Monthly Archives: May 2015

Asset Allocation – Part One

I’ve been thinking a lot lately about asset allocation. I know… I’m a wild and crazy guy. This financial independence community agrees on many things including cutting expenses, increasing income, reduction of taxes, and usually on some type of method for accessing capital (i.e. safe withdrawal rate). One thing I’ve noticed is the disparity in the community among the proper asset allocation.

There are many blogs focusing on different methods to achieve financial independence. One size definitely does not fit all. There are paths to financial independence through real estate investing, dividend investing, low cost index funds, etc.

One of the crowd favorites Mr. Money Mustache utilizes real estate and diversified low cost index funds. Dividend Mantra goes the individual dividend growth stock route and recently published a book. Go Curry Cracker and jlcollinsnh keep it simple with low cost index funds.

There are many ways to get to the goal, but no one has the answer of the best way to get there. This is because there is no best way. I have debated with myself over and over again the best way to achieve my goal of achieving financial independence. Do I buy a bunch of diversified dividend growth stocks? Do I buy rental real estate? Do I buy low cost index funds? I won’t lie, those questions played on repeat for a while.

In the past year, I have definitely settled on the low cost index fund method of getting there. The more I keep it simple, the less I have to stress about which is important to me emotionally. I still have some individual stocks that I have picked up over the years. I check my brokerage account daily, sometimes multiple times to see how my little portfolio is doing. If I stress about it that much now, who knows how bad I’d be in 10 years when I’d have a significant chunk of change in individual stocks in my brokerage account. Like I described in my last post, people like Mr. Money Mustache, jlcollinsnh, Rick Ferri, Jack Bogle, etc. have shown me that low cost index funds are definitely the way to go for me personally.

I also would love to add real estate to my assets (physical real estate, not REITs) but my current situation does not lend itself to being the right time to get involved in this investment arena. I’m quite handy and wouldn’t mind having one or two investment properties churning some passive income my way in the future, but not right now.

Are you planning on achieving financial independence through real estate, index funds, or dividend stock investing? How did you decide on your method? Does emotions play a part, in addition to the numbers?

Savings Waterfall

I always joke around with my friends that although I’m 27, on the inside I’m much older. I’ve been hearing about this reddit thing for a while now. One of my previous roommates would always peruse it and giggle to himself, so I thought it was just funny posts and memes. The other day I followed a link on Twitter to reddit. It was a story about a 22 year old who was making $100k a year and couldn’t figure out why he was in debt and living paycheck to paycheck. Of course there were some pretty harsh comments, but for the most part everyone was giving him sound financial advice such as use Mint to track your expenses, trim the fat, pay down the debt, etc. I was quite impressed with the help these complete strangers were giving this guy who bared all to get his financial house in order.

After reading this feed of strangers helping a individual get his financial life in order, I decided to poke around reddit some more… and then I was hooked. My favorite subreddits are obviously r/personalfinance and r/financialindepedence. I highly recommend taking a spin through both of them. While doing so I found that Justin at Root of Good and Mr. Frugalwoods are avid commenters.

What I found great about reddit is that the posts and comments get voted up and down by other users, so by natural selection the “better” posts and comments float to the top of the page.

One of the great takeaways I got from binge reading reddit was this great savings waterfall. I think it is great and an easy introduction to those new to personal finance.
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So I decided to walk through the waterfall and see how I tracked against the recommendation.

  1. Emergency fund – I currently have 3 to 6 months of expenses in a liquid online savings account yielding 0.99% APY. Check!
  2. Contribute to 401k up to company match – My contribution percentage will ensure I max out my 401k in 2015, therefore I definitely get the full employer match. Check again!
  3. Pay down high interest debt – The only debt I currently have is student loan debt at 3%. I’ve paid off all my student loans that were 4% and higher, so I consider this a win as well since I am choosing to milk this lower interest rate and pad my investments.
  4. Max out IRA – I will max out my Roth IRA this year. I kind of broke the path of the waterfall since I contributed to my 401k more than required to get the match before opening an IRA. I did this for two reasons, first my 401k plan through work only charges a $40 annual administrator fee whether you have $1 in it of $1 million, and second the plan is with Vanguard. Most people like to open an IRA before maxing out their 401k for more investment options and cheaper fees, but it was a wash for me.
  5. Max out 401k – Check! This will be the first year I do it though… better late than never!
  6. After-tax savings/investments – I definitely broke this rule of the waterfall. When I turned 18 I started a brokerage account and would buy some individual stocks from time to time up until recently. Now that I have become a self proclaimed Boglehead* I don’t plan on contributing to this account anymore. I will contribute any monies left after maxing out my retirement accounts to my Vanguard account and stick to low fee Vanguard index funds. If jlcollinsnh didn’t convince me before, reddit, Bogleheads, and a podcast interview with Rick Ferri** did. I don’t know if I’ll divest from all my individual stocks, but no new capital will be deployed to them going forward.

Do you enjoy the personal finance and financial independence community on reddit? What do you think of the savings waterfall? Do you follow the steps?

* – A Boglehead is a term intended to honor Vanguard founder and investor advocate John Bogle, and are investing enthusiasts who participate in the Bogleheads Forum.
** – Here is the Masters in Business podcast episode where Barry Ritholtz interviews Boglehead Rick Ferri. I highly recommend it.

Financial Independence Day – September 2026

Our friend Even Steven has convinced me to to dig a little deeper into my financial independence day (“FI day”). In previous posts I had estimated that I would become financially independent by age 40 which would be in year 2028. I had run the numbers quickly in the past and realized that this was probably a conservative and achievable goal. The reason I had not sit down and actually crunched the numbers is because of how many variables could actually affect the outcome. Even the slightest change in my assumptions could throw off my calculation by years. Therefore I did not want to set myself up for disappointment. But then I sat back and thought, why not set a goal and then try to beat it! Below is my calculation, along with explanations of my assumptions.

FI Day

 

 

 

 

 

 

 

 

Rate of return – I used 7% as my annual rate of return on my investments. The S&P 500 has returned approximately 11 to 12 percent annualized for the past 30 years including dividends, but historical returns do not dictate future returns so I went a little more conservative on this. In other financial independence day calculations I’ve seen anywhere from 5 to 9 percent used, so I settled in the middle. I like to keep it simple, stupid – so a large majority of my net worth will be in broad market low-cost index funds (thanks Mr. Bogle).

Spend inflation – I expect my annual expenses to increase with inflation at about 3 percent.

Safe withdrawal rate (“SWR”) – I will use the common 4 percent safe withdrawal rate to calculate when my investments alone can support my spending. For more information on the SWR, I’d start with jlcollinsnh’s stock series.

Assumed savings increase – I think I can add $5k a year to my annual savings which is a combination of raises, bonuses, side income, etc.

Year & Age – Self explanatory… I’m getting old. No longer “just graduated” from college.

Annual Savings – I should be able to save around $40k this year which includes pre-tax 401k, HSA, Roth IRA, student loan debt pay down, and savings to after-tax accounts.

Net Worth at End of Year – The calculation of this column is net worth at end of prior year times 7 percent plus the annual savings.

Annual Spend – I assumed $3k a month for expenses. I spend a little less than that a month right now but I do plan on traveling more in the future, and I currently share living expenses (apartment and utilities) with two roommates which I don’t plan to do for too much longer. This amount just increases with inflation at 3 percent a year in my calculation.

This is definitely a category that can fluctuate greatly going forward as I don’t plan on living and renting in Manhattan forever, especially after financial independence.

FI? – This is a simple calculation to see if 4 percent of my net worth will cover my annual spend.

As you can see by my calculation I project my FI day to occur in 2026 when I am 38 years old. According to my calculation, I’ll actually get there a few months before December 2026, so my FI day goal is officially September 2026. I’m going to do everything in my power to get there before then, but as we know a million different things can occur between today and September 2026, and therefore I’m going to keep an open mind to any of the changes that may come.

I think one of the most important parts to this financial independence journey is staying flexible and being able to adapt to changes. If the S&P 500 drops 10 percent tomorrow, I would not think of it as detrimental to my goal, but a great opportunity! I am currently saving more than I ever have and I would use it as a great buying opportunity. Same goes for if I decide to strike out on my own entrepreneurial endeavor. This new career path may pay less and postpone my FI date, but if it offers me more flexibility and more happiness, then this would also not be a disappointment at all.

Did I miss anything that you have included in your FI day calculations? Does this seem like a good FI day calculation that I can use and update every year? When is your projected FI day?