The Sunday Best (1/20/2019)
The Sunday Best is a collection of articles I’ve curated for your reading pleasure.
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!
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.
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.
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.
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.
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