I Got An Extra $1,000!

I recently have heard folks talking about what they would do with some unexpected additional money. J Money asked his readers “What Would You Do With an Extra $1,000?” I generally don’t spend too much time thinking about these type of hypotheticals, but this week it became my reality. I got a call out of the blue informing me that a $1,000 check was on the way to me!

This clearly isn’t something that happens frequently, and sadly isn’t something I’d recommend anyone try to replicate. There is a story with a lesson that goes along with this check.

Rewind to 2014

In the second half of 2014, we were doing a lot of home renovation projects. We had a large bonus room we were converting to a bedroom and adding a bathroom to it. At the same time, we were also remodeling an existing bathroom. The project started in last August and by early December we were getting close to being done. Normally we’re a bit faster, but my wife had a baby in this window and she’s the handier one in this duo.

Part of the bathroom work involved moving the toilet to a different part of the bathroom. Shortly after the toilet was installed in the new location, we went on a week-long vacation to introduce our new baby to our family. We had a great time on the trip but when we got home, we were greeted by water running out of the garage. Not good.

The brand-new supply line for that newly repositioned toilet sprung a small leak. Normally this wouldn’t be a big deal, but it must have gone on for several days. This was also an upstairs bathroom, right above the kitchen, and when I entered the kitchen the ceiling had fallen to the floor. Welcome back from vacation, right?

The Cleanup

This was a pretty emotionally draining time for us. We had a newborn, and weren’t getting much sleep already. We were so close to having our house put back together and then this. Now we had to rip out carpet and worry about replacing warping wood floors. We had some money saved up, we just didn’t really want to spend it on all these additional projects. I spent that first night and the entire next day ripping out soggy carpet and trying to dry things out.

Submitting an insurance claim wasn’t actually my first thought. After all, I was the one who installed the toilet supply line. What if I did something wrong and they said they wouldn’t cover the damage? I went back and forth for a day or two before a co-worker reminded me that this is exactly why you have insurance. It doesn’t matter whose fault it is, so long as it was an accident. We called our insurance and they stepped in were a huge help.

If you’ve never had to deal with a homeowners insurance claim, here’s how it goes. They first bring in a restoration company. In our case, because the water was clean water and not sewage, the cleanup was mostly just drying things out. This involved several dehumidifiers and fans placed throughout the house running 24/7 for almost a week.

Our kitchen was a pretty much unusable as they tried to salvage the wood floors by sucking out all the water. This was our kitchen for a week or so:

The Repairs

Once our house was completely ‘restored’ and dry, we were ready to start actually fixing things. The adjuster had come through and identified the cause and everything that had been damaged. He ran some fancy software that quickly spit out an estimate of how much it would cost to repair/replace everything.

In pretty short order, we got deposits to our bank account and were able to start putting things back together. We ended up spending a little bit more than our insurance gave us since we upgraded some things from what they were before the damage. For example, we upgraded one room from carpet to hardwood floors, and ended up replacing the majority of our carpet instead of just the section that was damaged. As much as possible, we did work ourselves. Placing rolls of insulation in the floor joists in the crawl space is simple and only took three hours, but I saved $500 doing it myself.

Our insurance policy had a $1,000 deductible, meaning we had to pay $1,000 before the insurance kicked in. I didn’t actually have to pay anyone, the insurance just paid us $1,000 less than what they estimated the damage to be. As part of the adjuster’s research, he also took the faulty braided supply line with him to send to a lab to see what went wrong. At the time, we were told that the insurance company was going to attempt to recover costs from the manufacturer if they found it to be improperly made. If they were successful in getting anything back, the first $1,000 would go to pay us back our deductible.

3 Years Later

I don’t talk to my insurance company often. Whenever I did, I would ask about the status of getting this $1,000 back. A few months after the incident, I was told that it was tied up with lawyers in a class-action suit. Having been involved in other lawsuits at work, I knew this meant it would take a long time.

Maybe 18 months after the event, I was told that the company that made the supply line had gone bankrupt and the odds of recovering anything had gone down substantially. At that point, I mentally wrote it off.

Imagine my surprise then, when my insurance company called me the other day and asks how I wanted to receive the payment. I was like, Cash Please!

Image result for wayne's world cash gif

So Now What?

So, I’ve got an extra $1,000 I wasn’t expecting. Now what? For me, it’s pretty simple. I’m not going to go out and buy anything I wasn’t already planning on getting. If I want something bad enough, I fit it into the budget and I buy it. I don’t need an excuse of having extra ‘found’ money to do so.

In this regard, I like Dave Ramsey’s baby steps, which says that you focus on whatever step you are on in the wealth building process. We are on baby steps 4, 5, and 6 (save 15% towards retirement, save for kids college, and pay off the house early), but are taking a quick breather to beef up our emergency fund (baby step 3). We have enough cash in our emergency fund for any typical emergency but want to make sure we have enough to buy a new car on top of our normal emergency fund amount.

All that to say, this money is just going into our savings account since that’s our area of focus. Once that’s beefed up enough, every extra amount goes straight to the mortgage.

So that’s my recent surprise and my boring plan for what I’m doing with it. I hope you can find some extra money, too, I just don’t recommend this path for finding it.

9 Things We’ve Done to Save Money (Some crazier than others)

We’ve done some crazy things in our day to save money. Some were done out of necessity at a specific time and others have become ingrained into our lifestyle. It’s easy for me to downplay those that are a part of our firmly established routine and to think of them as nothing special. Yet, as I interact with and see the behaviors my neighbors, co-workers, or family members I am reminded that some of the things we do aren’t ‘normal’.

These habits have helped us grow our net worth. An even greater benefit is that they have greatly contributed toward our overall sense of contentment. Some of these we don’t do anymore, but some we do. So in no particular order, here are 9 things we do (or have done) to save or spend less money.

Garage Sales

We recently hit up a nearby garage sale where there had to have been $10,000 worth of kids clothes. Everything was a high-end brand name and a lot of things had never been worn. By garage sale standards, the prices were a little high, but for $50 we got what would have cost >$250 in stores and everything is basically brand new. If only my feet were a little smaller, I could have got some handmade Italian leather shoes for just a few dollars. Our entire neighborhood isn’t so flashy, but having neighbors with expensive clothes and flashy cars is a natural byproduct of living in a neighborhood like the one we do. Their waste is our gain.

On the other side, we try to be really selective about what we bring into our home and to shy away from short lived “trendy” items as to not be having the need to have garage sales of our own.

Get Multiple Quotes

In our house, we do a lot of home improvement projects. Lately, it seems that we’re about 50/50 in terms of doing the work ourselves or hiring it out. (Rules of thumb: We always hire out drywall – it sucks. We never hire out painting – it’s easy to do ourselves and my wife can spend the time to get it to her exacting standards. She’s not been impressed with many “professionals” work).

Sadly, there are some real boneheads out there amongst residential subcontractors. Take, for example, the guy we had come to our last house for a drywall estimate. We were finishing our basement and had done all the work ourselves up to the point of drywall. He walked around the basement, saw what needed to be done, leaned back with his thumbs in his belt loops, and after taking a deep breath pronounced “Yup, I’ll get ‘er done for $3,500”. No measurements were made, nothing was written down, just 3-minute walk through and a 30-second mental estimate. The contractor who got that job actually did some math and did it for just under $2,400. Always get multiple quotes.

Thrift Stores

To this day, we have spent very little on brand-new clothes for our four children. We only really buy clothes for our oldest son and daughter and the other kids get hand-me-downs. Most of the clothes we buy for them come from consignment stores or thrift stores.

(Side note – in our town we actually only have donation centers for Goodwill. We have to go to the next town over to be able to buy stuff from Goodwill. Our town is definitely the demographic of Goodwill donors, not shoppers).

Nowadays it seems that most families don’t have more than two children, so there are often plenty of perfectly good clothes that kids outgrow where there isn’t a sibling to hand them down to. Most of what we buy at thrift/consignment stores is for the kids, but one of my favorite ties is a Brooks Brothers tie I got for $1 at Goodwill.

Packing Lunch

When we were getting out of debt and paying our way through graduate school, I think I probably went several years without going out to eat for lunch at work. Not only that, but the lunches I did eat were pretty pathetic. I think I’ve eaten enough Michelina’s frozen lunches for a lifetime. We’ve also packed meals for road trips and flights to avoid the need to purchase food on the go.

Even now that I’m no longer paying for grad school I continue to pack my lunch, but now I eat a lot healthier. I do eat out at work on occasion now, but when I do I try to make it a networking lunch and use it as an opportunity to maintain relationships with people I don’t work with every day. Making this sacrifice early in my career had a compounding effect on our net worth and ability to save, but now has become a money saving habit.

Carpooling

When we were both working, my wife and I carpooled to work for over two years. We had sold our second vehicle and worked close enough to each other that we didn’t have to get a second vehicle or pay >$1,000/yr for a parking pass at her job.

Currently, I have a couple of co-workers who live nearby and have carpooled with them, but it’s not a regular occurrence and it’s more a convenience thing than a cost savings thing when it does happen.

Takeout vs. Dining In

For years, we almost never ate out to ensure having enough money to pay for grad school. Now, we still don’t eat out much, but it’s because we have four kids and taking them all to a restaurant just sounds like it’s own special form of hell. But we still want to eat good food without making it ourselves every once in a while. Our latest tradition is that I will pick up take-out on my way home each Friday.

This isn’t really an area of saving money, but I have learned that at most restaurants the folks that handle take out orders get paid a little bit more to compensate for not getting tips. Knowing that, I have no problem skipping the tip on a takeout order. Boom – 15% savings. My kids are picky eaters too. Unless we’re going to a pizza place, any restaurant food we buy for them is a waste of money.

Avoid Tolls

There are certain cities where toll roads are just a part of life. Just driving into Manhattan or crossing the Golden Gate Bridge will cost you a decent chunk of change. This can come as a surprise to folks visiting from smaller parts of the country where all roads and bridges are free, but to locals it’s just part of living in a big city.

One city that I’ve found particularly egregious for tolls is Orlando. The worst is the one toll booth that you HAVE to go through to get in/out of the airport. Or do you? On your favorite navigation app, you can simply turn on the ‘Avoid tolls’ option and find ways around those pesky tolls. Note that this isn’t always recommended since your time is worth something too. One time we were driving from Orlando to South Florida and decided we wanted to save the ~$12 toll and avoid the Turnpike. We made it, but it probably tacked on 90 minutes to our trip. Next time we’ll just pay the toll.

The Orlando airport toll takes just a couple of minutes to avoid and doing so gives me a sense of accomplishment, even though it only saves $0.50. Note that this isn’t always recommended since your time is worth something too. One time we were driving from Orlando to South Florida and decided we wanted to save the ~$12 toll and avoid the Turnpike. We made it, but it probably tacked on 90 minutes to our trip. Next time we’ll just pay the toll.

Learn to Sew

This is an area where all the credit goes to my wife. I’m not talking about making your own clothes. I know people who do that, but the cost/benefit doesn’t make sense for us. For me, I regularly will need buttons reattached, hems to be redone, or even holes patched in my pants. My wife has taught herself how to sew and now I don’t need to go anywhere to get clothes repaired.

It blows me away that I meet people who won’t even attempt to repair clothes. It’s just seen as easier to replace something that only needs a simple fix. We draw the line at socks. If my socks get holes, they go in the trash.

Wal-Mart Parking Lots vs. Hotels

Here’s one that I haven’t seen anyone talk about before. Now, it’s been a few years since I’ve done this, but I’ve taken a few cross country road trips with only me in the car. When I’m by myself, I hate spending ANY money on hotels. All I really just need a place to lie my head down for a couple of hours before getting back on the road. Enter the Wal-Mart parking lot.

Did you know that most Wal-Mart parking lots allow for overnight RV and Semi-Truck parking? Regular cars are allowed too. It isn’t often the best nights sleep as the semi trucks leave their engines running and the flood lights stay on all night, but it’s completely free. I’d compare it to sleeping on a plane, which I’ve done more times than I can remember. My favorite part is that I can walk in at any time of the night if I need to brush my teeth or use the bathroom. In the morning, I grab a donut, a banana, and am back on the road before the crowd.

I’ve even met some cool people doing this. The most memorable time was driving through South Dakota and sleeping at the Wal-Mart closest to Mount Rushmore. This was near the time of the huge Harley Davidson rally in Sturgis and there was a caravan of RV’s and motorcycles that had formed a circle in the parking lot and they were up all night having a good time.

Note: this would never fly if I was with my wife and kids. I’m not sure I’d suggest my kids do it either, but I’d probably do it again.

 

There are a lot of other things we do that didn’t make this list. At the end of the day, I think it all comes down to being deliberate in your spending. You’ll be served well if you find ways to do things yourself rather than automatically hiring someone.

July 2017 Net Worth Update

I can hardly believe July is already over. The year really seems to be flying by. In the month of July, I finished reading seven books, vacationed to both Florida and Hawaii, and somehow we managed to grow our net worth another $12,800 to $680,980.

If you’re looking for a good read, the best two books I read this month were:

Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall by Neil Barofsky

A Splendid Exchange: How Trade Shaped the World by William Bernstein

July 2017 Net Worth Overview

Cash

As you can see, our cash balance continues to be stagnant, and this months excuse is a trip we took to Hawaii. It was totally worth it (left 3/4 kids at home!), and we snuck it in before school started. With school starting, we’ll be staying put for a while and should see our cash start to grow in September (we’re finishing up a backyard patio in August or September). At least our cash is paying a whopping 1.1%, right?

Investments

Again we continue to do nothing different or special with our investments. The S&P 500 was up 1.93% in July and we continued to invest. I keep about 1% of our investments available for more speculative, risky investments and one of those investments is Amazon. I’ve always said that I love the company but hate the stock but decided to buy some early this year on a dip in the $740 range. I still hold it and continue to be surprised at how much it’s gone up, despite recent declines.

Cars

Nothing new to report here, but Kelley Blue Book periodically shows an increase in the value of our SUV. Tesla launched their new Model 3 last week, and I now have a somewhat renewed desire to buy one but my little Corolla keeps chugging along so nothing planned here.

Side note – when we went to Hawaii, we couldn’t reserve a rental car online since the trip was planned at the last minute when we found really good flights. As a result, the cheapest car we could rent was a BMW 7-Series (non-luxury SUV’s and Minivans were available but even more expensive).

So for a few days, I went from driving a $3k 2005 Corolla to a $85k+ 2015 BMW. You know what’s crazy though? I didn’t like it. The gear shifter was confusing, the doors always took two tries to close, and I didn’t figure out how to unlock the doors without the key fob until the second day. There were other issues, but you get the idea.

Sure, it was roomy and comfortable, but it was a really big car to navigate through crowded streets (Waikiki is awful, it’s much more enjoyable out of the city). The island was also too small to really test out the powerful engine. My takeaway though was that I don’t get much enjoyment out of driving a really nice car.

Our Hawaii rental where we went to see a beautiful sunrise.

House/Mortgage

We continue to pay extra on the mortgage and our home value increased slightly, boosting our equity by $3,700. Our next door neighbor is getting ready to sell, that should help us gauge our own value. His house is smaller and needs some updates but he’s got great neighbors so it should sell quick, right?

We need our net worth to increase by $4k per month to hit our goal of $700k by year end. The concrete patio should be the last big house project for the year and travel will slow with school in session. Next year I’ll be excited to really start making a big dent in the mortgage.

 

Survivorship Bias and MLM’s

 

XKCD.com

I’ve been thinking a lot lately about survivorship bias and how it can cloud our judgment in evaluating financial opportunities.

We are guilty of survivorship bias when we see someone being successful and think that all we have to do is do whatever they did to reasonably expect the same results. What this way of thinking ignores is that in most cases MANY other people have done some of the exact same things and yet haven’t had nearly the same success.

Survivorship Bias Unpacked

For example, If we were to stage a competition of flipping coins where you advance to the next round simply by flipping heads, you would expect to lose about 50% of coin flippers in each round. If you start with 1,024 contestants, you’d expect the number of participants in each round to be roughly:

1,024 -> 512 -> 256 -> 128 -> 64 -> 32 -> 16 -> 8 -> 4 -> 2 -> 1

So after 10 rounds, you’d expect to only have one person left. Is he/she the best coin flipper in the world? How else is it possible that they flipped heads 10 times in a row! We need to interview them and have them give motivational speeches and buy their books, etc.

Seems pretty ridiculous, right? Except we do it all the time when we prop up legendary investors, the 19-year-old in California who won the lottery twice in one week, or those rare few individuals who achieve some degree of financial success with a multi-level marketing company.

What we miss in all of this thinking is that there were 1,023 other people who did the exact same thing and didn’t get the same result. We admire the sole survivor, yet ignore the existence of the other competitors. Nassim Taleb has written extensively about this and related topics in his book Black Swan but you really can’t go wrong with reading any of his books.

MLM Survivorship Bias

It’s the MLM’s that really get me with this. You know how this works by now. You get a Facebook friend request from someone you haven’t heard from in years and accept it thinking “oh, I wonder what they’ve been up to”. After accepting, you check out their profile and quickly notice that they’re involved in Rodan & Fields, or Beachbody, or Lipsense, or Isagenix, or Herbalife, or Essential Oils, or whatever else they dream up next. Now that you’re ‘friends’ they’ve got a great ‘opportunity’ for you to ‘be your own boss’ and generate ‘passive income’. They make it sound so easy and they all seem to project an air of success, following the ‘fake it ’til you make it’ strategy.

This got under my skin recently when a friend of a friend went all over social media touting all the success she’s had selling makeup through an MLM. She’s reached a new level and qualified for a free trip to a resort in Costa Rica. Good for her. She’s just doing her job, and so is the company. She gets a nice trip, and now probably dozens of people see what she’s doing and now want to get in.

For every success story you see in any MLM, there are literally thousands of failure stories you’ll never hear about. If you’ve got Netflix, I recommend watching Betting on Zero. I’m glad that this is helping get the issue out there, but I’m not sure these pyramid scheme type of companies will ever go away. The lure of a simple path to wealth and riches is too appealing, even if too good to be true. There is no simple or fast way to wealth. It requires hard work and time.

June 2017 Net Worth Update

I’m just getting back from a nice quick trip for the 4th of July and wanted to provide an update on our net worth. June was an expensive month for us in the DIY$ household. Nonetheless, we managed to still grow our net worth by $3,900 to $668,176.

June 2017 Net Worth Details

Cash

Our cash balance crept up this month but should jump more in July. We finished installing a backyard fence and had multiple trips that had me on planes for 27 hours in the month. Side note, it’s REALLY expensive to rent cars now that we need vehicles that can hold 4 car seats/booster seats.

I even added another stamp to my passport by visiting Santiago Chile for the first time. The best part of the trip was that my 6-year old son was able to join me. While on that trip, I almost had a disaster when I realized mid-flight that I still didn’t have a replacement debit card from when our accounts were hacked. Thankfully I did have some cash to convert and I made to sure to use credit cards everywhere I could and it worked out. Travel and home projects for July should be much lighter.

Investments

The S&P 500 returned 0.48% in June and we continued to stay the course. We continue to add 15% of my income to my 401k and are primarily invested in S&P 500 index funds. The only sort of exciting thing here is that our liquid assets are about to surpass $400k.

Cars

Our car values supposedly went up this month, but the overall trend still is down. I am a little bit nervous that one of our vehicles might die soon, but the fear is ungrounded. Both cars are doing great just getting old. What’s the longest you’ve heard a Corolla lasting? I drove my mom’s Suburban the other day and she’s at 210,000 miles.

House/Mortgage

Yet again, we paid extra on our mortgage but not nearly as much as we’d like to do. Once our cash builds up a little more we’ll start making much larger payments. For the first few years in this house, most of our home improvement projects were on the inside of the house. In the past year, we’ve shifted our focus to the exterior of the home. In June, we finished installation of a new aluminum fence.

We live on just under two acres but fenced in an area large enough for the kids to play in, but small enough to be relatively easy to manage. The next step was to tear down our deck. Rather than rebuild the deck, we’ll be pouring a concrete slab with some steps down to it from the house. Once that’s done, we’ll be focusing on the grass and possibly starting a garden. It’s going to be a lot of work, but surprisingly it feels less intimidating now that we’ve fenced in the area we’ll be focusing on beautifying.

Here you can see part of the new fence and the area the deck used to be

Overall, it’s been a good start to the year for us and I’m optimistic that we can reach our net worth goal before the end of this year. I’ll leave you with another view on our progress so far this year. 

 

May 2017 Net Worth Update

I just got back from a work trip, but wanted to make sure I kept up with my tradition of monthly net worth updates. Our May 2017 Net Worth increased by $6,470 to $664.267. 

May 2017 Net Worth Summary

Cash

Our cash balance went down slightly this month. We had to spend >$300 pumping out our septic tank and also spent most of the month on a low carb diet, which increased out grocery bill a bit more than normal. In May, we also paid for the materials to install a fence in the backyard. Now that school is out in our area, we’ve been wanting to allow the kids to play outside with less supervision and this will allow that. In the not-too-distant future, we may also be tearing down our deck and pouring a concrete pad in its place. None of these projects really will make a significant dent in our cash, but they will slow our growth and delay our acceleration of mortgage reduction. I expect our cash will stay around these levels for the next couple of months.

In May, we also paid for the materials to install a fence in the backyard. Now that school is out in our area, we’ve been wanting to allow the kids to play outside with less supervision and this will allow that. In the not-too-distant future, we may also be tearing down our deck and pouring a concrete pad in its place. None of these projects really will make a significant dent in our cash, but they will slow our growth and delay significant mortgage reduction. I expect our cash will stay around these levels for the next couple of months.

Because our accounts were hacked, my direct deposit was rejected on 5/31. Our old account numbers have all been closed and I missed the deadline by one day to have payroll make my deposit go to the new account. I’ve been out of the office but am told that there is a check on my desk for when I get back. These numbers assume that my paycheck had already been deposited. I feel blessed that missing a paycheck by a couple of days doesn’t really impact our lives like it would for many Americans.

Investments

The S&P 500 earned 1.16% in May and our investments continue to be primarily tied to that index. We had a little scare with some fraudulent activity in our accounts. Someone sold all our index ETFs and bought another stock. Everything is now resolved as if it never happened.

Most of our index funds are invested in ETFs. Whereas mutual funds can only be bought or sold at the end of the day, ETFs trade throughout the day like stocks. I like the flexibility of ETFs, but in reality, I don’t place many trades. I am considering changing to traditional index mutual funds ever since we were hacked. So far I haven’t made any changes but am open to suggestions.

Cars

Our cars continue to depreciate slowly but really nothing too exciting is going on in our garage. The only thing I really did this month was to change the oil and get a new antenna.

House

Similar to previous months we paid extra on our mortgage this month, decreasing our mortgage debt by about $1,100. The house value according to Zillow came down slightly, but overall our home equity increased. I’m excited to start paying A LOT more extra principal payments. Before we can do that, we first need to increase our cash and finish some home improvement projects.

529 College Savings

Our automatic investment to this account was missed this month because our accounts were compromised. I’ve since corrected this, but that explains why the account didn’t grow by as much as it has in previous months.

Summary

May was another pretty good month for us and June is already off to a great start. We are still on target to hit our 2017 Net Worth goal. I continue to be blown away at how quickly things have accumulated.

I Got Hacked!!

Several years ago in another state, our home was broken into while we were on vacation. We filed an insurance claim and within a few weeks, most everything was back to normal. For the rest of the time we lived there though, I always got a pit in my stomach coming home.

Last week, our digital house was broken into. Somehow, someone got my login info for my investment accounts and made some unauthorized trades. Having gone through both experiences, I can tell you that neither is fun. But being the victim of a digital crime sure beats being a victim in the physical world.

This would always be a big deal, but it was a bigger deal than just having our retirement accounts hacked since we also use our brokerage account as our primary checking account. Even though they don’t accept or disburse cash or have any locations near us, this works just as good as having a local bank or credit union. We rarely use cash for anything and if we need to get any, our ATM fees are reimbursed so I never care what the charge is to use a random gas station ATM.

What Happened

One day I was in a series of all-day meetings and took the chance to check my phone during a quick break. I saw that I had a series of notifications, including two missed calls, a voicemail, and a notification that some stock orders had been executed in my IRA.

I normally would brush off the other alerts (I hate voicemail), but the stock trade didn’t seem right. We have some automatic investments set up, but it wasn’t the right time of the month for that to be happening. My wife has joint access to all of our accounts but doesn’t usually do any transactions outside of our checking account. And lastly, what the heck is USAK and why did my phone say that I was the proud new owner of 15,000 shares?!?

I quickly excused myself from the meeting and did some more research. The voicemail was from my brokerage firm letting my know that they had noticed some suspicious activity on my accounts. As a result, they proactively had frozen my account from any more online transactions. Their fraud team was already all over it before I even let them know that this was, in fact, fraud.

The suspicious activity involved selling off my S&P 500 ETF, and immediately using the proceeds to buy shares of a somewhat thinly traded stock. My first thought was that this was a part of a “pump and dump” scheme. So far, though, I haven’t seen any activity that looks like dumping. In fact, whoever placed the order got the shares for under $6.30 and they are up >6% since then. Even though that’s better than my ETF over the same period, I’m glad things are back to normal.

I’ve been primarily invested in ETFs for a while now, but this experience has gotten me to think about going back to traditional Index Mutual Funds. Since they only can be bought or sold once a day, it wouldn’t be possible for someone to do intra-day trading like this.

What If You Get Hacked

The first thing to do if you find yourself in this situation is to know your brokerage firm’s fraud policy. Most big firms will have a policy that essentially boils down to you not being responsible for fraud. Just don’t do something stupid like give a crazy ex-girlfriend your password since that could imply authorization.

Fidelity has a Customer Protection Guarantee, Schwab has a Security Guarantee, and Vanguard has an Online Fraud Pledge. Each of these pages gives some tips on how to avoid this from happening. I follow most of these steps, but no one is completely immune. If you’re with one of these firms, relax. Call them as soon as you can to get it resolved, but don’t freak out either.

When I called in, they made me answer some additional security questions before changing my username and password. Because there could be a virus on my computer, they wouldn’t allow online transactions until I told them all my computers had been professionally scrubbed.

I trust myself more than Geek Squad’s competence and they were okay with me doing my own virus scans. As it turns out, something nasty was discovered during a virus scan on one of our seldom used laptops but all our machines are now squeaky clean.

The Aftermath

Because of this fraud, I had to spend about an hour on the phone and get new account numbers. They automatically set up the new accounts like the old ones, but we had to reestablish payments for our mortgage. I also had to reconfigure the new accounts in Mint and Personal Capital. We got a new checkbook over-nighted to us and I changed my direct deposit. The only remaining inconvenience is that we still don’t have a new debit card. I primarily use a credit card (that I pay in full every month) so this is fine.

In hindsight, this could have been MUCH worse. I’ve known people that have had this happen to in the past so I knew not to worry. I was surprised at how quickly it was resolved and how little was needed to prove that it was fraud. I hope you don’t ever have to go through this. But if you do, it isn’t as bad as you might think.

A Big Risk to Early Retirement – Inflation Risk

Lest you read my last post and think that I completely ignore the very real inflation risk in retirement, allow me to walk you through my thought process of how I account for it.

I already mentioned that when I project out our portfolio growth I’m assuming a non-inflation adjusted rate of return of 8%. If inflation were to average 2%, then my real return would actually be just 6%. I could just assume a lower rate of return, but I prefer to make some more granular assumptions about inflation.

It All Starts with Budgeting

Each year, I pull our full years’ expenses by category and make some minor adjustments to come up with a representative retirement budget.

First, I eliminate principal and interest payments on our house. Our mortgage will be paid off well in advance of retirement, so this won’t be needed. Next, I reduce our income taxes to account for lower income in retirement. I also reduce our charitable giving amount to account for us not having an income to tithe from, but not to zero since we will still want to be generous in retirement. Lastly, I eliminate any retirement account contributions since I won’t be eligible to contribute.

Not all of our expenses will be lower in retirement. I adjust our healthcare and travel expenses by assuming they will each be double current levels. Everything else stays the same. After all of these adjustments, I’m left with a budget that is roughly half of our household expenses. That sounds really low, but the majority of our current expenses are paying down the house, income taxes, and charitable giving so it is not unrealistic. In some categories like groceries, it may even be high given that we currently cover food for a family of six and will someday be empty nesters.

Inflation Assumptions

With this representative budget, I then apply inflation assumptions. The key difference here is that I use different inflation assumptions for different categories. Historical inflation has been 3-4% and I assume for most categories an inflation rate of 3%. The average for my lifespan hasn’t exceeded 3%, but it’s a real risk that it could be much higher. For me, medical expenses are the big wildcard. Not only do I assume they will be double my current level of spending, I also assume an inflation rate of 7% on medical expenses. If I were budgeting to be paying for higher education costs in retirement (I’m not), I would use a 7% inflation assumption for those costs as well.

Using this representative budget and specific inflation rates, I then inflate our expenses by the number of years between now and retirement to get an inflation adjusted retirement budget. Each year of retirement, I assume that expenses will continue to increase at the rates outlined above.

Inflation Impact on Retirement Income

One very interesting thing to consider is how inflation can eat away at your portfolio. For simple numbers, let’s assume you retire and have $1M worth of investments to live off of. It’s an oversimplification, but let’s also assume a steady 8% return, 3.5% inflation, and first-year expenses of $60,000. Since $60,000 is 6% of $1,000,000 and you’re earning 8%, then you can live off the earnings forever, right? Wrong.

You see, what happens is that even though you are consistently earning 8%, the growth of your earnings is lower than that because you aren’t reinvesting all of those earnings. Because your expenses are growing at 3.5%, and your income isn’t growing as quickly, your expenses will actually be greater than your income after just 15 years. After that, you begin whittling away your principal until year 33 when you run out of money entirely.

In this way, inflation is one of the biggest risks to early retirement. Everyone is impacted by inflation. The longer your retirement, the more time inflation has to grow and exceed your investment income.

Below I’ve outlined what hypothetical portfolio values would be with the assumptions outlined earlier.

How to protect against inflation?

There are a few things I am doing to protect our retirement dreams from inflation. The first is to have an initial withdrawal rate much lower than 6%. In your working years, you want to have as big a gap as possible between income and expenses. In retirement, you want to have a gap between expected investment income and expenses. Whether you plan to spend most of your money in your lifetime or leave an inheritance, inflation can derail either of those plans.

The primary other strategy is to remain invested in stocks. Over time, stocks are the only asset class that has consistently outperformed inflation. While earnings growth may not exceed inflation, left untouched a diversified stock portfolio would not lose purchasing power over time.

There are many ways to account for inflation in retirement planning, but this simple method works for me for now. It is absolutely something you don’t want to ignore, but I don’t lose sleep over it either. What are your inflation assumptions?

Assumptions for Early Retirement

I recently was talking to a friend who disagreed with my retirement planning assumption that our investments would average an 8% return. I had felt that my assumption was conservative given that I am close to 100% invested in equities. He felt that 4-5% was a better long-term assumption. Dave Ramsey assumes 12%. Who is right?

At the end the day, who really knows? We’re doing our best to save and invest a good chunk of our income and staying invested in the asset class with the best track record and best potential growth. But the conversation did get me thinking so I did some additional research.

Over at Moneychimp.com, there is a great resource that shows annual returns on the S&P 500 going back to 1871. You can look at any date range and see returns adjusted for inflation. This is great data for us because the majority of our portfolio is in index funds that track the S&P500. Their biggest takeaway is that:

“Over the very long run, the stock market has had an inflation-adjusted annualized return rate of between six and seven percent.”

When I assume 8% return, I’m assuming that to be before inflation. Is that what my friend meant? I don’t think so, but I’ll have to follow up. My impression was that he was just particularly pessimistic.

I was curious though, so I did some digging into the data set and found some things worth sharing (all numbers not adjusted for inflation).

S&P 500 Historical Returns

  • The best 1-year return for the S&P 500 was 56.8% (1933)
  • The worst 1-year return was -44.2% (1931)
  • Average annual returns from 1871-2016 were 10.7%

As you would expect, the longer you invest the more likely that you wouldn’t have lost any money.

  • The best 5-year annual return was 29.8% (1924-1928)
  • The worse 5-year annual return was -6.9% (1928-1932)
  • The average 5-year return was 10.7%/yr

It took going out to a 10-year time frame before there were no periods where you would have lost money. Investing in the worst 9-year period of 2000-2008, you would have averaged -1.7% per year.

  • The best 10-year annual return was 21.6% (1949-1958)
  • The worst 10-year annual return was 0.6% (1999-2008)
  • The average 10-year return has been 10.8%/yr

Our Retirement Plan Assumptions

The length of time I’m really interested in is even longer than 10 years. My goal is to have my working years last around 25 years and then to be retired for 40+ years. I’m about 10 years in with another 15 to go.

  • The average 25-year period has been an 11.1% return
  • The best 25-year period was 18.2% (1975-1999)
  • The worst 25-year period was 5.8% (1872-1896) 

We first started saving for retirement in 2006 and average market returns from 2007-2016 have been 8.8%. Our returns have been slightly higher than this, but aren’t as clean to track since we have been continuously investing new money for the past 11 years.

All this to say, we’re assuming 8% returns over the next 15 years and based on what we’ve seen so far and what has happened long before we started investing, we remain comfortable with that assumption.

I should have even more years in retirement than in my career, but my plan assumes a low withdrawal rate, under 4%. In retirement, we won’t be relying on sustained market returns to provide for our lifestyle but will remain invested primarily in equities similar to the strategy outlined in Simple Wealth, Inevitable Wealth.

I’m currently reading Nassim Taleb’s book Antifragile and he makes the very valid point that until the worst of anything happened, it wasn’t actually the worst. Said another way, just because a mountain is the tallest you’ve seen doesn’t mean it’s the tallest in the world. I know that future returns could be worse (or better) than we’ve ever seen before, but planning on an early retirement allows me to have sufficient margin in my plan to compensate for unexpected downturns.

See below for some more info on different investment horizons high, low, and average annual returns for a specific number of years.

What rate of return do you use for your retirement planning assumptions?

April 2017 Net Worth Update

For those who are just joining, each month I publicly update our household net worth. April was a good month for us, but nothing out of the ordinary. With this months’ increase of $6,744 to $657,793, we are still on pace to reach our goal of $700,000 by the end of the year.

NET WORTH DETAILS

CASH

Our cash went up a bit this month and continues to get closer to our goal of ~$40-50k. We had a couple items this month that slowed us down like a week of travel, rental car, etc. This next month we’ll also be fencing in part of the backyard and starting some other backyard projects. Household projects slow down our cash build up, but these allow us to enjoy our yard in a way we never have.

INVESTMENTS

The S&P 500 returned 0.9% this month, and most of our investments track that index. 15% of my income continues to go to my 401k, but we haven’t done anything else special.

We finally received and paid all of the hospital bills for our newborn this month as well. We paid from our HSA which I include in the investments category because I do plan on eventually having it invested and growing. As long as the balance is lower than our deductible though, I’ll keep it in cash.

Our total out of pocket was ~$3,500 for the baby. That was literally the cheapest we could go and still give birth at a hospital. My wife has always preferred natural childbirth, and is super tough. This is our fourth child to be born naturally and she’s never had any anesthesia/epidural. Avoiding pain meds during childbirth significantly reduces the hospital bill. Saving money isn’t the reason she avoids them, but it is a nice side benefit. One money saving tip we do use at the hospital though, it to bring our own Tylenol. Have you seen how much hospitals charge for OTC meds?

This month I had an experience that helped highlight a benefit of regularly tracking my net worth. One of our investments accounts is an old 401k we haven’t added to it in several years. I was feeling that it wasn’t moving much even though it is all invested in equities. Since I track the monthly balances for all our accounts as part of this process, it was nice to be able to quickly go in and show that it actually has gone up quite a bit. It just didn’t feel like it since the balance has been hovering around $15,000 for so long. That account has actually gone from $14k to $19k just in the past year or so.

CARS

Nothing too exciting in the car department. As expected, they continue to depreciate slowly, but really are close to their end of life value so long as they continue to be in good mechanical condition.

Late in the month I was driving back from the airport and noticed what smelled like engine coolant coming from my wife’s Expedition. Shortly before I got home the hood briefly started smoking but thankfully didn’t overheat. Much to my chagrin, I knew I didn’t have time to fix this myself, so had to bite the bullet and let a mechanic do it. Thankfully they were able to get it done all in the same day, and $500 later the leaky hoses and parts have been replaced.

I am certainly an advocate for DIY, but there are some instances where it just makes sense to pay a professional. Reasons to hire a professional either are for time or expertise. If the reason is expertise, I’ve found that I can often learn to do most things myself (thank you YouTube!). If I need something done with a tight deadline, I am not always able to do it myself. This was one of those times. It is worth pointing out that we tend to have at least one $500 repair per year on my wife’s Expedition. Her truck has 140,000 miles on it. Contrast that to my Corolla, which has never been in the shop (beyond routine maintenance) and has over 200,000 miles. If Toyota made a big enough vehicle, we’d probably have two. (No, the Sequoia is not big enough).

HOUSE

We continue to pay extra towards our mortgage, but less than we plan to pay once we reach our cash goal. We really haven’t seen many houses go up for sale in our area, but feel the estimate is conservative. Our next-door neighbor will be selling his house and downsizing as he becomes an empty nester this summer. His house is a bit smaller than ours and I’m not sure about the interior condition, but it will be interesting to see what it sells for and what the new owners do to the place.

All-in all, I’m pleased to report we’re on track to reach out net worth goals.