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No longer a millionaire :(

November 8th, 2008 at 06:43 am

It's no surprise that all of our investment accounts have been hit hard by the recent stock market plunge. This morning I decided to bite the bullet and see how bad the fallout was. It turns out I'm no longer a millionaire -- net worth is down to $840k. All things considered, I can't complain -- it was just fun to call myself a millionaire while it lasted. I am confident the stock market will recover over the next few years and we will be in good shape for retirement 20 years from now. I guess my new goal can be to reach $1M net worth again by the age of 40. Smile

Investing in Non-Deductible IRA vs Taxable Account for me

August 5th, 2008 at 04:56 pm

Jim_Ohio had a very interesting post about whether high-income earners (above the ROTH limit) should direct money toward a taxable account or a non-deductible IRA. In the comments he asked me a series of questions, so I thought I'd blog a bit about our situation, and maybe if I'm lucky Jim will stop by and give me his take.

Currently DH makes about $130k. I have the choice to work or not -- currently I'm contracting 20 hr/wk and expect to gross about $60k. We'll probably have about $35k in deductions, plus $10k in exemptions. Last year we had $9k in dividends and $23k in capital gains.

Our tax situation this year will be very different from last year, since I only worked for 5 months and didn't start with as many hours. Last year, our AGI was $169k, my business income was $23k, our taxable income was $124k. I'm guessing our marginal tax bracket was 25%, but our effective tax rate was 10.5% federal and 9% state.

1) How much are you investing each year? In the taxable account?
$15,500 to DH's 401k
$13k to DH's ESPP
$4k to DH's traditional IRA
$4k to my traditional IRA
No new money to my taxable account.

The IRA contributions will likely come from selling existing taxable mutual funds rather than new income.

2) how many years to retirement? Is early retirement a desire?
We are almost 38 now, so theoretically 27 years. I'd like the option of retiring at 60, so 22 years.

3) is mortgage paid off? Is their any reason to NOT pay the mortgage off?
The mortgage is a 10-1 ARM that is fixed at 5.125% until 2012. I think it's more advantageous for us to have the mortgage deduction and invest in the stock market instead of paying it off. Also, there is a fair chance that we will want to move to a better school district in 3-5 years time.

4) What choices are available for health care (HSA?), child care (child care account available?) and other less used deductions.
DH has excellent medical coverage, completely employer-funded, so no HSA.
We're currently taking advantage of the FSA health deduction, although I've been burned with it in the past. The dependent care deduction is tricky -- currently the part-time nanny prefers to be on a cash basis. To use the deduction we'd have to set up tax withholding, etc.

Here's our current strategy:

I wait until TurboTax tells me whether we qualify to contribute to a ROTH or not. We qualified for a partial contribution the year that I was not working, or I could take a deduction on a spousal IRA.

When we don't qualify for ROTH, we contribute $4k each to non-deductible IRA.

Now that I have business income, I sell stock in my taxable account to make the maximum contribution to the SEP-IRA to reduce the taxable business income.

One wrinkle -- it's quite possible that we will be in a higher tax bracket in retirement than we are now. I've been playing with the retirement calculators at http://www.hughchou.org/calc/index.html#RET. Our current retirent accounts total $339k, and current taxable accounts total $357k. I asked for $200k income and assumed 10% return. If we save all that for retirement, and don't contribute another dime, the calculator says we're "set for life". If I just look at the retirement balance, and assume we add $24k to it each year, and assume a 10% return, we're still good for a $200k (current dollar) income.

So what do you think, Jim? Am I better off to leave that $8k each year in the taxable account, or move it over to the IRA?

Adding RSS feed to your blog

August 4th, 2008 at 02:00 pm

I just enabled this blog for RSS feed. Feeds are great because you can see at a glance who has added a new entry you might like to read.

Here's how to do it in case anyone else would like to set it up for their blog:

From your blog page, Click on Control Panel, then Widgets, then Feedburner.

Click "create a FeedBurner feed"

Copy the last part of the feed address into the box in step 2. (I missed this step the first time through.)

Click Save

Click Activate

Go back to your blog's main page. In the sidebar should be an orange button labelled XML.

Large purchase throwing my budget for a loop

August 3rd, 2008 at 08:13 am

I'm sure I'm making our money management more complicated than it needs to be. About twice a month I sit down for an hour or so to get the budget caught up to our spending. We're pretty comfortable financially so I don't have to keep as close an eye on the day-to-day spending as many do, but I like to have a rough idea of where we are so I can pull back the discretionary spending before it gets too out of line. Unfortunately this month I've made a large purchase which, although I know we have the money to cover it, is throwing my accounting system for a loop.

The problem is that I've got the cash money (non-investment) divided up into so many accounts (3 checking, 2 savings, 1 money market), and the budget divided into so many catagories (10 master catagories, 46 line items) that it sometimes gets tricky to confirm that the budget and the total amount of money is in sync. I'm in the process of consolidating the checking and savings accounts, so that should help matters significantly. On the budget I really like having the granularity of all the line items (for instance separate lines for phone, electricity, water rather than a single line for utilities), so I don't think I will change that much.

I use YNAB as my budgeting tool, and while on the whole I highly recommend it, you can't verify at a glance that the register and budget are in sync. They are disconned by design (which is helpful for people snowballing a large cc debt), but if you're not careful the amounts in the budget and the register can get out of sync. I finally set up a spreadsheet where I list all my account balances, add up the budget numbers and calculate the difference. The large purchase is throwing everything off because it ought to be paid for by money that is currently outside the budget software. According to the software I have used up all my primary income for August and am $3k overdrawn.

Currently we have $38k cash in hand, and a $17k credit card bill to pay in full this month ($13k due to the large purchase.) We normally have $10-$12k coming in each month. I need about $7k/mo to cover normal montly outflows. I save $835/mo toward semi-annual purchases, and set aside 40% of my contracting income each month toward taxes.

Currently my budget includes the following balances that absolutely need to stay in savings:
Taxes: $9k
Semi-annual bills: $5k
House/car repair reserve: $1k

I also have $9k earmarked toward near-term goals -- vacation, Christmas, updating the wills.

$4k of cash needs to go to last month's credit card bill, and we will spend our usual $7k this month.

I still haven't decided exactly where the money for $13k purchase is coming from. The original plan was to sell stock from my taxable investment account (currently $350k). But the market's been down and I've been debating about trying to cash-flow it instead, repaying my cash accounts when the market is a little more favorable. DH's ESPP just made a purchase, and the stock is currently on the high side, so another option would be to sell, which would bring in $12k. I don't track the investment account or the ESPP in the budget, so either way would represent an inflow.

I think I have enough on hand to be safe paying the cc bill out of current cash, but I haven't figured out how to represent paying it and then paying the budget back. Loose ends like this really bug me!

Finally applied for life insurance for myself

July 28th, 2008 at 05:32 pm

When I was working full-time I always had life insurance through my job benefits. I don't remember if I took the basic 2x or 3x salary or bumped it up enough to cover the mortgage. When I became a SAHM that of course ended.

DH has insurance for 3x salary through work, and also a group term policy through IEEE (a professional organization for engineers.) The IEEE insurance is a great bargain, only $77 every six months for $500k coverage.

DH originally felt funny about taking insurance out on me, because he felt he'd be able to provide for our son on his own with no problem. Then we attended a will and trust seminar where they made the point that if both parents die you should leave enough insurance to pay for the guardian to raise your kids, and that provided a rationale he felt good about.

So I've had adding spousal insurance on the to do list for a long time now. IEEE actually called one day and instead of blowing off the salesperson like I would normally do I asked for a quote. Since I'm working again (software contracting), I could join IEEE myself and take out an individual policy, or go on my husband's policy as a spouse, so I asked her to quote it both ways. She said she'd never been asked that before. Smile It turned out that it was about $15-$20 cheaper to be a spouse, plus I wouldn't have to pay dues (although I might rejoin someday anyway if I decide to use the club for networking purposes.)

I think my policy is about $67 every six months for $500k coverage -- what a no-brainer! I should've taken care of this years ago.

So if DH dies, there's enough to pay off the house and income replacement for 4 years, and if I die he can pay off the house and have an extra 2 years of my current income. Plus of course we'd inherit each other's IRA accounts. $2M (half from insurance, half from our current net worth) should be plenty to raise our son if we both die.

I really should get a quote on long-term disability insurance as well. I think DH has 66% replacement coverage through work. Not sure if I am able to get it while working as a contractor.

7 Books that Helped Me Learn About Investing

July 28th, 2008 at 02:42 pm

Books I've found useful, and the main topic covered. I've placed them in the order I would recommend reading them. You can click on my Booknotes catagory to read my summaries of numbers 1, 2, and 7.

1. All Your Worth (getting your basic financial picture in order so you have money available to invest)
2. The Complete Idiot's Guide to Getting Rich (helps with goal setting)
3. Bogleheads Guide to Investing (explains mutual funds and the indexing strategy)

Text is http://investingessentials.blogspot.com/ and Link is
http://investingessentials.blogspot.com/ An online book abpuy impkementing the Bogleheads strategy,
5. The Intelligent Asset Allocator (how to structure your portfolio)
6. Morningstar Guide to Mutual Funds (how to analyze and pick funds)
7. Common Sense on Mutual Funds by John C. Bogle (highly technical analysis of index investing)

Attempting a quarterly portfolio review

July 13th, 2008 at 10:39 pm

This has been on my "to do" list since paying estimated taxes in mid-June, and I finally had the time and inclination to sit down and make an attept at it. I'm still in the process of figuring out exactly what to look at in these quarterly reviews. As usual, I find that I end up spending the majority of the time creating a new spreadsheet and manually typing in details that I later decide aren't really what I should be looking at.

I've been slowly making my way through Morningstar Guide to Mutual Funds, and taking notes on each chapter. I find it to be far better than the "learning" information on the website, which seems to be generic handwaving.

So in an attempt to understand what I currently own, I created a spreadsheet wtih the following columns (picked from my notes from the book):

* fund
* symbol
* account
* style
* stars
* sectors
* % assets in top 10
* asset allocation
* benchmark
* trailing annualized return (3, 5, 10 year)
* benchmark return
* 3 yr standard deviation
* expense ratio

Then I looked up each fund I own and copied the info. Putting in the sectors and the returns took the bulk of the time -- what a lot of typing! Not sure this was worth the effort. I noticed a little bit of duplication -- two large-value, and two world large-value funds -- but the holding in the second fund in each case were fairly small.

The only conclusion I came to was that, yes, American Funds has low expense ratios. Smile

Next I made another worksheet for the current hodlings:

* fund
* symbol
* account
* shares
* current value
* amount invested
* amount withdrawn

My basis info isn't available on my brokerage website, probably because the funds were originally purchased directly from American Funds rather than through the brokerage. I later transfered them to the brokerage so everything would be on one statement. I need to call my broker and see whether the basis info can be obtained and added, or if I need to go back through 15-20 years of statements to figure out the basis for each fund.

Finally I went to Morningstar and used instant x-ray to get an overview of the whole portfolio (including DH's funds). The asset allocation is currently:
Cash 9.47
US Stocks 35.93
Foreign Stocks 43.51
Bonds 10.57
Other: 0.53

Next time, I'd like to work out a way to streamline transferring the current holding numbers from the brokerage to the x-ray tool.

I'm considering eventually putting a 5-10% stake into REITs, but that's another learning curve in itself! My thinking is that real estate is an asset class that moves independently of the stock market, and the current bust may make the next few years a good time to invest.

The stock style is currently
large: 24/29/23
mid: 6/4/7
small: 2/2/3

Going forward I think I want to add more small- and mid-cap exposure.

The Stock Sector percentages were mostly close to the numbers for the S%P 500. Nothing struck me as terribly high, although I have no real opinions on which sectors should be 5%, 10%, or 15%.

World Regions:
US & Canada: 48.44%
Europe: 27.84%
Japan: 2.39%
Latin America: 2.82%
Asia & Australia: 14.45%
Other (Africa): 4.06%

Average Mutual Fund Expense Ratio: 0.68%

Stock Stats (ratio to S&P 500):
Price/Prospective Earnings: 13.27 (0.99)
Price/Book Ratio: 2.10 (0.91)
Return on Assets: 8.80 (1.03)
Return on Equity: 21.35 (1.00)
Projected EPS Growth - 5 yr% 13.00 (1.14)
Yield % 2.71 (1.25)
Avg Market Cap ($mil): 24,233 (0.49)

I'm not sure what to make of the Stock Stats section, but it seems to me to indicate that most stats are on par or a little better than the S&P 500.

Preschool Blues

May 20th, 2008 at 04:42 pm

DS turns 3 at the end of September, and I'm trying to decide between two preschools.

The first preschool is run by a local church. It's $221/mo for two mornings a week (3 hours each). I also work from home in the afternoons, and hire a nanny to babysit 20 hr/wk at $12/hr. (DS sleeps during half that time, but I need the coverage for days when I go into the office.) So my total cost per month is $1181. He's currently in the two-year-old class there, and I love the teacher. Because of his late birthday and reserved personality, he would stay with that teacher for another semester.

The preschool down the street, where DH can drop him off on the way to work, is $1000/mo. It's a full-time school that is open from 8-6 -- learning activites in the morning, lunch, 2 hour nap, and free playtime in the afternoon. DS would probably stay from 9 until nap is over at 3, so about 30 hr/wk.

I'm having a hard time deciding. The school down the street is cheaper and more convenient, and I think the learning part of the programs is similar. The other big advantage is that when I need to go into the office for a day and work until 6, there's no extra charge, where it's $12/hr if my nanny stays late.

The advantages of the current situation is that I get to spend 3 mornings a week with my son, and when the nanny is taking care of him I can hear them playing. He always stops by my office for a kiss before going down for a nap.

With the school down the street I'd spend about the same amount of time alone with him in the afternoon, say from 3-6. But somehow morning time is so much better than afternoon time!

On the other hand, at 3 perhaps more time with other kids would be better than time alone with a nanny.

If we go to the new school, I've been thinking about keeping him home 3 mornings a week, and leaving him there later in the afternoon. So the schedule might be 9 - 4 MW and 12-4 on TThF. The problem is I don't know if the director will be accomodating if I have my son skip so much of the academic portion -- she doesn't seem to be very flexible and could very well tell us to take him to another school instead. She's also set a July 7 start date, so that kills part of the summer for swim lessons, etc. (There are only 8 spots total for kids born Sep-Dec '05, and of course a waiting list, so it's pretty easy for her to tell us to take a walk.)

There are 2 other daycares that would be reasonable to consider, but I haven't checked them out yet, and so would probably end up on a waiting list.

It's a tough decision -- my heart says stay with the current setup, my head says the new school makes more sense financially and schedule-wise. I'm sure my son would thrive at either school.

10 Things I wish I'd known before I took time out of the workforce

April 23rd, 2008 at 11:40 am

When I had my son, I quit my job as a software engineer. I considered it a sabbatical rather than a career change to permanent SAHM, and knew I would eventually go back to work. When DS was 20 months, I found a contracting company that enables me to work at home 20 hr/wk. I thought this contest entry might be useful to people who have a real choice about working or staying home, and realize that not everyone can afford to do so.

1. It's worth taking some time off.
I thoroughly enjoyed the two years completely focused on my boy and would recommend it to anyone. It's a short enough time to not completely set your career back to ground zero, but gives you time to watch and enjoy the day by day changes that your child goes through in the years when they're changing the fastest. I like to think of it this way -- if someone offered you a once in a lifetime chance to quit your job and travel around the world for a year, would you do it?

2. Join a playgroup ASAP.
I waited until my son was 3 months old before joining a playgroup. If I'd known what a lifesaver it is, I would've forced myself to get out there sooner. Just having the chance to get out of the house and chat with other moms is a lifesaver when you are a SAHM.

3. You can keep the cleaning lady.
Before I decided to stay home, my biggest dread was the drudgery of housework. I had this notion that a SAHM was REQUIRED to do the cooking and cleaning. It was the least appealing thing about the job description. I planned to keep our cleaning lady for the first 3 months and then take over these duties. As the deadline approached, it occurred to me that if I could find room elsewhere in the budget, it was really my choice as to whether to spend the money on cleaning or on other things. Don't let preconceived notions of what you "should" do box you into a corner.

4. Have faith in your ability to restart your career.
The scare-mongerers out there like to make a big deal about the number of elderly women in poverty, and what happens if you get divorced. I truly believe that if you keep your time out to just 2 or 3 years at a stretch, it's not such a big deal to find work again.

5. Network, Network, Network
The best thing I did was to continue to go out to lunch with old coworkers. It directly led me to the part-time job I now enjoy. (My mother was available to babysit, but if necessary, find another mom to trade time with.)

6. There will be regrets.
Another woman at my old job became pregnant a few months after I left. She decided to continue working, and is now director of software. There are days that I think with regret that that could've been me, and I doubt I will be the one to break any glass ceilings in the future. For every decision there is a trade-off -- something lost, something gained. Make peace with that beforehand.

7. Try harder for part-time or a job share before you leave. Now that I know how much I like working part time, I wish I'd pushed harder for staying at my last job, in a part-time capacity. I'll never know what would have happened if I'd found a job-share partner and really made a case for how it would work. On the other hand, I really loved having no other pull on my attention during the first year, so I guess what I really wanted was a LONG maternity leave and then a job share! Smile

8. 30 months is ideal developmentally. I started working when my son was about 22 months, but if I had to do it over, I'd wait until he was 30 months old. I just see such a difference in his interaction with other kids and lessening of separation anxiety at this stage that I would recommend it as a better age.

9. Nannies come from Craig's List. If you work part-time, a nanny that comes to your home costs about the same as part-time daycare and offers you a lot more flexibility. Craig's List is THE place for nannies/babysitters and families needing childcare to meet each other. You can post to find someone whose schedule suits yours. You can find college students, a SAHM who wants to care for a second child, or a nanny who works part-time for another family and wants to pick up more hours.

10. Working 5 half-days is better than 3 full days I work 5 half-days, where a coworker with two preschoolers works 3 full days. We put in the same number of hours each week(usually between 18-22), but it seems that I'm able to respond to emails and meetings a lot easier than she is. I also feel fresher working a shorter stretch at a time. It seems easier on my son to have more a more consistent schedule day-to-day as well. Of course, it does make a difference to be working from home, as commuting is not a factor.