Sunk Costs Are Irrelevant

Stocks For Your Kids: Year 2 Update

Slug — Tue, 29 May 2012 16:53:02 +0000

Dear Son,

Happy birthday! On Sunday you turned 6 years old. What a joy it's been to watch you grow over the past year. It's hard to believe you're almost done with kindergarten. You're really starting to understand the value of money. I love watching you check the coin returns for leftover change wherever we go. I'm continually surprised by the amount of disregarded coins you seem to find.

Your ShareBuilder.com account is turning 2 years old, and your nest egg is slowly growing. Like last year at this time, these are still very hard economic times both here in the US and abroad. Problems in the EU and decelerating growth in Asia Pacific continue to dampen the US ability to recover. Our family is fortunate in that I have a good job that's pretty secure. We continue to save as much as we can because there are so many things we can't control in this life, and having an emergency fund makes weathering the storms easier.

This year your grandmother created a problem for us. A good problem. She decided to give you $1,000 more dollars to add to your account. I had always thought that her original gift would be a one-time event so that we would be tracking all of your stock returns from the same purchase date. Now, with an extra $1,000 sitting in the account, it would make sense to buy some more stock for you.

When I first opened the account, I thought it would be a great idea to buy you stock in things that relate to you every day which is why most of the stocks you see are household names, and your grandma wanted you to have shares in Berkshire Hathaway so I bought you some shares of that as well. Since that time I've continued reading about investing and learning time and again that buying individual stocks is not the best way to grow your wealth. Over the past 2 years I have been selling more of my individual stocks and have been replacing them with a diversified portfolio of index funds. For this new cash infusion, I've decided to invest in your first basket of index funds.

I purchased:

SCHB – This is the Schwab US Broad Market ETF. It seeks investment results that track performance, before fees and expenses, of the approximately 2,500-stock Dow Jones U.S. Broad Stock Market Index.

SCHF - This is the Schwab International Equity ETF. The fund provides broad exposure to international large-and mid-cap companies in over 20 developed international markets. It seeks investment returns that track the performance, before fees and expenses, of the FTSE Developed ex U.S. Index made up of approximately 1,400 international stocks.

VGT – This is the Vanguard Information Technology ETF. It seeks to track the performance of a benchmark index that measures the investment return of stocks in the information technology sector.

Each of these has the lowest available expense ratios available for the type of ETF it represents. With these I'm trying to get you exposure to a wide range of US and international stocks while perhaps getting a little extra bump in return from the information technology ETF. As always time will tell if these were good decisions. Interestingly, a couple of days after I made this investment, your grandma called me and told me she wanted to put all of it in shares of Facebook. Luckily it was already too late since I had bought you these other shares already, and she didn't want me to have to sell anything in order to buy Facebook. Even had it not been too late, I think I would have tried to convince her that an all-in bet on Facebook might not be the best path forward. I will be curious to see how this plays out down the road though.

When we look at how the original portfolio has done, things look pretty good. Overall, we're up 38% over the past 2 years. This is due in large part because I bought you shares in Apple and Amazon. Much of the rest of your portfolio has experienced only modest gains despite using dividend reinvestment. The only truly troubling stock right now is Hasbro. Last year it was up 7%. This year it's down 20% from our original investment. However, I still believe in the company and with a healthy dividend yield, you'll continue accumulating partial shares at a reasonable price. Also, you still really love Transformers and Star Wars so I don't have the heart to sell you out of it.

Here's hoping that year 3 will be even better, and that the new ETF's will add to your already significant gains, and that you'll finally learn how to swim so I can throw you in the deep end.

Love,

Papa

Dan Savage Net Worth

Slug — Thu, 24 May 2012 20:14:02 +0000

It's always interesting to see the Google search terms that send people to my blog. One consistent phrase is "Dan Savage net worth". It's not because I know anything about his net worth. Rather it's because I regularly post about my net worth, and I have posted about Dan Savage as well. But, I wonder who really cares about how much money Dan Savage has. Is it reporters just digging up background information? Is it social conservatives worried about how much influence Dan might get if he ever made a Super PAC. (Dan, if you ever read this, I would love to support your Super PAC!). Or is it just normal folks curious about how much money one can make as a sex columnist. I don't know. If you ended up here through Google, let me know why you want to know about Dan's net worth in the comments.

In terms of his net worth, I think it's safe to say for the vast majority of you all, Dan Savage has a considerably larger net worth than you. He's got an MTV show, a college tour, and has written multiple books which are certainly worth the read. I wonder if he's a 1%er. If I had to guess, I'd say he's a 5%er. He seems like a hard working family man who deserves his success. I certainly hope he's doing a good job of living within his means and saving for his son's college.

Best Ways to Use Your Tax Refunds

Slug — Tue, 15 May 2012 20:47:54 +0000

The following is a guest post from Joy Mali

Ever heard of tax refunds? Well for starters, you get your tax refund when you’ve been paying more than you should all throughout the year. The refund is actually the government repaying the principal on a loan you made. If, however you want the unintentional charity to stop, you can adjust your withholding whenever you get yourself a new car or when you get a house etc. But then again, who doesn’t want to have their money back? Here are some of the best ways to use your tax refund to manage your debt and improve your credit score.

Manage your debt – I bet you already knew what to buy as soon as you got the money. You must be thinking about going shopping, or getting that new tablet you saw online, but a wiser way to use it is to finish off your debts. You’ll be shortening the overall payment period and the interest paid by a significant margin.

Save up for emergencies – If you don’t have debts to worry about, then why not just save it for emergency purposes? You’ll never know when it will come handy. You can use it for when you have to pay for your bills, especially when you’re salary is still two weeks away. A lot of people experience this; because unlike the regular 15/30, 16/1 pay days, some just get their salary once a month. It’s actually difficult to hold to a huge amount of money all at once so saving up for emergency bills will surely help you out.

Save up for school – If you’re planning to have children in the future then it’s never too early to save for their education. Let’s face it, high school and college are expensive therefore it is best to be ready before it happens. It may be financial sacrifice but don’t you think it’s worth it if it’s for your child’s education? You’ll be freeing your child from debts too after he or she graduates. If they can’t handle the costs, you’ll still be responsible with the debts because you are the cosigning parent. So why not prepare for it now?

For Future debts – You’ll never know when something urgent will happen. Whether it be medical bills or simply your electric bill, an extra amount of money will be very helpful. You won’t be worrying too much of what will be left on your incoming salary if you have some extra with you. You’re also being smart about your financial disposition.

There are better ways for you to use the tax refunds that you get. Yes, it’s true, it is a sacrifice but it will be something that you’ll be thankful for in the future. Think about your wants and needs well. Weigh them out and think about which one you’ll be benefiting from the most.

Author bio:
Joy Mali is an active blogger and shares extremely interesting financial management tips over the web that encourages people to check credit scores regularly & to build a working credit report for a happy financial life.

Quest for a Million – Net Worth – 5/2012

Slug — Mon, 30 Apr 2012 16:01:18 +0000

April was not a particularly exciting month on personal finance front. The biggest change is that I have committed even more deeply to the LLC by investing $5,000 in. My partner has done the same. This capital will largely be sucked away in legal and website fees although we are doing it as frugally as we can. The good news is that we stand a good chance of getting a $10,000 matching grant for our funds which will go fully towards prototype development. We have a solid proposal in hand and can't wait to get started.

DW's business is struggling to add new clients so she's exploring some new marketing techniques. We're still cash flow positive though.

ASSETS

On the asset side, our home value has remained flat for much of the year. I'll be curious if it changes now that the spring market is upon us. There seems to a seasonality effect in place. Liquid capital remains high in spite of the LLC investment. This was assisted in part by getting the NC tax refund. Retirement accounts were flat in April reflecting the overall state of the stock market. There were lots of ups and downs, but I think many of us ended up about where we started.

Should I be concerned that 70% of my assets are in retirement accounts? I'm asking. I don't know the answer.

LIABILITIES

For liabilities, everything is on track. I finally have everything set up for auto-payment at US Bank for the mortgage. This month I actually paid $1,500 with the extra ~$80 going to principal. This will be the last month for this. From here forward I'm paying the minimum and looking for additional investment opportunities that exceed my tax-adjusted mortgage rate. Actually, I'll be looking for a minimum 5% hurdle rate. For now, I'm content to watch my liquidity grow.

As always, credit cards are still getting paid off every month and variable rate student loans are still getting paid down aggressively.

What about you? How's your net worth shaping up this month? How does that look year over year?

Catch up on all my Net Worth posts here.

Millionaire Teacher: Book Review

Slug — Thu, 26 Apr 2012 20:12:43 +0000

When Andrew Hallam emailed me to see if I would review his book Millionaire Teacher – The Nine Rules of Wealth You Should Have Learned in School I didn't know what to think. Aside from being flattered, I was a bit mystified. I mean, my blog's tone tends to be snarky, my word choices are irreverent, and I dress more like someone who will sneak into your house and slit your throat so if you're asking me to review your book, you're either very brave or you didn't do your homework. From what I've learned of Andrew, I think it must be the former.

One thing I want to note before I dig in…The first is that I did not read other reviews of this book. I don't want my message tainted by the thoughts of others so you can be assured that what you're reading is my opinion only. If it's consistent with others, that's great. If it's not, then we can chalk up yet another example of how I just don't fit in.

OK, let's get started:

THE GOOD

The book is very readable. It is highly accessible to personal finance novices by using easily understood language and examples. Credit goes to Andrew for having his book read by this kind of audience prior to publication so that he could make any necessary changes.

Another plus is the emphasis throughout the book of getting started NOW and, if you're young, getting started EARLY.

I really like that his initial focus is on understanding your spending. In many of the forums I too often read about people with poorly controlled spending who want to start investing. It is hard to start investing until your fiscal house is in order, and this comes across well in the book.

I can also appreciate his approach to frugality at a young age. When you are single with no children and only yourself to worry about, you can live very frugally. Andrew was a bit compulsive about it, and you see where it helped to get him. I think the key here is that he has also adapted to life post-extreme frugality. That is, he seems to have moved on to a point of cost-consciousness but within reason.

The highlight for me though is the crucifixion of actively managed funds and the parasites who try to pimp these out to you so they can leach away your weatlh. He assaults them from every logical and rational angle. If you read this book, and still want to put money in actively managed funds, you are simply an idiot.

BEST QUOTE

"The best weapon against exploitation is education." I could not have said it better. It really speaks to not only the value of educating yourself about personal finance but also implies that in the end it is your personal responsibility. There are so many people out there looking to come between you and your money, and Millionaire Teacher is a great tool to help you keep as much of your money as you possibly can.

MISSED OPPORTUNITIES

There were a couple of occasions where I think opportunities were missed. The first is a discussion of trailing stops. It might be a bit too advanced for this book, but it is certainly an effective way to reduce volatility and prevent big losses. For example, Apple has been on quite a run. In order to protect my gains, I set a 10% trailing stop on my shares. That is, if Apple falls 10% off of its peak, my trailing stop order will trigger a sale. In fact, it just did that about a week ago and my gains have been safely sitting in cash while Apple and the rest of markets bounce all over the place. A discussion of trailing stops would've been nice to see, but like I said, it might be a bit too advanced.

The other missed opportunities are less forgivable, especially with me as the reader. Let me give you another example. My Schwab account has about $1,800 in it. All of it is in Schwab ETF's. What's my point? It was all free. I used a rewards credit card sponsored by Schwab to get 2% cash back on my purchases that were then placed into a Schwab brokerage account which I then used to buy shares in Schwab ETF's commission-free. And, of course, I never carried a balance on the card. How is this a missed opportunity? Well, Andrew does not discuss commission-free ETF's and even worse he does not discuss credit card rewards. For someone dedicated to maximizing personal finance these have to be in the discussion.

FINAL THOUGHTS

I knew going in that this was a book focused more on those beginning their personal finance journey. So, as I was taking notes in it, I was thinking of my son and addressing my notes to him. I found myself agreeing with Andrew time and again on the value of starting early, on keeping your comparison set reasonable, on tracking your spending, on running away from anything actively managed and re-balancing in a rational manner. There were places as I noted above where I had many notes because I felt there was more to say, but most of the time I was underlining passages or simply writing "Yes!" In a few years when my son is heading out on his own, I think this book will certainly be among those I send with him on his own journey. Thanks again to Andrew for the opportunity.

Have any of you read his book? What did you think?

$800 Auto Repair Shrug

Slug — Tue, 24 Apr 2012 14:33:59 +0000

Right now my SUV is sitting in the auto repair shop with multiple gasket leaks. It's at least a 6 hour operation. It will cost me over $800 to fix it. I took it in for a routine oil change and this is where I ended up. It does explain that burning oil smell I've been ignoring for the last month or two though

I had an initial cringe at the $800 estimate, but it ended in a shrug. THIS is why you create an emergency fund. Life happens, especially to 14 year old SUV's. THIS is one of the key reasons we save. So we can shrug off these kinds of events.

I'm going to assume there's probably another $400 worth of repairs this year. That's $1,200 in total or $100/mth for the privilege of driving anywhere I want to go. I'll take it. My SUV is 176,000 miles young.

Emergency fund. GET ONE!

Quest for a Million – Net Worth – 4/2012

Slug — Mon, 02 Apr 2012 17:30:44 +0000

Q1 2012 has been a solid start to the year. For March, the most interesting thing that's been going on is the start-up of a new side project. I'm not going to go into detail now since it's still in its infancy, but starting an LLC and writing a business plan is actually a pretty cool process. Hopefully, I'll have much more to say on this in the weeks and months to come.

From a personal finance perspective, we finally finished our taxes this month. As an aside, if you haven't already done your taxes, I definitely recommend TurboTax. It's been a great package for us. We submitted and got our refund within about 2 weeks. Back to the taxes. As most of you know, 2011 was a rough year for many, my family included. The losses we took starting DW's business left us in position to reap a larger than normal refund from the IRS. This will be nice to add to the liquidity cushion I've been trying to build. Our effective tax rate this year was 9.46% which is completely in line with prior years. As long as I can keep it under 10%, I'm comfortable.

Also in March, DW's business began to stabilize, and she's currently looking to add more clients. Every month this year has been profitable so we're in great shape there, and her profits also add to the liquidity gains.

ASSETS

On the asset side, the tax refund and DW's business profits have increased our liquidity nicely in the savings section. Roth's have now been fully funded for 2011 so now we can start worrying about finding $10k for 2012. Retirement accounts continue to have traction. Actually, everything looks good here except for the brokerage account which got hit by my bad bet on CHTP that I discussed last month. CHTP probably won't recover until Northera gets approved in 2013 so I'm expecting to sit in the doldrums for a bit. Like I said last month…BLECH!

LIABILITIES

For liabilities, everything is on track. The student loans should drop below $60k soon which will be nice to see on paper. The new mortgage is working out. April is the first month that we will have a payment, and I'm actually transferring the extra payment I made to the old mortgage so it's already accounted for. Regarding whether to pay off the mortgage more aggressively, for now, I'm not. I'm going to take the liquidity. It's important for the Roth contributions and for the new opportunity I alluded to earlier

As always, credit cards are still getting paid off every month and variable rate student loans are still getting paid down aggressively.

What about you? How's your net worth shaping up this month? How does that look year over year?

Catch up on all my Net Worth posts here.

The Roth IRA: For You, For Me, For Everybody

Slug — Tue, 27 Mar 2012 11:11:19 +0000

Source: goodfinancialcents.com via Jeff on Pinterest

Look, I'm not a big joiner, but when I saw Jeff over at Good Financial Cents tweet about starting a movement that increases the awareness and usage of Roth IRA's, I couldn't say no. It's just too important to start saving in a Roth IRA at the earliest possible time you can. As soon as my son has earned income, you can bet I'm opening a Roth IRA for him.

I opened my Roth IRA as a grad student back in 2000. Since that time I've scrimped and saved every penny I could to make sure I maxed out the amount I could contribute every single year. Over the past 5 years, I've been doing the same thing for my DW's Roth IRA too since she's been at home with our son. At this point, we're sitting on over $80,000 that the US Government can never tax again. It has not been easy for us. For 2011 contributions, I wasn't able to actually finish the contributions until February of 2012. It's a lot of work to save that much, especially if you're participating in your company's 401k program and trying to max that out too (which you should).

For 2012, the amount I need to save looks like this:

401k: $17,000

Roth's for DW and I: $10,000

If you take into account the taxes you pay prior to earning the $10,000 for the Roth's, then you're basically taking about $30,000 off your base salary to do this. It's a huge savings goal, but it's worth it. And, it leaves you diversified regarding the effect of US tax policy. No one knows how US tax policy is going to change, but if a large portion of your nest egg is untaxable, then you can rest that much easier.

Roth IRA – Just do it and do it now! Join the movement! Check out more stories at Roth IRA.com.

#RothIRAMovement

Maximizing What’s in Your Wallet Q2 2012

Slug — Fri, 23 Mar 2012 20:32:12 +0000

Welcome to the Q2 2012 edition of Maximizing What's in Your Wallet!

As a reminder, this post is for all the credit card deadbeats out there looking to maximize cash back rewards. So, if you never carry a balance on your credit cards, have them set to auto-pay in full every month, and want to make the most of Q2 2012, then read on.

Here's how you should allocate your spending:

Gas - This is a no-brainer. It's the same card year round. It is the PenFed VISA Platinum Gas / Cash Rewards Card. You'll get 5% back all the time on gas purchases. Just make sure you pay at the pump. I used to use this card for a lot more, but the rewards have been really scaled back such that only the 5% gas reward makes sense. However, as a gas card, it's a great choice.

Groceries - I have been very pleased with my new Blue Cash Preferred^SM Card from American Express which pays me 6% back on all grocery purchases. It also pays 3% on gas and 1% on everything else, but I only use it at the grocery store. The downside to the card is the card carries a $75 annual fee, but it's worth it. Alternatively, the Discover® More Card! is offering 5% back here for the quarter as is Chase Freedom.

Restaurants - Use your Discover® More Card! for 5% cash back this quarter.

Drug Stores - Use one of the 2% cash back cards out there.

Home Improvement - Your best bet is to buy gift cards for your favorite home improvement store using the Blue Cash Preferred^SM Card from American Express or use your 2% card.

Department Stores, and Clothing Stores - Use one of the 2% cash back cards out there.

Hotels and Airlines - Use your 2% card or your favorite hotel card (mine's the Marriott Rewards® Premier Credit Card).

Movies - Chase Freedom is offering 5% back for all of 2012.

Gifts - For gifts I use the Amazon VISA year round. When you buy through Amazon with the Amazon VISA you get 3% back and the first time you sign up, they give you $40 off your purchase. It's well worth the sign up. I am tempted to use my new Blue Cash Preferred^SM Card from American Express to buy Amazon gift cards at a grocery store for the 6% cash back. If I can be more planful about such purchases, I will probably do this.

Museums - Use one of the 2% cash back cards out there.

Everything Else - I use the Fidelity Investment Rewards AMEX and Sallie Mae Signature VISA interchangeably. They both offer 2% cashback.

Two final thoughts: Please remember to sign up at Chase and Discover to be eligible for their 5% rewards, and remember this advice is ONLY for people who don't carry a balance…EVER.

9.46% Effective Tax Rate for 2011

Slug — Sat, 17 Mar 2012 19:53:23 +0000

Well, I finished my taxes. Yahoo! That's about a month later than usual, but the trickling in of tax documents seems to be taking longer every year. I still can't seem to get my withholding right to keep me from getting a large refund. I've used the calculator at the IRS, but like most things IRS-related, it's not exactly intuitive. I know there's worse things in the world, but I hate, hate, hate giving the US government an interest-free loan. When my refund comes it will be a nice chunk towards funding one of my Roth's for this year though.

I use TurboTax, a sponsor of this website, for my returns. I have for at least the past 6 years. It has made my life much easier because so much of the detail is simply transferred from one year to the next. One of the interesting figures that TurboTax calculates is your effective tax rate. What's an effective tax rate? It's the the actual rate at which you are paying taxes on your total income. Effective tax rate is calculated by taking your total tax paid and dividing by your total taxable income. My effective tax rate over time looks like this:

2011 9.46%

2010 9.95%

2009 9.29%

2008 11.2%

2007 6.79%

2006 9.75%

My average effective tax rate over that time is 9.4%.

What about you? How does your effective rate compare?

Effective Tax Rates

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