ETF 101

Welcome back RIPvestors, time has come to get back to my investment series.

We’re going to cover the very large ETFs world in this post, the preferred mustachians instrument to join the stocks party!

Disclaimer: I’m not an expert on this subject. I’m here to share what I know with you, my novice reader, since I think it’s more than enough to get started with ETFs. I’m here to learn more on ETFs from you, my dear expert reader, so that I can improve my knowledge and act better.

Another Disclaimer: I’ll run a simulation and finally pick an ETF at the end of this post. I’m not affiliate to the financial institution emitting the ETF. I actually own ~100k USD in shares of this ETF, so it’s a product I recommend because I’ve direct experience with it. I’m not here to sell you something!

Intro

Hey RIP, what’s an ETF?

Hello friend, long time no see!

We’ve seen in a previous post what generic investment funds are and the difference between actively and passively managed and how we should aim to invest into passively managed ones.

We’re going to explore here the Fund Structure, i.e. how the fund capitalization is collected, how profits are distributed and how shares of the fund are traded. We’re going to explore 2 different fund structures: ETF and Mutual Funds.

A possible structure is the following: you want to join the fund, decide which amount you want to invest on it, deposit the amount to your fund account and then you own a fraction of it. The total fund capitalization increases when new investors join. This extra money is used by the fund manager (or by the algorithm) to buy new assets according to the fund strategy. If you want to disinvest, the fund manager is forced to buy back the number of shares you want to disinvest at its current market value. The total fund capitalization decreases when investors quit. It means the fund may need to sell assets to pay back the quitting investors. This is the common pattern of Mutual Funds.

Another fund structure that’s getting every year more popular is the Exchange Traded Funds. ETFs capitalization respects the closed-end model, meaning that no money flows in or out of the fund once created – with some exceptions (accumulating funds). So at creation time the fund size is defined and so is the individual share size. Shares are then traded on stock exchanges like regular stocks. Initially all the shares are held by the institution who issued the fund (the trust company).

An ETF can be liquidated, which means:

  • the trust company sells all the assets
  • each shareholder redeems their shares
  • the fund then disappears.

Let’s make an example: I want to create an ETF with 100,000 CHF of capitalization and shares of 10 CHF, an unrealistically small fund. My fund will than have 10,000 shares initially worth 10 CHF. No matter how many investors will come and go, the fund will always have 10,000 shares.

My fund invests on stocks of italian companies that produces Mozzarella. With a capitalization of 100K we buy 1K shares of MammaBuona, 30 CHF each, and 1K shares of PizzaBella, 70 CHF each.

The day after buying the stocks, MammaBuona performed great and their share is now worth 40 while PizzaBella performed poorly and its share is worth 50. Total value of the fund portfolio is not 90K and so each share is now worth 9.

Wait, RIP, what does it mean that ‘a share is worth 9’? Aren’t they traded like regular stocks? So they are not strictly bound to their basket value… they may go crazy due to other factors, like normal supply/demand. is it correct?

Good point. Here things become a little bit obscure to me. You’re technically right, things traded on a stock exchange can go crazy. Let’s say your fund management skills demonstrated you beat the market everytime, then investors may be willing to pay more than the market value of the assets in your basket, since you’ll surely beat the market again. I lack knowledge here. Wikipedia explain that: “The ability to purchase and redeem creation units gives ETFs an arbitrage mechanism intended to minimize the potential deviation between the market price and the net asset value of ETF shares“. So let’s set this problem aside for a while. Well, let’s say for ever, I won’t come back on this.

“Ok, cool, but why do you advice ETFs and not Mutual Funds?”

That’s just personal taste. In US they love MFs slightly more. They have Vanguard, which is the best mutual fund company ever. Accessing Vanguard funds from Europe is more complicated and has financial implications (US Estate Tax, US dividend withholding…)

I personally prefer ETFs over MFs for the following reason: MFs bind you to a specific financial institution, while ETFs don’t. They may change their trading fees, they may go bankrupt, they may do aggressive marketing and force you to open other financial instruments with them (like bank accounts, credit cards…). Every bank has their “awesome funds you should buy” and a cool financial advisor that “works in your best interests“.

ETFs are kind of open source. Once they lift off they require less management (no external cash flow to handle) so it’s easier to make them passively managed, getting in/out is instant and cheap and they usually have lower Total Expense Ratio (TER). You don’t need to join any bank, you just need a broker to access the stock exchange(s) where the ETF is traded. ETFs are rapidly becoming the de facto standard for low cost fund investing, i.e. passively managed index funds.

Some may argue trading ETFs has 2 points of failure instead of one: the broker and the trust company managing the fund. My reply is that both have few (zero?) connections with the fund managed assets. And the closed-end structure cuts off some of the malicious strategies like Ponzi / Madoff schemes.

For the sake of completeness, here‘s a good article about why invest in Mutual Funds instead of ETFs.

Ok, cool, please RIP tell me more about stocks ETFs

Sure. We’ve previously discussed why you want to track Stock Indexes and why you want to differentiate among them. I’ve also disclosed my Asset Allocation so you know which indexes I want to track.

ETFs are tools to make your strategy happen, they are not a substitute for your strategy.

…Or are they?

Ok, let’s digress a little bit on the cost/control spectrum, i.e. how to implement your diversification strategy among the stock component of your portfolio. Usually delegating control (simplifying) comes at a cost. You could:

  • Buy individual stocks, and manually diversify. Total control, low maintenance costs. Well, costs may not be very low since you might end up frequently trading low volume stocks to rebalance your portfolio incurring in high trade fees.
  • Buy N funds that track stock market indexes and keep their value balanced (according to your strategy). You may hold a US S&P 500 Fund, a Europe Stoxx600, an Emerging Market, a Pacific… and rebalance yearly/by-quarterly/quarterly/monthly. Minimal costs, good control.
  • Buy a single World fund that tracks the entire world market, like the MSCI World Index or FTSE RAFI All-World 3000. A fund tracking such indexes keep self balancing to reflect world market capitalization and – in each market – to reflect company capitalization. Can be seen as a “fund of funds”. Given the slightly more complex behavior, usually world ETFs have higher costs (TER), in the order of 0.2 – 0.3 vs <0.1 of funds that track geographic (US, EU…) stock indexes. So, higher costs but less control. You may even buy more World funds to avoid keeping all your eggs into one basket, where the basket is the trust company managing the fund. You may even open more brokerage accounts to hedge against points of failure…
  • Use a Robo-advisor. Robo-advisors are (Wikipedia): “a class of financial adviser that provide financial advice or portfolio management online with minimal human intervention“. Essentially they are bots that keep your assets balanced, buying and selling shares on your behalf, according to a strategy. You throw money on your account and your robo-advisor knows how to allocate it. You want to withdraw from your account and your robo-advisor decides what to sell. This service comes at a price on top of the funds’ TERs. Here‘s a good US-centric article about robo-advisors. Popular robo-advisors are: Betterment, WealthfrontTruewealth (available in Switzerland). We’re not going deep there for now. Check out this MMM post about Betterment, this TSD post about Wealthfront and this JLCollins post about Vanguard for more info. Even higher costs, zero control.

I know people who operates at each level of this spectrum. Personally I adopt the “Buy N funds” approach. Minimal complexity and minimal costs.

Now we can finally dive into the mechanic of a single ETF tracking a single Stock Market index.

Is that all you can do with stocks? I heard about High Frequency Trading, Option Writing, Dividend Growth Investing…

Sure, there are countless opportunities, I know. It’s just that I’m a novice investor and all my limited knowledge is about long term investing on Stock Market Indexes. I don’t care about speculative high risk short term investments, I’m not a daytrader and I don’t wont to become one.

I’m both curious and suspicious about long term optimality of Dividend Growth Investing though. DGI means holding stocks of companies who have a long track record of having emitted constantly growing dividends over time. Here‘s an amazing introductory article on apathyends blog. Other excellent articles here and here. The good of DGI is that it’s a passive revenue stream without you having to touch the principal. The bad is that a company that issues growing dividends over time limits their potential long term growth. It’s not a coincidence that the strongest companies on the market today don’t issue dividends. Anyway, let’s just not waste time here to discuss this.

Wait, why just stocks? Why not go for angel investing, estates, precious metals, cryptocurrencies…

Wait wait wait, let’s step back. First you do your homework by asking yourself the following questions:

Q: What are your financial goals? Why are you investing? Short term? Long term?
(Mr RIP) A: I want to to reach FI and would like to live off of my portfolio profits forever.

Q: When will you need your money back? How much risk and volatility can you handle?
A: Ideally I’ll die at incredibly old age with my money still invested. I still need to be able to periodically withdraw something from my assets (ore use dividends/interests/profits). I can accept high volatility on a portion of my assets, given higher expected returns.

Q: What you feel comfortable investing in?
A: Nice question, thanks for asking 🙂 Well, this requires more space and time to elaborate, take a look at my IPS. Tl;dr: my AA (Asset Allocation) cover all the risk/reward spectrum, from super safe no reward (cash) to low risk low reward (bonds), average risk high reward (stocks) and potentially, in future very high risk high reward (angel investing / startups).

Q: Do you understand your investments?
A: Yes, I know the products I’m investing in, I’m in control of my portfolio. I made my investment choices and I’m ready to adapt them given new evidences. I know the risks. What I don’t know yet is my reaction if (when) things will go south. Will I be able to not panic? Life will tell.

Ok, ok, I got it. But I also heard of Small Cap, Large Cap, Tech, Finance, Banking and a lot of other sectors that have indexes. How am I suppose to pick my indexes? Just by geographic ares?

That’s a very personal question. Each one has their own taste and want to place their bets. My personal opinion is that sector-specific investments are inferior differentiation techniques – but I invest in a US Tech ETF, home biases die hard – while market capitalization categories are good tools to differentiate in risks/reward. Historically small caps have better returns but higher volatility. I differentiate among Large-Mid-Small Europe and Large-Small US.

Ok, let’s get back on track. You know your goals, you control your Asset Allocation and time’s finally come to pick the right ETFs to implement (part of) your strategy.

(continue on next page)

April 2017 Financial Update – Quaranta

Hi RIP voyeurs,

April 2017 is gone and hopefully this new wave of winter is gone too. Before jumping into numbers let me explain why you didn’t hear from me for an entire month. April has probably been one the busiest month of my life so far, so many things happened! I had no bandwidth for writing and blogging and several other activities. My “watch later” list on youtube crossed 200 videos and my “read later” bookmark folder crossed 1000 (!!) links, maybe it’s time to declare a “bookmarks bankrupt”?

Anyway, I’m fine with that (for now). My April 2017 has been filled with so many amazing life experiences and I chose to fully enjoy them with no commitment on blogging except for this monthly financial (and personal) update. I don’t see myself blogging much more for the next 2 months given we’re organizing the Italian Wedding and then going on Honeymoon for 4 weeks. I’d be surprised (and very happy) in case I am wrong on this.

Welcome back to my monthly update. As usual, the reference doc is my NW spreadsheet.

Overview

Numbers may not grasp the actual goodness of this month. NW Delta +8,078 EUR may seem not that good but I’m actually very happy!

Major wins for April 2017:

  • Mr Market bullish again, most of my ETFs went up, with the STOXX600 horse (Euro area) running like crazy after France election!
  • Contained expenses. Yes, above 5k CHF this month but more than 1K is extra and one-off (Travel, Wedding, my 40th Birthday party, quaranta anni). We did good after all.

Losses of April 2017:

  • Very strong EUR currency. France elections boosted EUR currency and stocks. I measure my NW in EUR while I own assets in 3 currencies. It means my NW measured in EUR got a bump. Anyway, not a big deal, currencies fluctuate. On the bright side, my NW in USD got a +23.5k, that’s an incentive to retire in US, lol!
  • Naked Hooli salary. No bonuses, no stocks, just my very naked salary this month. Turbo-Sad.

Other Financial Facts

  • I have 13.5K sitting in my brokerage account. That’s my timid attempt to time the market, proven wrong so far. 10K are sitting since a couple of months, 3.5K since the beginning of this month. Market performed well, so wasted opportunity here. Never time the market!
  • We are accumulating cash. Now that both my salary and Mrs’s one are flowing into the shared account, we have a fat cash reserve. This is not an attempt to time the market, it’s more about we should sit together and discuss what to do with money. We have a wedding + honeymoon coming so we’ll need cash. Will think about it in July, after Mrs RIP takes her very deep financial course with an awesome teacher: myself 🙂

Other Facts

  • Theater theater theater! 2 amazing weeks of plays. It’s been a success (for an amateurial company) from every point of view. Attendance satisfied, new friendships built, genuine feelings and whatever else. I found myself biking back home late at night singing and feeling very happy. That’s just the beginning, we’ll soon start planning next show and few summer activities, workshops, etc.
  • Run a relay Marathon. I spent the whole March training for it. I performed way better than expected. I’ve run 12 km in little above 1h. Next step: Half Marathon in September and probably a Marathon next year! Sadly, after the run I had a small calf muscle injury and I’ve not trained much during second half of April, but I’m getting better now and running again 🙂
  • Another Hike Trip, along the Via Francigena with Mrs RIP and a group of 16 people during Easter holidays. It’s my third hike trip in less than 1 year: May 2016 Italy Coast 2 Cost walking alone, October 2016 Via Appia with a dear friend and April 2017 Via Francigena with my wife and a large group. Three totally different experiences. This one was really amazing. From San Miniato to Siena, all in Tuscany. 5 Days walking a total of 100km with backpacks, almost always immerse in nature with no cars in sight. Not a very tough hike but spectacular landscapes and nice group. Made a lot of new friendships and, most important of all, Mrs RIP first hike trip stimulated her. She wants to repeat the experience! Another taste of FI life. Photo gallery at the bottom of this post 😉
  • Visited Rome while Mrs RIP went to Milan. I’m not going to Rome frequently these days. I went after Easter (for 5 days) mainly to give Wedding invitation letters to friends and relatives. Meeting uncles, aunties, cousins and grandparents was fun, but spending a full sunny day hiking in Rome, 28km by foot, covering almost everything a tourist can do in a week was priceless.
  • I turned 40 years old. Since our life is so intense this season I asked Mrs RIP to not do anything spectacular for this special date. No big celebrations. She can’t help, she organised what was supposed to be an informal “apero” at our place and became a 20 people thing with 24 hours of upfront preparation, cooking and organization. But it’s been a very warm and frugal party, I love my wife!
  • Loosing weight took a pause. Intense sport month till Francigena hike, then dropped everything. With an intense life I had trouble keeping up with good habits. Bad weather and a calf muscle problem set me down for a couple of weeks. I allowed myself to overeat and drink a little bit too much during theater nights and travel. Getting back on track in May.
  • blogged ZERO this month. Enough said. I’ll be back.
  • Having hard time keeping up with my waking up early habit. Several late evenings both due to theater and celebrations of various kind. But it’s ok and I’ll be back on track soon.
  • I met MP! Yeah, I physically met the awesome person behind The Mustachian Post blog (and forum)! We met for lunch and we had a 2 hours intense discussion over soooo many interesting topics. We seemed happy like children, like we knew each other since forever. It’s so fulfilling to know you’re understood and you speak the very same language 🙂 I hope we’ll meet again soon, maybe at FIWE?

Numbers & Details

Total Income for the month was 16,770 CHF (cell H40). Base income for both of us. I started putting Mrs. RIP Pillar 2 contributions in our NW and cash flow.

Total Expenses for the month were 5,070 CHF (cell H41). Without Wedding expenses 4,547 CHF (cell H45). More details on my expenses sheet.

Expenses highlights:

  • Wedding. 523 CHF, payments for photo shooting, flowers and make up.
  • Travel. 442 CHF, Francigena expenses like hotel room for the night before starting the trip, in Bologna, and cash expenses for food (and beers) for the 5 days.
  • Groceries. 891 CHF, kind of a lot. We did a bulk grocery purchase in Italy and spent quite a few bucks in groceries for our “frugal” 40 years old Mr. RIP party at home. It’s ok.
  • Transportation. 231 CHF for train tickets, tickets from Siena to Rome (me), Milan (Mrs RIP) and then back to Switzerland for both of us. Probably these should be budgeted to Travel.
  • Dinners out. 102 CHF, essentially we didn’t go out but on the very last day of the month, still on “40 years” celebration mood.
  • Leisure. 547 CHF, Theater, theater tickets I gave to relatives that came to watch me acting, a day in the SPA (40 years old celebration, ok, not so frugal) and Mrs. RIP cash withdraws. We can do better here.

Total savings are 7,953 CHF (cell H42), not too bad after all.

Saving rate for the month is 61.1% (cell H43), excluding Wedding 65.1% (cell H46).

Saving rate for 2017 so far: 69.4% (cell Q43), excluding Wedding 75.1% (cell Q46).

Net worth is 631,502 EUR (cell H17), Delta is +8,078 EUR (cell H18), percent +1.30% (cell H19).

The progress bar changed from 56.28% to 57.01% , with a step of +0.73% toward the big goal.

Forecast for 100% FIRE: 35 months left (+1 months), i.e. forecast Fire Date is March 1st 2020, (cell V10). Uff, the goal is moving faster than us. I knew that since 12 months linear forecast is stil consuming those awesome 2016 months when NW delta were above 20k per month.

Current Monthly allowance: 1,710 EUR (+22 EUR, cell V13).
Current Withdrawal Rate – Real:  8.85% (-0.23%, cell V15).
Current Withdrawal Rate – Ideal: 5.70% (-0.07%, cell V16).
Years of Ideal expenses accumulated: 17.5 (cell V19). If we cash all our assets we can live with 3k EUR per month without the need of any money until end of 2034, assuming no income and no investments. Reassuring, isn’t it? 🙂

Next Steps & Other Updates

  • Prepare myself psychologically for the ~20k Wedding&Honeymoon expenses over the next 3 months
  • Invest these 13.5k I have sitting in my Interactive Brokers account.
  • Keep postponing financial chores (close UBS account, Pillar 3a for Mrs. RIP, Pillar 3a funds instead of saving account for both of us, invest more instead of keeping too much cash)

How was your April? Mine was ridiculously intense!

Enjoy this gallery of Via Francigena’s hike!

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March 2017 Financial Update – Marriage edition

Hi RIP voyeurs,

March 2017 is gone, spring arrived earlier this year in Switzerland. At the time of writing this post it’s 23 degrees and I’m biking to work wearing only shorts and t-shirt!

Welcome back to my monthly update. As usual, the reference doc is my NW spreadsheet.

Overview

A very unusual month and hard to compare with others, mainly for a special reason:

♥ We got married ♥

Yes, Miss RIP is now finally Mrs. RIP. Ok, I previously explained that we’re going to celebrate in Italy later this spring with relatives and friends, but we got legally married few days ago in Switzerland! So yeah, I’m getting married twice this spring. Cool. And turning 40 years old. Less cool.

Ok, back to the finances. From a financial standpoint, getting married in Switzerland means life is split in before and after. We keep as individuals, what we had before. We share what we’ll earn after. It means we now have individual economies and a shared economy. Since almost 3 years we were already contributing into a shared account so we’re used to a shared economy. But we did that just to cover for shared expenses, not to accumulate wealth. Contributions were similar to taxes. Each one had to take individual decisions to manage his/her own wealth.

Now every source of income goes directly into the shared account. We’re responsible together for every new purchase, debt, investment. To make this manageable, Mrs. RIP delegated shared wealth management to me – but I demanded we do monthly reviews together and I’ll also offer some basic financial lessons to her. I’m not ok with being alone understanding our finances.

About expenses, we need approval of both for shared expenses above a certain amount (still undefined) and we allow 500 CHF each for monthly individual expenses with no question asked. At the end of each month we send 500 CHF to our individual accounts.

Net Worth. I used to track my net worth plus the shared one. Since we plan to reach FI together and since I just care that we, together, will reach FU Number, I’m going to merge the NWs and track the sum of them. I know, it’s risky for several reasons:

  • Mine is bigger. I mean my NW is an order of magnitude greater than hers. But we’re together and I don’t care. I’d already be FI if I had to cover just for my personal expenses.
  • I lose a bit of control over Saving Rate and NW: every individual Mrs. RIP expense would impact the saving rate and our total NW. But yeah, that’s true anyway 🙂
  • I lose a bit of control over Asset Allocations: Mrs. RIP has some cash, more than what’s reasonable for a normal emergency fund. She’s not into investments and I don’t want to force her. I’m ok to push for aggressively managing our shared wealth, but not her individual one. Summing our NWs would skyrocket the cash component. Not a big deal, I will compensate as much as I can reducing my own cash reserve and the shared one.
  • I lose expenses trackability: I don’t want to (and I totally shouldn’t!) track Mrs. RIP individual expenses, but I’d like to get a sense of total amount. I’ll keep accounting individual expenses I see on our credit card into their own bucket, but her cash payments are not tracked individually. When she withdraws cash, I just consider it as a Leisure expense at withdraw time.

Given all the above, this month we had an obvious nice jump on total NW, with a NW Delta of +45,331 EUR I’d like to fuzzy a bit Mrs. RIP’s NW so I won’t provide many breakdowns.

Anyway, as usual, here are the major wins for March 2017:

  • We got married. It’s a win 🙂
  • Mr Market got a cold mid month but he’s back on track! My Euro Stoxx600 ETF, where I invest ~150K EUR, went up 3%. Both Emerging Markets and Pacific went up 2.5% – 3%. US market ETFs stayed stable overall, with Tech (again!) covering for Small Caps’ losses.
  • I’m the new swordmaster! I did something unprecedented (well, I’m not sure) in Swiss history: I contested a medical bill and got a reduction! Well, not much, just 16 CHF from 354.40 to 338.60 but believe me it’s a great feeling. The story is: understanding Swiss medical bills is impossible, they have hundreds of complex entries. Even though my German is not very good, it’s good enough to understand that they charged me ~40 CHF for a “phone consultation” of three 5-minutes blocks, i.e. 15 minutes. What actually happened is that they call me to tell me “your blood exams are good, let’s meet again end of March, bye bye“. I went thru my call history and I found the call to be 2 minutes and 9 seconds. I walked in their building ready for a fight and I obtained a 5 minute block cut from our “phone consultation”. Plus I canceled the checkup visit.
  • Hooli stocks vesting. Extra money. I sell them automatically as soon as they vest. The proceedings are sent to my IB account ready to be invested. I have vesting events in March, June, September and December. June and December are major vesting events, March and September are minor ones.

Losses of March 2017:

  • Too many expenses. Dangerously close to 7k CHF. Ok, there are one-offs here, like 2170 CHF Wedding related, 830 CHF travel related, the above mentioned 340 CHF for the medical bill, but there will always be one-off expenses every month (hopefully not wedding related after July!).
  • Stronger EUR currency. Since I measure our NW in EUR and we own assets in EUR, CHF and USD, having a strong EUR means our NW performed worse. The USD was losing 3% till few days ago, it eventually recovered most of if.
  • Naked Hooli salary. No bonuses, just my naked salary this month. Sad.
  • Having hard time keeping up with my waking up early habit. Several late evenings both due to theater and celebrations of various kind. But it’s ok and I’ll be back on track soon.

Other Financial Facts

  • Changed Target Safe Withdrawal Rate (SWR) to 3.25% after a very deep dive thru the incredibly amazing Ultimate Guide to Safe Withdrawal Rates, on earlyretirementnow blog. Everyone who’s planning to retire on investments should definitely read all their posts! Previous target SWR was 3.33% so it means we’re playing it safer and we’d require a bigger FU Number.
  • Increased Target monthly allowance to 3000 Euro per month. Another safety margin at play here. Another FU Number increase. I don’t know if it will be the last one, I may play with monthly allowance more in the future. Anyway, these two factors pushed FU Number to slightly more than 1.1M EUR.
  • I’ll Track Saving Rate (SR) with and without Wedding Expenses. Wedding is (hopefuly) one-off. We’ll face wedding expenses till July (Honeymoon) and forecasts are north of 25k EUR, including Honeymoon. My principles say that I should save at least 50% of my take-home pay and I want to measure it against standard expenses, not extraordinary ones.

Other Facts

  • I lost weight. How much? Roughly 5 kg. How? A combination of few things worth a post on his own 🙂 Here’s a teaser trailer: strong motivation (getting married in June in Italy, want nice pictures), accountability (signed up for a half marathon happening in few days, a 5 days hike trip in Italy with Mrs. RIP during Easter and a triathlon in August) affirmation (got inspired by Tim Ferriss Show episode with Scott Adams, anyway, more on this in its own future post), mindfulness eating and tracking. I’m not done. I plan to keep going till end of the year and hope these new habits will stick and become the new normal.
  • Theater Acting Intensified. I’m on stage these days. 2 weeks of plays. We spent most of March doing rehearsals even during the weekends. I love this kind of life. That’s another taste of FI. I remember back in 2002 when I started (ouch, 15 years have been passed, how old am I??) I was close to quit my studies to go all-in with theater acting. Good thing I didn’t, but at the time I wondered “what if…”. Well, reaching FI means I can discover “what if”! I’m really craving for it. I look forward to having more time to play even more intensely. That’s yet another reason not to go out for dinner or spend money on happinessless things.
  • I blogged almost ZERO this month. Too many things on my plate. But I’m way happier thanks to increased physical activity, more outdoor time and theater acting, so I don’t actually care. But yes, I have a new series (and several dozens of new post ideas…) for this blog coming soon. Stay tuned!

Numbers & Details

Total Income for the month was 16,770 CHF (cell G40). High income due to Hooli stock vesting and Mrs. RIP salary. I’m not counting Mrs. RIP Pillar 2 contributions yet.

Total Expenses for the month were 6,932 CHF (cell G41). Without Wedding expenses 4,765 CHF (cell G45).

More details on my expenses sheet.

Expenses highlights:

  • Wedding. 2,167 CHF, some payments for rings, dresses and a luxury lunch with close friends here in Switzerland.
  • Housing. Italian condo fees 120 EUR.
  • Health. 338 CHF for the doctor visit and the phone consultation I mentioned above.
  • Transportation. Good month here. Few trains tickets purchased for Mrs. RIP’s family to come to visit us beginning of April (to see me acting) and no monthly local pass for me. I bike to work with this nice weather!
  • Travel. Paid off our 5 days hiking trip with Mrs. RIP along the Via Francigena during Easter (in a couple of weeks!) and purchased some gears for it, mainly hiking shoes (mine wore out after more than 10 years).
  • Leisure. As I said, Mrs. RIP cash withdraws go here.

Total savings are 9,838 CHF (cell G42), not bad, above the acceptability threshold.

Saving rate for the month is 58.7% (cell G43), excluding Wedding 71.6% (cell G46).

Saving rate for 2017 so far: 71.4% (cell Q43), excluding Wedding 77.4% (cell Q46).

Net worth is 623,424 EUR (cell G17), Delta is +45,331 EUR (cell G18), percent 7.84% (cell G19). As I said, these numbers are kind of meaningless this month since we joined our NWs.

The progress bar changed accordingly, from 57.81% to 56.28%, with a step of -1.53% toward the big goal. This is because we moved the target away.

Forecast for 100% FIRE: 34 months left (+4 months), i.e. forecast Fire Date is January 1st 2020, (cell V10).

Current Monthly allowance: 1,688 EUR (+136 EUR, cell V13).
Current Withdrawal Rate – Real:  9.08% (-0.44%, cell V15).
Current Withdrawal Rate – Ideal: 5.77% (+0.00%, cell V16).
Years of Ideal expenses accumulated: 17.3 (cell V19).

Next Steps & Other Updates

  • Not closed UBS account yet, too busy. Will April be the month?
  • Not made any decision about Pillar 3a investments for both me and Mrs. RIP with PF yet.
  • I have 10K CHF and soon 3.3K USD sitting on my Interactive Brokers account. Need to think what to do with them.
  • Not planning to invest shared money in April, even though our cash reserve is higher than planned. Keeping cash for Wedding & Honeymoon expenses.

How was your March?

Mine was veeeeery intense 🙂

I don’t get credit cards

Hi RIP friends,

I got my first real Credit Card few days ago. I didn’t own one before. Well, as I’ve previously explained, I had some sort of similar tools, like prepaid credit cards and a Hooli issued real credit cards, but that’s another story. With the prepaid cards you don’t get a line of credit and the Hooli card is for work related expenses. I’ve never considered it mine.

I never had a real credit card, I’ve never experiences this sort of monthly threat “pay your bill or we’ll destroy your finances“. It feels strange. And wrong.

Anyway I don’t get it. I don’t understand why it works this way. The system is broken and inefficient, I really don’t understand why.

Let me explain.

RIP, why are you complaining? Why you got this card??

Ok, let’s start with why.

Apparently some sort of Visa/Mastercard is needed in modern world if you want to buy things online. Physical purchases in your home country can still be resolved with debit cards / atm cards / cash. Did I tell you I hate cash? I’d love to experience the disappearance of physical currencies! Physical purchases in another country usually require either cash or some sort of credit card, regular or prepaid. And then there’s US, where for most actions you need a credit card, like car rental, bike rental (!!), hotels… That’s because with credit cards they can reserve an amount for eventual damages or “in case you don’t return the bike”.

Most of the purchases I do in Switzerland can be resolved with PostFinance card, which is a debit card that’s accepted on every Swiss website and physical shop, and it’s bound to your PostFinance bank account.

I hate cash. I avoid using it as much as I can. Did I tell you?

There’s only one money related thing I hate more than cash and it’s debt. I hate debt! Maybe it’s because I experienced so many time (in third person) people going mad due to it.

So, I got the card. It’s a Cumulus Mastercard, issued by Cembra Money Bank and connected with your Cumulus Migros account. Essentially your fidelity card for the Migros world. Migros is the biggest grocery chain. Well, not only a grocery chain: Migros is everything. A bank (Migros Bank), phone company (Migros mobile), IKEA-Like (Micasa), electronics (M-Electronics), gas (Migroil), language courses, flowers, travel, farmacy, you name it.

How does this card work?

  • You do your purchases, they anticipate the money for you. You pay later.
  • If you pay your monthly credit card bill, it will be the face value of the money advanced. No interests, no fees. A 0% loan.
  • You get points for using your card. We’re talking about 1% of your purchases in the Migros circuit and 0.5% of your other purchases back in terms of cumulus points. Actual cash, if you’re a Migros customer (I challenge you not to be one!).
  • You don’t pay any annual fee.
  • You get sign up bonus (3000 points, i.e. 30 CHF).

My first reaction was “where’s the trap? It can’t be that good!

I’m so used to only spend money when I have them, I’d never miss a payment. Why am I rewarded to get a service from an evil company without paying a dime?

Are they just hoping I miss a payment so they can charge 9.99% interests? Is that all?

If that’s all, the system is bugged my friends. It’s an horrible system. Ok, I get the benefits while someone else is paying with interests rates above usury limit, but that’s stupid!

Then I start looking closer at how people use credit cards, reading posts about “avoiding credit cards debts” or the concept of “minimum payments”… holy sheet, do people only see the “credit” word in “credit card”?

Apparently yes, they do. If you get a credit card with 10k limit, you may see it as “cool, I get another 10k to spend“. No no no no it doesn’t work this way! It shouldn’t! Credit cards are not cheap loans.

Credit cards are too good for smart people to be true. You get rewarded for getting a 0% short term loan. This is not a stable system, it’s based on financial illiteracy! Too bad for dumb people.

So I thought: “well, if everyone started using credit card correctly they’d go out of business overnight!

That’s also not true.

They’re not charging you for your purchases, but you’re not the only one involved in the trade. They’re getting a hefty percentage from the merchant! That’s where things go really evil. That’s why some merchant will charge you extra fees for credit cards payments (looking at you, my dear low cost flight company). That’s why some shop won’t accept your card below a certain minimum purchase amount.

And here’s where the system is purely wrong and evil.

Ok, I can’t easily articulate all of my concerns, but I’ll try. Please, understand I’m an old man, getting dangerously close to my 40s, a man who’s born in an age without easy access to credit and always been scared by debts.

The system is based on splitting consumer and merchant worlds. They (credit card issuers) befriend and reward consumers and drain merchants. Divide et impera. They drain way more (2-7%) the merchants than they charm consumers (0.5-1%). Plus signup bonuses. Ok, that’s a little bit of exposure on their side, but the break even for them is probably very close to few thousands spent on your side. Plus yes, they’re close to explicit thievery when it comes to currency conversion fees, but that’s not an issue for most people who (unlike the RIPs) don’t live a three currencies life.

The system is inefficient. Consumers and merchants could find a 1.5% discount or so for “cash payments” and credit cards will be cut out. I don’t understand why merchants don’t offer discount for cash payments. Are they forced to be silent? Ok, I admit handling cash is boring, risky and obscure (money laundering? tax evasion?) and it doesn’t work for online shopping… but what about wire transfers? Ok, I know, debit payments are not immediate and can’t be…

But…

But what about cutting out the middle man here?

Why can’t I just have money and send money to someone without a middle man?

Than I watched this TED Talk. Did I tell you I love TEDs?

Enjoy

In my EGN about future I missed this one!

Are cryptocurrencies the solution for this inefficiency/robbery?

I think so.

Are they production-ready today?

I don’t think so. But sooner or later they must become. I don’t like the mechanics and the whole speculative world behind Bitcoin, but if I have to guess how the world currency is going to be in 100 years I’d bet on a decentralized credit system almost impossible to hack, i.e. Cryptocurrency.

Have a nice day… and use your credit cards judiciously!

February 2017 Financial Update

Hi RIP voyeurs,

February 2017 is gone, it’s been incredibly warmer than average here in Switzerland, it really looks like spring already!

Welcome back to my monthly update. As usual, the reference doc is my NW spreadsheet.

Overview

This was a strange month. First of all, lowest saving rate since started this blog, 50.9%. Ouch. Few unexpected medical expenses, some expected wedding expenses and lowest salary ever since joined Hooli made it. I guess next 3-4 months won’t be better, with wedding date getting closer. Second, very high NW Delta of +19,496 EUR. How is it possible? Last month we saved 23k and NW went up by 6k… this month we saved 5.5k and NW went up by almost 20k, am I cheating? No, it’s simply that cashflow is not the same as net worth. NW growth is affected by savings, investments growth, and (in our complex 3-currencies life) currencies fluctuations.

Anyway, as usual, here are the major wins for February 2017:

  • Market’s doing incredibly great! I’m here, sitting on my chair, waiting for the market crash, the apocalypse and all the things and nothing happens! Why? All my ETFs are up at least 3% during February. I’m so tempted to time the market
  • EUR is weaker compared to both CHF and USD. I’m tracking my NW in EUR and I’m exposed a lot to both CHF and USD. EUR/CHF moved a little while EUR/USD a lot. Both in the right direction. Does it seem odd to aim for a weaker reference currency?
  • Slightly greater than expected 80% salary. February is one of those boring month where I don’t have 13th, yearly bonuses or stocks vesting. So I can finally see what’s my regular salary about. My base net salary is ~86% compared to a base one from last year. Cool. 80% work, 86% pay 🙂
  • Miss RIP got a raise. A small one, still better than nothing. This raise in not visible here, since I’m not tracking (yet) her NW and we keep contributing in ratio 3:1 to shared economy. Wait… now that I work 80% and she got a raise my net salary is no more 3 times hers so we should change internal taxation! Nevermind, starting next month we’re going to join future incomes.

Losses of February 2017:

  • Expenses over 5000 CHF. I set 4k CHF as “we did great” threshold and 5k as “we should be worried” threshold. We went above the second one. The good news is that base expenses were ok. If we exclude wedding expenses (1141), unexpected medical expenses (364), book-in-advance-to-save-money train tickets (~200) and once-per-year expenses (165, Miss RIP’s Half-Price Card) then we are below 4k. It’s a weak excuse though, our life is so complex that it’s normal to have unexpected expenses. It’s kind of… expected!
  • Saving rate slightly above 50%. The minimum since blogging. Why? Because of both a base 80% salary and high expenses. At least it’s still above my acceptability threshold of 50%.

Other facts:

  • Invested more money. Sold Hooli stocks and invested the whole 14k from proceedings. Why did I sell them? Am I not being loyal to my awesome employer? No, it has nothing to do with loyalty. It’s about differentiation. I’m already exposed a lot in Hooli and in IT in general because that’s where I work. What happens if Hooli bankrupts tomorrow? I’d lose my job, my immediate ability to earn a lot of money AND my stocks. Differentiate for the win.
  • Another round of rebalancing, according to my IPS. When I wrote my IPS I defined what my ideal asset allocation strategy would be. My actual investments were not aligned with my strategy back then. I’m aiming to my ideal allocation without having to revolutionize all my investments (which would generate huge trade fees).
    my investment sheet

    So, here follows this month’s steps: sold another 20k of Tech US ETF (SWX:XLKS-USD). With 34k available (20k from selling Tech US and 14k from selling Hooli stocks) I purchased 17k of a Pacific ETF (SWX:CSPXJ-USD) and 17k of an Emerging Market ETF (SWX:CBMEM-USD). According to the investment sheet on my NW spreadsheet I’m almost good. The sheet is not in sync with my IPS though. I may tweak a little bit my IPS to include a 15/5/5 split of US exposure (large/tech/small) instead of 20/5 (large/small). Need to think about it.

  • 80% life kicking in. I’ve been able to enjoy 4 amazing 3-days weekends, the last of which have been spent entirely with Miss RIP, like a small 3 days honeymoon at home.
  • Got a credit card. Why? Wasn’t I showing off by claiming I never had a debt?? Well, keep these complains for next post about “my credit card experience” so far 🙂

Numbers & Details

Total Income for the month was 10,797 CHF (cell F40).

Income highlights:

  • ~7,900 – my Hooli salary + a spot bonus and some extras (base 80% salary ~7.5k).
  • ~1,900 – my Pillar 2 contribution.
  • 1,000 – Miss RIP contribution to shared economy.
  • 15 CHF – Migros Blue coupons.

Total Expenses for the month were 5,300 CHF (cell F40). Expenses detail on my expenses sheet. There are 10 CHF untracked from my new credit card that should show up in next few days. I’m going to backfill expenses once the issue is solved. Here on the right a screenshot of 2017 expenses so far. Click on it for details.

Expenses highlights:

  • Wedding (1,141 CHF), not counting several train tickets we purchased which are because of the Milan wedding.
  • Health. I got a tooth repaired in Italy for 170 EUR and I few exams in Switzerland for 183 CHF. Still waiting for another doctor bill expected in the range of 200-300 CHF.
  • Transportation. Purchased a lot of trains tickets (~200 CHF) for March, April and May. Successfully experimented blablacar twice! Here’s the story: it used to be simpler to find cheap train tickets to Italy on Fridays and Sundays. Sadly, it’s no more true unless you purchase them months in advance (that’s why we did some planning and crazy shopping for the months to come) and it’s hard to find discounted tickets on Sundays. We had to go to Milan a couple of weekends ago and there were no discounted tickets. Buying tickets full price (with half price card) for 2 people (round trip) would have costed ~220 CHF. A lot. We used to pay 10 or 20 each ticket (40-80 total). Just before I was going to buy the pricey tickets mumbling and complaining with “the system”, my beloved Miss RIP proposed “why don’t we try carpooling? Like Blablacar?” We tried, we spent 15 EUR per person per ride (75 CHF total considering blablacar fees and currency conversion), we had nice and comfortable experiences and we met great people! Strongly recommended! We’re still missing few tickets in our trips plan for the next 3 months, but we’re completely relaxed since we have a new default option!
  • Restaurants and “food outside house” above 300 CHF. A lot, I know. We indulged a little bit, but that’s a category that gives us a lot of value so it’s ok. Fondue with friends? I’m always in!
  • We went to an overpriced SPA with friends and spent more than 100 CHF for 4 hours. Nice experience but too expensive.
  • Several IB Trade fees (52 CHF) for investments.

Total savings are 5,497 CHF (cell F42), too little saved this month. Saving rate for the month is 50.9% (cell F43), barely acceptable. Saving rate for 2017 so far: 77% (cell Q43), declining too quickly to normality 🙁

Net worth is 578,093 EUR (cell F17), veeery good! Delta is +19,496 EUR (cell F18), percent 3.49% (cell F19). Good, thanks Mr Market and Mr USD!

The progress bar changed accordingly, from 55.86% to 57.81%, with a nice step of +1.95% toward the big goal. We’re almost back in the 2% monthly jumps world 🙂

Forecast for 100% FIRE: 30 months left (-3 months), i.e. forecast Fire Date is August 1st 2019, (cell V10).

Current Monthly allowance: 1,552 EUR (+54 EUR, cell V13).
Current Withdrawal Rate – Real:  9.52% (-0.23%, cell V15).
Current Withdrawal Rate – Ideal: 5.77% (-0.20%, cell V16).
Years of Ideal expenses accumulated: 17.3 (cell V19).

Next Steps & Other Updates

Money & Investing

  • Everything is ready to close UBS account, probably doing it in March.
  • Still thinking about a better Pillar 3a with PostFinance, like PostFinance Pension 25/45/75. TERs are high, considering that they are funds of funds, and market diversification is very low. They invest in Switzerland stocks, essentially 3 stocks (Novartis, Nestlè, Roche). I know there are better options out there but I’d rather stay within PF, my financial life is complicated enough and I don’t want to make it more complex. Plus, Pillar 3 constitutes less than 5% of my total wealth and I may want to withdraw it within next 5 years. Keeping my money into a saving account at 0.2% interest may still be ok.
  • What about a Pillar 3a for Miss RIP? We’re getting married and next year we’re going to join our tax returns which means we might want to save taxes on those 6.7k she could set aside. In that case there will be too much money sitting at 0.2%, funds become more tempting.
  • Extra rebalance to adhere to my IPS. I’ve done a good job moving money around and investing more in Jan-Feb with limited friction (115 CHF total fees). As mentioned before need to think about 15/5/5 split between Large US, Tech US, Small US vs 20/5 Large/Small as mentioned by my IPS. Technically it’s the same stuff. Tech US are large companies. Problem with current split is that I’m triple exposed with Tech US: I work for them, I invest in Large US (most of them are tech anyway) and I invest in Tech US. Home bias is hard to die!

Wedding

Wedding is coming! We’d get officially married in Switzerland in March, and then we’ll celebrate it with a big party in Italy in June. March will be an interesting month! From a financial point of view, the default in Switzerland is that we, individuals, keep whatever was ours before the marriage while whatever we make as a couple after the marriage is then shared. If you want something different (sharing everything or keep finances separate) you need to sign a contract in front of a notar. Anyway, since we’re planning to reach FI together I’d add Miss… pardon, Mrs RIP NW to mine. Expect a nice jump forward in March 🙂

About the wedding budget… last time I took a look at the spreadsheet it was dangerously coming close to 25k…

I need to find a way to account for monetary wedding gifts too. Both my parents and future in laws are going to give us money, several thousands. I expect some of the invitees will too. I don’t want to consider it as income nor I want to don’t consider monetary gifts at all. Need to think about it.

Blog

February has been my least active month on my blog and on the communities (forums, other blogs,…) since I started blogging. I’m not losing passion, it’s simply a too intense period of my Stardew Valley farm life.

Anyway, good news:

  • book featuring me has been published!
  • Financial Independence Week Europe (FIWE) 2017 has been announced! I’ll be there for sure during the 3 main days and probably few days more to hang out with bloggers and participants! Follow the link if you want to join us! We’re going to Timișoara (Romania) in September 2017!

How was your February?

No, that was not my last summer of vacation!

Hi RIP friends,

good friends are always a source of inspiration. I was chatting with my bloggers friends Emma & Robert White (whatlifecouldbe) and Oli (frugalisten), discussing issues like the next FIWE and few personal updates.

…And then I’ve been enlightened by a clear memory of when I had first glance of what I would call FI epiphany…

I previously said I don’t remember when it was my FI Epiphany and I still don’t consider a single point in time when I realized “I want to be FI”. But now I remember when I put the first brick on this wall and I want to share it with you dear readers 🙂

It was June 1994, end of school year. I was attending the 4th year at my High School in Rome and we were all discussing what we’d do in the following summer! I was 17 and I was eager to enjoy my usual 3 months school vacation, from mid June to mid September. Yes, in Italy it works this way until High Schools. 9 months of “going to school” and 3 months of summer vacation. At that time we were all 16-18 years old and summer vacation meant everything for us! First kisses, beers, sun, the sea… 3 very long months all for us!

image credits: clipartfox.com

It was one of the last day of school, beginning of June. I remember clearly when our Math prof said “guys, enjoy this summer! It will be your last one you can spend this way!

She was sincere and happy for us, but her words sent us down. The electricity you could breathe in the air five minutes before was gone. She was still smiling.

Someone in our class took courage and asked: “Prof… what do you mean by ‘the last one’?

With a bit of bitterness on her voice she said: “Well, next year you’ll have Maturity exam so you won’t have 3 months for you. Maybe one, but then you want to prepare for University entry exams or you’ll go looking for a job or you depart for your Military service. Next summer won’t be the same. And from then it’s every year worse. You’ll work, i.e. 4 to 5 weeks of vacation spread across the entire year, or you’ll study, which means you have exam in June-July and in September-October and you have to study for them. You may not have realized yet, but this one, the 4th high school year summer, is your last light-hearted summer. Enjoy it as such!

She was sincere, she didn’t mean to be mean. Energy level of the room dropped but I was still on the fence. I remember scanning everyone’s eyes to see how they were taking this truth.

Despair, disbelief, a bit of anger… but soon, too soon, acceptance.

A random friend relaxed the atmosphere saying something like: “Yeah, it’s true. I never thought about it… so then if that’s the last one we should partyyyyyyy

Everyone switched to an inferior level of happiness. I was still waiting for something. My brain scanning all the other options finding none. Well, I didn’t know that life at University wasn’t that different from continuous vacation, but the point is: I didn’t know that I didn’t know enough to judge this prison sentence.

Ok, next year maturity exam, then uni, then job, family… pension at age 65-70… holy sheet what the hell is happening??

And then I mentally said NO. This is not true, this can’t be true. I will have a lot of similar summers! I don’t know how, but the rule is: “if I don’t have other options, I only have other options“.

I was not thinking about FI at that time, obviously. I still dreamed about “going to America” to work in Microsoft or somewhere else. Or founding my own software company or whatever. But I couldn’t accept I won’t have had the freedom of taking a summer off whenever I wanted.

The Freedom seed was planted.

Fast forward 23 years.

What happened? Did I took some summers off? Let’s see:

1999Third year at Uni, perfect curriculum so far. Took a lightweight year to recover from a sentimental failure. Mid July – Mid September free to enjoy the sea and the sun.

2004 – Before starting my PhD and after 2 years of Robotic Research I’ve thrown everything away and went skiing in April. Took the full month off and some spare days in March before rejoining.

2007 – After quitting academic career and before joining Videogame Company, why not take a couple of months off? May – June.

2009 – Negotiated a raise and a sabbatical at Videogame Company, took ~50 days off Mid July – Beginning of September. Bike traveled on south of France and spent time in Rome.

2010 – Almost burnout at Videogame Company, quit end of December 2009 and rejected an offer from a very famous company in UK. Finally free! 2 months off trying to figure out what to do next. January and February.

2010-2011 – Well, jobs started to hunt me during my Freelance days. I tried to only take enough to make me a decent salary and reject the others. These whole 2 years have been a big well paid part time job, I’d say 50%, but earning double compared to Videogame Company.

2011 – Freelance, but I still wanted more time for me, with no restrictions. Mid June – End of September. 4 months, more than school vacation! I took these 4 months to stay in contact with people. Friends in Rome and Tuscany, family, theater playing, tango dancing. I met future Mrs. RIP at the end of this extended time off. I still remember that one as the best summer of my life!

2012 – After having received the life changing offer from Hooli in June and before actually joining the company in November, why not take Mid July – End of October off? 100 days off seems the best way to celebrate! Bike traveled The Donau, Brenta, Mincio, Adige and Adda rivers and why not visit Croatia and Spain?

2016 – 4 years in the same place, never happened so far in my career. Time to take a break and take Mid April – End of May off and go hiking Italy Coast2Coast.

2017 – Started working 80%. It’s not a sabbatical, but it feels good. It’s not a school summer, but it’s 52 more days of vacation spread across the whole year. It feels good 🙂

202X – FI date is coming, how many summers are there?

Dear teacher, I’d love to tell you that you were wrong.

There’s always another option!

A book about Financial Independence (in German) featuring… me!

Hi RIP’s friends,

few months ago I’ve been contacted by Gisela Enders (klunkerchen.wordpress.com) for an interview about my Financial Independence journey. She said “I’m writing a book about FI and I’d like to share your story”. Wow, will my words be printed on an actual book? A paper one? One I could brag about for the rest of my life? Something I could go to mama and tell her “hey mom look here, I’m on a book”? So I replied to her showing my willingness to answer her questions and then patiently waiting for the book to come out.

That time is now! The book is ready and my interview is there! Look mom! What? You don’t understand English? Ahem, that’s not even English mom…

Here it is: Finanzielle Freiheit

The book is in German – meaning I can’t actually read my own interview 🙁 – but apparently an English translation is planned.

First part of the book is an explanation of what is FI, followed by a second part with interviews to those who’ve already made it, including the White Family (whatlifecouldbe) – member of the special circle of RIP’s bloggers family – and a third part with interviews to those who are on their way uphill, including me and Oliver (frugalisten), another member of RIP’s bloggers family 🙂

You can buy it on Amazon for 9.99€ but but but till February 26th special price ‘only for you’: 4.99€! (holy sheet how much I hate commercial speak)

If you want to help children in Transylvania (who doesn’t want??) you can buy the book using this affiliate link from the White Family.

So, what are you waiting for?