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).

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

10 thoughts on “Financial Update Oct 2017

  1. Count me in on the app idea! Understanding that the development and continued improvement of said app would take money have you considered a Go Fund Me route? One word of caution, the app is still just a tool. We, as individuals and as families still need to take the action to ensure we are headed in the intended direction.

    Great Up Date this month!

    Thanks

    • Thanks for the feedback Russ. The nice thing about having a decent financial cushion & learning to be content on relatively little is that money ceases to be a big motivator for me (especially with effective marginal tax rates of 50%). If I found the time to develop the app/site, I would make it available for free.

      In the interim, I’ll post my XLSX sheet in a few days after I scrape my personal data from it.

  2. Would love to see the app. Being a college student, it’d be a great tool to show my not financialyl savvy friends what compounding really does.

  3. Do the app, FP. It will make it easier to see the end from the beginning and give people a good figurative “carrot” to chase after and help motivate kids at an early age.

  4. I love your knowledge and sharing of it and would love to see more ways I could maximize my tax benefits. Go for it! Because I’m definitely not Excel savvy enough to do it on my own. 🙂

  5. Love the app idea and love the site…been an avid financial blog reader for almost 10 years now and just came across yours recently and have added it to my list of regulars…only wish you would post more often!! (Read your EITC post on gocurrycurry website a while ago, but I found your site more recently from rockstar.) Anyways, have a very similar outlook as you regarding spending, savings, etc. and noticed in your spreadsheet you have a 400k home. With the ability to afford much more, but the desire to spend as little as possible, how did you decide what was reasonable for a home in terms of s.f. and price. I am currently house hunting, and am really struggling as to where to draw the line.

    • Pete,

      Glad to hear from you and thanks for the feedback. I don’t post more often because my central message is dumb simple. 1.) Spend less than you earn, 2.) Be wise with taxes, and 3.) keep your investing costs low. I almost stopped blogging after writing essays on those three topics, but continued to keep the blog alive by using it as an online journal. I am in the process of changing my credit card rewards strategy to eek out a small gain (a few hundred tax free dollars/year) which I’ll blog about next month, but these types of posts are so trivial relative to the big objectives. I feel that the frequency that other bloggers post confounds the message of complete and utter simplicity.

      We are fortunate(?) enough to reside in flyover country where housing prices are very low. Our $400k home is in the 90th percentile of homes in our city. We chose to live in the lowest tier home in the nicest neighborhood in the city. Some neighbors within 0.1 miles from us have homes worth ~$2M (worth 10X more if in bay area, for example). How did we arrive at a $400k home? We have 5 kids and I would love to live out of a van/camper, but common sense and my life (my wife would murder me) says that a 4 bedroom home is probably a wiser move. Our last home was a 2 bedroom, mold infested home built in the 1950s. Prior to that we had 4 kids in a 2 bedroom condo. Suffice it to say that we are easy to please. 7 years of grad school with 5 kids will teach you to be content. Granted, we had $250k in assets near the end of grad school and we could have spent more, but the honest truth is that we are just really content people. It’s something I continue to work on daily. 2 years in my late teens spent living abroad in a 2nd world country definitely shaped my views of happiness and money.

      When we first moved out I was targeting a $300k home, but I don’t regret for one second our decision. I think the winning strategy in real estate (as a sage owner of a home for 18 months) is to buy one home in your lifetime to avoid transaction costs. If this means stretching a little for your first home to avoid selling in a few years, I think this is appropriate. But I don’t regret for 1 minute not spending more on our home.

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