Tuesday, May 5, 2015

Update - May, 2015

It's all downhill from here.


Long term goals are not easy to accomplish, especially when you are sacrificing to achieve them.  If you love working-out or running, then reaching goals just sort of happens without any real effort because you love what your doing.  This idea fits in nicely with the saying: "Love what you do and you'll never work a day in your life".  However, reaching a long-term goal involving real sacrifice like, for example,  dieting to lose weight or, dare I say, paying off consumer debts like credit cards or mortgages is certainly a different beast.  It's easy to tire out along the way or get bored over the span of several years as you trudge along ever so slowly reaching your goal.  I know, it happened to me over the past several months since paying off rental property number two in December.  I wanted more excitement, a break from the self-sacrifice we'd been exercising over the previous twenty-four months of mortgage debt pay down.  So, what have we been doing the past four months?

Investing in the stock market


It's no secret to anyone reading this blog that I enjoy buying dividend growth companies.  During the last swoon in oil prices we bought Exxon, Shell, Conoco, Kinder Morgan, BP and BHP Billiton.
We made about a thousand dollars dabbling.  It was fun and I liked the choices over the long term, but despite our success in picking some good stocks at the right time, I just couldn't get past the guaranteed return of mortgage paydown vs. the risk of being in the equities market.  More than that, the real advantage of paying off a rental property is that not only do you get the automatic return of your interest rate savings (4.125% in this case), but you get that plus principal as cash flow, a sort of  "dividend" that comes right to your bank account month after month after month.  In this case involving the third and final rental property the amount of cash flow we'll receive in approximately one more year would look like this:

          Balance on mortgage: $63,149.10
          Principal & Interest:   $553.88 monthly or $6,646.56 annually.

How much would we have to invest in dividend paying stock in order to receive a yearly dividend income of $6,646.56?  Obviously the answer depends on the yields with which you fill your income-producing portfolio.  I'll err on the high side and use the average of the stocks we had purchased above.  After all, energy companies offer some of the richest yields available:
     
Average energy portfolio yield:  4.67%
Amount of investment dollars required to produce $6,646.56 @ 4.67% yield:  $142,324.63


What does it all mean? 


     1.  It means that I would have to invest $79,175.53 more than what I currently owe on this last 
          rental property in order to generate the same return that I can get by just buckling down and
          paying off this last mortgage over the next twelve months.


     2.  If we opted for the dividend portfolio, we would have to accept the market risks and possible
          loss of capital.


     3.  It would take considerably longer to save and invest the additional $80k and reap the full
          dividend reward of $553.88 per month.

So, as you can see, it is worthwhile to re-evaluate what you want to accomplish and when.  In our case, we still want to remove this last vestige of debt and be 100% free.  We also want to get this additional income generated as soon as possible while avoiding the market risks inherent with an equities portfolio.  That day will come, but only after we've reduced or eliminated all other controllable risks to our personal financial profile.

Where are we in May, 2015?


Well, as I mentioned in my previous post and as a result of selling the aforementioned stocks, we were able to make a large principal payment totaling $11,000 this month bringing our balance to $50,809 from $62,149.  That's a wonderful chunk of equity and get's the snowball rolling downhill a lot faster.  I can't wait to see the effect on the interest saved next month and how much additional saved interest is added to that snowball.

We're back and we're as determined as ever to see this goal to its completion.  We have some medical issues looming and those costs will cut into our ability to make some larger payments, but on average we anticipate knocking this debt down by an additional $3k to $4k per month until paid off by this time next year.

Where are we in May, 2016?


Now that's a good question!  I see us claiming the glorious title of "Financially Independent".  We will begin to build our equities portfolio and do more travelling.  WooHooo!  Since our modest house is paid off, we don't have to spend any precious passive income to pay rent or mortgage anymore.  Outside of a modest amount to cover insurance and taxes plus a bit of maintenance, we keep the rest.  That means our housing costs are and will be less than $200.00 per month.  It won't take much to support our debt-free lifestyle and the additional $553.00 per month from paying off Rental House #3 will go a long ways towards supporting our Financially Independent lifestyle.  Looks like the Summer of 2016 will be an exciting one for us.  Let's reach those goals together, shall we?