Stretch Your Emergency Fund with Puddle

Personal finance isn't just about building up net worth—it's also about making money available when you need it.  Just like a business, you have to worry about your balance sheet and your cashflow statement.  Having a lot of money locked up in investments isn't helpful when you need cash to cover expenses today.

This is the logic behind the emergency fund—hold a couple months' expenses in fairly liquid form, like a savings account or US Treasury I Bonds, to smooth over unexpected changes in expenses and income.  Establishing an emergency fund should be your first act before considering any other kind of investing.

How much money should you keep in an accessible place?  To make that decision, you have to balance two opposing forces: the risk and cost of having too little, and the cost of not investing in something with a better return.


Earn 5.12% APY on $5000 in a Savings Account

Yesterday, I got together with five fellow Mr. Money Mustache fans at Lake Merritt in Oakland to talk about money and life.  This was the latest Bay Area Mighty Mustachian Meetup (BAMMM) event, which is to say I sent out an email on the Google Group list, posted in the MMM forum, and created an event in a Google+ Community and some people showed up.  If you'd like to hear about (or better yet plan) future events, tap into one of those channels or (NEW) follow me on Twitter at @BC_ChemE and watch for stuff tagged with #BayAreaMMM.

I don't do affiliate links, so I'm not linking this to make a buck.

The 5.12% Savings Account

The week after I posted this, the Mango Money sign-up page was deactivated!
The week after that, Union Plus sign-up page was also removed.
In August, the Mango Money signup page was back, but the terms have changed:
the savings account interest rate is 6% only with a $500+/month direct deposit.
Otherwise, the interest rate is only 2%.

One thing we discussed was the pain of holding cash in "high-yield" savings accounts that return, at best, 1% now.  I used the opportunity to pitch US Treasury Series I Bonds, which I've always liked for emergency funds because they at least keep pace with inflation.  Another attendee recently became financially independent (dunno if he wants to be publicly outed and not sure if he has a site) and had a more liquid solution with a better rate: a savings account associated with a prepaid debit card company called Mango Money.

The vital details, culled from the AHS Wiki page that serves as my open notebook for these projects:


Guest Lecture: Personal Finance 101

This morning I had the opportunity to give a forty-minute presentation about personal finance basics to a Penn State freshman seminar class.  One of my (many) long-term goals is to fix the lack of personal finance education at the high school and college level, so I jumped at the chance and dragged myself out of bed at 3AM to prepare a presentation.

I gave and recorded the presentation using Google Hangouts On Air:

The presentation is here and the spreadsheets referenced in the video are available here.

Unfortunately the audio on the other end wasn't working, so I was not able to do the question-and-answer session that I had planned.  In lieu of that, I'll follow up with the students using a Google Form to collect their questions and I'll post the answers here.

I have been subscribing to a lot more YouTube content lately, and I like the concept of preparing a series of short personal finance videos to add at the top of my posts here.  These videos could give the tl;dr version for people who prefer the sound of my voice to my writing style (what a choice!).

My public speaking needs work, but to be fair this was 6AM my time...


Save Your IRS Tax Transcripts

Have your taxes from previous years?  Archive them!  Collect all of your forms for each year, digitize them, and make sure they're backed up to the cloud—Google Drive, Dropbox, whatever.  The IRS can audit three to six years into the past and you can file a corrected return up to three years back, so make it a habit to keep this information organized.

Pieter Brueghel the Younger's The Tax Collector's Office, 1640.  I bet the IRS looks like this too.
If you're missing a year, or if you'd like to see what information the IRS has on your earnings for this or previous years, you can download tax account, income, and tax return transcripts online.  Just head over to the IRS transcript website and make an account!  Transcripts are free and can be downloaded immediately.  When you're doing your taxes for this year, this is an easy way to verify that you have all of the W-2s and 1099s that the IRS does.


Save Money on Electricity with Alternative Pricing Plans

Knowledge is Power

If you know how electricity prices vary over time, you may be able to use this to save money.

The Theory

The electrical utility system is designed with a certain base output power that is sufficient to meet the demand for electricity almost all of the time.  On hot and humid August afternoons when everyone is blasting the AC on high, electricity demand may spike above what the base capacity can supply.  The utility company then has a couple options:

0) Do nothing.  The grid line voltage will drop, a state called a 'brownout'.  This may successfully reduce power consumption, but it could also cause some types of equipment to malfunction or sustain damage.

1) Manage demand with rolling blackouts.  Demand is pruned by cutting off power to some areas of the grid; which parts are shut down is 'rolled' on a schedule, announced ahead of time if possible.

2) Supplement the base supply with additional power by activating 'peaking plants'.  These power plants may use designs that are less efficient and cost-effective than the base supply plants, but they can be quickly switched on and throttled, like a jet engine, to match fluctuating demand.

And last, but not least:

3) Manage demand with good old economics.  If the utility company can collect time-of-use data with a smart meter and consumers are informed ahead of time that the price of electricity will be higher on certain days ('critical peak pricing') or at certain times of day ('time-of-use pricing'), they may adjust their behavior and temper peak demand.

In Practice, with Pacific Gas & Electric

If you are one of Pacific Gas & Electric's 5 million+ electricity customers, you can take advantage of two peak demand reduction programs: the SmartRate Add-On and the Time-of-Use Base Plan.  I started taking advantage of these last year and it saved me 30% on my summer power generation costs.

SmartRate is a 'critical peak pricing program' for reducing electricity demand during peak demand periods. You receive a 23% discount on your May to October electricity rate in exchange for accepting a 320% rate increase on hot summer days (9-15 days per year) that are predicted to seriously stress the grid's capabilities. These peak demand 'Smart Days' are announced ahead of time and you can be notified by text or email, so you can plan to curtail consumption as much as possible.

What if you switch and you end up paying more?  Your first year comes with free bill protection, so you'll only owe the lower amount.

On the Time-of-Use base plan, the price of energy changes depending on the time and the season:

From November to April, you receive an 18% discount on weekends and weekdays
except from 5-8PM on weekdays, when you receive a discount of 6%.

From May to October, you receive an 18% discount on weekends and weekdays
except from 10:00-21:00, when the price increases by 24%
and 13:00-19:00 when it increases by 85%.

If your schedule means that most of your electricity usage happens off-peak, you can save a lot of money with this plan!  You can even stack the Time-of-Use base plan with the SmartRate add-on for even more savings.  Everyone wins: you save money on electricity and the utility company saves money on expensive peak power generation and storage systems.

If you don't have PG&E, call your utility company and ask them if they offer alternative pricing plans for their residential customers.  These plans require the utility company to collect time-of-use data with a smart meter, which have only been rolled out in certain markets.


Complete Expense Tracking with Mint and OneReceipt

It's been almost exactly two years since I waxed poetically about Mint (mint.com) for expense tracking.  Mint connects to your credit card, bank, and investment accounts and automatically pulls in and—with decent accuracy—categorizes your transactions.  I still use Mint on a weekly basis and recommend it without reservation.

Expense Aggregation with Mint is Awesome

The Mint team has also added billpay, a free credit score, and budgeting tools, but the transaction aggregation is the killer application for me.  With a glance at the site or the Mint app (Android, iOS), I can check the cash in my checking account and verify it covers the total charges sitting on my credit cards.  I can skim my recent transactions for unexpected fees, errors, and easy-to-forget repeating subscription charges.  I can even download my entire transaction history, all the way back to January 2012 when I started using Mint, as a .csv file for further analysis in a spreadsheet or Python script.

Travel Back In Time

Mint keeps track of your account balances on the last day of each month and this data is also exportable as a .csv file, so it's easy to look back in time and generate a net worth graph:

Mint usage automatically makes you more aware of what's happening with your money, and this increased awareness inspired a reformation of my spending habits... and the transformation of this site into a full-fledged finance blog. 

OneReceipt Makes Mint Even Better

The one piece of information that Mint doesn't capture is what you actually bought in a given transaction.  This is sufficiently annoying to me that I anticipated it would annoy enough other people to rapidly precipitate a solution, so I've been sealing each month's receipts in a plastic bag and tossing them in a shoe box under my desk.

All of my receipts.  Since August 2011.

FINALLY, a startup called OneReceipt has solved this problem.  According to the timeline on the bottom of their homepage, they too have been thinking about this since 2005.

∴ I am not crazy.

OneReceipt roots through your inbox and scrapes electronic receipts, and their iOS app takes photos of paper receipts and uploads them to a server for optical character recognition (OCR) and processing.

Turn THIS...

...into THIS

It got all of the items right!  It sees discounts and tax!  It can even get the timestamp!

It gets better.  Install the OneReceipt Chrome Extension, fire up Mint, and:

And of course, since this is obviously my early birthday present, you can export all of your receipt information as a .pdf or .csv.

Oh hell yes.

Thanks OneReceipt!

Follow the team on Twitter or Facebook or Google+ or whatever.


Petition Your Employer for a Better 401(k)

It's apparently 401(k) season over here at AHS, which is interesting considering:
  1.  I don't personally have access to a 401(k) (Berkeley offers a 403(b) and a 457(b) instead, the latter of which I'm contributing to), and
  2. I haven't written a comprehensive article on 401(k) plans.
But wait! That's not entirely true.  The AHS Wiki has a very large page on 401(k)s.  It's not super-organized or 100% comprehensive, but it will probably answer your questions.

As a general note, the AHS Wiki has a lot of information on topics that I haven't yet published articles on.  I use it as a low-pressure drafting space to make my research immediately accessible to other people.  Some pages are just a link collection, while others are in an advanced state of development.  Feel free to create an account and contribute!

A Bad Plan Can Cost You A Lot

 Lately I've written about how states like CA and PA are divesting from overpriced, underperforming actively-managed mutual funds in their state pensions.  As I've repeated endlessly (and upon which John Bogle has written many books), index mutual funds are the best way to keep your fees down and get your fair share of financial market returns.

A 2014 study by Bloomberg classified some of the best and worst 401(k)s in the business, but they primarily focused on company matching, not cost.  Investment cost—the annual fee, or 'expense ratio', that you pay to hold a stock, plus any other management fees—is extremely important too: a high-priced 401(k) plan could cost you $100,000 over your lifetime.

What if your company only offers high-priced garbage?

Maybe your company isn't big enough to attract Jerry Schlichter's attention to start a lawsuit.  How can you talk to your boss about improving the retirement plan?

Campaigning For Improvement

The Bogleheads, an online forum for investing enthusiasts, have prepared an article addressing this topic.  The punchline is that, under the Employee Retirement Income Security Act (ERISA), your company has a legal obligation (called "fiduciary duty") to make retirement account decisions that benefit employees.  This duty includes "paying only reasonable expenses of administering the plan and investing its assets" and "diversifying plan investments".  If your plan lacks low-cost index fund options, it fails both of these criteria!

So: carefully document this noncompliance, draft a friendly letter to your company's fiduciary (listed in your 401(k) Summary Plan Document), express your concerns for employee welfare and the potential for corporate liability under ERISA (Mr. Schlichter...), quote some Warren Buffett, and you have a shot!

Have you or anyone you know ever tried this?  Were they successful?  I'd love to hear about it!


PA Governor Tips Hat to Index Funds

Pennsylvania Governor Tom Wolf announced his budget proposal today, which included reversing the nasty cuts inflicted to public education by former Governor Ed Rendell.

On the finance front, PA is joining the ranks of states instituting pension reforms:
We need a new approach - and we need to question the decisions that got us to where we are today.  For example, why are we paying Wall Street managers hundreds of millions of dollars to manage our pension fund?

That doesn't help our middle class, it doesn't help our seniors, and it needs to change.
Believe it or not, as I mentioned earlier: our state has been wasting hundreds of millions of taxpayer dollars on Wall Street managers to handle state pension accounts.

But studies have shown that simply investing this money in a safe, conservative account would produce a similar return over the long term while eliminating these excessive management fees.

So, here's what we are going to do:

We are going to stop excessive fees to Wall Street managers.
We're going to improve retirement security for state workers.

With these and other improvements, we are going to save taxpayers nearly 1.3 billion dollars over the next five years while creating savings of 10 billion dollars in the unfunded liability.
In September, the state of California announced it was pulling its public pension money out of hedge funds and replacing many actively-managed funds with index mutual funds to save the state money while improving returns for investors.

Paying high fees to active fund managers who consistently fail to beat the market is a loser's game.

Read my series on index investing to find out how you can hold the entire market, cut your fees to nothing, and get your fair share of market returns.  Contact me if you need help getting started!


Companies Sued for Offering Bad 401(k)s

An attorney, Jerome  'Jerry' J. Schlichter,  has begun suing companies that only offer high-cost investments in their 401(k) plans.

Wall Street Journal: Supreme Court Hears Case on 401(k) Plans

From the video:
"He did a lot of research into big company 401(k) plans and found... he had a lot of questions about, 'why are they picking these mutual funds versus these mutual funds? These mutual funds are higher cost than these... maybe there's a better way that we can do this.'  So he started more than a dozen lawsuits. ... The companies that he's reached settlements with have changed the mutual fund options in their plans, gone to lower-cost options, and agreed to disclose a lot more about what they're doing.

The broader implication is that fees are going to go down in plans. ... more index funds, more ETFs, that kind of thing."
He's arguing that only offering expensive investments is a breach of the plan manager's fiduciary duty as defined in the Employee Retirement Income Security Act (ERISA).  Go Jerry!

I've talked extensively about the importance of selecting low-cost investments.  The 401(k) is an important piece of the investing puzzle (after the IRA), but some 401(k)s lock you into lousy, expensive investments for the duration of your employment.  It's good to see that someone's doing something about this.