My 529 Plan Plan

I have 2 kids, a 4yo Girl and a 2yo (we will round up 3 weeks) Boy. As soon as I got their SSN's (which takes a surprising amount of time, weeks to months after you file the initial Birth Certificate) my kids were the proud owners of a bank account and a 529 plan (they also have an investment account... I like to keep the money they get as gifts in their cash/investment accounts).

So then I came up with the 529 Plan Plan -- how to, with our own money (avoiding any presumption of windfalls/etc) to fund their college education. My parents paid for mine and I want to pay it forward as much as feasible (we are already funding ~25% of our net into our retirement accounts(plus another 8-9% to taxable accounts), so we already are paying ourselves first). Not seen on here is that thanks to a trip to Afghanistan I was able to sign my Post-9/11 GI Bill to my kids, so each gets 2 years of 50% college costs + books + a housing stipend. And who knows what college is going to look like in 14 years, I cannot see the current trend continuing.... But at least I am making the effort to cover them. And since my state plan (Virginia) allows me to deduct contributions from my State taxes it at least reduces the burden on us.

The plan is simple, 100 dollars a month, increasing that amount by 10 dollars every birthday.  One catch to the plan in that there a 130 dollar a month jump on their 5/6th birthday. That is the celebration of them not being in daycare anymore, it represents less than 10% of the monthly cost.... (side note, there is a plan for at least some of that money as well... while post-daycare the kids costs will seem light as feather, it is better to save and bank that money (50%) to cover things like camp, after-school, etc). I also programmed in conservative returns for the duration.

Below is a screenshot of my google sheets that contains the original plan, combined with the actual's (since I like seeing how the battle plan matches up with reality).

Saving

This past Friday was a reminder why I have an account labeled "House Savings Account"(HSA). Now you may say, Daniel, you already have a house, why would you have a house savings account? Because even though you already have a house, doesn't mean that you won't have unexpected (or expected) expenses in maintaining that house.

My HVAC (13 year old heat pump) decided to give up the ghost. And yes, I could get the basic one for maybe 4k less than the top of the line, but in the end there are advantages of putting in the top of the line for a system that consumes 40-60% of my home energy costs. So shortly (having it go down over the holidays is difficult) a healthy chunk (all actually, but I have other cash accounts) 11k will be leaving my accounts. In the time we have bought this house (less than 3 years) we have had to replace the roof, an outside door and the washer and dryer. This is why every month I put 200 dollars into to my HSA (as well as its other friend accounts, travel and car maintenance).

So while it may sometimes look like I have extra un-invested money laying around, we are prepped when life comes up

Financial Housecleaning

So in another week or so my birthday will wind around (I like birthdays, they are a sign of accomplishment of living another year). This one is pretty notable as it will be my 40th (crazy to me... I know I just said birthdays are accomplishments but... It is hard to believe we are more than halfway done with 2016 already).

One thing I like to do is step back and look at my financial state (I read blogs like this (which address how you should be investing at certain ages) and use tools at Personal Capital, like their retirement calculator. As I get older and the target window for retirement (I am planning on a hard stop at 62.. that's when I can start drawing my full FERS retirement from my government job). I will give an example of what I just did for my Thrift Savings Account (TSP, 401k for the US Government workers), without any real dollars behind it (I overshare a lot between social media and whatnot, but I have not reached the point of sharing my net worth with the world... I think the only person other than my wife that knows my full net worth is my broker team at Personal Capital (that and Google... but they swear that they won't do evil)).

At the beginning of the 2016 it was 40% C, 15%G, 20% S, 25% I. In March I started the long road to more stable assets, with the plan to decrement C, S, I (subtracting C twice) and slowly build up G and F every six months. So now I am at 38C, 16G, 1F, 20S, 20I. Adjusting both the contribution amount as well as the actual balances. I also did the same with another account (Betterment)  decreasing my total exposure to stocks by 2% there (with a bump in bonds to compensate).

Yes, I know that swinging slowly to more stocks will decrease my potential gains, but it also decreases my total risk exposure, which at this point in my life since I have been a prolific saver overall (not as good as I could have been but I also lived life) means I have a fairly large amount to protect.

So overall, birthdays are a good time to reflect on the past and plan for the future.

Luck

So reading over on a Personal Finance Blog Mr Tako Escapes, in particular his post about
The Arrogance Of Wealth and he brought up a topic I firmly believe in. That even the most successful person out there didn't get there solely on their own skill and knowledge. Luck plays a huge factor (that you were born in the right place and time, to the right parents and had the right opportunities in education and work to excel).

I have been saying the “luck” thing for a long time. But the people, like some people I know on Wall Street, don’t like acknowledging that, while yes, they are probably very skilled in their field, luck played a significant role (some may actually say overwhelming role) in their success…

I know that myself and most of my fellow Americans are very lucky. We live in a society where the biggest problem is getting too fat, from poor diet and lack of exercise. Where even the poorest have TV's, air conditioning/heat and cell phones. Yes, I know there is food anxiety in our society, but overall we don't have it too bad.

One thing I really want to instill in my children is to help them recognize the sheer luckiness of their position. To have (if my may be ever not so humble) great parents, food, toys, family and most everything a kid could want. I watch on TV and the Internet (and have seen with my eyes in Afghanistan) the true level of poverty that exists in the world. Where children don’t even have enough to eat every day (the story that has destroyed me this year was of a 2yo on the streets in Nigeria….http://www.independent.co.uk/news/world/africa/two-year-old-nigerian-boy-accused-of-being-a-witch-rescued-by-aid-workers-a6875706.html I am not prone to being a emotional but if that picture of the women offering water to the child doesn’t emotionally hit you I don’t know what will).

As my parent’s would say, “There but for the Grace of God go I.”

Mortgages

Aka, why I will not be paying down my mortgage down (except to get to parity before I refinanced) anytime in the near future. Yep, I am addressing the holy war item of the personal finance world, "Should I pay down my mortgage?" In my case? No. *mostly

As a veteran (key since I have a 10% disability which allows for no cost refinancing) I have refi'd a number of times (and this is the third property that I have owned). I think I may be done for while now, since I am down to 3.25% APR. Now I love spreadsheets, so I spent quite some time crunching numbers. Because of the refinance I got back my escrow and skipped a payment, so I ended up with a fairly nice cash reserve (that I parked in a Betterment Safety Net account (40% stocks, 60% Bonds)) that I will slowly draw down over the next 4.5 years to get the principle down to the same amount I would have left on my old loan (and ends a month earlier than my previous loan). Did I mention that I really, really love using spreadsheets (and as a good husband I make sure that my wife has access to them and understands them)?

But then? I am going to stop (for a long time most likely). Why? Because mortgages are "good" debt. Right now even when I pull out the standard deduction and itemize, I come out ahead. And while the end result of an early paydown is nice (no payment other than insurance and Taxes!) you also have an asset that is mostly non-liquid (maybe a bit by HELOC, but those are tightening up like mortgages have) asset that, when you look at the historic return on property falls into the lowest category, below even bonds (note I said historically, this period seems to be an anomaly). I personally have set the goal of not letting my home equity represent more than 25% of my family's net worth (and at no point exceeding the amount I have in my cash/taxable accounts, like it does right now).

My "net" cost

• P+ I + T + Insurance (no PMI, as a VA loan there is no PMI, even if I didn't already have 20%+ equity)
• I + T is deductible (whatever your top marginal tax rate is, in my case that is ~33% for both Federal and State)
• So gross cost is P + (I+T) * 2/3 + Insurance (but wait, if you look at it as I see it)
• However, remember that P is increasing your share of the asset (increasing equity, lowering the overall loan... effectively an investment (a bad one, since in general property that you live in is among your worst asset classes historically)), so really, the big question is can you get similar housing for the cost of 2/3 * (I+T) + Insurance? In my area? You can probably hear my laughter from wherever you are reading this.

Now there are some additional costs. Maintenance is another factor (HVAC's die, Roof's rot, painting needs to occur) but relative to my mortgage payment (and like a good saver I even have a special account for home maintenance that I automatically stuff money into every month (I need to do more but what I have it at is barely twice the cost of the insurance... which is 1/60th of my payment)) it is fairly low. Because I have a townhouse there is an association fee (we have a shared garage so there is some value from that on top of landscaping and snow removal) and there is always the hidden risk of an assessment in the future.

On a final note there will be a point in the far (15-20 year range) that this situation changes. As your Interest component decreases there may come a point where the mortgage slips into the "bad" debt category, where the net cost makes a standard deduction viable again, which removes the tax advantage from the mortgage. And by that point, based on my portfolio it may make sense to start piling on to the mortgage again. 

Betterment

So in addition to Personal Capital the other investing tool (other than my legacy accounts at USAA, which I have been reducing to limit my capitol gains exposure and to lower my overall cost (which I figured out from Personal Capital's Fee Analyzer and Investment Checkup ) is Betterment (https://www.betterment.com/) or better yet betterment.com/invite/danielbuchholz (since that is a win-win link, you get the cool features of Betterment for a 6 month for free, so do I (for a month), not that their fees are bad). Betterment is one of several "Robo-Investors" that have little to no personal contact, using questionnaires to determine what the ideal risk is for the investor and then giving them the tools to execute a portfolio based on that risk profile.

So there are always going to be people out there that will tell you that any fee's are bad and to avoid them at all cost, putting the entire sum into market tracking ETF (the current main love of most PF people is Vanguard, with their low entry cost, low fee on the ETF's). But I think that there are a few features of Betterment that offer some value to everyone but the most motivated investors:

• Tax Loss Harvesting:
• Betterment automatically will take advantage of market losses to sell assets that have lost money and buy and equivalent asset, allowing you to realize the loss
• https://www.betterment.com/tax-loss-harvesting/
• Automatic Re-balancing
• In addition to spreading your investment across multiple assets (to give you an acceptable level of diversification) they will also re-balance your portfolio if it strays significantly from your ideal ratio (if it hits more than a 3% aggregate difference). It will also invest any additional money you put in to bring the investment ratio back to your target. 
• https://www.betterment.com/portfolio/
• No transaction fee (but there is a cost)
• While they do charge a baseline fee (currently .35% for 0-10k, .25% for 10k-100k, and .15 for any amount above 100k) any additional costs for the features above (and for putting new funds in or pulling them out) is rolled into that baseline fee.
• https://www.betterment.com/pricing/

I think this Robo-Investor trend is pretty neat (I am a technologist after all) and it makes getting into investing a lot easier for the novices to journeyman level investors.

The one feature that is lacking and may cause me to defect to another Robo-investor is a lack lack of options for UGMA/UTMA (Uniform Gift/Transfer to Minors Act) to put my kids money in. I do use a 529 for my kids (my state plan allows for me to deduct from State taxes so that works for me) but outside of some initial large gifts to my kids that went into the 529, the rest goes into their personal account. But savings accounts are a joke so I have at least some of their money now as "sub" accounts on my Betterment account (another neat feature, you can create multiple investing goals, all with different target portfolios).

TSP

(side note, been reading a lot of personal finance blogs in the past year or so every so often I am going to hit items like that in the future)

I am not a financial advisor so take this with a grain of salt, this is just my observations.

As a federal employee (times 2 actually, since I am federal civilian and a Army National Guard Officer) I get the opportunity to invest in the federal Thrift Savings Plan (TSP). On my civilian side it is a solid deal (considering that it is in addition to a defined benefits plan, FERS, that while nice isn't as nice as all the other other government employee programs (for some (good) reason state and local plans are the ones that really seem to create a lot of the controversy, because they were underfunded by their organizations and are insanely generous)).

Some basics. First off, for any federal civilian employee under FERS, if you are not contributing 5% of your salary, you are leaving money on the table (there is an automatic 1% contribution, but to get the full matching you really need to do 5%, which gets the other 4% matching fees into your account, where it can start doing some work for you.

Now the biggest complaint against TSP is the lack of fund selection, which is a fair complaint, since there are only 5 basic options (2 of which are effectively bond funds). Some of these complaints come from before 2001, since back then there were only 3 funds, the 2 bond funds and a general stock fund. But the 3 other options should give you a comprehensive risk exposure across a number of asset classes.  They are:

• C Fund - Mirrors the S&P 500. 

• S Fund - Mirrors the Dow Jones U.S. Completion Total Stock Market Index, a broad market index made up of stocks of U.S. companies not included in the S&P 500 Index.

• I Fund - Mirrors the MSCI EAFE (Europe, Australasia, Far East) Index.

• G Fund - The one controversial part of TSP and the frequent focus of legislation. If they ever change it to non-favorable terms (right now they get a weighted average of 4+ year returns of the Treasury notes, which means we are getting long term rates on a short term asset, which has attracted the attention of the Congress-critters)  I know I will be engaged in a rebalancing in that event.

• F Fund - Matches Barclays Capital U.S. Aggregate Bond Index, which is more variable than the G Fund but often has a higher return. Less stable but more like regular bond funds.

There are also some "L" Funds that build a basket of the above items and are centered around when you expect to retire, basically slowly shaping your investments to be more conservative options the closer that date gets.

So overall, while solid it doesn't sound like the best deal (beyond of course putting in that minimal 5% to make sure you aren't leaving money behind). But the kicker comes when you look at fees. As of 2015 (https://www.tsp.gov/InvestmentFunds/FundsOverview/expenseRatio.html) the average expense ratio is .029%, which is the lowest among all my assets (and because just a little over 71% of my retirement assets, 55% of my total assets, it drags down my average to .05% in annual fees).

When I get a little older (maybe when I hit 50, 55) I may have to do some analysis of whether, from a tax perspective, it makes sense to explore the Roth TSP option.

BTW, one interesting feature. You can effectively make a loan to yourself (https://www.tsp.gov/PlanParticipation/LoansAndWithdrawals/loans/index.html) for up to $50,000. Other than a $50 cost, the interest rate you get is the effective rate of the G Fund. But the more interesting part is that any interest you pay is put into your account (so basically the marginal cost is keeping that amount loaned at a lower rate than it could  earn in the other funds).  

Net Worth (aka, I love Personal Capital)

Coming in a close second for the title of most boring post, everyone really should know their net worth.

I admit I was lazy up until 2ish years ago. We had plenty of money coming in and being invested, but I wasn't really paying attention to where it was and how it was being invested. I played around with Mint, but that was really focused on budgeting. Then I discovered Personal Capital. It pulled everything together and let me see in one picture where our money was and what it was doing (or not doing as was my case).

Their advisor tools, available for free, are great for you to peer into your investments. One thing that really hit me was the Investment Checkup tool, which shows the pretty impressive amount of fees (and also showed me how how over-invested we were in a variety things (man, was I overweight in the Tech arena)) from my Mutual Funds. This has motived me to do a serious rebalancing of investments (though my biggest one, the Thrift Savings Plan, doesn't offer a lot of options to rebalance. This is mitigated by the impressively low fees (0.02%)), pulling out of a lot of mutual funds (particularly important to me now is the fact that those big distributions at the end of every year? not the best thing from a tax perspective).  It also let us see the most effective way to remove some "bad" (aka, non-deductable. Realistically the only "good" debt is mortgage interest, but there are some exceptions depending on income level) debt (though then I set up a plan to replace that money that was allocated to immediately remove that debt).


BTW, we are also clients of Personal Capital's wealth management, so if you are interested in that check out this link: https://goo.gl/HcAzbi  That and I have been flirting with Robo-Investors (Betterment) Give this link a try betterment.com/invite/danielbuchholz

Budgets

Aka, the most boring post I will make. But it really is important.

Sometimes it takes a shock to bring about change. A layoff and a new baby on the way can definitely shake one up. Luckily my wife is very organized and a hard worker, so she finally got a new job a month before the arrival of Sean.

But that still forced a re-evaluation of things. You need to make sure that money coming in isn't exceeded by money coming out. When you have 2 kids in daycare (at 16-17k per kid, the DC area costs are insanely high) lots of churn in the budget become important to analyze. Some things just plain old lose (eating out every day for lunch at 10-12 per day, per adult? That adds up quick when you look at it ($120 * 52 weeks = $6240)).  You can buy a lot of bread, lunch meats, and leftovers when you are talking about that much money.  As you narrow things down (there are lot of things you cannot directly control (child care, mortgage) and a lot you only have minor control on (electricity, water, food)) you can see if there are things can be either dropped or that you can get a better deal on (I was paying how much for web hosting?!).

The best side effect of a budget? It has helped both of our waistlines (we know women gain weight during pregnancy, but a little known psuedo-fact (because I said so) is that so do men). Collectively we have probably lost 40lbs+ in the past 6 months.