Baby Steps: The Benefit of Micro Savings

A while ago, I read something that really struck me. It was about a comedian, W.C. Fields. He was a successful guy but he lived during the Great Depression and, it seems, was very concerned about saving a few bucks whenever he could. A sensible thing. And of course, one learned the hard way during the worst of economic times.

W.C. toured many cities and towns with his comedy act. And everywhere he went, he would open bank accounts to deposit his earnings, so that he always had some money handy no matter where he was. Of course, there was a problem after a while –  keeping track of where the cash was. It is said that when he died, there were a bunch of these accounts scattered around the country abandoned.

Well, that is what the Great Depression can do to you I suppose. You can never have enough cash stashed to feel a little secure.

If W.C. was alive today, he would surely love how easy it is to set up savings accounts and keep track of them – all from your phone!

I think I have that ‘insecurity’ gene that W.C. carried. I feel the constant need to put a few bucks away. For emergencies or unexpected needs.

So I have really embraced some of these financial services (banks, brokers, funds) that allow you to start with any amount (spare change really) to open an account, and then have regular deposits automatically pulled from your bank account – all before you see it or spend it.

I’m a firm believer it the ‘out of sight-out of mind’ approach to saving. So these services have allowed me to set up what I call little micro-accounts, all drawing little amounts out of my bank account, weekly and/or monthly. Its truly painless and I don’t even miss the money I’m saving because I set the amounts so low and it all happens automatically.

In short order, these accounts are now beginning to grow, which gives me further incentive to continue, or even increase these little savings programs.

The services I am using for this purpose are:

  •  Acorns. This service rounds-up to the next dollar all transaction activity in my bank account, and invests this spare change into a stock fund. So, for example, when I buy groceries and the charge is $34.75, Acorns with take $0.25 and move it into my little savings account with them. All they do is round up all my spending and save the difference for me automatically.
  •  Robinhood. This service allows me to buy stock with money I deposit in this account. No commissions too; except I suspect they take their cut from the price I pay for the stock. Anyway, I have been socking away a few dollars through an auto-deposit each week into this account, and buying stocks, even only 1 share, based on my own research, or impulse. I like this account because it allows me to but only a few shares so I can start to watch a stock before I really commit bigger amounts to it. And I must admit, I do occasional buy stocks on impulse, like LYFT after its IPO. Yikes! But at least the damage is contained.
  •  Marcus Bank (which is actually Goldman Sachs). This is a straight savings account which offers 2.15% (as of Aug. 1, 2019) interest on your savings. This is a better place to sock away my “safety net” money that leaving it in my regular bank with its 0.15% annual interest! So, again, I have set up a simply weekly automatic swept from my bank to this bank.

All three of these accounts were set up online and linked to my current bank account to pull out automatic investments and to draw back money should I need to. There are others, of course. These work for me for putting away money that might have been in a cookie jar in my kitchen. And, as I see the balances grow in these three accounts, it spurs me to add more and more savings to reach savings goals, which I continue to revise higher.

I think W.C. Fields would love this new way of saving.


IPO’s – San Francisco Real Estate and Southern California

In March, a New York Times article observed that the rush of announced IPO’s, logjammed to go public in the second quarter of 2019, might have a staggering effect on the price of homes in the San Francisco area, where many of these companies are based.

Hundreds of Billions of Dollars could be unleashed as various “unicorns” (defined as $1 Billion plus private value companies) suddenly become liquid public companies, giving their insiders, and the local economy, an enormous windfall. Such companies on the docket, or expected, include Uber, Airbnb, Lyft, Pinterest among others. As of this writing, Uber, Lyft and Pinterest have gone public, along with several others. But more unicorn listings are still to come.

The Times article posits a few interesting expectations of this new money on a rather small slice of real estate:

  • Estimated 10,000 instant millionaires created, many will be looking to spend on an upgrade to their homes and cars (Tesla anyone?);
  • Average home prices could exceed $5 million in San Francisco (and I’ll bet that’s for a “tear-down” because its about the location, not the home itself that is being purchased);

The article further notes that these millennial buyers prefer to stay in the city where upscale eateries and entertainment abounds; thus reducing the geography in which buyers will hunt for homes.

So, the simple rules of supply and demand will surely drive up prices. Keeping pressure on the home market are the sellers, some of whom are holding houses off the market until after the IPO money flows.

As it is now, the article points out, the rental market is already red hot. The current average rent for a one bed / one bath flat ranges from $3,550 – $3,690 a month. Its no wonder that renters use the common space in apartments as an additional room to rent, in order to hold down the cost somewhat for all occupants. Even closets might be rented out! So I have heard first hand.

Look to Southern California Next:

My observations about this comes from my southern California home, and occasional business trips to the Bay. The high rents and limited office spaces and homes available in the San Francisco-Silicon Valley market has some start-ups and tech firms looking to the south to relocate or add new offices. The west side of Los Angeles-Santa Monica area has their own “Silicon Beach” scene with businesses such as Snap, Hulu, Google/YouTube among others making their mark in this “relatively” more affordable market.

But it doesn’t stop there. Continuing south on the 405 and you arrive at Irvine and the “OC” (Orange County), also attracting unicorns like Houzz.

And not to be left out, San Diego, all the way down the 5 near the border,  is already home to Qualcomm and its own tech “halo” effect, plus a host of biopharma companies, and is now seeing some of the fleeing Silicon Valley businesses add new campuses in the area, like Apple, in order to find convenient and affordable (again, a relative term) housing for workers, new local engineer talent (Qualcomm poaching); and a better quality of life. The extra sunshine and milder climate is an added bonus.

Commuting from Southern Cal:

It was only a matter of time before Silicon Valley would have to look beyond the Bay for business expansion. After all, flight from San Diego to San Jose, the hub for Silicon Valley, is a little over an hour, which is not that bad.

I used to make that “commute”, in my case flying up to San Jose on Mondays ands returning to San Diego on Fridays. I would see a lot of regulars on the same flights doing the same.

The difference this time is that more offices are locating in the various southern California coastal communities, reducing the need for regular commuters like this. It will be interesting to see it unfold.


Dave Ramsey’s Money Rules

I came across Dave Ramsey’s basic plan for managing your money. I think he calls this the money pyramid and the idea is to move through this list by completing them in this order:

1.] Build a $1,000 emergency fund that is always accessible for life’s little unknown needs.

2.] Pay off your non-mortgage debts starting with the smallest loan balance first. Then, as each loan is paid off, apply the extra payment to the next loan to be paid so that you can accelerate its payoff.

3.] Build a savings fund equal to 3 to 6 month’s worth of living expenses as a buffer against job loss. The number of months your cushion fund should be is based on your job security, and whether there is more than one job-holder in the household.

4.] Save 15% for retirement. Roth IRA is best vehicle because it provides future tax-free withdrawals. The 401k up to the match level is next best.

5.] Save for your kids’ college. This one is huge and you should start as early as you can!

6.] Pay off your house ASAP.

7.] Give and save any excess equally.

Managing Money Guidelines: Home Budget

How much should you spend on a car? A home?

Here are some general guidelines experts have when you are planning a home budget as expressed as a % of your income:

15% – Transportation
25% – Life expenses
15% – Debt service
35% – Housing
10% – Savings

I would definitely plan to save 20% or more if you can swing it. Most folks retire without adequate savings; so save as much as you can.

What rate of withdrawals on retirement assets should be used in planning?

When you are planning what your retirement income stream will be, advisors typically recommend factoring in a 4% annual withdrawal rate from your retirement assets. Presumably, this will ensure you will not deplete your assets over your remaining years.

Recently however, advisors have been rethinking this axiom. Experts now see two conspiring factors that make a 2.8% withdrawal rate as more appropriate. Those factors are:

1.] A longer life expectancy means you and I could be spending, on average, 30 years in our golden years. Therefore, we need to stretch out our savings by withdrawing less of it each year.

2.] Future investment returns could be lower than assumptions used to arrive at the 4% withdrawal rate. If for no other reason, taxes are expected to be higher for everyone as the US and state governments pay down massive accumulated debts and expanding budgets. This will eat into after-tax returns.

In terms of estimated savings needed to generate $50,000 of annual income in retirement, you need:

> $1.8 million using the 2.8% savings withdrawal rate, or
> $1.25 million using the 4% rate

The difference is significant. The solution is, of course, work longer and defer retirement plans.