AskDong

My few but loyal readers may have across the new Mint button under about this blog.   What is it you might ask.  Actually I have the exact same question.   I added the link to increase the liklihood that I would be selected for the beta program.  Apparently it’s some type of online personal financial management that can serve as replacement for Quicken.  I came across it at a post at LazyManAndMoney.   He peaked my curiousity, and ended up filling out Mint’s survey.  I’m curious to see what it is.

At the moment, I’m actually generally pretty pleased with my current system.   I only track cash as a broad category (CASH), but I try to keep my cash transactions to minimal.   Almost all my cash expenditures are related to either lunch or beer.   What I do do is track every credit card purchase on Yodlee.   I log into yodlee every couple days and categorize my transactions (or recategorize if need be).  Yodlee is actually pretty good at tracking merchants once you’ve already categorized them, and as a result I have very few categorizations to manually assign.    In general I’m a big fan of their service.  Then at the end of the month I import everything manually via copy and paste to Excel, and run a macro.   I’m a bit of Excel Wonk (or at least used to be as my skills have gotten rusty), and find that this system gives me alot more flexibility than Quicken ever did, and it’s less work.   If Mint has something better to offer than I’m willing to give it a shot.  Now if Microsoft would only release a half decent version of Excel for the Mac…

Many of the financial blogs out there state the net worth of their owner and what their goal is.  Some goals are modest, others not so much.   I do neither.    I don’t quite feel comfortable stating my net worth in a public forum especially when my name (at least first name) is embedded in my blog, nor do I state an end goal.   This is not to say I don’t have a goal - I do.   I even have a vague number associated with it, but that goal is a moving target given when I reach it.  That’s where I differ from other folk, I don’t have a firm deadline for reaching it.    The current number I have is $1.7 million net of tax liabilities if I wanted to reach it next year (The specific before tax number would depend on the actual mix of 401K, Roth, and Taxable account holdings).   This is the amount of money I would need to feel secure enough that I wouldn’t have to have a job, and live to a ripe old age of 85.  Embedded in it are assumptions about the rate of return, and how much I would need to live off.   I won’t go through the gory details of the calculations here, but I basically think I need about 55k a year after taxes to live comfortably and do most of the things I want.  

I turn the question to you. So how much is enough?

Hi Dong,

Thanks you so much for encouraging me to set up both an online savings account with HSBC, and a Roth IRA with E*Trade. My question has to do with my Roth. I have been socking money in there for a few months, but have not allocated the money yet.

What is your advice on how to allocate for someone who is just starting out on retirement savings plan? (I have had a 401k for a few years, too).

-Rachel

Rachel I’m glad to hear you’ve been socking money away in your Roth and HSBC account. Now that you have a kitty built up in your Roth – there’s still a question of what to do it. There are embedded in that one question, two separate questions:

1. What do Invest In?
2. How do I time my Investments?

The first one is actually easier to answer as it’s a more straightforward. At this point given that you are just starting to accumulate substantial capital in your ROTH IRA, I would stick with mutual funds. You always want to make sure you’re diversified and that’s what a good Mutual Fund will give you. What Mutual Funds specifically? My mutual funds of choice for broad diversification are:

WFIVX - Wilshire 5000 Total Market Index Fund

DODFX – Dodge and Cox International

The Wilshire 5000 is index of the entire U.S. Stock market – you can’t get much more diversified (at least as far as U.S. stocks are concerned). You wouldn’t go wrong if you opted into any of other the broad market funds as the Vanguard 500 VFINX, or Vanguard Total Market VTSMX Full Disclosure, I own both DODFX and WFIVX at part of my portfolio. I do think it’s important to get international exposure and in some ways would recommend a fund like DODFX over a purely domestic fund if I had to pick just one. DODFX and funds like it are international not foreign which means that they actually have a fair amount of exposure to U.S. companies via large multinationals. News Corp, Murdoch’s baby, for example is one of DODFX largest holdings.

As for timing your investments, it depends a little on what mutual funds you’ve decided to make the core of your holdings and how frequently you fund your IRA. If you’re constantly funding your IRA and can purchase a mutual fund free of any sales charge then you might want to set up a purchase schedule of a fixed dollar amount to coincide with your funding schedule. I know for instance that WFIVX is free to acquire on E*Trade while DODFX is not. The advantage of spreading your purchases over many different intervals is that you reduce your exposure to the volatility inherent in the market. You’re not buying everything at a peak nor are you buying everything at a valley, this is commonly referred to as “dollar cost” averaging. If there are transaction charges associated with the purchase of a fund then its better not to incur them. For example if you were to buy $100 of DODFX every month, it’d cost you $240 while you’d be only purchasing $1200 of the fund. Right off the bat, you are 20% in the hole. You would be better off just purchasing the full $1200 in one slug at cost of $20, only putting you 1.6% down due to transaction costs.

Now specifically for you, if you have less than $2000 but more than $1000, I’d go ahead just purchase one fund like DODFX. If you have more than $2000, I’d still go ahead and purchase a fund such as DODFX, but limit that purchase to about $1500. Then start purchasing a transaction free fund such WFIVX via a set schedule (once a month should work) until you are robustly invested. If you have substantially more than $5000 seek more advice as that might imply a much more complicated course of action. If you have less than $1000, and are consistently funding the account, I’d go ahead setup a schedule to purchase shares of a fund like WFIVX. Purchase a fixed amount that is less than the deposit amount so the leftovers can accumulate for a bigger purchase on fund like DODFX at a later date. It’s likely that you might have to first purchase some initial quantity of WFIVX before you can setup a recurring plan. In either case use what you have in the account already for a seed purchase.

There’s also an argument to be made to invest in a life-cycle fund that is tailored to your age group. A life cycle fund involves the least work on a ongoing basis as it is designed to shift it’s holdings to best match the risk profile related to one’s age. I haven’t looked at the details of the specific funds and can’t really make a recommendation there. All I know is they vary greatly and widely and because of that will have to save any advice with regards to those for another day.

Disclaimer Below:

Any investment decision lies in the scope of a greater context, and should reflect your complete financial situation. That said it’s better to do something in your Roth rather than nothing just because a decision can’t be made. Again, I’m not a financial advisor – just a friendly guy with friendly advice. This answer should not be construed as anything but that.

Spring is in the air or so I’d like to believe despite the snow that fell the other day. I realize a lot of people save their tax inspired decisions towards the end of the year, i.e. selling losers in the portfolio and making tax deductible gift to charity. I think it’s always a good time to be in giving kind of mood. This year, I’m getting around to something I’ve been meaning to do for the last couple years.

I have a few odd quantities in my portfolio as result of spin offs. Specifically A, AV, and AGR. I no longer own any of the stocks that resulted in these spinoffs. I sold HWP (Hewlett Packard who begat Agilent) a few years too early. LU or as it’s now known as ALU (Alactel Lucent), I’m personally glad to be rid for the same reasons I’m pitching here for ridding myself of A, AV, AGR. I don’t own many shares of these stocks because I piddling stake in the originals. As a result the brokerage cost of liquidating these is relatively high on a percentage basis. But the bigger pain in the ass is actually figuring out the cost basis. At this point given that I didn’t keep the best records at the time of the spinoff and purchase of the parental shares, I have no idea what the cost basis is. I could spend an afternoon figuring it out, but I’d like think I have better things to do – like playing wii. So what to do?

I’m going to donate these shares to charity. It’ll cost me nothing and I’ll get a tax write off at the value of the shares at the time of donation hence no cost basis to figure out. If you’re at all civically minded, I think donating shares is great way to get rid of these little bastards. I don’t know the process for the brokerages other than my own, but I imagine it’s similar. I just need to fill out a form and designate the charity that I wish to donate the shares to and the brokerage account for that charity. A quick google is usually sufficient to determine the latter - use “stock” instead of “shares” as “shares” seems to pull up more UK pages… If and when I’m in a position to write about setting up a donor advised fund, I’ll write about that as well – though I think that’s more than a few years away – hopefully both I and the blog will be still around then.

Dear Dong,

Is there any financial reason (I know there are psychological ones) to have
money in a savings account when you are paying a significantly higher rate on
your HELOC? For example, if the savings account is paying 5% and the HELOC is
costing you Prime (now 8.25%), wouldn’t it make sense to pay down as much of
the HELOC as possible and then borrow from it (with no transaction costs) when
you needed to dip into your “savings?”

Sincerely,

CFO

Simple Answer: No.

There’s absolutely no reason not to pay down a HELOC from savings if you have it. As you said, you can always dip into the HELOC if the need arises. However that is not to say that you shouldn’t have extra savings once you’ve paid off the HELOC. While I think it’s okay to “fund” some of you emergency fund via a HELOC, it’s better to fund it with actual savings.