Author Topic: Reader Case Study: It's catch-up time  (Read 12140 times)

cschx

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Reader Case Study: It's catch-up time
« on: March 06, 2015, 02:09:52 PM »
Greetings Mustachians,

I thought I'd post my case since I suspect it may be a little unusual, and possibly of interest to the community. Also I could use some advice.

The short version: I'm a habitually frugal mega-saver who's been socking away 60-70% of my take home pay every month for the past 7 years. However, I didn't get the memo regarding retirement accounts until just recently. Consequently I have about $230k sitting in cash and nothing saved in tax-deferred accounts. (It's OK if you hate me, I kind of hate myself.)

I'm now 35 and I intend to retire by 40. I would like to catch up as quickly as possible by putting the maximum into tax-deferred accounts as fast as the IRS will allow.

My question: Can I still do this in five years? I think it's possible: If I max out my contributions, in five years I could have about $300k in retirement accounts and another $300k in regular investments. I'm pretty sure that's all I need to retire. But I'd like to hear your opinion, as well as any strategies you can share for making it happen faster.

I make a relatively low salary (about $56k), so if I can find a way to contribute the IRC 415(c) maximum of $53k that will leave me without sufficient income to meet even my current modest expenses. Given the opportunity cost of not contributing, I think it makes sense to meet expenses out of savings for a few years. I could probably make this work just by spending the interest on my current savings, even if I kept them in their present account earning 1%. But after getting belatedly hip to the whole FI thing, I now realize this extra savings ought to be in a taxable investment account that allows me to meet my expenses out of dividends and distributions or some such source of cash flow. Using savings to meet my expenses might also have a salutary effect on my spending habits (I'm pretty casual about spending now and don't track it closely, in part because I save so much: Typically $2-2.5k out of a monthly take home of $3,400, or between 59% and 73%). This would be quite a different financial pipeline than what I'm used to, and I'd love to hear any tips people might have for making it work.

My full case study is below for those who are interested, but any small piece of advice would be appreciated. Happy to post additional details if desired.

--

Income:
  Salary: $55,794 / year
  Interest: about $2,080 / year
  Total Income: $57,874 / year

Current Expenses:
  Rent: $830 / month (includes all utilities) = $9,960 / year
  Food: $100 / month = $1,200 / year
  Health insurance: $50 / month = $600 / year
  Gold custody fees: $4 / month = $48 / year
  Miscellaneous shit I don't really need: about $60 / month (on average; varies a lot) = $720 / year
  Total Current Expenses: $1,044 / month = $12,528 / year

Expected ER expenses:
  First-time purchase or construction of a home. I own no property and currently rent a small apartment. I don't wish to stay in my area after ER. There is a wide range of possibilities as to cost, but I'm a fan of bargains and cash purchases... maybe a small fixer-upper for ~$50k.
  Total Expected ER Expenses: $50,000

Assets:
  $208,774 in cold, hard cash in a bank account earning 1% interest.
  $24,053 worth of gold bullion, in a vault, in Zurich.
  About $1,522 worth of shitty investments I should sell ASAP.
  Total Assets: $234,349

Liabilities:
  None. I have no debt. Also no credit history. Can you tell I hate financial stuff?
  Total Liabilities: $0

I work for a university. My employer offers the following tax-deferred savings plans:
  1. Basic retirement plan: This is a 401(a) + 403(b) plan. Employee contributes 5% and receives a 10% match. At my present salary this is $8,369 / year. (No, I have not been taking advantage of this for the past 7 years... sigh.)
  2. Supplemental 403(b) SRA: Max contribution of $18k minus the 5% elective deferral from the basic plan = $15,210. Also available as a Roth.
  3. Supplemental 457(b) SRA: Employee only, with a max contribution of $18k per year. Also available as a Roth.
  Total available contributions through employer: $41,600 / year

I can also open a traditional or Roth IRA and contribute the limit of $5,500, but that only gets me up to $47,100 which is still $5,900 below the federal limit of $53k.

Specific Questions:
  (1) Can I still retire in five years?
  (2) Is my tentative plan a reasonable one? (See below.)
  (3) Assuming it's a good plan, what is the best way to max out my retirement contributions for the next few years given the options offered by my employer? What additional savings options can I use to reach the IRC 415(c) limit of $53k?

Short-term plan:
  * Max out employer-sponsored retirement contributions.
  * Open additional retirement accounts in order to contribute the federal maximum, if possible.
  * Liquidate shitty investments.
  * Move current savings into more productive investments.
  * Set up a (mostly automated) financial pipeline that will allow me to meet expenses using cash flow from after-tax investments.
  * Continue living frugally.
  * Try not to be such a dumbass in the future.
« Last Edit: March 09, 2015, 10:01:14 AM by cschx »

RexualChocolate

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Re: Reader Case Study: It's catch-up time
« Reply #1 on: March 06, 2015, 02:17:33 PM »
Gotta put that cash to work. Liquidate the gold, its commodity speculation and not an investment. If you want some as some sort of 'doomsday hedge' then keep 5-10k worth on your person, it does you no good in a bank vault. Just FYI- its not even actually there at only 4$/month, you just have a claim on a pool of gold that is.

Others can do the math on early retirement, but if you are literally spending 12k/year, you need approximately 50k(house expense) + 12k*25, 300k. You can retire in three years if you invest anything.

RexualChocolate

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Re: Reader Case Study: It's catch-up time
« Reply #2 on: March 06, 2015, 02:19:36 PM »
Also this website is more applicable at your spending level:

www.earlyretirementextreme.com


lavidaportland

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Re: Reader Case Study: It's catch-up time
« Reply #3 on: March 06, 2015, 02:44:32 PM »
I think you absolutely can retire in five years! Rough back-of-the-napkin figures...

Assuming your take-home income is about $45k/year, and you continue spending 12k/year, that means you'll save $165k over the next five years. Add that to the $235k that you already have and that's an even $400k. Subtract $50k for your ER expense, and you're left with a $350k 'stash.

Now, assuming you continue spending $12k/year after retirement, to achieve a 4% Safe Withdrawal Rate you'll only need $300k saved (that's 25x your annual expenses). That's well within the $350k nest egg you'll have in five years!

A couple of things put you in an even better position:
1. If you buy your home when you retire your monthly expenses will likely be less (i.e. no rent or mortgage payment... just taxes and insurance).
2. If you move your nest egg into actual investments you'll probably have more than $350k when you retire (depending on the market, of course).
3. You'll probably receive Social Security payments when you turn 65 years old.
4. You might still find that you want to work part time now and then on your own terms doing something you enjoy. That's just icing on the cake.

Read http://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/ if you haven't already.

My suggestions:
1. Sell the gold and put it in actual investments (e.g. a Vanguard index fund)
2. Max out your 401k contributions
3. Make sure you keep your frugal lifestyle
« Last Edit: March 06, 2015, 02:48:12 PM by solofist »

dandarc

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Re: Reader Case Study: It's catch-up time
« Reply #4 on: March 06, 2015, 02:52:42 PM »
FSA money is use-it-or-lose-it - not seeing medical expenses listed, so how would you spend this?

johnny847

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Re: Reader Case Study: It's catch-up time
« Reply #5 on: March 06, 2015, 02:58:35 PM »
FSA money is use-it-or-lose-it - not seeing medical expenses listed, so how would you spend this?

Well technically FSA plans can allow for a $500 carryover. But yea OP is planning on $2500 in contributions, which doesn't make sense without medical expenses

Personal Finance Habits

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Re: Reader Case Study: It's catch-up time
« Reply #6 on: March 06, 2015, 03:06:55 PM »
I'm in awe of those expenses. $3.33 per day on average spent on food? Do you just never go out, order in, or drink alcohol of any kind? Wow.

If you're only spending $12/k per year, you can almost retire now. Almost, but not quite. I would take all of your assets and put them into VTI. And contribute the max to your 401k.

It sucks that you haven't been putting any of that cash to work up until this point, but you're only 35 and your insane spending level almost makes it a moot point.

cschx

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Re: Reader Case Study: It's catch-up time
« Reply #7 on: March 06, 2015, 03:09:43 PM »
Yeah, sorry - I was confusing the health FSA with HSA which I've just been reading about over at madFIentist. I guess I should take that out since it's not relevant.

I've been reading ERE too, but decided to post here since y'all are so helpful.

I cook from scratch. It's fun. Did I mention dumpster diving?

humbleMouse

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Re: Reader Case Study: It's catch-up time
« Reply #8 on: March 06, 2015, 03:54:50 PM »
I would like to hear more about your lifestyle, please elaborate

rpr

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Re: Reader Case Study: It's catch-up time
« Reply #9 on: March 06, 2015, 04:04:45 PM »

I work for a university. My employer offers the following tax-deferred savings plans:
  1. Basic retirement plan: This is a 401(a) + 403(b) plan. Employee contributes 5% and receives a 10% match. At my present salary this is $8,369 / year. (No, I have not been taking advantage of this for the past 7 years... sigh.)
  2. Supplemental 403(b) SRA: Max contribution of $18k minus the 5% elective deferral from the basic plan = $15,210. Also available as a Roth.
  3. Supplemental 457(b) SRA: Employee only, with a max contribution of $18k per year. Also available as a Roth.
  Total available contributions through employer: $41,600 / year

I can also open a traditional or Roth IRA and contribute the limit of $5,500, but that only gets me up to $47,100 which is still $5,900 below the federal limit of $53k.

Specific Questions:
  (1) Can I still retire in five years?
  (2) Is my tentative plan a reasonable one? (See below.)
  (3) Assuming it's is a good plan, what is the best way to max out my retirement contributions for the next few years given the options offered by my employer? What additional savings options can I use to reach the IRC 415(c) limit of $53k?



I'm neither an accountant nor a tax expert but I was under the impression that the 415c limit does NOT include IRAs.

Also, there are other deductions like FICA  and medical insurance premiums that come first.

If you are maxing out a 403b + 457b + IRA, then you are doing great.

dandarc

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Re: Reader Case Study: It's catch-up time
« Reply #10 on: March 06, 2015, 04:19:01 PM »

I work for a university. My employer offers the following tax-deferred savings plans:
  1. Basic retirement plan: This is a 401(a) + 403(b) plan. Employee contributes 5% and receives a 10% match. At my present salary this is $8,369 / year. (No, I have not been taking advantage of this for the past 7 years... sigh.)
  2. Supplemental 403(b) SRA: Max contribution of $18k minus the 5% elective deferral from the basic plan = $15,210. Also available as a Roth.
  3. Supplemental 457(b) SRA: Employee only, with a max contribution of $18k per year. Also available as a Roth.
  Total available contributions through employer: $41,600 / year

I can also open a traditional or Roth IRA and contribute the limit of $5,500, but that only gets me up to $47,100 which is still $5,900 below the federal limit of $53k.

Specific Questions:
  (1) Can I still retire in five years?
  (2) Is my tentative plan a reasonable one? (See below.)
  (3) Assuming it's is a good plan, what is the best way to max out my retirement contributions for the next few years given the options offered by my employer? What additional savings options can I use to reach the IRC 415(c) limit of $53k?



I'm neither an accountant nor a tax expert but I was under the impression that the 415c limit does NOT include IRAs.

Also, there are other deductions like FICA  and medical insurance premiums that come first.

If you are maxing out a 403b + 457b + IRA, then you are doing great.
You are correct on the 415c limit - that is kind of an arbitrary goal for OP.  If OP was higher compensated, and the university more generous, max of everything would be:

53K (401A/403B combined limit) + 18K (457) + 5500 (IRA).  Or $76,500.

Kinda-sorta on FICA / medical - the IRS limit on matching is 25% of gross.  So they don't affect that.  What could come into play is not having enough of a paycheck to do 18K deferrals to each of the 403B and 457 - although that would have to be some expensive health insurance (assuming the plans aren't more limited than federal requirements).

Agree with the conclusion - maxing all tax-advantaged space is a big time win!

merula

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Re: Reader Case Study: It's catch-up time
« Reply #11 on: March 06, 2015, 04:21:21 PM »
My question: Can I still do this in five years? I think it's possible: If I max out my contributions, in five years I could have about $300k in retirement accounts and another $300k in regular investments. I'm pretty sure that's all I need to retire.

As someone else said, at $12,000/year in spending plus $50,000 for your house, you only need $350,000 if you're actually going to invest it. (Look into the 4% SWR.) BUT, most of your $12,000/year is in rent, which you wouldn't have if you retired. Can you retire now?

Let's say you buy a fixer-upper for $50,000. And, since it's a fixer-upper, you spend another $25,000 on the fixing. (Correct me if I was wrong and the $50,000 included renovation expenses.)

Now you have $150,000 in non-house investments. But your expenses are now $2,000/year plus utilities and property taxes. You don't say where you want to retire, but for a house worth $75,000, you're probably not going to pay more than $1,500 a year in taxes, and let's say another $2,500 to be on the safe side for utilities.

Your expenses are $6,000 a year. At a 4% SWR, you'd need (drumroll)...... $150,000. Congratulations! You probably have enough to retire RIGHT NOW!

Spondulix

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Re: Reader Case Study: It's catch-up time
« Reply #12 on: March 06, 2015, 04:26:41 PM »
I get not wanting to play the credit game... but for people who are smart about it, you can leverage credit to earn more money. For example, we've got a cash back credit card and put all of our expenses on it (including electric bills, insurance, etc). We pay it off every month (paying 0 in interest), and earn almost $1k a year back in cash (2-3% of my purchases). I'm getting paid to have a credit card.

The reason I mention it - I'm assuming your goal down the road is to buy a house in cash. Are you going to have that money sitting in savings in the meantime (earning 1%), or are you going to pull from your investments? If you get a credit card now, your credit will be stellar within a year or two, which means you could leverage a house purchase with a low interest loan (if interest rates are still low enough). The historical rate of return (averaged) for the S&P is 10%, and that money would be compounding every year that it stays in investments. If your goal is just to stay off the grid and live off your stash (vs maximizing your stash), you could certainly do it without credit.

EconDiva

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Re: Reader Case Study: It's catch-up time
« Reply #13 on: March 07, 2015, 08:30:24 PM »
I would like to hear more about your lifestyle, please elaborate

+1 

Yes...please elaborate....

Dimitri

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Re: Reader Case Study: It's catch-up time
« Reply #14 on: March 07, 2015, 08:48:04 PM »
Gotta put that cash to work. Liquidate the gold, its commodity speculation and not an investment. If you want some as some sort of 'doomsday hedge' then keep 5-10k worth on your person, it does you no good in a bank vault. Just FYI- its not even actually there at only 4$/month, you just have a claim on a pool of gold that is.

Others can do the math on early retirement, but if you are literally spending 12k/year, you need approximately 50k(house expense) + 12k*25, 300k. You can retire in three years if you invest anything.

As noted above, the gold is pretty much guaranteed to be in an unallocated pool account.  And if the proverbial SHTF you won't be able to get your hands on it easily.  If you can take delivery cheaply go for it.  Otherwise, liquidate and buy from APMEX, Kitco, JMBullion or your favourite dealer.  I would recommend that once you put in the order to liquidate you should buy the same day to avoid any price movement against you.  I would probably buy 20x1oz bars rather than 2x10oz bars as there isn't much price differential in buying the larger bars.  Personally I wouldn't reduce your gold allocation as it doesn't comprise even 10% of your assets.  Good luck with the bullion!

jbfishing

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Re: Reader Case Study: It's catch-up time
« Reply #15 on: March 07, 2015, 09:44:21 PM »
I'm just an amateur here so the only thing I can add that I didn't see mentioned already is that you can withdraw earnings from a 457 penalty-free after retirement. No waiting until 59.5.  Somebody correct me if I'm wrong.

randymarsh

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Re: Reader Case Study: It's catch-up time
« Reply #16 on: March 08, 2015, 11:56:00 AM »
Are you sure your expenses are that low?
  • Transportation of any kind. You obviously don't own a car, but you never take a taxi or bus anything?
  • Health insurance? Before or after FIRE?
  • Cellphone?
  • Renter's insurance?
I'm not saying you're wrong about your own expenses but you have be 100% aware of your spending to know if your assets are enough to survive on. I know I have a hard time remembering that yearly expenses are really monthly expenses I pay all at once.

Kaspian

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Re: Reader Case Study: It's catch-up time
« Reply #17 on: March 09, 2015, 12:44:48 PM »
I thought I'd post my case since I suspect it may be a little unusual, and possibly of interest to the community. Also I could use some advice.

I can't offer any advice, but I can offer community interest:  Holy shit, dude!!  That's a very impressive cash number considering it wasn't done through investing.  Well done!  Now put all those sleeping soldiers to work.

cschx

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Re: Reader Case Study: It's catch-up time
« Reply #18 on: March 09, 2015, 12:58:28 PM »
Thanks to everyone who's responded so far. I'm learning a lot! I'll take it from the bottom up...

@thefinancialstudent - You're right, I undoubtedly do have some unaccounted-for expenses, although I've tried to account for them here as best I can. The problem is that I haven't been in the habit of tracking my spending; I just try to make sure I'm saving enough. Obviously this is something I need to start doing and I'd love to hear any recommendations people have for budgeting/tracking tools (I take it a lot of people on this forum use YNAB).
  I added one big expense I forgot to include originally, which is my $50/month insurance premium. The other expenses you mention are basically nonexistent in my life (see below).

@Dimitri, @RexualChocolate - Indeed, I don't own enough gold to take delivery and the custody fees add up over time. I'll take a look at options for converting to physical. I don't really want to have a debate about the virtues of owning gold; the thought of the Internet Archive burning up its servers to preserve yet another gold-related flame war kinda makes me want to cry. Suffice it to say that I don't think of it as an investment, but rather as an insurance policy. And yes, I believe the chance of a U.S. default or sudden dollar devaluation is very low. But I have some Russian friends who lived through the collapse of the ruble in the 1990's, and once you experience that, or even hear a few stories, insurance starts to sound like a very good idea.

@Spondulix - I'm not opposed to credit cards, just a habitual avoider of credit/debt. I will look into this too... please share specific recommendations if you have them.

@merula - Thanks, this is a reassuring set of calculations. I'm not quite ready to quit yet, though. I actually like my job, I just don't want to do it forever.

@dandarc, @rpr - Excellent, this really helps my understanding of the tax situation. I don't think I'm going to get a 630% raise anytime soon, but it's a good reason to try to do better in terms of pay. My current paycheck will in fact cover the deferrals of $18k+$18k and then some, I just won't have quite enough left over to cover expenses. I'm curious if anyone has experience with the strategy I mentioned in my original post, i.e. meeting expenses out of savings/investments while maxing contributions on a relatively small salary.

@humbleMouse, @EconDiva - I'll gladly trade frugality tips for financial advice! I feel embarrassed doing so, though, because it basically all boils down to being as boring as humanly possible. Frugality has become so integrated into how I live that it's hard to know where to start, so I'll just give a smattering and let folks ask about anything they find especially interesting.

*Transportation*
  I've never owned a car - I walk, bike or take the bus everywhere. (I've been told this is inconvenient. I guess I just don't notice because I've never lived any other way.) When I travel, which is maybe twice per year, I take buses and trains; I haven't been on a plane in years. I live less than two miles from my place of work and walk to work most days. One of the perks of my job is that I get unlimited free bus rides with my employee ID card, and I rely on this quite a bit. Transportation costs will undoubtedly go up after retirement, but I'm not sure how to model this at the moment.

*Communication / Entertainment*
  Here I rely on the four most powerful words in the English language: "I don't need it." No phone, TV/cable, or home internet. I borrow huge numbers of books, CDs, and DVDs from the local libraries, all for free. My main leisure occupations are reading and listening to & playing music.

*Food*
  My motto is "eat low on the food chain and high on the supply chain." I buy in bulk and make everything from scratch, relying on a judicious combination of gardening, foraging and dumpster diving to obtain a significant portion of my food for free.
  When making bulk purchases I often go through my co-op, but I also make an effort to seek out local business owners who are usually quite happy to sell me a sack or two of something at an even better price. For example, I buy green coffee in bulk (twice per year, from a local roaster) and roast it every week. All the roaster needs to do is take some coffee out of large bag, put it into a small one and charge me 20% markup, which is still way below retail - a win-win. I enjoy two cups of freshly roasted coffee every day at an average cost of $0.33 per day. (You don't need any special equipment to roast coffee, by the way - I do it in a saucepan on the stovetop.)
  Instead of treating myself to fresh croissants at $3.00 each, I learned how to make my own croissants for about $0.30 worth of ingredients. Instead of buying expensive commercial nuts I gather the local black walnuts and hickories - which most people consider a nuisance - crack them out, and use them in my cooking. Around here black walnuts retail for about $16 per pound, but I get them for free. The shells can also be burned for fuel (they have roughly the same BTUs per kg as seasoned oak, and will work in a pellet stove). I gather apples, pears, apricots, and various berries from trees/bushes on public (and, with permission, private) property and make jams, jellies, preserves, applesauce, pies etc., all of which gets canned or frozen for winter use. I press apple juice and make hard cider, which I bottle in champagne bottles scrounged from the recycling bins behind downtown bars. I harvest a lot of common spring and summer greens (like nettles and lambsquarters) instead of buying leafy produce.
  Because I don't have the space for a large garden, in the fall I usually do a couple of bulk orders for winter veggies through a local farmer who will sell me a bushel of anything for $12-$16. A bushel of rutabagas costs $12 and weighs about 60 lbs. I store cabbages, rutabagas, turnips, beets, onions, squash etc. in an unheated entryway which is my "root cellar."
  Dumpster food: I try not to rely on it too much since it's mostly junk I wouldn't eat normally. There are exceptions though, like finding 40 lbs. of organic Peruvian bananas that got tossed in the compost bin behind Whole Foods because the staff thought they were a little too brown. I'm still going through those six months later.
  When I go to the grocery store I always shop twice: First in the garbage, then in the store for anything I didn't find out back. It's best to focus on stores that are too small to have a trash compactor. Even if you avoid processed foods this can replace a significant portion of your food bill. For example, butter and cooking oil are expensive, but butcher scraps are easy to collect and render into lard, which freezes well and is surprisingly good for you.
  I do a lot of sourdough bread baking and make my own yogurt, kefir, tempeh and miso, soft drinks, fermented veggies, etc. You can save a shocking amount of money this way and it's a lot of fun to do. The only caveat is that it's time-consuming. If you have a busy schedule, high-powered career, kids, etc. then maybe it's not for you.

*Clothing & Durable Goods*
  When it comes to these items I do most of my shopping in the trash. Our society is unbelievably wasteful, and college towns doubly so. The students will throw out anything they don't feel like moving at the end of the semester. There's a particular weekend in August when people actually come from across the state just to dig through our city's trash, but good pickings can be had year-round. I've found everything from nice clothes to kitchenware, household appliances, computers, exercise equipment, office supplies, miscellaneous electronics, and on and on. Last summer I found a $400 racket-stringing machine. Whatever I can't use I sell on Craigslist or Ebay. I find a lot of easily repairable electronics which I fix up and sell - recently I found a professional blender that must have cost $1,000 new. The university itself is even more wasteful, although much of the waste comes in forms I can't use (like wonderful old architectural salvage, which mostly gets landfilled).
  I'm disturbed by all this waste, but figure I might as well make use of it. Lately I've gotten more systematic about my scrounging and now use GIS software to keep track of the complex spatio-temporal relationship between the academic calendar, major apartment complex move-out dates and the city trash collection schedule. But I'm limited by the lack of a vehicle for transporting my finds, as well as a place to store large salvaged items. If I had these I could probably quit my job and just dive dumpsters for a living. Which sounds like a lot of fun, actually.

Ok, I guess that's plenty for now...

ZiziPB

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Re: Reader Case Study: It's catch-up time
« Reply #19 on: March 09, 2015, 01:48:16 PM »
Quote
The problem is that I haven't been in the habit of tracking my spending; I just try to make sure I'm saving enough. Obviously this is something I need to start doing and I'd love to hear any recommendations people have for budgeting/tracking tools (I take it a lot of people on this forum use YNAB).

I think there is nothing wrong with this approach.  I am not an expense tracker either, I just make sure that I save first.

And BTW, your life sounds fascinating, not boring at all :-)

RexualChocolate

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Re: Reader Case Study: It's catch-up time
« Reply #20 on: March 09, 2015, 02:43:13 PM »
@Dimitri, @RexualChocolate - Indeed, I don't own enough gold to take delivery and the custody fees add up over time. I'll take a look at options for converting to physical. I don't really want to have a debate about the virtues of owning gold; the thought of the Internet Archive burning up its servers to preserve yet another gold-related flame war kinda makes me want to cry. Suffice it to say that I don't think of it as an investment, but rather as an insurance policy. And yes, I believe the chance of a U.S. default or sudden dollar devaluation is very low. But I have some Russian friends who lived through the collapse of the ruble in the 1990's, and once you experience that, or even hear a few stories, insurance starts to sound like a very good idea.

I wasn't arguing the merits of gold as a doomsday hedge, I was arguing the merits of a constantly rolled futures option as a doomsday hedge, which is what you own. You own zero gold.

Gold in a publicly declared account would not have survived the last time the US government repatriated(partially stole) all gold, either. Liquidate the asset and convert to physical and don't tell anyone you have it- it makes no sense in its current form.

That much gold is 20 ounces, it'd fit anywhere.

ZiziPB

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Re: Reader Case Study: It's catch-up time
« Reply #21 on: March 10, 2015, 07:08:03 AM »
cschx, I have read your OP again, and I think you really need to spend some time educating yourself on the basics of investing.  You are a fantastic saver but you will not be able to retire any time soon with your money earning 1% at the bank and a gold bar or two sitting in some Swiss bank.

Here is what I think you should do:

- first, sign up for your employer's 403b plan to take advantage of the match - you are leaving a lot of money on the table by not doing it
- second, figure out how much you can put into your various employer's plans and have enough to live on
- three,  figure out what investment options you have in each plan offered with your employer and decide on your investment allocations
- four, set up your contributions
- five, leave an emergency fund in your 1% account and put the rest of your money to work.

Here are some resources to get you started: http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit

YTProphet

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Re: Reader Case Study: It's catch-up time
« Reply #22 on: March 10, 2015, 07:30:15 AM »
cschx, you may be the most interesting man (or woman?) in the world. Also, you should really put your money to work in the market since you're really hurting your bottomline by not doing so. You seem like a very smart person and could easily figure this stuff out. Read a few good books - The Bogleheads' Guide to Investing, The Bogleheads' Guide to Retirement Planning, Common Sense on Mutual Funds, etc.

merula

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Re: Reader Case Study: It's catch-up time
« Reply #23 on: March 10, 2015, 07:56:07 AM »
cschx, Could you please expand on the dumpster diving? I completely agree about how wasteful our society is, and I live very close to three colleges and five grocery stores, but I haven't the slightest idea how to translate that into free stuff and less waste.

Have you considered getting a bike trailer to transport your finds? In my area they can be found fairly cheaply on Craigslist.

cschx

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Re: Reader Case Study: It's catch-up time
« Reply #24 on: March 10, 2015, 10:13:42 AM »
cschx, I have read your OP again, and I think you really need to spend some time educating yourself on the basics of investing.  You are a fantastic saver but you will not be able to retire any time soon with your money earning 1% at the bank and a gold bar or two sitting in some Swiss bank.

Here is what I think you should do:

- first, sign up for your employer's 403b plan to take advantage of the match - you are leaving a lot of money on the table by not doing it
- second, figure out how much you can put into your various employer's plans and have enough to live on
- three,  figure out what investment options you have in each plan offered with your employer and decide on your investment allocations
- four, set up your contributions
- five, leave an emergency fund in your 1% account and put the rest of your money to work.

Here are some resources to get you started: http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit
You're right, I do need to educate myself, and that's why I'm here. It's working: I've already done two out of the five things you suggest, which correspond to the short-term plan I posted originally. The other three will get checked off by the end of this month. I have a whole pile of investment and retirement books I'm reading at the moment, including a couple of Bogleheads books.

As background: I've been shy on investing since I got burned back in 2007. I knew all about the real estate securitization mess, shorted early, lost money, then was too scared to get back in - typical rookie stuff.

I've actually had a strong interest in financial topics in the past, especially financial crime/regulation and monetary theory. My awareness of how the markets are distorted and rigged against ordinary investors allowed me to convince myself that it was best to stay out entirely, an especially handy justification after one has been burned by bad investments. For the past six years of historic market run-up I've been convinced at every point that another crash was just around the corner. Now I'm re-evaluating this position.

ZiziPB

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Re: Reader Case Study: It's catch-up time
« Reply #25 on: March 10, 2015, 10:30:29 AM »
cschx, I have read your OP again, and I think you really need to spend some time educating yourself on the basics of investing.  You are a fantastic saver but you will not be able to retire any time soon with your money earning 1% at the bank and a gold bar or two sitting in some Swiss bank.

Here is what I think you should do:

- first, sign up for your employer's 403b plan to take advantage of the match - you are leaving a lot of money on the table by not doing it
- second, figure out how much you can put into your various employer's plans and have enough to live on
- three,  figure out what investment options you have in each plan offered with your employer and decide on your investment allocations
- four, set up your contributions
- five, leave an emergency fund in your 1% account and put the rest of your money to work.

Here are some resources to get you started: http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit
You're right, I do need to educate myself, and that's why I'm here. It's working: I've already done two out of the five things you suggest, which correspond to the short-term plan I posted originally. The other three will get checked off by the end of this month. I have a whole pile of investment and retirement books I'm reading at the moment, including a couple of Bogleheads books.

As background: I've been shy on investing since I got burned back in 2007. I knew all about the real estate securitization mess, shorted early, lost money, then was too scared to get back in - typical rookie stuff.

I've actually had a strong interest in financial topics in the past, especially financial crime/regulation and monetary theory. My awareness of how the markets are distorted and rigged against ordinary investors allowed me to convince myself that it was best to stay out entirely, an especially handy justification after one has been burned by bad investments. For the past six years of historic market run-up I've been convinced at every point that another crash was just around the corner. Now I'm re-evaluating this position.

Great response! 

I had to educate myself in financial and investment matters following my divorce and it's really not difficult to get from a complete novice to proficient in a short amount of time.  You sound like a very smart guy/gal, so you will get there in no time at all.  My first post on this forum was in the summer of 2013 asking what a brokerage account was ;-)  The basic rule of investing for me is to keep it as simple and streamlined as possible and not take unnecessary risks.  It's about investing and not gambling or playing the market.  I like Bogleheads and try to stick to a 3-fund portfolio as much as I can.  So far it's served me very well.

cschx

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Re: Reader Case Study: It's catch-up time
« Reply #26 on: March 10, 2015, 10:44:34 AM »
cschx, Could you please expand on the dumpster diving? I completely agree about how wasteful our society is, and I live very close to three colleges and five grocery stores, but I haven't the slightest idea how to translate that into free stuff and less waste.

Have you considered getting a bike trailer to transport your finds? In my area they can be found fairly cheaply on Craigslist.

Hello merula. I was actually just contemplating a bike trailer after reading a couple of Mr. MM's old blog posts on the subject. Around here you can get used kid trailers for pretty cheap, so I was thinking I'd convert one.

Dumpster diving: Grocery stores are generally not worth your time unless they're small enough to use a dumpster without a trash compactor. And there are all sorts of special considerations that apply to dumpstered food items, the eating of which which must be approached with great caution. Trader Joe's is a diver's mecca due to their excessive use of packaging, but in other cases it can be hard to retrieve stuff you'd want to use; this is why I tend to focus on foraging where food is concerned. If you're curious you should check out the film "Dive!" (http://worldcat.org/oclc/725394709) and the classic text "The Art & Science of Dumpster Diving" by John Hoffman (http://www.worldcat.org/oclc/27418136). If you're interested in a more academic text with some practical tips, Jeff Ferrell's book "Empire of Scrounge" is a great read: http://worldcat.org/oclc/799576071.

Diving strategies vary depending on whether you'll be looting residential, commercial, or construction trash. For effective college town trash picking you need to know where the students live and when they'll be moving out. International students leave the best pickings because they can't take anything with them when they graduate. Find out where they live and when move out is. Your job is to stay ahead of the garbage men, so you need to understand where trash gets picked up and when. Rental houses and apartment complexes typically rely on the city garbage service, which will pick up on different days in different parts of the city. Since move out dates are usually around the end of the month, a lot depends on how the calendar shakes out in any given year. You need to identify properties with a high concentration of student residents which, due to their location and move-out date, will give you enough time after move out to look through the trash before the garbage men get there. If this all sounds complicated, know that amazing results can be achieved simply by random exploration - there is just that much waste. I did it that way for years and found tons of good stuff.

For commercial retail dumpsters there's usually a private "waste management" contract or a municipal franchise that's contracted out and picks up daily, making weekends the best time for diving unless you're the type who likes to get up at 2 AM.

Construction dumpsters can be a goldmine if you have a way to use salvaged building materials. Commercial and residential renovations are the best, since perfectly good furnishings and appliances tend to get thrown out near the beginning of the project. All such work is typically permitted, so check to see if your city has an online system for tracking building permits. This will clue you in to where to look, although you can find a lot just by cruising for roll-off dumpsters.

I tend to focus on electronics because they're small, transportable, generally easy to repair and have relatively high resale value (compared to, say, scrap). Also I feel like I'm doing a good deed by keeping all those toxics out of the landfill.
« Last Edit: March 10, 2015, 12:14:32 PM by cschx »

cschx

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Re: Reader Case Study: It's catch-up time
« Reply #27 on: May 09, 2015, 12:04:55 PM »
I thought I'd check in now that it's been a very mind expanding two months since my first post. Reading that post again felt a little embarrassing... I've spent two months completely immersed in personal finance/investment/retirement planning info, and have learned a ton. Here's what I've accomplished so far:

Maxed out my retirement plan contributions, front-loaded to the extent possible (the 403b started in March and the 457 in April). Took my first $0 paycheck at the end of last month. Since the bank won't take a direct deposit of nothing, my employer mailed me a check for $0.00 which is now proudly displayed on my office door (coworkers think I'm crazy.) In 2015 I will save almost $50k toward retirement while paying no federal income tax, and I will do this without changing my lifestyle at all. This is about $20k more than I was previously saving after-tax. In five years I should have about $250k of principal in the retirement plans to match my current after-tax 'stash of ~$230k.

Next year I'll exempt myself from tax withholding, take $0 paychecks the first nine months of the year and get big, fat paychecks in October-November-December. Those three paychecks are plenty for me to live on for the next twelve months. They go into a high-yield savings account which is set to auto-pay the balance on a cash rewards credit card. Yes, I applied for my first ever line of credit (at my local credit union) and was approved for a meager $1k. I'm planning to get that increased in 6 months, then I can start paying my rent on the CC and getting more cash back (I could do this now, but it would push my utilization up near 100% which would be bad for my credit score).

For the first year I primed the savings pipeline using my tax refund, existing savings, and proceeds from the sale of my shitty investments. The rest of the proceeds will get lumped in with the after-tax 'stash and invested. I was able to get a bigger tax refund because I opened a tIRA and contributed the max before April 15th (also front-loaded a max contribution for 2015). Losses from the shitty investments will be harvested to eliminate a small amount of residual tax liability after maxing out my retirement contributions. Since those investments were particularly shitty, I should be able to keep harvesting the losses for several years (yay?).

Due to the way my employer's retirement plan is structured I still have almost $10k in earned income below the IRS limit that can't be deferred. I am exploring ideas for doing freelance work to get some 1099 income, which would go into a Solo 401(k). My insurance is "too good" to open an HSA.

And so I've come to the hardest part: Asset allocation. I'm hoping someone can help me figure out how to think about this.

I'm 35 but planning on retiring in 5 years. Do I allocate like someone who's 35, or like someone who's 5 years away from retirement? I need to run the numbers in greater detail, but playing around with Firecalc and Cfiresim suggests that I need something like a 6% return on my current stash plus retirement contributions for the next five years. And then I need at least a 30% allocation to stocks to have a good chance of success over the following 55 years.

My current thinking is to use Mr. MM's approach: Treat the tax-deferred stash as "old man money" and invest it accordingly. The already-taxed stash is money I'm going to need in five years, so I should invest it conservatively. One problem is that this runs counter to tax efficiency (bonds in a taxable account). Another general problem I have is that I take ethical investing very seriously. Although I'd love to just sock my money into some Vanguard index funds and forget about it, I know what's in that sausage: Basically every evil corporation on the planet. And there's no way I'm going to support those corporations with my money.

I still have a stack of reading to do on ethical investing, but from what I've learned so far it appears there are basically three options:
  • Buy "socially responsible" index funds. These have crazy high expense ratios, often contain companies of dubious ethical persuasion, and tend to underperform the market. Not very appealing, in other words.
  • Buy individual stocks of companies you approve of. This is a bad idea always, but it's a super duper bad idea for me because I have zero interest in picking stocks and would doubtless be incredibly bad at it.
  • Peer-to-peer lending. This appeals to me the most, but I have a lump sum of $230k to invest which seems like an awful lot for this type of thing. And it's a risky choice for money I'll need in five years.
What other options am I missing?

Catbert

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Re: Reader Case Study: It's catch-up time
« Reply #28 on: May 09, 2015, 01:36:38 PM »

For the first year I primed the savings pipeline using my tax refund, existing savings, and proceeds from the sale of my shitty investments. The rest of the proceeds will get lumped in with the after-tax 'stash and invested. I was able to get a bigger tax refund because I opened a tIRA and contributed the max before April 15th (also front-loaded a max contribution for 2015). Losses from the shitty investments will be harvested to eliminate a small amount of residual tax liability after maxing out my retirement contributions. Since those investments were particularly shitty, I should be able to keep harvesting the losses for several years (yay?).

Sell those shitty investments now and put into something you like better.  Whatever capital losses you can't write-off this year (against capital gains + 3K of income) will just roll to next year.  If they are shitty but have a gain then still sell them (assuming you'll pay not higher than 20% cap gain rate).

Calvawt

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Re: Reader Case Study: It's catch-up time
« Reply #29 on: May 09, 2015, 01:43:23 PM »
I think you should stop kicking yourself as the first step.  You have been a great saver, just not a great investor.  Make some changes going forward and you can still retire in 5 years or so.  As other said get that cash hoard put to work immediately!  I would do the 401a to get the match and then a traditional IRA for $5,500.  After that I would do the 457b plan as those are great for people that do early retirement.

Psychstache

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Re: Reader Case Study: It's catch-up time
« Reply #30 on: May 09, 2015, 03:27:01 PM »

I still have a stack of reading to do on ethical investing, but from what I've learned so far it appears there are basically three options:
  • Buy "socially responsible" index funds. These have crazy high expense ratios, often contain companies of dubious ethical persuasion, and tend to underperform the market. Not very appealing, in other words.
  • Buy individual stocks of companies you approve of. This is a bad idea always, but it's a super duper bad idea for me because I have zero interest in picking stocks and would doubtless be incredibly bad at it.
  • Peer-to-peer lending. This appeals to me the most, but I have a lump sum of $230k to invest which seems like an awful lot for this type of thing. And it's a risky choice for money I'll need in five years.
What other options am I missing?

Investing in the market, maximizing your returns, and then using your time and money in retirement to engage in socially responsible activities/entrepreneurial efforts?

frugaldrummer

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Re: Reader Case Study: It's catch-up time
« Reply #31 on: May 09, 2015, 04:40:56 PM »
If you don't want to be overly invested in "evil corporations", what about investing some of those taxable savings somewhere other than the markets?  For instance, you could buy rental property and live off the income, or start an ethical entrepreneurial business of some kind (preferably one that would generate profits without you working full time) . 

What are your plans for early retirement?
« Last Edit: May 09, 2015, 06:12:38 PM by frugaldrummer »

MDM

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Re: Reader Case Study: It's catch-up time
« Reply #32 on: May 09, 2015, 06:11:10 PM »
Maxed out my retirement plan contributions, front-loaded to the extent possible (the 403b started in March and the 457 in April).

There is a potential pitfall with front loading - depends on how your employer handles things.  See http://www.forbes.com/sites/ashleaebeling/2012/01/13/the-big-401k-match-mistake/ or other articles on 401k/403b/etc. "true-up"s.

Bracken_Joy

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Re: Reader Case Study: It's catch-up time
« Reply #33 on: May 09, 2015, 06:38:40 PM »
Following, because you are a fascinating person.

Where do you log into the forums if you have no internet or phone? Work I'm assuming? How will this change with FIRE?

fields

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Re: Reader Case Study: It's catch-up time
« Reply #34 on: May 09, 2015, 07:38:06 PM »
Following

lpep

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Re: Reader Case Study: It's catch-up time
« Reply #35 on: May 09, 2015, 08:19:43 PM »
So interesting! What city/town do you live in? I see the "ch" in your name and wonder if it's Chapel Hill.

Zamboni

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Re: Reader Case Study: It's catch-up time
« Reply #36 on: May 09, 2015, 09:09:51 PM »
my employer mailed me a check for $0.00 which is now proudly displayed on my office door (coworkers think I'm crazy.)

That is simply awesome.

merula

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Re: Reader Case Study: It's catch-up time
« Reply #37 on: May 09, 2015, 09:55:25 PM »
Great job on taking advantage of your tax advantaged accounts!

Regarding asset allocation, that's more a matter of risk tolerance than math. I remember an amazing post somewhere on this board that was laying out a scenario of living through a crash; how would you feel if your entire savings dipped 25% or 50%, etc. Are you going to pull everything out and think you'll cut your losses and get back in when the market's on its way up? Because that's ridiculous thinking that requires you to be able to time the market twice. But it's human nature; many many people fall prey to it. Basically, know yourself, figure out what you're actually likely to do in a major crash and plan accordingly.

Re: Ethical Investing: I would read up on it if I were you and see what you think after that. I'd also dump the phrase "evil corporation", but that's mostly because I'm pedantic. Any company you can invest in is a corporation, because incorporating is just the legal separation of ownership and management. Entities can be "evil" or not (and that's purely a matter of opinion), and they can be corporations or not (purely a matter of fact). Seventh Generation (the green cleaning products people) is a corporation, but Arthur Andersen (the accounting firm who signed off on massive fraud at Enron) was not.

Personally, I think that in order to do ethical investing right, you'd have to find a fund that shares your exact ethics or manage it yourself. I've looked into this but ended up with Psychstache's approach, in part because I couldn't find an "ethical" fund that didn't have Apple as a major holding and I happen to think that patent trolling and planned obsolescence are unethical. But that's me, I'm sure there are others who see Apple as more ethical than some company I love.

Beardog

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Re: Reader Case Study: It's catch-up time
« Reply #38 on: May 10, 2015, 05:25:37 PM »
cschx, how do you communicate with friends and family without home internet or phone? 

cschx

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Re: Reader Case Study: It's catch-up time
« Reply #39 on: May 11, 2015, 12:22:50 PM »
Maxed out my retirement plan contributions, front-loaded to the extent possible (the 403b started in March and the 457 in April).

There is a potential pitfall with front loading - depends on how your employer handles things.  See http://www.forbes.com/sites/ashleaebeling/2012/01/13/the-big-401k-match-mistake/ or other articles on 401k/403b/etc. "true-up"s.

Thanks for the warning; I've heard about this issue before. Thankfully it's not something I need to worry about because my employer contributes a fixed percentage of my salary in every pay period. I do need to make sure I stay on top of any mid-year raises, though - I'm required to set deferrals at a fixed dollar amount per paycheck, not the most convenient method.

cschx

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Re: Reader Case Study: It's catch-up time
« Reply #40 on: May 11, 2015, 12:50:47 PM »
Great job on taking advantage of your tax advantaged accounts!

Regarding asset allocation, that's more a matter of risk tolerance than math. I remember an amazing post somewhere on this board that was laying out a scenario of living through a crash; how would you feel if your entire savings dipped 25% or 50%, etc. Are you going to pull everything out and think you'll cut your losses and get back in when the market's on its way up? Because that's ridiculous thinking that requires you to be able to time the market twice. But it's human nature; many many people fall prey to it. Basically, know yourself, figure out what you're actually likely to do in a major crash and plan accordingly.

Re: Ethical Investing: I would read up on it if I were you and see what you think after that. I'd also dump the phrase "evil corporation", but that's mostly because I'm pedantic. Any company you can invest in is a corporation, because incorporating is just the legal separation of ownership and management. Entities can be "evil" or not (and that's purely a matter of opinion), and they can be corporations or not (purely a matter of fact). Seventh Generation (the green cleaning products people) is a corporation, but Arthur Andersen (the accounting firm who signed off on massive fraud at Enron) was not.

Personally, I think that in order to do ethical investing right, you'd have to find a fund that shares your exact ethics or manage it yourself. I've looked into this but ended up with Psychstache's approach, in part because I couldn't find an "ethical" fund that didn't have Apple as a major holding and I happen to think that patent trolling and planned obsolescence are unethical. But that's me, I'm sure there are others who see Apple as more ethical than some company I love.

Hi Merula - I didn't mean to imply that all corps are inherently evil, although I'd argue that some acts are evil and that's not just a matter of opinion. Certainly I'd invest in a non-evil corporation, maybe even start one myself. I guess I intended "evil corporations" as shorthand for "people who will take my investment money and use it to do things I don't approve of." For you that might be Apple, maybe for me it's ExxonMobil... but if you're already thinking like this then you're going to have a hard time investing in a broad index fund, regardless of your particular scruples. The more scruples you have, the harder it is to find something you can invest in.

Regarding the Psychestache "make money doing evil and then use it to do good" argument - it's one I've seen many times before. And I mean this in the most non-judgmental way possible, but when it comes to my own moral responsibility I feel that's like buying rape offsets. You can't excuse a deliberately evil act by performing a deliberately good act.

cschx

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Re: Reader Case Study: It's catch-up time
« Reply #41 on: May 11, 2015, 12:58:31 PM »
cschx, how do you communicate with friends and family without home internet or phone?
Beardog: I'm a bit of a hermit but I do stay in touch with some folks, mostly by email. There's university wireless all over this town - I don't have to walk very far to find a signal.

Actually I could have free internet at home anytime I want it, I just have to ask my landlord for the wireless key. In fact he's offered to give it to me and I always say: "No thanks. Don't want it." I prefer living on a low-information diet with minimal distractions. When I had home internet in the past it would always turn into a gigantic time suck and would even mess up my sleep patterns due to late-night web surfing. Not a problem when you've got no internet!