Sunday, February 24, 2008

529 plans

well, it's time for me to open and start contributing to a 529 plan for the new addition to my family. after some deliberating, i've decided to go the savings route rather than the pre-paid. the 529 college savings plan allows after-tax contributions into a savings vehicle that grows tax free when used for college. this is good stuff for something that i am going to have to pay for anyway.

there are also pre-paid tuition plans covered under the 529 tax code, but i feel that they are more rigid and limit your choices down the road.

in researching this, i found a great comparison tool that helped me out to arrive at the utah 529 plan (you don't have to live in the state to sign up, in most cases) -- it's got a low expense ratio index fund that i'm going to go with.

Monday, February 18, 2008

emergency cash on hand

so, i've talked about having a cash reserve in liquid investments to cover several months of living expenses in the event of an unforeseen change in employment status, and i think it's pretty clear and reasonable why such a fund would be necessary. there are even some pretty clever ways to do that with little or no money, if you decide to go that route.

another idea that i've been bouncing around is to keep more cash on hand. what?!? why would you want something turning into cat food or burning a hole in your pocket? the main rationale for this is in the event of an actual emergency (flood, hurricane, or other natural disaster) that takes out some part of the atm or credit network fails and you can't tap into those would be liquid assets? you may need cold hard cash to buy food, water, and other survival items for a few days or maybe a week to cover your living expenses before the world rights itself again.

now, i've flip flopped on this several times -- should a big crisis come up, who knows, maybe i'd be out there looting, or maybe cash may been seen as suspect, but i figure a couple hundred bucks stashed in the fireproof safe at home in small bills has at least some merit. and, honestly, there is something quite intriguing about having a stack of twenties in there. not quite gangster lifestyle, but pretty compelling.

Sunday, February 17, 2008

emergency fund

i was reading a forum the other day where a lot of people were advocating keeping an emergency fund in stocks! they even had elaborate mechanisms to make sure that they would be able to stop losses. i can't say how bad an idea i think this is.

for one, an emergency fund should not be thought of as an investment vehicle. it is a pile of money that is ready so that it can be tapped into in the event of a big surprise -- loss of income or some such.

additionally, your emergency fund should be at little to no risk and be extremely liquid. now, i find that all of my stock holdings are pretty liquid, but you never know if you end up buying into a low volume stock or if a some sort of trading block happens on your stock the day you need it.

if you keep your emergency fund in a stock or stocks, you have a few issues that you have to contend with. one is that your ef may be very volatile. how can you bank 6-12 months of expenses in something that you don't know the value of day-over-day? the other thing is that if something should befall you, you stand to lose a substantial bit of money, if you have to break into your fund on a down day. even if you have standing stop loss orders in place, you bear the burden of commission charges and -- more importantly -- you have to determine another stock or set of stocks to put your money.

i keep about 1/2 of our emergency fund in cash in a checking account. the other 1/2 is in staggered 1 year cd's that mature each month and renew if i don't need them. it's valued at about 12 months of family expenses, but i'm sure that if we found ourselves suddenly unemployed, we could actually stretch that to 20-24 months.

i've heard people say that credit is good enough to use for an emergency fund. i've actually used that tactic, with extended 0% financing, but i disagree that a credit card should be used for that role, as it really only buys you about 1 month and then it's time to pay the piper.

Thursday, February 14, 2008


i opened up an etrade savings account the other day. i hold a good bit of money out of the market waiting for a good opportunity to buy (while at the same time diligently dollar cost averaging into the s&p 500). i heard a quote the other day -- it's better to be out of the market wishing you were in it and in it and wishing you were out of it.

Saturday, February 2, 2008

retire young

years ago, i decided that i wanted to retire young with a nest egg that i could reasonably live off of for my remaining years. well, i've decided to look back now to see where i was and how far i have left to go. i've never been fond of sites that post up net worth numbers or things like that, so i'll try to speak in generalities.

one key thing that i aim to achieve is for my investment/passive income to surpass my expenses. at that point, i'll feel comfortable quitting my day job, even in the face of rising inflation. currently, because we have a pretty substantial house payment, that horizon is out pretty far.

from about 2001 til now, our household income has more than doubled, but our housing expense has followed that increase in income -- but not exactly in the same scale. our liquid net worth from that time until now has increased about 10-fold. thanks largely to the increase in income and continued saving and investment.

of course, back in 2001, i was expecting to retire in 15 years. now, at about the half way mark to that goal, i just wanted to take some time to reflect -- without looking at lots of figures and stats -- to see how realistic it would be to retire in 7 years. just ballparking it, i'd say it would require some pretty aggressive measures to make it happen, but it would not require a lottery winning experience.

if we stay the course, i would say just from a back of the napkin type calculation, that we could achieve the break-even point somewhere out about 10 years, at which point our amassed principal might just be enough to produce an income stream approximately equal to our current expenses. so, i would say that we're not far off, especially considering that i am being very conservative in my approximations.

but, what it took to get to this point was to achieve a level of automation in my life that takes decision making out of the saving and investment process and to never waver from that.

bonus time

i was surprised to find out a few weeks ago that my company decided to pay out bonuses this year. it wasn't a huge windfall, but amounted to about an extra month's worth of take home pay. so, what did i do with that money? absolutely nothing. it just went into the bank and has been sitting there. that's where it'll probably stay. in the past, when i have been fortunate enough to receive a bonus, i was pretty diligent about putting some of it away into a separate account.

times have changed for me, however. my saving is so automatic these days, i know that each month i'm socking away a good percentage of my pay into investments, savings, and more discretionary accounts. it's a great way to live.