Raising children entails a lot of trial and error, and hoping that you aren’t screwing things up too much along the way. As our kids have gotten older we are moving into new subject areas, one of which is money. We want to expose our kids to good money habits while also giving them agency and discretion. Investing has been an area that has been going well so far so I wanted to share our experience with others in the same boat.
We set up an investment account at Betterment for each of the kids when they were born and have put in $25 a month since then. Now that the kids are old enough to be involved there is an account history and returns that we can go over together and learn together about expenses, how returns from appreciation and dividends work, and that there is risk involved in investing. Although we primarily use Vanguard for our own investments I like the aesthetics and diversification into multiple index funds / ETFs that Betterment makes more automatic – it seems to connect with the kids better and is more straightforward for them to understand.
[Note: We have chosen to hold the investment accounts for each of our children in our name so that we have control of the funds until we decide to give over full control. We’ve done this for reasons related to age and maturity, impact on college scholarships, and other considerations.]
Now when the kids receive some money for a birthday or we cash in the coins in their artisanal hand-crafted wooden banks we let them decide what to do with it – spend it, give it away, put in the bank, or invest in their Betterment account. It’s been fun and over the past year they’ve mostly chosen to invest their money, roughly 80% of their “earnings” going into their respective Betterment accounts. We sit with them at the computer but let them use the mouse, type in the contribution and notes, etc.
We’ll see how it goes in the future when there are more dollars at stake and more competing options vying for their attention and funds. From the early returns it’s been a simple and effective way to introduce investing for our family.
Employees often have the ability to contribute to an employer sponsored retirement plan (typically a 401(k) plan) – also known as a Traditional IRA. To contribute to this plan, the employee selects a percentage of income to contribute each pay period and this amount is taken out of their paycheck and sent directly to the plan administrator to be deposited in the individual’s IRA account. When contributing to a Traditional IRA no taxes are due at contribution. When the funds are distributed in the future, typically during retirement, income taxes will be due on the full amount distributed – both the earnings growth and the initial contributions.
Separately from a Traditional IRA, workers can on their own open and contribute to a Roth IRA (subject to income limitations). In 2019 an individual earning less than $122,000 can contribute up to $6,000 to a Roth IRA. With a Roth the individual pays taxes up front, when the money is earned, and then contributes the money after taxes have been paid. When funds are distributed in the future, typically during retirement, there are no taxes on the distributions.
Deciding between contributing to a Traditional IRA or a Roth IRA, or the relative amounts to each, is a frequent topic on personal finance blogs and talk shows. An important bit that doesn’t get enough coverage is this:
** Income Tax Rate Changes Are What Really Matters **
The are other factors to consider between these types of IRAs outside of tax treatment. A couple of factors, among others, include:
Employer contributions – Traditional IRAs often include employer-matching of employee contributions.
Liquidity – Ability to access contributions differ, with Roth contributions being accessible without penalty in some situations.
However, the biggest impact is made by the change in income tax rates between contribution and distribution. If tax rates are higher in the future at distribution, a Roth IRA is better – you paid at a lower rate when contributing and get to withdraw and avoid taxes at a higher rate. The converse is also true – lower rates at distribution favor a Traditional IRA. You avoid higher taxes at contribution and then they are applied at lower rates at distribution. Let’s repeat and then look at a few simple example calculations.
Higher income tax rates in future = Roth IRA better
Lower income tax rates in future = Traditional IRA better
If there are no changes in income tax rates, there’s no difference between the two types of IRA. Here’s a calculation example showing the net total distribution is the same if there are no changes in tax rates.
If tax rates are lower in the future than now (lower at distribution) then the Traditional IRA is better and yields a higher total distribution. Here’s the same example, with only the future tax rates decreasing.
If tax rates are higher in the future than now (higher at distribution) then the Roth IRA is better and yields a higher total distribution. Here’s the same scenario again, but with higher future tax rates.
There are two primary reasons for a change in income tax rates, both of which are difficult to predict over a long-term period.
Changes in Tax Law – changes to the rates and brackets in the IRS Code enacted by Congress
Changes in Income – changes in individual earnings resulting in a change in the applicable tax bracket (whether or not the tax brackets are changed by law)
Planning for the long-term is difficult but remember the impact that tax rate changes can have should be a prominent consideration.
Note: The content of this post is for informational and discussion purposes and is not financial or tax advice. Consult with an advisor before relying on this or any information.
Airbnb has collected and remitted Transient Occupancy Taxes (TOT) for hosts in the City of San Diego since July 2015, making collection of these taxes easier for both hosts and the City Treasurer. Per the City TOT FAQs, TOT is charged for the following stays:
“If you are renting a room for less than one calendar month, the rental is subject to the TOT.”
“It is the purpose and intent of the City Council that there shall be imposed a tax on Transients”
And to whom that tax applies in the definition for Transient:
“Transient” means any Person who exercises Occupancy, or is entitled to Occupancy, by reason of concession, permit, right of access, license, or other agreement for a period of less than one (1) month. A month is defined as the period of consecutive days from the first calendar day of Occupancy in any month to the same calendar day in the next month following, or the last day of the next month following if no corresponding calendar day exists.”
This definition does not rely on a strict number of days to qualify as a month – it is dependent on the number of days in each month. A stay of 28 days (or 29 or 30) in February (of a non Leap Year) are not subject to TOT but a stay of those durations in July would have TOT since July has 31 days.
The City of San Diego TOT is 10.5% for small short-term rental operators, those with less than 70 rooms. An additional TMD assessment used to apply to small operators but now applies to large operators only, effective September 1, 2016. Rates and additional information available on City website for TOT.
Airbnb has not correctly implemented the definition of a calendar month in collecting the TOT in San Diego and instead is applying the tax to any stays of 30 days or less. Per an email from Airbnb this week the company is collecting “10.5% of the listing price including any cleaning fee for reservations 30 nights and shorter”.
The Airbnb site can be used to see how the TOT calculation is being applied by entering dates and then clicking a property to see the reservations details, where the TOT is listed as a separate line as “Occupancy taxes and fees”. Below are a few sample results showing the TOT being charged when it should not be. The erroneous TOT charges are for hundreds of dollars each. I also called the TOT help phone number at the City (619-615-1530) to confirm that TOT should not be applied to these specific date scenarios.
I’m a big fan of Airbnb both as a host and as a guest. Having the company collect and remit TOT for hosts is a nice convenience, as previously short-term rental hosts on the platform had to complete and file a monthly return to report TOT. The incorrect application of the TOT rules and resulting overcharging of customers is not right and needs to be corrected. I’ve reached out to the company a number of times requesting this and either due to a difference of understanding or other reasons a correction has not been made. I’m hopeful that this article may result in corrective action being taken.
One of my favorite websites is the fantastic Mr. Money Moustache (MMM). This website and the book Early Retirement Extreme (ERE) by Jacob Lund Fisker caught my attention a few years ago and the concept of financial independence has been stuck in my head ever since. There are a number of great podcasts, books, and articles, on the topic and the “FIRE” movement (financial independence / early retirement) has grown into a semi-mainstream concept.
The biggest lesson I took from MMM and ERE is the impact that a person’s savings rate has on the ability to grow wealth. The flip side to the savings rate is the consumption rate – together they equal 100% of earnings. The money you earn is either spent and disbursed to another party via consumption – the pizza place, daycare, car payments, etc. – or it is kept and accrued in your accounts – savings, investment account, real estate, etc.
The impact of the consumption / savings rate is laid out most excellently in this post from MMM:
I decided to take a stab at making a simple calculation along the same lines – using a few basic inputs to see the time required to create a “Passive Income Symbiote”. The goal is to create a passive stream of income equivalent to gross earnings – to entirely replace wage earnings with passive income. If you can live on what you currently earn then it’s easy to imagine living on that same amount, but with all of your time free to use as desired. I chose the word symbiote with the idea that the goal is to have the Passive Income Symbiote be the “host” and the person becomes the “parasite”, living on the efforts of the host.
The basic elements for the calculation (spreadsheet attached, feel free to use and share if you like) are:
Income / earnings – how much you make
Consumption rate – how much of your earnings you spend
Return on investments – what you earn on your savings
Earnings increase – if you expect an annual raise, how much it is
Earnings increase spent – how much of any earnings increase you spend (also known as lifestyle inflation)
Many of these factors are hard to change or controlled by outside forces – bosses, annual evaluations, how the stock market performs – the spending / saving ratio is the factor easiest to quickly adjust. It’s also the factor that has the most impact on the time required to fully fund a PI Symbiote. I’ve included some suggested ranges for items like return on investments and annual earnings increase. There’s a relative limit on some items and I’ve tried to based the suggested ranges on my perception of those general limits. (You might get a 100% raise at your job but it’s more likely to be a moderate increase of 3-5%, for example.)
Good luck on your journey and creating your own pet Symbiote. Cheers!
I was recently included on two podcast I regularly listen to, both on the topic of short-term rentals. I have been using platforms like Airbnb for about 8 years to welcome people to San Diego and have had a great experience. As with many other cities around the globe, San Diego has been debating the proper place for short-term rentals (rentals of less than 30 days or a calendar month) in recent years. I’ve become involved in that political debate locally and follow the issue broadly as well.
The Voice of San Diego podcast is a great resource if you’re interested in local issues and longer interviews with people that make an impact here. I was part of a four person panel discussing potential new rules for short-term rentals in San Diego. The podcast was held shortly before a full City Council hearing on the topic which was expected to result in new rules for the city. Instead, the all day hearing resulted in nothing new and the issue remains up in the air.
Check out the Voice of San Diego podcast on short-term rentals here:
I was also recently on Get Paid for Your Pad – a podcast focused on short-term rentals with news and interviews of hosts from around the world. This show is a great resource if you are a current host, considering hosting, or just interested in the topic. Host Jasper Ribbens, from The Netherlands, does a great job of including perspectives from hosts from different cities and nations and covering a wide variety of news items from technology to new rules that impact the short-term rental industry.
Property taxes are typically described as a wealth tax – they are taxes levied on assets held rather than transactional taxes like income taxes (applied to wages as earned) or sales taxes (applied to goods when purchased). Property taxes are applied to the same property each year.
Back in 1978 Proposition 13 was passed in California to place a limit on property tax increases. Per Wikipedia, Section 1. (a) of Proposition 13: “The maximum amount of any ad valorem tax on real property shall not exceed one percent (1%) of the full cash value of such property. The one percent (1%) tax to be collected by the counties and apportioned according to law to the districts within the counties.”
Proposition 13 also placed some rules on how the value of a property is assessed or re-assessed. Again, per Wikipedia: “Proposition 13 declared property taxes were to be assessed their 1975 value and restricted annual increases of the tax to an inflation factor, not to exceed 2% per year. A reassessment of the property tax can only be made a) when the property ownership changes or b) there is construction done.”
I was curious about the impact of Prop 13 on property taxes in San Diego after seeing some listings on Redfin and Zillow that had astoundingly low property taxes. For example, the Banker’s Hill property shown below, currently for sale for $1,697,955, carries an annual property tax levy of $136.97. That effective tax rate of .008% is far below the 1% established under Proposition 13.
I decided to take a look at the property values and property taxes on my block in North Park. The houses are all pretty similar (outside of one empty lot that was purchased by a local church and razed for a small and scarcely used parking lot). Below are the property values (per Zillow Zestimate) and property taxes paid (per San Diego County Treasurer website). I’ve listed all the properties on both sides of the street but removed the addresses for privacy reasons.
Despite the homes on the block having pretty similar property values the amount of taxes paid and effective tax rate vary quite a bit. I found it interesting to see the differences in a very small area of town summarized together.
Last month a press conference was held to release a study done on the economic impact of short-term rentals in San Diego for HomeAway / Expedia by Xpera Group. The report follows a similar study commissioned by Airbnb and done by National University in October 2015. Both full reports are included on this post for anyone interested in this issue.
A few highlights from the new study:
Total of $500M of impact in City of San Diego ($300M direct spending, $200 induced and indirect spending)
3,00 jobs in City of San Diego
Transient Occupancy Tax (TOT or “hotel tax”) estimated to be $19M or more in 2017, a 200% increase over 2015 when the TOT from short-term rentals total $9.6M
In 2016, City of San Diego TOT was $202.8M of which $15.6M was from short-term rentals, a 7.7% share.
“Short term lodging guests tend to be much younger than hotel guests and have a higher percentage of females than hotels.”
Short-term guests typically stay longer than hotel guests, “roughly half of short term lodging room nights coming from trips of seven days or longer”
7,436 total short-term lodging listings in City of San Diego, estimated (as of June 2017). 11,530 estimated for San Diego County.
In 2016 San Diego County had 30.4 million visitors, 17.4 million overnight visitors. That would be an average of 47,671 overnight guests per night in the County.
The short-term rental issue continues to be a hot topic in San Diego and a good explainer for the current status can be found here on Voice of San Diego (from Nov 1, 2017). A full City Council hearing is expected to be held on December 12 although a recent hearing was cancelled on short notice in October so we’ll see how the December hearing plays out.
I’ve been thinking about vacant housing units in San Diego for some time and recently was reading about the issue in Vancouver, Canada. The data provided was much more thorough than anything I found locally so I wanted to use it to estimate what the numbers might be in San Diego. Following is my take and links to the underlying information from Vancouver. If you have information on this topic I’d love to connect or hear your input.
This article from the Vancouver Sun from February 2017 lays out some good information about vacant housing units in that city, which in recent years has been often in the news for quickly rising housing prices. Included is the following:
The figures from “2016 show there were 25,502 unoccupied or empty housing units in the City of Vancouver” (below graph from article shows the growth in this number from 1986 to 2016, a period during which Vancouver real estate prices skyrocketed)
This figure is for the City of Vancouver, not the region, and represents 8.2 per cent of total housing units
Per City of Vancouver, there were 309,418 total dwelling units in the municipality as of 2016. This total supports the above calculations (309,418 x 8.2% yields 25,372 or roughly the same amount as show in bullet one)
In response to the high housing prices in Vancouver, the city levied a 1% property tax surcharge on vacant units to push owners to add the units to the housing supply for renters or other owners.
I’ve been trying to find vacant number estimates or similar studies in San Diego and have asked various reporters, housing industry experts, random Twitter users, and other avenues to seek this information. The answers I have received have been all anecdotal but mostly consistent – there are a lot of Downtown condos and probably a fair share of other units that are mostly vacant but it’s hard to ballpark the percentage.
Vancouver is a relatively similar city to San Diego, located on the west coast of North America and with high housing prices and demand. Below are some basic demographic and economic factors – San Diego is larger but in the same ballpark, a large regional hub in a developed country.
Poplulation (metro) – Vancouver = 2.3M, San Diego = 3.3M
Poplation (city) – Vancouver = 647,520, San Diego = 1.4M
Housing units (city) – Vancouver = 309,418, San Diego = 526,663 (1/1/2015)
Since I can’t find a good local estimate for vacant units I thought Vancouver would be a reasonable estimate, or at least a starting point for conversation and hopefully the SD City Council, EDC, Chamber of Commerce, or other party could commission a study to quantify this aspect of housing stock in San Diego. (I would guess the amount would be higher in San Diego than Vancouver given the long history as a vacation destination, the warmer weather, and the presence of large population centers nearby – Los Angeles, Phoenix, Las Vegas, etc.)
The SANDAG numbers may best reflect the number of vacant units, but it’s worth looking at a portion of the above referenced Vancouver Sun article which notes that the private study produced a vacancy rate more than double existing city estimates.
“The census numbers of unoccupied units are more than double an estimate released by city hall last year because a completely different set of criteria and data were used.
Assessing the extent of empty or underused homes can differ depending on “your measurement tools,” said Yan.
While the census might count a greater number of folks who are, say, on extended vacation during the census period, the city’s estimate was criticized for likely missing the number of units used for only short, seasonal periods, perhaps one or two months in the summer, but then are left vacant for the rest of the year.”
So, based on SANDAG’s vacancy rate of 5.2% we would have 27,386 vacant units in San Diego. Using the Vancouver vacancy rate of 8.2% would estimate 43,186 vacant units here. And if we thought that the government estimates are off by half due to sampling methodology, as they were in Vancouver, we could use a rate of 10.4%, yielding 54,773 vacant units in San Diego.
Given the large impact that property tax rules in California can have on homes held for long periods (Prop 13 being most prominent) I would think the vacancy number in San Diego would be at the high end of the above numbers, probably 50,000 or higher, maybe much higher. Prop 13, over time, can result in incredibly low property tax burdens for long-time owners. Prop 13 allows properties like the amazing home below, currently for sale for $1.7M, to pay a total of $136.97 in total taxes a year – a rate of .008% rather than the approx 1.05%, $17,850 a year, if taxes were applied on market value at existing property tax rates. When holding costs are essentially nothing, there’s greatly decreased incentive to sell and little cost to holding an empty property. It’s probably a large part of the reason the house across the street from me in desirable North Park, which is worth around $750k, has sat completely empty for the 4 years I’ve been in the neighborhood.
I’m not advocating for an empty house tax as Vancouver did, but seeking to get an estimate of vacant units in San Diego to consider a similar or other action. Being involved in the short-term rental (aka Airbnb) debate here the impact of short-term rentals on housing availability and prices frequently comes up. It’s undeniable that increased demand has an upward effect on housing prices. However, short-term rentals produce economic activity for owners, businesses, and the city whereas empty units do none of those things. Upper estimates of short-term rental units in San Diego are around 15,000 (I would guess it’s around half that number) – likely far dwarfed by empty units in our city. We would be much better served putting vacant units on the market rather than reducing economic activity, entrepreneurial opportunity, and property rights by greatly restricting short-term rentals.
I use my bike mostly for function – getting to and from places, shopping, going to dinner, etc. One of the best purchases I’ve made was getting pannier bags, which make it easy to carry items and more comfortable than using a backpack or handheld bag. Pannier bags attach to a basic bike rack (front or rear) and are a convenient way to carry goods, or to carry camping supplies if going for a long recreational trip.
A couple of years ago I bought a used set of Avenir pannier bags for $10 a piece. They have some nice features like:
Reflective trim to increase visibility
Two bottle holders
One large pouch for large items (I’m usually carrying a laptop or papers) with clip straps to secure and expand or shrink height
Small zippered pouch for easy access to wallet, keys, etc.
Clips to secure bag to bike rack and reduce chances of falling off
Waterproof with drawstring tie on opening
I went to the grocery store the other day and took some photos to show what a shopping trip by bike looks like. I sometimes see newspaper articles or comments online about how non-functional it is to buy food items on a bicycle. I strongly disagree – the parking is usually much easier, it’s cheaper than driving, and with a couple of good bags carrying your items home is a breeze.
Here’s my bike with two pannier bags full of groceries – I didn’t put the chips in the pannier bags for fear of crushing them although there was room in the expanded upper portion if I wanted to use it.
On returning home, I unpacked the bags on our table and took this photo to show the amount of food that can easily fit in a pair of bags. We were cooking for a get-together so some of the items are in bigger quantities than usual but overall a pretty good idea of an average grocery shopping trip for me by bicycle.
We’re fortunate to live in an area with a number of grocery stores within a mile. I often walk instead of biking, but often pick up a couple of items in other areas when I’m coming home from work or other activities. Pannier bags are a great addition to any bike and I highly recommend getting a pair.
This morning a number of media outlets are reporting on a new proposal by four San Diego City Councilmembers regarding short-term rentals. Below is a copy of the memo released that was included in the Voice of San Diego Morning Report today. I wanted to share as I received a few messages about this today – I haven’t had time to read through yet but with the City Council likely to have a hearing on this issue in October or November it sounds like another option that will be on the table for discussion.
I’ll try to do a summary post in the next day or two but wanted to put up the full document for the meantime.