First things first
I have definitely been in a writing slump lately. After the Tubb’s Fire I had a burst of energy for writing and moving. I think this is common. The adrenaline and the rush of the entire experience. Then as the weeks have turned into months there has definitely been a level of situational depression. Some good days and some bad days. In my personal life it has led to an even closer relationship with my wife, brother, and parents. In my blogging life it has led to less reading and writing.
I told myself that 2018 would be the start of many more things. We are moving into our new rental home and out of our 700 square foot apartment in a arguable part of town (just last night I had to ask 3 cop cars to move so I could pull out of my parking spot and drive to the hospital). I will be writing more, working out more, and continuing to focus on the important things in life- family and friends (and this personal finance community).
So this is the first of hopefully many posts ranging the topics of forced minimalism and rebuilding with intent, the intricacies of home insurance, why you need to be well insured for life’s unexpected emergencies, and financial freedom.
So on to today’s post: From ashes to freedom- spending that insurance money. I chose this title because despite the sudden and traumatic loss of our home, daily routines, future plans, and implosion of our community we are finding ourselves much less financially burdened these days thanks to insurance money. Insurance itself is a long topic and one for a future post, but let’s just say that we had a lot of stuff and were well insured for that stuff. So when the fire came and turned all of our items into ashes, we came out financially ahead.
It was literally a fire sale
How can that be? We had excellent Coverage C which is personal property coverage. Our policy was for Replacement Costs which means insurance has to pay for what the item costs to replace and not the depreciated value. This is primer #1 for insurance- ALWAYS INSURE FOR REPLACEMENT COST.
Seriously go now and see what your home insurance says- are you insured for replacement costs? If not go and change it now.
Over the course of 37 years (10 together with my wife) we have managed to accumulate a bunch of stuff. Some of this was handed down to us through our parents, some was gifted through our wedding, and some we purchased. We had some high end items like antique wooden boats and old hand sewn Persian rugs. We had some cheap items like a ton of toothbrush heads and deodorants purchased at Costco. All of these items add up and at the end of the day we received more money than we could possibly spend today.
Now some of this money has been spent and some will continue to be spent. There is furniture to buy, laptops to replace, and toys for our son to enjoy. Still, since we are being intentional about our purchases, making them over the long haul, and likely never going to own as much stuff again, we come out financially ahead. So from the ashes we have earned a large sum of insurance money in the 6 figures. This provides a lot of freedom, much like winning the lottery.
Now comes the fun part…what to do with that insurance money?
By a bunch of $..t? Nope not us.
Fast forwarding our financial plan by 10 years while keeping a lot of cash on hand until we figure out how much this whole rebuilding a home is going to cost. HECK YES!!!
The first thing I did when I received the check was sit on it for a week. It was nice to see the large figure in my bank account. It is the most cash I have ever had on hand. If you include the check for rebuilding our home we were sitting on over $1.5 million.
Unfortunately the rebuilding money had to be sent to the bank to be held in escrow…It was good while it lasted, but now time to spend that personal property check.
After a week I paid off my not surprisingly large October credit card bill. Replacing clothes, computers, toiletries, kids books and toys surprisingly costs a lot. Even as we are slowly and deliberately adding things back to our lives, it is still expensive. I haven’t carried a credit card balance in a few years so this was not reducing our debt, but was just paying what we had currently spent.
THEN CAME THE FUN PART…Time to fast forward our finances…
I took a portion of it and paid off a 401K loan. When we purchased a little over a year ago we had taken out a sizable loan from our 401K. This is not something I necessarily recommend anyone doing, but we did it. It was being paid off over 3 years with 2 left to go. In one click of the mouse, I paid that bad boy off. All of a sudden I saw a double net worth bump- I took the amount due off of my debt and added that back into my 401K for a total gain of 2X! Yes it is funny math, but it works for me.
Next up- pay off my student debt. Now my student debt was still quite sizable. Let’s put it between $100 to 200k. It was low interest at 3.1% but I had always wanted to pay it off early. It stared me in the face each month. Taunting me! Holding me down.
While I never regretted taking the money out for my medical degree, I always regretted that I was not disciplined enough to pay it off quickly. 5 years out of training my plan was to pay it off over the next 10 years. By 2028. Ouch that seems like an eternity. So instead, I took that insurance money and transferred a huge chunk of cash to my loan company and slashed that debt to $0!
This left me with just my mortgage and the new 0% car loan I took out for our recently purchased Highlander. The mortgage is there for now because it is at 2.85% and likely lower than anything I will get in the current market. As we decide to rebuild, keeping the lower interest mortgage will keep me from having to take out a new higher interest rebuild loan. There still is the chance I will pay off the mortgage if rebuilding is going to take 2-3 years which some people predict.
The 0% car loan is there because…well it is 0%. I had my checkbook ready to go at the Toyota dealership, but when they offered the financing I decided to go for it. In the future I may pay this off out right, but for now it is worth keeping
Setting up my future self
The debt that has been stressing me out for the past 5 to 10 years is now a thing of the past along with all of our worldly possessions. Freedom in so many ways. This is huge.
For someone who has been thinking and talking financial independence, it is actually some seismic, tectonic plate moving event. (Okay maybe I should not make earthquake jokes after just getting through a fire and living in California!) It was like I am winning despite losing. The light at the end of the tunnel.
Now…ah now with no to low debt, I get to decide what are the next important things for me to do. So what did I do…well time to set myself up for the future. As Fritz at the Retirement Manifesto states, sometimes you have to move from Good to Great. So today we take his advice and do it.
First off was my son’s education. I always had set certain goals I wanted to meet to consider myself financially independent. One of these was funding my son’s college. So I took some money and added it to our already funded 529s.
My son now has $50,000 sitting in his 529 plans at the age of 2.5. If the rule of 7 works, this will hopefully grow to $200,000 by the time he is 17 and thinking about college. Who knows how much college will cost in 15 years. Heck it may even be free. I figure I can let this cash ride for a long time and revisit it when he is 10. (Also now that the tax plan has changed, we could use that money if needed for private education…let’s hope our public schools remain good).
On Christmas Eve I funded a Donor Advised Fund with Fidelity to the tune of $40,000. I have always donated small amounts to charity but now want to increase that donation rate. After being the recipient of many great organizations open hand and warmth, I appreciate the importance of a hot meal or a hug after such catastrophic events. Plus, by placing money into the Donor Advised Fund in 2017, I can take a tax deduction in 2017. I suspect that my itemized deductions will be much higher now than the few years coming up, so I might as well maximize them.
We are still sitting on some liquid cash. It’s not burning my pockets like liquid lava, but I am still contemplating what to do with it. We may need some to actually rebuild of our home as builders are quoting outrageous costs ($400 a square foot!). So we are gonna stash some cash until we figure this out.
Finally, I started contributing to the after-tax account at my job. I have always maxed out my traditional 401k but now am dropping an additional amount into after-tax accounts. If and when my income drops, then I can convert it into a Roth account. Not a bad deal and one of the perks of my job.
So there you have it. From the ashes comes a financial windfall and freedom. I am not financially independent but my path has advanced by 10 years easily. Debt is gone, kids college is funded, money for charity is set aside, and some is left to invest.
Not that I would wish this on anyone, but might as well take the positives with the negatives.
Here is to a great end of 2017. Be safe this weekend and may 2018 be a good year of progress for us all!
Happy New Year!