Millionaire Interview Update 66

Today I have an update for you from a previous millionaire interview.

I’m letting three years pass from the initial interviews to the updates, so if you’ve been interviewed, I’ll be in touch. 😉

This update was submitted in December.

As usual, my questions are in bold italics and their responses follow…

OVERVIEW

How old are you?

I am 40 and my wife enjoys the fact that she is a few years my junior.

We celebrated our 6th year of marriage this fall and are nearing the anniversary of our 10th year together.

Do you have kids?

We have 3 daughters (our largest growth category since our initial interview). They are 10 months, 2 ½ and nearly 5.

Luckily all are happy/healthy, but also occasionally crazy.

They currently attend the same daycare, but we will begin school in the next few months for our oldest.

What area of the country do you live in (and urban or rural)?

Still in the same mid-west location, but we did just recently relocate across town for additional living space and preferred school districts.

Local cost of living is very low on a national scale but has undergone some major changes with post-COVID inflation.

What was your original Millionaire Interview on ESI Money?

We were interview #259 completed early 2021.

Is there anything else we should know about you?

While taking on the large-scale review for this update, it was crazy to see the magnitude of changes we have experienced. When you are in the moment (and sleep-deprived) you tend to focus on the most recent or pressing changes, and they generally feel like small steps.

Compiled, these small changes have resulted in a massive shift in our lives.

We have added 2 daughters, doubled the time we have been married, doubled our net worth, and moved.

NET WORTH

What is your current net worth and how is that different than your original interview?

Current net worth is $4M +/- 100k. Original interview $2.1M.

A fairly large portion of our portfolio is made up of rental properties with value estimates that fluctuate quite a bit, so I’ve used a conservative assessment for that component. Since our first interview, we have invested roughly equally in property and stocks and have grown each position by roughly $1M.

*Not included – our home equity, vehicles, RSU’s (unvested). We did transition our previous home to our rental portfolio this year, but the equity position in our new home is relatively similar.

What happened along the way to make these changes?

While we have worked hard, invested consistently, and lived below our means, we have also benefitted from an incredibly high growth rate (inflation) in stock and property values over the past few years. I know we could have been more aggressive in our strategy and still safely added at least $300-500k to that growth, so there were plenty of missed opportunities.

Kids, careers, and the new “post-covid” normal have changed our outlook for sure. Kids have increased our current spending and future expenses.

Careers have taken a bit of a back seat to our family goals. The past few years of inflation and increased variability in the cost of living have also moved our pre-retirement net worth targets.

What are you currently doing to maintain/grow your net worth?

There haven’t been any major changes in our process over the past few years, although we have moved away from significant additions to our rental portfolio due to the current market and interest rates. We are continuing to max our 401k and IRA contributions and invest additional capital in ETFs and dividend stocks.

Due to some unfortunate weather-related events, we have taken on some updates to a couple of the rental properties in conjunction with insurance-funded repairs. We have also been paying some additional cash toward the mortgages with higher rates.

Both of us are continuing to work as we close in on our net worth goal.

EARN

What is your job?

My wife and I continue to hold management roles in different departments of a Fortune 50 company. She has transitioned within her group to a couple of different roles in this time, and I have added some areas of responsibility within a very similar role held during the initial interview.

Both roles are taking more of our time and mental bandwidth than we would prefer, but provide a good challenge and income. Some of the added responsibilities in my role would have been great pre-kids, but now are at a scale that can seriously impact my desired work/life balance.

While exciting, multiple large capital projects and an international JV are quite time-consuming additions to an existing full-time role and are not nearly as appealing as I would have thought a few years ago. I love the challenge in theory, but with the rental business also vying for time; I don’t want to sacrifice the family time that is necessary to pursue all of these opportunities.

What is your annual income?

In an average year, our base and bonus adds up to around $400k (roughly $50k of that will be variable). In addition, our rental portfolio/management work contributes around $125k in after-tax profitability.

Dividends and interest contribute another $25-30k, but these are all reinvested automatically.

How has this changed since your last interview?

A few annual and position raises have added roughly $100k to the W2 portion of our income. Our local rental market has increased significantly and we have continued to pay down our notes resulting in higher cash flow.

I have let this position coast a bit due to time constraints, but will be optimizing over the next 18 months. It will require a bit of additional investment and significant time but should increase to roughly $200k in net cash flow.

Have you added, grown, or lost any additional sources of income besides your career?

No major changes. As Lending Club ended their P2P program, I moved those funds to iBonds, but very small overall change.

We did add to our rental portfolio, but that change is reflected in the returns from that investment category above.

SAVE

What is your annual spending and how has it changed since your interview?

A fairly dramatic upward shift in our base spending category has moved our non-tax spending from roughly $75k to $135k. In addition to the overall inflationary impact of the past 3-4 years, we have had major changes in two categories.

Child care – during our initial interview we were working from home and could manage the care of an infant with a gracious assist from my mother-in-law. Now we have three enrolled in full-time daycare.

Housing – during our first interview we were living in a home we purchased prior to marriage and benefitted from a 15-year note with a rate well below 3%. We were in the market for a new home even at that time but finally found a good option just a few days after our 3rd daughter was born.

The new house checked a lot of our boxes, but most importantly the bedrooms above grade and school district which are both factors we value for the future.

I am sure there will continue to be shifting categories of larger expenses and maybe some lulls, but it does feel like we have had a fairly steady stream of “big steps”. In the past 6 years, we have paid for our wedding/honeymoon, upgraded to “family vehicles”, a new home, and the births/early stages of raising three daughters.

Over the next 2-3 years we are targeting a substantial paydown on our mortgage which would then allow us to budget roughly $25k/year for housing. Transportation, we will finish paying off our “free” money auto loans; taking that category to $8k (budgeting for replacement).

Childcare will gradually decrease but will remain a large category for a couple more years. While we will probably decrease the overall amount, I anticipate that those funds will shift into new (but still child-focused) activities for our daughters.

As we begin to tailor our budget for post-W2 optimization, we will factor in some room for home updates, vehicle upgrades, etc, but will also need to include a big bump for (non-subsidized) healthcare. In general, we will try to align our annual budget and rental portfolio income while allowing our stock position to grow untouched.

We should have more than sufficient funding to spend beyond our baseline budget following “retirement”, but want to at least set an initial target that allows us to maintain our current lifestyle.

What happened along the way to make these changes?

More or less answered above, but while we are financially comfortable with the increases and so happy for the primary reason for the increases (kids), there is also a solid dose of lifestyle creep. We could certainly reduce some of our spending, or at least find some better efficiency, but we are valuing our time much more highly these days.

Neither of us are completely mentally comfortable with the increased spending, but we know that we have some tradeoffs in the short term on the road to leaving our careers.

We were hesitant to buy a new home for several years as we debated building. A family member is a builder locally, but the market conditions both pre and post covid have not favored building (even with those sorts of connections building isn’t prudent from a financial perspective).

Finding an existing home that checked enough boxes ended up delaying our purchase into a higher price point and higher interest rate, but still a relative win compared to building.

INVEST

What are your current investments and how have they changed over the years?

Currently, our net worth is roughly evenly balanced between our rental portfolio equity and our stock/cash position. We continue to max out our 401k (capturing company match) and IRA contributions.

Our additional stock purchases are primarily targeting EFTs such as VTI as well as a selection of dividend-paying stocks. I will also admit to attempting a bit of individual stock picking and have been fortunate to have my winners/losers net out roughly in line with the broader market over the past few years.

We have slowed our pace of acquisitions of rentals, and have instead focused on paying down debt and improvement projects. We have picked up 3 or 4 properties since our interview, but they were somewhat rare opportunities for investment property locally.

One was a home with good bones, and I was able to get a bit creative with a fairly full-scale renovation while adding both a full bathroom and bedroom. So far 2 years of solid rental income have returned 20% annually.

Our most recent purchase was in a slightly premium end of the local market but has been an interesting experience. Extreme cold weather caused a pipe burst two days after we closed, which resulted in a nearly complete renovation.

Updates were needed anyway, but would have been undertaken more slowly barring the insurance event.

The newest rental investments should push our cash flow beyond our target spending range, so our stock investing is primarily focused on capturing market growth. A small dividend-focused holding is also being built to diversify cash flow options.

What happened along the way to make these changes?

Our strategy has not changed much, just extending our timeline a bit to build in a little extra margin and account for the addition of the 4th and 5th family members.

We are trying to invest less of our time into our portfolio, but otherwise, the categories in which we invest funds have not changed significantly.

MISCELLANEOUS

What other financial challenges or opportunities have you faced since your last interview?

Rents have required more effort to collect due to the overlapping trends of increasing rent rates and the removal of rental assistance programs. This has not been overly detrimental, but is a category to monitor.

Our company stock has had both an upward run as well as a return to sanity. We have kept a responsible position, but the elevated values did present an opportunity to sell we did not fully capture.

Overall, what’s better and what’s worse since your last interview?

Our growing family has ended up being a bit bigger and arrived faster than planned, but is an amazing adventure. We love being in the financial position to not worry about providing for our daughters.

Outsized market returns and consistent savings have helped our net worth to grow well ahead of plans.

On the other hand, our time is at such a premium now that I feel like we are in the final stages of a juggling performance. During our first interview, we were casually juggling with one hand and getting ready to add another airborne item.

Now, we have too many things constantly in the air, and it feels like another could be sprung upon us at any time, so it would be nice to start simplifying life.

What are your plans for the future?

We are looking forward to moving away from our W2 obligations over the next couple of years as we solidify our cash flow/net worth targets. While our daughters are young, we would like to introduce more travel and experiences to maximize our time with them and open their eyes to the world around them at an earlier age.

We do have a small list of expenditures we would like to knock out prior to leaving a steady income to reduce some of the future lumpy spending. But, it is a careful tradeoff, and in the words of everyone suffering from “one more year” syndrome, we would like to make sure our safety margin is sufficient.

Time is the most important asset one can manage, and in hindsight, I am relatively happy with where and how mine has been spent thus far. The next 3-5 years seem likely to be some of the most important of our lives as we balance important milestones/experiences with our daughters, and completing some of the most impactful steps in our long-term financial plan.

We are looking forward to our financial position making our time our own and affording us the luxury of making family our singular focus, especially in our daughters’ formative years.

Given that you have a bit more wisdom and experience, what advice do you have these days for ESI Money readers?

I would love to say we have cracked some secret code to financial growth, but we’ve been lucky to have shifted our focus to family life since the initial interview.

Conservative and responsible financial decisions early in life have allowed us to take a more relaxed approach to our finances now that we have children.

Balance is important, but the time frame used is an interesting consideration in the work/life balance evaluation. Did we miss some fun experiences in our younger years, I’m sure we did, but in return, the time and resources we have (and will have) available to spend with our daughters are poised to significantly outshine those “missed” opportunities.