Our Baby Step Update – Baby Steps 2 & 3 Complete!

Back in February, I mentioned how we would be done with Baby Step 3 by April. Turns out, I was about 3 months off.

The remodel cost more and took longer than anticipated – of course. And we didn’t secure tenants until mid-June, which means we had to cover all the overhead costs (mortgage, property tax, insurance, HOA) for a total of 7 months!

Once we got the first month’s check and security deposit from our tenants, the first thing we did was pay off my husband’s car loan. Baby Step 2 complete!

The rest of the money went to our emergency fund. Dave (and every other financial professional in the industry) says your emergency fund should be 3-6 months worth of expenses. We’re planning to save only 3 month’s worth for two reasons:

  1. We have HELOC that has an interest rate of prime + .25 percent. The prime rate is set by the Fed and it’s currently 4.25%, which means our interest rate on the HELOC is currently 4.5%. Since interest rates are likely to continue going up, we want to pay down the HELOC as fast as possible.
  2. My husband and I have pretty stable jobs that are salary based. Since the timing and amount of income we receive is fairly predictable, having extra cushion in our emergency fund takes second priority over paying down the HELOC.

We thought it would take us a few months to build up our emergency fund but now that I have my term life insurance in place, I decided to cash out a whole life insurance policy that my mom purchased for me when I was four. [Parents, please DO NOT buy life insurance for your young children. Life insurance is meant for replacing income that would be lost if something happened to the person insured and as far as I know, four year olds aren’t bringing home the bacon. And if you’re going to buy life insurance, please stay away from permanent policies (variable, universal and especially whole life)!] By cashing out my whole life insurance policy and applying the accumulated savings to our emergency fund, Baby Step 3 is now complete!

Now we’ll be tackling Baby Step 4 & 6. (We’re skipping Baby Step 5 because we don’t have any kids yet!)

Baby Step 4 is saving 15 percent of your gross income into your retirement account. We won’t be saving the full 15 percent because we still want to pay down that HELOC as soon as possible. But that could take a couple of years and I don’t want us to miss out completely on all that compounding interest in the meantime.

Once the HELOC is paid off, saving the full 15 percent into retirement accounts will then take priority over paying extra principal on our three mortgages, which is Baby Step 6.

Getting Term Life Insurance – Step by Step

Once we found renters for our condo, the next item on our list of financial to-dos was getting life insurance.

Here are the steps we went through:

  1. Contacted a life insurance broker and told him what kind of policy we wanted to buy (30 year term with death benefits that were 10 to 12 times our income). We chose 30 years instead of 20 because we don’t have any kids yet but plan to within the next few years and we wanted the insurance to last until our kids were all out of college and all the mortgages were paid off.
  2. Our broker sent us some estimates from different insurance companies and we picked the company with the lowest annual premium.
  3. Once we made our decision, our broker sent us a series of questions to answer (full names, home address, Social Security numbers, etc.)
  4. He then prepared an application for us to sign with some additional questions for us to answer. We signed and returned the application back to him.
  5. Shortly after, a medical examiner called us to schedule an appointment for our medical exams. Your medical exam determines your health class and your health class determines your annual premium. The better your health class, the lower your premium. We scheduled the medical exam for a Saturday morning.
  6. About 10 days after the medical exam, our broker let us know that my application was approved and what health rating I was in. My husband’s application is still pending because they’re waiting on medical records from his doctors.
  7. After I was approved, our broker sent me the official policy to sign. I returned the signed documents along with a check for the first premium payment.
  8. The check was deposited and my life insurance policy is now active.

 

Buying a Condo in Los Angeles for Under Market Value

We bought our condo in Los Angeles for under market value thanks to preparation and luck.

By the time I stumbled upon the listing on Redfin, a buyer was already in escrow but the seller was taking back-up offers. We submitted a back-up offer but was quickly outbid. We pretty much gave up on this property right away. But a month later, my mom saw that it was relisted because the first and second buyer both fell out of escrow. We immediately contacted the seller’s agent to find out why and it was because the previous buyers had issues with the property during inspection. We were willing to accept those issues as long as we could get it for a good price. We submitted a really low offer and at first, the seller was hesitant to even negotiate with us. But because it had been on the market for several months and she already had 2 buyers back out, we ended up agreeing on a price about halfway between our offer and the listing price.

Below is a timeline of how everything played out. Feel free to skip to the end for some final thoughts.

August 16, 2016 (my birthday!) – Saw the property on Redfin.

August 29, 2016 – Found out that the seller had already received an offer but is accepting back-up offers. We submitted an offer a little higher than listing price but was outbid.

September 29, 2016 – My mom informs me that the property has been relisted.

October 2, 2016 – Found out why it was relisted. First and second buyer changed their minds for different reasons but they both offered way above listing price. The first buyer offered $54,000 above listing price. The Second buyer offered $26,000 above listing price.

October 3, 2016 – Submitted our first offer ($39,000 under listing price).

October 6, 2016 – Received the seller’s first counter offer ($6,000 under listing price); sent our counter offer ($19,000 under listing price).

October 7, 2016 – Accepted the seller’s second counter offer ($12,500 under listing price).

October 10, 2016 – Opened 45 day escrow.

October 31, 2016 – After the inspection, the seller decided to lower the purchase price even more instead of paying for the repairs. So the final purchase price ended up being $25,000 under listing price.

November 22, 2016 – Closed escrow.

Final thoughts:

The listing price was already under market value because the seller was betting on a bidding war. Today, the property is worth about $84,000 more than what we purchased it for. But this estimate is without taking into consideration the complete remodel that we’ve done.

We got lucky because my mom happened to see that the property was relisted and told us right away. Preparation was important because we had all our paperwork ready to go and were able to move quickly. Even if we got lucky with the timing, if we weren’t prepared to move forward right away, the seller probably would’ve moved on to another buyer. But because we had everything ready, the seller could see that we were serious buyers and there was a very good chance this escrow would go through.

So if you’re in Los Angeles (or any major city) and buying a house for “a good deal” seems pretty much impossible, I just want to encourage you to be patient. Keep looking and stay on top of all the listings, even the ones in escrow. Have all your paperwork ready and make sure your real estate agent and lender are also ready to go at a moment’s notice. In the meantime, pile on the savings. You can never have too much savings. There’s probably going to be repairs needed, closing costs, remodeling costs, etc. so it helps to have a bunch of cash ready to go. And if you happen to buy a move-in ready home, you could use that cash for a bigger down payment or maybe even to buy your property completely debt free :)!

Dave Ramsey’s 7 Baby Steps

I was first introduced to Dave Ramsey in 2009, when I was still in college. My roommate at the time let me borrow her copy of The Total Money Makeover. Even though I had always been an avid saver and didn’t have any credit card debt, I wanted to learn more about money.

I didn’t retain a lot of the information I read at the time, but I remember agreeing with most of Dave’s principles. The book also helped me realize the importance of giving, which I had never thought much about before.

After reading that book, I didn’t think about Dave Ramsey or his 7 Baby Steps again until very recently.

At the end of the last year, my husband and I bought our third rental property. And when I finally filled out a net worth statement and realized just how much debt we had once we combined all three mortgages (plus a HELOC), it was a rude awakening to say the least.

Even though our net worth is still very much positive thanks to increasing home values, we don’t like having so much debt, or any debt, to be honest.

So shortly after we opened escrow, we started listening to The Dave Ramsey Show every day. Listening to all the Debt Free Screams has inspired us to finally take his 7 Baby Steps seriously and make a plan.

We are technically in Baby Step 2 because we have small car loan. But we should be able to jump to Baby Step 4 & 6 within the next 2 months (we’re skipping Baby Step 5 because don’t have kids yet) and here’s why:

Even though we have the cash to pay off the car, we are in the middle of a major home remodel for the new rental property we just bought. And since home remodels often come with expensive surprises (like suddenly all the pipes need to be replaced!), we want to have enough cash on hand to cover any of those surprises, rather than resort to borrowing more money.

Once the home remodel is compete, we should have enough cash remaining to pay off the car (Baby Step 2) and have a 3-6 month emergency fund in place (Baby Step 3).

My husband and I are currently saving about 10% of our gross income into our 401(k)s but as soon as the home remodel is done, we will bump it up to 15% (Baby Step 4). We will also be redoing our budget to make sure we can pay extra principle on our mortgages & HELOC to get out of debt faster (Baby Step 6).

Based off our current income and expenses, we are projected to be in Baby Step 6 for over 25 years (yikes!). But by reducing our expenses immediately and increasing our incomes over time, our goal is to get out of Baby Step 6 in 15 years or less. The average family takes 5-7 years to finished Baby Step 6 but since we have 3 rental properties, 15 years might be more realistic.

If all goes well, we should be financially independent the same time we pay off our last mortgage.

I know things won’t work out this way exactly because, you know, life happens. But that’s our plan and if we’re delayed by a few years, we would still be out of debt a heck of a lot sooner than if we had no plan at all.

Lessons Learned from Filing My 2013 Tax Return

The following post was drafted back in October but never published because it needed editing, which I didn’t get to till now…

***

I filed my 2013 tax return today.

The 24 hours leading up to me going to the post office was very dramatic and overwhelming.  I’ll spare you the details and just get to the lessons I learned:

1.  Your Tax Return is YOUR Responsibility

Ever since I started working and paying taxes, I relied on my mom to do my taxes for me.  She would get together with our CPA for a day or two and all I had to do was sign the bottom of my 1040 once it was complete.  This year was different.  In April, when tax returns were due, my mom was busy preparing for an out-of-country trip and didn’t have time to get it done so we filed for an extension.  Long story short, my tax return wasn’t ready until this morning, the LAST day of the extension.  I’m not a last minute person so I was in a panicked mess these last 2 days.  I wanted to blame my CPA for all the mistakes that were made/overlooked.  I wanted to blame my mom for not getting together with him sooner.  But at the end of the day, my tax return is ultimately my responsibility and I could’ve been more proactive and taken the time to get all the documents together myself.

2.  Save Your Tax Documents As You Go

When my coworker pointed out all the deductions that were missed, I scrambled to find all the necessary paper work to fill in those gaps: receipts, bank statements, etc.  If I had saved those documents as they were accrued, it would have saved me so much time and hassle.

3.  IRA & 401k Contribution Deadlines

Sadly, I realized on April 16th that you have to make your IRA contributions by April 15th to count for the previous tax year.  So in order for my IRA contribution to count towards my 2013 tax return, I had to have made the contribution by April 15th of 2014.  Just because you can file for an extension to complete your tax return, it does NOT mean you can get an extension on your contribution deadline.  I missed out on a key opportunity to lower my taxes.

4.  Make Sure You Are Withholding Enough

I wasn’t withholding enough of my paycheck and was slapped with a bunch of penalties, fees and interest.  You can estimate if you’re withholding enough using this calculator.

***

I started working on my 2014 tax return a few weeks ago and feel much more prepared this time around!

2015 Financial Goals

I wanted to write and publish this post before the new year began but failed, obviously.  You’d think that being the avid list-maker and goal-oriented person that I am, this post would’ve been one of the quickest and easiest for me to write.  Au contraire!  I’ve been drafting and redrafting this post for a week!

My writers block is most likely caused by the fact that I don’t have anything to cross off my financial “to-do list” at the moment.  I don’t have any consumer debt or student loans to pay off.  I don’t have any major purchases lined up.  And since I’ve been saving for retirement, I can’t say this is the year I’m finally going to start.

After mulling over this for a few days, I’ve decided that my financial goals for 2015 will be adjustments to how I’m already spending/saving.  For example, I’ve increased the amount of money I give to church and my mom every month and plan on sticking to this new amount for the rest of the year.  I’ve also increased the amount that gets taken out of each paycheck for my Roth 401k.  An expense I’m aiming to decrease this year is the amount I spend on work lunches.  I learned the hard way (read: painful stomach aches from lack of fresh food) that my “solution” for saving money on work lunches isn’t much of a solution at all.

What about you?  Have you figured out your financial goals for 2015?

Finding Out My CFP® Exam Results

My friend took her CFP® exam a few weeks ago and told me her preliminary results that day.  When she told me her results, it really brought me back to when I found out my results.  My experience was completely different from my friend’s because I took the exam before the change.  When I took it, the exam was 2 days, 10 hours total.  Everyone took it with a good old fashion #2 pencil and paper (the thin, grey, newspaper-y kind).  Our results got posted online FIVE weeks later.  The wait was painful and liberating at the same time.  Ignorance is bliss, right?  Nowadays, the exam is taken online and you’re done in 6 hours.  Immediately after, you get your preliminary results followed by your final results a few weeks later.

A coworker and I both took the March exam this year.  It was a second attempt for both of us.  Taking the exam with your coworker could be the best thing ever or the worst thing ever, for obvious reasons.  If you both pass, it’s double the celebration!  If you both fail, well, misery loves company.  The worst, of course, would be if one of you passed and the other one failed.  Our results were scheduled to come out on a Friday morning.  My coworker and I agreed in advance that we wouldn’t check it that morning and we would, instead, wait until the weekend.  (Both of us have experienced, on separate occasions, the pain of finding out we didn’t pass and having total breakdowns in front of our colleagues.  For me, it was the first and only time most of my coworkers have seen me cry.)

The Thursday before our results were supposed to come out, we woke up to an email saying that the results have already been posted.  We texted one another and confirmed that we still weren’t going to check until the weekend.  Thirty minutes later, I walk into the office and as I pass by her desk, I see she has this smirk on her face.  I was like, “what?!”  She squealed, “I PASSED!!!”  Apparently, her roommate knew her account login and password and checked it for her.  And when her roommate saw that my coworker had passed, she called to give her the good news.  Suddenly, all eyes were on me.  Literally.  I had maybe 5 or 6 colleagues staring at me wide-eyed asking, “Are you going to check?!”  No pressure.

I went back and forth between checking it right away and waiting till the weekend.  But finally I was like, “Screw it!  Everyone at the office already knows the results are out and that my coworker passed.  Might as well put everyone (including myself) out of their misery.”  So my coworker grabbed a laptop and we went into a bathroom stall.  (It was the only way we could get some privacy.)

I logged into my CFP account and got to the last button standing in between me and my results.  A sudden wave of panic washed over me and I couldn’t bring myself to click the button.  What if I didn’t pass?  WHAT IF I DIDN’T PASS?! was all I kept saying to my coworker over and over again.  Finally, I handed the laptop to my coworker and asked her to click the last button for me while I sat across from her with my eyes closed, knees pulled up to my chest and hands covering my face.  Yes, it was THAT dramatic for me.

I heard a click.  Then silence.  Then, “AHHHHHHHHHH!!!!!  YOU PASSED!!!!!”

We hugged; we cried; we laughed.  It was glorious.  The entire office celebrated with us over ice cream.

I think that day will go down as not only one of the best days of 2014, but also one of the best days of my life.  Because honestly, passing was a huge struggle for me.  And it was so rewarding to finally see all that hard work pay off.