Insurance is a Scam

Recently, I heard a story about outraged caused when insurance companies in the UK charging a higher premium for customers who had a hotmail email account.  Which got me thinking about how insurance works, its purpose, and how insurance companies work.  And for all intents and purposes, it’s kind of a scam.

The entire point of insurance is to pay a small amount now to reduce risk of a large payment later.  Of course, insurance companies still make money.  So how then, can they take money from you, and pay out your expenses, but you still somehow save anything?  The answer is, you don’t.  Unless you are one of the few people who end up spending the money paid in, you will spend more money paying insurance premiums than you will ever use.  And worse, you don’t get to reap the benefits you could have had by putting that money to work for you.

My favorite insurance to avoid is collision coverage for your auto.  I do have liability insurance (but perhaps I should consider self-insuring there too).  I drive a cheap car, but even an expensive car should give similar (if not even better) results.  I currently pay about $560 annually for my insurance.  I got a quote to see how much it would cost to get comprehensive coverage with a $1000 deductible.  This would cost $444 more.  So, is that worth it?  Well…  My car is probably worth about $6,000 according to Kelley Blue Book, and after the deductible, I could expect to receive $5000 if I totaled the car.  Alright, so $444 to get $5000 sounds alright, but realistically, how long should I expect before I actually total the car?

Forbes had a pretty good article on this which gave an expected time between accidents of 18 years.  OK, so then, $444 x 18 = $7,992.  So, I should expect to pay (if I’m an average driver and let’s be honest, I’m much better than average!) about $8000 in premium before I get that payout of $5,000.  Ouch.  So I’m paying $3,000 over 18 years for the peace of mind to not lose $6,000 in one year.  But, it’s worse than that!  Ignoring the fact that the car is constantly losing value and therefore the payout would be lower, I would be missing out on any gains that money would have.

If I put $8,000 aside and get at least 4% returns after inflation, I would be sitting on $19,250 in 18 years!  So, by not buying the coverage, I’m $11,250 better off.  Other insurances work the same, but the amounts are greater and may be out of reach.  If you, for some reason, have an expensive car, the amount you would need to bank would be higher.  Medical and house insurance would also cost more.  Of course, not everyone has that amount of money lying around, but if you do, you should definitely do this.

Another weird quirk about all of this is that insurers charge higher premiums to those who they believe are a higher risk.  This makes perfect sense, of course, but in our world of big data, it is getting easier to show a clearer and clearer picture of exactly how much of a risk it is to insure specific individuals.  And with this newfound certainty, insurers have nothing to gain by charging you a lower amount than they *know* they will have to pay out.  So, the cost of insurance as time progresses certainly will approach the cost of whatever loss you are insuring against (plus profit for the insurer to pocket)!

Knowing this, I think it makes the most sense to self-insure when possible.  On the long term, you will come out on top, but it requires diligence, planning, and a wealth of resources that might put this just out of reach.

Advertisements

Year in Review: 2017 – Savings & Growth

So, expenses are fun to track and they do matter for long term retirement plans as we need to have a really good handle on how we spend our money, but here’s the real fun, the fruits of our labor, and our long-term money making machine!  We managed to save nearly $233,000 and our investments grew over $34,000 on top of that!  This figure includes employer contributions to 401ks and HSAs, our pre-tax contributions to these accounts, and our post-tax contributions to appropriate accounts.
account balances.jpg

#1  New Jobs, Higher Salaries.

The easiest way to save more money is to make more money.  ECA had her first full year at her new job, and I also received a large bump in income when I switched as well.  We expect that our salaries will go up further thanks to ECA’s bonus structure and me working a full year (and probably receiving a raise as well).

#2  No More Extra Payments on Mortgage

The last few years, we put most of our money towards the house.  It was probably not the best idea at the time, but hey, it was safe and we can finish off that loan anytime we please now.  We’re keeping it around though since it’s such a low cost for a decent chunk of money that will do better elsewhere.  This did improve our net worth of course, so it’s not like that money is just gone!  Not until our house value crashes, at least!  But, by putting more money into our brokerage instead of the house we were able to take advantage of…

#3  Massive Growth in the Markets

Our performance has been phenomenal.  We don’t do anything complicated with investing (just index funds), but this past year was outrageously profitable.  The growth translates to about $35,000 this year, which is considerably more than our expenses for the year.  I doubt that this can continue forever, but I have my fingers crossed it will persist for another couple of years.  Some of this growth is taxable though, which reduces the true gains a bit here.  We don’t plan to touch anything in our investments until after we retire, so capital gains are not an issue, assuming the 0% bracket remains, but any gains on our 401ks or HSAs will be taxed when we finally pull it out, or backdoor convert it to Roth accounts.

#4  A Few Lucky Coincidences

Sometimes, you just get lucky.  When I left my previous employer, they paid out my unused vacation hours (which was expected).  In addition to this nice bonus since I had so many hours banked, I also somehow received a cash bonus from profit share, and a 401k bonus months later.  Totally unexpected there!

Estimations for 2018:

I doubt we will see any drastic improvement for our savings in 2018…  It should increase due to ECA’s bonus becoming vested, and general raises, but it’s not going to jump up like it did this year.  We went from a contribution of $170k to $233k, about a 37% increase in savings.  I don’t think that’s sustainable year-after-year.

 Still, I’m super happy with our results this year.  I think we far exceeded our expectations and our wildest dreams!

Year in Review: 2017 Expenses

Should old expenses be forgot, and never brought to mind?  Should old expenses be forgot, and auld lang syne?  It’s time to say goodbye to 2017, but before that, it’s that time again to review our expenses and gains!  On our path to financial independence, this was our best year yet!  We’re also getting a clearer and clearer picture of where our money goes and where it grows.

2017 review

trends.jpg

Bills & Utilities:  $6,454

There’s a very unsettling trend in our bills and utilities.  Year-over-year, we’re seeing a marked increase, nearly doubling since 2014, the first full year we were in our home.  It’s hard to say where this one is going because e

ach year has been pretty different.  In 2013 we were in an apartment until November, 2014 was the first year in our house, in 2015, we started doing Airbnb, last year, we had a long winter.

expenditures

The cost is really not bad when broken down further.  This year, we spent about $540/month on all bills and utilities.  Since our house is no longer considered “new”, our home insurance rate went up, but is still hovering around $45/month.  Our HOA bill has gone up to $180/month.  And we pay a fee for the sewage for a new construction of $150 quarterly, or $50/month.  Internet costs us about $40/month after it’s all said and done.  Cell phones cost us about $20/month since I don’t pay for one and ECA has Ting (it’s super cheap).  The remaining $205/month is split between our electric, gas, trash pickup, and water bills.  So, overall, our bills are reasonable and it’s hard to see where we can make any meaningful difference in any of these amounts considering we really only have control over the utilities, and they only represent about 1/3 of the costs.

If I had to guess, I would expect costs in this category to flatten out, but continue growing, probably around 5%-10% per year.

Food:  $4,232

Our costs of food, including groceries and eating out has stayed rather consistent over the past 5 years.  It just ebbs and flows, but is hovering right around our average of $4,000 per year which comes out to just around $340 per month.  This figure may also include some non-food items since I’m too lazy to track and split the costs of non-food grocery items.  It also includes all our fast food and restaurant expenditures which came out to be $224 and $247 this year respectively, or around $19/month and $21/month respectively (our target is around $50).

I expect this cost to raise slightly over time as the costs of food goes up, probably just above inflation or around 2-3% per year.

Transportation:  $2,316

Big drop this past year thanks to the new job!  Sparky has been going strong without any major trouble.  Unfortunately, I did have a fender-bender this year which reduced the car’s value (my fault, and only cosmetic damage, yes, I have liability insurance too), but since I have no intention of selling it anytime soon, that doesn’t really factor into our costs.  Of course, just like last year, I haven’t captured the total cost of the car which we bought with cash back in 2015 for just under $10,000.  I’m hoping that it lasts me at least 10 years total, but we’ll see exactly where and how that goes.

I’m betting that this coming year, we’ll see a drop in this cost since I will be working the whole year at my current employer and last year, 1/3 of the year, I was still driving a ton.  This category has a large chance of volatility though depending on gas prices and the chance of catastrophic loss of the vehicle.

Housing:  $4,506

Our housing costs consist of the interest on the mortgage and our property tax since all of the utilities are covered above.  Since we mostly have payed off the mortgage, our interest is very low, just under $740 for the year.  Our property tax has been steadily increasing, at $3,769 this year, up again from the last two years.  We will pay off the loan in about 10 months our standard payments, so I expect that we will spend about $250 in interest this year.  Our taxes will probably go up again, so I expect to pay around $3,900 in property tax.  I would assume that this will continue to grow at its current rate at about 5%-10% per year considering Seattle’s propensity to vote to tax itself.  Well, I have voted to agree to some of those in the past, so I can’t complain too much!

Shopping & Entertainment:  $3,634

There’s very little rhyme or reason to this category.  Sometimes, we want to buy something, so we do.  Sometimes that thing is expensive.  This year was my turn.  I bought a VR headset and a computer powerful enough to use it, together costing about $1500.  It’s awesome though and I’m glad that I did it.  The rest of the $2000 was mostly another $175 or so on video games, $200 in miscellaneous things we’ve done just for fun, but the rest was pretty much all clothes (mostly ECA’s clothes :P).  So, we probably split this category 50/50 this year!

This category is one of the hardest to predict, but it’s also one that we have the most control over.  If I had to guess, I imagine it will be lower next year.  We could also practically eliminate this category if things ever did get rough.  I imagine it will continue to ebb and flow due to the way we use technology, we probably will continue to spend every 4-5 years to replace our existing equipment and upgrade.  So, I expect to see a sinusoidal pattern with peaks about every 2 years where either I buy something or ECA buys something big in the peaks.  Over the long term, it should average out to about what we have been spending and will track with inflation.

Vacations:  $1,872

This category is the strangest right now as this does not necessarily reflect the true costs of the vacations, but instead what we paid out of pocket.  This past year, we got into credit card churning pretty hard, both opening a Chase Sapphire Reserve as well as several other cards.  Through these rewards, the vast majority of our costs were covered since we used those points for airfare and rental cars.  This was by-far the best way to use these rewards since Chase offered a 1.5x bonus when used for these expenses than what we would have received as cash and we planned to take the trips anyway.

Overall, this category acts a lot like our shopping & entertainment.  It’s completely discretionary and the cost varies just based on what we want to do.  I expect this to go back closer to average over the next year, perhaps increasing if we decide to go somewhere expensive.

Summary:  $23,016 spent in 2017!

Bringing our average annual expense to around $26,800.  At this rate, we could maintain our standard of living with one of us working 40 hours per week with an after-tax income of $12.90/hour (without any savings).  Or, using the 5% rule, an account of $536,000 would suffice.  Of course, any more we gather will allow us greater flexibility, and the freedom to increase our lifestyle if we desire.  Either way, I think we’re on fire!  Happy New Year!  Here’s to a wonderful 2018!

A Trajectory of Infinite Wealth

I’ve been thinking a lot lately of how much money we would need to retire. How can we guarantee that our expenses will not suddenly shoot up? How likely is it that our investments will continue to provide enough returns for our expenses? What if advancements in medical technology vastly expand our life expectancy? Can we, or should we rely on government assistance such as social security should our wealth run out?

I started to create something that I call a 70 year plan, assuming that we would live for 70 more years. This plan allowed me to tweak a lot of variables such as annual returns on growth, inflation, etc. And it showed me pretty quickly that tweaking different variables at different times would drastically change our outlook. A lot of scenarios showed me one thing that I think is worthy of pursuing though, infinitely growing wealth.

It seems to be the case that most people plan their retirement for what they think they will need and very little more. To me, this is short-sighted at best and dangerous at worst. I for one would not want to end my days in abject poverty, and I have no qualms about not spending all the money I’ve made throughout my life. This is why, my current plan will be one that has an infinitely growing trajectory.

The way to achieve this is obvious. We simply need to ensure that our expenses never exceed our growth. This needs to take into account inflation, taxes, market fluctuations, etc. to work. The biggest impact would be a long recession in the economy. If this occurred early on in our retirement, it could ruin this plan. Fortunately, we are young enough that if this were to occur, we could go back to work. Other than that, most everything can be addressed through mitigating risk, diversifying assets, and keeping our discretionary budget in check.

I plan to refine this a bit more into something a little more fun and useful, but for a simple test, I have run a few scenarios. I assumed a starting annual expense of $50,000. If I assume a low growth of 5% per year and an increase of expenses of 3.2% per year. It would take a starting net worth of $2.8M to last forever (well at least 4,000 years). A more optimistic outlook of 7% growth and 2.6% increases gives a starting net worth of only $1.15M! And a More moderate one of 6% growth and 3% increase in expenses means we’d need about $1.7M to start.

conservative

optimistic

mixed

The surprising thing for me was how low these numbers are.  It’s well within reach to pursue these levels of wealth and live within these means.  Even if we don’t get to spend all that money, we can leave a lasting legacy that never ends!

It seems to me more likely that society will end in some disaster or the very essence of what money is will change before this runs out. After all, a lot might change in the next 300 years…

Our Money Map

EC Aunt here!  I discovered there is this thing called “Money Map” from The Frugal Gene. I really loved the rainbow-colored map Lily built and decided to build our own. Cuz I really love building excel charts. I once built an excel chart explaining how we organize all the cupboards in our kitchen.

Screen Shot 2017-09-07 at 22.40.42.png

Income Line: Mainly plain old paycheck for ER Uncle. Paycheck and RSU for me. I am a minimalist so I do sell things I no longer use (clothes, beauty products, etc) but the side hustle income is very small. We rent our our spare bedroom suite on Airbnb for fun and money.

Pre-tax Line: We both max out our 401K ($36K total per yr) and our joint HSA ($6750 per yr). We no longer qualify for any IRA anymore ;(

Tax Line: We are at 33% bracket based on our AGI and sadly we don’t have very much deductions. Fortunately Washington State does not have income tax yet. Our Airbnb income is taxed for income and self-employment. Good news is for self-employment tax, my employer paycheck maxed out on the social security portion, so we are only paying for the medicare portion. We withhold additional tax through our paycheck.

Bank Line: We love combining our accounts as much as possible to keep things simple.

End Flow Line: We use credit card for 99% of our spend. so much more convenient vs carrying cash. We keep some money in our savings account as emergency fund.

Below please see a summary of all accounts:

Screen Shot 2017-09-07 at 22.24.34

Love that everyone uses their own style to build the map! What does yours look like?

Luxe Strategist

Budget on a Stick

Ms. Adventure Rich

Othala Fehu

MinaFI

Working Optional

Apathy Ends:

The Frugal Gene

Credit (High) Score

Being a personal finance nerd, credit score is something that has always fascinated me.  All of how we behave financially is boiled down to a single number for the sole purpose of determining the risk when lending us money.  Trying to maximize this number is kind of fun.  Like trying to achieve a high score in a video game.  But other than that, I feel that we, as a society, put too much focus on a credit score.  After all, in my entire life, having a high credit score has really only been important once.  And more recently, my view and approach to my credit score has turned from something worth preserving to something not worth even worrying about.

When we bought our home in March of 2013, ECA and I had a good enough credit to get a rate of 3.375% on a 15 year mortgage.  And although the loan cost us basically nothing (considering the growth we’ve seen in the stock markets these past few years), we began to pay down the mortgage as quickly as possible since we absolutely abhor being in debt.  This may not have been the best use of our money, but it felt pretty good to get the mortgage down from about $230K to about $20K in around 3 years.

Since then, my credit score has continued to improve.  I’ve even started to churn credit cards, opening 5 in the past year, and not seen any impact to the score.  Unfortunately, I wasn’t checking my score very often before, so the data isn’t great, but since Chase has started what they call their “Credit Journey” where you can get your TransUnion credit score for free with weekly updates I’ve been following a bit more closely.  I started this back in February, where my score was 808.  After opening a couple of cards somewhat rapidly, my score did actually dip down to 800 at one point, but it very quickly raised back up.

credit score

This service gives a few other interesting data points such as your current outstanding credit balances, your credit utilization (although mine says 0% so, that’s not quite right), your available credit, how many accounts you’ve opened in the past year (7 for me), how many inquiries in the past year (5), and the depth of your credit (only 7 years, well, I am only 30 after all).

There’s also a score simulator where you can simulate what different things might do to your score.  Which there’s basically nothing I can do to really raise my credit score.  Paying off all the cards would increase it by 3 points apparently!  Although I already pay them all off every month anyway…

Due to the value we gain from churning and the fact that we have no intentions to get a big loan anytime soon, thinking about my credit score basically has no effect on my behavior.  I used to want to get it higher, but I would gladly trade points on my score for real money, something much more tangible.  The only reason why my score is so high is because I’m a safe bet to give loans.  Save a catastrophic event, if a bank gives me money, they’ll get it back.  Of course, the only reason is because it’s worth it to pay it back since it costs me less.  It would do me no good to default, or to not pay off my credit cards each month.  I guess it’s just a mutually beneficial situation: banks win and I win, high score achieved.

The Airbnb Challenge – Converting the Living Room into our Bedroom

ECA and I have been hosting on Airbnb for nearly two years now.  We have a townhouse with two bedroom suites upstairs which works very well since we don’t need to share a bathroom.  We have been managing everything, and cleaning the room between guests to maximize our profits.  Last year, we grossed around $20,000 and after considering extra expenses such as utilities, we made around $16k before taxes.

Which really got us thinking, what if we could expand this?  Considering our expenses, if we were able to double this amount, we could theoretically maintain our lifestyle off of the income from Airbnb alone (although we don’t plan to do this), and if nothing else, we could make a considerable amount of money.  So, we set out to convert our living room into a third bedroom and try to open our suite on Airbnb.

Continue reading “The Airbnb Challenge – Converting the Living Room into our Bedroom”

The Wonderful World of Credit Card Churning

We have been using credit cards for all our purchases for a very long time.  We always pay off the balance every month and never buy any more than what we would anyway, so there has been no cost to do so.  And other than the shear convenience, with cash-back on every purchase that all of our credit cards offer, we have made a few hundred bucks every year.

But then there’s credit card churning which is on a whole ‘nother level.

Continue reading “The Wonderful World of Credit Card Churning”

Sparky in Trouble!

Sparky is the name of our car, it’s a 2013 Chevy Spark and I like it quite a bit.  It’s small (just under 12 foot long) so it can fit in basically any parking space.  It seats 3 passengers, so if I do need to drive anyone other than EC Aunt, it can.  It gets fantastic gas mileage (I’ve been averaging over 38 miles per gallon consistently).  It tells me when it needs an oil change, which has been about 3 times per year, and in general it doesn’t require as much maintenance as other cars I’ve owned.  However, recently, I ran into a problem with its battery… Continue reading “Sparky in Trouble!”

2016 in Review

Happy New Year!  One of my favorite annual pastimes is to review the previous years and find out how we did financially and I’m happy to say that 2016 was a very frugal year!  EC Aunt and I have only been out of college since 2012, and there’s a huge difference in our costs from then and now, so I really am only able to compare our expenditures from the last 4 years, but this year we managed to spend the least!

expenditures

This does exclude buying a car in 2016 which I prefer to distribute over several years if possible (assuming that I will be able to continue to drive it during that time).  This does include the cost of my previous car which we did not keep very long, so it’s cost was pretty much entirely in 2014, although we did have it for a bit in 2015.  These expenditures also do not include some costs of buying our house incurred in 2013 such as the closing costs on the house.  The biggest concern for costs not shown on here regarding our path to financial independence is the lack of health insurance, which I currently receive as a benefit through my employer.

Trends:

A few trends that are noticeable for the past few years is the decline in transportation cost, an increase in bills, a fairly consistent expenditure on food, a huge decrease in shopping this year, and a large decrease in vacation.

The transportation costs have been reduced primarily from getting a more efficient car, a slight drop in average price of gas, and the fact that EC Aunt’s work now provides her with a monthly pass for the public transportation.  I would expect once we retire that this cost would actually be even lower since the primary expenditure in this category is the cost to get to and from work.

The increase in our bills over the last few years are primarily due to moving into our townhome in 2014 and starting to pay for our HOA in addition to the other bills we already had and again increasing in 2015 and 2016 as we started to rent out our spare room.  Although I feel like these numbers are high, we’re better off in this position overall since the cost to lease would be higher than the cost to own and we’re actually making a decent amount of money on the house through renting out the spare room and the appreciation of the value of our home.  I’m really not sure how this category will be affected by retiring.  It depends on what we plan to do, and we haven’t quite yet figured it out.  I believe we will sell our home due to the high costs of bills such as the HOA, but whether we buy a new home, or rent, or just travel around for long periods with short rentals to break up trips is still up in the air.

Food costs have been relatively stable, and although we spent quite a bit less on fast food and restaurants, we spent a bit more on groceries this year.  This cost would also be quite variable in retirement depending on how much we travel and when we settle down again.  Traveling generally would make this cost go up quite a bit I expect, but it depends on where we are traveling since the cost of food might also be lower or higher in certain countries.

The decrease in shopping is almost entirely due to a huge cut-back from EC Aunt.  After getting her new position, she has decided that working for money is too hard and it’s easier to just not spend it!  The expenditure was especially high in 2015 for this category as well since EC Aunt bought a new MacBook Pro, an expensive LV purse, and an IPhone 6s…  Of course, she’s still using these, so their cost should carry over a few years as well.  She also cut back on buying clothes this year, although I don’t think her sense of fashion has suffered for it!  We also cut back a bit on our entertainment spending, opting for less expensive activities like clamming on the coast and playing Pokémon Go, heh!

The last major category that we can control actively is vacations.  In 2016, we simply did not travel as much as the last few years.  A big part of this was that EC Aunt felt she was traveling a bit too much with her new job and didn’t want to do it as much.  We were also both very busy with work and finding time to plan out a longer vacation is difficult.  There’s also the fact that we really want to spend more time in each location when traveling but when work is waiting for us to return to, it’s difficult to really enjoy the time we travel.  Of course once we retire, I expect this to be the largest portion of our budget so, this trend is not something I expect to maintain, nor do I want to maintain this low amount.

The only other trends worth mentioning would be the difference in the cost to lease and mortgage interest and property tax.  In 2013, we didn’t have a full year of a lease, so the cost was quite a bit lower for these categories.  We did buy the house that year, but the first payment was not realized until 2014.  Of course, if we continued to lease, the price would have gone up as well, so I’m pretty happy about buying when we did.  Over the last few years, we have been paying off our mortgage at a very accelerated rate.  We owe about $32,000 currently.  This has brought piece of mind and a greatly reduced cost of interest which of course has many pros and cons.  A considerable portion of our expenditures though is our property tax which has been going up and up every year and will go up even further now that Seattle has passed a major expansion to the public transportation system…  Still, as mentioned before, we’re better off owning the house than we would be to lease, so it’s just the cost of living and working in a growing city and really can’t be avoided.

The Breakdown and Its Impact on Financial Independence:

On average in the past 4 years, we have spent just under $28,000 a year, with a high of just under $34,000 and a low of just under $22,000.  Using the 4% rule (ignoring whether or not it is completely valid), we would need at least $550,000  using the low, $700,000 using the average, and $850,000 using the high number.  Furthermore, the high number might not actually be high enough for our retirement since we plan to travel more, we plan to have a modest budget at around $40,000 per year to cover everything, which would allow us a great deal of freedom, but would leave us plenty of room to fall back into super-frugal mode if anything goes badly.  For this, we would need $1,000,000!  So, to be extra sure, EC Aunt and I are shooting for a net worth of a bit over $1,000,000 in our retirement accounts in addition to the house.

balances

Our Progress to our Goal of Financial Independence This Past Year:

This year, we managed to save much more than previous years, not only because we were able to reduce our spending, but also due to the fact that we just made more money.  EC Aunt and I both maxed out our 401ks for the year, saving $18.000 each.  My company matched me $3210 for the year, contributed $3100 into my HSA, and a 401k bonus of $6,100.  Ending the year with a balance of just under $73,000 in my 401k, an excellent gain from my starting balance of $37,200.  We also contributed the remaining amount allowed to max out the HSA with an additional $3550 for a total of $6,550 contributed for the year, putting the final balance at $23,500, up from the starting balance of $14,470.  EC Aunt put in $18,000 into her 401k and received a match of $2850, she also started a Roth IRA, maxing it out for the year, ending her retirement accounts at $84,000, up from their starting balance of around $52,100.  We paid off a great deal of the premium on our mortgage this year!  We started the year with a principal of right at $100,000 and now we’re down to $32,000!  We also started a brokerage account this year which has a balance of $41,500!

In total, we managed to save just under $170,000 for the year, an amazing feat!  We also gained around $16,500 from growth of our accounts.  I expect that we should be able to maintain this rate of savings for the next few years, putting our timeline for Financial Independence at 5 years without any gains!  As long as the markets don’t crash, we could achieve this even sooner!  Here’s to 2017!  Hope it’s a wonderful year!