Time to take stock and see what’s what for 2025 so far. With half the year over, it’s as good time as any to check your progress and make sure you are still headed in the right direction for whatever your goals are.
For the year I’ve retained $20,151.25 of free cash flow. From this free cash I’ve purchased $15,566.00 in stocks and transferred $4,000 to a High Yield Savings Account.
On top of the free cash flow that has been allocated, $12,842.00 in pre tax money has gone into the 401k through my employer. So a total retained earnings of $32,993.00 so far for the year.
No debt has been added.
As far as the more balanced approach I’ve been taking to life and money, I’d say that has been going really good. I’m like over 2 years into this new Beau and it’s been interesting to say the least. I find myself having more time for me, friends and family. Which has been pretty cool. Still no regrets for the many years of grinding, but it’s sure nice to take my foot off the gas!
I have been consistently spending what I like to call “just because” money. Sometimes when I do my monthly numbers I find myself kinda shocked how much I spent on stupid random shit.
And when I feel like my work-life balance is out of whack, I will take a few weeks off from any extra shifts and just relax. I usually take overtime only when it’s convenient and decline when it isn’t. I’ve used sick days rather than pushing through like I would have in the past. So long story short, it’s been good.
I’m 39, and next month I will turn 40. I started investing when I was the ripe age of 22. I remember going to the Meryl Lynch in Stuart, FL. to open my first IRA account. They declined my money because I didn’t have enough assets. I understood at the time. No hard feelings. But the advisor there told me that I’d have a million dollars by retirement if I started that young and kept at it. I remember thinking that’s kinda crazy and probably not feasible. Well, I’m happy to the report that the million dollar mark has been hit at 39. Needless to say, a celebratory cocktail was had. It should be noted this is just money invested in stocks. Doesn’t include real estate equity or cash.
No special formula or secrets to offer, sorry. Just had a lot of luck, kept my living expenses super cheap and Invested aggressively and consistently. And the rest took care of itself.
Our capital markets are incredible here in the U.S. and we have some of the best companies in the world that are constantly working to increase value for not only their shareholders but their customers. I simply bought into that idea with full confidence.
Hope the year is going good! Maybe next time I write I’ll be the owner of a new Lexus 😬. Keep embracing the grind. Go Dolphins! 🐬
Let’s face it. We all like to see how we stack up to those around us. It’s natural. It’s all part of the evolution of our species and a great way to learn and grow. There are some great things that can come from this. And also some bad. Depending on how the information is processed and used. If it leads to envy and jealousy it’s probably counter productive. If it leads to adjustments and change for the better, it can be highly productive.
When the topic is personal finance, which are such a taboo subject like religion and politics, most people are left in the dark when it comes to any level of comparative analysis. I view this as a very negative thing. If people knew how far behind the averages they were, it could encourage them to make necessary adjustments to ensure their later years are not destined for poverty and a diminished quality of life. Unfortunately we have no idea where we stand usually. Nor do we even know a valuable metric to use as an instrument for said comparison.
I hear people say things all the time that lack context and or relevance. For example, a statement like “oh he’s rich he or she has 10 million of assets.” This lacks so many needed inputs to assess someone’s wealth. Like, gee um what are the liabilities maybe? Or how much do they spend annually? Quite feasibly you can have 10 million of assets with 9 million of debt, be spending more than you are bringing in annually and be on your way to bankruptcy. Real talk.
It would be so useful if we had sort of a universal wealth metric. So we all know where we stand. This could be so beneficial to those with low score to make the necessary improvements and for those with great score to be able to take their collective foot off the proverbial financial gas pedal and learn to enjoy what they have accumulated. So the score can benefit everyone. It’s all about context and perspective. Two eye opening and powerful words.
So, I have formulated a metric that I use personally called my wealth score. I use it to compare myself to others of course. But mostly I use it to ensure I don’t fool myself into thinking I’m doing better than I actually am. After all if you can’t be honest with yourself then well, you’re probably screwed. People fool themselves all the time. Without knowing or realizing it they tell themselves financial lies. They transfer money to a savings account month yet run cash flow deficits bc they don’t keep track of their total spending or they contribute to a 401k but spend more then they bring in, so their savings rate is actually negative. They are growing their assets but growing their debt even faster. These are all examples of the lies we tell ourselves when it comes to money. It should come as no surprise that people feel they are treading water financially. We need to keep score.
What we need is the best tool to see where we are. One that takes into account all the relevant metrics. Assets, liabilities and cash flow. But also a metric that strips out the unnecessary fluff metrics such as your primary residence and frequent flyer miles for example. We have to get to the brass tax of what you need to know. Without further ado, here it is:
net investable assets/total spending
If this number is above 25, I’d say you are entering the financially well off level of personal finance. So what does all this mean? As I usually do, I will use my own financials to illustrate the usefulness of this score a little later. I like to look at what could be used to invest to create passive income. Obviously, my primary house would do nothing, my frequent flyer miles or American Express points would do nothing either. Vehicles would also be excluded. Although if you had one or more “secondary” vehicles that could be sold and invested, this should be potentially counted. These are all great assets, and I count them on a balance sheet as such. But if I want to create passive income, they are useless. Hopefully the difference is clear. It’s an important distinction.
For me, for the net invested assets portion of this formula I count only the equity for investment real estate, net stocks which factor in lines of credit against them, and cash. All these assets are net invested capital. So for example if I had 350k of stocks and a line of credit borrowed against them of 50k, I’d factor 300k.
Next is the spending. This is the tricky part of this formula. As I’ve mentioned in prior posts, knowing your spending is incredibly useful, yet almost nobody does it. It’s tedious to keep track of. Years ago you’d have to have spreadsheets and keep receipts. These days it’s easier. You can simply link your accounts to software and it tracks it for you. I do both. I’m extra. If one fails I have backups. The important thing is to capture all your spending. Every penny. Not just your bills. How much does your life cost essentially. Notice that I don’t factor in any personal loans or credit card balances into this formula. These would be captured in a balance sheet of course. For the purpose of this wealth score however, it would be captured in your expenses in the sense of what you pay for your required statement bill. But only what’s required. Not any extra you choose to put towards servicing the debt.
This score is in my opinion the best at capturing your situation as it is. Only what’s necessary. Stripping out the rest. My score is 49
1,484,583 / 30,114.13=49.299
Not bad. my goal is to improve this figure going forward. Which means I have to essentially grow net assets much faster than I’m growing my spending or lifestyle. And that my friends is as they say, the brass tax of it. What is your wealth score? Happy holidays and happy calculating.
I don’t know about you, but with most things in my life I am constantly scrutinizing every detail in an attempt to optimize and get more efficient.
As part of this ever evolving process, I have slowly and over time completely automated my finances. This transition happened over many years. A few automated bills here, a few there, to the point where I’ve almost become like a silent partner to my own finances. For those of you who don’t know what a silent partner means:
As humans we all enjoy reassurances that whatever we are doing is ok. For me, these reassurances keep me grounded to my true North. They remind me of the reasons for what I’m choosing to do. I call these ongoing reassurances my automated advertisements. But first let me explain what advertising is meant to do.
If you’ve ever seen the hit show Madmen, the main character Donald Draper is pitching an advertising campaign to the owners of a cigarette company called Lucky Strike. The show is based in the 60’s during a time when government regulation due to the dangers of cigarettes were having an adverse affect on cigarette companies. Draper, which all his brilliance was getting to the essence of what advertising is when he said:
Advertising is based on one thing, happiness. And you know what happiness is? It’s the smell of a new car. It’s a billboard on the side of the road that screams reassurance that whatever you are doing is ok. You, are ok.
With that in mind, I like to create my own automated advertisements. I do this by turning on every possible notification from the 25+ financial accounts I have. These act as little automated advertisements meant to reassure me that what I’m doing is working. It reinforces that the process works.
Rent checks received
Dividends received and reinvested
Net worth increased
Cash flow for the month was $…..
Bill paid in full
Some of my favorites are when Amex sends me push notifications stating my credit card statement was paid in full, as I sit at lunch overlooking the intercostal like I did yesterday with clear blue skies. There is zero room for error because it’s all done automatically. The system works if I do nothing at all.
These reassurances although small, are the reward for discipline, responsibility and being organized financially. The mundane month to month details are handled. All I do is much like a silent partner to a business would do. I check in and see how things are going. Because of this, I know that there was more cash coming in than going out, to the penny. (And by the way, I’ve just recently automated this process as well.) So therefore, there is adequate money to pay credit card statements in full and all my other bills. I don’t need to worry. This is an upper level of financial security. Being hands off. And it’s wonderful.
My money is like a well oiled machine. My job is to make sure I’m headed “basically North.” Along the way I can see my automated advertisement billboards screaming at me that what I’m doing is ok. That I’m, ok.
Unbeknownst to anyone, a shift occurred in the life of Beau Pearson for the year 2023. Dare I say it, I slowed down. I slowed wayyyy down! I burned the candle from both ends so to speak, making less money and spending more. Just saying that out loud as I write this makes me cringe. And yet..this was on purpose and just because.
Why you ask? Why purposefully spend more and make less? Well, I wanted to see what that would look like financially at the end of the year and how I would feel about it is the short answer. Would I wish I didn’t do it? Or crave more of this new found easier path? Perhaps I would want to tighten up and grind extra hard to make up for the lost productivity. So many things to consider. But I did feel it was time to pivot. After 12 years of grinding due north to strict GPS coordinates, it was time to put the boat on cruise control and simply check in from time to time to make sure I was still heading what I will call “basically North.” I wouldn’t call it burn out, but at some point there has to be a course correction. So what did I do differently and how did the chips fall at year end?
For one thing I bought a “just because” car. I didn’t need a new car. I just wanted the feel of a new one and the experience of driving around in style. Especially when I want to go for a nice night out or cruise around for pleasure. I kept my old one to use as a daily driver. Which has been working out great. Averaging well over 40 mpg in the city, it’s a perfect commuter car. Plus I’ve had it since 33k miles and I take really good care of it. So now I have two cars. I don’t like the added insurance but it’s not that much more. Anyway, cost of this new car was $35,154.62 out the door. In May of 2023
Then, around the middle of December 2022 some long term tenants I had notified me they wanted to break their lease early. They were extending their family and needed some more space. Due to this, I was going to have a dreaded vacancy smack dab in the middle of my 12 day vacation I had planned in February! Now, the old me would have surely used that time to save money by fixing and painting things myself.
The new me however, said the heck with it. I made a detailed list of 27 items with photos, called my handyman/contractor and did a walk through with him explaining what needed to be done.
Finished and ready to list
As for me, I came into work one morning shortly after and decided to take a cruise during this vacancy instead. I called Norwegian and said “I want your biggest and or newest ship for a week.” You have to understand, this would have been unthinkable not that long ago. Not only was I going to have an expensive contractor bill when I returned, I was going to spend a pretty penny for this cruise. But I was in pivot mode so, let’s go!!
Spent a week aboard the Norwegian Encore
Finally, the last change I made was just indulging and spending more freely. I didn’t just throw money away. But if I wanted something I didn’t hesitate let’s just say that. While this may be normal to my readers, certainly not normal to me. Up until this point there would have been a rigorous debate in my head if I truly needed it or if could I do without it. Or put another way, was the purchase a want or a need? Those questions still happened but I relaxed my justifications and happily purchased some things that without a doubt made my time on this earth more enjoyable, more efficient and/or just plain better. I also took the liberty of updating my wardrobe and shoes.
Taking stock of 2023, how did I do? Here is a summary of what I refer to as retained earnings for 2023:
Free Cash Flow $33,437.10
401k $24,500.00
Net Rentals $8,673.53
Total $66,610.63
So it was a pretty damn solid year. I ended up spending $7,432 more than the average over the previous 5 years. Some of this was due to inflation, but some my own doing for sure. Certainly the cruise and added auto insurance for a second vehicle played a big roll. Nonetheless, my total retained earnings for 2023 were $66,610.63. I took $6,500 of the $33,437.10 in free cash and transferred it to a Roth IRA. The remainder went to paying off the car note of which $23,418.29 was paid down. Also, I decided to build up my cash on hand. As a result, I decided to open an American Express High Yield Savings to store this excess cash, so whatever I didn’t put towards the car note I moved to the HYSA, which has an APY of 4.3%. It’s not the best interest out there but well above average. I have multiple Amex cards so it was just easy.
All the work I’ve done over the last 12 years really paid off last year. Stocks and real estate both had impressive years. My net worth climbed $263k on the back of both my stock portfolio and the equity increase in my investment real estate. My stock portfolio climbed a whopping 173k for the year. I did contribute 31k of new money to the stock portfolios between the 401k and Roth IRA. Also I had $15,142.63 of dividends reinvested. So all in all, $46,142.63 was invested in stocks taking into account new money and dividend reinvestment.
So what’s my take on the new Beau? I would say this experience was worth it. I’ll keep being a bit more loosey goosey with my monies and continue heading “basically North,” being sure to at the very least keep it between the navigational beakers.
The personal finance space is vast and overwhelming. Everyone would love to be financially secure, but where do you start? What is the secret to getting ahead? Are there a few simple action steps you can do now that pay huge dividends throughout your life? See what I did there? you’re welcome.
Much like investing my money and ultimately seeking a satisfactory return, I like action steps that require little upfront time yet provide a windfall of lifelong benefit returns. Think of this as a personal finance hack. It’s so simple yet almost nobody outside of personal finance nerds such as myself actually do it. But this is to good not to share. What is this life altering free hack? Know what you spend money on. Boom. Done. Ok ok, I’ll elaborate.
When I say “know what you spend money on” I don’t mean tell me your bills such as your mortgage, cell phone and your utility cost. Everyone knows their bills almost to the penny, and that’s good too. But the real value comes from knowing your total spend. For example, food, gas, random trips to target, gifts, travel or even random vending machine purchases etc. Every penny is key. Looking at your bills and all your discretionary spending together gives you what your total monthly expenses are. This is key. So why is this such a big deal? With this data you can answer so many questions about the past and future. Suddenly things are crystal clear. This clarity brings a sense of calm and focus. Let’s talk about the benefits.
PerspectiveIf you’ve been struggling financially, which let’s face it, a lot of people are the days, having accurate data on where your money is going helps to have perspective. You may be thinking, who the hell cares about perspective when you are broke?! Stay with me, it will be worth it. Take a second to write down what you think you spend a month on your total food costs. Not just groceries but take out, restaurants and anything else that you would classify as “food.” Then try keeping receipts for a month for all these food items. Try to be as accurate as possible. I’m willing to bet your actual spending on this category will shock you. Now let’s take it one step further and keep every single receipt for a full month on every purchase you make. Again, this number may shock you. Little mindless purchases add up to big spending over a 31 day period believe me. Once every penny is accounted for, next let’s compare it to your total take home pay for the same month. If done correctly you should have a very accurate bird’s eye view of where your money is going and what is left after all the spending has happened.
Now that you can visually see where your money went, start scrutinizing what was wasteful or excessive. If your total spend was very close to your take home pay, then this is a problem. I call this treading water. Yea you are staying afloat, but you aren’t going anywhere. And if you catch a cramp, you are toast. The title of this blog is Build The Gap. The gap meaning the difference between your income and total expenses. Some would call this free cash flow. It’s considered free because you can do whatever you like with it. If you keep track of spending accurately, then you should know your gap each month.
Now a little perspective. Spending $600 a month for a family on restaurants for an entire month may not seem excessive. Hell in todays world this may be 2-3 dinners only. But If you consistently have no gap or even negative gap, meaning more expenses than income, suddenly these dinners seem more outrageous. On the flip side if you have consistent gap, in line with your financial and lifestyle goals, then $600 is money well spent. How would you know this insight If you didn’t keep track? The answer is you wouldn’t. Operating your budget on hopes and prayers is like treading water in the middle of the ocean. Sure with the salinity in the water you may be able to stay afloat for quite a long time. You may even eventually make it to safety, but would you want to? Probably not.
I always enjoy seeing actual figures when I read peoples blogs. It’s more personal and relatable. And let’s face it it’s a natural thing for us to compare ourselves to others. This can actually be healthy in many ways. But also destructive if done for the wrong purpose. For the sake of this blog post, I’m sharing because I want to demonstrate what I would call rational exuberance and what that looks like. Use it as a benchmark for your own fanciful spending. Two rather large expenses I made in 2023 were purchasing a new car and going on a week cruise with Norwegian. The total car purchase out the door was $35,134.62 for a 2022 Camry XLE Hybrid with 15,344 miles. This was about $7,000 less than the brand new out the door figure I was getting from dealers in my area. And my cruise was $1,462.00. It should be noted that I financed 100% of the car. Reason being is despite having a 7 figure net worth I don’t keep much cash. But I do recognize with interest rates being what they are presently, the rationale for holding higher levels of cash is elevated. So I will make that adjustment going forward. That being said, I used a Line of Credit against a rental property with a teaser rate of 4.9% for 6 months to purchase the vehicle that is interest only in terms of my payment. So I have a payment of $185.92 that gets adjusted down with each payment made. So when I do my free cash flow statement each month I’m only factoring in what is required of me to pay. So the $185.92 for instance. And of course I fully expensed the entire cost of my cruise.
So where did that leave me financially?Through October of 2023, I have had a total free cash flow figure of $37,609.31 or for you monthly people, an average of $3,419.04. Keep in mind this is cash flow. I fully max out my 401k at work which is $22,500.00. But this comes out pre tax. So my free cash flow figures would be net of that. I also included in free cash flow the net income for my rental properties.
So essentially I was handed $37,609.31 to build my net worth the most intelligent way I could. What did I choose to do? Well, first I maxed out my Roth IRA. So deduct $6,500. Then I had a little debt on a HELOC from some roof replacements last year that I decided to pay off, so deduct another $10,467.00. The remainder of my free cash went to paying off the new car.
All in all, I allocated $31,000 (24,500 401k + 6,500 IRA) of retained earnings to stocks and $31,109.06 (roofs and new car) to paying off some debt. Not a bad year. And I still have a month of cash flow to go! Now, just imagine if my gap was negligible or god forbid negative. Then that car purchase would have been idiotic. Considering my situation it was not a big deal at all. This is perspective. And keeping spending and investing in the proper perspective is imperative to being financially successful.
Work Backwards let your mind wander to the future. Where would you like to be financially? Paid off house? 1 million in retirement accounts and debt free? Write it all down. Then calculate how much you need to put away each month. Work backwards. Based on your present levels of income and expenses are your goals achievable or so adjustments need to be made? If you don’t know your expenses to the penny it’s nearly impossible to plan for things like this. You are operating under the hope and prayer method.
Make More or Spend Less a cool thing about getting ahead financially is you can take many approaches. Remember, the secret sauce is your gap. The difference between what you bring in and what you spend. If you are a high earner bringing in 25k a month, and you keep your spending like you were a broke college student and you are saving and investing 22k a month or 264k a year, then you will get rich very fast assuming you do intelligent things with your gap. For me personally. I’m an average guy with average earning power and I would argue below average skills. So taking the high earner approach seemed like a reach. And I didn’t want to sit around wasting time, thinking well, if I don’t make a lot of money I can’t get ahead. Hell with that. Give yourself a raise by spending less. After all is said and done, your free cash flow is indifferent if it came from making more or spending less. It’s all the same. It’s free cash. Period.
Suppose you say to reach my goals I need to have $3,500 a month of gap. that’s 42k a year to pay off your debt and then invest. Over a period of time this will get you to your goals. Well you can sit around and wait for some huge income opportunity. And if it doesn’t come you use that as an excuse. Or, you can say ok, I’ll be a frugal badass, have a more efficient lifestyle and cut my expenses by $3,500. Your gap won’t know whether it came from more money or spending less. And I’m guessing your future self won’t care either. And an added benefit is you will have learned to get the same level of happiness on far less money. And if I’m honest, you will likely be happier as a result than you were before. Because now your gap has a purpose. It’s working for you. And that progress and growth takes on a happiness of its own.
Build The Gap 