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.

Thursday, February 6, 2014

Debt - Just Say No!

This is part 2 of 14 of my series on the 14 ways I am changing my financial life in 2014.

As just a part of a plan to change my financial life in 2014, I am not going to use debt for the entire year. No charges on a credit card. No new loans. I buy and pay for everything in cash, check, and debit card. Mostly debit card. No exceptions.

On December 30th, 2013 I cut up my credit cards and entered the new year with nothing but the cash in the bank and a debit card. I have to be honest, it made me very uncomfortable.

I don't like debt. I have counseled people to get out of debt, to avoid it like the plague. Although I have used debt at different times in my life, I feel confident saying that I have never used it excessively. I have had a car loan a couple of times in my life, and I have always paid those loans off years early. It has been 8 years since I had a car loan.

I did not use debt to get an education until my Master's degree, but I had that paid off before I was even done with school. I have owned four homes in my life, each one had a mortgage. Three of those mortgages were paid off when the homes sold, and I still live in the fourth one with a 15-year fixed mortgage. I am working to pay it off a lot sooner than 15 years.

I used my credit cards almost obsessively for every purchase in quest of the almighty rewards points, always paying the entire balance at the end of each month. And I did pretty well at that game, often earning $1,000 or more in rewards in a given year. Outside of potentially missing out on the "points", why did I feel so uncomfortable without credit cards?

I quickly realized that my use of the cards for years had subconsciously trained me to think of the cards as my back-up plan in case of an emergency. Without the cards, I felt exposed and vulnerable. With the cards, I somehow felt more secure. That is just foolishness.

If an emergency came and I was unable to pay off my balance at the end of the month (thankfully that never happened), then I would have to carry that balance into the next month and start paying interest. That is debt. I don't like debt and do everything I can to avoid it, yet I had somehow allowed my credit card limits to become a layer of my perceived financial security. While I am grateful this scenario has never happened to me, it is simple now to understand why the credit card companies allow a person like me, who has never paid them any fees or interest, to rack up my rewards points? So that when an emergency comes they have me right where they want me.

Do you know what the best emergency back up plan is? Cash. Hard, cold cash sitting in a savings account called Emergency Fund at the bank. It doesn't charge me interest if I need it, and it earns me interest if I don't (the exact opposite is true of debt). As I allowed myself to become more dependent on my credit as an emergency back-up plan, I also became more neglectful of my need to set money aside in savings for an emergency. That neglect resulted in a very weak emergency fund. I have reversed that, and I'll go into more detail on that process in a future post. A well-funded emergency account has helped me get even more comfortable with my financial situation than when I used credit cards. So, I became uncomfortable without credit cards and have since enjoyed even more security and comfort with a fully-funded emergency fund. More on that in a future post.

I started this journey with the hypothesis that using cash and a debit card would translate into less spending. I was hoping to save at least $1,000 per year, justifying the loss of rewards points opportunities afforded by my now exterminated credit cards. Although I will be able to validate or invalidate that hypothesis in another month or two, I'm glad I discovered this little subconscious reliance on debt and got rid of it. Hopefully I'll learn a lot more things like this from the rest of my journey in 2014. Thanks for reading!