Fees and commissions matter (even that run into the 3rd decimal place)

The other day I met an affable Financial Planner who’s looking to go to the same grad school as I had been to. We were talking and at some point the topic of fees arose in our discussion. This FP wasn’t pushy or trying to oversell the value of planning for the future but was still a bit coy about really admitting how fees add up. And rightly so, because her livelihood depends on the fees! This is the operating model of any FP, they make money off the fees they charge to maintain your money. I have nothing against her but this got me thinking how fees add up, even little marginal ones such as 0.061%.

Let me illustrate this point by taking a look at my 401(k) investments and then compare it with the what-if scenario of putting the exact same amount in Vanguard index funds. I have to start off by acknowledging that I’m lucky to have a 401(k) plan that has low fees. Lower than a lot of other places.¬†This article says that the average expense ratios for equity mutual funds in 401(k) plans is 0.48%.

 

Before I started to look around I didn’t really think the average would be so low. Nonetheless we’ll run with this. In the table below you’ll see the actual breakdown of my investments in my company’s 401(k) plan.

 

I have money in a bond fund, a targeted date fund, a large cap fund, a mid/small cap fund, an international fund, and in my company’s stock. All funds are Vanguard institutional funds and the operating expense ratios of all the funds are very low. Kudos to my employer!

Side note: We can debate the efficacy of using 5 different funds to hold the money, but let’s keep that for another day!

What skews the perfectly low ERs are the Administrative Expense of 0.08% that our 401(k) administrator, in this case Aon Hewitt, systematically charges across the board.

My weighted average ER comes out to 0.111%. Not bad at all for being 4 times lower than the average! But still higher if not for the dang administrative expenses.

Now let’s assume that I take this money out today and roll-over into an IRA, and invest in similar Vanguard funds.

I have made a couple of adjustments, while keeping the weights of the bond, large cap, and international funds the same.

  • Kept the same weight for the mid/small cap from the 401(k) and rolled into the VIMAX Midcap fund in the IRA.
  • Rolled the ESOP and target date fund from the 401(k) into VSMAX Small cap fund in the IRA

With these changes, my new weighted average ER comes down to 0.05%. Compared to the 401(k), that’s a difference of 0.061%.

Again: We can debate the detriments of not just using VBTLX and VTSAX, another day ….

This change would result in almost $7k in extra money over a period of 20 years, at 6% annualized return. Plug in your numbers here. I’ve deliberately left the future contribution cell blank to have apples to apples comparison.

Dear readers, would love to know how your 401(k) plan expenses compare.

Are we Rockstars yet?

Say it to the tune of “Are we there yet?” your kids invariably sing when you’re taking them on a road trip ūüėÖ

Our blog was recently added to the Rockstar Finance directory of all personal finance blogs. I had no idea about this aggregator site before a fellow newbie blogger mentioned it.

You can find us at the recently added list or the main list. We clocked in at #149.

Though this means that we’re officially a part of the FIRE blogosphere, we are far, far away from being the rock stars of the demography that preach sensible personal finance. There are giants in this field and we learn and incorporate the portions that applies to us, in this phase of our lives.

Which bring me to the next point. And it is a rant. For which I’m apologizing right now. Having mentioned earlier that this is a judgement free zone, the next portion is going to sound hypocritical. But the incredulity of the stated facts are just too …well, incredible, for me to not lose my mind.

While going through some of the blogs there were recently added to the Rockstar Finance directory, I came across this blog maintained by a lawyer. I will purposely not name this blog nor reveal the gender of the writer. This is not meant to vilify the person behind the blog, nor give them added eyeballs. This is meant to show how stretchable our various aims and goals are.

This person claims that they need access to a gym that charge $893. Monthly.

MONTHLY $893 gym expense. A completely discretionary expense. Let that sink in.

Despite the fact there is a student loan that is more than the average sized mortgage. Despite living in a city with high costs. Despite having a $30k car loan at 3.5%. All the above factors are perfectly fine, even when taken in aggregation. But all these debts, plus a $893 monthly spending habit is another thing.  Not only does this individual have zero qualms about it, the blogger goes on to make an astounding appeal to the readers to not cancel their own expensive gym membership. This is where it got my goat.

I am dumbstruck. I mean I’m sorry that I’m even doing this, but this affects me viscerally.

 

Incomes (2018)

In this post we bare our incomes.

To state the obvious, we are a two income family. Both of us have professional, corporate, desk jobs. One of us work in a large, publicly listed corporation while the other in a small, private firm. We are salaried employees getting yearly pay raises and almost-guaranteed bonuses, though the size of those bonuses vary from year to year, as do the raise percentages.

W’s base salary is $95,506
W got a bonus of $2,785

M’s base salary is $93,359
M’s bonus was $11,422

Out total yearly income is (or would be if we continued our employment till the end of the year) $203,072

Incidentally, this was the first year that W outstripped M in base salary!

That’s it, that is¬†all our income.

Note: Why don’t we consider dividends as income? Fairly simple: All our dividends gets reinvested automatically into buying more shares of that underlying fund/ETF/stock. Dividends, at this stage of our life, are not something we use as cash.

In the near future, say, five months from now, one of our salary is going to increase by 50%. That will be a story for another day!

Note: If it isn’t clear, these are all gross numbers.

Purpose of this blog and why you should read it

[In our first post we had briefly described what this blog was about. This post is a deeper dive into why we are doing this.]

Another –¬†pick your category: Personal Finance/Financial Independence/Early Retiring/Living Frugal – espousing blog? Kill me already!

Right? I’m sure that thought has gone through your mind as you came here. Relax. We’re doing no espousing. No face punches. No eye roll. No shaming if you aren’t saving 50% of your income. No judgment if you aren’t engaged in some active side hustle. In fact, this space has less to do with you¬†and more to do with us. Specifically, our progress towards financial independence¬†ūüôā

You see, the main point of this blog is to document what we are doing. Everything else is secondary. We don’t see this turning into a profit making machine. We don’t even envision¬†making money off¬†the blog, nor do we¬†pursue any strategic or tactical ways for monetization. This is not some fall back option in retirement that will generate income. That’s not the purpose of this blog.

Even though we hope to achieve Financial Independence sooner that most working Americans, we don’t think that is a realistic option for many, many folks. That is just facts. The median household income in the US in 2016 was $57,617. The top 10% households earned at least $175,000. Our household income for 2017 was a tad under $200,000 (and this year has gone past the $200k mark). This is not bragging or showing-off but being acutely aware of cold, hard, reality. We understand we are in a very¬†privileged position. We acknowledge how lucky we are to be where we are.

The historic bull market run that started in 2009 is one of the major reasons our assets multiplied. We would be doing a disservice to not call this out. A whopping 80% of our assets are tied to the markets. There will be a crash/correction. We don’t know when. But from the crash, the markets will rise again ūüôā

The *perfect* audience of this blog is someone who¬†is in the similar income range as ours¬†AND still not on the path to financial independence! We really hope¬†we can inspire¬†YOU – 30-something, probably dual-income, with kid(s), high salaried,¬†white collar worker¬†– to bring¬†about a change in how you look at life, work, and freedom. Build your net worth and then control if you still want to go to the corporate job you have every morning. The answer could very well be yes, but at that point you’re making a conscious choice.

Does that mean all others are excluded? Certainly not!

Some of you reading this might be discouraged. Discouraged that the $60,000 job you have supporting¬†your family of four is absurdly low to even think¬†about retiring before 65.¬†That’s not our intention. We hope you see what we are doing and take heart from it. We didn’t start off with these salaries when we got married. If you are serious about gaining financial freedom start working on YOUR net worth, with strategies strewn around in the FIRE blogosphere!

If you’re in a very similar boat as us, welcome aboard! Would love to hear from you.

Others who have gone through this stage we’re in right now – we ask for words of encouragement! Or witty admonishments. We don’t follow the typical FIRE truisms – we have 2 cars (with a loan on one!), we eat out a few meals every week, we have cable, we still use an electric dryer, we have no side gigs.

But we do everything in moderation.

The car loan is 0.9% and we still pay more than the minimum payments; none of the restaurant meals are exorbitant; we love live sports; we run exactly ONE laundry cycle every week; and¬†we don’t have time for side gigs (we had a rental for 2 years and sold it; too much hassle)¬†with work, family, sporting, and volunteering commitments (and till this past February,¬†part time school!). At least for the time being, we¬†have absolutely no qualms and guilt¬†about¬†keeping it that way. And still be on track to be FIRE before our mid-40s, a couple of decades before¬†the overwhelming majority of¬†Americans do.

As for giving advice about how to get started on this path, we think, make that we know, that there are other bloggers who have done this for a long time, in a fashion that is far better than we could (probably!) do. There is no need to reinvent the wheel. Though from time to time we might sprinkle in tidbits about some interesting concepts. At times we will do some deep-dives sessions on something new we learnt or a future-state plan.

So, to recap. This blog is for anyone who cares about growing their money, and increasing net worth. We bask in the warmth (some would say “cold”; we beg to differ) of numbers. Everything you see in our monthly reports are what we are dealing in real life. No make-up, no mark-up.

March 2018

Jan-2018
Feb-2018
Mar-2018
Assets
Retirement
477,705.20
468,813.18
495,327.97
529college
19,853.29
19,096.68
20,315.59
Bank Accounts
41,349.08
51,254.82
54,582.04
Investments
19,844.21
19,575.18
21,422.73
Bonds
12,371.98
12,584.32
12,607.70
House
300,000.00
300,000.00
300,000.00
Total Assets
871,123.76
871,324.18
904,256.03
Liabilities
264,002.67
260,845.04
257,299.46
Net Worth
607,121.09
610,479.14
646,956.57
Change MoM
23,077.28
3,358.05
36,477.43

A net increase of $36k for March, easily besting the $23k from Jan 2018! That’s pretty good! We had a triple whammy of bonuses flowing in, the markets going up (till Mar 9, at least!), and paying down our debts by over $3.5k.

We’re very aware of the fact that we’re in the midst of a historic bull market. The crash will come, at some point. Maybe we’re in the middle of it. We don’t know ūüôā

Here is what all constitutes our Assets and Liabilities. We have updated this a bit since some things have changed from over a year ago.

Some changes around here

This post is the 5th published post for March! Wow. Don’t think we saw that coming when we started this blog.

Now that the master’s program is done, we (I) have a little bit more time on our (my) hands. With that time, besides the increased writing, we incorporated a couple of administrative change around here.

Let us know what you think!

The CFI …falacy?

Mr. Cubert at Abandoned Cubicle, who is a very talented, determined, and resourceful fellow (and a fellow Midwesterner!), has this strange article out there, extolling the virtues of Cash Flow Indexing. In a nutshell, CFI determines which loans to pay off first, freeing up, well, you guessed it: Cash Flows. It does not take into account the interest rates or the term of the loan. Mr. Cubert does a great job explaining why this works for him. I’d suggest you read his article first. This post, if not a refutation, is certainly an addendum to his!

One thing that is ignored in the CFI method is how not paying down your highest rate loans first, makes you pay MORE INTERST, in the long run and the short run. There’s no going around this fact. You are freeing up CFs at the expense of paying more in interest.

Here is a Google doc (which you can download and play around) I created, a pretty simple one at that, which shows the affect of paying more – extra towards the principal – on 2 hypothetical loans: a 15-year $150k mortgage at 4%, and a 5-year $20k car loan at 0.9%. To make for an easier comparison, we’ll assume both of these loans are taken out at the same

The CFI of the mortgage is 135, while the car loan is 59. According to CFI principle, the car loan is an “inefficient” loan and should be paid off early.

An extra payment of $1,333.79 every month will wipe off the car loan in one year, saving interest payments to the tune of $66.19. Whereas the same extra payment when applied to the mortgage would save interest payment of $296.72 over one year. The CFI method would certainly free up the monthly payments that was going towards the car in year. That is indisputable. What is also indisputable is that you are paying more by following CFI.

One thing that I still agree with Mr. Cubert is here: A¬†technically¬†smarter move would be to put any extra income towards higher yielding investments, as opposed to paying off the mortgage. But this is a¬†long-term¬†cash flow¬†play for us. At early retirement, we plan to avoid as many recurring monthly payments as possible. Which is¬†cash flow¬†smart.” We hope (and planning) to be mortgage free in the next 4 years.

I should stress another point here. I will take a 0% loan any day, even if I had the money to pay it in full and not take out the loan. Heck, we have checking accounts paying 1.55% now! With inflation, which is around the 2.5% mark now, any loan below that mark is essentially lending you money and paying you interest on that loan!!

In the first worksheet I’ve provided the year 1 numbers. The second worksheet has the whole life amortization schedule for the mortgage. You can plug in your own monthly extra payments to see how soon you can pay off your loan and how much interest you save.