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

Did we buy a rental property?

If you saw my post on Friday, you know that Girl Ninja and I were seriously considering going 50/50 on a rental property with my best friend from high school who married one of Girl Ninja’s best friends from high school. Today, I tell if we wrote up an offer, but not until I drag things out a little more 🙂

We viewed the property yesterday morning. It is due to list on Tuesday, so getting to see it pre-market was crucial. We completely expect it to go pending on the first day it lists for full (or above) asking price. Having the opportunity to write an offer, without having to compete with other interested parties, was a pivotal part of making the deal work.

The house appears to be in tip-top shape. It’s only a year old and the appliances, finishes, etc all still shine like they’re brand new. It was clear the owners took pride in their home. There were linoleum floors in the bathrooms and tile on the kitchen counter-tops. This bothered me because I would have preferred higher quality finishings, but at the same time, these are the perfect materials for rental wear-and-tear. The house shows really well and I could totally see a Microsoft employee (Microsoft is 20 minutes away) renting the house for his/her young family.

Okay, so now that you know we liked the place, it’s time to tell you if we wrote up an offer…

Drumroll please….

Nope. Here’s why:

If Girl Ninja and I co-bought this property, we wouldn’t be able to buy our own place for at least two years, since that is about how long banks need to verify stable rental income.

With any partnership there is risk. While I still believe that my friend and I would have been able to make this deal work, we know that everyone probably thinks the same thing. Neither of us could shake the potential issues that could arise when control is shared.

The time sensitive nature of the transaction. This was my biggest hesitation. I felt rushed. An offer had to be made last night in order to give the sellers enough time to respond before it goes to market on Tuesday. There were still a lot of questions I couldn’t yet answer, and while I believe the house is a good buy, I didn’t have enough time to really wrap my brain around all that encompasses being a landlord. Especially when that responsibility is shared with another person.

But ultimately, Girl Ninja and I did not go in on the house for one reason and one reason only. My friend decided to buy the house on his own. I’ve known this was a possibility for the last few days. He sees very little downside and a ton of upside potential. He can afford the risk and no longer has to worry about me dying divorcing, or forcing a sale. I went and viewed the house with him yesterday knowing he was probably going to be the only person writing an offer. It’s a little sad because I want our cash to be invested in something, but I know this is for the best. I’m super pumped for him and I hope his offer gets accepted.

Who knows, maybe Girl Ninja and I will rent from him once we have a kid or two 🙂

p.s. for those that care, here is the spreadsheet that lays out the numbers (click to make images larger)…

Screen shot 2013-04-14 at Apr 14, 2013, 11.45.19 PM

Screen shot 2013-04-14 at Apr 14, 2013, 11.46.08 PM

 

Putting my money where my mouth is…

You know how I keep saying Seattle real estate is in a bubble? Girl Ninja and I haven’t walked through a single house in over two months, we’ve virtually given up on the house hunting process. So we decided to do what any logical couple would do… buy a house.

Wait, what?

Allow me to explain.

If you’ve been reading along for a while now, you’ll know that I’m a big fan of short-term investing. Saving for retirement is great, but that only puts money in my pocket for when I’m old and wrinkly. If I want to have financial freedom before my 60’s I’m going to have to start investing outside of my 401k and Roth IRA. What better way to do that than to invest in an income producing asset.

A few weeks ago, I got a text from my long time best friend. He wanted to know if I would be interested in buying an investment property with him. I told him no. We chatted more about it. I told him no again. But after a few weeks of continued dialogue, and coming to the realization that Girl Ninja and I will probably not buy a house in the next year or two (because we love renting so much), I’m warming up to the idea.

We are going to look at a house on Sunday that hasn’t yet come on the market (it’s due to be listed on Tuesday, but through a connection were able to reach out to the sellers and get a viewing before it lists). It’s an 1,850sqft, 3b/2.5bth, that will list at $359,000. The house was built in 2012 and the owners are moving to cash out on the 20% YOY return on investment they’ve made. Well, that and they want to upgrade their home.

The house is in suburbia, which means it’s cookie-cutter, across the street from a large park, and in a solid performing school district. I personally wouldn’t buy this house for Girl Ninja and I, the layout isn’t my style, but it is shaping up to be the perfect candidate to make a rental property.

Here is how things would go down if we decided to move on the property.

  • My friend and I each put $55,000 in to a house fund ($110k total).
  • We buy the property for full list (we expect it will go pending the same day it lists due to the market).
  • We put 25% down, $90,000.
  • Another $5,000 each ($10k total) towards closing costs if necessary
  • And another $5,000 each ($10k total) for a maintenance/reserve fund.
  • Exact models of this house in the area are renting for around $2,300/mo, but we budget for $2,100/mo.
  • Our PITI payment would be $1,700/month.
  • Take discretionary rent income and build house reserve fund.
  • Let someone else pay off our mortgage.

Seems like a pretty good plan, eh? Obviously the scenario above seems pretty legit, but of course there are some concerns as well. Such as…

  • Finding tenants that don’t suck.
  • Knowing the market will cool off at some point and the house might not appreciate much above current price point for a few years.
  • Partnerships, by nature, bring an element of risk.

Still, no matter what way my buddy and I run the numbers (and believe me they’ve been ran), it seems that this house is smart buy. I don’t say that lightly, my friend is an investment banker who makes a crapload more than me, and knows Excel like Lindsay Lohan knows the inside of a courtroom. I trust the dude more than I trust myself (he’s actually the guy that got me to sign up for a Roth IRA 6 years ago!).

It seems like Girl Ninja and I are in the perfect position to take something like this on. Here is the way I see things:

  • We have had a ton of money sitting in a bank account for years now, earning virtually nothing.
  • We have no desire to buy a personal residence in the next 12 months, possibly longer (possibly ever).
  • I know that short-term investing is important to me, and at some point I have to stop talking about it, and start doing it.
  • I know all investments come with risk.
  • Having someone else pay off a house I partially own would be sweet.
  • Girl Ninja and I could always move in to the property if needed.
  • We aren’t buying for the short-term, minimum 10 year hold.
  • Never have to put another penny in to the house after the initial investment.

Who knows what will actually happen after we look at the house Sunday morning, but it should be an eventful weekend nonetheless. I’ll let y’all know how things went on Monday 🙂

p.s. I’m obviously leaving out a lot of information, if I didn’t, this post would have been triple the length. If you have more questions about the property or our assumptions don’t hesitate to ask. We want to be very diligent in the process and think of all the potential benefits and concerns.

Stalking the stock market.

I take a slightly more aggressive approach to saving for retirement than most. For now, 100% of my retirement contributions are invested in various mutual funds. These mutual funds give me partial ownership of thousands of different domestic and foreign companies. At this stage in my life, I don’t see much of a reason to not focus exclusively on stocks. As I hit my 30’s, in a few short years, I’ll probably begin dabbling in the world of bonds.

Seeing that I have some kind of affinity for the stock market, you’d think I’d be pretty market savvy. I’m not. I picked a few solid performing mutual funds and never looked back. So far this seems to have worked out for me.

What scares the crap out of me is investing in individual stocks.

It’s like going to Vegas and betting it all on black. Okay, not really. One can chart, look at P/E ratios, and spend hours on Morningstar to get a better idea of what is going on with a specific company. But I still feel like this…

50360e401d41c87726000130

Since I know nothing about how to properly build a portfolio of individual stocks, I’m going to turn the soap box over and give you an opportunity to educate me by answering the following questions.

1. Do you own any individual stocks? (If no, why not)

2. Which ones (or how many)? 

3, What’s a good source to learn the basics of dabbling in the stock market? 

4. Have ya made a bad buy before? (WaMu, Blockbuster, etc?)