Financial Update – Aug 2018

Another month, another update. A few random comments.

Good Reads/Listens/Watches

  • I mentioned this in a footnote a few months ago, but I spent three days this summer starting to write a “book” to my former self about money stuff. As of today, it’s basically 60 pages of tax optimization. It has a few typos and it’s not complete, but you can download the draft here (link).
    • If you care to give feedback, I would appreciate it. I’ve been collecting comments for the past few months and will incorporate them into the next version. I’m most interested in the big-picture feedback of whether the contents are helpful or not.
      • Given my lifelong propensity to optimize and analyze, I think my former self would have devoured the book.
  • Really enjoyed this Mad Fientist Podcast in which he talks about his second year of ER (link).
  • GCC confirms that life is indeed really great when you are financially secure (link).
  • Justin at Root of Good reflecting on 5 years of retirement (link).
  • My Money Blog on running out of money in retirement (link).
  • Warren Buffet on all-time high equity valuations (via My Money Blog) (link).
  • A father & son duo who we met at Grave Lake in the Wind Rivers compiled a great video on their experience with beautiful 4k footage (link).
    • Apparently they have been doing an annual backpacking trip for the last 18 years. It was really neat to observe that relationship and hear of their experiences.
  • Read/listened to a few books on poverty:
    • Educated: A Memoir
      • Of the three, I liked Educated the most. It reads like fiction given how crazy the author’s childhood was.
    • Hillbilly Elegy: A Memoir of a Family and Culture in Crisis
    • Evicted: Poverty and Profit in the American City
      • I only got halfway through this book before I put it down. Unlike the previous two books, this one doesn’t have a happy ending.
    • According to government classifications, I’ve spent 7 of the last 10 years in poverty while in grad school (2 years mba + 5 years phd) with anywhere from 2-5 kids. I was classified as living in poverty despite having $100k-$250k in assets because the U.S. defines poverty strictly in terms of income and family size (link). When you can happily live on nothing, taking a 70% pay cut to go from engineer to impoverished PhD student was no big deal. In fact, with government subsidies (like the $10k annual EITC + ACTC credit), the transition from almost $100k annual salary to $25k annual salary was FAR less dramatic on an after-tax basis than you’d might imagine. While living at $25k, we were still able to max out BOTH of our Roth IRAs every single year of grad school. Living in a low cost of living town in the Midwest made the $25k/year annual income go a long way. Blogger Justin at Root of Good, who has 3 kids, spends around the poverty limit each year despite month-long overseas vacations due to travel hacking.
      • Here Root of Good documents annual expenditures for the last several years of $31,708 (2017), $38,991 (2016), $23,802 (2015), and $34,352 (2014).
        • I have major budget-envy towards RoG. With a paid off house and a lower property tax bill (my unrelated, but aspirational real estate goals), my annual cost of living would plummet by around $15k. I can’t wait for that day to come.
  • 14 page discussion at Bogleheads on Fidelity’s new zero expense ratio index funds (link). Summary of discussion:
    • This is great news for investors. Competition between investing firms on pricing is great.
    • These zero expense ratio funds are only available in brokerage accounts & IRAs (i.e. not in 401ks….thanks TFB for the correction).
    • Part of how Fidelity keeps there costs so low is revenue from securities lending, which is letting people borrow your investments to sell short (i.e. they borrow, sell, hope market goes down, eventually repurchase at whatever the prevailing market prices are at the time, return them back to you without you ever knowing what happened). It’s common for firms to do this and not a reason for grave concern.
    • Vanguard currently has patents which eliminate capital gains distributions in their mutual funds. These patents expire in 3-4 years. Before they expire, Vanguard funds will provide a higher after-tax return than Fidelity funds due to taxation of capital gains distributions. After the patents expire, it’s possible (even likely?) that these Fidelity funds will produce higher returns due to lower expenses.
      • For now, I’m sticking with VTSAX for my taxable brokerage, though I fully acknowledge that there are plenty of good alternatives out there that are just as good (ITOT, etc).
        • I continue to like the simplicity of Index Funds over ETFs. For an informative read on the differences between the two, read this Bogleheads Wiki page.

Life

  • I bought a really nice new camera, blowing up our “other expenses” spending this month. It’s the largest splurge I’ve had in the past decade and a half of marriage. What prompted it was looking back at our old pictures (via Google Photos) and realizing that our old SLR pics were so much more enjoyable to look at than the crappy cell phone pics. Though my decade old Nikon D40 is still a great camera, it’s performance is obliterated by current technology (high ISO, white balance algorithms, resolution, autofocus).
    • Like our television purchase, it’s amazing to upgrade technology once a decade!
    • I’d like to think this is a wise investment, though only time will tell.
  • After 5 years of $15 2mbps/1mbps then $20 3mpbs/1mpbs internet through Time Warner cable (now Spectrum), I decided to upgrade internet to 20mbps/20mpbs for $45/month. Doing so gave me anxiety, but waiting months (literally) to back up our library of photos/videos to the cloud via Google Photos at 1mpbs became intolerable.
    • A few days after upgrading, I’m convinced that fast internet (anything over 3mpbs) is a luxury that you should only indulge in when you are in a decent financial position. It is amazing how functional 3mpbs internet is in terms of simultaneously utilizing VOIP & streaming high def (720p) content. If you’re looking to save some money, be smarter about your internet consumption. One of the lowest hanging fruits to enjoy better internet is to invest in $100 in a good router (we have the Asus OnHub and love it) and locate this good router centrally in your home, not obscured by computer monitors, etc. Don’t assume that higher speeds will give you noticeably better performance.
  • I helped my 86 year old grandfather back up a bunch of photos, journals, and documents (i.e. obituaries, marriage certificates, etc) to Dropbox to share with the extended family. It’s fascinating to go back in time and read stories of your ancestors. Despite being separated in time by decade/centuries, they were once people like you and me, with hopes, dreams, and fears. Strengths and weaknesses. Reflecting on this made me want to be more deliberate and strategic about what I want my legacy to be. It was like that “seize the day” scene from Dead Poet’s Society (link).
    • On that note, any recommendations on what series to binge watch on Netflix this weekend?
      • Just joking….?
  • Back to the grind with 80% of the kids in school, with the 5th in preschool again.
    • Mrs Frugal Professor is teaching a preschool coop with some other moms this year, replacing the $150/month recurring expense from the YMCA preschool last year. Woot!
    • After a relaxed summer dress policy at work in which a t-shirt and shorts were the norm, I resumed conforming to the norm of dress shirt and slacks. My dress shirt feels as suffocating as a straight jacket.
  • Feels like fall has arrived. There have been several cold and wet bike rides into work this month.
  • The kids and I played with my oldest daughter’s telescope and saw Saturn’s rings! It was incredible. The picture, included below, doesn’t do it justice, due to camera shake while taking the picture.
  • We had a fun time swimming at a neighbor’s pool.

Child #5 is unamused about the back-to-school photo shoot.

Saturn’s rings as viewed through my daughter’s telescope! The picture does not do it justice due to camera shake while taking the picture.

Karate moves off the diving board.

A failed diving attempt.

“D-” for effort.

Goodbye free summer bowling (link). It was fun while it lasted. I bowled a 198 last week (high of 222 this summer) but failed hit my goal of beating my brother’s personal best of 246. Better luck next year?


I solved a Mastermind puzzle in three moves (with a bit of luck)! I love this game! Brings me back to my childhood in the 80’s. The retro version of this game is the only way to go, and is exclusively sold at Target (link).


Order-of-magnitude increase in internet speeds.

And some more pics of the Wind Rivers. Why? Because they make me happy and because they happened during the month of August. This is on the Northern side of Texas Pass.

Top of Texas Pass (again), overlooking the Cirque of the Towers. 11,500 ft.

Eastern tip of Grave Lake. close to where we met the father & son YouTube duo.

 

This month’s finances

I really struggled this month deciding between taxable brokerage and superfunding a California 529 account. It was basically a coin toss for me which landed in favor of the taxable brokerage account.

Pros of taxable brokerage: if smart (like GCC), this will be tax free on back end just like a 529 would. Able to use funds for non-education purposes if needed.
Cons of taxable brokerage: dividend tax drag through the years = 2%*20% = 0.4%.

Pros of 529: I have a ton of kids so it’s unlikely I’ll oversave for college and have the problem of too much money in a 529.
Cons of 529: Less flexible if kids get scholarships, decide college isn’t for them, etc. These concerns, however, are mitigated by the high number of kids.

My wife and I still have no formal policy on college funding for our kids. This discussion on Bogleheads was interesting (link). I think our general idea is to pay for half. As of today, we want our kids to have “skin in the game.” As our kids get W2 jobs, we will begin to stuff their college savings into THEIR Roth IRAs up to their annual wages (or IRA contribution limits). Doing so has the advantage of the Roth funds easily being used for non-educational purposes as well (Roth principal for anything at any time, Roth interest for first time home purchase + retirement).

  • The good:
    • No catastrophes.
    • Expense ratios at Fidelity, where we have most of our investments though my employer, plummeted and are now reflected in the updated values below. This is not directly related to the Fidelity Zero announcement, but rather seemed to happen at the same time.
  • The bad/abnormal:
    • Camera.
    • More healthcare expenses.
    • $25/month increase in internet spending (i.e. $45/month total) in perpetuity.
    • Back to school shopping (clothes, etc) seemed to inflate our Costco spend this month by a few hundred dollars. I’m too lazy to reallocate these expenditures from “grocery” to “other expenditures.”

Full version is downloadable here (link).

Footnotes:

  1. I lazily approximate home value as my historical purchase price.
  2. I have a 15Y mortgage; which results in a faster rate of repayment. The true cost of the mortgage should exclude repayment of principal, which I show above.
  3. ~$0 cell phones as described here.
  4. All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, etc).
  5. Nobody knows the perfect asset allocation. Just pick one and run with it. Use a target date retirement fund as a benchmark if you want some guidance (link).
  6. I prefer Vanguard funds but my employer offers Fidelity instead.
  7. My low portfolio expense ratio is the primary reason why I don’t hold target-date funds, which have expense ratios anywhere from 0.16% to 1%. I can achieve a much lower expense ratio on my own due to Admiral shares, etc. And it’s not hard. Plus, a DIY portfolio allows one to tax-loss-harvest more easily.
  8. ETF’s are a pain to own relative to holding index funds directly. You have to deal with bid-ask spreads as well as the inability to buy partial shares. With a simple index fund, you don’t have to deal with either of these issues. I am currently invested in VTI b/c it’s $10/year cheaper than VTSAX in my Saturna HSA.
  9. The only other administrative cost not captured by my expense ratios is a $19/year administrative fee for my HSA at Saturna Capital ($15 per transaction + 4*$1/dividend reinvestment).
  10. The one blight in my expense ratio analysis is my 529 plan. The underlying Vanguard fund is almost free to hold (0.02%), but the high administrative fees bring the total cost of holding the fund to 0.29%. I abhor fees and would likely avoid 529 plans if I didn’t get to deduct up to $10k of contributions per year on my state return, saving myself $700/year in state income taxes.
  11. CA’s 529 plan has the lowest expense ratio US equity index fund of any in the US. I’d have 100% of my money here if not for the state tax deduction I receive in my own state.
  12. I own one share of Berkshire Hathaway (B Class) for the sole purpose of 4 free tickets/year to Berkshire’s annual meeting. Incorrectly classified as US stock index because it is a trivial holding and because it essentially is a US stock index.

Disclaimer:
This site is for entertainment purposes only, as disclosed here: https://frugalprofessor.com/disclaimers/

10 thoughts on “Financial Update – Aug 2018”

  1. Great post, and I’m excited to read the new sections of the book!

    One question. I admittedly need to learn more about ETFs vs index funds, but one thing in favor of VTI is that you don’t need 10k to get the .04% expense ratio. Also, it’s true you can’t by partial shares (a problem mitigated by the low-ish price per share of VTI), but if you have dividend reinvesting set up with Vanguard that will buy partial shares. Lastly, isn’t the bid/ask spread problem at least partially mitigated by placing limit orders at or just below the current price?

    Reply
    • Joey,

      Thanks for the comment. Unfortunately I’m just reposting more prominently the old version of the book (i.e. the same one you already graciously read and provided feedback commented on). I haven’t quite gotten around to updating & adding new section yet but hope to do so soonish.

      With respect to ETFs vs Index Funds, you’re correct that VTSAX requires a $10k minimum to invest in. Until you hit that, you’d be invested in VTSMX (ER of 0.15%). Once you cross the $10k treshhold with VTSMX, you’d be automatically converted to VTSAX (ER 0.04%). To put some perspective on the magnitude of these numbers, at $10k in VTSMX, you’re paying $11/year more in fees (=10k*(0.15%-0.04%)). For me, it’s worth the $11/year in fees as you’re just starting out to have the absolute simplicity of index fund investing. Regarding the bid-ask spread, it’s my understanding (I’m not a market micro-structure expert) that you incur these transaction costs regardless of what type of order you place (limit, market, etc).

      For me, if I have $36.25 in my bank account that I want to invest in VTSAX, I love that I can put every single penny to use without having to worry about partial shares or spreads. I agree it’s not a big deal (spreads are TINY on the wildly popular & traded VTI + share price is low as you mention), but for me I love the simplicity of index funds. Plus, I like daily settlement. It just makes sense to me that the orders are settled once per day at closing.

      An unrelated, but interesting fact: You can’t convert VTI to VTSAX, but you can convert VTSAX to VTI if you ever needed to down the road.

      Reply
      • That makes sense–it definitely seems more convenient to own the index fund in the long term. At some point I’ll have to sell the VTI in my IRAs with Vanguard and buy VSTMX/VTSAX. Thanks for the response!

        Reply
        • Given that there are no tax implications for transactions within tax-advantaged accounts, I think the strategy of VTI => VTSAX is a great one (since you won’t pay a penny in taxes upon selling VTI and buying VTSAX). I guess my advice on the VTSMX => VTSAX path is primarily directed towards taxable brokerage holdings.

          Reply
  2. The Fidelity ZERO funds are available in IRA accounts.

    While paying off the mortgage reduces the interest expense, it also increases the opportunity cost. Root of Good’s housing expense isn’t just property tax plus maintenance. The money tied down to the house foregoes an income it could earn elsewhere.

    Reply
    • TFB, thanks for chiming in. I didn’t know about the Zero funds in IRAs. That’s great to know.

      You’re indeed right about the opportunity cost of capital for paying off mortgage early, which is precisely why I’m not prepaying the 2.875% mortgage off early with excess cash. But when I look at my budget as of today, I directly observe the “interest expense” line item. If I were to prepay my mortgage, I would not see a corresponding “opportunity cost” line item. I guess there is a bit of irrationality in me that gets excited about the cash flow budget going closer to zero while conveniently ignoring the opportunity cost implications. For example, when I look at my financial statements every month, I smile when I see monthly interest expense slowly decreasing to zero.

      Reply
      • When you pay the mortgage with cash from paychecks, that money was never invested. You don’t see the income it could earn elsewhere and you only see the interest expense going down. When you pay from selling existing assets, like I’m doing now because I no longer have paychecks, it’s very obvious on the financial statements the interest income also goes down.

        Reply
    • Thanks. Photography has been a lifelong hobby of mine, though I haven’t touched it in the past 10 years. Having a fancy-pants camera has certainly increased my motivation (and ability) to take good pictures again. Luckily, it’s a hobby with zero marginal cost (and modest upfront costs), much like hiking, climbing, frisbee, etc. These are my favorite types of hobbies.

      Reply
      • Agreed! We love these types of hobbies and they encourage us to just get outside. We tried our hand at geocaching this past weekend and had a blast! Lots of adventure, found some new areas/potential camping spots and had a tailgate picnic all for the cost of a little gas 🙂

        Reply

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