Month: July 2014

College Funding for our kid

/ humblefi / 2 Comments

When it comes to college funding, there are a few main questions to answer.

  • How much to fund?
  • Where to fund?
  • What if unused for college purposes?

How much to fund?

College cost is soaring like crazy…looks like there is no end in sight. I wish I could fund the entire cost, but I am not sure I can. So, I have set a target of $20000 per year for 4 years. Anything more than this, the kid has to manage.

Where to fund?

I wanted a most generic college funding option. By generic I mean the following:

  • 529 plan
  • basic age based investment option
  • passive fund is okay
  • good set of low-cost investment options
  • acceptable in any college across the US
  • any state tax advantages
  • online acct management possible
  • automatic investment possible

Since I am a fan of Vanguard, I have a bias towards Vanguard 529 plans. But, I did dig into many articles on the web to find a good 529 options. Turns out, most of the good plans happened to be Vanguard ones. I picked Nevada 529 plan as satisfied all the above requirements.

What if unused for college purposes?

If unused, the 529 plan can be withdrawn but with a 10% penalty. The penalty is applicable ONLY on the earnings in the plan and not on the principal (because I am using post-tax money for investing into the 529 plan). There is a wonderful article from savingforcollege.com that I will refer to here for further reference.

Starting Status

07/25/2014        $22600        28.25% complete

09/29/2014        $23185         28.98% complete

07/04/2020         DONE

….. (see Progress Report for more updates)

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Emergency Fund

/ humblefi / 2 Comments

Why an Emergency Fund?

There are many events in life that cannot be planned for. Let us consider some examples:

  • My close friend used to work for a company that closed down without a hint as to this event happening. This happened when the market was in the dumps…but he was able to ride through it because he had some money stashed up. It was not that he planned to have an emergency fund..it was just that he was not financially aware on what to do with that money.
  • My colleague at work had mom continuing to stay in another (home) country. Mom was suddenly diagnosed with a fast acting cancer. My colleague dropped everything and left to take care of mom. Mom lived for another 6 months, but she got to spend the last 6 months with my colleague and died in peace. If my colleague did not have an emergency fund, my colleague could not have afforded those 6 months without pay…6 months that gave my colleague peace for the rest of life.
  • One of my other friends lost a job unexpectedly. His company was doing okay, but they canned his entire product line. He was given two weeks to search for a job inside the company, but it was a time of job freezes every where and he could not get any. Since he had two kids, the COBRA insurance payment for the entire family turned out to cost almost 1900+ dollars! This was a total surprise to him as well as me. Did I say that rent is expensive where I stay? His total monthly expense was almost $5000 per month. He was out of a job for almost 6 months and that is 30 grand right there.

So, for reasons like the above, I wanted to have an emergency fund that will at least give me and my family some months without pay in the event of any emergency. This is especially important since we do not have any relatives or friends that can support us financially.

Size of the Emergency Fund

Having decided to build an emergency fund, the question that arises next is…how much?

  • From seeing my family’s expenses and from seeing what my friends had gone through, I think a minimum of $5000 pm is an absolute necessity.
  • A year’s worth of expenses is what is recommended everywhere.I have nobody I can rely on to host me and my family. I am it.
  • I have a pre-existing health condition for which insurance would be almost impossible to get. So, I added $1000 in addition to account for a high cost insurance.

Considering all that, I decided to have 12 months of expenses for my emergency fund i.e. $72000.

Where to keep the Emergency Money?

Having $72000 in a Bank of America account was earning brutally low interest rate. Based on a tip from a wise soul, I came across Smarty Pig, a FDIC insured online bank that was providing 1% interest for the money. So, I decided to move the emergency fund into a Smarty Pig savings bank account.

Status of this Goal

Done!

What is Financial Independence to me?

/ humblefi / 14 Comments

There are many definitions of Financial Independence out there is the web world. For example, “FUMoney”, Eary Retirement, etc etc. Each person who defined it was solving a problem in his/her life i.e. was trying to get free in some way. So, what does financial independence mean to me?

  1. Emergency Fund for 12 months of expenses
  2. Multiple Passive Income Streams that produce $50000 per year for years 50-70
  3. College Fund for my kid
  4. A retirement fund that covers 30 years of expenses for years 70-100
  5. A paid off roof for my family
  6. A $100K medical fund to help fix emergency health issues…not sure about insurance with preexisting health issues.
  7. Life Insurance to cover my family.

I am not sure if this is a realistic number yet….but this is a start. I hope to refine it over the next year or so when I have some more clarity on issues like housing.

Emergency Fund ($72K)

We live in the age of uncertainty in many areas and one of them is the source of income. I do not have super intelligence or super will power, but I sacrifice many things and work really hard. Inspite of that, I cannot say that I will never face a loss of income streams. So, this fund is there to take care of my worries for a while. $6000 pm for 12 months = $72K.

Details here.

College Fund for my kid ($80K)

College cost is soaring like crazy…looks like there is no end in sight. I wish I could fund the entire cost, but I am not sure I can. So, I have set a target of $20000 per year for 4 years of college. Anything more than this, the kid has to manage. I feel since we brought the kid into this world, it is our responsibility to build a proper foundation for our kid. A college fund is one part of the foundation. Maybe I will write another post about all the parts of the foundation I have planned to provide for my kid…..but that comes later.

Details here.

Multiple Passive Income Streams that produce $50000 per year ($1million Taxable account investments….for years 50-70)

Where I live, $4000 pm is an absolute necessity. A major portion of this expense is housing costs. A 2bed/2bath apartment costs around 2.5K to rent in a good school district. A mortgage for the same house will cost $4500 at least. If housing is taken care of, then $4000 pm will afford some luxuries like travel, etc. Else, this money would be necessary for basic living….sad, but true. Moving out of this area is not an option for me….my entire social circle is here and it is almost impossible to find such a set of good people anywhere else.

Details here.

A retirement fund that covers 30 years of expenses at $30000 per year ($900K Tax-advantaged account investments….for years 70-100)

I have been contributing to 401K over the past 14 years of working…but not much to show for this yet. I was not maxing out my 401K in the initial few years and the 2008 downturn wiped out a decent chunk. My current company does not match 401K. 401K has recovered a bit now but still way off target. PS: With my health issues, I realize that won’t live until 100…but running short for my family is not something I want.

One question to ask is: what is the difference between the passive income streams (yrs 50-70) and this retirement fund?

  • The first difference is the source of the money…taxable account vs tax advantaged accounts.
  • The second difference is that I want to give the tax advantaged accounts as much time as possible to accumulate and grow. If at all possible, I would like to not touch it until I hit year 70. After that the plan is to just take $30K out of it every year…which roughly works out to 3% withdraw rate. PS: Need to study issue of Required Minimum Distribution (RMD) from the 401k/IRA funds later.
  • The third difference is the type of investments. The money in the tax-advantaged accounts will be in target date funds..which get super conservative as the target date approaches. So, effectively, there will not be much growth for the money beyond the target date. But, the taxable account investments will continue to be invested in slightly more riskier and hence growth oriented vehicles so that there is some percentage of the portfolio that is geared towards growing the money.

The expectation is that a combination of the passive income streams and the retirement fund should provide a reasonably comfortable money pool for each month spent in retirement.

A paid off roof for my family ($850K $1millon)

This is one I am having most trouble with. In the past, I was unsure of taking on such a big commitment, especially due to many uncertainties in personal and professional life. Now, it seems like it is next to impossible, even with a more than reasonable down payment. I just don’t feel like paying a million dollars for a house that needs a million dollars worth of repairs. But, without this, I will surely not be financially independent. I do not have anyone else to rely on for housing…no parents or relatives. So, this is a must. I am hoping that when I reach a state where passive income streams are generating money to take care of basic necessities (say $1000 pm), I can take the plunge into housing…..which hopefully would have cooled a bit down by then.

A $100K medical fund to fix broken health issues.

I have accumulated some nasty health issues which need to be managed over the rest of my life. With uncertainties about health insurance for folks with preexisting conditions, I do not want to saddle my family with a huge medical bill. So, this fund should cover for any emergency health expenses. My current plan is that if the Emergency Fund is unused until retirement (touch wood), it will morph into a Health Fund for me. So, I am not going to work on this actively in the immediate future.

Life Insurance

There are few questions to answer when it comes to life insurance:

  • term life or whole life
  • how many years
  • policy value

I wanted to protect my family from any emergencies for my earning years i.e. until 65-70 years of age. I decided to go with Term Life Insurance and not Whole life. Apart from Whole life being a whole lot more expensive, the main reason for term life insurance is that by policy expiry time (65 or 70), I hope to have a reasonable financial plan for my family, even if I am not there. So, I have applied for term life insurance…the approval process took a long time but the policy has been approved! It costs me a packet every month…a bottomless pit…but, at least my family is covered until 70yrs of age.

Status at the start of the marathon called Financial Independence

07/25/2014        Emergency Fund                        100% complete

07/25/2014         College Fund                             29% complete

07/25/2014         Passive Income Streams            3.75% complete ($150 pm vs $4000 pm)

07/25/2014         Retirement Fund                        46% complete

07/25/2014         Roof for our family                     not yet

07/25/2014         Medical fund                              not yet

09/01/2014          Life Insurance                           100% complete

Passive Income Streams….my choices

/ humblefi / 1 Comment

There are many possible ways to generate a passive income stream. The simplest example that comes to me is the Vending machine in our office 🙂 The person who owns it posted a photo of him and his family during Christmas break that thanked all the people who went to use the vending machine for “taking care of the family”. The background to the photograph was the backyard of a nice house, presumably his own. My initial thought was that it was such a nice gesture on his part to do this. But, my second thought was that this was an awesome passive income stream…there is some work needed to fill up the machine, but that is almost a weekly once visit. So, I decided to explore what are the different means of passive income streams and what applies to me. Here are my thoughts.

Cash

  • Interest money from cash stashed in a bank account
  • This option works for me.

Dividend Income

  • Dividends from bond and stock investments
  • This option works for me.

Side Business

  • An automated business that can function without full time effort from me
  • Ex: Vending machine 🙂 , a franchisee, etc etc
  • This option DOES NOT work for me. I am neither business savvy nor people savvy.

Rental Income

  • A rental income, especially one where the mortgage is paid off OR where the rent is more than the mortgage payment.
  • This option DOES NOT work for me. I am still struggling to buy a house for my family && did I say I live in one of the most expensive areas in the country 😉
  • But, this is something I will consider in future.

Based on the above thoughts, I have decided to create the following types of passive income streams

  • Interest money from Cash
  • Dividends from stocks and bonds

I will talk more details about each in the next post.