Investment Milestones Part 1: Investing in the Little Things
Updated: Feb 23, 2021
I love paying down debt, and if I have unexpected savings, cash, or a windfall, the first thought that crosses my mind is: can I throw this at the mortgage? In my previous post, I came to terms with the idea that I should not rush to pay down my mortgage before having more socked away in my taxable investment account. But how much should I have in my taxable brokerage account before I can give myself the green light to aggressively pay down the mortgage? And, more importantly, how do I motivate myself to save a large amount in investments when I could theoretically use that same money to pay down the mortgage instead?
I reflected on what motivated me to pay down debt, which included:
interest payment savings
Was it possible to recast these core principles in a meaningful way to get myself excited to invest...and stay invested?
There is a well-known rule of thumb based on academic research that suggests saving 25x your annual costs allows you to safely withdraw an average 4% from your investment savings without ever touching your principal over 30 years. For example, if your annual expenses are $40K/year, then you should save $1M in investments: ($40,000) x (25) = $1,000,000. Each year, you can safely withdraw 4% of your $1,000,000 investment, or $40,000 since (.04) x ($1,000,000) = $40,000, and still be left with another $1,000,000 at the end of the year to “safely” generate another $40,000 the following year.
It turns out that, ignoring housing debt and large home improvements, my annual expenses are roughly $40K/year. However, it would take me several years to save up $1M. I would love to find a way to create investment milestones that help me reach that goal, and also figure out an investment savings threshold at which I would feel comfortable slowing down investments to pay down the mortgage.
I found it incredibly motivating to see the smaller investment milestones, and also feel like each additional milestone was within reach!
I turned to my monthly expenses and ordered my monthly expense categories from lowest to highest, and calculated how much each expense category costs annually, how much I would need to save in investments to support this expense in retirement, and how each category laddered up to represent different investment milestones. Here's what I came up with:
My smallest category of monthly fixed expenses are what I pay in Subscription services: $25/month, which would require a total investment savings of $7,500 to support. Now this was an investment number I could wrap my head around, because I already have about $6K in taxable investments. I can visualize meeting my Subscriptions savings goal if I invest an additional $1.5K.
The next category is the $40 monthly Natural Gas bill, which requires $12K in savings. This was another bite-sized amount that I could find a way to reach: If I saved $1K/month over a year, or $500/month over 2 years, I can easily have enough in investments to cover this bill. Or, thinking of my lowest two categories -- subscriptions and natural gas -- once I reach a milestone of $19.5K in investments, I have enough to cover both those categories.
Once I add in the remaining categories -- Internet, Insurance, Pets, Electricity, HOA, Property Taxes, Food, and Stuff -- the milestones themselves become larger since each subsequent category is larger, and totals to $1,044,000. This chart shows how each expense category plays a role as an investment milestone:
I was genuinely surprised to see how each of the smaller monthly expenses require a rather large investment to sustain. At the same time, looking at the contribution graph of each investment milestone, I saw an opportunity: if I can save up $189K in investments, I can safely generate all of my regular monthly expenses from Subscriptions through Electricity. I found it incredibly motivating to see the smaller investment milestones, and also feel like each additional milestone was within reach!
It also made it easy for me to determine an investment threshold requirement for paying down the mortgage: save up $189K in investments, which is enough to pay up to Electricity, i.e. all required bills except the HOA and Property Tax. The graph helped me visualize that it would be harder for me to get motivated to save up $180K to cover the HOA bill alone, and therefore I should wait until after the mortgage was paid off to tackle the larger expense categories.
In my next post, I'll share my thought process on how to hit my $189K "Electricity" investment threshold and pay off the mortgages.