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/

4 thoughts on “Financial Update Sep 2017

  1. Great post. I wonder if you mean “Proj. Income/ Lagged 12 Mo. Expenditures” rather than “Lagged 12 Mo. Expenditures / Proj. Income.” Also, you could express it is a day of the year in addition to a percentage, so that “Dec. 30” would mean very close to financial independence.

    • Ruth, great catch on the mislabeling of the “% to FI” measure. I corrected it.

      My mind doesn’t work in calendar time like yours, but I like your idea if your mind works like that. I prefer percentages. As shown I’m still a long way from achieving FI, but the nice thing is that I’m making progress every single month.

    • Thanks JD. I spend a good portion of yesterday on a bike in the sun with my family. My happiness is definitely positively correlated with the amount of time I spend outside on a bike.

Leave a Comment