2million - My Journey to Financial Freedom

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

Tuesday, May 30, 2006

Temporary Assignment Expense Minimization Strategies

Even though I have agreed to take a temporary assignment for my employer which will significantly increase my living expenses during the period, I have a couple ideas on how I can minimize the damage:

1.) My employer will cover the costs of moving myself and my stuff up for my assignment. It makes sense to me to try and convince them that they can save money by assisting with furniture rental instead of moving all my stuff. It will save me the hassle of moving and could help reduce my monthly expenses if structured correctly.

2.) I think the best opportunities to reduce my housing costs would be to find someone with a house that is looking for a roommate. Apartment complexes typically have fixed rent prices, leases, and other requirements. People who rent portions of their houses could be more flexible on the price, lease, or terms.

3.) I am going to try and rent a room or at least some portion of my house out while I am gone. While I probably won't cover the mortgage payments, it will help offset some of the monthly expenses for my house.

4.) Temporary Assignment Tax Deductions. I have been reading up on this tax topic for months and I am doing my best to ensure I will have my duplicate living expenses (from the temporary assignment) qualify as a tax deduction. I hope to dive more into this area later.

Friday, May 26, 2006

A Better Look At My Credit Score

Part of the mortgage package I got from the lender included my credit report that was used as part of my application. This was the first time I have ever seen all three of my credit scores at the same time. It also included key factors with each score that adversely affected my credit score:

Equifax 740
-Proportion of balances to credit limits is too high on bank revolving or other revolving accounts
-Time since most recent account opening is too short
-Amount owed on revolving accounts is too high
-Too many inquiries last 12 months

Experian 733
-Proportion of balance to high credit on bank revolving or all revolving accounts
-Length of time accounts have been established
-Too many accounts recently opened
-Too many inquiries last 12 months

Transunion 728
-Proportion of balances to credit limits is too high on bank revolving or other revolving accounts
-Number of established accounts
-Amount owed on revolving accounts is too high
-Too many accounts with balances
-Number of inquiries adversely affected the score

On the surface I am satisfied - my scores are high enough to qualify me for the best rates, but this it is also very enlightening.

All the credit agencies indicated that the number of credit inquiries and the proportion of the balances to my credit limits negatively affected my score.

At the time this report was generated I had 2 0% balance transfers outstanding:
Card #1: $11,858/$16,200 [73% utilized]
Card #2: $15,164/$18,500 [82% utilized]

Since both of these 0% balance transfers are about 11 months old, its interesting to see their effect still lingers on the credit scores, but not too significantly.

Wednesday, May 24, 2006

Small Liquidity Crisis

Talk about bad timing. I just realized that BOTH my 0% balance transfers expire within days of when I am trying to close on my mortgage. While I have a fair amount of cash, enough to pay off both 0% balance transfers and then some, I don't have enough to pay off both 0% balance transfers, pay a 20% down payment, and pay for the closing costs.

Why put 20% down?
It all works out the same in the end I guess. I could put 5-10% down and get a new equity line for the remaining 10-15%, but that would be the same (or worse) as drawing money against my existing equity line. This way I can avoid any costs associated with opening a new HELOC for the home. If there is no financial benefit I just assume keep things simple; one less account to worry about.

If I work all the numbers out, I am about $5,500 short. My plan is to pay off both balance transfers, and put a full 20% down payment so I only need a 80% mortgage. I will then apply for a new 0% balance transfer offer as soon as I close to hopefully cover the ~$5,500 or so that I will need. However, I will need about $5,500 for about 30 days to get through closing and time to apply for the balance transfer.

I have a couple different options I am floating around:
-Try and borrow the $5,500 from my parents
-Pull $5,500 from the equity line on my 1st house
-Borrow $5,500 from my girlfriend's savings account (I can't believe she offered)
-I could always sell some IBM stock to cover the gap

I am leaning towards pulling the $5,500 from my equity line on the 1st house. Then if I do get another 0% balance transfer I can treat it as though I am paying off the equity line with a cheaper financing option. Even if I didn't get another 0% balance transfer I would be still planning to pay off the equity line within the next 12 months.

Monday, May 22, 2006

House Under Contract!

I have finally started my next big step in reaching my $2 million net worth goal. I have reached an agreement with a seller to buy a small 3 bedroom home!

I am very excited at the prospect of finally purchasing my next property in Raleigh, NC. I have been actively searching for over 5 months and this was the 4th home I made an offer on. It was a very challenging environment for me to operate in, reading a great deal in the news about the real estate slowdown, but observing the opposite at least here in the Raleigh area. Properties I was interested in would often go under contract within 24-48 hrs.

You may be asking yourself what the heck I am doing buying a home while in the process of going away for a temporary assignment for the rest of the year? I am not sure I have a great answer, but I have been searching for many months looking for just the right home for me. I weighed my carry costs for the next six months to the costs to continue renting my place in Raleigh (since I am maintaining my tax home and residence in Raleigh) and the need to still buy a place when I return.

While financially it will cost me a couple hundred dollars a month in net carrying costs, I think it could be well worth it given the length of time it took me to find this house and the need to still find a house when my temporary assignment is over.

Over the next couple of weeks I will be juggling a bunch of stuff including finding a place to live in NY, trying to actually purchase this house (I'll give it 50/50 until we can resolve any issues that might come up from the inspection), and preparing everything for my assignment. Stay tuned...

Wednesday, May 17, 2006

Planning My Temporary Assignment

As I previously mentioned I am going on a temporary assignment to NY for the rest of this year. I know this going to affect my monthly expenses for the rest of the year, but how bad will it be?

I don't know the answer yet, but doing some basic research I can put together some numbers to give me a rough idea of what my additional expenses will be:

Anticipated Additional Expenses for Temporary Assignment

Additional Monthly Expenses

Best Case

Most Likely

Worst Case

NY Rent

$ 400.00

$ 700.00

$ 1,200.00

NY Utilities

$ -

$ 150.00

$ 250.00

Additional Dining Out

$ -

$ 75.00

$ 200.00

Travel Costs to Home

$ 222.00

$ 250.00

$ 444.00

Total Extra Monthly Expenses

$ 622.00

$ 1,175.00

$ 2,094.00





6 Months Total Extra Expenses


$ 7,050.00


Details of Each Line Item Expense
Best Case - Maybe I can find a cheap room to rent with utilities included for about ~$400.
Worst case - I will have to find a small apartment to rent (expected costs would be $950-$1200) however finding short term rentals have either higher rates, or incur penalties to break 12 month leases.

Best Case - I find a room for rent that includes all utilities including high speed internet and cable tv.
Worst Case - I rent an apartment with no utilities included. That would mean I need to pay for electric, natural gas, water/sewer, cable tv, and high speed internet.

Dining Out
Best Case - I end up cooking most of my dinners and weekend meals. In this case I would not expect any more food costs than I have now.
Worst Case - It will just be me, and depending on living arrangements I may very well be cooking significantly less and eating out more.

Travel Costs
Best Case - This is really a wild card, but at minimum I expect to fly back to Raleigh for 1 weekend a month. Parking $5/day, Airfare $207 (best price found so far) = ~$222/trip
Worst Case - Again not sure, in theory I guess I could be flying home every weekend, but I don't expect to pay for traveling for more than 2 weekends/month. Myself flying down to Raleigh for a weekend and perhaps my girlfriend flying up to NY for a weekend for a visit.

Keep in mind these are the additional expenses above and beyond what my typical monthly expenses are today. I don't expect to cut any significant costs because I will be maintaining my home in NC during the assignment.

It isn't necessarily pretty, but at least I know what my additional costs could be. Here's to hoping I find a cheap place to live, that would certainly have the most signficant impact on my additional monthly expenses.

Monday, May 15, 2006

Carnival of Personal Finance

Welcome to the Carnival of Personal Finance, now in its 48th week!

If this is your 1st time at 2millionblog, you can learn more about this blog, or find a semi-up-to-date index of personal finance articles.

My attempt at having a portion of the carnival focused on a particular personal finance subject manner was a small success, there were several submissions related to the ins and out of 401(k)s.

Without further ado, here were the remaining submissions to this week's carnival:

Savings & Investing
Real Estate

Credit Card Debt

Online Income

More Personal Finance

Friday, May 12, 2006

Exchanging Personal Finance Blog Links

I have been lazy in keeping up with the blogroll on 2million. If your interested in exchanging blog links make sure you drop me an email @ 2millionblog@gmail.com. As long as your blog is slightly related to personal finance I'm willing to add you to the blogroll on this blog.

If your interested, add a 2million.blogspot.com link to your blog and email me with your site information and I'll do my best to add it to this site within a day or two.

Wednesday, May 10, 2006

Transfer of Assets to Sharebuilder Complete

It turns out that my transfer request of assets to Sharebuilder from Etrade is complete. In fact Sharebuilder impressed me again by having the stocks in my Sharebuilder account within 11 days of sending my transfer request in.

I'm happy to report that it looks like I was able to reduce my total transfer expense by qualifying for a partial transfer of assets. I just requested they transfer each stock holding to Sharebuilder instead of my entire Etrade account (including cash). I then just transferred my cash back to my checking about (via electronic transfer) and then requested they close my account. I was charged $25 for the partial transfer and nothing for the partial share liquidation/account closure. I saved $35 by requesting the partial transfer and then closing my account instead of the full account transfer which had a $60 fee that Etrade would have otherwise charged me.

It was a surprisingly smooth process and so far I am pleased with Sharebuilder's fast service.

Sunday, May 07, 2006

Hosting the Carnival of Personal Finance

I am excited to be hosting my first carnival next week. The Carnival of Personal Finance will be passing through here at 2millionblog.

I would like to "theme" next week's carnival around a personal finance topic, the 401k. I would like to encourage everyone to submit any posts related to 401ks in any way, shape, or form. Anything from the ins and outs of the 401k plan, the good, bad or ugly with 401ks, personal experiences, etc.

Of course all posts no matter what topic will still be in the carnival, but I plan to pay special attention to any posts focused on 401ks.

If you have any submissions feel free to email them to me at 2millionblog@gmail.com.

Saturday, May 06, 2006

I'm Headed to Poughkeepsie, NY!

I will be taking a temporary assignment in Poughkeepsie, NY for the remainder of the year! This will be a big change with huge impacts both in my personal life and my financial goals.

I will be taking this assignment as part of a development program I am participating in at work. I'm pretty excited about the opportunity; on the one hand it will be great to get away and spend sometime in a different part of the country; on the other it could be a difficult time period for my now long distance relationship and my finances.

Obviously this assignment will have huge impacts on my financial goals for the year. Its a temporary assignment and it looks like I may have to pay for all my living expenses while I am up in NY (while still paying my expenses in NC). I'll plan on sharing more information about my temporary assignment and how it will impact my financial goals as I learn more details.

On a side note I turned 30 today. Kinda scary, but luckily I haven't had time to think about it yet......

Friday, May 05, 2006

Are After Tax 401(k) Contributions a Good Idea?

I don't know how many 401(k) plans offer this feature, but IBM's plan allows employees to contribute up to 10% of their salary (on an after-tax basis) to their 401(k). These after-tax contributions are not part of a Roth 401(k) feature, nor do they count towards the IRS 401(k) pre-tax contribution limit ($15,000 in 2006).

From the 401(k) Manual:
"If you choose to contribute to the plan on an after-tax basis, IBM deducts contributions from your pay after taxes have been calculated. Therefore, after-tax contributions don't reduce your taxable income.

Because you've already been taxed on your after-tax contributions, you won't be taxed again when you withdraw those contributions from the plan. However, you'll be taxed on the investment earnings when you take a withdrawal."

However, the reason after tax contributions to a 401(k) aren't ideal is that any proceeds withdrawn at retirement are taxed at ordinary income rates. This means that your profits could be taxed at regular income tax rates instead of the currently lower capital gains income tax rates.

If your not already maxing out the pre-tax 401(k), Roth IRA, ESA, and 529 plan (if applicable) contributions, all of these plan are more desirable from a tax perspective by offering tax deferral (401k, 529 plan), or tax avoidance (Roth IRA or ESA on gains).

After-tax contributions to a 401(k) don't have any tax benefit, instead they sort of have a tax penalty - your likely to pay more tax when you withdraw than if you put the money in a taxable account. However, after-tax contributions to a 401(k) do have a big benefit (at least in my case). The investments choices have significantly lower expense/maintenance fees than their public mutual fund counterparts.

Can the lower fees offset the extra tax?
If you have already maxed out you other accounts with tax benefits, lets find out if the lower maintenance fees could offset the tax penalty. For example IBM's 401(k) plan has a Small Cap Value Index Fund with an amazingly low expense ratio of just .04% compared to 0.23% for Vanguard's Small Cap Value Index Fund. The 401(k) fund has less than 1/5 the cost than the comparable Vanguard fund has - it seems like these annual fees could add up over the years.

Lets work through a scenario to see which kind of account would come out ahead. Will assume we are investing $10,000 a year in either the 401(k) plan's and Vanguard's Small Cap Value Fund. We will assume we will make investments for the next 21 yrs and to simplify things we will assume the funds will both return 10% each year. Obviously we know the fund with the lower fees will be worth more, but will it be enough to offset the extra taxes we would need to pay?

Note: To simplify things I am not deducting the expense ratio fees from the investment, these fees would normally reduce the total investment, however this won't affect the outcome of this scenario



Yr End Value

IBM Fees

Vang. Fees


$ 10,000.00

$ 11,000.00

$ 4.40

$ 25.30


$ 10,000.00

$ 23,100.00

$ 9.24

$ 53.13


$ 10,000.00

$ 36,410.00

$ 14.56

$ 83.74


$ 10,000.00

$ 51,051.00

$ 20.42

$ 117.42


$ 10,000.00

$ 67,156.10

$ 26.86

$ 154.46


$ 10,000.00

$ 84,871.71

$ 33.95

$ 195.20


$ 10,000.00

$ 104,358.88

$ 41.74

$ 240.03


$ 10,000.00

$ 125,794.77

$ 50.32

$ 289.33


$ 10,000.00

$ 149,374.25

$ 59.75

$ 343.56


$ 10,000.00

$ 175,311.67

$ 70.12

$ 403.22


$ 10,000.00

$ 203,842.84

$ 81.54

$ 468.84


$ 10,000.00

$ 235,227.12

$ 94.09

$ 541.02


$ 10,000.00

$ 269,749.83

$ 107.90

$ 620.42


$ 10,000.00

$ 307,724.82

$ 123.09

$ 707.77


$ 10,000.00

$ 349,497.30

$ 139.80

$ 803.84


$ 10,000.00

$ 395,447.03

$ 158.18

$ 909.53


$ 10,000.00

$ 445,991.73

$ 178.40

$ 1,025.78


$ 10,000.00

$ 501,590.90

$ 200.64

$ 1,153.66


$ 10,000.00

$ 562,749.99

$ 225.10

$ 1,294.32


$ 10,000.00

$ 630,024.99

$ 252.01

$ 1,449.06


$ 10,000.00

$ 704,027.49

$ 281.61

$ 1,619.26



$ 704,027.49

$ 2,173.72

$ 12,498.90

In this example, we have contributed $210,000 and its now worth $704,000 (ignoring fees). Not bad at all. Its clear we would have saved at least $10,324.88 over the years in expense fees just by making out after-tax contributions to the 401(k) plan.

Note: We actually would have saved a bit more since the fees would be deducted each year instead of the end reducing our compounding investment.

But what happens after we pay tax on this? In both accounts we would have $704,000 - $210,000 = $494,000 of gains that would be taxed. If tax rates remain the same as the do today; the difference between long term capital gains and ordinary income rates would be about 10% or $49,400. Wow!

This would mean the after-tax contributions to the 401(k) plan would cost an extra $49,400 (extra taxes paid) - $10,324 (the amount of extra maintenance fees we would pay) = $39,075 over just sticking the contributions in a comparable taxable Vanguard fund account.

I think I'll do my best to avoid after-tax contributions to my 401(k) from here on out and stick them in low-cost mutual funds instead.