The following is the latest post on my new "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.
If you're interested in contributing to this series, then drop me an email.
Next in the series is FMF reader MM. He answered my questions (in red below) as follows:
Please tell us a bit about yourself.
I am 27 years old and reside in Boston. I am an active duty military officer, at a fairly standard rank for this point in my career. I am married with no children. Currently I am deployed to a combat zone. I went to Penn State University and had a full ROTC Scholarship, worked part time, had internships, and was able to study in the UK my junior year, with an intensive focus on the UK/Eurozone financial system and included a short internship in the City of London (financial district). I double majored in Supply Chain Management and Economics with a few minors. I also have a Master's degree in Finance with a Quantitative Emphasis from University of Colorado. This is my second deployment in the past 2.5 years or so.
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).
One of the "benefits" of being deployed is that your income is not subject to Federal or State Income Tax, though you do still pay Medicare and Medicaid. There are various additional incentive pays that are associated with being in a dangerous area and away from your family.
That said my gross salary is right around $100K, and I contribute 15% plus all special pays to my 401K equivalent, the TSP. Contributions made while in a combat zone are completely tax exempt, and are allowed to exceed the traditional $16,500 limit on standard 401Ks, up to the annual cap of $47,500 that most other programs have when matches are considered (no match is given in the military). However, when I return to the United States all contributions go back to "normal" 401K rules. According to the TSP website, tax-exempt contributions are "Contributions of money that will never be taxed. Such contributions can be made to the TSP by members of the uniformed services from pay that is covered by the combat zone tax exclusion." , which means I won't ever have to pay tax on this money, even when I withdraw it. However, monies contributed at home are subject to standard tax-deferred plan laws.
When I return from deployment, I will drop my contributions back down to 7% where they were before I left. I will explain the rationale on this below.
My net annualized salary while deployed is approximately $85K after all TSP contributions. I currently put 97% of contributions to the S Class fund, which is a Dow Jones U.S. Completion Total Stock Market Index masquerading as a Midcap fund, and 3% to the F Class fund, which is indexed to the Barclays Capital U.S. Aggregate Bond Index. I place that small amount into F class to smooth a little bit of volatility using some optimization and back testing as well as using the Modern Portfolio Theory thesis that you can actually maximize total adjusted returns while reducing risk with just a touch of bonds on top of any long equity exposure. Due to some moves I made back in 2008, my current portfolio allocation is 87% S Fund, 10% F Fund, and 3% G Fund, which is US Treasuries. This has served me well.
I max out both my and my wife's Roth IRA. I have been contributing since I was 18, but she only started in 2010 (we are the same age), so I have some serious catching up to do with her. My portfolio allocation is extremely aggressive, with 26% in Vanguard 500 Index, 20% in Dodge and Cox International, 15% in US Funds Natural Resources, 11% in Perritt Emerging Opportunities Fund, 10% in the Bruce Fund, 9% in TRowe Price Africa and Middle East, 8% in Matthews Asian Growth and Income Investor Class. My dollar allocation to each is 91.67, 100, 75, 50, None to Bruce Fund, 50, and 50 per month respectively, which is autoplanned for $5,000 annually. Right now I plow the $416.67 to wife's IRA in the Schwab S&P 500 Index fund, both for low overall cost, and low entry. Once she is up to $10K, I will probably try to roll it into Vanguard 500 Admiral Class.
My wife works in the greater Boston area as a communications officer for an NGO that is focused on medical care in Haiti. Her currently salary is right around $40K, and I deduct 10% for 403b purposes. Right now those funds are sitting in cash as I am waiting for a retest of 2009 market lows before jumping in with her. She is a journalist by trade, having worked for the Associated Press and having worked in several international capacities. This career path was afforded to her by her attending Northwestern's Medill School of Journalism after graduating from Penn State. While clearly one of the top schools in the world for her trade, it was not cheap, even with scholarships. She currently has a boatload of student debt, like many recent college graduates. Unfortunately, even though J-School is considered a professional school, in the same vein as MBA and Law School, salaries coming out of it pale in comparison. I am legitimately talking about $18,000 offers for entry level jobs after paying tuition and costs of about $120K (Columbia is the other elite J-School). If you ask me, this is a major reason "news" is so skewed these days. The only people who actually attend are the extremely wealthy to whom any graduate school cost wouldn't cause any hardship, or those who truly, truly do not care about money at all, and are willing to be debt slaves for most of their adult lives.
She is an exceptionally talented writer and we have had some very interesting adventures, so she blogs about them at length and eventually wants to write a book about them. In the meantime I am trying to gently suggest that we find a way to monetize the blog, or maybe she freelance some of her writing to a magazine (especially a travel one).
One caveat before I get into expenses, and some of my other asset considerations. I take a contrarian viewpoint to most traditional financial "insight" and often employ these viewpoints. So far it has not burned me. We have a mortgage on a Condo in a very up and coming area of Boston. It is in the city proper but it is not a traditional well heeled area like the Back Bay. The neighborhood development, amenities and exposure to incoming capital are truly amazing considering a city as old and space limited as Boston. We could honestly only afford the entry into this property via the VA Loan process. That said, the monthly payments are very manageable, but would probably cause many people to scream considering the space we get. It is just shy of 800 square feet and cost around $360K. The monthly mortgage is approximately $2200 + a $345 HOA fee. This includes all taxes. Right now we are in a 5.0% 30 year fixed and I contribute an extra $50 per month to principal. Sometimes if I have "mad" money I will throw it at principal, ranging from $500 - a few thousand at a time. I am currently working on refinancing my house to a 3.875% 30 year fixed and expect to close in the next month and a half. This will knock down monthly payments by about $300, and at that point I will start putting an extra $150 to the principal per month.
With all of these considerations, we did over 8 months of market research before deciding to buy in this neighborhood. We bought just before the flurry of new capital flowed to the area, and expect that in 10-15 years time the house could be worth double its current value (which would put it on the same level as Charlestown and Fenway neighborhood prices). I know that we are in a nationwide housing crisis, and am completely locked into the Case-Shiller index and all sorts of real estate indicators, but case in point, property values in our neighborhood were up on average 20% last year. There are pockets of growth throughout the nation. Boston also led the recession and to a certain degree has "led" out of the recession, though if you ask me recession is unfortunately here to stick around a while for many parts of the United States. Additionally, though we know we will be moving, I have no reservations about having purchased this place and only living in it for a temporary time. Rent demand in Boston, especially in our neighborhood is insatiable. I have property managers posting fliers and a few that I know calling me to ask if I am planning on renting out my place any time soon. I feel that after the refi I can be CLOSE to, if not completely mortgage covered by potential rent; at this point am unsure about the HOA being covered. That said, I know conventional wisdom is, "Never have negative cash flow real estate." I look at this kind of like a growth stock that pays no dividend. I'm willing to trade off a bit of cash flow for long term capital appreciation. I will also address how I cover that negative cash flow without dipping into my current salaried income below.
We have two cars, because we both reverse commute out of Boston in the morning and return at night. Surprisingly, parking is not too horrible in our neighborhood so we do not have to pay for dedicated parking spots so far. One thing that irks me is that when we bought our property, it did not come with a deeded parking spot. This is rather unfortunate because the going street rate (if you can even find a parking spot for sale) is about $25,000 cash for one. In other neighborhoods it can be as high as $250,000! My car is paid off and we bought hers on the cheap. There is about $6500 left on it and it is at a 2% rate. Originally when we moved to the area my wife took the T downtown to get around, but after getting this new job we had no choice.
There are other "debt" expenses, which I will articulate in the next category.
As for assets, that's where things take a serious turn for the better. Due to my intense financial market interest since middle school, I have studied and traded the market (stocks and options) almost continuously since college. I have a very unique strategy which I will now outline.
As I am in my 20s, I take a few shots at what I call "outright speculation" which is maybe in some way accurate, but I'd like to think at least the speculation is educated. At my age I have to try for a few grand slams. As far as portfolio theory, I have a heavily structured liquid portfolio, which is about 45% biased toward very high current income (the reasoning behind this is I want to be able to afford a mortgage in my desired living location in the absence of a job, as well as to cover down on the potential minor negative cash flow issue indicated above), using things like Agency REITs, Preferreds, high yield closed end funds, and to some degree Canroys and MLPs. I continue to explore Preferreds and Business Development companies. As of now my weighted average yield on cost pays me 11.6% annualized on a monthly basis. It alone could afford a mortgage in probably 80% of the country, and after refinancing my place will cover close to 75% of the monthly mortgage cost in Boston. Another 40% of my portfolio I dedicate to mid cap and blue chip equities that pay high yield dividends, have a history of dividend increases (for examples look at David Fish's list of Champions and Contenders) and ALSO have high liquidity options. I sell covered calls against them if I have a sizable enough position and roll them at least quarterly, usually looking 3-4 months out w/ a 20% upside strike. I also trade strangles, straddles and spreads around my basis to manage risk and if I think the equity is significantly beaten down I will sell naked puts if I would be willing to buy at that lower price. Additionally I work on macro theses that I see 3-5 years out and try to use bottom up fundamental analysis per security sector, and then wait for the techincals to line up- I use RSI, MACD, and slow and fast stochastics to determine entry points... Still need to learn better risk management on the downside but have enough conviction to generally believe my thesis will see it through, and have generally been proven right. 5-10% of my portfolio is the "outright speculation" and I have had several microcap oil plays like GTE, BPZ (when they were in their infancy), EGAS, junior miners, and a few true "hope" companies like INTK and PWVI. I have approximately a 5% allocation of my portfolio in physical silver, but it vacillates with the prices of my income oriented investments. So it's really 45% Income, 40% Optionable mid/large caps, 5-10% speculation, 5% Physical Metal.
If I sold out the entire portfolio and physicals right now except for the income instruments, and put all toward principal of my property, with current income portion of portfolio and salary I could probably have the place paid off in 5 years or less.
I use margin but try to be prudent about it, and the monthly income more than offsets the cost of it, by a factor of 4. The income allocation may not be very tax efficient but my AGI situation is unique at the moment and I find myself in a fairly low tax bracket. I don't mind paying taxes on income as long as the mortgage interest tax benefit still exists.
As indicated above I also max out my Roth and contribute as much as I can on a monthly basis to my TSP.
My next foray is in investment real estate. I am in the process of purchasing my first investment property with a partner; we've formed an LLC and are just about ready to make an offer. He happens to be a CFA and is very conservative about his investments and we have strict metrics about cashflow considerations. For example, the current property we are evaluating, at current sticker price and after all tax, repair, vacancy discounts, and property management cost considerations, has a Debt Service Coverage Ratio of 2.5. I hope over time that the positive cashflow generated from our properties will more than offset the negative cashflow from my current primary residence. Goal would be to eventually own 5-10 properties.
What are the current financial issues you're facing (saving, paying off debt, etc.)?
As I eluded to above, student loan debt is pretty much the PRIMARY issue. Her loans cost close to $1K per month and I still have a few sitting around at about $200 per month. We also had a wedding that was somewhat more expensive than I'd planned and have a small balance remaining at 0% on a credit card. We also have a few items on a 36 month 0% Best Buy card that were for "moving into first house" costs. This is manageable but I'd prefer to just knock it out. As I indicated above, I use margin, but in the past I also did a few Credit Card App-O-Ramas. I have some outstanding balances at 0% for life or for several remaining months and have thrown those funds into very conservative investments. Regardless all these little costs impact our cashflow as I pay well above minimum required payments so that I can have these balances paid off by the time the promotion periods end. The primary difference is that I am happy to live austerely in the pursuit of long term benefit. We both enjoy traveling, but my wife, god bless her, knows she is not great with money. She very much enjoys high fashion and also planning out trips that are pricey. She is excellent at finding deals, but I always jokingly accuse her of "dealing us into bankruptcy." From time to time I make some comments that she takes personally, but I would really just like to see if there is anything we can do to take out her student debt. We already have it on autodebit to reduce the overall interest rate by 0.5%.
I do contribute a LOT of money to our liquid monthly portfolio and also into some DRIP plans with companies that offer discounts on reinvested shares. I realize that I could take some of these funds to pay down her loans but I'm convinced I can outperform her interest rate. I'm just in a conundrum about how to increase our monthly cashflow. As I tell her, its never a situation where we don't have wealth, its often a case of liquidity, especially around mortgage time. I keep very little in savings (about $1000 in primary account and approximately $500 in two other external savings accounts in case of extreme emergency). I manage the checking account with the veracity of a CFO. If I absolutely had to spend large money on something, I have plenty of credit cards with high limits, could borrow from my margin, and if necessary could sell stock.
We do have a few monthly recurring bills, Comcast and Verizon each at about $100 per month for Cable, Internet, and Phones. We also have netflix at the 7.99 streaming plan rate. Beyond that, car and property insurance, electricity, and some margin service are the only other expenses.
If I had it my way we would find a way to live on $800 per month in terms of discretionary expenditure plus gas for cars plus groceries. My wife thinks I am crazy and that this is a completely unrealistic scenario in Boston. I am not sure what a happy medium is but I do know that if we didn't have her student loans to deal with we would have double the discretionary funds. Of course, to her credit if I reigned in some of the investing dollars we would have more to spend as well.
I break down my spending allocation like so (based off of Gross Income):
- Debt: 35.04%
- Bills: 8.20%
- Investing: 48% (This includes reinvestment of all dividends received, a substantial sum)
- Remainder: 8.76%
Based off of Net Income (subtract wife's taxes, TSP/403b, Dental & Health Insurance, Social Security, Medicare/Medicaid, and Servicemen's Group Life Insurance) and ACTUAL Expenditure (mostly plussing up above minimum debt service:
- Debt: 41.99%
- Bills: 6.8%
- Invest: 44.61%
- Remainder (Spending Money): 6.61%
Net Income allocation if only paid minimum on debt:
- Debt: 34.78%
- Bills: 6.8%
- Invest: 44.61%
- Remainder:13.82%
For both Net Income Scenarios, the reinvest portion is approximately 11.03% of Net, so could plus up "Remainder" with that, but as explained trying to eventually offset mortgage so reinvest every month to buy more shares and create higher dividend for future.
What are your plans for the future. (retire early, build your career, etc.)?
I'd like to be at $1M Net Worth by age 30. I would like to run my own hedge fund or at least day trade a professionally sized portfolio. Goal would be to generate enough income with portfolio so that I could pay for a permanent residence wherever i wanted (London, NY, wherever), and use that location as a platform for global travel with my wife. Would really like to record music and write but don't have any desire to be a starving artist. Probably 20% of the way there so far, and markets will make a huge difference as I do not currently the have time to run a short biased portfolio.
What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
Be diligent in your efforts, realize that one month's austerity can give you a few months' worth of prosperity. Go travel, read as much as you can. Do not listen to anything talking heads on television say, I believe most media is manufactured narrative. Be contrary by nature. Don't stand on a silent platform, verbalize your intentions, write down your goals [short, intermediate, and long term], and be flexible (something that I could use more work on in real life). Figure out how to create multiple streams of cashflow, especially passive forms of it.
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