Happy Autumn! We have closed our windows and have started to bundle up at night as the temperatures drop into the 40s and 50s.
We are also making progress on our financial goals.
Mortgage
Our mortgage is 88.1% paid off, up from 61.9% in April. There have been many sacrifices along the way to make that progress but we’d do it again in a heartbeat. At our current pace we should own our home free and clear by the end of the year (well before our 30s). The standard critic’s response to our situation would be that we had rich parents who paid off the house for us. The thought is that there is no way that a couple could live below their means and aggressively save money instead of spending it.
One of the nice things about keeping detailed financial records is that I can go back and look at the numbers and say that 8% of the house was procured using inheritance/gift money. The other 92% was earned and saved by our own sweat and determination. Of that 8%, 0% was explicitly earmarked for house payments, meaning that when we received a lump of money we CHOSE to invest it into our house instead of spending it freely.
Retirement
Our retirement accounts haven’t changed much in value over the last 6 months thanks to a market correction in late August. Our equity heavy portfolio is more volatile than a bond portfolio, but we are not worried about the anemic pace this year. The market value of the portfolio has remained steady solely because we keep pumping money into retirement accounts each paycheck. The important metric is the number of shares owned and that has been growing steadily over the past half year.
Just yesterday, Caterpillar announced that they would be reducing their employee count by 10,000. A couple of months ago, another major employer in our area, Mitsubishi Motors North America, closed a factory with 1200 workers. My heart goes out to these families. For many, I suspect these layoffs will have devastating effects on their lives. The pink slips being handed out are not because they are bad at their jobs, they are the result of global economics, something that the affected worker has no control over. What we do have control over is how we manage and save the money that we have right now.
Growing up, I remember my parents doing one yard sale. They probably did a lot more than one, but only one made an impression. We set up every folding table we had in the yard. Laid boards between them to make extra space and labeled dozens of well-loved trinkets for sale. Bargain hunters trickled through and we sold a tiny portion of what we had set out. Then we had to haul it all back into the house where it sat and sat, and sat, and sat.
Somewhere in my life journey a switch flipped and the thought of clutter became unappealing. I grew up in a three bedroom house with five siblings. Clutter was unavoidable, but now that I have a choice in the matter, I am a clutter phobic. Thankfully, Shae is also a clutter phobic and we actively work to keep our house clutter free.
So what is clutter? My general rule of thumb is that every item must serve some purpose and have been used within the past year. If a box hasn’t been opened in over a year, its contents are clutter. The box itself is clutter. The whole shebang must go.
Last week we were both feeling a strong itch to clean out some of the detritus so I set aside an hour a night to go through a dresser (misc electronics, stationery, etc.) drawer by drawer. Shae went through several boxes in the attic.
I generally make four or five piles as I sort through a box.
Recycling
Give Away
Sell
Trash
Keep
If at all possible, I like the piles to go from largest to smallest in that order.
Recycling and giving away are nice because it diverts material from landfills. At the same time, I make a conscious effort not to bombard family and friends with stuff. Do my nieces and nephews really NEED temporary tattoos or 10 beanie babies. Probably not, that is just making more work for their parents. Some items are valuable but no longer used, I’ll get to that in a second. Finally there is always something that can be thrown away.
In the course of a week, we set aside a number of sellable items with the intention of having an E-Yard Sale. Shippable niche items were listed on eBay, the popular online auction site. Larger general items were listed locally on Craigslist.
On eBay, I sold 2/3 items that I listed. I sold an old graphics card for $59 and a set of RAM modules for $20. A brand new A/C pressure switch for our old Nissan Altima did not sell and was tossed in the trash at the conclusion of the sale.I sold 1/2 items listed on Craigslist. I had picked up a pair of end tables off the curb while walking around our neighborhood. I sold them for $35 to a woman who was ecstatic to get them at that price. The folding tv tray table has not sold yet, but Shae might have found a buyer through a different classifieds website.
All told, I made over $100 by cleaning out some clutter from our house. Shae has made over $40 so far and still has some big ticket items pending. We also have three large boxes of toys, books, and misc crud that we will be donating to charity.
It feels so good to clean out our house. Working through sentimental attachments can be difficult, but donating to charity makes it easier. Isn’t it better to let someone else enjoy an item than to let it sit unseen in a box or drawer for years? Focusing on selling only items worth $10 or more online is also easier than setting up an entire conventional yard sale. You can set up an E-Yard Sale in your underwear!
Our garden is coming along. Everything is planted, but the back row has just started to germinate.
I love how the carrots look like a forest.
The lettuce and spinach has been growing like weeds. This picture was taken a few days ago and it has already doubled in size.
We’ve been eating fresh salad greens almost daily. My birthday was at the end of May and Shae grilled lamb bacon burgers. It was her first time grilling and I think she enjoyed it.
DIY projects have taken center stage again. This time we will be rebuilding our front porch. Here is a before shot.
It is shaping up to be a busy summer. Aren’t they always?
School is almost out for the summer, but you should always be learning new things in life. Today we’ll cover an advanced personal finance topic. It may sound like goobly gook, but the payoff is worth it! So break out the notebook and pay attention.
Roth Conversion Ladders
What if I told you that you could retire earlier or with substantially more money and you didn’t need to earn more or spend less. Does that sound too good to be true? Well, it is true thanks to a little strategy called roth conversion ladder.
What is it?
During your working years that you are saving up for retirement you have three options as to how you can save your money.
The first option is to use a traditional 401k or IRA (individual retirement account). With this type of savings account, your contribution gets to grow tax free. Then when you reach retirement age (59.5) any withdrawals that you make are taxed.
The second option is to use a Roth 401k or IRA. Your contributions are taxed going in and then at retirement age you can withdrawal the principle and interest tax free.
The third option is to invest in a taxable account. Generally the contributions to a taxable account are post tax and any gains (withdrawals) are also taxed. It is kind of the worst of both worlds. The one bonus is that you do not have to wait until retirement age to access the funds.
To sumit up, you can either pay the tax man when you retire, when you earn, or both.
A Roth conversion ladder is a strategy where you use a traditional IRA as your primary savings vehicle and then over time you convert the balance over to a Roth IRA. In doing so, you get the best of both worlds. Your initial contribution is tax free and can grow for many years and your eventual withdrawal is also tax free. The tax man can be removed from the equation and thebest part is that it is perfectly legal!
How does it work?
To start the process, upon retiring any traditional 401k funds will need to be rolled over to an IRA. This is pretty straightforward and according to Vanguard, it involves 3 simple steps that should take you less than 30 minutes.
Now the real fun begins. The IRS allows you to transfer IRA funds to a Roth IRA as long as the transferred money is considered income and taxed as such. Also transferred money is not accessible for a period of five years. Uncle Sam gets his cut during the transfer and is happy. You are also happy because you realize that being a newly retired individual your taxable income is basically whatever you transfer between accounts. You also know that income tax doesn’t kick in until you cross a certain threshold (exemptions + standard or itemized deduction). For example, since we are married and have one dependent we could convert up to $24,600 a year without paying a single penny in taxes.
$12,600 (standard deduction) + $12,000 (three times personal exemption of 4,000)
Obviously when Frugal Boy strikes out on his own, we will lose a dependent, but we would still be able to convert $20,600 a year tax free.
Roth Conversion Ladders are awesome because you get to grow money relatively tax free.
Perhaps the easiest way to understand the strategy is to see an example. Thankfully, Root of Good, has already packaged together some easy to read tables that show how it works.
Root of Good also explains some intricacies nicely, such as how to handle inflation during the five year waiting period, how to best cover the five year gap, and their own personal conversion plan.
Why Bother?
If this sounds like a lot of work or is overly confusing you may be asking yourself why should I bother. JL Collins, an early retirement advocate, crunched the numbers and determined that by using this strategy to minimize taxes, the test case individual could retire two years earlier than just sticking to the conventional script. You don’t have to earn more or spend less, just plan ahead and you can retire sooner!
When should I consider it?
Roth conversion ladders are best suited to those planning on an early retirement. The conversion takes time (the more time you have, the less taxes you’ll have to pay).
In Summary
If you are just starting out and the prospect of early retirement is appealing to you then you should utilize a traditional 401k and/or IRA. Having some money in a taxable account will help you cover the first five years of converting, but your primary goal should be to stuff as much money as possible into the tax advantaged retirement account. Later on in life, you can figure out the specifics of how you are going to access that money in a tax minimal way.
I’ve been periodically checking Comcast’s website for internet service deals and today I found out that they were running one of their better offers.
For those of you just tuning in, I’ve played this game many times (here and here). The last time I wasn’t able to get a very good deal and we were paying $55 a month for 25 Mpbs internet and digital phone. We never used the phone but it was cheaper to have it than to pay for just internet. Yay bundles </sarcasm>.
Anyway, after a frustrating phone call of repeatedly saying “no, I don’t want phone service. no I don’t want cable tv.” I got the new deal for $30/mo for 25 Mbps internet only. This will be good for 12 months, so I am pretty happy that I won’t have to bother with this again for another year.
Putting up with sales agents working on commission is worth saving $300!
