Net Worth Challenge

I should have mentioned earlier that our Roth IRA accounts have been maxed out ($4,000 in contributions to each account) for the year.  Back in June I made the final contributions to both of our accounts, much ahead of schedule.  I had expected to put in equal amounts of contributions each month for the entire year — but I guess I became a little trigger happy.
Of course, the accelerated contributions may be paying off because of the tremendous performance of the stock market.  If everything related to the market continues smoothly for the remainder of 2007, this move will have paid off.

This week I’ve been looking at our various investments and cash reserves. I’m looking to see if there are returns that can be improved by shifting these resources around. After careful evaluation, I’m convinced that we have too much money sitting in money market accounts earning a paltry 5.15%. Sure, this is a decent return — but given the strength of the equities market as of lately, the return should be much higher.

I have had a great year in both mutual funds and individuals stocks. I feel our excess funds sitting in our money market account would best be put to use in these types of investments. Therefore I will begin to move several thousand dollars (around $14,000 to be exact) into different mutual funds and individual stocks starting tomorrow. I expect the process to take up to one week as I pick and choose where I want this money to be allocated. I still plan to leave about $9,000 in our money market account to cover any unforeseen expenses and to have enough in case I need to pay off our 0% balance transfer bills rather quickly.

In a way I feel as though I am “borrowing from myself” in order to squeeze out some additional gains. I expect to put this money back into the money market funds
slowly over time. Although the money is lumped together into a money market fund, in reality my wife and I have allocated these funds to various items such as vacation fund, tenant deposits, credit card balance transfer deposits, wedding gift money (to be used for furniture eventually), and others. Since many of these items represent things we will not purchase until much later, I feel it’s alright to use these funds in more productive ways for the time being.

Back in January I wrote about several financial goals that my wife and I have going into 2007. There is another goal I have, although unwritten, that I am personally trying to work towards this year.

• I would like to spend less time each week working on my finances.

Now this doesn’t mean I want to get away from the blog and talk less about my financial situation — quite the opposite, in fact. I simply want to spend less time managing the day-to-day and week-to-week activities and find ways to automate my system to free up my time for additional activities — including writing more posts on my blog.

As of lately, it has been a daily routine for me to look at my planning spreadsheets, Microsoft Money account balances, and check stock/mutual fund quotes. The addition of our new rental property in March has meant additional bills to pay; all with varying due dates. I’m not one to be lax with my payments, so I have been working on my finances to some degree each and every day to make sure I do not accidentally skip a payment or forget an upcoming payment due date. The complexity comes in because I try and manage the balance in our checking account to be as minimal as possible. If we have extra money sitting around, it gets sent to our money market account to earn interest. Then when a payment is due, I transfer money back into the checking account and authorize (either electronic or over the phone) a payment to be made.

My planning spreadsheet helps out tremendously because I track when income is supposed to arrive (ie, paychecks for my wife and I) and when expenses are going to be due (ie, regular monthly mortgage, credit card, utilities payments, etc). I am able to keep the checking account balance at a minimum and the money market account balance at a maximum. This is all great and dandy, but it’s starting to take up more and more of my time.

To combat this situation, I am going to begin automating several tasks as best as possible. I have already taken steps to do this for some items; mainly our student loan payments. My next step is to automate all the mortgage payments (our house and our rental property) and find ways to automate my deposits into our money market account. There are several deposits that are equal from month to month — might as well make it as easy as possible. As I make improvements to my overall financial system, I’ll try and keep you updated. Wish me luck!

I just made my 2nd contribution into my Roth IRA this afternoon. I had planned on making the purchase during the last week of February, but didn’t get around to it during the hustle and bustle of preparing for the purchase of our new property.

I exchanged money from our money market account into my Roth IRA account to make the purchase. I plan on making the purchase for my wife’s account in the upcoming days. Both of us had planned on accelerating our purchases during the first part of the year. Up until last week that would have sounded like a great idea. With the recent performance of the stock market, however, it might make sense to spread out our purchases equally throughout the year.

In the past I would typically balance out my Roth IRA contributions throughout the entire year. I would start the New Year by seeing what the maximum allowable contribution would be for the entire year and divide it by 12 to determine my monthly contribution amount. For instance, in 2007 this would mean:

• $4,000 / 12 = $333.33 per month

However, I’m taking a different approach this year by attempting to make my contributions earlier. I am bullish on 2007 and believe the market has no place to go but up. Plus, I have a large reserve of cash sitting in my money market account at Vanguard, which I believe could be put to good use through this plan.

Now some of you are thinking, “wait a minute, what would it mean if you were bearish on the market instead?” Regardless of what I think the market will do in a given year, I will always contribute the maximum allowable amount into my Roth IRA (and my wife’s Roth IRA) for the year. But if I were bearish in a given year, I would follow the plan of balanced contributions for the year (ie, $333.33 into my Roth IRA each month).

With that explanation said, I made a $1,700 contribution last Tuesday into my Roth IRA account for 2007. I have not yet made a contribution into my wife’s account, but I expect to in the middle of this week. The maximum allowable contribution into a Roth IRA (if you meet the IRS income requirements) for 2007 is $4,000. With my contribution from Tuesday into my Roth IRA account, this means I can still put in $2,300 for tax year 2007. I can also put in $4,000 into my wife’s Roth IRA account for tax year 2007.

After graduating college, my wife and I wanted to get a good start in building our “financial foundation.” Both of us had been good savers in college and we planned on continuing our savings habits after starting our new jobs. I’ll admit it was tough to resist the temptation to spend our larger, post-college, real-job paychecks at first — and instead devote a large chunk of our new income to items such as retirement and other long-term savings goals. But after a short while we both became used to the new savings habits and started realizing how much it would help us in the future. Flash forward two years and it seems that our asset accounts are growing and the plan we created is working well for us.

In the last post I listed these asset accounts along with our liability accounts for the month ending September 2006. Now I would like to dive a little deeper and explain what each line-item represents:

Cash & Savings - The main account I use as a “starting point” for all my financial activities is my checking account. I use this account for direct deposit of paychecks, paying credit card bills, writing checks, and moving money from my different investment accounts. In addition to a checking account, I also maintain a savings account at the same bank. I only keep the bare minimum in the savings account because I can get a higher rate of return elsewhere. I also have a PayPal account for accepting online payments. This account usually has a small balance in it that I periodically transfer into my checking account. Finally, I also keep track of the money I carry around in my wallet (and the money in my wife’s purse). Although the amounts of cash in our wallet and purse are usually small, I still like to track it so that we know exactly where our money gets spent. Overall, I try and manage the balances in our checking, savings, PayPal, and wallet accounts so that only a bare minimum is stored here. Since I can earn a higher rate of return in a money market account, I generally store more money there and less money in the Cash & Savings accounts.

Taxable Brokerage Accounts - This item is comprised of my non-retirement Ameritrade, Sharebuilder and Vanguard accounts. I use the Ameritrade and Sharebuilder accounts for trading stocks, ETFs, and options contracts. I use both accounts because each one has an advantage that I try and utilize as best as possible. The Ameritrade account has lower commission charges and gets used for trading options contracts and for purchasing stocks that do not pay a dividend. The Sharebuilder account gets used for purchasing stocks that pay a dividend, since they offer dividend reinvestment for free. I try to set aside some money each month for investing in the stock market, which is separate from my retirement savings. As of lately, much of my investing in these accounts has been in small-cap and mid-cap stocks. I have been investing in these categories in order to better diversify my overall investment holdings. I also maintain a Vanguard account for short-term and long-term purposes. Instead of storing short-term money in my checking account, I keep this money in a Vanguard money market account. My money market fund at Vanguard holds money for items such as our vacation fund, home insurance fund, car insurance fund, property tax fund, and other such items. I also use Vanguard to purchase mutual funds for longer-term goals. Our house fund is invested in a mutual fund that is riskier, but typically has a higher rate of return than the money market account.

Roth IRA - Although I did not start my Roth IRA account at age 18, the first year available for me to join, I did start at a reasonably young age. My goal has always been to contribute the maximum allowable amount into my Roth IRA each year. When my wife and I were married, I was quick to setup an account for her and began contributing the maximum amount for her as well. I consider investing in our Roth IRA a high-priority. Both of these accounts are held at Vanguard and are invested in Vanguard mutual funds.

401(k) - My wife and I have 401k accounts at both our companies. We setup these accounts as soon as we began our full-time jobs and began contributing money into these accounts from day one. At the bare minimum, our goal has always been to contribute enough so that we earn the maximum matching amount from our companies. Lately, however, we have been putting away much more into these accounts because of tax planning. Because of tax planning, I hope to contribute the maximum allowable amount ($15,000) in my 401K this year. I would like to do the same with my wife’s 401K account, but her company has a limitation on her contribution rate. Therefore, it is impossible for us to contribute the maximum allowable amount for her account while she is at her present employer.

House #1 - Rental/Primary - In addition to starting our savings for retirement when we began working full-time, we also purchased a home shortly after graduating from college. We did not go the traditional route, however, and instead purchased a duplex with the intention of living in one side and renting the other side out. Now that we have lived there for a little over two years, we may start searching for a new home next Spring. We plan on keeping this duplex for many more years and will rent out the side we had been living in after moving to a new home.

Other Assets - The only assets this item currently tracks is the value of our two vehicles. While our cars may not be easily convertable to cash in the future, they are still considered assets and I do feel they should be included. I used the Kelley Blue Book website to determine the fair market value of our cars at the end of last year. I do not plan on making changes to the value of our cars on an ongoing basis each month, but rather once a year at the end of December.

Overall, I am proud of the values of each asset account because it represents progress that my wife and I have been making over the past two years. Believe me, they didn’t automatically start out looking so strong. It will be exciting for me to track the progress of these accounts in the future and to talk about strategies for maximizing the rate of return I am earning on these accounts.