Archive for January, 2012
When you are looking at buying property, there are two ways to look at the decision: life and financial. Both sides must be in agreement for this to be a good decision. I talked previously about deciding how much I could afford to spend financially.
In all honesty, I think that the best long-term investment would have been a 3 bedroom townhouse with 2 full bathrooms. Assuming that the person I want to marry doesn’t already own a place, we could easily raise two children in a 3 bedroom townhouse. The down payment and monthly housing costs would have been low enough for me to afford them on my income, which would mean that they would later be affordable on one income between two people.
The best short-term investment probably would have been a 1 bedroom condo since they are in the price range of the high $100′s to the mid $200′s. This would have reduced my monthly housing expenses now, not required me to borrow very much from my other savings buckets. The HOA dues would have been lower with the lower square footage than a 2 bedroom. With the low cost of the monthly payments, I could have paid off the loan faster and/or invested more. I would have been taking out a smaller loan since the total cost of the condo would have been less and I would be paying less interest. My property taxes would be lower.
So why did I pick a 2 bedroom condo over a 2-3 bedroom townhouse or a 1 bedroom condo? It is still in my monthly and upfront price range. It had 2 bathrooms instead of just the one in the 1 bedroom condo. It is a corner unit, so it doesn’t share very many walls with other units. Notably, the master bedroom doesn’t share ANY walls with another unit. It had a lot more windows than the 1 bedroom condos we saw (except for one that was a corner unit). It felt like a home. The condos felt more secure than the townhouses since there is no external door directly to my unit. As a single woman living alone, safety matters a lot to me. The condo I ended up choosing is centrally located to a lot of neighborhood amenities like restaurants, bars, gyms, libraries, grocery stores, and pharmacies and on a direct bus line to my current office. The townhouses that I was looking at were further away and buying a townhouse in my price range on a direct bus line to work would have taken quite a bit of patience looking for the right deal.
I pretty much knew that I was going to buy the condo I ended up putting an offer in on as soon as I walked into the unit. Maybe I’m completely crazy for making this particular decision based on emotion rather than straight-up numbers, but it’s also important that I’m happy in the place that I chose. I think that the numbers will be fine in the long run. Last year, I borrowed money from my down payment savings account to fund my vehicle purchase and within 5 months, the down payment savings account was back up to its previous value. My emergency reserves will not dip below $10,000 and at today’s stock price, my taxable investments and emergency reserves would be fully paid back by the end of July.
I could have chosen to stay in my apartment for another year, dealt with the crazy rent increase, and continued to save money towards a down payment. That probably would have been a “safer” move financially. I want to stay in this city for the foreseeable future – I could even see myself retiring here – and I think I’m ready for a change from my current place. But buying a condo just makes sense. I’ve run the numbers, I’ve thought through the life decision and the process, and I’m still definitely on board. So I’m doing this. This is real. This is happening.
At what point do I want to add a REIT Index Fund to my portfolio? Do I want to add a REIT Index Fund to my portfolio?
I would want it to be 10% of my stocks allocation or 9% of my overall allocation. Since Vanguard requires a minimum of $3,000 to invest in a fund, my total portfolio would have to be valued at $3,000 / 9% = $33,333.33, which will definitely happen this year.
If I want to add a REIT index fund to my portfolio this year, then using my Roth IRA contribution for that would be perfect since I should keep the REITs not in taxable.
It looks like Vanguard charges a 1% fee to redeem shares of their REIT Index Fund before you’ve held them for one year, which means that I should be reasonably confident about this choice before making the purchase.
Since the fund would go in my Roth IRA, I have some time to think it over before I need to make a decision.
What are the cons that I can think of for investing in a REIT index fund:
- My current investment strategy attempts to replicate the market’s proportions, but this would be over-weighting a specific sector.
- This would add additional complexity to my portfolio since it’s another asset class in my asset allocating/re-balancing spreadsheet and another fund in the implementation.
- It isn’t in my 401(k) plan and most likely wouldn’t be in future employers’ 401(k) offerings either, meaning that I would need to be able to keep it in either my Roth IRA or a future Rollover IRA.
- I’m buying a condo, which is adding a real estate asset. Do I want to put money into more real estate?
- I already have some REITs in the other index funds I own – as of 9/30, Vanguard’s S&P 500 Index fund was at 1.78% real estate and their Extended Market Index fund was at 7.39% real estate. (This means that I currently have about 1.5% of my portfolio in real estate.)
Well, that doesn’t make this sound like a very good idea. What are some pros to investing in a REIT index fund?
- My real estate holdings would be more diversified than just my single condo in a single city in the US.
- It would add commercial real estate holdings to my assets.
- The returns of Vanguard’s REIT Index Fund seem to be completely different from the returns of the US stock market overall.
Readers, do you have an REIT index in your asset allocation? At what point did you add it?
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:
- Higher interest rates than at your brick and mortar bank or credit union
- Easy to open sub-accounts
- 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?
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:
- 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.
- 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.
- 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.
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?