June 2018

 

jun2018

Big ticket expenses for June:

  • $2,915.62 on airfare, lodging, and day tours for our upcoming trip to Iceland. Exciting! We have a standalone savings account for big trips and all of the expenses were paid from this account.
  • $680.06 on patio and porch furniture. We have a standalone savings account for big household expenses and the furniture were paid from this account.

Our retirement accounts crossed over half a million dollars in June, for the first time. Debts reduced by $3.3k.

Other than that, nothing much to write home about. Haven’t changed what we put into our retirement or taxable accounts. Markets have been doing their thing. By end of this month, we go down to one income! More on that in next month’s update.

No, we don’t

Having been a reader of personal finance and financial independence for a long time, much longer than this blog has been in existence, I’ve come across various beliefs that masquerade as self-evident truths, when in reality they couldn’t be farther from the truth.

This post is a list of those postulates.

 

No, we don’t: Confuse Assets and Investments

The terms Assets and Investments are often used interchangeably, but there are distinct distinctions between them.

An asset is an item of value, that

a) a large section of the population agree holds its value, over time

b) a smaller sub-section of the population hopes increases in value, over time

An asset has no intrinsic value, other than what you paid for it, and what someone will pay for it when you sell it.

An investment, on the other hand, has some intrinsic, underlying value.

When you make an investment in stocks, you are essentially giving the firm capital to use in some endeavors that will potentially generate more value than the capital itself. They could be using that capital for R&D to make a new product; they could be using the capital to build more plants to produce more goods; they could be using the capital to hire and train more professionals to tackle a complex problem. You, the investor, gains when the firm does well, in terms of stock appreciation and/or dividends.

There is something called the Discounted Cash Flow (DCF) analysis to determine the Enterprise Value (EV) of the company. From the EV if you take away the debt owed and the cash in hand, you arrive at the equity value of the company. This equity value of the company divided by the number of outstanding shares, leads to the “correct” stock price. Check out this video by Aswath Damodaran, professor at NYU Stern, one of the foremost minds on Valuation.

Similarly you could be investing in rental properties. These will generate cash flows from the rent you receive. You will invest money (capital investment) when you buy the properties and then when have to replace the big ticket appliances. Over time, the steady cash flows will far out score the investments you made and you pocket nice profits.

Keep in mind the fluctuations of the markets and the seasonal changes in renting units are temporary. If you have a simple, robust, and well thought out investment plan or  business plan, over the long run you will succeed.

At least theoretically. There’s a saying that the markets can remain irrational longer than you can remain solvent!

Now contrast that with buying an asset such as gold. The value of gold depends on supply and demand. Gold, in and of itself, is not adding value to the money you spent in buying the bullion.

So, gold is not an investment. It is an asset.

Similarly, the home that you live in is not an investment. It is an asset, probably the biggest asset you own. You hope the price of your home goes up. In most of modern US history, the values of homes have gone up. Supply, demand, the condition of your immediate neighborhood, the broader national economy, demographic changes – all play a part in determining the value at any given time. Your home is not adding value by itself. If anything, you are spending more money to beautify your home by a kitchen remodel or by sprucing up the backyard!

No, we don’t: Call our personal vehicles Assets

Personal vehicle don’t count as Assets. The reason for this is simple. A car depreciates over time, that is, lose value as time passes. This defies the first tenet we’ve talked about Assets above. Now, not everything that depreciates over time can have the label asset removed from them. If vehicles are used for business purposes they fall under assets. They can be depreciated on the useful life value. In business accounting there is something called PPE – Plant, Property, Equipment, and they are treated as Assets. Here we are talking about personal assets.

No, we don’t: Strategize to beat the market

We are happy to get the return of the overall market. There could potentially be an investment that will generate a return greater than the market, but to correctly 1) Identify them, 2) Time the entry, 3) Time the exit – all these 3 events happening successfully on a regular basis ….well, that’s more along the lines of speculation for you. We follow the simple and sage advice of investing in broad market based, passive funds.

We actually do own some shares for a few individual stocks. First, they constitute about 2% of our overall investment portfolio, and second, we acknowledge them as speculative bets.

 

Readers: Any other BS that pass off as sage advice we might have missed?

 

Sports and the FIRE movement

In the FIRE community – and by FIRE we include fat, lean, medium, or any-other-category-that-will-crop-up-next – there seems to be a curious case of antipathy to organized team sports. Maybe antipathy is a strong word. Apathy perhaps paints a better picture.

The chosen form of exercise in the FIRE community seems to be going to the gym, running, walking, cycling, and skiing.

Notice a common them among these pursuits of physical exertion?

They are mostly done alone. Sometimes with a trainer or a friend or two.

Here is one such example, from the master, MMM himself.

Here is another example, from one of my favorite blogger, Mr. Cubert.

These are all great avenues to enjoy the outdoors, burn calories, stay in shape, experience positive effects of endorphins being released.

Teams sports are conspicuous by their absence.

What about the almost-40-year old who still wants to compete?

Compete with others, as opposed to oneself, which these individual sportsmen such as a cyclist or a runner does.  To “prove” they they still got it while scoring a goal or hauling in a TD catch. The adrenaline rush of going for a 50-50 puck and beating the other skater. The camaraderie of a bunch of like minded people playing for a common purpose – some similar age, some older, others younger. The backslapping and high fives after a win. The drowning of collective misery in beer after a sound thrashing at the hands of a team featuring 20-somethings. The “glory” of being crowned *Champions* (of a recreational league, which one one but your team cares about!)

These are noble intentions to aspire for!

Could it be a financial choice? It could be. If you think about the equipment costs for football or hockey, that could be prohibitive. The question then arises, what about sports such as soccer and basketball. You only need a pair of shoes/cleats, a ball, and a field/court. Less expensive than biking or skiing.

Could it be a factor of age? Certainly. But only if you’re edging closer to 40. Age can very well determine if you’re up for that stinging spike you were known for in high school.  There are tons of bloggers in the 20- and 30-year old range.

Could the stage of your life be playing a role? Absolutely. A thriving career, family with kids, and blogging as a side hustle, can handily take care of the 24 hours in a day, 7 days a week. But if you’re able to take time off to go for a run, you should be able to go a game of touch football.

That got me thinking. Are people who actively seek out a course different from the mainstream in terms of finance, and lifestyle made by those financial choices, inherently a bit reclusive in real life.

Pedaling away miles after miles, the wind swishing by the ears, whispering ideas about composing the next 3,000 word epic on the travesty of not taking advantage of geographical arbitrage …

Conquering the powder of the black diamond with a laser focus, the focus only matched by the resolve to eliminate all extraneous costs from the monthly budget …

I know, I know. The online community is thriving. I’ve made many an e-friend. Though I’m yet to meet a fellow blogger in person, I’m fairly certain they would be great people to hang out with. I’m thinking if in real life a lot of the bloggers are introverts.

Personally, I love team sports. I play them, watch them, follow them. I got introduced to soccer when I was very young. The love for the game has only grown as I’ve grown older. I try to play at least one game during the week, every week, throughout the year. I coach kids in the local soccer club. I have held elected office in the soccer club of the last city we lived in. I follow international clubs and the national teams of powerhouse countries. I cannot imagine a life where I’m not involved with soccer.

Readers: Would love to know what you think about the idea that most bloggers in the FIRE space are not interested in playing team sports? What about you, do you play team sport?

May 2018

Buoyed by the markets, and us continually pumping in money into our retirement accounts, our assets grew by around $17k in May. Almost $3k debt was slayed in the same period. Resulting in our highest Net Worth yet in our journey.

There were a couple of big ticket expenses in May:

  • $1,687.32 for Lasik eye correction surgery for one of us. The money for this got taken out of the HSA account
  • $1,175.51 for an international flight we booked for one of our mom. This kind of expense is not a common occurrence, more like once in a year (or two). This expense came from general savings

June will be interesting as there are a few high profile expenses coming up.

Found a gem – Penny and Rich

Once in a while you come across something so delightful that you can’t help but share. Happened to me yesterday, when I stumbled upon this riot of a blog – Penny and Rich.

Rich and Penny are cousins, supposedly. According to their About Me page, they grew up in a small town in the Midwest, close to each other. Rich is, well, rich. With a family income of $250k, Rich lives with his wife and twin boys in an expensive city in the East Coast. Penny, with her husband and 4 kids, live in the Midwest. And by the way, Penny is poor. $40k income. That is their combined family income to provide for 6 people. Their names are conveniently appropriate for their current state of affairs 😀

The blog is an open-letter-discourse between them. I find it fascinating. Both of them are excellent writers. They approach issues with very different mindsets and set of values. Their plan of actions are often at loggerheads with each other. The humor in their writing is organic, fresh, and to me, hilarious.

I don’t know them. I don’t know if they are real. I don’t know if some really intelligent group or person is using this as a live thought experiment,  presenting two arguments to the issues in personal finance space.

Now on WordPress

This blog initially started on the free Blogger platform. Then we moved to a paid Google domain. Soon we realized that we were missing a lot of features while being on the Blogger platform. WordPress was the next obvious choice as it is the most widely used blogging platform. But we were locked into a 60 day period after buying the domain on Google. Yesterday marked that 60th day and today we are excited to announce that we are on WordPress!

It would warm the cockles of our hearts if you either (re)subscribed to the blog or followed us by email!

Vanguard funds – Admiral shares, Investor shares, ETFs (and Institutional shares)

When we started to get serious about going down the path of FIRE about 6 years ago we realized pretty quickly that investing in Vanguard index funds was the way to go.

But invest in WHAT exactly?

Terms such as VTSAX, VBTLX, admiral shares, investor shares were thrown around and, to the uninitiated, this might be information overload when all we are looking for is a simple guideline on what is what.

This won’t be a crash course in what is a Mutual Fund or ETF (exchange traded funds). Neither this is going to be a debate over index funds v/s ETFs. Vanguard provides a detailed analysis in the differences and similarities between ETFs and mutual funds. 

To put it very simply, to the average personal (individual) investors – meaning regular Joe and Jill such as you and me – Vanguard offers 2 share classes (or variants) of passive, index funds and often times an ETF for the same underlying benchmark or sector that fund is tracking.

We’ll look at the different options to invest in the S&P 500 through Vanguard.

The lowest cost option is the Admiral shares. But their minimum investment is typically $10,000.
Vanguard 500 Index Fund Admiral Shares is the name of the fund. VFIAX is the ticker.
Fun fact: All mutual funds tickers end in an “X”.

Investor shares have a higher ER, at least twice of the Admiral shares, and their minimum investment is typically $3,000.
Vanguard 500 Index Fund Investor Shares is the Investor share fund for tracking the same S&P500 (you can reach it by clicking on the Investor share hyperlink given on the Admiral shares’ page on the Vanguard site highlighted in green in the above screenshot); VFINX is the ticker.

If you don’t have $3,000 lying around, Vanguard has an option for you.
The Vanguard S&P 500 ETF; ticker VOO.
The ER for this is 0.04%, same as the Admiral fund.
Notice that the ticker doesn’t end in an “X” as ETFs are akin to stocks.

Since the ETFs are essentially treated as stocks, there is a bid/ask spread and premium/discount.

Also, Investor shares can be easily converted to Admiral shares once you meet the minimum threshold. Vanguard takes care of that. As far as I know, to move ETFs over Admiral shares you’ll have to sell your ETF and buy Admiral shares. If you have a taxable account you will have tax implications when you sell your ETFs.

NOTE: I’m not a tax expert and you should consult a tax professional if you have questions. Materials presented here are for informational purpose only.

Vanguard also has funds to track the same underlying S&P 500 for its institutional investors.
ER are lower than Admiral shares and look at the minimum – $100M!! These are, as the name suggests, for institutional (pensions; insurance companies, hedge funds and such) investors.
Vanguard Institutional Index Fund Institutional Plus Shares; VIIIX

Now there you have it: Go forth and invest!