Today we continue the ESI Scale Interview series where people answer questions about their success at working the ESI Scale.
In short, the series focuses on what the interviewee is doing in the areas of earning, saving, and investing. They also get an opportunity to ask ESI Money readers for suggestions if they choose to do so.
If you’d like to be considered for an interview, drop me a note and we can chat about specifics.
With that said, let’s get started.
My questions are in bold italics and his responses follow in black.
Please tell us a bit about yourself.
I am single, 28-years old, and I live in an expensive beach city in Southern California.
I currently rent a small room in a small condo with 2 roommates. My share of rent is $840/month.
All-in-all I spend about $1k/month in rent and utilities which is great for the location.
What is your current net worth?
Net Worth: $126,644
Money Market Emergency Fund (Goldman Sachs Marcus): $10,008
Checking/Savings accts: $919
Taxable Brokerage: $8,759
- Roth IRA: $22,987
- Traditional 401k: $49,364
- Roth 401k: $24,693
- Car: $4,000
- Boat: $7,000
How did you accumulate your net worth?
I accumulated my net worth from my primary job (more about this in the career section) and investing through my retirement accounts.
Tell us a bit about your career.
I graduated college with degrees in Accounting and Financial Management.
My first job out of college was at a large investment management firm on the account management team (tons of hours).
My starting salary was $52,000 with a bonus of ~10%.
After a year and a half in this position I switched firms which provided a higher salary and a much better work-life balance.
In my current role, I work in the operations department of a specialty investment management firm.
It’s a middle office function so the pay isn’t as high as many would receive in a front office role.
In summary, my annual salary has been (base + bonus):
- 2013 (annualized – I started working in June 2013 after college): $57k
- 2014: $75k
- 2015: $79.5k
- 2016: $83.5k
- 2017: $84.5k
- 2018: $94.5k
- Base Salary: $79,500
- Guaranteed Bonus: $18,000
- Variable Bonus: TBA
- Total guaranteed 2019 comp: $97,500
The company uses the guaranteed bonus as somewhat of a retention to ensure I stay at the company for the entire year.
I was given a large raise and promotion in 2018 because I passed the Chartered Financial Analyst (“CFA”) exams. I think this designation will open many doors for me in the long run.
One unsettling thing that happened at my current company is that they went through a pretty significant round of layoffs (~30% of the firm was let go).
I made it through, but it is a bit alarming to see all these layoffs happen during one of the best economic times in history.
Do you have a side hustle?
No side hustle. I’m working on that in 2019
If you were rating these results on a scale of 1 to 10 (with 10 being best), what rating would you give yourself and why?
A ~10% annual growth rate in annual income is decent.
I give myself a C- because I should have generated a side-income of some sort to increase my investing potential. In my defense, it was nearly impossible to do anything outside of studying/working during the 4 years it took me to get through those exams. Now that those are done, I can focus on getting this rating to a 10.
What are your future plans regarding growing your income?
In the financial services industry, there are usually large bumps in salary for switching companies.
To that end, I plan on networking within my industry to position myself for a higher paying role at a different firm in the next ~3-5 years.
As I mentioned previously, the Chartered Financial Analyst designation should help me tremendously when I am marketing myself for a new role.
I will pursue my MBA if my company is willing to provide tuition assistance.
Personally, I think MBAs are far too expensive these days without a tuition assistance package. An MBA costs ~150k – 200k. If a company is willing to front the bill, I think the degree has potential to grow my primary income substantially.
I am working on a couple of side-hustles as of the time of this writing:
- One-time side hustle: Selling all my extra stuff (surfboard, drone, scope, extra golf clubs etc.)
- I plan on starting a personal finance blog this year to help others much like ESI has helped me. I’ve started writing articles. I’m now in the process of choosing a blog name (I’m open to any suggestions!)
What percent of your gross income do you save?
Short answer: 24%
Long Answer: I calculate my savings as a % gross income after making adjustments for estimated tax withholdings for the pre-tax portion of my savings (stepping through the calc using 2018 year-end estimates):
- I add my company 401k match to my gross income.
- Adj. gross income (denominator) = $94,500 + $3,380 = $97,880
- I calculate the liquidation value of any pre-tax investments using my current tax rate of 28% (this includes fed, state, social security, and all other CA taxes). I do this because I prefer to see a more conservative figure to keep my motivated to save more.
- Pre-tax 401k contribution = $9,240 * (1-.28) = $6,600
- Pre-tax company match = $3,380 * (1-.28) = $2,400
- Liquidation value of pre-tax investments = $6,600 + $2,400 = $9,000
- Roth 401k = $5,500
- Taxable brokerage account contributions = $3,400
- Emergency Fund Contributions = $6,200
- Checking & Savings acct contributions = $1,700
- Total post-tax investments = $16,800
Credit card increase:
- I pay off my credit cards in full every month. The change in credit card liabilities at year end was the difference between 2017 and 2018 year-end liabilities. This decreases my 2018 annual savings rate because it is money already spent.
- Credit card increase = $2,700
Gross savings rate = ($9,000 + $16,800 – $2,700) / $97,880 = 23.6%
If I were using a simple gross savings rate calculation, my savings rate would be closer to 30%
How did you get to this level?
To be honest, I started with a near 0% savings rate.
I have been working very hard to increase my savings in all my accounts, but, specifically, in my taxable accounts.
I don’t have any issues when it comes to saving in my retirement accounts, but I have a mental block when it comes to saving in my taxable accounts.
I think it may be in part due to how I was raised. Before getting into the details, I want to start by saying I had an amazing upbringing, and my parents are amazing people who I still consider to be a couple of my best friends to this day.
With that being said, my parents were the classic “Under Accumulators of Wealth (UAWs)” from the book The Millionaire Next Door. They had high incomes so, from my perspective, as a child, I thought they were very wealthy since there was so much emphasis was put on consumption instead of saving/budgeting.
It wasn’t until I read The Millionaire Next Door that I realized how big of a difference there is between income and wealth.
I’m striving, like most others reading ESI, to become a Prodigious Accumulator of Wealth. I think for me to become a PAW, I will need to put a ton of extra focus and effort into budgeting/saving.
If you were rating these results on a scale of 1 to 10 (with 10 being best), what rating would you give yourself and why?
Retirement saving: 7
I haven’t been able to max out the accounts every year, but I am moving in the right direction.
Non-retirement saving: 3
I have some savings outside of retirement, so I am giving myself a 3 rather than a 0.
What are your future plans regarding saving your money?
Focus on maxing out the tax-advantaged accounts and increasing my cash position in my emergency fund to 6-months’ worth of living expenses.
The $10k I currently have in the emergency fund is good for about 4 months.
What are your main investments?
- Traditional 401k: 17% of salary. Company match: 4%. I plan on using some of my guaranteed bonus to max out this account at year end ($19k)
- Roth IRA: $500 automatic transfer from my brokerage account which will hit the max of $6k in December of this year
All my investments are through low-cost fund providers and broken out as follows:
US Stocks (64%)
- iShares Core S&P Total US Stock Market Index (ITOT): $8,098
- Fidelity Total Market Index Fund (FSKAX): $40,184
- Fidelity Extended Market Index Fund (FSMAX): $18,909
International Stocks (24%)
- iShares Core MSCI EAFE ETF (IEFA): $4,256
- iShares Core MSCI Emerging Markets ETF (IEMG): $9,746
- Fidelity Spartan International Index Fund (FSIVX): $11,055
- Vanguard REIT ETF (VNQ): $8,935
Money Market (4%)
- Fidelity GOVT MMRK Premium (FZCXX): $4,278
The total annual fee for this portfolio is 0.06%.
I keep the Alternatives and most of the International stocks in my Roth IRA. I think the international/emerging market stocks will perform better in the long run, so I keep these investments in the tax-exempt account.
I am working on increasing my international stock allocation to closer to 30% of my portfolio which is more in line with a 2050 Target date fund (more on this below).
The above portfolio performs much like you would expect. It goes up when global markets are up and down when they are down. The Alternatives and cash make the downs a little bit more tolerable.
In a perfect world, I would invest everything in a target date 2050 fund and sit back and relax, but the 2050 TDF in my 401k charges 0.65%/year which is a bit too high for my liking.
I just started using the TDFs (Fidelity, Blackrock, and Vanguard) allocation to create a similar allocation with cheaper alternatives.
Each one of these providers posts their allocation between US Stocks, International stocks, Bonds, and Cash equivalents in detail every month or quarter. I use the average of the 2050 allocations create my own target date fund with lower fee investment options.
At the end of the quarter, I plan on comparing the performance of my account vs. the TDF to see where I stand. I think the performance will be similar, but I will get separate benefits from asset location and lower fees over the long run.
Note that I just started the “TDF portfolio mirroring” this year, so I am adjusting my portfolio weights with new contributions. It will take most of 2019 to get the portfolio to a good steady state (if markets don’t do anything too crazy)
TDF portfolio mirroring approach savings: 0.59% (we’ll see if the performance is similar)
If you were rating these results on a scale of 1 to 10 (with 10 being best), what rating would you give yourself and why?
Historically, I have held a diversified portfolio. However, I used to trade my accounts more than I probably should have. I’m working on getting to a steady state portfolio allocation that I can stick with over the long run.
What are your future plans regarding investing?
Max out my tax-deferred accounts and invest as much as I can in low-cost index funds.
What money mistakes have you made that others can learn from?
One of the first things I did at my first job out of college was to max out my IRA. Shortly thereafter, I took money out of the IRA and bought a dirt bike. Obviously, this was a terrible decision, but I did learn a lot from this mistake the following year during tax season.
Trading individual stocks. My first few years in the workforce I traded some single-name stocks. I have since wised up and switched to an all index fund approach. Working in the investment management industry, almost everyone trades individual stocks. I always hear about their winners and never hear about their losers. More often than not, my colleagues give me flack for buying the index. I guess we’ll have to wait and see who comes out ahead!
Unvested 401k – I left my first job before my 401k vested which was worth ~10k. I still think I made the right move by leaving, but I didn’t put any thought into the unvested account balance. I should have factored that in to my decision.
The boat – I am still torn on whether or not this was a good or bad purchase. Here are some of the details:
- I bought the boat from a family friend for $15k. At that time, the boat was selling for over $30k. Yesterday, I saw the exact same make/model online for $25k. I have it factored into my net worth at $7k since I prefer understating to overstating.
- Insurance and registration are ~$150/year.
- Luxury tax (1%)/year: ~$250 Thank you, California. The good news here is that I am going to re-register the boat in AZ where there is no luxury tax. This expense will go away later this year.
- Maintenance – Average of $300/year. No huge issues thus far.
- Parking is free – luckily my parents let me keep it trailered at their house near the river. If this ever changed, parking would cost ~$200/month at which point I would sell immediately.
- I use it 2-3 weekends per year, but my parents, family, and family friends use it almost every weekend in the summer.
In summary, I think the boat was bought for the right price, but I think the opportunity cost of keeping it vs. investing is not a great decision in the long run. I do get a non-monetary benefit from having my family and friends make great memories which may outweigh the monetary cost of keeping it. I’m still debating.
Are there any questions you have for ESI Money readers regarding any parts of your finances?
I have quite a few…
- Has anyone survived a period of layoffs? If so, how did everything shake out at the company? We’re you in a better position after the changes or we’re you doing twice the amount of work for the same amount of pay?
- Do you see any places where I can improve on the ESI scale? If so, where should I focus?
- Do you have any advice on how to save more outside of retirement accounts? I feel like I have tried every budgeting tactic out there. None of them have worked so far.
- Do you have any thoughts on my recreation of the 2050 target date fund using lower cost alternatives?
- What are your thoughts on the boat? Should I keep it or try to sell it?
MI 122 says
First off, I think you’ve done pretty well for only being 28. You should really see your net worth worth start to take off in the coming years. I too should have been saving a much higher percentage when I was your age, so I think you are heading in the right direction. Regarding layoffs, I’ve been through many of them. Too many. I’ve made it though every one of them without being effected, but they can be difficult. Continue to make yourself valuable at work, take on roles others don’t want, and don’t make enemies. Sometimes good people are let go, but companies will always go for the low performers and troublemakers first.
I think your investment strategy is fine, if you can stick to it long term. The fact that you’ve thought it through and are working towards a single allocation goal puts you far ahead of those chasing returns.
I’m not a leanFIRE guy, so I’m totally OK with the boat. You have live while your still working. The costs sound reasonable, so enjoy it!
Scale #48 says
MI 122 – Thank you for the advice. I am working diligently to become invaluable at the company, and I appreciate your comments on the boat.
May I ask, how did the companies shake out post layoff? We’re you in a better place after a year or two or did you move on to greener pastures?
I understand the workload will definitely get worse before it gets better. With that being said, how long would you recommend sticking around if things don’t get better (i.e. higher pay, decent work-life balance etc.)?
Given your choice of name “MI 122” I assume you will be the next Millionaire interview to be posted? I look forward to reading your story.
Layoffs in the U.S. are perennial. When my sons were learning about percentages, one commented that he had calculated that I had survived over a 100% layoffs. I know, the math is funky, but those 30% layoffs add up in a hurry.
Twice in my career (now in semi-retirement) I survived 100% layoffs of my entire workgroups. Both times, I had just taken another position in the same company. Folks asked if I had insider knowledge about the layoff, but I had not. One particular time, I got a close up view of my current VP in action during a convention and decided she did not measure up. I found another individual job about a month before she laid off our entire group of about 15. Within five years, she had moved on and the marketing group/function had been set up again but with different people.
Moral of the story: keep a close eye on the integrity and focus of management a layer or two above you and make sure they pass YOUR acid test for responsible, staff-oriented managers. If they have had a big layoff already, watch how the workload is redistributed. Few managers are smart enough to take the opportunity to ask the remaining staff how to make their entire group’s work more efficient. That could be an opportunity for you to analyze and make useful suggestions during the aftermath.
Scale #48 says
BSue – Thank you for the note.
I haven’t put a lot of thought into keeping a closer eye on management a layer or two (or three) above me. I will definitely be keeping a closer eye going forward.
In the finance world, efficiency and automation is everything. I am lucky that my boss and his boss agree. The issue have been running into is that the workload on the front end required to automate tasks is fairly steep. Now that we are running with 30% less staff, it is tough to allocate time to automation projects. If you have any tips, please let me know!
ESI #115 says
Above all, you are doing great. The plans are sound and your net worth is growing.
Please see below for some comments on your questions. My response contains the “>>>” mark after the question.
•Has anyone survived a period of layoffs? If so, how did everything shake out at the company? We’re you in a better position after the changes or we’re you doing twice the amount of work for the same amount of pay?
>>> I have ben through a few lay-offs, and I have been on both sides – loosing the job and keeping the job. When I was on the keeping the job side, work increased without increase in pay. In these cases, I quit and found another job (an missed out on severance). When I was on the loosing side, I received severance packages and then found another job. Overall, I prefer being on the loosing side – same end result (new job) but receiving severance.
•Do you see any places where I can improve on the ESI scale? If so, where should I focus?
>>> Your plans and progress are great. My only suggestion is to remember a job is just a job. Please remember to work in order to live, not live in order to work. Everything and anything can be improved, but sometimes appreciation of the current may be missed. The current may be good enough.
•Do you have any advice on how to save more outside of retirement accounts? I feel like I have tried every budgeting tactic out there. None of them have worked so far.
>>> Savings require some type of change – for example, cutting back on something else or generating a side income. The cost benefit for the change is different for each of us. That something else could be time (more hours working) or eliminating an expense and saving the money instead. (In my case, my time is more valuable than money.)
•Do you have any thoughts on my recreation of the 2050 target date fund using lower cost alternatives?
>>> I do the same thing but in a slightly different way. I personally do not like TDFs – they are expensive. I have bond index funds and stock index funds strategy. I re-balance about once per year and approximate the TDF holdings. In my 401k, the index fund expenses are less than 0.05%, but the TDF expenses range from 0.45% to 2.15% (for a 2060 fund). This is why I find TDFs appalling.
•What are your thoughts on the boat? Should I keep it or try to sell it?
>>> The famous saying for boat owners – “The two happiest days for a boat owner are the day of purchase and the day of selling. In my case, I would sell the boat, invest the money, and rent a boat whenever I felt the need for a boat outing.
Scale #48 says
ESI #115 – Thank you for the comment
I made it through the layoffs and the work has definitely started piling up. It may be time to consider looking for a new job.
Life > Work:
I couldn’t have said it better myself! The work-life balance was something I really appreciated about the company when I started. The balance has definitely been skewed to work with no signs of letting up.
It sounds like we are on the same page here. I have found it to be pretty simple to recreate the TDF exposures with cheaper alternatives. 0.05% vs. 2.15% fee will equate to well over $1m in fees over a 30 year time horizon. Keep those expenses low!
Unfortunately, boat rentals aren’t available where I vacation for 4-6 weekends in the summer. It’s an all or nothing situation 🙁
Thank again for all of the wisdom and advice. I really appreciate it!
Life Outside The Maze says
Here is some good but perhaps controversial advice, maybe get a different job. Based on your numbers you are doing well and based on your post you are smart and driven. Interview around and look for another role while you still have this one. You can probably get a 20% raise by changing jobs and interviewing well. If the layoff is a standard thing at your company that’s one thing, if it represents poor company performance all the more reason to leave. There are less opportunities for advancement at a company that is struggling. On paper, the answer for the boat is to sell it and invest the gain. However, you need to weigh the cost benefit yourself and how much joy you get from the boat. Here’s an idea, sell the boat and buy and live in a fixer upper property. Fix it up and rent out extra rooms. As far as the MBA, they are expensive but certainly pay off if you are going into management and could start at say $120K plus bonus. My point here is that investing in yourself is a super high return investment especially when done at a young age where you have more years of potential higher income. Invest in credentials or graduate degree, etc now while your expenses are low and no kids / family to get in the way. Hope this helps, I blog to help people like you.
Scale #48 says
Life Outside the Maze – Thank you for the comment.
Searching for a new job seems to be the consensus among the comments thus far. I plan on putting some feelers out in the coming weeks.
A fixer upper in southern CA with a reasonable commute runs 300-500k+. The 300k example would be a major fixer upper. After factoring in property taxes (1.19% * 400k = $4,760), insurance (~2k), repairs (unknown with a fixer upper), and HOA (~4k) the carry cost becomes hard to manage, even with rental income & write-offs. All of this gets magnified with a small down payment (i.e. high leverage)
Link for HOA fee research: https://www.trulia.com/research/hoa-fees/
I have done quite a bit of research on the MBA and I’m having a lot of trouble warranting the expense. I see the potential salary increase as an obvious benefit. However, if the MBA costs $100k, and the implicit opportunity cost of leaving my job for two years is an additional $200k of foregone salary ($100k annual salary * 2 years). Then factoring in interest on the student loan and the fact that jobs aren’t guaranteed post-grad makes it all a coin toss in my opinion. I imagine the total implicit + explicit costs are closer to $500k-700k for a top 20 program. Unfortunately the company I work for doesn’t offer tuition assistance. Part time is an option if I plan on staying at the company long-term which may not be the case.
What are your thoughts on MBA vs. another designation (i.e. CPA, FRM, CFP etc.)? These all provide a good course of study for much cheaper. What they don’t provide is the network and experience of going back to college… and who doesn’t want to go back to college?!
I will definitely give your blog a follow.
Thanks again for the advice!
Little Seeds of Wealth says
Could you provide more details on your budget? It’ll be easier for others to come up with ideas if we know where your money goes. In general assuming no income changes in the short term, you’ll have to cut back on something. Also, have you thought about renting out your boat? There’s a site called Boatsetter.
Scale #48 says
@Little Seeds of Wealth – Thank you for the comment!
Great point on the budget. For the sake of full transparency, see spending below for the past couple of years…
I have generally stuck with a loose budget (or no budget), but I have been much more strict over the past year or two as you will see shortly
2017 total spending: $68,165 (basically living paycheck to paycheck).
Rent was $15k, Entertainment/Travel $12k, Restaurants $10k, Groceries $5.5k, Golf $4k… and so on. I am a little embarrassed to share the 2017 spending because it is so atrocious.
2018 total spending: $48,667
Rent $13k, Restaurants $10k, Travel $6k, groceries $4k, Car/gas/insurance $4k
2019 YTD spending through 3/13: $8,156
2019 spending is tracking ~$40-45k annualized
Rent $2k, Restaurants $1.5k, Travel 1.5k, groceries $1k
The spending definitely picks up in the summer months.. I plan on keeping a very close eye on my budget this summer so I can save/invest as much as possible.
I have a feeling that you are going to rip me a new one for my restaurant spending, as you should. I have been working on decreasing my spending in the restaurants category, but it’s been pretty tough. Any advice outside of “cook more meals at home” would be appreciated!
Renting out the boat isn’t something I have thought of. I took a look at boatsetter. It looks like a great option! Unfortunately, they haven’t expanded to AZ yet. One big concern with the rental idea is that the boat I have is a wakeboard boat with a V-drive (i.e. needs deep water). I would be very concerned with a rookie taking it out on the very shallow technical part of the river where it’s parked. For reference, a prop is almost always ruined if the boat is simply floating down the river and clips a sandbar or rock without the engine running. If the prop is turning, it’s all over. A copper prop replacement runs ~$500. All-in, this is great outside of the box thinking!!
I really appreciate your time and comment!
Little Seeds of Wealth says
Great job lowering your expenses from 2017 and looks like you’re still improving! That being said your spending like you said is still fairly high for a single guy with no kids. I don’t do a strict budget either but I think it can be a good tool if you’re trying to establish a new, much lower budget level. Once you’ve adjusted your lifestyle and habits, you can go back to being loose 🙂
Both your restaurant and grocery bills are high. If you eat out a lot, your grocery bills should be small and vice versa. Also maybe eat at cheaper restaurants or look out for places with generous servings that’s enough for 2 meals. I like to buy hot food from the grocery store sometimes, cheap and better than fast food. I’d also look at the Misc items that you don’t detail out here and see what else you can do there. Looks like you had over 10k in misc spending in 2018.
You’re doing great. I wouldn’t sell the boat unless you aren’t using it often.
Your mix of 401k/Roth IRA/brokerage is excellent. When it comes time to retire, the blend of pretax and post tax will allow you to control your tax rates. If your company offers a Roth 401k, I would suggest putting some money into that, as tax rates are at historical lows, but the system you have now is great.
Keep it up, you’re doing great.
Scale #48 says
Given your name, I assume you are a CPA? If so, at what level of wealth/tax complexity would you recommend engaging with a CPA?
Currently, I’m fine with doing my own taxes and tax planning. As my financial situation becomes more complex and as I have more wealth on the line I would like to engage with a CPA.
Cayman Kayaker says
Having owned a share in a 26′ Robalo centre console, I totally agree with the definition of a boat; which says: “A boat is a hole, completely surrounded by water, into which you pour money”. Sell it, and if you want to get out on the water, buy a SUP or a kayak.
Scale #48 says
@Cayman Kayaker – Thank you for the note.
Straight to the point.. I like it!
Congrats on the CFA!!
I’m also working on the finance blog setup. The first name I thought of was “on sale” for 10K. Rearranging the words had the potential to be confused with a charitable organization (whose premise I frankly like). To avoid these things, I’d peruse the blog directory at Rockstar Finance and research who owns the other domain extensions beyond .com. Also, don’t get a .us domain since you can’t keep your personal info private. Good luck with this!
I also like your idea for mirroring the TDF.
For immediate small budget changes, I’d look for tiny things you can tweak.
Rounding up purchases/bills like the old checkbook hack that Acorns has made popular again (though diy to avoid their fees).
Avoid any account maintenance fees–you shouldn’t pay anything to anyone to manage your day-to-day money.
Is your emergency account earning good returns? You mentioned a mm account; is it their hys or does it compare? What about putting some of it in a CD?
Are you getting the best bang for your buck for your bills? Shopped ins, cell phone, etc.
Can you save on bills by paying yearly instead of monthly? We set aside small amounts per pay period for these that we then put in short term CDs (mos as opposed to yrs, Fidelity is great for finding these) if they pay better than our hys account.
A controversial suggestion is to have your money direct deposited into your high-yielding account first and then strategically transferred into your checking account to pay bills, making sure to keep under the 6/mo withdrawal limit. This increases your average daily balance and therefore your returns without affecting your ability to pay your bills. Controversial because of the chance for failure. But doable for those who keep track of their money.
Since you’re a dead-beat to the credit card industry, I’d make sure to have the best rewards card you can get. Often a points card is better than a straight cash-back as far as returns, just apply the points toward your monthly bill. (Obviously if you open a new one, keep the first for longer credit history/lower utilization ratio, and just charge a small amount 1-2 times a year to keep it active).
It looks like the boat is good for family and friends. Guess you have to weigh the mental health/fun times aspect of it vs having the money. Do they give back in other ways for the privilege of using it? (ie provide food when you use it with them?) Could you have fun doing other things for less than the ~$450/yr you’ll continue to spend on it plus the cost of travel (I’m assuming your parents live in AZ?) and food, etc.
Scale #48 says
Thank you! The CFA was definitely the most difficult test I have ever taken. I learned a ton, but I’m glad to have it behind me!
I’ll take a look at Rockstar Finance. Thanks for the tips!
Account Maintenance Fees:
I’m guilty of owning a CC with an $85 annual fee. The rewards are good, but I am in the process of searching for a new one with no fees. Any recommendations?
I misspoke. I have an online checking account with Goldman, not a mm fund. My apologies. The account yields 2.25% (similar to a mm fund) with FDIC insurance and zero fees or minimums. The 13-month CD yields 2.35% and the 1-year HY CD yields 2.75%. I weighed out the potential increase in returns, and I came to the conclusion that the additional 0.5% yield wasn’t worth locking up the money for a year. I especially didn’t want to lock in a rate as yields have been on the rise. The current Goldman account I use increases the yield almost immediately after the fed announcement.
I have decreased my bills to essentially the bare minimum.
Cell phone bill: $15-40 (varies based on usage)
Car: Paid off
Car & Renters insurance: $1,500/year. This seems a bit high considering my car is only worth $4k. Unfortunately, I will have to buy a new (used) car soon. I’ve had this car since I was 15 years old and she is getting very very old (170k miles that are 100% my own). I can decrease my insurance bill by 3% if I pay the 6-month premium up front. I don’t do this because I prefer to factor this cost into my monthly budget. However, I plan on switching to the 6-month premium next renewal period. Every dollar counts! I also shopped around for insurance and this was the cheapest I could find :/
Gas/water/electric: ~$80. My roommates also pay ~$80/month. Splitting everything three ways seems reasonable.
I really like that you set aside small amounts each pay period to pay future bills. I simply don’t want to clear up brain space to track all the various accrual accounts for future bills.
Direct deposit into higher yielding account:
I am definitely going to sign up for this. Great idea!!
My parents do live in AZ and always cover gas/beer/food when we go out. Gas for this hog is a HUGE expense. The tank is 54 gallons, and it takes premium. A full tank will usually last 1-2 weekends depending on what we’re doing.
Thank you again for the great comment!
The simplest no-fee card is the Fidelity Rewards Visa Sig.
2% back on everything, set up to auto deposit into a Fidelity account after $50 threshold.
(used by Mr. ESIMoney himself 😉 )
Otherwise, a quick “best no fee credit cards” search will yield many geared toward whatever category of spending you do most (some with really good intro bonuses).
At the very least, a call to customer service might result in your current card waiving the fee for a year. Can’t hurt to ask.
Scale #48 says
Awesome, thank you! I’ll definitely take a look
I have a couple of comments on your very well thought through approaches:
1. You have a great way of methodically sorting and adding up your assets. I especially like that you add your company match in to your denominator for calculating % savings rates and even better that you recognize that a dollar of Roth is more valuable than a pre-tax account dollar. In thinking through your liquidation value, though, you should not include social security or medicare tax rates in that combined tax rate, because those taxes have already been paid on that money and will not be charged again when you cash those accounts out.
2. Like most ESI readers, I am of course a fan and a user of index fund investments. However, target date funds presume that a fixed percentage of various investments can be determined, but I would argue that the optimal mix will depend on personal circumstances, including $ level of savings. Life is not all about percentages, and absolutes often matter. For example, many including you like to have a 6 month emergency fund. That is based on level of spending need and not a percentage of your net worth. As you acquire more wealth, the mix that you will prefer between investment asset classes will likely vary, but a target date fund will just keep on rolling with the same percentages.
3. Related to item 2, I like to keep my investments in etfs of single investment types and avoiding blend of assets funds. This allows me to sell asset classes that are losing to harvest capital losses (in accounts outside of retirement accounts) and donate winning investments for charitable giving (which avoids capital gains taxes). Money in taxable accounts in target date funds will by formula sell stocks when they are up and as you get older, forcing you to realize and pay taxes on capital gains on those formulas on not based on your optimal timing.
4. A possible budgeting strategy that you could adopt if you have a high deductible health insurance plan is to max out your HSA and then pay cash for medical deductibles, allowing the HSA to build tax free.
Scale #48 says
@PWilliam – Thank you for the comment
1. I can’t believe that I didn’t think of this. Thank you for pointing out this error. I’m going to update my calc right after I finish this response.
2. You make a very good point. Would you mind sharing your framework on investment allocation & rebalancing?
3. By single investment types, do you mean sector & country ETFs? I plan on being very thoughtful about asset location, especially as my taxable brokerage account becomes a larger part of my net worth. As you probably noticed in my interview, I stick with very broad based index funds.
In general, the asset location is as follows:
REITS & other high dividend paying ETFs & higher yielding assets (EM) -> Roth
Broad market index funds (US & International) -> Traditional (although I can’t split my investments in my 401k between Roth vs. Traditional dollars). For example, if my 401k is 50% Roth & 50% traditional, I am unable to invest the roth dollars in the international fund and the traditional dollars in the US fund. The dollars would be split evenly between the two types of accounts. This tidbit really makes me appreciate the segregation of the Roth IRA account.
Cash/tax-exempt muni/growth stock ETFs -> taxable
All of this will change as the taxable brokerage account gets larger. I definitely want to take advantage of the favorable long-term capital gains tax (while it’s still around)!
I really like the idea of donating the winners while tax-loss harvesting the losers!
4. Fortunately (or unfortunately from an HSA perspective), I don’t have a high deductible health insurance plan. Great idea, but unfortunately it doesn’t apply to my situation.
A bit unrelated, but have you or anyone else reading this blog ever thought to fund a 529 account in your own name with the ultimate goal of funding your future children’s schooling? From the limited amount I have researched on this topic, switching the trustee to your children is allowed even if the account was opened before they were born. It seems like this approach would give me a few extra years of compounding. The risks being: (1) locking up the money in an account that isn’t accessible, (2) not having children and having to take the earnings as taxable income, and (3) having children who have no interest in higher education.
Thank you again for sharing the wisdom!
RE. 2., I have fixed percentage allocations that I follow for new investments and rebalancing (15% large cap, 20% midcap, etc.), with the idea that I consider investments as a whole, rather than trying for those allocations in each account. I use work 401k options within this framework and then complete the % allocations by buying Vanguard ETFs in my taxable brokerage account, as well as our Roth IRA accounts which I also have in Vanguard ETFs in Vanguard brokerage accounts. I try to do all rebalancing within retirement accounts, so that I never trigger capital gains on the rebalancing sales, and that is fairly easily accomplished by having the same ETFs in both the taxable account and the Roth accounts. However, if an allocation class is down (such as emerging markets last year), I will often sell to get a capital loss ($3,000 of which can be used to reduce taxable income and any beyond that can be rolled over to the next year). To avoid changing my asset allocation plan when I do that, I take the proceeds and buy a similar ETF (for example sell VWO and buy EEM) to avoid wash sales. After a month, if it has not risen, I will reverse that sale (sell EEM and buy VWO), which again retains the asset allocation. When there is a capital gain on my ETFs (mostly the case over time), I never sell those shares, thus avoiding capital gains taxes.
Every few years, I donate appreciated shares to my donor advised fund, which I then use to make donations to the charities that I support. That is a very tax-efficient way to donate, but it requires a good amount of liquidity to donate multiple years worth of donations in advance. I am older than you and certainly did not do that when I was younger, but I have donated some appreciated shares that I bought back when I was younger, so it is something to keep in mind for later. All of the above strategies require that you use “specific identification” for your cost basis. I pity those who allow brokerage firms to just use average cost basis for their capital gain/loss/donation accounting, and I urge you to transition to specific ID, which is never worse and typically better for tax management.
Re. 3, I mean asset classes (large cap, midcap, Russell 2000, emerging markets, developed markets international, etc.) and not necessarily single-country or the like. I do have an energy ETF (Vanguard VDE) as a hedge against my own gasoline and heating usages.
Scale #48 says
2. Using the retirement accounts as a rebalancing vehicle is a smart idea. I haven’t had to flip large allocations given the size of my portfolio. I use new contributions to rebalance to target weights. This won’t always be the case so I will definitely use the retirement vehicles to harvest any gains, tax-free.
On the doner advised fund, what $ amount do you think is required to get one of these up and running? I would definitely like to donate when I am older and more established, and I would rather make one large contribution to a charity that I believe in rather than a bunch of small annual donations that may or may not make a difference. if there is a way to contribute 5% of my pay each paycheck to the DAF, and let it appreciate until I am older then I would like to set one up asap. Great point on the specific identification. I will definitely keep this in mind!
You can definitely use a DAF to build up funds for a large future donation. I use Vanguard, which has a $25,000 minimum to open a DAF. They are as always the low-cost leader, but others are fairly inexpensive and have lower opening minimums. Meanwhile, things are more complicated for DAFs with the new tax law. For most people, the $10,000 limit on state and local tax deductions (grumble, grumble), coupled with the $24,000 standard deduction has made itemizing deductions unfeasible. Mortgage interest is still deductible, but most of the ESI crowd (including me) pushes for no debt, so I have no mortgage). Thus, one needs to donate $14,000 just to break even on the standard deduction. The tax-efficient strategy is thus to “bunch” donations into the DAF in some years, while itemizing deductions those years, and then take the standard deductions in other years. For example, my wife and I donate about $14,000 per year to various charities. We donated $65,000 to our DAF last year, pushing our itemized deductions to $75,000. This year and likely next year we will take the standard $24,000 deduction and make our donations out of our DAF. In a few years we will make another chunk donation. The result is an extra $13,000 of tax refund in the bunched donation years and regular taxes in the other years. I am in my 50s, so a different stage in life. We are going to do this more often than our annual donations would require, so that we can make these tax-deductible donations when retired, as well as some of the larger gifts that you indicate you want to do. I believe that prosperity comes with a moral imperative to give back.
Also, I totally agree with your asset location plan, and I have a similar sort of philosophy in mine, although not super flexible due to the lack of Roth investments in my 401(k)–Roth has only recently become and option, so Roth is a small % there. I share your frustration on blended Roth/traditional accounts. I have different but equally frustrating forced blending in mine.
In regards to a 529 plan – we opened one when our daughter was 2. I might end up taking classes for my masters or certificate programs. Our investment adviser suggested I put our daughters in my name for the time being. When I do take a class I put more money into the plan than I usual monthly amount so I’m not “cheating” her college plan. They said I shouldn’t have any problems switching it to her when she gets closer to college years. She’s just in preschool now. Good luck!
I am 35 and probably exactly 8 years ahead of yourself in terms of FI:
-Keep the boat. As you age your priorities will change, you will look back on the boat with find memories. Mine is a muscle car I overspent on.
-Layoffs suck but are a part of the economy and working in it. Stay optimistic; if your redundant take the cash payout and move on. If not, keep working. A firm rarely lets go of the best talent. Remember that.
-Buy a property. Paying off a mortgage, long run is a form of forced savings. Google for more info and views.
Scale #48 says
@Mohammed – Thank you for the comment!
I appreciate the contrarian view on the boat!
Fortunately, or unfortunately, I made it through the layoffs unscathed. It wasn’t a situation where I had the option to take the severance and run. I’m a bit more concerned with stunting my career growth by sticking around a company with limited potential.
What are your thoughts on buying a property vs. fully funding retirement accounts? Do you have any thoughts on buying property out of state where it’s more affordable?
I really appreciate the comment!
Keep the boat. It’s a river boat (freshwater) stored out of the water which is far less hassle and expense than a boat stored in saltwater. It sounds like you/your family get quite a bit of use out of it compared to many. Consider selling partial ownership to your parents as they get more use out of it than you – then you can share the expenses. But even if not, keep it until you don’t enjoy it any more – I don’t think you’ll regret it. If you get married and have kids, I guarantee you won’t regret having it then.
Scale #48 says
@Jonathan – Thank you for the comment!
I like the idea of selling part of the boat to subsidize expenses. I’ll definitely look into this more.
As of now, I’m leaning towards keeping the boat for a few more years while I figure out the life plan. Thankfully, the carry cost is pretty reasonable (knock on wood).
Really love how you are reducing your spending (lifestyle creep) from 2017 and onward and almost at maxing out your retirement accounts.
Have you looked at cooking classes or cooking clubs? It may be a great way to reduce your $800/mo restaurant bill.
Kicking up your Emergency Fund & seeking out a possibly more viable/stable company for employment are worthy actionable items.
Don’t sweat side hustles. Continue on reversing on lifestyle creep and get into a comfortable lifestyle before anything else. Otherwise any surplus cash flow may end up going to lifestyle creep again.