Financial Update Mar 2017

Another month, another update. A few random comments.

  • The first half of property taxes were due in March. $3,500 down the drain. I will not retire in this state. By paying property taxes directly out of pocket we make approximately $150 in interest per year. Not earth shattering, but a small benefit to paying ourselves and avoiding Escrow.
    • I constantly listen to podcasts while commuting or doing housework. One of my favorites is Planet Money. They recently did a show on tax reform. It told the story of a professor at Stanford (I believe an accounting professor) who has spent his career trying to simply the process of tax filing. Specifically, he wanted the US to auto-populate the tax forms and simply send the already-completed tax forms to each household at tax time. To file your taxes in this framework, you’d only need to check the forms and sign (physically or digitally) and get on with your life, saving countless hours of lost productivity annually in the country. This idea was gaining traction and was close to being passed into legislation, but the Republicans shot it down because it made the act of paying taxes too passive. I think this was a legislative mistake, but nonetheless, I do see wisdom in the argument. The closer you are to the data, the better informed you will be and the better decisions that you’ll make. In my case, given that I’m not paying property taxes with Escrow, I feel the anguish every time I part with the $3,500 check (twice a year). Given that I pay attention to the federal and state income tax structure, I know precisely (to the penny) how much I will save by each additional dollar sheltered in a 401k, etc. Given that I track every penny of our expenditures, I’m able to forecast our wealth accumulation with extreme precision. There are benefits to being close to the data. And in today’s information age, it takes next to no effort to do so.
  • Taxes are by far our biggest expenditure. As I’ve mentioned repeatedly in this blog, it pays to think strategically on this dimension. One of my favorite resources for long-term tax planning is this website, which explains in great detail each state’s tax regime. https://smartasset.com/taxes/nevada-tax-calculator. Replace the word “nevada” in the preceding hyperlink with any state you’re interested in and you’ll learn all you wanted to know about the tax structure of the state (including county and city level taxes). The total tax burden map at the bottom of the page is fascinating if you click on the “back to US map” button. Total tax burden (not to mention cost of living) varies substantially across states; it’s really incredible. The picture of this map is shown below (dark = good, light = bad). You can click on the other tabs to see the tax burden by type (income tax, sales tax, property tax, etc). Our potential retirement destinations include: WA, NV, WY, ID, and CO. We’re taking a trip to the mountain west / pacific north west this summer and will keep an eye out for potential destinations. I’m a dreamer and I love having something specific in mind.

  • My cell phone bill (shown below) was $0.17 for the month of March through Tello. Yet I use my phone a bunch (mostly podcasts) + wifi calling (Skype + google hangouts). Mr 1500 recently blogged (link) about his cheap cell phone bill. I find it fascinating to see millionaires (and hopefully in my case soon-to-be millionaires) fretting about cell phone bills. But I think it’s precisely this fretting, particularly over recurring expenditures, which facilitates the accrual of wealth. There’s also a psychological aspect here. If I can convince someone to do something as trivially simple as changing their cell phone bill, it proves to me that they are teachable. Perhaps unsurprisingly, few people are willing to make this commitment. If someone is unwilling to change their cell-phone plan and make small behavioral adjustments, I know with near certainty that anything else I can teach them about tax minimization or passive investing in index funds will fall on deaf ears. Unfortunately, this is the case for about 99% of the people I talk to on the subject. One of the glaring exceptions is one of my buddies from graduate school who gave me a chance when I started talking to him about cell phone hacking, tax minimization, and low cost investing. We were both poor grad students at the time. He knew nothing about investing, but he gave me a chance. He fully embraced the cell phone hacking, and in fact, has far surpassed me in this regard. He next read everything he could from Jim Collins on passive investing (link). His investment accounts have grown from $0 to $100k in a matter of 2 years. Further, EITC hacking has proved to be wildly successful for him. One year alone, an $8k credit from the government allowed him to purchase a used minivan with cash.

  • I did my first back-door Roth contribution this month. It was incredibly simple. White coat investor and the Bogleheads wiki have great tutorials on the topic here: WCI and BH.  An important ingredient to the back-door roth is to have a $0 balance in traditional IRAs before you attempt a back-door Roth. After I left my MegaCorp, I naturally rolled over my 401k to a Vanguard Rollover Traditional IRA. Only recently did I realize that this was an idiotic move since it would hinder my ability to do a clean back-door Roth contribution, as explained by the articles above. I remedied this error by rolling in my rollover IRA from Vanguard to my current employer’s 403b plan. Once this rollover was completed, I had a green light to pursue the backdoor Roth. The process is dumb simple. Step 0.) Clear out all TIRA balances by rolling them into your current employer’s 401k plan (and importantly, avoid rolling over to TIRAs after leaving a company to avoid this problem in the future). Step 1.) Contribute $5,500 to your TIRA. Invest the money in a money market fund. You don’t want the balance to change before you convert. Step 2.) Convert 100% of your balance (which in my case was a few pennies above $5,500) to a Roth IRA here. I’ll owe taxes on the few pennies of interest when I file taxes in a year from now. Step 3.) Exchange the money market fund for whatever fund you want. A screenshot of Step 2 is shown below. It couldn’t be simpler. The only hang-up I encountered was having to wait about a week between Steps 2 and 3. I’m not exactly sure why Vanguard imposed this timing restriction on me, but it’s not a big deal.

  • I recently migrated the domain name registration from Bluehost to google domains (link). I’m pleased with Google domains. It’s only $12/year per domain with privacy included.
  • I learned of a tax filing hack a few weeks back, courtesy of the Bogleheads forum. The CD version of Turbotax (currently $35 on Amazon) allows for 5 federal efilings and 1 state efile. The way to minimize your tax filing expense is to buy the CD and share it with up to 4 friends. All 5 get to efile federal, 4 have to mail in state (or cough up $20). Total cost per person would be $7. A VP of Turbotax confirmed this strategy on the Bogleheads forum here.
  • I changed the formatting of my monthly financial report a bit. It now begins with annual financial goals at the very beginning of the sheet. Now, whenever I’m sitting on excess cash, I just fund my list of priorities from top to bottom. It takes all the guess-work about where I should put excess cash, and it provides a nice visual report of which goals I’ve met and which ones I haven’t.
  • For the first time in a long time, our “other expenses” category was near zero. We only spent $401 on categories other than “the Big Four” (housing, food, healthcare, auto expenses). If I’m trying to do diagnostics on our spending, this “other expenses” category is the most informative as it’s mostly discretionary spending. Everything else is essentially required to live.

An extended of version of the table is available here.

Footnotes:

  1. Don’t lend money to friends/family.
  2. I lazily approximate home value using Yodlee’s embedded SmartZip estimator.
  3. I have a 15Y mortgage; which results in a faster rate of repayment. The true cost of the mortgage should exclude repayment of principal, which I show above.
  4. $15 internet and $0 cell phones as described here.
  5. All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, etc).
  6. I prefer Vanguard funds but my employer offers Fidelity instead. Also, Fidelity mutual funds work better at my Saturna HSA.
  7. Nobody knows the perfect asset allocation. Just pick one and run with it. Use a target date retirement fund as a benchmark if you want some guidance (link).
  8. My low portfolio expense ratio is the primary reason why I don’t hold target-date funds, which have expense ratios anywhere from 0.16% to 0.75%. I can achieve a much lower expense ratio on my own due to Admiral shares, etc. And it’s not hard. Plus, a DIY portfolio allows one to tax-loss-harvest more easily.
  9. The only other administrative cost not captured by my expense ratios is a $19/year administrative fee for my HSA at Saturna Capital.

Financial Update Feb 2017

Another month, another update. A few random comments.

  • Tax refund finally came through. I denoted this as “other income”. As expected, EITC hacking / tax optimization proved to be wildly profitable this year. All low/middle income families with several kids should be doing this. I’ve drafted a guest post on the topic on GoCurryCracker which will be published in the coming weeks. It’s not rocket science.
  • We started two new forms of recurring expenditures this month:
    • We adopted a guinea pig, our first real pet. Yeah, it’s an over-sized rat but our kids love the stupid thing. We paid about $150 for a year’s supply of food for the thing. And we spent $100 or so on a new cage. Only after adopting the thing did I realize that I’m allergic to it. Brilliant planning on my end.
    • We started piano lessons for the three oldest kids. We have a teenager teaching them, but parting with the cash still pains me. Something like $100/month is what we’re doing. Ouch.
  • I maxed out 2016 Roth IRA contributions x 2.
  • I’m sitting on a lot of cash. I need to do 2017 (backdoor) Roth IRA contributions x 2, max out HSA, max out other retirement accounts (403b, 457), pay off mortgage early. Still trying to figure out optimal timing & sequencing.
  • I had a really interesting conversation with two of my friends this past month. Both of them know that I blog (and are two of the five readers I have) and that I am totally transparent with money. Talking about money doesn’t weird me out like it does many people. As a result, a these good friends have independently opened up to me about money. One of them is a friend from undergrad. The other is a friend from my master’s program. Both are 35. One told me that he hit $1M in net worth this past month. The other told me he’s worth several million dollars. A few things strike me as interesting about these conversations:
    • As a society, we don’t talk about money in a healthy way. We hide both our problems and successes, and as a result, we don’t learn from one another. As a result, we often suck at money.
    • My friends are truly “millionaire’s next door.” You wouldn’t know it from their consumption habits. They remain frugal. They drive crappy cars and live in modest homes/apartments. But this is precisely what enabled them to accumulate masses of wealth at a young age.
    • Not even their siblings or parents or other friends know about their wealth. I guess they don’t want to come across as bragging or whatever, but to me it’s kind of weird that these great successes are hidden from view for others to learn from.
  • My safe withdrawal analysis chart is slowly but surely climbing upwards. It is amazing to me how much savings is required to move the needle on this chart at all. I hope it is a reminder to us all of how much wealth and savings are actually required to retire.
  • We currently have high deductible health plans. Several of the members of my family got sick this month. In lieu of going to the doctor for a normal visit (and bill of $150-$200), we utilized a combination of minute clinics (in CVS) and telemedicine. It was our first experience with telemedicine and I was pretty encouraged. They treat simple stuff (sinus infections, allergies, etc). You may want to check it out if you have high deductible plans. Worst case scenario you’re out $10 if they tell you to see a physical doctor. My wife was prescribed antibiotics to treat a lingering sinus infection through one of these visits. Our daughter was told to go see a physical doctor for an ear infection. Again, I’m happy to pay $10 for a consultation which will likely save me a $200 visit. If it doesn’t work out that way, then I’m only out the $10. No big deal.
  • My wife is going on a cruise with her sister and parents, without me. The prepayment of that cruise showed up on this month’s finances as well. I’ll be left on my own with 5 kids for a few days. Heaven help me. I’ll try not to over-analyze the fact that my wife going on a cruise without me.
  • My water bill (below) shows my water usage relative to my home’s previous owner (I moved in over the past summer). I use about half the water as the previous owner. How did I accomplish this? Watering lawn less often (specifically, I turned all water off and saw which portions of lawn began to die, and only watered those portions). I also installed low-flow aerators on my sinks (0.5gpm, sold on Amazon here). I assume I use about half of the other utilities as well, despite having a large family. I assume I also spend about half on groceries, 80% less on restaurants, 90% less on entertainment, etc. As a result, my wealth will increase at a substantially higher rate than my peers. But I don’t feel deprived because we are gaining great value out of the relatively few resources we consume. This, to me, is the essence of frugality and wealth accumulation. We eat healthier than others (due to cooking our own food and eating lots of fruits, vegetables, legumes, and whole grains) at a fraction of the cost of what it would take to eat out at a restaurant. Libraries are free and expand our minds relative to rotting away watching TV. Etc, etc, etc. It doesn’t take a lot of money to enjoy an incredibly enriching and fulfilling lifestyle.
    • I think the process through which I figured out what areas of the lawn needed to be watered is somewhat symbolic of best practices in frugality. Addicted to your $150/month cell phone plan? Try cancelling it for a couple of months. If you die, then reinstate the plan. If you managed to survive just fine without it, then go ahead and transition to a cheaper plan. Similar strategies could work for TV payments, restaurant behavior, etc.  Life goes on without these expenditures. But only after breaking out of the automation of consumption do we consciously think about our consumption decisions. Again, I’m all for consumption that brings value to your life, but it’s often hard to isolate which of your many expenditures are bringing you happiness until you cut stuff away and see what hurts. If you cut and it doesn’t hurt, it means that it wasn’t bringing you happiness in the first place. When talking about this, I see a lot of similarities to this book (link).

 

Footnotes:

  1. Don’t lend money to friends/family.
  2. I lazily approximate home value using Yodlee’s embedded SmartZip estimator.
  3. I have a 15Y mortgage; which results in a faster rate of repayment. The true cost of the mortgage should exclude repayment of principal, which I show above.
  4. $15 internet and $0 cell phones as described here.
  5. All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, etc).
  6. I prefer Vanguard funds but my employer offers Fidelity instead. Also, Fidelity mutual funds work better at my Saturna HSA.
  7. Nobody knows the perfect asset allocation. Just pick one and run with it. Use a target date retirement fund as a benchmark if you want some guidance (link).
  8. My low portfolio expense ratio is the primary reason why I don’t hold target-date funds, which have expense ratios anywhere from 0.16% to 0.75%. I can achieve a much lower expense ratio on my own due to Admiral shares, etc. And it’s not hard. Plus, a DIY portfolio allows one to tax-loss-harvest more easily.
  9. The only other administrative cost not captured by my expense ratios is a $19/year administrative fee for my HSA at Saturna Capital.

Financial Update Jan 2017

Another month, another update. A few random comments.

  • Thanks to aggressive tax sheltering in 2016, we’re getting a $8k refund in a few weeks. I filed taxes for free using Turbotax’s Freedom edition (turbotax.intuit.com/taxfreedom/), which is available to those with low incomes who qualify for EITC, etc. What’s nice about this edition is that it handles capital gains taxes, etc, which most other free versions don’t handle. Plus it covered two state returns free. Pretty good deal.
  • In 2016 we cashed out 90k of our Roth IRAs to fund our down payment for our home purchase. The principal, of course, is tax-free and penalty free. We were also able to use up to $10k each in interest for the purchase, penalty and tax free (which we didn’t need to do). Roth IRAs are incredibly powerful savings vehicles – especially when your effective marginal tax rate is relatively low today. I’m grateful to have maxed ours out since 2005. We’ll continue to do so indefinitely, but in 2017 and beyond we’ll be forced to do back-door roths.
  • I still need to fund 2016 Roth IRA contributions X 2. The deadline is ~April 15.
  • We had an anomalous $2.5k expenditure this month. Without this our monthly spending would have been around $3,500. Extrapolating a bit, I guess it takes about $50k/year for our family w/ 5 kids to live. One of our biggest expenses is mortgage interest, so once the house is paid off our yearly spend will fall significantly.
  • Financial priorities for 2017 (most important first):
    • 1.) Fully fund tax-deferred accounts (401a, $18k 457, $18k 403b, $6.75k HSA).
    • 2.) Fully fund back-door roths x 2 ($11k total).
    • 3.) Contribute to taxable accounts
    • 3.) Pay off mortgage debt early

I’m a bit torn between whether to pay off mortgage early or contribute to taxable accounts. Mortgage rate is 2.875% but I’m itemizing (and well above standard deduction this year), so the effective interest rate paid will be close to (1-45%)*2.875% = 1.6%. That’s pretty low rate at which to borrow, but I’m debt-averse.

What I’ll probably do is a mix of taxable accounts and mortgage repayments. Having a good chunk in taxable accounts would allow me to tax loss harvest every year and wipe a maximum of $3k/year off my taxable income. Seems like pretty low hanging fruit that everyone should be doing. If you harvest a loss greater than $3k in a given year, you can carry the unused losses forward for future years. For example, if you harvest a loss of $9k in 2017, you can reduce your taxable income by $3k/year for 2017, 2018, and 2019.

Footnotes:

  1. Don’t lend money to friends/family.
  2. I lazily approximate home value using Yodlee’s embedded SmartZip estimator.
  3. I have a 15Y mortgage; which results in a faster rate of repayment. The true cost of the mortgage should exclude repayment of principal, which I show above.
  4. $15 internet and $0 cell phones as described here.
  5. All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, etc).
  6. I prefer Vanguard funds but my employer offers Fidelity instead. Also, Fidelity mutual funds work better at my Saturna HSA.
  7. Nobody knows the perfect asset allocation. Just pick one and run with it. Use a target date retirement fund as a benchmark if you want some guidance (link).
  8. My low portfolio expense ratio is the primary reason why I don’t hold target-date funds, which have expense ratios anywhere from 0.16% to 0.75%. I can achieve a much lower expense ratio on my own due to Admiral shares, etc. And it’s not hard. Plus, a DIY portfolio allows one to tax-loss-harvest more easily.
  9. The only other administrative cost not captured by my expense ratios is a $19/year administrative fee for my HSA at Saturna Capital.