A distribution of a portion of profits given to shareholders. This typically occurs quarterly and averages 2.22% according to dividend.com. You have the option of re-investing that dividend or taking a cash payout. This is considered a form of passive income.
Expense Ratio
Annual Fee that is charged on all funds or exchange traded funds (mutual/index). The amount is typically a percentage of all assets in the fund. The fee covers the cost of things such as administration, compliance, distribution, management, marketing, shareholder services, and record-keeping. The average fee for a managed account can be .5%-1%. Index funds are usually lower with an average of .2% and can be as low as .04%.
Example:
Return: 6%
Annual Investment: $500/Month
Expense Ratio (Managed Fund): .54%
Expense Ratio (Index Fund): .04%
After 30 years of investing:
Managed Fund Amount: $434,000
Index Fund Amount: $474,000
Difference: $40,000
Summary: Assuming the same return on investment an index fund will provide you with an additional $40,000!
Follow-up: Index funds have historically outperformed a majority of managed funds!
Understanding the New (2018) Marginal Tax Bracket
Definition
The marginal tax rate is the tax rate at which each earned dollar of income is taxed. The percentage of tax in each bracket increases as earned income increases. This tax bracket only defines what your federal tax burden (requirement) is and does not include any state or local taxes!
2018 Reform
The most recent and largest tax reform in the past 30 years has been nicknamed the Tax Cuts and Jobs Act and includes a revision of the marginal tax bracket metrics. With 7 brackets this reform at its core is designed to keep more money in the tax payer’s pocket for a majority of the population. The chart below shows what percentage of each dollar is taxed depending on gross income.
| 2018 | Individuals | Married Filing Jointly |
| 10% | Up to $9,525 | Up to $19,050 |
| 12% | $9,526 – $38,700 | $19,051 – $77,400 |
| 22% | $38,701 – $82,500 | $77,401 – $165,000 |
| 24% | $82,501 – $157,500 | $165,001 – $315,000 |
| 32% | $157,501 – $200,000 | $315,001 – $400,000 |
| 35% | $200,001 – $500,000 | $400,001 – $600,000 |
| 37% | over $500,000 | over $600,000 |
At the time of this article the 2018 tax season just finished and there were a lot of discussions among my co-workers how this is the first year in a long time that they had to pay. This peaked my curiosity so I figured I would share my results with an example below.
Examples
Single man John earns $94,000 in 2018. Below is a chart explaining how he is taxed according to the newer standards.
| 2018 | Earned Money | Tax |
| 10% | $9,525 | $952.5 |
| 12% | $29,175 | $3,501 |
| 22% | $43,800 | $9,636 |
| 24% | $11,500 | $2,760 |
| Total | $94,000 | $16,849.5 |
The first $9,525 dollars that John earned in 2018 was taxed at 10% which results in a tax requirement of $952.50 so far. The next $29,175 that John earned was taxed at 12%. At this point John has earned $38,700 dollars ($9,525 + $29,175). The next $43,800 that john earned was taxed at 22% which adds another $9,636 of tax burden. At this point John has earned a total of $82,500. The last $11,500 he earns is taxed at 24% and results in an additional $2,760.
To calculate Johns total tax burden for 2018 we have to add all of the numbers from each of the brackets. This results in John owing the federal government $16,849.50 (minus deductions and credits).
Through a simple google search you can see that the tax brackets were different prior to 2018. If we go through the same process for John with the 2017 bracket John would have had to owed $20,040. That’s $3,190.50 more than what John owed for the same amount of money earned!
The same process can be done for a married couple filing jointly. I went the same procedure as defined above but used the married filing jointly brackets. I found a couple who earned $150,000 in 2017 would have had to owe $28,977 and in 2018 would have to owe $24,879. That’s approximately $4,000 less the couple owed with the newer tax bracket.
Effective Tax Rate
From our example above we showed that John owed a total of $16,849 for the 2018 year. The typical train of thought is that because John made $94,000 he is in the 24% tax bracket and that all of his monies are taxed at 24%. If this were true then John would have been required to pay $22,560. Through our example above we showed that John only owed $16,849! In order to calculate John’s effective (actual) tax rate we simply divide the tax owed by his total income: $16,849/94,000 = 17.9%.
Summary
So, we started off this article with the attempt to explain why my co-workers had to pay, when they did their tax return, this year instead of receiving money like they had in previous years. What we just reviewed in this article was the amount of federal tax which is owed to the government based on the amount of income per year. If taxes were this straight forward then it would be obvious that the newer tax system is better. HOWEVER! Things get a lot more complicated once we add deductions and exemptions. To further this discussion and come up with the answer check out Tax Deductions and Exemptions.
Eating a Hole in Your Pocket
What’s for dinner?!?!?!
The answer to those three words is probably the single biggest controllable contributor to either bringing your FI date closer or pushing it away. This article, and others, will help you build the habits so that your answer to that question isn’t, “Let’s just go out to eat”.
Let’s compare the two options of going out to eat vs eating a meal at the house and see what kind of affect it has on our FI date.
Option 1: Going out to eat
Let’s say we go out to eat at any national food chain (Applebees, Olive Garden, Red Lobster, etc.). Below is a breakdown of the monetary cost:
| Appetizer | $8.00 |
| Drinks | $5.00 |
| Food (2 People) | $24.00 |
| Tip | $7.00 |
| Total | $44.00 |
Option 2: Eating at home
One of our go to recipes that we use at our house is an Orange Chicken Instant Pot Recipe. Below is a breakdown of the ingredients and the cost for the meal:
| Item | Recipe Calls For | Cost | Cost/Item |
| Chicken | 2.5 lbs | $1.99/lb | $4.98 |
| Sesame Oil | 1.5 tbsp = .75 FL oz | $4.10/5 oz | $0.62 |
| Orange Juice | 1.5 cups = 12 oz | $2.98/59 oz | $0.61 |
| Soy Sauce | 1/4 cup | $2.69/15 oz | $0.36 |
| Garlic | 4 cloves = .72 oz | $3.49/4.5 oz | $0.56 |
| Sugar, ginger, corn startch | Estimated | $1.00 | |
| Rice | 2 cups | $1.56/5 cups | $0.62 |
| Brocolli | 1 Head | $0.99 | $0.99 |
| Total | $9.73 |
This is enough food to create 4 well portioned meals. That means that each meal only costs $2.43 per person!
So let’s put some math behind what we have just went over. The difference between going out to eat and cooking something at the house for a family of two is $44-$4.86 = $39.14. If the average family goes out to eat twice per week then that would be a savings of $78.28 per week or $3774 per year! Now we can take that number and plug it into the SavingsPerWeek worksheet in the Engineer’s Toolbox. Assuming a modest 6% return on investment that will be a difference of $321,811 over a 30 year average working career.
Now, let’s tackle two of the major mental aspects on why people choose to go out to eat instead of making the financially sound decision of eating at home, time and energy.
Time
“I don’t have time to figure out what I’m eating then go to the store, then cook the food, then clean the dishes up.”
Some of my other articles will tackle this in length but here is a shortened version of how my wife and I blow this mental hurdle out of the water.
Scenario 1
My wife and I have a list (a cookbook) of our top 30 recipes and when deciding what to eat for the week we simply read the list and pick out a week’s worth of meals. We then spend approximately 30 minutes every Sunday night to order the food that we need for the week online. We take the 15 minute drive to the store and it is loaded up in our vehicle for us (for a $7 fee). It is then another 15 minute trip back home.
Each meal which is prepared and the cleanup of that meal takes about 45 minutes. Including the shopping time, prep time, and cleanup time my best time estimate per meal is about 1 hour 15 minutes.
The time that it takes to go out to eat will obviously vary so I will take an average of my experiences. Most of the restaurants around my house are approximately 15 minutes away. The wait time of an average restaurant is another 15 minutes. The time that it takes for the server to get food and drink orders and the food to be prepared and delivered to the table is another 30 minutes. By the time you eat, hang out to talk, and pay the bill you are looking at another 20-30 minutes.
My total estimated time to go out to eat at a restaurant is 1 hour and 30 minutes. Obviously there are many variables in this narrative and whether you make the decision to eat at home or go out to eat, once you take the average time of both scenarios neither of them proves to be better than the other.
Scenario 2
Let’s take a look at the opposite end of the spectrum where I already have the food I want to cook at the house versus I’m just going to pick up some fast food to eat.
I am still going to stick with my orange chicken meal at a cost of $2.43 per person. The time portion of this process has been reduced because I no longer have to go to the store to pick the items up. The great part about this meal is that it only takes 10 minutes of prep time and since we are using an Instant Pot we won’t have to sit there and stir the meal. The food takes 20 minutes to cook and you are ready to eat. Total = 30 minutes.
I live in the suburbs so there aren’t a lot of fast food places for me to choose from. The closest fast food chain I have to my house is a Wendy’s (8 minutes). If I want anything other than that it is another 5 minute drive. Including order time my Wendy’s trip is approximately 20 minutes and all other fast food places are 30 minutes. If you download the Wendy’s app they typically have good coupons for you to use and my wife and I can usually eat there for about $10.
In summary, the time and money portion almost equal out for our scenario #2. WAIT A MINUTE! What about lunch for tomorrow? The orange chicken, as I stated previously, created 4 meals while the fast food only created one. This results in the future action of having to go out to eat the next day and spending another $10 to eat for lunch instead of eating leftovers! Over a 30 year working career that’s about $80,000!!!
Energy
It’s Wednesday and you just arrived home from a rough day at work. You walk in and your kids are screaming and your wife is about to pull her hair out (not that this ever happens in my house). It becomes dinner time and you have the option of going out to grab a quick bite to eat at your favorite fast food restaurant or spend the time to cook a meal. Everyone is cranky and you don’t have the energy to cook a meal.
Are we going to protect our sanity by loading the kids up and grabbing a quick bite to eat? Or, with a little bit of prior preparation, do we grab the pre-made dinner in the freezer and drop it in the Instant Pot to produce a delicious meal with minimal effort? I am choosing option 2 and keeping the money in my pocket and eating healthier.
There are many times when you are juggling work and family activities and the energy to produce a healthy at home meal just isn’t possible. I don’t want to sit here and condemn going out to eat as if it was the worst thing that you could do or make you feel like you are ruining your future every time you go out to eat. But what I want you to take away from this article is the knowledge that every decision comes with an opportunity cost and there is no right or wrong answer for everyone. There are times where my wife and I are just physically and mentally exhausted and cooking dinner is just not an option. We accept the cost (time & money) of going out to eat in order to keep our sanity and don’t second guess our decision.
Take Away Points
*Making the choice to eat at home versus going out to eat can be very lucrative in the long run. Our example proved that by staying in instead of going out to eat just two times a week can save a boat load of money!
*For those times where you just don’t have any energy; buy, or make, dinners which you can store in your freezer and pull out to instantly cook.
*The decision to go out to eat doesn’t have to be black and white. There are times where going out with your friends and “getting away from it all” is the better mental decision.
*If you do choose to go out to eat you can keep costs down by not ordering an appetizer, and maybe order a water instead of your favorite pop (soda or coke for all you southerners).
*Making the sound decision of eating in is only half the battle. If you don’t invest the money that you saved and just spend it somewhere else, then you may as well just keep going out to eat.
Saving Money 72 Hours at a Time
There are entire blogs, like the Frugalwoods and 1500 days to freedom, that have dedicated their time to focus on living and talking about their frugal lifestyle. I have compiled a list of actionable tips from their lives and from my own that will provide you with the framework of how to build healthy frugal habits.
In this article I will provide you with one of the top 5 things that will help with developing the frugal habits that will become the foundation for you to pay off debt faster, save money, and reach FI faster.
Impulse buying can be one of the most detrimental actions to your path to FI. The great thing about it though is that it is controllable! As I’ve stated before, your habits drive about 50% of your daily activities. If you can control your impulse buying, then you can cut years, YES YEARS, off of your work life!
I looked back at my Amazon account at the end of last year and started adding up all of my “impulse” buys over the course of a year. It ended being around $100 a month! Just $100 you say? Well, if I took that $100 and invested it into my low cost, broad based index fund (VTSAX, VOO, …), then at a conservative interest rate of 6 percent it would have resulted in $100,000 in 30 years! Check out the excel spreadsheet SavingsPerWeek in the Engineer Toolbox section to input your own numbers.
So, armed with that information how do I change my habits to prevent me from having to work longer to make up for the $100 purchases? It’s simple. When I am at the store or going through amazon’s endless pages of items I will write the item down in my little blue book I keep with me. I then spend the next 72 hours thinking about the opportunity cost of this item and decide whether I truly need this item.
There is a website www.camelcamelcamel.com that will track prices on Amazon and can even send you alerts if an item reaches a specific price! If you don’t need an item right away this is the perfect place to utilize to get the best price out there.
There are also occasions during this period where I have looked at other sources (craigslist, ebay, etc.) to see if I can save money on that item. Example, I was in the process of building an indoor playground for my daughters and I needed a plastic slide to let the girls slide down from the second story of their playground into a ball pit. Even though I had a deadline (per my wife) I took the time to look at craigslist and ended up finding one a couple was selling for only $40 where the box stores were selling it for $110!
Impulse purchases are a result of consumers wanting instant gratification. Marketers and retailers exploit this natural human nature to sell their products. That’s why at grocery stores the checkout lines have low priced easy to grab items to purchase. By utilizing the 72 hour method you have the ability to overcome this marketing technique and supercharge your path to FI.
Once you have made the 72 hour rule part of your life you will find yourself thinking just a little bit different every time you go to the grocery store, every time you go clothes shopping, every time you are out at an entertainment event. And it will seem as if you are sacrificing that instant gratification and it will not be easy. But, once you have overcome the natural human nature it will become a habit that you share with every member of the FI community. And once it’s a habit, you won’t give it a second thought. Stay strong. It will pay off!
Take away points:
- If it’s not a heck yeah, then it’s a NO!!!
General Knowledge
Stocks Vs Bonds (Made Simple)
Stocks and bonds are the two main investment features that we will use in order to travel on our path to FI. But what is the difference and why does it matter? Whatever your risk tolerance is will decide on how what percentage of stocks vs bonds you will hold on to.
Stock = Shares = Equities
Those words are all interchangeable and they mean that you have partial ownership of a company’s assets. That includes the company’s cash, inventory, accounts receivable, land, building, and equipment. If for some reason the company becomes dissolved then all of those assets mentioned will be sold off and the proceeds will go to all of the shareholders. However, that is only after all of the creditors have been paid off and sometimes that means that all of the shareholders stock value goes to zero.
You earn money from a stock two different ways, dividends and capital gains. Dividends are profits that are earned by the company and are chosen to be paid back to stockholders, typically 4 times a year. The amount of dividend paid back is a choice (not guaranteed) made by the company and is used to entice people to purchase more stock. You have to pay taxes on dividends in the year that they are paid out and they are taxed at the capital gains rate (see chart below) for qualified dividends and your income tax rate for unqualified dividends.
Capital gain is the profit earned after selling your stock. I.E. If you purchased a stock at $10 per share and sold it at $11 per share then the capital gain is $1 per share. You are taxed on the capital gain only when you sell the stock. There are two different ways you can be taxed on your capital gains: short term and long term.
Your capital gains are considered short term when you hold the investment for less than one year. The monies earned are considered income and are taxed at your standard income tax rate. If you hold your stock for more than 1 year and then sell it, your profits are taxed at 0%, 15%, or 20% depending on your income. See the chart below for the 2019 long term capital gains tax chart:
| 2019 Long Term Capital Gains Rate (Based on Income) | |||
| Single | Married Filing Jointly | Heads of Household | |
| 0% | $0-39,375 | $0-$78,750 | $0-52,750 |
| 15% | $39,376-$434,550 | $78,751-$488,850 | $52,751-$461,700 |
| 20% | Over $434,550 | Over $488,850 | Over 461,700 |
Because you are investing in a company when you purchase a stock you are basically putting all of your eggs in one basket. The stock is solely based on how that one company does and has the ability to go to zero or increase exponentially. Therefore stocks are considered more volatile than bonds. See @#)(*@#$)#@ hyperlink Index Fund Fundamentals for how that becomes an advantage to us.
Bonds are a different animal where there is a defined rate of return. Bonds are issued by companies, municipalities, states, and sovereign governments to finance projects and operations. When taken down to the core a bond is effectively a loan given by the investor (You) to the borrower (company, municipality, etc.). Bonds are usually issued in $100 or $1,000 increments and have a defined interest rate (currently around 4%). The duration of the bond can be anywhere from 1 year to 30 years.
For example, let us say you purchase a 5 year, $1,000 bond at a 4% interest rate through your state government. At the end of the 5 years you will be paid the face value of the bond. (NOTE: you can actually purchase a bond for more or less than the $1,000 face value but we will not get into those details in this article.)
The 4% is a guaranteed rate of return that is paid on an annual basis. This means that you will be paid $40 per year for every year of ownership. At the end of the 5 year period you will have made $200. The money that you have gotten back will be $1,200.
Have the next section in two columns as a comparison
Stocks
*You own part of the company
*You can lose everything you put into a stock (More Volatile)
*The percentage earned is a product of how well the company does
Bonds
Related Articles
-Qualified vs Un-qualified dividends
-Should I Re-invest my Dividends?
-Index Fund Fundamentals
