This is Future You Speaking


Saturn Five

Greetings from the future.  This is a message to you from you at age 72.  I just wanted to thank you for the little things you did while you were young (or actually, what you are going to do over the next several years) because we’re in great shape now.

I’m living at a great little condo down on the beach in the Carolinas.  We sold our big house and moved here several years ago after leaving work at 67.  Note that I could have retired at about age 50, but instead I decided to change jobs.  I also started a small business, doing consulting.  It was nice to get paid a lot of money per hour because people don’t ask you to do anything but really important things when they need to pay you a lot.  They found someone else to fill out the forms and get the formatting on the reports just right.  I just got to do work on the challenging problems that I love.  Finally at age 67, Nancy told me it was time to hang it up and we moved down here.

And yes, Nancy and I are still together.  Fifty years of marriage last fall.  We found that being on good financial footing – thanks to you good work – really reduced the stress we felt early in our marriage when we were still struggling with bills.  Of course we’d have a minor argument every so often, but we didn’t get into the big money fights that some of our friends had because they had gotten deep in debt.  We also found that the monthly budget talks, where we’d put down on paper how we wanted to spend our income, really gave us a chance to talk about our wants and dreams.  That made us grow closer over the years.  I found out that things were important to Nancy that I didn’t realize.  It’s funny how when you’re talking about how you want to spend your money you’re really talking about what’s important to you.

Probably the most important thing you did was getting into the 401K right when you started work and putting 10% away each paycheck.  I really didn’t miss the money since it was taken out from the very first paycheck.  By the time I was forty, I had almost a quarter million dollars in there, thanks to those regular deposits with each paycheck.  Sure, that big bull market helped, but I would have missed the boat if you hadn’t decided early on to put money away with every paycheck and leave it alone.  By the time I reached 70, I had more than 10M!  Incredible how it grew those last few years.  Some years I was making almost $2M just in capital gains on stocks.  While my friends were worrying about making their money last, I was just thinking about trips I wanted to take and things I wanted to see.  We’re also set for home care when we need it, instead of the government nursing homes our friends are facing.

Another great move you made was getting that 15-year mortgage and putting 20% down when that mortgage broker was suggesting putting just 5% down on a 30-year mortgage.  You actually got more aggressive at reducing that debt after about ten years and we paid it off in twelve.  My friends at work who were paying down their home equity loans and still have 25 years left on their mortgages couldn’t understand how I was able to take those nice vacations every few years.  Having an extra $15,000 in my pocket by not needing to pay a mortgage payment each year really helped with that.  And you should have seen the envy on their faces when Nancy and I upgraded to our dream home, paying cash all the way!

Now on cars, let me say I wasn’t sure at first when you started buying those used cars.  I mean, that $2,500 hatchback didn’t stack up against the shiny new hybrids and  Mustangs in the lot other people were buying.  But then that left an extra five hundred dollars per month to put into stocks on the side.  By the time five years had passed and it was time to trade in the hatchback, I was able to pay cash for a nice four year-old car with about 50,000 miles on it.  That car could have gone ten years, but I was able to trade in and pay cash for another one about ever four years and still build up a portfolio of individual stocks.  By the time I was in the third car, I had something like $50,000 in stocks.  I had over a hundred thousand by the time I got the fourth one.  It sure felt good to know I had enough money to last for a few years in that account, even if my job went away the next year.

As time went on, I was able to add some luxuries to the standard monthly budget, like the cruises and a little vacation home on the lake, but I was still able to squirrel away about $800 per month since I didn’t have a car payment or a house payment.  Pretty soon, I was making almost as much in capital gains in my portfolio as I was getting in salary.  That was what allowed me to leave my job in my fifties and start the consulting firm.  I passed a million dollar net worth by the time I was about 42, and then a second million by the time I was 46.

Scott — your oldest son — was ready to go to college when  I was 48.  I couldn’t believe how much college costs were.  We were looking at about $100,000 for just an education at the state school.  But Scott didn’t go to a state school – he went to Dartmouth.  And because we had more than a million dollars in the portfolio, we just paid cash.  All of our friends’ children were getting student loans and coming out owing a house.  We just sent a check to the college and he came out debt-free.

Actually he was better than debt-free.  We started gifting stocks to him when he was about 16, teaching him how to manage the money while he was still at home.  We then paid for his tuition while he took care of his living costs in college using income from the portfolio.  He made a couple of mistakes, but in general he managed the money well.  We therefore kept gifting money to him throughout his college years and for a couple of years afterwards, so he had the security of a starter portfolio to start his adult life.  We did the same thing with our daughter, Kelly, who went to UC Santa Barbara.

So once again, thanks.  I know usually people have advise to give their younger selves, but you actually did a pretty good job of things.  Maybe the only advice I can give is make sure you take a little time to hold onto the moments while the kids are young – when you have the kids, that is.  Time passes really quickly, and you only get one shot at it.  Oh, and don’t get so mad at Scott when he wrecks the car.  It’s really not his fault.

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why Would You Not Want the Fair Tax


cropped-smallivy_1x1.jpg

Under my bed is a cardboard box that is bulging at the seams.  It contains my stock purchase/sales slips and my tax returns for the last 25 years or so.  I keep these because my accountant advises me to keep my tax returns forever, just in case the tax man wants to see them.  You would think he’d have a copy, along with hundreds of nefarious people who have broken into his database or intercepted my return out of the ether and stolen my information.

The sad thing is, there is no reason to live like this.  We could fund the government without needing to keep all of these records to prove that we are following the tax laws.  (Note also that a lot of people are cheating on their taxes anyway since there are only so many tax investigators to go around.  Per usual, those of us who follow the laws are made to suffer because of others who don’t.)  The way this could happen would be for us to enact the Fair Tax.

Details on the Fair Tax can be found here:

https://fairtax.org/about/how-fairtax-works

Read it now and forward the link to five of your closest friends, three acquaintances, and four people you really don’t like all that much.

In a nut shell, with the Fair Tax you would replace the income taxes, Social Security taxes, and the rest of those things with a sales tax that is paid on spending beyond what is needed for basic necessities.  (Spending on necessities would be tax-free because you would receive a check from the government that covers any taxes you pay below a specified amount each year.)   It would be collected when you buy things just as you pay sales taxes now.  Simple – no forms, no tracking spending, no special, tax-free accounts to manage.  Nothing.

Things that the Fair Tax would do:

1.  Fund the government without anyone needing to file a tax return, keep a receipt, make a contribution to a tax deferred account, or lift a finger.

2. Reduce business tax compliance costs, which means prices would drop (probably by enough to cover the sales tax that would be created).  You’d fund the government using the money you’re now paying for tax compliance.

3.  Take away the power from the IRS to inflict fear in taxpayers.  It would also eliminate the ability to use the IRS as a political weapon (are you reading this, Ms. Lehrner?).

4.  Make drug dealers, pimps, the Russian Mafia, and everyone else pay taxes like everyone else.

5.  Improve the economy as people focus on doing important work rather than going through machinations to save on taxes.

6.  Reward people for saving and investing (good for you) and punish people for spending frivolously (bad for you).

So what’s wrong with the Fair Tax?  Why isn’t everyone out there demanding that it be passed first thing next week?  Do you like the IRS?  Do you like filling out forms?  Do you like the challenge of figuring out how to take advantage of the most deductions?  Do you think that using TurboTax is more fun than playing Doom or World of Warcraft?  Do you think that your accountant is cute and like spending a few hours with him/her every year even if it costs you a couple of hundred bucks?  Anyone?

If you like the Fair Tax, tell your representative and senators.  Then, post a comment to this post letting me know you did.  We can do this if enough people ask.

Investing questions?  Something to share?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Invest in Oil


 

Space CapsuleDespite my efforts to keep my work and blog worlds separate, word is starting to get around the office that I know a little something about investing.  Actually some people had found out already just because of hallway conversations.  I actually gave a seminar on investing to one interested group at their request. Now that some are finding out about my investing book,  I’m starting to get more questions.

I’m glad to help.  I stated the blog as a hobby with the goal of maybe generating some side income from it, but really it has become somewhat of a ministry.  I’m finding that a lot of people want to learn how to handle money better and to invest.  We have Dave Ramsey in our area and a lot of people are fans, but he kind of leaves off when you get out of debt and doesn’t say too much about what to do next.  And what if you never got into debt to begin with?  What if you’re one of those weird people who went through college without loans.

Today a friend asked my how to invest in oil.  I told him to buy an Oil ETF.  I then explained that an ETF, or “Exchange Traded Fund,” is a relatively new invention that allows you to buy stocks in specific sectors of the market.  They trade like a stock, meaning you call up your broker or fire up your ETrade account and put in a buy order.  

You buy them from another individual, which means that people buying or selling them won’t affect the fund because there is no need for the fund manager to buy or sell shares inside the fund just because someone trades the ETF.  This is an issue for traditional mutual funds that must buy shares when a person sends money into the fund and sell shares to raise cash when people want their money back out of the fund.  (That drives up costs for everyone, which is why some fund managers limit how often you can sell shares then buy them back again.)

The price of shares of ETFs will generally go up when the shares of the stocks they own go up.  This is because when you buy shares of an ETF, you own a percentage of those shares that the ETF has invested into.  You also will receive your share of dividends the stocks within the ETF pay out (some ETFs invested in things like bank stocks or utilities pay good dividends).  If the ETF were ever dissolved, you would receive your portion of the cash.

The very first ETF was created by the Standard & Poor company, the Standard and Poors Depositior Receipts (SPDRs), pronounced “Spiders”, that owned shares of the companies in the S&P 500.  From there they created SPDRs on the small caps and mid cap stock indices.  Then they created an ETF on the Dow Jones Industrial Average, DIA (called “Diamonds.”)  Then things really got interesting when fund companies started to create ETFs on specific industries, like retailers, industrials, high-tech companies, and, yes, oil companies.  

Some ETFs that specialize in oil companies include:

1.  SPDR S&P Oil & Gas Exploration & Production ETF (XOP):

2. iShares Dow Jones US Oil & Gas Exploration & Production ETF (IEO)

and 3. PowerShares Dynamic Energy Exploration and Production (PXE)

So while you can invest in oil companies, should you?  My friend’s reasoning was that because oil prices have fallen so far, they really can’t fall much further so it was a good time to invest.  I’ve found, however, that it is really difficult to time the market.  Oil prices may fall and then just stay down for years.  Just ask gold investors who bought in during the boom of the 1980’s.  They needed to hold on until about 2010 before they got their investment back, and then they were still actually a little underwater because of inflation.  They had also missed out on years’ worth of returns that they could have gotten if they had just invested in common stocks.  They missed out on the miraculous bull market of the 1980’s that it took the Clinton administration eight years to kill with higher taxes!

I do think that ETFs are a great alternative to investing in mutual funds.  For example, if you have an IRA in a standard brokerage account instead of with a mutual fund company, you can buy ETFs just like any other stocks.  They are dirt cheap.  Vanguard even has an ETF corresponding to each of their index funds, so you can pick up an S&P 500 ETF, and REIT ETF, a small cap ETF, and so on.  That is a great way to diversify your portfolio and keep your costs low.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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