Republic Wireless and my $19 per month phone plan

dark and stormy

Painting by Sergey Gusev

It was a dark and stormy night.*

She told me to wait. Maybe I should have listened.

But I was impatient and headed to South America. The idea of remaining in touch, of having access to my email, the internet and, wonder of wonder, free international calls was not to be denied.

“No!” I cried. “I must have it now! Now, I tell you! Now!”

“It will only break your heart,” she said, “as it has so many others. This is not the one for you.”

But I was blinded by love. No longer thinking rationally. The thought of travel to distant foreign lands without it suddenly became unthinkable. Unbearable. I would not be denied.

I bargained. Cajoled. Begged. Pleaded. Threatened. Ranted. Insisted. And, finally, (this one being true) just asked.

And the nice Republic Wireless (RW) PR lady sent me the Motorola Defy XT phone. I’ve hated it ever since.

 weep for me

Weep for Me

So that’s the bad news and, blessedly, the end of my little melodrama.

The good news is that I remain enamored with Republic Wireless, its service and the concept behind what they are doing here. Moreover they have a new phone coming shortly: The Moto X. While I can’t yet speak from experience, by all accounts this one will be a major step forward and will put to rest many of the Defy XT’s shortcomings.

So, if you are a cut-to-the-chase sort, here’s the bottom line:

  • Republic is a fine company with which to deal and very much worth supporting.
  • Wait for the Moto X phone before you sign up. It shouldn’t be long. It is due in November.

The Phones.

Understand first, I am not a fan of technology. I am a fan of useful and reliable tools. When a technology reaches the point of being a useful and reliable tool, I’m on board. Unfortunately, many technology companies are infamous for using their customers in their beta-testing.

Depending on your perspective and inclinations, you will have read that last either as:

“Those rascals!”

Or

“Of course! That’s what makes tech so cool. I get to be part of the process!”

I’m a “those rascals” kind of guy and when they, and you “of course” types, get it sorted out, please let me know.

The problem with the Defy XT is that it is very much a phone for the “of course” types and since it is also tech that’s a couple of generations old, they have long since moved on. Time to just bury the thing. Thankfully, that’s what Republic is on the verge of doing.

In the beginning, I started a log to keep track of its many shortcomings. But with its pending demise, wading thru all those points in this post seems, well, rather pointless.

What is interesting, at least to me, is why Republic chose to go with such a flawed phone to begin with. The answer to that, apparently, is that Republic has the potential to break the expensive strangle hold other cell phone service providers have on us. That, it seems, has made the many cell phone manufacturers reluctant to supply Republic with their products. The revenue at this point would be peanuts and the risk of offending their bigger customers not worth taking.

Understandable. Cowardly, but understandable. Maybe shortsighted, too. Republic looks to have a very bright future, especially if the Moto X meets expectations.

Republic Wireless, the service.

When the nice PR lady first approached me about doing a review, her timing could not have been better. Our then cell phone service had just tried to hose us. Again.

My daughter had returned from her year studying in France. While she was there, we suspended her cell phone service. Part of that service was $10 a month for unlimited texting.

When she returned, we called and re-instated her service. With the first bill came a $400+ charge for texting. Oh, you wanted the unlimited monthly texting for $10 again? After an irate call or two they cut the bill to $100. Better, but being hosed is being hosed.

That, in a microcosm, is my (and I dare say your) typical experience with cell phone, and for that matter cable, companies.  They are forever looking to pad the bill and boost your monthly costs. Hoping you won’t notice and/or will let it slide. In dealing with them you’d best be always on your guard. And who needs or wants that? Especially with an alternative on the horizon.

So my first, last and only real question for the nice RW PR lady was this:

“Is there anything, anywhere I can do with this phone that will ever cost me more than $19 a month?”

“Nope,” she said.

“Just to be absolutely clear. Nothing at all? Intentionally? Unintentionally?”

“Nope.”

Impressively, this has proven to be true. I’ve used it here, there and everywhere, including unlimited calls, texts and data to and from South America and it is $19 each month.

Here’s my understanding of how it works:

Whenever you are in range of a wi-fi connection you connect and, just like your laptop, the phone uses the internet to download data. And also text messages and your phone calls.

If you don’t have a wi-fi connection, it defaults to the Sprint network and uses regular cell service. The idea is that most of the time, you’ll be using the internet and that is essentially free. The cellular service usage is typically small enough that the prices can be as low as they are.

Of course, the cellular service is only as extensive and as good as Sprint. Beyond their range, the phone only works in wi-fi mode. So, in South America for instance, my phone worked only when I had a wi-fi connection, just like a laptop or tablet.

cafe san sebas

Cafe San Sebas, Cuenca, Ecuador

My RW phone knows this place.

I quickly got in the habit of asking for wi-fi passwords where ever I went. The phone then remembers all of these and I have to say I found it pretty cool to return to my favorite cafes in Ecuador and have my phone automatically connect, just like coming home.

But for me the biggest plus is just dealing with a cell phone company that is not plotting to screw me. This is so refreshing it makes up for the shortcomings of even the Defy XT. Add to that the cost, which is a fraction of what we’d been paying, and you know why I plan to stay with RW. It kind of reminds me of dealing with Vanguard. And if you’ve read much of this blog, you know just how high that praise is.

This is not the service for you if….

….you value having the state-of-the-art newest and best phone from the company of your choice. For now, at least, RW = Motorola.

….are dependent on your phone for your business. In all candor, since I haven’t tested the new Moto X, I can’t yet recommend RW if your phone is also a critical tool.

However, this is the service for you if, like me, you value…

….low-cost. $19.95 per month for unlimited calling, texting and data – with no hidden traps – is tough to beat.

….supporting a company that is trying to improve service and choice in an industry that sorely needs it.

….supporting a company that, like Vanguard, truly seems to see value and success in putting the needs of their customers first.

….fast, friendly and competent tech help. Republic doesn’t offer a help-line number to call but they do offer several other options ranging  from a community forum right on down to snail mail (!). Personally, email works best for me and they’ve responded much, much quicker than the 48 hour window they promise.

moto s

Moto X

With the new Moto X phone they are now offering four different plans. Here they are, as described by RW and cribbed directly from their website:

$5 Wi-Fi only plan
This is the most powerful tool in your arsenal of options. Why? You can drop your smartphone bill —at will— to $5. If you’re interested in getting serious about cutting costs, you can use this tool to best leverage the Wi-Fi in your life to reduce your phone bill. It’s also the ultimate plan for home base stickers and kids who don’t need a cellular plan. It’s fully unlimited data, talk and text —on Wi-Fi only.

 $10 Wi-Fi + Cell Talk & Text
One of our members, 10thdoctor said :  “I use WiFi for everything, except when I’m traveling and for voice at my school.” Yep, this is the perfect plan for that. Our members are around Wi-Fi about 90% of the time. During that 10% of the time where you’re away from Wi-Fi, this plan gives you cellular backup for communicating when you need to. This plan both cuts costs and accommodates what’s quickly becoming the norm: a day filled with Wi-Fi.

$25 Wi-Fi + Cell (3G) Talk, Text & Data
Lots of people are on 3G plans today and are paying upwards of $100 a month on their smartphone bills. That’s nuts. This plan is here for you during the times when you need the backup of cell data. For folks who want to surf Facebook and check email in the car (as a passenger!) or who travel regularly for work, this option lets them enjoy all the benefits of Wi-Fi with the luxury of 3G cellular data. You may find you only want this cellular back up part of the month —no problem! Switching during the month to the $5 or $10 plan is easy, and is a great way to keep more money in your wallet.

 $40 Wi-Fi + Cell (4G) Talk, Text & Data
We heard you tell us that you wanted a super fast option, so we added this arrow to your quiver. This plan is here for you when you’ve got a road warrior kind of month, and you’ve got a serious need for speed. Have to get work done on a long train ride? And need to work fast? This is your guy. Just like the other plans, it’s just a few clicks away.

Will I be able to switch between plans?
Yes! When you purchase a new Moto X phone, you’ll be able to choose whatever plan you like—and you can also switch plans up to twice per month as your needs change. For example, if you know you’ll be taking a vacation and might require more cell data one week, you can switch to a cell data plan right from your phone and then switch back to a Wi-Fi “friendlier” plan once you return home.

That ability to switch as your needs dictate seems pretty sweet to me.

In short, despite the rough go with the Defy XT I’ll be sticking with Republic. Truth is, for all the issues, it was very cool to be able to call the USA from South America and still not push my monthly cost past that $19.95. Of course, that only worked when I had wi-fi available. But still, very cool.

Even more cool is the monthly savings and the sense that I’m now dealing with a company not looking to pick my pocket at every opportunity.

Assuming they stay true to this path, Republic’s future looks bright to me. I expect they will continue to expand and improve their service and the hardware.

I might even give the new Moto X a whirl.

If you’d like to give Republic a try yourself, just click on the ad below. By way of full disclosure if you sign up, this blog will earn a commission.

Note:

*This phrase, in writer’s circles, is widely regarded as the most cliched, hackneyed and simply worst possible opening line in all of fiction. So of course I’ve always longed to use it. Now I have. I promise not to again.

Addendum: 

November 14, 2013. The new Moto X phone has now been released. With it I can now give RW my unfettered recommendation. So if you want to give them a try, the time has come. I plan to.

Posted in business, Life, Money | 68 Responses

Case Study #3: Let’s get Tom to Latin America!

Latin_America_(orthographic_projection)

Image courtesy of Wikipedia

I wasn’t planning two Case Studies this close together. Really. But then Tom dropped this note in my lap (actually on Ask jlcollinsnh) and it proved irresistible on several fronts:

–It provides a chance to make a key point about F-You Money:

Unlike the amount needed for full financial independence (FI) and retiring, all that is needed is enough to embolden you to explore new and interesting options.

–It involves long-term international travel.

–It provides a great illustration of how to execute my 10-year plan without being stuck as an office drone.

–It provides a chance to illustrate how your F-You Money can grow to make you FI even while you’re off having adventures.

Let’s take a look at Tom’s situation, plans and questions:

Dear jlcollinsnh:

Help a Hoarder Go Back to School!

Hi! I’m a huge fan of your site. It’s nice to see your investing optimism amid all the doom and gloom of the mass media. Anyway, I’d love your advice on my current situation.

I’m currently working in a high paying job. It’s as life sucking as can be but the pay is amazing. At the end of this year, my contract will end and I’ll have amassed $250k in a checking account. Foolish, I know. It was my dumb “let’s try to time the market phase,” but I’ve grown out of it. You’ve shown me the light!

After this job ends, I plan to study in Latin America (I’m from the US) for five years. During these five years, I’ll have no income and expect to spend $16k a year, which is a firm, inflexible requirement. Once I graduate, I plan to permanently relocate and work in Latin America and start savings again, albeit at a much more modest rate than now. I’d then eventually like to retire early – perhaps around the age of 40.

Here are some stats:
Age: 28

Liabilities: $0.

Assets Upon Getting Laid Off and Going to School: $250k in checking, $17.5k in a Vanguard small cap 401k

Cost of School (2014-2018): $16k/year x 5 years = $80k

Savings Once Back in the Workforce (2019-2024?): $6k/year in savings (low salary but worthwhile profession)

Retirement Goal: (2025/age 40-ish): $450k in investments (18k/year withdrawal rate)

As I’m now an enlightened reader, I’m ready and excited to invest and have my money work for me. How would you suggest investing?

Note: I can only invest in taxable accounts, since I’ve already maxed out my Vanguard small cap 401k for the year and I am not interested in a Roth IRA as I plan to be in a low tax bracket during early retirement.

My current investment ideas include:

1. Keep the 80k needed for school low risk and highly liquid (high-interest checking and CDs?) and invest the remaining funds (170k) in the VTSAX, which I wouldn’t touch for at least 10 years. I’ll stay strong!

Pro: I’m guaranteed to not have to touch my VTSAX fund since I’ll have cold, hard cash to pay for school.

Con: I stupidly have too much cash sitting around.

2.. Take the entire 250k and invest in one of Vanguard’s conservative balanced funds, such as the Target Retirement Income Fund, or Lifegrowth Funds, or slightly more aggressive VBIAX and make monthly withdrawals as I go through school.

Pro: An excessive amount of cash isn’t sitting around doing nothing

Con: I risk having to make my aggressive 6.4% withdrawal rate during a possible down market during my time in school.

What do you think? I’m dealing with two different time horizon heres, Short term 1-5 years for school and medium term 10-15 years for early retirement.

Keep up the great work on the blog!!

Best,

Tom

croc feeding

Tom’s not been foolish. This guy, however….

Courtesy of http://www.break.com

Welcome Tom…

…and thanks for the very interesting scenario! Let’s get started with some general observations:

Don’t think of having held cash as having been foolish. Think of it as having been patient in figuring out what you needed to know about investing before making your move.

Looking at the two options you lay out, I’d say you’ve used your investment research time well.

Too often people rush into buying individual stocks or chasing “star” fund managers without understanding the landscape and how vanishingly difficult those paths are. Now that’s foolish.

Nothing at all wrong with holding your cash until you are sure about what you plan to do. This is for the long-term, after all. Time spent getting it right is time well spent. This includes time spent being sure you are mentally tough enough for the wild ride. Sounds like you are.

Speaking of being mentally tough, congratulations on being tough enough to:

  • stick out your high-paying sucky job long enough to set the stage for your adventure.
  • avoid the lifestyle inflation that could have trapped you in that job.
  • avoid taking on debt that would have made those chains even stouter.

All these are key parts of my ten-year plan linked to above. At age 28 you’ve managed to position yourself beautifully.

So let’s turn our attention to your two investment ideas and play with this cool Compound Interest Calculator I cribbed from Johnny Moneyseed’s recent post From employment to retirement in 7 years.

Scenario #1.

Actually, including the 17.5k you have in your 401k you are heading to Latin America with 267.5k.

If we pull the 80k you’ll need for the next five years into cash that leaves 187.5k to invest.

The 17.5 in the 401k Vanguard Small Cap Index fund is just fine left there for now. We’ll come back to it later. The rest — 170k — we’ll drop into VTSAX.

Now it gets fun, and a bit tricky.

Over time, the market returns somewhere between 8-12%. But with a five year time horizon, your actual results could range much higher. Or lower. I’m not overly concerned about this as your plan is to continue to keep this money invested and growing. So for the sake of this conversation, let’s run the numbers three ways. You’d end with:

  • $239,303 at a somewhat pessimistic 5%, but still offsetting 51.5k of the 80k you will have spent. Not bad.
  • $275,499 at a fairly modest historical return of 8%, more than replacing the 80k you will have spent. The beauty of money working for you illustrated!
  • $330,439 at an aggressive historical return of 12%, making you wealthier than when you started. Woo Hoo!

Now, what happens when you have been back working and adding that annual 6k from 2019 to 2024? Dropping each of the ending numbers from above in to our calculator, by 2024 you’d have:

  • $340,229 @ the 5% projection
  • $386,426 @ the 8% projection
  • $456,545 @ the 12% projection

As you can see, the bad news is that only one of these projections gets you to your 450k goal. The good news is you are now looking at a 10 year time horizon and the further out you go the more likely you are to get to the higher return levels.

So, even pulling the entire 80k you’ll be spending into cash up front gets you some pretty impressive potential results.

Scenario #2.

Keeping all the money fully invested, pulling it only as needed.

Since you are starting with 267.5k and you’ll be withdrawing 16k per year, you have a 6% withdrawal rate. If you haven’t already, now I’m going to send you over to give my post on withdrawal rates a read.

What you’ll see is that, while starting to push the envelope, 6% is not completely unreasonable. Especially given a bit of luck, the short time you’ll be doing it and the fact that, unlike somebody say 65 or so, you’ll have the ability to work your way thru it if the market turns against you.

Taking a look at the Trinity Study Update I referenced in that post, you’ll see what makes these academic withdrawal studies tricky is when they account for inflation over 30 years. Tough bar.

Comparing charts 3 & 4 you can see this clearly. Since it also designed to examine extended periods of 15 years or more, you need to be careful extrapolating to your 5-10 time frame. As we’ve discussed, the shorter the time frame the more likely your returns are to be outside the norm. For better or worse.

Understanding that, it is still instructive to look at chart #3 and the 15 year results @ 6%. Notice that 100% stocks gives the best results and that those results diminish the more bonds you add. Of course, 100% stocks will also magnify the “outside the norm” dynamic described in the paragraph above.

So now, hopefully, you can see I’ve set up a framework for your decision.

If you go with your scenario #1, you’ll get a good result but one likely to leave you a bit more work to do beyond 2024 before hitting your 450k goal.

Go with your scenario #2 and you’ll keep more money working (and at risk) and greatly improve your chances of being at 450k or more by 2024, but with a greater risk of a larger gap should the market move against you for an extended period. Go with a 100% stock portfolio version and you’ll magnify this effect.

So you’ll also need to decide between the idea of the balanced funds you mentioned or 100% stocks in VTSAX. It really depends on your temperament and goals. Personally, I’d be willing to risk having to work a bit longer against the potential of having more when I wrap it up in 2024. But that’s me.

girls-whispering

Psst. He might go for an option #2 version.

Not surprisingly, by extension, I’d go with one of the #2 versions. I’d set it up with Vanguard to transfer $1333 each month to my checking account and I’d never even glance at the funds while I was kicking it in Latin America.

As for a Roth, even though you plan to be in a low tax bracket, don’t be too quick to dismiss funding one. Things could change and you can always withdraw all your contributions tax and penalty free. Only the money it earns need be left in place, growing forever tax-free. It may never benefit you to the max, but it will benefit you. And there is no reason not to do it.

Ok, now back to that 401k. As soon as you are in your first year of no income, I’d roll this into a Vanguard Roth IRA. I’d also move it to VTSAX at this point, although if you are especially fond of the Small Cap Index fund that’s fine too.

While technically a taxable event, with no other income, at this amount the rollover should be tax-free. Once there it will grow tax-free forever.

Since for those first five years you won’t have income you won’t be able to add to it. But in 2019 when you start earning again, fund the Roth fully each year.*(See addendum #1) In fact, this is where most (up to the max allowed by law) of your planned savings in those years should go. Especially since it sounds like your income will be low enough not to need the immediate tax deduction.

There you have it. You are in a great position to pursue your new adventures while your money does the heavy lifting for you going forward!

What will you be studying and where exactly?

Travel safe and keep us posted!

 

*Addendum #1:

In the comments below reader Andres schooled me on the Foreign Income Exclusion for US expats and its effect on Roth IRA contributions. Here is our conversation…

Andrés:

One small wrinkle I’ve learned from living abroad: unless Tom makes more than the Foreign Earned Income Exclusion (which will be $97,600 for 2013 and is indexed to increase with inflation) he won’t be able to contribute to his Roth IRA if he is living and working full-time outside of the United States. However, he will be able to contribute to his taxable brokerage accounts as normal.

My reply:

Thanks Andrés…

Great input and something I didn’t know.

It got me doing a bit of research and I’d like to expand a bit on your comment.

The IRS says you can contribute to a Roth IRA if, in 2013 you

1. received taxable compensation during the year, and
2. your modified Adjusted Gross Income is less than certain levels which are detailed here:
http://www.irs.gov/Retirement-Plans/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-For-2013

Since the first $97,600 of foreign income is excluded, unless you make more than this you wouldn’t meet the income qualification.

However, in determining your income limit, this excludable income is added back in.

For a single taxpayer like Tom the income limit for a Roth IRA starts at 112k and phases out thru 127k. That is between 112k and 127k you can fund part of a Roth.

So, if Tom makes $97,600 or less: No Roth. Since the income is excluded, he doesn’t meet the earned income test.

If Tom makes over 127k: No Roth. He is over the income limit.

If Tom makes 100k, he could contribute $2400 to his Roth. That is his total adjusted gross income of 100k – the 97.6k exclusion = 2.4k

If Tom were to make between 103.1k (97.6k + 5.5k) and 112k he’ll be able to fully fund his Roth at the allowed $5500. Once over 112k the amount allowed gets steadily reduced until it is gone completely over 127k.

Whew!

And this is why I hate writing about tax stuff! :)

Addendum 2:

Also from the comments below is this great strategy presented by Jay Jay. Tom should definitely do this.

Thanks Jay Jay!

Jay Jay:

I’ve been reading your blog for quite some time (love it, and thanks for doing it!), but this is the first time I’ve felt I might possibly add some insight.

Since Tom’s income will be so low, his dividends and capital gains should be tax-free (assuming his ex-patriot status doesn’t impact that) up to $32k or more, depending on deductions and exemptions.

I know you usually recommend a “set it and forget it” approach to index fund investing, but it might make sense in Tom’s case to consider occasionally selling off his fund if it has experienced some gains, and then immediately buying back into it. He would of course need to calculate what amount he could sell which would still keep him in the 0% cap gain tax bracket. If he remains in a 0% tax bracket, all he’s lost is his transaction costs.

This is sort of the opposite of a wash sale. Instead of locking in a loss, you are locking in a tax-free capital gain. It also re-establishes the cost basis, so if he ends up in a higher bracket in the future, his capital gains will be less than if he hadn’t made the sale/repurchase. As far as I am aware, there is no 30 day limit for sales/repurchases that involve a gain.

My additional considerations:

Because Tom will be using Vanguard funds he need not even worry about transaction costs, which Jay Jay rightly points out could be a consideration in other scenarios.

However, when using Vanguard funds there is this glitch:

“If you sell or exchange shares of a Vanguard fund, you will not be permitted to buy or exchange back into the same fund, in the same account, within 60 calendar days.”

The easy way around this is to exchange from VTSAX to VFIAX (S&P 500 index fund) and back to VTSAX after 60 days. While VTSAX slightly out performs VFIAX over time, for short periods either could win making this an non-issue. In fact, I’d be comfortable enough with VFIAX to say just leave the funds there until you are ready to harvest the profits again.


 More Case Studies

Posted in Case Studies, Travels | 29 Responses

The Stock Series gets its own page

nice post

Courtesy of: Brainless Tales Greeting Cards

A couple of days ago a reader named Kevin sent me a very nice post over on Ask jlcollinsnh. It is dated October 2, 2013 if you’d like to find it and read our exchange.

In it he said that he has found the blog interesting and useful, especially the Stock Series. Useful enough that he wanted to share those posts with his friends and family. Problem was he found it cumbersome to do so.

I replied thanking him and pointed out:

If you look at the right hand column you see every post here organized by category. This this the link to the stock series:http://jlcollinsnh.com/category/stock-investing-series/

MMM also created a post with links as well:

http://www.mrmoneymustache.com/2013/03/07/how-about-that-stock-market/

As did Shilpan over on Street Smart Finance:

http://www.streetsmartfinance.org/2013/06/28/how-to-invest-money-in-any-economy/

Kevin replied saying, basically,

“Yeah, yeah. Got that. Still doesn’t cut it. Stop procrastinating. Get off your ass and create a new tab at the top for these things.”

(Actually, he was very kind, polite and profanity-free in his reply. I’m just reading between the lines as to what I would have meant.)

Well, persistence pays and Kevin’s prompted me to turn to my technical advisor The Mad Fientist. I put the idea to him and he replied saying, basically:

“Yeah, dummy. That’s what I’ve spent the last year or so telling you to do.”

But again, in much nicer words. And, of course, on reflection this is the same message Mr. MM and Shilpan were sending me with their very generous posts.

homer_simpson_d__oh__by_seekerarmada-d5jl5wh

Well, never let it be said that I don’t recognize a good idea when it’s banged over my head repeatedly and by multiple people for extended periods of time.

So, with thanks to all (and especially Kevin who provided the proverbial last straw) I give you the newly and better organized:

Stock Investing Series

You’ll notice this has also given me a chance to include several related posts not formally included in the Series. If you’d like to see others added, please let me know. I don’t always listen right away. But sometimes I get there.

Posted in Stock Investing Series | 25 Responses

Case Study #2: Joe — off to a fast start!

fast-start

Over in the Ask jlcollinsnh page, reader Joe posted a very interesting profile along with a series of questions.  Since I think his situation and our conversation about it might have broad interest, it has become our first case study in a long time (here’s #1) and this post.

First is his note, which I have edited a bit, but only to include some facts he later provided:

Jim -

I wanted to layout my personal situation for myself and my girlfriend and get some feedback from you re: any things you think we’re missing out on or areas of opportunity.

(Joe is 27 and his girlfriend is 24. The income and expenses are his alone. She is a full-time student.)

Monthly Income
* Salaried at $12,500/mo with quarterly bonuses based on profit. Given past profit numbers this should equate to about $3,300-4,200/mo. Total comp: $15,800-16,700/mo.

 I get 100% covered health insurance, dental, etc. I have disability insurance through work.

Monthly Expenses
* Housing (own) = $1,315/mo (House mortgage + property taxes + pmi)
* Bills & Utilities = $423/mo (Gas, Water, Electric, Internet, Cable TV, Cell Phone for myself and GF)
* Transport = $287/mo (Car Insurance, Gas, Maintenance, Parking, EZPass, Transit Pass, Bike Maintenance)
* Food & Dining = $321/mo (Groceries, Restaurants, Bars)
* Shopping = $330/mo (House goods, clothes, electronics, gifts)
* Pet care = $59/mo (Dog food, annual vet visit, toys)

Annual Expenses
* Travel = ~$3.2k/year, $260/mo (g/f family is INT’L so we need to travel at least once per year)

Monthly Investment Contributions
* Roth 401k = $728/mo
* 401k = $728/mo
^^ Note: Company matches to the tune of about $200/mo
* Principal Payment = $300/mo (Pay an extra $300 towards house)
* Vanguard taxable = $4k/mo (55% VTSAX, 15% VGTSX, 15% VGSIX, 15% VBMFX)

TOTAL INCOME: $16,250/mo
TOTAL EXPENSES: $2,995/mo
TOTAL INVESTMENTS: $5,756/mo

In terms of what I’ve gotten so far:

Assets
* House, Zillow = $255k
* CASH = $53k
* Car, KBB = $13k
* Roth 401k = ~$18k (Principal Target 2045 Retirement Fund)
* 401k = ~$18k (Principal Target 2045 Retirement Fund)
* Old 401k = ~$28k (Assortment of funds available in Fidelity)
* Vanguard Roth IRA = ~$21k (Target 2045 Retirement Fund VTIVX)
* Vanguard Taxable = ~$20k (55% VTSAX, 15% VGTSX, 15% VGSIX, 15% VBMFX)

Liabilities
* House Mortgage = $173k

QUESTIONS

  1. Anything good to do with some of that cash to keep it mostly liquid / safe as an emergency fund + life fund (marriage, new car, etc)? It’s just sitting in Capital One 360 + Bank of America.
  2. I just upped my investments, my plan is to up the contribution amount until I am breaking even every month and not growing my savings. Based on what my predicted income, taxes, spending, and current investment contributions are, I think that means I will likely push my monthly investments up another $3k/mo.
  3. I can rent out my house for ~$1,700 and move closer to my work for a monthly rent of ~$1,800. I would save about an hour per day by being closer to work, and given the the fact that utilities would be cheaper and I would make money on top of mortgage, it seems like a good idea. Thoughts?
  4. Should I consider saving some money and buying another house for myself as either an investment property or a house to live in (thus converting my current into an investment property)? Around me it is common to buy a house for between $250-350k that is pretty nice and it can rent out for $1500-2500.
  5. Are the target retirement funds decent?
  6. Am I missing out on any big opportunities in my portfolio?
  7. Does it seem like I’m on a good track?

Joe

My Reply

Welcome Joe and thanks for your detailed profile. Let’s start by answering your last question (#7) first:

Beautiful Track 5

It seems you are on an beautiful track!

Well done so far.

You have just about 200k in income and you are living on under 36k per year. That’s an annual savings rate of 82%. That’s brilliant. About the only thing that appears to be missing is accounting for the repairs and maintaince your house is sure to require over time. But think hard and be sure you’re not missing anything else in your expense profile.

If those expense numbers are accurate, and for anybody living on 18% of their income, I’d say spend it on whatever you damn well please.

OK, let’s look at your other six questions, in order:

1.  53k in cash, for somebody with your income and spending level, is needlessly high. It is just shy of 1.5 years of your current living expenses.

If wedding costs and/or a new car are in your near term plans, figure those costs and hold that aside as cash. Otherwise, half your annual spending is more than enough: 18k. And unless your job is insecure, I wouldn’t even hold that much. But with your assets, if you want to, it is a small enough number.

Make that money work harder: Move the excess to VTSAX (Vanguard Total Stock Market Index Fund) in your taxable account.

2. You should push your investment levels far higher. Subtracting your expenses ($2995) from your income ($16,250) you have a monthly surplus of $13,255. Yet you are only investing $5756, leaving $7499 unaccounted for. Since you don’t mention if your income is pre or post tax, some of that might be going to the tax man. But you still have much more to deploy.

3. Your idea of moving certainly makes sense from a cost and commute time savings point of view. However, with your income and savings rate, I’d make the call based more on which option provides you the most appealing lifestyle.

4. Having a rental house can be a very attractive investment. But it can also be a money pit. Do some very serious homework first, rather than just buying another house and converting your current home into a rental.

Remember, too, this is also a part time job. If this appeals to you and you see it as a desirable way to spend your free time, go for it. If not, you have no real need here.

A REIT like VGSLX  (Vanguard REIT Index Fund) gives you broad-based real estate exposure while you read a good book sipping cognac by a roaring fire.

If you haven’t already, start by reading this: Why Your House is a Terrible Investment.

5. I am not familiar with Principal Target 2045 Retirement Fund, but taking a quick look it seems OK. The .63% ER (expense ratio) is a little pricey. (Your Vanguard Roth in VTIVX, the Vanguard equivalent, has an ER of .18% for comparison.) My guess is you are in it because that’s what’s offered in your 401k. That’s fine, but when you leave that employer you’ll want to roll it into a Vanguard IRA (unless you are using the Backdoor Roth strategy described below). There will be no reason not to own the better, lower cost VTIVX in your IRA/Roth then.

Here’s my take on TRFs overall.

6. Not big opportunities, but your portfolio could use some fine tuning. Let’s look at that next…

rock pushing

We’ll just move a few little things around…

Open a non-deductable IRA…

and immediately convert it to a Roth IRA. This is a very cool technique called a Backdoor Roth IRA.  High income earners utilize this to get access to a Roth.

There are some complications to this (as described in the link), the  main one being that such a conversion will also effect all IRAs held other than Roths. But you don’t have any others. Your personal situation is such that you’ll avoid this common complication altogether.

Here’s what you do:

Read that linked article carefully. Then….

Open an IRA with Vanguard (you don’t have to specify deductible or non-deductable) and put the max contribution ($5000) into VMMXX: Vanguard Prime Money Market Fund. You want the money market fund so you have as little variation in value as possible in the short time you hold it as value variations add complexity.

Immediately instruct Vanguard to transfer it into a Roth IRA. You can use your existing Roth. You now have a perfectly legal Roth contribution in spite of your high income. And you can do this every year. Just be sure you don’t open any other IRAs or roll any 401k money into an IRA.

You won’t get any immediate tax deduction, but earnings will grow tax sheltered; important in your tax bracket.

BTW, for those readers who have lower incomes that allow for traditional deductable IRAs, my pal the Mad Fientist has worked out some very clever strategies:

http://www.madfientist.com/retire-even-earlier/ Check out the section on Roth IRA Conversion Ladder

http://www.madfientist.com/traditional_ira_vs_roth_ira/

Old 401k 

Ordinarily, I’d suggest you promptly roll this out of Fidelity (where the funds are likely to have high ERs) and into an IRA at Vanguard holding VTSAX. But that would vastly complicate the Backdoor Roth strategy above. So do this only if you decide against the Backdoor.

If you do decide to use that strategy, keep the old 401k but with an eye towards consolidating the multiple funds you have into Fidelity’s Total Stock Market Index fund, if available. Responding to the competition from Vanguard they have made these very low cost and it will serve you well.

If they don’t offer the Total Market Index fund, look for the S&P 500 Index Fund. That will serve nicely. So would a Target Retirement Fund if you prefer one of those.

Vanguard Roth IRA in VTIVX

I guess is this is an older Roth built when your income was low enough to allow Roth contributions? If not, I see a problem. As a single guy, your income disqualifies you from contributing to a Roth.  (Other than the Backdoor discussed above.) The phase out limits range from 112k to 127k. Past 127k you can no longer contribute at all. If you built up this Roth when your income was within the limits, no worries. If not, you’ll have to back out of it.

As for VTIVX, this is a fine fund. But Roth money is very long term and you already hold a very similar fund in your 401k. I’d use VTSAX instead. It will be a more volatile ride, but if you leave it alone after 40-50 years it will very likely have delivered a much stronger return.

Vanguard Taxable

You have 20k spread across four funds and you are adding 4k per month. That’s great, but you don’t need so many funds. I’d simplify and focus all this into VTSAX for the reasons I outline here, and this is why I don’t feel the need for international funds.

Mortgage

While I don’t have a great problem with you paying an extra $300 per month, I also don’t see the need. If your interest rate is 4.5-5% or less, better to invest this money in VTSAX. If your interest rate is higher, look into refinancing.  With your income and lack of debt, they should fall all over themselves offering you their best terms and rates. I’d go for a 15 year fixed. It will be a higher payment than a 30 year but you’ll be done with it sooner.

I’d also borrow a full 80% on your 255k value = 204k. This is higher than your current 173k balance and not the advice I’d give to most. But this debt is so small compared to your income and your tax bracket is so high, you can easily afford it and will benefit from the tax deduction. Put the excess you receive right into your VTSAX fund.

Oh, and if you keep this mortgage you now have more than enough equity to have them dump the PMI. That’s wasted money for you and I’d get it gone ASAP.

OK, now…

lets_review

First, keep on with your terrific savings rate and increase your investing pace. Soon enough you’ll find your investments are producing the 36k you are spending. When that happens, live on that and invest your full income. Your investments will then really explode, as will the income they can provide. At that point, feel free to expand your lifestyle to that increasing level. For more on how much spending your investments can support, here’s my piece on the 4% rule.

Second, notice we are simplifiying and streamlining your investments. At this point in your life you are in the very active wealth building phase and VTSAX is the best tool for that. Both in your taxable and tax advantaged accounts. Because it’s what is offered in your 401k, you’ll also be holding the Principal Target 2045 Retirement Fund. That’s fine and you can roll it to Vanguard when you move on from this job, depending on your use of the Backdoor Roth.

Third, we are introducing that last as way to access the benefits of a Roth.

Fourth, your house is very modest against your income and that will serve you very well. Unless you can advantageously refinance, don’t worry about the mortgage. But dump the PMI.

You are off to a fine start and with your income, spending level and savings rate should easily hit finacial independance in short order.

Good luck and keep us posted on your progress!

Addendum:

For more on the idea of buying another more suitable house and turning your existing home into a rental:  How a smaller house saves us $16,500 a year.

More Case Studies

Posted in Case Studies | 65 Responses

Chautauqua 2013: A Week of Dreams

Chau - crater_lake-300x170

Lake Cuicocha:  Where we had lunch and a boat ride in the crater of a volcano.

First, thank you for you patience. I always feel a bit bad closing down the blog and leaving you with only past posts while I wander about during my summer travels. Not bad enough to stay home and write, or to lug along a laptop, of course. But bad.

Still after roaming around Ecuador for the better part of the summer, this past Sunday I returned, exhausted and having to relearn a few things about living here in the USA. Such as flushing the toilet paper down the toilet. See, in Ecuador nothing gets flushed that doesn’t, ahem, come directly from you. Used toilet paper is placed in the basket conveniently provided. Yep. Even the paper soiled that way.

Seems the septic systems can’t handle it. This despite the fact, as Mr. Money Mustache explained to me, septic systems “like” toilet paper.  It never occurred to me that they’d like anything but, when you consider the rest of what the systems deal with, a little TP is likely a step up.

But anyway, I’m back just in time for what is starting out as a drop-dead gorgeous fall season here in New England. As I told somebody recently, if I didn’t live in New Hampshire it would have to be on my annual travel schedule each year for these couple of months. Tomorrow my pal Barry, who has been storing my Triumph, is coming by to pick me up. Shortly after we’ll be in the wind, riding the back roads around these parts.

Ecuador, as always, was a magical trip. Seems I’ve been often enough now that upon my return the border agent felt the need to quiz me closely on just where I live. Jeez.

But the final week was the most magical of all. It was a week of dreams. It was the week of the Chautauqua.

mustachian_salute-300x225

Chautauquaians giving the newly created Mustachian Salute:

Finger mustache, arm gun displayed.

It was the premier event for Cheryl’s company, Above the Clouds Retreats and the realization of her dream to launch her company, sharing Ecuador and her Happiness and Passion path.

It was the realization of the dream of a local family who, after over a year of living in a chicken coop, are now about to move back in to their newly renovated house. Earthquake damage repaired with funds provided from the revenue this Chautauqua generated and channeled thru Cheryl’s Project One Corner.

Chau - the_family-300x198

The four of us with the Ecuadorian family and their refurbished home.

Listening to this Ecuadorian woman describe what being able to return to her home meant for her family had tears streaming down Cheryl’s cheeks as she translated. Mr. MM and I were sitting together on a low concrete wall. He leaned over and whispered something to the effect of “It is taking all my manly badassity to keep the tears at bay.” I was glad it wasn’t just me.

It was a dream realized for the kids at the orphanage we visited as they received the backpacks and other goodies attendees provided. Including the piñata that when finally burst showered them with goodies.

chau pinata

It was a boost to the realization of the dreams of every attendee. I know this based on my many personal conversations and by the fact that on every evalutation form we recieved, the answer to this question –

Would you recommend this Chautauqua to a friend?

– was “Yes.”

It was the realization of my dream to create a “Chautauqua” (one of my favorite old-timey words) where I could discuss the ideas on this blog personally with readers and in the company of presenters like Cheryl, Mr. Money Mustache and JD Roth, from each of whom I was eager to learn. They did not disappoint!

Cheryl is one of the most relentlessly happy and joyful people I’ve ever met, and not because her path has been an easy one. No one was listening more closely than I as she discussed her secrets.

From the moment Cheryl and I began discussing this Chautauqua, I knew we needed Mr. Money Mustache on board. If you read his blog you already know why. What you might not know is that he is every bit as formidable in person and an extraordinarily gifted speaker to boot. Fun to hang around with too.

Mr. MM also deserves the credit for whistling in JD Roth. JD’s presentation on “Fear, Flow and Freedom” was the one I was personally most anxious to hear. Remarkable stuff and at the end it even inspired me to do what ordinarily I would never have done: Ask the group directly for help.

See, for literally decades people have complemented my voice. While I did have the chance to do a bit of radio work, serendipity has never led to doing voice overs. I’ve always thought that would be fun and so I put it out to the group. As JD said, in effect I had just bought 26 lottery tickets.

Now, by extension and further using JD’s principles, I am buying many, many more by sharing this with you, my readers. If you want to hear what I sound like, you’ll find a link to my podcast with The Mad Fientist here. Another Chautauqua dream in the process of being fulfilled.

There is a certain process that occurs in pulling an event like this together. The concept is created. The speakers lined up. The destination chosen and secured. The P&L spread sheet created. The costs analyzed. The week planned and arranged. The endless details attended to. And finally the invitation to attend is offered. It is not unlike planning a grand party and then holding your breathe hoping the guests will actually come.

Chau - me pete jd

Fine tuning the Chautauqua at Cheryl’s farm house the day before the event.

We need not have worried. All 25 slots sold out in three weeks. Unfortunately, life intervened for a few people forcing them to cancel. Come arrival time at Quito International Airport we had 22 attendees plus the four presenters and Cheryl’s husband Rich, who handled the logistics and served as master of ceremonies. 27 people.

And what an amazingly diverse group it was. Not just in race and sexual orientation, although we enjoyed both. But in:

  • Age – ranging from geezers like me to folks in their twenties.
  • Occupations – including a corporate lawyer, doctor, banker, a couple of CFOs, a librarian, two US Marines, entrepreneurs, a fellow blogger and IT folks just to name a few. Some already FI, some on their way. Even a Wall Street money manager and a former stock analyst. Amazingly, given my views on Index Funds and Investment Advisors, both were still speaking to me after my presentation.
  • Wealth – ranging from multi-millionaires to people just breaking out of the grip of debt and on their way.
  • Geography – they came from all over the US and Canada, and one from Mexico.

You might think such a wide-ranging group would be a recipe for conflict. You would be wrong. As the Wall Street guy said to me towards the end, he and his friends amuse themselves at conferences with assessing the “AQ” of the various groups. That would be “asshole quotient.” His AQ score for this group: Zero. I’d have to agree.

chau - party time at Pete's

Mr. MM hosting one of many impromptu parties at his Hacienda Cusin casa.

In fact, it was absolutely stunning how well everybody got along. No matter how we mixed up the group (something we did very intentionally during the week) at meals and between events the conversations were universally robust, friendly, engaging, humorous and enlightening. These are all people who are fiercely independent and who are following their own unique paths.

On reflection, all this is not surprising. For all their diversity, getting to the Chautauqua required a couple of potent filters.

  1. Nobody signs up for a week in a distant country with a bunch of strangers without a pretty strong sense of adventure.
  2. All came to the Chautauqua thru one of our three blogs, and if you enjoy one the chances are good the others will resonate with you as well.

At a very fundamental and core level, we were all kindred spirits. In fact the comment I heard most often was how refreshing it was for attendees to be with other people who “get it.” If your goals involve FI, intentional living and personal freedom, in most circles you’re the odd one out. Talk about this stuff to most of your family, friends and co-workers and they’ll look at you like you have two heads.

But at the Chautauqua, almost by definition, these were core values everybody shared. The people there built, expanded and drew support for them with every encounter.

Associating with all these dynamic, smart, accomplished, positive and independent people was an endless joy for me. I learned far more than I taught. In this I can say with great confidence I was not alone.

So, to all who attended:  Thank you for making this event one of the best trips and best weeks of my life. Truly a dream realized. I salute you:

chau wine toast

To those reading, I only wish you, too, could have been there.

For other takes on this event:

Mister Money Mustache

JD Roth

Johnny Moneyseed

One life, many adventures

Carlos reports on the ERE forum

Unfortunately, we were unable to video tape the presentations as planned. But in their posts both JD and Mr. MM provide links to their slides for your reference. As for me, I’ll provide a recap of mine in a soon-to-come post.

A note on the photos in this post:

At the Chautauqua we had three expert photographers in Rich, Mr. MM and JD. Since this is one of the many skills I lack I’ve shamelessly cribbed those you see here from them. Cheryl also tells me she plans to put a bunch up on the Above the Clouds website. When she does, I’ll post the link. The embarrassing ones are sure to be included.

Posted in Chautauqua, Travels | 64 Responses

Closing up shop plus an opening at Chautauqua, my new podcast, phone, book and other random cool stuff

water dancer

Drowning in debt? Great Ted-Talk on Debt. Short, too.

My apologies.

I should have posted this a few weeks back.

As regular readers know, I tend to disappear each summer for a few weeks of extended travel. We roam around at other times during the year too, but usually only for a week or two at a time. Unless you are paying very close attention to the blog you likely don’t notice those.

Since I travel without a computer, laptop, tablet or other device I am for the most part out of touch. I confess I kinda like that and it is a great break from the daily routine. Which, after all, is part of the pleasure of traveling.

Sometimes the places I stay will have a “house” computer and I’ll log on to check emails and the blog. But these are far too uncomfortable to do any serious writing. At least for me.

The point of telling you all this is so you won’t be surprised as the coming weeks pass without any new posts. I’ll also be very slow in responding to comments and questions. But go ahead and leave them. I’ll try to get to a few from the road and will respond to the others when I return.

Actually, our summer travels have already started. We just got back from my in-law’s beach house on Lake Michigan, which they graciously make available to us. You walk out the door right on to the sand that stretches miles in both directions. We returned wondering why it has been four years since last we were there, and resolving to make this an annual trip.

Lake Michigan

Lake Michigan

Since I grew up about a mile from the lake, and spent my mostly unsupervised boyhood adventures in and around it, it holds a special place in my heart. But even without that history, I can’t imaging not finding it magical.

After this short return to New Hampshire, in a few days we’ll head to Ecuador. My wife will spend the first two weeks with me in Cuenca, our favorite city there, before heading back home. For my part, I’ll then head over to the little beach town of San Clemente. For $15 a day I’ve secured a water front room right on the beach. Breakfast included, of course.

If the low price concerns you, this place came with the seal of approval from some local expats. They don’t know it yet, but I’ll be paying for their advice with the taco mix, baking soda and Miracle Whip I happen to know they like and can’t easily get.

From there I head to the Chautauqua. I am very much looking forward to this event. It has taken a lot of work and planning (fortunately for me, mostly by Cheryl :)) and it seems we have an exceptionally interesting and adventuresome group joining us.

Hacienda

Rooftops of Hacienda Cusin where we’ll be staying

Join us in Ecuador

When we first announced the Chautuaqua in late February, it took all of three weeks to fully sell out. But since then, life has intervened for a couple of attendees. Unfortunately, illness and job loss were the reasons. We are very sad as these were two couples we were especially looking forward to meeting.

So we find ourselves unexpectedly with four open slots. If you’d like to join in, just go to the registration page let Cheryl know. Hope to see you there!

The Book

Even when I return, things around here are likely to be more quiet that usual. Thanks in large part the kind encouragement of many readers here, I have finally begun writing my book. I figured this would be far easier than it is turning out to be. While much of the material has been written in the form of the posts here, those have come together randomly as topics were suggested or occurred to me.

Putting this all in book form requires a rather dramatic rethinking and organizational effort, combined with no small amount of rewriting so the material actually flows. Then, too, there is actual process of preparing it for publication. That’s a whole new area for me. It will be fun, but time consuming, to learn.

While far more work than I had imagined, it is also great fun and very rewarding to do. Plus, I can’t wait to get it into your hands. Assuming, of course, you’d want to have it.

While I complain about writing one, my pal Tom has written several in between roaming all over the planet having grand adventures. Oh, and he also just started his own book publishing company: http://www.roundwoodpress.com

Irritatingly, he’s also younger than I. But then, more and more people are these days….

The New Podcast

Earlier this week I sat down for this

interview podcast: Why your house is a terrible investment

with Joshua Sheats who recently launched his blog Radical Personal Finance. Joshua reached out to me a couple of weeks back after having read my post of the same name.  In his email he said:

“I’ve really enjoyed reading your site–your “worst possible investment” article is an absolute gem. I’ve sent a bunch of people to it and literally read it aloud to people a half dozen times. I also really enjoyed your interview on Mad Fientist’s show.”

At first, with all this travel going on, I put him off. But then it occurred to me this might be a great bit of extra content here for while I’m gone. Plus, look at those nice words he wrote to me! Who says flattery doesn’t work? :)

Once you are done listening to my podcast with him, or if it just bores you too much to carry on, check out some of his others. He also has interviews up with The Mad Fientist and Paula of Afford Anything.

A new cell phone?

An upstart new cell phone company has asked me to give their new phone and service a test run. My pal Mr. MM already has, and with high marks, so I expect to be impressed.

Assuming I am, I’ll do a full review on it when I return.  It will include a link for the discount the company has promised to offer my readers if they sign up.

It will get its first harsh test when I take it to Ecuador. As I mentioned above, I don’t typically travel with gadgets. But I’m making an exception for this one. Seems I’ll be able to make and receive calls to US area code numbers from anywhere in the world that has a wi-fi connection, in addition to accessing the internet of course. We’ll see.

The phone uses a wi-fi/cell hybrid service that I’m told is transparent to the user. The cost is $19 per month + whatever taxes apply where you live. Unlimited data, texting and minutes. Pretty sweet deal.

As you might imagine if you read this blog, my first and main question was:

“Is there anything I can do with this phone that will ever cost me more than that $19?”

Answer: “No.”

My first impression (and hope) is that these guys could be to phone companies what Vanguard is to investment companies. And that would be a very good thing for us. I’ll let you know.

Random cool stuff

As always, I’ll leave you with some random cool stuff I’ve been collecting….

Butterfly by Missy

Butterfly

Photo by Melissa Boulanger

el-angel-paramo-76

El Angel

Here’s some great music from Stan Hirsch, my favorite guitarist:

The Good, Bad and the Ugly

Dawn’s Dance

Before I Fell After

Compelled to Play

Mardan Palace

24 amazing pools

The Fairy Doors of Ann Arbor, MI

Sailing-Stones-Death-Valley-631

Rocks moving themselves along the desert floor

Cool facts about Planet Earth

woodpile

 How to stack firewoodtepui-venezuela-1[4]

tepuis

WPA poster

WPA – Works Progress Administration art.

shacks

As you watch this two minute clip showing all the features, remember: This thing was built some 200 years ago using only hand tools:

The Roentgens’ Berlin Secretary Cabinet

Star-Wars-Set-1

Say, Luke, this place looks oddly familiar….

Finally, here’s my favorite motorcycle video:

http://vimeo.com/31288625

It’s Better in the Wind

I first put this up in my motorcycle post way back in ’11. It deserves another look. Even if you don’t care about motorcycles, it’s 15 and a half minutes well spent for the sound track alone.

(I have it playing as I write)

This short film was created by a young guy named Scott Toepfer and as much as anything I’ve seen it captures the sheer joy of motorbiking.  Doesn’t hurt that a couple of the bikes in it are Triumph Scramblers like mine.  Scott and his pals have good taste.

 

Posted in Random cool things that catch my eye | 41 Responses

They Will Kill You For Your Shoes!

San-Pedro-Guat-005-11-1024x678

If you decide to pursue financial freedom you are going to have to choose to spend your money on investments. Somehow in our culture this has come to be seen by most people as deprivation. That has never made much sense to me. Personally, there is nothing I’d rather buy or own than F-You Money.

With it, the world’s possibilities are endless and you are faced with the delicious decision as to what to do with your freedom. The limits are your imagination, and your fears.

Regular readers of this blog know the cornerstone of my investing approach is that the stock market always goes up. After all, the Dow Jones Industrial Average started the last century at 66 and ended at 11,400. That was thru two world wars, a deflationary Depression, bouts of inflation and countless disasters. If you want to be a successful investor in this century, you need some perspective.

Some seek absolute security…

  • Can I be sure the US economy is not about to enter the 25-year down cycle Japan is still living thru? Or something worse? Nope.
  • Is a 4% withdrawal rate always going to be safe? Nope. About 4% of the time it will come up short and you’ll need to adjust.
  • Don’t I know that Ecuador has a high crime rate? Yep, in some areas you need to be careful.

…it doesn’t exist. We all must play the odds and make our decisions based on the alternatives. But in doing so, we must also realize fear and risk are often overblown…

…and understand that letting our fears control us carries its own set of risks. Safety is an expensive illusion and You can get rich with good old-fashioned trust.

Getting past my own fears has allowed me to avoid panic and ride out financial disasters like 2008. It has given me my own F-you money. It has allowed me to indulge in my own somewhat risky passions.

Long-term slow travel holds particular appeal, so it’s not surprising I’m drawn to Go Curry Cracker. Below, with Jeremy’s kind permission, is one of my favorite posts from their ongoing journey.

Meanwhile, Mike from 27 Good Things reached out and invited me to write a guest post on his site. He’s come up with a very cool concept and I urge you to check it out. Here’s 27 Good Things by jlcollinsnh

They will Kill you for your Shoes!

by Go Curry Cracker

“You’re going to Guatemala?!  You need to be careful.  Don’t show anybody your iPhone.  Don’t carry much money.  It’s dangerous there, they will kill you for your shoes!”

My friend Jake was en route to Guatemala to visit us last weekend, and this bit of sensationalist drama was courtesy of the United Airlines employee that he was sitting next to on the first leg of his trip.  It is always nice when you can sit next to a knowledgeable person on your travels.  Clearly he wasn’t in the sales department.

During his layover, Jake texted me to get my view of things.  “Is it dangerous? How has your trip been so far? Should I still come?”

My reply?  “You’re damn right it’s dangerous!  Dangerously awesome!  See you in a few hours”

 

Let’s be serious for a moment.  Jake has nice shoes. But would anybody really kill him for them?  Why does this well-intentioned person feel so strongly about the people of Guatemala that the topics of murder and footwear end up in the same sentence?

The United employee isn’t a member of the police or even the fire department, but the word of a man in uniform isn’t to be taken lightly.  We were also cautioned by several people in Mexico about how dangerous Guatemala is.  It made me really start to question my view of the world.  Could the people of Guatemala really be dangerous?  Were my wife in I in constant danger, and we had just been lucky so far?

Perhaps this United Airlines representative had an abundance of first person experience that I didn’t.  Maybe he has seen the dark underbelly of this beautiful country, while we had only seen the thin surface that the marketing department of the Board of Tourism had wanted us to see.  I began to keep a watchful eye on the people that we came in contact with

For example, Maria.  Maria is an entrepreneur and runs a successful family business.  Her four daughters and many of her grandchildren also take part.  When we went to visit her, I tied my shoes extra tight so they wouldn’t come off without serious effort.  She seemed warm and friendly, but I made sure I always had a clear path to the door.

Maria

Maria (photo courtesy of Jessica Wilding)

In Panajachel, this guy was helping coordinate rides with tuk tuk drivers.  He almost insisted we take his photo, probably to distract us while his friends jumped us.  He even tried to make small talk.  Seriously, how dumb does he think I am?  When I told him we lived in the US, his face turned grave and he asked, “Is it true that people would kill me there for the gold in my teeth?”

“Maybe.  If not for your teeth, then for your name brand polo shirt.”  I had to let him know that we weren’t easy targets, and that comment must have caught him off guard because we were able to get in a tuk tuk without incident.

Nice Guy

Nice Guy.  Nice Teeth.

Boarding a boat to another town on Lake Atitlan, we met Sansa.  She was traveling to neighboring towns to sell her home baked goods and some cheap plastic earrings. I lent her my arm as she was boarding the boat, because at her age she doesn’t move with ease.  I was careful though, better that I let her fall than have her take my kindness as a sign of weakness.

Winnie spoke a little of the local Tz’utujil language to her.  “Utz aawach?” she said.  “Como estas?”  “How are you?”

Sansa

Sansa

Sansa insisted that Winnie sit next to her. “We will practice together”, she said, and proceeded to teach Winnie some other common Tz’utujil phrases.  I kept my eye on her the whole time.

These people were all quick to share a smile and a kind word, and offered us assistance in getting where we were going.  I think this may have been part of their plan to find out where we would be later, so they could catch us unaware.

We have also encountered a few of the more seedy types.  For example, the fruit lady.  She walks about the town carrying a giant basket on her head, full of fruit for sale.  She could easily hide a weapon and ill-gotten shoes underneath a few bananas.

Fruit Lady

The Fruit Lady.  What Is Hidden Under Those Bananas?

Or these unsavory types.  They even have their own get away vehicles

x

Conversing Privately, Obviously Plotting Devious Deeds

And most dangerous of all, the children.  Nobody would ever suspect a roaming gang of little people, but we know the truth that is masked by their seemingly innocent faces.

Watch Out, They Are Coming for Our Shoes!

Run! They Are Coming for Our Shoes!

With the gods smiling upon us, and my constant diligence, we somehow made it through the weekend of Jake’s visit without incident.  We visited numerous bars and restaurants, walked the streets and back alleys of San Pedro and Panajachel, toured the local market, and rode an epic 1 km long zipline through the jungle.  Since we didn’t go anywhere that a shoe bandit might think to find a tourist, we were able to escape the worst.

Jake is now back in LA, shoes safely on his feet, but we are still at risk.  They kill people for their shoes, and we could be next…

Addendum 1:  From the comments:

Go Curry Cracker says:

Funny thing, one of the popular trade items here is hand made shoes. For about $20, they will measure your feet and 2 days later you have custom shoes

Go Curry Cracker says:

It’s a highly organized and efficient operation

Addendum #2:

For more on the ying and yang of living in Guatemala, and by extension any place new, here’s Pauline: I can’t complain.

 

Posted in Guest Posts, Travels | 38 Responses

Stocks — Part VIII-b: Should you avoid your company’s 401k?

Sometimes the universe has a way of telling us to look more closely or again at something we thought we knew. In my case, two jlcollinsnh readers have caused me to take another look at 401k programs. I don’t like what I see.

pickpocketduck

Caution! Pickpockets at work.

401Ks were enacted into law in 1978. In fact, the term 401k refers to the section of the IRS code that deals with the law.

But it took awhile for them to spread. As memory serves, it wasn’t until the early or mid 1980s the company I was working for at the time rolled one out. I thought it was the greatest thing since sliced bread. I enrolled in that one and every one since, had the max withheld and never looked back.

In fact in Stocks — Part VIII, where I talk about them, my first bullet point is:

“These are very good things.  I always maxed out my contributions.”

Sure, the funds offered back then typically had somewhat high ERs (expense ratios) but the tax savings and the sometimes company match more than made up for those. 401Ks were a no brainer.

Now I’m not so sure.

(Please note: for the purposes of this discussion I refer to 401K plans. But it also applies to 403b plans and other variations of employer sponsored tax-advantaged retirement programs)

Last week in the comment section under Part IX of this series, reader Prob 8 posted:

“If anyone doubts JLC’s claims regarding the impact of fees and commissions on your portfolio, please check out this video from PBS: http://www.pbs.org/wgbh/pages/frontline/
It’s called The Retirement Gamble. You’ll have to paste that into the search box to find the video.

There are interviews with Jack Bogle and all you’ll need to know to realize fees and investment advisors are hurting your portfolio more than helping.”

It is about an hour-long and Prob 8 points out the discussion of excessive 401k fees starts at around the 20 minute mark. But I strongly urge you to watch the whole thing. In fact, if you own investments and especially a 401k, you should consider it mandatory viewing.

I was appalled and frankly a little stunned to learn how fully investment companies have plundered what was once a great retirement tool. So important is this new information, I copied Prob 8′s comment and link and created it as an Addendum on:

Stocks — Part IX and Stocks — Part VIII, the two most relevant posts for this in the series.

In the film, the math on how damaging even seemingly modest 2% fees really are is well demonstrated. It is nothing short of breathtaking; and even I didn’t fully appreciate just what a cesspool of fees some 401k plans have become.

But as I was about to learn, we should be so lucky has to escape with 2% fees.

Last Sunday in the comments section of Putting the Simple Path to Wealth into Action, reader Chris posted a comment outlining his situation and asking a few questions. Among other things, he is investing in the “Simple IRA” (think 401k) offered by his employer. The funds in it are all from Fidelity.

He mentioned that he was considering a specific fund: Fidelity Asset Manager 85%. I jumped on the Fidelity site and quickly saw this fund carried a .82% ER. Not great but not a deal breaker either. Pretty much in line with what I’d faced in my own 401Ks.

In his reply, he said some very nice things about the blog, said he would explore his fund options and he provided a link to the Fidelity offerings. Curious, I clicked on it and poked around.

OMG! as the kids say.

Here is my slightly updated reply (you can read the entire exchange over on that post):

OK Chris…

…now I’m offended. Not at you, but at Fidelity.

As you and everybody who reads this blog knows, I recommend Vanguard as it is truly the only investment company that puts its customers’ best interests first.

Competition has forced companies like Fidelity to offer a line of low cost index funds and that has allowed me to soften my view on them, especially if Vanguard is unavailable for some reason. But I’ve always cautioned their heart wasn’t really in it and they only served up low-cost funds when forced to and as “loss-leaders.”

But clicking on the link you just provided, I am truly appalled. Not only is the list of funds almost endless and confusing, they are all “Class T” where as far as I can tell “T” means “Take lots of your money.”

These things are absolutely dripping with fees.

You may recall in my first reply I said: “Fidelity Asset Manager 85% is an OK fund but has a pricey expense ratio of .82%.” I got that ER simply by looking up the fund on Fidelity’s web site: https://fundresearch.fidelity.com/mutual-funds/summary/316069707

As high as .82% is for an ER, at least it is the only fee. But in your IRA they don’t offer you this class of the the fund. They force you into their Class-T. Here’s a look at that fund “T” classed and the related fees:

https://advisor.fidelity.com/advisor/portal/performance?deeplink=yes&pageUniqueName=afc.performance&sasid=1774&dplid=2

Maximum Sales Charge 3.50%
Gross Expense Ratio 1.37% as of 11/29/2012
Net Expense Ratio 1.32% as of 03/31/2013
Expense Cap: 1.50% as of 10/2/2006
Management Fee 0.56% as of 03/31/2013
Distribution and/or Service (12b-1) fees 0.50%

Holy crap!

I poked around and looked at several other funds, and all were laden with fees. For instance another option you might have considered would be this TRF (Target Retirement Fund):

https://advisor.fidelity.com/advisor/portal/performance?deeplink=yes&pageUniqueName=afc.performance&sasid=2337&dplid=2

Maximum Sales Charge 3.50%
Gross Expense Ratio 1.29% as of 5/30/2013
Management Fee 0.00% as of 03/31/2013
Distribution and/or Service (12b-1) fees 0.50%

Holy crap, again!

This is nothing short of a money grab on Fidelity’s part and shame on your employer for not better protecting your interests.

All of this is enough for me to seriously suggest you skip investing in your 401k all together. Here are the three things that you might want to consider before you do:

1. Does you employer offer a match? A match would help offset these horrible fees, so you might still invest but only up to the full match.
2. Are you in a really high tax bracket? 25%+. Even without your 401k deduction, you are not.
3. Does the 401k get your income below $41,952 for the EIC (see #3 below) as we discussed?

My condolences,

jlcollinsnh

As troubling as all those fees are, they are only the ones we can see. Even more troubling are those, as that video points out, so deeply buried as to be undetectable.

So what should you do?

Well, unfortunately, Fidelity isn’t alone in this money grab. Indeed, with so much money at stake, my guess is virtually every other investment firm is engaged in this same disgraceful plundering of your retirement fund. Vanguard being the sole exception for the reasons I’ve already described.

The time has come to seriously reconsider participating. To do so, you are going to have to take hard a look at your plan. I know this is unpleasant, and it runs counter to my contention that investing should be simple. If you wanted to just step away, things are bad enough that I wouldn’t argue. (Although the Mad Fientist would, so be sure to read his take in the Addendum.)

But there might still be some value in your plan and with a little work you should be able to figure it out. Here’s how:

1. If your plan offers Vanguard, you’re golden. More and more do. Good for them.

2. If you plan offers any other investment firm, you’ll want to take a close look. The Fidelity plan we have above offers a great template as to what to avoid.

  • Notice first the huge range of funds offered. This is not done for your benefit. It is done to force you into throwing up your hands in despair and asking for their help in choosing. Making investing complicated is a way of gaining control. What they will choose for you likely will be what costs you the most and works best for them.
  • Beware if the funds offered are in a special class. When Vanguard does this, it is because the economies of scale allow them to offer even lower costs. VTSAX has a super low ER of .05%. The Institutional Shares version — what would be in your 401k, VITSX – is even lower at .04%. But as we can see, when Fidelity does it, it is designed to drain as much of your your money as possible into their pocket. This will be true of most other 401k special class fund groups.
  • Look, as always, for index funds offering the total stock market index or the S&P 500 index. These not only are the best investments, they should have the lowest cost. But in our Fidelity example above, not only do they offer a huge range of funds all in the hyper-expensive “T” class, they seem to have held back their Spartan (low-cost index) funds. At least I couldn’t find them.

Once you’ve assessed just how bad your 401k plan is, you can decide if and how you want to participate. Here’s how:

1. Does your company offer a match and if it does, how much? Sometimes it can be as high as 100%. Sometimes less, sometimes nothing. Usually up to some limit that will be less than the maximum you can contribute. This match is “free” money. If it is generous enough, it can make up for even the horrible fees we see in our Fidelity example above.

2. Think about your tax bracket. Federal income taxes here in the USA are actually pretty low for most people. For instance, if you are married and filing jointly you are in the 15% tax bracket until you earn more than $70,700. But that’s what’s known as AGI (Adjusted Gross Income). You’ll also have a standard deduction of $11,900 and a $3800 personal exemptions for each of you, your spouse and any dependent children. Looking at our friend Chris above with his two kids, this means he could earn $97,800 before hitting the 25% bracket:

$97,800 in income, less…

$11,900 standard deduction

$15,200 in personal exemptions — ($3800 x 4) =

$70,700 AGI for the 15% tax bracket.

Any additional deductions would drive the threshold for income taxed at 15% even higher.

Now this is just one example and taxes being taxes, there are lots of variations. If you are single you’ll hit the 25% bracket at $35,350, for instance. So you really do need to explore your own situation.

Remember, too, that 401Ks don’t eliminate taxes. They only defer them. There is a lot to be said for your investments growing tax free for decades. But 15% is also a very, very low tax rate. In retirement your rate could easily be higher. Maybe you’ll be wealthy enough to be in higher brackets. Maybe the government will have simply raised the rates. Maybe both.

But if your 401k plan is fee heavy as so many appear to be these days and your bracket is 15% or less, you’ll want to think long and hard. For you, maxing out your 401k might not be the slam-dunk it was for me in my day.

3. Does maximizing your 401k get your income down low enough to qualify for the EIC? (Earned Income Credit). The EIC is a very desirable credit where the government basically gives you money. It can wipe out any tax due and, importantly, it is a “refundable” credit. This means once your tax is zero, they give you the rest as a cash payment.

The EIC is designed to help low-income people, especially those with children. Your Earned Income and AGI must both be below certain limits. Here they are direct from the IRS website:

Preview of 2013 Tax Year

Earned Income and adjusted gross income (AGI) must each be less than:

  • $46,227 ($51,567 married filing jointly) with three or more qualifying children
  • $43,038 ($48.378 married filing jointly) with two qualifying children
  • $37,870 ($43,210 married filing jointly) with one qualifying child
  • $14,340 ($19,680 married filing jointly) with no qualifying children

Tax Year 2013 maximum credit:

  • $6,044 with three or more qualifying children
  • $5,372 with two qualifying children
  • $3,250 with one qualifying child
  • $487 with no qualifying children

Investment income must be $3,300 or less for the year.

(One caution when looking at those credit dollars, they are figured on a sliding scale. The closer to the income limit you are, the lower your EIC will be. So just tucking in under the ceiling won’t really help all that much.)

 So what is the bottom line?

It is a little hard to say as I have no way of knowing how bad your plan might be, (and please don’t send it to me. I simply don’t have the time to wade thru them all.) The Fidelity plan above is awful, others could be even worse. But we can use this one as a measuring stick. After you investigate your own, you can adjust my recommendations accordingly. But for this one Chris is stuck with….

Go for it if:

  • Your tax bracket is 25% or higher.
  • Your 401k deduction will lower your income enough to get the EIC.
  • Your employer offers a match, and then contribute only up to the match ceiling.

Consider skipping it if:

  • Your tax bracket is 15% or less.
  • Your employer doesn’t offer a match.
  • You think your tax bracket might well be higher than 15% in retirement.

Here’s a calculator that might help you in your personal assessment: 401kfee.com

But absolutely, positively roll any 401k you have over to an IRA at Vanguard the moment you can. Unfortunately, this is usually not until you leave your employer.

Never, ever leave your 401k with your employer once you move on. Too much chance for mischief.

Finally, please join me in thanking Chris and Prob 8 for opening my eyes to how the 401k world has changed. I’m grateful to have such bright readers contributing and asking astute questions. If you don’t already, let me encourage you to read the comments after the posts around here. Some of the best stuff is found in them.

Addendum I:

Before publishing I sent this post out to the Mad Fientist for a peer review. His efforts have made it both more accurate and more complete. He also did a little additional analysis and as you’ll see he concludes that, as ugly as all these fees are, you are still better off funding your 401k. Here it is:

I’d argue that it is usually always prudent to invest in your 401(k), even if you only have high-fee investment options, due to the fact that the tax savings resulting from the 401(k) contributions will more than compensate for the higher fees.

To get some numbers to support my argument, let’s compare two different scenarios.

Assume two investors make $80,000 per year.  Investor A decides to max out his 401(k) with $17,500 every year and invests his 401(k) money in the Fidelity fund with the awful fees mentioned in the post (3.5% front-end load and 1.32% expense ratio).  Investor B does not contribute to a 401(k) and instead invests his money in a Vanguard taxable account with an expense ratio of 0.05%.

Thanks to the fact that 401(k) contributions are pre tax, Investor A’s taxable income decreases from $80,000 to $62,500.  This means that he only has to pay $9,225 in federal tax instead of the $13,600 that Investor B has to pay.

Due to the front-end load of the 401(k) fund, Investor A’s $17,500 contribution would actually only buy him $16,888 worth of shares.  Combining that with the tax savings I already mentioned, however, means his $17,500 401(k) contribution would actually fetch him $21,263 worth of shares ($16,888 into his 401(k) and $4,375 of tax savings into his taxable account).  Compared to Investor B’s $17,500 contribution, Investor A is able to invest $3,763 more every year.  These additional contributions definitely add up and more than cover the higher 401(k) fund expenses.

Assuming both investors contribute to their accounts for 10 years and earn an 8% return, Investor A would end the 10-year period with $293,056 in his portfolio ($229,828 in his 401(k) and $63,228 in his taxable account) and investor B would end up with $252,914 in his portfolio (all within his taxable account).

As was mentioned in the post, it is important to roll over 401(k)s into a low-fee IRAs as soon as possible, since there’s no point paying high fees if you don’t have to.

By rolling over his 401(k) into a Vanguard Traditional IRA after the ten years, Investor A would then have the benefit of tax-free growth within his IRA, an expense ratio equal to that of Investor B’s, and $40,142 more than Investor B.

Obviously the money in Investor A’s Traditional IRA could be taxed at withdrawal, although it doesn’t have to be if he  slowly rolls it into a Roth IRA. (http://www.madfientist.com/traditional_ira_vs_roth_ira/)  But I’d still choose the extra $40,142 and the possibility of multiple decades of tax-free growth any day.

Addendum II 

401kfee.com

Using this calculator I ran some numbers to illustrate the difference in having Vanguard v. Fidelity in your 401k.

First, I set the current age to 55. With the retirement age preset at 65 that gives us a 10 year window, a reasonable job length/holding period for a 401k. I used an 8% projected return and set the “lower fee” option to 0%. Then I ran both scenarios separately to get a cleaner look.

Scenario I: Fidelity’s Asset Manager 85% Class-T.

401k contribution of $17,500 less 3.5% load (commissions) = $16,888 invested.

Plugging in 1.32% for the net expense ratio, after 10 years the account would be worth $262,076 and Fidelity would have collected $19,033 in fees in addition to the $6120 in load/commissions. ($612 per year x 10 years)

Scenario II: Vanguard’s VTSAX.

401k contribution of $17,500 + zero  load (commissions) = $17,500 invested.

Plugging in the .05% annual fee, after 10 years the account would be worth $290,520 and Vanguard would have collected a grand total of $776 in fees. That’s right. Less than $1,000.

$290,520 – $262,076 = $28,444 extra dollars Fidelity has picked from our pocket and cost us in lost earnings from that money not being available for investing. That’s an astounding 9.8% of our $290,520 potential.

Addendum III

In proofing this post and the two Addendum, it occurs to me it starts to look like you have a choice:

Give you money to Fidelity or give it to Uncle Sam. If the numbers are close, and since Uncle Sam is at least upfront about it and provides some useful services, I’m inclined to lean that way.

But if you take only one thing from this post, this is it:

Reading the Mad Fientist‘s thoughtful case it is clear — most often you’ll be money ahead funding your 401k. Given the highway robbery now imbedded in so many of them, that’s tough for me to say. But there it is. 

Addendum IV

Here’s a very cool tool that let’s you evaluate your company’s 401k plan: Bright Scope. The link takes you to the report on Google , a company famous for being a great place to work. The 401k plan reflects this and shows they even offer Vanguard. To find your own plan, just enter your company’s name in the search box.

Unfortunately, they don’t provide specific cost numbers, only a scale relative to other plans. Still, fun and useful.


Addendum V:

Mr. 1500 shares his own 401k horror-show.

Posted in Stock Investing Series | 90 Responses

Shilpan’s Seven Habits to Live More with Less

One of the over-riding themes here on jlcollinsnh is that when it comes to investing simple is not just easier, it is more effective and more profitable.

My pal Shilpan runs a blog I read faithfully: Street Smart Finance.  What is most appealing to me is the wisdom he brings from a lifetime of learning, hard work, success and failure. He is one of the few people who makes me, when he writes something with which I disagree, sit back and consider that maybe, just maybe, I might be wrong.

He also regularly expands my horizons. The best investing really is the simplest investing. In the post below, which he has graciously allowed me to reproduce here, he reminds me this is true of far more than just investing. It is actually drawn from his other blog: Success Soul. Enjoy!

Live-more-with-Less

Life is really simple, but men insist on making it complicated.
-Confucius (BC 551-BC 479) Chinese philosopher.

Simple life is a pathway to happiness. It’s as simple as a rainbow of seven colors. In the modern world full of gizmos, simplicity is an extinct virtue.

Simplicity is a subtle, profound way of life leading to the nurturing of your inner happiness. That makes me believe that sources of external happiness veil our capacity to nurture inner happiness.

Simplicity is a way to manage our time to deposit more inner pleasure in our Bank of Life.

Habits and addictions are two sources of external happiness that keep our focus on excess leading to more habits and addictions. As I grow older, I’m mindful of my life; I am dwelling deep into time; I am trading for the pleasure of mine that takes away eternal, inner pleasure of time with my wife, my children, my spiritual being and the community that I live in.

Excess in eating, spending, working, ego, thinking, pleasures and — of course — doing everything to please others is a sure way to wreck your life speeding on the highway of more stuff for happiness; I am not against materialism, I am against excess that leads to the wreckage.

These  7 habits are essential to set limits, and to create inner awareness to live happy, content life with less.

Less eating:

Overeating has many dreary consequences including high fat, high sugar food, sedentary life and emotional clutter leading to depression. With my new-found mantra, I’ve been devoting my focus on the diet. My mantra for the day becomes, “Better and balanced diet to invest time to deposit more inner pleasure in Bank of my Life.” This allows me to be mindful about what I eat. Being a vegetarian, it allows me to focus my attention to eat vegan food rich in fiber and protein. I feel excess in energy — and certainly relaxed — as a result.

Less spending:

If you pay attention to your closet, you can see excess manifested through your spending habit. We’ve all had time in our life when we refused and abhor to open that bill, charged every credit card in our wallet to the limit to buy things that we wanted. I’ve lived in the third world country, and I know that it takes lot less to deposit more inner happiness in my Bank of Life. If I am mindful for a day to buy only what I need and not what I want, I’m feeling calmness and peace that comes from within.

Less working:

I’ve always struggled with this habit. It’s manifested my life to a degree that I’ve become addicted to setting goals and seeking external pleasure by setting higher goals to spend more time working for those goals. I’m mindful for a day to turn off the laptop and head back home no matter what happens. I’ve now realized that life moves on. It has allowed me to develop inner consciousness about the goals and their relevance to my new mantra of life.

Less Ego:

An ego is an excess form of time spent on self-centric thoughts. I’m not against having an ego. Without an ego, we can not instill burning desire to achieve what we conceive. It’s excess that takes time away from my purpose to invest time for the inner happiness. With excess in ego comes the root of an evil; It kills the veins of morality leading to horrible act of self-indulgence. If I’m mindful about keeping my ego in the closet when I leave home, I’m nurturing the mind of magnanimity.

Less Obsessive thinking:

We’ve all been victim of this viral state of mind. We choose our thoughts and focus our attention to those thoughts. It’s that very decision we make to choose and obsess with thoughts of events that went wrong on the day, lack of forgiveness for the mistakes we’ve made on the day that leads us to misery and despair. With new mantra, I’m mindful about the thoughts I choose and thoughts I harbor. By allowing mind to relax with yoga and meditation, I’ve learned to focus on thoughts of content and not on the contempt.

Less Pleasures:

External pleasures always imbibe our inner pleasure. I do not drink or smoke, but I’ve habit of drinking a can of diet coke a day. I’m more mindful on a day to avoid these chemically altered drinks to invest my time to deposit more inner pleasures in my Life Bank. I’m feeling more energy and higher state of awakening due to seeking pleasure from within.

Less People Pleasing:

Keeping up with Joneses is the norm in the modern-day society. It’s both sad and disdainful to live life just to seek approval of others. If I know myself well and accept myself deeply, I don’t need approval of others. People pleasing is a form of external happiness that’s as fake as a mirage. Pleasing my inner self allows me to invest time to deposit eternal happiness in my Bank of Life. It also allows me to eliminate the emotional clutter I’ve deposited in the form of rejection by others who indeed have no interest in investing time to deposit more inner happiness in my life. I’m mindful for a day to do what pleases my inner self and care less for what others opined about my decision to do so.

 

To read more from Shilpan head over to Street Smart Finance.
To hear Shilpan tell his story, check out his interview with the Mad Fientist:  The Real American Dream
Here’s the video Shilpan sent me on Minimalism.
Posted in Guest Posts, Life | 16 Responses

Stocks — Part XIX: How to think about money

Level I: It’s not just about spending

Get yourself a nice, crisp one of these:

$100

Or one of these:

100 aussie

Or one of these:

100 euro

Or one of these:

100 pounds

Or one of these:

100 canada

Or one of these:

2000 czech

Or about 16 of these:

10000 Tanz shilling note

Now prop it (or them) up on the table in front of you, or in your imagination, and give some thought as to what it means to you. For instance….

  1. You might think about what you could buy with it right now. $100 buys a very nice dinner for two at a good restaurant. A fancy pair of sneakers. A tank of gas for your big-ass pick ‘em up truck. A few bags of groceries. Maybe a nice sweater? I dunno. I don’t buy much stuff, so this is hard for me. I did just buy a $119 LL Bean bed for my dog. It’s going back. He won’t sleep in it.
  2. You might think, Mmmm I could invest this money. The stock market returns somewhere between 8-12% a year on average. I could spend that each year and still aways have my $100 earning more for me.
  3. Or you might think, but inflation and market drops are a concern. Mmmm. I’ll invest my $100 but only spend 4% a year. Any extra earnings I’ll re-invest so my $100 grows and the money it throws off keeps pace with inflation.
  4. Or you might think, I’ll invest this money and I’ll re-invest what it earns and re-invest what that earns and years from now, after the power of compounding has worked its magic, I’ll think about spending.

You can probably come up with other variations (and if you do I hope you’ll share them in the comments) but looking at these it’s easy to see that one view will keep you poor, one will get you in the middle class, one will elevate that a bit and the last will make you rich.

Consider:

Mike_Tyson_Portrait

Mike Tyson

Photo courtesy of Wikipedia

Mr. Tyson was one of the most intimidating and formidable boxers of all time. Few have mastered the Sweet Science better. The Dismal Science, not so much. After earning some 300 million dollars, he wound up bankrupt. A lifestyle reputed to cost some $400,000 a month didn’t help. And as is always the case with the suddenly wealthy and financially unaware, I’m sure he was surrounded by sharks looking to bite off chucks of that fortune for themselves. But the root problem is he apparently only understood money in terms of buying stuff.

I don’t mean to pick on Mr. Tyson. (I’m not NUTS after all.) In this, he is not alone. The world is filled with athletes, performers, lawyers, doctors and business executives and the like who have been showered with money that flowed right off them and into the pockets of others. In a sense, they never really had a chance. They never learned how to think about money.

It’s not hard. Stop thinking about what your money can buy. Start thinking about what your money can earn. And what the money it earns can earn. Once you begin to do this, you’ll start to see that when you spend money, not only is that money gone forever, so it the money it might have earned. And the money that money might have earned. And so forth.

Clearly, none of this is to say we should never spend money. Rather it is to fully understand the implications when we do. Consider buying a car for, let’s say $20,000.

For even the least financially sophisticated it should be obvious that if you buy the car you no longer have the 20 grand. I sure hope so, anyway.

But, distressingly, it appears that most people don’t understand that in choosing to lease or borrow money to buy the car they are basically saying, “Geez. I don’t want to pay twenty thousand dollars for this car. I want to pay much, much more.” My guess is that if you are reading this blog you are already more financially aware than most and you get that. Debt makes anything cost more.*

Level II: Consider Opportunity Costs

But what you might not have considered, and what I’d like you to look at today, is the concept that even paying cash, that car is going to cost you far more than $20,000. There is an opportunity cost to no longer having that money available to work for you. And it’s easy to quantify.

All you need do is select a proxy for how the money could be invested and earning for you. Since I am forever talking about VTSAX, let’s use that.

Since VTSAX is a total stock market index fund and the market provides average returns of 8-12% annually, we have a tangible number to compare. Let’s use the lower end of the range: 8%.

At 8% 20k earns $1600 per year. So your 20k car actually costs you $21600. But that’s just the first year, and of course you are suffering this opportunity cost every year. Over the 10 years you might own the car, that’s $16,000. Now your 20k car is up to 36k.

But that’s really still understating things. We haven’t even considered what those annual $1600 chunks could have been earning themselves. And what those earnings could then have been earning. And what those….

Oh, should you not already be depressed enough about all this, remember that the 20k is gone forever and so is the $1600 in lost earnings year after year with no end. Expensive damn car.

You have probably heard of The Magic of Compounding. In short: “The money you save earns interest. Then you earn interest on the money you originally save, plus on the interest you’ve accumulated. As your savings grow, you earn interest on a bigger and bigger pool of money.” It’s a beautiful thing.

evil-twin-72

By Rebekah Bogard

Think of Opportunity Cost as its Evil Twin.

One of the beauties of being financially independent (FI) is that by definition you will have enough money so that the power of Compounding is greater than the Opportunity Cost of what you spend. Once you have your F-you money, all you need do is make sure you continue to reinvest to out-pace inflation and keep your spending below the level your stash can replenish.

But if you are not yet FI and you see this as an attractive goal, you’ll be well served to look at your spending thru the prism of opportunity cost.

Level III: How to think about your investments

Warren Buffett is rather famously quoted as saying:

Buffett quote

Unfortunately, too many people take this at face value and then leap to the conclusion that Mr. Buffett has found a magical way to dance in and out of the market avoiding the drops. Not true.

Wander on over to Mrs. EconoWiser’s fine site and you can listen to exactly what he says about this: You can’t successfully dance in and out of the Market. My favorite line:

“The Dow started the last century at 66 and ended at 11,400. How could you lose money during a period like that? A lot of people did because they tried to dance in and out.”

The truth is during the crash of 2008-9 Buffett lost about 25 billion dollars, cutting his fortune from 62B to 37B. That left over 37 being the reason I was wandering around at the time irritating friends by saying, “Gee. I only wish I could have lost 25 billion!”

What Buffett didn’t do is panic and sell. In fact, he continued to invest as the sharp decline offered new opportunities. As the market recovered, as it always does, so did his fortune. So did the fortunes of all who stayed the course.

Now there are likely many reasons Mr. Buffett didn’t panic as that 25 Billion Dollars and all the potential it represented slipped away. Having 37 billion left surely helped. But another key is probably how he thinks about the money in his investments.

Also rather famously, Mr. Buffett talks in terms of owning the businesses in which he invests. Sometimes in part as shares and sometimes in their entirety. When the share price of one of his businesses drops, what he knows on a deep emotional level is that he still owns precisely the same amount of that company. As long as the company is sound, the fluctuations in its stock price are fairly inconsequential. They will rise and fall in the short-term, but good companies earn money along the way and in doing so their value rises relentlessly over time.

We can learn to think in this same way. Again, let’s use VTSAX in exploring this idea.

Suppose yesterday you said, “Mmm. This idea of owning VTSAX makes sense to me. I’m gonna get me some.” And having said that, you sent Vanguard a check for $10,000. At yesterday’s close the price of VTSAX was $41.16. Your 10k bought you 242.9543244 shares.

If a week from now VTSAX shares are trading at 43, you might say “Mmm. My 10k is now $10,447. Yippee. That jlcollinsnh sure is smart.”

If a week from now the shares are trading at 40, you might say “Damn. My 10k is now only $9718. That jlcollinsnh is a bum.”

That’s the typical way average investors look at their holdings. As little slips of paper or, more accurately in this day and age, little bits of data that go up or down in value. If that’s all they are, drops in the price other people will pay you for them on any given day can be very, very scary.

But there is another better, more accurate and more profitable way. Take a few moments to understand what you really own.

At 43 per share or at 40, you still own the same 242.9543244 shares of VTSAX. That in turns means you own a piece of virtually every publicly traded company in the USA, 3317 last time I checked.

Once you truly understand this, you’ll begin to realize that in owning VTSAX you are tying your financial future to that of virtually every publicly traded company based in the most powerful, wealthiest and most influential country on the planet. Companies filled with hard-working people focused everyday on prospering in the changing world around them and dealing with all the uncertainties it can create.

Some will fail, losing 100% of their value. Actually, they don’t even have to fail and lose all their value to fall off the index. Just dropping below a certain size or what’s called “market cap” will be enough.

Those will fall away and be replaced by other newer and more vital firms. Some will succeed in a spectacular fashion growing 200, 300, 1000, 10000% or more.  There is no upside limit.  As some stars fade, new ones are always on the rise. This is what makes the index, and by extension VTSAX, self-cleansing.

If I were to seek absolute security (a very different thing than the smooth ride most mistake for safety) I’d hold 100% in VTSAX and spend only the ~2% dividend it throws off. Or maybe a variation like the last portfolio option I describe here.

Nothing is sure, but I can’t think of a surer bet than this.

In Closing: 

We live in a complex world and the most useful and powerful tool for navigating it is money. It is essential to learn to use it. And that starts with learning how to think about it. It is never too late.

Oh, and somebody please send Mr. Tyson a link to this site. It’s not too late for him either.

Addendum I: 

Over on Street Smart Finance, Shilpan just published a very nice interview with Mr. Money Mustache and me. In the introduction he refers to me as “someone as financially savvy as Mr. Bogle.” That would be Jack Bogle. As in the founder of Vanguard and the inventor of index funds.

While I’m as prone to wallow in praise as the next guy, this is more than a bit over the top. I just write about the things Mr. Bogle created. A candle in comparison to a wildfire. But I’m honored that anyone would see even a candle’s worth of the same flame in me as in him.

If you care to, check it out here.

 Addendum II:

My thanks to Paul for his comment below which reminded me of something I wanted to share. We have two spots now open on the Ecuador Chatauqua trip. Unfortunately for the worst possible reason.

Tragically a gentleman who had signed up to come with his wife has suffered a very serious coronary. Our thoughts and prayers are with him and his family, and I hope you’ll take a moment to add yours. From a purely selfish point of view, and having learned a bit about them, I am especially sorry not to have had the chance to meet these particular people. Hopefully he will heal quickly and completely and we’ll get the chance to hang out together on another trip.

Addendum IIb:

I’m pleased to report he has stabilized and appears to be on the mend!

Addendum III June 30, 2013: 

*Shilpan of Street Smart Finance just sent me this great Ted-Talk We Need to Start Hating Debt Again. An 14 eye-opening minutes.

Related Posts Plugin for WordPress, Blogger...
Posted in Stock Investing Series | 55 Responses