Lazy Man and Money

Fixing My Biggest Money Mistake

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Last week, I wrote about My Biggest Money Mistake. It was not a money mistake that most people can identify with. I over-optimized and put too much into retirement accounts. It’s great if we are looking to maximize our net worth. It’s very poor if the plan is to use the money to pay expenses now – 15 years before traditional retirement age. As I mentioned in my previous article, this is a “good problem” to have. We’ve been extremely lucky that most of our personal finance plans have worked out well.

Overall, around 90% of our money is in real estate equity or a retirement account. Half of the real estate equity is our primary residence. The other half is in rental properties. We’re a few years away from owning our primary residence which will largely eliminate our biggest expense. The mortgages on the rental properties will be paid off in a few years as well, giving us a supplemental income. The rental property equity simply looks like a big number on paper a screen.

Getting the money out of the rental properties is straightforward. We could sell one to pay off the other two and get a smaller income stream now. We could sell off all three and invest the money in an index fund. If we did that, we may get around $10,000 a year in dividends. However, if we stay the course, I estimate we’ll get $30,000 a year in rents after all expenses once the mortgages are paid off. I don’t like the idea of selling the properties at this time.

Getting the money out of the retirement accounts early is a little more complicated. Actually, it can be easy if you are okay with paying penalties. However, the whole reason why I put the money in a retirement account was to maximize the growth and the amount available after taxes.

When we look at retirement accounts there are two basic types – those that are invested with pre-tax money and those that are invested with after-tax money. Pre-tax retirement accounts include 401ks, traditional IRAs, and government TSP plans. After-tax retirement accounts include things like Roth IRAs, Roth 401ks, and Roth TSP plans. With the after-tax Roth accounts, you’ve already paid tax, so you don’t need to pay tax again. For this reason, the only thing we need to think about with Roth IRAs is being old enough (age 59.5) that we don’t get penalized.

However, with the pre-tax retirement accounts, we have to pay regular income taxes on all the money we take out. Right now, that actually isn’t too bad. If we earn up to $80,250, we’ll pay only about 12% of taxes. If we earn less than $171,050 we’ll be in the 22% tax bracket. If we earn less than $326,600 we’ll be in the 24% bracket. That’s a ton of income, so I it’s not worth look at the 32% tax on incomes over $326,601. This almost guarantees that our effective tax rate would be less than 20%. (If you didn’t know, you pay all the taxes as you move up in the bracket, landing in a high tax bracket doesn’t mean all your income is suddenly taxed at that number.)

It’s hard to imagine we’d make over $326,000 in retirement, but it isn’t impossible. My wife may get a $60,000 pension that’s indexed for inflation. We might have income of $45,000 from rental properties (which will naturally adjust for inflation). We have a few other income sources (blogging, my dog sitting, etc.) that could add up to around another $50,000. My wife may continue to work that brings home an income. That would be around $150,000 before we account for withdrawing money from the IRAs. There’s not much room left in the 22% bracket, but still plenty of room in the 24% bracket.

So we wouldn’t pay too much more than the expected 20% in taxes except for two possible scenarios:

1. The brackets get lowered over time. I think there’s a strong possibility that this happens. We can imagine that at some point we want to fix the national debt and one way to do that is to raise taxes by lowering the bracket thresholds. If the $326,000 bracket gets dropped to $200,000, we might risk running into the 32% bracket easier. Alternatively, the tax rate may go up, which would conceivably be the same thing.

2. At age 70-something, we might have to pay Required Minimum Distributions (RMDs). I write “70-something” because the RMD age has changed recently and there’s legislation for it to potentially change again. In any likely scenario we’d be forced to take a percentage of our nest egg as regular income at age 70 or later. Since my wife and I are 45 years old, we may have 25 years of compound interest. With that much time, our pre-tax retirement accounts could be a big number, leading to taking a big distribution in our 70s. Social Security will still exist (in some form) and some simulations say that will be another $60,000 of income.

Some combination of #1 and #2 will likely happen. It’s always difficult to plan for “what ifs” in the future, but it never hurts to be prepared.

I’ve been writing a ton about taxes, but having access to money earlier rather than waiting until age 59.5 would be ideal. Fortunately, it’s possible to get access to the money early, while also potentially limiting high tax brackets in the future.

There are two ways we can access our IRAs early:

1. We can take Substantially Equal Periodic Payment (SEPP). That means that we commit to taking an amount of money out of our IRAs as determined by an IRS formula. We’d have to continue it until age 59.5 or face big penalties… with interest. It’s not a bad plan, but I don’t like to have to withdraw money based on what an IRS formula says we should. I also don’t like to be locked into 10-15 year decisions.

2. We can use a Roth IRA conversion ladder to move money from our pre-tax IRA to a Roth IRA. We’ll have to pay the taxes on the income immediately, but that sets up two very good scenarios. First, we can withdraw the money, tax-free, after 5 years. Second, we can let the money grow while not having to worry about taxes. The first scenario would give us access to money, penalty-free. The second scenario gives us the flexibility to decide not to take the money if we don’t need it.

I’m 90% sure that the Roth IRA conversion is the way to go. Getting access to money tax-free in 5 years is about as good as we could hope for.

There’s one small problem with a Roth IRA conversion. Paying taxes up-front can be tough. If we were to convert $50,000, we’d have to pay $10,000 in taxes (and we can’t use that $50,000). When you are trying to get through 5 years because you don’t have access to that retirement money, it’s not easy to come up with $10,000. That’s when I had an idea. Since you can take out Roth IRA contributions at any time, we could use our previous Roth IRA contributions to pay off the taxes on our IRAs. Under normal circumstances, you won’t want to pull those Roth IRA contributions out. However, pulling $10,000 out means putting $50,000 in, so I’m sure the personal finance experts won’t mind.

At the end of the day, all this essentially guarantees us paying around a low 20-ish% marginal tax rate, while giving us access to money in five years. Locking in that tax rate now is valuable, because I feel that taxes will rise in the future. Of course, I’ve felt this way for a long time and it doesn’t happen. Politicians don’t like the idea of raising taxes as it’s unpopular with almost all voters. At some point, I think we’ll simply need to do it.

My Biggest Money Mistake

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My Biggest Money Mistake

For whatever reason, people love to ask me about my biggest money mistake. Other bloggers will ask it when they are compiling a top ten article. For a few years, I had gave some answers, but I didn’t have any strong conviction behind them. There was a brief period of day trading after college. I also bought a convertible after college. Basically, the “after college” time wouldn’t make many of my financial highlight reels.

However, in hindsight, I don’t think either were big money mistakes. I didn’t lose too much day trading and I learned a lot. I still have the Mustang convertible today (20 years later) and have paid roughly about $1400 a year (or a little more than $115/mo.) for it. Things could have been a lot worse.

I think it’s difficult for many people to talk about their biggest money mistakes. In about 99.9% of the cases, it is because they are embarrassed that they made the mistake in the first place. I’m finding it difficult to write about my financial mistake, but for a completely different reason. My biggest money mistake comes from a situation when it’s considered a “good problem to have” such as having two great starting quarterbacks or being at a great buffet and realizing that you only have one stomach. (Does anyone remember buffets?) Because most people would love to have this kind of problem, it may sound tone-deaf. If so, I’m sorry in advance.

I Saved Too Much for Retirement

For years, I made it my mission to max out my retirement accounts the best I could. As a software engineer, I was pretty successful. As a blogger, less so. My wife, as a pharmacist was able to max out her retirement accounts as well. It turns out that if you max out your retirement you can have a million dollars in 20 years. Neither of us are there, but, as you can imagine with our retirement accounts are not small. Given the stock market run of the last decade, maybe a lot of people find themselves in this situation.

In general, putting more money into retirement accounts is a smart move. You get to delay paying taxes during what is, for most people, their peak earning years. Then you can pull out the money and pay taxes on the smaller amount because you don’t have your main income. The downside to most retirement accounts is that you can’t easily access the money until you are older, typically around age 59.5.

Having too much money in the future isn’t the problem. The big money mistake is that the money we have access now is 7% of that retirement nest egg. That’s not a lot of liquid cash.

I should have planned it so that we set aside 35-45% of the money to use now and 55-65% that we can use later in retirement accounts. It’s a lopsided situation, where it feels like we are just getting by now, but are set up to have a lot more money in the future.

That’s why we stopped retirement contributions, with the exception of Roth IRAs. We continue to contribute to Roth IRAs because we can pull those contributions out at any time without a penalty. In fact, the ability to do this may turn out to be very important in the future, but we’ll put that aside for the follow-up article.

There was another reason why we put so much money for the future. Simply put, we could. We didn’t have kids for a long time, so the dual-income, no kids gave us a lot of financial flexibility. More importantly, we have my wife’s military pension and rental properties to help supply income before retirement. Unfortunately, we still have to wait five years for the mortgages on those rental properties to be paid off. They won’t produce income until then.

There’s one other “problem” with this lopsided situation. When you combine a pension, rental income, and a big IRAs it has the potential to lead to a high tax bill. The IRA disbursements are taxed as regular income which may be 37%, or (much likely) even higher in the future. I’ve forgotten a lot of math over the years, but if memory serves, the commutative property of multiplication means that it doesn’t really matter when you pay the taxes, you just want to pay the lower amount. If we had invested money in a regular taxable account, it could be subject to long-term capital gains rate which maxes out at 20%. The money could also be invested in a way that paid qualified dividends that would realistically max out at 15% for us. (You need over $500,000 in qualified dividends a year for a married couple to get to the 20% range.)

If we could pay taxes of between 15-20% it would be a lot better than paying taxes of 40%.

Fixing My Biggest Money Mistake

Sometimes there are problems you can’t fix. As the saying goes, you can’t put the toothpaste back in the tube.

Fortunately, in this case, there are some things we can do. OThe solutions that I initially found were less than ideal. However, with a little more time and focus, I think I’ve found some ways that it won’t be so terrible…

… but that will be an article for another day. Update: Read Fixing My Biggest Money Mistake.

10 Biggest Money Mistakes Analyzed

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Money MistakesDo you have money mistakes? Of course you do, right? We all have money mistakes. I spend way to much time (and it’s part of how I make a living) limiting mine as much as I can, but I still have money mistakes.

There was a Twitter thread that went viral (for money conversations at least) about money mistakes that caught my attention. It caught my attention because everyone agreed that it was very good. I agree that it was very good too. However, I thought that each mention of a money mistake had a lot more nuance that deserved a deeper look. That’s just the way Twitter is.

I thought it would make for a good blog post to explore some of those nuances. Unfortunately, I’m sure this will come off as if I’m criticizing Nick Maggiulli Of Dollars And Data, but I’m actually a big fan of his work. I’m a subscriber of his newsletter and I recommend that you subscribe as well.

10 Biggest Money Mistakes Analyzed

I’ll be embedding all the Tweets in this post, but you can read the money biggest mistakes here. Some of my responses are a little snarky to make this a little more fun.

“1. Grow Income instead of Cutting Expenses”

The main problem that I have with growing income advice is that it is rarely actionable. If I asked everyone reading this who wants more income, I bet all of you would raise your hands. Making a case for more income in many careers is a long, slow, tedious climb up the corporate ladder.

Alternatively, you can add a side hustle and trade time for money. That can work depending on your life situation. It was easier for me before we had kids. If this works for you, I suggest combining this income with cutting spending to maximize overall savings. Then invest those savings for passive income.

It’s far less complicated to give people advice on how to cut spending. There are a lot of ways to save money. What’s best for you greatly depends on your personal situation. If you are a high income earner with high expenses, growing income more may not be the answer.

“2. Not Thinking Like an Owner”

I agree with this advice, but I think it isn’t the best example.

Brady took stock options (ownership) in Under Armour in 2010 (Source) that were up 800% in August of last year… and Under Armour stock has doubled since then. Tom Brady certainly has a significant ownership stake in his nutrition/sports performance company, TB12 Sports.

Peyton Manning had ownership of 31 Papa John’s franchises (Source.) Manning sold ownership after the CEO got involved in some scandals. I’m sure Manning owns stakes in other businesses, even if it is stock from his many, many endorsements.

Madden may have ownership in some things, but he took $150 Million to license his name in perpetuity to Electronic Arts for the famous Madden Games (source).

“When the company’s stock first went public, he was offered an opportunity to buy it for just $7.50 a share. Thinking EA was just trying to milk money out of him, Madden declined. He later called this decision the ‘dumbest thing [he] ever did in [his] life’ — and for good reason.

EA’s stock was priced at $70 by 1999 and reached an all-time high of close to $150 a share in July 2018 — thanks in large part to the franchise that bears Madden’s name and will for the foreseeable future.

In fairness to John Madden, EA went public in 1989 with a market capitalization of about $84 million. So he was actually getting paid for his name almost twice what the whole company was worth. According to this calculator, an S&P 500 investment would have grown more than 1000%, meaning that John Madden’s name could have reasonably gotten him 1.5 billion.

I don’t know about you, but if the dumbest thing you’ve ever done still nets you 1.5 billion (or half that if he invested more conservatively), it’s still a good day.

But what about Jerry Richardson?

First, it’s hard to connect Richardson’s success with being an NFL player. While he was a player, he only played for 2 years and was far from a star. He used the bonus money from winning a championship game and used that to start the Hardees business. I’m not sure how much the championship bonuses were in 1960, but I bet it wasn’t much. Many other people could have had the same starting money with a little opportunity or inheritance.

In short, it’s more coincidence that he’s a wealthy football player than causation.

As Axios points out, “But the story of how [Richardson] came to sit in [the Carolina Panthers owner’s] box is complex and interesting and improbable and kind of inspiring.”

Richardson started Hardee’s just 6 years after McDonald’s got its start. It proved to be the perfect time for fast food restaurants.

Also from the Axios article, “In 1993, toward the end of his career, Richardson and several investors paid the NFL $206 million to create the Carolina Panthers as an expansion team. That may have proven to be the most shrewd business move he made. The Panthers are now worth north of $1.5 billion, according to Forbes.”

I feel it would be more accurate to say Brady/Manning are more “business owners” than Richardson was a football player. It’s also worth noting that Richardson didn’t start his business ownership until his playing days were over. Brady is obviously still playing. They both have 40 years of earnings and compound interest growth to get where Richardson’s net worth is today. Even with inflation, I wouldn’t bet against them.

The main advice of “think like an owner” is true, but remember that it was improbable that Richardson would be a successful entrepreneur. Don’t go start a burger stand thinking that you’ll make a few billion dollars.

“3. Overemphasis on small wins vs. big wins”

I don’t want to say that you shouldn’t prepare for a salary negotiation. However, I’ve been on both sides of a few salary negotiations, and I can tell you it wasn’t much of a negotiation. The numbers were preordained.

I hope the numbers in your salary negotiation haven’t been preordained. If that’s the case, then it’s certainly worth spending a few hours to prepare to maximize the return there. There’s a chance of a $800/hour return on your time (using the example above). That’s year after year and compounds with future raises. The thing that gives me pause is that the chance isn’t 100% and it may be zero.

Driving across town to save $40 on a television does have a few benefits though. Personally, I like to get out of the house. I like to visit electronics stores. That’s entertainment for me. Also, the chance you are going to save $40 is 100%, which contrasts with the possible 0% chance at $4000. Finally, this kind of frugality can become habit-forming (in a good way!) and lead to savings in other areas. I’ve personally found that I’ve become frugal enough that I don’t have to worry about budgeting.

One last thought: Since I’m being a little snarky with this article anyway, does has anyone actually driven across town to save money on a television set? If I buy locally, I either buy from the one electronic store (an independent one) or Wal-Mart. (We don’t even have a Best Buy.) However, most of the time I would buy a television on a deal that I saw online.

“4. Timing the market”

No one knows what the market is going to do. That is a universal truth.

However, on January 23, 2020, I wrote How I’m Managing Stock Market Risk in 2020, specifically about how the 10 year bull run had made me nervous. I increased my bond holding. That turned out to be very useful when the market crashed in March. The bonds didn’t go down very much and I was able to sell them and buy stock indexes on sale while the market was going down.

With the market back up to new highs, I’m selling some down stocks and buying back the bonds again. I’m still staying fully invested, I’m simply trying to reduce my investment risk in this market environment

There is significant research into using CAPE (Shiller PE) into asset allocation. All of that essentially amounts to “timing the market.” It’s timing the marketing using valuation.

(If you don’t know what I was writing about in last paragraph, just stick to the buy and hold method. It has always done well in the long run… with the exception of Japan’s Lost Decade(s).)

“5. Borrowing too much”

Borrowing too much is a universal mistake. The problem is that “too much” isn’t defined. Eating a strawberry might too much for a single ant, but it’s not enough for me. Borrowing $100,000 is too much for me, but it wouldn’t be for Jeff Bezos. Often, you don’t know where the line of “too much” is until things have gone south and your DeLorean is in the shop.

I think a bigger money mistake is not understanding good debt vs. bad debt.

“6. Paying attention to other peoples’ finances”

Like everything else on this list, this is very sound advice.

I wonder if the average person gets caught up in how much money Tom Brady or Jerry Richardson has. We all know that there are celebrities that are richer than us.

It’s the people in your personal circle that can be more difficult. When I lived in Silicon Valley there were 10 very expensive sports cars on my street. Society and relationships can become strained with big financial differences. I don’t “worry” about them, but it’s hard to imagine that people’s financial well-being doesn’t have an overall effect on those relationships.

“7. Too much lifestyle creep”

Just like the “borrowing too much”, it’s hard to know the correct amount of lifestyle creep. Often you can only tell in hindsight.

Technically spending more than 0% of your raises pushes your financial independence further away. Some people’s goals aren’t financial independence. Everyone has their own comfort level with their savings percentage and this is the same way.

I don’t want to tell you how much lifestyle creep is too much. That’s a personal decision for you to decide. The key thing to understand is that if you save and invest more, you get to financial independence quicker.

“8. Investing in products you don’t understand”

As a parent to a 7 and 8-year-old (who get very good grades in school), I have trouble explaining how stocks work. I think I could do it, but it wouldn’t be a slam dunk. Trying to explain an ETF or index fund would only be more complicated. I’m not sure there are a lot of investments that can be explained very well to a 5-year-old.

The Teen Titans Go explain how rental properties work in an episode down to the details of getting a mortgage from a bank for leverage to build equity. It’s quite good and they explain it quite well. I understand it, but I’m not sure they do.

The advice of investing in simple products is sound. I don’t agree that an average 5-year-old should be able to understand many investing products. Fortunately, if you are reading this blog or the original money mistakes Tweet, you are probably not 5 years old.

“9. Paying too much in fees”

This is a universal mistake. However, I’ve been reading this advice since I started investing in mutual funds back around 1990. Most of the investment options I’ve seen put expense ratios in fairly clear view and show how your money would have grown after expenses.

I hope there aren’t too many still around making this mistake.

“10. Obsessing over not having enough money”

Let’s end on my favorite piece of advice. I’m guilty as charged of this one. We’ve reached to the point where we’ve stopped our retirement contributions. We’re pushing too many chips for age 60 and not enough for now.

I don’t mind leaving hundreds of thousands in inheritance though. I do enjoy the security of not having to worry about money. I don’t want to sound too much like a Scrooge McDuck, but sometimes having money is as comforting as spending it.

So what you think? Have you made these money mistakes? Let me know in the comments.

Major Money Mistakes: Things to Avoid When Adopting Your Frugal Way of Living

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The following is guest post by Connor Gray. He is known by his friends and family as Mr Frugal. He loves saving money, and helping others do the same, and writes for a variety of lifestyle and personal finance sites sharing his tips and tricks.

Being frugal is a great way to live. You will find that there are many ways you can save money while still enjoying yourself, providing you with a sense of satisfaction and a realization that you can make big savings when you want to.

However, there are a number of mistakes that you can end up making when you want to be more frugal, and here are six to avoid.

Mistake 1: Buying Inferior Products

When you start living a frugal lifestyle, you will want to spend less when you go to the shops. But while it makes perfect sense to spend less on cheaper products that are not particularly important, such as a cheaper brand of cereal, there are some times when you really should be spending more.

You’ve probably heard the phrase: “Pay peanuts, get monkeys.” Keep this in mind when you make an important purchase.

When you buy a new dishwasher or vacuum cleaner, this is something that you want to last. Quality products last longer. They cost more, but in the long term you save money because you spend less on fixing and replacing them, so know when to spend more to save more.

Mistake 2: Not Getting the Most from Your Existing Possessions

Look after what you have and get the very most out of your existing possessions. Sometimes there are simple ways to protect what you own. They involve spending more at the outset, but they can save you more in the long run.

For example, take the car seat protectors from Shear Comfort. Buying them involves a cost, but you can protect your car seats and keep them in good condition. Then when you come to selling your car, this could help you to get a better price for it.

Sometimes you really do have to spend money to save money, and the trick is knowing where to spend your money.

Mistake 3: Buying Too Much Just Because It’s Cheap

Don’t make the mistake of assuming that just because things are cheap, you can buy more of them.

You may see a great deal on food at the supermarket, and it’s so cheap that you end up buying it because it’s cheap rather than because you need it.

But you’ll either eat something you don’t need, or end up throwing it away. So always ask yourself whether you really need something before you buy it.

Mistake 4: Creating More Problems through DIY

DIY can be a great way to save some money. Doing things yourself rather than hiring someone to do the job for you is very sensible. But there are times when it makes more financial sense to pay for professional services.

Know your abilities because DIY mistakes can be very costly. If you don’t have the skills, don’t attempt to fix everything yourself. You could end up causing more damage, and then you’ll have to pay for a professional as well as paying extra to fix the damage.

Mistake 5: Spending Just Because You Have a Coupon

Coupons can be very attractive, but many people make mistakes when it comes to using them. There is often a need to use the coupon even if you don’t really need the product on offer. You may think that it is an offer too good to refuse, but remember that you will usually be spending money. Again, ask yourself whether you really need the product in the first place.

Mistake 6: Forgetting to Enjoy Yourself

The most common mistake of all is being so frugal that you forget to enjoy yourself. Being frugal is great, and it can be very satisfying. But that does not mean you should stop enjoying life. Treat yourself and your family, know when to spend slightly more on a special event or day out, and don’t miss out on all the fun things in life that involve spending a bit more money.

Save Money and Be Happy

These are all some of the most common mistakes that you can make when attempting to live a more frugal existence. Avoid these and you will spend less and get more enjoyment from your new frugal lifestyle.