Just what I needed

As if to keep me on track, Mr. Money Mustache reminds me of another reason to hold on to as many dollars as I can. Go read his post on your money working harder than you can if you haven't already and then come back.

Inspiring, right? Sure I might think it's difficult to fight hedonic adaptation and cut a hundred or two dollars from my monthly budget. But no matter how hard it is those dollars will work still harder — if I can hold on to them, that is.

January is coming to a close. This month I tried to not buy anything on most days which I thought was going to be more intrusive. I didn't achieve anything superhuman, but I did pretty well considering I didn't know where to set my goals — more on that later. It seems I wasn't buying things terribly often in the first place. The little nagging voice was a friendly companion this month: "maybe it's a good idea to buy that, but do you want to turn today into a buying day?". I almost never did.

And at the end of it I find MMM giving me a moral justification that holding onto those dollars is perhaps their most valuable use.

It's been a good month.

Emergency fund versus student loan payoff

This morning I was thinking about the tradeoff between building an emergency fund and pre-paying student loans. I'm not the first one to approach this question; the internet is abuzz with different perspectives. The consensus, as best I can tell, is "it depends". There are pros and cons to both approaches. Life is full of tradeoffs after all.

But why am I again considering a change in course, again? This time it's because of external factors. My girlfriend's company is going through a round of layoffs so she's been feeling insecure in her employment situation. I don't think she should worry — it seems they're trying to cut costs by getting rid of people with longer tenure and higher salaries — but honestly you never know. She would feel more comfortable if we had a little more of an emergency fund.

Security is a big benefit of an emergency fund. Of course, you can save money in interest if you take more risk and throw all your extra cash at your debt. Increasing your cash decreases risk, and so does decreasing your debt, but they're not symmetric. Just because I'll be paying less interest on student loans doesn't mean I won't have the mortgage coming due every month. There's also security in having two incomes in a household. Honestly we could keep up our expenses for a few months on just one of our salaries, though we'd cut out pretty much everything if one of us lost our job.

My philosophy is that, in general, you should keep exactly enough cash so that you can sleep at night, and no more. This is when you've got non-mortgage debt that you're working hard to pay off. If your living situation is flexible enough and you're confident you can cut expenses if you hit some financial turbulence, I say keep savings to a minimum and save money on interest.

How is our emergency fund stacking up? Between my girlfriend's savings account and the $1k in our joint savings, we have like three months of mortgage payments that we can count on. And we've been funding the joint savings at around $500/month. Then there's my savings. I made a deal with her that I'll save up $3k and keep it until her employer settles down with all the layoffs. That would be another month for the mortgage, and after she's more confident in her employment I'll be able to turn around and throw it at my loans.

I have somewhere between $1200 and $1700 in savings depending on how much ends up on my credit cards for January. By the end of next month I should have the $3k, the bulk of which I'll probably put in my 401k-loan-prepayment fund. This also means I'll most likely not send in a student loan pre-payment next month. Bummer. But it's worth it if it helps my girlfriend sleep at night.

I have a confession to make: 401k loan

I never claimed that my student loans were all of my debt, but I didn't tell the whole truth either.

When we were buying our house, I had a few thousand dollars saved. I had been working full-time for less than a year after a dismal bout of grad school. In terms of saving rate I think I was doing pretty well though I don't have any numbers for you. My 401k comprised a plurality of my assets at around $8k.

I came up with around $15k for a down payment with my girlfriend covering the rest. To reach that target, though, I really had to scrape. I sold $3k of a mutual fund my mom bought when I was in grade school. I had $1k of stock in a Scottrade account that I liquidated. I had around $6k in cash. The difference came from my 401k.

I did an early disbursement for $900, which was all they let me take out. This was taxed as income but there was no penalty because there's an exemption for first-time home buyers. I'm not sure how I feel about that provision of the US tax code. It seems an unfortunate consequence of the fact that most household savings is in retirement accounts since most Americans suck at saving money. I bet if people couldn't raid their retirement accounts for a down payment, like I did, then a lot fewer people would be buying houses.

I also took out a loan of $4200 against my 401k. This was a very interesting option. I hear every 401k is different so I don't think this is available everywhere. The way it works for me is as follows: I can have one loan out at a time, for an amount up to half of the vested value of my 401k. When the loan gets dispersed, my funds are liquidated and then replaced with this "loan" investment vehicle that becomes part of my portfolio. Essentially I wind up paying myself the principal plus an interest rate of like 4% or so. Yes, I am paying myself the interest. The repayments come out of my paycheck, I believe out of post-tax dollars. My repayments are $38.91 twice monthly for an original term of five years, the maximum allowed. One more up-side is that this doesn't show up as debt to anyone checking my credit so it doesn't affect my credit score.

There are a number of downsides. First is that it's debt just like any other. It's easier to forget that I have it since it doesn't show up in Mint, or pretty much anywhere. Stealth debt, if you will. While it's cool that I'm paying myself the interest, that also means that I'm not getting appreciation from the market. That can work both ways, though. I think this year has been rather crappy for my funds, so the overall value of my 401k account has stayed pretty flat because of the almost zero volatility of the loan. They also charge a $50 fee to give you the loan (that's where they get ya), along with a yearly $50 fee. And if I quit or am fired, I'd need to pay back the loan immediately or else be subject to income taxes and the 10% early withdrawal penalty.

Read those terms and decide what you think about this "loan" product. Honestly, as debt goes, I think this is one of the more benign versions, albeit a type of debt with a large number of rules and caveats. It feels like making a deal with the devil except you get your soul back afterward and you're pretty sure he's not going to be too much of a dick about it.

Out of the $4200 of the original loan amount, I still have $3660 to pay back. This is the main reason I made a smaller pre-payment than I would have liked for January. I took $700 out of my savings to start a 401k Loan Pre Payment Fund. I'd like to fund this concurrently with paying off my student loans, depending on the progress I'm making toward my end-2013 student loan payoff goal. I'd like to vanquish it some time this year but I'm not willing to commit to it as a formal goal just yet.

I'm not sure that a 401k loan, if its terms are favorable and its use is noble and Mustachian, is unMustachian except inasmuch as debt is unMustachian. That said, it's best to avoid playing with fire if one can help it.

Student loan status - January 2012

It's that time of the month again when I look over my student loans, assess my progress, and send in some extra money to pay them off early.

This month I've seen my bank account slowly accumulating more and more dollars, on account of not buying so many things. My frugality muscle exercise routine is kicking in. Even so, I've decided to be a little more conservative in my pre-payments this month. I decided it's important that I have a bit of an emergency fund (see also a cautionary tale from mortgagefreeby30). My plan is to gradually fund a savings account while I stay as aggressive as I can with my student loan pre-payments. Once the dust settles from a few bank transfers and credit card shuffling, and I see where I'm at, I'll be in a better position to send in a bigger chunk of money next month.

Let's see what those balances are at:

• Direct Loans (US Dept of Ed): $25,879.91
• Sallie Mae (total): $3,900.32
• Current Principal Balance: $3,885.03
• Accrued Interest: $15.29
• TOTAL: $29,780.23

That compares nicely to last month's total of $31,825.54, a net reduction of $2,045.31. Not too shabby.

My plan is still to pay off the Sallie Mae loan with all due haste, but earlier this month I decided to add a caveat. Since both loans are at the same interest rate it's pretty much irrelevant which one I pay off first, from a how-much-interest-I'll-wind-up-paying standpoint. But for some reason it makes me feel a lot better seeing portions of my payments going toward principal rather than interest.

Take a look at my recent payments to my DoE loan to see what I mean:

It's irrational, but interest-only payments bother me.

As you can see, the amount applied to principal and to interest can vary widely. It was either an oversight on my part, or something to do with a payment mix-up, that caused me to miss my 12/07/2011 payment. The payment I made on 12/27/2011 mostly covered it, but those extra 20 days of interest meant I had an interest-only month in December. That makes me feel bad.

The way I see it, accrued interest gets in the way of my ability to chip away at principal. Even though I decided to retire my little loan first, I'll still feel a lot better if I can keep making payment toward principal on my big one.

I've decided to make a $900 payment toward Sallie Mae, and put another $200 toward DoE. This is a little less than the average monthly amount I'll need to vanquish all my student loan debt by the end of 2013. Hmm, come to think of it, I don't have that number handy. By my simple calculations, ignoring interest that accrues, I'll need to average payments of $1240/month to meet my student-loan-payoff goal. $1100 this month isn't bad after all, but I know I can do better next month.

This student loan payoff goal is fun. Vanquishing debt is almost as addictive as racking up new debt, and a whole lot less nerve wracking.

Book review: Millionaire By Thirty

I've been reading a lot since I got my trusty library card (which was such an awesome idea by the way). Unrelatedly, I'm a guy who has strong opinions. The other day I found myself angry at what I was reading.  I found myself barking, out loud, "You're not guaranteed an 8% rate of return, dummies!" It got intense. I had to put the book down and walk away for awhile to cool off. It was then I knew I'd have to share my thoughts.

This begins what I hope will be a series of book reviews. Let's get started with the book that got me so mad. It's called Millionaire By Thirty: The Quickest Path To Early Financial Independence.

Millionaire By Thirty? More like: Potentially Lose Your Shirt In The Next Housing Bubble

I was hopeful when I picked up the book. Look! it has "financial independence" in the title! I like financial independence! But I immediately became skeptical.

Here, see what you think. This is from the first page of content, the author's note:

This book is not like other personal finance books out there:

• It does not instruct you to cut up your credit cards in a race to be debt-free. Why? Because being totally debt-free can actually cost you money. 

•  It does not encourage you to send in extra principal payments against your mortgage. Why? Because your mortgage can be one of your biggest friends in achieving wealth. 

•  It does not discourage you by suggesting ideas like socking away the cost of a latte a day for forty years to become a millionaire. Why? Because there are much better ways to speed along the path to financial freedom.

Are you skeptical yet? As you can see the book starts off anti-Mustachian, and it just keeps heading in that direction.

The first few chapters are alright. "Mapping Your Future", "The Millionaire Mindset", "Pay Yourself First". Kind of wishy-washy to me, kind of repetitive. The anecdotes feel contrived. For example, chapter one begins: "Do you feel like you're in a fog when it comes to your finances?". The next paragraph is about a time the authors visited San Francisco and it was foggy. Hooray for metaphors!

But nothing bad yet. I was still with them when they recommended buying a home instead of renting. Sometimes you can find house where the mortgage is about what you'd pay in rent, then part of the payment you're paying yourself and the other part is tax-deductible. That sounds good to me. But I'll admit, it's riskier than renting. The authors don't mention that. They also recommend making the smallest possible down payment. Why? Because you can get a higher return on that money elsewhere. "Equity has no rate of return" they tell you. Isn't making pre-payments on your mortgage like making an investment with a guaranteed rate equal to your mortgage rate? No, they say, it earns you zero (I should point out that they are wrong).

Chapter 7 is titled "Real Estate Equals Real Wealth". It's about how every few years (because housing prices always always always go up, right?), you should refinance your home, take out a bigger mortgage, and invest the difference. The sometimes-implicit sometimes-explicit assumption, in order for this strategy to work, is that you can earn a guaranteed rate of return of at least your mortgage rate. This is a big assumption! There are no such investment opportunities that are liquid, safe, with a high rate of return, as they claim.

They also really really don't like paying taxes, so much so that anything that's tax deductible is awesome. Here's the way I see it though: just because mortgage interest is tax deductible doesn't mean I'm not still throwing money away on interest. You're just throwing away less money in interest. For example, a mortgage at 4.5%, when you're at a marginal federal income tax rate of 25%, is like paying an interest rate of 3.375%. Pretty good, but it's not like they're giving you money. You're still paying interest of 3.375%.

They talk about how banks arbitrage by borrowing at low rates and lending at higher rates to make a profit, and that you can do this too. But they neglect to mention that this is risky business! Banks are operated by professionals, and even professionals can get it wrong (see, for example, the 2008 subprime meltdown). Seriously, if you do a cash-out refinance to pay 5% on your mortgage, and invest the money in the stock market expecting a consistent 8% return, you are fooling yourself and you're going to lose your shirt one way or another. Not to mention that most of the lending banks do is making mortgages to homeowners like you. You expect to turn around and get a better rate of return elsewhere? Ugh. Dummy.

I'm not going to go through some of the other points they make because it isn't worth it. If you do read this book, read it as a cautionary tale of what not to do, and use it as an exercise to debunk personal finance fallacies.

Ironically, the first edition of "Millionaire By Thirty" went to press in April of 2008. At this time housing prices were dropping (see above chart) and the worst was yet to come. The authors could scarcely have been more wrong in their advice.

One last thing I'll leave you with. I briefly mentioned in an earlier post the guy we bought our house from. He had over a dozen houses in the area, and purchased them in the early 2000s. We bought our house at a lower price than comparable houses partly because it wasn't renovated and partly because he had to get rid of it because he didn't have renters and he couldn't make the payments. In fact, in our cluster, the two lowest sale prices of the past two years have been from this same guy, and the other one was a foreclosure. Judging from the HUD-1 form from our settlement, and seeing that the guy owed about $70k more than he bought it for (and thus got zero dollars from selling the house), I'd venture to say he did exactly what the authors of "Millionaire By Thirty" recommended. Word on the grapevine is that he was going bankrupt.

Pretty bad advice if you're trying to come out ahead.

Cruises are not Mustachian

Last week I went on my first-ever cruise along with my girlfriend and her family. Her dad likes to put together whole-family vacations every few years. It was a nice trip to the western Caribbean. And it was good to get away — it was my first real vacation since I started working full-time.

It was not a Mustachian experience, however. I believe MMM alluded to this fact in a post: his was "Educational for one trip, but far too cheesy and commercial so we will not be repeating." A lot of things are included in the price of the rooms (which my girlfriend's dad very generously paid for), like food and the pool and even a library … and I can't think of other gratis amenities.

They are very good at getting money out of you on a cruise. Alcohol costs money, and so does soda (but not iced tea). Myriad shopping opportunities, all duty-free. There were bingo games and a casino. On shore of course there was shopping, and you paid for excursions (like swimming with dolphins and hiking and other activities organized by cruise management).

How did we fare, having been exposed to all these temptations to spend? I'd say pretty well, all things considered. The first caveat is that for Christmas, my girlfriend and I got (a very generous) $1k from her dad, specifically to spend on the cruise, so that we wouldn't worry about money while on vacation. So I didn't get too stressed out about trying to be frugal.

My big purchase was a massive quantity of duty-free alcohol. I was planning on gradually stocking my liquor cabinet over the next few months, as I could justify the expense, and so the benefits are two-fold: being tax and duty-free the overall cost was like 40% less; and since we were given money to spend anyway, the alcohol wouldn't affect my bottom line. Not to mention this way my attempted frugality doesn't look suspicious. If I'm given a big wad of money that I "need" to spend, I'm going to spend it in the least wasteful way possible. All told we spent $250 on liquor and now I won't have to restock for probably two years. I consider that a victory.

I also spent like $7 on little souvenirs, and a combined total of around $50 on drinks. This included rounds for her family too, which I consider a good use of money. She gambled a bit with her family — they like to play blackjack — which makes me nervous every time I watch so I went back to the room after a little while. But she stopped when she was $150 ahead, so I'm not complaining.

All told, and including shopping that she did while on land, we spent less than $700. The extra part of the $1k we agreed will go in the joint fund. I feel pretty good about how the vacation turned out from a fiscal perspective. It was hardly Mustachian, but I feel I made the best of what could have been an excessively spendy situation.

Frugality muscle exercise routine: mid-January update

Whew. I'm back from our cruise vacation. It was my first time on a cruise and I now believe that cruise vacations are mostly if not completely anti-Mustachian. But that is a topic for later. Today's post is about the frugality muscle exercise routine I laid out for January.

Here's my status, with special thanks to Microsoft Paint:

Fancy, I know.

Red X's are days when I purchased something. Green check marks are days when I didn't purchase anything. And blue X's are days I was on vacation. I'm counting cruise days, and the travel thereto and therefrom, as a subclass of spending days. I wasn't sure how I would count them until I experienced first-hand the sheer magnitude of the consumerism. Believe me when I say I put forth a valiant effort in frugality.

Thursday the 5th we made a last-minute trip to the store for toiletries for vacation. Monday the 16th we went grocery shopping to restock. And the rest of the days, as you can see, I was purchase-free.

That isn't to say I wasn't tempted. This afternoon at work was a perfect example. Some co-workers were planning to walk to a nearby lunch shop where the Wednesday special is a spicy pork bulgogi that I've been interested in trying for the better part of two months. I was tempted. In the end it wasn't even that I couldn't justify the expense. I couldn't justify another day this month where I spent money on something I didn't absolutely need.

I'm feeling pretty good about how this month is coming along. I'm spending-free on 6 out of 18 days, or 6 out of 8 days, or somewhere in between. My gas tank is about half full and with luck I can get through the rest of the month only filling up once. We've got another two grocery trips this month scheduled, one of which can double as my gas purchase day. I'm aiming at two or three more purchase days this month, hopefully no more than four.

Growing a money mustache takes a while

It's been a little over two months since I decided to adopt the philosophy espoused by Mr. Money Mustache. In that amount of time, the initial shininess has worn off and I feel like I'm beginning to settle in for the long haul.

At first I was really excited. Here is a guy offering an answer to the 9-to-5 for 40 years existence otherwise in front of me. Change your life for the better, even — man up and spend time on the things you should be doing anyway. Like try improving yourself or learning how to replace a toilet tank gasket instead of eating potato chips on the couch watching Keeping Up with the Kardashians.

The first few changes are easy. Making a preliminary budget and getting a library card, for example. I found I could score big savings by cutting back on groceries and bringing lunch to work every day. But sweeping changes to one's consumption are tough. I don't know how much of it is willpower versus changing one's self-image, but I definitely feel a struggle in reducing how much I consume.

It's a good, righteous struggle. I feel my life starting to have purpose again, a feeling I took for granted until graduate school beat it out of me. I know (generally) where I want to be in ten to twenty years, and I know (again, generally) how I'm going to get there. But now comes the really tough part, and that's the follow-through.

By follow-through I don't mean how difficult it is to deny oneself their daily latte or equivalent. I mean, time is slow, I only receive a paycheck so quickly, and I can't spend all month checking Mint to see my 'stash creeping toward that savings goal.

Don't get me wrong. I still have a ton of work to do. You've seen my monthly budget. There are hundreds of dollars of fat I need to trim. There are habits I need to establish and skills I need to learn and material possessions I need to purge. But those aren't the only things I'll be doing month-in and month-out for the next decade. I'm starting to see the reason MMM suggests profitable leisure time — your time has to be filled with something. Best to make it count.

Mustachianism isn't some get-rich-quick scheme. The path toward Mustachianism entails real, meaningful change. I feel like this is one of the most important goals I've set out for myself. And, like most things worth doing, this is going to take a while.

Frugality muscle exercise routine

Like I said yesterday, I'm disappointed by my December spending. Not to fret, I've got a goal that should put me back on the path toward Mustachianism, and train my frugality muscle to boot.

GOAL: Make purchases on as few days as possible during the month of January.

This goal is only partially about buying fewer things. It's also about rationing out and deferring purchases as long as possible. By aiming at making purchases on as few days as possible, I'm penalizing myself more for impulsiveness than for buying qua buying.

There are 31 days in January. My girlfriend and I are going on a cruise with her family for 10 days, during which time I'm going to keep track of what days I buy things but I'm not going to restrict myself more than normal. I didn't buy anything yesterday, nor today, though today isn't over yet.

So there are 19 days unaccounted for. I plan on filling up on gas twice this month. Ideally, I can defer any and all purchases so they happen on those days — or, better yet, not at all. That said, I'll probably consider three or four days of spending a victory.

Ever vigilant.

December 2011 post mortem

Basically, two steps forward and one step back.

I spent a lot in December. This started off with Christmas gifts and some home purchases and went south from there.

• December spending
• Total - $7788
• Total without student loan prepayment - $5788
• Mortgage - $2805
• Home purchases - $532
• Student loans - $2270
• Groceries - $391
• Restaurants - $240
• Alcohol - $73
• Bills / utilities - $407
• Car - $313
• Shopping - $424
• Gym membership - $229
• World of Warcraft subscription - $80
• Movies - $24

Analysis

Home purchases were the Nest, a new electric toothbrush, and a trip to Costco. I think the electric toothbrush was worth it. My girlfriend was using her old one for like five years. Rather than spend a ridiculous amount of money to buy new toothbrush heads for an old toothbrush, I decided to make the upgrade.

Student loans included my usual payment of $270, but I also made a $2000 prepayment on my Sallie Mae loan. This was basically the size of my year-end bonus, so I still have some cash to make another sizable prepayment in the new year.

Groceries are were a little high but otherwise in line with my expectations. I think we can do a lot better on groceries going forward. We had a lot of leftovers this month and built up our pantries substantially. I'm looking to reduce trips to the store in January. That should positively impact our bottom line.

As I mentioned in a previous post, I consider a restaurant budget of ~$200 to be in my best interest in the near term. This month it was mostly because of a fancy New Years Eve date that was very enjoyable. I included alcohol as a separate item this month. The $73 was spent on wine to bring to holiday parties, restocking my wine cabinet, and getting different flavored schnapps for mixing drinks at home.

Utilities were $119 for water, $95 for FiOS, $108 for electric, and $85 for gas. Water is a quarterly bill. We lowered our FiOS bill after the statement was issued, so our next bill will include a pro-rated credit. I'd like to see the Nest reduce our gas bill below $80 for the next few months, but that's just guesswork and wishful thinking for now.

I had to fill up my gas tank like four times this month on account of making multiple trips to NJ for the holidays. This is much more than I like spending on gas. Fortunately the holidays are over and I'm going to keep out-of-state car trips to a minimum in Q1 2012.

Oh shopping. This is a combination of Christmas gifts, discounted gift cards, and trips to the store for other holiday shopping. I'm not proud of this line item. It's what got me serious about coming up with a frugality muscle exercise routine for January — the topic of tomorrow's post.

Gym membership was a huge mistake, and the topic of a future post. In December we made our final monthly payment, so this is off our budget going forward.

Last is entertainment. I used to play World of Warcraft all the time, and I decided it's a good medium-term habit in terms of cost efficiency, so I signed up for 6 months. I'll reevaluate later to see if it's an expense I want to cut. Movies were three redbox rentals, Netflix streaming subscription, and a trip to the movie theater — only $11 since I had a coupon for a free ticket.

Findings


This was not a good month for Mustachianism. I feel like I took my eye off the ball. I mean, the numbers speak for themselves. I spent entirely too much this month. There's reason to believe a lot of the spending was transient, but that's not an excuse. Here is a small consolation: I still spent below my May-October average.

All I can do is try to improve next month. I'm glad to take the time to reflect, and to get myself back on course.

Happy new year everyone.