Sunday, September 20, 2020

August 2020 Net Worth Update

Led by continued increases in the stock market, our net worth hit another all-time high in the month of August, ending the month at $1,149,900. 


CASH

Our cash balance dipped a bit, but this was expected since we had several things hit in August that were either one-time or won't come again for a while like our annual homeowners insurance bill and several things to get ready for the new school year. We still would like to get it up over $40k and we should be able to get there soon. Our property taxes are due this fall, but should be able to stay at or above $40k even after that is paid. 

People often ask me where to park their extra cash since savings accounts pay so little. We keep the bulk of our savings in an online savings account. The rates are historically low, but better than you'd get at your typical bank and emergency funds aren't meant to be put at risk. The Federal Reserve recently came out and indicated that rates will stay at these low levels until at least 2023, so I suspect that more and more people will be looking for higher interest on cash. To anyone looking to do that, I simply say "BE CAREFUL". I suspect we will see more and more people out pitching 'risk free' investments that come with strings attached and heavy commissions to the person selling them. 

INVESTMENTS

Our investments went up with the market, and grew by about $35k. It's hard to believe that my first job out of college less than 15 years ago paid me as much in a year as we now regularly earn in a month. The power of compounding is real. We continue to invest primarily in index funds, and haven't made any remarkable changes to our allocation. While I don't consider our paid off house as part of our portfolio, knowing that we have that gives me additional comfort being invested heavily in equities. 

We skipped adding to our taxable investment account this month but plan to resume that as soon as we pay of our property taxes since we didn't want to tap into our savings account to cover things like that. While there is not upper limit on our accounts at this point, we are watching for when our taxable investment account balance can hit $100k and $200k and may make some large purchases with a portion of it when it reaches those milestones. 

OTHER

We are getting close to finishing our bathroom renovation and will then push pause on large home project until at least 2021. Overall we will have saved more than $10,000 by doing the work ourselves but we are getting to the point where we're just ready for it to be done. Cosmetically it looks mostly done, but we still have a few faucets and drains to hook up. We have a few other large projects in mind next but we need a breather to build up cash and to get some other things done that we've been putting off. 

Saturday, August 29, 2020

July 2020 Reading Review

Yet again, I finished the month having read 8 books. Some were short and one was an audiobook, but in future months I'm aiming to read fewer titles. Here's a run-down of what I read, in the order I enjoyed them with the best listed first. 

    I really enjoy Bethany McLean's writing and her choices of topics. If you follow my reading, you'll know I read a ton about the financial crisis so it's rare to find something that offers a new perspective or detail. This one went into some interesting background and detail on Fannie Mae and Freddie Mac that I either didn't know, or hadn't thought about in the way it was presented. 
    Besides finding it fascinating, one of the reasons I read so much on this topic is to better understand the inter-connectivity of our economy. They say that history doesn't repeat itself but it often rhymes, so the better I know history the better I feel equipped to understand the present.

    It was only coincidental that right around the time I was reading this, CEO's of four of the largest tech companies in the world were testifying in front of Congress to discuss antitrust matters. I really liked that it was short and to the point, and it gave me some things to think about. Tim Wu was also a recent guest on The Prof G Show Podcast if you'd like to get a taste for the content in podcast format.

    This book really causes you to think about things that you may consider to be 'common sense' and to question how you know what you think you know. For example, in the Army they were trying to determine whether recruits from cities or rural areas would fare better in training. The original hypothesis was that those from rural areas would do better since they may be used to the living conditions more that those from cities. After doing a study though, they found that recruits from cities actually did better and they attributed it to comfort with hierarchy stemming from more familiarity with the hierarchies of large companies or organizations.  
    Sometimes I've found myself reading the results of a study and thinking "did they really even need to do a study on that? It seems so obvious." This book helps shed light on the fact that what may seem like 'common sense', still needs fact checking and validation. I really like behavioral economics and this one was a similar style, but not focused on finance. Definitely an interesting read. 

    The Great Depression left emotional scars on the psyche of the generation who lived through it and influenced the investment behavior of an entire generation. Likewise, those who lived through the high inflation periods of the 1960's, 1970's, and 1980's have formed beliefs and fears that influence their behaviors today. This was interesting to read more about all the different ways inflation impacts our behavior and the economy, and gave me some things to think about as we plan for our future. 
    Inflation is one of the biggest risks for early retirees, which we planning to do. No plan is without risk, but it is important to me to make sure we are planning for things like inflation as best we can.

    This came recommended to me from some co-workers while on a business trip to India a while back and I just now got around to reading it. I wish I had read it before I had my trip since it really gives new perspective and who knows when I'll ever be able to get back. I knew that England had colonized India, but I had no idea the that the colonization was largely done by a private company and militia sanctioned by the government. 

6. Enemy Contact (Jack Ryan #27) - Mike Maden 
    Lumping these two together as they were equally enjoyable, and most all the same characters. These are predictable and always seem to wrap up loose ends way too quickly, but I really like the characters and can read one of these books in ~3 days. No one can truly replace Tom Clancy but the Jack Ryan books that keep coming out do a good job of honoring his legacy. 

    I really wanted to like this one, but really didn't get much out of it and won't be recommending it to anyone just getting started. I know the author has inspired a lot of people in the personal finance and early retirement community, it just didn't do much for me. 

Monday, August 10, 2020

July 2020 Net Worth Update - another all-time high

Even as the global pandemic continues to rage, our net worth continues to climb. We ended July at a new all time high, crossing over $1.1M to end at $1,117,400.


CASH

Our cash balance dipped a bit as we made our semi-annual car insurance payment, had some car repairs/maintenance, and new windows for the bathroom remodel that is still ongoing but nearing completion. August will also be an expensive month but we should be able to get up to $40k in the not-too-distant future. Above $40k we will likely add more to our taxable investment accounts.

We generally don't keep much cash on hand, but I did withdraw some cash early in the pandemic to have on hand in case there were a shortage. I hadn't been counting that cash in these totals and had honestly forgotten about it until I found it while cleaning out my closet. In July however, I spent this cash (and a bit more) on a bicycle. This is something that I've been wanting for a while now, but for years has always been a 'not until after we pay off the house' type of purchase. Of course, as soon as we pay off the house a global pandemic hits that causes a lot of people to spend a lot of time at home. Nationwide it seems like everyone wanted to buy a bike all at the same time so it has been hard to even find anything besides the most expensive models. I finally found one that I like a lot and now have been biking most days when I previously would have gone on walks.

INVESTMENTS

Our investment accounts are about as boring as it gets. The bulk of our portfolio is in index funds, and we don't plan to touch it for 10+ years. The part that I am excited about though is watching the taxable account balance creep up. We might use some of this within 10 years, but don't have any real plans so we'll keep it invested and be comfortable with any downside risk we may have. 

Our next big milestone is to get our Liquid Net Worth to be $1M. This will take a few more years but we're well on the way. Now without a mortgage we're able to invest even quicker than before when we were only doing enough to get the company match on my 401k.

Tuesday, July 28, 2020

June 2020 Net Worth Update

June was yet another good month for our Net Worth. We ended the month up almost $19k to $1.086M. 

CASH

Despite having my pay cut due to the COVID-19 pandemic, we've still been able to add to our cash balance and are looking to get this over $40k in the near future. My job still has a lot of uncertainty and while things are becoming clearer, we aren't likely making any large purchases until we are more comfortable that my position is secure longer term (which also hopefully coincides with my pay cut being rolled back). 

INVESTMENTS

Our investments continue to perform with the market and nothing really has changed here. I'm considering doing some additional Roth IRA conversions this year if we do have excess cash but again that's something that would require some more clarity on our financial outlook before we do it. 

It is nice to see our non-retirement investment accounts growing now too. While this could be considered an extension of our emergency fund, our intent is that these investments have a time horizon of 5 years or longer before we would use them. Anything else we plan to spend in the next 5 years we can cover through our normal cash flow. 

OTHER ASSETS

Housing in our area continues to sell quickly and we have noticed a few people taking advantage of low interest rates to upgrade their home. I hope for them that it doesn't come back and bite them, but I am loving living mortgage free and haven't even considered going back into debt. 

We've been adding to our 529 accounts as well and will likely continue at this pace for the foreseeable future as we do plan to fund some (but not all) of our kids education using a combination of 529 accounts, cash flow, and non-retirement investment accounts. It's important to have a healthy amount set aside beforehand since we could have up to 3 kids in college at a time.




Sunday, July 12, 2020

June 2020 Reading Review

So apparently I read 8 books in the month of June. Some were pretty quick reads, but I really didn't think I had read so much in the month. That puts my at 47 books finished so far this year, purposefully slower than last years' pace. Here are the books I read, ranked from best to worst.  


1. Untamed - Glennon Doyle

    This one was the best book I read this month and really gave me a lot to think about. In it, the author weaves a lot of different life experiences around the theme of being authentic to our true selves, with a great analogy about a cheetah born and raised in captivity catching glimpses of its true nature. 

2. Sharing the Work: What My Family and Career Taught Me about Breaking Through - Myra Strober

    Myra Strober is a professor at Stanford, who helped pave the way for women in academia. This book follows her story and the challenges she faced starting her career in the 1970s when women were expected to be secretaries or lecturers, but not tenure-track faculty. A lot of progress has been made, but sometimes it's good to read things like this to help see how far we've come. I think it's something that's also important to men to read, especially those who may make hiring decisions. 

3. A Falcon Flies - Wilbur Smith

    This is the first in a series of books following the Ballantyne siblings, who in 1860 traveled to southern Africa to try and reunite with their missing father. Much of the book also focuses on the slave trade and if nothing else, this book should be read to see some of the horrors associated with the trade the often will get glossed over or ignored when discussing slavery. This was a really long book and I liked it, but it ends with enough closure that I'm unsure whether I'll continue the series or not. 


4. Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County, the Largest Municipal Failure in U.S. History - Philippe Jorion

    In December 1994, Orange County, California declared bankruptcy. This book was a quick read about what happened and how to prevent something similar from happening again in the future. Perhaps the greatest lesson learned for me is something that also applies to personal finance and that is: 
"Don't Invest in Anything You Don't Understand"
Follow that one piece of advice and you won't avoid losses, but you will likely avoid financial catastrophe. In the case of Orange County, it was complex derivatives like interest rate swaps. In my experience, I've seen people go broke trading options, levered ETF's, and inverse ETF's. The one common thread in all stories is that they couldn't clearly articulate how the risks associated with their investments.  


5. Humans of New York: Stories - Brandon Stanton

    We have followed this account on Instagram for years where Brandon Stanton goes around NYC taking pictures of total strangers and interviewing them for a brief caption. The book is really just a compilation of Instagram posts and captions, but is also a way to support the author. It was fun and in some cases interesting, but also it pleases me to know that we're at a point in our lives financially where we can afford to buy books where the content is already available elsewhere for free but we still buy it to support the author.   
    I really enjoyed 'The Divide' by Matt Taibbi so wanted to read more of his stuff. This one though ranks pretty low in terms of books about the financial crisis, banking system, etc. Seemingly every paragraph uses hyperbolic adjectives to illustrate his disdain for the financial establishment and individuals involved (there's a whole chapter about Alan Greenspan called 'The Greatest A**hole in the Universe'). Even though I agree with a lot of the conclusions drawn by connecting the dots, there are better books out there. 
    If you want to read a snippet from the book, check out the author's article about Goldman Sachs in Rolling Stone magazine 


7. The Players Ball - David Kushner

    This book follows two characters through the start of the internet era who end up in a battle over a valuable domain name. One was the successful creator of the dating site Match.com who owned several other site, and the other a shady character who allegedly store a domain name the first guy owned but wasn't using. This was back when things like domain names weren't recognized as having as much value as they do today, but quickly became a major lawsuit when the stolen site began making millions. 
    If you're looking for a good read about shady characters on the internet, I would recommend American Kingpin, the story of the founder of the Silk Road, the largest website in the world for illegal activity until the founder was caught and jailed. 


8. The Art of Loading Brush: New Agrarian Writings - Wendell Berry

    Most everything on my shelf was recommended to me by someone at some point, but for the life of me I couldn't recall where this recommendation came from. The author is a great thinker and there were a few parts in this book that definitely gave me pause and made me think about the decisions I make with regards to food choice and sourcing. Overall though, this was a pretty difficult read that mixed philosophy with economics into a long essay about food production. Interesting, but really wasn't my sort of book.

Wednesday, June 24, 2020

Roth > Traditional

One of the goals I have before I retire is to convert the majority of our retirement accounts over to Roth balances. You don't have to search too hard to find folks who can show you how mathematically the Traditional IRA is superior because of tax deferral, or how lower tax rates now reward those who deferred taxes in prior years. 

But personal finance is personal. You can't always just rely on math and always choose the most optimal solution. Just like I could show you how mathematically we're foolish for having paid off our house early, there are real but intangible benefits to the peace of mind I gained from doing so. 

Having more of our retirement assets in Roth accounts is one of those things. Here's a few stories of things I've seen that have shaped my feelings on this topic. 

Phantom Money:

Years ago, I met with a couple in their late 60's who lived in a part of the country hit very hard by the housing crash. Due to a series of sub-optimal decisions and unfortunate timing, they found themselves trying to sell a house that was worth about $100k less than what they owed on it. 

The wife in this couple had mostly been a homemaker but had held a part-time job for several years that allowed her to contribute to a 401(k). After many years of growth, this account was worth around $100k at the time we met. Seeing a potential solution to their being underwater on their mortgage, she asked me 'Well, can't I just use that $100k to pay down the mortgage and be done with the house'?

I'll never forget the look in her eyes when I had to explain that taxes would be due on the amount withdrawn from her 401(k) and that the $100k balance she had become used to seeing on her statements, would really only be ~$70k, still leaving them $30k in the hole. Up to that point, she had always thought she had $100k, when in reality she never actually had the amount on her statement available to her. 

There are ways to take money out over time to minimize the tax consequences, but that wasn't an option when they needed a large amount of money in a short period of time. It's hard not to see your balance and think about what you could get for it, but whenever you see a pre-tax 401(k) balance you should always see that number and deduct ~25%. Our Roth accounts on the other hand, are all ours.

Too Much Tax Deferral:

Is there such a thing as too much of a good thing? Most certainly yes, even in deferring taxes. I've met with several retirees whose primary strategy in their working years was to save as much as possible into tax deferred accounts, with little to no thought put into a withdrawal strategy. 

One particular scenario that stuck in my mind was a client who had saved about $5M for retirement and going into retirement had based their expectations upon a certain level of fixed income to come from those assets. Throughout their careers they were usually in the highest tax bracket, and had put as much as they could into every tax sheltered vehicle possible, including deferred compensation accounts. This was done partially with the belief that in retirement, their tax rates would be lower.

At the point we met, they were within a few months of retiring and finally starting to look at a withdrawal strategy. What became clear fairly quickly was that because of the requirements on deferred compensation payouts and timing of Minimum Required Distributions (MRDs) from retirement accounts, it was going to be virtually guaranteed that they would still be in the same, highest tax bracket for at least the first 15 years of their retirement. 

Yes, this is a great problem to have. But it just goes to show that withdrawal strategies need to be considered early on. With the benefit of hindsight that client wishes they had done some Roth conversions earlier in their careers even though the tax bill at the time seemed unpalatable. They also maybe wouldn't have deferred as much income and would have just done non-retirement investing (the deferred comp account only earned CD-like returns), or possibly even retired sooner.

Lessons Learned and Our Strategy:

I have two main takeaways from these examples. First, never look at a pre-tax investment account balance and think that whole amount is actually yours. I would much rather have a $100k Roth IRA than a $100k Traditional IRA. Second, planning withdrawal strategies needs to be on your mind throughout your accumulation years. Asset location (the type of account) is as important as asset allocation (the type of investment).

As mentioned before, our strategy is that we want as much in Roth accounts as we can afford to by the time we retire. This means that all 401(k) contributions we make go in as after-tax contributions. This reduces my take home pay by more than if we did pre-tax contributions, but also means we're putting more away into retirement accounts than if we did the same percentage of income but pre-tax. 

Each year, we also pay the taxes on a portion of our pre-tax accounts and convert that balance to Roth. We have a lot to still convert with only about 1/3 of our total retirement accounts in Roth, but we are still 10+ years from retirement so should be able to make very good progress between now and then. Also now that we are no longer paying a mortgage, we can afford to convert a bit more than we were doing in previous years. 

Lastly - we plan to be retired younger than age 59 1/2, which means that we can't solely rely on our retirement accounts to live on for the time before we hit that age. With the house paid off, we are now contributing monthly to our non-retirement investment accounts an amount similar to what our minimum mortgage payment was. This amount, while taxable, is what will get us to age 59 1/2 if I retire in my early 50s. 




Thursday, June 11, 2020

May 2020 Net Worth Update - New All-time High

Coming off the heels of a strong month in April, we reached another new all-time high net worth in May, up almost $37k to $1.05M.



CASH


We finally got the cash refunded from our cruise that was cancelled back in March. This was the primary reason our cash balance went up by almost $6k. Our bathroom remodel expenses were much lower in May than in April, but we still spent $1,700 on some new tools and hiring out some of the trickiest plumbing parts. 

We typically hate hiring work out when doing home improvement projects but there are times when we know our limits and ran into one of those situations with the plumbing. We've now reached the point where tile is going down so soon it will start to look like a bathroom again. 

Our cash cushion is feeling much more comfortable now. It should be more than 6 months of expenses, but we haven't had a month since paying off the mortgage where we haven't had large 'one-time' expenses so it still feels possibly a bit lighter than we'd like.

INVESTMENTS


The S&P returned 4.5% in May, and our investments performed similarly since we are primarily invested in US Stock Index funds.

We continue to add a bit each month to non-retirement investment accounts, but mentally those accounts still feel as 'untouchable' as our retirement accounts even though I know we could technically get at the money penalty free at any time. We are now up to over $6k in those accounts and since we have no immediate spending goal for that money, it is invested in index funds. 

With the house paid off and already having crossed $1M in net worth, the next medium-term goal is to get our 'liquid net worth' above $1M. The timing of this obviously depends on a lot of variables like the market and my income/bonus, but I suspect we'll get there around 2026.


OTHER ASSETS


Our 'Other Assets' remain unchanged other than that we are adding to our kids college savings accounts each month. There are a few large purchases of what I'll call 'toys' that we have been waiting on until the house was paid off that when we finally bite the bullet and buy them, I don't plan to include in our net worth. 

We do include our primary vehicles in our net worth, if we were to buy something like a boat, RV, or ATV I would just show a big drop in cash with no corresponding asset. Nothing like this is imminent, but I wouldn't be surprised if we did buy something 'fun' in the next year or two.