Guest post: “2013 review and 2014 plans”
(This guest post is a 2013 update and 2014 plan from a previous guest poster. If you’re interested in contributing a guest post, please see our guest posting guidelines.)
Well, it has been a full year since my last guest post here on The-Military-Guide and I have to say, the anticipation of this update has served as a valuable tool for keeping me accountable and focused on reducing expenses while increasing our investment contributions. I figured that I would take some well deserved ridicule in the comments section if I failed to show that I had continued to focus on improving our family’s financial situation…so, without further ado…I offer to you the readers an update on the changes we made over the past 12 months.
On the reducing expenses side…the military moved us back to the United States in mid-2013…so our travel costs should drop tremendously as we won’t have the tendency to view every available weekend as another opportunity for a “once in a lifetime trip.” The relocation also allowed us to set up residence in a low cost area of the country and we even moved into on-post housing which saves us on utilities each month. As is the nature of a military community, folks are constantly coming and going, so there is always a stream of fresh arrivals swapping advice and asking questions on the various services and utilities required to set up a household. In the fresh glow / chaos of setting up a household at a new duty station, it is easy to lose sight of all the little monthly expenses that you will obligate yourself to pay. I have spoken with a number of other new arrivals and a shockingly high percentage of them signed up for the premium cable package, new mobile phone contracts, and some recent returnees from overseas also added a new vehicle payment to their monthly obligations. I tried to optimize each of these areas as we settled in so that our monthly budget wasn’t saddled by contractually mandated expenditures.
After three years of living overseas, we were a little behind on our cultural knowledge with regards to prime time TV offerings, and I opted to keep us that way here at our new duty station. Yes, we “cut the cable” and our entertainment needs are currently met through a monthly combination of high-speed Internet for $45.79 (the promised rate of $39.99 per month evidently didn’t include taxes) $7.99 for Hulu Plus, and $7.99 for Netflix. Sadly, even this limited diet of entertainment allows plenty of annoying shows to leak through and I still have to flee the family room more often than I’d like in order to avoid the mindless shows that are evidently targeting a far cooler demographic niche than the one I occupy.
Upon hitting the ground back here in the US, we also needed to pick up new mobile phones. (We decided not to have a “landline phone,” however, we do have a VOIP phone number through our computer.) I wanted to avoid expensive contracts, and our experience overseas with pay as you go phones was great, so we are doing the same thing here. Of course the mobile network operators have no desire to subsidize phone prices for the no contract crowd, so we had to pay full price for our phones. The solution for now is a $30/month pay as you go plan with the cheapest phone I could find through Virgin Mobile for me, and a $45/month pay as you go plan through Straight Talk for my constantly connected wife and her iPhone (definitely not the cheapest phone, but I lost that battle.) I know that Republic Wireless has cheaper monthly rates, but they don’t allow the iPhone on their network, so while that won’t pass muster with the spouse, I may investigate that option for me in the future.
I also had to sell my beloved diesel car when we left Europe. I hated to see it go because it provided cheap and reliable transportation for the last three years. I knew that I didn’t want to buy a new car with the attendant monthly payments, so I figured that I would buy a $5000 used car for cash upon my arrival back here in the US…and my only criteria were air conditioning (since we are stationed in the Southern US) and airbags. Sadly, every $5000 car I saw had serious flaws and almost all of them smelled like a 2 pack a day smoker had driven them…so I upped my price limit to $7500 and found a one owner, Japanese sedan with new tires, a new battery, and a new timing belt (as verified by CARFAX and the dealer sticker under the hood). Most of the cheaper cars I’d seen were going to require these same maintenance expenses within the first year or two anyway, so I bit the bullet and paid for the car on the 3rd day back here in the states…I definitely didn’t want to pay for a rental vehicle longer than necessary. The wife still has the paid off mini-van…and I toyed with the idea of becoming a one car family…but my current job would require me to take the car more often than I’d like, thereby leaving my wife stranded without a vehicle…so for now, we remain a two car family.
Last year I mentioned that an area for improvement was the 30-year, 5.875% mortgage that we were carrying on our rental property. After checking with a number of lenders, we found one that seemed to offer a reasonable interest rate for an investment property (as opposed to the typically lower owner occupied interest rate). So, we finally pulled the trigger this year and refinanced the property through USAA. We opted for a 15-year, 3.25% mortgage. We now pay $79 more per month (actually only $60 more in principal & interest…details below), but we brought our mortgage payoff date forward by nine years, so that is a trade off that I am willing to make.
The old 5.875%, 30-year mortgage / monthly payments:
- Principal portion of payment after six years: $337
- Interest portion of payment after six years: $1045
- Escrow for taxes & insurance: $316
- Additional principal payment: $100
- Total monthly payment: $1798
The new 3.25%, 15-year mortgage / monthly payments:
- Principal portion of payment after one month: $904
- Interest portion of payment after one month: $538
- Escrow for taxes & insurance: $320 (tax increase in 2013?)
- Additional principal payment:$115
- Total monthly payment: $1877
I know that many readers will disagree with the additional $115 principal payment each month. I understand mathematically that perhaps I would be better off investing that money instead…however, emotionally, I sleep better at night knowing that I am bringing the mortgage burning party ever closer. I also have a soft goal of paying off the mortgage before I start paying college tuition fees for my oldest child. I’d like to have the rental property generating income free and clear by then (in the year 2019…so I’d better start sending in even more if I expect that to happen) since it is my understanding that college financial aid calculations will count an investment property as an asset instead of viewing it as home equity (which is generally not counted against you when it is owner occupied).
In a similar vein, I grew concerned last year when I heard that the 529 plans I had been contributing to since 2001 might ultimately harm my children’s chances at receiving financial aid when it comes time for them to attend school. However, I have since read up on 529 plans, and it appears that I am on solid ground by continuing to contribute to the three separate 529 plans that I maintain for my three children. I believe that most of the advice against the 529 plans is based on older information that failed to consider the 2009 changes which re-classified all 529 plans as parental assets, which are counted against the financial aid calculations at the 5.64% rate instead of the far more punishing 20% student asset rate. However, my reading also brought me to another interesting twist in the saga, as several websites mentioned the disadvantage of having multiple 529 accounts (to account for subsequent children). Due to the ease of beneficiary changes from child to child, all 529 plans in a family are aggregated and counted as a total value against the financial aid formula for the first child. So, once again, while mathematically, it might make sense to consolidate them all and spend the savings on the first child and pay for the subsequent children out of monthly cash flow and other assets…the emotional side of the argument favors maintaining the three separate accounts. In fact, I posed this same question to Nords in a private email and his take on it was spot on as usual…his response:
Beneficiaries are easy to change so there’s no administrative difference between one account and three—or 20. However, the impact on your kids and the college financial offices is significant. Your kids know that they have “their” money set aside for college, and there’s no sibling rivalry about who’s going to blow all the money at Harvard while another kid has to go to the local community college (or to USNA). There’s no “Dad loves you more” rivalry either. When they can see exactly what they have, they’ll figure out how to get the rest.”
Speaking of the 529 plans…all three are still invested with Vanguard, and a couple of years ago, I selected the option to automatically increases the monthly contribution on each child’s birthday…so, while the monthly contributions for last year were $125 per child per month…they have been upped to $150 per child per month this year. I love this feature as it only requires you to make a good decision once. Thereafter, the default action of doing nothing will result in an ever-increasing stream of savings. A quick comparison of 529 portfolio values one year later reveals:
|Date:||Dec 2012||Dec 2013|
(Created with the HTML Table Generator)
For full disclosure of the above figures, as well as some of the ones that follow, I should in fairness point out that we received a modest inheritance in 2013. Not enough to be life changing…but enough that we were able to take a family vacation to India, and contribute an extra $1,000 to each of the children’s 529 plans, as well as $2,000 to our joint taxable account. Additionally, this inheritance money was used to pay for the closing costs of the mortgage refinancing…and the remainder is sitting in a bank account until the tax bill comes due in April. Incidentally, this inheritance comes from the side of the family that originally gave me the gift of stock shares (as detailed in last year’s guest posting). My grandfather was the investor of the family, and he used to go to the library to pore over the Morningstar stock reports. He built portfolios of high dividend paying blue chip stocks that saw him and others comfortably through the final years of their lives, and still left enough of a legacy that the inheritance mentioned earlier represented only 4% of the total value of the estate…so, my love of investing evidently runs in my family’s genes.
Similar to the discipline enforcing option detailed above for the 529 plans, I also selected the “maximize annual ROTH IRA contributions” option for both of our ROTH IRAs with Vanguard. This meant that when the annual ROTH IRA contribution limits were raised from the 2012 limit of $5,000 per year, to the 2013 limit of $5,500 per year…I didn’t have to do a thing. I didn’t have to remember to change my monthly contribution, or recalculate the new amount. Instead, our monthly contributions automatically went from $416.66 per account each month to $458.33 per month without us having to lift a finger…fantastic. Speaking of fantastic…the stock market gave investors a wonderful lift this year. Check out the difference in account balances from last year (including contributions).
|Date:||Dec 2012||Dec 2013|
|My Roth IRA||$81K||$105K|
|Spouse’s Roth IRA||$49K||$66K|
|Joint taxable account||$21K||$27K|
(Created with the HTML Table Generator)
Wow…that is a pretty good year. We were significantly above my projections from last year’s chart where I used a 5% return as the basis for the calculations. Of course I also predicted a 1.7% pay raise for 2014…and the new budget passed in December of 2013 has the DoD receiving a 1% pay raise instead (along with a cut to military pension entitlements for working-age retirees). Fortunately, I had a margin of safety built into the calculations, and all subsequent years only predicted a 0.5% pay raise. I sincerely hope those predictions don’t come true.
I have found this exercise (both this year, and last year) to be immensely beneficial. It has forced me to examine my own savings and investment plan…and helps to hold me accountable, even if only to myself and my wife…since this is an anonymous posting after all. However, as an example, I publicly mentioned that I wanted to increase our ROTH TSP contributions ($417 per month last year)…and I have done that as well. (Currently $500 per month is going into the ROTH TSP…plus 1% of base pay is going into a standard TSP account.) I’d love to be able to max out the entire $17.5K allowed per year…so, we shall see how close I get in 2014. Also, the helpful commenters in last year’s posting spurred me into action with regards to refinancing the rental house, and researching 529 plans. So please fire away with any comments, suggestions, criticisms, etc. that you may have. I know that the collective wisdom of the readers of this blog can always find ways to improve upon the plan I have devised…so I am all ears. Hmm, perhaps I’d better go increase my TSP contributions now so that I have some improvement to show for 2014.
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