Credit Card Debt
For newer readers, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way. However, given the current lack of great no fee 0% APR balance transfer offers, I am mostly waiting on existing offers to end.
Retirement and Brokerage accounts
Not much stock market movement this past month. Wife’s 401k was already maxed out at $16,500 for 2009. I made another $5,000 contribution to my Solo 401k, for a total of $10,000 contributed in 2009. This makes us about 80% done with our goal of maxing out both our 401k salary contributions for 2009.
Our total retirement portfolio is now $181,673, or on an estimated after-tax basis, $145,887. At a 4% withdrawal rate, this would provide $486 per month in tax-free retirement income, which brings me to 22% of my long-term goal of $2,500 per month.
Cash Savings and Emergency Funds
I did pay an additional $6,000 towards my mortgage this month, which ate up a lot of cash. This is roughly two extra mortgage payments, which if I do this every year will put me on track to shorten my 30 year mortgage to 20 years. Depending on interest rates, future contributions may be invested into municipal or government bonds.
We still have a little over a year’s worth of expenses in our emergency fund.
Home Value
Using four different internet valuation tools – Zillow, Cyberhomes, Coldwell Banker, and Bank of America (old version) – I again took the average and took off 5% to be conservative and 6% for real estate agent commissions. This ended up giving me a 6% value increase this month, which again makes my home value movements dwarf all other activity for this net worth measurement.
I’ve been using these internet tools for 10 months now, and while I like being able to track the overall trend in home values, the wide swings in estimates make me very skeptical of their accuracy. I expect to do this for another 2 months so that I have an entire year of data, but after that I will switch to another less volatile method.
You can view previous net worth updates here.
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I still don’t see why you have so much money sitting in cash. What emergency could possibly come along that would require you to have so much money earning such a cruddy interest rate? Wouldn’t the money be just as accessible if you had it parked in equities making thousands more for you per year?
Speaking of Solo 401-k… Like you, I have a regular W-2 job and also a consulting business on the side. Couple of questions:
a) Can you deduct a portion of your monthly mortgage (for office space, for example) if your business is an S-Corp? I’ve received conflicting info about this.
b) Have you made an analysis (or are aware of an analysis) showing whether it’s better to have the business organized as an S-Corp, C-Corp or LLC depending on your state of residence?
–TIA
I think it makes a lot of sense to be overweight cash right now, there is no guarantee that equities will continue their march upward. In fact, I still don’t see the economy exactly improving as much as the green shoot folks would like to project. The time for making the thousands Alex above mentioned is over for now, I would be very concerned at this point stepping into the market. You must have some very good income to add $30K in a month though.
I tend to agree with Alex, you can easily get by with half that amount of cash, but you probably realize that and seem to be paying the house off faster.
John,
You can write off home office expenses as an S-corp. I’ve had two different accountants do it two different ways, but neither of them had a problem with it. (One way is to pay yourself rental income and deduct your a portion of your utilities from that rental income… A little convoluted, but it works.)
S-corps are nice due to the ability to pay out distributions, C-corps are really for much larger organizations and are a different beast altogether. I haven’t formed an LLC yet, but I think they are pretty similar to an S-corp in a lot of ways.
– The emergency fund is in cash because what’s the point of potentially earning an extra few % a year when you have to withdraw when its down by 20% or even 50% at times. There’s still both upside and downside to the current stock market.
– You can definitely take the home office deduction as an S-Corp. Whether you actually satisfy all of the many rules and have valid proof for IRS standards is the harder question.
– LLC vs. S-Corp: See here:
https://www.mymoneyblog.com/archives/2009/02/s-corporations-vs-llc-income-tax-savings-benefits.html
Always nice to see this going up for you 🙂
If you rent an apartment instead of having a mortgage, and you have your on-the-side consulting S-Corp running from the apartment, can you deduct part of the rent from as expenses?
Why in the world would you have over a years worth of expenses sitting at 3% interest while you have credit card debt at 5% that you could pay off while easily maintaining a great emergency fund. Am I missing something?
It looks like you’re about even on your house now, that’s good news. How about taking 50K in cash and paying down on your mortgage and then turn around and apply for a HELOC. Use this as an additional emergency fund. Possibly get a rate of Prime, Prime +1 and leave it at a $0 balance.
Helocs can be revoked by the lender unless they are drawn and therefore make poor sources of emergency funding. They could be the proverbial fianancial umbrella, where the loaner asks for it back when it rains (as a reminder, regulators are debating raising the capital ratios on financial firms which could discourage lending to some extent as banks will have to hoard more capital to safeguard defaults). I don’t think too much cash is a problem now. An intereting twist on a rule of thumb is “monthly expenses x unemployment rate x 100”.
That’s the thing about emergency funds. You put them in the stock market, and it tanks, which is exactly when unemployment doubles and you get laid off! How often does the market soar and you can’t find a job for 6 months or more… Same concept – You put them in HELOC, and it gets frozen right when you need it! Cash is king in this case.
Credit cards are a 0%, as stated. As long as my cash is doing better than inflation, I am happy. As my assets grow, my emergency fund will look smaller and smaller as compared to rest of assets.
roth ira is a good emergency fund – mine will be huge after converting next year – minimizing tax implications by not working and stashing everything in home biz LLC S-Corp for that period. life is good not having lost anything on a house and dollar-costing into the market huge since december 08. still have 50k heloc and 40k cash on the side for emergencies – never use emergency fund in stocks or housing
I’m a fairly new reader of your blog and give cudos for such good work. I am curious to your process of the market value of your home. I see you have been consistant but it really just pops out, as you said, and somewhat difficult to digest that your home value increased 6% estimately in a single (1) month during the worst housing bubble bust in maybe all of mankind. What are your thoughts and confidence that this method accurately gauges your housing worth since it’s based from comps?
Jonathan, I could not agree more with you on the cash reserve strategy. I have an even bigger pile in cash right now just because of the market and economy situation. So far it is doing better than other investments if computed over 1 or 2 years. The only thing that I think is worth considering is to park half of it in something like BND which is relatively stable and earns a bit more than your “high yield” savings account.
Hi Jonathan – Any concerns about the data on zillow (if you provided updates) will eventually be seen by the assessor and show up on the tax appraisal? My house on zillow is way off on bedrooms and bathrooms, but I fear updating it might lead to trouble down the road. Thanks
I know you qualified the value of your house but no house in California is going up 5.5 % in a month especially with all the equity stripping over the last twenty years pushing more homeowners into foreclosure and all the junk mortgages handed out like candy pushing up the values of homes no longer available
Valpo Mike – I doubt the tax assessor has the time or resources to check Zillow for each house. However, if you plan on make a dispute for lower property taxes, they might verify actual bedrooms.
Hogan and Mike – I think the problem is in the technique itself. I always get comments like yours when the home values pop up a bit, but some other months the price will drop 10% or more twice in a row. This method depends a lot on local comps, so it probably undershoots and overshoots as new sales pop up. If you have a better alternative, I am always open to suggestions.
i’d guess the tax assessor gets valuations based on price per square foot of comparable sales in the area and multiplies that by the square footage of your property.
how can you guys fault him for having 20% of his debts in cash? The fact is that most people, when they lose their job, tighten the belt severely and start resorting to doing stupid things like tapping retirement accounts, selling cars, etc.
Now if he continues to accumulate on top of $125K and has no additional need its a different story, but for now I think he’s doing the right thing.
You never know when a good opportunity is going to come along, so you should ALWAYS keep some semblance of cash on top of your “emergency” living funds in my opinion.
Regarding a home’s value, I always just tracked it as the price I paid initially and left it alone until I realized the sale amount. This is because the estimates didn’t affect how I budgeted or invested and clouded the movements of the other accounts where I could actually make an impact.
Not to say I didn’t check the valuation tools for fun and to decide whether it was time to sell and the price to list at.
It’s probably tough to estimate home value in this market, since you never really know until you try to sell. However, if you don’t plan on moving, your home price probably isn’t too important.
Being the conservative accountant type, I’d probably not increase the value of the house until it is very obvious that home prices are more stable. No way would I increase it 6% in a month. I use about a 15% discount in my own Net Worth statement on the value of my home. But, in my area of the country, houses don’t fluctuate much, so it’s pretty easy to calculate.
Howdie Jonathan – I wrote a new entry called “Your Net Worth Is An Illusion” and provided a positive shout out to your blog. Hope you enjoy it and appreciate it!
Best
Financial Samurai
At Bill,
You saying you wouldn’t park money into equities, contradicts what Johnathan is doing with his money in his retirement accounts. He feels it’s safe to wage his retirement savings on the stock/bond market but does not feel safe to invest beyond his retirement funds? Surely this guy does not need that large of an emergency fund, times are hard and certain streams of emergency might be tight but even still you’d be able to tap into the following…HELOC, personal loan, roth ira principal withdrawl, liquidate equity portion and other sources of funds.
He seems to have a large income between himself and wife, yet plays it very very conservative in his approach to financial independence. I read this blog and envy him on his choices and savings abilities, but if I had his income I would certainly be absorbing much greater risk to aquire wealth.
seems his risk tolereance only goes up when he uses ‘toy money’ such as his investments in online person to person loans and such. Other than that he plays it very safe.
All that said, when your income is so high you can afford to take less risk and slowly conserve and build wealth as he has been.
Godspeed
Cash is King!
Although many financial advisors may not agree at the moment I always love the safety of having cash on hand. There is a certain feeling of control when you know that bills can be paid on time or even in advance. Cash may not provide a good interest rate from the banks but if more banks had held a larger proportion of capital in cash reserves then maybe the Global Financial Crisis may not have hurt so many people.
How did you decide to add $27,000 in the value of your home? That is an illusion.