The Sunday Best (1/20/2019)


The Sunday Best is a collection of articles I’ve curated for your reading pleasure.

Expect most of the writing to be from recent weeks and consistent with the themes presented on this website: investing & taxes, financial independence, early retirement, and physician issues.

 

 

Presenting, this week’s Sunday Best:

 

I talk about leaving my job to travel the world with my family. Here’s a physician who is living that dream. Big Family Small World recaps their first year in their Christmas Letter 2018. To better understand what led up to their worldly adventures, read Revisiting Retirement.

 

Doc Wife isn’t looking back at last year. She and her family are focused on a stellar 2019. 100 Actionable Ways to Start the New Year 2019 Easier, Happier, Wealthier. I thought I was going overboard with 10 Financial New Years Resolutions!

 

On January 20th, is it too late to make resolutions for this year? Not according to The Physician PhilosopherIt’s Never Too Late for New Year’s Resolutions!

 

Here’s a resolution for you: stop making bad investments. They may be unavoidable, to some extent, but NextGen Wealth would like to share with you their Top Ten Ways To Avoid Bad Investments.

 

Are you a DIY investor? Are you good at it? How do you know? The White Coat Investor offers 10 Ways To Know You Are Competent to DIY Your Investments.

 

If you want to be on a fast track to financial independence, you’d best avoid those luxury items. Or should you? I suppose it depends upon your definition. Side Hustle Scrubs puts his money toward different styles of Luxury Items.

  • Bonus: What do you have parked in the Doc Lot? [this is comedy gold!]

 

Your typical luxury items can make it more difficult to save for retirement successfully. Are you on track? The Doc of All Tradez (who will be joining me in Honduras in May, 2019 (and you can, too)) attempts to answer that question Using Prediction Calculators for Retirement.

 

You’ll reach your retirement goals more quickly with a second job. Not that Vagabond MD needs one. Hatton1, the Doctor of Finance MD, hosts the interventional radiologist in VagabondMD Has Two Jobs…..FIRE?????

 

This is a great time of year to focus on how to best manage your student loans. I created the Student Loan Resource Page to help you with that. Ryan Inman of the Financial Residency Podcast wants to help you, too. How to Take Your Student Loan Debt from 6 Figures to Paid Down.

 

When you’re debt free, you can afford to be more generous with your money. Crispy Doc knows this and has acted on it. How My Donor Advised Fund Made Me Less Selfish.

 

I won’t pretend there wasn’t any selfish motivation when I started a Donor Advised Fund of my own. I’m not a fan of paying taxes. How much can one save in taxes by making Backdoor Roth contributions? Calculating the Value of Your Backdoor Roth Contributions.

 

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When I first heard about Crowdfunded Real Estate, I had lots of questions. I had the pleasure of having some of them answered by the CEO of one of the top platforms. EquityMultiple: An Interview With CEO Charles Clinton.

 

If you want to win as an investor, you need to know who or what you’re up against. In this week’s Saturday Selection, The White Coat Investor shared Know Your Enemy: Investing for Retirement.

 

 

Farewell, John Bogle

 

The father of index fund investing passed away earlier this week. Without his ingenuity and determination to bring index fund investing to the masses, I suspect we’d all be a little less wealthy. Well, all of us that don’t work for brokerages not named Vanguard.

We should be grateful that “Jack” stayed with us as long as he did. Thanks to the miracle that is modern medicine, he received a new lease on life at age 66 back in 1996, and got nearly another 23 years on that second heart.

The investment products he created and the ideas that he shared in countless ways had profound effects on the industry and me, personally. I’ve read several of his books, and I was inspired to write “How Much is Enough?” based on the ideals put forth in his powerful book simply titled Enough.

The Bogleheads have been paying him tribute for years, spreading Mr. Bogle’s message far and wide with the highly informative wiki and offering advice to both new and seasoned investors via the popular forum.

Taylor Larimore shared John Bogle’s obituary here, and hundreds of people have expressed their sympathies and gratitude in the merged thread announcing his passing.

Unlike my friend Dr. Jim Dahle, I didn’t make it to a Bogleheads annual meeting to meet the man when I had the chance. Unfortunately, like the vessel his company was named for, that ship has sailed.

I want to recognize the immense impact the man had on both the financial services industry and my own investment and life philosophies.

 

Parking Cash at… Where Else… Vanguard

 

It’s tough to make a tasteful segue from that discussion, but this seems like a good a place as any to mention that I recently moved a big chunk of “parked cash” to Vanguard.

Over the last year or so, rather than investing in a taxable account as I normally do, I’ve been setting aside money to build a home on our lakefront property that we purchased as a home base for the next phase of our lives.

A rule of thumb is that you should be conservative with money you plan to spend in the next few years — some say five years.

I’ve had a savings account with Ally Bank, and they’ve been steadily raising interest rates. Just this week, we got a bump from 2.0% to 2.2%. That’s pretty darned good, but I realized I could do better with a money market fund at Vanguard.

That hasn’t always been the case. For much of the last ten years, the Vanguard money market funds weren’t paying sqaut. I’m talking 0.01%.

Now, however, yields are in roughly in the 2.3 to 2.5% yield range for funds that are taxed by the feds. Vanguard offers a variety of money market funds, and the taxation of each and how to select the best one would make for a great blog post.

The Prime Money Market Fund (VMMXX) is fully taxable at the federal and state level. The Federal Money Market Fund (VMFXX) is fully taxable at the federal level and may be partially taxable at the state level.

Finally, the Treasury Money Market Fund (VUSXX) is fully taxable at the federal level and not taxed at the state level for most or all.

There are also federal-income-tax-exempt municipal money market funds that pay significantly lower interest, but these may be your best options, particularly if you’re in a high federal income tax bracket, particularly if you live in CA, NJ, NY, or PA, as there is a fund that will be free of state income tax for you.

Here are the current options, expenses, and yields:

 

 

I chose to park my money in VUSXX, which has a $50,000 minimum initial investment. It’s got the lowest expense ratio and is fully tax-exempt at the state level. Living in Minnesota, that’s a 9.85% tax break on the fund’s earnings.

My after-tax earnings on the (currently) 2.31% yield, in the 24% federal income tax bracket will be approximately 2.31% * (1 – 0.24) = 1.76%.

When I moved my money from Ally, my cash was earning 2% but fully taxed at both the federal and state level, giving me a post-tax return of 2.0% * (1 – 0.24 – 0.0985) = 1.32%.

With the new 2.2% interest rate at Ally, the after-tax return has improved to 1.45%, but it’s still 0.31% (a.k.a. 31 basis points) behind the return from VUSXX.

If, hypothetically, I were sitting on an average of $200,000 for a year, moving the money from Ally at 2.20% (1.45% after tax) to VUSXX at 2.31% (1.76% after tax) is a move that would boost my after-tax earnings by $620.

That’s well worth the handful of mouse clicks it took to purchase some VUSXX.

[note: When first published, I had adjusted the return for the expense ratio initially, but have changed the math to reflect the fact that the SEC yield reflects the return after fees.]

 

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Have an outstanding week!

-Physician on FIRE

23 comments

  • Thanks for linking the Vagabond post from my blog.
    I too have been studying the “cash” options at Vanguard. A couple of months ago I sold 600k worth of Intermediate Munis to get a 22k tax loss harvest. I parked the money in VMSXX for about 6 weeks. I then reinvested it back into the original fund. As luck would have it the “timing” was great in that I have made around 10K on the fund appreciation, harvested 22K in losses, and earned that tax exempt interest.
    I am currently studying my positions to decide how to best raise $577k for a new house. The joys of FI. No mortgage paperwork. I will probably write a post about buying a house for cash and how to decide on the right way to pay for it after I do it.

    • bean1970

      yes @hatton1. paying home in cash is super easy. just cut a check to the closing agent and sign closing documents. Having no bank involved totally is a game changer. You don’t need an appraisal. We had no inspection (since we gutted the place and had been renting 4.5 years before we bought it) and you can do what you want with the insurance (to include dropping it all together)… we just kept enough insurance to keep personal liability minimums. Basically nothing on the house itself. i will just pay cash if i need another house . The beauty of FI.

      thanks PoF for another great post. i can’t keep up with all the great blogs so I just wait for yours to recap 🙂 !

      • I had the house inspected for $400. I have a $34000 deductible. The biggest I could get. I want it for tornados and fire. Only $800/year with that deductible.

    • We bought our current house as a cash purchase. Took some capital gains to come up with the funds, but it was worth it to avoid the mortgage for us.

      Cheers!
      -PoF

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  • Mike Zaccardi

    FYI – the SEC yield takes the expense ratio into account.

    • Good call! When I first wrote that up, I did it right. Then I saw the expense ratio, and changed it all up last minute. I’ve now gone back to the original math, which is even more in my favor. Thanks for the tip!

  • You convinced me. I am moving a large chunk from Ally to Vanguard. Now I just have to wait on my CDs to mature (Sept, Nov and Dec 2019) to decide what else to do. Some nice reads above. We are enjoying a bit of snow this morning in Tennessee, so nice to stay warm and read a bit.

  • John “Jack” Bogle really was a rare breed, who looked out for the little guy and turned away the potential of large sums of money in the process.

    Not many people in his position would have made the choices he did. On top of that he was initially ridiculed for the S+P 500 index fund he created at the time. The why try to beat the market when you can just match the market mantra that we now use was novel at the time and had much opposition.

    Even creating Vanguard’s business model was a testament to his philosophy. Essentially eliminating another layer of expenses like other companies who have a board of directors to answer to with shareholders demanding profit, these funds were offered at barebone costs to everyday Joe’s.

    The fact that other companies have no followed suit in the declining expense ratios game is directly the result of Bogle and as regular investors we are the benefactors.

    • How right you are. He could have been worth billions, but he knew that tens of millions was more than enough for him and he wanted to do right by the investors in his company.

      The investing world is a much better place as a result.

      Cheers!
      -PoF

  • I was actually surprised to see 2.47% in VMMXX. Last year I had taken a chunk of cash and parked there. It was close to 2%. Nice to see it’s moved up more. I had also taken my copy of Enough off the book shelves and re-reading it. So many shoulders to stand on in our journey to FI & Bogle high up on the list. I’ve got another chunk of cash at Schwab and was curious to find that SWVXX is also well above 2% (2.32%). Contrast that to $100k that is just sitting in an eTrade account that received a total of ~$100 last year …. need to make a few mouse clicks! And just poking around, there is another $50k just sitting in cash at another account at Schwab. I’m lazy and losing money. Thanks for the reminder and push. On a totally different topic, I’ve been playing around with consumption smoothing models the last couple years & really like MaxFIPlanner. I have no affiliation to it, but curious to your thoughts on those tools. It is yet another tool to triangulate on Enough and pull down planning.

    • I haven’t looked at MaxFIPlanner, but I’ll have to check it out.

      Might as well round up all your “loose change” and put it to work! As interest rates rise, the more it will matter.

      Cheers!
      -PoF

  • Seth

    I Haven’t been paying much attention to the increasing rates of the Money Market account, but this is quite a pleasant surprise. At these rates, it is closely approximating the returns of my bond funds that I hold in my 401k plan with Vanguard. Any opinion on changing the fixed income portion of my 401k from a Total bond fund index to a Money Market Fund? I have VUSXX available without a minimum and am seriously considering making the switch

    • You’re looking at different investments, and bonds have not performed well in the last year or two. A savings account is a better comparison for a money market fund. Those are two apples, and the bond fund is more orange-like. Both are fixed income, though, so they are related.

      I’m keeping my bond money in Vanguard’s Total Bond fund, and my cash in VUSXX.

      Best,
      -PoF

  • God Bless Sir Jack Bogle.
    He was an amazing man.
    He could have made himself a multi-billionaire.
    Instead, he empowered the rest of us.
    I learned of the S&P 500 index fund in 1984 and have been a believer and an investor ever since.
    He literally made me millions. If I never deviated from the path he forged I would have done even better.
    Nevertheless, as Bogle would say, I have “Enough.”

  • lpt

    How does one figure out if VMFXX and VUSXX is taxable in one’s state? (I’m in Mass, and we do have state income tax). I tried to look at the Vanguard site, but wasn’t sure where to find this info. Thanks!

  • Thanks for the shout out, PoF.

    Bogle was a men among boys. He paved the way for our success and continued to maintain solid behavioral finance traits despite his massive wealth. He was a role model leader, investor, and human being.

    TPP

  • Thanks for including me! Love the idea of possibly earning a better interest rate within VUSXX. I’ll definitely be running the numbers for myself. Thanks!

  • VagabondMD

    Thanks again for the mention. Back to the math, I will be working somewhere between 0.75 and 0.85 FTE (plus small consulting gigs) while I sort things out, nowhere close to two real jobs.

    Thanks also for the Vanguard money market update. I lost track of the yields and did not realize that for the first time I can remember, the tax equivalent yield of the taxable MM funds are higher than the municipal. So I will be moving some money, too!

  • Thank you for mentioning me, PoF! I know you’ll have an amazing 2019, too! Can’t wait to see what you and your family have in store.

    I’m also super sad about John Bogle. Bogleheads’ Guide to Investing book, based on his index fund philosophy, is THE inspiration behind starting my blog. He will never be forgotten.

  • Tip of the hat to you for turning me and many others on to the DAF. I imagine it’s lowered the barrier to giving for a number of us.

    Appreciate the update on money market fund rates, this is one aspect of the portfolio I tend to park money in and ignore.

    Fondly,

    CD

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