Wednesday, March 30, 2016

Being Frugal Sometimes Means Spending A Little To Avoid Spending A Lot
If I am going to spend a lot of money on something, I want to make sure it lasts and that I get my money's worth. I'll pay more for a higher quality product because buying a more expensive product once every ten years is cheaper in the long run than buying a new cheaper one every two or three years. Given this, it's no surprise that I'm also a big fan of preventative maintenance.

I'm one of those people that always reads the owners manual. (Yeah, I know. I'm one of those people.) I do it partly to make sure I know about all the features a product has, but also to find out what kind of maintenance the manufacturer recommends. That's just the engineer in me coming out. I figure the folks who made the product know best how to make sure it keeps working, so I might as well follow their advice.

By keeping products well maintained, I can extend their life, sometimes by many years. I may spend a bit each year on maintenance, but it's cheaper than plunking down a big chunk of money on a replacement frequently. Here are some of the common maintenance tasks I do with the big ticket items in my house.

Water Heater

Although I recently put in a tankless water heater, it only serves our master bathroom. The rest of the house is supplied by a 50 gallon tank water heater. About 7 years ago, we came back from an out of state trip to see water running under our garage door and down our driveway. This sight falls into the "things you don't want to see" category. Turns out, our water heater had rusted through and was leaking. Getting it replaced was expensive and inconvenient, as we were without hot water for a couple of days. My long term plan is to eventually replace this with a tankless model that will serve the whole house, but I was in an emergency situation, so I had to go with a new tank model just to get hot water quickly.

Turns out, there is a simple thing you can do to extend the life of your water heater. Tanks rust out due to a electro-chemical reaction between the water and any metal in the tank. To extend the life of tanks, most water heaters include one or two rods that are meant to corrode. These are called sacrificial anodes. They are made of a metal that is more electrically conductive than the metal the tank is made out of, so they corrode instead of the tank.

The problem is they will eventually completely corrode away and, once they are gone, your tank starts corroding instead. The maintenance is simply to sacrifice another virgin put in a new sacrificial anode. It's an extremely simple thing to do. On the top of most tanks, you'll see a 1-1/16 inch hex nut. That's the sacrificial anode. Turn off the water to the tank and release the pressure. Then, unscrew this, pull out the old rod, and put a new one in. There are all kinds of videos on YouTube on how to do this. You just need to make sure you get the right type and size rod for your particular brand of water heater.

A new anode for my water heater costs about $30. I replace it every two years, but you may need to change the anode more often based on the properties of the water in your area. I set a recurring reminder in my computer to change the anode so now I never forget to do it. Here is a picture of an old rod I took out of my tank (top) and the replacement rod (bottom). You can see how much corrosion took place in two years.

For comparison, my new water heater cost me $975. Paying $30 every two years is cheap insurance. Before I was doing this, my old water heater lasted five years. My new water heater has lasted 7 years so far and I've replaced the anode twice. Note that most water heaters have a warranty on the tank against leaking. However, if you read the fine print, you'll see that warranty requires you to perform regular maintenance, which includes replacing the anode rod.

Cost: $30

Another part of water heater maintenance is flushing the tank to remove any debris from the bottom of the tank. Small rocks, mineral deposits, and pieces of the anode rod that may break off, all fall to the bottom of the tank. If they stay there, they can cause problems during the heating process by creating hot spots in the tank. It's best to flush the tank periodically to get these particles out. I do this at the same time I replace the anode rod.

Cost: 50 gallons of water - about 8 cents.

My goal is to get 15 years out of the water heater.

Air Conditioner

I live in Arizona and air conditioning is a requirement here. Twelve years ago, the AC went out in my house during the summer and, let me tell you, it was not fun. My wife was pregnant at the time and the temperature inside the house quickly got to 90 degrees. And it doesn't cool down at night. Needless to say, my wife was not pleased with the situation. Not surprisingly, AC repair companies are swamped during the summer and we were not able to get our unit fixed for a day or two. We ended up having to stay in a hotel until it was fixed.

We live in a different house now and we actually have two air conditioning units, so if one goes out, we could probably survive until it was repaired by going to the part of the house serviced by the working unit. If both went out at once though, we'd be toast.

We still had an issue with one of the condensation drainage lines getting plugged in our new house. Condensation at the heat exchanger in the attic backed up and spilled out of the capture pan. We ended up with water damage on the ceiling in our kitchen and had to have the ceiling repaired and repainted.

So I have purchased a yearly maintenance contract with a local AC company. They come out twice a year - once in the summer and once in the winter - and perform maintenance on our AC and heater units. If something is broken or needs to be fixed, we get a discount on the service. They can catch any problems while they are still small and prevent them from growing into much more expensive problems later on.

Cost: $200 per unit per year / $400 total per year

Another maintenance task is to replace the air filters regularly. I have programmable thermostats that track how long each unit runs and I have set them up to display a reminder to change the filters after they have had 3 weeks of continuous use. That usually works out to about 3 months in "real time", about 2 in the summer.

Cost: $23 for 4 filters per change.

My goal is to get 20 years out of the AC units.

Washer and Dryer

Washer and dryers get a ton of use. We probably average a load a day each week. I consider these machines to be close to indispensable, so I want to make sure they stay in working order. I plan on replacing these every 10 years and actually have a line in my budget to save for that expense, but I want to minimize any repairs during those ten years. If fact, I just replaced my units a couple months ago because our old dryer died. Total cost: $2,600. (Recall what I said earlier about paying for quality products. I could have purchased cheaper units, but I opted for ones recommended by Consumer Reports for quality and reliability.)

Reading the manuals told me regular maintenance on the washer involves running a self-cleaning cycle every 20 loads and cleaning the dryer lint trap after each load. I'm not going to count loads of laundry, so I cheated a bit here and I just run the washer self-cleaning cycle on the first of every month. (That probably works out to once every 30 to 40 loads, but that's close enough in my book.) Again, I use a recurring reminder on my computer so I don't forget. Cleaning the dryer lint trap is just something I do after each load. (In fact, when my old dryer needed to be repaired, the technician commented on how clean my dryer was!)

Cost: Negligible.

My goal is to get 10 years out of the units.


Cars definitely need regular maintenance! I drive a Prius and it has a computer that tracks mileage. I can set thresholds for alerts for about 15 different maintenance tasks - oil changes, tire rotations and balancing, air filter changes, spark plug changes, etc. I love the computer, because it tracks the mileage for me and it takes zero effort on my part. When it's time for something to be done, a notification pops up on my display. I get the work done, then reset the alert.

I've had no major problems with the car so far. I crossed the 100,000 mile mark a couple months ago and had to spend about $1,000 on some major (routine) maintenance, as a lot of systems are due for checkups at that point. I've got a line item in my budget for auto maintenance though, so that was planned for. My goal is to get 175,000 to 200,000 miles out of the car. Of course, my overall goal is to replace the car with a Tesla :-) Those need even less maintenance!

Cost: Varies, depending on service. Averages about $75/month.

By spending a little bit periodically on preventative maintenance, you can keep your appliances in good working order, extend their lifespan, and put off the need for expensive replacements!

Wednesday, March 23, 2016

Your Retirement Is A Bathtub

A little over a year ago, my wife and I decided to remodel our master bathroom. One of the things my wife wanted was a bigger bathtub. She’s rather tall and she couldn’t lay in the old tub without having to bend her legs and have her knees sticking out of the water. (Yeah, First World problem, I know.) We did some research and found a standalone tub that was big enough to allow her to stretch out her legs and remain submerged. The tub holds 65 gallons of water and our water heater only holds 50 gallons. This meant every time she would take a bath, she would be draining the hot water tank, leaving the rest of the house without hot water for at least an hour while the tank recharged. Not only that, but 50 gallons wouldn’t be enough to get a full tub to the temperature she likes. (She likes her bath like she likes her husband – hot!) This was obviously a problem.

The solution? As part of the remodel, we installed a tankless water heater to supply hot water to the new tub and our shower. As the name implies, a tankless water heater doesn’t store water in a tank and keep it hot. Rather, it heats the water as it passes through the unit. You never run out of hot water because the unit heats the water as it is needed. Additionally, you never have to worry about a tank rupturing or leaking or corroding. You save energy by only heating the water you need and not keeping 40 to 50 gallons of water heated 24 hours a day. Turns out, this is how the majority of the world heats water in homes. I’m not sure why it’s not more widely done in the U.S.
My tankless water heater

Your retirement is your bath tub

What does this have to do with finance? Think of your retirement as a bath tub and the hot water as your retirement savings. You want to spend your days soaking in nice warm water, but the water keeps cooling off. Expenses and inflation keep leaching off the heat and you need to keep hot water coming in to keep the bath warm. If your money isn’t generating income to cover your expenses, your hot water tank is going to run out of hot water and you’ll be left in the cold. But if you invest wisely in products that generate a steady income stream that covers your expenses, you’ve got yourself a nice little tankless water heater and you’ll never run out of hot water.

Where do you get your tankless water heater?

You need to build your own tankless water heater for your retirement. There are several ways to do this. Stocks that provide a reliable dividend are one way. Annuities are another. You can lend money and use the payments you receive as your income stream. You can create content that people pay for.  To put it in financial terms, passive income is your tankless water heater.

Don’t spend your retirement in cold water. Start installing your tankless water heater today by building up your passive income streams. (Water.. Streams.. See what I did there?)

Wednesday, March 16, 2016

Drowning In Debt? Start Here!
When you are drowning under an ocean of debt, it's easy to get discouraged. If the total amount you owe is in the four or five figure range, it can seem like you'll never be able to make it to the surface for a breath. Throwing an extra $10 or $20 towards your debt now and again just seems like an exercise in futility.

Well, don't lose hope. The internet is full of stories of people in exactly your situation and who managed to swim their way out of debt. Most of these stories are about Millenials, probably because they tend to have thousands of dollars in student loan debt and they also tend to share more info on the internet than prior generations. However, their stories and lessons can be applied to any age group. I'm going to list a couple of sites that I find encouraging as a starting place for those needing some inspiration.

Getting The Right Mindset

Make no mistake - getting out from under a huge pile of debt is not an easy task. It takes hard work and lots of sacrifices. It also takes time. Hard work and sacrifices over a long period of time - that is a perfect recipe for failure for many people, so it's really important to have the correct mindset when you embark on your debt reduction journey. You have to be fully and totally committed to your goal, every day. You will also probably have to change your views about money, debt, and how you want to live your life, so you don't fail.

This short article at Psychology Today shows how debt can make people feel like failures. It also shows the importance of overcoming that feeling so that progress can be made.

The Dear Debt blog has a similar concept. Readers send in letters they have written to their debt, stating how the debt makes them feel and how they plan to conquer it.

Both these sites illustrate an important point - if you truly want to get out of debt, you have to face it head on. You have to confront the reality of your situation without excuses or guilt and be determined to change. This site has a short quiz that can help determine just how serious you are.

Case Studies

Staying inspired over a long period of time is not easy. There are all sorts of tricks people use to maintain their inspiration - for example, taping a picture or statement of their goal to the bathroom mirror so they see it each day. The internet provides a plethora of success stories that can serve the same purpose.

There are hundreds of blogs written by people who have overcome mountains of debt or who are their way to doing so. And since blogging can be interactive, it's easy to leave comments and join discussions with like-minded people and form support groups.

Amanda paid off $42,800 in one year and over $47,000 in student loan debt in 14 months. Andrew and his wife paid off $55,000 in debt, also in 14 months. Jacquelyn paid off $48,000 in debt. This is where she started and this is where she ended up. I really like her story because she's very candid about how hard it was to eliminate her debt. She worked extra jobs, long hours, and sacrificed a bunch, but clearly, she says, it was worth it:

I needed to pay off my debt. I needed it. I was lost, confused, devoid of work ethic... I had lost belief in who I was becoming, what I could do... I needed to feel this pain. It’s opened my eyes to why time should be deliberately spent in a way that aligns with your actual dreams.

And Finally, How-To Guides

There are tons and tons of sites out there with tips on how to reduce your debt. Not all methods work for every person, so it's simply a matter of surfing around until you find one that will work for you. Here's an article on how to get out of credit card debt. Here's one on how to sell stuff on eBay for extra cash.

How about a list of things people trying to get out of debt usually get wrong?

Here's a guide on how to save money when you have an irregular income.

One thing these guides agree on is that it is vitally important to have a budget and know exactly where all your money is going. This site has links to almost 20 budget spreadsheets and links to several budgeting websites. Of course, my own magical budget spreadsheet can be found here.

Another important step in conquering your debt: Accountability. One thing you'll read time and again on these blogs is that they were started to force the authors to become accountable for their actions and help keep them progressing towards their goal. (Heck, that's why I started this blog!) So even if you've never written a thing in your life, start a blog to document your progress. Even if no one reads it, forcing yourself to be publicly accountable is a major motivator. If you put ads on your blog, you might even make some extra cash!

The Journey Starts With A Single Step

It may take a long time to become debt-free, but it will take forever if you never get started. Persistence is key.

"Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not: the world is full of educated derelicts. Persistence and determination alone are omnipotent." - Calvin Coolidge

(Remember when I talked about staying motivated? Get this quote on a poster! I got one for my daughter and it's hanging on her door.)

Wednesday, March 9, 2016

Book Review: The Little Book Of Common Sense Investing Little Book Of Common Sense Investing is one of the more famous books written by Vanguard founder and former CEO John Bogle. If you know the name, you've got a good idea of what the book will be about - how low cost index fund investing consistently beats the pants off any other method of stock market investing in the long term.

This should be obvious by now. Studies have been done confirming this. The greatest indicator of how well a mutual fund will perform is its expense ratio. The lower it is, the better it is for investors.

For those that still don't grasp this, Bogle gives a detailed analysis of why this not only is the case, but must be the case, according to the "relentless rules of humble arithmetic," a favorite phrase of his that appears many times throughout the book.

The Relentless Rules Of Humble Arithmetic

The case for low cost indexing is rather simple. No one can consistently beat the market. Rather, Bogle argues, the best you can do is mimic the market. In fact, there is not even a need to beat the market. Simply matching the market's performance over time is enough to make you a millionaire. Further, the best way to mimic the market is to own a little piece of every company that trades in the market. Hence, a whole market mutual fund that owns shares of every single stock in the market in the same proportion they exist in the market, weighted by market capitalization, is the best way to mimic the market.

If you have such a mutual fund and it charges no fees at all, it will perfectly mirror the market. Therefore, simple math tells you the more fees you have to pay, the more the fund's performance will diverge from the market's. Humble arithmetic.

Destroying the Counter Arguments

Once that premise has been firmly established. Bogle goes on to address various claims that other strategies can better this performance. He shows how each one is false.

Actively managed funds, those where a person or persons is involved in picking stocks, simply can't beat the performance of a broad based index fund. First, actively managed funds have higher fees, so right off the top, the investor loses some returns to pay those fees. Second, most actively managed funds buy and sell stocks frequently. This incurs commission costs, which of course, are passed on to the investor. Third, frequent trading results in a higher tax bill due to short term capital gains taxes. If the investor is not holding the fund in a tax-free or tax-deferred account, these are more costs that will need to be paid. And lastly, the stock market is a zero-sum gain. For every seller, there is a buyer and for every buyer, there is a seller. They can't all be right all the time. Fund managers that do well one year, inevitably do poorly the following year. Bogle has the data to back this up.

When you add emotion into the mix, things get even worse. It's human nature to chase performance. This leads investors to throw money into sectors that did well in the past. They buy high, in other words. Then that sector drops and another one becomes hot, so they sell again and buy the latest hot sector. They sell low and buy high again. This is a recipe for disaster.

Broad based, low cost index funds, which have low turnover greatly reduce the losses due to taxes and trading commissions. The result is a performance that is impossible to beat in the long term.

Bogle also spends some time talking about bond funds, where the same rules apply - low cost, broad based wins the day. He then talks about exchange traded funds (ETFs), which sound good, but actually are just as bad, due to their short term nature - again commissions and taxes gnaw away at overall returns.

But don't just take Bogle's word for it. At the end of each chapter, he provides quotes from other finanicial giants supporting his claims - everyone from Warren Buffet and Charlie Munger to Noble prize-winning economists.

The book made a great impression on me, even though I already knew the benefits low cost, buy and hold funds provide. In fact, after reading it, I went and changed my future 401(k) contributions to be split 90% into low cost Vanguard funds and 10% in a low cost bond fund. This book is highly recommended.

Wednesday, March 2, 2016

Goal Update: End of February 2016

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of February, 2016
Current value: $21,113
Change from last month: +$293
Percent of Goal:  19.42%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month:

Income this month from my online courses sales was $154. Low, as expected. This payment was for December sales and that is my slowest month.

Not much change in my account value this month and I'm still hovering just under 20% of my goal. I didn't get a big gain this month, not only because my courses didn't bring in much money, but also because I sold most of my stock. I sold $20,000 of stock, leaving me with just 2 shares, and put the proceeds into a hard money loan. That means I've unlocked a new achievement!

My partner has made a loan of $577,500 as a first mortgage on a group of properties - a single family house and a multi-unit property consisting of a duplex and a triplex. Our borrower, who we've done dozens of loans with in the past, bought the property at a foreclosure auction for $830,000. The as-is price for the property, which is what we feel the property is worth right now, without any improvements, we estimate to be about $800,000. (So yes, if we were doing the buying at the auction, we probably wouldn't have bought this at the $830,000 price. But there were multiple people bidding on this property, so the price ended up a bit higher than what we feel it is worth as-is.) The borrower is going to fix the property up and sell it (i.e., he is going to "flip" it). We estimate the after repair price to be between $1 million and $1.2 million. Yes, that's a high value, but this property is in Hayward, California, which is in the Bay Area. That's just what property costs out there.

My $20,000 is part of the $577,500 total loaned. I'm earning an 8% return, paid monthly with interest-only payments. That works out to $133.33 per month. The loan is due in full in 1 year or when the property is sold, which ever comes first. Here are a couple pictures of the properties. The first is the multi-unit portion and the second is the single family home.

I think John Mellencamp sang about this place...

How safe is this investment? We feel it's pretty safe. If the properties are worth $800,000, our loan of $577,500 gives us a loan to value ratio of 72%, which is good. This means if the borrower didn't pay us and we had to foreclose and sell the property, we've got a $222,500 safety margin for the hassle of doing all that. If we did have to foreclose, we would have, in effect, bought a 6 unit property (1 triplex, 1 duplex, and a single family home) at about $100,000 per unit. In the Bay area, this is a fantastic deal. We figure each unit would rent for around $1,800 per month if we wanted to keep it and rent it out instead of selling it after foreclosure.

I've made many loans like this over the years. If you want to know more about how the process works, including how to evaluate deals to see if they are safe / profitable or not, check out my old real estate blog for details on my previous loans. Search for "hard money" on that site. My 8% return on this loan is about double the current dividend rate on Realty Income stock, which is why I sold the stock and moved my money into this investment.

Oh, and I hit another milestone this month: our highest net worth ever!

Net worth is calculated by adding up all our assets and subtracting all our liabilities. I don't normally track this figure closely, which is why I don't talk about it much here, but I glance at it now and again when I'm logged in to The actual value bounces around a lot because it includes my wife's and my retirement accounts, which are invested in the stock market and hence subject to value fluctuations daily. Still, I think this is the first time we've crossed the $600,000 threshold.

As a reminder, if you have any questions or suggestions for topics, feel free to contact me by clicking on the Contact link at the top of the page!