Tuesday, November 7, 2017

Major milestone reached: over 200K invested in my 401K

Someone on the ChooseFI Facebook group pointed out that the above balance is an 8 digit palindrome made with only 2 different numbers!
I just hit a new milestone in my 401K: my investments have surpassed 200K in value!  This bull market has really helped to boost our investment returns.  While 200K isn’t enough to retire on*, it’s a great milestone to reach and keeps us encouraged to stay the course with our investments.  My last big 401K milestone was surpassing 100K in value in September 2015.  Second to our real estate portfolio, my 401K is our best performing account.

A 401K is an employer sponsored salary deferral account that allows you to contribute part of your income towards your retirement.  These contributions come out of your paycheck pre-tax and can be invested into a portfolio of mutual funds.  Contributions into your 401K lower your adjusted gross income, which can lower your tax liability.  Currently you can contribute a maximum of $18,000 a year into your 401K (if you are under age 50).  Starting next year in 2018, you can contribute a maximum of $18,500.  For more information regarding 401Ks, read this Investopedia article.

I started contributing into my 401K in October 2011, a little over 6 years ago.  I started off with a 3% contribution from my paycheck.  Then I kept slowly ramping up my contributions, just 1% every month or two.  I increased the contribution amount and then made our lifestyle adjust to the decreased take home paycheck.  I didn’t start maxing out my 401K until June 2014, when the maximum was $17,500 per year.

It’s amazing how much money you can accumulate by consistently investing into a bull market.  I’ve been a part of a profit sharing program with my company for the last 4 years, and distributions go into our 401Ks.  I actually prefer that these distributions go into my 401K, and not my bank account.  This helps me hide my bonus money from myself so I’m not tempted to spend it all.  Also having a company match provides an instant return on your money.  Saying no to the 401K match is like saying no to a free raise.  Don’t leave free money on the table.  My company offers a 3% match, while other companies may offer more.  Company matching contributions do not count towards the maximum individual contribution amount.    

People (and the media) have told me countless times to get out of the stock market for various reasons (double dip recession, European debt crisis, Grexit, US government shutdown, terrorist attacks, oil crisis, Brexit, a new president, etc). The entire time I just kept my contributions on autopilot, investing whether the market was up or down and just ignoring the noise.  Consistent contributions into my 401K allow me to dollar cost average into the stock market.  When the market is down, I purchase extra shares and when the market is up, I purchase less shares.  This takes the emotion out of investing.  My taxable and IRA accounts didn’t perform as well because I was always over thinking my investments: waiting for the market to pull back before buying more shares, exchanging stocks for bonds when the market reached a new high, or only making new purchases on a down market trading day.

Automatic investing simplifies your investing so you don’t overthink your investment timing
.  Fidelity investments did a 
study of the portfolios that performed the best from 2003 to 2013.  They found that the best performing accounts were from investors who were dead!  This is because these dead investors didn’t try to dance in and out of the market.  The investors who tried to time the market ended up performing far worse than those that just stayed the course.   

Right now I am 90% invested in 3 funds designed to mimic VTSAX, the Vanguard Total Stock Market (71% S&P Fund, 6% Vanguard Mid Cap, 13% Vanguard Small Cap Growth) as well as 10% into a Vanguard Health Care index.  These are simple index funds and there is no magic to our asset allocation. 
This last year has been great with a 26.2% rate of return.  I don’t expect that to continue going forward.  But I do expect to continue maxing out the 401K.  This all goes towards funding our financial freedom and retirement. 

Are you maxing out your 401K contributions?  If not, it’s time to increase your contribution amount - even a 1% increase will make a difference long term.  

*Someone from the ChooseFI Facebook Group pointed out this link where you can read about 8 countries where 200K is enough to last 30 years! 

Wednesday, November 1, 2017

Side hustles October 2017

The great thing about doing side hustles to generate extra income is that you can hustle on your own terms.  The more hard work, time, and creative effort you put in, the more extra money you can make.  You can hustle as little or as much as you want, whenever you want.  It’s your extra money, and you can choose how you want to spend it.  Instead of focusing on what ideas don’t apply to you, try focusing on different side hustle ideas that you can implement to work for your situation.

Once a month (usually on the 1st), I like to post a short summary of our personal and financial situation for the previous month.  Here I’ll share some of what’s been going on with our lives and our side hustles. 

Welcome to November, did everyone have a good October?  I can’t believe 2017 is almost coming to an end.  I love this time of the year when the weather starts to cool down and the holidays start to clump together.  We love getting together with friends and family to celebrate these special occasions. 

October has been another fun month.  With most of our investments automated, we are guaranteed to reach financial freedom in due time.  We try to live a fun and purposeful life along our journey.     

This was the first year we took our son out to go trick or treating.  We went to the local mall and had him run around.  Our son has so much energy and he loves to explore new places.    
Whether it’s the mall or around our neighborhood, our son just loves running.  He’s finally getting more sure footed and isn’t tripping or falling much anymore.  
I hope the days of bruised and scuffed up kneecaps and elbows are behind us… at least until he starts climbing!

Rental property problem
Earlier this month, we got a call from our tenants at our rental property.  Water was dripping from the downstairs ceiling and they were concerned!  Since our regular plumber wasn’t available to help, I had to search Yelp for local plumbers.  After calling several companies and leaving messages, I received a call back from a plumber after 2 hours.  I guess it was a busy day for plumbing.  

Since this was an emergency, there was no time to get multiple quotes.  The plumber went to meet our tenants and quickly discovered that there was a leak coming from the toilet in the upstairs bathroom.   
A crack in the upstairs toilet caused the leak
Here's a hole in the downstairs bathroom ceiling waiting to be patched up
I purchased a new toilet at Home Depot online for $139 and had the plumber go pick it up.  He billed us $375 to remove the previous toilet and to install a new toilet.  Our handyman repaired the ceiling for $125.

The total costs of the emergency repair came out to be $639, well over our expected monthly profit form our rental property.  The repair was taken care of quickly while I was at work.  Thankfully, we have a large emergency fund for our rental property to cover repairs like this.  We used my wife’s new Chase Ink Business Preferred credit card to make the payments, helping her reach the spending bonus requirement.  All of the expenses are tax deductions.         

Here’s our monthly summary of side income that we have generated in the previous month of October.

Award Travel
On 10.15, I booked a free 3 night stay in Carlsbad through the Chase Ultimate Rewards travel portal.  We redeemed 30,687 Ultimate Rewards points to save $460.31 on the hotel stay.

Cash back
On 10.4, I received a $150 statement credit on my Barclaycard Arrival Plus credit card.  This was to offset a purchase I made at Venetian hotel in Las Vegas. 

My Barclaycard Arrival Plus has returned tons of cash back in 2017: $550 towards an Airbnb stay, $119.99 towards hotel stay at Hilton Narita hotel, and now $150 off hotel stay at Venetian hotel, Las Vegas.  That’s $819.99 worth of travel cash back in 2017!  I’m going to shift future spend on other credit cards because I’ve used up all of my Arrival points.  The new Arrival Plus card redemptions start at $100, and I don’t see myself spending $5,000 on the card just to get $100 cash back (earn 2x points per $1 spent). 

On 10.24, I received a $25 statement credit on my American Express Blue Cash Everyday credit card.  

AMEX offered an easy $25 statement credit after adding an authorized user and spending $250 within 3 months.  This no annual fee credit card earns 3% cash back at supermarkets and 2% cash back at gas stations and department stores. 

Survey Income
On 10.6, I received a check for $18 from M3 Global Research,
On 10.19, I received a check for $25 from E-Rewards Medical

Side Job
On 10.10, I received a check for $162.50 for teaching at the local university.  

Rental Income
On 10.5, we received a net profit of $430 from our rental property.

Miscellaneous Income
On 10.26, my wife received a $5 Amazon gift card for getting the flu shot provided by her health insurance work benefit.
On 10.28, I received a $50 Amazon gift card for doing a Ford Test Drive offer a few months ago.

Monthly Totals:
We saved $460.31 on award travel
We earned $175 cash back
I earned $43 from paid surveys
I earned $162.50 from my side job teaching at the local university
We earned $430 from rental income
We earned $55 from miscellaneous income

All of this totals $1,325.81 from our side hustles for the month of October.  Our second baby is coming in December and we can’t wait to meet her!  I expect our lives are going to be changing quite a bit when that time comes.  It’s time to step up our side hustle creativity.       

Saturday, October 28, 2017

How to increase your saving and investing rate

I first started working when I was around 16 years old.  My parents told me that if I wanted money, I would have to go work for it.  I’ve done many odd jobs and side hustles such as building computers, selling jewelry, product reselling, tutoring, being an information desk attendant, paid chauffer (before Uber!), and more.  What my parents never taught me was that I should try to save some of the money that I make.  I kept telling myself that I would start saving money “once I started my career.”  The thought of investing my money for greater returns never even crossed my mind.

From high school to college to graduate school and even after first starting my career – I was terrible with my finances.  Whatever money I made, I somehow ended up spending.  It didn’t matter whether I was making a little bit of money or a lot of money.  I never tracked my spending.  Sometimes I would even make purchases on my credit card, and then wait to get paid so that I could use my paycheck to pay off my credit card bill.  I was always one month behind – and it felt awful. 

While I was always good at making money, it took me decades to get good at saving money.  Once saving more became second nature, investing more was simply the next step.  It took a long time, but we have finally reached the point where we are comfortable with our finances.  Today I am going to talk about how you can start saving and investing more.    

Hide your money (from yourself)
Back when I had poor spending habits, whether I had a small paycheck or a large paycheck, I always ended up spending most of it.  I would always find myself just barely getting by.  My rent, bills, food, and entertainment expenses would all somehow get paid, but I was never thriving financially. 

Most of us will find a way to make our finances work and live on the amount of money that ends up in our checking account.  This is where hiding your money from yourself can work extremely well.  You are your own worst enemy when it comes to saving more.  If you hide money from yourself in your savings and investments accounts, you can spend everything in your checking account and still manage to hit your saving and investment goals.

There are several easy ways that you can hide extra money from yourself including: splitting paycheck direct deposits, increasing retirement contributions, and automatic investments.   

Split your direct deposit paycheck into separate accounts
Many companies that offer paycheck direct deposit can also split your paycheck into more than one bank account.  Instead of your entire paycheck going straight into your checking account, you can split your paycheck into one deposit into your checking account and another deposit into a savings account.  This is one of the easiest ways to effortlessly save more. 

To split your direct deposit paycheck, you can contact your HR department to have them set aside either a percentage of your total paycheck or a set amount into a separate bank account.  I recommend having your employer deposit enough money to cover your regular expenses into your main checking account, and then putting the rest into an online savings account.  Online savings accounts tend to have better interest rates.  I recommend and use CIT Bank, which offers 1.35% APY on balances up to $100K.  Since your money is held in an online bank, this provides a barrier to hopefully discourage you from raiding that account and spending down the funds.  

Just like with retirement contributions, if you automatically save a portion of your income in a separate savings account, you will be less likely to spend it.  Every time you get a raise or bonus, you can increase the amount that goes towards your separate savings account.  Even just increasing your savings rate by 1% each month can add up to a huge difference over time.  Since the amount of money that goes into your checking account will tend to be stable over time (while the amount of money that goes into your savings increases), you can easily avoid lifestyle inflation.  If you don’t see all this extra money in your bank account, you won’t be tempted to spend more over time. 

Splitting your paycheck allows you to save more without exerting any discipline.  

Increasing your retirement contributions
If you have access to them through your employer, 401K and 403B retirement accounts are the easiest way to automate your investments and accumulate wealth.  Retirement account contributions come directly out of your paycheck and are immediately invested pre-tax.  You simply select a percent of your gross income or a set dollar amount to contribute with each paycheck.  Investment contributions happen automatically so you don’t have to do anything when you receive your paycheck.  This allows you to put more money right away into your investments to let them compound and grow over time.  Retirement contributions decrease your gross income and may lower your tax liability.  Investing in your 401K is a win-win.      
Who wants to pay more taxes?!

Many companies offer an employer match up to a certain percentage of your contributions.  This is free money and you should never say no to the company match.  For example, if your company offers a 4% match on your contributions, you should be contributing at minimum 4% of your paycheck into your 401K.  Saying no to an employer match is like turning down a pay raise.  When starting off, I recommend slowly increasing your 401K contributions by 1% at a time.  If you increase your contributions by 1% every month, you will hardly notice the difference in your paycheck – and by the end of the year, you will now have a 12% contribution rate.  If you find yourself struggling to manage on that 1% increased paycheck deduction, then you can dial it back for your next paycheck.

Generally, 401Ks should not be accessed until you are 59.5 years old or you may be subject to a 10% withdrawal penalty as well as income taxes.  There are several ways to access the money sooner without penalty (and less taxes) such as through a Roth Conversion Ladder or with Substantially Equal Periodic Payments (SEPP).  See this Mad Fientist post for much more detail explaining how to access your retirement funds early.       

Automate your investment contributions
Vanguard makes it easy to set automatic contributions into your IRA, taxable or 529 accounts, with minimum purchase amounts as low as $50.  You can set your contribution rate to coincide with payday, that way a portion of your paycheck automatically gets invested.  You can also set your investment contributions to take place at the beginning of the month, every 2 weeks, or any other schedule that suits you.  This removes the discipline it takes to regularly invest in all market conditions. 

Why automatic investment contributions are so important
The market is volatile, and no one can consistently predict which direction the market will go on any given day.  If the market is going up, you may be tempted to avoid investing.  If the market is going down, you may be tempted to over invest.  Automatic investing simplifies your investing so you don’t over-think your investment timing.  Studies consistently find that those who dance in and out of the market end up performing far worse than those that just stay the course.  Fidelity investments did a study of the portfolios that performed the best from 2003 to 2013.  They found that the best performing accounts were from investors who were dead! 

Saving more doesn’t just mean spending less on something
When many people brag about saving, they like to say things like “I saved 20% off this new outfit,” or “I used this coupon to save $20 off this pair of headphones.”  Don’t forget that when you save money on purchases, it’s just spending less money and still decreasing your account balance.  If you spend all your time trying to chase the best deals out there, you will spend more time exposed to marketers trying to get you to buy more stuff.  Don’t let getting 50% off of something turn into paying 50% more for something you may not have needed.  Browsing deal sites regularly exposes you to so many other deals on things you didn’t even know you wanted.  Instead of trying to resist the pressure of advertisements and sales trying to get you to consume, avoid being exposed to marketing in the first place. 

Instead of thinking “how can I buy this item on sale?” consider “do I need this item at all?”  Buy what you need, when you need it and don’t obsess about the costs.  You’ll save much more this way in the long run.

Bottom line
The formula for financial success is an easy one: earn more, spend less, and invest the difference.  Hiding money from yourself can work wonders to increasing your saving and investing rate.  I track all of my spending with Mint and ClearCheckbook.  I track all of our investments with Personal Capital.  We are currently saving 50% of our income and investing much of that savings.  Our goal is to save 75% of our income.  Start now and work on slowly increasing the amount you save and invest.  Your future self will thank you. 
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