Category: how to

After the last blog on our investment performance in 2015, I got the following email from Scott, a loyal reader from California who I went to grad school with:

What’s amazing is you were able to increase your beginning-of-year net worth by about 25% this year, and that you did this mostly through savings! With that ability to save you almost don’t need returns on your investment portfolio. Do you have any tips on how you did this, especially in a year when you weren’t working? Does the lower cost of living in the mid-Atlantic deserve much of the credit? Was there a nice upward move in your home value?

Scott, California

 

So I figured I’d do a bit of a deeper dive to give you some more detail about how things worked out for us.  Who knows, maybe you were wondering the same things that Scott was.

 

Crazy cash flows

As I have mentioned, 2015 was a crazy year because of me quitting my job and Foxy Lady getting a new job in North Carolina, leading us to move across country.  Those two events were the driving forces behind our fairly crazy finances this year.

When I quit my job we got a cash bolus from Medtronic.  I was able to cash out all my vacation, plus I got a severance.  So even though I officially separated in August, I got paid a lump sum that would be equivalent to me being paid probably through October or November.  That was definitely nice, but money evaporated pretty quickly due to a few things:

• Our dog had a pretty major surgery that set us back about $5000.
• We had to get an apartment to live in in Greensboro while we looked for a house. There were deposits and stuff like that which came to a few thousand.
• All the while, our house in LA didn’t sell so we were still paying a mortgage, utilities, lawn and pool guy, property taxes, and other expenses; all that probably ran to about $5000 per month!!!
• Also, to get the house in LA ready to sell we had to do a little bit of work. Unfortunately that “little bit” actually became fairly big and probably cost of about $15,000 or so.

I didn’t track the numbers 100%, probably because if would have depressed me, but I figure that all the extra money that came as I left Medtronic was more, but not nearly as much more as I would have hoped, than the amount we had to spend on those “moving expenses”.  Let’s say we came out to the good $20,000 on this.

Once we got to North Carolina, the cost of living is definitely much lower, especially with things like housing.  But because the house in LA didn’t sell, we weren’t really able to take advantage of those lower costs in 2015 because we were paying the double mortgage and all those other costs associated with the LA house.  As it turned out we did sell the LA house in the last days of 2015, so we started 2016 with a clean slate.  Now, we definitely feel the lower cost of living, but that will all be reflected in 2016.

Also, to Scott’s question, we did make a fair amount on our house, but since we didn’t get that money until 2016, it wasn’t reflected in the 2015 numbers.

 

Saving in boring ways

So to Scott’s main question, how did we save enough money to account for that increase in our net worth?  Because of all the cash flow stuff I mentioned about, we really didn’t have extra money at the end of the month to give to Vanguard to invest.  Really our savings came in two main ways: our 401k accounts and our mortgage.

As I mentioned in the last blog, knowing that I was going to quit my job I really tightened the belt and maxed out my 401k in the first half of the year.  That was $18,000 which is the IRS max, plus probably about $8000 of matching funds from Medtronic.  So that’s about $26,000.

Similarly, Foxy Lady maxed out her 401k, so that was $18,000 plus probably $6000 in matching funds from her two employers over the course of the year.  So that was about $24,000.

Our LA mortgage was about $2300 each month, of which about $1300 was interest.  So that meant that each month $1000 was going to equity.  Over the course of a year, that adds up to $12,000.  In September we bought our North Carolina house.  Our NC mortgage is such that each month we put about $800 towards equity, so that came to about $3000.

Finally, there were those consulting opportunities that fell into our lap a little bit.  This was really found money that we weren’t expecting at all.  Since we made these major life decisions, me quitting my job and then moving to NC for Foxy Lady’s job, with the plan that we’d live off of Foxy Lady’s income we were able to take my consulting income and just bank it.  Net-net, this came to probably about $30,000.

If you add all that up—the money from leaving Medtronic, the 401k stuff, the mortgages, and the consulting, you get about $115,000 which we were able to save.  So that’s how we were able to move the needle forward, despite a down market.

Of course, this was a bit of a boon of a year.  In 2016 we definitely won’t have any windfalls from leaving Medtronic, nor will we have me saving in my 401k, and who knows what will happen with my consulting.  On the other hand, in 2016 we’ll be free from our LA mortgage so we’ll be able to take full advantage of the lower cost of living that NC provides.  There’s absolutely no way we’ll save as much in 2016 as we did in 2015, but that’s okay because we planned for this.

 

I hope this post scratched your voyeuristic itch a little bit.  That’s how the Fox family was able to keep moving forward despite a slightly down year.

 

 

“What’s your problem Stocky?  You started off writing pretty consistently then in the past few months you’ve become super-erratic.  Are you abusing some controlled substance?  What gives?”  This is a question some of you may be wondering given my admittedly abysmal record for posting regularly.

The fact of the matter is that I’ve been busy working, and that hasn’t given me the time to write as many blogs as I would like.  Wait????  What????  I was supposed to be retired, so what am I doing working?

When I was seriously considering quitting my job and taking the plunge into early retirement, I read a lot of blogs on the subject (the best one being www.mrmoneymustache.com).  Most offered pretty similar advice: take the first few months to decompress, but after a while you’ll get bored and what to do something meaningful.

For a lot of earlier retirees that “something meaningful” can be a second career, where they’re doing something they really enjoy but that also generates a little income.  When I read that, I was really skeptical.  I’m good with spreadsheets, but how could that translate to something people would pay good money for but which wouldn’t have the “pain-in-the-ass” qualities of a real job?

So I sauntered off into retirement without any expectations of earning an income.  Foxy Lady and I had run the numbers a million ways and we were all set to live on her income and enter this new phase of our life.  So that was that.

 

How it happened to me

After a week or two in retirement I got an email on LinkedIn asking if I would be interested in working for a smaller company running their sales operations department (that’s what I did at Medtronic).  I replied that I wasn’t interested in fulltime work, but if they needed help I would be glad to work on a consultative basis.  They said “yes”.

A few weeks later, I was catching up with a former colleague.  She said they needed some sales operations expertise to help them build the compensation plan for their sales force.  Again, I was able to set up a little consulting agreement.  A month into retirement, I had two consulting clients who needed help doing the things I did for a living.

This is such a lucky development (but I absolutely believe that you make your own luck), and I really feel like I have the best of all worlds.  The nature of the work allows me to work on my own schedule most of the time.  Typically I can do the work that needs to be done when the cubs are at fox school during the mornings or in the evenings after they are curled up in their dens.  That means during the days I spend the time with them doing all sorts of fun “this is why you retired early” activities like—building dams in the local creek, going to the Science Center and Children’s Museum, making forts out of the couch cushions, etc.

Every once in a while I do travel, but it’s pretty minimal.  Foxy Lady and I counted 4 days over the past 6 months that I didn’t sleep in my own bed (and tuck the cubs in).  Also, every once in a while there’s a deadline that requires I stay up late, or there’s a conference call that requires a sitter for the cubs.  But just like the travel, that has only happened a few times.

Plus, intellectually it’s very satisfying.  If you’re the type of person who is able to consider early retirement, odds are you were professionally successful.  Sometimes it can be tough trading in the satisfaction of achieving a goal, leading a team, and all those other things for Danny Tiger and building chainsaws out of Legos (pretty much every one of Lil’ Fox’s Lego creations is a chainsaw he uses to cut the legs off our dining room table).  Doing consulting has allowed me to stay intellectually engaged, while avoiding all the crap.  I don’t have useless conference calls, development plan that are garbage, office politics, and all the other BS that makes you want to consider early retirement in the first place.

Finally, and to the point of a personal finance blog, it has been a bit of a financial boon.  I took my salary when I was working, calculated what the hourly rate would be, and tripled it to make my consulting rate.  And the companies were happy to pay it.  For them, they get someone with expertise in an area they really need, but they don’t need so much that they want to hire a fulltime person for it.  Plus they don’t have to pay benefits and all the other stuff.  So it’s a pretty sweet deal for them too.

In dollar terms, I’ve pretty much replaced my income.  We all know how big an impact a little extra savings can be.  So this consulting income, even if it completely dried up after 2015, has really moved the needle for our nestegg.

 

How it can happen to you

The reason I am sharing all this is because I think a lot of people, me included before six months ago, that don’t really realize what a legitimate option this is.  However, many of you probably have really valuable skills that people are willing to pay for on a consultative basis.  And this is especially true if your career is one that has enabled you to build up a nestegg that allows you to retire early.

There are a million companies that need database programmers and market researchers and financial auditors and sales ops people.  And to reiterate, if you were good enough in your career to amass the wealth to retire early, you’re probably good enough to be really valuable to them.

When I retired, a few of you said something like, “I’ve been thinking about doing the same thing, but I’m just too concerned to leave the comfort of a steady paycheck.”  I totally get that, and it’s a sentiment that I shared for a very long time.  But my story is an example of what can happen if you close your eyes, grit your teeth, and jump.  The rewards can be pretty amazing.  Foxy Lady and I marvel at what a great situation we’ve stumbled in to, and none of it would have ever happened had we not taken that leap.  We’re so glad we did.

 

For those of you who have retired early, what have you found in terms of earning opportunities?

As you, my loyal readers know, I quit my job at Medtronic to be a stay-at-home fox with our two little cubs.  As part of all this, Foxy Lady got a sweet job with the good folks at VF Corporation (who bring you fine apparel brands like The North Face, Timberland, Seven for All Mankind, Vans, Reef, and many more).  It’s a great opportunity for her, but the one downside is that she travels a lot.

That means that I find myself at home fairly often with the boys, needing to make dinner.  I’m not completely helpless in the kitchen but I am no Foxy Lady (she is an amazing cook).  Also, it’s hard when you have two little guys underfoot, not always being very cooperative.  Hence I find on those occasions, sometimes premade meals work really well.  My personal favorite is the frozen lasagna from Costco—really good and I highly recommend it.

Now this post isn’t about premade meals for parents who are double-teamed by the ankle-biters, but premade meals got me thinking about premade investments.  When I buy that frozen lasagna from Costco, one meal (enough for 4 people) costs about $8.  That may not seem like much, but if you broke down the ingredients and added it all up, it actually starts to seem like a lot.  There’s probably four lasagna noodles (my guess is that would cost $0.30 total if you bought them on their own), a quarter of a pound of cheese ($1), half a jar of sauce ($0.50), and a half pound of sausage ($2).

If you could buy all that stuff separately for about $4, why is Costco charging me $8 for it?  That’s a 100% markup!!!  Obviously, there’s the whole convenience factor.  I could make lasagna from its core ingredients, spending an hour or two preparing it, dirtying three or four pans, and probably screwing up at least two or three steps.  Or, for a mere $4 more I can have someone else do all that and have it all ready for me.  With lasagna I will pay the extra for someone else to do the work, but what about investments?

 

The different types of premade investments

In the financial world, individual bonds and individual stocks are the only “ingredients” that are really from “scratch”.  Everything else is “premade” to a greater or lesser extent (no more words in “quotes” for at least 3 paragraphs).

Mutual funds (or ETFs which are really the same thing)—the most common are mutual funds where someone else buys a bunch of stocks or bonds, mixes them all together into a portfolio and then you buy shares of that portfolio.  Costs for mutual funds vary (as you have read here ad nauseam) but index mutual funds tend to have very low costs, probably the lowest cost investment you can get if you don’t do it from scratch (buy the stocks and bonds yourself).

Target funds—this is a new innovation we talked about here.  Basically they take the date you think you’ll need your money, when you plan to retire for instance, and they mix stock mutual funds and bond mutual funds to balance your asset allocation.  So if you plan to retire in 30 years, you would get a 2045 target fund.  Right now it is mostly in stock mutual funds since you have a long time until retirement but it will slowly shift that more to bonds and cash as you get closer to your target date.  These are a “little more work” than regular mutual funds and they tend to cost a little more, about 0.25% compared to 0.10% for a stock index fund, but they still tend to be on the lower end of costs (dang, I couldn’t keep my promise).

Whole life insurance—This is an investment vehicle that basically says something like “you give me $1000 per month and I will give you $500,000 when you die, when ever that happens to be.”  Because it’s a certainty you’ll die, it’s a certainty that you’ll get that $500,000.  In that way it acts like an investment.  On the spectrum between from scratch and premade, it sits pretty far on the premade side of things.  Basically someone is taking your money and investing it for you (along with all their thousands of other clients), and giving you money at the end of the game.  There’s a huge element of uncertainty here, namely when you die, but if you use some basic probability calculations you can come up with a rough estimate of how much they charging you for this service.  Brace yourself, because it’s a lot: about 4-5%, which is a ton when you compare it to the 0.1% that an index mutual fund charges.  Remember the power of a single percentage?  Here you’re talking 4%, so it’s a lot.

Annuities—Whole life insurance’s bizarro cousin is an annuity.  Basically you pay a bunch of money for an annuity, let’s say $500,000, and you get a monthly payment until you die, let’s say $1000 per month. So you can see there are a lot of similarities to whole life insurance in that the annuity company takes your money (along with all their thousands of other clients) and invests that money.  They take those investments and pay you your monthly check.  And you guessed it, similar to insurance the fees (after you tease out the uncertainty of when people die) are extremely high.

 

Loss of control

Another negative (or positive, depending on your perspective) about premade investments is that you lose a lot of control in your investment choices.  If you go back to my lasagna example, I don’t really have a lot of choice in the product that I purchase.  If I really want gluten-free noodles, I’m out of luck; or non-pasteurized cheese, or humanely raised beef, or organic sauce.  There are probably only five or six frozen lasagna choices out there, and the odds are super low that I can find a brand that perfectly aligns to my wants.  When you get everything premade, you lose that choice.

Similar with investing, the closer you get to the original ingredients (individual stocks and bonds), the more control you have.  If you don’t want companies that sell tobacco (or alcohol or non-sustainable agriculture or fracking or . . . ) you can make that choice; with annuities or life insurance or other “premade investments” you kind of take what they give you.  Sure you can vote with your feet, but I think you’d have a hard time finding an annuity company that does invest in the four things you like but not the two that you don’t.

Maybe that choice is important to you, and maybe it’s not.  With lasagna I really don’t care—conventional or organic really doesn’t matter to me.  With investing I do care because I know that things like costs, diversification, and others matter a lot and I can manage those pretty easily.

 

The costs of premade investments

The point of all this is there’s a whole range of costs that go along with investments.  As you know, I am a hawk on investing expenses, as I think it’s one of the main ways you can really move the needle on increasing your returns.  But not everyone is like me.  And just because something is expensive doesn’t mean it’s not worth it; it’s all about the value you get.

So coming full circle, I am willing to pay almost double to have someone make the lasagna for me so I can just pop it in the oven.  It’s about $4 and to me it’s totally worth it.  I don’t have the time or the skill or the energy to futz around with that while two little boys are trying to play kiddie golf in the living room.   Of course there are some who, when faced with that choice, go with the less-expensive but more time-intensive option of making the lasagna from the core ingredients.

Investing is the same way.  You can have someone do it all for you.  The extreme example is an annuity where you give them all your money and they manage it for you and give you a monthly check.  That’s a pretty worry-free approach.  But it’s expensive.  If you make that choice, there’s nothing wrong with it.  Just make sure you are making an informed choice.

 

As you know, Foxy Lady, the two little cubs, and I relocated from Los Angeles to North Carolina.  Obviously there were a ton of changes for us, including selling our house in LA and buying a new one in Greensboro.  As I mentioned before, property values in LA are absurd, so we were able to cash out of our old house and had more than enough money to buy our new Greensboro house outright.  Yet that’s not what we did.  We ended up taking out a 5-year adjustable rate mortgage with an interest rate of 2.25% on our new house.  Let me tell you why:

 

Super low rates

Right now interest rates are at historic lows.  A 30-year US bond has an interest rate of about 3% and a 1-year bond returns about 0.5%.  Because interest rates are so low, that seeps into other areas like mortgages.  Today you can get a 30-year fixed mortgage for about 4%.

Just to put that in perspective, when I bought my first condo in Chicago in 2007 mortgage rates were 6% and everyone was saying how crazy low they were then.  Uncle Fox (UF for short) was telling me that when he bought his first house in the 1970s his mortgage rate of 9-10%.  That’s crazy high.  Just 1% can mean hundreds of dollars per month in savings on interest (obviously depending on the size of your mortgage).

You know how financial nerds reminisce about the heady stock market days of the 1980s and 1990s, or tell cautionary tales about the crazy interest rates and inflation of the 1970s (okay, maybe you aren’t a finance nerd, but I am)?  I think 20 or 30 years from now we’ll be old folks who will be waxing on to the youngsters about when mortgages were so cheap, maybe the way your grandparents talk about a gallon of milk costing a quarter and a movie costing a dime.

We even doubled-down on this by getting a 5-year adjustable mortgage.  We could have gone with a vanilla 30-year fixed with an interest rate of 4%.  Instead we went with an ARM and that pushed down the rate to about 3%.  That 1% decrease translated to about $350 in savings per month.  Of course, we run the risk that after five years interest rates will rise, but remember that we have the money to pay off the mortgage, so if things start to go haywire we can just kill the mortgage and be no worse for wear.

 

Good time to be an investor

Seriously, I think now rates are so low that you’d almost be silly not to take out a loan.  Of course, if you borrow the money and then just stuff it in a mattress you’re not really helping yourself.  We are taking the money we’re getting from our California house that we could have used to buy our Greensboro house outright and investing it in the stock market.

Sure there’s a chance that the stock market could go down, but remember that mortgages have 30-year time horizons.  Right now is a pretty crazy time for the stock market, but history tells me that over a long period of time, the stock market does really well.  So if I can borrow money at 2-3% and invest it at 6-8% over 30 years, that’s a sweet little score for the ole nestegg.

Of course, nothing in life is guaranteed, but Foxy Lady and I are willing to play the odds on this one.

 

Company relocation

Not everyone will be so lucky, but for us we were able to take advantage of a pretty awesome benefit from Foxy Lady’s job that her company gave as part of her relocation.  When they moved us out from LA to Greensboro part of the package was to “buy two points” for our mortgage.

Basically that means that they would pay 2% of our mortgage (about $8000) and get us a lower rate.  That allowed us to get our 5-year ARM which normally would have been about 3% interest, and we got it for 2.25%.  That 0.75% lower rate translates to another $300 or so a month in savings.  That’s a lot of money over time, yet if we didn’t take a mortgage and just bought the house outright, we would have foregone that pretty sweet benefit.

 

That’s our story.  As we were going through this process, the decision to get a mortgage or just go mortgage-free was something Foxy Lady and I discussed for hours.  Paying off your mortgage “seems” like a good thing and a goal we should be shooting for.  I totally get it.  When you start a mortgage it’s like starting a marathon, and after years of hard work you cross the finish line and pay that sucker off.

Because we were really lucky with our LA home we had the chance to achieve that dream early.  It seems like a good thing to do.  But as is so often the case with investing, your head and your heart don’t always agree, and if you can stomach it, it’s usually better to go with your head.  Interest rates are so low right now, plus we were very fortunate to have a bit of a turbo boost with Foxy’s new company buying points for us, that the “cost” of the mortgage was just crazy low.

Many years from now we’ll know the answer.  Did we do better investing that money in the stock market, or should we have just paid off our house?  Who knows, but my head always tells me to bet on the stock market.

On Monday I posted part 1 which covered how we started thinking about life insurance and came to the decision to get it after two little cubs joined our lives.  To read that click here. 

Once we decided that we wanted to get life insurance, and had a rough idea of what we wanted it to accomplish (Foxy Lady needed a bridge until she found another partner, I needed something to allow me to raise the boys on a single income), we actually had to go out and do it.  When thinking about life insurance, the first thing you need to do is decide between the two major types (I’m not an expert here, and I know there are a lot of nuisances, but this is my general understanding; any readers who can shed a little more light, please do so)—whole life insurance and term life insurance.

 

Whole versus term

With term life insurance, basically you’re signing up for a limited period of time (10-year or 20-year policies are common) to have life insurance and then when the “term” is up your policy expires.  If you’re lucky and you outlive that 10 or 20 years, your policy is done and worthless (but you’re lucky because you’re alive, right?).  Prices obviously vary quite a bit, but if you’re young and healthy, this type of insurance is very inexpensive—Foxy Lady and I each have a 10-year term policy for $1.5 million and we pay $50 per month for it.

A whole life policy is very different in that it lasts until you die.  So with the term policy, after the term (in our case 10 years) is done, the policy is done; with whole life, so long as you keep paying those monthly premiums, the policy will last as long as you do, if you live another five years or another 55 years.  Whole life policies are much more expensive (when I was shopping for this stuff, a $1.5 million whole life policy for me would have been about $1300 per month), but that kind of makes sense.

With term policies, especially when you’re younger like Foxy Lady and I are, the chances of us actually using the policy are very low.  The probability of us dying in the next 10 years is about 2%.  So the insurance company is really counting on us having that 10 year policy, paying our premiums every month, and then after 10 years they pocket all the money and we don’t see a dime.  Of course, it’s worth it to us because there’s always that small chance that the nightmare scenario happens, and that’s what insurance is for.

But with a whole policy, there is a 100% chance that you’ll get your money because there’s a 100% chance that you’ll die eventually.  That’s what makes it so much more expensive than term policies.  If I bought that $1.5 million policy for $1300, in a way I am just socking away savings into a life insurance policy that will go to Foxy Lady when I die.  It’s guaranteed that she’ll get that money.  In this way, whole life insurance policies have a bit of an “investment” feature the same way an IRA might have.

 

Which one did we pick?

As I mentioned earlier, Foxy Lady and I picked 10-year term policies, and here is why.  First, we decided for term life insurance instead of whole life insurance because I think you can actually do a lot better investing your savings in things like a 401k, IRA, or brokerage account than with a whole life insurance policy.  Remember, we each would be paying about $1200 more per month for whole rather than term life insurance.  That’s a lot of money, and if you do back of the envelop calculations, if you invested $1200 per month, it would only take you about 30-35 years to get to $1.5 million.  I was 36 at the time we got life insurance so if I had to take the over/under on if I’d make it another 30-35 years, I’d probably take the over (statistically there’s over an 80% chance that I’ll live another 30 years).

Once we decided on term life insurance, we had to pick the “term”.  Should we go on the short end like 10 years, 20 years, or really extend it out to something like a 30-year- term?  At 10 years, our premium is $50 per month; had we taken a 20-year term the premium shot up to something like $125 per month, and at 30 years it was something like $700 per month.  On the surface it may seem counterintuitive that the longer you have a policy the more expensive it gets, but it starts to make sense if you think about it.  The chances of us dying in the next 10 years is pretty low, about 2%; but over the next 20 years it’s about 6% and over the next 30 years something like 18% (it surprised me it was that low, I expected it to be a lot worse).  So the longer you make the term the more a term policy starts to “look and act” like a whole life policy.

This is a point Foxy Lady and I talked about a lot.  We decided on a 10-year term policy because it was the least expensive, and that’s always a good thing.  But then we also thought about what our financial situation would be like in 10 years when the policy expired.  At the time we had one little cub, ‘Lil Fox who was two years old at the time, and we were expecting our second, Mini Fox.  When a 30 year policy would expire they would be well into adulthood, out of the house, and on with their lives (hopefully).  So after 30 years, Foxy Lady and I would be in a similar situation to where we were before we had kids.  Remember that it was only having little kids and the responsibility of taking care of them if something happened to one of us that prompted us to get life insurance in the first place.  So a 30-year policy was out.

Then it came down between picking a 20-year policy or a 10-year policy.  The 20 year option was attractive because it basically saw us through the boys’ childhoods; after 20 years ‘Lil Fox would be finishing up college and Mini Fox would be starting college (by that time we should be free and clear since we are saving for their educations).  With the 10 year option they would be about halfway through their childhood, so that seemed to tip the balance in favor of the 20-year option.

But then we started thinking about our financial situation in 10 years and  what that would look like if the doomsday scenario happened—we got a 10 year policy and then one of us died in year 11.  I suppose the uber-doomsday is both of us die after 11 years—are you kidding me, how can I even think about something so horrible (do you see what I mean?  Thinking about life insurance sucks).  We’re diligent savers, having built a nice little nestegg when both of us were working, still maxing out our 401k accounts, and building up equity in our home.  After 10 years based on some simple projections, we hope to have a net worth of $4-5 million.  Looking back on that doomsday scenario but knowing we have a $4-5 million backstop, we felt okay about things.

If you remember, Foxy Lady would replace me (with a guy who hopefully had an income) while my body was still warm so she would have more than enough money to see her through.  I would want to raise the boys without marrying again, so the stakes are a little higher for me, but even then I would be fine.  So as we thought about it, we really only needed life insurance to get us through a few years while we built our net worth up.  Once we got to $4-5 million, if tragedy struck, financially we knew those we left behind would be okay.

So that’s how we settled on a 10-year term life insurance policy.

 

How much insurance to get?

Once we knew we wanted a term policy and once we knew we wanted it to be for 10 years, the last thing we had to do was figure out how much life insurance to get.  This is probably the most important part because it’s what you’ll get if tragedy strikes, but in a weird way it was the easiest decision in the process.

A lot of places have life insurance calculators.  You put in information for your current situation like how much you currently make, do you have a mortgage, how many kids do you have, etc.  And it spits out a number for how much insurance you should get.  As you can imagine, since these are on the insurance companies’ websites, they tend to give you really high numbers.  When we did our research, it was telling us that we should each get something really high like $2 or even $3 million policies.  On the surface that seemed really high.  When Foxy Lady and I thought about those numbers (again, imagining life without the other—good times), they seemed more than enough.

The good news was that the insurance wasn’t all that expensive.  A $1 million policy was about $35 for each of us (Foxy’s was a little lower since she’s a woman and 18 months younger).  For $1.5 million it was $50, and for $2 million it was $70 per month.  $1 million seemed like plenty for us but since getting a little more didn’t seem all that much more expensive, we ultimately decided to go with a bit of a middle-ground option and settled on $1.5 million for each of us.  True to form for a sales guy, the dude we bought the policy from tried to upsell us to $2 million and gave us all sorts of reasons why people in our situations really needed the additional coverage.  Gotta love sales people.

 

Dang, this has been two long posts on life insurance.  Fortunately for Foxy Lady and me at this point, it’s all set up and we do the automatic withdraw every month and we don’t think about it.  But I can tell you when we went through it, it was a very difficult process, imagining losing the loves of our lives and imagining moving forward with our boys but without our partner.  It sucked.  But it was something we felt we needed to do for the little guys.  I’m convinced we’ll out live our 10-year policies and never use them, so in that way it seems like a total waste.  But the very nature of insurance is you use it when that one-in-a-million tragedy happens.  So we have our bases covered.

I hope this glimpse into one of the harder financial decisions Foxy Lady and I had to make was helpful.  What about you?  How do you look at life insurance?

I started writing this and found that the post became enormous.  So here is part 1 of the life insurance post.  Tomorrow I will have part 2.

 

If you ever want to have a really uncomfortable conversation with your significant other, start talking about life insurance and what makes sense for the two of you.  Of course, life insurance is an important element of financial security for many (but certainly not all) of us, so it’s a conversation you need to have, but it’s a really morbid one.  Plus, you’ll find out what type of life your spouse would want after you’re pushing daises which is kind of weird in its own right.

For Foxy Lady and me, we certainly didn’t think about life insurance before we got married, and really didn’t give it a lot of consideration until we had the little guys.  As a single person, I don’t really think life insurance makes sense—if you die your family and friends will be sad, but you really aren’t leaving anyone in the financial “lurch”.  Your funeral and final expenses might cost a few thousand dollars, but that’s really it.  Your 401k and other assets should more than cover that.

Once you get married (or act like you’re married, such as living together and sharing expenses), but before you have kids, the equation starts to change.  If both of you are working, you’re going to gravitate to a dual-income lifestyle.  If one of you unexpectedly died it would be a sad event, and now the surviving spouse would have to cope with life on a single income instead of the double income.  Maybe that’s a big deal, and maybe it isn’t.  This is important especially if the surviving spouse was making less money than the one who died.  This is a bit of a judgment call.

For Foxy Lady and me, when we were at this stage of our lives we had the attitude that the surviving spouse would keep working and just kind of continue life like before we were married.  Again, it would be very tragic and I don’t mean to diminish that.  Foxy Lady is the love of my life and my life partner, and if anything happened to her, emotionally I would be crushed.  But from a financial perspective, before we had kids, I would have been fine, so it wasn’t something that justified us getting life insurance.

And then the kids came, and this is where the equation really changed for us.  Now if one of us passed away, we wouldn’t just be leaving the grieving spouse to take care of him/herself, but we’d be leaving two little guys whose employment prospects wouldn’t be all that good for at least a couple decades.  All joking aside, losing a spouse sans kids would be a bump in the road financially, but one we could probably overcome.  After all, we had jobs and supported ourselves before we got married so why couldn’t we do it again?  But with kids, your expenses are higher and there’s just a greater sense of responsibility for those you’re leaving behind.  At least that’s how we felt.  So after we had Lil’ Fox we got life insurance.

 

What do you want life insurance to do for you?

The first thing you need to do is figure out what you want life insurance to accomplish; this is where you start having those uncomfortable conversations with your spouse about what they’d do after you died.  I figured that Foxy Lady would mourn my loss, wearing all black and lamenting her widowhood until she joined me in heaven.  She surprised me when she said that she’d move on.  After putting some serious thought into it, she said she would want to remarry so the boys would have a father figure.  For her, life insurance would serve as a bridge between my death and her moving on with her life.  Assuming that she married a good guy with a decent job (see how it gets uncomfortable?  I’m starting to think about the guy she’ll be with after I’m dead), she’d be fine after a few years.

For me it was different.  I grew up with a stepmother and know firsthand how challenging that type of relationship can be, for both the adults and the children.  When Foxy Lady and I imagined life if she passed away, I wanted to be able to raise Lil’ Fox (at the time Mini Fox hadn’t arrived yet) without the expectation that I would find someone to try to fill in that motherly role, both in terms of child-rearing and income.  Financially, that meant that I needed to be prepared to become a single income family.

So for me, I “needed” more life insurance for Foxy Lady than she needed for me just because of how we would move on in the event the other one passed away.  But that balanced out because at the time I was making more with my job than she was with hers.  My higher income meant I needed less insurance for her, but my desire not to remarry meant I needed more—so that balanced out.  Her lower income meant she needed more insurance for me, but her desire to find another spouse over time meant she needed less—again balancing out.  Really, really morbid, and I think this is why conversations about life insurance are so hard.  Seriously, who wants to think about these things?  But if you want to be responsible to those you might leave behind, you have to.

 

So there you have it, part 1.  Tomorrow I’ll post part 2 on how we decided which kind of policy to get and how much.  See you then.

We have made the move from Los Angeles to Greensboro, North Carolina.  Obviously that’s a huge change.  LA is one of the Top 10 cities in the world in terms of cultural relevance; Greensboro is the 3^rd largest city in the 9^th largest state in the country.

LA is an amazing place to live.  Probably the best thing about it (and other super-cool cities) is that everything’s there and it’s all super-high quality.  World-class culture: amazing museums, galleries, music venues, restaurants, etc.  World-class natural beauty: the ocean and mountains are right there, and the weather is probably the best in the world.  World-class sports:  the Lakers, Dodgers, Clippers, Kings, Galaxy, Ducks, Angels, USC, UCLA, the Olympics.  World-class industry: obviously entertainment, but also financial services, aerospace, transportation.

Across the board, LA has the best of everything.  But we know nothing is free in this world, and that certainly applies here.  Along with everything I mentioned, LA has among the highest costs of living in the country, especially when it comes to housing.  When Foxy Lady and I were thinking about moving, the stratospheric cost of housing definitely played a major part in the calculation.

 

How much does living in a super-cool city really cost?

In LA we lived in a nice house, but by no means anything off the charts.  For an upper middle-class family of four, it was probably a pretty average house: 4 bedrooms, 4 bathrooms, 2900 square feet.  But because it was in LA it was really expensive—$1.5 million.  That seems crazy, but that’s just the way the real estate market is in LA.  Similarly sized houses that weren’t as nice would go for maybe $1.2 million and the ones that were really nice on the inside could go for well over $2 million.  It’s like an alternative world out there.

You can compare that to a place like Greensboro.  A similar house in a nice neighborhood would probably run you about $400k.  That’s a huge difference!!!  Over $1.1 million!!!

Now we have something to work with.  We know there are huge benefits to living in LA (all the things I mentioned above, plus many more) but we know that comes at a cost (the difference in home prices).  If we took that $1.1 million and invested it in the stock market (assume a historic 6% return), that difference comes to about $66,000 per year, which breaks down to about $5500 per month or $1300 per week.  That is how much “extra” we were paying to live in LA versus a place like Greensboro.

 

Is it worth it?

$1300 per week is a lot of money.  But just because something is expensive doesn’t mean it’s not worth it.  Living in LA is awesome.  There’s no question about it.  But is it that awesome?  When Foxy Lady and I looked at it with the “$1300 per week” premium, it just wasn’t awesome enough.

Raising two little cubs dictates how you spend your time, and we found that while there were amazing opportunities all around us to enjoy things only available in places like LA, we weren’t taking advantage of them.  We never went to the super-cool music venues like the Greek Theater or the clubs on Hollywood Boulevard, because . . . well, because we had two little ones.  We never went to see the Lakers or Dodgers or Kings because tickets were expensive and getting down there was a hassle.  Rather we went to see the local college team play for a couple bucks.  A couple times we went to a 4-star restaurant and it was amazing, but mostly we would go to local places that were kid friendly because . . . well, because we had two little guys (McDonald’s playland is pretty popular in our house).

But it’s not like we were hermits.  We did stuff and had a lot of fun.  We’d go to the local park pretty much every day to play on the swings and slide.  We’d enjoy the kid-oriented events at the local library.  We did a lot of playdates with friends who had kids of a similar age.  We’d go to the beach or go hiking along the nearby trails.  We’d go to Universal Studios which was only a couple miles away every once in a while.

On Sunday evenings, after the cubs were asleep in their beds and Foxy Lady and I had a couple peaceful moments to reflect on the weekend, we’d ask ourselves if we got our $1300 worth of LA living that week.  The vast majority of the time the answer was “no”.  We were living in one of the most amazing cities in the world, and we weren’t taking advantage of it.  At this stage of our lives (two little kids) and our personal tastes which tend to be on the pedestrian side, we were perfectly happy living simpler lives.

Once we came to that conclusion, the decision became pretty easy.  We could move to a lower-cost area and pocket that $1300 each week.  When we did get a hankering for the highlife we could take a vacation to LA (or New York or Boston or Miami or San Francisco or London or Paris or Tokyo); that trip might cost a few thousand dollars but we’d still be well ahead of the game.

So for us it wasn’t worth it to pay the “super-cool city premium”.  But for many it is.  We had neighbors whose families lived in LA so leaving wasn’t really an option.  I totally get it.  We had other neighbors who worked in the entertainment industry plus they would go out to banging clubs a few nights a week, so they were really getting the most out of LA.  And for them, staying in LA and paying the premium totally makes sense.

Now we’re in Greensboro and I must confess that I really like it.  It’s a nice slice of small-town America, but not too small.  We have a symphony, an opera, a minor-league baseball team, a children’s museum, a science center, college basketball, and a lot more.  But let’s be honest; undeniably, all those would compare unfavorably to their counterpart in LA, and that’s a bummer.  However, when you add in that $1300 per week that we’re saving, at least for us that tips the scales.

 

Personal finance is definitely about investing in stocks and bonds, 401k and IRA accounts, and all that.  But a big part is managing your expenses.  Some people look at that as budgeting your money and buying one less Starbucks per week or something like that, and there is definitely a place for that.  However, we found that probably the biggest impact on our spending is choosing where to live.  Places like LA, New York, Boston, Seattle, Chicago, Miami, and Dallas are amazing cities which offer its residents incredible amenities.  But, if you’re anything like us, you need to ask yourself how often you will take advantage of them?  If the answer is “often” then living in those Alpha cities probably makes sense.  For us, the answer wasn’t often enough, so we “downgraded” our city and will pocket the difference.

 

How about you?  What are the amenities in your city that you like the most?

“You can’t hit what you can’t see”  –Walter Johnson, major league pitcher from 1910s

As you take more control of your personal finances, there will come a time when you need to start tracking it somehow.  Maybe you’ll be hyper-obsessive like I am and look at it multiple times a day (which objectively is stupid since the numbers don’t change that fast, but I do it anyway).  Or maybe you’ll want to see what things look like every week or every month to make sure you are on track.  Either way, you’ll need some way to track your finances.

There are two major options: a program you purchase and install on your computer like Quicken, or an internet website that consolidates your online accounts like Mint.  For the longest time I was a Quicken devotee (and before that I used Microsoft Money), and then I recently switched to Mint.  This post is going to be looking at the pros and cons of each, Dr Jack-style, to help you pick the one that will work best for you.

 

TRACKING SPENDING:  Both do this fairly well.  You can download your bank and credit card activity, and both do a somewhat decent job classifying the expenses into the different categories.  I think this is a bit of “the price of admission” that you should absolutely expect.

There is one feature that I really liked about Quicken that I don’t get with Mint—the ability to split expenses.  When I go to Costco and spend $300, I can only use a single category in Mint, so I use “groceries”.  However, in real life, that $300 was split into $150 for groceries, $30 for pet food, $70 for Foxy Lady’s contacts, and $50 for some pool toys for Lil’ and Mini.  In Quicken I can split that $300 expense into those different categories which is really nice when you want to compare your spending to your budget.

[EDITOR’S NOTE:  After posting this, a reader named Ashleigh mentioned that you could indeed split transactions in Mint.  It took some tinkering around but I figured out how to do it.  She was indeed correct.  That said, I must say that it’s not the most user-friendly or intuitive process.  But hey, it’s free so I can’t complain, even though I just did.]

Advantage: Slight edge to Quicken

 

PROJECTING FUTURE SPENDING:  This is a really nice feature in Quicken that you don’t have in Mint.  When you look at the cash flow of your checking account, it’s nice to look into the future to make sure that your balance doesn’t fall below a certain level.  So you might get a paycheck or two, but then you’ll have your mortgage, a credit card payment, and a couple bills, all of which are hitting on different dates.  That’s a lot of moving parts.

If you’re like me and you try to keep your checking account’s balance fairly low, freeing up the extra money to invest where you can get a higher return, then you need to be a little more precise.  This is probably the single biggest feature that I miss by switching from Quicken to Mint.

Advantage:  Quicken

 

ACCURACY:  With Mint the website downloads your transactions and then does its thing.  Most of the time this works well but sometimes it doesn’t work and the results look goofy.  Look at the picture from Mint for one of my investments.  Notice how it thinks that I invested $321.69 and that has increased $26,747.  While I would like to think that I am that brilliant of an investor, I can assure you I’m not.  For some reason the download had a bug in it.  With Quicken, you can actually go into the file and manually change things to take care of stuff like that.

Advantage: Quicken

 

NON-BANK STUFF:  A lot of people have financial “stuff” going on that isn’t with your bank or brokerage account.  Sometimes it might be off-the-book loans like maybe your parents helped with the down payment on your house.  With us, I have stock options that aren’t in an account compatible with Mint, so I don’t have visibility to them.  With Mint, if you can’t download them they don’t exist.  Obviously that creates a bit of a problem if you want to take these into account.

With Quicken if you have stuff like that you can manually create accounts and transactions.  It’s not ideal and certainly not as easy as downloading them, but sometimes something is better than nothing.

Advantage: Quicken

 

ANALYSIS:  Quicken has a lot more robust offering of analyses that you can use, including a host of reports that you can customize to show whatever you want.  I used these to track how my spending was doing to my budget as well as a report that showed how my investments were doing.  Mint has some useful reports, but it isn’t anything near as robust as what Quicken has.

However, Quicken does have a bit of overkill.  There are all kinds of reports that it offered that I didn’t use, or even worse used and thought gave bad advice.  Quicken had a retirement projection tool that I played around with.  It said that at 65 I would have something like $5 million, but that I would run out of money by 90.  Ludicrous.  I didn’t use that tool after that.

Advantage: Quicken

 

CONNECTIVITY:  This is one of the areas where Mint really shines.  Its whole platform is based on smooth, seamless connectivity with all your accounts.  Everything is designed to make this easy—from initially linking your accounts to Mint, to updating them.  I love Mama and Papa Lynx (my in-laws) to death, but sometimes they aren’t the most technologically savvy.  They got everything up and running in Mint without any problems, so you know it’s pretty user-friendly.

This is the main reason that I don’t use Quicken anymore.  I kept having problems where my accounts wouldn’t update.  Sometimes it was my accounts would change (like when my Vanguard account got large enough to go to their Admiral shares), other times it would be a cookie or some other technical thing on my browser that I don’t really understand.  No matter, it would be a royal pain in the butt.  I’d have one of three options, none of which were good: I could spend time with their technical support, I could manually enter the transactions, or I could just not update (what I ended up doing).  We live in a technical age, so to have this not work really well is a problem.

Advantage:  Big advantage to Mint

 

TECHNICAL SUPPORT:  As you would expect with a free site on the internet, Mint doesn’t offer you a lot of help if things go wrong or you screw something up.  If you click on the “get help” link it sends you to a page that recommends you try to find the answer to your problem in their community.  So basically you’re hoping that you can find someone who had the same problem you did and wrote about it.  That’s kind of an “f-you”, isn’t it?  I’ve struggled a couple times and found my answers by googling for it, and it worked but it took a bit of effort.

Quicken on the other hand has a bonafide help center.  You can chat with a real person who will try to help you.  This is what I used when I had connectivity issues.  By and large, they’re pretty good and can solve most problems with a minimum of hassle (although it’s probably a minimum 30-minute time commitment).  Maybe I’m stuck in the past, but I do like it when I can talk (either over the phone or via chat) to a live person.

Advantage:  Quicken

 

INTEGRATION TO OTHER PRODUCTS:  Quicken allows you to upload your files to programs like Turbo Tax and also to spreadsheets if you really want to do some hardcore analysis.  But this is another feature that I think sounds really great, but when you really think about it, it might not be all that valuable.

Take the tax thing for instance.  I supposed you could download all your stock sales from Quicken into your tax program to calculate your capital gains, but who really does that?  Doesn’t everyone just take the form that Vanguard or Fidelity or whoever sends you and plug all those numbers into your taxes?  In all the years I used Quicken I never once used these features.

Advantage:  Irrelevant edge to Quicken

 

COST:  Mint is free, and that is awfully hard to beat.  Quicken on the other will set you back between $50 and $100.  Plus Quicken uses planned obsolescence where their product stops working after a while (it stops connecting to the internet to update your accounts), so you have to buy a new version every couple years.  Certainly a few hundred dollars over a decade isn’t going to change the world, but I’d rather have it in my pocket than in Intuit’s.

Advantage: Big advantage to Mint

 

So there you have it.  Looking at it, Quicken has more advantages than Mint, and that makes sense.  Quicken is a better, more powerful product, no question.  However, Mint has probably the two biggest advantages—its connectivity and it’s free.

I appreciate that I am a power user when it comes to these things, and even I find a lot of Quickens extra features overkill, and I just don’t end up using them.  That makes me give the verdict that Mint is probably the better choice for most of you out there.  But don’t shed a tear for Quicken and their parent company, Intuit.  It turns out that Intuit owns Mint as well.  So there’s a lesson in cannibalization.

What is your opinion on Mint or Quicken or any other system you use to track your finances?