State of the Union: 2014

I thought it would be good to create an annual State of the Union to remember what I did each year regarding my investments and why. This was a big year – the first year I really dove in and learned how to have my money make money of its own.

Through my reading of the books and articles I listed in my first post I’ve gone from knowing basically nothing about the stock market and calling my parent’s mutual fund manager to ask what 401K plan to enroll in to at least an intermediate level. And with that knowledge has come a sense of calm and an understanding that flexibility and knowledge are the only kind of security.

So I set out to tackle the first problem that was draining a lot of my long term growth: expense ratios. I wasn’t even aware that these varied as greatly as they do and what insane effect they can have on long term growth: equating to hundreds of thousands of dollars lost. Personal Capital, the free investment tracker, actually has an entire section that visually shows how much money is lost to expense ratios over the course of your life based on different percentages and how many working years that can add to your life. It was quite a wake up call.

So I had to tackle that and of course I discovered that the Fidelity Target Retirement fund that my parent’s mutual fund manager recommended had a high expense ratio. That makes sense since they’re adjusting the asset allocation for me. I set out to learn about the best funds Fidelity does have to offer and had a few criteria:

1. Low expense ratios
2. An index fund (since the market can’t be beat)
3. Full control over asset allocation (no Target Retirement funds)

I discovered a fund that tracks the S&P 500 and has an expense ratio of 0.05% – a vast improvement from the previous 0.78% and moved my money into that fund a few months ago (Note: After I made that exchange I noticed that Fidelity took $300 from my balance to account for the previous expense ratio. Yikes!). Next I tackled my other accounts, which are held by Vanguard – the best place for investments and where I will be placing my 401k as soon as I can roll it over when I leave this job. In this instance it wasn’t so much the expense ratio that was the problem (0.18%), but the fact that I had no control over the asset allocation because I also had my money in a Target Retirement fund. So I went out in search of the best index fund for my needs at the moment and discovered VTSAX: Vanguard Total Stock Market Index Fund with an expense ratio of 0.05% for Admiral Shares (which have a minimum of $10,000 compared to a $3,000 minimum for the Investor Shares equivalent with an expense ratio of 0.17%). So everything was set for my first year of real investing.

Except for one unexpected roadblock. Back in March I decided to contribute to my first IRA with Vanguard so I could max my contributions before the 2013 contribution year ended in April. So I contributed the maximum to the account – thinking I had opened a Roth IRA. About a month ago I discovered that that was unfortunately not the case. Despite clicking through the Vanguard link that said “Open an IRA Now” I had incorrectly opened a regular account. At the time I was devastated – thinking that this mistake had seriously set me back on my path to financial independence, but I later realized that there will be a lot of mistakes on this journey and I just need to learn from them. So I spoke to a very helpful Vanguard representative about how to fix the situation when the 2015 contributions became available on January 1 and left it at that.

Based on articles by the MadFientist and several other sources I also decided to contribute to a Traditional IRA in 2015 instead of another Roth because it will provide me with an additional $1,600 that would usually go to taxes that I can reinvest instead. Final numbers for the end of 2014 are below.

2014: Year 0

401K
Contributions (2011-2014): $22,533.99
Gains: $2,002.73

IRA
Contributions: $11,000
Gains: $456.63

Emergency Fund/Cash for Bills
$17,358.68