Another month, another update. A few random comments.
Good Reads/Listens/Watches
- Two good posts unpacking the $2T stimulus package:
- Kitces (link).
- GoCurryCracker (link).
- A subtle point regarding the stimulus checks: The check issued in a couple weeks will be based on 2019 AGI if you’ve already filed and 2018 if not. If you have lower AGI in 2019 than 2018, this creates an incentive for you to file your 2019 taxes ASAP (assuming you’re in the phase-out region). Conversely, it creates an incentive to delay filing taxes if your 2019 AGI is higher than your 2018 AGI. I filed my 2019 taxes before stuff hit the fan so this isn’t actionable for me. For those (like me) in the phase-out region whose 2020 AGI will be lower than your 2018/2019 AGI, don’t worry. The real stimulus amount is based on 2020 AGI (for taxes filed by April of 2021). For those in the phase-out region of the stimulus in 2020, this creates a 5% tax alpha for any pre-tax contributions (trad 401k/403b/457 + HSA) in 2020. If your 2020 AGI is greater than your 2018/2019 AGI, there isn’t a clawback provision. You’re just lucky.
- TLDR; For those (like me) whose 2020 AGI is less than their 2018/2019 AGI, you’ll get the remainder of the stimulus check in April of 2021 when you file your 2020 taxes. For every $1 you can decrease your AGI, you’ll generate $0.05 more in stimulus check as you slide down the phase-out region.
- The $300/person charitable deduction for non-itemizers is a nice feature of the bill.
- I’ve enjoyed John Oliver’s videos on the Coronavirus a lot (link).
- His ability to mix comedy into timely and in-depth reporting is masterful.
- I’ve seen more leadership and practical guidance out of his few Youtube videos on the topic than I have the leadership of our country.
- GoCurryCracker on course correction (link).
- It’s a pretty poignant article.
- “The Daily” podcast sharing the experience of a spouse caring for their Coronavirus-infected spouse (link).
- Pretty intimate and harrowing account that makes the crisis seem more personal than pretty much anything else I’ve read/listened to/watched.
- It made me feel completely childish for complaining about any inconvenience (including financial drawbacks) that the isolation measures have caused.
- BigERN’s recent thoughts on the trade-off between economic catastrophe and virus containment (link).
- Bogleheads reflect on lessons learned from the Coronavirus crash (link).
- Response of Google employee living full-time in a moving van to the pandemic (link).
Life
How are you holding up? I hope everyone is staying safe and sane.
- This post-apocalyptic world we’re living in is bizarre.
- This month has been one of the longest of my life.
- It’s been nice spending more time with the family (most of the time….).
- The lack of interaction with others has been difficult.
- Work has transitioned to online.
- I prefer teaching in-person, but admittedly this forced me to skill up and learn how to make decent recordings to share with students. That’s a skillset I’ll continue to utilize going forward when life gets back to normal.
- I miss interacting with my colleagues.
- I’ve heard of other workplaces having a “remote coffee break” in which colleagues have a Zoom meeting to connect and shoot the breeze. Our department is going to try that on a somewhat regular basis. I’m looking forward to it.
- With nothing better to do, I’ve started exercising more. I’ve done squats for the first time since Jan 1. And I’m running a few miles with the dog most days. I took a 15 mile bike ride yesterday (something I did daily in real life).
- Our family started its annual “marathon in a month” tradition. The adults and FC1 are doing 2 miles per day with the rest of the kids doing 1 mile per day. It’s a really fun tradition; I recommend it.
- After a rainy few weeks, the weather is finally starting to turn for the better. What a morale booster that has been.
- I officially moved the blog to a $5/month DigitalOcean droplet (link).
- The FinanceBuff and a good friend both recommended Linode to me, which is the same basic idea as DigitalOcean. I tried both and found DigitalOcean to be slightly more idiot proof (helpful when you have no idea what you’re doing). I’d recommend either to the aspiring blogger. $5/month for lightening fast WordPress hosting with the ability to scale up as volume grows. You do, however, need to feel comfortable typing a few commands into a Linux/Ubuntu shell.
- I’m really curious to see how the virus effects the frothy real estate market. I wouldn’t be surprised if this were the catalyst for a sizable drop in home prices.
This month’s finances
- The good:
No catastrophes.- Still employed…
- This is surely decimating the state coffers (reduced sales tax & income tax revenue + increased spending on social safety nets). The virus will almost certainly reduce student enrollment in the fall so it’ll be interesting to see how bad this hits the university. I worry things could get ugly.
- It’s easier to spend less money while quarantined at home.
- It’s a forced subsistence existence; good for savings rates and horrible for (much of) the economy.
- I guess we now have the answer to the famous riddle: what would happen to the economy if everyone were frugal (reminds me of this 2012 Mr Money Mustache post here).
- The bad/abnormal:
- Global pandemic, causing widespread physical and economic turmoil.
- Our 100% equity portfolio (predictably and deservedly) took a beating (a $124k loss to be precise).
- Since starting this blog, I’ve had cumulative investment losses of $21k. When including my pre-blogging life, I have above-zero gains but not by much (thanks to being in grad school for most of the 2008-2020 bull run). Hopefully sequence of returns risk can work to my benefit through the eventual recovery as I continue to dollar cost average…
- Our 100% equity portfolio (predictably and deservedly) took a beating (a $124k loss to be precise).
- Dog
- $100 for obedience training.
- $59 for bike leash.
- One of the better purchases I’ve made in my life (link).
- Global pandemic, causing widespread physical and economic turmoil.
Full version is downloadable here (link).
Footnotes:
- Fidelity unambiguously has the best HSA on the market. $0 admin fees + $0 expense ratio funds.
- I lazily approximate home value as my historical purchase price.
- I have a 15Y mortgage which results in much larger principal payments than a 30Y mortgage. Since principal payments are simply transfers from one pocket (assets) to another (debt reduction), I treat such cash flows as savings.
- ~$0 cell phones described here.
- All expenditures at Costco & Walmart are classified as “Food at home” for simplicity (even if it’s laundry detergent, clothing, medicine, toys, etc).
- 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). If you prefer to DIY (as I do), then a three-fund portfolio is great (link).
- 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.
- ETF’s are slightly more annoying to hold relative to index funds. With ETF’s, you must 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. Bogleheads discussion here (link).
- I continue to own VTSAX rather than FZROX and in my taxable brokerage account because it is more tax efficient due to lower capital gains distributions. Bogleheads discussion here (link).
- 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.
- CA’s 529 plan has the lowest expense ratio US equity index fund of any in the US (link). I’d have 100% of my money here if not for the state tax deduction I receive in my own state.
- I own one share of Berkshire Hathaway (B Class) for the sole purpose of getting 4 free tickets/year to Berkshire’s annual meeting.
- I bought 100 shares MoviePass for $0.0127/share to be able to tell my students that I held a stock that went to zero. So far, the stock price stubbornly remains above zero.
Disclaimer: This site is for entertainment purposes only, as disclosed here: https://frugalprofessor.com/disclaimers/
I’d love to do a virtual coffee date with you!
I worry about enrollment for new students, plus attrition for current students. It’s not a sunny outlook currently.
I’ve been meaning to pick your brain on how you’re surviving. I’ll shoot you an email to set something up later this week. It’d be fun to catch up. Hope you’re doing well!
The prospects for higher ed are mixed (private vs public, near vs long-term) but the uncertainty is huge: will we be open for in-person classes in fall? Many shoes getting ready to drop.
On Zoom: two new zero-day exploits just found. It’s now a “major security risk”. Startups aren’t antifragile.
The tradeoff on Roth vs pretax for 403b, etc. is interesting. Yes, Roth costs a chance at the stimulus check. But in the long-run what’s the effect of $2T (plus the next likely fiscal stimulus) on future tax rates? Can one optimize for both? 🙂
Andy,
The question about what $2T in stimulus will do to future tax rates is certainly an interesting question. Like you, I certainly don’t have the answers here, but your point is extremely well taken.
I’m still predicting that the brunt of the future tax increases will fall to the wealthy the future. If future taxes are continued to be levied on income rather than wealth, a frugal family happily living on < 400% FPL will likely escape much of the brunt of future tax increases. Of course, this is pure speculation and who knows what the government will do going forward with that ballooning level of debt. For now, at least, we should be thankful for near-zero interest rates on that debt (in fact, below zero after accounting for inflation).
C’mon 50 year bonds.
Hadn’t heard of 50Y bonds until you mentioned it. Hard to believe that’s not an April fool’s joke.
The muni market is going to be bad for a bunch of states. My friends who are experts on state balanced budget requirements are watching how the states handle those really carefully. All depends on what the ratings agencies are wiling to let happen.
Those are some interesting thoughts. I live in a balanced budget state, so I guess we’ll see what happens. This can’t be a good time to be employed by the state government.
Thanks for the clarification on the 2020 AGI issue. I was worried there might be a claw-back but good to know there won’t be. We are in the phase-out range but I am happy to get something at least.
Glad you found the clarification helpful. Hopefully I’m not wrong. It’s a complicated program.
I have an interesting situation regarding the tax credit. Unmarried mother and father living together with child.
Mother files as single for 2019 and claims child as she qualifies for EITC credit. Expect to receive full stimulus check of $1200 + $500.
Father files as single for 2019 and is in the phase out amount. Expect to receive $400 stimulus check based on 2019 filing.
Next year, when we file 2020 taxes:
If father claims child for 2020 and therefore can file as head of household, then he would qualify for full $1200, so would get an additional ($1200 – $400) = $800 back on tax return, plus would he also get $500 for the child?
The mother files as single for 2020, but would not have to give back any money because there is no claw-back.
Surely, this is not how it works. Seems like double dipping. I know there are several parents out there that alternate each year who claims the child, so this is not that uncommon of a scenario.
That scenario is quite interesting but I’ll readily admit that it’s above my pay grade! Sorry that I can’t help you out!
If I had to venture a guess, I’d assume that the tax law is not sophisticated enough to prevent the scenario you’re proposing.
Many comments on fairness, lack thereof, and the difficulty of being both simple and fair for these credits at https://www.bogleheads.org/forum/viewtopic.php?f=2&t=310450.
Thanks for sharing that Bogleheads link. I’d seen the thread you linked to and also found it to be interesting. The stimulus is obviously far from perfect, but I believe it’s about as well as we could have hoped given the constraints.
Small typo – you may want to cut the word “flu.”
Thanks!
With my oldest heading to college this fall, it will be interesting to see how the university experience is impacted. I found this read somewhat enlightening: https://www.profgalloway.com/post-corona-higher-ed
Thanks for the links, especially the Kitces link on the CARES act as I was looking for details on the above-the-line charitable contribution.
Thanks for the Galloway link! I’m certainly keenly interested to see how this effects higher ed.
If I were a betting man, I’d wager that in-person classes will be cancelled until Aug 2021.
Also came here to compliment on the nice set of links – well done!
After 2 years of homeschooling in a 1000 sq ft apartment with no yard I dare say we were built for this. 🤣 So excited for stimulus, it means in just 10 more months we will FINALLY be down to paying on our last loan. Glad you guys are surviving, most of the time 😉
Congrats on getting so close to repaying your last loan! That’s huge news! Keep up the good work!
On the homeschooling dimension, it’s great that you’re so prepared for this. Hopefully you can continue to keep your sanity.
What do you think of UGMA/UGTA accounts? Minors aren’t required to file for the first $1,000 (or so) unearned income?
This person agrees with you: https://www.bogleheads.org/forum/viewtopic.php?t=135851#p2005687
I haven’t done this personally nor do I plan on doing it. The added complexity of managing 5 more accounts for my kids (as well as the tax implications) makes my head hurt. But you’re right; I could potentially save a few bucks in taxes for doing so.
How frequently are you rebalancing your (equity) portfolio? Do you know how Vanguard does it?
I only have equities, so there hasn’t been much rebalancing to be done. With respect to the domestic vs international rebalancing, I find it easiest to accomplish via my 401k contributions. If I’m too heavy in domestic, then I change my new contributions to be more international heavy.
In this manner, I never have to sell. I simply get to my target portfolio through continued purchasing of the assets I’d like more of.
Hi Prof,
I first wanted to say thanks for a few valuable ideas I’ve picked up from your previous blog posts.
1) I moved about 100k to Merrill in the fall and picked up a $375 bonus. I qualified for for the 75% preferred reward bonus. I can now expect to average ~$100 per month in credit card rewards and I’m sort of mentally earmarking this cash flow as my “$50 car payment for life” a la rootofgood.
2) I’ve adopted a Fidelity brokerage account as my primary bank account. I love it!
3) I got the $750 reward from HSBC. This reward has changed my mind about stockpiling cash and in the current COVID19 world I’ve enjoyed having several 10k/15k/25k piles of cash that I can periodically move around to earn account bonuses and interest. I’m on track to earn $4k+ of risk free, FDIC insured returns on an average cash balance of ~$75k.
I too am worried there will be permanent damage to higher education as universities (particularly those funded be state taxpayers) are proving to be redundant. You may have written about this before but I was wondering if your current FIRE plans are conditional on getting tenure at your current university? If so, do you put in a massive amount of hours each week in order to make that happen (I ask because you seem to be a devoted family man)? What is your backup plan? If not, how does that impact the amount of effort you are willing to devote to the hassles of publishing peer reviewed academic research? Do you enjoy teaching enough to teach part time as part of a semi-retirement strategy or simply as a margin of safety for the 4% rule?
Thanks again! Keep up the good work!
Scott,
Congrats on adopting several of my crazy ways (5.25% BoA bonuses, banking with Fidelity, and HSBC bonuses). As you’ve surely discovered, these actions require some non-trivial startup costs but will pay dividends for the rest of your life. I’ve been at this optimization game for about 15 years now and surely my strategies will adapt over time, but that’s part of the fun of it.
I’ll only consider my blogging career a success if you’ve also minimized your cell phone expenses to basically zero. This is the sacred cow for most people.
I’d be much more excited about bank account bonuses if they were tax free. However, in this zero-interest rate environment, this is one of the few chances we have to earn above-zero interest. I’ve ebbed and flowed on the brokerage/bank account bonus game over the past 15 years. I’ve surely pocketed > $10k over that time period. Looking at your $4k return over this year, perhaps I’ll have to up my game. Many Bogleheads do the same.
Regarding the upcoming crisis in higher ed, I’m not sure what to say. I agree that the damage is likely to be permanent. How bad, I’m unsure. In the face of such uncertainty, what’s my strategy? The same as it’s been for the past 15 years: take one day at a time, put one foot in front of the other, try to learn something new each day, try to be a good person and father and husband, try to keep my body healthy, and try to enjoy life. With those objectives, I’m hopeful that good things will continue to happen in the future, though I acknowledge that the future is quite uncertain.
Regarding tenure, I’m not sure what to make of it. Depending on how the next few years go, there’s a chance I get tenure. There’s also a chance I don’t get tenure. I try not to let it bother me too much either way. If tenure happens, life is pretty good here in the midwest despite the lack of mountains. If not, then hopefully I can take my skillset elsewhere to earn a living (in academia or elsewhere). In either case, I hope that our assets will be large relative to living expenses to minimize the financial stress of raising 5 kids. The nice thing is that the last 15 years of financial discipline have provided a great foundation for the rest of our life, come what may.
I hope you’re doing well in this uncertain time!
– FP
This is one of the most comprehensive monthly reports I have ever seen. Ditch the professor gig, may make more money as a CFO : )
Max
It’s been fun putting this report together and watching it evolve over the past 3.5 years. When I first started it was much more primitive: https://frugalprofessor.com/financial-update-oct-2016/.
A year or two back I wanted to automate this sheet and turn it into a software program that competed with Mint, Personal Capital, etc. But then I realized that I din’t know how to code well enough. So the idea died.
It’s probably a good thing. When I solicited opinions from others about my idea, the consensus was “why the hell would any person want to understand at that level what is going on with their personal finances?”