Better Financial Motivator: Stick or Carrot?

Posted on July 23, 2010 // 6 Comments

We all have financial goals that we want to reach. Some of us do better with a reward attached to reaching our goal (carrot), while others may actually try harder if trying to avoid a punishment (stick). We are motivated by personal desire, by our family, by our friends… but how about a website?

For the those that need that extra bit of discipline, check out Stickk.com, which lets you create a “commitment contract” which have real penalties attached to them. For example, you could commit to saving an extra $150 each month in a separate savings account for 6 months. You could set a penalty of $250 if you don’t follow through – send to a friend, enemy, or donated to an organization that you dislike (NRA, PETA, whatever… dubbed anti-charities).

The site is serious, and started by economics professors who all agree that incentives make the world go ’round. You choose a third-party referee (input their e-mail), as well as give them your credit card information. If you don’t follow through, your card is charged!

If you do better with carrots, you can always set that up yourself. If you reach your savings goal, go out and get a manicure or a nice steak dinner.

Filed Under: Funny, Goals //

Net Worth & Goals Update – July 2010

Posted on July 12, 2010 // 19 Comments
Net Worth Chart 2010

Time for another net worth update… last one was back in April.

Credit Card Debt
I used to take money from credit cards at 0% APR and place it into online savings accounts, bank CDs, or savings bonds that earned 4-5% interest (much less recently), keeping the difference as profit while taking minimal risk. (Minimal in regards that the risk was under my control.) However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”.

Most credit cards don’t require you to pay the charges built up during a monthly cycle until after a grace period of about 14 days. This theoretically provides enough time for you to receive your statement in the mail and send back a check. As this is simply a real-time snapshot of my finances, my credit card debt consists of just these charges.

Retirement and Brokerage accounts
We recently converted our Traditional IRA balances to Roth IRAs, as the income restrictions were lifted this year. The choice to convert was rather simple for us, as we had non-deductible contributions that will now be able to be withdrawn tax-free. (We still owe taxes on very modest gains.)

Our total retirement portfolio is now $289,277 or on an estimated after-tax basis, $249,976. At a theoretical 4% withdrawal rate, this would provide $833 per month in after-tax retirement income, which brings me to 33% of my long-term goal of generating $2,500 per month.

Cash Savings and Emergency Funds
We are now a bit below a year’s worth of expenses (conservatively estimated at $60,000) in our emergency fund. This is after withholding some money for paying taxes on the Roth IRA conversion above, and also for undisclosed, one-time recent expenses. It’d be fun to say that we picked up a convertible or something, but the reality is much less exciting. 😛

Our cash savings is mostly kept in a combination of a rewards checking account (with debit card usage requirements), a SmartyPig account at 2.15% APY currently, or in a 5-year CD from Ally Bank, which despite the long term still provides a very competitive yield even if you withdraw early before the 5 years is up. (See here for more details.)

Home Value
I am still not using any internet home valuation tools to track home value. After using them for a year and finding them unreliable, I am back to maintaining a conservative estimate and focusing on mortgage payoff. If we get some positive cashflow after retirement savings, I do want to pay it down faster.

Filed Under: Goals, Investing, Real Estate, Retirement //

Net Worth & Goals Update – March 2010

Posted on March 22, 2010 // 18 Comments
Net Worth Chart 2010

Lack of Recent Updates
Up until last December, I had done regular monthly updates of our net worth for five consecutive years. However, recent personal events made me much less interested in detailed, analytic planning towards early retirement. As a result, I have barely checked any of my statements in the past few months, other than to make sure they weren’t negative. I think I made a few trades here and there, but for the most part haven’t bought or sold any stocks to maintain my asset allocation. I haven’t even converted my Traditional IRAs to Roth IRAs like I had planned, or made any IRA contributions for 2010.

Instead, reading blogs and other financial news has simply been a recreational escape for me, and I think my blogging has reflected that. I still had fun learning about ways to save money here and there, and enjoy keeping track of other market changes and various offers out there.

However, it’s time to catch back up a bit! Here we go…

Credit Card Debt
In the past, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. However, given the current lack of great no fee 0% APR balance transfer offers, I am currently not playing this “game”. My balances are simply monthly charges that I have not yet paid in full when due.

If you’re looking for a competitive offer, Citibank is offering 0% APR for 15 months with a 3% balance transfer fee.

Income
We’re both still working, but will be taking some unpaid time off in April which will reduce income temporarily. Our monthly expenses are still much less than our (regular) income, so while we may eat into savings a bit, I expect to bounce back into the positive very quickly.

Retirement and Brokerage accounts
Near the end of last year, I had gradually moved $30,000 into a brokerage account at OptionsHouse to invest in ETFs due to their $3.95 trades. In my usual way, I then thought about switching instead to WellsTrade since I now had the $25,000 required to get 100 free trades per year. Stuff happened, the application process took too long, I got distracted, and the money is still sitting mostly non-invested. Grrr.

As stated above, besides our regular 401k contributions, we haven’t made any real moves in our retirement accounts either.

The stock market has done relatively well in the meantime, with the S&P 500 nearly hitting 1,200. Our total retirement portfolio is now $269,538 or on an estimated after-tax basis, $233,164. At a theoretical 4% withdrawal rate, this would provide $777 per month in after-tax retirement income, which brings me to 31% of my long-term goal of generating $2,500 per month.

Cash Savings and Emergency Funds
We continue to keep a year’s worth of expenses (conservatively set at $60,000) in our emergency fund. It’s still a nice warm safety blanket. I am thinking of moving a chunk of it into several separate 5-year CDs from Ally Bank, as they pay 1.60% APY (as of 10/25/13) and each would have a small early-withdrawal penalty of only 60 days interest.

Home Value
I am no longer using any internet home valuation tools to track home value. After using them for a year, I went back to simply taking a conservative estimate and focusing on mortgage payoff. After checking them again today, I am staying away. A house nearby sold recently for $500,000 but is listed at both Zillow and Coldwell Banker as being sold for $1,000,000. Needless to say, it is skewing my home value estimates!

It would seem that I am currently long on thoughts and short on action. Time to fix that.

Filed Under: Goals, Investing, Real Estate, Retirement //

15-Minute Resolution #5: Check the Asset Allocation of your Investment Portfolio

Posted on January 12, 2010 // 14 Comments

Here’s the next installment of my series on New Year’s Resolutions that can be done today, and not put off for “some day” in the future. We all know how that usually turns out…

Last year was definitely a roller coaster year when it came to the stock market, and you may have taken the “just don’t open the scary statements” solution. Well, it’s time to take a peek and see where you stand. I won’t pretend that recent performance has been great, but if you made regular contributions throughout, you may be surprised to see your portfolio balance higher than it was in 2007. (Maybe.)

Asset allocation is how your investments are split between different asset classes. The most generic examples are stocks and bonds, but you can also divide them further into categories like large companies vs. small companies, international vs. domestic stocks, or different safety grades of bonds. Other asset classes include real estate, commodities, or precious metals. Your mix of assets has a great impact on the volatility and expected future return of your portfolio.

The easiest way is gather all your most recent financial statements and plug your holdings into the Morningstar Instant X-Ray tool.

(If you want it to remember your portfolio, you must sign up for a free site membership.) The site will then “x-ray” your holdings and break it down by asset class:

How do I know if my asset allocation is correct?

Well, ideally you would already have set your target asset allocation, and all you would need to do is to rebalance your assets to that target. Rebalancing is a way to maintain the risk/reward balance that you have chosen for your investments, and also forces you to buy temporarily under-performing assets and sell over-performing assets (buy low, sell high). How often one should re-balance their portfolio depends on a few factors. See this post on How often should I rebalance my portfolio?

Otherwise, setting an asset allocation can be a very complex topic. I recently pondered a very general rule-of-thumb where you set your stock percentage to double your tolerable loss in one year. So if you could only stomach a 30% stock, you should only invest a maximum of 60% of your portfolio in stocks.

Here’s a big collection of my posts that I did when deciding on my own target asset allocation:

Simplified Theoretical Stuff

  1. Disclaimer and General Philosophy
  2. Consider Simply Buying The Entire Market
  3. Efficient Frontier and Modern Portfolio Theory

Choosing An Asset Allocation

  1. Deciding On The Stocks/Bonds Ratio
  2. Deciding On The Domestic/International Ratio
  3. Considering The Diversification Benefits Of Small and Value Stocks
  4. Equity Asset Allocation: Comparison of 8 Model Portfolios
  5. Investing In Real Estate Through REITs?
  6. Interim Target Asset Allocation: Looking Back & Some Decisions

…See the rest of my 2010 Instant New Year’s Resolutions here!

Filed Under: Goals, Investing, Retirement //

15-Minute Resolution #4: Automate Your Emergency Fund

Posted on January 8, 2010 // 17 Comments

It’s Friday, so here’s an easy slam dunk resolution involving emergency funds. If you’ve done any sort of financial reading lately, you know that many folks recommend having at least 3-6 months of living expenses put aside. Given the current high unemployment rates, I personally wasn’t comfortable until I had 12 months of expenses. Not only could you lose your job, but there could be unexpected health expenses, car repairs, or whatever. But that’s not the main point here.

The easiest way to build your emergency fund is to put it on auto-pilot. Your task for today is to schedule an automatic, repeating monthly transfer of $100 into a savings account.

Just about every savings account available allows you to set up an automatic monthly transfer from your checking account. Here is how to do it with Capital One 360’s Automatic Savings Plan. I just chose $100 as a round number, but change it as you like.

(Perhaps you’ve already got a healthy emergency fund. If so, then you can apply this resolution to another specific savings goal, like a new car fund or in our case a pet healthcare fund to replace costly pet insurance.)

Instead of telling you more reasons to do it, I’m going to try to counter any reasons NOT to do it.

  • Don’t wait until tomorrow. It won’t get any easier later on, only harder.
  • Don’t open up a new account, if you already have one available. If you don’t, one of the fastest applications I’ve seen online is at Capital One Consumer Bank. Takes less than five minutes.
  • Don’t worry about interest rates. It doesn’t matter if your savings account doesn’t earn as much interest as some of the top accounts. This can all be changed later.
  • Don’t worry about not being able to keep it up. Start with as much or as little as you feel comfortable. It doesn’t matter if it’s $100 or $1,000. I don’t even care if it’s $10.

The hardest part is starting. You can always change your mind later, it’s still your money. But hopefully, in several months you’ll wake up to a big chunk of money you didn’t even realize you saved.

See the rest of my 2010 Instant New Year’s Resolutions here!

Filed Under: Budgeting, Goals //

15-Minute Resolution #2: Start Spending Consciously

Posted on January 6, 2010 // 17 Comments

Alright, now for a 15-minute 2010 Resolution that doesn’t make you spend less, just better. Huh? Achieving financial success doesn’t mean pinching every single penny all day long and watching your net worth ticker inch upwards. It means spending money on what you enjoy, and not wasting it on things that you don’t (like credit card interest).

An interesting exercise to help you focus is to list ALL your voluntary expenses, and then organize them by priority. When I say voluntary expense I mean that you should generally ignore bare expenses like rent for a single room and basic food. This is not a rigid exercise, but mostly to get you to think more about spending consciously. Again, don’t spend more than 15-minutes on this.

What is your most important expense?

What is your LEAST important expense?

For example, your list might look something like this, from most important to least important:

  • Mortgage on my dream house
  • Yearly travel
  • …
  • …
  • Monthly iPhone Bill
  • Dining Out
  • Daily Starbucks
  • Rounds of golf
  • Cable TV
  • Beer & Alcohol

You might think, well everyone is going to put housing first. No, in fact it may be at the bottom. Maybe you live in a luxury downtown urban condo right now, and would rather save $1,000 per month and share a 4-bedroom house with a bunch of friends and spend that money on private French lessons and wine. Only you know!

Now write down your list and place it somewhere visible. Make it your computer desktop background if possible. Next time you spend any money, you’ll think twice about whether you’d rather allocate it to something more important to you. You can now finish the rest of the 2010 with a better frame of mind.

In addition, the next time you run into a money hiccup, you’ll know what to cut first before dipping into savings or *gasp* stopping your 401k contributions.

See all the 2010 Instant New Year’s Resolutions here.

Filed Under: Frugal Living, Goals //

15-Minute Resolution #1: Save More For Retirement

Posted on January 4, 2010 // 11 Comments

Do you feel you aren’t saving enough for retirement? Worse, do you feel like what you should be saving for retirement is some huge number you’ll never reach? I think such daunting numbers are what kept a lot of my younger co-workers out of the 401k plan completely.

How about 1% then? Let’s see how much 1% is for a household with a single earner making $50,000 gross per year. For simplicity, let’s say they live in a state without income tax like Texas. If you are paid bi-weekly, putting away $500 pre-tax annually (1%) into a Traditional 401k amounts to an additional $19 reduction per paycheck. If you do live in a state with income tax, the actual paycheck difference will be even smaller.

I know that even this may be hard for some families, but keep in mind this money is still yours and you’re just using the 401k or IRA container to save you taxes. Now, if you’re convinced that you can handle this (and I hope you are), then go right now and either fill out the proper form from Human Resources or go online and submit for a change. As for the investment choice, if you are undecided consider just going for the target-date option for now until you learn more.

Most importantly, increase your contributions by 1% today! Now you can say in 2010 you started saving more for retirement.

Fine Print
I kept things simple above so you don’t get bogged down. You might be satisfied with your current contributions, or you might want to put away more than 1%. Even better, you might get a matching contribution from your company, which will boost your savings even further. On the other hand, what if my 401k has horrible investment options? Or what if you don’t have a 401k/403b at all? You can start an IRA with just a $50 per month commitment with a low-cost provider.

What about Traditional vs. Roth? Check out this Video Post: Roth IRA vs. Traditional IRA.

You may find that if you haven’t maxed out your Roth IRA for 2009 or 2010, then you may want to do that instead of the 401k because Roth IRA contributions can be taken out at any time without penalty (but not earnings).

See all the 2010 Instant New Year’s Resolutions here.

Filed Under: Goals, Retirement //

This Week: 15-Minute 2010 New Year’s Resolutions

Posted on January 4, 2010 // 7 Comments
credit to Bill Waterson

This time of year, it is trendy either to make New Year’s Resolutions or to talk about how resolutions are stupid. I know, because that’s what I usually do…

I thought I’d try something a little different this time – something I was going to call the “instant” resolution, or “single serving” resolution. The idea is that this is not something huge that you’ll have to tackle over an entire year, but something significant that can be done today and then you’ll be done!

So I’m going to put up one per day this week, and challenge you to finish it in that day. They won’t be earth-shaking or surprising. The goal is gradual improvement and motivating action, not becoming some super-saver overnight. I hope it works!

2010 Instant Resolutions

  1. Save More for Retirement
  2. Start Spending Consciously
  3. Check Your Free Consumer & Credit Reports
  4. Automate Your Emergency Fund
  5. Check the Asset Allocation of your Investment Portfolio

Filed Under: Goals //

Monthly Net Worth & Goals Update – December 2009

Posted on December 2, 2009 // 17 Comments
Net Worth Chart 2009

Wow, December already…

Credit Card Debt
Up until now, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn up to 4-5% interest (less recently), and keeping the difference as profit. However, given the current lack of good no fee 0% APR balance transfer offers , I am no longer playing this “game”. The balance that you do see is either before the end of the statement or during the grace period, where I’m also not paying any interest.

Retirement and Brokerage accounts
Mrs. MMB and I have both maxed out our 401k salary deferrals for 2009. We have also started to invest in regular taxable accounts by investing $30,000 that was previously being held as cash. I’ll outline the trade activity in an upcoming portfolio update.

Our total retirement portfolio is now $231,368 or on an estimated after-tax basis, $191,475. At a theoretical 4% withdrawal rate, this would provide $638 per month in after-tax retirement income, which brings me to 26% of my long-term goal of $2,500 per month.

We are also getting ready for a Traditional-to-Roth conversion once the income limits are removed in 2010. We’ll need to gather up some information in order to see how much tax we owe on any gains. More details on this to come.

Cash Savings and Emergency Funds
We keep a year’s worth of expenses in our emergency fund. Potential large expenses include $10,000 for home improvement projects (minor roof repair and solar water heating), as well as $15,000-$20,000 on a new car to replace our 1995 Nissan. Hope it can last us 15 years as well!

Home Value
I am no longer using any internet home valuation tools to track home value. Some people have suggested using my tax assessed value, but I also think that is too high. I simply picked what I felt is a conservative number based on recent comparables, $480,000, and keep it for at least 6 months if not a year. (Currently on month 3 out of 6.) For the most part I am concerned about mortgage payoff, which I still plan to accomplish in 20 years at most.

You can view previous net worth updates here.

Filed Under: Goals, Investing, Real Estate, Retirement //

Monthly Net Worth & Goals Update – November 2009

Posted on November 2, 2009 // 28 Comments
Net Worth Chart 2009

Credit Card Debt
In the past, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way.

However, given the current lack of great no fee 0% APR balance transfer offers, I am no longer playing this “game” and have just paid off my last 0% offer for now. This makes the net worth chart a bit funny, but it should clear up next month.

Retirement and Brokerage accounts
Our total investment portfolio increased by a few thousand dollars since last month. DW’s 401k was already maxed out at $16,500. I made another $1,000 contribution to my Solo 401k, for a total of $16,500 contributed in 2009 as well. (I forgot the limit was $16,500 and not $15,500 last month…) This makes us done with our goal of maxing out both our 401k salary contributions for 2009.

I am starting to build up too much cash, and have started investing for retirement in a taxable brokerage account as well. In the interest of tax efficiency, I’ll have to move around some investments in order to keep bonds in the tax-advantaged IRAs/401k and the “extra” stocks in taxable. I expect to finish investing $20,000 this week.

Taking that additional 20k into account, our total retirement portfolio is now $211,095, or on an estimated after-tax basis, $170,047. At a 4% withdrawal rate, this would provide $567 per month in tax-free retirement income, which brings me to 23% of my long-term goal of $2,500 per month.

Cash Savings and Emergency Funds
We keep a year’s worth of expenses in our emergency fund. Another $10,000 is earmarked for upcoming home improvement projects that I keep putting off (minor roof repair and solar water heating).

Home Value
I am no longer using any internet home valuation tools to track home value. Some people have suggested using my tax assessed value, but I also think that is too high. I simply picked what I felt is a conservative number based on recent comparables, $480,000, and keep it for at least 6 months if not a year. (Currently on month 2 out of 6.) For the most part I am concerned about mortgage payoff, which I still plan to accomplish in 20 years at most.

You can view previous net worth updates here.

Filed Under: Goals, Investing, Real Estate, Retirement //

Monthly Net Worth & Goals Update – October 2009

Posted on October 6, 2009 // 23 Comments
Net Worth Chart 2009

Credit Card Debt
For newer readers, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way. However, given the current lack of great no fee 0% APR balance transfer offers, I am mostly waiting on existing offers to end.

Retirement and Brokerage accounts
Wife’s 401k was already maxed out at $16,500 for 2009. I made another $5,500 contribution to my Solo 401k, for a total of $15,000 contributed in 2009. This makes us about 95% done with our goal of maxing out both our 401k salary contributions for 2009.

Our total retirement portfolio is now $190,085, or on an estimated after-tax basis, $152,349. At a 4% withdrawal rate, this would provide $508 per month in tax-free retirement income, which brings me to 20% of my long-term goal of $2,500 per month.

Cash Savings and Emergency Funds
We still have a little over a year’s worth of expenses in our emergency fund. Part of the cash is earmarked for some smaller home improvement projects.

The next step is to put future funds into buying ETFs in a taxable brokerage account since I no longer have room in tax-sheltered accounts. I’ll probably use TradeKing or Scottrade as my buy-and-hold ETF broker, and keep Zecco as my “play money” account.

Home Value
I am no longer using any internet home valuation tools to track home value. If I still did, it would have been $572,000. Some people have suggested using my tax assessed value, but I also think that is too high. I am simply picked what I felt is a conservative number based on recent comparables, $480,000, and keep it for at least 6 months if not a year. This way, I just focus on the mortgage payoff, which I still plan to accomplish in 20 years at most.

You can view previous net worth updates here.

Filed Under: Goals, Investing, Real Estate, Retirement //

2009 Q3 Investment Portfolio Update – 9/21/09

Posted on September 21, 2009 // 26 Comments
2009 Q3 Portfolio Breakdown
 
Retirement Portfolio Actual Target
Asset Class / Fund % %
Broad US Stock Market ($64,794) 33.8% 34%
VTSMX – Vanguard Total Stock Market Index Fund
DISFX – Diversified Stock Index Institutional Fund*
FSEMX – Fidelity Spartan Extended Market Index Fund*
US Small-Cap Value ($17,554) 9.1% 8.5%
VISVX – Vanguard Small Cap Value Index Fund
Real Estate (REITs) $18,004 9.4% 8.5%
VGSIX – Vanguard REIT Index Fund
Broad International Developed $46,820 24.4% 25.5%
FSIIX – Fidelity Spartan International Index Fund*
International Emerging Markets $21,678 11.3% 8.5%
VEIEX – Vanguard Emerging Markets Stock Index Fund
Bonds – Short-Term $4,484 2.3% 3.8%
VFISX – Vanguard Short-Term Treasury Fund
Bonds – Inflation-Indexed $18,568 9.7% 11.3%
VIPSX – Vanguard Inflation-Protected Securities Fund
Total Portfolio Value $191,902
* denotes 401(k) holding given limited investment options.

Like many others, for most of this year I’ve just been trying to keep my head down, make my regular stock contributions like a good boy, and not looking at my statement balances too much! There’s been a lot of “wow, my portfolio isn’t so bad anymore” talk due to the recent market run, so I figured it was time for a checkup. You know of course, that this also means the market will tank today… 🙂

Contribution Details
So far in 2009, we have made the following contributions:

  • $5,000 x 2 for 2008 non-deductible IRA contributions
  • $5,000 x 2 for 2009 IRA contributions
  • $33,052 for both of our 401k contributions, including salary deferral and company match. One is maxed out, the other has a little left to go.

2009 Performance
In my last update back in April, I had found our year-to-date performance to be about -15%. According to my spreadsheet, the 2009 year-to-date dollar-weighted performance of our personal portfolio is now 41% YTD.

For reference, the Vanguard S&P 500 Fund (VFINX) has returned 20.52% YTD, their FTSE All World Ex-US fund (VFWIX) has returned 35.72% YTD, and their Total Bond Index fund (VBMFX) is 5.11% YTD as of 9/18/09. The Vanguard Target 2045 Fund (VTIVX) has returned 23.4% YTD, which as a similar stock/bond breakdown to our portfolio, but less international exposure. Part of the good relative performance (which was previously relatively poor) is also likely due due to the timing of my large lump-sum investments.

Investment Changes
We have used our new contributions to keep us close to our asset allocation target, with a 85% stocks/15% bonds split. Right now, we are not too far off. The target percentages for each asset class are shown above as well. Currently, with the run-up in equities, we are a bit underweight in bonds.

You can view all my previous portfolio snapshots here.

Filed Under: Goals, Investing, Retirement //
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