Archive for January, 2012

Debating Ditching “High Interest” Savings Accounts

I have a confession to make. I am no longer sold on the merits of high-interest savings accounts.

The main draws of high interest savings accounts are:

  1. Higher interest rates than at your brick and mortar bank or credit union
  2. Easy to open sub-accounts
  3. More difficult to access your money (can take 2-3 *business* days)

Ally ‘s currently posted rate is 0.89% and this fluctuates constantly. ING Direct’s rate is currently 0.80%. The institution where I have my checking account is lower than that (somewhere around 0.55%), but how much do we and should we pay for convenience/annoyance?

For example, I have a rewards checking account in which I keep a certain level of savings. I use a spreadsheet to track which “sub-account” in my checking account has what balance and gets what amount of interest each month. I’ve done the calculation and I would actually earn more interest by keeping about $30,000 in this checking savings account than in one of Ally’s accounts.

My local institution also makes it super easy to open sub-accounts online and I can even rename them, just like I can with Ally or ING! It is not annoying to access the money – it transfer instantly to my checking account.

For a lot of people, having their savings accounts at an institution separate from their checking account is a good thing. But for me? It’s just plain annoying. It makes paying the visa bill for vacations annoying – I can’t just transfer money from my savings account to my checking account and write a check. Instead, I wait 2-3 *business* days for the funds to show up in my checking account. I’m not any more liable to spend the money if it’s at my local institution than I am with it off at Ally or ING.

I’ve already transitioned my vacation savings account to my local institution. (I did this a few months ago.) It never builds up higher than $3,000 before I take a vacation, so dealing with annoyances for small amounts of change and interest is a huge pain. I’m debating (er, strongly considering) doing this with my vehicle replacement (2020) and house down payment funds as well.

Readers, are you with me on ditching high-interest saving accounts?

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Keeping Investing Simple

By only using four funds for investing and trying to keep each bucket (Taxable, Roth IRA, 401(k)) to have the minimum funds possible, my investing plan looks quite simple:

  1. I only have one index fund in my taxable account (for now). This means that it is quite easy to be past the $3,000 minimum Vanguard has and eventually, to hit the switch point for Admiral shares.
  2. I have only two index funds in my Roth IRA. My goal is for this bucket to be the only one that contains shares of Vanguard Extended Market Index Fund. (This is currently true.) It also currently contains the overflow allocation for International stocks, which helps if I need to re-balance the Extended Market Index amount.
  3. My 401(k) bucket contains all of my fixed income allocation. It has no minimums on funds and it has three of the four funds that my implementation calls for (International stocks, S&P 500 Index, and fixed income), which makes it really good to use for re-balancing.

In bucket 1, Taxable, I know that 100% of my contributions are going to International.

In bucket 2, Roth IRA, I know that my contributions are going to be split between two funds and I’ll figure out the exact split at the time that I make the contribution.

In bucket 3, 401(k), I know that I need to contribute all of my fixed income allocation for the year and most likely everything else will go to the S&P 500 Index since there is so much International everywhere else.

I definitely feel like by keeping it simple, I’m much less likely to try and tinker with my portfolio. I determine the allocation splits for the year by plugging some numbers into a spreadsheet, set it for the year, and then forget about it.

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Roth IRA’ing for 2012

I’ve spent a lot of time thinking about how I will make my Roth IRA contribution for 2012.

If I had a good estimate of my income for 2012, I would just make the direct contribution right now (or with my first quarter bonus). My MAGI for the year could be anywhere between $77,000 and $121,000, assuming that I max out the traditional 401(k). It could even go higher than that since I don’t know what kind of annual bonus I’ll see with my performance review this year.

My first idea was to wait and see if my MAGI would be under the $110,000 limit and I would have a good idea of this by the time my third quarter bonus is paid out. But! I have no guarantee that I would be eligible at that point anyway and if I wasn’t eligible, I would just make a backdoor contribution.

So now I’m thinking that maybe I should just make the backdoor contribution with my first quarter bonus since there is a reasonable chance that I would end up needing to do that anyway. I had been planning on using my first quarter bonus to re-pay the taxable investments that I borrowed from to form my down payment, but instead, I could max out my Roth IRA via the backdoor with the first $5,000 I owed my taxable investments and set the remaining $354.89 aside in a savings account until I accumulate $3,000 that is earmarked for taxable investments.

Yes, I think this seems like a good plan. Last year, I maxed the Roth IRA out in April. This year, I’ll do it once the dust has settled after closing on the condo (so probably in early to mid February) and perhaps in 2013 I’ll do it earlier, as soon as I get my first quarter bonus.

Readers, what’s your plan to max out your Roth IRA for 2012?

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Creating my Investing Plan for 2012: Asset Allocation

My initial asset allocation strategy for the year will cover:

  • Re-paying the taxable investments I borrowed to increase my down payment
  • Maxing out my 401(k)
  • Employer contributions based on my initial salary
  • Maxing out my Roth IRA
  • No other taxable investment contributions

Since the most common good option in 401(k) plans seems to be a S&P 500 Index fund, I’m going to keep shares of the Vanguard Total International Stock Index Fund (VGTSX) in my taxable account. I will not set the dividends to automatically re-invest since that creates extra, annoying tax lots.

Taxable

Re-paying my taxable investments into the International index will fill up pretty much all of my International allocation for the year. Any further taxable investments will also go into this fund with the intention of eventually reaching the Admiral shares level.

Roth IRA

I keep two funds in my Roth IRA: Vanguard Extended Market Index Fund (VEXMX) to complement the Vanguard S&P 500 Index Fund (VFINX) shares in my 401(k) and the International index. Right now, it’s looking like about a 65/35 split of my estimated $5,000 contributions to my Roth IRA. Maybe in 2013, I will be able to use Admiral Shares for one or both of these funds!

401(k)

My employer matches into something that I categorize in my asset allocation calculations as a large US stock.

To meet my desired asset allocation at the end of 2012 with my projected contributions, I am going to split  15/85/0 between the three funds in my 401(k):

  1. Vanguard Retirement Savings Trust: 15%
  2. Vanguard S&P 500 Index Fund: 85%
  3. Vanguard Total International Stock Index Fund: 0%

I will already have filled up my international buckets with my taxable and Roth IRA contributions, so I’m not going to add any more money to that fund in my 401(k) in 2012.

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Creating my Investing Plan for 2012: Contributions

My first goal for 2012 is to max out my traditional 401(k). First, I need to calculate how much I need to contribute monthly to reach this goal and then I need to calculate into which funds I should deposit the contributions.

Monthly 401(k) Contributions

I have a simple little spreadsheet that takes the following formula to tell me how much to set my monthly contributions at:

  • H3 = annual base pay (gross)
  • H2 = ROUND(H3/12,2) = my monthly gross base pay
  • J2 = Yearly max to the 401(k) – $17,000 for 2012
  • I2 = ROUNDUP(J2/H3,2) = the % that I should contribute monthly from my paycheck to max out the 401(k) over the course of the year

My second goal for 2012 is to invest 20% of my gross income. The % in I2 combined with my employer match adds up to 21%, but barely, so I’ll come out barely investing more than 20% of my gross income for the year into my 401(k) and that’s okay.

How to deal with a Raise

I know, I know, raises aren’t terrible – they’re awesome! But when you went and calculated the perfect percentage to contribute to your 401(k) each month, a raise will go and change that number. If you’re lucky to get a huge raise, you could go and accidentally max out your 401(k) in *gasp* November!

For this, I have another simple little spreadsheet!

  • A1 = Yearly max to the 401(k) – $17,000 for 2012
  • A2 = amount contributed so far
  • A3 = A1 – A2 = amount remaining to contribute to your 401(k)
  • A4 = new annual base pay (gross)
  • A5 = ROUND(A4/12,2) = new monthly gross base pay
  • A6 = number of paychecks remaining in the year (so if you got your raise effective on your July paycheck, then you would set this to 5)
  • A7 = A5 * A6 = salary remaining for the year
  • A8 = ROUNDUP(A3/A7,2) = the % that you should contribute monthly from your paycheck to max out your 401(k) with your last paycheck in December!

Other Income

Since I will accomplish my goal of maxing out my 401(k) in December with my regular monthly salary, the second goal applies to any extra income I receive. Since I don’t know if I can Roth IRA or not until I receive my third quarter bonus, I will use all bonuses up until that point in 2012 to re-pay my various savings buckets and max out the Roth IRA with my third quarter bonus.

Any remaining funds to get myself up to 20% of the gross amount of my income will either come out of my fourth quarter bonus or my December paycheck.

Roth IRA Eligibility

Throughout the year, I will keep a running total of my total expected pay for the year (regular salary, plus extra income seen so far). When I am confident with my full, partial or none Roth IRA eligibility for the year, I will make the maximum contribution to my Roth IRA. This will likely happen when I receive my third quarter bonus.

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Social Security “Recapture” Tax is dumb

Warning: This post is going to be full of math. This is not a political post – this is a math post.

For the first two months of 2012, Social Security Tax is 4.2% of your wages and for the remaining months, it will be 6.2%. The wage at which you stop paying Social Security Tax for 2012 is $110,100. [1]

I would thus expect that the maximum Social Security Tax that I will pay is as follows:

  • January/February: $110,100 / 12 * 4.2% = $385.35
  • March through December: $110,100 / 12 * 6.2% = $568.85
  • Overall total = $6,459.20

Since I will receive my first quarter bonus in one of (January, February), I will only pay 4.2% Social Security Tax on it, as will I on my January and February paychecks, despite these totaling almost $30,000 at my current calculations. Over the course of the year, I will still pay the $6,459.20 in Social Security Tax that I owe throughout the year, according to my calculations.

What exactly is the purpose of the new “recapture” provision of the tax law? It is suggesting that I will owe approximately another $176.41 at tax time come April 2013 simply because my first quarter bonus was paid out in one of (January, February).

Doesn’t this “recapture” provision defeat the whole purpose of phasing out the tax at the earnings level of $110,100? Those of us earning more than $110,100 in the year will not see Social Security in our old age past that earnings amount, so why I am being forced to pay more into Social Security than my math suggests? Is my math wrong?

[1] http://www.irs.gov/newsroom/article/0,,id=251650,00.html

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Financial Goals for 2012

Save as much as possible:

1. Max out my traditional 401(k) – $17,000.

2. Invest 20% of my gross income. Use my Roth IRA to the maximum that I am eligible and invest the rest in my taxable investment account.

3. Save $3,000 towards a car replacement in 9 years by automatic transfer of $250 each month.

4. Re-pay the various savings buckets that I borrowed from to form my down payment in priority order: taxable investments, emergency fund (including improving it to 6 months at the new level of expenses), car replacement. Estimate of completion of each in order: January 2012, August 2012, November 2012. (Total: ~$20,000)

5. Put any leftover savings amounts after paying myself back into an “other” savings account and figure out what to do with this in 2013 when I will have extra monthly cash flow.

Have excellent credit:

6. Make all mortgage payments on time.

7. Make zero requests to change the limits on my credit cards throughout all of 2012 – let the credit card companies come to me.

Keep financial anxiety to a minimum:

8. Maintain my system of: a) nearby credit union for checking, most/all of my emergency fund, vacation savings, and other small and/or short-term goal savings, b) Ally for larger, more long-term savings amounts (e.g. car replacement and down payment funds).

9. Only check my checking account once per week, to ensure that there were no fishy transactions.

10. Only check my Vanguard account on the 2nd business day of the month (when the previous month’s dividends post in my 401(k) account). Wait until they post to write my monthly summary.

11. In January, create an investment plan for the year and stick to it.

Net worth:

After much deliberation, I decided not to set a net worth goal for the year. With the bonus structure of my income, my income could swing wildly in 2012, so I didn’t want to make a goal that could be unachievable despite huge efforts on my part. I am going to concentrate on how much I am saving and investing in 2012. I will still track my net worth, but I’m not striving for a particular number. If I hit all of the above savings and investing goals, then I will be saving about $50,000. That could turn into a net worth increase of $50,000, but it could not, so I don’t want to spend the year stressing about that.

Income/Savings:

Since I bought my condo and will move in in February, my spending will change a bit and my monthly savings will go down a bit as well. I am anticipating about $10,000 gross in more income in 2012 than what I earned in 2011 which should translate to about $7,000 more in savings and investments, but we will see how that plays out.

Mortgage:

I don’t plan on making any mortgage pre-payments in 2012 because I don’t want my condo to be too high of a percentage of my overall net worth and I will spend a good portion of my discretionary savings paying back my various savings buckets. I will re-evaluate this decision once I have re-paid all of my various savings buckets.

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