2million - My Journey to Financial Freedom

A Personal Finance Blog      ANNOUNCEMENT:2million has moved to www.2millionblog.com.     

Friday, December 30, 2005

Free Premium Entertainment Coupons

As you may know one of the ways I reduce my dining expenses is using the Entertainment book, although I wait until later in the year to buy an Entertainment book after they have been discounted. However I just found this web site that gives you access to many of the premium coupons found in the Entertainment book.

Go to this SBC web site and sign up for a free account to access these coupons (no information other than email address required, apparently there no need to be an SBC customer either). It will allow you to print off 4 premium coupons a month.

These coupons will help hold me over until the Entertainment book goes on sale!

Thanks to slickdeals for the find.

Tuesday, December 27, 2005

The Best Time of the Year to Buy!

Being as frugal as I am, I typically don't buy things that are aren't an immediate necessity. Any purchase I can put off or convince myself I don't need right away (even when I think I find it at a good price) usually helps me keep my expenses down. Delaying purchases helps me avoid unnecessary or impulse buying which helps boost my savings rates that help me reach my annual net worth goals.

However, this is the time of the year I loosen my grip on my wallet. After the holidays almost everything is on clearance and great buys are plentiful. Since Monday I have bought:
-remaining holiday gifts (last of the gifts I needed which were 50% off the pre-Christmas prices)
-home items including a crystal vase (not something I desperately needed, but was less than 1/2 the price at Macys )
-cordless drill and other hand tools/accessories (great buy at an outlet store)
-gas powered pressure washer (had a 10% off coupon)

Why now?
-Most importantly, I have reached my annual target net worth for 2005 and psychologically I think its important to reward myself. Its time to celebrate the hard work throughout the year.
-The tax year is almost over, now is the last chance to buy things for additional write-offs in this tax year.
-After the holidays almost everything is on clearance - one of the best times of the year for the frugal shopper such as myself.

I have only got a couple more days till the new year so I need to make the most of it. Then its time to buckle down for another year of rigorous savings towards my 2006 net worth goal. Happy New Year!

Wednesday, December 21, 2005

Brainstorm - Buying Real Estate in Your Hometown

I have been kicking this half-baked idea around for awhile.

As I suspect is the case with many you, I no longer live in my hometown. I live a few hours away and go visit my family and friends in my hometown several times a year.

I am always interested in finding real estate investment opportunities. Unfortunately, these days it seems nearly impossible to find a real estate investment that has an acceptable rate of return.

I have often wondered (usually during the trips to my hometown and back) if I could couple these trips with an investment in real estate to enhance my total return to an acceptable level.

For example, if I owned a rental property in my hometown, I believe any travel expenses to and from my hometown (with the primary purpose of working on the rental property) would be deductible from my rental income. My understanding is these expenses include transportation including airfare or car mileage (40.5cents/mi), lodging, and meals.

Lets say I head to my hometown an average of 8 times a year to primarily work on my rental property and spend $100 during each trip (lodging would be free because I would stay with family/friends).

 

Miles

Mileage Rate

Food

Amt. Deductible

1 trip

400

$ 0.405

$ 100.00

$ 262.00

4 trips

1600

$ 0.405

$ 400.00

$ 1,048.00

8 trips

3200

$ 0.405

$ 800.00

$ 2,096.00



Assuming a 25% federal tax rate and 8% state income tax rate then this would in effect be a $2096.00 x 0.33 = $691.69 or ~ $700 tax credit.

Now what if your hometown was on the other side of the US. Expenses to travel to a rental property would be even more significant in this case from larger airfare and rental car expenses.
Airfare estimated @ $300 r/t
Rental car estimated @ $180/trip


 

Airfare

Rental Car

Food

Amt. Deductible

1 trip

$ 300.00

$ 180.00

$ 100.00

$ 580.00

4 trips

$1,200.00

$ 720.00

$ 400.00

$ 2,320.00

8 trips

$2,400.00

$ 1,440.00

$ 800.00

$ 4,640.00



Assuming a 25% federal tax rate and 8% state income tax rate then this would in effect be a $4640.00 x 0.33 = $1531.20 tax credit.

Nothing earth shattering, but with proper planning it may be a handy twist to help maximize possible investment returns from a rental. This day in age, with high real estate prices, this edge may help you find real estate that meets your investment return. In my scenario, I could find a real estate investment that was roughly $700/yr less profitable in my hometown and still find that is has an acceptable rate of return.

Monday, December 19, 2005

Patience Paying off, Pfizer May Have Turned the Corner

Not too long ago I was really bummed with my Pfizer investment. I have been steady investing in Pfizer stock since 2001 all the while the share price pretty consistently losing value.

I thought Pfizer was a great company and a good long term value. I know I can't time the market so I have been continuing to invest in Pfizer because I see this as a great opportunity to get a discount on one of the greatest pharmaceutical companies in the world.

It looks to me as though Pfizer may have at least stopped the bleeding over the past week with 2 major news announcements. Last Tuesday, Pfizer announced a 26.3% rise of its dividend , a nice bonus for long term shareholders that Pfizer has consistently rewarded with 39 years of annual dividend increases. Then on Friday, a US court ruled in Pfizer's favor on a Lipitor patent dispute that has a major impact on Pfizer sales performance for the next couple of years.

I expect Pfizer shares have had a bit of a bounce on this good news in today's trading and Warren Buffets old adage may yet hold true again.

Wednesday, December 14, 2005

What is your Savings Rate?

A big part of reaching my goal is saving a high percentage of my earned income. While it sounds like it is an easy thing to calculate, up till now I haven't had any idea how much of net worth increases was savings and how much has been the result of investment returns.

I know I probably save a lot more than the average personal savings rate of 0.9%. If I had to take a guess I would say that in recent years I probably save somewhere between 40%-50% of my earned income.

Unfortunately calculating how much I save on an annual basis doesn't appear to be a trivial matter. I need to start by figuring out what I consider income and what counts as savings:
1) I am going to say my earned income is that what my employer reports to me as pensionable earnings. I don't know if this is 100% accurate but its good enough for my calculations. Its more accurate than my Social Security earnings because it doesn't include life insurance benefits, etc.
2) Any capital gains, dividends, interest, investment returns, etc will not be counted as earned income or savings. I have done my best to exclude investment returns as any capital gains, dividends, interest are passive income and I don't want to count them as savings.
3) Gifts, rebates, freebies, gambling profits, etc will not count towards income, but maybe be counted as savings.
4) Rental income will not count as earned income or savings. This is easy so far because annual expenses are more than rental income, but in future years this could change.
5) I will calculate a saving rate with and without mortgage principal payoffs. I am not sure if one should necessarily count mortgage principal repayment as part of savings, but I know many people that use their savings for mortgage principal increases.
6) I will also calculate a savings rate with and without principal applied to my car loan as savings. I don't think this is necessarily accurate. However in certain years I mainly focused on paying down my car loan I think its inaccurate to discount these payments.

Based on this I will determine my annual savings by calculating the total balance change in my cash accounts, the total amount added to all investment accounts, and the total mortgage principal paid for the year. There are 2 stock investments from which I don't reinvested dividends so I need to back out the annual dividend payments to my cash accounts.

Unfortunately I can't present the details of my calculations because I don't want to reveal my exact earned income (to prevent any problems with my employer). However after crunching all the numbers I end up with an impressive savings rate:

Year

Savings Rate

SR (No MP)

SR (No CP)

2005*

56.75%

54.39%

53.67%

2004

56.38%

31.45%

52.05%

2003

55.23%

43.05%

54.00%


Notes: *2005 is earned income and savings through 12/7/2005
SP (No MP) = Savings Rate ignoring mortgage principal payments
SP (No CP) = Savings Rate ignoring car principal payments


I think this is a good approximation of my savings rate. Keep in mind its on the high side because I don't factor in gifts, freebies, gambling profits, etc. in my income. However, I would estimate these other incomes are insignificant and at most account for 1-2% of my savings rate.

Its a great feeling to see that I am saving over 50% of my gross income even after taxes and expenses. However its a mixed blessing because my savings rate will only decline as I move onto to future phases in my life such as starting a family, etc. I guess this means I need to focus on others ways to saving more such as bringing in more income or improving investment returns to keep the pace of my annual net worth increase.

Anyone else have estimates of what their annual savings rates are?

Monday, December 12, 2005

Setting a 2006 Net Worth Goal

Its about time for me to start setting a 2006 net worth goal. It looks like I will end this year with a net worth of $206,000-$208,000, above my target of $205,000 for 2005.

So how do a pick a target for 2006? Well first let me highlight the major financial themes I expect in 2006:

Income
-I expect my earned income to remain flat for the year as I hope for at least a minor raise which should offset an expected smaller bonus than I received for 2005.
-My cash balance pension will vest late in 2006 which should add at least $10,000 to my net worth.
-I anticipate my tenants will renew their lease this summer allowing me to continue to generate net positive cash flow from my rental property.

Expenses
-I expect significantly larger expenses with several large purchases this year including home closing costs, etc. I expect these purchases will be roughly $10k above and beyond my typical expenses.
-I may need to temporarily relocate for 6 mos for my job which could result in an extra $3,000-$6,000 in unreimbursed living expenses.
-If I purchase a home I expect my living expenses will go up at least $400/mo over my current arrangements. I will anticipate 6mos ($2,400) of additional living expenses although I don't know when I will buy a house nor how much my monthly cost would be.

Overall I expect the one time benefit I receive from vesting of my pension to offset my expected jump in expenses for large purchases for the next year. At this point I will also ignore the possible expenses that I may incur if I need to relocate - if I end up relocating, it will be a good excuse to revisit my annual target and adjust accordingly.

According to my long term plan to reach my $2 million net worth goal, I am way ahead of where I need to be so I don't need to take any drastic actions or be too aggressive in this upcoming year's goal although it would be nice to continue to get further ahead of schedule to allow myself more flexibility in the future.

Year

Annual Target

12/31 Net Worth

2001

$ 21,000.00

$ 21,000.00

2002

$ 45,360.00

$ 44,000.00

2003

$ 73,491.60

$ 88,000.00

2004

$ 105,852.10

$ 155,736.61

2005

$ 142,949.32

est $207,000.00

2006

$ 185,346.99

 

2007

$ 233,670.59

 

2008

$ 288,613.89

 

2009

$ 350,946.08

 

2010

$ 421,519.75

 


In 2005, I set an annual target that was $50,000 over my 2004 EOY net worth. Based on the themes I laid out above I think I should be able to do slightly better than that in 2006 mainly due to the additional returns from my increased net worth.

My goal for 2006 will be to increase my 2005 net worth by $55,000. Since I am planning considerable larger expenses this year than in the past (more on these later in the year) this should still challenge me to continue to grow income and the ROR on investments. This would put my target for 2006 at $262,000.00, assuming I close 2005 with a net worth around $207,000.00.

Now back to savoring my success in 2005 before I need to buckle down again and focus on meeting my new 2006 net worth goal!

Friday, December 09, 2005

Adjusting for my Potential Tax Liability

As you may have noticed from my net worth reporting, I don't really report liabilities that are accruing such as taxes on a monthly basis. I typically receive a small refund from my income taxes each year so it has been safe to assume the withholdings from my paycheck typically cover any expected tax liabilities.

However, since I rented out my home in the latter half of the year I am losing a significant portion of my tax deductions (mortgage interest /property tax deduction) [for clarification, I will still have these deductions as rental expenses, but they will now be more than offset by the rental income]. Since I didn't change my withholding after I made this change, I have been worried about a growing tax liability.

Since it looks like I will hit my net worth goal for the year and it would be a more accurate reflection of my true net worth, I have decided to make an adjustment of $3,000 in tax liability for the month of December on my balance sheet. This liability combined with my current withholdings should adequately cover my estimated tax exposure for the year. Luckily I have a line item for tax liability on my net worth report to easily account for this adjustment.

Wednesday, December 07, 2005

My $2 Million Net Worth Goal Part 3: Lessons Learned

Previously I discussed the starting points and assumptions I used to develop a forecast of my annual net worth that I used as a basis for formulating my $2 million net worth goal. Since I have been chasing this goal for 4 years, I have found some things that worked well and things I would changed if I had to do it again.

Lessons Learned:
Issue #1: A big assumption I made was a 10% ROR on my savings. At the time this seemed like a reasonable objective, but I now recognize this is my biggest challenge. I have masked this today with additional cost cutting and savings, however long term it is absolutely critical to focus on improving the ROR on my net worth. I will be focusing a lot of attention on improving my ROR in future posts.

Issue #2: Nowhere in this goal setting exercise do I factor in life events such as an engagement ring, home closing costs, wedding expenses, dual incomes (or lack of), or raising children. I did estimate my living expenses and make an assumption that my overall consumption would increase by 6%/yr which should account for some of this, however I have learned from my friends and colleagues that starting a family will change everything and I have clearly underestimated the future cost of living. All the more reason to get ahead early I guess.

Issue #3: Inflation. That about sums it up. When I did this goal setting exercise I knew there would be inflation, but I didn't really take into account that inflation would be more than 2%/yr. I figured my investment strategies would also hedge against inflation mainly by focusing net worth in stocks or real estate instead of cash or bonds. However I recognize that inflation COULD be more significant than I initially anticipated.

Issue #4: Healthcare. One issue that will ultimately become the biggest is healthcare. To reach my goal of being financially free I need to find a way to pay for healthcare at least up to the age of 65 (assuming Medicare will be around) without relying on employment. Most likely I will either need a lot more than I anticipate or I need to find another way to afford health care costs.


Things that worked:
-Defining a single goal. A net worth goal of $2 million is pretty simple to remember, straightforward to explain, and easy to focus on.
-Its only a rule of thumb. I only forecasted a goal for 20yrs in the future. If I miss my goal it may take me a couple of extra years to reach it, but worst case I will probably still reach my goal.
-Breaking it down into a yearly target helps with planning. Unfortunately, volatility of the stock market I have learned will affect whether you can reach your goals no matter how much you try and save. If your worried about the volatility of the stock market I have a couple of suggestions:
1) Set a yearly target range. This will give you some flexibility, if unexpected events occur. I figure its ok to miss an annual target, but plan to take corrective actions in the following year to stay on course.
2) The volatility may actually help you reach your goals just like dollar cost averaging. If the market tanks 10% one year you would have to save an extra 10% just to break even, which traditionally is a better time to invest more since the stock market is 10% than it was. Think about it.
3) Look for alternative investments. Its not necessarily easy, but one might be willing to make a real estate investment that would give you a more consistent 8% ROR, plus tax breaks, to reduce the volatility in your returns.

Hows My Progress?
I formulated this $2 million net worth goal in 2001 when I started my career. So far I am on track and gaining ground to reach it before I turn 45.

Year

Annual Target

12/31 Net Worth

2001

$ 21,000.00

$ 18,670.95

2002

$ 45,360.00

$ 37,964.36

2003

$ 73,491.60

$ 97,036.82

2004

$ 105,852.10

$ 155,736.61

2005

$ 142,949.32

est $207,000.00

2006

$ 185,346.99

 

2007

$ 233,670.59

 

2008

$ 288,613.89

 

2009

$ 350,946.08

 

2010

$ 421,519.75

 

2011

$ 501,279.53

 

2012

$ 591,271.75

 

2013

$ 692,655.05

 

2014

$ 806,712.05

 

2015

$ 934,862.24

 

2016

$ 1,078,676.18

 

2017

$ 1,239,891.19

 

2018

$ 1,420,428.53

 

2019

$ 1,622,412.51

 

2020

$ 1,848,191.35

 



As you can see I got behind in my goal in the very beginning. It was a frustrating time because the stock market continued to go down and I was losing more money than I was saving. However, because I was focused on getting as close to my goals as possible, I did everything I could to cut costs and save more money to invest. This tactic ultimately benefited me starting in 2003 as my investments began to rebound.

Monday, December 05, 2005

Money Saving Tip: Buy Parts Yourself and have Mechanic Install Them

About 1 month ago (ironically just after I finished paying my car loan off), I started having trouble starting my Nissan Sentra. I am not even close to being a mechanic; about the limit of my car knowledge is that I can change my oil.

Despite my lack of knowledge I really didn't want to spend a bunch of money fixing my car up just after I finally finished paying for it. I talked to as many people as I could find that knew something about cars and did lots of googling trying to find details of anyone having similar problems. Most of the signs pointed to the starter on my car.

I then called the dealer and got an estimate of $380 to change out my starter. Someone recommended I also call a local tire shop (who did full service) and they gave me an estimate of $303.76. Better, but I checked with Advance Auto Parts (auto parts store) and knew I could get a remanufactured starter for $88.21 (after tax).

I called the local tire shop back and asked them to break down the estimate for me. Once they told me it would cost $251.26 for the starter I told them I could get a starter for almost 1/3 the price. I pressed them on what the 3x price increase gets me and they explained the difference was they warranty the part and labor.

After more investigation I found out that the part I could get from Advance Auto Parts was also covered by a lifetime warranty. I was really just paying an extra $163.05 for labor if the part fails again and needs to be changed out. Since the labor to change out the starter was only $52.50, the part could fail and be replaced 3 times before I see any payback on the extra cost. Not a good payback on my investment.

 

Parts

Labor

Total

Dealer

 

 

$380.00

Tire Shop

$251.26

$52.50

$303.76

Advance Auto Parts & Tire Shop

$88.21

$52.50

$140.71



So I called up the tire shop and they agreed to let me bring in my own part. Everything worked out great. I am very happy with the service I got and I saved over 50% off my repair bill estimates.

Bottom Line: Consider all the options. If you can find a good mechanic who will let you supply the parts, you could easily save 50% off the repair bill.