'2006 was a good year' was an update on how things have changed for me in a year. It wasn't really advice, so much as it was reinforcement that following my own advice paid off - at least last year.
Somewhere underneath all that explanation, you might have gathered that 'changing jobs' was some good advice. See, I was impacted by the dot-com boom / bust cycle in such a way that I had to crawl back out. Changing jobs twice last year was a strategy. For the most part, I sat still, and didn't make too many risky financial moves.
So, now I'm sitting here looking at how my investments paid off. The best seems to have been one of my 2 mutual funds. It's one that you would consider risky for a mutual fund, because it's an international fund. The other mutual fund I have is less risky, and didn't perform nearly as well.
Combined, these 2 mutual funds returned 17.4% between 1/1/06 and 1/1/07.
Aside from any dividends, I never have to pay any tax on these gains until I sell. I consider them a line of defense that I haven't had to cross. In fact my diversification is a set of buffers, where cash is on the outside, and the retirement accounts are on the inside.
At the beginning of the year, I had about $47,500 in my money market account, and throughout the year it has accrued and lost and accrued again, cash. The reason it lost cash at some point is that I pay an extra lump sum payment against my mortgage every year. The balance is now about $83,000. Last month, it drew about 4.75% interest. I earned $2,700 in interest from this account last year.
It seemed so sudden, how much cash I wound up with. And when you have what seems to be a lot, if you're like me, you are more afraid of taking risks that could mean losing large chunks of capital.
If in 2007 the interest rate remains constant at 4.75% and I start off with $83,000 and make no withdrawals or deposits (purely theoretical), then at the end of the year, the account will be worth just over $87,000. That sounds nice, and I'm not used to making so much money in interest every month. It's $330-$340 per month. If I follow this strategy, in 2008 I'll pay about $1,000 in taxes on the $4,000 I made. Right now isn't the best time for me to have to adjust my salary up before paying taxes.
What if I take $25,000 of that and buy into a (not super-duper risky) mutual fund like the ones I have - and haven't been afraid of holding on to? If it earns 15%, then its market value would be roughly $28,800 at the end of 12 months. And I don't have to cash it out.
If I lose my job sometime in the future, or retire, and am unemployed for several months. I wouldn't have to pay as much tax on that $3800:
In addition to the roughly $12,000 I'd make from unemplyment benefits, or whatever piddling amount I'd be getting from social security, I'd hardly be in a top tier tax bracket, but the $3,800 would sure help out. Remember that that the $3,800 is about $800 more than what I would walk away with, after paying taxes on the interest I would draw off my money market account.
Also, while neither is exactly chump change, recall that I stand to benefit less with $83,000 than with $25,000.
Thursday, January 04, 2007
2006 was a good year
It's been more than a year since I posted my last article.
I want to give you an update on how my financial state has changed in only one year:
I have changed jobs twice. The company I worked for was a consulting company with about 30 software developers. I started working with a very small start-up company in March that had just received it's initial round of funding.
I relived some deja vu by working there, and grew skeptical. I decided to quit after working there for only 3 months.
I have been working for a new company - which coincidentally has financial institutions, namely portfolio managers, for customers. It has a lot in common with Arthur Andersen, in terms of my co-workers and level of job responsibility. More is expected of me, of course, because I was an entry level programmer back then. At Arthur Andersen, when I was in my late 20s this work environment bothered me. It seemed too slow paced. But now, I enjoy it either because I'm older or just have over a decade more work experience.
We'll refer to the original company I worked for a year ago "company A". We'll call the company I worked for after that "company B", and my current company, "company C".
Between company A and company B, I earned $11000 more in annual salary. I switched from a PPO with a $250 deductible (which I never used) to a High Deductible PPO with at $2400 deductible (also never used), and enrolled into a Health Savings Account (HSA) to which the company contributed $200 per month. I lost my dental insurance (they didn't tell me about this during the interview process, by the way, although it wouldn't have mattered because of the salary increase). My commute dropped in cost by about a third. I lost my 401(k) plan, but I wasn't contributing to very much since the company I worked for only matched 15% which didn't vest for 4 years. That was bunk that was offset by the shares I never expected to cash out.
Between company B and company C, I earned an additional $5000 in annual salary. I now have everything in terms of benefits - it's at least as much as I ever had in my life. I gained a week of vacation - 3 weeks now instead of the original 2 - which for me is better than additional money. I take public transportation and the cost is that of a $45 FastPass. The company offers commuter checks, which allow me to pay that $45 before taxes are accounted for. I enrolled into a Flexible Spending Account, which works for me now that I am not afraid of going to the hospital for a check up or to the dentist - and I have gone to both. Oh, remember that HSA? Free crown. I do have to pay a small portion for my benefits. But overall, it's worth it. I regained a 401(k) plan that matches 50% of the 1st 6% I contribute. I contribute exactly 6%. I enrolled into a Legal Plan which costs about $8.50 per half month. I'm using it for estate planning - something I've put off for a long time.
I'm looking at a Microsoft Money report on my "Net worth over time", customized from 1/1/2006 to 1/1/2007, and it shows a steady gain of $54,645. And it doesn't have any 'corrections' like a house re-assessment. It's a real increase in net worth over 1 year. I haven't analyzed where the greatest gains came from.
Remember the money market account I wrote about in my article titled 'Diversification'? It has grown to have quite a large amount of money in it. I contributed to it, gradually, over the past year. At some point, I moved cash that was in my Ameritrade account (earning less than 1% interest) to this account. I felt like a fool because I left more than $15000 - just sitting there. Interest rates had been rising over the year, and my money market account was already paying about 4%. I have a car loan that I won't pay off because the interest rate is lower than what I get from my mutual fund (regardless of having to pay tax on the interest). I have over $80,000 in my money market account.
My company had a laptop stolen that contained some personal information about employees. Someone broke in and stole a laptop in December. It had our social security numbers and addresses in a spreadsheet, or something like that. So, to make us feel better, we all got free accounts so we could see our credit.
The last time I checked, was when I re-financed my home loan in 2001, and my score was 791. Now it's 805. According to the service, that translates into having better credit than 99.97% of consumers.
I want to give you an update on how my financial state has changed in only one year:
I have changed jobs twice. The company I worked for was a consulting company with about 30 software developers. I started working with a very small start-up company in March that had just received it's initial round of funding.
I relived some deja vu by working there, and grew skeptical. I decided to quit after working there for only 3 months.
I have been working for a new company - which coincidentally has financial institutions, namely portfolio managers, for customers. It has a lot in common with Arthur Andersen, in terms of my co-workers and level of job responsibility. More is expected of me, of course, because I was an entry level programmer back then. At Arthur Andersen, when I was in my late 20s this work environment bothered me. It seemed too slow paced. But now, I enjoy it either because I'm older or just have over a decade more work experience.
We'll refer to the original company I worked for a year ago "company A". We'll call the company I worked for after that "company B", and my current company, "company C".
Between company A and company B, I earned $11000 more in annual salary. I switched from a PPO with a $250 deductible (which I never used) to a High Deductible PPO with at $2400 deductible (also never used), and enrolled into a Health Savings Account (HSA) to which the company contributed $200 per month. I lost my dental insurance (they didn't tell me about this during the interview process, by the way, although it wouldn't have mattered because of the salary increase). My commute dropped in cost by about a third. I lost my 401(k) plan, but I wasn't contributing to very much since the company I worked for only matched 15% which didn't vest for 4 years. That was bunk that was offset by the shares I never expected to cash out.
Between company B and company C, I earned an additional $5000 in annual salary. I now have everything in terms of benefits - it's at least as much as I ever had in my life. I gained a week of vacation - 3 weeks now instead of the original 2 - which for me is better than additional money. I take public transportation and the cost is that of a $45 FastPass. The company offers commuter checks, which allow me to pay that $45 before taxes are accounted for. I enrolled into a Flexible Spending Account, which works for me now that I am not afraid of going to the hospital for a check up or to the dentist - and I have gone to both. Oh, remember that HSA? Free crown. I do have to pay a small portion for my benefits. But overall, it's worth it. I regained a 401(k) plan that matches 50% of the 1st 6% I contribute. I contribute exactly 6%. I enrolled into a Legal Plan which costs about $8.50 per half month. I'm using it for estate planning - something I've put off for a long time.
I'm looking at a Microsoft Money report on my "Net worth over time", customized from 1/1/2006 to 1/1/2007, and it shows a steady gain of $54,645. And it doesn't have any 'corrections' like a house re-assessment. It's a real increase in net worth over 1 year. I haven't analyzed where the greatest gains came from.
Remember the money market account I wrote about in my article titled 'Diversification'? It has grown to have quite a large amount of money in it. I contributed to it, gradually, over the past year. At some point, I moved cash that was in my Ameritrade account (earning less than 1% interest) to this account. I felt like a fool because I left more than $15000 - just sitting there. Interest rates had been rising over the year, and my money market account was already paying about 4%. I have a car loan that I won't pay off because the interest rate is lower than what I get from my mutual fund (regardless of having to pay tax on the interest). I have over $80,000 in my money market account.
My company had a laptop stolen that contained some personal information about employees. Someone broke in and stole a laptop in December. It had our social security numbers and addresses in a spreadsheet, or something like that. So, to make us feel better, we all got free accounts so we could see our credit.
The last time I checked, was when I re-financed my home loan in 2001, and my score was 791. Now it's 805. According to the service, that translates into having better credit than 99.97% of consumers.
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