Welcome back! The last few posts here discussed our Financial 180 at a high level, but today I want to discuss some of the nitty gritty details. Let’s dive into this graph of our net income:
The green portion of the graph shows our annual income, and the red portion our expenses, for the years 2010 – 2016. The black line traces our net income through the years. Between 2012 and 2015, we aggressively increased our savings rate from around 8% to over 80%, and the turnaround in the direction of the black line is striking. Let’s break this down into periods of time for a more detailed analysis…
2010 – 2011: Living Paycheck To Paycheck
In these years, my wife and I were simply spending all of our money every year. We weren’t taking on substantial new debt (we already financed the house, cars, furniture, etc. by this point), but we weren’t saving anything either. We were barely staying in the green. For these years, our net worth stood still. Apparently in the United States, where we live, this is the norm.
According to CBSNews:
“38 percent of the more than 3,200 full-time workers nationwide who took part in an online survey said they sometimes live paycheck to paycheck. Another 15 percent said they usually get by this way and 23 percent said they always do, according to findings released Thursday by job-search firm CareerBuilder.”
This story from NPR is just as bleak:
“If a financial emergency struck — say, a health problem or a car that needed repair — would you be able to come up with $400? According to the Federal Reserve Board, 47 percent of Americans would have trouble doing so — they would have to sell something, borrow money or simply couldn't pay.”
Think about that for a minute. Almost half the nation is in such a delicate financial balance that they couldn’t handle a single unexpected $400 expense. This is scary, because that means Americans are spending every dime they earn. It means that a $400 unexpected expense is going to go on an interest-bearing credit card with a revolving balance, to eat up even more of the dollars that the average Joe doesn’t have! (It's quite a vicious cycle, but as I'll discuss in part two of this series, there are plenty of ways to break free, or even prevent this situation in the first place.)
2012: Negative Net Income: Living Beyond Our Means
So what’s worse than spending all of your money? Spending money you don’t even have. 2012 was one of those years for me. I got engaged to my wife, flew to the Philippines to celebrate with her family, then planned a very lovely albeit extravagant wedding with over 100 guests at the happiest place on earth.
Now let me clarify something: I don’t regret the beautiful memories we made, by any means, but I now know we could have made things just as magical for a fraction of the cost! By the end of the year, we had spent well over six figures… once again. In fact, we spent almost $20K more than we made that year. Our net worth decreased in lockstep. Time for our turnaround.
2013 – 2016: The Financial 180 Begins
In 2013, you can see things start to turn around, and by 2015, things really pick up speed. As our expenses decline, our net income climbs. What is even more impressive is the snowball this created after just a few years. Take a look at a how the value of our assets change over time:
The growth in years 2013 and 2014 are more modest, but things really move exponentially in 2015 and 2016. So much so, that by the end of 2016, our passive income contributed to gains in our net worth nearly as much our earned income. This crossover point is significant. It means that in 2017, my dollars will be working harder than I am!
Disclaimer: the markets have been doing well the past few years, and I don’t expect growth to continue at this pace forever. In fact, the current bull market has had an unusually long run, historically speaking, and stocks are probably overdue for a decline. This is a normal and healthy part of investing, and I’ll be ready to buy more when the market goes on sale.
So how were we able to increase our savings rate from 8% to over 80% during these years? We needed to take the very large, vague goal of ‘turning our finances around’ and break it down into smaller specific, achievable changes to our spending and investing. What kind of changes did we make, specifically?
Find out in Part 2… on the next Financial 180.
Interested in starting your own Financial 180? You've come to the right place. The math is easy: create a gap between what you earn, and what you spend. If you can save half your income, your working career will only be around a decade long! Want to shorten it even more? Read on to see exactly what expenses the wife and I cut from month to month. Track your progress against the milestones of FI, and gradually build up your own savings snowball. Check out the books and links in our resources section and jump-start your journey to FI. The you ten years from now will be glad you did!