How many of you invest outside of retirement?

investing

I’m currently of the mindset that Girl Ninja and I have enough job security and enough liquid assets we can afford to quit saving money. It’s a fun place to be in for sure, but it is also extremely intimidating. Throwing excess income in to a savings account each month takes virtually no effort. Investing money in short-term investments, however, requires one to be much more proactive.

I could take the easy way out and just increase our retirement contributions to some insane amount, but that doesn’t really help us much. Sure, we’d be super rich when we are all old and wrinkly, but what good does that do my 40 or 50-year-old self?

I’ve said it before and I’ll say it again…

  • I’d way rather have $1,000,000 waiting for me on my 50th Bday (side note: today is my 28th birthday) and $2,000,000 in my retirement accounts, than just having $5,000,000 waiting for me at 65.

That’s just me though.

Maybe you’re different? Who amongst you ACTUALLY is being proactive about investing in shorter term assets? Throwing a couple bucks at some random stocks isn’t what I’m talking about. Strategic, consistent, and significant allocation of discretionary income is what I’m looking for.

If you don’t, why not? If you do, what specifically have you chosen to invest in?

 

I get high.

I’ve been doing a lot of blogging lately about real estate and the stock market. The last twelve months have been insane for both markets. Epic and unsustainable are some of the adjectives that come to mind for the recent  gains.

The general consensus amongst PF nerds is that one should strive to buy low and sell high. Today, I’ll make the argument that one should Buy low AND Buy high.

One of the Seattle Real Estate blogs I read repeatedly says this is a terrible time to buy a house in Seattle because of the recent market appreciation. This bothers me for a few reasons: 

A house is a home first, an investment second.

I have to pay to live somewhere, right? Real estate is one of the only investments I can think of that satisfies a basic human need, shelter. Even if my house lost all of its monetary value, it still provides ME value. If your WaMu stock loses all of its monetary value, you have nothing.

We are looking at houses within our budget.

Just cause the market went up doesn’t mean our budget did. If we find a house that we like – in our price point – I’m not going to refrain from buying it just because it was $20,000 less last year. Milk was also cheaper in 1995, so should I not pick that up at the grocery store today? Which leads me to my next point…

Buying high is a good thing.

I mean, that’s they way the stock and real estate markets works right? They should both be setting new highs every day. Okay well maybe not every day, but over the long haul the trend is supposed to be (and always has been) up. Why do we act scared or surprised when the Dow sets a new record?

THAT’S WHAT IT IS SUPPOSED TO DO!!!!

I get that one might argue the importance of buying low and selling high when it comes to short-term investments. But who the crap buys a house with the intentions of selling it two years later? That’s stupid, or at least speculative at best. Two years from now the housing market may be down, but I bet you a billion dollars twenty years from now the market is up. I don’t really care if my house is worth $300,000 or $320,000 today, when it is going to be worth $700,000+ thirty years from now. Sure, it would be nice to time the market, unfortunately no one can do that without taking a gamble.

Moral of the story kids: The market being at all time highs should be reassuring that the market is performing as expected.

Well, we officially quit saving yesterday.

After a brief chat with Girl Ninja yesterday, we’ve made the wise decision to stop saving money for the foreseeable future. No, we haven’t hit our $100,000 savings goal yet, and if I all goes according to plan, we never will.

I first blogged about our ambitious $100,000 savings goal in June 2010. Exactly three years ago. And here we are, probably four weeks away from reaching said goal, ultimately deciding it’s time to throw in the towel and give up.

Have I gone bonkers? 

bonkers

 

Don’t worry, I haven’t gone off the deep end yet. It’s just time I start practicing what I preach.

While it’s true we have not hit $100,000 in savings, we are pretty freaking close. About $3,500 short as of this writing. This week’s blog post about 401(k) loans got me thinking. I like the idea of using a 401(k) loan, but ultimately have decided against it for one reason.

I wont need (or want) a boat load of cash sitting in the bank once we’ve made our down payment.

As I’ve mentioned before, we will likely use between $70k and $80k for a down payment and closing costs. This will leave us with a $10,000 emergency fund and between $10,000 to $17,000 for “other things” (furniture, vacations, etc).

I have no desire to keep more cash in the bank than necessary. In other words, we’ve reached our MAXIMUM savings threshold. I feel like any additional savings would no longer be classified as “being responsible” but instead as “hoarding”.

hoarding

We knocked debt freedom off the list years ago. Yesterday, we put a check mark next to savings. Now it’s time to make some new priorities. So…

  • I upped my 401(k) contributions last night from 13% to 20%, and after I see exactly how that affects my paycheck (thinking about $430/month less in take home pay), I might increase it even more.
  • We’ll probably begin living slightly more frivolously (emphasis on slightly). Maybe we go out to a nice restaurant once a month. Take a weekend trip somewhere once a quarter. Or finally update one of our six-year-old laptops. We won’t be keeping up with the Joneses by any means, but it will be fun to splurge every now and again.
  • Lastly, and what I’m most excited about, we will take the majority of our discretionary income and FINALLY start throwing it in to taxable investment accounts. If all goes well, we can make some serious progress in our goal to build up some short to mid-term investments. It’s important we get a jump-start on this now, before we have kids, a larger house payment, and only one income. 

While it would be cool to actually reach our $100,000 savings goal, I think it’s way cooler to move on to the next phase of Operation Build Wealth.

I might take out a $30,000 401k loan just to piss some of you off.

If you’ve been reading PDITF for longer than, say five minutes, you’ll know I’m not necessarily the smartest PF blogger of the bunch. But what I lack in brains I make up for in crappy stick figure drawings…right?

yes

Over the years I’ve read a handful of articles about 401k loans. Most articles pretty much say the same thing, “They’re really dumb, so don’t do it.”

So for that reason, I’ve decided to consider taking out a 401k loan.

How you like them apples counterintuitive personal finance?!

Okay, I’m not necessarily considering taking out a 401k loan, as much as I am trying to figure out the reasons why I should not take one out.

A few things to note….

  • Girl Ninja and I have just shy of $100,000 in our savings account.
  • When we finally find a house worth buying, it will probably be priced between $350k and $400k.
  • We will put 20% down (so looking at about $70k to $80k).
  • My govt job is stable (instead of facing furloughs I am working mandatory overtime)

So now that you know those basic things about me, allow me to try and explain why I’m flirting with the idea of using a 401k loan as part of my down payment.

I logged on to the TSP website (the government version of a 401k) and played around with their loan calculator. I ran some numbers based off a $30,000 TSP loan (to be used for part of our 20% down payment) being paid back over 3 years.

According to the calculator I’d be charged 1.75% interest on the loan, and would have bi-weekly payments of $395 taken out of my paycheck to pay it back. Over the course of the three-year payback period, I’d have paid a total of $810 in interest, or $22/month. There would also be a $50 administration fee charged upfront.

The cool thing (is cool the right word?) about a 401k loan is that, although I would have to pay $22/month in interest on the loan, that interest gets paid to my 401k balance. So I’m just paying myself interest, not the bank, not the government, just myself. Essentially I borrow $30,000 from myself and pay myself back $30,810 over the course of three years.

I’m failing to understand why this is a terrible decision? 

The reality is the stock market has gone gang busters the last couple years.

DJI

What’s more, I didn’t start investing until 2007/2008. This means I missed the 2002 to 2007 bubble. Virtually all of my 401k investments were made while the market was “on sale”. This makes for some pretty incredible returns, not because I’m awesome at investing, but I didn’t have money to invest until the Dow was trading sub 10,000. Dumb luck I guess. 

While it’s true the market could continue to go higher and higher for the next couple years, I don’t think it’s necessarily a bad choice to lock in a 25% YOY appreciation. Especially when I’m cashing out at HISTORIC HIGHS in the stock market to take advantage of mortgage interest rates that are still near HISTORIC LOWS.

What am I missing here? 

There are only two things I can think of that make this 401k loan option potentially stupid…

    1. The markets continue to go gang busters for the next three years. I will be paying myself 1.75% interest on the loan which is a heck of a lot better than my savings account currently pays, but if the stock market goes up 20% a year for the next three years that will be painful to watch. My gut says this scenario is unlikely and the bull market will cool (especially as the fed lightens up on Quantitative Easing), but it is still a possibility and something to consider.
    2. If I get fired or quit my job I have to pay the loan back in full within 60 days. This is definitely the most popular reason PF bloggers advocate AGAINST 401k loans. But isn’t this because most people who take out 401k loans don’t have the cash on hand? I’ll have more than the loan amount in my savings account, so in the unlikely event I got canned, I could pay the loan in full no issue. Remember, I’m a firm believer “liquidity is king” so why not keep the cash in hand?

Okay, so like I said. I’m not the smartest kid in the room. Have I done all my homework? What am I overlooking?

Note: If you think this decision is really stupid (which it totally might be) I just ask that use realistic numbers and analysis in your rebuttal as I’ve tried to do in this post. Not just a  comment like “401k loans are for idiots.”

Does “buying low/selling high” apply to retirement?

Did you know I LOVE LOVE LOVE getting emails from PDITF readers!? It’s nice to break up the spammy sponsored blog post proposals that typically flood my inbox. “Dear Ninja, I would like contribute relevant financial information to blog readers of your fine website”. 

Emails like that make me want to stab my eyeballs out with a jalapeno.

jalapeno eye

That’s why I was pleasantly surprised to get this email from a reader….

Ninja,

I have a question about buying low and selling high. Does this apply to retirement accounts as well?

I have nearly 40k in my 401k, nearly all a ROTH. I put in 12% of my income in and my employer matches 4%. Given that the markets are what I would consider “high,” does it not make sense to sell now and move my accounts to cash?

I tried doing this through my Fidelity account, but did not have a cash option, everything was in funds or bonds of some sort. When I contacted a representative on how to do this I was asked why am I doing this, that this is not the point of a 401k, and that it would benefit me to stay in the market, for the long term.

Thanks!

Ahhh, pretty simple question “Should I buy low and sell high?” 

The answer is even more simple…. YES!!!!!

Only problem is, no one knows what “high” or “low” means. People were freaking out when the Dow dropped under 10,000. They thought 9,000 was an insane deal and it was time to buy. Little did they know, the markets would shed another 25%.  

I think your Fidelity rep is spot on. Maybe the markets hit 16,000 next month, or maybe they drop to 13,000. Since I have no way of knowing what’s going to happen I just invest consistently every month. That means I bought in when the market was in the 6’s and I’m buying now in the 15’s.

Don’t get me wrong. I know the markets have been extremely bullish the last couple years. A correction will surely come. But is that correction going to be from 20,000 back to 17,000? Or will it be from 15,000 down to 12,000? Will it be six months from now, or six years?

I CAN accurately predict the market will go up and down, but I CAN’T get any more specific than that.

And for that reason, I’ll stick to boring old unemotional dollar cost averaging in my retirement accounts.

Should I accept a free financial consultation?

goldilocksgoldilocks

goldilocks

A few months ago, I signed up for a new money management website called Personal Capital. It’s a competitor to Mint.com and apparently was founded by the former CEO of PayPal. I decided to give the new guys a shot and set up all my accounts shortly after they launched. After a few weeks of use, I decided it wasn’t for me and that I’d just stick with Mint. Haven’t logged in to the site for a couple of months now.

Personal Capital (PC) was out of sight and out of mind… until yesterday, when a financial advisor from the company left me a voicemail. Apparently PC prides itself on its investment portfolio analysis tools, and as a benefit to new members they offer a free consultation with one of their financial advisors.

I find this both intriguing and creepy. I haven’t called the advisor back yet because I’m kind of skeptical of what can really be accomplished in a 30 minute phone call. Me thinks it will be more of a sales call, than a productive advising session.

But then another part of me figures “What the heck, it’s free.” Might as well give it a shot right? Even if the guy is super sleazy and just tries to sell me on more advising sessions or investment products, I’ll at least get to write an epic blog post about the call, right?

I’ve never consulted with a certified financial planner before. I’m definitely open to the idea (especially if that consultation is free), but I don’t want my first experience to be a bad one and I fear this could be exactly that.

If someone from Personal Capital, Mint, or your bank called you and offered a free consultation on your investment portfolio, would you take them up on it? Or should one only consult with a neutral, third-party, financial advisor? Should I return the voicemail? Anything I should ask the advisor if I do?

 

A lot can happen in 12 months.

Sorcery

Yesterday, I went all “Who wants to be a millionaire” on you guys and asked the audience a question. It was a simple question:

How has your financial situation changed over the last 12 months?

Of the 333 of you that responded, 240 said things have gotten better. Only 44 readers said things have gotten worse. I wasn’t surprised by the results, considering anyone who voluntarily reads personal finance blogs in their free time, probably tends to care about their finances more than the average joe.

I liked my question because it was intentionally vague. I left it up to the respondent to decide what an improvement in one’s financial situation meant. Maybe that meant getting a fat raise, maybe it meant your retirement funds have appreciated, maybe you moved out of your parent’s basement, or maybe you’ve finally started knocking out that consumer debt that’s been hanging over your head. It was awesome to see the additional insight some of you provided in the comments section, so thanks for that.

While not much has changed in the Ninja household over the last year (expenses and income are pretty much the same), we’ve seen a pretty incredible increase in our net worth.

In fact, I just ran the numbers and it looks like we’ve shot up $55,454 in the last 12 months. In-FREAKING-sane. I honestly had no idea we made that much progress. That works out to a $4,621 increase each month… for twelve straight months.

What’s more, we dropped $12,000 cash on a car upgrade and another $7,500 on MANteresting during this time.

How the heck did we swing this?

I really don’t know. I mean, obviously the markets are responsible for a big chunk, but it really just comes down to boring ol discipline. Investing in our future, saving aggressively for a down payment, not being consumer whores, blah, blah, blah.

Being intentional and proactive with our finances in our 20’s will hopefully set us up for continued success in our 30’s, 40’s, and beyond. I’m taking the words of Spock seriously and doing my best to…

Live long and prosper