Financial Plan for 2014

Simple goals, simple implementation, right?

Income plan

The vast majority of my income comes from my W-2 day job. This is separated into regular salary, which is paid out monthly, and stock of which I will see two comparably sized vests this year. I am expecting my overall W-2 income (before deductions) to be somewhere between $160,000 and $200,000 for the 2014 year. This assumes a modest 2% increase and the 52 week low and 52 week high +20% stock prices for the RSUs. I anticipate my income surpassing the Social Security tax maximum ($117,000 in 2014) with my September or October paycheck.

My RSUs see a flat 25% of federal income tax deducted from them, which isn’t quite enough tax because my base pay alone takes me into the 28% federal income tax bracket these days, so I need to compensate for that with my W-4 allowances. My spreadsheet suggests that at this point in time, I should set zero (0) allowances on my W-4 for 2014. I will re-evaluate this after each RSU vest and raise.

Investment contributions

I plan to:

1) Contribute the 2014 maximum of $17,500 to my 401(k) for the year, spread out throughout the year:

  • H3 = annual base pay (gross)
  • J2 = Yearly max to the 401(k) – $17,500 for 2014
  • 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, e.g. if it is XX.3%, I will set it to XX+1%. I will most likely reduce this by one percentage point for my April and subsequent paychecks.

2) Make my 2014 Roth IRA contribution of $5,500 through the backdoor on January 2nd, taking the funds from my savings account.

3) Continue contributing the maximum to my Health Savings Account until the plan year ends partway through 2014. I will then re-evaluate health insurance plans and whether I will contribute to the Health Savings Account again (depends on which plan works out the best).

4) Set aside my 2015 Roth IRA contribution from my final RSU vest for the 2014 year in a savings account. This will probably either be $5,500 or $6,000.

Mortgage plan

All funds that are not set aside for spending, my 401(k), my Health Savings Account, or my Roth IRA will be thrown at the mortgage. My estimate is that this should be around $2,500/month on average, plus RSU vests.

Investment allocations

This exercise is similar to what I did for 2013. As of 12/12/2013, my investments portfolio is worth ~$130,700. I estimate adding about $25,000 to the portfolio this year, including my 401(k) contributions, my employer match, and my Roth IRA contribution, putting an estimated year end balance at $156,000.

(Note: when I wrote this post last year, I estimated that my end of year balance would be $98,100. It is $34,600 higher than that as of November 30th. Crazy!)

My target asset allocation at the end of 2014 will be:

  • 27% Fixed income
  • 36.5% US stocks
  • 36.5% International stocks

Based on this, let’s calculate my ideal portfolio at the end of 2014 and compare it to where my portfolio is now:

Current Ideal EOY Difference
US stocks $48,500 $56,945 $8,422
International Stocks $47,900 $56,945 $9,073
Fixed Income $34,400 $42,124 $7,773
total $130,700 $156,000 $25,268

I will add my $5,500 Roth IRA contribution to the Vanguard Total Stock Market Index Fund Admiral Shares, which means I only need to add another $2,922 to US stocks for the year. Subtracting out my 401(k) match from there leaves my 401(k) contributions as follows for the year:

  • 4% or $654 to add to US stocks (S&P 500 index fund)
  • 52% or $9,073 to add to international stocks (total international index fund)
  • 44% or $7,773 to add to fixed income (stable value fund)

There, we can set and forget for the rest of the year!

I will re-balance the Extended Market index fund vs S&P 500 index fund amounts in January 2015 when I make my Roth IRA contribution for that year – for now, I just care about US vs international vs fixed income.

Banking plan

I’m going to have my entire pay direct deposited to my credit union checking account and then pay the mortgage from there with the leftovers each month. My credit cards are all on auto-pay from here and all of my bills are on auto-pay to a credit card.

I will continue to withdraw any health expenses from my HSA after putting them on a rewards credit card through the end of this plan year. I will re-evaluate my HSA plans during open enrollment.

My plan for expenses is as follows:

  1. If purchase is in person and < $15, use debit card until I reach N transactions. This should earn me just under $200 in interest for the year, i.e. meets my $100 gain for the year rule.
  2. All purchases go on that credit card (this is mostly automatic, so no big deal), as well as restaurants and in-person places that don’t take American Express.
  3. All non-foreign purchases that take American Express go on the Fidelity Amex card
  4. All other purchases (including possibly foreign ones) go on the credit union cashback visa (I love this one because it does automatic redemption every month, no matter the amount!)

This algorithm should net me about $400-550 in cashback rewards for the year, based on 2013 spending levels.

Based on my spending patterns and my rule that I will only add a credit card if it will gain me at least an additional $100/year in cashback rewards and I think I could use the card effectively for at least two years, I can’t really optimize any further than this. I could add the US Bank Cash+ Visa Signature card for 5% cashback on restaurants, but with my spending levels, that may or may not actually make any sense. My credit history is still new enough at this point that I don’t want to churn yet (under 4 years), but I will re-evaluate that in 2015.

I’m really enjoying how simple this plan is and I can’t wait to let it be implemented! Here’s to an awesome 2014!


Rewards Checking Account Math

Back in July, I debated whether or not to use my credit union’s rewards checking account. I’ve been using it for a few months now for my emergency fund and some other small savings accounts.

So how exactly do these accounts work? Mine works as follows:

  • I earn Q% on the first $M in the account.
  • I earn H% on any funds above $M in the account.
  • I need at least one ACH transaction in the qualifying period and D debit card transactions to get the qualify Q% and H% rates. In my calculations, I will assume that this happens.

At first I thought it only made sense to keep $M of savings in this account, but then I started looking at the math.

These calculations assume that the alternative to placing your savings in the rewards checking account is in an online savings account earning 1.00% or S%.

The base formula for calculating how much you should keep in the rewards checking account beyond $M is:

(i) $M x Q% + $X x H% = ($M + $X) x S%

If we solve for $X, we get:

(ii) $X = $M x (Q% – S%) / (S% – H%)

So to maximize the interest on your savings, you should keep $M + $X of savings in your rewards checking account.

I was surprised when I ran the numbers on my account – $X actually turned out to be more than double $M. But I did the math for both sides of (i) and it was correct.

Indecisive in Checking Accounts

I am indecisive. There, I said it. Now I’ll say it again, for good measure. I am indecisive.

I have had checking accounts with 4 banks/credit unions since moving to this state 3 years ago. 3 of those were opened in the last year.

It’s easy to say “Make the right decision the first time.” The first bank I opened a checking account with was perfect at the time. They had a branch in the next office building over from mine. The staff there were super friendly and helpful.

A few months later, I moved offices. That bank was no longer quite as convenient as it was before, but it wasn’t a bad option. Why did I really need to go into a branch anyway? I have my debit card. I have my checks. And I have my cherished online banking. (Whatever did we do before they invented online banking? I certainly don’t know.)

About a year after the first office move, I was preparing to move offices again. By this time, that “perfect” bank was getting annoying. They were charging me fees if I didn’t keep a minimum balance in my account, have an automated transfer to a savings account with them, etc. I didn’t feel like I had control over my money. I mean, who would keep tens of thousands of dollars in a CHECKING account when there is such a thing as online savings accounts that earn you more interest?

I tried using ING’s Electric Orange checking account for most of my checking needs, but I like checks. Call me old-fashioned, but I like checks. I also like having a real person as a face on my financial institution. I only lasted about 2 months with ING as my primary checking account. In this time, my other bank had started charging me monthly fees for somewhat undisclosed reasons.

I quit my bank. Boy, did that feel good! I went into a branch where no one knew me and closed out my accounts. It felt so good to do the final withdrawal and deposit my funds into a brand new account at a credit union down the street. (If you’re still with me, that credit union down the street was financial institution #3.)

The one problem with that credit union down the street is its location. It is absolutely nowhere near my office or my apartment. With the CO-OP network, that really wasn’t a big deal at first. I just used the ATM of the credit union right next to my office.

As of the beginning of April, I switched my primary checking account to that credit union right next to my office. The online banking is way better than my other credit union, but mostly, it’s just far more convenient when something goes wrong.

I have nothing against my other credit union. I mean, they gave me a credit card that I still use today. I’m not going to quit them like I did my bank. They’re just an old friend who I don’t need to see all that often.

Here’s to hoping that my relationship with my now-primary credit union will last for many years to come! And if not, I hope that we can part as friends.

Rewards Checking Account

My credit union offers a rewards checking account that is earning a reasonable rate. (Where reasonable rate = a higher rate than their high interest savings account)

I’m debating moving the contents of my savings account into there and then keeping track of the subaccounts (checking versus savings) in a spreadsheet to take advantage of the higher interest rate. I would earn about $18-25 more per month in interest with all of the funds in my checking account.

I don’t worry about the accounting perspective – I have a good system in place for that. I don’t worry about meeting the minimum number of debit transactions per month – I eat out for lunch most days, which covers that easily.

So then what do I worry about? I worry about having $25,000 sitting in my checking account and being more open to fraud than having $3,000-$5,000 in my checking account and $20,000 in my savings account.

Readers, do you use a rewards checking account? Did you have this same worry? How did you overcome it?