Grow Your Savings

My daughters have recently gotten into a savings kick. While out hiking with some family friends, we found out that the son was saving towards a dirt bike by socking away any gift money he received. He was also looking around for toys he had either outgrown or no longer played with to sell online. He was up to a couple hundred dollars! As soon as we got back home, old toys started flowing out of the kids' rooms and onto Facebook marketplace. The girls staged the photos, chose their price point, and we listed them. Sure enough, within the hour we had several offers on toys that hadn't seen the light of day for months.

The kids' rooms became a little cleaner. They learned a little something about the free market. And when they finally have enough saved to get that American Girl dress or that new Wellie Wisher, they will have a sense of accomplishment and see that small, disciplined actions add up over time.

As for Julie and I, we've sold old power tools, a washing machine, a dog crate, a dining room table, etc. It gives that item a longer lifespan (delaying its journey to the landfill), and we get a few extra dollars towards a replacement.

Something else that has really helped grow our savings is incremental increases to our savings rate. Both Julie and I take full advantage of our employer's 403b match. After that, each year we have increased our savings by a percentage point or two. Like the proverbial frog in the pot, we just never notice that little bit of money being siphoned out of our paycheck. People tend to expand their lifestyle to fit their income, but we circumnavigate ourselves this way. If we never see the money, we never miss it.

Another way to increase your savings is by picking up a side gig. I do math tutoring on the side and as much as possible try to stick that money in mutual funds. A friend of mine is looking into Doordashing a few hours per week and put that towards her mortgage. Another friend is using Zoom to meet with his clients to provide life insurance. With Uber, Lyft, AirBnB, teleconferencing opportunities, etc., there are ways for you to leverage your skills and time to make progress towards your financial goals.

A little extra saved over a long times becomes a lot. What ways have you found to save a little bit extra?

Investing 102 with Phil Zema

Today's post is written by Dr. Phil Zema, a friend of mine from high school. We spent many long nights around the gaming table, and over the years I have come to appreciate his keen mind and thoughtful analysis. He's been investing with Vanguard since 2014.

Investing can be overwhelming, scary, and confusing. There are legions of ways you can invest, and if you aren’t paying close attention, you’ll never know if the financial advisor or investment platform that promises hefty financial returns is a shark or legitimate. For example, we’ve heard about financial institutions who charge hefty fees to manage your portfolio. Such fees shred whatever you've gained during bull markets. Moreover, scary events such as the financial crisis of 2008 or the current COVID-19 pandemic can lead to long-standing recessions and sudden drastic drops in the stock market. With all the bad things that could happen and given all the uncertainty in the world, isn’t it just better to avoid investing and put one’s money in super-safe savings accounts? In the long run, the answer is likely no, especially if you consider inflation’s impact on your wealth.

There’s a safe, honest, and reliable platform through which one can invest. It’s called Vanguard. Vanguard is focused around mutual funds (more precisely, they are Index mutual funds, but I’ll save this nuance for another post). Mutual funds are sets of certain types of investments. For instance, an S&P 500 mutual fund is basically a stock portfolio of each company in the current S&P 500. Accordingly, if you have money invested in this mutual fund, you own a tiny bit of shares in each of these companies.You will own a piece of Google, Amazon, some pharmaceutical company you’ve never heard of, and 497 other companies. Vanguard has scores of these mutual funds, and each is designed to track various types of investments including both American and international markets, industry types (e.g., energy, healthcare, and technology), bonds, real estate (specifically, REITs), and money markets.

Vanguard has two primary virtues: First, it makes investing incredibly easy. For example, if you just want to start an IRA (and you should want to do this) and plan to retire in 30 years, easy-peasy: go to Vanguard, create an account, and select the retirement fund that you think best suits your needs. Note: Vanguard also creates mutual funds according to when you think you’ll retire. So if you think you’ll retire around 2050, Vanguard has a 2050 retirement plan.

Why does the year matter? Basically, on average you make more money if your money is invested in stocks rather than bonds. However, events like the 2008 recession or the 2020 pandemic happen, which can substantially lower the value of your retirement nest egg. However, if you’re young, you have time to recover. Considering that the stock market increases on average between 6 and 10% (depends on who you ask and if inflation is factored into the equation), in the long-run you’ll likely end up doing quite well yourself. What makes Vanguard awesome is that, as time passes and you slowly move towards retirement, they invest your money in significantly safer bond funds. While bond funds tend to make less money, they are less susceptible to economic downturns. Moreover, by the time you retire, since your investments have paid off, you no longer need the added gains and risks of investing in stock market mutual funds. Thus, a few clicks and your retirement plan is taken care of.

The second advantage of Vanguard is that it is incredibly cheap for investors. Typical financial advisory firms charge anywhere between 1%-2% (maybe even more) of your portfolio’s value. Accordingly, for every $100 your portfolio is worth, your financial advisory firm gets anywhere between $1-$2 per year (and perhaps more--see Jeremy’s last post where he links John Oliver’s take on such firms). The fee for Vanguard’s 2050 lifecycle fund is .16%. Which means you pay $16 for every $10,000 in your portfolio. On the other hand, firms could take anywhere between $100 and $200 of your portfolio.

$100 to $200 may not seem like much, but it adds up over the long haul especially when you consider its toll on the compounding interest you’ll receive from long-term investing. Let’s put this in perspective: Imagine you start investing in an IRA today with $5,000. And let’s suppose you invest $1000 per month for the next 30 years. Let’s also be modest and suppose that, with inflation factored, your mutual fund increases roughly 6% each year (there is a ton of literature about the amount of stock market returns, but I’ll leave this for another time. Many say 8-10%, but I’ll lean more conservatively). The bottom line is that if you go with Vanguard, you’ll keep most of this 6% increase.

However, if you stick with the investment firm , they could take as much as 2% of your portfolio leaving you with around a 4% net gain on your investments. Accordingly, if you go with Vanguard, in 30 years you’ll have $1,003,230.43. Yup, you’ll be a millionaire. If you go with the firm: $701,487.55. This is not to say that all financial advisors are sharks. Some are undoubtedly reasonable, honest, and caring (e.g., those with the fiduciary label). This is just to paint a scenario about what could very well happen to your investment money if either it’s managed by the wrong hands or you’re not paying attention.

You don’t need a degree in business or economics to be a good investor. My gut is that if you just go with Vanguard low cost index funds, in the long-run you’ll likely be just as good as many investors (Warren Buffet is of similar opinion -see page 20, paragraph 6). Ultimately, your money is in good hands with Vanguard, and they are incredibly friendly and helpful to work with. When it comes to investing, Vanguard is da bomb.

Investing 101

More than half of Americans are invested in the stock market in some form or another, whether through a retirement account (IRA, 401k, 403b, etc.) or through individual stocks or mutual funds. For our family, investing was something that we knew we needed to do if we ever want to retire (or be financially independent), but the concept was pretty intimidating.

Thinking tactically, we invested up to our employer's match from year one, earning a 100% return on our investment immediately. If your employer offers a match, you really have to find the money in your budget to take advantage of it. You're getting an immediate raise when you do. The FIRE community calls this "paying yourself first."

How that money is allocated, however, can make a big difference in the long-term value of your portfolio. We have an account manager with our school’s retirement account who has helped us choose our investments based on risk tolerance, income goals, and time left until retirement. Investment into your retirement should be automatic, but the allocations should not be. Ask questions and get educated about the fees associated with your funds. Know what you are getting yourself into. This video from John Oliver is insightful. I am not at all qualified to recommend how you should be saving for retirement, but I can confidently say that you should be doing it if you're not already. Do it.

In addition to our automatic retirement savings, we have also started using credit card cash back to our advantage with this fairly easy two-step process.

1. We have this American Express card. It gives us 6% cash back on streaming services and groceries, two categories that we already spend money in every month. We then pay our balance down to zero every month. Do not get this card unless you can keep it without carrying a balance.

2. Then we redeem our cash back and use it to invest in stocks/mutual funds using Robinhood, an app with zero commissions/fees for trading. In this way, we aren't spending any extra money each month, but we are beginning to develop a little pile of money. I've invested in dividend-paying mutual funds. They're on the conservative side.

If you sign up using the links above, you'll get a pretty decent sign-up bonus from AmEx and a paltry little stock from Robinhood.

This extra pot of "free money" gives me the flexibility to learn about investing without taking money from my family's monthly coffers to learn how to invest without touching our retirement savings (that is OFF LIMITS for me). I have friends that do options trading; that's something that I'm beginning to look into as we have more to work with.

What are some lessons that you have learned over time as you have invested?

Vacationing on a Budget: Beach Edition

The first time I saw the beach, I was 17. I spent my formative years in central Texas and Montana. There was no way that we could get to the beach easily. I finally saw my first beach on a band trip to Florida. The experience of having waves toss me around was thrilling; water stretching to the horizon was stunning. And swimming out to where you can't touch is just a little horrifying. It touches something Lovecraftian in my psyche.

Early in our marriage, Julie’s family hosted our annual beach trips, which was really kind. We didn’t have much in the way of “disposable” income. But once we started vacationing on our own, we had to figure out how to pay for it.

A day trip from Greenville is a lot of driving; it’s about 3 hours each way. However, if you pack your snacks and meals, the only expense you have is gas. Kids get to play in the waves, build sand castles, get burned when you don’t realize that antibiotics somehow negate sunscreen, and have a quintessential beach trip. Total cost for the day: around $100. We’ve done this a couple of times now, and each time we have had a great time. There is something special about packing up in the car in the early morning light and then having your headlights swing into the driveway late that same night, then carrying your kids into bed after they’ve passed out from a long day.

Now that we have a bit more income after teaching for more than a decade (closer to two!), we have upgraded to staying at a house within a few miles of the beach. 

A small property within walking distance to the beach we are going to is $541/night, including taxes and fees. That is simply out of reach. This year we opted to rent a 2-bedroom house that is a 10 minute drive away from the beach. That choice alone saved us over $2000! 

Another place that money usually trickles away (or floods out) is in dining out during vacations. We try to eat in-house most nights, opting for a seafood dinner one night (I’m the only person in the family who likes it anyway). We stock up our cooler with frozen Costco meals, and our meals cost about $8-10 on average. That’s significant savings compared to eating out.

Just for kicks and giggles, we looked the house we are staying at on Zillow. The owners are the real Cash Tacticians! It’s a duplex, and they live on one side and rent out the other side. Conservative estimates put their rental income at about $40k/year. On a $450k property, that should cover their mortgage and pocket them $8k on top of it, easily paying for itself. We are nowhere near having rental properties, but it always amazes me when I see how it works for other people.

We currently save $450/month for a big summer vacation each year. We book our trip using a cash rewards card, then pay it off immediately, scoring a few extra dollars along the way. This year we over-saved and under-spent so that next year, Costa Rica might be possible! Jungles, volcanoes, some of the most diverse ecology, and the Spanish language mean that next summer’s vacation should be amazing!

Don't Be Surprised by Unsurprising Things

One of my favorite board games is Agricola, a complex worker-placement euro game in which you have to build a farm starting with two people and a plot of land. You till fields, build fences, plant crops, raise livestock, and eventually grow to a large estate. I’m sure it’s much more fun on a board than in real life. At the end of the game, the player with the largest and most diverse farm wins. But there’s this one other factor that crops up throughout the course of the game. Every so often you need to have enough food on hand to feed your family. And, without proper planning, it’s really difficult to do. Many novice players either miss this or forget about it, and when it comes up, it’s devastating. They are surprised by something that is not really surprising. Or, at least it’s unsurprising once you’ve had it happen to you once.

A much more succinct example would be this: Don’t be surprised when I, as your Dungeon Master, drop a fireball on your closely clustered party. You should have seen it coming.

In personal finance, there are a few ways to handle what could be (or should be) unsurprising expenses. It all comes down to planning. We budget for short-term expenses, save for long-term expenses, and insure against potential expenses.

Some expenses are certain to be incurred and are possible to predict. They WILL happen, and it’s foolish to be surprised when they come around. Some expenses that fit in this category are annual (like property taxes or your termite plan) and others are monthly (mortgage/rent, utilities, auto insurance, etc). Instead of being surprised when they happen, plan for them and set aside money from each paycheck for them. This process is called budgeting. That has a generally negative connotation, but it’s really just having enough food to feed your family when that phase of the game takes place.

Other expenses are likely to be incurred, and less possible to predict. This would be expenses like your car breaking down, your water heater going out, a speeding ticket, a storm taking a tree down, yada yada yada. Each of these events can cause serious financial stress, in addition to the regular stress that comes along with them. I’ve been on the side of the road waiting for a tow truck that I couldn’t afford, but couldn’t afford not to have either. It’s not a pleasant experience. The way to handle that is to set aside money into a separate account and never touching it. This is called an emergency fund. Several personal finance gurus (Ramsey and Howard Dayton among others) recommend getting a $1k emergency fund saved up as soon as you can, and more as it becomes possible. This will cover you in case of some of these semi-major emergencies. Saving money and keeping it separate from your checking account is just spreading your party out so the Dungeon Master can’t TPK you with a single fireball.

Lastly, there are catastrophic expenses that may or may not be incurred. Your house may burn down. Your car may be involved in a major collision. Your spouse (or you, or both) may die. These are usually too large of an expense to be covered personally. Unless you are vastly wealthy and can self-insure against those expenses, you should purchase insurance. Auto insurance is mandated, as is homeowners if you hold a mortgage. Life insurance is completely optional, but it’s a responsible purchase if you have dependents. For this, I’d recommend a term-life policy with a term that covers the needs of your family until you can either self-insure and/or your dependents are moved out, through college, and on their own. Some people use whole-life insurance as an investment vehicle. There are better ways to invest, for sure.

Of course, there are surprising things that will surprise you. Like, Costco is STILL out of toilet paper. What on Earth is going on? And how can we possibly be pregnant after having unprotected sex?! (We're not actually pregnant, but "surprise" kids always crack me up. We all know how this works.)

I tried coming up with a boardgame equivalent to insurance. No luck. Any ideas? Leave them in the comments. Thanks for reading!