Financial Update Sep 2017

Another month, another update. A few random comments.

Good Reads/Listens/Watches

  • This MyMoneyBlog post (link) on the rising cost of insurance + the viability of purchasing insurance on the open market was interesting. The rate at which healthcare expenses are rising is alarming.
  • A friend of mine forwarded me a video of a recent MMM interview (link). Watching that video reminded me of why I like him so much, mainly that he challenges societal norms by thinking logically about problems and strategically solving them. I’d like to think that I am similar to him in this regard.

Life

  • My wife has dreamed her whole life about going on a cruise, and she finally went on one with her sister and parents. I managed to keep the kids alive and the house from burning down in her absence….just barely.
  • Fiber internet is relatively new in town and my colleagues were discussing this over lunch (I brown bag daily, others are a mix). One of them mentioned that he had signed up for the full 1GB/s speed. When I questioned him whether he had first tried out the intermediate 20MB/s ($45/month less) or 100MB/s ($25/month less) speeds and found them to be insufficiently fast, he laughed…perhaps because he thought I had a good point or perhaps because he thought I was crazy. There is something profound going on here. Just as my colleague with 1GB/s internet, our society readily adopts excess without ever asking if it will make us happier. We have larger homes, bigger/costlier cars, more TV channels, more cell data, more restaurant expenditures than we possibly need. Many of us have incomes to support the excess. Many of us don’t, but we indulge in the excess anyway. The monetary cost of this excess is easily computed, and the rich person will somewhat rationally argue that he/she can afford the excess. However, I prefer to view the costs of excess in terms of time. Time away from family. Time away from pursuing hobbies and worthwhile pursuits. When reframed this way, I find it hard to argue for the rationality indulging in excess (where “excess” is defined as consumption that does not increase happiness like perhaps an unused 980MB/s of internet bandwidth).
  • Our good friends asked me for 401k allocation advice after I had touted myself as a bit of an expert. I looked through their 401k menu and picked the 3 lowest cost index funds to achieve a three-fund portfolio. I think they were skeptical of the advice, despite the fact that decades of academic research have concluded that reducing investing costs will raise long term returns. I suppose it’s analogous to me asking a doctor what the secret to health is and them responding 1.) wash hands, 2.) exercise, 3.) eat broccoli, 4.) wear sunscreen, 5.) and sleep. Index investing is almost insultingly simple, as is following simple steps to improve one’s health, but it is empirically the best way of investing. Will this immunize you against market declines? Of course not (much like eating broccoli won’t keep me from getting run over by a bus), but over an investing horizon of several decades, it’s the best we can do.
  • I contacted my state treasurer to point out that the excessive 529 administrative fees were going to  cost me $10k over the coming decades. I proposed two solutions: 1) lower the fees, or 2) allow me to contribute to another states’s 529 plan (CA has the cheapest total stock market fund at 0.08% total expenses, compared to my state’s 0.32% of the same fund) and maintain my state’s tax deduction (a few states currently allow this). Unfortunately my request was not very well received. Solution #1 seems unlikely b/c our state is small enough that we can’t negotiate better fees. Solution #2 would require a law to be passed in our state. This is a perfect example of how things get screwed up when government gets in between myself and my investments. I’m considering writing my local legislature to propose Option #2 but I’m skeptical that it will make much progress.

This month’s finances

  • The good:
    • Dumped another $13.1k into taxable brokerage.
  • The bad:
    • We went without A/C for 5 weeks by using windows. In less humid environments, this can work fine. In the oppressive humidity where we live, our home got to the upper 80s which felt more like 95. We finally cried uncle and had a repairman slap a $250 band-aid on our aging A/C unit. I’m hoping we can get a few more years of life out of it.
    • The price of my trusty TWC/Spectrum 3MB/s internet rose from $15 to $20 per month. Bummer. Even after the fiber internet rant above, I feel the irrational compulsion to upgrade my internet to 20MB/s. Then I snap out of it and realize that the 3MB/s works just fine (VOIP, streaming, remote desktop telecommuting, etc).
  • I’ve changed my financial reporting a bit to interface with Personal Capital. I’ll post the updated sheet after I finish my tweaks.
    • I now include a trailing 12 month sum for the income statement.
    • I now calculate a % to FI value on a monthly basis, calculated as the projected retirement income (based on Safe Withdrawal Rate (SWR) percentage) divided by the previous 12 months of expenses. This % to FI measure is increasing in the size of the investment portfolio. Likewise, the % to FI measure increases when expenses are reduced. I’m hoping to increase the numerator and decrease the denominator to accelerate my path to FI.
    • I break up taxes into each individual component now (federal + state + social security + medicare).

Full version is downloadable here (link).

 

Footnotes:

  1. Don’t lend money to friends/family.
  2. I lazily approximate home value as my historical purchase price.
  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: https://www.frugalprofessor.com/disclaimers/

Financial Update Aug 2017

Another month, another update. A few random comments.

Good Reads/Listens/Watches

Life

  • The kids are in school, so we’re back to the grind. We have 4 of the 5 kids in school. Our poor 3 year old has no idea what to do with himself without his siblings.
  • I’m coaching my 5-year-old daughter’s soccer team, which is hilarious. The best part about coaching is choosing the time and location of practice. I chose the school next door and walk/bike there. Beats the heck out of driving 20 min one way across town for a practice.
  • I was reluctantly interviewed by a local news-station doing a story on the $700M Powerball lottery. A young woman came to my office with a video camera and asked questions like:
    • Should a person quit work after winning $700M?
    • How much of the money should a person spend/save after winning $700M?
    • How should a person who has won $700M invest the money?
      • Needless to say, the conversation was of the least productive uses of time I’ve ever experienced. The obvious answer to the above inquiries is to not buy a Powerball ticket which has negative expected return. Lotteries and casinos are a regressive tax (disproportionately affecting the poor) on the ignorant. The sure path to wealth is lowering your expenses (particularly recurring expenses), lowering your taxes, and investing the savings wisely in low cost index funds.
  • One of my wife’s college friends was tragically murdered at the age of 35, leaving behind 3 young kids. At times like this it really makes you reflect on what you’re doing with your life, as any of us can go at any minute. Am I using my time productively or rotting away my life by mindlessly consuming internet drivel? Am I improving relationships with those that matter most or am I letting those relationships dwindle? Am I contributing to making the world a better place or not? Am I learning new things or letting my brain slowly turn to mush? What are my bucket list items and how do I accomplish them? Are safeguards in place to look after my family in the event of catastrophe? How do I make the most out of each day?

This month’s finances

  • The good:
    • Given that all my tax advantaged accounts are maxed out I dumped $7.7k into taxable brokerage accounts this past month. I absolutely love having this hierarchy of savings in place so that it’s a mindless exercise to shovel money into the appropriate bucket when I’m sitting on extra cash.
    • My father in law, the handiest man I know, drove out to help with some home repairs, saving us thousands of dollars in repairs. Nonetheless, we spent quite a bit of dough at the hardware store.
      • I dumped $500 into lumber and hardware for a climbing wall in our basement. I’ll post pictures next month when it’s completed, assuming I don’t die in the construction of it.
  • The bad:
    • Overall spending was higher than we would have liked. But with home repairs and climbing wall behind us, I look forward to lower spending next month (famous last words).
    • It turns out that my wife, who is 34 years old, was recently diagnosed with exercised-induced asthma. Her whole life she complained of being out of breath when exercising. I would always laugh at her and tell her it was because she was out of shape. Sure enough after the diagnosis, she got her first rescue inhaler this past month and it seems to be making a big difference. So we now have 3 people in the family on inhalers, which cost us $143 this past month. I guess it’s a small price to pay for the ability to breathe.
    • Paid $130 total for two eye exams at a local retailer. We found out our 5-year-old-daughter needs glasses. We picked up a pair for $35 after shipping from http://www.zennioptical.com/. I love eCommerce, which destroy excessive retailer margins. Zenni has glasses for as low as $12 after shipping. I love Miraflex glasses for kids, but for little kids this frame is a great cheap substitute for our 5 year old daughter: http://www.zennioptical.com/286516-children-s-plastic-full-rim-frame.
    • Our A/C crapped out, leading to a likely $6-7k replacement cost in the coming months. I’m thinking about deferring the expense until the spring because we’re almost through the hot season. + 1 for living in Seattle where they don’t have A/C.
      • My desire to throw away all of my earthly possessions and live in of a van full time peaks every time I have home repair issues.
  • Thoughts on taxable investing:
    • Taxable investing is a nuisance. Every time you receive a dividend or sell a security, this triggers a taxable event, and thus a drag on the return of the investment.
    • The nice thing about taxable investing is that capital gains can be deferred by simply holding onto stocks for decades without selling. I plan on holding the current shares in my taxable accounts until I die.
    • I put a lot of thought this month as to what investments to hold in a taxable account. This wiki article at Bogleheads was helpful: https://www.bogleheads.org/wiki/Tax-efficient_fund_placement. It says that both domestic and international stocks are efficient to hold in taxable accounts. However, I dug deeper this past month and found this post: https://www.bogleheads.org/forum/viewtopic.php?f=1&t=137580&p=3508650#p2033033 as well as the QDI tables from Vanguard: https://personal.vanguard.com/us/insights/taxcenter/yearend-qualified-dividend-income-2015 and https://personal.vanguard.com/us/insights/taxcenter/qdi/yearend-qualified-dividend-income-2016.
      • The dividend yield on total US stock market fund = 2%. All of which tend to be qualified dividends (this past year was a slight exception), meaning they are taxed at 15% for me at the federal level + 7% at the state level.
        • My annual tax drag on the US stock portfolio = 2%*(15%+7%)=0.44%
      • The dividend yield on total international stock market fund = 3%. Only 70% of which are qualified dividends, being taxed at 15%, with the remainder taxed at my marginal tax rate of 45% (37.5% federal + 7% state). Assume 6% foreign taxes (In other words, 3.18% yield, of which 0.18% is foreign tax withheld).
        • My annual tax drag on the International stock portfolio = 3.18%*70%*(15%+7%) + 3.18%*30%*(37.5%+7%) – 0.18%=0.73%.
          • The 0.18% is subtracted from the above because it represents the taxes that have already been withheld by foreign countries on the dividends.
      • As shown, the annual drag on the total international stock portfolio is about 0.3% higher than that of the domestic stock. This is due to higher dividend yield on international stocks, lower proportion of qualified dividends (QDI), high state income tax, and very high effective marginal tax rate.
      • As a result of the above analysis, I’m going 100% domestic in my taxable accounts from here on out. I’ll get my international exposure through my retirement accounts and avoid the extra tax drag.

Full version is downloadable here (link).

 

Footnotes:

  1. Don’t lend money to friends/family.
  2. I lazily approximate home value as my historical purchase price.
  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: https://www.frugalprofessor.com/disclaimers/

Financial Update Jul 2017

Another month, another update. A few random comments.

Good Reads/Listens/Watches

  • I watched Lion and really enjoyed it. I had never heard of it before but found out about it through Justwatch, a great streaming filtering tool.
  • Mike Piper, the Oblivious Investor, on why Vanguard’s Target Date Funds don’t use Admiral Shares (link). Moral of the story: it’s complicated and unlikely to change in the foreseeable future. Takeaway for me: mimicking the target date funds through a DIY 4-fund approach will continue to be the best strategy going forward.
  • Low cost investing really works. Great article at MyMoneyBlog illustrating this (link).
  • Great Freakonomics podcast on the stupidity of active management (link). Great insights from Jack Bogle (founder of Vanguard) and Eugene Fama (recent winner of the nobel prize in Economics), among other really smart people.

Life

  • Wrapped up our summer travels (Pics here: link).  Highlights include:
    • Spending lots of time with friends & family
    • British Columbia
      • By far the prettiest place we visited this summer.
    • Seattle
      • We used to live there years ago. It was a blast seeing old friends. It is such a beautiful place. Seattle is expensive and traffic is horrific, but I could easily live an hour or so away from Seattle in Bellingham-ish.
    • Colorado (Boulder & Colorado Springs)
      • I dragged my family up the iconic Flatiorn 1 in Boulder. We had to stop about 50 feet from the summit which was disappointing to me but probably prudent. I was proud of my kids for making it up there.
      • Garden of the Gods is incredible. We did lots of bouldering there with the kids. I wish I could have spent a few days (or a lifetime) there climbing. Gorgeous. The Manitou Springs Penny Arcade was pretty fun to visit as well.
    • Utah (Salt Lake City & Park City & Heber & Sundance)
      • There is a poorly advertised free ninja warrior obstacle course on top of Utah Olympic Park in Park City (link). We walked up a mountain to avoid the lift ticket fees (only to find out they offer a free shuttle up there) and spent a few hours on the course. Our kids had the time of their lives. I think we’ll be returning regularly.
      • The ziplines at Sundance were pretty epic (link). Being up there in that scenery made me never want to leave. Robert Redford, a full time resident there, certainly has life figured out.
    • 50 mile backpacking trip over 3 1/4 days in the high Uintas of Utah. Our last day we put in 20 miles of hiking. Link to route: https://caltopo.com/m/121B, Caltopo is a fantastic tool for planning backpacking routes, by the way.
      • 12MB stitched panorama photo taken from the top of Red Knob Pass (link).
      • It’s amazing to me that a couple hour drive and a few hour walk can put you out in the middle of some of the most remote wilderness in the country. I intend to do a trip like this annually until I kick the bucket.
        • We got rained and hailed on every afternoon like clockwork. My 5-year-old rain jacket purchased at Costco turned out not to be waterproof anymore. Whoops.
    • I’m amazed at how cheap it can be to travel. A few bucks of gas and a few bucks of trail mix is all it cost to do the backpacking trip. I’m intrigued by the idea of living full time out of a van (or at a minimum living out of a van while travelling), but my wife rightfully shoots me down while kids are in the house.
  • Protip: Our family has done free summer bowling for years using this website. My wife and I pay $25ish for the two of us total for a parent pass, but the kids are free. We bought some cheap rental shoes years back from https://www.bowling.com/. We hit this up every week or two during the summers. It has worked for us in multiple states so far.

This month’s finances

  • The good:
    • 100% of tax-advantaged accounts are now maxed out (457, 403b, HSA, IRA, and 529). We are now dumping money into taxable brokerage accounts. $10k in this past month and much more to come in subsequent months.
    • We crossed $400k of net worth.
      • By continuing to ruthlessly optimize our expenses, particularly our recurring expenditures, we’re well on path to continue to accrue wealth at a good clip.
        • I love the complete automation of this. I exerted the effort over 10 years ago (probably around 2005) to optimize our cell phone bill and concluded at the time that free VOIP + prepaid cell phones was optimal. A decade later we’ve stuck with this plan and harvested over $10k of savings, with tens of thousands of dollars in savings in the decades to come. We optimized our grocery bill a decade ago (by being mostly vegetarian and buying generic Kirkland products at Costco) and have benefited immensely from this plan. We’ve done the same for TV (antenna), internet (cheapo), insurance (high deductible), etc. We ruthlessly think and strategize around these recurring expenses, solve the problem once, then stick to the plan indefinitely, laughing our way to the bank.
  • The bad:
    • We pissed away another $3,500 in property taxes (which are not tax deductible thanks to AMT). Have I mentioned that I don’t like taxes? I constantly dream of the perfect tax haven. WA, WY, and NV are all scoring very highly on this dimension for retirement, with no state income tax and very manageable property taxes.
    • We spent $260 on home repairs with a few grand likely coming in the next few months.
    • $365 orthodontist bill + $93 asthma medication.

Full version is downloadable here (link).

Footnotes:

  1. Don’t lend money to friends/family.
  2. I lazily approximate home value as my historical purchase price.
  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: https://www.frugalprofessor.com/disclaimers/