Stock Market Dip: How Are You Reacting?

I am not a financial planner nor a financial advisor. This post reflects my own uninformed opinions and does not contain financial advice. 

After a comeback rally Friday, the DJIA closed at ~24,200, still down about 9% from its high at the end of January.

For those of us with a long time horizon, this downturn is a blip. Whether the market bounces back or craters in the next year or two isn’t make-or-break for me, though it may shift my FI plans, depending on timing of the recovery.

That said, the recent stock market volatility has tipped the scales on at least one borderline decision:

Because I plan to quit my job, I have decided to build up my cash cushion a bit before maxing out my retirement accounts. I still plan to fill my 401k before I leave, but I want to make sure I have cash on hand first in case my employer terminates me early. I’ve dropped 401k contributions down from 50% of my income down to the match; I’ll push it back up after my cash cushion reaches optimal levels. The stock market volatility has, in effect, tipped the balance toward this more conservative course of action.

Other than adopting more conservative sequencing in preparation for my sabbatical, though, I have no plans to change my behavior. I’m pretty happy with my investment allocation. Charitable contributions continue apace. Given that I’m looking unemployment in the face, I’m feeling remarkably unfazed. That said, give it a few months and a potential recession and see whether I’ve changed my tune.

At least for now, though, all there is for me to do market-wise is to watch and to wait. And to idly speculate what may come next (mostly because it’s fun). With no real basis whatsoever– no data, not a finance person, etc etc etc hedging– my guess is this correction is going to be “the big one” we’ve all been waiting for. Maybe it’ll last a few months, maybe even a year. I wager– again, based on no knowledge, wisdom, or reliable intuition into these matters– this’ll end up being a 30%+ correction and the DJIA will drop below 20,000 once more. I’ll be DCA-ing in anyway, I’ve been wrong about this stuff before. But, hey, we all try to think about what’s next during crazy times, don’t we?

How are you reacting to recent market fluctuations (if at all)? How low do you think we’ll go?

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Financial Update – January 2018

Each month I will post an update on my finances to both give you, the reader, some insight into my situation and to give me markers of my progress on my financial journey. My updates consist of two parts:

  • Financial Progress Table – Tracks net worth progress.
  • Spending Table – Compares monthly spending to an average (for me) “bare bones” budget, keeping me accountable for additional expenses.

For now, monthly updates include only my personal net worth and spending. As my fiancé and I combine our finances, updates will shift to cover going values instead.

Financial Progress

Each net worth goal in the Financial Progress table is broken down into undisclosed units of money. My current goal is to reach “Financial Freedom.” By the time I reach this goal I will have:

  • A retirement account that can support us when my fiancé hits 65
  • Two college savings funds funded for four years of in-state public university tuition, room, and board
  • An emergency fund for six or more months of living expenses
  • Sufficient liquidity for my fiancé and/or I to make a career change with one to two years’ runway
  • A mortgage less than two times my gross salary without bonuses

Once “Financial Freedom” is achieved, the focus will then working be towards “Financial Equilibrium”, where the income from investments covers all our ongoing expenses.

jan18

Spending

I’ve created a “bare bones” budget which represents the average minimum amount I can expect to spend each month. This is the minimum amount I need to comfortably live in case of a job loss, emergency, etc. I expect to frequently go over my “bare bones” budget in a number of categories (here’s looking at you, “Groceries & Dining), but I want to remain accountable to myself when I do so.

For privacy reasons, there are two things I do not include in my spending updates: my monthly mortgage and charitable donations (pegged at 10% of my net income).

january 2018.png

Money Summary

This month has been a train wreck. Not financially— in that respect January has been pretty dang good. But my job? Oh my goodness. It’s like the entire city’s economy emerged from its winter doldrums all at once. With frenetic energy, everyone has decided there are no more bomb cyclones to delay us: work needs be done. And it was all due yesterday.

In any case, my personal life is going swell. I’m making good progress on getting my core into shape as per my yearly goals. I’ve also managed to dredge up enough energy to work on some personal coding projects. With all this activity, though, I’ve fallen behind on blogging. I think, for the foreseeable future, I’m going to be posting less, though certainly not disappearing.

Finances, a.k.a. the theoretical topic of my blog and this post. What to say about those? Well, the stock market is bonkers. I know it’s bad to say this, but I kind of wish the market would have a minor to moderate correction (say, 15%+). Right now, because of bullish spirits in the financial markets, I feel like we’re being gaslit to believe in this weird parallel universe where everything’s just fine guys and what could go wrong? Anyhow, I have enough in my investments and the market is speeding forward so quickly that I’m seeing four-digit daily fluctuations in my net worth. I know I should be celebrating, but more than anything I find it deeply concerning. That said, maybe the dip last few days are an indication that we’re finally in a period of downturn. Which is good, I think. 

Since it’s the beginning of the year I’m back to maxing out my traditional 401k. If my projections are right on our incomes— there is some uncertainty regarding by bonuses and fiancé’s job prospects— we should be able to max out our Roth IRAs. Because I’m contributing so much pre-tax, at least nominally my net worth progress is rocketing, nearly twice as much in January as it’d be in a normal month. This should more or less continue through April, though unlike most years it seems I owe taxes for 2017. So no refund to look forward to. Womp, womp.

As far as spending goes, my food was high for any reasonable person but normal for me. We had really high utility bills this month due to the devastating cold. I’ve also added a line item for wedding expenses, which I’ll total up after we have the actual ceremony. On the whole, though, January has been alright on the spending front. I’ve been too busy to even think of buying things.

How were your finances in January?

What Do I Want My Post-FI Life To Look Like?

I’ve been thinking: though I’m on a solid track toward financial independence, I want to make sure I’m preparing myself for my post-FI life in the real way, not just financially.

For instance, after I reach financial independence I’d like to write a novel, get it published. But, as any writer would tell you, your first novel is like a first pancake. As in, it’s probably going to s-u-c-k. What makes a good writer, like most things, is intention and practice. Or so I’ve read.

Therefore, it makes sense for me to start writing now so that when I finally hit financial independence I’m not just starting and struggling. I want to have gotten through that first part of the S-curve. Like my financial front-loading I want to have built the foundation emotionally and skill-wise for a successful fauxtirement. Soon as I put in my notice, I want to be rolling.

But before we get to the point of preparing myself for post-FI, I need to look at the possibilities. Because, while it’s still abstract, there are so many ideas of what my life could look like. Getting a survey of my goals first will help me figure out what skills I should be preparing for later.

So here they are, my what-if-I-didn’t-have-to-work-anymore life paths:

Writer

love to outline stories. Character development, plotting, scene development. But here’s the deal: when it comes to actually writing as in can I put a string of words together I am very much a work in progress. My sentences are either too long or too short, I use too many commas, and half the time I’m like what the hell are words even. Don’t even get me started on writing dialogue. I remember once my creative writing professor said that one of my pieces read “like it was written by a third-world dictator, maybe North Korea.” I’m still not entirely sure what she meant by that, but I assume it was bad (and also kind of racist).

I’ve had some practice in the past few years writing on blogs, theater-y work, and general report writing for my job. But if I wrote novels or short stories, they’d probably fall somewhere between science fiction and literary fiction.

Benign capitalist

Unfortunately, as much as I think governmental intervention is important in creating safeguards and rules for a just society, it seems the only way to make an impact quickly either for the betterment or detriment of people’s lives is to use the most flexible institutional structure available in our country. That is: start a business. I’d like to found a B-corporation, build it up, and then transfer the ownership to the company’s employees, giving labor the financial benefit it’s due and starting afresh to found new companies in different areas.

As to what my businesses would actually do? I’m not entirely sure yet. I think I’d like to provide services that make zero waste living more viable (think, e.g. Go Box which provides businesses with reusable takeout containers). Or maybe I’ll buy up foreclosed property (to compete with exploitative buyouts like what’s happening in Detroit) and resell to previous owners under a rent-to-own model.

Tinkerer

Sometimes I feel like I just want to make things. Play around with an Arduino, learn how to do basic carpentry. This life path feels the most amorphous, in part because I rarely do anything with my hands and wouldn’t even know where to begin. But it also seems like it could be a lot of fun. Just having adult play. And if I come up with something useful then maybe I can spread it to the masses.

What would you do with your life if you didn’t have to work? How are you preparing yourself for post-FI?

Tax Optimization and Charitable Giving

How are we reacting to the new Republican tax law?

Well, I’ve crunched the numbers and my partner and I will be around $3-4k short of the new standard deduction, not including charitable contributions. This gap will widen over time as we pay down our mortgage and our interest deduction declines.

Since we plan to continue donating 10% of our net income, we can pretty easily surpass this $3-4k gap each year if we give as normal. But it would be more tax efficient to bunch our giving so that we give the same amount on average, but only every other year. Applying such a strategy would net us an average of $385 in greater tax refunds every year (growing slightly over time). Not a life changing amount, but not chump change either.

The big downside to such a plan is that we would, in essence, be “delaying” charitable donations which could be well used by our favorite institutions sooner than later. I put a pretty high discount rate on donations– I think $50 to a cause today is worth way more than $50 to a cause a year from now. Because who knows what the world will look like a year from now. Plus, if we lived our whole lives around financial optimization, we wouldn’t be giving this much to begin with.

Alternatively, we could “prepay” charitable donations a year early. Which, if you believe the stock market will continue its bonanza of 20% annual increases, means we’ll be missing on non-trivial market gains.

So where does that leave us? To bunch or not to bunch?

Since we “prepaid” a lot of our charitable obligation for this year, I am inclined to donate the remainder of this year’s charitable obligation and then “prepay” next year’s obligations into a donor advised fund. From an efficient giving standpoint, I still think it is better to just donate the extra to charity now and eschew the DAF altogether. But from a mental accounting standpoint, having the money under my “advisement” (read: basically under my control except legally?) is strangely comforting. Plus, setting up a charitable foundation in anticipation for our wedding might be nice. Have our guests donate into our charitable pot rather than buying us a toaster oven we’ll never use.

Are you changing your tax strategy due to the new tax law? Will it affect your charitable giving?

Financial Update – December 2017

Each month I will post an update on my finances to both give you, the reader, some insight into my situation and to give me markers of my progress on my financial journey. My updates consist of two parts:

  • Financial Progress Table – Tracks net worth progress.
  • Spending Table – Compares monthly spending to an average (for me) “bare bones” budget, keeping me accountable for additional expenses.

For now, monthly updates include only my personal net worth and spending. As my fiancé and I combine our finances, updates will shift to cover going values instead.

Financial Progress

Each net worth goal in the Financial Progress table is broken down into undisclosed units of money. My current goal is to reach “Financial Freedom.” By the time I reach this goal I will have:

  • A retirement account that can support us when my fiancé hits 65
  • Two college savings funds funded for four years of in-state public university tuition, room, and board
  • An emergency fund for six or more months of living expenses
  • Sufficient liquidity for my fiancé and/or I to make a career change with one to two years’ runway
  • A mortgage less than two times my gross salary without bonuses

Once “Financial Freedom” is achieved, the focus will then working be towards “Financial Equilibrium”, where the income from investments covers all our ongoing expenses. dec 17 fin

Spending

I’ve created a “bare bones” budget which represents the average minimum amount I can expect to spend each month. This is the minimum amount I need to comfortably live in case of a job loss, emergency, etc. I expect to frequently go over my “bare bones” budget in a number of categories (here’s looking at you, “Groceries & Dining), but I want to remain accountable to myself when I do so.

For privacy reasons, there are two things I do not include in my spending updates: my monthly mortgage and charitable donations (pegged at 10% of my net income).

dec17.png

Money Summary

In spite of some big end-of year charitable contributions, I managed to just barely stay in the green this month. Mostly because the stock market has been crazy. I’m sure to pay for the progress in due time.

While I was high on the spending front, there are a few ameliorating factors.

For one, since Fiancé has been out of work, I’ve taken over all the utilities, including our once-every-four-months water bill. This skews my individual numbers a bit, even though as a household we’re going along as expected. When we finish joining our financesour new budget will reflect our combined numbers more accurately.

Another big contributor to this month’s spending is the annual fee for my new Amex Platinum card. I will more than make up for the fee in points and benefits, with $450 in comped AA gift cards and Uber rides by the end of January. But, since I won’t be taking out the rewards in cash back (like for my Amex Blue Preferred), it makes sense to track the fee.

Other big purchases made just for the indulgence include my Kobo e-reader and a couple’s massage. Also some food delivery, in spite of my “spend less on food” challenge, because it is <10 F right now in New England and leaving my warm cozy bed covers let alone my house in search for food is hard.

How were your finances in December?

My Goals for 2018

This is going to be a big year. My fiancé and I will get married. If all goes well, the voters will upend our robotic overlords. Yeah, I’m optimistic 2018 will be a good one.

This is also the last calendar year before my partner and I start trying for kids. Which means I want my goals to count. I know life and personal identity don’t stop when you have children, but there’s still a part of my brain that’s like: Embrace the YOLO while you still can.

With that in mind, here’s my first draft at goals for 2018:

  1. Marry and combine finances with my partner. If I hit only this goal, I’ll consider this year to be a win. The hardest part, by far, will be planning the wedding.
  2. Increase net worth 3 units. According to my calculations, I should be able to increase our net worth 2.5 units on my income alone. If my partner finds work by Jan 1, we’ll be looking at something closer to 3.25 units. If we hit the 3-unit mark, that’ll set us up to hit our “financial equilibrium” by first half of 2019. It’ll also mean that our non-house assets will be greater than our mortgage.
  3. Generate another stream of income, separate from my job. Right now I’m able to supplement my income with churning and proceeds from our roof of solar panels (expect a detailed post in a couple months). It’d be nice if I can find another light-weight way to make a couple thousand a year, just to pad our expenses.
  4. Chisel my way to six-pack abs. Pure whimsy and vanity. I’ve never been the rippling muscle type: my muscles are 90% jelly and I don’t think I could do a pull up to save my life. But I have been going to core classes the last couple months to good effect– you can now see the faint outlines of a couple abs right under my rib cage. I feel like if I put work into it, I’ll be able to get myself a six-pack. And this feels like my last opportunity since I imagine I shouldn’t try this while pregnant.
  5. Visit Ireland and Amsterdam. Combination honeymoon and trip to visit our friends while they work abroad. Fiancé will get to connect with his Irish ancestry, plus it’ll be his first time traveling internationally.
  6. Get involved in 2018 governor’s race. It’ll be an uphill slog to get rid of our elephant-in-the-room governor, so I want to help out where I can.
  7. Do one “interesting” thing per month. This is an idea I took from Chris Hutchins who was recently interviewed on the Mad Fientist podcast. In my updates, I will plan out my “interesting thing” for the next month. I’m hoping having a collection of 12 memorable moments by the end of the year will help me feel like I’m living to the fullest in 2018.

Then there’s my “keep on keeping on” list:

  1. Maintain body weight, regular diet and exercise. Due to my CSA, I have been eating healthier this year than I ever have before. I’ve also been pretty diligent about putting in 2-3 exercise sessions per week. I’d like to maintain that trend and keep my body feeling strong.
  2. Continue volunteering and donating 10% of my income. I’d like to continue fostering my relationship with my Little Sis and help her navigate the terrible time that is early teenager-dom. Also, charity.
  3. Read at least one book a month. Stay curious, keep reading.

Looking at this list, I don’t feel like I’m really setting “goals” for myself. “Goals” entail growth. This is more just itemizing the things on my schedule for 2018. Nothing here is terribly outside of my comfort zone, with the notable exception of political canvassing. That one’s going to hurt. Everything else, though, feels like the natural extension of the person that I already am.

Should I get more weird and creative goals? Or I’m just putting too much pressure on myself to live it up in my last moments of unmarried, childless freedom? I think this is likely just a blip of new-years inspiration-envy FOMO, which too shall pass.

What are your goals for 2018?

Combining Finances Part One: Creating A Joint Budget

Fiancé and I are in the process of joining our finances. For the sake of my own record-keeping and for the benefit of others maybe going through the same thing, I plan to walk through the steps we are taking to meld our financial lives together.

As a reminder, we’ve decided to structure our accounts in a his-hers-ours fashion:

joint-finances-2018-e1504554198958

To begin the process of bringing our accounts together, I wanted us to start at the very beginning with the most basic building block of a financial plan.

Yes, that’s right: the dreaded budget.

Steps to create a joint budget

  1. Draft list of current recurring expenses to personal credit cards and bank accounts.
  2. Identify which expenses will be considered “joint.”
  3. Outline a basic budget for the household.
  4. Agree on rules for joint non-recurring spending and to add new line items to combined budget.
  5. Check individual credit scores.

Joint versus individual expenses

The first thing we did was lay out all our common expenses and determine whether they would be considered “joint” or “individual.” We agreed that joint expenses would cover those things that are considered “needs” and that are used by us both or pivotal for our general welfare. That means covering the house, the car, health care, groceries, utilities, and basic household and personal care items.

Everything that’s not considered a “need” will be covered by our individual slush funds, which will each get $600/month. This money will not be monitored in our joint Mint account. It’s our own private money that we can do with as we please.

Items that will come out of individual expenses include:

  • Shopping
  • Entertainment (other than Netflix)
  • Takeout/Restaurants
  • Fancy gym memberships
  • Fancy hair cuts, massages
  • Fun individual travel, conferences
  • Excessive amounts of eggs
  • Pokemon
  • Gold-plated waffle iron

The last three items were added by Fiancé. He’s a silly biscuit.

Our household budget

I didn’t realize how much we were spending as a couple until we drafted this combined budget. It was eye-opening and not in a good way.

I’m not going to itemize all our line items, but the below summary by category will give you a good picture of our projected spending. Similar to my monthly updates, this budget does not include mortgage payments or charitable contributions, which are pegged at 10% of our net income.

joint.png

Right now our joint spending is way higher than I’d like it to be. There are a few clear areas of improvement:

  • Once fiancé finds a job that covers his expensive recurring medical costs (which are not being covered by his plan now), we’ll be able to reduce the “Health” category by $400-500.
  • Due to a car accident a couple years ago and his new vehicle, fiancé’s car insurance payments are $285 per month, nearly half our monthly transportation budget. I wager we can shop around and knock off $100.
  • I’ll also be working to combine our cell phone plans and hopefully cut costs by $25.

If we manage to make progress on these three items, we’ll be able to cut our joint non-mortgage spending down to $2250 per month (the number I’m going to focus on for “Barista FI”). That plus $600 each into our individual spending accounts means we’re expecting a monthly non-mortgage outlay of $3450/month or $41,400/year. Which… isn’t great. But it’s a start. Sigh.

Rules for joint spending

Establishing rules for joint spending will help us make sure we’re not silently inflating our expenses and that we feel comfortable with the level of mutual oversight of our joint money.

We’ve decided that we will:

  • Check in with each other when adding new recurring line items, no matter the amount.
  • Check in with each other for one-off purchases other than regular household maintenance items. 

We plan to set most of our recurring expenses on AutoPay and reconcile our budget quarterly-ish. But still there will be a couple dozen times a month we’ll make joint purchases manually. Since it’d be a hassle to text every time we buy anything jointly, the following items won’t require checking in:

  • Auto: Gas, tickets, registration
  • Consumable household items — paper towels, toilet paper, etc.
  • Consumable personal care — shampoo, soap, lotion, etc.
  • Groceries
  • Healthcare expenses: minor

This list probably covers 95% of our manual joint spending. For everything else, we’ll give each other notice and have a brief discussion if needed.

Credit scores

Since the next step to combine our finances involves opening checking accounts and credit cards together, I thought we should make it a habit to check in on our joint credit. Luckily for me, in spite of all my churning, I’m still in the high-700s. Fiancé’s score is nearly identical, so we’re in a pretty good spot credit-wise.

Do you and your partner(s) have joint finances? How do you handle individual versus joint spending accounts?