2million - My Journey to Financial Freedom

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

Monday, February 27, 2006

Taking Assessment of My Portfolio Returns, Part 2: Retirement Accounts

In the 1st part of this series I determined that the total return for my net worth was a measly $2,094. Its a painful pill to swallow and after crunching the numbers, my head immediately filled with logical explanations/excuses as to why this number is so low. Rather then pass them on, lets dig into my net worth and see whats behind this number.

I'll start by taking a look at my retirement accounts:
I currently have a Roth IRA and a 401k Savings Plan.










$ 3,550.00









My Roth IRA is invested in Vanguard Windsor II Investor Shares (
My 401k return includes the company match.

On a side note: I found on Vanguard's website that the 1 year rate of return for Windsor II Investor Shares was 7.01% as of 12/31/2005. That could indicate, at a minimum, 1.16% of my reported return was from the $3,550 contributions I made over the course of the year.

My retirement accounts had pretty successful returns for 2005. I gained a total of $8,331.13 in these retirement accounts. This is not surprising for me since all of this money is invested in mutual funds which provide me with broad market diversification and more normalized returns.

I'll continue this series by looking at my 2005 returns for my cash accounts, investment accounts, ESPP & stock options, and rental property.

Wednesday, February 22, 2006

Taking Assessment of My Portfolio Returns, Part 1: The Bottom Line

It is finally time for me to sift through all the financial data I have for 2005 and begin to understand how my portfolio worked for me in 2005. My net worth went from $157,340 on 12/31/2004 to $206,990 on 12/31/2005 - this should be pretty easy, right?

No way. I have been scratching my head trying to understand how I should handle reinvested dividends, additional investments throughout the calendar year, and how to treat my rental house. I have decided to start by simplifying this analysis to just try to get an understanding of how my investments faired - therefore I might not yet be able to easy demonstrate what my TRUE rate of return for each investment was, but I should be able to benchmark the total return for my entire portfolio.

This analysis would be much easier if I wasn't saving so much money! One of my problems is that in most of my investment accounts I have added additional investments over the course of the year. This is a problem when it comes to calculating a TRUE rate of return because you then need to factor in the rate of return for all these additional small investments over the course of the year.

Assumptions for Assessing Investment Returns
Let me begin by making some assumptions about how I want to treat various transactions on my balance sheet:
-my rental house is an investment so I will treat the mortgage principal paydown as investment return
-Any principal payments to my mortgage for my primary residence will be treated as retained earning to adjust for net worth change calculation
-car principal payment will be treated as retained earnings to adjust for net worth calculations
-401k company matching will be treated as investment returns
-I am going to ignore taxes on investment returns such as dividends and interest. Most of my dividends are immediately reinvested in more stock and at the end of the year I have to pay tax out of pocket for those dividends. Accounting for this would be too painful and I don't think it would impact my investment returns.
-I'm going to ignore the return on any investments made over the course of the year for now. This may result in my calculated return being slightly higher than my TRUE return.

Step 1: Formula for Entire Portfolio Return
To start this analysis I thought I could get a rough idea how I faired by using this simple formula:
[12/31/2005 Net Worth] - [Net Worth 12/31/2004] - [2005 Retained Earnings] = [2005 Investment Returns].

Since I knew my 2004 and 2005 net worths, all I would need to do was calculate what adjustments (retained earnings) where made in 2005 as a result of earned income and this would give me a rough idea of what my 2005 investment returns were (ofcourse this is not completely accurate because of many additional sources of income that don't classify as savings or investment returns such as rebates, bonus money, gifts, etc).

Step 2: Plug in 12/31/2004 Net Worth and 12/31/2005 Net Worth
According to my records my net worth on 12/31/2004 was $157,340 and my net worth on 12/31/2005 was $206,990. All I need to do is plug these into the formula.

[12/31/2005 Net Worth] - [Net Worth 12/31/2004] - [2005 Retained Earnings] = [2005 Investment Returns]
[$206,990] - [$157,340 ] - [2005 Retained Earnings] = [2005 Investment Returns]

Step 3. Figure out what I retained from my earned income
So with that I needed to calculated what earnings I retained in 2005. This basically means I need to figure out what part of my earning went to boosting my net worth.

I start by finding out what my net cash change is. I total the change in cash I have in savings and checking accounts and subtract out any CC balance changes:

Net Cash Change in 2005


Change in Checking Balance

$ (174.85)

Change in Savings Balance

$ 20,022.29

Change in Revolving CC Balance

$ (1,309.03)

Change in 0% APR Balance

$ (10,346.00)


$ 8,192.41

Then I need to add in retirement account contributions and investment account contributions:

Retirement Accounts Deposits


401k Contributions

$ 17,750.40

Roth IRA Contributions

$ 3,550.00


$ 21,300.40

*Note: My 401k contributions do not include the company match (I'm am going to treat the match as an investment return in this analysis). They do include an additional $3,750.40 in after-tax contributions that the IBM 401k plan allows employees to make. I'll talk more about this feature at a later time.

Investment Account Deposits



$ 2,000.00


$ 7,371.58

Pfizer DRIP

$ 7,400.00

Merck DRIP

$ 2,500.00


$ 25.00


$ 250.00


$ 19,546.58

I also need to include principal payments I made on my car loan and mortgage since these were items that boosted my net worth but had nothing to do with investment returns:

Loan Principal Payments


Car Loan

$ 2,700.00

Mortgage Principal*

$ 1,018.60


$ 3,718.60

*Note:Only includes principal payments when house was my primary residence, after rental conversion these payments are treated as investment returns.

Now I need to make some adjustments and back out some items included in these totals. I have 2 stock holdings (IBM & Bellsouth) where I elect to take the cash dividend and deposit them into my cash accounts. I need to back these out of my retained earning number because these are really investment returns. I also need to back out any interest I accumulated on my cash accounts. My net expenses exceeded my rental income so I don't think I need to make any adjustments regarding the income received from this activity.

Back Out These Cash Deposits


Bellsouth Dividends

$ 166.38

IBM Dividends

$ 251.37

Rental profit

$ -

Savings Accounts Interest

$ 783.99


$ 1,201.74

Finally I need to catch everything I missed. I did receive a rental deposit in 2005 that is being treated as cash so I need to back that out of my cash. I also made an adjustment in December for an expected increase in tax liability, which I need to remove from my cash total.

Misc Liabilities


Tax Liability

$ 3,000.00

Rental Deposits

$ 1,000.00


$ 4,000.00

Ok now lets total this all up:

2005 Retained Earnings


Net Cash Change

$ 8,192.41

Retirement Accounts Deposits

$ 21,300.40

Investment Account Deposits

$ 19,546.58

Loan Principal Payments

$ 3,718.60

Back Out These Cash Deposits

$ (1,201.74)

Misc Liabilities

$ (4,000.00)


$ 47,556.25

After crunching the numbers I established I retained $47,556.25 of my earned income based on the assumptions I detailed earlier.

Step 4: Compute 2005 Investment Return
Now we just plug the retained earnings in and compute what my total return was:

[$206,990] - [$157,340] - [$47,556] = [2005 Investment Return]

Wow this is going to be ugly......

[$206,990] - [$157,340] - [$47,556] = $2,094

Ugh! I am shocked, confused, and embarrassed. I started the year with $157,340 and somehow managed to only gain $2,094?? How can I, a person who is at least semi-financially intelligent be making a 1% return on my money?

If I had stuck my money under my mattress I might have come out further ahead than I did. I'm at a loss for words - I had expected this to be closer to 4-6% (even higher if you didn't include the equity in my house).

In Part 2 of this series, I will take a stab at figuring out what happened to my portfolio.

Friday, February 17, 2006

Book Review: The Automatic Millionaire Homeowner

Since I am actively searching for a home at the moment I was eager to jump into this book. I had never read the bestseller "The Automatic Millionaire" by the same author, but I am famaliar with the principals and was eager to see what insight the author had for the real estate world.

I read this book in a single evening. After reading the entire book I finished disappointed. Since I am activing looking for my next home I had hoped this book would serve as my inspiration for pressing ahead and making a commitment. Needless to say I don't think it came close.

This book is written for an audience who has never bought a home. It offers muted inspiration for getting out of the renting lifestyle and offers little real insight for anyone who has any common sense when it comes to real estate.

I do take contention with a portion of the book the author used as a guide to how much one could afford. The author used some common rules of thumb provided by the FHA that a family could spend 29% of their gross income on housing costs and up to 41% of their gross income for all debts (so if you had no debts you could spend 41% of your gross income on housing costs) and discussed them as a "floor" and "ceiling" when it comes to the affordability of homeownership. I am shocked that the author would suggest such an idea as I wouldn't consider it a wise suggestion at least in the area that I live in (I suspect it may make more sense in CA and NY where the author has lived).

Who Should Read This?
Renters who want to know about how home ownership can help them create wealth; book is more applicable to high value real estate areas such as CA and NY.

Who Shouldn't Bother Reading It?
If you are a homeowner and have a basic understanding of real estate topics, this isn't worth your time.

For the Financially Savvy:
Expert Insight:
Real Life Experiences:

Thursday, February 16, 2006

2millionblog's Book Rating Review System

I wanted to take this opportunity to define a book rating system for this blog. I want to be able to convey more than whether a book is good or bad, so I thought I could rate a book on several measures to give you greater insight into the benefit of (or lack there of) reading the book.

I am going to rate each book on a scale from 1 to 5 stars for each measure. I also will try and identify the target audience that will benefit most from the book and those that need not bother with it.

-Level of Inspiration: A key measure to me for most personal finance books is the level of inspiration it provides the reader. I think a lot of personal finance books are great at inspiring the reader, but fail to give real world examples (or vise versa).

-For the Financially Savvy: This measure will try and gauge the usefulness or novelty of ideas discussed in this book (I suspect many of this blog's visitors are financially savvy so this measure is for you)

-Expert Insight: I hope this will measure the level of expertise shared by the author in the subject field of the book. For example if the book is about real estate, what level of insider tips or expertise does the author share with the reader.

-Real Life Experiences: A measure of real life examples or practicality of the book. For example, I would say Rich Dad, Poor Dad would rate low in this category because the author rarely talked about actualy examples in his life that helped him build wealth.

This is a work in progress and will probably refine it after I do a couple of reviews. If you have any other suggestions be sure to leave a comment.

Tuesday, February 14, 2006

Adding a New Stock To My Portfolio (JNJ)

If you are a regular reader you know I have been a fan of pharmaceuticals for awhile. I have been steadily adding to my holdings of Pfizer and Merck for the last several years. However I am also a fan of the whole healthcare industry.

My Healthcare Portfolio



Est Act Value




$ 4,500.00

Company DRIP



$ 15,200.00

Company DRIP



$ 3,500.00

Company DRIP



$ 300.00

Etrade account

Towards the end of last year I stopped contributing to these holdings for a couple of reasons. 1) I was trying to increase my available cash since I was house shopping and 2) I felt I had a large enough position in these stocks (PFE and MRK in particular) for now relative to their valuation since they had bounced off there lows.

However, I still like the healthcare industry. There is a lot to love:
-positive industry; they help people
-generally attractive dividend yields
-people will pay almost anything get healthy, cost is not an issue

Johnson & Johnson (JNJ)
I have been eyeing Johnson & Johnson for awhile. I like the company as a long term holding, and recent weakness is presenting me an opportunity to jump in.

The case for JNJ:
-I think JNJ will thrive over the next 50yrs as the baby boomer generation get older, people live longer, and new medical technologies are developed
-attractive dividend yield (~2.30%, and hopefully another dividend hike soon)
-JNJ has raised their dividend around 15% annualized over the past 15+ years.
-S&P currently rates JNJ a strong buy
-to quote a recent article "for patient investors, any opportunity to buy JNJ when it's out of favor is one to grab"
-JNJ just passed on buying Guidant and has been paying for it on Wall Street, but I think its a sign of shrewdness by the company's leadership, they knew what price the would pay to make the purchase a profitable business decision and stuck to it.

Unfortunately I haven't invested in Johnson & Johnson in the past, because I couldn't use their company sponsored DRIP. The plan requires ownership of at least 1 share to enroll and I couldn't justify the expense to purchase 1 share through normal means.

However, now that I have become comfortable with my Sharebuilder account, I am going to use a JNJ dividend reinvestment plan as my first real investment through my Sharebuilder account (see post regarding Sharebuilder vs DRIP fees). This will allow me to run it through the course of regular contributions, etc. If its successful I will most likely consolidate any accounts with excessive fees into my Sharebuilder account.

I am going to start with an initial investment in JNJ of $500 + $4 purchase fee.

Wednesday, February 08, 2006

My Personal Finance History

Based on requests, I thought I would give you more information about my personal history. My life's choices has a lot to with my journey to financial freedom so I think its important to know more of my background to better understand how I got to where I am today.

I graduated with a BS degree in Computer Science in December 1998. I was just like any other college student, broke, but I was blessed enough to have the support of my parents to pay for my tuition and basic living expenses while I worked to get my degree.

Rather than entering the workforce like most of my graduating peers, I opted to stay and get a MS degree in Engineering. I was luckily offered an assistantship at the university which gave me free tuition and a stipend (roughly $12,000 a year). I was again blessed to have my parents agree to continue to pay my health insurance premiums during this time.

While in graduate school, I purchased my first car, a newly used Nissan Sentra. I put $5,000 down (my life's savings) and I received a loan from my parents to pay for the remaining amount (roughly $7,000).

In addition, while I was in graduate school, I started a dot com business with my brother. We spent several years and roughly invested $8k of my savings in the business which we finally shutdown and sold off most of our assets in 2004 for a sizable loss.

In August 2001, I finally entered the real world and have been working at IBM ever since. I began paying close attention to my finances after reading The Millionaire Next Door given to me by a professor towards the end of my grad school career. As I entered the workforce I realized my limited financial means at the time would limit my choices in the future and I wanted to do something about it.

Since 2001, I have made steady progress in my increasing my net worth. I paid off the car loan from my parents and purchased my 1st house in 2002. In 2005, I rented out my house and I am currently looking for a new home.

Here is a chart of my monthly net worth since I started working in 2001:

I left graduate school with a signing bonus and moving allowance that accounted for the majority of my $14k net worth in July 2001. As you can see I have been steadily improving this number to a more reasonable $216k net worth today. Hopefully this streak will continue for many more years.

Friday, February 03, 2006

Guide to Taking Advantage of 0% Balance Transfer Offers

Based on requests from visitors, I have decided to compile my own guide to taking advantage of the credit card companies' 0% Balance Transfer Offers. I hope this guide will help everyone understand how to maximize the value of these offers and help boost your earnings for the year. If anyone has additional suggestions or tips - please post them in the comments.

What is a 0% Balance Transfer offer?
Most of us frequently get these annoying solicitation from credit card companies trying to get me to sign up for their credit card. Infact there are probably some in the advertising on this web site right now. Most of these offers include some gimmick or promotion to entice you to sign up for these offers.

A typical offer I see is "0% APR on Balance Transfers until 2007!" where the date given is typically 8-12 months in the future. Also, keep in mind the longer the balance transfer offer lasts the more you can make. I typically wait until I receive an offer that is at least 0% APR for 12 months. This is a 0% Balance Transfer offer - read on to find out how you can take advantage of them.

Here is an example of a credit card 0% Balance Transfer offer:

How do you screen out the less attractive offers?
Once you have a 0% Balance Transfer credit card offer, you need to review the fine print to make sure there are not any catches with the offer. The biggest catch out there in a small "balance transfer fee" typically 3% (but varies with each credit card company).

You want to make sure there are no balance transfer fees other fees associated with taking out a balance transfer. (Note: You can still profit if some of these fees are in the offer, but since these offers are frequent, I would just recommend waiting for a better offer).

Here is an example of the fine print on balance transfer fees.

Notice this offer has a balance transfer fee of 3% ($5 minimum, $75 maximum). I prefer offers with no balance transfer fees at all, however if you can't find a no fee offer, one with a maximum may also work ok for you (just $75 less profitable in this example).

Now that I have an offer, how do I get access to this 0% balance transfer?
Fill out the application. I usually wait till I get the card in the mail so I know exactly what my limit is. When I call to activate the card, I begin the process of initiating a balance transfer. There are many techniques to choose from:

A) Ask for a check made out to you. I have done this for my Citibank credit cards. When you call to initiate a balance transfer I ask if I can get a check made out to myself. Its that simple. (Note: make sure you wont get a cash advance fee if you do this)

B) Apply the balance to other credit cards.

->B1) If you have a soon to be expiring 0% balance transfer then just ask that the balance transfer be used to pay off the balance on the old account.

->B2) Depending on how much you purchase every month on your credit cards, ask that the balance transfer be applied to you primary credit card to pay off your existing balance and any credit on you primary credit card account you can consume in future purchases. Instead of paying the balance on your primary credit card you spent, earmark those funds as your balance transfer funds.

->B3) If the first 2 options don't work, you can also consider having the balance transfer applied to a unused credit card account. When the transfer is complete you can call the credit card company and ask that a check for the positive balance be sent to you. (Note: I have heard from friends that some companies may not be willing to issue a check for the credit/positive balance so double check before trying)

C) If you have a HELOC have the balance transfer applied to this loan. Then you can write a check to yourself for the amount transferred.

D) If you have any type of loan, consider having the transfer amount paid to that loan. If you are planning on paying down/off the loan in the near future anyway you may be able to make a better rate of return by using the balance transfer to pay it off sooner rather than later.

I have used techniques A, B1, B2, and C all with great success to get access to the balance transfer loan.

Now that I have the 0% balance transfer, what do I do with it?
The whole reason you are doing this is to earn money, so this is a very important step. I always look for the highest-yielding risk free investment.

Here are some suggestions:
A) Online high yield savings accounts such as HSBC Direct, ING Direct, or EmigrantDirect.
B) If you have an outstanding balance on a HELOC or Line of Credit and you can pull back out money at anytime, consider paying down the HELOC or Line of Credit. You may make a better return on your money by saving on the interest payments.
C) Short term treasury bills on TreasuryDirect.gov.
D) Short term CDs such as a 6-month CD.

I have been putting my balance transfers in my EmigrantDirect and HELOC accounts.

How do I pay the balance transfer back?
Every month you should make the minimum payment on this credit card with the balance transfer. The minimum is usually somewhere around 2% of the balance. On a $10,000 balance transfer we are talking about a payment around $200 a month. I usually move the minimum payment amount from my savings account and try to pay the minimum payment as soon as I get the statement to avoid any risk of being late on my payment. To date, I have never been late with one of these payments.

I usually plan on paying back the entire balance of the balance transfer the month before the 0% APR expires. So if the offer expires in June 2006, I would pay the loan off in May to ensure I don't risk accumulating any interest on the loan. You can read the fine print of the credit card offer to determine exactly when the 0% APR expires and when the credit card company begins charging interest.

Other tips on 0% Balance Transfer offers
Taking advantage of these offers does lower your credit score. Its hard to tell how much, but I was surprised last year when my credit score fell significantly most likely due to taking advantage of several 0% offers. I currently have 2 0% balance transfer offers and my credit score appears to have recovered.

-Using balance transfers can help increase your liquidity. Having this "extra" cash in savings accounts with easy access to them, allows me to take my "emergency funds" and other short term savings and put them to work in more restrictive, but better return vehicles, like 1 yr bonds, or paying down some of my mortgage.

-Taking advantage of balance transfer offers can result in pretty significant returns. Last year I probably earned close to $700 in interest from money borrowed using 0% balance transfer offers.

-You typically cannot do a balance transfer from one credit card to another credit card offered by the same company.

-Read and re-read the fine print on the credit card. If you have questions call the credit card company and make sure they explain the fees to you.

Ready to give it a try?
You can start right now by checking out some of the advertisers on this web site. I bet there are a couple 0% Balance Transfer credit card offers on the right hand side of this web page.......

Wednesday, February 01, 2006

January 2006 Net Worth Update (+$9,814)

Here's my net worth update for January as of 1/31/2006. It a great way to start the year and I am well on my way to reaching my year end net-worth goal of $265,000.







$ 6,767.92

$ 8,322.69

$ 1,554.77



$ 31,578.16

$ 32,182.28

$ 604.12



$ 41,444.02

$ 45,559.61

$ 4,115.59


Roth IRA

$ 20,508.99

$ 21,476.28

$ 967.29



$ 71,494.39

$ 72,649.45

$ 1,155.06


Stock Option

$ -

$ -

$ -



$ 29,249.98

$ 28,929.72

$ (320.26)


Rental Equity

$ 40,842.21

$ 41,026.58

$ 184.37


Other Assets

$ -

$ -

$ -



$ -

$ -

$ -


Reserve Funds

$ -

$ -

$ -



$ (31,894.81)

$ (30,341.25)

$ 1,553.56


Tax Liability

$ (3,000.00)

$ (3,000.00)

$ -



$ 206,990.86

$ 216,805.36

$ 9,814.50


Highlights for January
-All credit card debt (except current month's purchases) is in the form of 0% APR balance transfers earning interest in my savings accounts.
-I reduced my monthly stock investments as well as reduced my 401k contributions (down to 10% from 20%) to increase the amount of cash on hand in the event I came to an agreement to buy a house (I made offers on 2 different houses), but couldn't come in agreement with either seller.
-I found out that in 2005 I had earned $1990 in passive income.
-I bought Taxcut Deluxe + State for a net $8.96 and have been working on my federal and state income taxes ever since.
-After searching around for various options, I decided to try Quickbooks SimpleStart to help me keep track of self-employment income.

Stock Investments for January (Outside of 401k & ESPP):
$250 in Roth IRA
Since I was trying to increase my cash on hand, I refrained from additional investing for the month.