- Yesterday I was chatting with one of my company’s summer interns about his plans for the weekend. He told me that he was going skydiving. Wow! I thought, that’s awesome. I’ve always wanted to go skydiving, but never got around to it before I got married and became a parent. I explained to the intern that the second thought that went through my head after “Wow” was “life insurance policy.” I have a sizable life insurance policy in place already, but I’ve been meaning to read up on the fine points of it to figure out exactly what coverage I have. I find that I have many insurance policies, but don’t know what insurance I actually have. You always hear horror stories about people having insurance, but not being covered for some bizarre sequence of events. So back to the top of my to do list goes: Read and understand current insurance policies.
- A short phone call this week earned me about $150. I have been engaged in a kind of progressive credit card arbitrage. We got a cash back rewards credit card last summer that came with a high limit and a 0% APR on purchases for a year. We’ve been making minimum payments to the card while stashing the rest of the full payment in a high interest savings account. I had written in my credit card notes that the 0% offer expires in July. I called the credit card issuer to ask specifically when the offer expires. The answer is that the offer is good until the END of my August billing cycle, which means that I don’t have to settle up until the middle of September. I estimate that I should be able to earn about $150 dollars in extra interest on the money that is sitting in my Vanguard Money Market fund.
- We finally received our tax refund this week, which isn’t bad considering that we didn’t file until about 3 weeks ago. It took longer than expected to file this year due to some Traditional to Roth IRA conversions that we ended up being ineligible to make. So it took a while to figure out how to undo the conversion and then how to record that on the tax return.
- In case you’re wondering: this tax refund will be used to bolster our emergency funds which currently total $10,233. This is far short of 6 months worth of expenses, but we’re getting there.
Some articles that I enjoyed over the last two weeks:
- Gather Little By Little investigates the fine art of hypermiling — eking every possible mile out of a gallon of fuel for your car. We have been de facto hypermilers since 2001 when we purchased a diesel car that easily gets 45 miles per gallon. However, I have been independently implementing some of the suggestions that also appear in GLBL’s article and anecdotally seem to have improved city mileage to previously unheard of heights. I won’t know for sure until the next fillup, which may still be weeks away.
- The Boston Globe reports that People in Debt Feel Literal Pain. Wow! Debt troubles are pervasive! The lesson here: If you want to improve your health, get out of debt.
- Gametheorist writes about his children’s entrepreneurial teamwork in selling candy bars for their sports club fundraiser. What fascinated me about this was the posturing of the pricing in order to induce people to buy more. What further fascinated me is that it worked so well!
- Lastly, PaidTwice had another rough week in homeownership. Her week went from dreams about a more luxurious bath experience to a shorted circuit breaker to a major, necessary home repair. Isn’t it nearly always the case that just when we start to feel secure, comfortable, and in control of our lives Mr. Murphy comes knocking? This happens to me at work, with our finances, around the neighborhood, on the highway, etc. The best guard against Mr. Murphy is a healthy emergency fund, both in literal and figurative senses. Always try to foresee alternative outcomes and plan around them or hedge against them. We can’t foresee or prepare for everything, but a little planning can go a long way — see Point 1 at the top of this entry.
Next month ScrapperMom and I will have both maxed out our Roth IRAs for the year. Since this is currently the only tax advantaged vehicle available to us, for us to continue to save will require a new strategy of some kind. Our prior experience with saving in taxable accounts has been in high interest savings accounts. We have never purchased stocks or mutual funds outside of a retirement account.
We have a number of medium term plans, including purchasing a new home, paying cash for a new (to us) car, buying more investment properties, etc. Some of these, like the new home and car, are expected to take place in approximately five years. This leads me to start wondering again what kinds of investments make sense for parking the money which we will begin to save in 2 months.
One idea that has crossed my mind a number of times is that of using Target Retirement Funds. Target Retirement Funds are a relatively new concept that has gained ground quickly in recent years. Generally TRFs are funds of stocks, bonds, and/or other funds that are balanced by the fund manager to be appropriate for someone who plans to retire close to the year in the name of the fund. For example, the Vanguard Target Retirement Fund 2010 has an appropriate mix of stocks and bonds for someone who is just about to retire and needs to shift from growth to a more steady income with preservation of capital. The nice thing about these funds is that they automatically adjust over time so that someone who owns shares of one of these funds does not have to rebalance her portfolio periodically. The funds also continue to adjust as the date of retirement passes by, so they continually become more and more conservative.
The Vanguard 2010 Target Retirement Fund (VTENX) is currently composed as follows:
Top 10 Holdings
Typical TRFs have some interesting characteristics. They are passively managed, meaning that the funds or the contents seek to match some index, and are only adjusted periodically by a manager to track the index. The balance in the fund is only adjusted periodically to be appropriate for the date of retirement. Because of this, the management fees or expense ratios tend to be low. They also tend to be tax efficient since there isn’t a lot of trading so the realized gains are low. They are now available at most major brokerages. As Kevin at No Debt Plan shows, one huge advantage of a TRF is that the barrier to entry into the fund is substantially lower than inventing in each of the funds in the fund individually.
Why am I considering a “retirement” fund for medium term savings? Well, that’s what I’m trying to figure out also. If a 2010 TRF is a smart move for someone at or near retirement who needs to try to continue to earn enough to keep pace with inflation but can’t afford to lose any money, then why wouldn’t this also be ideal as a medium term savings vehicle?
Let’s look at the pros and cons:
Pros:
- Low cost barrier to entry; if I wanted to create a well rounded portfolio for this savings goal it would take nearly over $15,000 just to get started.
- More upside potential than a cash account like a CD or Money Market account
- Easy to manage
- Tax efficient
Cons:
- No guarantee on return
- No guarantee on capital; more downside potential than a cash account
- Periodic fees in the form of expense ratios
- Lack of “peer review” in concept
I’m the type of person who is generally willing to take on a bit more risk than many. While this investment is not without risk, the risks are generally low, as the fund is well diversified across several different investment classes, many different investments within those classes, and through global investment exposure. I’d like to see some real estate investment trusts in the mix, but I think this is probably as good as it’s going to get for now.
So what do you think? Am I crazy or brilliant? Is this a good strategy for a medium term (5-10 year) savings plan, or is it too risky for such a short term? Should I go for the 2010 or 2015 plan? What do you think about using the 2020 or 2025 TRF for longer term goals?
My wife and I are big fans of Google Apps, a suite of office type applications that run in a web browser and provide such services as Calendar, Spreadsheet, Document, RSS Reader, Email, and more. We have been sharing a number of calendars for a few years now, which is a fantastic way to keep track of all kinds of appointments from any internet connected computer. More recently, we have been using Google Documents, including Spreadsheets to share all kinds of information.
Google Apps are fantastic for collaborating on a project. Anyone with a Google account can share a Google item with any other Google user. Each user can see the item, whether it be a calendar entry, spreadsheet, or Reader item, and depending on the level of permission, can also edit the item. Multiple people can even be working on the same document simultaneously, and Google will merge the concurrent changes as they are made and refresh the other participants’ views.
This functionality seemed perfect to become a key tool for tracking spending and budgeting. A major problem that we had with tracking spending was capturing odd purchases or dividing up single bills into multiple spending categories. Often ScrapperMom or I would purchase something online from a vendor whose name we would not recognize at the end of the month when I sat down with Quicken to review and categorize our finances. A Google spreadsheet seemed like the perfect place to record such a transaction, since it was accessible nearly everywhere by both of us. Some other typical entries include grocery bills that also include a cash back portion, or bank deposits that include multiple checks.
Another great use for a Google spreadsheet is a budget. I can view and reorganize our monthly budget from anywhere. At the end of the month, I simply copy last month’s budget to a new sheet, and then make some minor modifications, if necessary, to prepare the spending plan for the coming month.
Lastly, I use Google Calendar to alert me when bills, transfers, or paychecks are due. I also set up alerts to remind me to check bank balances to make sure that always meet my minimum balances.
What technologies do you use to keep track of your finances?
ScrapperMom gets paid every other Thursday, and I get paid on the first of every month. ScrapperMom’s paycheck is directly deposited into our Money Market account at Everbank via a 3rd party payroll service. This past Thursday was a payday, and I was especially interested in seeing what the take-home portion was. This would have been the first paycheck since her raise, and I wanted to see how accurately Paycheckcity.com’s NetPay Calculator predicted take home pay.
I logged into my bank’s website to check on the payment and didn’t see it. I didn’t panic, since I know that while direct deposits often post the night before, or in the morning of the day they are supposed to, it’s not unusual to see them post later in the day. So I checked later, and still no payment. I checked on Friday, and the payment was still not there.
At this point, many people would have had a very serious problem on their hands, namely one of an empty bank account. This, however, was not, and is not the case for us. We don’t live paycheck to paycheck, and therefore usually have the equivalent of 2-4 times ScrapperMom’s biweekly paycheck amount in our account.
I told ScrapperMom that her check had not posted. She told her boss who started to look into it. Fast forward to yesterday: I finally had a chance to check again from the hotel room here in Ottawa where I am on business. There was still no check. ScrapperMom asked her boss about it again, and here’s where it gets interesting: The payroll service apparently had the person who handles this, and a number of other accounts, leave with no notice, and “mess up” the accounts on her way out.
So while this may be an interesting story, it once again points out how frequently we are at the mercy of any number of financial world mistakes, market conditions, and various other ways in which we can be wrongly separated from money that is rightly ours. If we were living paycheck to paycheck we would be in serious trouble by now, and so the lessons learned here are:
- Realize that factors beyond your control can and will put you in a pickle from time to time
- Make reasonable attempts to mitigate the consequences of these factors — not living paycheck to paycheck can cover a wide range of potentially detrimental factors
- Don’t panic. It’s likely that eventually everything will get worked as long as you can weather a short term storm
We have been told that the next paycheck will be issued on this coming Thursday and will cover 3 weeks. Now I’ll have to adjust our forecast slightly, as well as our calendar. This also makes me want to find out when the next bonus 3 paycheck month will be…
Partially inspired by Five Cent Nickel’s article on Reconsidering Our Asset Allocation, partly by my recent read of Burton G. Malkiel’s A Random Walk Down Wall Street, and partly by an urge to simplify, I have recently been consolidating a number of retirement accounts from a number of brokerages to one. I have chosen Vanguard as the host for the bulk of our assets, primarily because it offers the index fund options that I want with very low fees.
The process for consolidating is pretty easy. I logged into our existing Vanguard accounts and filled out 5 questionnaire pages that detailed what I wanted to move, from where, and into what fund(s). At the end of the process, I was prompted to download and print out a PDF to sign and return to Vanguard. This process had to be completed for each brokerage account not yet at Vanguard.
I called Fidelity to make sure that there would be no problem with Vanguard getting the money for the transfer. I was informed that in order for this to go smoothly, I would have to move all of our assets into cash positions. And by the way, I was told, I should do this today since the market is up… advice that smelled of market timing to me and was promptly ignored… Instead, I opted to wait until I knew Vanguard would have received our paperwork and started to execute the transaction.
Within a few days I saw that one of the Fidelity accounts was empty and the Vanguard had increased my almost the same value. Almost? you ask? Yes, Fidelity took a $50 “cash out” fee out of the money that was transferred. After researching this point for 30 minutes or so, I was unable to find this fee stated, explicitly, anywhere on Fidelity’s website. It does say that the law allows them to charge one, but they don’t say what the charge will be.
So I guess this is just Fidelity’s way of saying, “Don’t let the door hit you on the way out.” And this is yet another reason that I can’t, in good faith, recommend Fidelity to any potential investors who might seek my advice on the matter, even if it is the home town favorite in my neck of the woods.
photo figure credit: ctsnow
