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Archive for October, 2014

The price of dignity: $15

October 5th, 2014 at 01:40 am

Yesterday, I did something I haven't done in years.

I went to the salon!

Back in January, my hair was getting extremely long and my co-worker offered to cut it for me. She seemed very confident (and had been asking to do it for months), so I agreed, but it did not take me long to realize that she bit off way more than she could chew. My hair is very thick, full, and slippery, and she was really struggling to cut through it. As tortuously long minutes ticked by and she continued to saw and hack and hem and haw, my distress level was starting to rise precipitously.

Finally, I had to put an end to it. I had started off with waist-length hair, and by the time I made her stop, my hair was down to chin-length, and could barely be tied back into a tiny, pathetic stub of a ponytail. The left side was visibly longer than the right, and the back was all sorts of different lengths. It looked, to put it bluntly, utterly ridiculous. I was completely traumatized by the experience.

But in the interest of good workplace relations, I had to smile and nod and pretend that I loved my new haircut -- as well as endure the painfully polite "compliments" from all my other friends and co-workers. There was nothing that I wanted to do more than to run to a salon and get everything fixed (in a wild moment of panic, I even considered hair extensions), but if I'd went out and got it redone immediately, the charade would have been up.

So I gritted my teeth, ironed my resolve, and spent the next nine months growing my hair back out. It has been a miserable, embarrassing, and painstakingly long wait, but the time has finally come that my hair is long enough to handle a trim without an immediately noticeable loss of length.

I found a coupon for a $9 haircut at a local salon, and went. I was extremely nervous after what I'd been through, but the stylist made me feel so comfortable, and he did exactly what I wanted, which was to even out everything while taking as little off as possible. The difference is subtle but immeasurable -- the comment from the SO was, "You actually look like you have a proper haircut now."

Lesson learned. Some tasks should best be left to the professionals. I don't think the trauma of the past nine months was worth a free haircut. I have never been so relieved to hand over money in a very long while. The guy certainly earned it. That $15 (I gave a $6 tip) was so worth my peace of mind... and my dignity. Whew.

Switching to a traditional IRA

October 2nd, 2014 at 05:12 am

Up until now, I've been using Roth IRAs exclusively. I just followed the extremely typical advice for young people to use a Roth, because it's better to pay taxes when one is younger, making less income, and thus in a lower tax bracket.

I also thought that the math worked out better, at least if one assumes a constant tax bracket. In a Roth, you pay your taxes up front, but everything after that grows and is withdrawn tax-free. It's a very simple FV calculation. In a traditional IRA, the same contribution amount goes in and grows tax-free, so you wind up with the same FV as the Roth, but the withdrawal is taxed.

This seems like a bad deal until you remember that you get to keep the taxes that you would've lost with the Roth. If you also invested the amount that you would've paid in taxes, and let that grow over time, it essentially makes up for the withdrawal taxes on the IRA itself, at least if the tax rate is the same. However, that investment with the saved taxes is outside of the IRA, so it is not tax-advantaged, so you actually wind up with less FV than if you'd just gone Roth to begin with.

So I managed to think through all of that, but for some reason, I never questioned the implicit assumption that my tax bracket in retirement would be the same as now (or higher). I guess I wanted to make sure that I "could" withdraw as much as I wanted in retirement, so I didn't see the harm in accepting that I'd have a high income in retirement.

Now that I'm properly thinking through my current income and expenses, it has become abundantly clear that this assumption is false. My savings rate is in excess of 50%, so I am spending nowhere near my current level of income, and my expenses are expected to drop even further once the mortgage is paid off. There is ZERO need for me to replace my current income, so I will be in a LOWER tax bracket in retirement -- and that's a good thing, because it makes FIRE that much easier to achieve.

So it seems like Roth has been the wrong way to go all along. I should've been using a traditional IRA and taking the tax break right now. Oh well.

I've gone and made myself a traditional IRA in Vanguard, and I'm swapping over to it. I may even inquire about recharacterizing this year's contributions. This just goes to show that always assuming a worst-case scenario can cost ya.

(I also have another reason why I'm interested in switching to traditional, and that has to do with the Roth Conversion Ladder, which I'm learning about right now. Maybe I'll write it about it later, after I've got it worked out in my head.)

Bon(d) Voyage!

October 1st, 2014 at 04:36 am

Out of laziness and expedience, I handle almost all of my money management passively. All bills that stay constant month-to-month are on auto-pay, and investments are either on payroll deduction or auto-drafted on a weekly basis. To avoid accidental overdrafts, I keep my checking balance very high, and my cashflows are generally positive. As a result of this setup, I can go for a fairly long time without looking at my bank accounts.

A side effect of this passive approach is that a lot of cash accumulates in my checking account when I'm not paying attention. Every once in a while, I'll pop in and transfer a few grand out into savings and/or bump up my investments, but those actions weren't aggressive enough to prevent my cash holdings from topping $75K in recent months.

I know that $75K is too much to hold in cash. Following the standard advice of keeping 6 to 12 months of expenses in liquid assets, I should only be holding around $15K (+/- $5K). After my car purchase in 2012, which was my biggest anticipated expense, there's been no need to hold additional cash on hand.

So if I'm committed to holding no more than $15K in cash, where should I put the remaining $60K? The lowest hanging fruit by far was to pay off my student loans, so I did that. Boom, that took care of $7K, and Sallie Mae is out of my hair for good. But that still leaves $50K or so that still needs a good home.

One obvious option is to sink it all into equities, and that is a reasonable suggestion, given my long timelines and high(ish) risk tolerance. But I'm hesitating on taking this course of action for a few reasons. The first is that I don't feel like I'm underexposed to stocks. In my (half-hearted) attempts to drain my checking balance, I've already increased my automatic investments to $400 per week, to the point where my cashflow is now pushed into the negative. (I should be fine after my year-end bonus/raise, though.) Combine that with my maxed out 401(k) and IRA contributions, and I'm sitting at $43,800 worth of stock purchases per year. That's half of my base (gross!) salary, so I can hardly be accused of not investing enough.

A slightly more tangible objection to the lump sum stock investment idea is that I am in the process of researching and planning what to do with all of my stock options. I'm looking into this because I've already vested into quite a large number of shares, but action is not necessarily imminent because I've still got a few more years to go in terms of vesting into the rest. However, if I'm interested in a buy-and-hold cash exercise, I will need a considerable amount of cash up front (tens of thousands, easily). I'm concerned that if I tie up all my money in equities right now, I may not be able to pull it out in the next few years if I wanted to do a cash exercise. But the time horizon is still long enough that it seems a shame to not invest at all.

So I've decided to compromise. I bought some bonds instead! Specifically, I got the Vanguard Intermediate-Term Investment-Grade Fund Admiral Sha..., which (coincidentally!) has a minimum balance of $50K. This fund holds, according to its description, "diversified exposure to medium- and high-quality investment-grade bonds with an average maturity of five to ten years" by investing in "corporate bonds, pooled consumer loans, and U.S. government bonds within that maturity range". That seems consistent with both my time scale and risk tolerance. I do understand how bond prices work in conjunction with today's insanely low interest rates, but bonds are designed to provide steady income and returns, and it's got to beat the return on my savings account.

In conclusion: I've successfully ditched my cash! I am not buying more stock, but I am still investing. I suspect I'm be done with direct bond purchases for the time being, and may even allocate any returns back towards equities, but at least I don't have $50K burning a hole in my pocket any more.

Bon(d) voyage!