Rob's 401K Summary

I had a request to open up the Cavitation kimono and share with everyone my 401K performance. I have to admit, I have not done this in over 2 years so I was a little unsure about what I was going to find. Weeeellll, here we go:


So on average I guess this is just about right...10%. Now clearly this little exercise has shown me that there may be a little room for improvement. I am not sure why the US growth funds are doing so poorly but they appear to be something I should jettison...I will get on that when I return from CR. Also, despite what CherkyB claims (as he is hunting for more ad revenue) the European growth fund has been one of my top performers...maybe we should increase exposure there. Finally, the Russell 1000 Value fund has been another stellar performer - somewhat surprising to me.

There is one notable item missing from the table above...The Company Fund! As I mentioned in a comment somewhere else, I have never participated in my "Company" stock fund...seeing as it would be the equivalent of putting all my eggs in one basket (a decision I made back in 1998 - well before the Enron meltdown). As it turns out, that was a tremendously good move. That fund has a 1 year return of -17% and a 10 year average annual rate of return of a paltry 2.5%...not even keeping up with inflation!

Funded my 401K/IRA and Lost $$ but my investments went up...HUH?

Funded my 401K/IRA and Lost $$ but my investments went up...HUH?: So from the title I know that you are already scratching your head..."how does one lose money with a 401K/IRA if the investments have not gone down??" It's simple if you follow the Cavitation way ;-) ...let me explain... For the past ~10 years Jen and I have been putting money into both our 401Ks.

Rob: I contribute regularly to my work 401K which is matched generously by my company. For 2006, the maximum contribution allowed was $15K. I unfortunately do not do that...I only put in ~$10K (not including employer contributions), meaning I am losing out on both the tax deferred gains on $5K as well as the income tax deduction I could have gotten (lost $$ #1). The reason for not kicking in the extra $5K was plain and simple --> comfort. I am not quite yet willing to take the $400 per month bite that would be necessary. [I am sure that someone will point out here that not all $400 will show up as a net decrease due to offsetting tax benefits.] The interesting thing is that a one time contribution of $5K this year (age 32) would compound into $116K by age 65 (assuming 10%)...and that would translate into $5800 per year in dividends for every year after 65 (assuming a 5% rate of return on the $116K). Hmmm...that seems like a no brainer....

The reason I am not currently stressing about the $5K (well at least I wasn't until I I wrote the last paragraph) is due to the fact that my employer kicks in another ~$9.5K on top of my contributions...so in total I am actually putting ~$20K/yr into my retirement fund...and at age 32, I think that is pretty good...but we shall test that in a later post. For now, the money being lost here is tied back to the $5K shortage in my contribution levels.

Now for Jen: Ever since Jen stopped working a few years ago to take care of the kiddos, we rolled her employer 401K into a rollover IRA and continued contributing at the max rates. In 2006 and 2007 that max rate is $4000 per year. In 2008, that will increase to $5,000. So in the case of Jen, it is not a question of not putting in the max allowable...it is a question of timing! I tend to wait until the end of the year when I am pulling together my taxes and then I realize...oops...I forgot to put that money into her IRA back in Jan of the previous year. So I cough up the dough and fund the max IRA contribution for the previous year. Needless to say, that means I am losing on average about $400 in gains (assuming market average of 10%) just because I make the contribution later than I could have. And to make matters worse, then there is the subsequent impact of lost compounded gains due to the delta in the two start dates --> the delta on $400 invested 1 year apart (again assuming 10% market growth) equates to a delta of about $800 at age 65! (lost $$ #2)

So the moral of our story: Just because you think you are doing great by making the effort to plow lots of cash into your retirement account...chances are you can still do more. Just a little tweaking here and there can make a huge difference in the end!

Taxes and lost $$

[reposted from my other blog]

Last week Jen and I completed our 2006 taxes. For the record, I always use TaxCut because I really like the interface and it does a nice job handling special situations (like when we had dual residency in CA and CO). I originally used TurboTax, but it got the boot quite a few years back 'cause I once got two different results from the same data (I think it was using AMT on one calculation and not on the other). Anyway, as any normal human, I do not like the process of doing taxes. I try my hardest to maintain a folder of tax related activities through the year...but it always ends up taking me a few evenings and fetching lots of paperwork in between to get'r done. The interesting thing (or maybe not) is that I love completing my taxes. Not because I typically get a refund...but because you always have a much better understanding of your financial situation coming out from completing your taxes.

So this year I completed our taxes and we did in fact get a large refund this year (about $15K). The driving factor behind the big refund is simple, I still have my W-4 deductions set to my bachelor days. Now this is quite obviously a waste of potential money, seeing as I let the government keep about $1250 per month of my money thus I lost out on all the interest. Assuming I had placed this $1250 per month into a MMA acount making 5% interest, I figure I just lost out on ~$350 (a free 2.3%) ... ok, so now I am sure Jen is a little upset with me! Here is the table I used to calculate the loss:

Now one thing to point out here...one must be disciplined enough to actually save all $1250 per month and put it into the MMA. If you don't and instead spent anything more than ~$350 then you are break even or even lower. In the end, is $350 a huge price to pay for a "zero interest savings account"? OF COURSE IT IS! Instead, this year I plan to change my deductions and direct deposit the extra money into a separate high interest savings account like AmTrust Direct which earns 5.36% (just don't go over the 6 transfers per month or the fees will get you)!

Financial Fitness - FREEDOM!!!

[reposted from my other blog]

Back in February I wrote a piece regarding financial fitness for gen-X/Y/Z. In general, I wanted to continue to benchmark our personal performance through time. While I have not had time to recompute our numbers lately (too busy with B-Day parties and getting ready for the upcoming move) what I can say is that Jen and I have officially kicked all of our non-house related debt!!! That's right....we now own both our cars outright (got the title for our Nissan Maxima just a few weeks ago) and have completely paid off all our student loans (we payed off Jen's back in 1998 but mine hung around a little longer). It feels absolutely great to know that those monthly payments will now be moving into the savings account instead of heading out the door (~$750/mo)! Since Jen and I have always harbored strong negative feelings about carrying credit card debt, we have never had to deal with that common ailment thankfully. So all in all, the only remaining monthly payment we will be making from here on out will be our house (which we hopefully will sell in the next few months). Note: if we were staying at our current residence, our next move would be to refinance our mortgage and put even more monthly $$$ into our pockets.

Something I should point out here: Up until 2006 the interest rates on my loans have been very low (~4%) but so were the interest rates on safe investments like CDs, MMAs and savings accounts (~2%). This meant that there really was no incentive to either pay off my loans (as they were already cheap) or to put my money "under the mattress" (to make no money). This really only left one option: to put our money to work in the equities markets with some risk to principal. Consequently, that is where a lot of our savings have been - in the equity markets. To be honest, that has payed off relatively well seeing as how our index funds have gone up ~10% each year for the last 4 years. As most of you are aware, over the past 1.5 years interest rates have been steadily moving up. Thus the incentive to take the risk in the equity market has been dwindling. Option 1: I can pay off my loans and make a sure 7%. Option 2: I can put my money "under the mattress" and make 5%. Assuming the market holds course at 10%, the incentive to be in the market has dropped from ~6% to only about 3%. Now, how much risk are you willing to take to realize that last 3%? My vote was to take the 7% and run...and sleep well at night.

Now that our debt is all cleared out...and we have cashed in our 7% gains...we have more money each month to "put back to work". This time the math is not quite as easy, seeing as the equity market premium is now at 5% (10% Equities vs. 5% MMA). So here we are again, at another fork in the road... I will write more about this decision process over the coming weeks...

Debt leaving college: Ready....Set....GO!!!

For the record, when the Mrs. and I left college and headed out into the real world we had a debt load of roughly $30K. Jen's edumacation hangover was only about 4K since she went to NMSU and got in-state rates. Mine was the remaining $26K. Seeing as how my school at the time was ~$24K per year (~$96K total), I figure $26K in edumacation hangover was actually a pretty good result...

I did own my truck outright at the time which was worth about $13,000 and we had a little cash tucked away to get a start in the real world...so I would say that we started our post edumacation life together with a total net worth of $0!!! Could have been a lot worse ;-)

Moving forward I plan to discuss our net worth through time...hopefully someone can learn from our mistakes and our successes!

The college years...all 5 of them....money well spent!

Upon completion of high school I decided to head on out to RIT for a little edumacation. The school was recommended by a family friend (Mr. Dillman) who's daughter was attending RIT at the time. She had heard of this engineering program called "microelectronic engineering" (uE) and touted that the placement into industry was ~100%...basically you just had to have a pulse. So I said to myself "Self, I have a pulse!!" and off I went.

After the first year of indoctrination, I mean edumacation, my head was spinning so I did what any self respecting 19 year old would do...head back home and take up a graveyard shift at the local Frito-Lay plant. Ironic that this move landed me in my first "chip" business job ;-) Working graveyard meant I got some extra bones for the effort. One additional benefit was it allowed me to take on a few odd jobs during the days to supplement the income ... no not drug pushing but instead painting houses. I started my own "business" and set out to paint the world a brighter tomorow (and to paint a brighter financial picture for myself)! That was a rough summer but I banked enough to tell those devils (a.k.a. parents) that I did not need their $$$ anymore...this kiddo was going to make it on his own (with loans and scholarships). In hindsight, I should have let them pay a little longer ;-)

Anyway, I went back my second year and that was when it all clicked. First, I was sure that I was in the correct major as I absolutely loved uE ... but more importantly two life changing events happened at the end of the year. First, I was offered a Co-op job at this little chip company called Intel (to be further called "the company" ) in New Mexico. Back then they didn't have the cool swirly logo like they do today, so it was a hard choice. In the end I went to Albunukie anyway ;-) Second, whilst in Albunukie I laid my eyes on the pertiest girl I ever did see...the future Mrs. But I digress...

My co-op at the company ended up being my "life" sentence. They paid really well (twice what I was making at my previous chip job) and the opportunities to apply one's intelligence was unbelievable. Hence, I was hooked. Not to mention I got to take lots of coffee breaks as apparently nerds are quite fond of their coffee...the start of my second life sentence...the java! Anyway, the remaining 3 years at college were 6 months in Crapchester and then 6 months in either Phoenix or Albunukie (hence why it took 5 years vs. 4). The major dough made during the co-op months was great enough to significantly offset what would have been a terrible debt. Not that I got out unscathed...but the scalping could have been mucho mucho worseo! As it turns out, that original job interview for the co-op position was my last. Every summer I returned to the company without fail and after graduation the offer was already in the mail...

Oh, is it obvious by now that I am tremendously in favor of a quarter based co-op education? Beyond the financial benefits and the increased odds of landing a full-time job upon graduation, there is the sometimes overlooked advantage...you get a sneak peak at the rest of your life...for better or worse. My kiddo's will hear this story someday...I promise.

One last and significant financial lesson I accrued in college: shop around and find your ideal bank with the greatest benefits you can extort!! I began by plunking my hard earned Frito-Lay/Painting money down into the closest bank I could find. It just so happened to be Key Bank. The service was absolutely terrible, the rates were terrible and they did not even have this new thing called online banking....holy crap batman! So I started to shop around and ended up choosing a little bank known as Citibank. Now, they didn't have the cool red umbrella on their logo at the time so that was not the reason for going their way. Instead, it was three main factors. First, the service was second to none. Second, they allowed me to upgrade to Citigold status (many perks involved) despite the fact that I was WAY under the requirement of having $50K in the bank. Third, they had online banking. Now this isn't the glamorous / slick web stuff we have now. It was a program on my computer which actually dialed directly into the bank and established a connection! It was awesome (despite looking terrible) since it meant I could do all my banking from anywhere in the country without the need to keep toting my monies around. Nowadays this is commonplace for any Tom/Dick/Harry bank...but back then it was cutting edge and that is the reason I still hang with the Citi today!

Oh, I almost forgot to mention...all that slick online banking saved me so much time, that I ended up developing a bad habit of watching Seinfeld with my roommate...Mr. Cangemi...which took years to finally break!

High School...rubber meets the road!

In high school, the rubber really starts to hit the road with respect to finances. All of us want an awesome car to cruise around in but (unless our parents are filthy rich) we quickly realize that our options are limited by our often meager savings account. Unfortunately, for many of us who grow up in a rural area...it is kind of difficult to make moolah without a vehicle. As such, many of us turn to an age old argument: "I can't get a job without a car" in the hope to land some time with the famdamily car. Once we have successfully made the deal with the devil (a.k.a., our parents in those prime teen-age years) we start the search for the "dream" job.

My "dream" job landed me squarely at the nearest McDonald's. I know it is not sexy...but where I grew up, the closest McDonald's was about 20 minutes away...and there wasn't much else around except the "country store" in town which wasn't hiring. And thus began my illustrious career...literally flipping one burger at a time ;-) Now to be fair to McDonald's...they provided my exactly what I needed: I could generally chose my hours and I got paid relatively well for the area - just slightly over minimum wage if I recall correctly ;-)

I stayed with McDonald's for the rest of high school and quickly worked my way through the ranks. By the time my senior year rolled around I was opening the store and managing the inventory/books/money. I can painfully remember how much of a slog it was to get to the store by 5:30am on school days, especially during sports season (oh wait that was all year: soccer/basketball/track). BUT, it was during those drives into work that I really had a chance to think about what I wanted to do when I grew up. While I did not know the exact thing I wanted to do, I definitely knew that I did not want to work like this!

I often look back on those years and thank my lucky stars that I was fortunate enough to go through that experience. First, I was (and still am) humbled by the fact a minimum wage job could be so difficult. Second, had I not pushed myself so hard and felt the "pain of progress" then I may never have built that foundation upon which I would continually draw through college. Lastly, I should thank those devils (a.k.a., parents). They were open minded enough to let a teenager "rent" their car and pile a 5:30am job on top of school & sports. I know that they were carefully watching to help if I slipped...

[I will insert a random thought here: Today I wish I still had that first paycheck I ever brought home - seeing as it was so huge (~$75). It is funny how almost every kid goes through the same experience of disappointment when they see the bottom line and ask themselves..."Self, why is this check so small?". That is when we all first really learned about TAXES and social security! When my kiddos are old enough to have their own first job, I will absolutely make sure to scan in their paycheck before we head down to the bank.]

In The Beginning...

A very-very long time ago (when I was about 13) one of my math teachers, Mrs. Fox, decided to play a little "game" in an effort to get us involved with numbers and graphing. The game was your typical "stock pick-em" game where you started with $100K and after two weeks you had to chart all your gains and losses. The one with the biggest gain won. I was not the winner....not even close. I ended up losing a lot of money...

Looking back, while this was a great math/graphing lesson, it was a terrible lesson in investing. Mission accomplished Mr. Fox! Clearly, a two week horizon was too short and the reason I lost ;-) I recall that the winner just randomly chose a stock and got lucky. One of my major holdings was this company called IBM because I was already into computers. Well, unfortunately in the late 80's IBM was not the rocket I desired (that did not happen until about '93). So I ended up shuffling around a bunch of stocks chasing the high fliers and generally doing nothing more than losing money to transaction fees...hmmm...come to think of it, this might have been a pretty good lesson in investing --> in how NOT to invest!

All I remember was being terribly frustrated with my current "holdings" but always being able to build scenarios where I could have made a killing...only if I knew which stocks were "good" and which were IBM ;-) And thus the seed of interest in personal finance was first planted.

I do have another blog for more general family stuff, but I found very quickly that I liked to write about money topics...a personal passion. So, I decided not to bore my family to death with finance posts and decided to move my financial diatribes over here. I will be exploring the path that led me to this point in my life and writing about financial interests/decisions moving forward. Hope you enjoy the ride...and feel free to commend/ask questions along the way...seeing as that is a big part of blogging....

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First and foremost: I am not certified in any field of finance. I am an engineer who is just trying to make sure that my family is happy and well taken care of. All thoughts posted on this website are just that...thoughts. There are no guarantees made with respect to investment performance. Ok, lawyer types, is that enough or do I need to tell everyone a few more dozen times that I am not a financial adviser??

Ok, now that we have that completed...please enjoy the show. I hope that it will be entertaining whilst provoking your own thoughts about maximizing your personal finances. After all, we ain't gonna be gettin' any social security (despite the many years of contributions) so we better all be prepare to shoulder the load now for the old geezers and then turn around and take care of ourselves.