Financial Update Dec 2017

Another month, another update. A few random comments.

Good Reads/Listens/Watches

  • Sebastian Thrun on Machine Learning & AI.
    • Found through “TED Talks Daily” Podcast. Youtube link here: https://www.youtube.com/watch?v=d_QrGglKG64.
    • Sebastian is optimistic on the future of AI unlike many others. I liked the following quote: “Today 75% of us work in offices and do repetitive things. We’ve become spreadsheet monkeys. And not just low-end labor, we’ve become dermatologists doing repetitive things, lawyers doing repetitive things. I feel we’re at the brink of being able to take an AI [to] look over our shoulders, and make us maybe 10-50x as effective in these repetitive things.”
  • Comically tragic WSJ article of people losing access to their Bitcoins
    • James Howells, an IT worker in Newport, Wales, lost 7,500 bitcoin he mined in 2009 after a hard drive with his private key was accidentally thrown away during an office cleanup. His story went viral this month as the value of the hard drive’s contents rocketed to more than $100 million. Now he’s attempting to excavate the landfill and dig through four years’ worth of trash to find it.
  • Jonathan, the pharmacist at ChooseFI, is quitting his job to work on the podcast full time. Thought it was a pretty interesting episode:
  • Warren Buffet finally won his 10 year, $1M wager in which he pegged the S&P500 index against any hedge fund.

Life

  • I taught a 90 minute personal finance lecture for a friend’s class comprising of a dozen soon-to-graduate grad students. Here was a note I received from one of them:
    • That was without a doubt the most interesting lecture of the fall semester. I wish someone would’ve taught me this during undergrad or graduate school studies. I appreciate you giving us a nudge in the right direction! I’m excited to maximize my savings and wealth once I start working full time. Thanks again for coming and speaking with us… I really enjoyed it.
    • For the life of me I can’t figure out why the basics of personal finance aren’t taught in K-12, undergrad, or grad school. Why are university systems sending recent college graduates (undergrad + grad + phds) into the world without arming them with the understanding of what an index fund is, what the difference between a Roth & trad IRA is, and the mechanics of how a progressive tax code should shape their decision making?
      • Perhaps I’ll eventually expend the personal capital to convince my department to let me develop and teach that course.
  • For some reason (I was an idiot) I had dragged my feet on enabling two-step authentication on my investment accounts, fearing it would interfere with account aggregators like Personal Capital. I enabled two-step authentication this month on all accounts. Personal Capital works just fine with two-step authentication. You simply add the second step token within Personal Capital.
    • Everyone should enable two step authentication on all investment accounts.
    • I found this site helpful for navigating sites where it wasn’t obvious how to turn on: https://www.turnon2fa.com/
  • Took advantage of the free Global Entry membership (usually $100) using my BOA Premium Rewards Card. They allow one credit every four years.
  • Started climbing at the university gym. Easily one of my favorite things to do. Such a fun combination of strength, strategy, and endurance. I took my wife and 5 kids one Saturday. I need to do that on a weekly basis.
  • Continued biking to work in 20-30 degree weather. Had wind gusts of up to 30-40MPH one day. Luckily most of the time the wind is at my back in the evenings making for a quick ride home. I drove one day this month and instantly regretted it. I’m convinced that bike commuting highly correlated with happiness.
    • A friend forwarded me a link to this running/biking visibility product, which is like battery operated blinking glow-sticks for your body: https://www.noxgear.com/tracer360.
      • 2 weeks into owning the product and I’m a fan. I purchased it to improve my side visibility as well as provide an extra layer of redundancy in my lighting in case my primary lights die.
  • My wife and I took advantage of free skin cancer screening: https://www.aad.org/public/spot-skin-cancer/programs/screenings/find-a-screening. My wife’s primary care physician recommended that she see a dermatologist.
    • I highly recommend the program. A participating physician wasn’t available in our home state so we went to one while on Christmas vacation out of state.
    • Upon returning home, my wife is going to follow up and get a mole removed and biopsied as a preventative measure.
      • One of her brothers had melanoma in his 30’s but detected it early enough to survive unscathed. Skin cancer is terrifying.

This month’s finances

  • The good:
    • Crossed $500k of net worth. Though an arbitrary milestone, it feels good to be growing that number month after month.
    • Followed my own advice to save over $1k in 2017 taxes. If we were not in AMT territory, we would have benefited an additional $3k through early payment of 2017 property taxes. Bummer.
      • Prepaid next month’s mortgage payment to save $300 in taxes next year. 5 minutes of work for $300 in savings is a pretty good ROI.
  • The bad:
    • $2,500 insurance deductible for deer + $120 check engine light investigation at dealer ($500 car rental showed up last month).
    • A neighbor’s friend knocked over our brick mailbox. We repaired it for $850 and the driver refused to get insurance involved. After much pestering them they coughed up half while still refusing to involve insurance. I was convinced by smart friends to not pursue the matter further and file a police report.
      • A wise friend told me recently that he budgets around $500/year in people screwing him over. That way, when he is screwed over in real life like we all are, it doesn’t upset him. It’s known as “mental accounting.” I think there is a lot of wisdom here.
    • Spent $400 on a Crocs order (20 pairs of shoes which should last our family another few years).
      • Have I mentioned we like Crocs?
      • I might be a hoarder.
    • Splurged on two $90 MoviePasses from Costco: https://www.costco.com/MoviePass-and-Fandor-12-Month-Subscription-eVoucher.product.100395930.html
      • We have several family members with passes and they all rave about them. I’ll update later with our experiences.
      • The local theater a mile away from our house participates in the program, so that should be a cheap and easy date. Looking forward to it.
    • High restaurant expenditures is deceptive. We purchased fifteen (7 for us, 8 for gifts) $8 cow calendars from Chick-fil-a.
      • They give you a “freebie” every month which is usually pretty good.

2017 Year in Review

  • Finances
    • Paid 13.6% of income to taxes
    • Spent 24.2% of income
    • Saved 62.2% of gross income; 72.0% of net income
  • Family
    • Pulled kids from organized sports due to too much craziness
    • One extended road trip including a getaway to British Columbia with spouse (and no kids!)
    • Two camping trips
  • Personal
    • Bike commuted most of year (except during horrible winter months)
    • Body weight exercises 3x/week
    • One 50 mile backpacking trip in Uintas
    • Started a blog (technically end of 2016)
    • Officially became a doctor, but not the useful variety (kind of funny)

Goals for 2018

  • Finances
    • Keep doing the painfully simple things that generate wealth:
      • Living significantly below means
        • Keep staving off lifestyle creep
      • Keep maxing out all tax-advantaged accounts
      • Keep investing in low-cost index funds, trying best to ignore market fluctuations along the way
    • Don’t hit a deer (5% of 2017 annual spend)
    • I’d like 2018 annual spending to drop to $50k
  • Family
    • Do another extended road trip
      • One of these years I want to do a national parks tour…probably not in 2018 though
    • More quality time with kids
      • Minimize phone usage in front of kids
    • More camping trips
  • Personal
    • Complete coding course at: https://www.freecodecamp.org/
    • Incorporate olympic lifting into training
    • Climb >= 3X/month
    • Start training for 2019 half ironman???
    • 50 mile backpacking trip (Wind River Range, WY?)
    • Limit online rotting (phone & computer)
      • No incessant checking of news or Reddit

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. $20 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 Nov 2017

Summary of this months finances.


2012 minivan travelling 75mph vs deer. Family is safe. Radiator + oil pan done for. Rest of car in okay shape (above pic is during teardown inspection of car). $6.5k repair estimate. $2.5k insurance deductible. Grateful it wasn’t worse.


Item #91 on repair estimate. 1 man hour for removing all animal product from undercarriage.


Our rear winshield (taken from outside) by my 10 year old daughter. I don’t understand the physics of this.


Waiting for grandpa to save us during 3-4 hour ordeal. That’s our luggage by the store. Me wearing canvas Crocs (more on these blessed shoes later).


Playing cards (Love Letter) on the floor of the convenience store for several hours.

Favorite quote from my wife over Thanksgiving: That’s what financial freedom buys you; you can piss away money without feeling stressed.

  
“no stress”

 

Another month, another update. A few random comments.

Good Reads/Listens/Watches

  • I listened to a new GoCurryCracker podcast the other day and really enjoyed it: https://www.youtube.com/watch?v=aiF6g4qvpjc
    • The audio quality isn’t fantastic, but it’s worth the listen anyway.
    • I’ll eventually stop with the GCC love fest, but the man is brilliant.
    • I find it fascinating that most people who pursue FI are former engineers; I guess our minds are wired differently…we solve problems and trust the math.
  • The term “aggregation of marginal gains” was discussed briefly in a ChooseFi podcast.
    •  Good article to highlight the idea: https://jamesclear.com/marginal-gains
    • Our financial life can be summarized by the cumulative summation of marginal gains. The most important gains come early on in life when our brains are least developed, yet they are the most impactful.
      • Choose right major ($$,$$$/year)
      • Marry right person ($$,$$$/year)
      • Choose right career ($$,$$$/year)
      • Choose index funds and simple DIY investing without help ($$,$$$/year)
      • Live in low cost of living area ($$,$$$/year)
      • Live in modest home ($$,$$$/year)
      • Max out tax advantaged accounts (HSA/401k/IRA/529) to minimize taxes ($$,$$$/year)
      • Drive crappy cars ($,$$$/year)
      • Buy in bulk ($,$$$/year)
      • PB&J for lunch ($,$$$/year)
      • Choose right healthcare plan ($,$$$/year)
      • Avoid cell phone plans ($,$$$/year)
      • Maximize credit card rewards ($$$/year)
      • Board games ($$$/year)
      • Utilize library ($$$/year)
      • Wear sweatshirt before turning on heat ($$$/year)
      • Make own yogurt ($$$/year)
    • The most impactful bullets to our financial well being are the first few bullets. Yet over the years I continually try to optimize, resulting in gains that are increasingly trivial in magnitude. But when you aggregate all of the decisions we’ve made in life, they amount to a massive difference. Perhaps our greatest characteristic is the continued pursuit of optimality.
    • That’s the beauty of thinking logically through long term savings. If you can get the important items solved early in life, the rest of your life is set. If you’re not where you want to be, don’t panic. So long as you right the ship and change your behavior today, you can still accomplish your goals.
    • Bringing a PB&J to work won’t make us millionaires, but doing it alongside every other marginal gain we’ve incorporated will.
  • It’s all about the recurring expenditures: http://www.humbledollar.com/2017/11/number-one-number/
    • A family with low fixed costs is one that is on track to generate huge amounts of wealth.
    • A family with high fixed costs is one that is on track to generate low amounts of wealth.
      • The nice thing is that it’s pretty easy to turn from a high fixed cost family to a low fixed cost family by trimming down recurring expenditures.
  • National Park tour: http://www.theretirementmanifesto.com/visiting-every-national-park-in-retirement/
  • Improv Everywhere:

Life

  • I had the time of my life creating a few eBay listings for the Costco golf balls with my 10 year old daughter. We spent some time observing the prevailing market price for the balls, calculating profits at given price points, deciding what the optimal quantity of balls would be to sell to maximize profits, the difference between fixed and variable selling expenses, etc. My daughter was jumping up and down for joy like a possessed soul. My brother was even on the phone who had interned at eBay so we were picking his brain. It was an experience I won’t soon forget. I hope it gives my daughter a sense of empowerment knowing that she has the power to use her brain to think of ways of providing value to others and monetizing it.
    • Speaking of making money with her brain, we signed our oldest two daughters up for a brain scan study at the university. They were shoved in a huge MRI machine, shown math videos, then scanned (they learned binary counting). I got to see pictures of their brains. They were rewarded with $45 Target gift cards and were giddy about it. A lesson we hope to teach our daughters is that they can sell their bodies for money. This came out wrong. We hope to teach them that they can sell their bodies to medical research for money.
  • We hit a deer while travelling at 75mph at night en route to see the inlaws over Thanksgiving. The car 1 mile in front of us (and out of sight at the time) had hit the deer initially, leaving it on the ground in the middle of the lane, dark fur on back facing us. By the time I saw it, I only had a split second to center the vehicle over the animal and hope to clear it. There was a large thud and immediately the check engine light went on. We almost immediately lost all engine oil and all coolant. We were fortunate to be 1 mile from the nearest exit which had a tiny gas station. We were 175 miles away from our destination and 175 miles away from any major city. After talking on the phone for Geico for an hour they told me I was out of luck since I was too far away. I was disappointed and I called back to get another agent who arranged a tow to our inlaws town. My father in law came to rescue us. The 7 of us waited for hours on the floor of the convenience store. I’m grateful to the owners of the gas station who approved the worker to keep the store open for 1 extra hour while my FIL drove to get us. Car needs new radiator, radiator support structure, and new oil pan, with repairs spanning 3-4 weeks. I didn’t have rental car coverage so we’re self insuring. We found a $500 minivan rental for 3 weeks (which turned into a $850 rental after failing to read fine print of rental car contract and incurring $350 additional driver charge…..stay away from Fox Rent A Car!!!!!!). We will also blow through our $2.5k deductible, for a total expense of $3,350. Geico says that my premiums won’t increase since it wasn’t my fault.
    • Self insurance always sounds good in theory until #*@^ hits the fan. I still stand by my philosophy of insuring only those things that I can’t afford to replace (home, health, life, our minivan), but months like this are painful to swallow. It’s certainly the price I pay for a lifetime of low premiums.
      • This reminds me of a William Bernstein investments quote that goes something like “it is the duty of every investor to lose money periodically; it’s the price you pay for achieving positive long term equity returns.”
        • Losing money in investments isn’t a sign that you’re doing something wrong. Rather, it’s the price for playing the game.
      • Borrowing from the above, “it is the duty of every self insured individual to lose money periodically; it’s the price you pay for enjoying a lifetime of low premiums.”
        • Losing money in self insurance isn’t a sign that you’re doing something wrong. Rather, it’s the price for playing the game.
    • Surprisingly, neither the repair shop nor the car rental store accepted Costco golf balls as a valid form of payment. Their loss, I guess.
    • Our prepaid cell phone plans (link) performed flawlessly through this ordeal thanks to great Sprint coverage where we broke down. We were on the phone for perhaps 2 hours, costing us $3.60 through the ordeal. I don’t understand why people pay $100/month for cell phone plans. It’s irrational.
    • I don’t really understand the point of emergency funds. We hold close to $0 cash (typically around $1k through the month) and seldom need to use it. I get paid on 1st of month, then auto pay credit cards in full, then dump into index funds on 2nd of month. Most emergencies I can think of can be financed with credit cards, which are a form of 0% borrowing for 45-75 days. During this time period we can easily sell stocks to produce cash. If the probability of hitting a deer is positively correlated with stock market declines, I guess my strategy would result in me systematically liquidating stocks at low prices. I find this correlation to be unlikely, though some argue that the correlation of job loss and market declines is positively correlated. The higher the correlation with market declines, the more rational it is to sit on cash for emergencies and bear the opportunity cost of not having money invested. A week into the ordeal and I have zero need for cash.
  • I played a round of golf with my folks over Thanksgiving. The Costco ball is as good as advertised, yet I still hate that sport as much as ever. It makes no logical sense to participate in the sport. Too frustrating, too much time, too much money.
    • My favorite memory of my visit with my parents was starting the Inaugural (and impromptu) Family Decathlon with my father and brother, both great athletes. Events included mile (won; 6:30), pullups (won; 18), pushups (lost; 45), plank (won; 5min), ping pong (lost handily), standing long jump (won; 8 shoe lengths), 50 yard dash (won, just barely), and 50 yard speed walk (lost handily). I was overall victor but just barely. It was a blast and will continue to be a blast going forward as we all train for it. The decathlon was totally unplanned. Next year I am nixing speed walking, which I thought was a joke but my brother insisted was not. All of my track and field events were performed in canvas Crocs, the best shoe ever made. Formal enough to wear to work, yet versatile enough to beat younger brother (by 5.5 years) in all track events except speed walking.
    • A friend of mine, who knows I’m a Croc connoisseur, sent me this article the other day of a family who runs marathons in the original Crocs. Brilliant: https://www.indystar.com/story/life/2017/05/09/meet-father-and-son-who-ran-mini-marathon-crocs/314393001/
  • About once per month I get an email from a friend asking for advice that I’ve already given them via email. Protip: learn how to use your email’s query capabilities. For example, if you are my friend and I’ve emailed you about good life insurance companies, enter the following in your gmail search bar: “from:frugalprofessor life insurance”. Done. Instant answers. And another protip: don’t delete emails. I’m amazed that otherwise really smart people don’t think to perform this simple query in their emails before emailing me the same question again.
    • Other helpful gmail queries:
      • from:frugalprofessor has:attachment
      • to:frugalprofessor from:mrsfrugalprofessor
      • from:frugalprofessor “life insurance”
      • label:unread label:inbox
      • size:10MB (this one queries for emails > 10MB which you can delete to free up space)
  • It was open enrollment for health insurance at work. Naturally, I solved for the optimal plan a year ago using Excel when I was a new hire. This year I decided to share my sheet with my colleagues, many of whom were shocked to learn that they had been making sub-optimal decisions for decades because they had never done the math themselves. It took me 5 minutes to model in Excel, yet this will pay dividends for years to come. Y intercept is annual premiums (incurred regardless of healthcare consumption). Slope of first portion of line is 1 until deductible is hit, after which coinsurance kicks in. Slope of line to right of first kink is equal to the employee portion of the coinsurance (either 20% or 30% depending on plan). Last kink is the annual stop loss. As shown, high deductible + HSA dominates all plans due to HSA tax savings. Without HSA, high deductible plan wins for low spending, followed by medium deductible plan for moderate to high spending. Several of my colleagues admitted to having participated in the low deductible plan for years, a plan which is vastly inferior to the others. And I work with brilliant people. Brilliant people who hadn’t spent 5 minutes in Excel modeling a simple life choice. Extrapolating a bit, I’m positive that the general public systematically makes very large mistakes in many aspects of their every day lives. Here’s the XLSX file to the curious (link).

  • We drove 8 hours round trip in early November to camp in 30°F weather to take the family rock climbing. It was a blast. Yes, 4 hours away is the closest rock climbing we have access to. Yes, rock climbing in 30°F weather in November is cold, particularly on the hands. Yes, my wife is a saint for putting up with me. But it was a blast. Suffice it to say that I’m easy to please. Give me a rock, a tent, and a climbing partner and I have entertainment for years. It turns out that our 5 kids are surprisingly easy to please as well. They are content hopping around rocks, playing in dirt, playing with sticks, roasting marshmallows. Go figure, the great outdoors is great cheap entertainment. Who would have thought?

That was awesome. Only way out was up; no bailing out.

My third child with a nasty mullet billowing out of his helmet. I have since buzzed it off.

My timid fourth child giving it a go.

Child #1 helping child #5.

 

New Credit Card Rewards Strategy

About once a decade I revamp our credit card strategy. For the past year we’ve been doing the following:

  • Costco Visa: 4% gas; 3% travel; 3% dining
    • Travel is pretty narrowly defined and excludes Ubers, for example.
  • Fidelity Visa: 2% on everything else (including Costco)

Six months ago I read of a fantastic strategy on Bogleheads (perhaps my favorite resource of financial info). It is contingent upon having $100k in assets at Merrill Edge to hit “Platinum Honors” status. Here is how it looks:

  • BoA cash rewards: 5.25% gas (even at Costco); 3.5% on groceries (including Costco)
  • BoA premium rewards: 3.5% travel; 3.5% dining; 2.625% on everything else
    • A weighted avg of the above spending yields 3% cash back for our family across all purchases.

There are three inconveniences with the above setup.

1.) You need to park $100k at Merrill Edge. Once I hit $100k in my Vanguard taxable brokerage, I’ll transfer over and continue to hold the Vanguard funds (VTSAX). No tax implications.
2.) The cash rewards has a $2.5k/quarter spending limit on gas/groceries. This can be defeated by getting two of these cards (my wife and I both have them; both of our accounts will point towards the same joint brokerage account). We just blew through the $2.5k/quarter spending cap the past 6 weeks on one card and seamlessly swapped to the other.
3.) The BoA premium card has a $95 annual fee. However, it reimburses up to $100/calendar year on travel incidentals. One of these incidentals is a $100 gift card to American Airlines (link contains what works and what doesn’t). So if you can use this, it essentially makes the card free. If you don’t want to jump through this hoop, the BoA travel rewards card does essentially the same thing. Here’s how it looks on my statement:

The cash rewards has a $150 bonus currently after $500 spend, which can be redeemed for 75% more once I hit $100k. Bonuses from spending before hitting $100k can be deferred until you hit $100k.

The premium card has a $500 bonus after $3k spend. No amplification on this bonus. Bonuses from spending before hitting $100k cannot be deferred.

Here’s the analysis I did based on current spending. Looks like it will net us an additional $400/year tax free since credit card rewards are not taxed. Tiny marginal improvement, but it’s tax free money that we’ll get year after year.

 

This month’s finances

  • The good:
    • Mrs. Frugal Professor: “That’s what financial freedom buys you; you can piss away money without feeling stressed”
  • The bad:
    • Deer on Apple iOS 11.1Deer on Google Android 8.0Deer on Samsung Galaxy S8 (April 2017)Deer on Emojipedia 5.2Deer on Facebook 2.2
      • $2.5k deductible will show up next month. $850 rental fee shows up this month.
    • Spent $,$$$ on golf balls. A hilarious percentage of our net worth is now in golf balls, something like 0.5%. Perhaps it belongs on the balance sheet now.
    • Spent $$$ on bouldering mats for our basement climbing wall. Despite the expense, I’m considering this a wise investment (saved brain damage, trips to ER, etc).
      • Once again, CamelCamelCamel saves the day. I placed a watch on these items months ago and they popped on sale this month.
    • Spent $380 on foosball table at Costco plus $$$ on other random Christmas presents.
      • I don’t feel bad for spending money on durable items which will serve as entertainment for decades to come yet still have a non trivial resale value years from now. Our ping pong table purchased from Amazon about a year ago for $300 is among my favorite recent purchases. Even our 3 year old loves playing ping pong and is freakishly coordinated at it.

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 Oct 2017

Another month, another update. A few random comments.

Good Reads/Listens/Watches

  • My wife and I binge watched the first season of This is Us and are now caught up on season 2. I’m a fan of dramas and this is the best show I’ve seen in a while.

 

Life

  • We upgraded our 10 year old electric pressure cooker with a massive new one (Instant Pot). We made our first batch of yogurt in it this month (a gallon, to be precise) in addition to our normal rotation of beans, lentils, and rare serving of meat. Doing so will save us $20-30/month on yogurt expenses. Electric pressure cookers are amazingly versatile appliances that should in everyone’s kitchen. If you want to save several thousands of dollars per year on groceries, learn to use one. It’s hard to overstate the cost (and health) benefits from cooking your own beans, lentils, and (brown) rice. Unlike processed foods, when you cook from scratch you can control the sodium content of everything you eat.
  • Our friends bought a frisbee golf basket to put in the open space behind our home. As a result, our kids have started enjoying frisbee golf more. Our family biked to the nearby frisbee golf course and loved it. We’re trying to make the most of the last few days of fall.
  • 4 of the 5 kids are now bike riders! We practiced some more and finally got our 5&7 year-olds comfortable on bikes. All 7 of us go on bike rides frequently, but usually we have 3 kids in trailers (3, 5, 7 year-olds). Seeing 6 of the 7 of us on bikes was pretty awesome. Hopefully we can continue to practice before winter hits.
  • We purchased long underwear for our entire family from Costco. Cold weather is upon us and I wore some last night while trick or treating, sleeping, and biking in to work today (low 30s). How have I lived thirty something years without knowing how awesome long underwear is? We’ll have to keep our thermostat a few degrees cooler as a result.’
  • I was asked by a church to give a talk about personal finance. The audience had people from all walks of life, ranging in age from 12 to 90. Here are the slides if you are curious (link).

 

This month’s finances

  • The good:
    • No catastrophes.
  • The bad:
    • Bought a bunch of winter gear from Costco (gloves, long underwear, etc). When buying for 7 people this can get costly. This shows up as “grocery” expenditures this month per the normal convention of categorizing everything from Costco/Walmart as “groceries”.
    • $529 in car registration fees. Ouch.

 

New Reporting

I’m constantly tweaking our financial reporting Excel sheet. New features added this month:

  • Decomposition of change in Net Worth
    • Clearly shows the impact of taxes on wealth accumulation. Wealth tomorrow = Today’s wealth + investing gains + income – taxes – spending. Once you understand that you can drastically control the amount of taxes you pay, you’re well on your way to maximizing wealth.
    • Shows contribution of unrealized investment gains (+ dividends) to change in net worth.
      • Looks like we’ve racked up $51k in capital gains & dividends over the past 12 months. The market is good at times and bad at times. But for a buy and hold investor who “dollar cost averages” (buying regularly over time regardless of the market’s price at the time….the opposite of one who tries to time the market by jumping in and out), I generally try to avoid thinking about stock market performance at all. You cannot get rich by timing the market. It is a fool’s errand. I would do nothing differently today had we instead lost $50k over the past 12 months. We’d simply be $100k poorer.
        • Note that this is easier said than done. It’s easy to dump money into the market when stocks have been performing well recently. It’s another thing entirely to dump money into the market after it drops 40%.
    • People who claim that dividends are superior to capital gains (i.e. large portions of the internet) don’t understand how stocks work. Unrealized capital gains (achieved through stock appreciation & share repurchases) are a much more tax efficient way of returning capital to shareholders than dividends. I hate dividends.
  • Annual spending over last 12 months
    • Due to our lumpy spending patterns (uneven property tax payments, uneven timing of home repairs, etc), it’s nice to smooth this out by summing spending over last 12 months. This number is higher than I thought it would be. We’ve had very rare expenditures over past 12 months (large tuition payments), so I hope our total spending falls considerably over time.
  • Decomposition $1 of income over past 12 months (what % to taxes, expenses, savings)
    • A lot of bloggers talk about savings rates. I had never computed ours until now. It’s a bit ambiguous how to calculate it. For example, do you include 401k match as income? What do you do with taxes? Does mortgage principal count as spending? You can see my assumptions in my report (I include 401k match as income, exclude mortgage principal from spending, etc).
    • Our most recent gross savings rate is 65.2%. Our most recent net savings rate is 74.3%. Our tax burden (including social security, medicare, state, and federal) is 12.3%. This low tax burden is a result of EITC hacking last year and will surely increase over time as the EITC hacking falls out of the 12 month rolling window. I’m curious to see what this converges to over time.

Am I crazy for finding interest in analyzing our spending, taxes, investing, and savings in a methodical manner? For the life of me I can’t figure out why people spend 2,500 hours/year in jobs and spend 0 hours/year doing financial introspection and planning. It’s no wonder we’re all broke. After spending 200 hours/month working, I don’t think it’s unreasonable for a family to spend 0.5-1 hours per month reflecting on how they did the past month, how they can improve, and discussing progress towards long term goals.

I have a crazy idea of creating a website/app that will allow people to track their finances like me (without being an Excel wizard) and project wealth and retirement dates in the future. I acknowledge that people generally don’t care about their finances. I also understand that there are competing products out there (You Need a Budget, Mint, Personal Capital). But I have yet to see a tool that does big picture financial planning, including ruthlessly optimizing taxes.

Thoughts on whether there would be a market for this?

 

 

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).

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