Saturday, June 7, 2014

Daybreak Triathlon 2014 - Race Report

My son took 2nd in his age group
To celebrate turning 40 this year, I completed my first Olympic-distance (1 mile swim, 20+ mile bike ride, and a 10k run) triathlon. It was my way to try and laugh aging in the face.

This is only my third triathlon, with the last two coming in Aug and Sept last year (2013). I didn't begin training for my first triathlon until July of last year, so I have been participating in the sport for less than 12 months. My first two triathlons were a Sprint-distance, which includes a half-mile swim, 12-mile bike ride, and a 5k run. Olympic-distance is basically twice the distance in all of the sports.

My 14-year-old son and I have been planning and training for this race for months. We started within 10 seconds of each other, but he beat me by about 5 minutes and took 2nd place in his age category. I couldn't be happier for him. It seems like he has really caught the "bug" for the sport.

Daybreak, Utah is a community in the southwest part of Salt Lake Valley. It is about a 30 minute drive from our home. The weather was fantastic. Not a cloud in the sky, about 60 degrees when we started the swim and about 75 degrees when we finished the run.
Setting up in the transition area

THE SWIM (36:10)
The pre-race meeting was located at the transition area, but the point-to-point swim required us to start at East Lake Beach of the Oquirrh Lake, a man-made lake which is the centerpiece of the Daybreak community. After the pre-race meeting, we walked to the start of the swim (about 10-15 minutes). We waited to put on our wetsuits until we arrived at the swim start, although most of the other participants already had their wetsuits on. The swimming wetsuits are amazing for buoyancy, but they are designed to fit tightly. Sometimes getting one on feels more like a wrestling match than anything else.

The water temperature was in the low 60s and it felt great. We put our swim caps on, then our goggles, and waited in line for our turn to start. Organized as a time-trial start, we waited for our individual start. The organizers were starting swimmers about every 3-4 seconds, so it went fast. My son went ahead of me. After they told him to go, I gave them my race bib number, they entered it into a handheld device, and then hollered "go". About 4 seconds is all the time that it took, and I had officially started my first Olympic-distance triathlon.

My start was less than stylish. I felt awkward with the shallow water start, and it took me several strokes to start to get into a rhythm. Open water swimming presents so many challenges, the most significant for me is the need to "sight". Without a black line on the bottom of a pool to follow in a perfectly straight line, swimmers can get off course pretty quickly. About every 10 strokes I would sneak a peak forward (as opposed to the side when I breath) as my head came out of the water so I could stay on course.
Oquirrh Lake - part of the swim course

The first quarter-mile was pretty uneventful, but then other swimmers started bumping into me. I made contact in some way with at least 10 other swimmers. Luckily each incident was minor, all part of the triathlon swim experience.

There were a few sections of the swim that were very shallow, shallow enough that I could reach down during my swim stroke and touch the bottom of the lake. These areas also had underwater plant growth, and a few of them rubbed along my face as I swam by. It was a little distracting, but the race directors warned us to be prepared for it.

At the half-way point I looked at my watch (which I had started at the beginning of the swim) and realized I was going a little slower than I wanted. I kicked it in gear and I ended up happy with my swim time. The water was clean and clear, allowing me to easily see my watch and everything else going on in the lake. Awesome!

The toughest part of the swim was at the end. With one last buoy to round we were headed straight into the sun. I do not have any tint on my goggles, and I could not see where the buoy was. I could, however, see the swimmers immediately in front of me, so I just followed them, hoping they would not lead me astray. Within a few minutes I could see the buoy. I made the last turn, and then gave an extra push to finish strong.

I swam as far as I could into the shore. Then I stood up and began running to the transition area. The other swimmers that exited the water at the same time did not seem to be in much of a hurry. I passed several. I pushed my goggles onto my forehead, then unzipped my wetsuit. By the time I reached the transition area I had pulled my arms out and had it pulled down to my waist. Then, to my surprise, there were two people offering to help remove wetsuits for any of the participants. I sat on the grass and one of them grabbed my suit at the waist and yanked it off with one hard tug while I held my legs in the air. Awesome. Probably saved me at least 30 seconds of trying to step out of the suit and slowly get it off once in the transition area.
Face painting for the kids

I quickly located my spot in the transition area, threw the wetsuit into its spot, and grabbed the towel to begin drying off my feet. My son was just leaving with his bike. He swims a little faster than me, so he had gained about a minute on me. I put my socks and bike shoes on, pulled on my bike jersey and sunglasses, strapped on my helmet, grabbed my bike, and trotted to the bike mount area. And I was off for the second of three events.

THE BIKE (1:10:53)
I mounted the bike, which I had strategically placed in the easiest gear before the race started. I started to spin to get my legs tuned up while I drank half of the water in my water bottle.

The bike course follows 118th south all the way to the entrance to Kennecott Mines. It was uphill most of the way. The sprint-distance bikers turned around there, but the Olympic-distance rode on for several more miles before turning around at the designated spot. Most of the ride from Kennecott to the turnaround was downhill, which was a welcome reprieve, but that meant I had to ride back up it. Once arriving back at Kennecott, I made up a lot of time on the rest of the downhill.
More face painting - that's a tiara

The best part of the bike was hearing the cheers of my family as I returned to the transition area. My wife took some great video clips, that I'll share later. During the ride, I made sure to make a positive comment to anyone that I passed or that passed me. "Good job" and "nice pace" seem to roll off the tongue naturally for me while breathing heavily. I did the same thing on the run.

Transitioning from the bike to the run was the most frustrating part of the race for me, and it was all my fault. With hundreds of bikes throughout the transition area, it is easy to get lost. I had carefully selected a landmark to help me find the row where I stashed all of my gear. It was a sponsor banner with a bunch of kids on it. What I did not realize, however, was that there were TWO of the exact same banners in the transition area, and I turned at the wrong one. I could not find my spot, and I was lost. I lost at least a minute figuring out where my gear was. My wife and kids were watching the whole thing. Luckily my son had come in about 2 minutes ahead of me. They saw where he parked his bike, and they were able to tell me where to go (since he and I set up next to each other).

Here is a video of how T2 went once I found my spot. I am pleased with how fast I got everything done, not allowing the frustration of getting lost to derail me at all. Please note that my 4-year-old daughter is the one repeating that she loves me, and then she is also the one that tells me that I am not winning. Funny.

THE RUN (1:05:09)
Here is the video of me just after I exit transition and begin the 10k. By the way, thanks to my wife for taking all these awesome video clips.

As I got started, I was tired and my legs felt heavy. I was questioning in my mind my ability to put together an entire 10k run. I was also racing against the time on my watch. I had set a goal to try to finish in 3 hours. As I began the run it was clear that I had a good shot to come in under 3 hours if I could keep a decent pace on the run. I kept an eye on my watch for the rest of the race, using it as motivation to keep pushing even though it was hot and I was tired. I definitely started to doubt myself and all the things I should have done in training but just didn't have time to accomplish.

Nonetheless, I pushed on, now about 2 hours into the race and with 2 of 3 events complete. The run course is a beautiful trail that goes around Oquirrh Lake. It is mostly flat, although there are some uphill and downhill sections over and under the bridges and to compensate for some grade changes around the lake. One time around the lake equals a 5k, so I was on a journey to run around the lake twice before crossing the finish line.

Here is me completing the first lap.

I had my eye out for the two aid stations the race directors told us about in the pre-race meeting. They were located at 1.5 and 3 miles, respectively. I had finished off my water bottle on the bike ride, but I knew I would need a lot more water to stay hydrated and hit my goal. As I came to each one during the first lap, I walked through them, drank two cups of water, and dumped a third one over my head. The water was very cold, and it felt amazingly refreshing when it hit my head and trickled down my face and neck. When your body and mind are suffering, sometimes the little things really make a huge difference. I continued this pattern of hydration during the second lap as well.

A little way into the second lap I started to feel a little weak. I remembered eating a banana for breakfast, but nothing else. I had eaten a bag of GU Chomps while on the bike ride (they are sticky, so I had stuck them to the post of my bike and ate them one by one during the ride). When I transitioned to the run, I put two GU gel packs in the back pocket of my jersey. I consumed them about mile 4. That helped.

Here is me crossing the finish line. You can hear my son barking commands like a drill sergeant. He ran alongside me to the finish.

My final time was just over 2 hours and 56 minutes, beating my goal by more than 3 minutes.

Lest you think my goal of three hours was going to break a world record, please note that the man who took 1st place in my age division had the best time of everyone in the entire race. He finished 50 minutes ahead of me. I was just happy to finish! You can see me above at 8th place out of 9 participants in my age bracket, but the participant number probably grew into the teens because this was printed right after I finished and there were still lots of people out on the course. I will post my final standings as well as the time breakdown for each of the three sports and two transitions when they become available, hopefully in a couple of days.

Here is a quick video of me and some of my kids just after finishing the race.

CONCLUSION (2:56:43)
I think this race was well organized, the course was awesome, and I will definitely do it again. I'm grateful for the lessons I learned and the support of my family to train for and then participate in this race.

Saturday, May 17, 2014

Saving for Retirement

This is part 9 of 14 of my series on the 14 ways I am changing my financial life in 2014.

[Author's Note: This article is not an offering of investment advice nor is it a guarantee of investment returns. It is merely a representation of how I choose to plan for and invest my personal retirement savings. Any assumptions or numbers used are for illustration purposes only and are not to be construed as investment advice.]

As part of my financial overhaul in 2014, which happens to be the year I turned 40, I am taking a hard look at planning and saving for retirement. Planning involves thinking about when I want to retire, my philosophy for the lifestyle I want when I retire, and how much money I will need in retirement. Saving for retirement involves which investment vehicles I will use, my overall investment strategy, and a disciplined commitment to stick to the plan.

One quick thought before I jump into this - making a plan for retirement is just that, a plan. Of course it is impossible to execute perfectly on a plan that has variables like investment returns and health that could cause the plan to derail. But knowing what to shoot for and what I can do every month to try to make it happen is empowering. I am convinced the results I achieve will far surpass the results of a reactive, apathetic approach to planning for what could be the most rewarding and successful part of my life. As Stephen R. Covey once said, we must live life in a crescendo.

Picking the day you will stop working decades before it will happen seems unrealistic to me. I would rather answer this question: at what age would I like to be financially able to retire? Many people are working into their late sixties and even seventies. Some do this because they have to, others because they want to. My goal is to be financially able to no longer need to earn an income at 60-years-old. I believe I will want to keep working beyond that point, primarily because I really enjoy a lot of things about work and because I like to have things to do. I don't "hang-out" well.

One of the main reasons to pick 60-years-old is because my wife and I have a goal to serve a mission together. We have actually set a date to accomplish this, hoping to leave about February of 2034. That is one month before I turn 60. And it would be nice if the pressure to provide an income was gone, allowing me an unrestricted focus to do what I love, focused on where and how I can have the most impact for good.

There are so many variables that go into knowing how much I will need when I retire, like:

  • How long will I live?
  • How long will my wife live?
  • What financial needs will my children have post-college that I should help with?
  • How much will I really want to spoil my grandchildren?
  • Will my health allow me to travel and do other adventurous things that cost money?
  • Will my health land in me in an expensive long-term care home?
  • Will I even live to see retirement?
  • Will Social Security still be available?
  • What tax bracket will I be in? What will be the state of our taxation system?
  • What will inflation be?
  • What return will my retirement investments earn?
Financial planners use a complicated, assumption-based model to print out pages and pages of details to show you how much you need to set aside for retirement. I respect the work these professionals do, but I know that the plans they create are only as valid as the assumptions they make, which are certain to be wrong on several fronts. 

So here is my simple approach. I assumed I would need to live on $50,000/year, or about $4,000/month (not including social security or anything else, just what I plan to contribute to my retirement). I hope I live until I am 100. Knowing that I want to be financially prepared for retirement at age 60, that means I need 40 years worth of $50,000/year. That totals $2,000,000. That's a lot of money. But it would only support a modest lifestyle until age 100, based on my calculation in today's dollars.

$2,000,000 is a HUGE number, yet it is very achievable with time and the right investment strategy and vehicles, not to mention a tremendous amount of discipline to make it happen. Could I retire on a lot less than that? Considering investment returns minus inflation, probably. In the spirit of simplicity, I am excluding the tax, inflation, and investment return assumptions so I can pick a number. When I hit the number, I know I can be done with worrying about having enough. And regardless of what unforeseen things happen, I know that I can make it through retirement with that. If I never reach the number, I'll know I likely need to earn money longer or hope that social security is still around to help supplement what I have.

To keep some confidentiality, I am not going to give you specifics about my situation from here forward. I have been saving for retirement since the very first job I had while I was in college. So, I am not starting with zero. I have actually done okay, primarily because some of the money has been invested for almost 20 years. That's a lot of time to grow. Starting as early as possible is often the most critical part of reaching retirement savings goals!

To figure out how much I need to save, I first need to figure out how much of the $2,000,000 I don't need to save. I start by using the Rule of 72 to determine how much my current retirement savings will become over the next 20 years when I turn 60. Simply, this rule states that I take my expected return on my investments, divide it into 72, and that is the number of years it will take for my money to double. If I assume an annual rate of return of 9%, 72 divided by 9 equals 8. That means my investment will double every 8 years. 

If I have $150,000 saved for retirement today, then based on the rule of 72 and my assumed rate of return it should double to $300,000 in 8 years. Then it will double again to $600,000 in another 8 years. The, with only 4 years left until age 60, it will increase 50%, or to a total balance of $900,000 when I turn 60.

Of course most investments do not move in a perfectly linear path like this, but over time the final outcome should be in the ballpark. So, of my $2 million goal in 20 years, almost half is taken care of, leaving me with a need to figure out how to save and get that savings to grow to $1.1 million in 20 years. 

Assuming no rate of growth, I would have to save $55,000 per year for the next 20 years to have a balance of $1.1 million. I don't know about you, but I do not have that much "discretionary" income every year to set aside. I have 7 kids, braces, house payment, and lots of other things that spread my budget pretty thin. So what happens if I consider the potential growth of 9% on all of the money I invest between now and retirement? How much would I have to put in then? Turns out I can cut the number more than in half.

Using a simple excel spreadsheet formula called PMT, I determine how much I would need to set aside each year to end up with $1.1 million in 20 years. I may need to write a separate blog post about how to use Excel to do this if you are interested, but here is a picture of how it looks in Excel: 

So I need to set aside $21,500 per year, or about $1,800 per month to hit my goal. That is still a lot of money. Remember, so far all of the numbers used have been for illustration. I have followed this process with my own numbers to determine the amount of money I need to save every month to shoot to be financially prepared for retirement at age 60. Will it work out perfectly? No, but it should get me into the ballpark of where I need to be.

Here is the main key for retirement savings - use low cost, tax deferred retirement accounts as much as possible. Tax deferred means that your earnings every year are not taxed. This includes Roth and Traditional IRAs, 401(k), 403(b), and other employer sponsored plans. I currently use my employer's 401(k) to defer 5% of my income into my account, and they match another 4%. Then I use a Roth IRA for myself and my wife to handle the rest. You will want to consult a tax expert to help you decide which vehicles are the best for you.

As I mentioned in another post about my 401(k) investment strategy, I am comfortable with quite a bit of risk exposure for my retirement funds, primarily because of the long time horizon - 20 years. As retirement gets closer, I will need to become a little more risk averse, although not so conservative that inflation erodes my hard-earned and saved principal. 

I have invested my 401(k) into all stock mutual funds representing a broadly diversified and strategically allocated portfolio. My Roth IRA is also 100% in stocks, using a managed and balanced portfolio at My wife's Roth IRA is slightly more conservative with a 90% stock 10% bond portfolio at Betterment. If you haven't learned about the Betterment philosophy and offering, I would encourage you to do so. It is the most aligned with my investment approach of any that I have found. You can get a $25 reward if you use this link to set-up an account: Betterment $25 Referral Reward.

With the right strategy, investment vehicles, and dollar amount in place, it is time to make it happen. I have a lot that I want to accomplish with my life once I turn 60, and I do not want money to hold me back. I want it to be a tool to enable my wife and I to enjoy our lives and accomplish much. I am, therefore, willing to make sacrifices today to make it happen. It requires discipline to set some "wants" aside and save the money for the future. It also requires regular reviews to re-work the numbers and make adjustments and changes as necessary.

Will it work out perfectly? Of course not. I may need to work longer if the market doesn't do as well as hoped or if I am unable to save enough money. I am, however, confident that my proactive approach will produce far greater results than a reactive, unplanned approach.

Start as early in life as possible. Pick a number. Select the right investment vehicles and strategies to make it happen. Execute. Review regularly, pivot, tweak, and re-commit. That's my retirement savings plan. What's yours?

Wednesday, April 30, 2014

An Investment Strategy for My 401(k)

This is part 8 of 14 of my series on the 14 ways I am changing my financial life in 2014.

[Author's Note: This article is not an offering of investment advice. It is merely a representation of how I choose to invest my personal 401(k) account. I will not give details on specific investment choices, focusing rather on principles I have used to guide my decisions.]

In my last post about creating your personal financial statement and using it to improve your net worth, I said the following:
"If free cash flow is how we grow our net worth, then we want as much of it as possible!"
Having extra money around and using it to pay down debt or saving/investing is not the only way to grow our net worth. Another effective way to grow net worth is to grow the assets we already have through a smart investment strategy. But I am guilty of not applying that simple principle, and I have changed in 2014. 

As I have gone through this financial overhaul this year, one glaring oversight was my lack of an investment strategy for my 401(k) funds. I have religiously deferred money from my paycheck into the plan, but I failed to put more than 2 minutes into where the money was invested. This may not seem like a big deal, but I have received formal education as well as gained several years of professional experience on how to analyze investment options and put a plan together to accomplish the best results. I an guilty of neglect with my own assets, specifically my 401(k) retirement funds.

In creating my investment strategy, I followed these steps:
  1. Determine allocation of stocks, bonds, and cash
  2. Decide how to diversify among the different asset classes
  3. Select the best mutual fund available for each asset class in my retirement plan
  4. Transfer my existing balances into the new mutual funds selected
  5. Adjust my ongoing deferrals into the new mutual funds
  6. Create a plan to re-balance my portfolio quarterly
Understanding the time horizon for the money invested helps to determine risk tolerance. I have at least 20 years until I retire. I just turned 40-years-old, and most retirement accounts are subject to an early withdrawal penalty if I take out money before I turn 59 1/2. I may work a lot longer than that, but I know I won't be touching this money for at least 20 years. 

Stocks are the most volatile, or are considered the most risky, yet research shows they also produce, on average, the highest returns over the long haul. Bonds generally have a lower return and are considered less risky. And cash is often FDIC insured, meaning it is not very volatile, or risky, yet promises very low return opportunities. 

I can expose myself to a lot of risk with my retirement funds. When lumped in with all of my assets, I have bonds and cash in other places, enough to create the right balance for my entire asset portfolio. So I decided to invest 100% of my 401(k) into the stock market.

Knowing that I am 100% into the stock market, I need to figure out the best way to allocate my 401(k) plan among the available asset classes. I decided to allocate and diversify as follows:
  • 25% - US Large Companies
  • 25% - Medium-Sized US Companies
  • 25% - Small US Companies
  • 25% - International Companies
I could buy one company's stock in each of these four asset classes with all of my 401(k) money, but that would represent putting all of my eggs in one basket. Even if I really believe in those four companies, sound investment strategy follows a disciplined plan to diversify among many different companies of various sizes spread across the globe within many different industries. Mutual funds provide a great vehicle to diversify among many different companies, even if I have just a little to invest. In total, my 401(k) plan has 27 investment choices. I read about all of them, looked at their historical performance, and reviewed their Morningstar rankings. I also determined which types of companies in which they invest. I found very good mutual funds for each of the asset classes mentioned above. In total, I am invested in 6 mutual funds in my 401(k), totaling 25% in each asset class.

With a clear investment strategy, I was excited to transfer out of my existing investment choices and into my new plan. As I did this, I was reminded how poorly I had done in selecting my mutual funds when I first enrolled. Not that the mutual funds individually were bad, but that collectively they did not represent a cohesive strategy for my 401(k) and other assets.

Since I have part of every paycheck deferred into the 401(k) plan, I updated my deferral allocation based on the 6 mutual funds I selected, ultimately representing 25% into each of the identified asset classes. This means all of my ongoing investments are aligned with my overall strategy.

Now that everything is perfectly in place, I just leave it alone, right? If only it was that easy! On the very first day after I had accomplished the transfers and changes to my ongoing investments, everything started to fall out of balance. Different asset classes go up and down at different times. This is one of the benefits of reduces overall volatility. Yet I found over time that my portfolio fell further and further out of balance. There are many schools of thought surrounding the need and timing for re-balancing a portfolio. I chose to do it quarterly. I created a simple spreadsheet that I complete at the end of each quarter, and it tells me the transfers I need to make to bring my portfolio balance back into alignment with my overall strategy. 

Regular re-balancing has an additional benefit. It forces me to buy low and sell high. If some mutual funds go up more than others, I will sell some of my shares in those funds and put that money in the under-performers, meaning I am buying low and selling high every quarter. Over time, this should help the overall returns of my portfolio. 

With 100% of my 401(k) in the stock market, I need to be ready for big spikes and dips in the value of my portfolio. The stock market is volatile, and I now own a broad piece of it. At times I may feel tempted to divert from my investment strategy, afraid that the market might go down or in an attempt to try and time certain moves in the market. But research shows emotional moves hurt overall portfolio performance. 

So how do I temper such temptations? It is really quite simple. I make sure I am putting some of my paycheck into the 401(k) every month. If the market is down, I know I am still winning because I bought low with the money I just put in. It helps me to have patience to wait for the rest of my portfolio to return to and eventually exceed where it once was.

Saturday, March 15, 2014

Personal Financial Statements

This is part 7 of 14 of my series on the 14 ways I am changing my financial life in 2014.

I love the topic of personal financial statements for two reasons. First, I don't think we look at them often enough. And, second, they are the best way to get a regular snapshot of our progress. And, if I were to add a third, it probably has something to do with the fact that I am a corporate finance geek and have prepared financial statements for hundreds of businesses. Shoot, I've even written and entire book on how to use business financial statements to improve performance and outcomes, Impact Your Business. So I promise in this post to keep it basic and focused on personal situations, not complex businesses.

The best way to start is by creating a balance sheet. Here is the easiest way to think of it. Everything that has a balance of money in it should be accounted for here. You start with all of your assets, then your debts/liabilities. The you subtract your debts from you assets to determine your net worth.

These are the most common categories for listing your assets:

  • Checking Accounts
  • Savings Accounts
  • CD Accounts
  • Stock, Bond, Mutual Fund Accounts (Non-Retirement)
  • Notes and Contracts Receivable (a fancy way to say that someone owes you money)
  • Cash Value of Life Insurance policies (for whole or universal life, hopefully you have term life insurance and this a zero balance! I'll write on that topic another time.)
  • Personal Property (jewelry, cars, RV, boat, toys, household items.
  • Retirement Accounts (IRAs, 401(k), 403(b), etc.)
  • Personal Residence
  • Other Real Estate Holdings
  • Other Assets
Add all of these up, and you will have the balance of all of your assets. Here is an example of what it might look like.

Sample Assets - Personal Financial Statement
When listing the value of your assets (and liabilities for that matter), it is important to note the value as of the date you are preparing the statement. Some of these values can change daily, like your checking account, while others are likely estimated values, like your home, that may stay static for a while.

These are the most common categories for listing your debts:
  • Credit Cards
  • Accounts Owed (like medical and other bills, especially any accounts that have slipped past their dues date)
  • Notes Payable (a fancy way for saying that you owe money to someone else)
  • Taxes Payable (any taxes that you owe but have not yet paid)
  • Real Estate mortgages
  • Other liabilities
Add all of these up, and you will have the total amount that you owe, also referred to as liabilities. Here is what it might look like:

Sample Liabilities - Personal Financial Statement
Personal finance is simple math, and calculating net worth is no different. Simply subtract your liabilities from your assets, and the remainder is your net worth. Here is what it looks like:

Sample Personal Financial Statement - Net Worth
It is important to look at your net worth every month to see which direction it is trending and to understand why it is going in that direction. Over time, we want our net worth to increase, and you really only have two levers you can pull to make that happen - increase assets, decrease debt. The more you do of both, the more your net worth will increase over time. The second part of the personal financial statement will help you determine how to best accomplish that.

Please don't let this title scare you. All we want to accomplish with this second part of your personal financial statement is determine how much extra cash you have at the end of every month/year to pay off debt (reduce liabilities) and/or save or invest (increase assets). As a rule of thumb, we want to try to have at least 20% of our income available for increasing our net worth. For purposes of this blog post, everything will be stated on a monthly basis.

These are the most common categories for listing your income:
  • Net paycheck or W-2 income
  • Earnings from self employment or businesses
  • Interest and investment income
  • Rent income (if you own rentals)
  • Other Income
Here is what this might look like:

Sample Income - Personal Financial Statement
Outflow refers to all of the money that leaves your accounts. Generally, a household has three types of outflows: needs, wants/luxuries, increase net worth with free cash flow. We delineate the needs and wants, then the remaining is what we can use to either pay down debt or save/invest. These are the most common categories for needs and wants:
  • Needs
    • Tithing/charitable donations
    • Rent/mortagage
    • Utilities
    • Groceries
    • Clothing
    • Transportation (necessary for work, etc.)
    • Insurance
    • Other needs
  • Wants/Luxuries
    • Shopping
    • Travel
    • Dining Out
    • Vacation
    • Gifts and presents
    • Other wants/luxuries
Here is what the accounting of needs and wants might look like:

Sample Outflow - Personal Financial Statement
Notice a couple of things in this example. First, the percentages listed to the right of the totals calculate the percentage of the inflow that is going to that category. From my perspective, the most desirable situation for this is 60% to needs, 20% to wants and luxuries, leaving 20% remaining. For people in dire financial situations with a lot of debt to pay off or other serious financial problems, a great deal of discipline is used to reduce the wants outflow to almost zero, leaving almost 40% of income per month to clean up whatever financial mess they are in. This is very hard to do and requires great sacrifice, but it can and has been done.

With money left after all of the main expenses, we need to decide what to do with it. Here is an example of the entire free cash flow statement indicating that the free cash is used to pay down debt. 

Free Cash Flow - Personal Financial Statement
Hopefully you can see that the purpose of the free cash flow statement is to help clarify how much money is available each month or year to make progress on your net worth, in the form of accelerating debt repayments or saving/investing.

It is imperative that we all make growing our net worth a significant priority in our lives. Why? Because no one else is taking responsibility for our financial future, and our net worth will determine how well we are prepared for the future, including all of our retirement years. Debt is stopping us from growing our net worth, so we need to focus intently on knocking that out. Then we need to put away as much money as possible for the future. We control the growth of our net worth by reducing debt and increasing assets. 

If free cash flow is how we grow our net worth, then we want as much of it as possible! We increase our free cash flow two ways: increase income and decrease our needs and wants outflows. It is very simple math, but very hard to exercise self-restraint and deferred gratification to slowly eliminate our debts and slowly watch our savings and retirement accounts grow. 

If you would like a copy of the template I used for this blog to use to calculate your net worth and free cash flow, just leave me a comment or message me and I can send it to you. It is in Microsoft Excel format, but I could also drop it into Google Docs if needed.

AFTERWORD: Two additional thoughts came since I posted this. First, the best way to view net worth is with several years worth of data so you can see the trends. When you are making it trend up, that's the satisfaction that you are working hard! Second, this post, when applied to business, actually is the foundation for a well-run and financially strong company.

Saturday, March 8, 2014

New Budgeting Software

This is part 6 of 14 of my series on the 14 ways I am changing my financial life in 2014.

My budget and my budgeting software weren't working. Well, technically they worked, but they left something to be desired in terms of helping me build and maintain the right habits to optimize how I used my money.

I have used for for the last several years. It is great for looking at historical expenses, and I love that it will connect to all my accounts, download their balances and transactions, and even allow me to categorize the expenses and build monthly budgets for each category. However, it lacked in a few areas.

If I ever spent more than I budgeted, the software gave me no consequence for my indiscretion. It didn't require me to make it up in the next month or pay it back in any other way. When the next month came, the system just rolled all the balances to zero and I started over with a clean slate. I realize I should be responsible to hold myself accountable, but it would have been nice if the software forced me to pay it back.

Another frustration with most budgeting software is how to handle expenses that come up less frequently than monthly. For example. I pay for my life insurance annually. The annual premium doesn't fit into my monthly budget, but it would if I could accrue 1/12th of it every month until it was due a year later. The most common alternative is to set up a separate savings account for each of these types of expenses, but that can add up to more than 10 different accounts. That's cumbersome.

Have you ever come to the end of the month, blown through your spending budget, and made excuses for all of the things you needed to buy just that month, just once? The challenge is that many of us make the same excuses pretty frequently, sometimes even monthly. That is not one-time, and it says that you either need to increase your expense budget or get your spending under control. Either way, most budgeting software struggles to help you target and improve in this area.

So my three pain points mentioned above had me convinced I needed a new solution. So I started looking for a new budgeting software and came across a company that I heard of before. In fact, I had met the company founder at a business event and remembered him telling me about his company. Most importantly, his software solved all the problems I mentioned and more. It is called You Need A Budget (use this link for a 10% discount on the software: You Need a Budget 10% discount).

I started using this software in January and I am hooked. It allows for zero-sum budget, where every dollar that comes in is allocated for a specific purpose. The You Need A Budget site calls it giving every dollar a job, which is the first of four rules the site uses to explain the methodology behind the software design. It is a digital format of the envelope budget, the old-school way of using cash for all purchases.

Here's how the envelope budget works with cash. You place each dollar you receive into one of several envelopes. You then need to carry those envelopes with you everywhere. When you spend money on groceries, then you remove money from the grocery envelope. When the envelope is empty, you know you can't spend any more. The same applies for each of your envelopes representing how you have categorized your spending.

Carrying around envelopes with cash is just not practical anymore, especially for those like me who would much rather live a paper-free life. "There's got to be an app for that" is how I approach old, archaic ways of doing things. You Need a Budget makes it easy to create digital envelopes with money that is in your bank account. Using your computer or smartphone you can quickly see how how much is in each envelope whenever needed. I always check the budget before I spend to make sure I have enough in the envelope. If I have enough, then I swipe my debit card. This is the modern way of applying the envelope budget principles, and it solves many of my aforementioned problems.

Unlike my old budgeting software, You Need A Budget makes me pay the price if I overspend on my monthly budget. It carries the deficit into the next month! And, if I under-spend, it carries the surplus into the next month. The makers of the budgeting software call this rolling with the punches.

I love how You Need A Budget handles the expenses that are highly variable each month, like my annual life insurance premium. I pay zero dollars for life insurance for 11 months, then in the 12 month I pay the entire amount. Called saving for a rainy day, I just put the monthly amount needed into the life insurance digital envelope. If I don't use the amount during the month, the balance rolls simply over to the next month (treated like a surplus in a budget), and sits there until I need it. I repeat this process each month during the year, saving 1/12th of the annual premium each month. Then, when the premium is due, I spend all of the accrued balance without a major gyration in that month's budget. Here is a list of what I use this for: Christmas, life insurance, summer vacation, winter vacation, medical, home repairs, home furnishings, school clothes, auto repairs, gym membership, and athletic contest fees (triathlons). This allows me to have a planned budget for all of these expenses even though the actual need to pay for them varies significantly from month-to-month. All the while, the cash is sitting in my checking account earning a small amount of interest.

Although not a complaint I mentioned above, the software solves another pet-peeve I have with other budgeting software - focusing only on expenses, neglecting the management of income. Rather than living paycheck to paycheck and hoping to cover your expenses, the software is designed to help you live on last month's income.

As money comes into your account, you can assign it to be used for next month's expenses. It may take a little time to build up the reserves to do it, but it I highly recommend you implement this discipline into you life. This process is amazingly helpful for knowing how much money you have to work with at the beginning of the month (especially helpful for those with variable incomes). You start every month knowing exactly how much you have to spend, and you can easily give every one of those dollars a job. It makes "nailing" your zero-sum budget pretty easy.

So think this through. That means that during the month of March, each time you get paid or money comes into your account you are ear-marking it for use in April. You are stockpiling cash all month, then using it the next month. That sounds like one month's worth of an emergency fund to me.

You Need A Budget has been a great fit for the way I want to manage my money. It even gives me an easy option for tracking money for the kids and the tithing they owe. It is offered as downloadable software with a great iPhone and Android app. It is very easy to use and designed to help you see and understand what you need to do with your money. If you want to check it out, use this link for a 10% discount: You Need A Budget 10% Off.

Friday, February 28, 2014

My Switch to an Online-Only Bank

This is part 5 of 14 of my series on the 14 ways I am changing my financial life in 2014.

Since I am making so many changes, I figured I would try out an online-only bank too. Read on for my logic, which one(s) I selected, and how my experience has been so far.

I am a big fan of innovating business models. Banking is an old industry that, in some respects, is still stuck in an old, archaic model. The rise of online-only banks, meaning they have no brick-and-mortar retail locations, is disrupting the industry for the better. All banks and credit unions have been working hard to keep up with online services, but they are still stuck in the old model. 

As I thought through the banking model, I asked myself this question: If I never set foot in a retail bank again, will I be better or worse for it. I had to answer that question with "better". I haven't been in my bank or credit union for years, except when I have had to set up a new account. And that process takes forever. My experience with setting up an account at online-only banks is not only several times faster, but I can do it from the comfort of my home.

Oh, and perhaps one of the best parts of online-only banks is that their business model is profitable enough that they have interest-bearing and no fee checking accounts along with the highest yielding savings accounts available.

I won't go into all of the details of the pros and cons of the different online-only banks, but here are a couple of websites that helped me do a lot of my research: 2014 Best Online Bank Reviews & Comparisons and Best Online BanksI couldn't limit myself to one, so I chose two.

The Capital One 360 checking account is the one I ended up liking the best. There are plenty of no-fee ATM options, one of the highest interest rates for checking and savings, and the best overall user interface. Without the ability to physically walk into the bank, I appreciate that they have spent a lot of time and effort in designing a very intuitive and value-added online experience.  

My experience with this new bank account has been near flawless. I have transferred all of our transactions to this checking account, I use this debit card almost exclusively for transactions, and I have set-up a couple of savings accounts as well.

If you decide you want to sign up for an account, use this link and it should get you a $50 bonus for signing up: $50 bonus Capital One 360 Checking (Full Disclosure: this link is a promotion for current customers to refer their friends. The friends get a $50 bonus, the referrer gets $20).

This was a close second, so I decided to set up a second checking account with a debit card here. The interest rates are slightly better, but the user-interface is not as good as Capital One 360. In addition, Ally Bank's overdraft fees are a little more onerous. Ultimately overdraft fees will likely never be an issue for me, but when I did my initial analysis that was probably more of a concern than it is now. As I mentioned in an earlier post about my emergency fund, I use this checking account and debit card for reimbursable expenses incurred while traveling for my employer. I will be setting up at least one savings account here as well.

I have not been disappointed in any way with using online-only banks. I am glad I made the switch, and I cannot see myself going back to a traditional bank for the regular, day-to-day transactions. I am now an advocate for online-only banks.

Wednesday, February 19, 2014

Emergency Fund

This is part 4 of 14 of my series on the 14 ways I am changing my financial life in 2014.

The ever-elusive emergency fund. At least it has been elusive for me. Each time I have built it up, I have ended up using it on something other than an emergency, forgetting each time to immediately re-build it. One time I used it to start a business. Another time I used it as a down payment on a house. All of my "indiscretions" directed the money toward a good financial cause, but I have to be honest and hold myself accountable: I never actually used it for an emergency, and I always failed to make my number priority building it back up again.

As one of my major changes for 2014, I am committing to only use my emergency fund for an emergency, although I am sure hoping I don't have one. So, hopefully I don't use my emergency fund for anything in 2014, although if I do, it will only be for an emergency. It will sit there, even if I start a business, buy a house, or do something else else that requires money. So how much is in my emergency fund and where is it saved? That's what I'll talk about for the rest of this post.

First I tried to think about my 'worst-case-scenario' emergency. It didn't take long to realize that losing my income would create the most devastating long-term financial challenge for me. I have insurance to financially cover just about any major catastrophe, and even disability insurance to replace my income if I was unable to work due to disability. But it doesn't replace all of it, and it takes several months after a disability before it even begins to consider making payments to me. No income is my worst-case scenario, yet there is really no realistic way to fully protect against that for life, primarily because I hope I have a lot of 'earning' years left.

Next, I went through all of my monthly outflows, or expenses, and determined which of then I would change without immediately changing my lifestyle. I would stop automatic saving/investing plans and other convenience, or non-need, items, but I kept things like music lessons and other activities for the kids. Again, I am concerned with not having to be disruptive to my lifestyle when calculating my emergency reserves. I call this amount my monthly "nut", a term commonly used in business to define the monthly amount of gross profit required to cover a company's current overhead, breaking-even without having to restructure the company.

If a drastic emergency occurred, it is likely I would make changes to my family's lifestyle and drop many of the expenses I initially kept in my monthly nut calculation. But I would rather my estimate be high, knowing that cutting them back in an emergency would only stretch out the timeline I could live on the reserves.

Next I need to figure out how many months worth of my monthly nut I should have in reserves. It really is overwhelming to contemplate, but we all need to go through the exercise to be financially responsible and accountable. Experts recommend somewhere between 3-12 months of living expenses. Since I am the sole bread-winner and my wife works at home raising our children (a non-cash producing job but, by far, more important than any of the work I do professionally), I knew we needed more than 3 months worth. This is just a simple diversification issue. If we both brought in half of the income, then if only one of us lost a job, we would at least still have the others' income until the job was replaced.

12 months feels like too much, at least for now, considering all the things going on in my life. When I am fully-employed I can usually earn a little more than our monthly "nut", meaning I usually have more savings I could dip into if needed, and, I would hope to be able to replenish the depleted reserves very quickly. In addition, I could likely find supplemental income opportunities (like pick up some consulting gigs) while seeking for the best full-time opportunity. So 12 months just didn't feel right. So, I settled in on 6 months. It's an easy calculation:

Monthly Nut X 6 Months = Emergency Fund

An emergency fund needs to possess three traits. First, liquidity, which means I can easily sell or transfer the money. An example of an illiquid investment would be stock in a small, privately-held company that is not likely to sell any time soon. That doesn't work for short-term emergency needs. Second, accessible, which refers to as short amount of time as possible to get the money into my checking account. And third, preservation of capital. This concept refers to the fact that this money does not need to grow much over time. It is much more important to make sure that it is in a safe place (like and FDIC insured savings account), not losing value, so that I don't take a loss if I need the money.

My 6-month emergency fund is comprised of a few different elements. First, I now have myself trained to live on last month's income. All of my income this month goes into a savings account at my online-only bank. It accumulates all month, then I transfer it into my checking account at the same bank at the beginning of the next month. Those are then the duns from which I pay all of my outflows and expenses during the next month, right out of that checking account. How is that part of my emergency fund? All of that incomes this month piles up throughout the month. In reality, it represents 1 month out of my 6 month emergency fund. It is paying future expenses, anyway. It is liquid, immediately available, and even earns a little bit of interest while it waits to be put to work the next month.

I have a separate savings account at my online-only bank called "6 months". This is where I keep most of the rest of my emergency fund. It is earning an interest rate of a little less than 1%/year right now. It just sits there and does nothing but earn interest. It is liquid and immediately accessible for an emergency.

Since I stopped using credit cards I have found travel for business a little more complicated. Now I have to use my own cash to support those expenses, and, in essence, I am in the hole until my company reimburses me. I have decided to use a small part of my emergency fund for this. Here's my logic.

My employer pays directly for flights and often hotels. I pay for all additional expenses incurred while traveling (like rental cars, meals, parking, etc.), and then I usually get reimbursed within a couple of weeks after I submit the expense report from my trip. I did not want these outflows (travel expenses) and inflows (reimbursement payments) disrupting the checking account that I drive my entire household budget through.

So, I set up a checking account with a different online-only bank and I use that account's debit card for all reimbursable expenses. I have put a small amount of my emergency fund, less than 1 month's allocation, into that account (which earns .25%/year interest) to cash flow the expenses until they are reimbursed. As a side note, I wanted to try out two online-only banks, so this worked out well for that purpose (I will be writing a review of them in a future post). The most important thing to note is that these funds are readily accessible for an emergency, and my employer is, at a maximum, only about 2-weeks out from reimbursing me for anything I've spent.

With all of this money tied up in low-interest but liquid and accessible accounts, I am a little stir-crazy. I would like to see my money have more of an opportunity to grow than is offered in low interest-rate savings and checking accounts offer (even though my online bank offers some of the best rates around). To be fair, in exchange for a low interest rate I am enjoying preservation of capital, an important element of an emergency fund. But I am willing to add a little more risk (meaning preservation of capital is not guaranteed) to part of my emergency fund in exchange for a little better potential return. I have taken 1/6th, or one month, of the emergency fund and put it into a portfolio primarily consisting of short term bonds with a very broad but small stake in the stock market.

I do not recommend this strategy for most. I have a lot of experience in the financial markets, and I know I can stomach the fluctuations. I am willing to take a small but very calculated risk to try and get a little better return. I am a finance geek and, if you want, can explain the beta of this small portfolio and the likelihood that it will or will not go down or up by certain percentages. I am very comfortable with it, so that is what I chose to do. The investment is liquid and accessible, the only risk is that it's value could drop at the very time I need it for an emergency. I've calculated the absolute worst-case scenario, and I'm comfortable with it. In terms of priority, I would consider this the very bottom of my emergency fund, meaning I will only access it if I have used all the other resources in my fund.

Many of you know I am Mormon. One of the tenets of my faith is be prepared for emergencies. As such, I have accumulated what amounts to about 1-year of food for my family. I have also stored other supplies that might be useful in case of an emergency. I consider this part of my emergency fund. If I have no income, I could likely avoid a grocery store for a while and be fine. I think it could amount to saving me as much as $500/month in expenses. If my situation is dire enough to necessitate the use of my emergency fund, then that savings could prove to be very important, helping to stretch out the effectiveness of those funds well beyond their intent. I take great comfort in knowing that.

The concept of an emergency fund is simple. However, it takes great focus and discipline to build it up and then only use it for its intended purpose. In 2014 I have committed to build, maintain, and use my emergency fund for merited emergencies only. I feel better knowing it is there. In fact, it gives me an interesting sense of freedom from the worries and concerns of immediate financial ruin being just one paycheck away. I would argue that this peace, if you will, empowers me to be better at what I do, unshackling my potential to be my best self.

If you have any thoughts about emergency funds and how you handle yours, I'd love to hear about them. Feel free to comment. Thanks for reading!

Saturday, February 15, 2014

Exterminate Debt, Be Free

This is part 3 of 14 of my series on the 14 ways I am changing my financial life in 2014.

Besides not using debt (specifically credit cards but also including any other forms of debt) in 2014 as I detailed when I described my one use for credit cards in 2014, I am also exterminating, or paying off, all forms of debt in my life. At the beginning of 2014, I was guilty of two forms of debt: credit card float and a 401(k) loan.

I stopped living on the credit card float that I described when I wrote: Credit Cards Erode Emergency Funds. It is dangerous and can create a subconscious reliance on credit.

401(k) LOAN
About 1.5 years ago I decided to use my 401(k) account as a bridge loan, spanning a 14 month gap between when I paid for a new house and I received a contractual lump-sum payment. In order to get my monthly payment as low as possible, I reasoned, I took a loan from my 401(k) to put toward my house, reducing the amount of the mortgage, and, hence, the monthly mortgage payment. Then, about a year later I would pay that loan off with funds that I knew I would receive. In the process I would pay myself interest of 4% on the loan I took from myself, or from my 401(k) funds. I wrote about why this was a bad decision here: I'll never borrow from my 401(k) again.

[Author's Note: If you're interested, I used a 15-year fixed mortgage to finance the home purchase. We bought when rates were very low, obtaining a 2.875% interest rate. And, even though that is just about the lowest interest rate imaginable, I am still in a hurry to get the mortgage paid off, but more on that in a future post.]

My background in business finance says that every entity has an optimal balance between debt and equity to finance itself. There are complex formulas to determine what this balance should be. I know, I had and entire MBA course on the subject. No matter how much empirical data and analysis was used as proof, one reality remained: companies without debt survived the economic downturn. Companies with leverage were much more at risk for insolvency, and some ultimately didn't survive. I like my chances with no debt, regardless of what traditional finance principles teach. Debt-free equals freedom. That's what I want and need.

Friday, February 14, 2014

Olympic Distance Triathlon

Last summer I trained for and participated in 2 Sprint distance triathlons. A sprint triathlon usually consists of a half-mile swim, 12-mile bike ride, and then a 5k run. My goal for this summer is an Olympic triathlon, which doubles all of those distances. 1-mile swim, 24-mile bike ride, and a 10k run, in that order.

I have some work to do to get ready. My winter training has not been nearly as intense as when I was preparing for the triathlons at the end of summer 2013. This last weekend I did a mile swim followed by a 5k run and felt like I could go no farther. I will need to add an entire bike ride an additional 5k run to complete a full Olympic distance race. Lots of work ahead, but it will be worth it.

I officially signed up for the Daybreak Triathlon June 7, 2014. This will be my first Olympic distance event. There will be many there to win. I plan to finish, and enjoy the training required to prepare. For the next four months I will be swimming 1-2 times/week and biking at least twice per week, sometimes as many as four times per week. I enjoy the bike the most of all the sports, so I tend to over-train in that sport. Plus, I plan to do a century ride sometime in summer 2014.

I am the most susceptible to injuries when I run, so I will keep running to once per week, maybe twice per week on very rare occasion, and I will very rarely run an entire 10k at one time. To make up for the under-training in the run, I usually over-train in the other two sports by swimming more than a mile and biking over 24 miles each session.

I'll drop occasional updates on my progress on the blog, and I'll share a race report after I complete my first Olympic distance triathlon.