It’s time to meet three households from Net Worthy Land!
Megan is in her second year of a thriving pediatric practice at a Boston medical clinic. Her substantial MD salary has allowed her to easily qualify for a townhouse in a newly redeveloped downtown neighborhood, and a brand new mid-level luxury car.
Nick is a freelance coder, with several years experience, living - well, wherever he wants to. That’s right, he’s a genuine digital nomad, roaming the country, living in and working from a used, highly customized RV - which isn’t quite paid for yet.
Audrey and Dominic are a married couple, with three children all under 5, living in suburban San Antonio. Audrey has a supervisory position at a credit union headquarters office. Dominic had been in construction, but for now is a stay-at-home dad.
Before we go on, take a minute to notice whether you’ve already started jumping to some conclusions about these three households’ financial states. So far, I’ve only provided you with just a bare, few details - and not a single financial statistic. But if you’re like most people, you’ve probably already started comparing the three, decided who’s doing best and worst, and whose future looks brightest. If you have, remember what your hunches were - you might be in for a surprise or two.
Whether it’s fair or not, whether it’s even remotely accurate or not, people do that all the time - make guesses about somebody else’s financial status without any real solid facts or figures to base them on. My advice would be to keep that kind of speculating to a minimum - it’s none of your business, and you’re probably pretty far off anyway. But here’s the real point: as bad as it is to make uninformed guesses about somebody else’s financial condition, it’s even worse to take that approach to your own!
Back to our three households. Despite their very different circumstances, they have some things in common:
1. Megan, Nick, Audrey and Dominic are all 30 years old.
2. All three households recently read I Am Net Worthy, they now understand the object of the game, are they’re each fully committed to achieving financial independence.
3. They’ve each determined that they’re in the RED phase on the three phase path.
4. And - just yesterday as a matter of fact - they each used the Net Worthy Financial Dashboard to get a better handle on their current financial situation.
With that last point in mind, let’s take a closer look at each of these households - using the power of the Net Worthy Financial Dashboard to illuminate what’s really going on in each case.
The Financial Dashboard is a red phase tool.
As a reminder, your goal in the red phase is get out of it ASAP, by (a) paying all non-mortgage debt completely off, and (b) establishing and completely filling up an emergency fund, the size of which is determined by your risk profile. There’s no doubt about it, the red phase is the least fun part of your financial life, so the best approach is to focus hard, grind it out, and get it behind you. Then you can proceed to the much more fun yellow phase, begin your long term investing program, and perhaps buy a house. The Financial Dashboard is your indispensable go-to tool for charting your course out of the red phase, and into the yellow.
The Dashboard is simple to use.
First, you enter seven very specific numbers from your financial life into the input panel.
Then the Dashboard works its magic, and the output panel spells out where you stand. All this is covered in much greater detail in I Am Net Worthy. But instead of explaining it, let’s just watch how it works in action.
We’ll start with Dr. Megan, our pediatrician from Boston. Her path to an MD career was pretty typical: 4 years of pre-med undergraduate study, then 4 more years of med school, followed by 3 years of residency and internship. Life was very demanding for Megan during those years. She spent very little, partly because she was studying or working almost every waking hour, but also because she had so little to spend to begin with. She finally emerged from that with the opportunity to step into a very high income medical career, but also with some hefty student loan balances.
Upon starting her practice, Megan’s attitude was that the years of sacrificing were over, now was the time for enjoying the rewards for all of that hard work! Besides, she wanted to “look the part” of an up and coming young physician. So she bought a 2 bedroom townhouse in a “young professionals” neighborhood near downtown, and a brand new mid-level luxury car. She had to borrow for both, but her MD income made that easy. She quickly learned that there were lots of expenses, for both the townhouse and the car, beyond just the monthly payments. On top of that, it wasn’t long, before she felt some social and professional pressure to “keep up with Dr. Jones,” and she found herself regularly spending lots of money on “lifestyle” items like destination vacations, a high end wardrobe, and club memberships.
Income: Megan makes $200K per year. That’s 3X the US median household income, and 4X what the median 30 year old makes. While that’s a huge income, Megan is also well aware that pediatrician earnings rank relatively low among the various medical specialities. Despite making $200K/year, sometimes Megan feels that radiologists’ and surgeons’ higher earnings are a little unfair.
Debts: Megan has $100K balance on her undergraduate student loans, and another $100K from medical school. These carry an APR of 7%. The townhouse was $750K; the balance on her 30 year fixed rate mortgage is $650K, at 5.5%. Her indulgence in a brand new German engineered car was $52K, but she felt like she made a great buy because the MSRP was $56K. Nevertheless, she still owes $40K on it, on a 5 year loan at 8%.
Emergency Fund: Nobody in medical school ever explained to Megan what an emergency fund was or why it was important, even though she spent part of her residency working in an emergency room. She understands it now, though, and she heard on a radio show that $1,000 is a good size for an e-fund, so that what she’s started with.
Wow! Did you see that coming? Megan certainly didn’t! The Dashboard is telling her that at her current rate, she’ll be 80 years old before she’s out of the red phase, and ready to begin saving and investing for retirement! The grim way of thinking about that - like millions of others, she’ll probably be forced to retire before she can even begin to make any progress saving for it. Megan had always believed that making lots of money just automatically means that you’re financially independent. She’s just learned that in the 21st Century financial world, it’s more true than ever before: It’s not how much you make, it’s how much you keep! She’s making a lot, but she’s not keeping a lot. Unless Megan makes some changes, her chances of ever achieving financial independence are very slim.
Some who see this scenario claim that it paints an unrealistically glum picture. They’ll point out that Megan’s income will go up as her practice grows, or that once the car and student loans are paid off she can really increase her gap. Maybe. Or maybe she’ll just buy another car. Or fall prey to all the other forms of “lifestyle inflation” and continue increasing her spending as long as she can afford to. All the Dashboard is designed to tell us is - at the present rate, how long will it take to have non-mortgage debts paid off and an e-fund fully established?
Fortunately, Megan is finding this out now, early in her financial life. If you know better, you can do better - and now Megan knows better! The Dashboard experience served as a wakeup call for her. She realized that she was truly fortunate to be actually living her lifelong dream to help kids, especially kids with medical problems, all day every day - and that her lifelong dream was certainly not to “look the part” or worry about competing financially with other medical professionals. She resolved to tackle her financial situation head on, with the same determination and discipline she’d displayed in earning her MD.
The whole problem is her gap. There are any number of changes she can make to immediately improve it. On the income side, she could lease her second bedroom to a medical student. She could opt out of all those lifestyle expenses, many of which were “stream expenses” that had completely snuck up on her, and completely forget about keeping up with Dr. Jones. She could bite the bullet and sell the luxury car, and get a used, resale winner that’s far more economical. And now that she’s a Dashboard user, she can use it to try out all these various ideas on for size to see how much each of them will help. Now that she’s clear on the diagnosis, Megan can write her own prescription for a strong, healthy financial future.
Nick is a freelance software developer, and he’s become a really good one. Here’s the path he took: after trying various no-future jobs following high school, he became convinced he needed to learn some real job skills. He swallowed his pride, moved back in with his parents, and earned an associate’s degree in computer science from a local two year college. That landed him a coding job in a local tech company, which turned out to be good news and bad news. The good news was that he thrived in his work. He found that the better he got, the more he really enjoyed writing great code, and the more he got paid for it. The bad news? He couldn’t stand the work environment. After toughing it out for a few years, he decided that the structure, rules and internal competition weren’t for him.
He didn’t want to leave until he had a solid plan for his next job. He knew he wanted to continue coding, but he was confident that he’d developed the skills to do so as a freelancer, instead of an employee. At the same time, he’d long been interested in the FIRE concept (Financial Independence/Retire Early), and read everything he could find on it. That led him to discover a whole online community of digital nomads, who use technology to work in a remote, location-independent way while living a very low expense, nomadic lifestyle. Nick put all these pieces together, and knew this was for him - doing the work he loved to do, living the way he wanted to live! After much research, he settled on a used RV that he picked up at a good price, and then customized it to be the perfect combination work/living space for him. He’s been living this lifestyle for a few years now, and so far so good! He’s become a master at keeping his expenses ultra low. As a freelancer, he’s on his own for certain expenses like health care, but other than that, it’s RV expenses, warehouse club groceries and not much else. He’s found that some of the best scenery on earth is free, it’s just a matter of getting to it.
Income: Even though Nick loves coding, he’s also a firm believer in work life balance. So he came up with what he calls the 45/45/45 plan, and sticks to it: he earns a minimum of $45 per hour, he works a strict maximum of 45 hours of freelance work per week, and no more than 45 weeks per year. That means his gross pay is 45 x 45 x 45, or $91K per year.
Debts: FIRE enthusiasts make a big point of avoiding any unnecessary debt, and Nick’s a true believer. The one exception, though, is the RV that makes the whole digital nomad lifestyle possible. He was able to meet much of the RV price out of savings, but financed the rest. He has a balance of $10K remaining, at an APR of 12%.
Emergency Fund: Nick understands this is important, so he’s been steadily adding to it. But the 12% APR on the RV loan balance has his attention even more, and that’s why his progress has been pretty slow so far.
Go Nick! It’s the same moral of the story as with Megan: it’s not how much you make, it’s how much you keep. Well, Nick’s making plenty, and he’s keeping an amazingly high percentage of it. His RV is making race-car-good time on the road to the yellow phase, and he’ll cross over the border in only 5 more months. Once he does, he’ll be able to redirect his $3.4K gap every month, away from RV payments and e-fund infusions, and towards long-term saving and investing.
Or will he choose to do something else, too? One thing the yellow phase is famous for is opening up your financial life for more choices. Once he crosses over into yellowland, it will be a good time to ponder whether he intends to keep on the road indefinitely, or if he might prefer to start devoting at least some of that gap into saving up for a house. Financially speaking, there’s no right or wrong answer; Nick has put himself in the position of being free to choose his own idea of his best life, and his own financial future.
Audrey and Dominic had been sweethearts all through high school, so when they decided to get married after graduation, it came as a big surprise to: absolutely nobody.
After the wedding, Audrey got a teller job at a local credit union branch office, and Dominic found work in construction. At first, with two incomes, they weren’t too stressed at all about money. But like many people, they started paying more and more attention to their spending with each passing year. They wisely started stocking up on savings in anticipation of starting a family, which they’d always dreamed of. Before long, the dream started coming true! First one daughter, then another, and finally little Dominic, Jr. came along in rapid succession. Naturally, household expenses surged, the savings account was soon exhausted, and Audrey and Dominic resorted to credit cards to cover their now-negative monthly gap. The growing credit card balance, and its alarmingly high APR, was a wakeup call. They made a point of cutting every bit of excess that they could out of their spending, and started chipping away at the credit card balance.
Their income situation had also changed a lot over the same period. Audrey loved her work at the credit union, and so did the credit union - she was promoted a couple of times, and was now in a supervisory position at the headquarters office. Her income was growing, her hours were steady, and the credit union employee benefits were terrific - all perfect for the young parents. On the other hand, Dominic’s construction wages seemed high on a per hour basis, but the work wasn’t steady. As the family grew, it became evident that it was a better strategy for him to be a stay-at-home dad, rather than constantly pursue on-again, off-again daycare options, at least until all three children were in school. Although it was quite an adjustment from being on a construction crew, Dominic surprised Audrey - and himself - by quickly becoming pretty darn good at it.
Audrey and Dominic have very, very busy lives, and their finances are tight! Still, they’re living their dream of raising a family, even if “happily ever after” has turned out be quite a bit more demanding than they’d first imagined. They’re committed to achieving financial independence eventually, but they see it as a very long-term proposition - with these current preschool years as being among the most challenging that they’ll face. They’re looking at the Financial Dashboard as a way for them to answer the question: if we keep grinding it out financially the way we have, are we actually making enough progress? Will we be able to “get over the hump” financially anytime soon, or will it always be this tight?
Income: Audrey makes $45K per year at the credit union headquarters. That’s a little lower than the US median household income, but a little higher than the median income for 30 year-olds. Dominic pursued a few ideas for earning some home-based income, but came to the conclusion that caring for three preschoolers simply didn’t leave enough time in the day for that. Since the young family is dependent on Audrey’s income as well as Dominic’s unpaid child care, they both took out term life insurance policies. Yes, money is tight, but term life insurance is relatively inexpensive, and both feel that this is money well spent.
Debts: It’s all about those credit cards. They’ve chipped down the balance to $10,000, but the 18% APR is a killer.
Emergency Fund: As responsible parents, Audrey and Dominic want to have something in reserve for emergencies, but they also want to throw every spare dollar they can to knocking down the credit card balance. The compromised on an emergency fund equal to one month’s average expenses.
At first, Audrey and Dominic had very different reactions to seeing their Dashboard output panel. Audrey was somewhat distraught. Her comment was, “After all that squeezing and saving we’ve done, it’s still going to be five more years before we’re all the way out of the red phase?” But Dominic took more of a long view and replied, “Without the squeezing and saving, we might never get out. This means that if we grind it out, we’ll be debt free and and with a full e-fund before little Dom is in first grade. By then, I’ll be able to go back to work, and we’ll have decades left to fill our financial bathtub up with two incomes.”
Sometimes, the gap’s already as big as you can make it without compromising other major life priorities - in that case, at least the Dashboard can tell you how far away the light at the end of the tunnel is. But Audrey got to reading a little more of I Am Net Worthy, and found something in Nugget 9.3 about balance transfers - and knew right away that might be a smart way to shave some time off of the 5 year Dashboard estimate! The book recommends carefully researching the balance transfer option before pursuing it - and so do I - but Audrey and Dominic have definitely stopped adding to their credit card balance, so they really are great candidates for this strategy. With a little research (and some help from colleagues at Audrey’s credit union), they found a balance transfer card with no transfer fee, a very low annual fee, and an 18 month interest-free period. Boom! By transferring their balance to this card, Audrey and Dominic can cut the yellow phase countdown all the way down to 4 years, without having to cut another dime from their budget. They’re on their way!
1. Remember at the beginning when I asked if you had started jumping to conclusions about which of the three households was in the best, and worst, financial shape - just based on a short description of their jobs and living situations?
If you made some guesses, you probably learned from reading the case studies that it’s really tough know what’s going on in somebody else’s financial situation just from outward appearances.
Likewise, it’s tough to know what your own financial state is, let alone where it’s headed, until you actually get a firm handle on the most important numbers.
The longer you wait to do so, the longer it will take to get on track to financial independence. The Financial Dashboard is designed to make this super easy for anyone to do - use it!
2. The Dashboard spurred Megan to consider making major lifestyle changes, so she could start keeping more of that big income.
It alerted Nick to begin pondering whether it was time to consider buying a house.
Audrey and Dominic never would have realized how much they could save by transferring their credit card balance. See the theme?
Filling out the input panel, and really analyzing what the output panel is telling you is the essential first step. But the real payoff from the Dashboard comes from making concrete decisions about your financial future, and then acting on them!
3. Now that you’ve read all three case studies, which one of the three households is doing the best job financially?
Don’t answer that, it’s a trick question! After using the Dashboard, each household is now positioned to get on the best financial path for them.
Megan’s life dream was to help kids every day.
Nick loves to code, but he wanted to do it on his own terms, not an employer’s.
Audrey and Dominic are living their dream of starting and raising a happy, healthy family.
If you start early, and stay focused, you can decide on the kind of life you want to live first, then use the Dashboard to chart your course to financial independence. But if you wait too long in your financial life, the reverse may become true - your financial circumstances will largely dictate what kind of life you can live.
Three completely different households, in completely different circumstances - but now all three of them are headed towards the yellow phase, and ultimately to financial independence. How about you?