Sunday, December 31, 2017

2017 Year in Review

The older I get, the quicker time seems to pass. Here we are at the end of another year. A lot has happened, but it still seems like yesterday when I shared some of my goals for 2017.

Tonight we’ll be going to bed before midnight (we did the countdown with the kids on London time). Before the year is officially over here in the US, here is a quick re-cap of how I did with 2017 goals.

2017 Intellectual Goal


Similar to previous years, I had set the goal of reading 52 books this year. I blew this goal away and completed 62 books in 2017. My reading is perhaps the largest impediment to me blogging more, so I may consider scaling back my reading at some point.

I did read mainly from my “to-read” list, but added a lot to the list so it didn’t really get shorter. My local library also started offering Hoopla, which I loved since it has a great selection of books already on my list. Sadly, it became too popular (expensive) so it has since been discontinued at our library.

In no particular order, some of the best books I read this year include:

1. The Undoing Project: A Friendship That Changed Our Minds - This was a great story about the pioneers of behavioral economics written by one of my favorite authors, Michael Lewis.

2.  1493: Uncovering the New World Columbus Created - Charles Mann: From the same author as 1491, this book detailed many of the secondary impacts of Columbus' voyage on the globe and not just the American continent.

3. When to Rob a Bank - Steven Levitt and Stephen Dubner: From the creators of Freakonomics this is another compilation of fun experiments and research of everyday topics through the lens of economists.

4. Born a Crime: Stories from a South African Childhood - Trevor Noah: I've been very impressed with Trevor Noah as the new host of the Daily show and reading his history of his childhood was hilarious and sad.

5. Last Man Standing: The Ascent of Jamie Dimon and JPMorgan Chase - Duff McDonald: I've always been impressed with Jamie Dimon but reading this helped me see even more things that he's done behind the scenes that prove he's the right guy for the job.

6.  Chaos Monkeys: Obscene Fortune and Random Failure in Silicon Valley - Antonio Garcia Martinez: I like reading inside stories of companies from the viewpoint of a non-executive (this book was mainly about Facebook). Silicon Valley is a different world in many regards, and I'm glad I don't work there despite the opportunity for obscene fortune.

7. Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires trying to Reinvent Money - Nathaniel Popper: I read this over the summer and afterward made a small 'investment' in crypto currencies (I since took out my initial investment but still have a position that is 3x my initial investment). This book is a good background on the history and use of bitcoin.

8. Work Rules!: Insights from Inside Google that will Transform the way you Live and Lead - Laszlo Bock: This one came recommended by several people at work and was written by a senior HR leader at Google. Although I don't have the budget to do nearly as much for my employees as what Google offers, I have taken some of the learnings to heart and made some changes.  There are a lot of things you can do to show employees you value them short of gourmet catering 3x/day.

9. Humans Need Not Apply: A Guide to Wealth and Work in the Age of Artificial Intelligence - Jerry Kaplan: Artificial Intelligence has and will continue to change the modern workplace. This book raises some questions that need to be answered as this field continues to advance.

10. Pound Foolish: Exposing the Dark Side of the Personal Finance Industry - Helaine Olen: It shouldn't surprise you that there are many so-called financial experts in the media who really don't know what they are talking about. This book attempts to dethrone some of the more famous finance personalities. In some cases I felt she was spot on and in others she just had an ax to grind, but the overall message of being skeptical is wise.

2017 Career Goals


I was intentionally vague in describing my career goals, but I will say that I have been pleased with my career growth in 2017. It wasn't my best year, but I learned a lot and helped my team grow. 2018 is shaping up to be a very challenging year but I have laid the foundation for 2018 success in 2017. I wasn't planning on getting a new job or promotion in 2017 but did have an interview for a promotion recently. For a variety of reasons I doubt I'll get the job, but the fact that I was considered even for an interview bodes well for future opportunities.

2017 Financial Goals


I set what felt like a lofty goal of reaching $700k net worth by the end of 2017. The Stock Market in 2017 performed much better than I had assumed. That and some other wins helped us reach this goal back in September. Our next big goal and milestone will be to reach $1M net worth and we are going to stretch to try and get there by 2020.

Other accomplishments for the year included welcoming our fourth child into the family, adding a stamp from Chile to my and my sons passports, and lots of travel within the US. I’m now up to 43 states visited and just have some hard-to-reach states left. We also found time to do home projects like adding a fence, new patio, and exterior paint.

We are still figuring out 2018 goals but they will likely be a continuation towards our longer term goals such as paying off the house, visiting new countries, and spending time with family.

Wednesday, December 13, 2017

Are Index Funds Safe?

In the years following 2008, any time I recommended a mutual fund, portfolio, managed account, or any other investment, clients would almost always ask me: "How did this do in '08?"

What people were really asking was "is this going to protect me from the downside next time the market corrects"?

This often lead to discussions about bond funds, which at the time showed steady 10-year track records like the blue line in this graph.


"See, look how smooth the growth has been compared to stocks (yellow line is the S&P500)". A few years ago, the 10-year return for bonds even looked better than stocks. Lots of money poured into bond funds from cash that investors had pulled out of stocks but were too afraid to get full back into stocks.

Shift to Index Funds


As stocks have continued to set new records, including now the first year ever of 12 winning months, a tsunami of cash has been piling into index funds driven in part by charts like this one:



"Stocks are the best long term investment, but why waste money on actively managed funds when the mostly underperform the index?" Sound familiar?

A lot of this capital has come actively managed stock funds but also from cash and bond funds. If money is going into Index Funds from cash and bonds, many of these investors previously cashed out of stocks.

During the 2008 financial crisis, I met too many people who thought that actively managed funds "should have seen it coming" or "should have gone to cash". It came as a surprise to many investors that their mutual funds prospectus prohibits market timing. Now those same investors who poured cash into bonds when they were still afraid of stocks have been rushing to index stock funds as stock performance continues to enhance feelings of FOMO.

Personally, I doubt their original unrealistic expectations have changed. The market has gone up for so long there hasn't been the need to blame anyone for losses, and there are many who have pitched index funds as "safe". Sure, they're safe in that they are diversified, but when the average investor asks if something is "safe", they aren't thinking about the difference between systematic and unsystematic risk. They are asking whether they'll ever lose money. They'll tell you they know the risks of investing in the market, but when we next see a >10% drawdown that will all be forgotten.

Are Index Funds Safe?


Index funds are no "safer" than the actively managed mutual funds they've been replacing in investor portfolios. The only things they save you from are higher fees and the risk of underperforming the market. I'm all about being a DIY investor, but it is important to have realistic expectations. When the market tanks, you'll be just as exposed as anyone else. I'm ok with that risk, but the average investor attempting to time the market may be disappointed.

I'm very curious to see what happens to fund flows after the next market selloff. Will those new to indexing strategies truly stick with it? As much as has been said about the change in investor preference and behavior, I'm still skeptical.

There is strength in numbers, and following the herd mentality sometimes just feels right. Sitting in cash when everyone else is losing feels great at that moment. That still doesn't mean it's the right move long term.

Tuesday, December 5, 2017

November 2017 Net Worth Update - Up again

NOVEMBER SUMMARY


November is behind us and we continue to make progress towards our financial goals. For the first month in what felt like a while, we haven't had any major travel or home improvement projects, which is nice.

This month I also reached my goal of reading (or listening to) 52 books for the year. I have met this goal every year since I starting tracking it in 2011 and only started getting into audiobooks in the past couple of years (I'm about 50/50 reading vs listening). Not everything I read is worth recommending, but the best books I read this month were:

The Simple Path to Wealth, by JL Collins. The title sums it up best - it really is a simple read about a topic that many try to overcomplicate.
Religious Literacy: What Every American Needs to Know about Religion, and Doesn't, by Stephen Prothero. This isn't a religious book but was helpful in learning about religions role in our culture.

And of course, the market continues to surprise and delight contributing to our 13th consecutive month of net worth increases. We ended the month with a net worth of $731,362, up nearly $10k.


CASH


Our cash balance stayed pretty flat this month and will probably do the same thing for December. We mostly completed our Christmas shopping in November and also booked a cruise for this coming Spring. So far, we've only booked flights and made the initial payment towards the cruise and we'll cash flow the remaining cruise costs.

In our house, Christmas tends to be a pretty low key holiday. We make it special but don't go all out, especially for the kids. This year, we will spend less than $1,500 on gifts, most of that on gifts for each other.

For the kids, we'll spend under $100 each and you know what's crazy? They'll be thrilled. By not constantly giving things to the kids, even small or simple gifts become a big deal. Also, I hate clutter, and if you're being honest most Christmas gifts are clutter. We really try to make sure we aren't contributing to a cluttered house whenever we buy gifts. The one exception to this rule lately has become Legos. Since introducing them to our house earlier this year we've been able to keep the mess to a minimum, but I tolerate it since it is contained and they really spark the kids' creativity.

As inexpensive as electronics have become, we are pretty firm in our stance of kids not having their own electronic devices. This will only get harder as they get older since many of their peers at school or church are already getting their own tablets or phones.

INVESTMENTS


Similar to previous months, the biggest factor driving our net wort change was our investments. The S&P 500 was up 2.81% in November, and our investments were up 3.1%. This is basically just the market gains plus our normal monthly contributions.

For our primary portfolio, our asset allocation is heavily weighted to US stocks, as shown below:

I've been allocating out of bonds for some time now but still have some lagging positions. Rather than have the bond income reinvest into bonds, I reinvest it into stock mutual funds.

CARS


As expected, the value of our vehicles declined this month. Back when I had the Corolla, the value had pretty much leveled out and KBB had it hardly depreciating at all. Now with a newer car, I expect to see the value steadily decline for the next several years.

Something to know about my wife's car is that she doesn't drive it much. LIke hardly at all. We live close to our church and kids schools, our kid takes the bus from the bus stop two doors down, and I do almost all of the grocery shopping on the way home from work. With her natural hermit tendencies, this means that there are times when she goes almost a week without driving anywhere.

For years, whenever I review coverage with our auto insurance provider, I always ask how low can we say her car is driven each year. Consistently, I've been told 8,000 miles is the lowest they can quote (even though she probably doesn't drive 1/2 that much). This came up again when I called to add the new car to our insurance, but this time I was told that they actually could quote a lower rate but that I would have to give them an odometer reading and call back with another reading in 30 days.

I gave them the odometer reading and made a reminder to call them back in 30 days. The grand total of driving for those 30 days? Under 300 miles. I told you we didn't drive that car much. They rounded it up to 4,000 miles per year, but that one change lowered our insurance bill by almost $200/year.

HOUSE


Zillow says our house value came down slightly, but we paid extra on our mortgage so the decreased principal helps offset the loss. Nothing too groundbreaking here, but it is exciting to see that we'll now be consistently paying down over $1,500/mo. Our current plan is to increase this amount further starting in January.

Our home improvement projects in November were limited to general maintenance and repairing a few spots of rotted trim on the exterior.

This is the time of year where we look at our last 12 months of spending and decide which areas we want to increase or decrease our spending in the next year. In 2017, we spent roughly $9k on home repairs/improvements, which was roughly what we've spent in 2016, and slightly less than 2013-2015. In 2018, we're thinking we may lower that expense further to make additional progress on the mortgage, but we do have plans to renovate our master bath and kitchen at some point, each of which would be at least a $10k project.

529 College Savings Accounts


I am now including these funds in our net worth, but we haven't really changed much with this account. The amount we've saved here has been growing steadily, but will not be enough by itself at this rate to pay for 4 years of college for each of our children. Our goal is not to be able to fully fund their educations, but this will make a good contribution. Once our home is paid off (within 5 years from now), we will revisit how much we are saving here vs increasing our taxable investing.

Net Worth Summary


A year ago when we set the goal to reach $700k net worth by year end,  it felt like a stretch goal. Market returns have certainly helped by significantly exceeding my assumptions, but I would rather be conservative in my projections. As gains continue to exceed our expectations, we can reach our goals with even lower future growth assumptions.

Tuesday, November 14, 2017

October 2017 Net Worth Update

October was another great month for the DIY$ household. We had a lot going on financially but were still able to increase our net worth by $15k to $715,925.

Here's how it went down:


CASH


Our cash balance got decimated this month. We paid almost $4k for our new patio that finally got completed, and also bought a new car. A lot of the cash had been earmarked for a car anyways, so this isn't entirely unplanned. We'd rather keep our cash balance above $20k though, so we have some rebuilding to do. We should only be below $20k for a couple of months.

INVESTMENTS


Each month we add about $1,600 to our investments accounts, almost all of which is tracking the S&P 500. The S&P was up 2.2% in October, so this explains the vast majority of the change in our investments.

Investing in index funds certainly isn't the most exciting way to build wealth, but it makes for one less thing to worry about. I don't spend an incredible amount of time researching mutual funds but do periodically rebalance between US and international, large-cap and small/mid-cap.

While the majority of our investments are in index funds, we do make the occasional speculative investment. I do this to learn about new markets, keep a pulse on other trends, and sometimes just to have fun. The rule that we have set for ourselves is to have no more than 1% of our net worth tied up in our non-core index fund strategy.

As of right now, we are way under this limit, but some of our speculative investments currently include

  • Amazon (AMZN)

  • Bitcoin

  • Some REIT ETFs (MORL and NLY)

  • Various options trades - none at the moment, but I have historically traded spreads

CARS


We finally said goodbye to my trusty old Corolla. For weeks, I had been unsuccessfully making offers on cars but wasn't having much luck getting what I considered a good deal. I was looking at newer Corollas, Camrys, and Fusions or slightly older Lexus in the $15k range. We ended up with a 2012 Lexus for right around $15k plus tax and traded in the Corolla.

I probably could have gotten an extra $1k or so if I sold the Corolla on my own vs trading it in, but I really value my privacy and time and didn't relish the thought of having to meet up with random strangers from Facebook or Craigslist to sell it. I wasn't pleased to trade the car in for less than my previous net worth calculations valued it but decided that it was worth avoiding the hassle.

If the Corolla was actually worth more than $2,500 I may have tried harder. Although it probably has another 100,000 miles left in it, the list of small things wrong with it was actually pretty long once I started to list them.

Here's a list of some of the little things that were wrong with the Corolla:

  • Fading paint on the roof

  • Scratched/peeling tint on one window

  • Weatherstripping coming loose from one door

  • Broken latch holding down center console lid

  • Sunroof shade that wouldn't close all the way

  • Squeaky A/C

  • A slight smell in warm weather that I never could put my finger on

  • A loose section of the body kit

The new car has none of these problems. In fact, it has quite a few upgrades that I'm really excited to have. The KBB when I bought the car showed that I paid right about what it was worth after taxes and fees, but by the end of the month it had dropped a couple of thousand.

HOUSE


A lot of our net worth increase came from the value of our home. The value still seems in line based on prices in the neighborhood. The house next door is still for sale, but I'm not surprised it hasn't sold yet since there haven't been many updates to it.

In October, we increased our payment slightly and will bump the payment amount up again starting in January. We've always paid extra, but haven't been paying the maximum we could since we were building cash to buy a car. Now that we've bought the car, we'll start to really attack the mortgage once our cash is back at a more comfortable level.

NET WORTH SUMMARY


With our net worth already exceeding our 2017 goal of $700k, I've been making some projections for our next goal/milestone. It no longer seems that out of reach to hit $1M by 2020, so that is going to be our new target. It still feels strange to be within sight of $1M, but so did getting to $500k just a few years ago.

Also, starting in January I am going to start including our 529 accounts with our net worth. Even though the money is earmarked for kid's college it is still ours and we can technically use it for anything. We discussed it and just decided that it makes sense to include it.

Sunday, November 5, 2017

Work 401k Seminar Prep

As part of my job, I was recently put in charge of hiring new graduates to join our finance department. Once they start, we pair them with a mentor and I stay in touch and offer career advice and guidance as needed.

As part of my ongoing advice and guidance, I'll be hosting a 401k seminar later this month. This is the first time I've done something like this, and I'm honestly pretty excited. I've solicited questions from the group and a couple of themes have emerged. As part of my preparation, I wanted to share some of my thoughts on these topics.

To provide some context, the audience is all 20-something recent college graduates working at their first job. We pay them pretty well (mid 50's), are in a lower cost-of-living area, and provide some amazing benefits. Our company offers an excellent 401k match and relatively short vesting period.
401k Match - this is 'FREE MONEY' and there are almost no good excuses for passing this up. As an incentive to get you to contribute to the account, employers will often provide matching contributions. Make sure you're at least getting your full match.

Vesting Period: The money your employer puts in your 401k might require you stay working there for a period of time. I've seen as short as 2 years and as long as 7. If you leave the company before you are fully vested, you may forfeit some of the employer contributions. The money you put into a 401k from your paycheck is always yours and you'll never have to give it back. 


Q: What is the difference between After/pre-tax contributions and which should be a priority?


A: We have the choice between traditional and Roth 4o1k's. My general advice to anyone is to focus on Roth contributions. This is especially true for those who are young. The difference between the two is that you end up with lower take-home pay by doing Roth, but you end up with much more in retirement. Here's a simple example:

Either way, a 6% contribution puts $3k into your 401k. The difference today is that if your contribution is in a Roth, you end up paying slightly more taxes now, but won't ever have to pay taxes on that money again.

If you invest $3k per year for 30 years and it grows at 8% per year, you end up with $339,000. Not bad for only investing $90,000, right? But you will pay taxes when you withdraw if your contributions are made pre-tax (traditional). All of a sudden that $339,000 is more like $288,000 (15% taxes). It's even less if you want to take out so much that you get pushed into a higher tax bracket.

On the other hand, if you had been making Roth contributions, that $339k is ALL YOURS. This is why I sometimes say that Traditional 401k/IRA's include 'Phantom Money'. Even though you see the balance, it's not all yours unless it's Roth.

My preference is to have all of my contributions go into Roth. Since employer contributions can't go into Roth, I'd prefer to have as much as possible actually be MINE. For those currently doing pre-tax contributions, I'd consider transitioning your contributions over.

Q: Can you talk about 401k early withdrawal penalties and payback options?


A: Honestly, I'd rather not. Long term you'll always be better off finding ways to avoid taking money out of your 401k before retirement. While you are actively employed, the only way to get money out of your 401k is to take a loan. Loans are paid back via increased payroll deduction. Although it is true that you pay yourself back with interest, the interest rate you pay yourself is generally much lower than the returns you'd be missing out on if the funds had stayed invested.

The big risk of a 401k loan is that if you leave the company, the balance of the loan is due in full within 60-days. Any amount left unpaid is considered an early withdrawal, taxed, and penalized (if you're younger than 59 1/2).

Several in my audience may be considering going back to school for an MBA in the next few years. To them, I would recommend avoiding student loans but definitely plan ahead and do not rely on 401k funds to pay for the degree. Although there are provisions where Roth contributions can be withdrawn without penalty, I still believe that it should be avoided before retirement.

Q: What's the right mix of stocks and bonds?


A: This is perhaps the hardest question to answer because there really is no one-size-fits-all answer. The right mix for each person depends on your goals and risk tolerance. You may have heard that in the early stages of your career you should be as aggressive as you can tolerate, but without having gone through a bear market it's hard to really know your risk tolerance.

There are rules of thumb out there like "120 minus your age is the percentage you should have in stocks and the rest in bonds". Rather than give that blanket statement, allow me to share how my asset allocation has shifted over the years.

My Asset Allocation History


When I started my first 401k, I loaded up on stocks and maybe only 5% in bonds. This was back in 2006 and the market was hitting new record highs, sound familiar? A few short years later, I had built up around $25k with more of a 70/30 stock bond split. And then the financial crisis hit. My portfolio was basically cut in half in what seemed like a matter of days. This was a huge gut check for me and caused me to rethink my asset allocation. Thankfully, I didn't get out of the market like many clients I was advising at the time wanted to.

I kept a 70/30 mix for years and was a believer of the age-based asset allocation model. When friends or family members were just starting out, I would recommend using Fidelity Freedom Funds or Vanguard Target Retirement Funds that automatically rebalance as you get closer to your target retirement date, eventually landing in a 20/80 stock/bond mix. There is nothing wrong with this approach, and for many people, it may still be a great one.

My Current Allocation Strategy


Where I differ now from the mainstream age-based strategy is that I am planning on retiring much earlier than traditional retirement age. Also, I believe that we in the DIY$ household have proven to not act irrationally during bear markets. During down markets, we don't sell and continue to dollar-cost-average into our investments. This tells me that we can handle having a larger allocation to stocks. Our current asset allocation is over 90% stocks, and we plan to keep it that way until and during retirement.

I am subscribed to the strategy outlined in Simple Wealth, Inevitable Wealth. Simply stated, this strategy is to only invest in stock mutual funds, and during retirement to keep a cash reserve equivalent to 2 years expenses. During retirement, we will replenish cash from investments except during significant down markets. During those times, we'll draw down cash to allow the market to recover and build the cash account back up after the investments recover.

This strategy may not work for everyone, but this is why personal finance is so personal. You need to find what works for you, develop a plan, and stick to it. That's the important part though, having a plan vs. not having a plan. I'm sure we'll have plenty more to talk about, but these are the thoughts I've collected thus far.

Saturday, October 7, 2017

September 2017 Net Worth Update - We made it!

September was a momentous month for us in that we reached our 2017 net worth goal of $700,000. We took a slight step backward already in October by buying a new (to me) car today, but any ground we lose should be recovered again by the end of the year.

Sept 2017 Net Worth Overview



We had a lot of green this month and just barely bumped up over $700k. Our expenses weren't too high for the month, but October expenses will be much higher. We got the backyard patio installed and bought a new car.

CASH/CARS


Our cash balance crept up at about the rate of growth I would expect from a normal month without any big expenses. We had a quick trip in September to visit family, but those expenses were minimal.

We've been building up our cash for a new car, but as of the end of last month, we still hadn't found the right thing. I've been looking for the right deal and found something today that checked all the boxes (including price).

Say hello to our new addition. I upgraded the 2005 Corolla with 209,000 miles to this 2012 Lexus with 50,000 miles. I was looking at Toyota, Lexus, and Ford sedans and was looking for a deal. More details to come, but suffice it to say I'm pleased with how it worked out and will miss my old Corolla (I traded it in).


INVESTMENTS


Yet again, we didn't really do anything exciting with our investments, yet they managed to grow (including our contributions) by almost $10k. For the year, just my 401k is up over 16%. My return assumptions for long-term growth are much lower than this and market growth is the main reason that we have reached our net worth goal this early in the year.

HOUSE/MORTGAGE


Like normal, we paid extra on our house and knocked down the mortgage by another $1,100. We've been holding off making larger payments until we bought a car so next month we will start paying even more towards the mortgage.

Our neighbor finally has his house up for sale and is asking $420k. His house is smaller than ours and needs some updating, so I still feel pretty good about our $450k assumption. Another slightly larger house down the street just went up for $485k, so we're right in the middle.

Our next door neighbor is in his 50s, divorced, and an empty nester. He was waiting to move until his kids were all out of high school, and it turns out the reason he waited so long to sell is that he had to sue his ex-wife again to take her name off the deed. They've been divorced for at least 5 years. He already paid her everything that was owed in the divorce, they just hadn't officially taken her name off the house.

Divorce is a terrible thing. I've got a few friends and family members in various stages of divorce and it's just sad. In The Millionaire Next Door, a lot of time is spent talking about how divorce destroys wealth, and that you are more likely to accumulate wealth if you get married and stay married. Money isn't everything though. Even without the financial impact though, it's a devastating thing to have to go through.

WHAT'S NEXT?


In recent years, we've added ~$100k to our net worth each year. An increasing portion of that growth simply comes from our staying invested. I guess the next big milestone from here is $800k but really, we're getting excited about closing in on $1,000,000.

Setting a goal of $700k for this year was very achievable. I knew what needed to happen and none of the assumptions were that aggressive. It's extremely unlikely that we'll get to $1M in 2018, but with some aggressive assumptions, it could happen in 2019. That's crazy. It's right around the corner. We'll have to do some goal setting as a couple in the next few months and this will definitely be part of that discussion.

Sunday, September 10, 2017

August 2017 Net Worth Update - up to $685,332

August was a crazy month here in the DIY$ household. We got some of our last trips in before school season makes it harder to skip town with the kids, got the backyard prepped for our concrete patio that will be poured in September, and increased our net worth by $4K to $685,332.

NET WORTH SUMMARY



We've done a pretty good job at growing our net worth. With the recent madness of hurricanes and other extreme natural disasters, it has caused us to reconsider some of our net worth allocations. I'm not talking about bonds vs stocks or international vs domestic, I'm talking about taking stock of our 'survival' inventory. We already have a bit of non-perishable food stored and lots of tools, but we'll be re-evaluating whether we have enough. We may also find ourselves buying things that are really just for emergency preparedness purposes.

CASH


Our cash balance crept up again this month, helped out a lot by an extra $1,000 that came our way unexpectedly. I know I keep saying that we're done with big trips, but our travel never seems to end. It isn't impeding us from saving for retirement or building our cash but it does slow down our cash pile-up. This month I traveled for work a bit (no out of pocket expense), and we took the kids to California for a wedding. I also just got back from a quick trip to go to a football game with my dad and brothers.

After spending a few days in the SF Bay Area and Sacramento, I think I'll be adding that area to my list of 'places I won't be upset if I never go back to'. Las Vegas and Chicago are already on the list for me. We got to see the Muir Woods (along with what felt like an entire small town), and that was great. I'd still like to see Yosemite, but the city and traffic are just not for me.

INVESTMENTS


The S&P 500 was basically flat in August, growing just 0.05%, yet our investments managed to grow by about 0.5% excluding our normal monthly contributions. While most of our investments are invested in S&P 500 index funds, we do have some international funds that did well.

CARS


Nothing has really changed in our driveway or replacement plans. We have a gas guzzling Expedition EL to tote around our crew and it is great. When we travel and have to rent a vehicle like we did in San Francisco, we typically get a minivan. Every time we rent a minivan, I'm reminded how much I prefer a large SUV.

My little Corolla is a great car. There really isn't much more to say. It has over 207,000 miles on it and has never had any major repairs. The end of this year will mark 10 years that we've owned it. As much as I love it and know it could probably go another 5-10 years, I've started looking at replacements. It is getting old and while it runs great, it's cosmetically showing its age.

HOUSE


Yet again, we paid extra on the mortgage. Our total home equity went down slightly as Zillow has our home value declining. Our neighbor has moved out and has been doing some home improvements before selling. We're curious to see when he lists his house for sale and how much it ends up selling for.

A friend who lives nearby recently sold his house and it was only on the market for two days. In our area, updated houses sell quickly and for top dollar. Houses that aren't updated tend to sit until homeowners realize they won't get top dollar based solely on location.

MINI DIY OOPS


A few times each year, Sherwin Williams has a 40% off sale. Pretty much whenever this sale happens, we buy a couple of gallons of paint. Even with the 40% off it's still more expensive than some of the stuff at Home Depot or Lowes, but it covers so much better and is much easier to work with. There's a reason the pros use it. One thing we love is that they keep a record of all the colors you buy, so you can go in and say "I need another gallon of the color I bought last Spring", and they'll know what color you're looking for. That's how it's supposed to work.

We bought 3 gallons back in July but didn't get around to using it until August. Halfway through painting a room, we realized it wasn't the right color (doh!). It looked a little off from the get-go, but it was close enough that we thought maybe it would dry right. Not so. Turns out, someone fat fingered the numbers and gave us something one shade off from the same sample card. At the store, they were great and swapped it out for the right color even though we had already used some of it.

The room looks great now, but we wasted a couple of hours painting the wrong color. The moral of the story is that Sherwin Williams is great. But when it comes to paint colors remember to 'trust, but verify'.

So that's the August update. Better late than never, but life seems to get in the way sometimes. We're still on track to get to $700k by year-end and are excited for what's next.

Tuesday, August 22, 2017

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.

Tuesday, August 8, 2017

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.

Wednesday, August 2, 2017

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.

Sunday, July 23, 2017

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.

Wednesday, July 5, 2017

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. 


Friday, June 2, 2017

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.

Tuesday, May 30, 2017

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.

Tuesday, May 23, 2017

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?

Saturday, May 20, 2017

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?

Monday, May 1, 2017

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.