Since we’ve been debt free, living a mortgage-free life, how we manage our money has changed.
It’s kind of hard to believe it, but not long ago, we were a financial mess. Today, we reflect on how grateful we are for how far we’ve come and how we only one milestone away from completing this journey.
Life is simpler now that we have the luxury to focus on the art that is wealth building for financial independence. Reading personal finance books from authors like Kiyosaki, is the reason we’ve been able to come so far so quickly, so we’ll have to step it up a notch.
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On one hand, we could focus on saving cash for future investments in real estate or business. On the other hand, we could go all in on tax-deferred and tax-advantaged retirement accounts by doubling down on index funds.
Or I guess we could try both, which is something we’re entertaining.
In the meantime, here’s how we’re managing our money today…
Update: Since the last post on how we manage our money, we’ve had to make some changes because Garrett quit his job to work with me full time on DIY Marketing. (Yes, we’re now both entrepreneurs!) Managing cashflow for a business is a bear, so how we manage our money is going to change over time.
How We Earn Money
Garrett has a W-2 job in sales, so he earns a salary and commission. We rely on Garrett’s salary each month to pay our bills.
We work full time in our marketing business, which pays a salary.
How We Used to Earn Extra Money
When we started paying off debt, I had a full-time job and we had an online side hustle in digital marketing, which helped us crush our credit card debt in 2015. I’ve since transitioned our side hustle into an agency that I run on a full-time basis — exciting times!
Garrett had a W-2 job in sales, but now he works with me in the biz.
Future Income Sources
We might purchase a mobile (manufactured) home park in the future. All of our current income sources require some activity, so they are active income sources. A manufactured home park could serve as a source of passive income to supplement our active income, but the jury is still out on whether or not we take on debt to acquire this asset.
Update: We’ve decided not to pursue real estate; instead, we’re dividend investing for passive income by way of a taxable brokerage account.
Where Our Money Lives
This was most challenging for us to figure out when we paid off our debt. We kept it simple when we were in debt with one checking account and one savings account; we focused on using every dollar for our debt while also NOT overdrafting our checking account. Today, it’s a little more complicated…
Checking Account (x1)
We have a checking account at a local bank. Call me old-fashioned, but I like being able to walk to the branch to deposit checks on occasion.
We aim for a small buffer in our checking account, enough to cover bills that are debited from our account via ACH. The rest of what’s left each month goes to a savings account.
We write very few paper checks. Our checking account register (also paper) indicates that probably 80% of the paper checks are written for medical bills. There are far too many errors in medical billing for me to feel comfortable automating this.
Savings Accounts (x2)
We have two savings accounts: one at our local bank and one with an online bank.
We use our local bank’s savings account to save for the “escrow.” Since we don’t have a mortgage, we set aside money each month to pay property taxes and home insurance; the money required for these expenses sits in this local savings account. At a laughable 0.03% APR, there is little incentive to save more than we need in this account.
After much debate regarding our emergency fund, like how much to save and where to save it, we decided to sign up for an account with an online bank, which has an APR of 1.9% (at the moment). Not bad for a savings account.
Where Our Money Grows
Again, another challenge in post-debt life, which I’m truly, truly thankful for. 🙂
401(k) (x1) Garrett’s employer offers a 401(k) with a company match. He contributes enough each pay period so that by the end of the year, he’ll have contributed the IRS max of $18,000 — first time ever! Making the switch to max out this contribution means less cash, which just means we have to pay even closer attention to our household budget. Garrett invests in a target date fund.
SEP IRA (x2)
Since we’re self-employed, we rolled our tax-deferred retirement accounts into SEP IRAs with Vanguard (VTSAX, FTW).
For our contributions, we set aside the IRS max of 25% of my income; however, it doesn’t go to Vanguard (yet). There is a lot of complicated stuff associated with making SEP IRA contributions that I don’t understand. Thankfully, our accountant does. When our accountant prepares our taxes, he advises us on exactly how much we’re actually able to contribute to the SEP IRA. In the meantime, the money sits in a high-interest savings account with Ally until spring.
Joint Taxable Brokerage Account
With our emergency fund fully funded, we’ve started dividend investing via a taxable brokerage account. Half of what we earn each month gets transferred into this account where we buy VYM shares.
Where Our Money Isn’t
Here’s what we’ve stopped doing (or haven’t started).
We paid off all of our debt. Since we were in debt our entire adult lives, this is a refreshing change of pace that gave us the ability to start paying our future selves instead of our past selves.
I sheepishly admit that we did not fully understand how the Roth IRA worked until early 2017. Money in a Roth IRA “grows tax free” didn’t really mean anything to me until I looked into what will happen with our 401(k) and SEP IRA contributions upon retirement — we end up paying taxes on all the money…contributions AND growth. Yikes!
Let’s say that our retirement accounts grow to $1 million dollars. We’ll have to pay taxes on $1 million dollars, but only as we draw from those accounts. But that’s crazy in light of what the Roth IRA offers. If you had the choice between paying taxes on $1 million dollar and NOT paying taxes on $1 million dollars, what would you do? And that, my friends, took me 13 years to understand.
With all that said, we’re still not contributing to a Roth IRA. In the future, our income will decline and we plan to leverage the Roth conversion ladder to convert our tax-deferred investments into tax-advantaged investments, but not for years to come.
How We Manage Our Monthly Cash Flow
Fortunately, 80% of our finances are automated, so it’s something we don’t have to think about daily like we used to. Again, so very, very thankful. 🙂
“Pay yourself first!” When Garrett is paid, his employer deducts the 401(k) contribution and puts it to his retirement account. That was easy.
For my SEP IRA contributions, we transfer money from checking to our online savings account. In the spring, I can execute a transfer to Vanguard.
We used to budget with Mint.com, but now we budget money with BB&T U because we have a checking account with BB&T. We continue to budget spending each month. We use a zero-based budgeting system, so we track every dollar and give every dollar a job. We have all of our accounts tied to Mint.com, which makes zero-based budgeting easier; we’re always on top of our account balances, upcoming bills, etc.
We buy groceries, gas, and pay most of our bills with the Amazon Rewards Visa. We make online payments on this card every two weeks to ensure that we never, ever pay credit card interest. What I love most about the Amazon Rewards Visa is the cash back we earn, which pays for some of the stuff we regularly buy from Amazon.
Once we’re sure all of our bills are paid and that all checks have cleared, we move money from checking to one of our savings accounts, depending on which account needs topped up (if any). If our accounts don’t need to be topped up, we put the money to our taxable brokerage accounts.
The Lesson I Learned in Changing How We Manage Money
This was NOT the plan we had originally outlined. In our first version of this post, we prioritized saving over investing so that investing was at the bottom of the list. Yikes!
In the second version of this plan, we thought we could do it all and that we needed to do it all each month. However, we have profit at the end of the year to distribute that can help us replenish those savings accounts that don’t make us much money.
In the latest version of this plan, we invest half of what we pay ourselves from the biz — no more, no less.
I think we focused on saving money first because we still have a scarcity mindset, but I’m thinking that because of our self-reflection resulting in an immediate change to our plan shows that we’re moving toward an abundance mindset.