I went to a stock options workshop at work. Now that the stock price has risen such that my vested options are worth a whopping $344K at fair market value (rising to $500K by year's end when more shares vest, assuming the price holds steady), I figured that it's finally time to learn how to deal with them.
I went into the workshop all happy and excited. I left decidedly less so, because I realized that I dun goofed pretty badly when it comes to tax planning.
My original plan was to buy out all of my ISOs with about $50K in cash in September, after the remaining shares vest, and hold them for long-term capital gains. I was also going to start selling off my NQs up to the Roth IRA AGI limit each year and move the money into more diversified investment vehicles.
Now that I've learned all about the AMT, I've realized that I can't do that.
I want to preface what's coming next by first saying that (my earlier marriage penalty post aside, which was more intended to be an analysis than actual griping) I almost NEVER complain about taxes. Furthermore, I HATE people -- especially rich people -- who complain about taxes. Yeah, I get that they're a pain, and it's not like I don't try to minimize/optimize my own tax bill (mostly because I try to minimize/optimize everything), but at the end of the day, taxes are the price you pay to live in a civilized society, as well as a "problem" that you only have if you've MADE MONEY. Making LESS money is still way better than making NO money.
But the phantom tax on ISO spreads? OMG, that's TOTAL BULLSHIT.
I know, I know, cry me a river -- but I am relatively certain that after I buy out my ISOs, I cannot afford the AMT that gets triggered on the $330K spread. I am FINE with paying taxes if I've actually made money, but I'd like to buy and hold in this case, which means that not only have I not made a dime, I've sunk in my own capital, and not even a nutjob like me has the kind of liquidity to afford the tax bill under the AMT. Not to mention the fact that triggering the AMT effectively negates all that is nice about ISOs relative to NQs.
I'm immensely frustrated right now, because I should've learned about all this way earlier. I should've been buying out my ISOs two years ago when the spread was much lower. I let the ball drop on this, and I'm kicking myself. As it stands, I'm gonna be spending the weekend plugging numbers into the AMT worksheet and seeing if there's any way to make this situation suck less.
I got all excited when I saw the stock price shoot up earlier this year. I thought that I could shave a few years off my FIRE date. I thought that if the market doesn't tank, maybe I could FIRE as early as 2017. Now I will probably have to throttle my ISO buyout to stay under the AMT threshold, and at the rate the stock (and my salary) is rising, I have no clue how long that's going to take.
I'm really trying to keep some perspective on all this. Yes, I got blindsided by the AMT with regards to exercising my ISOs, but even in the absolute worst-case scenario, in which I assume that half of my options are lost to taxes, my projections still have me reaching my FIRE goal of $1 million in three years, which is still two years ahead of how long it would take without any options at all.
I'll re-evaluate everything once I've worked out the AMT numbers. It is what it is and I'm still a lucky bastard no matter what. Once this is all sorted and I have a plan, I hope to not complain about taxes again for a long, long time.
Viewing the 'Planning' Category
I went to a stock options workshop at work. Now that the stock price has risen such that my vested options are worth a whopping $344K at fair market value (rising to $500K by year's end when more shares vest, assuming the price holds steady), I figured that it's finally time to learn how to deal with them.
I've been taking steps in recent months to get my health care finances in order. During open enrollment at the end of last year, I switched to a high-deductible, HSA-eligible insurance plan, which dropped my annual premiums from $1690 down to $1144. Add in the $1000 HSA match that my employer kicks in, and I'm effectively paying only $144 per year for my health insurance. Even accounting for the new, higher $1500 deductible, I still come out on top.
And the out-of-pocket max of $3000 is definitely affordable in case I blow through the deductible due to a catastrophic circumstance.
Plus, I get a shiny new tax-advantaged investment vehicle to play with, which can be used to pay Medicare premiums or even function as a 401(k) when the time comes. Awesome. So I'm all set for the near-term.
Health insurance coverage and costs in early retirement might be more tricky -- or so I thought. One possibility is to go on the SO's employer plan -- that is, if he decides to continue working, and we actually get married. Currently, that would cost $1344 per year after adjusting for the $500 HSA match. Okay, so not nearly as good as my current employer plan, but is certainly tolerable.
But what if going on his plan is not an option? I certainly don't want him to keep working a job just for the health insurance if he doesn't want to!
We live in CT, so I went on our state health exchange to do research. I put in my expected FIRE income (which I guestimated at $10,000 if solo)... and kept getting bumped to the login page because, "Based on the income information you entered your household may be eligible for HUSKY D/Low Income Medicaid."
Erm... huh? I was so, so confused. I was expecting to look at subsidized private plans, not Medicaid. I mean, we may be freaks of nature, but we're certainly not poor, not if we're FIRE'd. Surely this can't be right?
But, as it turns out, with expanded CT Medicaid under the ACA, the annual income limit for a single-person household is $16,243, and for a two-person household, it's $21,984. There are no asset tests for eligibility. No matter how you slice it, whether solo or married, we are going to come in under these limits post-FIRE, especially since these figures are for MAGI (modified adjusted gross income), and thus easy to manipulate using deductions and Roth distributions.
I looked further into CT's implementation of the ACA, and Medicaid in particular. Apparently, ACA subsidies operate along a linear income scale. Above 400% FPL, there are no subsidies. Between 250% and 400% of FPL, one tier of subsidy kicks in (tax credits). Between 138% and 250% of FPL, a second tier of subsidy kicks in (cost-sharing).
Below 138% FPL, you are supposedly considered too poor to afford health insurance, and the subsidy is essentially 100%. And that means getting covered by Medicaid, where the government pays for all your health care costs.
There is no way to change what tier of subsidy you qualify for because it is predetermined by income. Furthermore, the subsidy is all-or-nothing -- you either take what's offered, or you turn down all subsidies. In my case, the choice is to either go on Medicaid, or pay full price for a private health plan. I don't have the option of getting a partially subsidized private plan.
And the cheapest private plan on the state exchange costs $2400 per year for a $6000 deductible, and goes quickly downhill from there. Yuck. And ouch?
I am honestly feeling seriously conflicted right now. On the one hand... it looks like health insurance will literally be completely free in FIRE (I actually spent quite a while trying to google "Medicaid premiums" before I finally realized how the program worked and that premiums don't exist). This is amazing and totally unexpected, since I've just been assuming that health insurance was going to be a major unknown expense in my projections. CT Medicaid even covers dental!
On the other hand... I feel so guilty (not to mention shocked) about potentially going on Medicaid. It is just strange to be mooching off a program intended for the socioeconomically disadvantaged. I mean, I am both willing and capable of paying a reasonable amount for health insurance. It's just that it genuinely looks like the program is working exactly as intended, and full price of a private plan is... kind of outrageous. How do you expect a rational decision-maker to turn down free given the alternative (or lack thereof)?
What does make me feel slightly better is the knowledge that on Medicaid, I would only cost the government money if I incur health care costs -- compared with an otherwise constant stream of private insurance premium subsidies. So the government might actually come out ahead, considering that I never go to the doctor (last time I went was in... 2007?) -- at least while I'm still young and healthy.
I think I'd budget $3K per year for health insurance anyway, just in case, but Medicaid being the preferred route is going to take some getting used to.
I have made the executive decision to no longer use a Target Retirement fund to manage my retirement asset allocation. That's right, the training wheels are finally coming off. It's time to learn to balance my investments on my own!
I have decided to make this change for a few reasons. The first is that the Vanguard Target Retirement funds charge fees based on the investor share class, and due to my portfolio size, I will save hundreds of dollars per year by moving over to the equivalent admiral share class. That's a good enough reason as any to make the switch, even if I wanted to keep the Target Retirement fund's pre-determined asset allocation. For a few hundred extra bucks per year, I am willing to deal with the so-called "inconvenience" of having to manually rebalance my investments.
Another reason to leave the Target Retirement fund is that I want the flexibility to change my asset allocation. Right now, the 2050 fund allocates 10% to bonds. I do hold bonds, but I'd rather hold them in my taxable accounts, and save the tax-advantaged space for equities with higher growth potential.
As an aside, I've heard the argument for holding less tax-efficient funds such as bonds and dividend-yielding stocks in the tax-advantaged space. My gut feeling, however, is that protecting equity growth and capital gains (especially in the Roth space, which not only grows but is also distributed tax-free) beats out protecting bond interest and dividends (which are designed to be lower), although I am totally willing to be convinced otherwise using math. Right now, though, I'm also using bond holdings specifically as a short- and intermediate-term savings vehicle, so I want them to be easily accessible in a non-retirement account.
I also realized that I am likely going to retire sooner than 2050 and may need to deviate from their glide path anyway, so I might as well cut the cord now.
As for how I'm handling the asset allocation... I have decided to hold a 70/30 split of Vanguard's Total Stock Market Index Fund and their Total International Stock Market Index Fund. This mirrors the Target Retirement 2050's exact ratio of these same two funds (at 63% and 27%) but without the bonds. In reality, this is slightly complicated by the fact that my active 401(k) is held in a separate account with different fund choices, but I'll get as close to this breakdown as I can. The larger goal is to force myself to start actively managing and rebalancing my asset allocation.
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.)
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.
I realize that pensions are rare like unicorns these days, but I actually have a small one under a previous employer. It's not worth much because I only worked there for three and a half years before being laid off, but the pension is supposed to pay out $261.88 per month starting in 2049 (when I turn 65).
They are now offering what I presume is a buyout. I can either:
1. Roll over a lump sum to an IRA or another employer's qualified plan ($6352.78).
2. Take a lump sum cash distribution ($5082.22).
3. Start monthly payments now ($24.71).
4. Retain the original pension benefit.
Should I take it? To figure out if this is a good deal, I calculated the present value of this future annuity.
Step one: Calculate the PV of the annuity at age 65. I'm arbitrarily using an interest rate of 6%, and a life expectancy of 100 (so 35 years).
PV(0.06/12,12*35,261.88) = $45,928.57
Step two: Discount that to today's dollars using the same rate.
PV(0.06,2049-2014,0,45928.57) = $5975.55
So it looks like the lump sum payment is a reasonable offer. I'm also assuming an extremely long life expectancy, which would bias the value upward. I'm not sure what rate I should use, but 6% is a figure I can hope to beat by investing on my own. I've tried plugging in different interest rates, but that causes the PV to fluctuate wildly.
I am really tempted to take it. If I roll it into an IRA now, I know I'll have control of and access to it before age 65, which is particularly helpful if I'm planning ER. I also avoid the risk of the company underfunding, raiding, or otherwise reneging on their obligation (I'm looking at you, Hostess) anytime in the next 35 years. I have so far been completely ignoring my pension in retirement planning, so this would allow me to take it into account.
I have until month's end to decide. Hmm.
How much does one need to retire securely?
I've been trying to answer this age-old question ever since I learned how to spreadsheet. In fact, my Google Drive is littered with the desiccated remains of various retirement projection spreadsheets that I've attempted over the years, but could never figure out how to finish. Usually, it ends with me throwing up my hands and going, "It's a pointless crapshoot to try to guess 40 years into the future, but it's impossible to overshoot it at this juncture, so just maximize the sh*t out this, and you can figure out the details later."
That has been a pretty good approach up to now, but if I really want to FIRE it up in the next decade or so, I need to set actual goals and criteria for success.
I know that the standard guideline for having enough retirement savings is the 4% rule. So if your expenses total no more than 4% of your nest egg, then your nest egg can sustain you indefinitely, assuming a 7% rate of return with inflation at 3%.
And that's where I start getting twitchy. Can you really count on 7% returns in perpetuity? I know that's (more or less) the historical long-term stock market average, but there's no way to know for sure what future returns will look like. Plus, I would need to be sustained for many decades longer than a normal retiree, which makes projections even more difficult to make. I don't want to run out of money, especially given the fact that I can easily continue working and I don't have to take early retirement at all in the first place.
What I'm getting at is that I am very risk-averse and financially conservative. And I don't mean risk-averse in the sense of investing; on the contrary, I'm fairly risk-tolerant there because I know my timelines are flexible. I'm risk-averse in the sense that my mind always jumps to worst-case scenarios. I don't like being on the edge. My natural tendency is to save and save and save, because I don't know what could happen tomorrow and I might need that cushion. I could lose my job. (Actually, been there, done that. :P) Or come down with cancer. A tree (or a meteor) could fall on the house. The SO's Beetle could get creamed by a Mack truck. The possibilities for catastrophe are endless.
As a result of this rampant paranoia, I need to build in a large safety margin. I need to know that I can survive anything, and I'm not decreasing my financial resilience by giving up a fairly nice income. But I also want to be somewhat realistic and not let irrational fears and rampant goal inflation make FIRE unattainable, even though the honest truth is that I'd be terrified.
But I'm gonna force myself to come up with something just to get the ball rolling.
My current thought process is that I have two criteria that must be fulfilled before I would feel comfortable declaring FIRE -- a paid-off house, and two million in assets.
The paid-off house is pretty straightforward. As detailed in my recent spending review, the mortgage is by far our largest fixed expense, and knocking that out alone would drop our annual spending from $40K down to $25K, with another $5K being shaved off when I stop renting in and driving to/from NY. Furthermore, the mortgage is something that needs to be done sooner or later. We're already paying extra towards the mortgage every month, and we're on track to paying it off in about ten years.
As for the two million in assets... We already have $1M, which, according to a 4% withdrawal rate, could already (in theory, with proper allocations, etc.) support our current $40K in annual expenses. But as I've already said, I don't feel even remotely safe enough with a 4% SWR. With a two million dollar portfolio and ~$20K in expenses, that would be a 1% SWR, which I think is conservative enough. And even if something horrible were to happen to the SO, I should still be able to handle a 2% SWR on my half of the two million. And there's even wiggle room to increase spending if it really came to that.
So I think the preliminary goals for FIRE should be no mortgage and $2M. I would not be too surprised if I chicken out and raise/revise it later, but this seems reasonable for the time being. I'm already thinking that home equity and inaccessible retirement vehicles shouldn't be included in the $2M, but we'll cross that bridge when we come to it.
And I've also got some time before we reach the goal to work on emotional readiness and all that jazz.
I recently compiled a somewhat exhaustive record our household's monthly and annualized expenditures, I thought I'd share it on the blog.
Housing - $20,739
The mortgage, at $1377/mo or $16,519/yr, is the biggest housing expense, and it includes $2600 property tax and $1031 in homeowner's insurance. I work out-of-state, two hours away from home, so I also rent a room near work where I stay during the work week, which comes out to $310/mo or $3720/yr. I also budget in $500 for various DIY projects such as deck staining and weed whackers.
This is by far the largest part of our annual expenditures, and I’ll talk more about it at the end.
Utilities - $1760
Electricity usage per month is around 320 kWh, which comes out to $60/mo. Water usage is typically 100 cubic feet, or $20/mo. Internet (cable modem) is $30/mo. We don't have (nor do we want) cable TV. Trash and recycling pickup is $20/mo. Cellphones are currently free, because the SO gets reimbursed by his employer and I'm mooching off my parents' plan. Heating oil is spiky and my records aren't great because the SO orders the oil, but I'm guestimating it's about $200/yr.
I'm using long-term (two year) averages for the utility figures, so I think they're fairly accurate. Heating oil is the only exception, because that is highly dependent on the price of oil and the winter weather, but we already keep the thermostat in the low 50s so there’s not much more that can be done there anyway. The only area we might be able to reduce is trash pickup, because we don't generate enough trash to need weekly pickup, but my address is not allowed to use the dump, so I'm kind of stuck hiring a service. If there's no cost to cancelling and resubscribing, I might just sign up for a month of trash pickup a few times a year, but I'd have to look into that.
Automotive - $5413
Currently, we have two cars. Mine is 2 years old, the SO's is 14 years old, and both are paid off. Insurance is costing $1233/yr for comprehensive collision for my car, and $630/yr on liability for his. My maintenance costs are $120 for 2 oil changes per year, but the costs on the 14-year-old car are much higher; maybe $1200 or so? I haven’t really been tracking his car repair expenses, but I'm gonna try to start doing that now. As for gas, mine is around $1300. I have no idea what the SO spends on gas, because he rides in a carpool most of the time and he doesn't track his fill-ups as maniacally as I do, but since he does all the local driving to the grocery stores, I’m guestimating it at $600/yr.
In some ways, cars are a discretionary cost, but we're in a small town, and a car is our primary means of transportation. I have done the research on the public transport options in the area, and it is wildly inconvenient to go to the grocery store or the dentist's office by bus. We also travel regularly to see family out-of-state, and while it's possible to make the trip on public transportation, it was time-consuming and not fun at all. There is also the issue of potential emergencies, like rushing the cat to the vet. At the end of the day, we think it is worth it to spend the money for the convenience of having a car.
With that said, I would love to drop down to a single car in the future. A used but not-too-crappy car would keep both amortized costs and insurance low. Aside from the work commute and grocery runs, we don't drive much anyway, so if I can ditch my commute, I don't think we'd still need two cars. That would save a few grand a year.
Medical - $4682
The SO and myself both get medical and dental insurance through our work. Our health premiums are $1690/yr (me) and $2513/yr (SO), and our dental is $156/yr, and $224/yr. I also threw his $100 annual deductible into the budget, but I haven't been to a doctor in 7 yr (I know! I’m terrible! I better not have cancer). It's kind of sad, how different our health plans are, because even if the SO switched to a high-deductible HSA-eligible plan, his annual premium would still be $1844, which is higher than my normal plan, but it's actually a fair price for insurance.
I half-joke that we should get married just so I can put him on my health plan and save almost $1000 a year. Even taking into account the amount we'd spend on a wedding, we'd break even after a year or two, heh.
Consumables - $5100
This category encompasses all the regular, discretionary but non-emergency spending, including food and entertainment. The figure that drove the last financial advisor crazy was the $160/mo ($1920/yr) I put down for groceries. Yes, that's what we spend, and no, we don't live on ramen (unless it’s homemade, delicious ginger tempeh soup with ramen and bok choy). I don't really dine out either, because unless I'm in a college town or a specialized restaurant, the vegetarian options tend to be either nonexistent or wholly uninspired. The SO does spend $40/wk going out to lunch, but that is how he pays for his carpool, so it should probably count towards the transportation budget. Between these two items, that’s $4000/yr.
Aside from food, the rest of the discretionary budget covers entertainment (generally either Netflix or various video games), pets, and odds 'n ends such as gifts and other miscellaneous purchases. The most costly indulgence is the Broadway tickets we get once a year, but aside from that one night out, I prefer staycations to vacations. All of those total no more than $1000/yr.
Total - $37,695
One-Time Large Expenditures - ???
We do encounter occasional, isolated, large expenditures which I’m not including in the regular budget, but we do have to take into account. Last year, I traveled to California for a wedding, and we had veterinary emergency, all of which cost more than $3000. This year, housing maintenance is shaping up to be the big unanticipated expense.
So housing takes up the bulk of annual expenditures. Paying off the mortgage alone would drop expenses down to $25K. If I'm no longer renting and driving out-of-state, that would chop off another $5K, and would drop annual expenditures down to $20K. Most of the other categories, such as utilities and medical/dental premiums, are fairly inelastic. We definitely need both cars right now, but maybe we won't in the future. There isn't much fat to trim in consumables, either.
At our current expense level, I would have to bring in $40K / 2 = $20K to maintain our lifestyle. After the mortgage is paid off, I'd only have to bring in $10K to $13K. Obviously this may change, but I am wracking my brain for what I might want to spend more on, and I'm honestly drawing a blank. I’ve never been big on consumerism, and the only areas where I enjoy spending money is food/cooking and pets. And the pets kind of prevent me from being able to have nice things anyway, because it's all just gonna get shredded by sharp (but adorable!) claws and teeth.
What's way more important to me than planning for possibly higher future spending is making sure that I can be fully independent without the SO -- because he might get run over by a truck tomorrow (yes, that is how my mind operates). That means being able to handle the doubling of all expenditures. This is absolutely essential to my peace of mind, and will likely result in a ton of overcompensation in retirement planning/projections, but I'm okay with that. At the end of the day, I'm the only one that I can truly count on.
My workplace will occasionally bring in financial advisors to give seminars and one-on-one consultations. I've been to two of these sessions, meeting with three advisors total, the most recent of which was just this past week, and have come away frustrated at the lack of productivity every time.
I understand that it's a free service, the scope of their help is limited by time, and they're likely not expecting someone like me, but I think it goes beyond that.
The main crux of the issue is that we simply don't see eye-to-eye philosophically.
For this most recent meeting, I tried to go prepared. In the past, showing my various account balances just resulted in sputters of disbelief and a request to repeat my age, so I brought my complete Social Security earnings history. When I say that my spending is such that a withdrawal rate of $20K is sufficient to maintain my lifestyle, I get asked what kind of car I drive and what model phone I have, so I actually tallied up the entirety of my annual spending to demonstrate that I am not, in fact, grossly underestimating my expenses.
But it didn't work. I still got asked to repeat my age. I still got told soothingly that "circumstances change", that expenses rise over time, and that once I get used to a higher standard of living, it's difficult to go back. The advisor took one look at the grocery line on my budget and told me, pityingly, "Well, you don't look like you eat much".
That last comment just made me laugh, because it shows how deceiving appearances can be. Now, I am a tiny, tiny person, so I guess it might seem like I "don't eat much", but that's not the case at all. I actually love eating and cooking, and I even briefly attended culinary school and worked as a prep cook at a restaurant before my pharmaceutical career took off. Our pantry is stocked to the brim, we make all our food from scratch, and we eat like kings -- all on a fraction of the cost of average households.
But what's more, that comment also betrayed the tacit assumptions made by the advisor. I am tiny because I don't eat, and she feels sorry for me because she assumed that I'm purposefully depriving myself, and that I will let it go at some point. It's fairly galling to me, mostly because it really reminds me of the condescending comments I've gotten my entire life when I tell people that I don't want kids, and they're like, "Oh, you may say that NOW, but just wait and see..."
Um, no. I know what I want, it's not the same as what you want, please don't project yourself onto me while ignoring what I actually say, because it causes you to come to incorrect conclusions about me, which makes me quite grumpy.
The truth of the matter is, at our current level of spending, we have almost everything we could possibly want, and I frankly don't know what else to spend money on. I don't want a bigger house; I actually prefer it small and cozy. I don't want a fancy car -- I barely even want a car at all, although I accept that I need one at the present time. I don't want a smartphone, I'm perfectly fine with my six year old phone, and I don't even have texting or a data plan.
And as for food... When I can make gorgeous artisan bread for less than a dollar per loaf, why would I ever want to spend more? And even if I go hog-wild and stop subbing walnuts for pine nuts in my pesto recipe because pine nuts are too expensive, I still don't see my grocery bill increasing by that much, because at the end of the day, any raw ingredients, even pine nuts, simply don't add up to more than a few hundred dollars a year.
Perhaps the hardest fact for these financial advisors to wrap their heads around is that I really and truly do not find consumerism to be all that appealing. For me, frugality is not a form of masochistic self-deprivation; I genuinely find it much more satisfying to live a simple and efficient lifestyle. As a result of these dispositional differences, all of their advice and experience is predicated on a set of assumptions that do not apply to me.
I think this is a big part of why haven't felt comfortable and in sync with these financial advisors. (Hell, I think this is a big part of why I feel out of place in this world. :P)
There was a bit of good news that came out of this session, though. After I finally got her to stop fighting me on the validity of my numbers, she conceded that she does think I can early retire in ten years. Actually, she doesn't think I need more than five years, especially if I can line up a side hustle. Obviously, I won't just take her word for it, but at least this tells me that I'm not on a wild goose chase. This is a realistic and achievable goal.
I just have to work out all the details.
Here's an overview and analysis of all my financial accounts as of Wednesday, 18 June 2014 in excruciating detail.
CASH - $64,345
Yes, I know. I cringe when I look at this, because I know this is an absurd amount to hold in cash, but right now, I have $14,581 in my personal checking account, $7,873 in a joint checking account (the SO contributes his share of the mortgage here), $1,268 in a joint savings account, and $40,622 in my personal savings.
This is a somewhat hilarious "problem" to have, but I cannot get my cash levels down because I am hardwired to keep inflows greater than outflows, and it just keeps accumulating. I've been trying to move some of this cash into investments, but I wanted to dollar cost average rather than throw in a large lump sum (although I tried the latter too when I dumped $11K into an international stock fund last November). So I'm drawing down my checking account with weekly $400 automatic investments, but even with all of my other regular expenses (mortgage, Roth IRA, student loan and credit card payments) coming out of the same account, the balance isn't coming down. Actually, it's still going up. Sigh.
INVESTMENTS - $430,442
Here lie the bulk of my assets. My investments are primarily in retirement vehicles, but now that retirement is maxed, I'm redirecting excess cash to non-retirement brokerage accounts.
- 401(k)/403(b). My currently active 401(k) is at $82,419, and the 403(b) from my first job is at $13,847. The 403(b) is invested in the Vanguard Target Retirement 2050 Fund. The 401(k) is split 86.3% in Vanguard Institutional Index Fund Institutional Shares and 13.7% in company stock. I still need one more year to fully vest in the company stock match.
- Rollover IRA. The 401(k) from my second job is in a rollover IRA worth $42,250. I also have $8121 in stock match that's in a rollover IRA brokerage account. The non-stock portion is invested in Vanguard Target Retirement 2050.
- Roth IRA. The balance on my Roth IRA is $104,410. This includes a bit of rolled over Roth 401(k) from job #2. This is also invested in Vanguard Target Retirement 2050 (I'm apparently not very creative, okay??).
- Brokerage. I've got $47,766 in Vanguard 500 Index Fund Admiral Shares, $14,802 in Vanguard Total International Stock Index Fund Admiral Shares, and $14,265 in Vanguard Prime Money Market Fund, for a grand total of $76,834 in non-retirement investments. And yes, I know that Money Market is basically more cash. Ooops.
- Stock options. I have $102,296 in vested and exercisable stock options with my current company. I really don't know what to do with these. And here's the doozy -- I have an additional $142,396 in UNVESTED shares which is not included in this total. I feel like this portion of my net worth is actually cheating.
STUDENT LOANS - ($7274)
I still owe a little over $7K on my 3.5% Stafford loan. It started out at $17,125 in 2006, and I've got about seven years left on it. I've been known to chuck an extra hundred dollars at it every so often, but I'm not really in a hurry to pay it off.
MORTGAGE/HOUSE - ($1,516)
This one is a bit painful and not a success story. I paid $205K for my house in 2008, but it's current value on Zillow is only $136,621. I still owe $138,137 on the mortgage, which means that not only has it lost one-third of its value, I'm actually slightly underwater on the loan -- hence the negative sign. The one piece of good news was that I was able to refinance it through HARP last September to from a 30-year fixed rate of 5.875% down to a 15-year fixed rate of 3.875%.
My only other property is my car. It's a 2012 Civic that I bought last year to replace my dead 1999 Toyota Camry that I inherited from my dad. It was a bit more than I'd wanted, but I was on a short timeline because I needed a car to commute, and I was tired of having Roadside Assistance on speed dial. It's not financed so I own it outright, but I don't like counting it among the assets column because it depreciates, but Mint includes it under assets, so I guess it counts.
So that's everything. Here's what's on the to-do list for the moment.
Action item #1 - Fix the excess cash situation. Holy moly, this is clearly one area where I fail, and when I fail, I fail hard.
Action item #2 - Should I move the stock portion of the rollover IRA out? It's irritating to me for some reason. I guess I just don't like holding a single stock.
Action item #3 - Oy, how does one deal with all those stock options? They make the "you must diversify!" part of my brain hurt, but they're worth SO MUCH and WHAT IF IT KEEPS GOING UP. Should I buy them out and hold them for capital gains? I know nothing about stock options.
Action item #4 - The one constructive comment that I received from a consultation with two financial advisors two years ago was that my diversification is awful. Well, I had (and still have) no idea what I'm doing, so they're probably right. I really ought to figure out proper diversification and asset allocation.
Action item #5 - Should we accelerate mortgage payoff? I'm vaguely embarrassed that I'm underwater, but we do like the house and have no plans to sell. A paid-off house is still a paid-off house, right?
It's been a while, but I am back, and I am rebooting O Capitalism!
When I started this blog back in 2006, I had just graduated from college, and was starting to work through the ins and outs of being on my own. After figuring out the basics of frugal living and financial management (including the magic of compounding interest), and especially after landing a terrific new job, I sort of went on autopilot for a while, and stopped thinking about and working at personal finance.
However, a lot has happened over the past six years, and here's the whirlwind cliff notes version. After changing jobs, I bought a house (2008), my SO moved in (2009), we got some cats (2009, 2010), I lost my job (2011), I earned a Master's degree (2011), I found a new job out of state (2011), I paid off one of my student loans (2011), I replaced the 14-year-old car I inherited from my parents (2013), I refinanced my mortgage (2013), and that brings me to now.
This year, 2014, I am turning 30. It's hard to believe that time has flown so fast, but I am officially bidding good-bye to my 20s and young adulthood. I feel like I need to reassess where I've been, where I'm going, and plot a fresh new course for the next decade. After all, this is a long game.
It's the new year, and there's one thing I really, really want to change about myself.
I *need* to start taking better care of my teeth. Specifically, I need to start brushing regularly before I go to bed.
The problem is that I never decide to go to bed. I always just allow myself to conk out whenever I feel tired enough. And I never know when that will be.
As a student, I fell asleep all the time while studying in bed (I don't believe in desks; plus, my chair sucks and I like my bed because it is warm). Now, I find that I'm falling asleep while reading in bed.
I know a possible solution is to brush my teeth *before* I start reading in bed, but I like to snack while reading. Also, I read all the time, and I never know when I'll conk out. Sometimes, I stay awake for hours. Other times, I'm out in ten minutes.
And, of course, once I'm already nodding off, I can almost never summon the willpower to wake myself up enough to go and brush my teeth.
I am terrified of seeing a dentist, even though I know I really need to. I regularly have nightmares about my teeth falling out. I can't sleep well at night because of the guilt, although it's still not enough to get me to wake myself up. I can feel my teeth rotting (I really hope that's all in my head).
In order to motivate myself, here's my plan. I'm going to pay myself a dollar for every time I brush my teeth. It'll be my dentist avoidance tax.
God, I hope this works.
Happy New Year, everyone!
In parts I and II, I talked about my accounts and usage.
Now, we get to cashflow.
I get paid via direct deposit biweekly. That meams eight months per year with two checks, and four months with three checks.
But for the expenses that come out of checking--namely, rent, student loan repayment, utilities, and credit card bill (for groceries, transportation, and miscellany), I'm pretty sure I can subsist off of only one paycheck per month.
So what I think I'm going to do is keep the first paycheck of every month in checking, and transfer the others out to income savings immediately upon receipt.
My income savings account gets debited weekly for Roth IRA deposits to Vanguard. Right now, I'm putting in $170/wk until next March (to max out this year's contribution and get on track for next year), but afterwards, this drops to $76.92/wk.
I've also set up auto-transfers to my various subaccounts.
My car fund receives $200/mo. This will pay for my lessons, license, and registration. After a year, I hope to have enough to buy a car (~$2000). Now I may not actually get a car summer, but I want to be *able* to. Afterwards, this fund will pay for insurance, gas, maintenance, and the like.
My emergency fund also gets $200/mo. With a goal of $5000 for (6 months of expenses, sans car), it'll take me two years to build. I think this fund will eventually get moved to a higher yield money market account.
My house fund currently gets $50/mo. I know this won't actually get me anywhere, but I want to start saving regularly for this. Once my monthly expenses stabilize, I'll adjust this amount. This money will probably go into either high yield CDs, or mutual funds (probably the latter).
I haven't set this one up yet, but I think my medical fund will also get $50/mo. I know that my birth control pills will cost $130/yr.
I think I'll put off the "grad school application fee fund" for a year.
I guess what's left over will go towards discretionary spending (a bike comes to mind), although knowing me, I'll probably throw everything that's left at my house fund. I'd like to have $40K for a down payment by 2015. More on this later.
The SO finally called the bus company to inquire about commuter discounts for the bus between New Haven and Middletown.
(52 weeks/year) * (5 weekdays/week) / (12 months/year)
= 21.67 weekdays/month
=~ 22 weekdays/month
At the standard fare of $3.60 per way, that's $158.40/mo
There is a 10-ride discount fare of $32, or $3.20 per way, or $140.80 per month.
There is also a monthly pass for $122.
This decreases the estimated monthly car maintenance cost to $200 to $250 per month.
I did Part I a long while ago. Eek. Well, time the catch up again.
Last time, I talked about what accounts I have. Now, I'll talk about how I'm using them, and what changes I might be making.
Bank of America
Bank of America checking is by far the most convenient checking account available. It has the closest (and most ubiquitous) ATMs, which is necessary for my periodic cash withdrawals and check deposits. All of my co-workers also have BoA, so it also makes money transfers easier.
For these reasons, I think I'm going to stick with BoA checking.
However, I'm going to downgrade this account from Regular to MyAccess. To remain free, Regular Checking requires a minimum balance of $750 in checking, or $1500 in savings. Both amounts are rather too large for my liking. $750 is just too random a figure for me to remember to stick to, and $1500 is way too much to hold in such a low-interest savings account.
MyAccess, on the other hand, is free with direct deposit, and has no minimum balance requirement. Perfect. So I've requested that my direct deposit be switched from ING to BoA checking, and once it goes through, I'll downgrade.
I wonder if I can still get the $50 sign-up bonus, though. Will have to keep that in mind.
With my checking free, I can finally ditch this savings account. No more $1500 earning 0.5% interest and me losing value each year due to inflation. Everything will be going over to ING.
Power Rewards Visa credit card
I'll keep this card around for the credit history and insanely high credit limit, but I've been lusting after a decent CashBack card for a while. I just don't know if I route enough money through my CC to make any of the available offerings worthwhile.
ING is fine and dandy.
And I've been having fun with their subaccounts. Right now, I've set up five.
First and foremost is my "income" subaccount. Money from my current job's salary goes here. The reason why I'm keeping this separate is to make sure that I can live off of my income alone. No living above my means. If I'm going over, I want to see myself actively borrowing from my other subaccounts.
I also have a "seed" subaccount. All of my college work-study wages go here, as well as four years worth of unspent allowance money. My father is the joint holder of my ING account, so he'll also occasionally toss money in. I'm trying to get him to stop doing that (yes, I did say "stop"; I'm an odd one).
Anyway, I have around $15K in this subaccount. This money is eventually earmarked for investments (to grow into a house down payment?), but for now, I'm keeping it around as a backup emergency fund while I feed my actual emergency fund from my current income.
I also have subaccounts for three savings goals: emergency (aka unemployment) fund, car fund, and house fund. I might also start a medical fund for prescription medications, co-pays, and deductibles. And one for grad school application fees?? What about attorney fees? Should I be getting a will/living trust set up, or sign one of those official "don't keep me alive if I'm a vegetable and for goodness sakes please donate my organs and let first year medical students dissect me in anatomy class" forms?
I'm also quite tempted to open an EmigrantDirect account. The APY difference is no longer small change, and the credit card might also be worth a look. Maybe I'll switch my seed account over?
I guess Vanguard is now the home of my investments. I have over $6500 of Roth IRA principal invested in their Target Retirement 2050 Fund, and my 403(b) starts going in this Friday into the same fund. Which probably means I should switch my Roth into a different fund.
I'll talk about my investment thoughts in a separate post, though. Still not quite ready for this yet.
I finally went ahead and transferred $2,393.61 from my Bank of America savings account to my checking account. I left the minimum $1500 in savings to keep my checking free.
And from there, I transferred $1,393.61 to my ING account.
I held $1000 back because my co-workers were registering for a course that our PI was supposed to pay for, but they couldn't find him in time. So who's Ms. MoneyBags in case they had to throw down a check anyway?
Yours truly, apparently.
That is just wrong on so many different levels.
Thank goodness I didn't actually have to loan them the money. Actually, I would have been loaning my boss money. How weird is that? And it's not a trivial amount, too.
Anyway, after work, I attended an International Student Welcome Dinner with two labmates. I would be getting a free meal, and all I had to do was...pretend to be an international student. It was amusing and rather stressful, because although I knew I looked the part, I also knew that if I spoke one lick of English, my perfect American accent would give me away instantaneously.
So I did a lot of smiling, nodding, enthusiastic gesticulating, and fakely-accented single syllabic responses. Anything to convince people that I wanted to communicate, I was trying to, but I couldn't speak enough English to carry on a full conversation.
Yeah, it was pretty hilarious.
The food was good, though, and totally worth it--eggplant parmesian, salad, and pizza. And I got to take home a free box of donuts because they had too much left over. Score!
Then, I went to B&N to read. I finished half of Rich Dad Poor Dad. Fascinating book, I'll need more time to absorb it.
On the way home, I passed by a help wanted sign. Didn't have the guts to go in and ask about it, though. Why am I such a wuss?? I guess I just hate confronting people (this is why I retreat to the internet). I just freeze up and end up talking myself out of it.
Maybe next weekend, when the SO visits, I'll have him accompany me as I go door-to-door. That might, like, actually force me to go inside and ask.
I'm also thinking of getting certified as an EMT, and then doing that as my part-time nights and weekends job. All this, because I'm afraid to walk into a store and ask about their help wanted sign.
Self-confidence? What self-confidence?
Recently, I've had my first major spat with my SO of nearly two years.
We've lived in cities 30 miles apart since mid-June. While this probably seems like No Big Deal, neither of us has a car (I don't even have my license and he has "issues" with cars), the public transportation sucks, and as a result, our relationship has essentially become long-distance.
I wanted to fix this by buying a car and moving in with him (since he's neither capable nor willing to move in with me). Initial estimates placed the cost at $5K for the car and at least $400/mo maintenance; after more research, I was able to get the price down to $2.5K for the car and less than $300/mo maintenance--by only driving car to a bus that would take me to/from work every day.
The snafu came when it became clear that he expected me to 1) pay for the car itself, 2) pay for the monthly car maintenance, and 3) split his rent and utilities with him 50/50. This would put me over my current monthly expenditure by $200, and does not include the tripling of my commute time.
I was looking at buying a car in an attempt to bridge our long-distance relationship for the sake of both of us. And he wanted everything to come out of my pocket (because he "didn't want me to do anything that I would not have done without him"), and then enjoy the 50% rent and utilities reduction that comes with having a roommate.
I never explicitly asked him to contribute, but I was greatly peeved that it didn't even cross his mind to, you know, offer *something*. After all, I'm on a shoestring budget, and he makes $20K/year more than me. Why should I be making all the sacrifices while he does not lift a finger?
Finally, I suggested that maybe we should roll the car maintenance cost into the total household expense, and split *that* 50/50. That would only put me $50 above my current monthly expenditure, and still save *him* over $600/mo. And I'll still save and pay for the car myself, and deal with the commute.
Apparently, suggesting that we "split household costs" hit a major nerve, and he completely flipped out. It was unacceptable, too much commitment, why did I have to do this when he was perfectly happy with the long-distance arrangement. When I pointed out that a relationship should be a partnership/two-way street, he replied that he doesn't see anyone except himself in his future.
I'm sorry, but WTF? I couldn't take it anymore. I broke it off. And it wasn't even really about the money. How the hell was I supposed to react after being told that splitting household costs was unacceptable because he didn't see me as part of his life? Smile, nod, and go along with it? I wasn't looking for a free ride or an engagement ring, just... MORE THAN WHAT HE WAS GIVING, that was for sure!
And then a few days later, he gets his act together, and totally regrets what he said before.
It took me a while to get over what happened, but we are trying to work things out again, and this time, his offer was very different.
1. He'll float me an interest-free loan for the entire cost of the car when/if I buy it next summer. This removes the car fund from my budget, and takes a lot of pressure off of me for the upcoming year.
2. I will be repaying him for the car in lieu of paying rent until the car is completely paid off. Yes, he's giving me free rent up to the cost of the car, in exchange for my buying it and putting us back together.
3. My monthly expenses will NOT increase. Since I'm paying just shy of $600/mo for rent and utilities now, that's the maximum I have to contribute. This eliminates any financial risks I might be taking by moving in with him.
4. He doesn't even care if his own monthly costs do not decrease. He's not interested in using me to save money. I think he's even willing to pay extra to have me around.
5. He wants us to put down in writing the explicit terms of our cohabitation. It will guarantee that even if our relationship goes south, I won't be hit with any extra costs until I can move out.
I am so stunned by this 180 degree turnaround. It's not like I'll ever hold him to #4, since it essentially implies that I can get away with just paying for the increase in utilities that I'll be invariably causing, plus the car purchase and maintenance.
I haven't decided what I'll do yet, but I'm bouncing around some ideas. I might accept free rent for half of the price of the car. I might also go with the "pay equal shares" approach, where we contribute equal percentages of our salary towards joint household expenses. That will end with me paying 40% of the bills, and him paying 60%. That comes out to be around $500/mo for me, and $760 for him. I save $100/mo, and he saves $200.
I'll post a more explicit budget when it's not 4am.
I think this *might* work.
I've been trying to get a handle on all the different investment terminology, and in the process, I've learned a new concept.
Dollar cost averaging (DCA).
When you make small, periodic investments over time, you tend to buy more shares at a lower cost.
In light of this, I've changed the auto contribution for my Roth to weekly instead of monthly. At $170 per week until April 9, 2007, this should max out my $4K 2006 contribution, and also put me on track for my 2007 contributions. I'll have to calculate whether my year-to-date income savings can handle this rate of deduction, though. I'll do that this weekend.
I also feel better (somewhat) about the fact that share prices (for the Vanguard 2050 Target Retirement Fund where I've invested my Roth) have fallen in the past couple of days. Losing over $50 in the first week of starting my first investment is not exactly encouraging, although I know intellectually that it doesn't really matter.
But still, I should look into who's managing the fund, and possibly switch out. My 403(b) will be going into the same fund, and I'm thinking fund diversification is probably better.
I'm going to start building a Fund Watch list. I have over $10K in seed money that needs to go somewhere. I should be able to buy two funds with this money, although I think I'll only get one, at least until my emergency fund ($5K goal) is built up.
Oh, and FYI... I just calculated my net worth, and against my expectations, it is actually positive, even with my $22K in student loans. I'm worth nearly $5K, baby.
To start off, I just want to point out that I posted my e-mail address and AIM screenname. It's over to the right, below my Bio section. So e-mail or IM me! I'm bored and lonely!
Now, onto the primary order of business...
I'm realizing that I've been putting in 10 hours of work a day for 7.5 hours worth of pay. And this is, in fact, normal, approved of, and even occasionally expected.
While I do like my job and stay late because I get sucked in, I am starting to get irked at the lack of compensation.
So I've been thinking. Maybe I should get a second, part-time job in the evenings. This will force me to leave (normal) work on time, and even provide me with compensation for the extra time that I would have spent working, anyway.
Yes, I know this is backwards and demented. I'm thinking of working more in order to, um, work less at my normal job. Someone please come and screw my head on straight.
I've been contemplating my options. Keep in mind that I have no experience in any of these positions.
I know the base pay for waitressing sucks, and I'm not sure what it'll be after tips. But the possibility of free food at the end of the day is enticing. But I bet the job itself is mad frustrating. I've done customer support. *shudder*
I like books and bookstores, so maybe I can find a job in one. It'll be nice and mellow? This might be better for a weekend position?
- Baby/house/pet sitting/walking
This is a nice possibility because this could go under the tax radar. I'll have to find clients, though. Not really sure how to go about that.
I'd like to avoid this possibility, but there are many subjects that I can teach. I just don't like dealing with *people*. And I kind of want a mindless-robot type job where no thinking is required. So probably not this one if I can help it.
I'm thinking 10 extra hours a week should bring in about $100 a week (probably a little less)?
It's not like I have anything better to do with my time, anyway.
Besides, um, blogging.
I just broke up with the bf.
I don't curse much usually, but I'll make an exception this time. Children, please cover your eyes.
I guess the car fund just took a dip in priority. Maybe I'll lower it to $250/mo, and up the emergency fund by $100.
In the meantime, I think I'll go cry some more now.
I feel like I need to do house cleaning regarding my various bank accounts--or at least re-evaluate if they're suiting my needs, and if I can do better.
So, in the next series of entries, I will analyze which accounts I have, which accounts I want/need/is best, and how to get from the former to the latter.
In conjunction with this, I'll also figure out how my money will navigate these accounts for minimum fees and maximum returns.
I'll just start off with what accounts I've got.
Currently, I have accounts with two banks: Bank of America, and ING. First, I shall discuss what types of accounts I have with each bank, look up and write down what their features are, and how I use them.
Bank of America
Regular checking account
I got this account four years ago for when I started college. At that time, it was still Fleet Bank. We chose it because it offered free checking to students at my college, and it was the only bank with an ATM on campus--a reasonable consideration at the time (but no longer relevant now).
This account gives me check writing, an ATM/debit card for cash withdrawals and check deposits, and online banking and bill pay. I use all of these features. BoA is also pretty ubiquitous, which is also convenient.
Here are the minimum requirements to avoid fees, copied from their website,
- A $750 minimum daily balance in one checking account.
- A $1,500 minimum daily balance in one Regular Savings or Custom Savings account.
- A $5,000 minimum daily balance in one Money Market Savings account.
- A $5,000 average daily balance in checking linked with savings, Money Market Savings, CD or IRA accounts.
Regular savings account
The maintenance fee of $3/mo is waived with an automatic monthly transfer of $25 or more from your Bank of America checking account, or with a minimum daily balance of $300.
The interest rate is 0.5%, and the APY is 0.5% (erm, what's the difference between the two??). The interest is compounded daily, and awarded monthly.
I think we can all agree that the interest rate sucks. I'm seriously re-thinking this particular account.
Power Rewards Visa credit card
This is my first and only credit card. I didn't really want it, not after hearing all the horror stories about credit card debt, but after urging from both my family and alumni friends, I agreed to get one to work on my credit score.
BoA was, like, sending me card offers every other week (because they were imagining a "CLUELESS COLLEGE STUDENT JUST WAITING TO BE LURED INTO LIFELONG CREDIT CARD DEBT" stapled to my forehead, no doubt), so I just decided to bite, and show them who's boss. They knew how much money I had in my accounts, so I was essentially preapproved.
I have no idea what the interest rate is, but it doesn't matter because I use it for groceries, books, and online purchases, and I always pay it off every month. I forgot once, because I was paying it online the day the balance was due, and didn't realize it took a business day to process. Never did that again. Now I pay it on the first of each month, along with my rent. They're not making another penny off of me.
Fixed Term IRAs
I have two fixed term Roth IRAs with BoA, again, opened for me by my father. One has a little over $6000 with an interest rate of 4.78% and an APY of 4.88608%. It matured last Friday. The other has a little over $2000, with an interest rate of 3.2%, and an APY of 3.25%. It matures next March.
I think that in order for these Roth IRAs to be fee-free, I need to maintain a minimum of $10,000 in my BoA account. But I'm not 100% sure.
My father opened a joint account for/with me a few years back to take advantage of the high interest rate. He transferred a lot of my work-study savings from BoA into this account, as well as a lot of his own money. Because I can no longer distinguish which money is mine and which is his (unless I ask him for the tax returns that he did for me for the past four years or count up all of the debits to my BoA account from the past four years), so I just call that account the "Seed money" account.
Since I got my job, my paycheck has been direct deposited into ING (with the exception of three checks). I opened a subaccount called "Income" to hold them.
I also started subaccounts for the various goals I'm earmarking funds for--car, house, and emergency. And possibly Roth IRA.
All right, in the next installment, I'll critique these accounts, and figure out what I'd like to change.
David Bach says: "Pay yourself first," eh?
All right, then. Here's my new monthly budget plan, based on his advice. I know that he thinks that budgets don't work, but I probably wasn't the type of person he had in mind. I 'budget' all the unavoidable expenses so that I know exactly how much I can pay myself with afterwards. It's not like I need a budget to help me limit my spending.
Okay, let's start off with income.
At $16.15/hr and 37.5 hr/wk, I'm making a gross of $2600/mo. Furthermore, my gross income for 2006 will total around $17,400.
I still don't know how much taxes I'll owe, but my father is sending me last year's tax software Any Day Now. He also says that after plugging my figures, I should not owe more than $900 in taxes for 2006.
So that gives me around $2350/mo to work with. I think. I hope.
Paying others (boo):
Rent: $500 (sigh)
Utilities: no clue yet, guestimate $100 total?
I try to save by not plugging in my second and third computers, and turning off the one I do use when I'm away at work, but sometimes, I wonder why I even bother. My roommate has tons of electronics, runs the AC all day/night even when it's not hot, and wastes gas by burning his food by leaving the stove on for an hour.
Even though I don't spend more than $60 most months, I always allow myself $100, because skimping on food seems... unwise and unnecessary. And I might actually end up accidentally starving myself if I don't cut myself some slack here (I've actually lost weight... which is NOT GOOD). But I can make an effort to take the extra $40 that I never spend and put it towards paying myself at the end of the month.
Student loans: $134
That's the amount due for Stafford, starting September, which I've put on automatic debit (yeah, automation! Reduced my interest rate by 0.25%, too!). I still haven't decided if I want to accelerate repayment on this because I've been hearing mixed reports. But at least the interest is tax-deductible!
Union dues: $40
I get free health insurance and dental thanks the our union. I fully support them, and don't begrudge them their dues. I just have to turn in my member registration form!
Now, for the good stuff. Paying myself (in approximate order of importance):
Roth IRA: $333.33/mo
This will max out the $4000/year contribution limit over the course of 12 months. My father says he'll make up the rest if I don't make it to $4000 this year, but I think I can do it on my own.
I currently have $8262.09 in two Roth IRAs in Bank of America. These were deposited by my father for me a few years back when I was still young and naive and had no idea what he was doing and thought it was all quite silly to start saving for retirement so early. *whacks younger self in the face repeatedly with something smelly*
Anyway, the rates suck, so I want to roll it over to Vanguard. Except Vanguard requires a minimum balance of $5000 to waive the maintenance fee. And while one of my BoA Roth IRAs has matured (the one worth $6000, so I can satisfy Vanguard's minimum), the other one does not mature until next March. But if I move the matured Roth IRA, I'll be hit with a charge from BoA for dropping below its minimum.
I'm still trying to figure out how to resolve this mess. This is why I haven't signed up for a Vanguard Roth IRA yet. But when I do, I will AUTOMATE the $333.33/mo transfer.
403(b): 20% (~$520 pre-tax)
In order to max out the $15,000 yearly contribution, I'd have to deduct $1250 per month. While I'd love to do max this out as well, I don't think I can handle a >50% paycheck reduction.
David Bach recommends at least 10%, which would be around $260 for me. But I think I can handle 15%, which is why I made it 20%, or $520.
Now, I just have to GET OFF MY LAZY ASS AND FILL IN THE VANGUARD FORMS AND TURN THEM IN. *cracks whip*
Car fund: $400
My car fund has a target goal of $5000 in 12 months, or about $400/mo. I may not end up spending it in a year, but it'll be good to have this around when I do finally get around to buying a car.
House fund: $40
Although a house down payment is many, many years down the line, I feel like I should start saving for it now. Can't hurt, right? The car fund gets priority for now, but once the car fund is fulfilled, that money will probably go here. And in the meantime, I think this is where I'll plop my excess grocery money.
Emergency fund: $100
If I should have at least 3 months worth of expenses in it, then $3000 is my target. I'm going to keep this conservative for now.
Savings: whatever is left
I'm terrified that I won't have anything left to go here at the end of the month, though. This is so weird for me, because I'm used to putting *all* of my unspent money into savings, which amounts to half (or more) of my paycheck. But now, I'm "paying" myself so much that I'll hardly have anything left!
And my savings will need to fund any shortages to my Roth IRA maximum, as well as any unforeseen expenses, such as clothing, public transportation fares, and dental co-pays (I'm in serious denial about the existence of cavities). And this will probably also need to supplement my various funds (car, house, emergency).
I know this should be right, but why do I feel so panicky? Am I cutting it too close? Doing too much too soon? What if I can't handle this? I do have a father-supplied savings buffer, but I don't allow myself to see it as touchable. If I end up dipping into it, then I'll have to re-evaluate this budget.
I know I still need to discuss cash flow, but I think I'll put it in a new post. This one is overwhelming enough as it is.
A bit of good news, at last.
I found a bus that goes to/from New Haven to a Park & Ride Lot four miles outside of Middletown.
I'd still need a car, but this cuts costs drastically.
I decrease my daily mileage from 60 mi to 8 mi, for a decrease of 87%! Plus, I save on $100/mo parking. And I probably can get a cheaper car, since it won't be driven so hard.
The bus fare is $3.60 per way, for a total of $180/mo--if there is no commuter discount/monthly pass, which I can investigate. But with the savings in gas and parking, I still come out $100 on top, compared to the previous estimate.
And the bus schedule is perfectly synch'ed with my work day.
This just might work.
I've been thinking of buying a car.
I don't even have a driver's license yet.
Everyone thinks I'm some sort of weirdo-freak for not driving (um, grew up in New York City?) and is not sure how I get by without one (by walking, taking public transportation and carpooling?). People keep telling me that I'll need to get a car eventually, so stop resisting already. But I counter by saying that I get along fine, and I'm saving loads of money--and the environment, to boot.
Why am I finally considering it? Because I'm a sucker who misses her bf in Middletown, and he doesn't drive either. If I moved back to Middletown, I could room with him for cheaper rent, but I'd have get a car and drive to New Haven to work.
So I thought I'd crunch some numbers and get a sense.
According to my father, he says I should expect to spend $4000 to $6000 on a decent, fuel-efficient used car. I'll trust him, since he's neither trying to sell me a cheap junker that will get me killed, nor persuade me to overspend on something I don't need.
Now, I just signed a one year lease in New Haven. That means I'll have a year to save (and learn to drive!), since I'd really rather not take out a car loan.
I'd have to put away $500 per month to reach $6000 in 12 months.
This does not include:
- driving lessons (at $30/hr)
- driver's license test ($40)
- actual license ($77)
- license plate/registration ($150)
And then after I get the car, I have to continually feed it money monthly. Here are the figures, as far as I can estimate them:
- insurance: $800/year (get it with my family)
- parking: $90/month (ouch, right??!)
- gas: 60 miles/day round-trip at 30 mpg and $3/gallon for 25 days = $150/month
- maintenance: ???
- property tax: $360/year
Rounding up on the gas, since I'm sure that particular figure is tragically optimistic, everything comes out to be about $400/month.
All of this (one year of saving $500/month, plus $400/month afterwards) for the opportunity to split $775/mo rent, heat not included. (I'm currently paying $500/mo w/ heat included.) Oh, and the joy of seeing my bf every day.
Wow, the frugal part of me is screaming that it is SO NOT WORTH IT.
Then why have I put saving for the car into my budget?
Damn it. DAMN IT. *whacks oxytocin upside the head*
So, the take-home verdict is in. My monthly income should be $2,025.962, but I'll be rounding that down to $2,000 for the sake of paranoia and Nice Round Numbers.
Ahead comes guestimations of future expenses.
This is with a roommate. At least it includes heat and hot water, is close to the shuttle bus, and is within reasonable walking distance of my favorite grocery store.
This is split with the roommate.
Also split with roommate. Can't live without broadband. This expense doubles as entertainment in the form of internet radio and bittorrent.
Natural gas: $50
Don't really know if this is accurate, but I'll probably be footing the bill for this one alone, since I am the sole cook of the household.
I budget $100, but I usually spend $60 - $80. I also get the use and abuse the CostCo membership of my roomie. Yay! Bulk nonperishables, here I come!
Student loans: $250
Again, an overestimate of what I'm required to pay, which is $133 for my Stafford, the only loan currently in repayment.
This figure is another random shot in the dark. I need to do more careful analysis before deciding on the final amount.
Over a period of 12 months... that's approximately $10K into savings? If these projections hold true... Only time will tell.
1. Calculate my income tax bracket so I know my actual take-home pay. Apparently, I screwed up my tax exceptions. Must fix, and adjust the figures.
2. Write a proper budget based on above post-tax pay. This might need to wait a few months so I can get a sense of what the ballpark range on bills will be.
3. Figure out how much to put into retirement, based on above budget. Maybe strategically take out enough pre-tax dollars to bump me into a lower tax bracket? Does it work like that?
4. Calculate the best way to pay off my student loans. All $23K of them. Shniff. Take into account the fact that interest rates on my Stafford will drop 1% next year if I make all my payments on time. And my Perkins has higher interest rates.
More as I think of them. Damn, being an adult is complicated.