Category Archives: Moneyhacks

Smart Travel Through Geographic Arbitrage

Traveling is pretty awesome.  You get to see new vistas, taste new dishes, and experience new cultures.  The biggest problem with traveling the world is that it can cost a lot of money.  But it doesn’t have to.  Since I try to be a value conscious consumer (VCC) in everything I do, I also focus on getting the best value proposition on overseas travel.

If you have explored the far off travel destinations of the world from your computer screen, then you know one way to travel on the cheap is to visit countries that tend to be inexpensive.  I’m talking about places like eastern Europe, Southeast Asia, Central America and South America.  The kind of places where you can stay in a hotel for under $20 per night or rent a simple apartment for $400 per month.  Or get a decent meal in a restaurant for $2-5.

Finding a cheap place to visit isn’t particularly challenging.  Just book a ticket to Thailand, Mexico, or Chile, grab your passport, and go!  But there is a way to stretch your travel dollars even further while vacationing overseas.

 

Geographic Arbitrage

In the Root of Good family, we have been diligently thinking about where in the world we want to travel this summer.  The initial list included east coast USA and Canada, Southeast Asia, and Latin America/South America.  We have since added Europe (probably Spain) to the list of potential vacation spots.  The list is very broad at this point and includes generally low cost areas (with some exceptions like parts of Europe and Canada and the eastern US).

To make a decision on where we want to go, we are focusing on a number of different factors such as cost, weather, flight duration, political stability, language familiarity, food, ease of getting a visa, scenery, and sites of historical significance.

I want to focus solely on “cost” in this post.  And particularly the impact of foreign exchange rates.  When you travel overseas, you spend money from your own country by exchanging your money into a local currency (euros, Thai baht, or pesos for example).  For most readers of Root of Good who are based in the United States, you would be converting the US dollar into euros, bahts, or pesos.

One trick to finding a great value for overseas travel is to find a currency that has lost a lot of value relative to your home currency.  I stumbled upon a blogger that is enjoying a mini-retirement in Chile right now (the name of the blog escapes me at the moment!), and he mentioned the weakness of the Chilean peso (or the strength of the US dollar when you are buying Chilean pesos).  He further commented that the recent “scare” in emerging markets has led to a slide in most emerging market currencies relative to the dollar.

When I hear something like this, I think “arbitrage opportunity”.  If I can find a country that’s currency has been beaten down (for whatever reason) then that means everything in the country is on sale with a built-in discount.  Then I can find good deals on lodging, transportation, and food within the country to make a trip even more affordable.

I surfed over to finance.yahoo.com/currency-investing to check out just how weak the Chilean peso and other currencies really are right now.  The yahoo finance site lets you “compare” a lot of currencies on one chart.  I chose to compare the Chilean peso, the Mexican peso, the Peruvian nuevo sol, the euro, and the Thai baht.  I wanted to see exactly how much the US dollar has appreciated against the foreign currencies of places we might visit this summer.

 

Foreign exchange rates 1 yr

 

To summarize the graph, here are the one year changes in valuation of the currencies I observed:

US Dollar Vs. Foreign Currency Exchange Rate

CurrencyDollar's Strength Vs. Foreign Currency (1 yr. change)
Chilean Peso+17%
Mexican Peso+5%
Peruvian Nuevo Sol+9%
Euro0%
Thai Baht+9%

Over the course of the last year, the US dollar has appreciated against all the currencies listed except the euro (which maintained the same exchange rate versus the dollar).

That guy in Chile was right!  The Chilean peso was the hardest hit currency in the basket of currencies I checked on.  The US dollar has appreciated 17% over the last year compared to the peso.  In February 2013, USD $1 would get you 470 Chilean pesos.  In February 2014, the same $1 can be traded for 551 Chilean pesos.

To me, Chilean pesos might as well be saltine crackers.  I don’t have any intuitive concept of what they are worth.  To look at a great example of what this weakening of the Chilean peso means in practice, let’s consider lodging costs for a month in Chile.  I checked craigslist and found a nice two bedroom apartment in Santiago, the capital city of Chile, that would accommodate the Root of Good family.  I didn’t research it thoroughly, but it seems to be in a safe area (Tarapacas), near the subway and bus lines, and convenient to shopping, dining, and pretty much everything in Santiago, Chile.  And it’s on a sweet, tree-lined pedestrian mall.  It’s 1,000 square feet, with very modern interior furnishings.  The kind of apartment that would easily rent for $4,000+ per month in Manhattan in New York City.

Chile-apartment

The lovely tree-lined promenade outside the apartment in Chile.

The rental price in Chilean pesos is CLP 350,000 per month.  One year ago at CLP 470 per dollar, the apartment would cost USD $745 per month (350,000 / 470 = 745).  At today’s exchange rate of CLP 551 per dollar, the apartment is only USD $635!  That’s a $110 savings just from the shift in the Chilean peso/dollar exchange rate after one year!  That is only the savings on one month’s rent.

Apply the exchange rate savings across all travel related spending categories like local transport, entertainment, alcohol, restaurants, and groceries, and you’ll find that a USD $2,000 monthly budget in Chile one year ago only costs USD $1,700 today.

The other emerging market countries in the chart also experienced a weakening of their respective currencies versus the dollar.  The dollar gained 5% versus the Mexican peso and 9% versus the Peruvian nuevo sol and the Thai baht.  You won’t save quite as much today compared to one year ago in those three countries as you could in Chile.  But those three countries are still “on sale” versus one year ago.

The one currency in the table that didn’t weaken against the dollar was the euro.  It remained unchanged at 0.74 euros to USD $1.  We have been patiently awaiting a weakening of the euro for years, and unfortunately it hasn’t budged much.  This doesn’t mean Europe is a horrible value today compared to a year ago (it’s virtually the same, after all).  What it does mean is that the emerging market countries are much better values for vacations right now compared to Europe.  Not only are the emerging market countries cheaper in general, but they are even less expensive today due to weakening foreign exchange rates.

Visiting a country with a weak currency means you get a great value while you are there.  You can always visit other countries with stronger currencies later.  Why not take advantage of the opportunity presented by a weak currency right now?

 

Beware Inflation

If you happen to like this way of searching for whole countries on sale, keep in mind that inflation can complicate your search.  High inflation in a country with a weakening currency can offset any foreign exchange savings you might enjoy.  Let’s take Mexico as an example.

Even though the dollar gained 5% against the Mexican peso over the last year, the inflation rate in Mexico partially offset some of that strength.  It’s really the relative inflation rate that’s important.  The US inflation rate over the last year was 1.5%.  In Mexico, it was 4%.  This means prices in Mexico (denominated in pesos) increased 2.5% more than prices in the US.  Of the 5% strengthening of the dollar, 2.5% of it (or roughly half) is lost to higher inflation in Mexico.

Let’s look at a meal in a restaurant in Mexico.  One year ago it might cost 100 Mexican pesos for a nice sit down meal.  That would be USD $7.89 at the exchange rate at the time.  Today the meal has increased by 4% to 104 pesos.  That would only cost USD $7.81 at today’s forex rates.  Even though the price went up 4% in peso terms, it dropped 1% in USD terms!  All while prices in the US have increased by 1.5% over the last year.

The other countries in the table only experienced 1-3% inflation, which means the foreign exchange savings of 9-17% for Peru, Mexico, and Chile way more than offset any slightly higher foreign inflation.

If you see a currency that depreciates by 20-30% versus the dollar, make sure the country isn’t experiencing steep inflation.  You’ll actually be worse off if you get 30% more of a currency due to forex rate changes, but the country has experienced 50% inflation over the same time period (hi Argentine peso!).

 

Traveling For Less

We have a budget of around $5,000 for our 1-2 month long summer trip.  By choosing to visit countries that have currencies suffering from weakness right now, we can stretch our dollars even further.  And in a few years, there’s a good chance somewhere else we want to visit will be comparatively inexpensive due to a weak currency.  That’s what I’m calling “geographic arbitrage” – finding destinations with short term currency weakness and choosing those countries as your next travel destination.

To keep costs even lower, we also plan on using our Starwood hotel points at Sheraton hotels and airline frequent flyer miles we accumulated over the last few years.  I’m also signing up for a pair of Barclay’s Arrival cards for me and Mrs. Root of Good.  The Barclay’s Arrival card offers a bonus of 40,000 miles that you can redeem toward any $400 travel purchase.  A Barclay’s Arrival Card for me and Mrs. Root of Good would mean $800 off any of our flights, lodging, rental cars, or ground transportation.

Will we end up going to Chile just because our US dollars buy 17% more pisco sours (denominated in Chilean pesos)?  It will certainly factor into our decision, but we aren’t just bottom-fishing for the best value on the planet.  We do want to actually enjoy ourselves while on vacation.  And after I cleverly brainstormed Chile as an awesome place to spend the summer, I realized Chile celebrates their summers during our winters and their winters during our summers.  If that’s confusing, just know that it has to do with rotational tilt of the earth, solar geometry and other nuances of astrophysics that are beyond the scope of an already confusing article on foreign currency exchange rate arbitrage.

In other words, it might be chilly in Chile if we visit in July.  Perhaps the eponymously named Ecuador (situated closer to the equator and therefore warmer) might offer a more comfortable environment for drinking, eating, relaxing, and exploring.  Or Peru or Mexico or Thailand.

 

 

Have you ever traveled on the cheap by taking advantage of temporarily depressed currencies?

 

photo credit: flickr Malojavio El Saucejo creative commons

Repairing Things Around The House

A Lot of Things Broke

January was a very busy month because things fell apart.  A lot.  Before we could get our new oven installed, our microwave emitted it’s last electromagnetic rays and then died a sudden and painless death.  After a quick google, all the advice said “don’t bother trying to fix microwaves, it’s cheaper to buy a new one”.  Figuring this advice suspect, I proceeded to tear apart the microwave and test all kinds of things with my trusty voltmeter.  Sure enough, the magnetron was shorted out.  I found a few replacement magnetrons (that’s a cool word, isn’t it?) on eBay for $50-60, which was about the price of a similar but brand new microwave from Walmart (the cheapest place we found new microwaves).  Now I know why the initial advice was “don’t bother fixing it”.  No sense in trying to repair a 13 year old microwave when a brand new one is the same price.

We ordered a new microwave and it unfortunately arrived within a couple of days.  I say “unfortunately” because we ended up permanently “borrowing” an unused (and slightly more powerful!) microwave from our family.  When the new microwave arrived, it sat in our second living room for a few weeks before I made the trek to Walmart to return it.

I wish that were the end of January’s “fixing broken stuff” saga.  But it isn’t.  Mr. RoG Jr. apparently put the laptop mouse inside the laptop between the keyboard and the screen and then proceeded to jump on the cover over and over until he bludgeoned the LCD panel into an artistically interesting but mostly useless mess.  The screen looked pretty when illuminated, however (in a modern art kind of way).  That’s why I buy low-end electronics, or, as I tell the kids “that’s why we can’t have anything nice”.  Mrs. RoG wanted to buy a new laptop because she hates the Windows 8 operating system on our current laptop (which is what all computers come with these days).  I knew you could buy replacement LCD panels for laptops so I set off to eBay to find a compatible screen.  After ordering one for $45, I didn’t feel so bad about having a laptop screen smashed by the little guy.

Not long after the laptop screen incident, I hear a crashing sound upstairs.  The two girls managed to pull the closet rod down.  Apparently 162 shirts isn’t an excessive load, but 162 shirts plus an 8 year old amateur trapezist is just enough to rip the closet rod’s mounting bracket in half.  It’s never boring around here.  And lest anyone thinks the Root of Good family lives a deprived life of barren frugality, I’ll allow the 162 shirts adorning the newly reinforced closet rod to speak for themselves.

Other than a few other minor issues like replacing the missing shingle on the roof and tightening a loose door handle, I didn’t have any more broken things to fix at my house.  Luckily I have in-laws that know how to put the hurt on clothes dryers.  I managed to fix their broken dryer after some sleuthing with my trusty voltmeter.  $15 for a replacement heater coil (thanks again, eBay!) and the dryer is like new.

Then they managed to break the other dryer they were using as a temporary replacement while they were waiting on their first dryer’s replacement part to arrive.  So I busted out my invaluable voltmeter again (I got a basic voltmeter for $6 from Harbor Freight if you are interested).  After a few minutes of diagnostic testing, I released my verdict.  The thermal cutoff sensor is busted.  I inform my in-laws that they are in luck since the replacement part is only about $5.  The underlying problem was a huge clump of lint the size of a large burly man’s clenched fist blocking the hot air exhaust duct inside the dryer.  The hot air can’t get out and the thermal cutoff acts as a fuse.  It breaks the circuit to the heater coil so the dryer doesn’t get hotter and hotter, catch fire, and burn the house down.  I cleaned out the excessive lint, and once I receive the thermal cutoff kit in the mail, they will have a nicely refurbished clothes dryer.

I’m getting to be quite the expert dryer repairman.  I have learned that the guts of most clothes dryers are very similar.  And there are youtube videos to guide you through troubleshooting and repair.  The most common parts that fail are relatively inexpensive to test and replace and you don’t need any fancy tools (unless you consider my $6 voltmeter fancy).  Next time your dryer stops working, google the symptoms and see if you can avoid blowing a couple hundred bucks on a service call and the subsequent repair.

nickel cabinet handle

Guess which one is old and which one is new.  Hint – look at the shiny one.

Back at my own house, we just installed brand new cabinet hardware in the kitchen.  Our old cabinet handles weren’t very pretty.  That’s not why we replaced them though.  They were dangerous.  The old handles have little prongs protruding from each side and frequently catch on our clothing.  When Mr. RoG Jr. fell in the kitchen and almost impaled his eyeball on the part of the handle that juts out (he still got an ugly black eye), I knew it was time to make the upgrade.  We looked at the usual places – Lowe’s, Amazon, eBay.  Those places wanted $50 or so to replace the 33 cabinet handles.  Then we checked Walmart.com.  They had the lowest prices by far.  All 33 handles delivered for $25.  They were the exact same model of handle offered at Lowe’s but at a third of the price!  Moral of the story – shop around a bit.  I don’t like to spend money on merely cosmetic upgrades, but I think it was time to let our antique cabinet handles go since they were a little dangerous.  And the new handles are all shiny and make the kitchen look slightly more like something from the 21st century (and they make Mrs. Root of Good happy).

Next up – the dishwasher.  It’s not draining completely after each cycle and it makes a weird noise during part of each cycle.  Hopefully I can fix it and avoid replacing it since it’s only 4-5 years old.  But I’ll leave that repair job for another day.

 

 

Are you a fixer upper or do you have the repairman on speed dial?  Or maybe nothing ever breaks at your house?  

 

 

Enjoying Four Months of Early Retirement

Wow.  Four months into early retirement!  December was another very busy month in the Root of Good household.  It’s usually a month filled with family, friends, and festivities.  This December proved no different.

Our house has turned into party central for family gatherings.  We invited Mrs. Root of Good’s side of the family to gather at our house for Christmas lunch.  The weather cooperated and produced a slightly chilly but sunny day perfect for outside recreation.  We gorged ourselves on excessive amounts of ham, veggies, mashed potatoes, gravy, and pumpkin pie.  Mrs. RoG’s family tried to outdo my simple American fare by bringing their holiday favorites: spicy papaya salad, pad thai, egg rolls, and spring rolls.

Christmas Food

 

Early Retirement: Month Four

If you want to see a full chronicle of my early retirement adventures, I produced summaries at one monthtwo months, and three months.  It’s almost like a diary.  But for grown men instead of little girls.  Looking back at my previous updates, the same activities recur each month.  Some have visions of early retirement that include grand goals like climbing mountains or hiking across the continent.  For now, I’m content enjoying simple pursuits that I never really had time to explore in depth while working.

Here’s the four month update:

  • French language studies at duolingo.com – I didn’t manage to complete any French lessons in December.  The month was so full of fun holiday distractions and intellectual pursuits that I was too busy to complete a single French lesson.  Hopefully I’ll find time in January to return to foreign language study.  For some reason I have an urge to study German.  Maybe the novelty of learning a new language will rekindle my interest.
  • Blogging – Another decent month of blogging with eight articles released in December.  It’s a nice hobby, and even better when it produces income.  Revenue earned in November has finally started to flow into my checking account now.
  • Exercise – Walking the kids to and from school every day means a built in 40+ minutes of moderate exercise five times per week.  Since I have time to walk to the grocery store for shopping and to the library for my son’s story time, I occasionally hit three to five miles of walking each day.  I asked the kids if they prefer walking to school or driving, and they both said they like walking.  Even when it is slightly below freezing some mornings!  All this walking with the kids will pay off when we go on vacation and find ourselves exploring new cities on foot.  The kids are surprisingly whine-free compared to 99% of the other kids I have seen.
  • Social – December was full of family gatherings, play dates with Mr. RoG Jr. and hosting friends for lunch or dinner at our house.  One of the big concerns of prospective early retirees is that they will miss all the social interaction they enjoy at work.  I haven’t felt socially isolated at all so far.  Having kids, picking them up from school, and walking around the neighborhood creates a lot of casual social interaction.  Kids are the magic social lubricant that makes you get out and meet other people.  You get a few kids together for a play date and the parents hang out and socialize.  It’s like a recipe for instant friend-making.
  • Entertainment – I really indulged my reading addiction in December.  I finished reading three books that were somehow related to Africa.  For the curious, I read “Infidel” by Ayaan Hirsi Ali, “Things Fall Apart” by Chinua Achebe, and “Heart of Darkness” by Joseph Conrad.  I still feel a little guilty when I sit down and read for a few hours straight because I’m neglecting some other part of my life.  Note to self: it’s okay to relax and indulge occasionally!
  • Kids – Even though they are time sucks (in a good way), spending lots of quality time with them doesn’t suck at all!  Since I started spending all day with Mr. RoG Jr. four months ago, I have noticed tons of subtle changes as he grows.  Which makes the hard work of parenting all worthwhile.
  • Oven update – For those that read my summary of early retirement month #3, you might recall that our 41 year old oven broke in November and we bought a new one.  As it turns out, we didn’t receive the new oven for over a month because it was backordered.  Now the new oven installation will be a January task.  Using the broken oven to cook all the holiday meals was a bit tricky but we managed.

Christmas tree

 

I still feel the need to be productive and efficient in what I set out to do each day.  If I while away the morning playing with Mr. RoG Jr., then I feel bad in the afternoon when I realize I haven’t accomplished anything.  I don’t know why this is the case, because I consider spending time with the little ones to be a valuable endeavor in itself.  Maybe my internally imposed emphasis on productivity and trying to use each day to its fullest is a good thing?  I just need to start thinking of “playing with the kids” as an important task.  It’s okay to relax and enjoy life, right?

Under the old rules of the working life, I worked during the week and tried to do as little as possible on the weekends.  The weekend effort at relaxation was usually stymied by those evil chores and errands that required my attention. Now that every day is a weekend, I know that attempting to do as little as possible means I’ll waste my life away.  I’ll have to keep working on the fine balancing act between productivity and relaxation.

Whenever it gets chilly in North Carolina, I tend to get the travel bug.  We still don’t have any travels planned or any particular dates picked out.  But I have been exploring a few different ideas for cool places to visit.  Our older kids’ summer camp enrollment forms are due at the end of the month, so hopefully this deadline will force our hand at making a decision on scheduling summer vacations.  No more procrastination!

Time to make use of all the Starwood hotel points and airline frequent flyer miles I accumulated in 2013 and earlier.  I have been thinking about getting a pair of Barclay’s Arrival cards for me and Mrs. Root of Good.  The Barclay’s Arrival card is awesome because you get a bonus of 40,000 miles that you can redeem toward any $400 travel purchase.  That means flights on any airline or rooms at any hotel brand.  Or we can get $800 off a cruise ($400 for my card, $400 for Mrs. RoG’s card).  To sweeten the deal, the card gives 2% in travel rewards on all purchases.  I’m not sure where we are going yet, but I bet we won’t spend much out of pocket on the trip!

Christmas in North Carolina

Typical Root of Good style – laying in a hammock on the back deck. Who needs a vacation when you can do this on Christmas Eve?

 

Income and Expenses

Here’s a look at the Root of Good household’s financial activity in December.

Personal Capital makes it really easy to take a quick look at my income and expenses, and then drill down to areas of spending that were unusually high.  Keeping track of our investment portfolio takes two clicks and is incredibly easy with Personal Capital.  If you haven’t signed up for the free Personal Capital service, check it out today.

Income

 

Numbers don’t lie.  We had a ton of income in December.  As expected, our investments paid out huge dividends.  I’ll be writing about the glory of dividends in a future article, so I won’t belabor the point here.  With over $13,000 in dividend income in December alone, we can fund over half of our annual core expenses or five months of our fully loaded retirement budget.  Not a bad way to start off the new year!  And more dividends will continue to flow into our accounts all year.

The first of my blogging income appeared on the Personal Capital display in December.  $532 to be exact (shown as “other income”).  That’s about how much we spend on groceries each month.  And I expect to receive significantly more revenue from blogging in January.  If the blogging income continues, it will cover a big portion of our monthly expenses.

Now let’s look at expenses:

Expenses

 

It looks like we spent a lot of money in December.  But it isn’t as bad as it seems.  $820 of this spending was for gift cards that, when purchased, led to many hundreds of dollars in discounts or credits.  Our local grocery store offered $15 off groceries when you buy $100 in gift cards.  I loaded up on $100 gift cards as much as I could, and saved a bunch on groceries.  Our American Express cards offered a $25 statement credit when you purchase $75 of amazon.com gift cards.  Yes, I’ll take a few of those, thanks!  To top it all off, a local restaurant offered a free meal coupon when you purchase a $25 gift card.  Another $100 in gift cards and four free meals.  Since we have ample cash available in our accounts, I can make the strategic move to cash in on these promotions when they appear without fear of being able to pay off the credit card next month.

I also created $1,000 of spending to help us hit the spending requirements on our pair of Starwood Hotels Amex cards.  This money eventually found it’s way back into the checking account.

In total, we spent about $1,200 after subtracting out the mortgage payment, gift card purchases, and the shuffle spending.  Since we budgeted around $2,700 per month for retirement, we are well within our target budget.  Not bad considering the Christmas gifts we purchased.  It’s easy to be lulled into a sense of safety with these low spending months.  However I know January will be much uglier since we will have the annual house property tax bill ($1,450) and the auto insurance bill for six months ($235) on top of all the regular expenses.  We have been coming in under budget the last few months in order to cover months like January when it won’t be possible to stay under $2,700 monthly spending.

On the supplemental income front, I’m looking forward to getting some cash rebates in the next few months from different beer companies.  North Carolina has some funky liquor laws.  The result is that nationwide beer promotions that normally require you to buy beer and some groceries to get a $5 or $10 rebate don’t have the beer purchase requirement in NC.  Score!  I have a stack of beer rebates, a stack of receipts with qualifying grocery purchases, and a book of stamps.  We’ll see how much beer money I can make off these beer rebates.

 

December was another great month of early retirement.  Even though I still don’t have enough time to do everything I want to do, I’ll manage!  It’s a great feeling to know that I can get up tomorrow and focus on whatever I didn’t get done today.  I’m hoping January warms up a bit so I can get outside and enjoy some sunny days with Mr. RoG Jr.  At least the days are getting longer now, and spring is just around the corner.

 

 

Running Out Of Money In Early Retirement

Panic washes over me.  The realization that I’m broke, penniless and destitute sinks in.  How will I provide for myself?  My family?  Where will I live?  I wake up in a cold sweat, heart pounding, pulse thumping in my ears.  Slowly, I return to wakefulness and I realize I was only having a nightmare.

But what if it really happened?  What if I woke up one day and realized my investment portfolio was depleted and I couldn’t feed my family?

Spending all the money in my investment accounts would definitely qualify as an “early retirement failure”.  This kind of failure is what some early retirement naysayers claim will happen if you quit working before age 65.  But is it really possible to suffer this kind of catastrophic early retirement failure?  

I don’t think so.  Here are five reasons why:

 

1. We only spend a tiny fraction of our total investment portfolio each year.

The standard rule of thumb for retirement spending is that you can spend 3% to 4% of your investments each year.  Flip this rule on its head and you see why I’m not too worried about spending it all.  Every year early retirees don’t spend 96% to 97% of their investment portfolios.

Put another way, since we spend only 3% of our portfolio each year, it would take us 33 years to deplete our portfolio (assuming zero investment returns for all 33 years).  We have a 33 YEAR emergency fund at our disposal.  

What if the unthinkable happens and our investments get cut in half overnight?  We still have adequate assets to last for 16 more years!  I don’t think we could live forever on a portfolio balance half its current size, but we will have plenty of time to adjust course and figure out our next steps.  We could wait and see what happens with the markets for a year or two, or wave the white flag and head back to work as soon as possible.

 

2. Dividends and Interest.

Part of our annual expenses are funded by dividends and interest.  Dividends can fluctuate year to year but are relatively stable.  Interest payments are very stable.  Our portfolio yields around 2.2% to 2.4% each year, which is just a little bit less than our annual spending.  We don’t really need big returns in the stock market to fund our annual expenses, as dividends and interest cover most of our annual spending.  In our taxable accounts alone, I expect around $8,000 per year in dividends and interest, which is enough to pay 25% of our $32,000 budgeted retirement expenses and enough to pay 33% of our “core” expenses of $24,000 per year.

 

3. Availability of other income sources

The core foundation of our early retirement financial plan is an adequately sized investment portfolio.  But it’s not the only source of income available to early retirees.  If we saw our investment balances dropping quickly, we could supplement our portfolio withdrawals with other sources of income.  Part time temporary jobs, self employment income, profits from hobbies, selling your stuff on ebay or craigslist, or doing odd jobs can all provide additional income streams while the investment portfolio continues to do the heavy financial lifting.

I suppose some would demand the forfeiture of your honorary early retiree badge if you were to accept the idea of “doing work in exchange for money” as a valid pursuit during retirement.  That’s a very binary view of life.  I’m okay with others placing themselves within artificial constraints.  Lucky for me and everyone else on the planet, we get to make our own rules in life.  Like how we define “retired”.  It can be pretty easy to earn money with a part time pursuit that you enjoy, just be sensitive when using the word “retired” around those that would seek revocation of your early retiree badge.

In a guest post here at Root of Good, Nick from Pretired.org laid out a case for rethinking retirement altogether.  That article might help frame your conceptual take on early retirement and the role of making money even though you are “retired”.

 

4. Flexibility With Annual Spending

Even though our retirement budget is $32,000 per year, we don’t have to spend $32,000 every year.  I intentionally added some wiggle room into our budget so that we could shrink our spending in years when our investments struggle to hold their value.  Vacations, gifts, entertainment, and dining out represent over 25% of our annual budget.  We could trim a few thousand dollars from these categories and still live a perfectly wonderful life.

 

5. Social Security

We are still three decades away from Social Security.  Under the current SS rules, we will be entitled to payments that can fund two thirds of our retirement budget.  Maybe Social Security will still exist when we become eligible, or maybe SS will be modified to our detriment.  I’m guessing it will still exist in some form.  I haven’t explicitly factored SS into our retirement budget, but knowing that there’s a good likelihood of receiving something 30 years from now provides an extra layer of financial security.

 

Minimizing Risk Of Early Retirement Failure

During our early retirement, we rely on our investment portfolio to generate our living expenses.  We also expect the investment portfolio to grow over time to keep up with inflation (at a minimum).  Even though we have a big fat investment portfolio, it doesn’t mean we can rest on our laurels and ignore our finances.

Here are some tricks anyone can use to keep early retirement finances on track:

1. Track spending.

Are your expenses trending up or down?  Are some categories growing disproportionately?  Do we need to trim expenses to keep within our budget?  The easiest way to automate expense tracking is with Personal Capital (review of Personal Capital).  Personal Capital does all the heavy lifting by automatically consolidating your purchases and bill payments from your credit cards, debit cards, and checking or savings accounts so you have a full view of your spending all in one place.  Automatically.  For free.  You can’t beat the price and level of effort required to get a complete view of all spending.

Personal Capital Expense Tracking

 

2. Manage investments.

In general, you don’t want to look at your investments on a daily basis.  The fluctuations will drive you insane and force you to make emotional (dumb) decisions.  Keep your eyes away from your investments and your hands off the “buy” and “sell” button at your brokerage firm.  Go out, live life, and have fun instead.

You do need to keep track of your investments and make sure you aren’t going broke.  Monthly or quarterly check-ups will do the job.  It’s infrequent enough that you won’t suffer much emotional pain if the portfolio value dips.  The last thing you want to do is sell when your investments are down.  Remember the “buy low, sell high” rule to getting rich in the stock market? Don’t do the opposite.

US Stock Allocations

In addition to tracking expenses, I also use Personal Capital to gather all my brokerage accounts, 401k, 457, IRA, and HSA holdings into one screen so I can quickly determine my total investment portfolio balance.  I love spreadsheets and have a number of them to do more detailed analysis, but I pull data from Personal Capital to populate my other investment management spreadsheets.

If you notice your portfolio has dropped 20%, don’t panic, but pay attention.  Your investments will most likely recover over the next couple of years.  But it may be time to consider a plan B to get some supplemental income flowing in order to take some pressure off your investment portfolio.

As part of your investment management, don’t forget to rebalance your portfolio.  Here’s how I do it.  While you are rebalancing, keep in mind tax implications from selling appreciated assets.  As you are rebalancing your investments, you can also sell appreciated assets to generate cash to fund the next quarter’s budgeted expenses.

 

3. Generate more income.  

I already touched on the possibility of other income streams.  If you have adequately saved and prepared for early retirement, you don’t have to focus too much energy on earning even more money.  Just be aware that the option to earn a buck is out there if your portfolio starts to get rough around the edges.  Think about your hobbies or interests and how you can make some cash doing what you love.

Getting some cash flow coming in the door can also help relieve the psychological fears of running out of money due to exhausting your investment portfolio.  In our situation, we plan on spending $32,000 per year which is around 3% of our investment portfolio.  If Mrs. Rootofgood and I make just $8,000 per year from part time pursuits, hobbies, or odd jobs, we will have enough to fund 25% of our annual spending, and bring our withdrawal rate closer to 2%.

$8,000 per year isn’t a big number.  It equates to $333 per person per month.  I happen to make more than that from Root of Good right now, but I could also make that much doing a ton of different things that are interesting or challenging (in limited quantities).  Fixing appliances, light handyman/construction tasks, yard work, dog walking, babysitting, tutoring, running errands, participating in focus groups, or ebay/craigslist selling could easily net $10-25 per hour.  To earn $333/month at that rate of pay, you would have to work 3 to 8 hours per week.  Not exactly hard work.  Maybe you don’t like doing any of those jobs I mentioned, but I bet you are sufficiently creative to come up with a few things you wouldn’t mind doing a few hours per week.

The concept of working during retirement may not be to your liking.  That’s okay, because you probably won’t need to work another minute if you don’t want to (assuming you’re only spending 3-4% of your investments each year).  The odds are strongly in your favor that your portfolio will rise enough over your lifetime that you’ll be just fine.  But if you are genuinely scared of running out of money when there’s a dip in the stock market, earning a little supplemental income is a great way to put your mind at ease and take a little stress off your hard working portfolio.

 

4. Adjust spending in hard times.

Getting in some supplemental income is great, but you can also keep your early retirement on track by trimming expenses when your portfolio takes a hit.  You’re already following tip #1 “Track Spending” and you have Personal Capital quietly capturing all your expenditures, right?

Find areas where you can cut back temporarily.  Skip the long overseas vacation this year and explore local tourist destinations in your own state or within driving distance.  Skip the luxury hotel and find a good lower tier hotel that has solid reviews.  Travel off season.

Argentina's Historic Military Officer's Club - the "Circulo Militar"

Argentina’s Historic Military Officer’s Club – the “Circulo Militar”

An even better way to cut vacation expenses is to figure out travel hacking.  Sign up for some credit cards and snag some free flights and hotel stays.  And get some cash back bonuses from credit cards.  We flew half way across the world to Argentina and Uruguay for free using frequent flyer miles from credit card sign up bonuses.  Once we arrived, we enjoyed the region’s low costs on restaurants, entertainment, local transportation, and hotels.

When you’re at home, skip some expensive restaurants and work on improving your cooking skills.  You can often replicate expensive entrees at home for a fraction of the price, and tweak the salt, oil, and butter to your tastes to make the dish a bit healthier.  And you save money.

There are also big expenses that can be postponed for a year or two if your investment portfolio is temporarily depressed.  Major home maintenance, replacing a car, and optional medical or dental procedures all fall into this category.  Eventually these big lumpy expenses will be a necessity, but there’s usually some flexibility with the timing.

 

Failing Early Retirement Due to Boredom

I haven’t seen any academic papers on the topic of “early retirement failure”, but I bet a common cause of returning to work isn’t financial, but rather mental.  Some people aren’t cut out to provide their own entertainment all day.  Think of prisoners serving a life sentence.  After decades of incarceration the inmates would have an extremely hard time adjusting to life outside the walls of their cell.

Maybe the office cubicle is the perfect environment for those who can’t handle the freedom of choosing what to do all day.  But that’s another topic for another day.  I’ll have to address the non-financial aspects of early retirement failure in a future post.

 

Don’t Fear Early Retirement

In this article I have explained why the risks of running out of money aren’t as dire as some fear.  We are humans, not mindless machines stuck in an endless loop of unbridled spending without any feedback from our own finances.  If an early retiree’s investment portfolio hits a speed bump, that retiree has a number of options before declaring their early retirement a complete failure and heading back to work full time out of financial necessity.  As outlined in the tips above, the early retiree would be wise to keep track of expenses and investments, and be ready to earn some supplemental income or trim expenses when their investment portfolio starts to wilt.

 

 

Do you fear running out of money during early retirement?

 

Argentina and Uruguay Trip Part 1 – Montevideo

A few years ago we decided to escape from the daily grind.  Escape far away.  We managed to accumulate hundreds of thousands of frequent flyer miles and hotel points by signing up for credit cards with bonus offers.  We felt it was time to start spending these not-so-hard earned rewards.

Whenever it gets cold here in North Carolina, I think about how it’s much nicer elsewhere in the world.  Why not go there?  We considered Hawaii, Mexico, and Central America.  All warm places.  Then I started thinking strategically.  Why not find the most expensive plane tickets we could get for free using a limited amount of points?

After some snooping around the internet, we noticed tickets to Argentina were usually expensive.  Since I studied the award chart for our American Airlines Aadvantage miles, I knew we could get to South America for only 40,000 points during the “off-peak” period of March-May and August-November.  As it turns out, March is still nice and warm in Argentina since their seasons are the opposite of ours in North America.  40,000 points for a ticket that normally costs $1,300 is a steal, since a ticket in the US is normally 25,000 points in the American Airlines miles program (for a $300-400 ticket).

Then I started thinking, “if we are traveling halfway across the world, are there other interesting destinations near Argentina?”.  I researched the region a bit, and saw that Uruguay was just across the river from Argentina and travel between the two countries was easy.  Uruguay made the list to visit while in the southern hemisphere.

Iguazu Falls is another interesting destination in Argentina.  By some measures, Iguazu Falls is the widest waterfall in the world.  As I researched Iguazu Falls, I realized Argentina was a big country and there was no way we could see all of Argentina in one trip.  Iguazu Falls would have been at least a two day side trip if we traveled by air, which would consume a big part of our nine day vacation.  In hindsight, I wish we saw Iguazu Falls.  There is always a next time though!

I mentioned Argentina is big.  It’s 2,300 miles from the northern regions to the very southern tip of Argentina.  If you picked up Argentina and rotated it ninety degrees and dropped it on top of the US, it would barely fit within our borders.  Needless to say, there are a number of distinct geographic and cultural regions of Argentina.  It is geographically similar to the US with arid regions, mountainous regions, plains, and forests.

We decided to focus on the main attraction, Buenos Aires, and the surrounding area.  Uruguay is right across the water from Buenos Aires, and Uruguay is where we started our journey.  Since we were using American Airline’s Aadvantage miles, we were able to buy one way tickets to and from South America without paying outrageous prices as you would if you buy one way tickets with cash.  We bought tickets to Montevideo, the capital of Uruguay, for 20,000 miles, and booked the return flight from Buenos Aires to Raleigh for another 20,000 miles.

Montevideo architecture

Downtown Montevideo buildings

Some say frequent flyer miles are hard to use, but we had no problem getting direct flights with a short layover and reasonable departure times.  We had a two hour layover in Miami International Airport on the flight to South America and on the return trip.  How did we get all these Aadvantage miles?  We signed up for a couple of Citi Aadvantage credit cards that were each offering 30,000 or more miles as an initial sign up bonus.  We also received 50,000 miles on British Airways by signing up for their credit card.  We chose to use the American Airlines Aadvantage miles for the tickets to Uruguay and Argentina.

If you want to get your own free tickets to Argentina or somewhere else in South America, apply for your own Chase Sapphire card, Citi Aadvantage card, British Airways card, or any other travel rewards card that offers a large sign up bonus.  Or sign up for multiple cards and travel around the world for free!  Here’s the link to the best travel rewards card offers available today: Travel Rewards Credit Cards .  For a few minutes of effort, you can get a free flight that normally costs $1,500 or more.

Arriving in Montevideo, Uruguay

After a short layover in Miami, the flight to Montevideo, Uruguay was about 9 hours.  The flight was overnight, and I didn’t get a lot of sleep on the plane.  Montevideo’s airport is rather small and clearing customs was a breeze.  Bienvenidos to Uruguay!

We immediately changed some US dollars to Uruguayan pesos at the airport to cover the bus fare to our downtown Montevideo hotel.  The bus ticket was about $1 (USD).  The taxi was a little more expensive, however I think we had a more genuine local experience on the bus.  After 45 minutes, we knew we were getting close to downtown Montevideo, but we had no clue where our hotel was located (we didn’t have a smart phone with GPS).  I turned to a police officer riding the bus with us and asked if he knew where our hotel was.  Not only did he know exactly where our hotel was, but he offered to personally escort us to the hotel.  Score!  I think.  I noticed he had a really old revolver strapped to his wide leather waist belt.  The gun looked like an antique pilfered from a history museum or something you might see in an Old West cowboy movie.  Bienvenidos to Uruguay!

The middle aged police officer on the bus was very friendly and helpful to us strangers from 5,000 miles away.  You would think the Montevideo Chamber of Commerce sent this guy to personally welcome us to the country.  After walking a few blocks along the cobblestone sidewalks, the nice officer delivered us to our hotel and wished us well.  Not even a subtle suggestion that we should “tip” him for his assistance.  Maybe they pay the cops well here in Uruguay, unlike much of Latin America.

Everyone was friendly in Montevideo.  Montevideo itself was fairly cosmopolitan, with a lot of Brazilian tourists.  We heard Portuguese regularly, but rarely heard English.  Size wise, Montevideo is like Raleigh, Charlotte, or other mid-sized US cities.  Montevideo has a population over 1 million people, and constitutes about a third of Uruguay’s citizenry.  The city proper was decidedly urban, but like many mid-sized cities in the US, once you drive 20-30 minutes out of downtown, the scenery turns more rural.

Vaguely European style. Swiss perhaps?

Vaguely European style. Swiss perhaps?

 

We spent two nights in the historic “Old Town” in the middle of Montevideo at the Hotel Palacio.  We paid around $35 USD per night back in 2010.  Today, they are charging $45 USD per night.  The room was decent but basic.  The building must have been 100 years old but appeared well kept and updated.  The elevator appeared to be of Victorian vintage, however it faithfully allowed us to bypass four flights of stairs every day.  We didn’t really spend a lot of time at the hotel, so it was perfect for us.

Spiral staircase surrounding the open air elevator shaft at Hotel Palacio

Spiral staircase surrounding the open air elevator shaft at Hotel Palacio

 

We could have stayed for free at the Four Points by Sheraton Montevideo hotel using our Starwood Preferred Guest Points (Sheraton Hotel’s loyalty program).  We signed up for a few of the Starwood American Express credit cards and obtained enough points to stay for a few WEEKS for free.  Since the historic Hotel Palacio was very inexpensive, we decided to go local and pick a cheap option for our first two nights in South America.  The Four Points in Montevideo was in the same points category as some $150-200 per night hotels in the US, so it wasn’t a great value to get a few free nights with points when there was a viable $35 per night room nearby.

Pro Tip: If you are interested in getting up to eight free hotel nights at a Sheraton or Four Points hotel, check out the 25,000 bonus point offer on the Starwood American Express card here: Travel Rewards Credit Cards.  Starwood is the most valuable hotel loyalty program in my experience.  Don’t forget you can get a card in your name and in your spouse’s name for double bonus points!

 

Mrs. RootofGood enjoying the sun on our walk along the jetty

Mrs. RootofGood enjoying the sun on our walk along the seawall

 

Exploring Montevideo

We spent most of our three days in Uruguay exploring Montevideo.  After arriving at our hotel we relaxed for a few minutes on our balcony and made a plan for the day.  Our overnight flight left us a bit tired, but curiosity overcame fatigue and we headed out for a day of exploring the Old City of Montevideo.  The Old City’s streets are arranged in a grid pattern, making navigation by foot very easy.  The Old City covers the entirety of a small peninsula one half mile wide and one mile long that extends into the Rio de la Plata river.  You can walk across Old City in ten to twenty minutes and you don’t need a car at all.

 

Thanks to our guidebook, I navigated those streets like a human GPS

Thanks to our guidebook, I navigated those streets like a human GPS

 

I can’t really describe the Old City with one adjective.  It’s a mixed bag.  Some parts were really nice with well maintained plazas surrounded by architecturally impressive buildings.  Other parts were rather run down with streets and building facades best labeled as “works in progress”.  I guess it would be unreasonable to expect everything in the “Old City” to be shiny and new.  The word “old” is in the name of the area, after all.

 

old montevideo

 

What was probably the doorway to a grand house a century ago peeks through a crack in its concrete encasement

What was probably the doorway to a grand house a century ago peeks through a crack in its concrete encasement

 

We never felt unsafe anywhere in the Old City or anywhere in Uruguay for that matter.  We did have some unruly teenagers approach us while we were resting on a bench.  They wanted to know the time.  Me being a nice guy, I offered them the time of day.  It was after I pulled out my broken watch with no straps to tell them the time that they started asking about my phone.  “Where’s your phone”?  “Where’s your phone”? I assume they wanted me to pull out my phone to tell them the time so they could snatch it and run away.  Since I didn’t have a phone (just my crappy old broken watch), they eventually got frustrated, gave up their attempted thievery and went their merry way.  The quickly approaching police officer may have also hastened their departure after discovering my cellular poverty.

 

This is the Montevideo version of an environmentally friendly recycling program. These guys go around in their horse drawn cart and pick recyclables out of the garbage.

This is the Montevideo version of an environmentally friendly recycling program. These guys go around in their horse drawn cart and pick recyclables out of the garbage.

 

Our first dinner in Montevideo was quite an experience.  “Eat lots of meat” was very high on our “to do” list while in Argentina and Uruguay.  Both countries have abundant grazing land that produces lots of beef.  We headed down to the Mercado Del Puerto (Port Market).  The Mercado Del Puerto looks like it beat up a train station and stole its Victorian era wrought iron roof structure.  The large cavernous enclosure under the wrought iron roof hosts a variety of parillas – restaurants that serve a wide variety of grilled meats.  We walked around the Mercado Del Puerto at least twice looking for the best grilled meat.  In an episode of No Reservations, Anthony Bourdain visited this same market and supped on large chunks of meat.  After seeing him chowing down and visiting the rest of Uruguay, we knew we had to visit some day.

Eventually we pulled up some bar stools to the side of a particularly appealing grill and placed an order for a couple of beers and some hunks of meat and sausages.  We were sitting about five feet from the edge of the grill.

 

The old wrought iron building that houses the Mercado del Puerto

The old wrought iron building that houses the Mercado del Puerto

 

Mrs. RootofGood enjoying the slabs of grilled meat fresh from the parilla

Mrs. RootofGood enjoying the slabs of grilled meat fresh from the parilla

 

After a short wait, our food arrived smoking hot and juicily smiling at us from our plates.  Eating ensued.  The meat here was good.  The prices were a little cheaper than in the US – around $35 for the whole meal for two including a couple of drinks and a tip.  We ended up at the Mercado Del Puerto later in our stay in Montevideo and had some less than stellar fish and chips at American prices.  My take on the Mercado Del Puerto: a little touristy.  It’s a neat experience to visit and grab a meal, but one meal is probably enough.  Better quality food and prices can be found elsewhere in Montevideo away from the most tourist-laden areas.

 

A typical lunch in one of the many cafes in Montevideo. Pizza and pasta with pesto. And a couple of beers and a glass of wine. Under $20 for a nice meal.

A typical lunch in one of the many cafes in Montevideo. Pizza and pasta with pesto. And a couple of draft beers and a glass of wine. Under $20 for a nice meal.

 

On our second day in Montevideo, we finished our exploration of the Old City.  We walked out on the sea wall or jetty that extends a half mile into the Rio de la Plata river.  Lots of locals were enjoying an afternoon fishing or lazing about.  We hit up a few museums and local restaurants before stopping for dulce de leche (caramel) ice cream at McDonald’s.

 

We were about a half mile out into the Rio de la Plata at this point. What a view! And so much solitude.

We were about a half mile out into the Rio de la Plata at this point. What a view! And so much solitude.

 

Since we only stayed a few days in Montevideo, we didn’t have a lot of time to explore the rest of the city.  We managed to break away from the Old City for a few hours when we took a local city bus (fare = $1) to Pocitos, a visibly nicer and wealthier part of Montevideo.  The bus route skirts the beaches along the coast for part of the way.  We tend to skip the paid organized tours when we travel and instead jump on a city bus and see where it takes us.  It’s a more authentic way to experience the city and its people.  You’re rubbing shoulders with the locals (literally) and you get to see off the beaten path neighborhoods where the locals live and work.  Compared to organized tours, it’s also way cheaper and the schedule is more flexible since local buses run all the time.

How did I find out about this awesome bus route?  In this case, I asked the lady at our hotel’s front desk about local bus routes that could take us to Pocitos and she let me know about the nice scenic route along the beach, and she showed on a map exactly where to catch the bus.

In the evening of our second day in Uruguay, we caught a presentation of Macbeth (in Spanish) at the Solis Theatre just a block down from our hotel.  Built in 1856, it is the oldest theater in Uruguay.  Inside the theater, it looked just like an opera house plucked straight out of Vienna or Italy.  Probably because most of the interior furnishings were imported from Europe back in the 1850’s.  Since I’m a big Shakespeare fan (love the Bard!!), I got a kick out of the play.  Mrs. RootofGood?  She got a good nap.

 

The Solis Theater or Teatro Solis as they call it. A real marvel inside. Guided tours $1 USD.

The Solis Theatre or Teatro Solis as they call it. A real marvel inside. Guided tours $1 USD.

 

We finished off our last night in Montevideo with some late night pizza and drinking 40’s in the park.  Slumming it Montevideo style!  The pizza here is good, but different than what we are used to in the US.  Order pizza and you get bread sticks with some marinara sauce on top.  You have to order “with mozzarella” if you want cheese on top.  And any meats or other toppings must be requested.

 

Mmmmm street food. Hamburgers for 20 Uruguayan pesos ($1 USD) or loaded hot dogs for 8 pesos ($0.40 USD).

Mmmmm street food. Hamburgers for 20 Uruguayan pesos ($1 USD) or loaded hot dogs for 8 pesos ($0.40 USD).

 

In the Old City, there were dozens of restaurants, cafes, and bars, most with sidewalk seating.  For breakfast one day, we bought some delicious pastries and quiches from a bakery for just a few dollars and dined by the waterfront.  Overall, the prices were a little less than what I’m used to in the US.  $5-10 could get you a basic lunch or dinner, or you could try street vendors for $0.50 to $1 for hot dogs or burgers ($5 lunch for two!).  Our meatstravaganza on our first night was the most expensive meal in Uruguay at $35.

 

After spending a few bucks on some quiches and pastries from a local bakery, we sat here on the waterfront and enjoyed a mid morning brunch.

After spending a few bucks on some quiches and pastries from a local bakery, we sat here on the waterfront and enjoyed a mid morning brunch.

 

 

The travel guide we used.   Includes Buenos Aires and also covers Montevideo and Colonia in Uruguay:

 

In part two of the Argentina and Uruguay Trip Report, I’ll cover Colonia del Sacramento, Uruguay.  I’ll also sum up my thoughts on Uruguay and provide a detailed cost summary.  In part three, I’ll cover Buenos Aires, Argentina.  Make sure to subscribe on Facebook, Twitter, or by email (in the column to the right) if you want to catch parts two and three of the Argentina and Uruguay Trip Report.

 

Have you ever been to Uruguay?  What did you think?  If you have never been, what images did you have of Uruguay before reading this article?

$150,000 Income, $150 Income Tax

Taxes.  It is our duty as patriotic Americans to keep our individual taxes as low as possible.  I want to show you just how patriotic I am.

Over the years our income has grown steadily.  Not long ago our combined incomes crossed into six figure territory.  In 2013, our earnings peaked right around $150,000 from our jobs plus some dividend and interest income from our investment portfolio.

In my overview of my path to early retirement at 33, I briefly discussed our tax strategies and the benefits of a low tax rate.  Our tax rate has stayed very low throughout the last few years.  Two factors played a big part in allowing us to pay almost no federal income tax:

  • Taking advantage of all available tax deferred savings options
  • Having a bunch of kids (well, just 3, nothing too crazy)

Almost all wage earners can take advantage of tax deferred savings plans.  Having a bunch of kids isn’t necessarily a great way to save a bunch of money, but I will demonstrate how having kids led to big tax breaks in our situation.  On a $150,000 income, we pay 0.1% of our income in federal income taxes.  Even without kids, our tax rate would have been under 4%.

You won’t find any clever or unique tax dodges here.  No shady or questionable tax treatments.  No one is committing federal tax fraud.  We simply did the research and put a plan in place to maximize our tax savings.

Shrink Your Paycheck

This seems like backward advice, but do everything you can to make your take home pay as small as possible.  Employers offer all kinds of opportunities to reduce your taxable income before you even get your paycheck such as:

  • Retirement plan contributions (401k, 457 or 403b plans)
  • Pension contributions
  • Employee Stock Purchase Plans
  • Employee Stock Ownership Plans
  • Health Insurance
  • Dental Insurance
  • Flexible Spending Accounts (for health/dental or child care)
  • Health Savings Account

Here’s how you make your income look tiny when you get your W-2’s during tax season.  Our combined gross salaries (before any deductions) were around $141,000 in 2013.  My salary was around $69,000 and Mrs. RootofGood’s salary plus bonus were around $72,000.

W-2 Salaries

 We took advantage of all the benefits offered by our employers.  I worked for the government where I had access to a 401k and a 457.  I found this unbelievable, but you can actually contribute the IRS maximum of $17,500 to EACH of these accounts.  I chose to contribute the maximum of $17,500 into the 401k and the 457.  I was also required to have 6% of my salary (or $4,200) withheld to fund my pension (which I never intended to take).  The cash value of my pension contributions (without any earnings) can be withdrawn and rolled into an IRA when I would like to do so.

Using these tax deferred savings plans, I turned my beefy $69,000 salary into a puny $29,800 per year.

Mrs. RootofGood was lucky to work for an employer that offered really good benefits.  She contributed the maximum to her 401k ($17,500) and also contributed $5,000 to her Dependent Care Flexible Spending Account (daycare for the little one), $6,450 to her Health Savings Account, and paid $500 for the year for health insurance (yes, per year!), and $600 per year for dental insurance.

Mrs. RootofGood’s $72,000 salary magically metamorphosized into a scrawny $41,950 W-2 salary.

At tax time, our W-2’s will arrive telling us that our total earnings (for federal income tax purposes) are $71,750.  We basically cut our $141,000 gross salary in half for federal income tax purposes.

 

Even More Deductions

In addition to our earned income, we expect $9,000 in investment income from our taxable investments at Vanguard and Fidelity ($8,000 dividends and $1,000 interest).

We have $15,000 in capital losses from tax loss harvesting our mutual funds over the years (What is “tax loss harvesting”? – sounds delicious!).  Each year we take a $3,000 capital loss write off against our other income ($3,000 per year is the maximum deduction).

Adding up our income (including the $3,000 capital loss), our total income for 2013 will be $77,750.

2013 taxes

Our deductions include $11,000 in traditional IRA contributions (maxing out $5,500 into each IRA), and $600 in student loan interest payments.

Subtracting the deductions from our total income, we end up with an “Adjusted Gross Income”, or AGI, of $66,150.

But wait, there are more deductions!  A $12,200 standard deduction plus $19,500 in personal exemptions ($3,900 x 5 people) further reduce our “taxable income” to $34,450.

The party doesn’t stop here.  Out of our $8,000 in dividend income, $5,500 were “qualified dividends” that are tax free if you are in the 15% tax bracket or less (in 2013, that means $72,500 or less taxable income).  We are in the 15% tax bracket with our $34,450 taxable income.  In effect, we pay tax on $28,950 ($34,450 taxable income minus the $5,500 qualified dividends taxed at 0%).

Our total tax owed on $28,950 works out to be $3,450.  Part of the income is taxed at 10%, part at 15%.

That’s not a bad tax bill considering we made $150,000 in 2013.  But we still have to take a few tax credits.These things suck down milk and poop out tax deductions

We have three kids.  In addition to having superhuman powers of massive cereal consumption, they also generate a $1,000 Child Tax Credit per Cap’n Crunch-stuffed mouth.  That adds up to a $3,000 tax credit (that reduces our taxes owed dollar-for-dollar).

We somehow managed to pay $300 in foreign income tax through our international mutual fund holdings.  Owning tiny slivers of luxury shopping centers and office buildings in Zurich, Shanghai, Singapore, and Dubai sounds totally sweet until you realize the countries you invest in are siphoning off tiny slivers of your income (they have Uncles too, just not named “Sam”).  Fortunately, the federal income tax code, in its infinite generosity to the privileged few, allows a tax credit for any foreign income tax paid.  Poof – another $300 in income tax liability gone!

Our tax liability went from $3,450 before subtracting tax credits to a bottom line tax bill of only $150.  Yes, that is right folks.  Through our Houdini-like usage of tax-defying strategies, we managed to earn $150,000 and pay only 0.1% tax.

I am always a little dumbfounded around tax time.  The tax code seems strange and convoluted, and I don’t think a family with our level of earnings should have such a small tax bill.  But hey, that’s the law!

The tax savings don’t stop with a tiny 2013 tax bill.  We also managed to contribute over $74,000 into tax deferred savings plans that won’t be taxed until we withdraw them at some later date (if we ever pay tax on the withdrawals at all!).  Tax deferred accounts are the gift that keeps on giving year after year.  Note that we had $9,000 in investment income in our taxable accounts, and we had to pay tax on part of it.  We have over $10,000 income in our tax deferred accounts that we don’t pay tax on each year (the tax is deferred – that’s why they call the accounts “tax deferred” I think).

Out of curiosity, I re-ran the tax calculations to see what our tax burden would be if we didn’t do any tax planning.  Our tax liability would increase to $19,883.  Good thing we know our way around the tax code!

 

I Don’t Have Kids, So I Can’t Pay 0.1% Taxes Like Mr. RootofGood

Unfortunately, if you don’t have any little booger-encrusted tax deductions running around your house, you’re gonna pay more taxes.  Sorry to tell you this, but you are subsiding me and my burgeoning empire of miniature RootofGoods.  I thank you, and also want to offer my condolences.

The good news is that you could still pay under 4% of your income in federal taxes if you use all of the deductions and tricks that we did.

I re-ran our tax situation assuming we have zero kids.  Aside from the utter peace and quiet throughout our house, a few other things change.  The $5,000 Childcare Flexible Spending Account deduction goes away (as does the childcare expense itself!).  The personal exemption drops by $11,700 to only $7,800.  The child tax credit goes to $0.

After losing all of these deductions and credits, we would end up paying $5,655 in federal income tax on our $150,000 income.  That works out to a 3.8% average tax rate.

2013 Taxes Without Kids

Moral of the story: have 3 kids, save $5,500 in federal income tax.  However, kids can be pretty expensive, so don’t have kids for the income tax benefits alone.  They are cute though.  And they can fetch beers on command.

 

Readers, did I miss anything?  Have you been able to keep your tax burden low while earning a hefty paycheck?  

 

Need help keeping track of expenses and investments to prep for tax time?  Use the same personal finance tools that I do.  And you’re in luck because it’s free!  Check out Personal Capital today (review here).

Auto Costs On The Cheap

One area of spending where we have done a great job of keeping costs low is auto expenses.  This is an area where you can get by on the cheap (one old beater to share for the whole family) or very lavishly (a fleet of 3+ luxury sedans and a beefed up toy hauler pick up).

As with most expenses, we focus on the value side when making transportation decisions.  Our goal is to get from point A to point B reliably and consistently, and keep our vehicle operating expenses low.

We have two Hondas, both 13 years old, both bought brand new.  As I explained in my recent post on the RootofGood household finances, our auto costs run around $3,500 per year total.  Gas costs are the bulk of the expense at $2000 annually.  Maintenance/repairs, insurance, taxes, registration, and inspection are $1500 annually.

The biggest auto expense comes from gas for Mrs. RootofGood’s 45 mile round trip commute.  It is almost all freeway, and she travels off peak, so traffic is minimal (usually a 30 minute commute one way).

Mrs. RootofGood drives around 12,000 miles/yr, and 85-90% of that is commuting.  We use my Honda Civic for the every day driver if we happen to drive around town as a family.  With 3 kids in the back seat.  The Civic can be snug at times (for the three kids in the back anyway), and we use the Honda Accord and the way more spacious back seat for vacations.

When I was working, I drove around 6,000 miles/yr.  Over half of that was for work.  My commute was ~2,300 miles during the year, and probably another 500-1000 miles of reimbursed business travel (at a rate of $0.56/mile).  Our cost of operating the cars add up to approximately $0.20/mile not including depreciation.

$0.20 per mile seems like a low operating cost.  Both cars are sedans, and as a result many maintenance tasks are less expensive than those for larger vehicles.  Replacement of four tires, for example, usually runs $250-300 including installation for mid-range all season tires.

Our personal travel mileage including vacations, shopping, errands, hauling kids to/from school and to grandma’s, social visits, and the occasional beach or mountain vacation add up to approximately 4,000 miles per year in recent years.  Or a little over 300 miles per month on average.

I recently quit working, so my mileage is likely to drop from 5600/yr to 3000 or so.  I normally walk the kids the 1/2 mile to school, and we walk to parks, the library, the community center, restaurants, the grocery store, the dollar store, and other shopping in the neighborhood at distances of 0.5 to 1 mile.  We enjoy living in an area where we can walk to many different destinations.

At $0.20 per mile vehicle operating costs, walking instead of driving also saves us a small amount of money on each trip.  Walking the kids to school, for example, saves us about $75 annually.  The money is relatively trivial, but the enjoyment of the outdoors, the social interaction with neighbors and friends you see while walking, and the fitness benefits make walking worthwhile.  It also helps the kids get accustomed to walking, so that when we do go on vacation, they usually make it at least a few blocks before they start whining!

Now that I’m retired, my typical weekly driving is a grocery store trip, and usually a kid related errand or two (doctor’s office, it’s raining so I drive the kids to school, playdate, or birthday party) and a lunch out with friends one or two times per week.  I think the longest trip I have taken in the 1.5 months of my retirement to date has been 16 miles round trip to meet a friend for lunch near his workplace.  Otherwise, a typical trip is 3-4 miles one way.

We have considered going to 1 car when Mrs. RootofGood retires in a couple of years.  Most of our auto expenses have been work related, and those expenses will stop soon.  I guess I’ll have to do the math of what it costs to have a car sit mostly unused all year.  I don’t know what value we would get out of having the 2nd car if we are both retired.

Our schedules will be much more flexible at that point.  I would estimate having the second car might come in handy once per month.  Right now the plan is to keep the second car for a year or so and see how much we use it.

We also live 1/2 mile from three different bus routes that connect to most of the destinations we travel to routinely.  I used to ride the bus to work regularly, and the travel time was actually less than my commute in my car, since the bus dropped me off at my office building’s front door (instead of my car’s parking space 2 blocks away).  The bus is only $1 per trip, and I’m comfortable enough riding it to get around in a pinch.  It’s a little bit of a hassle, but so is maintaining cars.  The bus might be plan B if we go to one car.

At some point we will have to update our cars with newer cars.  I am tentatively planning on buying a lightly used 6-7 year old car for around $10,000 or so.  Given our growing family, the next car might be a minivan.  Gas mileage and operating costs will be higher than those for our sedans, but our annual mileage won’t be as high as it has been if Mrs. RootofGood isn’t working.

 

Auto Insurance

A great way to chip away at auto expenses is to shop your auto insurance.  Don’t assume that your auto insurance provider has the lowest rates around year after year.  The auto insurance market is competitive, and the best insurer this year probably won’t have the most competitive rates in a year or two.  Many providers offer discounts to new customers.

If you haven’t shopped your auto policy in the last year or two, make sure to do so now or at your next policy renewal.  Like those Geico commercials say – you can save up to 15% on your auto policy in 15 minutes.  Except you should talk to 3-4 insurers to increase your odds of finding the cheapest policy.  So make it an hour.  In my opinion, spending an hour to save a few hundred dollars is an excellent investment of time.

We only pay around $550-600 per year for auto insurance for the two of us.  I still call around every year to see if anyone can undercut my current insurer.  The last couple of years I haven’t been able to cut costs in this area, but I’ll keep checking since my rates just went up a small amount at the last renewal.  I get very little value out of “customer service” with an auto insurer, since we have an incident extremely rarely (maybe once every 5-10 years).  The leading insurers seem to be fairly similar (and faceless) once you get beyond their marketing (hand holding, being “there” for you, having cute lizards/cavemen, etc).

 

Auto Maintenance

Before I close out this post, I wanted to touch on auto maintenance.  I do minor tasks myself, but take the car in for routine oil changes roughly on the recommended schedule.  The auto shop does a free 30 point (or some large number) inspection and gives me some problem areas.  Many times these are total B.S. after I research the issue a little, but sometimes the problems they identify are actually problems.

I have found that it is usually better to spend $100-200 to fix a minor problem before the problem causes catastrophic failure of some important system in the vehicle.

You can call around to a couple trusted auto shops to see who can do the repair for the lowest price.  I have found some routine maintenance tasks can be significantly cheaper at the dealership versus the independent mechanic’s shop.  Apparently that is because the dealership will lie through their teeth and recommend totally unnecessary repairs (= pure profit), to which suggestion you respond with a firm “no, thanks” until you research and possibly debunk their recommendation.  Again, sometimes the suggested repairs are legit, but not always.

I have a trick for tire rotations.  I always get my tires installed at Discount Tire.  They tend to be the least expensive option anyway, and I buy the tires at one of their big sales they have a few times per year ($100+ off per set of tires).  The kicker is they offer free tire rotation and balancing for life, and they will repair punctured tires for free (in my experience).

I also do a few maintenance tasks myself at home.  I’m generally scared to do anything with the engine itself, but I’ll complete simple tasks like replacing the air filter and checking and refilling fluids (brake, oil, windshield wiper, transmission, power steering, coolant, etc.).  I have a reminder on my calendar that pops up on the first Saturday of the month to remind me to check the tire inflation levels, and the oil and coolant levels in our cars.

Our cars are 13 years old, and at some point are likely to start leaking tiny amounts of oil and/or coolant if there is a leaky gasket or pin prick hole in a hose.  I would rather figure this out at a routine monthly maintenance check in my driveway than 20 miles from home in the rain stranded on the side of the interstate.

I’ll dabble with small repairs like replacing bulbs and fuses, resetting the OBD computer, and most recently, replacing the power window motor and arm.  Youtube was my friend for all those tasks.  The parts are usually a tiny fraction of the total cost of repair if you went to an auto shop.  I have probably saved $1000 or more over the years doing simple repairs at home.

To manage routine maintenance, I keep a spreadsheet where I record all maintenance tasks completed, along with the odometer reading and date.  The spreadsheet has the recommended maintenance intervals for all tasks such as replacing coolant, replacing spark plugs, rotating tires, changing the timing belt, replacing the transmission fluid, and of course oil changes.  The schedule I keep in the spreadsheet helps me keep up to date on maintenance.  I also use the spreadsheet to keep notes on problems the auto shop has mentioned, or things that I discover on my own.

 

 

How do your auto maintenance and operating costs compare?  Are you your own mechanic?

RootofGood Household Spending

The RootofGood household spends less than $2,000 per month on core living expenses!  This number may seem amazingly low, and it is for a family of five.  Before anyone thinks I’m starving my kids or have magical powers of cost avoidance, let me define “core expenses”.

Core expenses include all expenses that will continue into retirement.  I have excluded some major expenses that most people bear at some point in their lives such as childcare, mortgage payments, and student loan payments.  Ideally these expenses will end by the time one enters early retirement.

In our situation, our mortgage has about 3.5 years remaining and the interest rate is 1.99%.  We aren’t in a hurry to pay off the mortgage while Mrs. RootofGood continues working, as it is a relatively small payment easily covered by her take home pay.  It will be paid in full within 3.5 years at the current monthly payment.  We can pay it off in full with liquid cash or investments on hand if we need to.  For us, keeping the mortgage is merely an asset allocation choice.

Childcare costs are gone.  I’m the childcare now that I’m retired!  We will continue paying for summer camp for the kids (as long as they want to attend camp).   I always called that an entertainment expense instead of childcare.

Student loan payments are now under $2,000 per year and will go away completely once Mrs. RootofGood retires.  We participate in the Income Based Repayment plan for our student loans, and the payment amount is tied to your Adjusted Gross Income (AGI).  Since I’m no longer employed, our AGI dropped and our payments were cut in half.  When Mrs. RootofGood quits, the payments will be extremely tiny or zero.

 

RootofGood Household Expenses – 2010 to 2012

Here is a summary of the RootofGood household’s expenses for the years 2010, 2011, and 2012.  There are year to year variations in individual categories, so I averaged out the spending over the three years to give a more accurate picture of our expenses.  I used a spreadsheet to manually keep track of spending, and have recently switched to Personal Capital so I can automatically see all spending, income, and investments in one place.

I’m showing the average annual and average monthly spending in this chart:

 

Expense Summary

RootofGood Average Household Expenses – 2010 to 2012

 

Our total core expenses were $1,973 per month, or $23,694 per year.  Personal expenses and housing (excluding mortgage) were more than half of our expenses at $702 and $455 per month, respectively.  “Fun” expenses and auto expenses also took up a smaller, but still significant part of our budget at $319/month and $291/month.

The non-core expenses that I’m calling “temporary” expenses were almost equal to our core expenses at $23,704 per year.  That figure does include additional mortgage principal payments during some years.  The temporary expenses have already dropped significantly since child care is no longer needed, and student loan payments were cut in half upon my retirement.  The mortgage will be gone in 3.5 years or sooner.  Since these expenses will be gone soon, I separate them out from our core expenses.  I don’t need to generate an income stream to permanently fund expenses that will go away in the short term.

 

Spending in Retirement

Financial experts often say you can expect to spend 80% of your pre-retirement income during retirement.  The “80% rule of thumb” may work for a very select few, but it is nonsensical for so many reasons.  Your taxes during retirement will go down and your work related costs will go to zero.  Lunches out at work, commuting costs (gas, tolls, auto maintenance), parking, business attire, and unreimbursed professional fees will be greatly reduced or eliminated.  In our case, childcare fees also went away.  If you plan for it, mortgages can be paid off by the time you reach retirement.

In our situation, our core expenses that will continue indefinitely during retirement represent about half of our total expenses from the last 3 years.  We will have additional expenses that add to our historical core expenses:

To counter those additions to our expenses, we expect to lower expenses in some categories:

  • No commute = less gas and tolls
  • Possible reduction in lunch costs for the kids (if income is low enough)
  • More free time = focusing on reducing expenses in more areas or spending less just for convenience

Here is a detailed explanation of our full retirement budget that is based on our historical budget outlined in this post.

 

Detailed RootofGood Household Budget

Here is a more detailed peek into our expenditures:

Expense Details

The details of RootofGood Household’s Average Expenses – 2010 to 2012

 

Some areas where we spend surprisingly little are dining out, home furnishings, and communications.

We cook at home for most meals, and are lucky to have inexpensive restaurants in our neighborhood or close by.  The grocery budget is probably higher, but we can make high quality meals at home for less than the going price at restaurants, even if we used coupons while dining out.

The bulk of the home furnishings over the last 3 years was the purchase of a treadmill.  Otherwise most of our “stuff” comes cheap or free from craigslist or family and friends getting rid of unwanted stuff.  I suppose some could criticize our decor as dorm room chic, but it is comfortable and we don’t waste a lot of time on “stuff acquisition” (you might call it recreational shopping).

Our communications budget includes home phone, cell phones, and internet.  Internet is the most expensive.  Home phone was under $20/month when we paid for Vonage VOIP service.  Now it is zero since we switched to Google Voice and Obihai (updated 12/23/2013: Google Voice is possibly planning to tweak their free services by May 15th, 2014 which may not allow using the Obihai device with free Google Voice.  I’ll update as the date approaches and figure out a free or cheap workaround).

Cell expenses included Mrs. RootofGood’s T-Mobile phone that runs under a buck a month ($10/yr) after an initial year at $100 (hint: T-Mobile Gold Rewards plan).  My cell was paid for by my employer, but no more!  It runs around $22/month on Virgin Mobile, and in the next 2 months I’ll be deciding whether to reduce that expense or get rid of the phone altogether (the horrors!).

Overall, we spend relatively little for a family of five.  It is the result of careful, intentional spending in areas that bring us the most value.  The benefit of keeping expenses low is the ability to save more each year and bring about financial independence and retirement much sooner.

 

How much do you spend each month?  Check out Personal Capital if you have no idea!  

Simplest Way to Manage Investments, Spending, And Income: Personal Capital

I decided to take the plunge into the world of all-in-one personal finance and investing software.  Some folks use Quicken, Mint, or Wealthfront.  I looked at all of those, and tried some but they didn’t quite do what I wanted to do.  They were either too clunky, cumbersome and time consuming to use, or they didn’t get the investment management part done correctly.

Enter Personal Capital.  This is a slick web site that makes managing your finances and investments quicker, easier, and prettier.  All your credit cards, checking, banking, investments, 401k’s, IRA’s, and other accounts are in one place, conveniently summarized.

The online investment and personal finance tracking services at Personal Capital are totally free, no strings attached.  They also offer a financial advisory service for accounts over $25,000 in value, however they do charge a fee for the professional advisory services.  But you can use the investment and personal finance management engine free of charge forever.

 

My First Time Using Personal Capital

After putting in my username and password, Personal Capital got down to business by asking me to put in all my financial accounts.  In about 5 minutes I added:

  • Three accounts at investment firms (1 Vanguard and his and hers accounts at Fidelity).  This includes 2 brokerage accounts, 8 IRA’s, and 1 HSA
  • Two 401k accounts (his and hers) and a 457b account
  • 3 savings and 1 checking account at our credit union
  • A mortgage loan with a different credit union
  • College 529 savings accounts for our 3 kids
  • 3 credit card accounts

This process was amazingly easy to get all those accounts consolidated into one place.

To finish linking all of my accounts, I spent another 5 minutes verifying super secret security questions on a few accounts like what’s my dog’s favorite hobby and which tooth did my second grade bestie lose first.

I expected glitches when I was importing my accounts.  We have 25 different financial accounts spread across ten different companies or login ID’s.  Zero glitches.  Everything imported cleanly and accurately on the first try.  So far, Personal Capital is doing what it is supposed to – streamline my personal finances and investments.

I tweaked the descriptions of a few similar accounts like our his and hers Vanguard traditional IRA’s.  I added my name or Mrs. RootofGood’s name (so I can keep them straight).  Editing these descriptions and names is simple – click the little edit button, change your description, click save.  Done.

I deleted a few duplicate accounts where they appeared both on my Fidelity login and Mrs. RootofGood’s Fidelity login so that these accounts only show up once on Personal Capital‘s display.  Easy again.  This step is where I have had problems in the past with Money or Quicken – getting all the accounts to show up once, and only once (and one reason why I never used them).

I manually add in my cash balance pension fund, and another cash balance retirement account (an ESOP).  The ESOP account balance will have to be updated annually by me when I receive the statement from the plan sponsor.  That’s about the only manual update required since Personal Capital automatically pulls transactions and balances from your myriad financial accounts.

In about 20 minutes I have taken our household’s relatively complicated financial life (27accounts total) and displayed everything on one screen.  With pretty, interactive graphs and charts.

After getting all the accounts into Personal Capital, I wanted to play around and explore the different features and displays.  Income, spending, cash flow, cash balances, portfolio allocation, overview of investment fees – all easily accessible from the Personal Capital web page.  Before using Personal Capital, I had to manually go to all of my investment accounts and credit cards and download then copy/paste the transactions and balances into my own spreadsheets to check on what I was spending or manage my investment portfolio.

 

Income

My monthy income is right there, categorized and summarized in a colorful graph.  Before using Personal Capital, I always knew roughly what we had coming in each month, but this really puts it in perspective with exact numbers and categories.  I was surprised our investment income was over $2,500 for the month.  I never added it up before, and it is surprisingly large.   Now that I’m retired, Personal Capital is going to be a great tool to help me keep track of cash flow and available cash in my accounts.

Income Summary

Root of Good’s Personal Income. The “Deposits” included a large payout of my accrued vacation time (I wish that was what we earned each month!)

 

Expenses

Expenses are as cleanly presented as income.  No surprises here.  Our mortgage is the highest expense, and groceries are the next highest.  The childcare expense is gone now that I’m retired (which also makes me a stay at home dad).

Root of Good's Monthly Expense for September 2013

Root of Good’s Monthly Expense for September 2013

 

Investment Asset Allocation

The way my investment portfolio’s asset allocation is presented is probably the coolest part of Personal Capital.  I try to keep my US investments roughly equal to my international investments, and the graphic makes it easy to tell that I’m within a percent of hitting that goal.

Asset Allocation Summary

Root of Good’s Asset Allocation

 

You can drill down into any specific area in your asset allocation.  I wanted to take a detailed look at my US Stock allocation, to see whether I’m sticking with my goal of maintaining a tilt toward small cap and value investments.

US Stock Allocations

Root of Good’s US Stock Allocation

I’m doing pretty good.  The mid cap and small cap bands together are bigger than the large cap, which is what I want.  The value boxes on the left are bigger than the growth boxes on the right.  I’m on track.

I also took a peek at cash sitting around in my investment portfolio.  Looking at the summary made me realize I have been slightly negligent in investing my cash.  I try to stay fully invested.  I just discovered I have over $15,000 sitting in a money market account (ticker VMMXX) in my IRA from a recent retirement fund rollover.  I also discovered $1,407 sitting in the FDIC-Insured Deposit Sweep, which is our HSA’s cash account.  I thought I was pretty diligent in managing my investments, but staring at these cash balances sitting there earning nothing makes me realize I have a little work to do.  At least now I have a tool to draw attention to lazy cash sitting around!  Let’s get that money making more money!

Cash Summary

Quick look at cash in my investment portfolio. I just found $17,000 in cash sitting around in my portfolio doing nothing!

 

Personal Capital also has apps on Apple Itunes and Google Play Market (for Android).  The apps look awesome, but I haven’t tried them on a phone or tablet yet.

Give Personal Capital a shot and see how you like the look and feel.  I love the interface so far, and it will save me hours each month managing my personal finances and investments.

 

Let me know your experiences with Personal Capital if you try it out!  Anything I’m missing?

Charge Everything on the Credit Card! Most Bizarre Financial Advice Ever?

Conventional personal finance gurus like Dave Ramsey say things like

“Responsible use of a credit card does not exist…

 

 There is no positive side to credit card use.”

That may be true for merely conventional people.

If you are a conventional person who spends way too much money each month and “can’t afford” to get your 401k match, then I want you to do four things:

  1. Slap yourself
  2. Stop reading now
  3. Figure out how to stop wasting so much money on crap you don’t need
  4. Set a reminder to come back here in a few months and read on.

For the folks that are left, I assume you can handle paying your credit card bills in full each month.  Keep doing so.

I’m about to tell you how to make $1000 per year with almost zero effort.  

Credit cards are awesome :

  1. credit cards gives you “float”
  2. credit cards reward you with cash back, frequent flyer miles, or gift cards

Float is a term you normally associate with buoyant objects that refuse to sink in a pool or bathtub.  In the financial world of credit cards, float is a term that describes the period of time between charging a purchase and subsequently paying for a purchase.

For example, I may spend $100 at the grocery store on October 7th (the first day of my credit card’s billing cycle).  The credit card company will send me the bill with that $100 purchase on November 6th, and my payment will be due on December 2nd.  The elapsed time between October 7th when I make the $100 purchase and December 2nd when I ultimately transfer $100 to my credit card company is a period known as “float”.  In this case, the period of float is 56 days, or almost 2 months.

You won’t get 2 months of float on every purchase, but on average you’ll get around 1.5 months of float on your purchases if your purchases are spread evenly throughout the month.

Float is like a free loan from the credit card company.  And who said credit card companies weren’t nice?

A quick calculation says for every $1000 in monthly spending you have, you save about $9 per month by graciously allowing the credit card company to give you a free short term loan each month ( $1000 * 1.5 months average interest free period * 7% opportunity cost / 12 months ). Do this for a year and you have saved $105.

On top of that, getting 1% to 5% in cash back or rewards points for your everyday purchases is simple with a variety of credit cards in the market today. $1,000 monthly credit card spending at an average cash back rate of 2% yields another $240 per year in cash back or rewards points ($1,000 x 12 months x 2% = $240).

To recap for those that weren’t paying attention.  If you spend $1,000 per month or $12,000 per year on a credit card, you can save $105 from the float, and make $240 from cash back or rewards points.  That’s $345 per year of free money that credit companies are begging to give you!  All you have to do is spend $1,000 per month on a credit card.

Who only spends $1000 per month on a credit card?

The median household income in the US is around $50,000 per year.  Some of that income goes to savings, some pays rent or a mortgage or taxes, some repays debt.  What is left is mostly spent on goods or services that could be charged on a credit card.

Many families spend $3,000 per month or more on chargeable expenses.  Some purchases can obviously be charged like:

  • groceries and household goods
  • automotive expenses like gas and maintenance
  • medical and dental
  • clothing
  • dining out
  • entertainment
  • electronics

Put down the checkbook or stacks of cash and don’t overlook many other expenses that you could be funneling onto a credit card and getting big bucks from float and cash back rewards:

  • home repairs
  • house insurance and taxes
  • auto insurance, license, and registration
  • utilities such as natural gas, electricity, water/sewer, trash, cable TV, internet, and cell phone
  • daycare, after school care, or summer camp
  • private school or college tuition
  • vacation rentals like mountain cabins or beach houses

I am certain I have overlooked some expenses that are customarily paid with check or automated bank drafts.  So next time you are about to pay a bill out of your checking account, take two minutes to check the service provider’s website to see if they accept credit card payments instead.  You can rack up some easy cash back or rewards points with very little effort.

As always, make sure you aren’t paying an extra charge or “convenience fee” to use a credit card.  My county charges around 2% to pay with a credit card for example, so I pay using ACH bank draft from my checking account.

If you can save $345 per year while spending $1,000 per month on a credit card, a more typical family that spends $3,000 per month will save over $1,000 per year.  That $1,000 is free money just waiting for you.  Don’t miss out!  Charge everything you can on a credit card, but make sure you pay it off in full by the due date to avoid interest charges.

But Credit Cards Are Confusing and I Don’t Know Where to Start!

I have compiled some excellent credit card offers that will allow you to implement the strategies I have discussed in this article.  You should always get at least 1% cash back or the equivalent in rewards points.  Some cards will pay more than that on everything, but may restrict redemption options to travel or gift cards.  Other cards will have 3% to 5% cash back on specific categories like groceries, gas, or a changing set of categories.  I personally love the 5% cash back on groceries and gas I often get since I spend a lot on those two categories and I can’t cut those expenses much more.

When you are checking out these credit card offers, pay attention to bonus features that might appeal to you.  Many cards give you $100 to $400 as a sign up bonus, and some offer enough frequent flyer miles or hotel points to give you a free round trip flight or two, or many nights in a hotel.

Be careful, as some cards have annual fees that could eat into your savings from cash back points.  It can be worth it to pay an annual fee when the cash back or rewards program is really great.  We have paid an annual fee for the American Express Starwood card that rewards you with hotel points, as the rewards program is excellent, and it didn’t take us long to earn free nights.

Don’t feel like you can only have one credit card.  You might to apply for a good basic 1% to 1.5% cash back, a card to get bonuses for specific frequent flyer or hotel programs, and a card or two to get the larger 3-5% category based bonuses on gas, groceries, or other categories of spending.  You can do multiple applications at the same time, but be careful if you plan on getting a car loan or mortgage/refinance soon, as a large number of new credit applications can adversely impact your credit score short term.

And if you find cards that have great sign up bonuses, remember you and your spouse can apply for separate card accounts so that you each get the sign up bonus (free vacation for 2 anyone? 🙂 ).

We have multiple cards and label them with tiny sticky notes covered in clear tape that reminds us what categories of shopping to use each card for.  Groceries and gas might be on one, Amazon.com on another, and then “Everything Else” on our third card.

 

Best credit card offers right now:
Cash Back Cards

Travel Rewards Cards
Travel Rewards Credit Cards

For more details on credit cards I recommend, check out my complete credit cards recommendation page.

As with any financial transaction, review the terms and conditions carefully and make sure you understand what you are getting before submitting your applications.

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