Lazy Man, Author at Lazy Man and Money

My Kids’ Roth IRAs

June 13, 2021 by Lazy Man 9 Comments

Two years ago, my kids got a Roth IRA to jump-start their retirement savings. It was a little aggressive for a 5 and 6-year old, but I wanted to start them early. By starting now, they’ve got the most valuable thing on their side – time.

It can be difficult to get a kid a Roth IRA. On one hand, you have the IRS with the annoying rule that the kids have to have earned income to put into an IRA. On the other hand, you have pesky labor laws that limit the work a kid can do. It’s a shame that my baby modeling idea never took off. I also don’t see people lining up to purchase their wonderful Pokemon art creations.

Kid Roth IRAs with a Side Hustle

So how do they earn this money to comply with the IRS demands for funding a Roth IRA? I pay them to help with my dog sitting business on Rover.com. In non-COVID years, I can make around $15,000 a year, which is a nice side hustle while I’m freelancing from home and writing this blog.

I’ve been dog sitting for five and a half years now, so the kids have grown up with a couple of extra dogs around. They’ve become naturally curious about feeding dogs and they love to play fetch with them. We’ve taught them how to pick up the dog droppings, but that’s not something they like. Some of their peers do the chore for allowance. However, for the family dog sitting business, it’s a core aspect of the job.

Feeding dogs, playing with dogs, keeping the water bowl filled, and picking up after the dogs is most of the dog sitting job. These are all things that my kids can do. Occasionally I have to give them medicine, but that’s about the only thing that I need to do 100% myself. The IRS should have no issue with me subcontracting out some of the work to them. In fact, I did some math on what a professional pooper scooper company costs, and it seems like it could be a couple of thousand dollars a year for the number of dogs we have and how often they’d have to come. My kids aren’t professionals, but the service doesn’t fill the water bowls or play with the dogs, so I think it averages out.

[This article has been refreshed for 2021.]

Kid Roth IRAs: Powerful Stuff

Contributing to a Roth IRA at this age is very, very powerful. Money grows quite a bit nearly 60 years of compounding until they reach ages 65 and 66.

Before we get to my kids’ Roth IRA numbers, here’s a helpful CNBC look at kids and Roth IRAs in general. Who wouldn’t want 3.4 million in one of their accounts?

My kids won’t have 3.4 million any time soon. If they were to earn 7% interest over that long period of time, a single dollar would be nearly $58. So $1000 in a Roth IRA would be worth $58,000. Of course, at 3.5% inflation over that time, you’d need $7,878 to have the buying power of $1,000 today.

When you crunch those numbers, it gives them a real post-inflation gain of 7x their money. Theoretically, if they could earn the $6000 Roth IRA limit, they’d set themselves up with $42,000 in retirement. Of course, that would be an extreme amount of dog care and that wouldn’t be reasonable.

In addition to the Roth IRA, we pay them some real spending money. They saved up for a Nintendo Switch before the pandemic. That was really good timing, because they were hard to find last year.

I settled on paying the younger one $400 and the older $600. In the next year, the younger got $600 and the older got $750. Since he’s a year longer, it works out to be fair as he’ll have an extra year at the end. This year, I’ll go to $750 and $1000 for each. The dog sitting business is going well with everyone traveling now that they are vaccinated.

Here’s how my 8-year-old’s Roth IRA grew to $1891.99:

Here’s how my 7-year-old’s Roth IRA grew to $1368.73:

The 8-year-old would have an inflation-adjusted amount of $13,443.70 in his nest egg at age 65. My 7-year-old would have to settle for “only” $10,066.02. I haven’t contributed to their accounts yet this year since dog sitting income got started late with COVID. These projections will go up once that happens.

Investing in My Kids’ Roth IRA

I normally believe in investing in only index funds for them. However, they always have some money left over. With VTI trading at $222, I buy a couple of shares with $600 and have over $150 leftover. I can buy some other index funds but sometimes I look for some satellite stocks. The theory is that you have core holdings and then little satellite holdings to explore. That’s why it’s also called “Core” and “Explore.”

Core – I’ve decided that the core of their portfolio should be the Vanguard Total Stock Market ETF (symbol VTI). Last year, I bought as much I could and then used the rest of the money (less than $160) to explore. This year I did the same. One child got the high-dividend ETF, symbol HDV, that I’ve been touting lately.

Explore – Last year, I explored with Exxon and Ford stocks. I liked that they paid high dividends. I had an idea that I could show how reinvesting the dividends grows. It all sounded good until COVID happened. Ford eliminated its dividend completely. This year, I explored by buying more Exxon (dollar-cost averaging) while it was still paying a big dividend. I also explored by buying all three cruise lines (Carnival, Royal Caribbean, and Norwegian) with at least a share of each. It turns out that those stocks all performed well. Ford’s stock is up nearly 100% as they look to an electric car future. The cruise lines are up 100% as it seems like cruises will be possible soon. Even Exxon has benefitted from rising oil prices.

I don’t have a plan on how to invest their money this year, beyond buying VTI as a core holding. Perhaps we’ll put money into VEU and VWO which focus more on international investing. It might also be time to sell the satellite stocks and put the money into these more traditional indexes.

Because the account is with Fidelity, the no-cost commissions make it easy to diversify by buying a share here and there.

The Future of My Kids’ Roth IRA

In the next few years, I’m hoping they can participate in some of my blogging work. (The older has helped a little bit with my MoneyTime Review. Perhaps later this year or next year, I’ll introduce a bi-weekly kids article. I’ll interview them and get their perspective on what money-related thoughts they have. I’ll then explore how we are parenting their use of money. This is just a seed of an idea. I need to think a little more about how this would work. Of course, I’d pay them for their time and insight, which would be earned income.

After that maybe they can do babysitting or lifeguard work. There will be more opportunities for them to earn money as they get older. While all this is nice, their core “job” now is to get good grades in school.

ProPublica’s Scandalous Reveal of the Wealthiest People’s Taxes

June 10, 2021 by Lazy Man 1 Comment

There’s been some considerable buzz the last few days around ProPublica’s Tax Revelation. Never before have has an organization obtained the taxes of the richest people in the United States… and then reported on the results in detail.

I want to get to the content of the report itself, but the reporting is scandalous, because it involves a significant invasion of privacy. ProPublica explained why they ahead with the article, explaining that there was a great public benefit to know what’s going on behind the scenes. They also explained that they feel they have significant legal protection since they didn’t solicit the information. In any case, exposing the privacy of people who have a combined wealth of over a trillion dollars takes an amazing amount of courage. When a news organization is going to take that risk, with minimal profit upside, we owe it to them to read the article and pay attention.

What we Learned from the ProPublica Article?

While I just finished saying that we owe it to ProPublica to read the article, it is L-O-N-G. Because of this, I’m going to tell you a little bit about what’s inside and we’ll go from there.

One reason why the article is so long is because it details a lot of the history of taxation in the United States. I never knew that income tax was unconstitutional until the 16th Amendment in 1909. If you think about it, we’ve only had an income tax for a little more than 100 years. Some of the oldest people in the world would have been alive when America didn’t have an income tax.

The main point the article tries to make relies on a little statistical gymnastics. That’s not to say there’s anything false or even misleading about it. It’s just that it shines the light on some math that I’ve never seen combined. Specifically, it highlights how the wealthy are able to grow their wealth exponentially over a number of years and how they can do it while avoiding paying taxes. The average person earns a salary and pays taxes on it right away. This means that they typically build a little wealth through savings over a long time, while paying around the same amount of taxes during that period.

The wealthy don’t have to pay taxes on a lot of their wealth, because they earn it in stock ownership. They don’t pay taxes unless they sell the stock and it gets converted into gains.

In short, they don’t have to pay taxes on wealth, which is very different than income.

It’s important to note that they may have to pay taxes on dividends, but many of the tech billionaires come from companies that don’t pay dividends. When the wealthy do sell the stock, it gets taxed at the long-term capital gains rates, which is 20% for the ultra-wealthy. That’s a much better tax rate than the 37% top income tax rate.

However, and this is perhaps the big revelation, the ultra-rich borrow money from a bank at a low interest using their stock as collateral. Suddenly they are paying 3-5% interest instead of 20% capital gains. The article cited a couple of instances where Larry Ellison had a $10 billion credit line and Elon Musk had the same for more than $55 billion dollars.

This leads to what is known as “Buy, Borrow, Die.”

What is “Buy, Borrow, Die”

The “buy” part, I think is more accurately described as earn or acquire. In this case, it is about growing assets. If you start a successful company you may have a lot of stock. This can happen if you come on a C-level executive as well. You don’t really “buy” the stock, it is earned. In order to “buy”, you’d have to have the income first which would presumably be taxed at that time. In any case, that’s the nomenclature that we inherit and I don’t have the clout to change it.

I covered the “borrow” part above. The last part is to “die.” This is the easiest step because it will inevitably happen anyway. On a serious note, this is about setting up your estate so that you can pass on money to heirs and escape estate taxes and things like that. The ultra-wealthy have some ways of doing this involving hundreds of trusts according to the article. The article also mentions that they avoid taxes by giving money to charities. In my opinion, that’s a greater good than paying more taxes.

ProPublica put together a quick video about how this “Buy, Borrow, Die” strategy works:

If you want to read more about it, my friend, Jim Wang at Wallethacks, wrote about “Buy, Borrow, Die” strategy last November. As usual, he was ahead of the curve.

Create Your Own “Buy, Borrow, Die”

The point of ProPublica publishing this information is to create awareness of the inequity of the tax code. It’s a time when politicians are looking at revamping the tax code so that the ultra-wealthy pay more. How can you use this information? You can talk to your politicians and try to impact tax policy going forward. Unfortunately, that’s a steep uphill climb.

Can someone of more moderate wealth create their own “buy, borrow, and die”? I’m not sure, but I’m intrigued by the idea. I think some people have created something like that with their FIRE plan. Their general plan is to buy stock (or real estate) and let it compound (piggy-backing on the ultra-wealthy stock gains). Then retire to have little income and have that stock throw off dividends that, for some lower-income levels may be completely tax-free. Tools like a Roth IRA and a Roth IRA conversion ladder may also help you effectively pay no taxes.

In the above scenario, the “borrow” doesn’t come into play unless it is based on real estate. The final step of dying and leaving money to heirs is a lot easier for the moderately wealthy. They don’t have to deal with estate taxes. The heirs also enjoy a step-up tax basis for stock assets. This means that the next generation doesn’t have to pay taxes on all the gains.

I should note that there are ethical questions about avoiding taxes. Most of the responses in the ProPublica article come down to, “We’re doing what’s legal. Don’t hate the player, hate the game.” Many also point out that they give so much away that it’s kind of silly to look at the taxes they pay. For example, Warren Buffett has pledged to give away 99.5% of his wealth. How upset can you be with him for legally avoiding taxes with that in place?

Passive Income Update: May 2021

June 7, 2021 by Lazy Man 1 Comment

We’re into June and that means it’s time to review how our passive income grew in May. Before I put you to sleep with boring numbers, here’s a slightly more interesting look into our last month.

The beginning of the month started with my wife still deployed getting 60,000 shots into people’s arms. The kids had a Cub Scout event and learned how to garden. It’s a good thing that I wasn’t teaching them, because I can’t keep plant life alive. We also went out for Mexican food for Cinco de Mayo to support the local Mexican restaurant. Turns out, any other day would have been a better choice.

Once my wife came back we did a lot more stuff. My 2nd grader is enthralled with Australia that he’s learning in school. We went to the zoo and Outback Steakhouse to help support that enthusiasm. We went to a food truck event that felt very, very normal. My wife and I took a day off to enjoy a picturesque lunch. My wife ran a half marathon. The kids and I helped run one of the water stations.

That’s a full month, especially when you read the financial update below.

That’s enough lead-in… let’s start the Passive Income report. I used to call this the Alternative Income Report, but everyone loves passive income better. While I transition to the new terminology, there may be some “alternative income” mentions including the FAQ. If you are a new reader, you’re going to want to refer to my Alternative Income FAQ as you’ll likely have a lot of questions.

The way I calculate these numbers requires that long explanation – it isn’t intuitive at all. The reason why I do things a little differently is that this catalogs a journey. For example, we don’t have passive income from our rental properties while we are paying down their mortgages. Instead, I calculate the percentage of equity we have to show where on that journey we are. Each month you see that the bank owns less and we own more. When we get to owning 100% there will be no mortgages and all that rental income can be used for living expenses.

Lazy Man’s Passive Income – May 2021

I categorize our passive income into 3 main sources that are largely represented in my passive income pyramid. For this report, I ignore the bottom section, “career/job” – that’s not passive at all. (I do have some income in that area, but that’s not the focus of this report.) I combine dog sitting and blogging into one section of “somewhat active” income. I leave real estate and investment income as their own separate main sources of very passive income.

1. Blogging + Dog Sitting Income

Last month, April was a great month for blogging and dog sitting. I don’t know why the blogging came back, but dog sitting is back with vaccinated people traveling. I didn’t know if it would be sustainable. The only way to find out is to gather enough data points. This month we have another data point.

My 7-year-old struggled to read anything last year. Now he’s reading the 8-year-old’s books upside-down.

This month, May, blogging hasn’t been as good as last month. It was still very good, more than double the average from January to March. While I never like to see the income go down, I do like to see that April was just an aberration.

As great as April’s dog sitting was, May’s is even better. I’m writing this on June 4 and I have already booked more income than May (assuming no cancelations). It seems that the only limit to dog sitting income is… my willingness, space, and time to manage multiple dogs. It’s much more passive when you have one dog to sit. It gets a little more complicated when you have several and have to coordinate their eating times and spaces. At some level of income, it gets hard to call it passive-ish.

The 7-year-old is flexible too.

In April, dogs and blogs combined for a total of $3,584.48 – the start of the comeback. In May, it was:

Total Blogging + Dog Sitting Income: $3,540.96

It’s hard to get much more consistent than that. If only we had one more dog or a day of blogging we probably would have passed the previous month. This income is so much better than it was during COVID when I wasn’t sure if I’d make more than $1000.

With dog sitting back, my kids can pitch in to help. My 8-year old is extremely good with dogs at this point. He can feed them, let them out, and play with them in the yard. My 7-year-old is good too, but it’s more of a work in progress. This help means that I can pay them a legitimately earned income (a small percentage of the overall dog-sitting income). Because the income is earned they can save money in their kid Roth IRAs and it will be money that they’ll never pay tax on. I want to get them more involved in blogging, taking pictures, and things like that, but it’s going slow. During school, they have too much to keep them busy. Maybe we’ll make some progress this summer.

(Note: The blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)

2. Rental Property Income

Zillow’s estimates on the property values continued to skyrocket. It seems like every month they go up by tens of thousands of dollars. In addition to that appreciation growth, we paid down the mortgages as we always do. Due to the growth, we’ve made over $90K in equity for the year. The housing market is really moving.

My wife and 8-year-old played “Chopped” and I choose a bunch of old food that we had around the house. It’s a great rainy day activity! You earn bonus Personal Finance credit if you remember BillShrink. (You can notice some Pokemon influence in the background.)

It can be difficult to deal with tenants, but I like to think of those equity gains as a salary. The “work” for last year’s $60,000 of equity is pretty minimal. We had to work a little more for the $90,000 this year, but ~$15,000/mo. is very good. Of course, equity isn’t really salary – we can’t spend the money, because it isn’t liquid. Also, it’s can’t continue like this. We’ll enjoy it while we can.

This month we went from 66.15% to 67.50% ownership of the equity in our properties. We are only a few years away from getting real profits from the rental properties.

If we owned the rental properties with no mortgages (100% of the equity), I calculate that, after insurance, property taxes, condo fees, and estimated condo maintenance we’d make about $3,400 a month. That number represents our net gain.

If you multiply our expected net rent $3,400 by the amount of equity we have (i.e. where we are on our journey to 100% equity ownership), 67.50%, you get $2,295 in estimated monthly passive income. When I started tracking this (January, 2017), we only owned 36.4% of the properties and they had lower rents. The math worked out to $1,174 back then. So in a little more than 4 years, we’ve seen the number grow $1000+/mo. It’s almost double. That’s good passive growth in 4+ years.

The kids love our backyard summer splurge of a hot tub.

In about 5 years from now, the ratio will grow to 100% of a rent that should net $3,400 monthly after expenses. Since rent is inflation-resistant (we can raise it as costs of living go up), we don’t have to factor in inflation like other investments. So we can think of it as around $40,000/yr. of income in today’s dollars buying the same value in the future. That should be enough money for us to live on with our own home paid off (plus our solar panels, frugal shopping habits, and military healthcare.)

In the previous report, the rental property income was $2,249.

Total Rental Property Income: $2,295

3. Dividend Income

For this section, I assume we will earn a 2.5% dividend yield on our holdings. That could be from a high-dividend ETF or from simply holding strong companies that have a long history of dividend growth. There are some income investing ideas here. We can also look at making passive income with dividend kings. If we wanted to simply retire on this dividend income, I would get Sure Dividend’s newsletter to try to get closer to a 4% average dividend yield. That link to the newsletter has a special discount rate and in full disclosure, I make a few dollars if you sign up for it.

My 7-year-old goofs around quite a bit, but he was all business in helping at the marathon water station.

The market dropped a bit mid-month, but then it rebounded again. So you won’t even see the drop in this report. I have done well with my satellite stocks overall, but they’ve been giving up some of their gains. I feel good to have locked in most of the gains. Now when I lose money with them, I don’t feel bad. It’s always good to play with the house’s money. Taking profits and buying diversified index funds has worked well for me.

Our portfolio continues to hit new all-time highs. I get nervous that the markets were too high. So I continue to execute on my plan to continue to stay fully invested, but moving more money to bonds, i.e. giving my stocks a shave. It was a small move of money from stock to bonds mostly for the psychological effect of being active. The small amounts seem to add up and when stocks dropped last March, I was able to buy in at lower prices by cashing in some bonds that didn’t drop as much.

My 8-year-old completed a 365-day streak in Duolingo – most of it in Norwegian (his school friend is from there). Can I add this in his college application?

We continue to get a profit-sharing check since I bought (a lot of) a company. The business was almost ideally positioned in this pandemic due to its virtual nature. The investment income from this is essentially the same as dividend income. It is taxed differently, but for the purposes of this report, it makes sense to group together all stock ownership in this bucket.

Total Dividend-ish Income: $3,733

Last month, it was $3,700. This is a fairly normal size gain – but it’s amazing that it has been continuing like clockwork through all these reports. After nearly 50 reports, I think there were only a few where it dropped… and it seemed to rebound right away. This dividend-ish number rarely moves that much, but slow and steady wins the race. When I started tracking this in 2017 we were at $1,180/mo.

Annualized, this monthly $3,733 is almost $44,800. If our mortgage was paid off, we might be able to live on this by itself. However, because most of our investments are in retirement accounts, we can’t use much of this potential income for now. (We can use the profit-sharing check as it goes straight to our checking account.) We’ll probably let this investment continue to compound for another 14 years until we are age 59.5. Then we’ll have to see if we want to tap it or let it continue until we are required to take some of it at age 72. I hope to see an estate planning lawyer and possibly some other tax and financial professionals soon.

Very Close to Passive Income

Our “very close to passive income” is a combination of rental property income and dividend income. If there were some royalty income from books, movies, or music, I’d include that as well. I’m too tone-deaf to have a rockstar music career, but I keep the idea open that I’ll write a book someday.

An evening at the beach after school is a great way for a kid to unwind. They had the help of about ten school friends in digging this hole.

The stock and real estate markets have been going up and for a long time. COVID dropped the stock market for a short time, but that’s the only hiccup. If you look at the charts, we had a small setback when we sold one property and bought another in late 2020. It’s taken a few months, but it’s back to new highs.

I love having both types of income working together for us. I think everyone interested in FIRE should have stocks and real estate income streams. The diversification gives me great confidence that we’ll be better prepared than most people in the case of an unfortunate economic event. We’ll still likely get rent checks if the stock market crashes. We’ll still get dividend checks if a tenant is late paying for a while. Of course a bad economy may impact both at the same time, but that’s what an emergency fund is for.

I’m starting to get very encouraged about the future – at least in the United States. Last month, I wrote:

[COVID] may not be 100% gone, but it could get to a point that it is rare enough to not have to think about it.

It’s starting to feel like it’s getting to the point that I don’t have to think about COVID. The kids aren’t eligible to get the vaccine yet, but there are large parts of the day where I don’t have to think about it. We are lucky to be in the United States – it isn’t like this in other countries.

Very Close to Passive Income: $6,028

Last month it was $5,949. The $6,028 is yet another all-time high – ho, hum. As you can tell from the chart below, it just keeps moving in the right direction. It had been the stock market driving the gains for a while. However, real estate may be the bigger driver now.

The local zoo had a few Australian animals. Unfortunately they didn’t have any kangaroos. We went to the zoo twice this month, once to see Australian animals and a second time at night to see the Asian lantern exhibit.

This would be more than $72,000 a year of almost completely passive income. What’s better is that there would be no need to touch the investments themselves. We wouldn’t have to sell stocks or get a reverse mortgage. Property maintenance and property taxes for rental properties are already factored in. We would still have all the underlying assets (property, stocks, etc.) and be able to pass these on to the kids for them to build on – unless we choose to draw them down for more fun, charity, or other spending.

This “very close to passive income” has grown from $2,354/mo. in January 2017. It’s worth noting that, once again, these are fudged numbers that aren’t “real” yet (except for the profit-sharing check), because the money isn’t liquid. We have gained more than $3,000 in passive-ish income in a little more than 4 years. I used to wonder if we can get to $8,000/mo. in passive income by the start of 2025, but I feel like we will get there now.

Final Passive Income

When you add up “dogs and blogs” to the “very close to passive income” you get:

Passive Income: $9,568.96

Last month it was $9,533.48. That’s barely a gain, but any gain is good. More important than the gain is that it’s the second month we’re at all-time highs. I spent the last year thinking that we’d hit new lows. With most of the money coming from passive-ish income that seems to consistently grow, the difference is what I can earn from dogs and blogs.

Supporting the local Mexican restaurant on Cinco de Mayo

I’d like to see this average $8,000 this year. I didn’t think it was possible with dogs and blogs not performing, but now it’s starting to look like there’s a chance. It will take quite a bit of luck, as the number has been low for many months.

This ~$9,500+/mo income is almost $115,000 a year. That largely hypothetical annual income for writing on a blog, taking care of dogs, and investing is very nice. In the long term, $115K would be a lot more income than we’d need – given our necessary expenses for the next 45 years. Of course, those necessary expenses aren’t going to cover all our spending, but it’s a large percentage of it.

As 2020 has proven, you never know what bad news is lurking around the corner. This preparation gives us the financial flexibility to fight it.

None of the numbers here include my wife’s day job of bread-winning pharmacist income, her vested military pension (more passive income when she retires), or the freelance work I’ve been doing over the last couple of years (which isn’t passive at all). That’s the fuel that drives the passive income engine – it allows us to live well and invest. My income doesn’t match my wife’s, but I’m good at stretching a dollar in almost all our spending.

I love two things about the graph below. First, it continues to stay high like it did last month. Second, it doesn’t dip down too far. It’s been above $6,000 for a while now. It’s good that we are turning this ship around and moving it back in the right direction. I’d like to see $7,000 become the new floor.

(Once again, the blue line is the monthly number. The red line is a 3-month average which helps smooth the curve.)

Net Worth Update

My net worth updates aren’t very exciting as I don’t share the exact numbers. That’s why it’s just a footnote here.

I truly believe that net worth is one of the most important numbers in personal finance so it is worth sharing in some way. Showing relative growth can be useful.

May was another great month for our net worth. We saw it jump 3.80%! For the year overall, our net worth is up 15.28%. It’s very odd to have these kinds of gains when our numbers have been growing for so many years. In terms of dollars, sometimes the monthly gains are more than I’ve made in a year as a software engineer.

The view from our table at Castle Hill at a fancy lunch with my wife.

I feel it’s important to acknowledge that everyone is in a different place in their financial journey. I’ve been blogging about personal finance for 15 years. FIRE wasn’t a “thing” back then, but it’s in the news a lot now. We naturally are further along in that journey than some younger readers who may be just starting out. If you are one of these readers, I hope you won’t be discouraged by some of the numbers above. I didn’t start many of these graphs until year 11 of blogging (year 13 of early retirement planning). Please try to use it as motivation for what may be possible (depending on your circumstances and market luck) over 10-15 years.

There’s a big wild card in calculating our net worth. Now that my wife’s pension is vested, it’s reasonable to ask whether to include it in our net worth. I decided that it does make sense to include it. She could have earned more in immediate salary if she didn’t work for the government. That would have boosted all the numbers across the board. Calculating pension value is not easy, but here’s the best way to know what a pension is worth. In the end, it seems my wife’s pension may be worth ~$2.4 million. However, like most of the money mentioned in this article, this isn’t money we can spend right now.

How was your May? Let me know in the comments.

Doubling the Kids’ Money with Robinhood

June 3, 2021 by Lazy Man 2 Comments

This is going to be another short article today. I am still swamped with dog sitting business. I love that so many people are getting vaccinated and traveling. I also love that almost everyone decided to get a dog in the last year and a half. The only downside is that I’m constantly doing meet and greets, and booking appointments. I had two meet and greets yesterday and during one, I had an emergency last-minute request from someone who needed to travel for work, but their dog regular sitter was on vacation.

After more than a year of very few dogs to sit it is an overwhelming, but a welcome change.

In any case, I didn’t intend to write about dog sitting today. We can save that for the May financial update that should come out early next week. Instead, I want to talk about investing your kids’ money.

I started an investment account with Robinhood when the kids were 2-3 year old. In July that will be exactly 5 years ago. It’s a perfect time to look back and see how that decision went.

I don’t like to invest other people’s money. There’s just too much risk if it doesn’t work out. Fortunately, a 2 and 3 year old weren’t going to feel too much one way or the other.

I could waste a lot of words to build suspence before giving you the results, but I wasted that opportunity in the article’s title. Here’s how they’ve done:

For full disclosure, the results include a little free stock from Robinhood from referring friends (and website visitors). If you sign up here, you’ll help make a couple of kids very happy as they’ll get some free stock… and you will too.

No worries if you don’t sign up, because they are already very happy with the growth of their money. They are starting to figure out how money works, but grasped the idea that twice as much money is better a while back.

I should be open and say that there’s no guarantees that you’ll double your money when you invest via the Robinhood brokerage. The brokerage doesn’t make your money double, the investment choices do. The rule of 72 would indicate that they’ve made 14.5% interest per year. My kids have been lucky with that great bull market and I expect things will slow down in the future.

They’ve been mostly in the US total market (via Vanguard’s VTI ETF), but sometimes I buy some fun stuff for them like a gaming conference company or a little Dogecoin. That’s the advantage of having free trades with Robinhood. Five years ago, brokerages offering free trades were rare, but they are more common now.

The other thing I should note is that Robinhood doesn’t have custodial accounts for kids. I had to put the account in my name and I’ll have to pay taxes on it when it’s sold and distributed to the kids. Hopefully, since they are long-term capital gains, they won’t be so bad. Since having separate accounts was difficult, I simply added the same money from each kid whenever I do a cash deposit. This way they’ll each own 50% of the account.

529 Plans: How Do you Choose?

May 31, 2021 by Lazy Man 20 Comments

[I know this is Memorial Day. We should be focused on the people who made the ultimate sacrifice for our freedoms. There are a lot of great news stories that cover the significance in great detail… far better than I ever could.
Instead, I cover personal finance and while many people were at BBQs this weekend, we had 529 Day on May 29th. I republished an article then, but it was a Saturday on a holiday weekend. Since I have this other 529 article, I think it makes sense to republish this as well. Between the two weekend holidays, maybe it counts as one regular week day.

I originally wrote this article in 2007 after days of reading about to best gift money for my nephew’s college. Fourteen years later, the specifics of the plans may have changed, but the overall lessons and logic remain the same. My nephew and niece (who came later) have $5,000 each in college savings in the plan. I’m keeping this original 2007 form even though a lot has changed since then.]

I mentioned yesterday that I’m looking to give my newborn nephew a head start in his education savings. Having gone through a number of options, I decided that a 529 Plan was my best option. Unfortunately, a lot of research may be necessary to decide on the right state’s 529 Plan for you. Here are the steps I took to determine which state will receive my money. Remember that I’m looking to give $500 initially and $100 a year after that.

Check your own state first
My home state is California. I thought it would be very easy to see if there was a tax benefit for my state. However, states don’t often advertise that your invest is NOT tax-deductible. They are in the business of getting you to invest with them, so it doesn’t serve their cause to advertise a fact that could be construed as a negative. When the originating source isn’t helpful, I suggest looking for a third party. Kiplinger.com came to the rescue with a list of states that offer a 529 Plan tax deduction. It’s not the most recent list, but the best I could find. If your state is on that list, chances are your best option is to invest in your own state’s 529 Plan and take the tax deduction. The exception is if your own state has a significant reason to reject them, such as the ones below. If your state, like mine, isn’t on that list, there’s no particular advantage that I could find for going with that state. In fact, you may be better off looking at another state’s for a variety of reasons that we will cover now.

How is a state’s 529 Plan sold?
There are two basic ways to invest in a 529 Plan. The plans are sold directly or through an advisor. Some states may offer either one or both options. The direct sales is the do-it-yourself method and the advisor option is for people that wish to have a little more guidance. If you’ve been reading my writing for any length of time, you know that I’m a direct kind of guy. I hate paying fees when I can do the research myself, so I eliminated any plans that didn’t have a direct sales option.

How do I know if a state’s plan is any good?
Put simply, this is the biggest question for those that are looking outside their own state. With 50 states and some having multiple plans, you could spend a week reading about each of them. I typically find this stuff fun, but it has it’s limits. I spent a lot of time researching various articles that listed 4 or 5 good states, but none of them gave me anything to compare or went into detail on why they are good. I finally stumbled upon Saving for College’s 5 Cap Rating System. With their list you can pretty quickly scan through and weed out quite a few sub-par states. In my research, I only looked at plans that had 4.5 Caps for the out-of-state and had a direct sale option. This left me with just a handful to consider. I still needed to narrow it down which required me to reject some plans.

Reasons to Reject a state’s plan:

Minimum Investment
Since I intend to invest only $500, any plans that required more than that had to be excluded. I came across a few that were $1000 to start and some that seemed to require automatic deposits of $25 a month. After eliminating those I was left with about 4 or 5 different options.
Maintenance Fees
Some states charge $25 a year if you don’t have $25,000 in assets with them. We are expecting to contribute $100 a year in addition to our initial deposit. Those maintenance fees would be 25% of each year’s investment. This eliminated Utah for me despite the fact that it’s one of the best state plans according to most reviews.
Expenses
Like mutual funds, 529 Plans have expenses. Like you and me, the financial folks have to make their living. There are numerous reports on how index funds often outperform the managed funds, so I prefer to go with them. They typically have very low expenses since they aren’t out visiting companies to research their investments. So I looked at the expenses of the remaining choices. I was happy to stumble upon two states with expenses as low as 0.30% that matched all the above criteria.
Investment Options
I might be getting a little picky here as most plans offer the basics – age-based plans, equity plans, balanced plans, etc… However, a few plans go above and beyond and offer more choice. Other plans offer fund families you might already know and trust.

The Winner
Ohio passed all the tests with flying colors. I don’t have the beneficiaries social security number, so I haven’t signed up yet. Maybe during the final review there will be some kind of gotcha, but right now all systems are go. They seem to have put together a best of breed program. There are no fees, no significant minimums (just $15 per investment option). Their expenses are amongst the lowest I found (except for you lucky folks who live in Louisiana) as long as you go with their Vanguard option. I’ve read that you can mix and match a few different Vanguard funds, which, if true, is going to be icing on the cake. If it’s not true, then I’ll go with the Aggressive Growth option as it’s 85% Vanguard Total Stock Market Index and 15% Vanguard Institutional Developed Markets Index Fund. I love the way that Vanguard has handled my ETF portfolio, so I’m excited to give them a little more money to work with.

The Runner-up
Michigan almost had it all – it really was a photo-finish. The only differences I could find were in the investment options. TIAA-CREF is a great organization, but I don’t know them like I do Vanguard. They also had only three static investment options and it didn’t seem like you could build a portfolio from them at all. Though their all equity option was tempting, I’m passing Michigan for more choice.

Have you invested out-of-state 529 Plan? If so, I’d love to read in the comments what factors influenced your decision.