Monthly Recap – August 2021

August is my least favorite month. It’s hot and it’s been hot for several months. Waiting for cooler weather is basically like waiting for Christmas.

Fortunately, on the financial front, August was a productive month. Although some spending was over budget, we were able to reduce some expenses and also save money for large upcoming items.

Our actual grocery/household spending of $1,545 exceeded our $1200 budget substantially, but we were able to keep our restaurant spending to only $295.

Grocery Spending.  Difficult to control. 

It’s kind of difficult to determine the cause of our grocery/spending. We’re off by about $345, which is about 1-2 big grocery runs. We did make a Costco run in August, which was about $270. We continued our Hello Fresh experiment but only at an August cost of $136.56.  There are several regular grocery orders that seem to average a bit higher cost than usual.  Some of this is probably due to buying snacks and school lunches for my kids who went back to school in August.  Ultimately, it seems that we simply need to plan a bit better and deny ourself or our kids certain items.  Or just simply go to the grocery store a bit less.  Below is a helpful YNAB report showing our grocery/household spending since August of 2020.  You can see that there were some good months earlier this year but spending has crept up in last 4 months. 

We spent $270 on gas, $382 on clothing, $193 on medical, and only $50 on childcare. All of these are close to the average over the last several months. Our miscellaneous and entertainment budget at ($535 and $563) seem a bit high.

Good Budget Concepts

Before we get to entertainment, a quick note on productive budget concepts. A lot of people will make the mistake of budgeting too restrictively. Or they will have so many budget categories it’s impossible to learn anything from the data. Consider your real life. Don’t try to budget $0 for entertainment or $20/month for food. That’s simply not sustainable and will likely cause you to quit budgeting entirely when you fail. You are going to want to do fun things and spend money. You need an entertainment budget category. and a catch-all category for things you forgot or that only come up on rare occasions.

For example, our August miscellaneous spending includes $220 for passport renewals. It would make no sense to have a budget for passports since it comes up every 10 years. This is miscellaneous spending. Now, back to entertainment. As you can see below, we clearly like to have some fun as we have kicked up our entertainment spending over the last several months per our YNAB report below.

Entertainment Spending over last 13 months.

Note that I use my entertainment budget as an overflow for restaurant spending and for cash withdrawals. If I need cash, I withdrawal cash and categorize the cash as entertainment. The cash will be spent on fun things like fast food or other “entertainment”.

Saving for the future.

We saved $1000 for Christmas and paid $522 for our portion of a vacation deposit for summer 2022. My entire side income has been allocated for our car replacement fund, which is now up to $2800. We continue to contribute $225 total to a college savings account for our kids.

Giving.

We donated approximately $1160 in August. This includes all of our standard automatic monthly giving. Unfortunately, we did not give our extra $1000 in August or July. fact, I had to move the July allocation of $1000 to other spending/saving priorities in August. There is so much need, but I think we must build our cash position to be ready to be prepared to make a career move and/or buy a new family car.

Rental Account.

Our rental account continues to generate cash. At August month-end, we have about $4200 in our rental account. I’d prefer to let this fund build up over time and use it on a big purchase of potentially another rental property or for our Roth IRA. My spouse would prefer to give some of it away. It’s a typical conundrum and conversation in our house. As of August, we are simply holding tight.

Conclusion

Overall, August was a productive month. We bolstered our cash/savings position and made progress on saving for the future. Hopefully, we will make further progress over the next few months by spending more intentionally and continuing to growing our income.

Track Your Net Worth! Net Worth Update – August 2021

Track your net worth!

Track your net worth regularly to develop valuable data about the longer-term impact of your financial habits. Net worth is the value of all of all your assets less any debt.

I use a spreadsheet(Google Sheet) to simply record my account balances on or around the 20th of each month. The formulas automatically tally everything up and produce a net-worth calculation. As you can see below, I exclude certain assets from my net worth calculation, like cars (depreciating assets) and college savings (basically a prepaid expense). I use the purchase price for any real estate as I think it’s simply speculative (and time-consuming) to estimate and factor current market value. Either way, the point is to simply track your net worth in a way that helps you learn and change your behavior as necessary to reach your goals. Intentionality!

August 2021 Net Worth

I tracked my net worth monthly for several years but have failed to update it since October 2020. So, this update shows almost a year of gains. Interestingly, my earliest entry is 10 years ago (August 2011), when my net worth was only $78,135. In 10 years, we’ve grown our net worth 12.7x or approximately a 29% annual return. Of course, a substantial portion of these gains is the result of our contributions to retirement and houses (i.e. employment) and not necessarily a 29% annual market return.

Highlights:

  • Net Worth (including cars and college savings) is basically $1MM. Overall good progress but hopefully, we can accellerate the gains and growth over the next ten years.
  • 401k growth appears substantial. My 401k increased $91,840 or 32.65%. This includes my contributions of approximately $19,000. So, the earnings may not be quite as good as it should since the S&P 500 is up from 3443 to 4441 or 29%.
  • I only earned $10 on $6801 invested in a college fund. I shouldn’t be, but I’m scared to pull the trigger on anything in this market. According to stockchokers.com, I (my kid’s college fund) would have approximately $8,875 or up about 30% had I simply bought SPY.
  • My cars are a year older but apparently worth 8% more. Thanks Joe! Note: I let these values float and input whatever Mint says they are worth.

Don’t try to time the market!

The Roth IRA is a great investment vehicle.  Not only do you earn tax free growth on your investments, you also avoid the headache of tracking your basis and earnings for tax reporting.  I’ve maxed out mine and my spouses’ Roth IRA’s every year since 2010, except for 2014 (when we only contributed $3,500 each).

Contributing to a Roth IRA is nice, but you have to actually invest in stocks or mutual funds. to earn a return on your investment. Duh!  There are millions of investments and strategies, including stocks, bonds, ETF’s, and mutual funds.  I do not have the time or energy to research and invest in single stocks, so I invest via low cost, broad based funds.  I look for funds that either track the market or have a positive long term track record, such as Vanguard Total Stock Market (VTSAX) and Vanguard’s Growth Index (VIGAX).    I also have substantial holdings in a Target Retirement Fund, which automatically rebalances from stocks to bonds as retirement nears.  These broad based market index funds cost of only 0.04% and 0.05%, respectively, compared to the 0.15% for the target retirement fund.

Since 2010, the broader market has had a tremendous run.  For example, the S&P 500 index is up 167% and the Nasdaq is up 250% since 1/1/2010.  With those gains, I expected a pull back and began to believe that I could time the market with a cheap entry point.  Almost every investor will probably feel like they can sell now to buy cheaper later (aka time the market).  Sometimes it might work, but trying to time the market is almost always a money loser.  Here is my story of how timing the market cost my family substantial gains. 

Selling to Buy Cheaper

Early in the pandemic, I moved a substantial portion of my Roth IRA to cash. I thought the market had run up too much too quick and the coming (as I thought) pull back would allow me to purchase at a lower level. 

Specifically, I sold 586.52 shares of VTSAX at $71.79 on May 8, 2020, receiving total proceeds of $42, 106.27.  As of August 13, 2021, a share of VTSAX is $111.98, so my 586.52 shares would have grown to $65,678.51.   In short, I missed out of $23,572.24 of growth or 56% gain on my $42,106.27.   I also sold 103.83 shares of VIGAX on April 17, 2020, at $90.88.  These shares now trade approximately 69% higher only 14 months later.

Not only did I do this in my account, I did the same thing in my wife’s Roth IRA. Ugh!

Here is a spreadsheet showing all our sales in 2020.  Note: this chart includes some sales prior to the pandemic but those were generally intended to consolidate holdings.

Together, our accounts have missed almost $60,000 of [paper] gain on just our major holdings of Vanguard mutual funds.   Had we done nothing, our account balances would be about 33% higher.   OUCH!

A year later, the major pullback still has not come.  I sold shares expecting (hoping) for a pullback that never came, so not only did I miss out on substantial gains – I’m stuck without a good entry point.  If I jump in entirely with all my cash and then the pullback comes – I don’t have any cash to take advantage of it.  If I continue to hold cash, I’m missing out on substantial gains over what I’ve already missed (see above).

Capitulation.

Trying to time the market is dumb.

Realizing my mistake – I have since pulled the trigger on what I believe is the best option available: A systematic weekly/monthly investment in multiple low-cost Vanguard funds. I have not gone “all in” but initiated small weekly automatic investments into multiple index funds. This preserves some cash for a few years to take advantage of the major pullback but also gets us back into the market – by dollar-cost averaging.

Maybe I should go all-in and use my future contributions to dollar-cost average. However, I think if I do that, the market pullback will soon follow. Some research actually shows that going “all-in” may be a better long-term approach. I think I’ll probably increase our weekly investment amounts to push more cash into the market more quickly as a hybrid approach to going “all-in” at this point in the market cycle.

Lessons Learned.

I learned a very important set of lessons. Don’t ever think you can actually time the market. You might get lucky. But, the best long-term approach is to ignore the noise and just keep investing.  Systematically. 

Also, don’t fight the Fed and don’t sell anything. Ever.

July 2021 – Monthly Review

July 2021 – Budget review for an upper middle class Amercan family.  

Income.

My job usually processes raises the second week of July each year.  This is the fifth year in a row that my pay has remained stagnant (last raise in 2016).  While it’s dissapointing, I probably cannot complain too much about my base compensation as it is good money and includes all health insurance premiums for my family.  Further, I’m at the point in my career that growth will come primarily (only) from my own rainmaking, which has been illusive.  

Although I did not get a raise at my day job, I started a new side job that actually includes a nice supplementary salary.    I did not take this side job for the money but the money is a nice bonus as the position will require some time and mental capacity.  This opportunity should help me build relationships and grow my book of business at my day job. 

My spouse continued to recieve her monthly part time salary.  For some reason  no federal taxes are withheld from her paycheck.  This works out, however, as I withhold the maximum from my paycheck.  She also pays almost 10% of her pay to a retirement program while her employer pays over 15%.  So, over 25% of her compensation is forcefully directed to the employer’s retirement program.  I’m in the camp that would love to self-direct this amount to a 401k or roth program in lieu of the state’s underfunded defined benefit plan. 

Expenses.

This month, we had the joy of taking the entire family to our child’s sports tournament.  While the team struggled, it was a good time for the families involved.   Unfortunately, the trip was simply expensive.  The tournament was located in a major tourist area and hotel rooms were minimum $300-400/night.    The trip cost us at least $1200 between the $700 for a small hotel room at a basic hotel for only 2 nights and various food and gas purchases.  Further, the trip has solidified our intent to purchase a minivan soon, which is necessary but probably not something we’d feel pressure about absent this trip. 

Immediately following this trip was another stop at a conference related to my new part time job.  Some of these expenses were paid, but we spent additional money on food that we probably would not have done.  Not complaining but rationalizing our high expenses.  

Restaurants and Groceries. 

We spent $1720 on groceries/houshold and $600 on restuarants.  Wow!  This is probably a record or close to it.  The grocieries/household spending includes two orders at HelloFresh, which cost $136.56 for 4 meals (for 4 servings).  We recently started using HelloFresh, and I believe it saves money by reducing grocery spending overall.  However, this may not be true, as we clearly continued our normal grocery spending.  Some of the Grocery spending was also our attempt to get some healthier food during our long trip.  We stopped at a walmart hoping to grab a rotisserie chicken and a few small sides.  Well, I ran in and left my family in the car and was in such a hurry (I fear my spouse) that I ended up spending almost $50 for a few salads, sides, fruit, and chicken tenders.  They were out of rotisserie chicken, of course. 

Similarly, spending over $600 on restuarants is very odd.  We usually budget about $300-$350 and sometimes we get up to $450 if we have a nice dinner out for a special occasion.  There was a night out here but it was only $70.  Turns out that we have 25 different charges for restauarants.  This is absolutely due to our long trip, but still a bit of a shocker.  Any way, I hopeful that our high spending this month was an anomally.  So far, August spending has been much more normal.  

Other Spending. 

  • Clothes.  We spent almost $400 on clothes in July.  Some of which is necessary for school and others are simply wants.  Specificallly, we spent $100 on t-shirts to celebrate a major accomplishment for our favorite sports team. 
  • Miscellaneous.  Miscellaneous is basically the same as “stuff I forgot to budget for” and cost us $565 in July.   However, several of these costs were simply necessary, including a new tailgating tent for $85 (I hate the hot Sun), renewed Amazon Prime subscription at $125 (I’ve tried to cancel but my spouse thinks it’s worth it), more sports memorabilia purchases for $90 (Hailstate), new flags for the front of our house ($120), and a football related equipment purchase (the things we do for our kids).   
  • Entertainment. We spent $647 on entertainment, which is almost entirely a recategorization of the $700 in cash I withdrew intending to buy a rowing machine.  I used about $140 of this cash to pay for a oil change and related service work to our care while on our trip.  Turns out, it’s really helpful to have lots of cash on trips but it’s very hard to keep up with how it leaves your pocket.  
  • Medical.  Only spent $229 on medical in July, thankfully.  However, $150 of this is on a small bottle of ear drops.  This might be the most expensive liquid on the face of the Earth – a small 100-200 ml bottle costs $150.  
  • Kids Activities spending was way up at $267.  $155 of this was simply to pay football and the rest is for baseball hitting lessons and a monthly membership to the baseball hitting facility.  It’s a lot of fun and probably worth it, but I hope this kid knows how good he’s got it. 
  • Yard maintanence. We spent $90 on pinestraw for the flower beds on the front of our house.  We also paid a neighbor friend to mow the grass a few times but this money likely came out of my spouses Venmo, which is off our YNAB budget.  

Monthly Standard Expenses. 

  • Mortgage. $2000 for our mortgage, which I see is going to increase to $2070 in September due to higher taxes and insurance (thanks Biden…joking). 
  • Private School. Every year we debate our choice to send our kids to a local private school , and every year we decide to stick it out another year.  In the grand scheme of private schools, we have a pretty good deal – our school is not that expensive at about ($5k-$7.5k).  However, it’s super expensive compared to our successful public schools (that cost nothing).  This month we had the joy of adding another child to our monthly private school tuition payment of approximately $1700.  Luckily, this additional expense is more of a shuffiling since it generaly offsets the childcare payments we would be paying otherwise.

  • We spent $120 on two months of cell phone service.  We transferred from Visible, a prepaid plan that runs only $25/line for unlimited to US Mobile, which costs $30/line.  So far, US Mobile has provided better service.  This should be lower in August since we paid for both July and August – in July.  Unless we switch carriers, then it we will pay for most of September in August.

  • We spent $180 on car insurance (I love insurance and get the highest limits possible). 
  • We also paid $126 for our first monthly dues and a few charges for food at a local country club pool membership. This is honestly reasonable for the nice pool, and I am happy to provide my spouse a kids a pool option during the long, hot summer. 
  • We spent $691 in our “vacation” category, which is exclusively our charges for two nights at a Courtyard type hotel.  

Rental House. 

Our rental house continues to chug along.  Our tenants pay as agreed and keep the house up fairly well.  We renewed our insurance and flood insurance for approximately $1700 in July – leaving $2740 in our rental account retained earnings. 

We actually renewed our tenants for two years at the same rate.  We’re probably leaving some rent on the table, but I value high quality tenants over a few extra rent dollars.  We also considered moving the property to an LLC, but I’m not sure it’s worth the extra hassel and, so far, it’s been difficult to find a property insurance policy for an LLC owned property with a premium comparable to our existing policy.  My strategy has been to simply insure the additional risk of holding the properyt in my personal name with umbrella coverage.  

Giving.

We gave $1209 to various charities and our church in July 2021.  We have bugeted another $1000, but frankly cash was fairly tight toward the end of the month and nothing seemed to really pull at us.  We’ll leave the money budgeted for now and see what happens.  

Goals.  

I’d love to save a substantial amount monthly such that I can retire around age 50. I don’t mean lay around and eat all day, but I want to avoid the requirement of an 8-5 job. I want the freedom to work on various projects that may/may not pay off and the freedom to travel/work from anywhere. In short, this is not a true retirement but more of a “work my way”. I could possibly quit my current job but it would be very tight. Clearly, our standard of living has increased over the last several years (kids are fund but expensive).

Yet, as noted above, we need to acquire a larger family vehicle. We have our eyes on the Honda Odyssey and Toyota Sienna. I think we like the Odyssey a bit more and have started a “car replacement” savings fund. I budgeted my entire side income take-home pay of approximately $1400 to this category and will continue to do so. New Odyssey Elites (top-of-the-line model) have an MSRP of about $48k but could be bought for about $43k. I’m hoping to save about $25k and trade in our current vehicle for $18k. We can come up with another few thousand, if necessary. Ideally, we’d save about $2500/month and be ready to pull the trigger in about 10 months.

In short, there is always something that requires priority over simply saving for early retirement. Nonetheless, we are very blessed and look forward to continuing the current trends while analyzing spending and growing income.

Monthly Update – April 2021

April was a defining month for our budget. We made some key decisions and tightened up where and when we needed – yet were able to make some memories and accomplish a few must haves.

quote calligraphy under cup of lemon tea
Photo by Dominika Roseclay on Pexels.com

Tax Refund/Roth Contribution

We received a substantial tax refund and contributed the max to our 2020 Roth IRA. This was a difficult decision for me as I’m really interested in funding my startup.

Food Expenses Packaged Up

We minimized food and grocery expenses but also spent considerably on optional home furnishings and a family trip. We only spent $1060 on groceries/household and $270 on restaurants. Unfortunately, May is off to a terrible start in the restaurant category. We only spent $140 on clothes. Early in the month, we were low on cash because we maxed our Roth IRA (backdoor style) with $12,000 cash. It’s amazing how well our income can cover overspending, which becomes fairly evident when we buckle down. We’re absolutely blessed.

Adulting

We spent about $930 on new tires for the family car. We’ll probably have to spend a similar amount for tire on my truck, soon.

Cell Phone Service Savings – May Not be Worth It.

We spent only $50 on monthly cell service in April via Visibile. Visible service is fine at times and also really terrible. The service is so bad at times, that we’ll probably move to another provider soon. Moving to a post-paid plan will likely run us about $120+ for two lines with unlimited data. I favor prepaid plans because you avoid certain taxes and it’s a better value, in my opinion. The carriers claim that their prepaid plan’s data is secondary to their post-paid plans, but I did not notice any issue when we were with Verizon prepaid. We can move to Verizon prepaid for about $100/month for 15GB of data, which should be sufficient.

Entertainment and Family Memories

Our entertainment spending was very high at $904. This was due to spending $320 on two nights in a hotel and about $287 on tickets to a baseball game. We enjoyed ourselves and made memories for life. Well worth it. Miscellaneous spending was also high at $600. Nothing really to show for it either since it includes $330 for TurboTax and another $60 for a dumb crypto tax prep service. Spending $60 on a tax prep service annoyed me, so I sold all my crypto in April. My small play investment provided a nice return that I’ll write about soon. My wife also spent $325 on a new rug. Not what I’d consider fun, but she is generally pretty frugal – so I’ll allow it (ha)!

Giving Continues to Bless

We also continued our increased giving in the month of April. It’s truly been eye-opening how the increased giving has not hurt our bottom line. Perhaps, there is some practical truth to proverbs 11:24, which says “One gives freely, yet grows all the richer. Another withholds what he should give and only suffers want.” However, I think giving changes your attitude about money and life, which is true riches despite your net worth. I hope to continue our obedience to call to give, but I’ve still got a ways to go and no longer have any expected windfalls to make it work.

Roth IRA Contribution or Fund Startup

 

Every year since 2009, I’ve contributed to my and my wife’s Roth IRA. In fact, I’ve maxed our contributions out every year since 2010, which the exception of 2014. The tax-free growth of a Roth IRA provides significant value.

However, the streak may end this year. I’ve got an idea for a startup that I’ve been dreaming about for several months (if not years). In 2020, I formed a corporation and engaged a developer to determine costs for the potential venture. What I intended to be able to do for about $20k will likely require about $50-$80k, and that’s only for a prototype or initial build. The startup design will likely require significant capital investment.

I would love to partner with the right person on this project but that door has not opened so far. I could borrow money to fund the project, but, at this point, I’m not too keen on leveraging my house or borrowing against my paid-for rental property to fund a startup. So the only other options are to fund the startup with cash on hand, build it myself, or simplify the project dramatically. These are all good goals and part of the value in rejecting debt and limiting yourself – it forces you to adapt. Nonetheless, some cash is going to be necessary and the $12k that I’d use to contribute to our Roth IRA’s would be a nice boost for the project. Further, I keep coming back to the fact that a contribution to my Roth IRA will grow tax-free forever.

When working through a tough decision, I like to list the pros/cons to each path forward.

Factors favoring not contributing to Roth IRA

  • I maxed out my 2020 401k ($19,500) contribution.
  • My spouse earned another year toward our state’s defined benefit retirement plan vesting requirement.
  • I need cash for the startup
    • Cash on hand makes me more decisive; Funding the startup is going to take more time without using this available cash. Practically, the startup probably does not get very far in the short term without cash to pay third parties.
  • .We make too much money to directly max out our Roth IRA contributions
    • We could contribute a partial amount and back door the rest, but I assume a better approach is to back door the entire contribution per person.
    • The back door Roth process adds complexity.
      • Perhaps this ineligibility is a sign not to do it or not to max it out?
  • Most of my existing Roth accounts are uninvested and held in cash pending a market pullback (obviously a huge mistake).
    • I don’t know if or how I would immediately invest the contribution given the market’s recent run-up.
  • Would love the potential career shift offered by the startup

Factors favoring contributing to Roth IRA

  • Contributing continues long streak of Roth retirement savings;
  • Saving for retirement is the foundation of future stability and retirement savings
    • Its save to assume money spent on the startup will be lost since most startups fail
  • 401k contribution alone does not meet the general goal of saving 15% for retirement
  • Contribution cash is available (but tight); Can save and contribute to startup later this year
  • Contributing my available cash forces adaptation for startup and potentially minimizes the risk of investment
  • The Roth IRA contribution window expires; there is no deadline on funding the startup
    • In other words, I can fund the Roth and move on to the startup after the Roth
  • We spend thousands on private school and other “wants”, which I would generally prioritize after saving for retirement. By not contributing, my priorities are not in line.
  • I need to get back into the market and contributing will force me to evaluate investment options and actually invest.

Career considerations?

While I’ve been blessed with a decade-long career, perhaps I’ve hit a plateau. I dream of founding and running a successful startup – where I get to hire people like myself.

So, perhaps this is my time to take a risk?

Monthly Update – March 2021

March 2021 – 31 Full Days of Spending.

A 31 day month makes for budget busters. March 2021, was particularly painful in a few categories. We spent $796 spent on eating out – Yowsers! Lots of this spending involves lunches with several new colleagues. We also celebrated a birthday with steak and drinks! Fortunately, we came in slightly below our budgeted amount of $1200 for groceries/household. Clothing came in at $446, and I have no idea where this money went. I’m going to say my wife bought some clothes for my girls, which seems to be a recurring event. Gas was up but that’s not a big deal as prices are higher and we traveled a bit.

We also spent $717 on “miscellaneous” and $736 on “entertainment”. Many Target purchased at categorized as miscellaneous but could certainly be groceries/household or even clothing. I spent almost $80 trying to buy a $27 extension cord that was a “good” deal. I bought it twice hoping to cancel the first order so that I could substitute the filler item. Unfortunately, both orders shipped. The entertainment budget is a bit more understandable. We spent $196 on 4 tickets to an upcoming concert along with about $200 on various baseball event tickets. We spent $120 on various items while visiting a family member’s house. Another $100 for drinks and appetizers at a nearby resort.

To Cut Costs or Earn More?

Some positives from March: We switched cellphone providers to Visible, a prepaid carrier on the Verizon network. This switch will reduce our monthly cell phone cost by about $30. The service appears worth the cost savings, so far.

We will save about $360 if we keep the phone plan for a year. Yet, there is a point at which it’s a much better strategy lucrative to earn more than to save more. The time spent researching and executing the switch might have been better spent developing business at my day job.

Giving Update.

In late January, I mailed a $1,000 donation to a local charity that does great work for the homeless. Giving is not easy for me, so this remains a big deal. The charity never received the check, unfortunately. To make good on my verbal commitment, I also made the donation electronically in March (the original check remains outstanding). If the check is eventually received, I hope to bless the tremendous organization with the extra gift.

Stimulus Inflation Coming?

We make too much money to qualify for the third stimulus payment. A slightly expected financial windfall never materialized. Of course, we don’t need to receive $7000 ($1400 for each of the 5 people in our home). It’s great for people that need it but it also represents a dangerous precedent. We should not look to Washington and politicians as the source of financial security/blessings/hope.

Who knows if inflation will pick up but the total money supply has grown substantially over the last year. See Fed’s chart here. https://fred.stlouisfed.org/graph/graph-landing.php?g=Ckxu&width=670&height=475

Huge deflationary pressure around March of 2020. The growth of the money supply makes it hard to believe there will not be at least some inflation.

Payroll Tax Cut/Base Broadening Proposal by Mark Goldwein

Mark Goldwein wrote an interesting proposal in thehill.com to reduce payroll taxes paid by employees while raising revenue to address social security shortfalls.  

For context, Mark writes:

“…. Currently, the federal government taxes 12.4 percent of wages to cover the cost of Social Security benefits. This payroll tax is divided evenly between a worker and her employer so that each pays 6.2 percent. It applies only to cash wages and only up to a maximum of about $133,000 of earnings per year, otherwise known as the taxable maximum.”

As noted above, the payroll tax only applies to cash compensation below a specified amount. According to Mark, about 15% of cash compensation is paid to those individuals earning more than the taxable maximum and about 20% of total compensation is paid to employees as non-cash compensation, neither of which is subject to the tax.

Mark argues that requiring all non-cash compensation to be subject to the tax (at a  rate of 5.2%) raises additional revenue sufficient to reduce the payroll tax to the employer and employee from 6.2% to 5.2%.

Without discussing the merits of the proposal, the fact that the current payroll tax of 12.4% is insufficient to pay for current benefits is absolutely astounding and probably something that most voters simply do not understand or appreciate. This is not sustainable and kudos to Mark for proposing a thoughtful solution. Yet, again it seems crazy that a 12.4% payroll tax on approximately two-thirds of all compensation is insufficient. Why and how did this happen?

15 Year Mortgage or 30 Year Mortgage

I favor 15-year amortization over 30-year amortization schedules.

I recently paid the 48th payment on my 180 payment mortgage. In other words, I’m 4 years into a 15-year mortgage. I paid a total of $26,685.87 in interest over the last 4 years and paid $55,039.17 of principle (from $231,600 to $176,560.83). Although I paid a small amount of approximately $75.00 extra each month, I think this shows the great benefit of a 15-year mortgage.

If I had a 30-year mortgage, the required monthly payment would have been lower, but I would only have paid $21,919.29 of principle (from $231,600 to $209,680.71) and $33,175.35 would have gone to interest. This assumes the 30-year mortgage would have a 0.5% higher interest rate, which is fairly typical.

Some might argue that had I taken the lower payment (i.e 30 Year) and invested the difference, I would have a greater net gain than the 15 year. This might be true since the market has done fairly well between August 2015, and August 2019. Assuming the difference in payment of $554.80 over 48 payments, that immediately nets $26,630.40.  Further, that money was invested systematically in the market and the S&P has gone from approximately 2000 to 2900 or a 45% total gain. I presume that a more exacting calculation could be performed but the gain on your monthly investments would be much smaller since you only started with $554.80. Ultimately, this ignores the reality that most people simply lack the disciple to do such investing.

The first few years in a 30-year mortgage are painful since most of your payment will go to interest. The first payment in a 15-year mortgage amortization schedule is much more favorable. There are several google sheets amortization schedules that you can manipulate to figure out what works best for you.

Two Simple Steps to Start Running

Running provides a very inexpensive way to burn calories and exercise. Personally, running reduces stress and clears my mind. So, although running may not offer a direct financial benefit running can help you stay in shape and provides psychological benefits.

1. Conquer the First Step

On a cold dark morning, the first step out of the door (or maybe bed) is the hardest. More times than not, simply walking out the door for a run is 75% of the battle. If you can get up and out, you are likely going to get your run in. So, when you’re not feeling it – simply just go for a walk. After about half a mile, your blood will be pumping and you’ll probably want to run. Imagine that.

2. Start Slow

If you are a beginning runner, set a very basic goal. Do not set a goal to run a 6 minute mile average in a 5k. No, your goal should be to enjoy getting out and relaxing on a short and easy run/walk. You can push yourself later.

Read — “Born to Run” by Chris McDougal. Although the book starts a little slow, you will put the book down and strap on your running shoes.

There is not much else more satisfying than knowing that you’ve got your run in for the day.