Financial Literacy

A small rant this evening…

This weekend’s WSJ had a small article about a three question test on financial literacy. The questions were very simple, but apparently only one-third of participants were able to answer all three questions correctly. The full article from the WSJ can be found at the above link.

What is particularly concerning with these types of studies is that time time after time they show that most Americans just have no idea how money works. It’s no wonder we suffer from housing bubbles, credit card crises, and all sorts of other societal problems when people don’t even understand the basics.

When we don’t educate our kids, and even our adults, on how money and personal finance works, yet build a retirement system where success is built on at least a basic understanding of these principles, we shouldn’t be surprised when so many fail. And when too many fail, guess what? The rest of us will just end up paying anyway.


Stock Investment Changes

I recently decided to make a few changes to my monthly stock purchase plan, and figured it might be helpful for others if I shared here.

This is related to a taxable brokerage account where I’m currently directing $4k a month. I could invest more money all at once, but I feel like the market is high and I’m trying to do a little dollar cost averaging. Plus, once you build into your monthly “expenditures” it just becomes another “bill” to pay and you don’t think much about it. Automatic investing is the only way to go!

While I’ve traded plenty of individual company stocks in the past, I’ve come to the conclusion that it’s just not worth it to do this (except for a very small portion of my portfolio). Rather, I’m increasingly convinced that investing through index funds is the way to go.

Anyway, in the table below you can see how I was previously investing my money, and how I’m investing it now. All of these are iShares Index Funds. (ETFs)



IVV = $600 IVV = $400
IJH = $300 IJH = $300
IJR = $300 IJR = $300
IEMG = $600 IEMG = $1000
IEFA = $700 IEFA = $1000
IYR = $400 IYR =$0
AGG = $600 AGG = $300
MUB = $500 MUB = $700

The rationale behind my changes are pretty simple. US Stocks have been on a run so I’m going to stop investing so heavily there. International holdings (Europe, China, etc.) have not been doing well, so I will invest there. Also, with the dollar kicking butt against foreign currencies, I can presumably afford a lot more international stocks for the same money than I could just a few months ago. I completely pulled out of the REIT fund (IYR) as these have had a great run and I’m feeling a little overweight here. Since this is a taxed account, increasing the municipal bond holdings made sense in my mind too (MUB). That said, I don’t want to put everything there as I think even with taxes there is opportunity for much more growth outside of bonds.

So, that’s it. I might change up the investment mix again in a few months, but for now I’m happy with this.

If any readers have thoughts or observations on this, I’d love to hear them!

Early Retirement Spreadsheet (Calculator)

Not too long ago I came across this early retirement spreadsheet put together by J. Money over at BudgetsAreSexy. I liked it a lot, and after playing around with it for a little while, I was inspired to build one of my own as well.

One of the main issues I’ve found with most retirement calculators is that they seem to only work well if you’re planning on retiring within 5 or so years of the “normal” retirement age. I wanted something that could break out my traditional retirement funds from my early retirement funds.

That is to say, most of us have our retirement money saved in 401ks, Roth IRAs, and Traditional IRAs. However, if I’m looking at really retiring early, I don’t want to touch these accounts because I don’t want to take the penalty of doing so before the allowed age (59.5).

I needed a tool that could show me a few things. Such as, will I have enough in traditional retirement if I stop contributing to 401ks etc. at age 40 because I’ve retired early and don’t have the money to do so anymore? Will I have enough money in my taxed (penalty free) accounts to last me from age 40 to age 59.5?

I also wanted something that would show me what I could withdraw on an annual basis that was based on how much money I want to have, not on a 4%rule or some other rule of thumb (although I appreciate the heuristic just the same).

So, I built the attached document. I generally like it, but I’m sure there is still room for improvement. If you have ideas on how to make it better, let me know! If you find flaws in it, let me know! At any rate, I hope other’s find it helpful.

Freedom 40 – Early Retirement Workbook

My Results –

Based on entering my own information into this tool reinforced some things I knew and helped me to learn a few new things.

First – rate of return and inflation will both have a HUGE impact on success or failure. Longer time horizons help smooth these out.

Second – I’m looking pretty good for traditional retirement already. Of course, if I decide I want to live a fancier lifestyle, or if markets don’t do well, this might not be the case, but right now it looks ok….

Third – The freedom 40 plan is looking pretty daunting at the moment when I consider my ER funds and their ability to fund my lifestyle from age 40 to 59. Right now the tools says I can only make it to 46! Of course, I could reduce my desired annual income to make it last longer. Or I could take a job that isn’t as demanding as my current one to supplement my income. Or I could just rely on Mrs. Freedom 40! :-) At any rate, it helps show some hard truths about my plan. Still, I’ll keep pushing on towards my goal!

Challenging the Conventionional Path

This is a bit of a diatribe, but I was feeling introspective tonight…

I’ve never thought of myself as much of a maverick, but in some ways perhaps I am…

Often in my life I’ve gone against the tried and true path. I’ve deviated just a bit from the norm. After high school, instead of going to college right away, I took a year off to live in Switzerland. In many parts of Europe and Australia/New Zealand this is a common occurrence and often referred to as a “gap-year.” Here in the U.S. you rarely find anyone who has done something similar. I was a good student in high school. Top ten in my class and all that. I remember at the time many of my teachers tried to talk me out of my decision to do a gap-year and live abroad. They told me I would “miss out on opportunities” and that I would always “be behind” my other classmates. Some said if I took a year off, I’d never go to college. It was strange at the time to hear this. Here were people who had heretofore been huge advocates of mine, but now because I was following a path unlike theirs, and unlike the traditional path they knew, they could only tell me why I should reconsider. To be fair, this was not all of my teachers, but it was quite a few.

It’s interesting to look back think about this. It’s revealing too. So many times in life people are unwilling to accept others who don’t fit the narrow societal definitions of “normal”.

I stayed the course and followed my heart as it took me on an adventure overseas. I saw many amazing things, learned a new language, challenged myself, grew my worldview, made some great friends, and more. Looking back on this , I still contend it was one of the best, and most pivotal decisions I ever made in my life. My teachers were wrong too. I applied to colleges with my classmates and simply deferred my enrollment for a year. When I got to college a year later I was eager to hit the books again. I was enrolled in an honors program on top of my major course of studies and graduated with distinction. Many of my high school classmates took 5 years to complete college, or didn’t complete at all. Those who did entered the work force one year earlier than me. After college, I don’t keep in touch with most of my high school classmates anyway. The warning of “being behind” my classmates seems ridiculous looking back on it. Who cares if I enter the work world one year later! How many people count their high school friends as their close friends 10 years later?

I continued to challenge the norm throughout college, perhaps notably in my Senior year. During that Senior year of college I enjoyed things, rather then stress about a job. Meanwhile, my friends stressed over career fairs and resumes. They fretted over interviews and job prospects. Looking back on it, I probably should have done the same myself. Maybe not to the same degree, but I should have done something. But, I didn’t, and it turned out ok.  I firmly believed at the time that the working world would always be there and that there was no hurry to get out “into the real world”. So, I eased into the work world at my own pace. I worked painting houses down at the beach. I worked in a call center. I made enough money to pay the rent, by some food and some beers, and have a great summer with friends.

When I started to get serious about a “real job” I looked in my home state for some time. But, being that I grew up in rural america, it quickly became apparent to me that I needed to make a big change if I wanted to do something I would find meaningful and challenging. So, instead of settling for something at home, I moved to Washington D.C. I didn’t have a job when I moved, but I figured I’d find something, even if it was washing dishes to pay the rent. Fortunately, after just a few weeks I found a great job which led to a solid career. I’m still convinced that a big reason for why I got that first job is that I told the interviewer I had moved to D.C. without a job and that I would “figure it out” and do whatever I needed to do to make things work. It shows a certain chutzpah, no?

Now I’m looking to retire at 40. A full 25 years before the “normal” retirement age. I haven’t made this known to friends an colleagues yet, but I’m sure I’ll face some of the same challenges I’ve faced in the past. People will say I’m crazy, they’ll say I’ll fail, they’ll dismiss the idea, they’ll say I’m giving up a great career and a chance at being a big-shot in the organization. (As if that’s all there is to strive for).

I’m still not sure if I can get there by 40 or not, but I’m going to try. heck, if I don’t quite make it, I’ll certainly be closer to the goal than I would be otherwise. I definitely want to keep challenging things. In fact, I feel I need to challenge them even more. I need to push back on the standard assumptions of society that we all trap ourselves in.

Challenge everything. Don’t accept the normal.  Be the abnormal. Be awesome.

Monthly Net Worth Update – March 2015

My primary goal is to have the freedom to retire at age 40.

I am still working out the details of how much money I want to have in early retirement, and thus, how I want to live in early retirement. As such, I am also still working out the details about how much money I need to save in order to enable my early retirement.

I’m a big believer in completing monthly net worth updates as a way to stay on top of your financial situation and work towards your goals. I will share my monthly net worth updates here.

March 2015 -

2015.03 - Freedom 40 Monthly Net Worth Update

February turned out to be a pretty good month. The markets continued to do well, which as is most often the case has the biggest impact on our net worth growth or decline.

We reached a new all time high of $978,283 and we’re closing in on the big $1 Million milestone! Hopefully things will keep going well and we’ll be in the “double comma club” soon!

Net Worth Notes:

Cash - This continues to be considerably higher than I would like. While having an emergency fund is important, we have too much money here at the moment that is doing little for us. I’ll be looking to invest up to $75k of our cash in the next few months. The challenge with that is where. I’ve considered another rental property, but haven’t seen any worth while in our area and I’m also just not sure I want to deal with that additional hassle. The market is another option, but it’s been so hot for the last several years, I feel like it has to come down sometime soon. I’d like to have money on hand to take advantage of a market decline, but I also recognize the folly in trying to time these things. I’m torn!

Taxed Stock Account - For the last year I’ve been pumping $4k per month into this. It primarily consists of ETF Index funds, including some tax-free munis. I intend to continue funding this at the same level (or more) for as long as possible. There may be a need to reallocate some funds here to more tax favorable investments (e.g. munis, growth stocks, less dividend holdings). Also in this bucket is a small amount invested recently in a LendingClub account.

Retirement Accounts - This consists of my 401k, Trad IRA and Roth IRA, as well as Mrs. Freedom 40’s 403b, and two Roth IRAs. We maxed out the 401k/403b the last two years and will do so again this year. We make too much to directly contribute to a Roth, but I did a backdoor conversion last year and may do so again this year. We’re only able to do this for Mrs. Freedom 40 at the moment unless I roll my existing Trad IRA into my 401k. I used to be a big believer in the Roth, but now I’m a little torn on it based on this great article on the Great Roth Controversy by GoCurryCracker.  

Rental Property - This is a 2BD/1BA across the street. We used to live there and rent it out now. I updated the approximate value at the beginning of 2015 and will probably not change this until early 2016. I plan on holding onto this asset for a long time. Currently, this creates nearly $0 cash flow, but the tenants do pay the mortgage every month!

Home Value - As with the rental, I updated the approximate value at the beginning of 2015 and will probably not change this until early 2016. We have no plans of moving in the near future. If we do, there is a strong possibility that this will become a rental property.

Other - this consists of two cars, some gold and silver coins, and my HSA. I may separate the HSA in the future, but for now I’m fine with it here.

Home Mortgage - This just keeps going down a bit each month as we make our regular automatic payments. I used to put a fairly substantial amount of money towards additional principal payments, but I now believe it is better to invest this money as I should be able to get a better return than the 4.375% on the mortgage and I can have access to the money if needed.

Rental Mortgage -  Pretty much the same deal here as our home mortgage. Keeps going down a bit each month. While we’re not making much (if any) money on the rental now, here we can see we are getting a benefit from our tenants paying our mortgage. This one is at 4.5%.

Other Loans - This includes 2 Student loans Mrs. Freedom 40 has. Both are at 1.875% so I firmly believe in making only the regular payments and no more. We can put our money to better use than paying these down. This also includes my car loan which is at a whopping 0%. I could have bought my car in cash, but instead I financed at 0% and will have that money working for me in the market instead.

Here’s what our Net Worth looks like over the past 12 months. Thanks to continued dedication to savings and lots of help from the stock market, we’ve seen great growth!

Let’s hope it keeps going!

2015.03 - Freedom 40 Monthly Net Worth Update (Last 12 months chart)


Tax Time

The weather here in D.C. was pretty horrible all day. Freezing rain. Blech. So – I used it as an opportunity to get started on my taxes. I use Turbo Tax at the moment and I feel it walks one through everything pretty well. Still, it is always amazing to me just how complicated the action of completing ones taxes is. Honestly, why don’t we just completely re-haul the tax code and get rid of all the crazy credits, deductions, and nuances! Instead, just have everyone pay a basic percentage of their income and other earnings and call it a day!

The other thing that I was reminded of was just how much the wife and I pay in taxes! I mean seriously! We do very well, there is no doubt about that, but shit! It definitely makes one a little bit grumpy.

I have a dream of someday amassing a small fortune in municipal bonds and just pulling down tax free income from those. I know this probably would never be the best investment strategy, but you’ve got to admit that on a more emotional level it sounds pretty appealing.

Anyway – that’s all for today. Just a little rambling about taxes! Hopefully spring is on the way soon to brighten our moods!

My 401K and Employer Contributions

I took a little time at lunch today to review how much I’m contributing to my 401k and how much my employer is pitching in (employer match). For me, it’s not a question of whether or not I’ll max out my 401k, because I will, but rather trying to determine how quickly to fund it. I was reading another blog recently and the writer talked about trying to max out his 401k as early in the year as possible in order to let the money have more time to grow in the market. I suppose there is a dollar cost averaging argument to be made against this approach, but it seemed like something I should at least consider.

As I looked into it though, I realized that my employer will only contribute 25% on each 1% the employee contributes, up to 6%. Once the employee goes over the 6% threshold, no more employer contributions for that pay period. As such, there is no incentive (from the perspective of maximizing the amount of “free” money I get from my employer) to max out the 401k early. If I do, I will forgo the largest possible employer contribution I could get.

The employer contribution is not terribly huge in my case, but from a pure emotional standpoint I’m more than reluctant to give it up. That said, if I maxed out my 401k earlier, I might make the same or more in dividend earnings and market gains.

What would you do? Invest the max as quickly as possible, or slow the contribution pace so you could get the most money as possible from your employer?

I went with the later for the time being. This meant reducing my contribution to 10% per month. I’ll now have a little more money in each paycheck, which I will need to make a plan for saving or investing in a taxable account.

Honestly, this stuff can be so confusing even for someone that is very experienced and intelligent on the subject. No wonder so many people throw their hands up in the air when it comes to financial matters such as this!