As you can surmise from the title, last week was atypical and unique. Early in the morning hours on the Saturday following Thanksgiving, my father passed away. He had been suffering from Alzheimer’s disease with some serious memory impairment for the past 2 years, but eventually got bad enough that my mom could no longer care for him at home. Physical decline accompanied his mental decline such that the last six weeks of his life, things went downhill fairly quickly. At least it wasn’t all drawn out.
If you have been reading the blog, you know that we went out and pre-paid for the funeral in order to spend down assets to help my dad qualify for medicaid while allowing my mom some money to live out the rest of her life. Her mother lived to 94, so she could have another 25 years left and is still in good health currently. Ultimately, he died before the application was even ready so it really didn’t matter, but it did open up the door for financial discussions.
Do I Have Enough Life Insurance?
Of course during these times, we always reflect and confront our own mortality so I have been looking at some of the financial aspects of my life and other aspects as well. I am pretty well convinced that I have enough life insurance. If something were to happen to me today, the amount of life insurance that I would receive would pay for the funeral, would pay off every liability (including my portion of a commercial building) plus leave enough left over that my wife could easily live for the rest of her life without working.
Passive income from the rental properties should be enough to live off without even touching the extra cash left over from life insurance. Of course assuming I survive today, my plan is to get some of that debt paid off which would make the numbers look even better. Which brings me to the next point.
I will give my parents kudos for not having any debt at all. My mom lives in a paid for condo, has two vehicles and has some cash set aside along with a death benefit that she will receive. Unfortunately, it is not all that much, but will help out. Her biggest issue is that she operated on the belief that retirement means saving what you can and living off the savings.
When we looked at her budget, it worked as long as my dad was alive. Now that he is gone and looses his pension and social security, her budget will be somewhere between $500-$1000 short per month. Looking at that kind of burn rate, she could probably make it for 15-17 years. I suppose we will need to reassess her budget at the beginning of the year after everything has settled down a bit.
But it still gets me to thinking that savings are not enough. I want some passive income.
Finding Passive Income
I am clearly not at the point where I can retire, but I also don’t want to spend the next 25 years working full-time either, especially if I might be in line for getting Alzheimer’s. I would like to be in a much better position in the next decade. That is going to involve eliminating a lot of debt. Once that is done, then I will be looking into purchasing assets that will throw off cash so I can meet expenses without having to work as hard.
Real estate and dividend stocks will be my main focus, but the first step will be to free up the cash by eliminating debt payments. I look at all the money I spend on mortgages, student loans, auto loans, credit lines, and credit cards and figure that I could be in such great shape if I wasn’t working so hard for others.
I will probably put together a little blog on debt so I can record my thoughts and keep myself accountable. Once I get it together, I will let you know, but I really want to get this debt thing under control in the next 5 years so I can start looking at slowing down. I am putting together a plan and will execute it accordingly.
Obviously, I have had plenty of other thoughts over the past week. I am glad that my dad didn’t have to suffer any longer than he did. It could have been worse. The service was nice. It was good to see all the people. And getting back to work was difficult. At least, it is a slower time of year.
Anyway, thanks for reading. Hope your December is not too crazy with the holidays. I am looking forward to another year coming up counting on the Mayans being totally wrong.
Here are the carnivals that included articles from my blogs in the past week or so:
I had to prepare a personal financial statement again for the bank that holds the loan on the commercial building that I own with a partner. Actually the bank owns it, and we are simply making payments to eventually acquire full ownership. I am not sure why they are wanting the information so soon since I completed this exercise at the end of May. Although I suppose it could have actually been for a different bank at the time since I have had several requests for the information from various banks for various reasons.
This is the only time that I bother to go through this exercise since it takes a few hours to get all the information together. That is time that I would rather be spending doing something else. But the good news is that from May 28, 2012 to September 2, 2012, my net worth increased by 18.5%. I was really rather shocked since it had only been a little over three months. The previous increase had been 28% over 6 months which I thought might have been an anomaly so I was only expecting maybe 6% at best.
Looking At the Numbers
When I look at the numbers, I realize that the increase in net worth has come from two primary reasons.
First, my total retirement account assets have increased. I have continued to save the maximum even though cash flow can be tight at times. I have always believed in paying myself first even though I have trouble doing that with net income at this point. I also receive a match so there is no way I would be passing up free money.
Second, I have been contributing more to the commercial loan than my partner so I now own a greater percentage of the commercial building and have been benefiting from the decreased mortgage balance on that and a few rental properties. I now have more equity in the real estate than I did in May so each payment that is made will simply continue to increase my net worth.
While it is nice to see net worth increasing, it does little to help the monthly cash flow and will not pay off any major debts that are coming due. Unfortunately, I will have to make some tough choices in the months ahead. I suspect that things will be getting better, but it may take to the end of 2013 before I see some major results.
At least it is good to see things headed in the right direction. I have a plan and a suspicion that the plan may just work.
I just edited an article about seven steps to get out of a personal debt crisis over at Penny Thots. I felt that it was appropriate because I just recently decided that I wanted to get incredibly serious about developing a 5 year plan for eliminating all of my debt that is costing me more than 10% interest.
Why 5 Years?
There are several reasons why I picked 5 years and will be structuring the plan in such a fashion. First of all, I am in enough debt that I know it won’t be happening overnight but I don’t want it to take 20 years either. Some of the debts will be paid off in that time frame simply by continuing to make the current payments, e.g. the Prosper loan. Others will require some additional payments.
In five years (actually 67 months), I will be facing a significant birthday and will really need to be thinking about getting everything in line for retirement before it sneaks up on me without being adequately prepared.
Finally, the youngest child will be graduating from high school in just under six years so it is expected that the house will be empty. Having extra cash and extra time would be a good thing. At that point, extra cash will be used to invest in cash producing assets that help to support my wife and me during retirement.
Why Ten Percent Interest?
I would hope that the answer speaks for itself. Making 10% annually on an investment is a decent return, especially a no-risk, tax-free investment like paying off debt. Any debt that is charging me less than that will make me think twice about possibly putting those funds that would be used for payoff into dividend paying stocks or more real estate.
Student loans and mortgages are carrying such low interest rates that it would certainly seem reasonable to continue to pay these off slowly while building an asset base.
Creating the Plan
First, I need to sit down and figure out which debts are costing me the most interest and figure out where to focus my energies. I also need to write down monthly goals and targets to see if the debt reduction plan over the next 5 years will be feasible. My gut says it is, but I want to write it down in excruciating detail. I will work on that over the next few days.
Then I want to present the plan to my wife and enlist her cooperation and commitment. I figure that I will have to include a few rewards along the way to make any sacrifice more palatable. Things like deferred items around the house and a trip might be useful for obtaining the proper level of motivation.
I feel like I have made some progress but need to really sit down, create some intensity, and then execute. It is going to be a long road, but in the end, should be well worth it. I hope update everyone next week on how it all turns out.