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.