Financial Update May 2017

Another month, another update. A few random comments.

Good Reads/Listens/Watches

  • Wisdom from Warren Buffett and Bill Gates:
  • A WSJ reporter shares her infuriating experience of calling her financial advisor to figure out how much she was paying in fees (link). After a series of calls to different people (including company headquarters) with little success, she finally arrived at the number. 0.55% in mutual fund fees + 0.85% in advisory fees for a total fee of 1.4%.

    After a series of phone calls that elicited the kind of confusion and frustration I have rarely experienced outside of interactions with cable-company customer-service representatives, I think I have an idea. Barely.

    Describing the fee disclosures of my adviser as opaque would be generous. The experience left me wondering whether someone even less savvy than me, a Wall Street Journal reporter, would be able to navigate this system, to ferret out the good information from the bad.

    • This is absurd on so many levels. Most importantly, it is absurd that this woman was pissing away 1.4% of her portfolio on an annual basis in fees by listening to a financial advisor. I’ve said it before, but I’ll say it again. If the stock market will produce a nominal return of 5% over our lifetimes (a completely arbitrary number I pulled out of thin air but seems reasonable to me), and inflation runs 2% over our lifetimes (a number which again I pulled out of thin air but seems reasonable to me), we will all experience a real return of 3% in the stock market. This woman was pissing away 1.4% of this 3% return in fees, or 47% of her potential upside.
    • I played dumb on a call to Personal Capital a few years back when they were trying to sell me on their 1% advisory services. After listening to their spiel for about an hour, they essentially claimed that they could beat my current returns by 1% but would charge almost 1% in fees for the right to do so. I am sure they were wrong with the former claim, but even if they were right, on an after-fee basis I’d be no better off with them. This whole industry is absurd. The only thing perpetuating the industry is people’s vast financial ignorance. Once the financial ignorance is solved (easier said than done), the industry will implode. Hence the huge migration to Vanguard I mentioned last month.
  • Warren Buffett on tax reform and healthcare during his recent Berkshire meeting (link).

    Today’s corporate tax rates, Mr. Buffett seemed to suggest, are a distraction, not a true impediment to growth.

    “If you go back to 1960 or thereabouts, corporate taxes were about 4 percent of G.D.P.,” Mr. Buffett said. “I mean, they bounced around some. And now, they’re about 2 percent of G.D.P.”

    By contrast, he said, while tax rates have fallen as a share of gross domestic product, health care costs have ballooned. About 50 years ago, he said, “health care was 5 percent of G.D.P., and now it’s about 17 percent.”

    Mr. Buffett said our global competitiveness had fallen largely because our businesses were paying far more for health care — a tax by another name — than those in other countries.

    • Buffett is spot on. I have a healthcare rant coming later in this blog post.
  • Speaking of interesting facts, every US citizen should be informed of the following:
    • Sources of U.S. revenue and how it is spent: https://www.cbo.gov/publication/52408. We are basically a welfare state.
      • The vast majority of our expenditures being spent on Social Security (24%), Medicare (15%), Medicaid (10%), Unemployment + Food Stamps + Federal Retirement + ETIC (16%), etc. 15% of budget goes to military (does not include VA benefits), 6% to interest. 16% goes to a bunch of other welfare programs including housing assistance.
      • Income primarily comes from payroll taxes (34%) and individual income taxes (47%). The ladder is extremely progressive, with the lion’s share of the tax revenue coming from the very top of the income distribution. The former is much less progressive, as payroll taxation is largely a flat tax (with the exception of social security being phased out above $120k in income). Only 9% of federal revenue comes from corporate income tax. The remaining 10% comes from estate and gift taxes, etc.
    • Largest tax breaks for individuals and corporations:
      •  The largest break by a mile is the subsidy for employer sponsored health care plans. This should be removed, as discussed later.
      • Mortgage interest is only #3 on the list because not everyone who has a mortgage benefits from the deductibility of the interest (mort int + state  income tax + property tax < $12,600 if MFJ).
    • It boggles my mind that we can’t balance our budget at the federal level. It’s not rocket science. It’s ensuring that expenditures are below income receipts (or alternatively said that our income exceeds our expenditures). Almost all budgetary problems are spending problems, not income problems. Our debt burden has been relatively painless thanks to historically low interest rates, but interest rates will rise and we’ll soon feel the hurt. The great folly of government is that it’s too easy to spend other people’s money. And it’s too easy to over-promise on spending when the burden of paying for it falls to future generations.

 

How to Fix Healthcare Rant (feel free to skip, of course)

  • Remove the healthcare premium tax subsidy. It is the largest tax break that the US offers. It is utter nonsense that we have this. It creates a huge incentive for companies to offer bloated, Cadillac policies and it’s very regressive….it disproportionately helps those who are well off and have juicy employer-provided plans.
  • Make consumers price-conscious through exclusive use of high deductible plans. High deductible plans will produce many benefits.
    • Create incentives for price-conscious consumers.
    • Reduce overhead from running insurance companies.
    • Given that we have a high deductible plan, I feel 100% of the hurt every time we go to the doctor, up to the deductible which I hope we never hit. As a result, we’ve innovated and come up with less costly options such as telemedicine and minute clinics, which are anywhere from 40% to 95% less costly than going to our primary care physician. Do you think we would have invested the time to figure out lower cost options if we didn’t have the financial incentive? Not a chance in hell. Five months into 2017, we’ve only reached $375 of our deductible, thanks in part to our innovativeness (not to mention good luck avoiding accidents thus far).
  • Divorce employers from health insurance. Remove that nonsensical distortion – an unintended consequence of wage caps during WWII. A competitive market for health insurance will arise (like in all other aspects of insurance (life, car, home, etc))
    • https://www.ebri.org/publications/facts/index.cfm?fa=0302fact
    • During World War II, the number of persons with employment-based health insurance coverage started to increase for several reasons. When wages were frozen by the National War Labor Board and a shortage of workers occurred, employers sought ways to get around the wage controls in order to attract scarce workers, and offering health insurance was one option.
  • Further incentivize good health by allowing for price discrimination in health insurance markets (just like how life insurance charges more for smokers with high cholesterol).
    • How is it that I’m penalized for being obese or a smoker for life insurance, but it’s not Kosher to do this in healthcare?
    • How is it that I pay the same amount for health insurance as my colleagues? I have 5 kids and some of my colleagues have none. They are subsidizing me, and it’s not necessary. I should bear this cost of having more kids, but I’m rewarded with a subsidy from my colleagues.
  • Require that doctors post prices for all procedures. One article I just read suggested that our healthcare woes will go away once consumers start asking “how much does this test cost?” and “is this test really necessary?”
    • With a more streamlined health insurance industry, there is no need for the nonsense battle between what doctors charge and what insurance companies reimburse. Again, this further drives down the overhead costs of insurance companies.
    • Require a certain percentage of the medical expense to be collected at the time of service, just like any other service on the planet. My preference would be full payment at time of service with all reimbursement handled on the back end between the individual and the insurance company.
      • I spent an hour this morning calling a half dozen dermatologists to inquire about pricing for a a basic preventative skin cancer screening exam. Receptionist #1 said $75+whatever your insurance doesn’t pay. Receptionist #2 said $120-$180. Receptionist #3 said $80-$121. Receptionist #4 said $150-$250. It is absurdly difficult to find out medical prices before incurring the expense. Under the current system, neither patients nor doctors care about costs. Only 3 months after the service is provided, when the insurance company decides it won’t cover all of the procedure, will the consumer care about pricing. By then, it’s 3 months too late and the consumer can’t choose a lower-cost provider.
  • Reform malpractice litigation of doctors, who are required to carry expensive liability insurance which costs are naturally passed down to consumers.

I shared the above points with some colleagues over lunch. One of them retorted “it makes sense for the fraction of spending on healthcare to go up as countries get richer, after all, health is priceless.” I understand where my colleague was coming from, but I reject the premise entirely that doctors make us healthy. In general, good lifestyle choices make us healthy, not doctors. Exercise, veggies, avoiding excessive salt & sugar (i.e. processed foods), sleep, washing hands, and sunscreen make us healthy. Doctors are generally there to clean up our mess when we fail to do what we know we should. I understand there are many conditions that are outside of our control (cancer, horrible birth defects, etc), but I’d suspect that the vast majority of healthcare expenditures are a result of poor lifestyle choices.

My former employer (the MegaCorp) offered free screening to employees every year. We would dutifully stand in line for 5 minutes to get our fingers pricked, to hop on a scale, and have our blood pressure checked. I would always marvel at the supposed insights learned during these exams. My colleagues would come back from these exams surprised to learn that they were 100 lbs overweight, had high cholesterol, and had high blood pressure, and were at risk for a series of horrible diseases. Really, you needed a doctor to tell you this?

Sorry about the rant. I’ve been teaching my oldest daughter economics lately and the idea of externalities. Externalities abound in the context of health insurance markets and it’s interesting to think through the implications of our current system and how one might fix it.

 

Life

  • I forgot to blog about this last month, but I took our family to the spring football game last month. It cost $17 for the 7 of us total. We have a strict no-buying-snacks policy at entertainment events like this so my kids resort to foraging. We stuck around until the end of the practice game and my kids were elated to see all of the half-eaten popcorn containers left behind by people.
  • We mulched. We had a truckload of mulch dropped off on our driveway. I had no idea how much mulch we’d need, so I gave it some thought and picked a random number out. 10 cubic yards. Then I went to Home Depot to buy a wheel barrow and realized that we needed less than that. Probably 8. The truck arrives with 12 (2 “free bonus ones”). Crap. I spent three days in the heat shoveling that stuff around. The joys of home ownership. That and removing bushes from hell littered with thorns and planting a garden. $364 down the drain.
  • The kids have tired of taking care of their guinea pig after 3 months of owning it. My wife or I don’t want to take care of the thing so we put the thing on Craigslist and it was gone in 3 days. If we were stronger-willed parents we’d probably force our kids to take care of the thing for the next 4 years of life the thing has left, but I hate the daily battle with the kids. Lost $300 or so on the deal, but we got the pet ownership bug out of our system. Best investment I ever made. Goodbye Thumper.

  • Sleep still eludes me, as it has for the past decade or two of life.
  • Exercise went well. Biked to campus every day. Did my workout routine. Took a few days off to recover from the mulching fiasco.

 

This month’s finances

  • Dumped $6,750 into Saturna HSA. It turns out they recently removed the lower trading expense for Fidelity mutual funds, so I opted instead for the ETF equivalent of the Vanguard Total Stock Market Index (VTI).
    • This was my first ETF purchase in my life, and I’m not a fan. ETF’s are a pain to own relative to holding index funds directly. You have to deal with bid-ask spreads as well as the inability to buy partial shares. With a simple index fund, you don’t have to deal with either of these issues.
  • I dumped $2k into a 529 account just to test the waters. Relatively high cost funds (0.32% after management overhead relative to the 0.04% expense I could achieve on my own). But I live in a relatively high taxed state, with marginal rates of 7%. If I lived in TX, WA, NV, etc, I don’t think I’d touch a 529 plan with a 10 foot pole. I guess I still need to give it some more thought, but I think the $10k/year (the state deductibility max) is a no-brainer.
  • It turns out that Vanguard lowered its expense ratios by 1bp (0.01%) for all funds I’m invested in. I hadn’t seen any other blogger/news article mention this. I love that company. It’s relatively commonplace, with expense ratios adjusting roughly annually.
  • Investors talk a whole bunch about alpha, which is a essentially fancy way of saying any excess return above the market. I’m convinced there is basically no alpha out there to be had from stock picking, which is why I advocate low-cost investing. However, I think there is substantial tax alpha to be gained through the efficient management of one’s taxes. Fully funding HSA, 401k, IRA, 529 plans are ways I achieve positive tax alpha. Further, tax loss harvesting, which I’ll expound on in subsequent months, is another source of tax alpha. I think this tax alpha is the lowest hanging fruit out there, and I’m absolutely shocked others don’t see the wisdom and follow suit.
    • I had a recent conversation with a colleague of mine, who is a brilliant man in his mid-forties. He has been employed by the university for a while (10Y or so). We got talking about effective marginal tax rates and tax sheltering. It turns out it never had occurred to him in is life to calculate his effective marginal tax rate. I showed him how to do it (and I shared my spreadsheet with him), and it turns out that his effective marginal tax rate was over 50%. Mine is 45% but his is over because he hits AMT like me but he also loses the refundable education credits with a kid in college, which leads to a 5.5% higher effective marginal rate than me. He and I determined that he could save $20k in federal and state taxes annually by sheltering $36k of income in a 403b + 457, which he validated in Turbotax himself by running scenario analyses. His mind was blown. In exchange for saving him $200k in taxes over the next 10 years, he promised to buy me a Chipotle burrito. I consider it a fair trade. Tax alpha people. It is unbelievably powerful.
  • After reading a series of good posts about umbrella insurance on Bogleheads, I finally succumbed. I detest recurring expenditures. I detest over-insuring. However, my one rule of thumb that guides my insurance choices is to not insure anything that I can easily afford to replace. Well, if I’m at fault in a horrible accident, or if someone slips and breaks their neck on my driveway, I’m exposed to huge litigation risk. Umbrella insurance protects me. I understand retirement assets to be protected from litigation, which is a huge shadow benefit of sheltering money in these accounts. I struggled to know how much coverage I should get but finally converged on a $1M policy for $143/year through Geico. I know it’s cheap, but I’m frugal and it kills me to sign up for a new recurring expenditure. I’ll probably allocate this to my auto expenses since it is primarily driven by auto risk. In addition to the countless Bogleheads posts on the topic, I found this blog post informative: http://www.financialsamurai.com/how-does-an-umbrella-policy-work-and-how-much-does-it-cost/. If you are not a reader of the Bogleheads forums (in particular their personal finance one), I’d encourage you to do so. There is no better source of financial wisdom on the planet than the collective brainpower there.
  • I paid $164 for car insurance this month (6 month premium) and $439 for annual homeowner’s insurance premium.

An extended of version of the table is available here (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.
  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 1%. 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. ETF’s are a pain to own relative to holding index funds directly. You have to deal with bid-ask spreads as well as the inability to buy partial shares. With a simple index fund, you don’t have to deal with either of these issues. I am currently invested in VTI b/c it’s $10/year cheaper than VTSAX in my Saturna HSA.
  10. The one blight in my expense ratio analysis is my 529 plan. The underlying Vanguard fund is almost free to hold (0.02%), but the high administrative fees bring the total cost of holding the fund to 0.32%. I abhor fees and would likely avoid 529 plans if I didn’t get to deduct up to $10k of contributions per year on my state return, saving myself $700/year in state income taxes.
  11. The only other administrative cost not captured by my expense ratios is a $19/year administrative fee for my HSA at Saturna Capital ($15 per transaction + 4*$1/dividend reinvestment).

Disclaimer:
This site is for entertainment purposes only, as disclosed here: http://www.frugalprofessor.com/disclaimers/

Financial Update April 2017

Another month, another update. A few random comments.

Good Reads/Listens/Watches

  • I listened to an interesting podcast on strategies to pay for college (link). Cliff notes version: get kids to take ownership of college costs + get them to apply for grants/scholarships.
    • Random thoughts from me: A more expensive college won’t necessarily lead to better life outcomes, especially when considering leaving undergrad under a mountain of debt. Further, if your kid is going to go on to grad school, nobody will care where they went to undergrad (if they can get in to grad school).
  • White coat investor has a great post on backdoor Roths (link). In it, he highlights a strategy I’d never heard mentioned before. If you have a rollover IRA which complicate the execution of the backdoor Roth, you can solve the problem by rolling this into a Fidelity solo-401k, thereby leaving your traditional IRA balance at $0. Brilliant.
  • As usual, Vanguard is decimating the investment industry (link). John Bogle (founder of Vanguard) is my hero.
  • I recently watched the new Warren Buffet documentary called Becoming Warren Buffett (link, choose version that’s 1.5 hrs). Good movie.

Life

  • One of my neighbors came over with his daughters to introduce himself. In the course of our conversation, I disclosed that I was a bit of a tax/investments guru if he ever wanted to bounce ideas off of. He asked specifically what I advocated, and I said something along the lines of managing taxable income to minimize one’s tax burden. I further explained that I’m a proponent of low cost investing. He responded by saying that he was all set on the investing dimension because he has a guy at Edward Jones handling his finances. Despite my wanting to scream obscenities at the absurdity of this statement, I shut up and let the conversation drift another direction. I’ve had similar conversations hundreds of times with acquaintances throughout my lifetime, yet I never learn to shut up. Now that I have a blog as an outlet, I’ll hopefully learn to shut up in real life. 99.999% of the public doesn’t care about this stuff or isn’t able to comprehend the value of it. Yet, increasing your net (after-fee and after-tax) investing returns by a mere 1% per year will compound to an enormous difference in wealth over a 40-year investing horizon. But people bad at math (i.e. most of us) fail to understand the power of compounding and fail to understand the power of these small changes.
  • I taught my 4-year-old and 6-year-old (don’t know why I delayed with this dude) to ride a bike. Protip: I used a kid’s climbing harness and held onto it while running behind them. A more ghetto alternative is to use a belt around the torso under the armpits. The most counter-intuitive thing about teaching biking is that if you find yourself leaning right, you must correct by turning right.
  • I am in the process of wrapping up teaching. I gave an optional personal finance lecture for my last class period. 25% of students showed up. Maybe I’ll make it mandatory next year, but I think those that came liked it a lot. They were floored at how little I spent, particularly on food. Most of my students are days away from starting their careers and enrolling in 401k plans and health insurance plans. They need to be educated on how to make smart decisions, but through a colossal failure of the public and university system, nobody has bothered to tell these students how to manage their money in the past 17 years of public schooling.
  • I’m pretty burned out. Over the past 10 years, we’ve:
    • Pumped out 5 kids
      • Managed to keep all of them from killing each other (easier said than done) and not burn down the house (yet).
    • Completed master’s degree
      • I finished in 3 semesters instead of 4 by loading up on max credit hours to have time to go back to MegaCorp before PhD, the first time in the history of the program that this had happened.
    • Completed PhD
      • I don’t know that I’d wish a PhD on my worst enemy. It’s a blessing and a curse. We lost about 50% of students who entered the program. Mental health problems abound in PhD programs. I about lost my mind when I was on the job market. Such excruciating and unrelenting stress until the job was secured.
    • Wrapped up first year of teaching a difficult undergrad class which required a lot of prep time.
  • This isn’t an attempt at self flattery. It’s just an attempt to justify my current feeling of burn-out. Due to my work load, I’ve worked every weekend the past many months and seen my family much less than I would have liked. As a result, I need to get more balance in my personal and family life. Here are some goals for the summer, which I’ll hold myself accountable for on the blog:
    • Physical:
      • Get back in shape.
        • Bike to work (I succumbed and bought a parking pass during the horrific winter months). How to guarantee success? Cancelling my parking pass will force me to bike.
        • Work out 3x/week. Specifically: (3 sets of: 15 pullups, 30 pushups, 90 second planks, 7 rep weighted squats).
        • Take backpacking trip with buddy this summer.
      • Sleep more. In bed by 11pm. Wake up at 7am. Work out first thing in morning or it won’t happen.
    • Family:
      • 2 dates per month with spouse.
      • One monthly 1-on-1 date with each kid per month per parent. That’s 10 dates per month, or 2.5 dates per week.
    • Mental:
      • Read a new book every month.

This month’s finances

  • I completed the remaining $5.5k of backdoor Roth contribution for this calendar year. With this goal checked off my list, my financial goals portion of the spreadsheet now tells me that I should fund my Saturna HSA and 529 up to state deductibility limit. I’ll do so shortly.
  • I updated my spreadsheet a bit. Specifically, I now chart net worth by account type. As you can see, I’m following my own advice quite well on being tax-savvy. I’m plowing every penny I own into tax-deferred and tax-exempt accounts until they are maxed out. Only after this will I consider prepaying the mortgage early or dumping money into taxable brokerage accounts.
  • I now plot spending as a function of time. I’ve had some really weird expenditures over the past couple of months, but I’m hoping my steady-state spending can converge to $3.5k. This past year has been really anomalous.
  • I cashed out a tiny amount I had in a taxable brokerage account and harvested a $500 loss. The proceeds shows up as “other income”. I still have to harvest $2,500 more in losses to hit the max of $3k this calendar year. Harvesting the full $3k limit will reduce my tax bill by $1,350 (=$3k*0.45 since my effective marginal tax rate is 45%). To have losses, I need to eventually start piling money into taxable brokerage accounts. I’ll do so soon.
  • Major expenditures:
    • $270 annual premium for a $1M 15Y term life insurance policy. We figure that $1M is probably good enough given frugality + existing assets. In the not-too-distant future, the policy will be irrelevant as we’ll be able to self-insure at that point. Self insurance is a really important topic that is relevant in many aspects of life (through high deductible auto insurance, high deductible health insurance, high deductible home insurance, not paying warranties on phones/appliances). In the event of some catastrophe, I can liquidate financial assets at a moment’s notice. Until this catastrophe, I pocket the savings on lower insurance costs.
    • $288 web hosting fee ($8/month * 36 months) to Bluehost. Painful.
      • I finally signed up with an Amazon affiliates account to help defray some of this cost (http://amzn.to/2pgodpD). One the one hand, it seems to cheapen this whole blog. After all, why would anyone trust me now if I’m trying to get you to buy crap on Amazon, right? On the other hand, being the cheapest dude I know, it pains me to no end to pay the $8/month.
  • I simplified my asset allocation. Fidelity is my 401k administrator, and I set up the auto-rebalancing feature in my portfolio. Every year, it will rebalance my 401k holdings to my target allocation (70% US equity, 30% int equity). At Vanguard, where we have our Roths, I split it (50% us equity, 50% int equity) to ensure I’m above the $10k Admiral share hurdle in each fund. One of the purported value-adds of financial advisors is that they “rebalance” for you. Well, Fidelity is doing this automatically for me every year now thanks to a couple of mouse clicks. It’s my understanding that Vanguard doesn’t offer this, but it takes about 2 minutes to accomplish every year. If you are paying a financial advisor a 1% assets under management fee (which is made worse when the advisor dumps you into actively managed funds charging an additional 1% fee), please stop. It’s a racket.

 

An extended of version of the table is available here (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.

Disclaimer:
This site is for entertainment purposes only, as disclosed here: http://www.frugalprofessor.com/disclaimers/

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.

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