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.
- Don’t lend money to friends/family.
- I lazily approximate home value using Yodlee’s embedded SmartZip estimator.
- 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.
- $15 internet and $0 cell phones as described here.
- All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, etc).
- I prefer Vanguard funds but my employer offers Fidelity instead. Also, Fidelity mutual funds work better at my Saturna HSA.
- 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).
- 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.
- The only other administrative cost not captured by my expense ratios is a $19/year administrative fee for my HSA at Saturna Capital.