Creating a Financial Strategy to Sail

In the last blog I covered how we set a sailing budget and basic assumptions. In this blog, I’ll share how we took our sailing budget, and put it together with the rest of our financial plan to build a strategy we could have confidence in to allow us to take a sailing sabbatical.

This is the phase when everything went from theoretical information to actual strategy. Everyone says not to let anyone tell you that living on a boat is cheap but until you see YOUR numbers in black and white does this hit you like a ton of bricks. Sure, the living expenses can be quite cheap since you aren’t spending weekends in shopping malls, but depending on your standard of living, your fixed expenses could be much higher or lower than the next person.

With the cruising budget envelope done, we popped that into our ten year budget to see what we needed to save and what it would take to save up for the boat costs (financing, cash, etc.). Adding all that up, we got a really good picture what was going to need to happen to get this whole endeavor paid for, and what realistically our income could support. We swizzled a few of our decisions and came up with a workable financial plan for the medium term.

To summarize, we budgeted conservatively for what we could save for in our overall ten year budget (mentioned above) and liberally in what the boat would cost and our five year sailing plan to have a picture of best and worst case on both sides. This would give us room to get more specific as we started making more refined decisions in this phase.

Next, we had to tackle further refinement on our re-entry scenarios. Should we think about this as a five year sabbatical or a full scale retirement? What would we expect to make if we had to come back to our old jobs, after being out for 5 years...and a little bit older. Or, do we want to come back to our old jobs, should we create a scenario where we are doing something totally different, something non-specific, but maybe where we would really need to live on a very tight budget until we hit the threshold to gain access to our 401K and IRA accounts.

Also part of our re-entry discussion, was more discussion about where we would live. If we came back, would we want to live here if our kids were all now gone? Or, would we want to live somewhere else entirely? What do you model for? Traditional wisdom initially had us looking at this as if we were trying to take time off like an extended vacation. Then we started discussing, what if it changes our perspective and we decide to either stay on the boat or doing something altogether different living somewhere else completely.

It was much easier to think of it as a cultural sabbatical, where we were taking some time and would figure out what to do later. This is when we decided to extend our plan out to 10 years sailing, with the trade-off being find some way to make income, so we weren’t tapping into savings to pay for our annual costs. We discussed consulting gigs, rental property income, investment income, odd jobs, online businesses….worst case we sail until we run out of money with enough set aside to go back to a solid place to live and 6 months of living expenses to decide what to do next.

The key success criteria here might seem obvious but it was being sure we had zero debt, or if we had debt say in a rental property mortgage loan, that the funds were secured to cover the costs of the loan for some period of time.

This of course led to the discussion about whether or not to get a loan on the boat, or pay cash. Everyone in the entire world will tell you never to pay cash for a car, so naturally people assume boats go by the same rule. But hear me out on this...I’m a simple girl and don’t like owing anyone money. My mom went through economic hardship and the recovery from that took years.

With cars, sure, you can get a 0% APR loan or at least very low, you can also lease. Boat loans are different, they are much higher than mortgage rates, generally speaking 5-6%. We explored the idea of doing a collateral loan, but that’s just lame. To tie up our money to secure a loan and still pay interest? Some financial guy we spoke to did some hocus pocus talk about paying yourself back the interest because you take a loan from yourself somehow but that just sounds like someone in the middle making money. I’m sure there are way more financially savvy people listening than me, as I said, I’m a simple girl and I choose to only make financial decisions on things I understand that are logical. The bottom line is, no matter what way you slice it, you pay the interest on a loan, period. With property it’s a different story, because that appreciates and with my mortgage I took a completely different approach. For us, we made the decision that you have to think of the boat as the thing you buy to enjoy, like a disposable good, that might be worth something later but have no expectations on the backend.

Sidebar here, we did look into creative charter ownership and boat as a business options in quite a bit of detail actually. I’ll cover this deeper on a future podcast because the whole thing got pretty convoluted when it comes to us wanting to live on it and use it. As of now, this is not part of our plan.

And we’re back….10 year sailing plan, no debt, some income options if needed, and buy the boat outright, that’s where we are so far. The next decision we had to make was whether cash flow from an investment property was better than putting the money in the financial markets and pulling out the interest. So that was the next step, really understanding what our money was doing for us, for the money we had in the markets today. If any of us had a crystal ball on this one, we would all be living on boats by now.

So the next step was to look at our current investment strategy and what was happening.

At this point, what this whole thing had unveiled is how our investment strategy had been on autopilot and it was time to start digging at that.

Prior to this whole endeavor, we didn't really have financial goals beyond covering college. We had things we needed to pay for, but had never put together a financial strategy against something over a period of time. Years earlier after my divorce, I sat down with a financial planner and he asked me what my retirement looked like and it was a question I didn't even understand. The thought of not working had never crossed my mind. Now, I had a tangible set of numbers I could go talk to someone about and assess the bric a brac that was my financial strategy; a CD here, and IRA there, unconsolidated 401Ks, an online investment account, an old stock purchase plan, a managed investment account, a bunch of savings and checking accounts that my (now previous) bank had opened on my behalf (PHFT!) and charged me for. I had more accounts than I had dollars! And we needed to get this all on track and merge our near-term goals with our long-term goals - which was to not have our kids take care of us later...though I like threatening them with that every now and then :-)

I tried to do a retirement plan using a tool from a prominent investment firm but I'm convinced after interviewing multiple financial advisors, the system is designed to be frustrating and make you feel dumb so you'll pay them to manage your money for you on top of the trading fees. They were literally using some half baked tool that the guy couldn’t get to work, so he just said ‘trust me.’ (A book could be written on lessons learned as a woman working with financial advisors, but for another day.)

I ended up reading a tip from a sailing blogger I follow (Amy Alton from Out Chasing Stars), and looked into an online tool she had found to do some really simple long-term retirement modeling. It's called Personal Capital. With it, I could plug in my goals, add all the retirement information, my assumptions based on our sabbatical plan, and it projects out for you what happens with the monte carlo modeling calculations. The hardest part of this tool was deciding how long you were expecting to live. It was able to tell us, with all our assumptions, spending, savings and social security, that our five year plan would work without the sky falling. It also allowed us with confidence to determine we had an option for a 5 year plan and a potential for a 'quit our jobs and never look back' plan.

I have to say here...I am not a financial expert. However, I do believe I will always be the best steward of my own money. This was the point in my life that I started to read more and pay attention to what these different financial institutions are motivated by. You can call me paranoid, but after going through a few financial advisors, I was really shocked some of the decisions they were making and how they were using my money to benefit either themselves individually or their company. At one point I went through each and every investment to understand the margin rates, fees, etc. and these guys had no good answers. Again, I’m not for everybody.

What I believe, is that no twenty something person working at a big financial investment firm is going to know more than me, doing a little research, because no one knows what’s going to happen. They follow models and indexes and a playbook you can read about. And no one with the experience of Warren Buffett is going to be put on my piddly accounts, so I think it’s safe to say working with a basic online investment service for a fixed cost (versus a big firm with a percentage of every trade) gives me the ability to control my decisions and make sure my investment strategy is in line with my goals completely. That’s just me, you might be different.

We were able to look at all these separate accounts over the last 25 years and see what had happened. I had been through two major downturns in that amount of time, and my various investments were just okay. Except for the 529s, those were amazing and brilliant and did really well. We were also over and under invested in some areas because we were double invested in certain industries or different fund types because of the various investment areas in each of them individually; we were both overly weighted for example in tech.

Okay, so we consolidated all the various accounts and streamlined the investment plan. Basic hygiene probably that we should have done years ago. We tailored a focused long term strategy in the financial market for 10-15 years down the road, with some amount of cash that was giving us a return, and also allowed us access for our more short-term goals. It was at this point, I could do some modeling for what the 10 year comparison return was on the financial markets versus what a real estate investment property might be, using the trending the preceding 30 years, based on where the economy is today. Again, I’m not a finance professional, I’m just sharing what we did in order to make these decisions for us. Mapping three different options, aggressive, conservative and moderate, the investment property option came out to be the better option, even in the scenario where the entire housing market tanks - which is a real possibility as I'm writing this.

With that done, I updated all the numbers and then tackled our savings plan, leading up to the boat purchase. It’s always fascinating to see the money coming in and somehow it just vanishes, like the socks in a dryer. We took a scalpel to our expenses...well, let’s be honest, this was more about me. My husband doesn’t spend a whole lot of money, while I on the other hand...I like nice things. But again, because we never looked at this whole plan, and all of our money together, it never mattered. I made my money and spent it, he made his money and spent it. That was not going to work anymore and after 2-3 visits with our CPA, we got a better tax strategy together as well, something we didn’t really tackle together either until this point.

Once two of our kids left for college our living expenses really came down, though our college costs obviously were very high, well mine were, because it was my kids in college at this time. I really got a lot better at managing my Amazon impulse purchases, although it’s still baffling that we get at least two deliveries a week from them. Then, once my husband’s son left for college things got even clearer. This kid could eat you out of house and home. He ate constantly so we never had an idea of what food actually would cost us. Now we knew. Somewhere in there we turned into a vegan household and started cutting processed food. Not only was this less money spent at the grocery store, it was better for us too. What we learned is that as two people, we can live pretty cheap and didn’t have expensive habits per se, aside from bareboat charter vacations where we would bring friends and split the costs.

All this I was tracking in a master spreadsheet for a couple years now and as far as my husband was concerned, it was just happening in the background. He will listen to this so I want to be respectful, I guess the best way to say it is….. I spend much more time focused on the financial plan than he does. So when it came time to sell the house and give him the milestone checkpoint on the plan, I had to rethink how I walked him through it.

As I previously mentioned, my husband and I see through different lenses when we look at spreadsheets, so I had to put it together in a narrative, to stop the madness and bickering about why my columns looked a certain way or get lost in the weeds on details that weren’t material in the big picture.

Here’s my strategy, wait for it….I did this through a series of post-its (don’t laugh) that map out a timeline to show the big picture of what happens when, and what money goes where. It might sound really first grade, but it’s a good visual that keeps it in our face everyday and as the plan assumptions change we can take note together, discuss it and then apply it to our budget spreadsheet. It also came in handy to walk my son through it when he started looking at me sideways when he realized that we were in fact, planning to go live on a sailboat...he never much took it seriously until I told him that it was now time to sell the house. Post-its are awesome!

Here’s the lesson I learned after going through this multi-year financial planning process. There is always a way to get yourself on a boat. It sounds impossible in the beginning, but just like with anything else, it just takes some solid planning, reprioritization on spending, attention and focus.

We are very lucky to both have solid jobs and some assets to work with, and, with four kids we also a lot of expenses. But when we suddenly had a very clear goal for what we were saving for, there were many scenarios that emerged to make it happen...even with our most ambitious scenario or our most conservative. It made decisions and trade-offs crystal clear, and we knew we had options to reduce expenses or the length of time to make the numbers work.

Finally...

I fully recognize that not all people need everything buttoned up to buy a boat and sail into the sunset without a worry in the world. But in order for me to make it a real plan for us, I had to go through this process to get to the point where I could say, 'Okay, Jimmy Cornell, let's do this!