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Indulging in life, financially responsible

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Instilling a Saver’s Mentality on Kids: Then and Now

December 5, 2016 by Andrew Leave a Comment

Shae and I hosted Thanksgiving this year and my parents handed me an envelope filled with banking receipts covering years of my childhood.  It could have just as easily been shredded, but since I have it, I might as well delve in and examine some of the financial going ons of my childhood.  I have vague recollections of particular financial events, such as diligently depositing birthday and Christmas gift money, but now I have the receipts to piece it all together.

Then

It all started when I was 3 months old.  My parents opened up my first bank account.  Gee, thanks Mom and Dad.  Back in the olden days, there was no online banking.  So I had a Savings Register to record transactions in.

87-register

Opening up the register, you can see the first deposit, and subsequently, how old I am.

87-register-inside

That $310.00 adjusted for inflation would be equivalent to $660 in 2016.  Thanks Grandparents, uncles, aunts, and family friends for pitching in for my financial future.

Over the years, the balance steadily grew.  I particularly like the 4th or 5th grade me that deposited $25 of ‘prize money’ in 1998.

87-register-inside-2

I have no memory of what contest I won back then, but an interesting thing begins to happen around that time period.  The handwriting changes, and some of the entries are being made by a little boy.

Around junior high school, middle school, or whatever you call 6th, 7th, and 8th grades, I had saved up enough money, at my parents behest, to start meeting the minimum requirements of Certificates of Deposits, or CDs for short.  I do remember my Dad always shopping around the 4 or 5 banks in town looking for the best CD rates.  I also remember him on a trip up to Grandma Schenk’s house once bemoaning the fact that she did not shop around rates and was leaving money on the table by being loyal to the same bank forever.

Anyway, in ’00, there is a receipt of a CD being closed.

00-cd-close

At age 13, the saver mentality had been thoroughly beaten into my head by my parents and I had approximately $3,000 to my name, the bulk of which was tied up in a CD.

Birthday’s and Christmas’s kept rolling by year after year, and year after year I would write a fistful of thank you notes to grandparents, uncles, and aunts before dutifully marching down to the local bank and depositing checks and cash.  At some point my Dad made me go alone and stopped helping me fill out the deposit slips.  Of course I was terrified, but it was a good sink or swim lesson.

02-bday

My Dad kept optimizing the best savings rates for me and kept the bulk of my savings locked up in CDs.

02-open-cd

This particular CD was kept open for 2 years before being closed.  The grand total of interest earned over that two years was $231.47.

05-cd-close

In 2004, I began working and earning money for myself.  The pay was negligible, but the real payoff was learning the value of a dollar.  Performing a mind numbingly boring task for hours on end to collect a small paycheck gives one plenty of time to think.  Suddenly, that new flashy item being marketed to you seems a little less interesting when you replace the dollar cost with an hour cost.  Something that costs $50, is the same as something that costs almost 10 hours of work for someone on Indiana’s minimum wage of $5.15/hr.  Yes, that was what I started at.  Spending several hundred of my own dollars to take a girl to high school prom did not seem like a balanced equation.  A couple of hours of fun was not worth the 50 hours of work required.

Finally in ’06 as a senior in high school, I opened up my first solo bank account.  I was now 100% in charge or my own finances.  The rest as they say is history.

Now

Now the tables have turned.  I am in the role of Dad, and Frugal Boy and Frugal Fetus are in the role of child.  Just like my parents handled all the finances when I was born and slowly relegated duties to me over the years, Shae and I are doing the same with our children.  Frugal Fetus doesn’t know it, but he/she already has a college savings plan opened up and partially funded.  In fact, since it was opened in July, it has returned 6.83% APY. Frugal Boy’s 529 college savings plan has returned 8.95% APY for the year-to-date.  On a more concrete level, any cash that Frugal Boy receives he diligently stores in his doggy bank at his parents behest.  Any checks are invested into his college savings.  Amusingly enough, Frugal Boy already recognizes and calls out the different bank branches as we travel through town.  I think he is almost ready to graduate to his first real bank account.  We will probably open a PNC ‘S’ is for Savings account for him.  It has 0 fees for age 18 and under account holders and uses Sesame Street characters to encourage kids to save.

IMG_9200

There are a number of savings programs available for kids.  Here is a roundup of some of the more popular ones.

Posted in: Finance, Parenting Tagged: Banking, investing

Diversification – Buying an Apartment Building

October 20, 2016 by Andrew 2 Comments

Shae and I have kicked around the idea of buying investment real estate for several years.  Today, we finally pulled the trigger.  In all truthfulness, the moment came several months ago when we submitted a bid on an apartment building.  It has just taken until today to finalize all of the legalese.  Buying real estate isn’t for the faint of heart!

So what is so special about real estate as an investment tool.  In one simple word, ‘leverage’.  Putting someone else’s money to work for yourself is relatively easy in the world of real estate.  Mortgages are advertised by virtually every bank, credit union, and even insurance salesmen!  Right now, we are living in an almost unprecedented environment of cheap borrowing.  The prime mortgage rate for a 30 year fixed rate loan is hovering around 3.5%.  In fact, that is the rate we secured.  I remember when I was a kid and you could have a savings account earn more than that.

With money so cheap to borrow and smart people expecting stock market returns going forward to range from 6-8%, it makes sense to seek diversification away from equities and bonds.  One extremely popular and well established method of doing just that is owning investment properties.

We have talked together for years about what type of property we would want, why that would best achieve our goals, and how we would want to operate it.  For us, residential housing, aka apartments, with a buy and hold strategy was a natural fit.  Earlier this year, we got serious again about getting out of the armchair and into the field.  We ran numbers on dozens of different properties for sale.  I adapted a simple back-of-the-napkin model from BiggerPockets.com and used that to get a better idea of how different properties sized up to one another.  Eventually, we started to get a feel for our local market.  There were some abysmal numbers out there, a lot of mediocre ones, and some that seemed too good to be true.  We started calling realtors and visiting places in person.  Sometimes the numbers lined up with what we saw in person.  For example, one place had an amazing rate of return on paper, but in person it was obvious that it was a high turnover, hard to collect rent type of place.  When the tenants have smashed holes in the drywall, you run the other way as fast as your legs can carry you!

Eventually, we spotted an attractive looking quadplex that ticked off all our checkboxes.  It had a simple geometry, was purpose built for apartments, good neighborhood, and was taken care of by a respectable owner.  The ask price was 170k.  We offered 151k.  Other buyers put in bids, counteroffers ensued, and we eventually won with an offer of 156k.  Below you can see our napkin investment math.

4-plex

Monthly Rent through Total Expenses are on a monthly basis.  The CAP RATE, or capitalization rate, would be the investments rate of return.  Leverage is what makes the work worth it though.  CASH-on-CASH is the rate of return that we are forecasting for the profit, cashflow/year divided by the cash to close.  In essence, we made an investment of 45k dollars and expect to make 6k a year in profit.  Of course, only time will tell how well it actually performs, but at some point you just have to jump in and start swimming.  The other huge benefit of real estate is depreciation, but I’ll get into that closer to tax season.

Posted in: Business, Finance Tagged: Banking, Budget, investing, mortgage

Frugal Book Club #6 – The Bogleheads’ Guide to Investing

February 8, 2015 by Andrew Leave a Comment

A Boglehead

If I had to recommend just one book about investing, I would recommend The Bogleheads’ Guide to Investing.  It presents information in a very easy to digest format and the authors cover many different subjects that are relevant to all stages of life, from what to do with that first paycheck, all the way to how to plan an estate.

I was able to skim through the book in a single night, mostly because I am already familiar with the Boglehead approach to investing.  Hint, it is the same one advocated by Vanguard.

So if you haven’t jumped into the investment pool yet because of fears or apprehension, then this is the book for you.  If you are already swimming in the waters and want a refresher, this is also the book for you.

Posted in: Reading Tagged: book, investing, library, reading, vanguard

Calculating 529 Performance

January 9, 2015 by Andrew Leave a Comment

With the first year of 529 contributions under our belt, it was high time to take a look back and see how they did.  The first thing I did was log into the online account and see the rate of return posted in big bold letters.

3.4%

Wow, that is terrible, especially considering that the fund we invested in returned a healthy 9.9% in 2014.  Obviously something else is going on and you may have already guessed it.

That’s right, we didn’t invest everything on January 1st, instead we made contributions throughout the year.  By giving Frugal Boy a big Christmas present/contribution, it effectively killed our rate of return because of the sudden influx of fresh cash that diluted previous gains.  To properly calculate your return, weighted for irregular contributions, you will need to open up Microsoft Excel and use the XIRR function.

Here’s how to use the XIRR function.

In column A, enter positive contributions and negative withdrawals (or fees).  In column B, use the Date function to enter in the date of that contribution.  At the end of each column, enter the ending balance and date.  Multiply your ending balance by (-1).  So a positive ending balance would be displayed as negative (it’s just how the XIRR function works).

Finally, use XIRR(colA, colB, guess) where guess is your expected percentage return (e.g. 8%).

Here is an example:

RR-4b

Properly weighted, Frugal Boy’s 529 had a rate of return of 10.33%.  Not too shabby 😀

IMG_5318

Like our taxable investment account, we selected a low cost indexed fund that consists of:

  • 70% VIIIX – Vanguard Institutional Index Fund
  • 20% VDMIX – Vanguard Developed Markets Index Fund
  • 10% VEXMX – Vanguard Extended Market Index Fund

The heavy equity exposure and associated risk seems appropriate for his age.

Posted in: Finance, Frugal Boy, Parenting Tagged: 529, investing

Lazy One Fund Investing

January 8, 2015 by Andrew Leave a Comment

Today we simplified our investments.  You may remember that we were contemplating making this move a while back (see here), but due to capital gains and taxes we had to wait until 2015 to avoid getting hit with a big tax bill.

Recap

We have condensed our portfolio from 6 mutual funds and an individual stock to a single mutual fund, Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX).  This switch will give us broader diversification, VTSAX holds every publicly traded stock in America, and it lowers our expense ratio.  The new lower expense ratio of 0.05% means that if you hold $10k for a year, Vanguard only skims off $5 to keep the lights on over in Valley Forge (their headquarters).  Can you imagine walking up to a stock broker and saying “Hey buddy, I’ll give you $5 to invest my money in every company in the United States”.

Investing Made Simple

We’re not trailblazers by any means.  You can read more about this strategy in more depth on other blogs.

  • ThirftyGal’s Money Strategy (Nice simple explanation)
  • Budgets Are Sexy
  • JLCollinsNH

I love the simplicity of the whole deal.  Set up an automatic monthly investment and walk away.  There is zero mental load associated with this plan.  In fact, the less you think about it and worry about the market ups and downs the better.  Fidgeting around with it is the biggest risk of losing money.  So if you have 20+ years to kill time with and want to be set for retirement, consider setting up a lazy one fund portfolio.

Posted in: Finance Tagged: Index Fund, investing, Taxes, vanguard
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