Comparing Your Heating Fuel Cost

In almost every place I know, using electricity from power company is the most expensive way to heat up an area.

British Thermal Unit (BTU) is the preferred unit of measurement for energy in USA. 1 BTU is "the amount of heat required to raise the temperature of one pound of water by one degree Fahrenheit". But 1 BTU is a small amount of energy. It is more convenient to use therm (THM), which is defined as 1 THM = 100,000 BTU.

When your gas furnace burns the gas, it generates heat. The amount of heat generated by burning a cubic foot (Ccf) of gas is always the same: 1031 BTU. How much dollar per THM is that? Your gas bill should include the dollar price of a THM which makes the calculation easy. My bill for December shows that the peak rate is $0.4604/THM.

With electric heaters, all heaters no matter their make and model and price and quality, always output heat at the rate of 3412 BTU/KWH (Kilo-Watt Hour). This means, if you have a 1000 Watt (1KW) heater running for an hour, it will release 3412 BTU in the form of heat.
Electricity bills usually show rates in dollar/KWH. Multiply that by 29.31 to get to dollar/THM. For example, my electricity bill is $0.06/KWH which calculates to $1.76/THM.

So, heating my house using natural gas is 3.8x cheaper than using electricity.

That said, I do use electric heater regularly. I use electric heater in my small, enclosed computer room. It does not take long to heat the room and it has pretty good insulation that the heat stays longer. When I'm planning to be in the computer room for a long time (more than an hour), I turn off the gas furnace that heats up the whole-house.

Smoking Your Retirement Fund Away

413 days of not smoking! Wooho. Don't worry, I'm not out to sway smokers to stop smoking. Because that's just about the most impossible thing to do; I know it because no one, not even my wife, could stop me. She could only help me stop, but I did the stopping myself. It's mind over matter, baabey!

The MSN Money article 'The high cost of smoking' describes various costs associated with smoking. I didn't find anything new there that I have not read before back while I was smoking. I am sure any smoker has heard them too.

But, a snippet from the article is particularly relevant to my final goal, the end goal of these mini-goals I set out before myself.

Sloan and his colleagues found that the effects of smoking on lifetime Social Security benefits were $1,519 for 24-year-old female smokers and $6,549 for 24-year-old male smokers. This is money paid into Social Security but never collected, because the beneficiary died prematurely of a smoking-related illness.

"You could be paying into Social Security year after year, and if you die at 66 because you're a smoker, it's money down the drain," says Sloan.

What a waste of efforts. After working so hard, enduring various unpleasantness in life, experiencing so many things, one dies without the chance to reap the benefits.

If I am socking away most of my income for retirement, living frugally, not tuning in to the gotta-have-the-latest-iPod insanity, then I better stay around long enough to enjoy it. Deferred enjoyment is possible only if you are still around to do the enjoying.

So, I'm planning to stay around long enough so I don't smoke my retirement fund away.

Free Money: ESPP

If your company is offering Employee Stock Purchase Plan (ESPP), then you have a money tree. It can give you an outrageous, guaranteed return rate.

ESPP is a plan where you pledge a percentage of your after-tax salary to be deducted every paycheck period during the plan's offering period ('offering' because you are offering your salary to the great company of yours).

At the end of the offering period, the collected money is used to buy the company's stocks at a discounted price. The discount rate is set in the plan and is applied to the lower stock price at the beginning and ending of the offering period. The exact stock pricing vary among plans; some use only the stock price at the end of the period.

My company's offerring period lasts for 3 months, and the lower stock price is purchased at a 5% discount. That means, if you sell it on the same day, it becomes a guaranteed rate of at least 5%. The exact return rate is calculated as thus:

Return rate
= profit/contribution
= (sale proceed - contribution) / contribution
= (purchased share * price per share - contribution) / contribution
= ((contribution / (price per share * (1 - discount rate))) * price per share) / contribution
= 1/(1 - discount rate) - 1

For me, it's 1/(1-.05) - 1 = 5.26%. Imagine that, my money grows 5.26% within 3 months! If you were to put the contribution in a savings account, you'd need to find one with an APY of 18.97% to get the same return rate!

So, let me just restate this amazing tidbit: 5% ESPP discount has the same return rate as a 18.97% APY savings account!

Look can really be deceiving. Without running the numbers, I wouldn't have figured out that the ho-hum, just so-so discount rate is actually an amazing 18.97% APY. Furthermore, had my company stopped being the cheap-ass they were and offered a 15% discount rate like many other companies, that would equal 71.22% APY with $500/month contribution.

I have a google spreadsheet that you can copy and start playing around with if you have a google account. To use it, simply replace the bolded fields with your numbers. The comparison is between putting $500/mo to the ESPP plan or letting it compound in a savings account. Unfortunately because I am not skilled in spreadsheet programming, you'd have to figure out the Savings Acount APR manually by trial-and-error: put in various figures until the difference is close to zero.

If you do not have a google account, you still can view it but not play with it.

The return rate calculated by the spreadsheet is actually the minimum guaranteed rate. If the the stock price is rising during the offering period, your return rate will be even higher to the point of being mind-boggling! If the stock price is dropping like a lead, you will still make the minimum guaranteed rate as long as your company is still traded.

But, but, surely, something this good must have a bunch of gotchas, right? Yes:

1. Some companies prevents this activity by putting a holding period: you have to wait for several days/weeks after the end of the offering period before you are allowed to sell the stocks.

This introduces risk. If the stock price drops before the holding period is over, you have to choose whether to keep the stocks or sell them at a loss. If you want to keep the stock, be mindful not to keep too many eggs in one basket because your income is already a big and significant egg in that basket (your job is an investment too!).

2. The reason some companies prevent this is because the spirit of ESPP is to help employees become owners. For me, this present an ethical dilemma, but I believe that I am not doing the company or any other employees any significant harm. Furthermore, if the company really wants to emphasize the ownership benefit, it can enforce a holding period. In the meantime, it is really a very low-hanging fruit that I simply has to take advantage of.

Anyway, don't be shy to share your numbers.

Mortgage After-Tax APR Comparison

Just want to drop a quick note that I have a spreadsheet that may help you answering that flummoxing question: should I invest or prepay.


Mortgage After-Tax APR Comparison

Invest or Pre-Pay the Mortgage?

Now I come to the point where many others have came upon: to invest or prepay my mortage?

Factoring in interest deduction, my after-tax mortgage interest rate is 3.7%. That's 3.7% guaranteed after-tax investment rate.

I need an investment vehicle that offers a before-interest-tax 5.16% APR to beat that. An equivalent investment vehicle delivering the same kind of rate guarantee is CD. Since CDs are usually advertised in APY with monthly compounding, the equivalent APY is 5.28%. A quick check at bankaholic.com showed only 7 banks offering CDs with higher APY.

The highest is offered by KeyDirect at 5.7% for 120 months (10 years). Unholy cow! But that is the longest CD term I've ever seen and is offered by a bank that I don't want to do business with any longer.

The next one is CountryWide's 5.45% but only for 3 months. Sounds good except that it needs a $10K initial deposit. But building up to $10K takes time and all the while the collected money will be sitting in lower-than-5.16%-APR accounts. The other CD offers do not seem good as well. So, it seems my mortgage gives me the highest guaranteed investment rate for now.






Let's go a riskier route: stock market (includes mutual funds). The tax rate for capital gain is 15%, so, the minimum APR to beat the mortgage's rate is 4.35%. If I invest in various low-expense-ratio index funds or ETFs like VFINX, VTI, SPY, my risk of not making more than 4.35% APR over the next 3-5 years (expecting a baby, see below) is very low. Investing it in stock market gives you the best bang for your time.

Yet, 36% of my income is already in stock market in the forms of 401k and IRA. For me putting extra money in the same basket just increases the risk needlessly. Furthermore, if we own the house, we will be less affected by a recession. That is the virtue of not putting all your eggs in one basket.

Readers who are still with me at this point would probably think, 'this guy is going to prepay'. I would have, but my better half, well, being better, she gives me a better argument.

'We are still young', she argued, 'what is youth without risk?'. We have no children yet. We can basically take as much risk as we want now. We can even be fools and go back to the 30K debt hole we came from without affecting any innocents.

I bought it. For better or worse, I liked the argument. Perhaps I'm just greedy instead of being young. For now, I am reducing the amount of pre-payment from $1500 to $1000/month. Over time, I'll move more and more to the stock market.

When our risk-equation changes, like when we have a baby, I will have to revisit this topic again.

UPDATE 2007-Dec-14: I have a spreadsheet that may help you answering that flummoxing question: should I invest or prepay.

Mortgage After-Tax APR Comparison Goggle spreadsheet.

----
Formulas:
Effective APR = APR * (1-TaxRate)
APR = Effective APR / (1-TaxRate)
APY = (1 + APR/q)^q - 1, where q is number of compounding per year.

Initial 2008 Budget

$150K/year pre-tax income.
$15.5K for wife's 401k
That leaves $134.5K pre-tax or $88.7K after-tax.
$15.5K for my Roth 401k
and
$10K for our Roth IRAs.

That gives us a monthly income of $5200 which needs to be deducted by
$2800 for all bills, including mortgage. The leftover is $2400.

We are planning to use $1000 to pre-pay the mortgage, and put the rest (after food expenses) in either stock market (if the condition is good) or in high-interest saving accounts.

This is a very simple on-the-napkin budgeting. If we manage to follow this, our net worth will increase by $62.4K by the end of 2008.

Choosing Benefits for 2008

It is that time of the year again. The last call for changing our 2008 Q1 benefit is coming soon.
We are not planning to change anything much. We are keeping the HMOs, the dentals, the 401ks (of course!), and basic life insurances.

One thing that shocked us was the increase for HMO plan: from $35 to $50 months! My company is offering HRA which costs only $15/month. It is tempting, but despite attending the seminar twice, I still do not understand it. May be I am too dense, but I am not going with HRA despite its cheaper cost until I understand it completely. Isn't there an advice not to invest in something you don't understand? Isn't the health plan a form of investment on our health?

Starting 2008, my company is offering Roth 401k. I'm switching from traditional 401k to Roth 401k. Unfortunately, my wife's company isn't offering one yet.

Net Worth Review: November 2007

I finally finished preparing my first for-public net worth and put it over at networthiq.com. I put a badge on the right side of the page.

So, we are worth $107K now, if zillow.com's valuation of our house is accurate. We started from $0 net worth 4 years ago. Before that, at one point, we were $30K in debt. Through discipline, a lot of hard work, luck and allowing for time to help us, we are now $138K away from that point. Phewww....

Now we need to do what took us 4 years in only 1.5 years. That's the goal!

I also discovered that the money we bring home has increased unnoticed over the years because of raises. We now actually bring home $8.9K/mo. It simply means more for us to save since our private lifestyle is still college-student like.

Income Distribution

I stumbled upon a gem comment today at getrichslowly.org.

# Baba Ghanoush Says:
June 1st, 2007 at 10:55 am

In our house, the discretionary savings gets allocated in this order:

1) 100% to emergency fund (until at least 3 months expenses)
2) 100% to pay off high-interest debt
3) 401K to point of company match
4) monthly contribution to a “big ticket fund”, which is savings for occasional large expenses, like semi-annual insurance, vacations, etc.
5) Roth IRA to contribution limit
6) 401K to contribution limit
7) remainder: 50% mortgage prepay and 50% taxable index fund

I have #1 and don't have #2. I am already doing #3. The line between #1 and #4 is fuzzy. I guess any liquid asset I have over 3 months expense is automatically part of #4. I'm already doing #5.

I have not been doing #6, instead I have been putting down money for mortgage prepayment. I am still forming a plan of what to do with the leftover after #5. That post at getrichslowly.org has a lot of insightful comments that I have not gone through completely yet.

While my goal is to increase my net worth by $100K in 1.5 years, I have to balance it with long-term interest too.

Poor Elderly Couple

While I was queuing up for casher in grocery store earlier today, I overheard the elderly couple in front of me arguing. They were arguing in Chinese about not being able to pay for the stuffs on their cart. They were talking in normal voice probably because they were confident that no one around could understand them. But, I understood Chinese well enough to snoop on them.

Basically, they were worried that they didn't have enough money to buy the stuffs in the cart. The total for their stuffs came to $23. The man slid his card (I couldn't tell if it was a credit or debit card) and the transaction was declined. He tried again and got declined again. They were forced to let go of some stuffs before the transaction was finally approved.

I didn't know where they got their money from, but seeing that they are from Asia, their children probably support them. It is customary in Asia for children to support their elderly parent.

I am from Asia likewise, and I will support my parents when they are ready to retire. I will do it without any hesitation not because I have to, but because I respect them and thankful for them slaving their prime years towards my well-being.

But, now I think I am the first generation along my family lineage to have the chance to not be a financial burden for my children, and I want to take that chance.

The Goal

I am a 30-ish software developer working in financial industry. I live and work in a suburb in a metropolitan.

I started to realize the importance of saving enough for retirement only since the last 6 months or so. It was a late awakening but an important one nonetheless.

My hope is to sock away $100K within 1.5 years through various (legal!) means. The $100K does not have to be in liquid form. Depending on economic conditions, I may distribute the money in house equity, stock, or other monetary mechanisms.

The difficulty of this undertaking is high, but not that high as my wife and I earn about $150K/year of gross combined income. We take home about $8K/mo. To get to $100K in 18 months, we'll have to save $5.5K/mo. Our mortgage is $2.5K/mo. 5.5+2.5 is $8K/mo, which is our monthly take home.

Fortunately, we can use some of the $5.5K/mo to live because we contribute 6% of our salary to 401k. That calculates to $9K/year or $750/month. Maintaining an expense of only $750/month for two people will be difficult. There are various expenses: car repair, house repair, emergencies, etc.

In shorts, I will need to learn and experiment with various expense-reducing and investment techniques to survive on less than $1K/month for 18 months.

One thing we have going on for us is we have no other debt beside our mortgage. And a pillow to fall on on some months, and lastly a piggy bank to break, if we really really have to.