I hesitated to write this post because for a while we weren’t sure if our plan to afford my mid-career break and our 13 month honeymoon would work. Now that we are nearly through 11 months, it looks like we’ll complete the trip on budget. Things haven’t gone exactly as planned but affording this trip involved creative thinking and a combination saving money, cutting expenses, accumulating travel miles, and earning more money.
As I mentioned in the FAQ, I’ve been thinking and saving for this trip since 2010. At first, my strategy was simple. I opened up a savings account and started putting some money in it. I have always been a saver. As a kid, I would dutifully put my allowance and money from mowing lawns in my locked safe (which my brother would occasionally steal from). At the same time I was saving for the year abroad, I was more aggressively saving to buy a house. I moved to a smaller apartment and cut expenses. I found a place two blocks from the beach in San Diego that I fell in love with. I put an offer in and after some back and forth, it was accepted. In October 2012 I was a first time homeowner. I thought I had it figured out. I was making six figures and had a nice new house close to the beach. I was still saving some money toward travel but not as much as I would have liked. I then started watching some HGTV and other home improvement shows. My favorite show was Income Property with Scott McGillivray. In this show, owners would live in one part of the house and rent out the other part of their property. These owners would basically have their mortgage paid for by the tenants. With mortgage, taxes, and insurance adding up to over $3500/month, I was looking for ways to accomplish the same things with my house. My idea was to add a second story to the house, live in the second story and rent out the first story. I went to a couple of design-build companies in San Diego, submitted plans to the city, and thought everything was good. However, the city came back and rejected the plans due to zoning and coastal permit issues. To resolve these issues would have been cost prohibitive so we looked for different ways to accomplish our long term goals.
Around this same time, I read Rich Dad, Poor Dad by Robert Kyosaki and it changed the way I viewed money and how I was going to afford this yearlong honeymoon. There are a number of good nuggets of wisdom in the book regarding personal finance but the one that stuck with me was the definition of Assets and Liabilities. In Rich Dad, Assets are things that put money in your pocket and Liabilities are things that take money out of your pocket. This viewpoint really resonated with me and I realized my house, that I loved, was a Liability until the day I sold it or converted it to an income property. I spoke with Diem about my plan to implement some of Rich Dad’s teachings and she was surprisingly on board. We decided to move out, put the house on the market, and turn the house into a vacation rental on Airbnb while we waited for an offer. We moved into a 1 bedroom apartment and looked for a new property in San Diego that would let us accomplish our Income Property plan of living in one part of the house and renting out the other. The vacation rental actually worked out really well. We were making good money but it was a lot of work getting the house cleaned and ready for each guest. We were ready to sell and turn our house into an Asset.
Another part of our saving plan was to start investing in more Assets. One of the recommendations in Rich Dad, and the one we’ve been concentrating on, is real estate. We knew that investing in San Diego would require a higher price point than we were comfortable with for most income properties. We looked to other markets and decided on St. Louis. I grew up in St. Louis, I was familiar with the area, and my family still lives there, so it was a logical choice. A friend from high school put me in touch with another real estate investor who went to Mizzou with my brother. We discussed the market, his investing strategy, what I had planned, and some steps to put our plan in place. I also had another friend from high school who was a realtor and real estate investor in St. Louis. I decided to leverage my knowledge of the area and my contacts there to start investing in multi-family properties there. The price of properties in St. Louis is much lower than Southern California and I found the numbers work a lot better in terms of cash flow.
Now some of my San Diego friends may be saying that you don’t have contacts in a lower priced market and can’t do what we did. If you’re really interested in investing in real estate, I suggest you start listening to a podcast called “BiggerPockets.” It goes over a number of real estate strategies and the website of the same name has a wealth of knowledge about how to get started in real estate investing, forums discussing all types of situations that come up when investing, how to analyze properties, and finding out where and which properties to invest in. The podcast hosts always point out that you can find affordable, or at least more affordable opportunities, within a 2-hour drive from where you live. I’ve found this to be accurate. While coastal and central San Diego is pretty expensive, eastern San Diego, El Cajon, and inland are definitely more affordable. I also read a number of other real estate and general business books including: The Millionaire Real Estate Investor; Rich Dad: Cash Flow Quadrant; The E-Myth Revisited; The One Thing; The ABCs of Real Estate Investing; and a lot more.
While these books are helpful and give you a good base of knowledge, they don’t compare to actually taking the big step and purchasing your first investment property. Our first property was definitely a doozy. I won’t go into all the details but the first year of rehabbing and managing this four-unit property involved 2 evictions, bed bugs, long delays in rehab, being over-budget, tenants leaving all their trash and belongings behind, and delays in getting the property rented out after rehab. We definitely bit off a lot, but the property has turned into a great cash flowing property and did not deter us from taking the plunge again.
As I mentioned, the STL property required a huge amount of rehab which took a lot longer than expected. We went several months where the entire property was vacant so that we could fumigate and rehab. Luckily the cash flow from the vacation rental largely offset the rehab costs in St. Louis but there was still a good amount of out of pocket expenses.
Back in San Diego, we eventually sold our house. It was a tough decision because the house was doing so well as a vacation rental. However, since I bought the house in 2012 and sold in 2015, I was lucky to get good appreciation without having to do much to the property. With the cash we made from the sale, we had enough for entire yearly budget for the honeymoon. However, we wanted to put our money to work and used that money to buy more Assets. The plan was to buy one property in San Diego and one more investment property in St. Louis.
We found a nice single family home in San Diego that was converted into a duplex. We moved into one unit and the second unit was already rented out to 3 guys. Our plan was that once we left for our honeymoon, we would rent out our portion as well and put our stuff into storage. In St. Louis, we actually found two more 4 unit buildings to invest in before we left. In retrospect, it would have been easier to stick to one more investment property in St. Louis and keep the extra cash for our trip, but we believe we did the numbers right and that these investments will put us in a better position long term.
Now to the actual numbers. While we’re away, we have 4 properties (3 in STL and 1 in San Diego) being managed by two different property managers. The combined monthly Cash Flow for these properties total about $2,150. We calculate Cash Flow in the following way: Cash Flow = Rental Income – (Mortgage + Tax + Insurance + Management Fees + Vacancy (8%) + Utilities + Capital Expenditure (8%)). This cash flow helps us not only with our year abroad but also when we return. We also planned to rent out my car using Relay Rides, earning about $400 per month.
We also had some expenses outside of these rental properties that we’ll be paying while we’re away (e.g., car payments, student loans) totaling about $800 per month. For the year honeymoon, this means we’ll be earning around $20,000 and need to save $40,000 for our $60,000 budget. While we’re saying we have a $60,000 budget, in reality our daily budget is about $100/day. This means a total daily budget of about $39,500 for the 13 months. The excess is left for reserve, unexpected expenses, splurges, and various activities (e.g., great white cage diving, nice meals, safari, etc.). The remaining $40,000 was supposed to come from a combination of left-over savings and money from a cash-out refinance we were going to take on the increased value of the first rental property in St. Louis. Even with the increased loan amount, the income from the property would be more than enough to cover the increased monthly payment. However, things don’t always work out the way they should.
With respect to the refinance, some banks and appraisers are not familiar on how to value multi-family properties. They sometimes value the building based on comparable sales of similarly-sized properties instead of based on the income the property generates. We were unlucky and got an appraiser that was not experienced with appraising multi-families. We got a lower appraised value than we wanted and, after going through another appraiser, we still didn’t get the valuation we wanted on the property to make the refinance worth it. Thankfully my parents were able to loan us the money that we were expecting to get from the refinance but I really didn’t want to have to resort to that.
The second wrinkle in our plans was that Relay Rides was sold to Mercedes Benz and ended its program of renting out people’s cars at LAX airport. We got the news less than a month after we left for Europe in July, so not only were we out $400 per month, but I also had to figure out what to do with my car for the next 11 months. Luckily my friend in Orange County was able to pick up my car (Thanks Evan!) and my friend in San Diego agreed to store my car at his house (Thanks Woody!).
Our final method of affording our honeymoon was accumulating airline miles and travel points. I got a Capital One Venture Card back in 2013 when they matched miles accumulated on other airline cards. I had over 100,000 miles with American Airlines. I had been keeping these miles ever since specifically for this trip. I also was able to get miles from Chase Ink Business credit cards for the 3 investment properties in St. Louis. I also opened a Chase British Airlines card and a Hilton Rewards credit card to get some more miles. Unfortunately, we used up a lot of our miles during our trip to Eastern Europe (Prague, Vienna, Budapest) in December 2015 – January 2016. Even still we’ve saved around $2,400 using miles and points so far. There are entire sites dedicated to travel hacking (Travel Hacking Cartel, the Points Guy, Extra Pack of Peanuts, etc.) and we probably would have utilized these techniques more but since we were trying to do the refinance, we were restricted from applying for new credit cards and taking on more debt. We also used rewards programs like Orbitz (total earnings: $206) and Ebates (total cashback: $121.90) when booking our travel. The Platinum Orbitz rewards program (Which we qualified for with all our bookings) offers free TSA pre-check and reimbursement for two checked bags, along with other perks.
Before you begin your plan to save for your trip, I recommend taking an assessment of your current financial position. Sites like Mint do a great job of letting you see where you stand and where your money is coming from and going to. Mint will also let you set budgets and set up goals (like a yearlong honeymoon!) to save for. The amount you need to save will depend on the length, budget, and locations of your career break. We could have saved money by traveling to fewer countries, staying longer in one location, cutting more expensive places (e.g., Scandinavia), etc. On the other hand, we also could have spent a lot more. It's your mid-career break so plan it your way!
After you have a grasp of what your current financial position and how much you need to save, it's time to get down to the nitty gritty. Below is a list of ways to cut expenses and increase income to accelerate your savings for a year abroad. This list is definitely non-exhaustive and should be constantly reviewed and revised depending on your preferences and goals.
Ways to Cut Expenses:
- Cut the cord: Cancel cable/satellite TV in favor of Netflix, Hulu, or other streaming service.
- Re-evaluate Housing Expenses: Are you living in the largest house/apartment you can afford? Can you move into a smaller place?
- Stop or reduce eating out: Eating out is more expensive and less healthy than cooking at home. You may enjoy having more control of what goes into your body and develop a new appreciation and skill of cooking.
- Shop Smart: Make sure you aren’t paying retail. When you find that you absolutely have to buy something, make sure you’re minimizing your expenses. Extensions like Honey, will automatically search for promo or coupon codes when shopping online.
- Cancel or reduce Gym memberships: How often are you actually going to the gym? Does your work have a free gym you can use? You can often get great workouts in at home without weights or gym fees (Insanity, P90X, Yoga), but if it’s important to you then keep or find a gym with lower fees.
- Cut Car/Gas expenses: If you live in a major city with good public transportation (e.g., Chicago, New York), you probably don’t need a car. If your work is within a manageable distance, consider walking or biking to work. You save gas and get the added benefit of exercise.
Ways to Increase Income:
- Rent out your house or apartment: Have an extra room in your house or apartment? Consider renting it out on Airbnb or VRBO. This also works well if you’re traveling for a couple days or a week(s). We found that renting out your place can basically pay for your vacation.
- Buy Assets: As I mentioned above, Assets put money in your pocket. This can be investment properties, dividend paying stocks, annuities, or any other investment you feel comfortable with and that you determine can make you a profit before your trip.
- Sell Liabilities: Do you have some stuff around the house you aren’t using or won’t be using while you’re away? Consider selling them to help finance your trip, especially if you’ll still be making payments during your travels. This could be old gym equipment, furniture, TVs, or your car. We decided to hold onto our cars even though we still had payments left but you won’t need them while traveling so you could sell them prior to travel. Of course you would have to get another car when you get back.
- Increase hours or get a second job: This is a less desirable option as part of the Rich Dad philosophy is to get out of working for someone else and start making your own money, but this can be a good short term solution.
There are definitely more ways to save for a year abroad than the way we did. Some people prefer stocks, simple savings plans, index funds, or a combination of any of the above. I believe the important thing is discussing and starting a plan for saving and investing. Continually check-in (at least once a month) to gauge your progress and set action plans. I only wish we were able to start our real estate investing sooner because the cash from these Assets just compounds and compounds and allows us to purchase more Assets. We plan to continue investing when we return.
Remember, "long-term travel doesn’t require a massive 'bundle of cash'; it requires only that we walk through the world in a more deliberate way," - Rolf Potts, Tools of Titans. Have any more travel or saving tips? If you want any more details on our saving and investing plan, please let me know if I can help you plan your own mid-career break!