suffice it to say that I believe this represents a safe, dependable, high value passive income stream.
So now that I've determined what type of investment I'm going to use, I need to figure out how much I need to invest. I'll go over how I did that in my next post. Warning: there will be math. But I'll also include some bunnies, so it won't be too scary.