Dave and Katy’s Travels | An Investment, retirement, and travel blog

I’ve been a bit lax in updating the blog, since so many things have been changing over the last month or so. What basically happened was that I went through the interview process with one of the big internet companies, and ended up getting a job offer.

So here I am in Seattle now, and my wife is back in Chicago working on selling the house. Just a few days ago I put down money on a new apartment, so we will be stretching ourselves very thin until the house is sold. However, in the long run I think this could be a good financial opportunity.

As with many tech companies, beyond my normal salary, I also received a stock bonus upon hire, and will theoretically receive one every year. My plan is for us to live off of the salary (contributing to 401k of course), and keep (or sell/invest) the stock bonuses for retirement. I figure that should give a decent boost to the retirement plan. My stock bonus upon hire was about 45% of my total salary, so if that continues I should be doing quite well in the savings arena. Once I put 15% in my 401k, I’ll end up saving over 50% of my salary, which is pretty good at my income level.

Our networth will change dramatically over the next few months I imagine. We will need to sell our home, my wife will need to quit her job and find a new one. So for awhile our networth will be damaged, but hopefully within a year or two we’ll have made up the damage and get moving upwards again.

So it will be an interesting next few years, we’ll see what happens.

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I e-mailed Fidelity with my common request, which is something like “I want to give you all my accounts if you can administer my HSA”, and the response I received was:

Thank you for inquiring about Health Savings Accounts(HSA’s) at Fidelity.

At this time Fidelity is not able to provide that service of a HSA administrator. While we have been doing a small pilot plan with some of our institutional clients, we have not opened the HSA administration service to the general public.

Unfortunately, we do not have a time frame to provide you as to when we might offer this service.

If you have any other questions or comments, please send us another message at any time. Mr. Person, know you have a choice when it comes to investment companies, and we appreciate your interest in Fidelity.

I liked their reply in that they actually say they’re doing a pilot to see how it works. So hopefully these larger brokerage houses will start offering this plan sometime soon.

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I received a response from Vanguard when I asked them if they offered HSA Administration.

Thank you for your e-mail. We appreciate the time you have taken to contact
us.

Vanguard is examining the feasibility of offering Health Savings Accounts
(HSAs), but has no firm plans at this time.

Vanguard is aware of some HSA programs featuring Vanguard mutual funds. It
appears that these parties are providing HSA administration and offering
Vanguard mutual fund investments via an investment-only relationship.
Vanguard has not formed a direct partnership in providing an HSA program at
this time.

Additional information regarding HSAs can be found under the ‘Account Types
& Services’ sub-link of our ‘Personal Investors’ homepage. Next, click the
two HSA-related links on the right-hand side of the page under the ‘Also of
interest’ heading.

If you have additional questions or would like more information on
consolidating your assets with Vanguard, please contact Vanguard
Specialized Services at 1-800-337-8476. We are available Monday through
Friday from 8 a.m. to 8 p.m. Eastern time. An associate will be pleased to
assist you.

So I’ll need to continue bothering brokerage houses until I find one that does offer HSA Administration. One reason I like E-Trade is that I can keep my taxable (with individual stocks), IRA, Roth IRA, and emergency savings (high yield savings account) accounts all in the same location. If I’m going to have an HSA that needs an administrator, I want my brokerage house to handle that as well.

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E-Trade did actually respond to my previous query on the same day I asked it, I just assumed they would e-mail me the answer. Instead, it was in their online message system (somewhat strange, and hard to find in their interface). In either case, they say that they don’t have an option for HSA rollover, and don’t currently know of any plans to offer such a thing.

I just saw an early retirement forum post earlier today that Vanguard may be offering an HSA solution. I’m going to look into that and see what Vanguard says.

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If you haven’t read about them, HSA accounts are the best thing thing Roth IRAs. In fact, they’re really the best account type ever created. First, they accept funding pre-tax, just like a 401k or IRA. So you can lower your tax burden by putting your max towards this account. Then you can invest these funds (using your HSA Administrator) to grow the funds over time. Finally, you can use the funds at any point, Tax Free, for any health care costs. So the money you use to fund this account is never taxed. To top it off, if you hit 65 and have way too much money in this account, you can start withdrawing your funds as income (just like a 401k/IRA account), so you’re not completely restricted.

Now, the only large issue in the above information is the “using your HSA Administrator”. Of course like 401k accounts, your HSA account needs an administrator. Due partially to how new these HSA accounts are, there don’t appear to be a large number of HSA Administrators available. According to the U.S. Treasury page on HSA accounts:

“Insured banks and credit unions are automatically qualified to handle HSAs. Any bank, credit union or any other entity that currently meets the IRS standards for being a trustee or custodian for an IRA or Archer Medical Savings Account (MSA) can be an HSA trustee or custodian.

If I am reading the above right, every single bank out there should be able to take my transferred HSA account from my employer upon termination / quitting / etc. I personally use E-trade as our brokerage of choice for roll-over IRA accounts, Roths, High-yield savings, etc. I looked through E-trades materials on their website and I didn’t see any mention of rolling over your HSA account to their platform. E-trade does have an insured Bank associated with the company, so I believe they should be capable if I understand it.

I found a supposedly complete list of HSA administrators here which appears to be a fairly short list. I’ve seen other short lists online as well. I’ve written to E-trade to ask their future plans, and to see if there is any reason they haven’t moved forward with offering to handle HSA accounts. I’ll be interested to know if there is a reason more institutions haven’t moved forward with this wonderful account type.

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Towards the beginning of my investing career, I read somewhere that it was important to come up with your own list of investing rules, and then stick to those rules for a long period of time. This would help you be more consistent with your financial decisions, and can partially take the emotion out of investing.

For example: I had decided for a time to invest in individual stocks. I went through a large number of research sites, and finally came up with what seemed to be a solid list of companies to invest in. I took my IRA which had just rolled over from my company, and put my $40k into these stocks. The stocks were what are often called “falling knives”. In other words, they were in the process of sinking fast, and I was trying to catch them on their way down. The idea was that they were likely to go up later, and I wanted to catch that gain.

Of course many of those stocks continued to fall, and I chickened out and sold a month later, losing over $5k of my $40k investment. I dropped all my cash into an index fund. A couple of months later I checked on those stocks, and without exception they were higher than my purchase price. If I had just followed my own plan, I wouldn’t have lost a penny. My index fund did eventually pull me back past my initial investment point, but how much more would I have had if I’d just stuck with my initial plan?

So without further discussion, my current investing rules:

Do not purchase individual stocks

I partially believe in the efficient market theory, to the level that I’m sure there are plenty of people in the world who know more about these stocks than I do. If the stock fell “for no good reason” yesterday, likely there really is a reason.

I don’t want to get into the habit of buying & selling stocks back and forth. This is very inefficient, and I’m no good at it. If I own whole markets, I’m much less likely to panic and run from them.

Stocks falling in price is a good thing, so don’t sell

It is hard to get used to the idea, but when the stocks I am purchasing fall in price, this is good for me. I am still in the accumulation phase of investing. If stocks go up, I’m buying them at a higher price. If stocks go down, I’m buying them at a lower price.

• Example:
  • You invest $1,000 per year in a stock that costs $10 per share. If the stock jumps up to $20 per share after 5 years, you will have 750 shares after 10 years, or $15,000.
  • If the stock drops to $5 per share after 1 year, and then comes back to $10 per share after 10 years, you will have 1900 shares, or $19,000.

Lower priced = Lower P/E (especially when we’re dealing with index funds). This means that my investment is actually less likely to drop, than a stock priced at a premium.

Purchase only when your commission is less than 1%

This is not difficult at all if you’re using a discount brokerage. Lets say my commission is $10. That means I need to make sure I’m always investing at least $1,000 per purchase.

Just imagine your stock fell 1% in price as you purchase it. Purchasing when it costs more than a 1% commission is that much more of a drop in price, therefore it takes that much more of a gain before you even break even.

Buy only index funds, and preferably in large markets

I try not to time the market, or pretend I understand where the economy is going. So I don’t want to buy large amounts of a healthcare fund, or bank stocks because they’re cheap right now. I want to buy large market index funds, such as “whole market index”, “international value”, and so on. Again, if I try to predict where a market/stock is headed, if I turn out to be wrong, I’m likely to sell it in a panic, rather than letting things correct over time.

Buy only with limit orders, not with market orders

This is just from personal experience. I’ve seen a stock trading from 10.05 to 10.15 all day long. I put in a market order to purchase, and what happens? I end up with a purchase price of 10.35. I look at the stock, and I can see a tiny blip in the graph where it jumped up to 10.35 for a few seconds (probably just my purchase). So now I set a limit order at the current stock price (or perhaps a few cents more to make certain my order is placed). I don’t time things, so if my order is not filled, I won’t cry, I’ll just get the stock the next day. Sometimes for less, sometimes for more.

Check on my accounts once per month

The way I do this check is that I update our NetworthIQ homepage monthly. While updating our balances, it involves me logging into each account we own (retirement, HSA, checking, etc) and checking the current balances.

I don’t want to check more than once per month, because I’m in index funds. If the whole market jumps or falls day by day, I shouldn’t care. I’m investing for the long term.

I don’t want to check less frequently, because I want to make certain that nothing strange has happened with my accounts. They haven’t emptied, they haven’t grown strangely large, and they haven’t changed names to Fredrico Fernando and been transferred to Puerto Rico. Basically, it’s just to check to make sure everything is ok.

I’ve also found that when I’m consistent with my monthly balance checks, I’m also pretty good about keeping an eye on my finances in general. It is a monthly reminder that I should perhaps increase the amount transferred to the accounts, spend a bit less, etc.

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Well, I don’t post for almost a month, then I post twice in a single day.  Go figure.

I was just mentioning how so many things I’m finding are fluff, and then I found what I consider a diamond in the rough.  What’s funny is that the large value I just got wasn’t from the blog post itself (which was fine), but from one of the comments.

In this comment, the person describes their method of automatically saving money.  Now the conventional wisdom is the following:

1. Direct deposit funds into your checking account.
2. Automatically transfer out (or just have the direct deposit do it), a certain amount per month towards savings.
3. Increase this amount as necessary.

Now what the above method does is that it takes a variable amount (your real salary + bonus) and strips off a constant amount (your savings).  This is basically what I do with our finances, sending $300 per month towards our eTrade accounts.  This works “fine”.  However, when we get a bonus, or our salary increases, etc, I have to take an action in order to increase our savings amount.   If you’ve read any personal finance blog posts (such as all those fluff posts I recently mentioned), you’ll notice that you’re supposed to always save a large portion of your bonuses / raises.

I’ve always strongly believed that people (especially myself) will take the path of least resistance.  If something is automated it will likely happen.  If something is not automated, it will likely not happen.  So when I get a raise/bonus, it is likely I won’t increase our savings amount, and we will end up spending the money.

However, this comment with such a simple idea has struck me as a brilliant move.  Here’s the new steps:

1. Direct deposit into a high yield savings account (money market, e-savings, etc)
2. Transfer a set amount per month to your checking.
3. Live off of the checking amount.

This is so simple yet brilliant.  If you know you can live off of $1500 per month, just setup your e-savings account to transfer $1500 per month to your checking.  Now you can get raises, bonuses, etc, and your personal “salary” (money going into checking) will not change.  If you need to increase your “salary” due to inflation (or some other reason), you manually go into your automatic transfer settings on the website of your financial institution and change it.

Making this simple change has transferred the burden of least resistance towards spending less.  Now, if you’re lazy, you won’t increase your transfers.  Every time you get a raise or bonus, you will be saving that much more each month.  You will have to take a number of steps in order to reduce your savings levels, which makes it less likely to happen.

I’m going to look into doing this as soon as possible, and I’m pretty excited about the whole thing.

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I decided when I created the blog that I wouldn’t post unless I had come up with something I really was interested in posting. In other words, I wouldn’t post things on the blog just because it was that time of the week.

I’ve always been impressed with how often some people update their financial type blogs. Some of them manage to post every single day, and most have a weekly type schedule. However, once you actually look at the individual posts, you see huge amounts of garbage, repetitious posts, and complete fluff.

For example, some post titles I’m glancing at while looking for something to read (slightly changed to protect the innocent):

• 25 ways to grow rich
• How to eliminate debt quickly
• 15 ways to spend less money
• 5 most important steps to growing your wealth

What do these blog posts include? Do they have interesting tricks you can use to reduce your spending? Doubtful. Do they have innovative ways to keep track of your expenses? Rarely. What they are is an excuse to post some fluff piece that sounds interesting enough to draw in extra traffic. They’ll state that you should save 10/15/20% of your salary, track your expenses, pay down debt, reduce interest rates, etc. And of course they have mentioned this in 23 other posts on their site, just in different ways.

Now I completely understand that it’s hard to keep saying the same message in different ways, but it still ends up being frustrating. The message is correct, and there are certainly people out there who need to hear that message a few times. The comments on these messages are often scary.. “how can you possibly expect people to save 15% of their salary??”, or “It is unrealistic to expect people to pay off their credit cards each month in full”. Apparently this message is still needed for some. But for those of us who are already well educated, it becomes difficult to find those pieces to bring us to the next level.

I am always interested in hearing concrete tricks/tips that people use for their finances. I’d love to hear something original that someone came up with and couldn’t wait to share with the world. I just wish there was a way to filter out all the fluff.

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Katy and I are on vacation right now, and I noticed on a TV today in a restaurant that the fed dropped the rates 50 basis points (rather than the 25 expected). Theoretically rates should drop around .5%, so perhaps instead of the current 6.25% I could potentially get, reasonable rates may drop to 5.75%. As our current rate is 6.5%, we’re getting towards the point we would want to refinance.

However, I know that refinancing timing is also determined by how long you plan on staying in a home. We’ve continued to think about moving again before our retirement. We have pretty much decided that we don’t want to stay in this home for the next 10 years, so we’ll need to move at least once more. The only question is the timing of when we would move.

I personally think I’d like to move sooner rather than later. We’re spending a lot on this house currently, and I think it’d bode well for our long term financial future to cut out our costs asap. If we can manage to stay in the next home for 10 years, we could also put a pretty large dent in a mortgage. That extra money would be appreciated when we have retirement costs. As things are, between closing costs and realtor costs, we’ll be lucky to walk away without losing much.

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I’ve read plenty of times about the two income trap. Basically, if you make two incomes, you are taxed at a higher level. Then because you’re both working, you need to pay for child care, lawn service, accountant, maid, etc. Of course you don’t “need” to pay for these things, but it becomes more likely if you don’t have someone sitting at home all day.

While we’ve certainly been hit by this trap, we’ve avoided the real trap for a few reasons:

1. We both make almost the same salary, so we’re both heavily contributing to our financial well being. Either of us quitting would still drastically reduce our salaries.

2. We don’t have kids, so no child care costs.

3. We’re planning on drastically reducing our spending in retirement, so we don’t need to save 50% of our salary to retire early. If we had to replace our full salaries, we’d be working for a long time yet.

4. We have pretty good salaries, enough to pay for lawn services/maids/accountants/etc and still come out ahead.

So as things are, the two income trap really hasn’t hit us. I think there are plenty of others in our situation. Young professionals with no kids, where both couples work and make decent salaries. Sure, it would be nice to have one of us at home in charge of maintenance/cleaning/etc, but it just doesn’t make sense.

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