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/

8 thoughts on “Financial Update April 2017

  1. Greetings, I am enjoying your blog.

    Can you expand on how you are paying $0 for car insurance? I thought maybe you had no car, but then what would the gas be for?

    • I pay $164 every 6 months for catastrophic coverage on 2 cars. My minivan is a few years old and we carry comprehensive with a $2.5k deductible. My sedan is several years old and we only carry liability. Clean driving record. We’re in our mid-thirties. Low cost of insurance state. Been with Geico forever.

  2. I love the site! Keep in mind that selling something in taxable for a loss while purchasing substantially the same item (whether in taxable or, since 2008, in a tax-advantaged account) within 30 days (before or after) will trigger wash sale rules.

    • Glad to hear you like the site Amanda. I appreciate the feedback. Like teaching, it’s sometimes lonely being a blogger. Without feedback, I have no idea if I’m effectively communicating what I’m trying to.

      Thanks for the heads up on tax loss harvesting. I am aware of this rule, but it’s nice to reinforce that point on the blog. In the coming months, I will update my spreadsheet to have a TLH feature that will allow me to track different “purchase lots” and help me from triggering wash sale rules.

  3. I love your monthly break downs, and your spreadsheet is one of the best I’ve seen. Thanks for making it available!

    • Glad to hear that you are liking the financial updates. I hope you can replicate this yourself. It’s an incredibly powerful tool…

  4. I notice that you’re at least planning to prepay the 15 year mortgage. Let me tell you that it’s great when it’s paid off.

    Your zero bond fund allocation is appropriate. Why on earth would somebody own bonds when he has a mortgage? There’s no way the risk-adjusted return on a bond fund could exceed the zero-risk liability that the mortgage creates.

    When you pay it off, tax strategy changes a little bit. You should alternate from one year to the next in taking the standard deduction. Pay your property taxes in January and December of the year that you itemize and also make two years worth of charitable contributions to a donor-advised fund at Schwab or Fidelity (you can direct contributions to your favorite charities when you want that way). That way you get the biggest bang for your buck. If want to maximize this strategy and you can deduct sales taxes, defer purchases of big ticket items to the year that you itemize also.

    • Thanks for the thoughts. $0 mortgage will be a great day. I also like your idea of prepaying property taxes and alternating standard deduction + itemized deduction. Unfortunately property taxes and state income tax is so high in my state that I’ll be forced to itemize every year, negating the benefit you describe. If not for this, your suggestion would be incredibly lucrative.

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