Lazy Man and Money

What Makes Up Your Financial Blueprint?

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Happy Independence Day (readers in the United States.) This week you may have already seen a lot of bloggers to write about financial independence. I thought about writing on the topic, but I found myself gravitating to a question of general financial health.

There are a lot of pieces to your overall financial picture. I often look at net worth as it’s a good measure of your overall financial health. However there are a lot of other pieces that factor in. For example, there are credit scores, insurance coverage, retirement funds, retirement planning, and liquidity (such as an emergency fund), and estate planning.

Even after making that list, I’m thinking about other things that I immediately forgot like credit card rewards, identity theft protection, career growth, and real estate.

It feels like all these things are swirling around in a “financial hurricane.”

I can organize a lot of with spreadsheets, but it’s very difficult to get the big picture. When in doubt, I just make what seems to the best decision, which has generally worked out well.

My Financial Blueprint

So today I wanted to stop and think about how all these pieces of the financial fit together. I’m going to need your feedback and thoughts on this because mapping an entire financial picture isn’t easy. Also, I can almost guarantee you’ll have different thoughts and ideas than I do. I’m certainly not married to these number myself:

Net Worth – 20%

This might be low for what I consider the most important financial number. However, since I’ve got a lot of areas to cover, I need to save some room. When I think of net worth, I don’t look at it as a single number. I think about it in terms of age and the cost of living in an area. Having a 250K at age 25 is amazing. It’s much less amazing at age 60. Similarly that 250K means a lot more in Phuket, Thailand than it does in New York City.

In short, context matters.

Retirement Preparedness – 20%

There’s likely some overlap between this number and net worth. For us, our retirement accounts are about 55% of our net worth. So while that net worth percentage above may seem a little low, there’s some of it baked into this category.

I think this category is largely about having a healthy amount whatever retirement accounts are available to you. For most people, that’s their 401k and Roth IRA.

Emergency Fund – 15%

It’s great to be prepared for retirement, but what about now? How prepared are you for a job loss, car repairs, or a big health bill? I could go on, but I think most everyone reading personal finance blogs understands the value of having liquid cash.

Usually an emergency fund is measured in months of expenses rather than straight dollars.

Insurance – 15%

Do you have car, house, life, umbrella, and/or any insurances you may need to protect your income? Protecting your financial behind is important.

Money Ratios – 10%

Which money ratios are important? My friend Jim from Wallet Hacks has a list of seven important money ratios. While some of them overlap the above, not all of them do. There are some about investing, debt, housing, etc. I’ve been meaning to write about some of my favorites for some time. In the meantime, let me know some of your favorites in the comments.

I was on the fence about adding this one. It should be obviously which side I ended up on.

Ultimately, I decided to add this because I think some ratios give you a good view into your current finances. I could have a high net worth, but if I buy a huge mansion, it doesn’t bode well for my future financial health, right?

Credit Score – 10%

Your credit score can be very important… especially if you plan on buying that mansion. Having an excellent credit score qualified us for the very best mortgage and car rates and it’s saved us tens of thousands of real dollars.

Estate Planning- 10%

Do you have a will? Do you have a trust? These things are often difficult to talk about because they involve thinking about death. However, they are important.

For me, one of the big questions I have is, “What becomes of Lazy Man and Money if I die tomorrow?” My wife has no interest in learning how to blog. Maybe in 10-15 years, my kids will be interested in blogging on the site.

Final Thoughts

I don’t know if I could possibly more wishy-washy than I have been, but I do want to emphasize that these are my initial thoughts. I’m sure I didn’t cover everything and the percentages I gave are hardly based on any kind of scientific theory.

What makes up your financial blueprint? Let me know in the comments.

Dobot to Start Charging Fees

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For a couple of years now, I’ve been using some stealth services to squirrel away savings without me noticing. They were free, backed by fairly reputable companies and FDIC insured, so I figured I had little to lose. I started with Digit.co and really liked how after a 3-minute set-up, I had a system set up to save a few thousand dollars a year.

Then Digit started to charge fees for the service and I had to move on.

Before Digit started to charge fees, Dobot contacted me and essentially said, “We’re like Digit, but we’ll help you save towards one or more goals.” I’m really looking to get this 65″ OLED TV from LG (yes, I’m a bit obsessed) so I set that up as one of my goals.

I’m about 50% of the way to my goal of $2500 saved (Amazon doesn’t seem very competitive in this case. That’s a story for another day.) When I moved on from Digit, I created a goal in Dobot with the name “emergency fund” to replicate what I had with Digit.

Unfortunately Dobot is charging fees, so I’m going to have to kick it to the curb too.

Part of their email that I got on July 19th is as follows:

“It is vital that we are able to continue providing the services you’ve come to trust, so today we are sharing important news about our relationship with our Dobot savers and how we make money. Dobot will begin charging a small monthly fee for the services we provide. The fee, $1.99, will begin on July 31st for all accounts created before July 1st. For new users of Dobot, there will be a 30-day trial period.”

They aren’t giving a lot of people time to get out. In looking at the Dobot app, there isn’t an obvious way to close your account either. I did a quick Google search and it seems like contacting them and asking is how they recommend canceling. I hope they have a large staff of people dealing with their email.

It’s not that $2/month is a big deal. It’s less than $25 a year. However, I don’t see the value of that $25. I could set up my bank account to transfer $100 on the 5th, 15th, and 25th of every month to a saving account for free. People have been doing things like this for years and years. It seems to me that banks should offer a Digit/Dobot service for free. Maybe some day they will.

I’m looking into one more of these services that some friends of mine have been talking about. I don’t want to say who it is or give any kind of recommendation until I know how it works and can properly review it.

Taking a Loan From Our Retirement Accounts?

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Happy Patriots’ Day! Yes, it’s mostly a Boston holiday, but everyone in the United States could find a reason to celebrate it. I love 11AM baseball (but not as much as I loved 8AM baseball when I lived on the West Coast).

I was very excited to get this blog post out this morning, but I had a disappointing experience at my son’s school. It turns out that I had unknowingly been breaking a school rule for about 6 months. They explained the rule to me this morning. I explained how we were in compliance with the rule. They then clarified an unwritten, not-communicated point about the rule. That point makes a lot of sense for the whole existence of the rule know that it is clarified. However, I defend my wife and myself taking it literally.

The end result is that we felt terrible that we were taking advantage for 6 months. They probably felt terrible that both me and my 4-year old were confused. Hurt feelings all around. The lesson as always: Communication is important.

You aren’t here for communication lessons, so let’s move from personal to personal finance, shall we?

In the past 10 years I’ve read a lot of personal finance articles. There are almost no absolutes in personal finance. However, this comes close: “Never borrow from your retirement plan.”

Case in point. From Here’s what happens when you take out a loan on your 401(k):

“While 401k borrowers are borrowing from themselves, this isn’t a harmless transfer of money from one pocket to another, experts say. ‘The best spin you could put on it is it’s the lesser of several evils,’ said Greg McBride, chief financial analyst for Bankrate.com.”
…
Borrowing from a 401k plan exacts a big opportunity cost. Borrowers miss out on any compound growth that their investments would otherwise have earned in the market.
…
Unless the money is repaid quickly, the loan represents a permanent setback to retirement planning, McBride said.
…
Those who borrow from their 401ks lose out on tax efficiency, too. Loans are repaid with after-tax dollars. In other words, someone in the 25% tax bracket would need to earn $125 to repay $100 of the loan. Savers’ 401k money is taxed again when withdrawn in retirement, so those who take out a loan are subjecting themselves to double taxation.
…
Employees who leave their jobs, are laid off or fired typically have to repay their loan within 60 days. If they don’t, the loan amount is considered a distribution, subjected to income tax and a 10% penalty if the borrower is under 59 and a half.
…
[CFP Andy] Smith’s list of acceptable reasons to take a 401k loan is short: to pay back taxes or other money owed to the IRS, to pay a tax lien, or to try to avoid bankruptcy.
…
But to the extent possible, experts say it’s best to avoid getting into a situation where we need fast cash in the first place. That means setting aside a liquid emergency fund of six months’ expenses.

[I bolded the point about double taxation, because I’ll cover that later.]

Whew! That was a lot of digest. I’m not going to into each point. Instead, I’ll use that as a “flavor” of the issues… and then drill into a few points that I consider significant in our situation.

Today, I want to challenge the thinking about borrowing from a retirement account. Or at least, I want to make a case that like almost everything in personal finance… it is personal.

Regular readers know my wife is an officer with military benefits. As a government employee, her retirement program isn’t a 401k, but a TSP. As best I can tell there aren’t any significant differences between them… other than TSPs tend to have investment choices with extremely low expenses. As best I can tell a TSP loan is almost the same as a 401k loan. TSP loans aren’t written about very often because they aren’t as common.

If you aren’t familiar with TSPs, it might be best that you think “401k” when you read “TSP.” As always, please consult your professional financial and tax advisor about any and all of this stuff.

What are TSP Loan Terms?

Because TSPs are a government plan, taking a loan out is straight-forward. There’s no need to talk to a loan officer and justify your need. The theory seems to be, “It’s your money, you can get it easily… under these conditions.”

There’s one set of conditions for buying a primary residence, but that’s not us. The other set of conditions are the ones we are interested in. I’ll focus on those.

It seems you can currently take a loan of up to $50,000 at 2.375% for up to 5 years. It’s a fixed rate. Procedurally, it is as simple as sending in the application. You pay it back with the interest into your own account. Yes, instead of paying interest to the bank, you are the bank. You are lending it to yourself.

There’s a fee involved… a one-time, $50 processing fee.

You might think there’s some kind of breakage issue involved. There might be with 401Ks, but TSP loans can be set up to come out of your paycheck. You set it up once and forget it.

Defending a TSP Loan

My wife has been maxing out her TSP contributions for around 15 years. That’s roughly $16,000 (some years were less and now it’s more) a year or around $240,000. The stock market has been doing well, so there are investment gains as well. It’s not a small account.

Let’s address a few points:

  • Undermining Our Retirement Plan

    While the TSP account isn’t small it also ISN’T the major focus of our retirement plan. I don’t think taking a TSP loan undermines our retirement planning at all. I understand how it would most people, but we aren’t most people.

  • Opportunity Cost

    This may be considered one-in-the-same as the above point. However, I wanted to make a special point that the stock market has had an extreme run over around 8 years now. In the short term, I think the opportunities aren’t that great. That’s because I know where the stock market will go now (I write half-jokingly.)

    If the stock market stays relatively flat for a few years as I think it might, the loss of opportunity is minimal. I don’t want to discount it completely, but I no longer assume that we’ll get 7% over the next 3-4 years.

    I might falling into the same trap that Punch Debt in the Face did in 2013. I hope not.

  • Loss of Job

    This is the bogeyman that keeps financial planners up at night. It’s a trifecta of financial pain. You need to come up with a pile of cash in a short time. You have no job. You presumably have no emergency fund (or you wouldn’t be borrowing in the first place.) You are going to have pay income tax on the money and a 10% penalty. Penalties and fees always make me feel ouchies (to borrow a phrase from our kids).

    With my wife’s career, the likelihood of job loss is minimal. High ranking officers aren’t typically fired. Also a pharmacist can usually get work relatively quickly (even if it is an hourly wage.) We have some other coverage even in this extreme case… such as these hidden emergency funds.

Why Should We Get a TSP Loan?

Maybe I should have addressed this above. I wanted to dispel the general reasons why experts are against retirement loans before getting into “Our Why.”

Last week, I wrote about our surprise condo assessments. They are around $20,000 for each condo unit… and we have two in the property. The terms of the loan are 5.2% for 11.5 years and then they adjust to some higher rate.

We could try to sell the properties, but that seems to be a terrible idea. When you considering these expenses would be passed onto a prospective buyer they will offer $20K less than the value of the properties a few months ago. After seller fees, it would amount to a fire sale… a big loss to us. However, the rents are good and the financing would lead us to lose an extra $100 or so a month. That’s not a huge amount. We still have a tremendous price-to-rent ratio (it was around 6.5, but now it’s probably closer to 8).

While the one-time $20K seems like a lot (and it is), each of these properties should earn us $10K a year when they are paid off. Perhaps they will earn even more as the property is greatly upgraded.

The terms of the loan that the condo association got really caught my attention. As I was I writing the article, I realized how terrible the terms are for people with great credit like us. It isn’t competitive with current fixed loan rates now and it feels like an exploding loan as it will adjust in some unspecified way in 11.5 years. I defer to Clubber Lang for a prediction on how these loan terms will turn out for most owners:

I’d rather have a loan at a fixed 2.375% rate vs. an exploding 5.2% rate. Wouldn’t you?

There are a couple of other reasons why we might take this loan.

  1. Paying Off Our Solar Panels

    We financed solar panels a couple of years ago with a HELOC. It had a good teaser rate at around 2.5%, but it is 4.5% now. If I had it to do over, I would have locked in a TSP loan at around 1.5% back then and use that. I simply didn’t realize we had access to better rates.

    I don’t miss paying for electricity. And I think I’ll enjoy each and every year of the next 25 years of not paying for it (or paying pennies for it).

  2. A Master’s Degree for My (Pharmacist) Wife

    I never would have thought of looking at a TSP loan unless my wife mentioned that her friend is doing it to finance a master’s degree. It seems that is the next step in the corporate/military ladder. Borrowing for an advanced degree might make sense for most people, but for a doctor (of pharmacy) it seems like a step back to me.

    I shrug my shoulders and justify it as complimentary. It might make her a Captain. It might not. It can only help, right? And if it doesn’t carry weight with the government, it will carry weight in the private sector.

Retirement Loans and Double Taxation

Remember the bolded text above about double taxation? Clearly Marketwatch couldn’t be wrong about double taxation of 401K loans, right?

Well, Vanguard seems to have a different view.

Vanguard makes the great point that “First, it’s easy to see you aren’t ‘taxed twice’ on the principal balance of a ‘k’ loan. If you borrow $10,000 from your retirement plan, you receive $10,000 to use as you want — you don’t have to pay taxes on it.”

This makes sense to me. You weren’t taxed in withdrawing the funds the first time, right? You simply have to put in what you took out.

The analysis on the interest is more complicated. I defer the Vanguard article. Worst case scenario we’d be taxed twice on that interest. However, the amount of interest we’d be charged is fairly minimal. One calculator projected it at around $200. If the government wants to tax me twice on $200 interest, I say Bravo Zulu.

Conclusion

It seems to me that there are legitimate reasons to take a loan from a retirement account… and I don’t think they need to be “last resort” reasons.

There is at least one important question that I didn’t answer above. Why not have an emergency fund to cover this?

We have layers of emergency funds as I hope I explained. The extreme expenses from the condos are somewhat planned for. We could finance them, but I think we’ll decide that we have better options.

The alternative is to not invest a sizable amount of money… and I’m not sure that is a great idea. In all the retirement articles I’ve read, I didn’t find something like “put the money under your mattress.”

Digit Adds Fees. Meet Dobot! (It’s Free!)

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For nearly two years now, I’ve been telling everyone that they should sign up for Digit. Digit transfers a little money every day or few days into a separate savings account. The general idea is that the money is out of sight and out of mind. I thought that was a perfect way to grow an emergency fund, save for the holidays, and even execute some clever saving hacks.

Best of all, Digit was free. That’s all changing according to an email I received yesterday:

Today we have a couple of big announcements to make.

As Digit becomes a more important part of our customers’ financial lives, we’ve decided to make a conscious decision about how we want to make money: We work for you, and you pay us. It should be that straightforward. Too many financial services complicate things by making money doing things not in the best interest of their customers. Charging for Digit will allow us to support our service while making sure we always do what’s right for the customer.

A monthly subscription will cost $2.99. For all existing users, Digit will remain free for the next 100 days.

We are also significantly increasing the Digit Savings Bonus. All customers will now earn a 1% Savings Bonus (up from 0.20%). With the recent introduction of Goalmojis, customers are saving more than ever, and we want to make sure you’re earning real rewards for saving with Digit.

Thank you for being an early user, believer and fan. You have helped sparked the savings revolution. We promise to continue building products that make your financial life easier and better.

Why Was Digit Free to Begin With?

My understanding is that Digit was free because they weren’t paying interest (at least at first). Later they added the savings bonus that was mentioned in the email. The percentage rates are annual, so if you had a $1000 in the past you’d get $2… parsed out in 50 cent increments every few months. Obviously, it’s not a lot of interest and I presumed that, like banks, this organization could pool millions and millions of dollars and get much better interest rate… a rate that’s good enough to pay employees at that scale.

It seems that things have changed, or that Digit might want to expand and do more.

Is Digit Worth $35 a Year?

Only you can decide that. I had some readers who said that they set up automatic transfers with their bank to another savings account and it accomplishes the same thing. Other people have said that they wouldn’t have saved anything simply because they had too many other life tasks to get done.

I’m not particularly thrilled by definition of a Savings Bonus. It feels like they should just pay interest like a bank. The only difference I see is that this Savings Bonus is only paid out a few times a year. If a customer leaves just before the Saving Bonus is paid they would presumably lose a couple months worth of interest.

In general, you’d have to have around $3600 for the 1% Saving Bonus to offset the fees. That’s a pretty sizeable chunk of money for some people.

“Have You Met My Friend Dobot?”

Last year a competitor to Digit came on the scene… Dobot (“Dough bot”). Dobot is like Digit, but with goals. Dobot was and still is free. You can read my Dobot review here

While they both squirrel away money, they do it in different ways. Digit saves money into one place which is why I liked it for a general emergency fund. Dobot pushes you to save money for a certain thing.

For example, I wanted to save for this 65″ OLED television that is currently priced around $2500. I told Dobot that I wanted to save $2000 by Black Friday (finger’s crossed for a deal). I have $955 saved now.

You can have multiple goals with Dobot. So I could simply just create one called “emergency fund” with a goal of having $2000 in that by the end of the year. Boom, instant Digit!

It seems that Digit was looking to be like Dobot anyway by offering Goalmojis (which I never got around to using).

Goodbye Digit

It was fun while it lasted Digit, but it seems that I’m going to have to move on. You were doing what is right for me before and now you not. No hard feelings. I’d say that we can still be friends, but you’ll have to drop your monthly friend fee for that to work.

You’ll be fine without me. You’ve probably got a few hundred thousand or a million others to keep you company. I know that many others will leave like me, but I have to think that a few will forget the changing rules or be unwilling to change. In either event, you should make out quite well.

Don’t worry about me. Dobot is treating me well. I wish you the best of luck.

My 2017 Resolution is Personal Finance Blasphemy

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(I hate clickbait titles but it’s appropriate.)

dog on couch

Nearly every blog I read is making a resolution. I subscribe to the Bill Murray line of thinking that it’s best to wait a couple of weeks. However, there is one resolution that I’ll share now.

I resolve to spend money. I want people to call me Spendy McSpendington.

This is difficult for me, because I’ve been Frugal McFrugalface for a long time. It was nearly a decade ago that I put together hundreds of tips on how to save money… and I was frugal long before that.

Things changed in the last month. It was kind of a chain reaction of events:

  • It was time to replace our couch which lead to this conundrum.

  • Our carpets were in worse shape than the couch. Between the standard amount of mess that a 3 and 4 year old make and my dog sitting gig, it was time for a change. Once one dog pees on the rug another will follow and it’s almost impossible to keep up with it, no matter how much Nature’s Miracle Urine Destroyer we use. (It’s a great product, but sometimes there’s simply too much especially when you have 500+ dog day stays in a year like we had.)

  • My Subaru Forrester was a mess for the same reason the carpets were. It’s not just the dog and the kids, but it’s the beach car as well. I shouldn’t throw the kids and dogs completely under the bus, I probably generated most of the trash.

So here’s what we did after Christmas to close out the year:

  • We bought a new couch! (I might have more to say on that next week. It wasn’t very eventful.)

  • We put in some new waterproof vinyl plank flooring (more on that in the future too).

  • Finally, my wife gave me a gift card for a local car detailer who made the Forrester look almost new again. I couldn’t recognize my car.

That’s a lot to do in the span of a week or so. In total it was about $4000. Of course the flooring and the couch should last for years and years, so I think of it as being amortized over a long time. Still, that’s quite a spending spree for a few days. We’re not done as we’re looking to make other improvements throughout the house.

There’s a method to the spending. We got some great deals on the flooring and couch. More importantly, they’ll be easier to clean in the future which saves me time and energy.

We’re making 2017 the year of comfort. This means that we’re going to try to be spend more to live more comfortably. Many personal finance bloggers focus on fighting lifestyle inflation. We’ve been winning that war for 10 years and it’s time to judicially spend to improve our quality of life.

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