Saturday, December 31, 2016

Your household needs a year-end report

Along with rebalancing my portfolio, the other thing that I do with my finances before the year ends is updating my household's end-of-year spreadsheet. It doesn't have to be overly complex. Mine is very simple and can be done by anyone who is Excel savvy.

I've been updating the Excel document since 2013 to help us keep track of our expenses relative to our income on a yearly-basis.



What does mine contain?

Itemized expenses

The first column is reserved for the name of the institution receiving the payment. For example, I'd write "American Express" for my credit card payments (which, BTW, I always pay in full). For expenses that are difficult to track, I end up using the generic description of the expense (e.g. ATM withdrawals).

The second column contains the total payment that I've sent to that institution for the year. In the case of a generic expense, I just use the column to total the expense for that category.

I use the third column for the monthly average, i.e. I divide the corresponding value under the 2nd column by 12 to obtain the average.

Lastly, the bottom row contains both the yearly and monthly average totals (sums of second and third
columns, respectively).

Net income per earner

This is similar to the above except that the 'expenses' are recorded from the perspective of our employers. I write my wife's name and mine under the first column, since we are the only ones working in the household.

The second column contains the total amount of the paychecks received by the individual for the year. Like what has been done above, the third column is used for the monthly average and the totals are calculated on the bottom row.

Total savings

I reserve a section to record the total savings that we made that year. The total is calculated by subtracting the total expenses from the combined total net income that my wife and I earned that year.

In addition, I also record our total 401K contributions (including employer contributions) for the year as separate line items. It doesn't make sense to add them to the total savings because they were made before taxes.

Net-worth statement

This spreadsheet also contains our net-worth statement (i.e. assets minus liabilities). This is sort of like the year-end balance sheet of a Fortune 500 company except that the items are expressed in hundreds instead of millions (not to mention that the C.E.O. of the household is also the Chief Financial Officer).

Institutions

This tab contains a list of institutions that I conduct business with. It includes the account numbers, website info, and other essential information. I try to refrain adding password information in this tab for security reasons.


My year-end-report spreadsheet



Why is this important

Maintaining this spreadsheet has the following benefits, among others:

Decision making tool

You can use it to make informed budget decisions for the year ahead. For example, you can adjust your emergency fund goal for next year based on the average monthly expenses that you have incurred in the year.

Historical projection tool

It helps you perform intelligent 'guesstimates' like when you need to project your future net worth. The numbers can help you set long-term goals such as setting a retirement savings amount goal. You see, retirement is not a matter of reaching a certain age-- who wants to retire broke?

Record keeping tool

I've uploaded this spreadsheet on the 'cloud' (One Drive, to be specific) so I can easily share the document with my wife (who happens to be my household's chairman of the board). In this way, it is easily accessible from any device and not forever lost in the unlikely event that I get ran over by a truck.


That, my friend, is why you need to create a household year-end report...

I wish you all a happy, healthy and prosperous New Year!!!



via GIPHY

Tuesday, December 27, 2016

Rebalancing your portfolio is like going to the dentist

There's probably nothing more uncomfortable than your visits to the dentist. I don't know about yours, but my dentist certainly doesn't have the gentlest hands that I can brag about. Once you're seated on that dreaded chair, you'll be as helpless as a toddler as she works on scraping the tartar buildup from every corner of your teeth with her very rough hands. It's never a pleasant experience.

The same can be said when rebalancing your portfolio. Except that now, you're in charge. You are the dentist and your patient's set of teeth is your investment portfolio.

Your portfolio needs regular checkup

Every six months you need to get your teeth checked or else you might get cavities no matter how skillful your brushing skills are. Same is true with your portfolio- it needs regular checkup no matter how good your mutual fund or stock picks are.



Just like your visit to the dentist, it's never a pleasant experience. But you know it needs to be done regularly to maintain your financial health. Unlike your experience at the dental chair, the pain is purely psychological.

Rebalancing your portfolio involves selling your winners-- the ones that went up substantially in value, and buying some 'losers' with the aim of adjusting the allocation to match your original goals.

The problem is that this process goes counter to natural human emotions. Because of greed, we tend to buy more of those that went up. Out of fear, we sell those that went down without regard to the long-term outlook. As a result, we end up buying high and selling low.

Perform an X-ray of your investments

The dental X-ray machine provides pictures of the teeth, bones, and soft tissues around them. Not only do these images help find issues with the teeth, but they can also provide some insights on possible problems with the mouth and jaw. A similar tool should be used for your portfolio, and it's probably already being offered by your online brokerage.

I've been a Charles Schwab customer since 2002. I have benefited immensely by the investor tools available on the website. One of them is the "Schwab Portfolio Checkup" tool, which I've been using to 'x-ray' my portfolio on a regular basis.

The following aspects of your portfolio should be thoroughly examined.

Asset allocation

You need to stick to your long-term plan. The majority of your assets should be invested in equities when you're in for the long haul (10 years or longer). Historically, stock investments offer the best upward potential compared to other investments. In my opinion, someone with a high tolerance for risk and longer investing time horizon should allocate 90% of  his portfolio to stock funds.

Equities are often categorized based on market capitalization: large, mid, and small caps. Large-caps are companies that have market capitalizations of $10 billion or more.  As a consequence, they provide stability and liquidity to a portfolio. Small and mid-capitalization companies have more up-side potential for growth given their smaller size.

As you approach retirement, it's wise to gradually increase your allocation to fixed-income instruments such as bonds, which are less riskier. This is especially true when you find yourself unable to sleep at night, constantly worrying about an incoming market crash.

Not only will fixed-income instruments 'soften' the effect of a market crash having no direct correlation with stock market price movements, but they also generate regular income flow that you can potentially reinvest.

My asset allocation as of August of 2016

Sector diversification

The equities portion of your portfolio may be diversified in other aspects, say, market capitalization. But if those companies all belong to single sector then you may be in trouble.</

For example, everyone knows what happened to the airline sector in 2011 as profits were trimmed substantially when the travel industry was hit hard by rising fuel prices.
The chart below displays the percentage of my equity holdings by sector compared to the overall market (S&P Global BMI). Any deviation of at least 20% will be a red flag.



Equity concentration

Billionaire investor Warren Buffett famously stated that "diversification is protection against ignorance" and many investors took this to heart and lost a lot of money.

The problem is not because they got cocky or too confident about their picks that they end up investing in just a couple of individual stocks. Rather, it's because their portfolio is highly concentrated in a few stocks (not to mention that they're not Warren Buffett).

In my case, the two largest individual stocks in my portfolio are Microsoft (MSFT) and Bank of America (BAC), both of which I've owned for a very long time. But they represent less than 5% of my portfolio.


The thing is even if you run the company yourself or are involved in its day-to-day operations, there will always be some risks that need to be managed. The saying that you should never put your eggs in one basket still holds true.

Fixed-income

Like equities, your typical fixed-income mutual fund may be comprised of different types. For example, US treasuries provide stability while municipal bonds provide tax-exempt income. Treasury Inflation-Protected Securities (TIPS) provide protection when inflation is high.

You should examine the allocation of your fixed income holdings to make sure they still reflect your original goals.


Bonds can be also classified based on the credit ratings of the companies or institutions that issued them. For example, US issued treasuries are rated AA+ by Moody's. On the other end of the spectrum are junk bonds, which generally offer higher yields and therefore riskier.

Lastly, it is important to understand how your fixed-income investments react to higher rates. For the past decade, the Federal Reserve kept interest rates very low to promote economic recovery. This is where the time-to-maturity matters. The longer the bond matures, the more sensitive its price reaction will be against interest rate hikes.

Quality

There are many techniques that you can do to check the quality of an investment. In my opinion, it doesn't make much sense to perform fundamental analysis on a baskets of stocks like mutual funds or ETFs (or you'd be more inclined to pick individual stocks instead), so we normally rely on some reliable benchmark to compare to.

One red flag is the consistent underperformance relative to its benchmark. Given a choice, I'd personally invest only in mutual funds that have a long positive track-record. Sadly, they seem to be hard, if not impossible to find, in employer-sponsored retirement plans.

I'd pick a fund with higher Morningstar ratings (3 stars or more). The company provides data on thousands of investment offerings, including mutual funds. It has emerged as the trusted source of investment research.


Expense ratios

You need to pay attention to your fund's expense ratio as it can easily eat up your return. Actively managed funds have substantially higher expense ratios than index funds for obvious reasons-- they need to pay a fund manager and other expenses related to actively managing the fund. Sadly, most actively managed funds don't beat their respective benchmark indices.


I'd personally avoid any actively managed fund that charge more than 1.2% unless the fund has an exceptional track record. Note that international funds generally do have higher expense ratios so it doesn't make sense to compare their expense ratios to domestic funds.


What's next

Your portfolio's 'X-ray' report is an important tool. Using the numbers and information that you gathered, you can adjust your portfolio to better reflect your risk tolerance and time horizons for various goals.
As for me, here's how I've rebalanced my portfolio for 2017. With rising interest rates and record-high equity prices, I decided to increase my cash position while making sure that it is still completely aligned with my current goals.


Just as X-rays can be harmful to you when done too frequently, rebalancing your portfolio too frequently can do more harm than good.

You don't need to follow the day-to-day changes in your portfolio either--- for most of us, that would be stressful and could potentially just lead to reactive, bad investment decisions driven solely by emotions.

In my case, I rebalance my portfolio once in every six months. About the same frequency, as my visits to the dentist.



Sunday, November 27, 2016

Drive carefully. Don't skimp on insurance.

Inspecting a rented Lamborghini in Nevada

One of the aspects of wealth building is being able to protect what you have accumulated. Even if you are extremely frugal with no debt, wealth that you have worked so hard for your entire life can be lost in various ways, among them:
  1. a natural disaster
  2. a medical emergency
  3. an ugly divorce
  4. a court judgement arising from a lawsuit.
I've recently almost had to deal with the last one when the greedy 20-year-old waitress, whom I got involved in a 3-car-accident with, tried to sue me, and the person driving behind me, by half a million dollars for non-existent injuries that she sustained. Fortunately, I was adequately insured. The case was eventually settled, I paid nothing out of pocket, except half of my $1,000 deductible.

Here's how the story went...

SANDWICHED BY TWO CARS

It was a clear and sunny morning, in the spring of 2013, I was driving along the highway towards work at probably around 55 to 65 miles per hour when the car in front of me suddenly stopped. It was so abrupt that even though I was comfortably 6 to 8 car lengths away when I first hit the brakes, I still couldn't avoid the accident (and I did try to hit the brakes hard!). Seconds later, I was rear-ended by the car behind me.


NOBODY GOT HURT

Fortunately, none of us got hurt. Everyone got out of their respective cars unscathed. The other 2 drivers, both in their early 20s, even shook their hands. It turns out that they happen to know each other as they worked in the same restaurant a few years back.

It's so obvious that none of us got hurt that nobody even bothered to call an ambulance.
Should one of us got hurt it would have been me. My car was sandwiched between bigger and heavier cars, and I'm the oldest driver, the one having the brittlest bones among the three.

Don't get me wrong. I know that whiplash injuries are real and that they can sometimes manifest days or even weeks after the accident. But I do know that I didn't hit the car in front of me that hard. It had no visible damage whatsoever, as far as my bare eyes can tell.

THE POLICE REPORT

The traffic policeman came, quickly investigated, and wrote the police report. The driver behind me and I were given traffic citations for driving faster than conditions warrant, presumably because we were the ones who hit the cars in front of us.

I probably hit the car in front of me at 10 miles per hour. The car, a relatively new sport utility vehicle (SUV), did not sustain any visible damage, it seemed to me. The police report states that it has minor paint scratches. This is not surprising because I was driving a small subcompact car, a Prius C hybrid (I blogged about my Prius), which I bought just the year before this accident.

When the traffic citation came over the mail, I decided to just pay the $130 fine and not contest the ticket. I figured it's not worth the trouble and it would have been difficult to prove otherwise. Anywhere you go, you are presumed guilty if you happen to rear-end the car in front of you. Besides, the report states that everyone is fine and there were no injuries.

THE DAMAGE REPORT

My car wasn't as lucky. It absorbed all the energy from the impact (modern cars are designed this way). It had sustained $13,000 worth of damages, at least according to the collision shop responsible for the repairs, brought forth by the front and rear impacts. Part of the reason why it sustained that amount of damage is because of the bumper incompatibility between my car and the SUV- mine is much lower height in comparison. Amazingly, I managed to drive the Prius back home, after the accident, without being towed after the rear left wheel had been replaced with a donut.

Since my car was less than a year old, it was never declared as totaled; it's much cheaper for my insurance company to shoulder the repairs than to pay for the replacement cost. With the Prius C having been in the market for barely a year, the bright side is that car parts will be replaced with original equipment manufacturer (OEM) parts.

Since I've chosen to have a high deductible in my policy, I had to pay my insurance $1,000 before they can do the repairs. I was reimbursed $500 because the other driver who rear-ended my car was also at fault. Of course, this is peanuts compared to paying for the repairs yourself.

THE COMPLAINT

A full two years later, the driver of the SUV filed for a civil case against me and the other driver seeking compensation. The complaint alleges the following, among others:

"As a factual cause of the two collisions, Ms. XXX sustained the following injuries, some of all which may be permanent in nature and may have aggravated pre-existing conditions: trauma throughout her body; headache; contusion and strain and sprain of her left ankle; strain and sprain of the pelvis;  bilateral shoulder strain and sprain; cervical, thoracic and lumbar strain and sprain; rib contusions; cervicobrachial syndrome; cephalgia; kyphosis; lumbago; and myofascitis."

I wasn't surprised of the lawsuit because I was warned by my insurance carrier months before. But the above made me laugh. Her ambulance-chasing lawyer probably tried very hard to put as much medical lingo in there to make her 'injuries' appear very serious.

I wasn't at all worried. Why should I?  My policy provides coverage in the amount of $250,000 per person and $500,000 per occurrence for bodily injury. The chances of me paying out of pocket is very low:
  • The case would have to go to trial
  • The jury would have to decide in her favor
  • The judgement would have to exceed my coverage limit of $250K
Having a peace of mind is exactly the reason why we buy insurance.


THE DEPOSITION

Months later, I received a letter from the lawyer assigned by my insurance carrier to defend me. In addition to setting the time and date for the deposition, he gave me pointers on how to conduct myself during the course of the event.

In its simplest form, a deposition is the oral testimony taken under oath prior to trial when most objections available at trial do not apply. You're suppose to tell the truth, speak slowly and clearly, answer the questions directly, and stick to the facts and testify only to what which you personally know to be true. Most importantly, you should never lose your temper.

I was advised to be in the venue 30 minutes ahead of time, so he can prepare me for my deposition. I felt I didn't need preparation because all I need is to sit there and tell everyone exactly what happened. So the only other preparation I really had prior to this meet was watching Justin Beiber's deposition in YouTube.

I went to the event in a suit and tie and shook hands with the stenographer and the other drivers' lawyers. Once seated, her lawyer immediately asked questions, one after another, hoping that I make a mistake. Among the questions asked:

Q. Did you apologize to her for hitting her?
A. I don't -- No.
Q. Have you ever apologized to her for hitting her?
A. No.

Saying 'Yes' would have been tantamount to an admission of guilt. I would never apologize to her. Normally I would, but this is an exception. She's maliciously suing me for financial gain. Besides, she's the one who stopped abruptly. Under no circumstances was I tailgating her before the accident happened.

My deposition probably took an hour. To be honest, I enjoyed the experience mostly because all I had to do is to tell the truth. When it was her turn to give her testimony, I left following the advice of my lawyer.

Hers probably took the rest of the day. Her transcript was four times as long as mine as she was bombarded with questions about the extent of her injuries. It was full of lies she made Richard Nixon an amateur in comparison. I guess that's needed if you're wishing for a huge settlement from the jury.


THE SETTLEMENT

One afternoon, a year later. I received a phone call from my lawyer informing me that the case won't go to trial. They have decided to settle the case with the complainant by paying her the sum of $75,000 ($20,000 to be paid on behalf of the other driver involved). He thanked me for my cooperation then hanged up the phone.

There was a sense of relief that it's finally over. However, part of me wanted to proceed with the trial because this is a clear case of soft insurance fraud and I was more than eager to testify against her. It is insurance fraud that makes our premiums go higher. It is the paying public that eventually suffers.

A great majority of this type of cases don't go to trial. Insurance companies are smart enough to know that trials are typically more expensive because juries are extremely unpredictable. You just can't predict how outrageous the awards complainants get should they win. $75K is a chump change for these big insurance companies. Her lawyer knows this.

I hope she puts the money to good use (a significant portion will probably go to her lawyer's bank account). Paying all her debts is a good starting point. It seems she spends more on things that she cannot afford. A 20-something working 2 jobs probably won't be able to afford a brand new SUV.

LESSONS LEARNED

There are many lessons that can be learned from the accident.

Drive carefully. Never get into an accident.

Drive defensively and never tailgate. Maintain a safe following distance. Avoid distracted driving. If you've been driving distracted, lawyers can easily collect data from your cellphone provider and use that against you in court. Being sued is a long and time consuming process, much more if you go to trial.

I'm the safest driver in the world but still got into an accident. So the next lesson is ...


Make sure you have sufficient insurance coverage

Don't skimp on your insurance coverage. Most states in the U.S. will require you to carry the minimum amount of typically 25/50/15, signifying the maximum amounts of $25,000 for bodily injury per person, $50,000 for bodily injury per accident, and $15,000 for property damage per accident.

Mine was 250/500/250 because I had substantial net worth to protect. If I opted for the minimum, I would have been held liable to pay $50,000 out of pocket to cover the difference. Lowering your liability limits is one of the worst decisions that you can ever make with auto insurance.

Consider having an umbrella policy if you have a relatively high net worth. An umbrella policy is relatively cheap because it steps in to protect you only if your liability is over and above the limits of your auto policy.



Thursday, November 10, 2016

I'm officially a millionaire after Trump's win

I finally reached the millionth milestone after republican Donald Trump's win. This is unexpected because I was expecting a market crash. This is a testament that ONE SHOULD NEVER TIME THE MARKET.

S&P 500 vs DOW


Just a week ago, I jokingly suggested to my coworkers to move all their investments to cash, wait for the market to plummet when Trump wins, and then buy everything back. Fortunately, none of them took my 'advice' seriously or I would have been chased down the hallway at work with an axe.



I'm sure, a million dollars is just a chump change for these two people (especially the one sipping my iced coffee), but I'm still proud of this accomplishment considering that I never started investing until I turned 30. Besides, how many people can boast about coming to America to become a millionaire in his mid-forties?

Of course, I couldn't have reached this milestone without my wife. Follow this link if you want to read more about how we did it.



Saturday, October 22, 2016

When buying a hybrid car make sense

 I've recently received an email from the Toyota dealer where I bought my Prius from. The email states that it's due for its 80,000-mile scheduled maintenance.



I replaced my Honda Civic with a Toyota Prius C in 2012 hoping to save a ton of money because I have a long commute. My eldest son who was in college also needed a car at the time and my old Civic was the perfect car for him.

A Prius C is a subcompact version of the regular Prius. It was the most fuel-efficient hybrid car available in the market when I bought it, probably still is. It has a smaller battery and is supposedly more economical than a regular Prius when driving in the city.

I have driven to the moon

My workplace is approximately 40 miles away from where I live. So each and every working day, my car's mileage goes up by about 80 miles. I've been doing this commute since we purchased our home in 2004. Things like this happen when you love where you live and equally love where you work.

To put this in perspective, the miles that I've accumulated over the past dozen of years would have been more than enough for me to reach the moon!

vs

260 work days * 80 miles / work day * 12 years =
 249,600 miles

Is switching to a Prius worth it?

I've always wondered whether buying a Prius C is worth it as opposed to a relatively gas-friendly Honda Civic. I'm fully aware that this is not really an apple-to-apple comparison because I'm comparing two different car segments (compact Civic vs subcompact Prius). But am I better off buying a non-hybrid Civic instead, considering that it costs about $2000 less than the Prius?

Let's try and find out.

Obtaining historical gasoline prices

The first step is to research gasoline prices. So I went to gasbuddy.com to get the last 4- year historical information for my area:




From the above chart, I was able to obtain the average prices in the last four years. Notice the dramatic decrease in gasoline prices in 2015 and 2016 due to weaker global demand and increased supply, mostly due to OPEC members refusing to cut production pushing the supply to the highest levels.

Average gasoline prices and miles driven

Researching fuel efficiency of cars

My next step was to visit the fueleconomy.gov website to research the fuel efficiency of all the cars that we've owned throughout the years. There you can compare side-by-side the city/ highway or combined fuel consumption of the chosen vehicles.

The set of vehicles below is a very good selection because they happen  to represent 4 distinct markets according to size (sub-compact, compact, mid-size, and SUV).




Given the data that we have so far, I'm able to summarize the hypothetical cost of driving each vehicle for a total of 80,000 miles within the past 4 years in my area. For simplicity, we'll be using the combined MPG of the vehicles.


Gasoline savings matrix

From the above, I'm able to create a gasoline savings matrix that can easily tell me how much I would have saved (or not saved) when switching from a specific type of car to another. For example, this table tells me that I would have saved a whooping $8,684 when switching from a Honda Pilot to a Prius.


The same table tells me that I've already recouped the $2000 extra that I've paid for buying the hybrid because the resulting gas savings for driving the Prius in lieu of a Civic amounts to $3,256, which is substantially more than the premium.

Note that hybrids generally cost $4000 more than the non-hybrid counterpart. I've actually downgraded to a subcompact when I replaced my Civic with a Prius C.

Conclusion

Buying a hybrid made sense for me only because of my very long commute to work. Most people don't drive 20,000 miles in one year so it takes double or triple the amount of time for them to recoup their investment. Do not buy a hybrid car for the purpose of saving money on gas unless you plan to keep the car for a very long time.



Saturday, October 8, 2016

Projecting your future net worth

Yesterday, I was playfully googling my name maybe out of vanity and boredom. In doing so, I happened to bump into a comment that I wrote to a WordPress personal finance blogger in 2010.

The post reminded me of 3 things:
  1. my household net worth in April 2010 was $330,000
  2. my own mortality
  3. the responsibility to give back.
There is no doubt that I'm going to give away some of my wealth when I die. Not just for estate planning purposes (an estate worth roughly over $5 million dollars is taxed by Uncle Sam), but also for generously extending my legacy.

But what kind of wealth am I talking about? Is this the kind of wealth that will significantly benefit the community, or just my loved ones?  Would this wealth transcend generations potentially changing my family tree?

I really don't know. The most that I can do is to perform a very simple historical projection.

The first step is to determine the average rate my net worth grew for the known periods (i.e. average growth rate). The second step is to apply the same rate to the projected periods.

How to calculate the growth rate

The math involved is very simple.

Say, your net worth last year grew from $100,000 to $130,000. The growth rate for this period is calculated as ($130,000 - $100,000)/$100,000 = 30%.

Formula for calculating growth rate for a specific period:

(Ending net worth - Starting net worth)/ Starting net worth

You can obtain the average growth rate by applying the following formula:

(Growth rate in Period 1 + Growth rate in Period 2 + ... Growth rate in Period n) /
Number of Periods

Determine average growth rate

Here's what else I know, in addition to the number in 2010:
  • Our net worth was over $100K when we purchased our home in 2004
  • Current net worth as of this writing is somewhere around $975K
Running the numbers in Excel, the average growth rate that I came up with is 20%.



This chart shows that we have a net worth of around $328K in 2010. This closely resembles the number that I mentioned in the comment section of the Wordpress blog.

This also shows that my net worth grew by roughly $900,000 in the span of 12 years.

Apply the rate on projected periods

Of course, there are many factors that will affect our growth rate in the coming years, including:
  • Stock market returns
  • How fast my mortgage is paid off
  • Whether my kids go to a public or private university
As far as the first point is concerned, we certainly have no control over the price of MSFT, AAPL or GOOG stocks. But we certainly do have control over our spending.

Hopefully, our mortgage will be paid off in 2024 before the kids go to college. We also have $95K saved up for the kids' education.

If the great recession of 2008 did not stop us from having a 20% growth rate, I don't see any of these factors slowing us down.

Also, we love what we do. We both love our careers. I write financial web application software for a living and I see myself doing it until I retire.

All these considered, I've applied the same 20% growth rate. This is by no means a highly optimistic number.

Here's what the chart looks like for our last 15 working years:


The projected net worth when my wife and I both turn 60 is an astounding $15,000,000. At 3% inflation rate, this is equivalent to 10 million dollars in today's money.

In this chart, our net worth is projected to grow by 10 million dollars in the next dozen of years. Contrast this to the first chart where it grew by only $900,000 for the same length of time.

This phenomenon is referred to as the "power of compounding interest"- where the interest applied on top of the interest works exponentially in your favor.

Let's go much further than that and do a projection of our ending net worth, with the assumption that we both continue to live until the age of 90.

Applying a lower growth rate in retirement

Age 60 to 70 years

Here we stop working so growth rate is cut by half to 10%. But with 15 million dollars and no mortgage to pay off, we can afford to travel the world once every quarter. With this kind of money, the interest alone when invested at 5% is worth $750K annually. Our retirement income will be supplemented by dividends and rental properties that we will buy in cash. Half of our assets will be in fixed-income investments like bonds and CDs.  It is also in this period where my wife's pension will start to kick-in. Projected net worth is $42,000,000 by the end of this period. At 3% inflation rate, this is roughly equivalent to 20 million dollars in today's money. Thanks to a low-key lifestyle and continued allocation in stocks for the significant portion of our portfolio.

Age 70 to 80 years

Growth rate is cut by half to 5%. At this age bracket we probably will be less active. But hopefully we can continue to travel the world at least twice a year and enjoy other leisure activities. We will also start taking the required social security distributions maximizing the value. Majority of our portfolio will be in very conservative investments like bonds and CDs. I am also hopeful that by then interest rates will be higher. Projected net worth at the end of this period is $72,000,000. At 3% inflation rate, this is roughly equivalent to 25 million dollars in today's money.

Age 80 to 90 years 

Growth rate is -5% because this is the wealth reduction phase as we will start giving generously to various charities that we care about. We will continue to enjoy a good life not available to many. Health problems may kick in but this is hardly a financial concern when you have insurance and millions of dollars in the bank.


At the end of this period, our estate would still be worth roughly $48,000,000. This means that we have given away around 13 million dollars in today's money. Because at 2% growth rate, it would have grown to $91,000,000, if we weren't as charitable.

By then we would have already established a charitable trust that will distribute our assets to our heirs efficiently without the cost, delay, and publicity of probate court. There would still be over 12 million dollars in today's money to leave for my heirs to enjoy.

Instead of dying quietly, we will have the rare opportunity to greatly impact the lives of the people around us in a positive way.

It is in this phase that we will give like no one else in my family tree.

Only time can tell if my projection is right on the money.


Monday, September 19, 2016

How to become a millionaire

Some of you may wonder, how exactly can I become a millionaire?

One route is to have a fabulous income. Rock stars, movie stars, or famous athletes may have no trouble achieving this status the first time they get their paychecks. Those that fall into this category achieved their success through a combination of luck, raw talent, and perseverance.

Another route is to become a successful entrepreneur. Many people became millionaires this way. However, the failure rate is very high. According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months.

Others achieved the status through less than stellar means:
  • Marrying into money
  • Inheriting money, if they're lucky enough to have wealthy parents.
  • Defying the odds by winning the lottery jackpot.
  • Becoming an ambulance chasing lawyer in America (see related blog)
  • Stealing taxpayer's money by becoming a politician in the Philippines

For the rest of us, becoming a millionaire while keeping your day job seems like a fantasy. But nothing could be further from the truth.

Thanks to inflation, being a millionaire is now easier than ever. It is definitely achievable if you follow these steps:

Make yourself marketable

You need to have a good education to become marketable. Formal education is a must but not to the extent that you end up drowning in debt. You don't want to be that person with $150K of student loans just to get an English degree from a private institution.

My wife and I went to less prestigious schools in the Philippines. We can both attest that all our present and previous employers care about is that you're doing your job and that you're doing it right.

Good name schools and high GPAs only matter when competition is tough, and you're fresh from college. Once you've acquired experience, prospective employers will be looking at your skillset and track record. I know because I myself conducted many technical interviews of potential hires for my company. It's very important to keep learning and get your skillset up-to-date.

Establish a very strong work ethic

Having worked with people that came from Ivy league schools, many of them are smarter than me where I work.

But it is I who established a reputation for being a hard worker as my bosses often see me burn the midnight oil. It is I who is willing to work during weekends without being asked.

Over time, my employer became so dependent on me that I always get significant raises and bonuses. Over the span of 5 years, my salary doubled from $55K to $110K a year. I even had a bonus as large as $30K, which is unusual for a regular rank and file employee like me.

Live below your means

My wife and I didn't spend a dime when we got married. It's more like $400 dollars, and that includes the registration and cost of the reception. Our only other guest, besides the officiating minister, was his wife.

But we did have the money. We had over $50,000 in cash saved at the time. Instead, we chose to use it as a down payment for a house a year later.

When picking a house, we made sure that either of our incomes can afford it so that there's a cushion in case one of us suffers a job loss. As a result, our house payment, including property taxes, is less than 1/4 of our net income. In contrast, your local realtor will probably tell you that you can afford roughly twice or thrice your household gross income.

We avoided getting into debt or using a line of credit when doing home renovations. I managed to do most of the work myself saving us thousands of dollars in the process. I knew nothing about home repairs and improvements initially but was able to equip myself with the necessary skills and knowledge through reading and watching YouTube videos.

We brown bagged our lunches and drove modest cars. We spent substantially less than we earn.

Save wisely and aggressively

It is important that you save wisely and aggressively. When my wife and I receive salary raises, we didn't change our life style. Instead we invested the difference:
  • She contributed 20% of her salary to a 403B retirement account
  • I contributed only 15% of my salary to a 401K retirement account but fully funded a ROTH IRA instead.
  • $800 goes directly to a money market account, which serves as our emergency fund. We maintain 3-6 months' worth of living expenses.
  • $500 goes to the kids' college fund
  • The rest ends up in my brokerage account as 'play money' for buying stocks
Invest majority of your money in highly diversified stock mutual funds. Over time, you'll be heavily invested in the market. So it is important that you STAY THE COURSE. Stocks can provide the long-term growth-- but only if you're invested.

That folks is how regular people like you and me become millionaires.





Sunday, September 11, 2016

9-11 Portfolio

The week ending 9-11 is somewhat catastrophic as global equities and emerging-markets tumbled by at least 2%. Dow Jones index is down by 394 points, while the S&P 500 fell by 53 points. It was the biggest rout since Britain voted to secede from the European Union. The previous two months have been very tranquil in comparison.

That said, my brokerage portfolio lost $2,399.44 in just one day:


Roughly 70% of our assets are invested in mutual funds, and a few individual stocks. 85% of this portfolio is invested in highly diversified stock mutual funds. Only 9.6% of this is invested in bonds, and the rest are parked in cash.


It's probably worth mentioning that a small percentage of the International Equity portion is invested in the Philippines, my country of origin. EPHE is an emerging market ETF (exchange traded fund) that tracks the country's market. It is composed of great companies that I've known since I was a kid (Ayala, SM, PLDT etc.).

The Philippine stock market took a hit when President Obama cancelled a meeting with the country's new president, Rodrigo Duterte, after the latter called him a "son of a w**re":


Note that I'm refraining from making political comments about the new president in an effort not to make this a political blog.

I'd be lying not to admit that I'm somewhat disappointed that our overall portfolio took a hit by around $12,000 or half a million pesos in just one day. But it was only because it was on the brink of reaching the one million dollars mark (the first million is indeed the hardest).

In the past, I've always anticipated buying opportunities. Everyone knows what happened in 2008 when the markets tumbled, tumbled, and tumbled even more due to the housing crisis and credit default swap fiasco. While everyone that I asked, sold, sold and sold more; I bought, bought, and bought more.

Our net worth had quadrupled since then. So trust me, I'm always on a lookout for buying opportunities :)








Sunday, August 28, 2016

400 weeks

Coming up with a successful pre-retirement strategy involves detailed planning. For starters, you need to list down some goals. Not just one goal but many goals. For us, the ultimate financial goal is to retire comfortably, so we're able to live our dreams before the age 60. But this goal is too broad to be useful. Breaking this down into many sub-goals at midpoint should help provide details that make it more tangible.

In a healthy relationship, the wife should always be involved. So in my case, I had to sit and talk to my wife before coming up with the following:

  • We want to have the option to quit our jobs and start our own business by age 52
  • We want to have at least 2 million dollars in investible assets.
  • We want our mortgage paid off by the time our eldest daughter, Maddie, goes to college.


All three, I believe, can be accomplished in 400 weeks!

Paying off our mortgage is key. However, I don't want to get too crazy paying it off because the interest is a miniscule 3%. In comparison, the stock market has returned more than 10%, on the average, between 1970 to 2015 (here's a calculator).

The only reason I'd like to have some additional money to cover the principal is to provide some diversification as we're already heavily invested in stocks (I will cover the asset allocation of our portfolio in a future blog).

Here's a projection of when our 15-year mortgage will be paid off if I keep paying an additional $300 towards the principal:




On May 1, 2024 the outstanding balance will be $0.0. The year that Maddie goes to college, our mortgage will be paid off.

Her little brother goes to college 4 years later. So there should be no overlap of college expenses on our part:



Should they decide to attend private school (which I will strongly discourage them to do so), it wouldn't be a problem. We've already saved up more than $90K in their 529 accounts, and we have no mortgage to worry about by then.

This is why how we spend, save and invest our money within the next 400 weeks is crucial.  It's a huge step towards our lifelong dream to become truly financially independent.

But this is just half of the 800 week journey. We'll both be 60 after the next 400 weeks (of the first 400 weeks). I'm confident that by then, we'll be more than ready to retire completely from being self-employed. If the past 12 years can be used as an indicator, my guess is that our net worth would be somewhere between 10 to 15 million dollars.

That folks is an example of how you do long-term planning!

Do you think this is too ambitious? Let me know what you think.









Sunday, August 21, 2016

About this blog

Thanks for stopping by Millionaire Before 50. Hope you enjoy your stay.

Some interesting facts about me...

I'm a Filipino-American software engineer who moved to the U.S. in the middle of the dot-com boom and eventual bust, which caused many layoffs in the tech industry. While the recession did not necessarily leave me in financial ruins, the events acted as the impetus for me to start saving religiously- at a late age of 30.

I'm now happily married to a beautiful registered nurse who also mothers my 2 children. Together we work as a team to achieve our dream to become financially independent from our employers by the age of 52. I hope to chronicle our journey through this blog.

We successfully funded my eldest son's college education (it helped that he finished his degree in 3 and a half years) with very little help from the government or his real mother.

Our combined income before taxes throughout the past dozen of years range from $120K-$200K.
You might think that's a lot, but the income supported 7 people if you include my in-laws. It is typical for immigrant families to bring their parents with them.

I know, having in-laws living with you supposed to suck. But I get along with them quite well plus they provide some economic value (they help us save money on childcare). It also helps us to become very focused realizing that we could become DUNKIN-- Dual UNemployed with Kids and IN-laws to support after we retire. It's a matter of investing now or eat donuts for the rest of our retirement lives!

I regret naming named this blog with "Millionaire" in the title as some people might think I'm bragging, or worst bombard me with and welcome solicitations. For this reason, I am no longer writing anonymously. I simply don't want this blog to interfere with my relationships with friends and family.

I plan to become outrageously generous to the needy someday.


This was me when my house was being built. So excited that I forgot to zip my fly.


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