The weather has been quite frigid the past few days, and that has forced us to stay indoors. Here are some of the activities we have been doing to keep ourselves entertained.
Free RedBox DVD Rentals
From now until January 18th, you can get free rentals by using code 45TH8787. Get one movie on day 1, return it the next day and use a different credit card to reuse the code on day 2. Rinse and repeat until you are out of card numbers.
Story Time at the Library
Our public library offers children’s story time every second Saturday of the month and select week nights. Bundle up junior and expose him/her to some culture. Frugal Boy was more interested in the audience than the guitar playing librarian.
Build a Fort
Use boxes, blankets, and furniture to make a fort in your living room. Have fun crawling through it, resting in it, and ultimately, destroying it.
Assemble Christmas Gifts
If you haven’t already, go ahead and assemble some of the Christmas gifts and take them for a spin.
You probably know who Warren Buffet is, but do you know about John Bogle? If you invest through Vanguard then you should, because John Bogle was the pioneer of low cost index funds. In his book, John Bogle on Investing: The First 50 Years, he presents a collection of essays and speeches that discuss the founding principles of Vanguard and why those principles are just as important today as they were 50 years ago.
Bogle argues again and again that simplicity is favorable over complex investing strategies time and time again. The more complicated you make investing, the harder it is to understand and the easier it is to get caught up and make a mistake. Why go to the trouble of sorting through a haystack to find a needle when you can just buy the entire haystack. In his opinion, instead of trying to pick winners (needles) out of the stock market, just buy the entire stock market (the haystack). The simple goal of enjoying the entire market return in aggregate will statistically beat the complicated goal of trying to outperform the market by identifying the best stocks.
Long Term Investing
The longer the time horizon is for the investment, the better it will do. While stocks are more volatile than bonds, over a 25 year horizon that increased volatility drops to a standard deviation of just 2% of a 6.7% median return (meaning that you could expect returns between 4.7% and 8.7% with a degree of confidence). Compare that to the one year deviation of 18.1% on 7% median return (-11.1% to 25.1%) and you can see how the longer you hold an equity the more the peaks and valleys are smoothed out. Just like Buffet, Bogle takes a buy and hold mentality.
Vanguard is unique among brokerages because it is a mutual company. When you buy a Vanguard fund, you become a part owner of the company. The advantage of this over a private company, is that Vanguard wants to better serve its masters, and those masters are fund holders. What do fund holders want, lower costs!
Consider the two scenarios below. One portfolio has a 1.2% expense ratio, the second has a 0.2% expense ratio.
Now which expense ratio would you rather have? Cost is one parameter that investors can control!
Index vs Actively Managed Funds
An actively managed fund has a human being or a whole team of humans that are trying to pick winners for a fund. They eat, sleep, and breath financial markets. Why try and choose winners yourself when you can let a team of experts do it for you? The answer is that you shouldn’t let the ‘experts’ do it for you because historically they have been outperformed time and time again by index funds. Index funds are passively organized to track a benchmark. A common example would be an index fund that recreates the S&P 500. Index funds can pass cost savings, by not having to pay a salary to an expert, to you, the person who is risking their hard earned money.
Bogle loves to tear apart actively managed funds in his book by showing cold hard numbers again and again. The numbers don’t lie, actively managed funds underperform. Just take a look at this analysis done by Forbes.
Using VTSAX, Vanguard Total Stock Market Index Fund, as the baseline, they compared 54 actively managed funds that had the same investment objective. 78% of those actively managed funds posted returns less than the passive index fund. Only 22% outperformed VTSAX. If I approached you and said you had a one in five chance of beating the market, would you bet the farm on it? If so, please don’t go to Vegas, they’d love you.
The book is quite long and not for the new investor. If you are interested in getting started in investing (you should be!) then I would recommend that you check out Vanguard’s 4 Principles for Investing Success on their website. Then use Vanguard’s Portfolio builder to get a recommendation that is personalized to your situation.
We will be reorganizing our taxable investment account in January to better align with Bogle’s and by extension Vanguard’s philosophies. For starters, we will be simplifying our positions from:
VCR – Vanguard Consumer Discretionary ETF (expense ratio 0.14%)
VDC – Vanguard Consumer Staples ETF (expense ratio 0.14%)
VWO – Vanguard FTSE Emerging Markets ETF (expense ratio 0.15%)
VYM – Vanguard High Dividend Yield ETF (expense ratio 0.10%)
VCSH – Vanguard Short Term Corp Bond ETF (expense ratio 0.12%)
VBK – Vanguard Small Cap Growth ETF (expense ratio 0.09%)
VTSAX – Vanguard Total Stock Market Index Fund Admiral Shares (expense ratio 0.05%)
By switching from ETFs to a mutual fund, we are simplifying our contributions. In the future we will be able to setup a monthly direct deposit directly into VTSAX instead of transferring money into our account and manually placing buy orders for each ETF.
We will also be reducing our cost. 0.05% expense ratio is an incredible value!
You may be wondering about diversification. Well, VTSAX, with 3804 holdings, gives us ownership in virtually every publicly traded company in America. We’re buying the haystack. Our prepayments on our mortgage serve as our ‘bond’ replacement, and I am not convinced that in our investment horizon (20+ years), foreign equity or bonds are needed at this time.
So there you have it. Our low cost, indexed, long term, and easy to understand investment portfolio. It consists of buying and holding a single mutual fund. What could be easier than that?
If you are just getting started VTSMX is the same thing as VTSAX except it has a lower initial investment requirement and a slightly higher expense ratio. VTI is the etf version.
With the end of summer rapidly approaching we have been trying to cram in a few last minute trips. I’ve seen a lot of kids sporting mohawks and I guess that is a sign of me being out of touch. Why?!
I can be cool too!
Yesterday we drove up to Rockford to visit with Frugal Boy’s Great Aunt. Since it was a longer drive, we tried out a new thing and checked out an audio book, War Horse, from our library. Listening to Joey’s adventures in France helped the miles pass by quickly. Upon arriving at our destination we decided that the best (cleanest) place to change Frugal Boy’s diaper was in the backseat of the car.
It’s a little cramped in here!
We walked around for a little bit while we waited for Auntie to arrive. It didn’t take long before we had to retreat back to the car to fetch the first aid kit. Shae had stepped on a broken beer bottle and had to patch up her foot. Yay, litter!
Nothing a bandaid can’t fix (as she hobbles on)
For lunch we went to a Vietnamese hole in the wall restaurant.
When eating at an ethnic restaurant, I always pay attention to the other customers. If the majority of the other diners are of the same ethnicity as the restaurant, then it is probably a good spot. In this case, the food was great!
While we were eating and talking I couldn’t help but notice the torrential downpour occurring outside. The short trip from the restaurant to the gardens proved to be an adventure as the car splashed through huge puddles. At one intersection, a car’s exhaust pipe was underwater, I’m not sure if they got out or not.
Soaking wet, we resumed our day at Nicholas Conservatory and Gardens. While the gardens and greenhouse were no match for Garfield Park a couple of hours away, they still boast to be the third largest in the state. Before even entering the greenhouse area, visitors are treated to a view of the immense mechanical systems required to keep the temperature and humidity at proper levels for growing tropical plants in northern Illinois.
The conservatory has an abundance of Koi ponds and for a certain six month old, that was pretty fascinating.
There are also many waterfalls.
This kaleidoscope bowl was pretty neat. You look through the eyepiece and then spin the planter bowl.
Benches are tucked away and provided ample opportunities to slow down, chat, and enjoy the surroundings.
This plant would appeal to many little girls egos out there.
Queen Emma’s Lily
Leaving the greenhouse we ran into the first little princess (with 7 escorts).
A Quinceañera is a traditional rite of passage from girl to womanhood for many Latin American cultures. In case your spanish isn’t too good, it is celebrated on a girl’s 15 birthday.
We left Princess Peach behind and strolled through the rose gardens.
Working our way back we stopped to take a picture of the pond and greenhouse. You know it is someone’s special day when they don’t bother to stop to stay out of your pictures.
It was starting to feel very Jets vs Sharks when we ran into the second princess.
This one had a photographer and a videographer.
It was a good thing that we went early in the afternoon. By the time we returned to the conservatory it had been closed for a special event.
I wouldn’t make a very good spy
Here was the third princess’ gang of lackeys.
They were notably older and not male. Princess Peach and the rest of the jets had finished their pictures and were crowding into a stretch limo.
The groom and groomsmen piled out of a stretch pick up truck. Why in the world would you ever need a stretch pickup truck?!
Just because you can, doesn’t mean you should.
Shae had grabbed a brochure, and the price to rent out the conservatory for an event was $3200. That did not include catering.
All in all, it was a very fun day. The people watching was extraordinary and we didn’t have to move much because the sights came to us.
The ride back was uneventful besides the fact that Joey got tetanus and was almost put down. Then he was almost sold to the evil French butcher. Mmmm, now I’m hungry for some horse meat. Can you tell I’m not a horse person and would rather feed starving human refuges.
Frugal Boy got to try out a brand new toy.
Village of the Damned anyone?
One of the reasons why we live frugally and try to cut costs in our lives is so that we can travel more and take Frugal Boy with us. Being frugal isn’t the same as being miserly!
School starts tomorrow for our local K-12 schools. That means that you should be wrapping up your summer reading program. We finished ours and turned in our logs a couple of weeks ago. Some of the goodies that we got included a half pound of beer nuts, a free haircut coupon, and a free zoo admission coupon.
I didn’t finish Do Fathers Matter as there are only so many ways that the same conclusion can be reached in the span of 200 pages. I was in the mood for another personal finance book so I picked up a copy of Dave Ramsey’s The Total Money Makeover from our local library. For those of you who are unfamiliar with Dave Ramsey, let me give you a few bullet points about him.
He runs a self syndicated radio show that ranks in the top 10 in listenership
He has authored several New York Times best selling books about personal finance
He is anti debt
He is openly Christian and uses bible quotes in his books and on the air
His methods are controversial
The last point I will share my own thoughts as I walk through my summary of The Total Money Makeover.
What’s it all about?
Ramsey models the book after a fitness plan (there are many fitness analogies) and lays out seven steps to take the reader from debt laden to a golden retirement. The first five chapters cover some (un)common sense items about personal finance such as the importance of not racking up debt, ignoring the Joneses, the stupidity of gambling, and the importance of insurance. The next seven chapters Ramsey describes each of the seven steps of his plan along with some of the frequently asked questions. The last chapter paints a rosy picture of how good life will be once you have completed the makeover. It is also the chapter where his Christian ideologies come out in full force for better or for worse.
Step 1: Save $1,000
According to Ramsey, the first thing you should do to get out of debt and start building wealth is to put aside $1k for emergencies. Well, technically there is a step 0 where you have to get current, pay off any past due bills, on all of your existing debts. I digress. Ramsey spells out what qualifies as an emergency and what doesn’t. Christmas for example, isn’t an emergency because Christmas comes at the same time every year. The reasoning behind saving up $1k first is to keep you from sinking into any more debt when a real emergency such as your car’s strut coil blows out.
Step 2: The Debt Snowball
The second step of Ramsey’s plan is in my mind one of the most controversial points in the entire book. First I’ll describe the step as detailed by the author and then I will add in my 2¢.
With a $1k emergency fund in place, Ramsey suggests that the next prioritization to building wealth is to eliminate all debt. To do this, he recommends that you list all of your debts that are less than 50% of your gross annual income on a sheet of paper from smallest balance (e.g. $54 cell phone bill) to largest (e.g. $35,000 student loan). Then cut up all of your credit cards so you won’t use credit ever again. Finally, put every penny you can muster into paying off the smallest balance first while continuing to make the minimum payment on all of your other bills. When the smallest balance is paid off start on the next smallest and so on. If at any time your emergency fund dips below $1000, stop making extra debt payments and replenish the rainy day fund. According to Ramsey, most people should be able to finish steps 1 and 2 with two years.
Here is where I have some bones to pick with the author.
Number one, I don’t think that credit is the anti-christ. Ramsey tends to portray things in a very black and white world view; good vs evil, up and down, on and off. Credit cards are labeled as bad and dangerous when in reality they are no more dangerous than say a hammer. Sure, if you continually hit yourself or someone else in the face with a hammer, you can do a lot of damage. If you use the tool properly, it can make life a little easier for you. His assertion that debit cards provide the same level of protection as credit cards is incorrect. Yes, on paper they offer the same protection against fraud, but reality doesn’t line up nicely with what is written in the fine print. I had my debit card number stolen earlier this year and let me tell you what a pain in the ass that was. For starters, when a thief makes a bunch of charges using your debit card, that money is GONE from your checking account. Bye bye money, I hope you weren’t planning on buying anything important anytime soon. You contact your bank’s fraud department and they ask you a series of questions, then you print off, sign, and mail some affidavits to back up your claim. They credit your account with what is missing (assuming everything has gone according to plan) and you wait 4-6 weeks for confirmation that you really were robbed and the temporary credit will be made permanent. Compare that to when my credit card number was stolen several years ago. It was issued by the same card company. I called them up and reported the fraudulent purchases and because it was the company’s money that was taken, not mine, they took IMMEDIATE action.
With all of that said, if you are one of 60% of individuals who carries a card balance, aka you don’t pay the card off in full each month, then you should probably consider cutting up your credit cards. Hitting yourself with a hammer is no fun.
Number two, I cannot whole heartedly agree with his prioritization of debt repayment. Smallest balance to largest completely ignores the interest rates associated with the balance. Mathematically speaking, one should pay off the highest interest rate balance first and continue down the line until they are at the lowest rate. Logically, my way saves more money and would have debts paid off sooner, but humans are illogical and the psychological boost from paying off small debts probably does help individuals tackle the harder larger debts later on.
Step 3: Finish the Emergency Fund
Once all your debts except the house are paid off, Ramsey encourages the reader to finish funding their emergency stash. For the average American a full funded rainy day stash will be between $10-15k. Ideally that money should be kept in a savings, checking, or money market (with check writing) account for easy but not too easy access. CDs, bonds, and dresser drawers are not recommended because they are either too easy or too hard to access money in an emergency.
Step 4: Invest in Retirement
Only after paying off all debts except the mortgage and having a fully funded emergency fund does Ramsey suggest that you start contributing to a retirement account. Even if your company offers a match, he still doesn’t recommend contributing until the first three steps are complete. I have another beef with this because you are giving up FREE money for the sake of having debts paid off a month or two sooner. If I had to pick just one point of contention between Ramsey and other talking heads in the personal finance world, it would be concerning his investment advice. Ramsey swears by large cap growth mutual funds and their ‘unshakeable’ 12% annum return. Many of his calculations later on in the book use this magical 12% number to support ostentatious claims about golden retirements on small monthly investments. In fact, Ramsey only wants individuals to contribute 15% of their gross income to a tax preferred retirement account because that will be sufficient. If you have ever played around with a retirement calculator, you know that a change of even 1% return compounded over 20-40 years will have a HUGE impact on the final outcome. Consider for a moment that the de facto number used for most stock market investments is 8% and you have a pretty glaring difference between what Ramsey is preaching as truth and what may be truth.
Step 5: College Funding
If you don’t have kids or they have already graduated college you can skip this step. Going along with step 4, Ramsey discourages the practice of prepaying tuition at todays rates in favor of investing in a large cap growth mutual funds via an Education Savings Account, or ESA. His justification is that prepaid credits will only earn the rate of college tuition inflation, 8%, which is less than his superior 12% mutual funds. While 529 plans are okay, he thought they were too restrictive, mostly because they don’t allow you to arbitrarily pick investments like an ESA does. An ESA isn’t without restrictions. For starters, you can only contribute up to $2000 a year. Unlike 529s, you cannot roll the money over to another beneficiary. If money remains when the ESA beneficiary turns 30 years old, it must be withdrawn at a 10% penalty on top of regular capital gains taxes.
Either way, I would highly recommend that parents set up something for their kids education expenses. Student loans are a great catalyst for a life in debt.
Step 6: Pay off the home mortgage
If you forgive the fact that we haven’t cut up our credit cards (because we pay the balance each month), then this is the step that we are currently working on.
whittling down the mortgage
As you have probably learned by now, Ramsey despises debt. His first recommendation is that people should avoid mortgages and put down 100% cash on home purchases. Failing that, they should secure a 15 year fixed rate mortgage and work to pay it off early (that’s the route we went). One of the interesting conundrums that this step is challenged with is how one secures a mortgage if they have religiously followed the above steps. By closing all credit accounts, one’s credit score will drop. A low credit score makes it more challenging to get a prime mortgage. Ramsey’s ‘solution’ is to find a small bank or credit union that still does in house underwriting without relying on a FICO score. To me, this sounds like scuttling around the issue. Sure, there are probably some financial institutions out there that won’t pull your credit score but c’mon, most of them will.
Step 7: Build Wealth
By now you should be completely debt free, including your house, your retirement is on track for a dignified exit from this world, and your children are set to graduate from college with no student loan debt. Invest, spend, and give become the motto for this step. Continue to build your wealth but take some time to spend money on yourself and the wants that you have denied yourself for so long. Finally, Ramsey encourages a healthy dose of charity to help those that are less fortunate. In Ramsey’s eyes, you are considered wealthy when your money makes enough for you to live on.
So there you have it, one of the most popular financial planning books on the shelves. Is it a perfect one size fits all plan? No. Would I recommend the book to someone caught in a debt vortex. Yes.
Share your thoughts on The Total Money Makeover plan in the comments. What step are you on?
I mentioned previously that we are participating in our library’s Summer reading program. The first book that I read was the Millionaire Next Door by Stanley and Danko. It was an interesting book and worth the read. The book, published in 1995, did feel dated at times, especially when talking about average incomes. It also made no mention of the burgeoning field of technology and all of the entrepreneurship opportunities there (the book talks a lot about how self employed individuals are statistically more likely to be millionaires compared to their rank and file counterparts).
The big takeaway that the authors hammer away at for the duration of the book is that wealthy individuals live below their means. In other words, they are frugal. Keeping up with the Joneses is stupid, because the Jones don’t have any money, they spend it all and spend everything that they can borrow. I like to think that we are living below our means. We have been in our house for 13 months now and have paid off 20% of the mortgage. Contrast that to the Joneses who most likely have a 30 year loan and would only be 3.6% done. How have we paid off so much of our mortgage in so little time? We live below our means and have started making quadruple mortgage payments each month. We also saved up before buying and were able to put down 66% on the house. If you put down less than 20% you are usually hit with PMI, private mortgage insurance. Those 3 little letters can add a substantial amount to your monthly mortgage payment so it is best to put at least 20% down on a house.
At this point, you may be wondering “What’s the point of being wealthy if you don’t spend money?” According to Stanley and Danko, millionaires do spend money on priorities such as tuition for their children and grandchildren, professional services including health care, accountants, and lawyers, and investing in their retirement accounts. The last one is most likely the largest motivator to accumulate wealth. Financial Independence, or the ability to live off one’s accumulated wealth without having to work to pay for necessities is the cornerstone of retirement.
The American dream/promise is that if you put in your 35-45 years of work, you can retire and laze about while enjoying the lifestyle that you had whilst working. The reality is that many Americans cannot afford to retire or maintain their lifestyles due to small savings and/or having a lifestyle beyond their means.
Retirement is a privilege, not a right
If that sounds too harsh read some of the statistics out there about the impending retirement catastrophe (okay the article and my wording are a wee bit hyperbolic, but my point remains).
Now for something completely different
I’ll step off my personal finance soapbox for now and pick up the next book on my reading list, Do Father’s Matter? by Paul Raeburn. I have read through the first chapter and so far the most interesting topic has been epigenetic inheritance. Way back when in 9th grade biology class, I was taught that a new living organism developed according to its DNA ‘blueprint’. My limited understanding of epigenetics is that they are kind of like doodles on the blueprint. Most of the time they are ignored or wiped off completely, but sometimes they affect the developing organism. In this way, it is possible for a male’s sperm to contain information in addition to the DNA. This information, according to Raeburn, acts as an environmental weather forecast for the developing fetus. “Hey fetus, there is no food out here in the real world, so turn on the genes that help you fend off starvation”. In this way, a father’s health at the time of conception plays a large role in the resultant baby just like the mother’s nutrition during pregnancy affects the fetus.