How to decide if you should buy a vacation home or a camper?

If you can't decide if you should buy a vacation home or a camper, here are two simple tests for you:

Test 1: Should you buy a vacation home?
1. For your vacation, do you like to go to the same location again and again?
2. Are you comfortable dealing with additional expenses and other issues coming with owning an additional property?


Test 2: Should I buy a camper?
1. For your vacation, do you prefer a camping atmosphere to a hotel or resort?
2. Are you comfortable dealing with additional issues like winterizing ect. coming with owning a camper?



If both of your answers were "no", that is easy. No is no.

If you answered both questions of either test with "yes", then you should buy.

The next question that follows is when to buy? The answer to that will depend on your financial situation and if you concider that purchase a luxury. So it might be now, in few years or it may be never.

Most will put a second home or a camper into the category of "luxury". That only means that for those people who categorize it as luxury, this specific way to spent their time off/travel is not a necessity.
But I am sure there are definitely people out there who will consider a camper a necessity. 
The really outdoorsy people who love camping atmosphere and can't imagine their life without it - for them a camper is a necessity. 
For those who need the comfort of a cozy place - a place they know is their own and nothing will change - a second home is a necessity. 


If you answered only one question with "yes" and another one with "no", then you really need to carefully weigh all positives against all negatives.



Vacation home

If your answer was not a clear "yes", than maybe it is another family member who is more interested in this purchase. 
After buying a second home, who will be the one who will end up taking care of it?
Decide carefully, because it may feel like a sacrifice later and may not bring you as much joy.

Let's take an example of a $200,000 vacation home. There may be additional expenses like management fees and maintenance fees, repairs, home owners insurance and property taxes. If you plan to rent it out, the income from renting out will help to keep the expenses down.

The approximate expenses just for this example would be approximately $800 per month in mortgage, probably $1,000 in property taxes, likely $600 in home insurance and maybe $200 in maintenance fees (or more, dependent on a particular property). That is approximately $13,600 in expenses per year.
This amount will take me and my family to Hawaii and on a Carribean cruise. And that every year until the mortgage is paid off. Maybe not in the last few years when the 30 years of inflation will make the travel costs higher. 
Of course after 30 yeras you will own the vacation home and I will own only memoris of different places I went to. At that time I will be 74 and I might not care to travel so far anymore and would prefer a vacation home close by. Then you might be ahead.  

If you are savvy and will carefully select a great property which you can rent out for the most of the year, that might be a very acceptable solution. You might have enough money for both, keeping the vacation home and travel to other places. 

The best here is to carefully evaluate all properties coming in question and see if you are comfortable with all aspects of it.  

  

Camper

Costs of a camper vary and will be very likely less than the costs of a vacation home. So it appears that making this decision may be easier. But a decision is still a decision.

The money in the above example will be enough for many exotic trips, but many times people that buy campers care less for exotic trips and have different preferences.


For someone who likes to stay in a hotel with the convenience of a breakfast prepared by someone else, a room cleaned every day by someone else, and a gym on site, a question about buying a camper will not likely arise.

But I might be wrong. 
I know two men who exercise quite regularly and can prepare their own breakfast. One of them already owns a camper and takes it to his shooting competitions which happen many times a year. Those competitions mostly happen in remote areas where hotels are not as good. He also likes hiking. He hiked the entire Appalachian trail. Owning a camper is very natural for him. 
My other friend also goes to the gym a lot (four times a week) and that really shows in size of his muscles. Now he is planning to buy a camper. He says he is quite outdoorsy. Will he enjoy the camper? 
Of course, it is not the availability of the gym on site that will decide that. More important - does he likes that kind of vacation? Many men do. 

At the end, it is only a question of priorities (as first) and finances (as second). 
If you can go trough you wishes, separate the priorities out and see if you  have enough money for that, any question will be easy to answer.         

How much money do I need in my emergency fund?

The definition of an emergency fund:
Money kept easily accessible to cover unexpected expenses.

This definition leads to following questions:

1. How much money to keep?
2. Where to keep it?
3. What kind of unexpected expenses are there? 


Most financial websites recommend to keep 3-6 month of expenses in your emergency fund. That might be the right number. I will do my own estimates and see if I will come to the same result.


I will start with How much money to keep and what kind of unexpected expenses are there?
  
Step 1
First step is to list all expenses. Then mark the fixed expenses and calculate them separately.

Below are two examples which I will use.

First example is for a single person, renting a place and having one car (not paid off yet).

The second example is for a family of 3, owning a house with mortgage and having 2 cars (not paid off yet).





























As you see in the table are the expenses calculated per month and per year (monthly expenses were multiplied by 12 and yearly expenses were divided by 12). 


Fixed expenses are highlighted orange and variable are highlighted blue.

At the bottom of the table are two lines with 3 month and 6 month expenses where only fixed expenses were multiplied by 3 or by 6. This would be the minimum to keep.

I feel that this number must be modified depending on your personal risks and this modification is in step 2 below.  

Step 2
Define what is your most costly risk to cover (not the most probable but the most costly).

1. Job loss - how easily is it replaceable, how likely will you need to relocate?
2. Medical/dental emergency - how much is covered by your insurance, what is the insurance deductible and have you saved enough for your HSA to cover the deductible?
3. Car repairs - don't know much about that but assume up to $3000.
4. Home repairs - probably up to $10,000 - something urgent like roof repair.
5. Unplanned travel - if relatives who live far away become sick or die.
6. Old parents which may need financial support


Increase your savings if:

1. If your most costly risk to cover is the loss of job which will not be easy to replace at the same location and you might need to move. You may need to ad few extra thousands  to the emergency fund ($5,000-10,000 or more, depending on your own estimates). 
In addition to moving to a new place you may have a mortgage which is not paid down yet which will be additional risk.  

2. If you are worried about your health. There may be a prolonged period of non-working which may lead to loss of job. Disability insurance usually have 90 days waiting time before they start paying.  

3. Increase my be needed during recession which may make job loss more likely.



Now about where to keep the money?

The money has to be easily accessible.

Most payments are done by credit card. Some are not.
It is good to keep the money where you can access it within few days.

Option 1:
Savings account
There are online high-yield savings accounts that give more interest than major banks savings accounts connected to checking accounts. For example Dollarsavingsdirect pays 1.5% interest compared to Wells Fargo savings account with 0.01%.


Option 2:
Money market accounts
Money market accounts have similar interest rates to the online savings accounts.


Option 3:
CD
There is a penalty of 3 months of interest if you withdraw money before the CD matures. But that will be not such a significant amount of money. On $25,000 at 1.5% interest that will be $93 will be the penalty for 3 which equals month interest. At 1.5 % your interest for the entire year will be $375 (before taxes). Savings account may have comparable interest rates and are more flexible.


You can check the rates for savings accounts, CDs and money market accounts on www.bankrate.com.


 Any other accounts are not flexible enough. This money can't be invested in stocks or bonds because you may have to sell at a loss, especially in times when market is down.


Start saving in a designated account. If you are married, remember to make it joined with your spouse and have it designated as WROS (with right of survival).

 

In support of indexing

I already wrote about that I support indexing. Here is more information about indexing compared to some other types of investments.  

There are many advantages of indexing. The two main advantages for me are the diversification and the inability to go down to $0 like individual stocks. Those two features appear to be protective in bear markets. 
Of course like individual stock the indexes will go down during depression times too but their come back up is more certain. For the broad market ETFs that works even better than for market sector ETFs.

Below I will compare index ETFs to actively managed ETFs and to individual stocks.



Tax efficiency
The turnover rate in index ETFs is lower compared to actively managed ETFs and that will generate fewer capital gains. If you buy individual stocks it will depend on how long you hold that stock. Different indexes have different turnover rates too and even using only index ETFs may still produce some capital gains.

Costs
First there are transaction costs (commissions) - costs of buying or selling stock or ETF. Those comissions are the same for both types of investments.  Some institutions offer commission free ETFs, for example E-Trade, Fidelity, Schwab and others offer commission free ETFs. I noticed that that is not always the best deal. Some ETFs will have large spreads (difference between sell and buy price) and if buying or selling a large position the amount you lose due to spread will be much more than a commission if you trade an ETF with a tight spread. The spread will be less important if the amount is small or if you plan to hold for a very long time.
 
Example:
A commission free ETF with a bid/ask spread of 10 cents. 
If you buy 500 shares, the "costs" due to spread will be $50. That means you will be immediately in minus of $50 and will have additional $50 to cover before getting into the green.

An ETF with a spread of 1 cent plus commissions.
If you buy 500 shares, the "costs" due to spread will be $5. The commissions are the additional $4-5. You will be down only $10.
The larger the position, the larger will be amount lost due to spread.
The worst case would be to trade ETFs or stocks with large spreads with a broker who charges high commissions.
The best case would be to trade a narrow spread ETFs or stocks with a low commission broker or to avoid commissions.  
And don't forget the expense ratio for ETFs. 

Stocks will have costs associated with every transaction of buying or selling but there is no cost for holding it.
The ETFs have expense ratios and in addition to the transaction costs there will be holding costs for the period you hold the ETF. The ratios vary a lot and can be very low, for example 0.03% for SCHB (broad market ETF from Schwab) and 9.26% for BIZD (VanEck Vectors BDC Income ETF). 

   
Diversification
The index ETFs do have built in diversification compared to a single stock.
The degree of the diversification depends on the structure of a particular ETF.
For example S&P500 is tracking 500 stocks and the Russel2000 is tracking 2000 stocks. Some of the stock held by different indexes overlap, for example the Apple stock is held by both SPY and QQQ.  
The stocks may be represented differently in an ETF. There equal weighted ETFs and non-equal weighted ETFs. You can read more about the difference between them in this post.
If you want to diversify your investments well with just stocks, that will definitely require more work.   


Risk control
Two risks are controlled with ETFs:
1. The risk of losing a substantial amount of money due to bankruptcy of a company which stock becomes worthless or falls very low and never recovers. The major indexes always recover even after severe depression.
2. Indexing eliminates the risk of mismanagement of your money by an active manager who can make wrong decisions which will lead your fund to underperform the market. Index tracking ETFs will market-perform.  
  

 

Equal weighted ETFs - better or worse than regular index ETFs?

What are equal weighted index finds?

If you look at the components of an index fund such as S&P500, you will see that large companies are overrepresented. Even if  the index holds 500 companies they are not equally represented.

As you see below in the example of SPY ETF which tracks S&P 500 index, Apple comprises 3.94% of the index and the top 10 holdings represent not 10% but 20% of the index.

Here is the example of QQQ and Apple stock is also overrepresented. The top 10 holdings represent over 50% of the ETF value.  

An equal weighted index fund will hold the same set of companies as its underlying index but the value amount be equally distributed.  

RSP is the equal weighted ETF corresponding to SPY and QQQE is the equal weighted ETF corresponding to QQQ.
The expense ratios are higher due to higher turnover and the equal weighted ETFs may produce more capital gain distributions. But are they a better choice for the investor?

The non-equal weighted indexes are weighted by market capitalization. When a stock is increasing in price, the index will increase the amount of stock that is going up. If the stock goes down, the index will decrease the amount of stock held. Basically it is going with the trend.

The equal weighted indexes are more contrarian. The funds are divided equally between all held stocks. If a stock goes down in price, it will be bought and the opposite with the rising in price stocks - they will be sold to keep the equal shares.
This will lead to sell high and buy low. It also may lead to keep buying a stock which will never get up again. But since one possible big loser stock will only be 1/500 the risk is contained. During the recession when the stock prices are going down, more stocks will be bought at a lower price  buy the equal weighted ETFs compared to the non-equal weighted ETFs.

How did their performance compared during last recession? 
 
Here is SPY compared to RSP. This timeframe includes year 2009.

However in the last 5 years there is no significant difference in performance.  
 

 

And in the last year the non-equal weighted SPY outperformed the equal weighted RSP.

 

Now let's compare QQQ and QQQE. In this case the non-weighted QQQ over performed the equal-weighted QQQE in the long term.

The same for the last 5 years:

And for the last year:

Whatever the explanation is, the results are variable.

The expense ratios for equal weighted ETFs are higher (SPY 0.09%, RSP 0.20%, QQQ 0.20% and QQQE 0.35%).

The main advantage of the equal weighted ETFs appears to be in the diversification - they are more diversified compared to the non-weighted ETFs.  

Happy 44!!!

My 44th birthday is this month. 
Starting this challenge 102 has an interesting effect on me. It is always present in the background (very faintly) and its presence made me make some new decisions. For example I started to take my health more seriously and recently I even started going to a gym.

My daughter asked me not to die at all. I couldn't promise that. She asked me why my granduncle is still alive. I said that it is because he is always happy. He also was married several times because his wifes just keep dying before him. They were all much younger then him, like 30 years younger: he is 100, she is 70...
Then my daughter asked me to stay happy always so that I will never die.  I just told her that I am working on that... I might have to take some happy pills like in the image above.

After death check list

This checklist should make the processes you have to deal with after someone's death easier.

It is helpful to keep all important information in one place and let the person close to you know where you keep it. It is helpful if the information is updated as soon as something changes.

Immediate steps:

1. Contact close family and friends.

2. Contact the deceased's treating physician.

3. Contact the deceased's lawyer.

4. If deceased had minor children or other dependents, arrange care for them.

5. Arrange care for pets if any.

6. Locate will/letter of instructions- this will go to the layer.

7. Locate durable power of attorney and/or living will.

8. Locate instructions for funeral or memorial services.

Next steps:

1. Order (at least 5) certified copies of death certificate. The copies can be requested by funeral director, local department of Health or State department of health or the Vital Statistics office of the state. Usually one copy is needed per each transfer of each major asset (like car, land or bank account) but also insurances or annuities. Ask if non-certified copy is sufficient or if a certified copy can be returned.

2. Locate list of all assets (bank accounts, insurance policies, annuities).

3. Locate deposit box.

Safety deposit box access after death in TN:

T.C.A. § 45-2-905 (c) Upon the death of the sole or last surviving lessee of a safe deposit box, access is authorized as follows: (1) The duly qualified executor or administrator of the lessee may have access to and remove contents from the safe deposit box, without inventory unless an inventory is required by the lessor or by court order; (2) In order to search for and remove any written instrument purporting to be the lessee's last will and testament, or any writing relating to a burial plot or burial instructions, or any writing purporting to be an insurance policy on the life of the lessee, a lessor shall permit a person named in a court order for that purpose, or if no order has been served upon the lessor, the lessee's spouse, parent, adult sibling or adult descendant, or a person named as executor in a copy of the lessee's purported will provided to the lessor, or any person with a right of access to the safe deposit box immediately prior to the death of the lessee, to open the safe deposit box with an officer or employee of the lessor and remove the documents. A record of items removed from the box by the person authorized entry shall be made by the lessor and the other person. If a purported will is found that does not name as executor the person conducting the will search with the lessor's representative, the lessor may make a copy thereof and mail or deliver it to the executor named therein, or to the court having jurisdiction of the decedent's estate according to the decedent's domicile as declared in the instrument; and (3) If an executor or administrator of the lessee's estate has not requested access to the contents within sixty (60) days following the lessee's death, the lessor may then permit access by the surviving spouse or any next-of-kin of the lessee for the purposes of inventory and the removal of contents. Prior to removal, an officer or employee of the lessor and the surviving spouse or next-of-kin of the lessee shall inventory the contents of the box and prepare a record thereof to be retained by the lessor.

4. Forward mail.

5. If you are the executor of the will, locate all documents necessary for paying the property taxes and the final tax return. The administrator of the estate must pay any taxes owed by the decedent at his death or owed by the estate until it closes.

If there anything going through probate, in TN the executor cannot represent himself in probate court and you will need help of probate attorney.

There is no time limit to file the will with the probate court in TN.
The executor:
1. Has responsibility to inventory the estate and provide that inventory to the probate court.
2. Pay all bills and obligation the estate has pending before distributing assets.
3. TN does not require all wills to be probated. The probate will be necessary for all assets which are solely in descendants name.
4. See link for probate exceptions (non-probable assets).

List of documents to locate:

Legal papers:

1. Will/Trust
2. Final instruction letter, durable power of attorney, living will
3. Pre-paid funeral contracts
4. Social security number or card
5. Birth certificates of all family members
6. Marriage certificates
7. Driver’s license / passport

Access information:

1. Passwords to computer, cell phone
2. Home security system information

Deeds and titles:

1. Real estate property deeds
2. Mortgage document
3. Any loans
7. Vehicle titles and registrations (car, RV)



Insurances:

1. Insurance policies (life, accidental, disability with death rider)
2. Employers or pension insurance
3. Health, dental, long term care insurance
4. Property insurance (car, home)
5. Annuities

If you can recover insurance documentation, use TN online recovery services


Financial accounts:

1. Bank accounts (checking, savings, CDs)
2. Investments/brokerage accounts
3. Retirement accounts (401k, IRAs)
4. Stock and bonds certificates if any
5. Credit card accounts


Keep monthly bank statements of all individual and joint accounts that show the account balance on the day of death which will be needed for the last individual and for the estate tax return.


Other accounts:

1. Professional memberships
2. Magazine and other subscriptions
3. Social media accounts
4. Honorable discharge papers for a veteran and/or VA claim number (if veteran)




Organizational:

1. List of all recurring bills with due dates and how they are usually paid
 (electricity, heating, water, garbage, lawn care, cable, Netflix, house alarm, cell phone, land line, car and home insurance)
2. Loans (mortgage, car loans)
3. All credit cards
4. Cancel services which are no longer needed (cell phone)

Executor:
 - Keep detailed records of all bills paid
 - Contact probate attorney. With the will and the executor named, the attorney will have the document admitted to the probate court. If you have probatable assets  inventory of all assets will be made and will be filed with the probate court.

Cancel:

1. Cancel no longer needed services (cell phone ect)
2. Credit and debit cards (after cancelling services or  transferring recurring bills to your accounts).
3. Driver’s licence
4. Email and social media accounts

Change:

1. I the deceased was beneficiary on your bank and investment accounts, insurances, annuities and retirement accounts (401k, IRAs) change the beneficiary.
2. Change utility bills in your name (if applicable).

  

Who do you need to notify and ask for death or survivor benefits if available:

When calling keep records of date called and requirements.

1. Social security administration (notify of death and apply for death or survivor benefits. The payment of the month of the death must be returned, contact the bank to return that payment. That will be prorated to reflect only the lived portion of the month. There is also a one-time payment of $255 to the survivor).

2. Medicare (If deceased received Medicare the Social Security office will notify it. If the deceased was enrolled in Medicare Prescription Drug Coverage (Part D), Medicare Advantage plan or had a Medigap policy, contact these plans to cancel). Medicare in TN: (TennCare) estate recovery - submit form (money used by TennCare for care you received while you were living will be recovered from the estate with Estate Recovery program).

3. Health insurance (make sure the coverage of the dependents continues).

4. All insurance companies (car, life, long term care, disability... ask for any unused premium to be returned to you).

5. Employer (ask for any possible death benefits or pensions and ask if pension benefit includes survivor payments).

6. If the death was result of criminal act, contact  Criminal Injuries Compensation Program which helps with costs of medical services, loss of earnings, burial costs, and other financial losses incurred as a direct result of personal injuries sustained by a criminal offense. Eligible crimes generally include, but are not limited to, homicide, aggravated assault, sexual assault, robbery by force, and drunk driving.

7.  Credit Bureaus (Equifax, Experian and Transunion) - no benefits, just notify

  

Estate Taxes:

Federal government imposes an estate tax on the value of estate property (except trusts). Starting in 2016 the IRS requires those with estates exceeding $5.45 million in assets to pay estate taxes.

Starting in 2016 there is no state estate/inheritance tax in TN.

What is the difference between estate tax and inheritance tax?

The estate tax is assessed before the assets are given to the beneficiary or beneficiaries. It is paid from the estate money before the estate is distributed to the beneficiaries.

As of 2018 the combined gross assets have to exceed $5.6 million. 
The inheritance tax applies after the assets have been inherited. It is paid from the inherited money and each beneficiary pays it on the received amount.

Not all states have inheritance tax. TN has none.  



Based on that information, taxes are not going to be the reason for me to set up a trust if the estate value is less than $5.6 million (in 2018).
However making the most of your assets are non-probatable is not a way to avoid estate tax. For example, half of the amount in a WROS account will be inherited money which can trigger estate tax if the amount is high enough.