How Every 16 Year-Old with a Job Can Retire a Millionaire


I’ve been encouraging a couple of twins who I’ve known since they were five to start an IRA since they are now 17 and working a job at a grocery store.  An IRA, or individual retirement account, is a little gift from the government that allows individuals to save money either tax-deferred or tax-free.  They come in two flavors: Traditional and Roth.    A traditional IRA is tax-deferred, meaning you pay no taxes on the money you invest or any of the money you make in the account until you withdraw it at retirement age.  With a Roth IRA, you pay taxes on the money you invest, but then pay no taxes on the money you withdraw or the interest it earns.

So how would these little wonders turn a 16 year-old into a millionaire at retirement?  Well, if one of the twins were to open an IRA and put $4,000 in it, and then invest entirely in a diversified stock mutual fund like the Vanguard Total Stock Market Fund, it would double in value about every six years. Because it would double eight times between the time they were 16 and 65, every dollar they put into it would be worth $256 when they reached 65.  This means that $4,000 would be worth about  $1 M at retirement age, even if he invested nothing else after putting the original $4,000 away.

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If he invested in a traditional IRA, he would also save on the taxes on the year he put the money into the IRA.  If he were in the 10% tax bracket, he would get to keep $400 more of his money right now, so it is like he gets extra money for making the investment.  Went he withdrew the money from the IRA at age 65, however, he would be taxed on the money he was withdrawing.  If he were in the 25% tax bracket during retirement, this would mean that he would actually only get $750,000 after taxes.

If he invested in a Roth IRA, he would not get a tax break now, so he would pay $400 more in taxes now.  But when he withdrew money at age 65, he would get to keep all of the money he earned, tax-free.  This means he would get to keep the whole $1 M.  The only catch is that he would need to find the extra $400 to invest.  (In fact, if he invested that extra $400 he got to keep from taxes when he invested in the traditional IRA, putting in $4,400 instead of $4,000, he would end up with the same amount of money after taxes as he would have had with a Roth IRA if his tax rate at retirement were the same as it was when he was working.)

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For the twins, I’m advising they go to Charles Schwab since they offer an IRA account with a $1 minimum investment.  This means they could put whatever they can this year, even if it is only $100, an then add to it as they can.  If they could get used to putting in $20 per paycheck, that would get them to a little over $1,000 per year.  They could also go to Vanguard, but they require a $1,000 minimum to start.  Both are great companies with a wide selection of funds to choose from for investments.

Filling out the paperwork and opening the account only takes 15 minutes or so online.  Because they are minors, the twins would need to have a parent be a custodian on the account until they turn 18.  After opening the account, they would just need to send in a check or send money from a bank account electronically, then choose investments.  At Schwab, I would start with the Schwab Total Stock Market Index Fund (SWTSX).  At Vanguard, I would buy the Vanguard Total Stock Market Index Fund if I had the minimum $3000 to invest, otherwise I would choose the 2065 Target Date Retirement Fund which only has a $1000 minimum.

 

So what else do you need to know about IRAs?  Well, there are some important rules:

  1.  You must have earned income equal to or exceeding the money you put into the IRA during the year you put the money in.  This means you need to make at least $4,000 from a job or from running a business in 2018 if you want to put $4,000 in an IRA this year.
  2. Right now you can put in up to $5,500 per year.  If you were to put $5,500 away each year between age 16 and age 35, you would be absolutely set for retirement, no matter what else you did financially.  (Lone exception, you must not touch the money in the IRA and it must stay invested in a diversified stock portfolio your whole working life.
  3. If you take the money out early (before retirement age), you’ll pay a penalty plus you’ll need to pay taxes on the money.  (Actually, there are a couple of exceptions with the Roth IRA, but why would you want to raid your retirement funds? Just stay invested.)
  4. With a traditional IRA, you’ll be forced to start taking the money out when you’re about 70 1/2 years old, so you may need to pay some hefty taxes then, especially if you invested a lot more than the original $4,000 and have several million dollars in the account.  With a Roth IRA, there is no need requirement to take the money out ever, so you could let it grow for another 30 years and leave it all to your heirs, if you wished.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

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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.

Are Your Parents Likely to Move In? If So, How Should You Prepare?


Don’t look now, but if your parents are in their late fifties or sixties, chances are pretty good that they’ll be moving back home – to your home – in ten to fifteen years.  They’ll still be healthy.  The issue will be that they’ll be out of money since many people in their late fifties and even early sixties have just a fraction of the amount of money needed to make it through a 20-30 year retirement.  Many just have enough to make it five years or less.

There are a couple of things you could do.  You could just ignore the issue and believe it won’t happen.  You could move away and leave no forwarding address, hoping to hide somewhere.  Or you could take on the issue head-on, figuring out if you are likely to need to take your parents in, perhaps help them take steps to delay the inevitable, and make choices now to be ready when the day arrives.  Here are some steps to take:

Have the talk

People say that the two conversations parents and children find most difficult are those about sex and money.  But if your parents are heading into retirement in the next ten or twenty years, now is the time to get a gage on how they are doing.  You may not be able to get them to talk about specific numbers, but maybe you can find out things like 1)Do they have a pension plan at work or a 401k?   2) If they have a 401k, have they been putting away 10% or more right along (if not, suggest they start putting away 15% now) 3)If they have they have a 401k, have they let it build up their whole career or have they pulled money out?  4)Are they planning to stay in their home in retirement or downsize and use the savings for living expenses?  5)Have they talked to a financial planner about their readiness for retirement?

Hopefully, they have a pension plan or they have been regularly contributing to their 401k with no withdrawals.  If they are planning to sell their home and downsize, they may be able to stretch their retirement savings a bit.  If they have gone to a financial planner, hopefully he/she has started to help them realize whether or not they have saved enough.  If from the answers to these questions it does not look like they have done much planning, brace yourself for the worst.  At the very least, see if you can set up a meeting with a financial planner to discuss their status and look at options.

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If you do get specific numbers, you can calculate the amount they have total in retirement accounts and other savings/investments (their net worth) to determine how much money they have available to generate income for retirement.  (Do not count their home value in the total unless they plan to sell.)  Once you have their net worth, subtract $400,000 for a couple or $250,000 for a single from the total to account for medical expenses in retirement, then divide by 25.  That is the yearly amount they’ll have available to withdraw each year to fund their retirement and probably make it through without running out-of-money.

For example, if they have $500,000 saved:

Yearly Amount = ($500,000 – $400,000)/25 = $4000/year

In the case above, they would be able to generate about $4,000 per year before starting to deplete their savings.  Add that to maybe $12,000 from Social Security, and they would have about $16,000 per year to spend.  That would not be a good lifestyle for most people and they would need help with bills and expenses.

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Set a Target

If you figure out that they need to be saving more, figure out how much they will need to pay for yearly expenses, and then figure out how much they need to save up to reach that target.  Assuming they’ll receive $12,000 per year from Social Security, here’s how much they would need to save up to generate different yearly income levels:

Monthly Income Yearly Income Single Account Value Couple Account Value
$2,500.00 $30,000 $700,000.00 $850,000.00
$3,333.33 $40,000 $950,000.00 $1,100,000.00
$4,166.67 $50,000 $1,200,000.00 $1,350,000.00
$5,000.00 $60,000 $1,450,000.00 $1,600,000.00
$5,833.33 $70,000 $1,700,000.00 $1,850,000.00
$6,666.67 $80,000 $1,950,000.00 $2,100,000.00
$7,500.00 $90,000 $2,200,000.00 $2,350,000.00
$8,333.33 $100,000 $2,450,000.00 $2,600,000.00

Realize that without the expenses of work clothes, maintaining a car for work, and things like professional dues and meals out, the amount needed in retirement will be less than their income while they are working.  If they pay off their home and cars, this will lower the amount needed even more.  They might therefore be able to set their retirement income target at 70% of their current take-home pay or so.  Of course, setting the target high reduces their risk in retirement.

Encourage them to save/invest if needed

If it looks like your parents aren’t ready, you’ll need to help them get into the best position they can.  Have them pull together a budget using the income you expect them to have in retirement if things don’t change.  Perhaps seeing what their life will be like if they head into retirement with $50,000 will cause them to decide to get passionate about saving.

You can then help them develop a savings plan to reach their goal.  If they are five years or less away from retirement, just subtract the amount they have from what they need, then divide by the number of years they have left until retirement to determine how much they need to put away per year.  Divide that number by 12 to determine how much they need to put away each month.

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 If they have more than five years until retirement, Multiply their monthly savings rate by the factor from the table below to estimate how much they’ll need to save each month since they’ll be able to invest to enhance their savings.

Years to Retirement Multiply Monthly Amount by
5 0.9
10 0.81
15 0.4
20 0.27

So, for example, if you calculate that they’ll need to raise about $2,000 per month to reach their goal and they have ten years until they will retire, they will actually only need to put away $2,000 x 0.81 = $1620 per month.  This assumes that they invest the money in a diversified set of stock and bond mutual funds or a target date fund appropriate for their retirement date.

Note that they will only need to save 27% as much if they start 20 years early – their investments will make up the rest.  If they are only five years away, they’ll need to raise about 90% of the difference through hard work and saving.  There is good reason to start saving early.  It may be too late for your parents, but you still have a chance.

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Encourage them to work longer

If they don’t have enough saved up and it is clear that they will not be able to do so before their expected retirement date, encourage them to think about working longer.  Not only will this allow them to pile up more money, but it will also reduce the number of years they’ll be drawing an income from their savings, reducing the amount they will need to have.  As long as they are healthy and don’t have enough saved up to live comfortably, they should continue to work, even if it is only part-time near the end.

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Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @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.

Sample from the Cash Flow Book: The Cash Flow Diagram.


fig1basiccashflow

As I’m working on the second book, Cash Flow Your Way to Wealth, I thought I would put out some samples from the book.  Here is part of Chapter 1, which presents the basic idea of personal cash flow and the cash flow diagram.  Look for the book to come out in a couple of months.  Enjoy!  SI

Most people mistake income for wealth, but the two are very different things. Income is the amount of money that you have coming into your household – the size of the stream entering your canyon. Wealth is the storage of money that you have – the level of the lake in your canyon. Huge amounts of water flow through the Grand Canyon in the Colorado River each year, yet there is far less water in the Grand Canyon than there is in Lake Mead behind the Hoover Dam. The difference is that in one case the water is allowed to flow right through, where in the second it is stored.

People who have high incomes tend to drive fancy cars, have big houses, eat at expensive restaurants, and wear expensive clothes. People who have large amounts of wealth tend to drive modest cars, have modest houses, eat at home a lot, and wear average clothing. There are a few extremely wealthy individuals who do display their wealth somewhat, but even then the cost of their lifestyles are well within their income level.

Luckily, you don’t need the income of Bill Gates to become wealthy. You just need to start storing some of your income, then invest to increase your income. This is not an overnight process – it takes time. Decades, in fact. But with a bit of persistence and patience, most people can join the ranks of the wealthy. Because most people spend all that they make and then borrow more, it isn’t that difficult to become one of the top 10% or even top 1% of wealthy individuals, currently around $1 M and $8 M, respectively.

Now let’s get to the heart of the matter – the cash flow diagram. A lot of people create budgets. Budgets are fine, but a budget is a flat canyon with no dam – you balance inflows and outflows with nothing saved and stored up when you’re through. A cash flow diagram directs your money into investments, which in turn create more income, increasing the size of the stream entering your canyon. In this chapter we’ll introduce the diagram and give an overview of each of the boxes that comprise it. Then, for the rest of the book we’ll go into each of the boxes in detail and show how to setup your own cash flow to build wealth.

A basic cash flow diagram is shown in Figure 1. Income flows in through Box A, rests briefly in Box B (Cash on Hand), then is distributed to various expenses or savings/investments. Income includes your paycheck, any income you make from side jobs, investment income, alimony, and gifts from uncle Bob. Cash-on-hand is your bank account or checking account – money that you have readily available for use whenever you want. Expenses are money flowing out of your bank account, never to be seen again. Investments are places where you put money at risk in order to generate more income.

Cash flow through your cash-on-hand is required to follow the familiar PISO equation:

Production + Inflow = (Change in) Storage + Outflow.

This says that all money produced by your investments, plus any inflow from salary and other sources, must equal the change in your cash-on-hand plus outflows to expenses. Rearranging we have:

(Change in) Storage = Production + Inflow – Outflow.

In other words, if you want to increase your storage of money (your wealth), you need to make the sum of your production of money (investment returns) plus your income (salaries, etc…) exceed your outflows (expenses). Or, as your grandma used to say,

Spend less than you make.”

What a simple concept: If you want to increase the amount of wealth you have, spend less than you make. And yet few people ever build any real wealth over their lifetimes, so few people follow this principle. In fact, most people spend more than they make, so they are destroying wealth before they ever have the chance to earn it. No wonder the fiscal health of society is so poor!

OK – so this all makes sense, but what does it have to do with Figure 1, the cash flow diagram? Well, your inflows – your income – is given in Box A. Box B is your change in wealth storage. Boxes C, D, and E are expenses, which are outflows of cash. Finally, Boxes F and G are investments, producers of wealth.

Notice that there is an arrow from Box A to Box B. This means that Box A increases Box B – your income increases your cash on hand, just as inflows increase the storage of wealth. There are arrows from Box B to boxes C, D, and E. These are the outflows, which decrease the amount of wealth you have stored. If the cash flowing in from Box A exceeds the cash flowing out through to Boxes C, D, and E, your wealth will increase. If the opposite is true and the flows to Boxes C, D, and E exceed cash flowing in from Box A, your storage of wealth will decrease. When everything is balanced, such that inflows from Box A exactly equal outflows to Boxes C-E, then your wealth will remain constant.

Going back to our vision of the river and the canyon, the canyon is Box B. The water flowing into the canyon is the arrow from Box A into Box B. Water flowing out of the canyon are the arrows to Boxes C-E. If you have a small salary, the money flowing from Box A to Box B will be small – a creek. If you have a large income, it will be substantial – a raging river. It doesn’t matter how much money is coming into Box B from income, however, if the amount flowing out of Box B to C-E is equal to or greater than the amount flowing in – the water in the canyon will never rise, it may  even decline. The amount of wealth stored in Box B will never increase or it will even decrease until there is no more stored wealth.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @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 Are You Doing, Financially. Examining Your Level of Safety.


sailboat_IpodIf you were to go to a financial advisor and the first question he asked was, “How are you doing, financially?” what would you say?  If you are paying all of your bills on time, driving a nice car, and taking regular vacations to nice places, you might say that you were doing just fine.  You might even say that you were doing great.

If he then were to ask how you thought you were doing compared to other people, you might need to think for a moment.  There are a lot of people out there on the road with shiny, new cars.  There are a lot of people at those resorts with you.  How could you tell how well you were doing compared to them?

The way to really tell how well you are doing financially is to look at your level of safety.  How far away are you from the cliff?  If the ground were to start crumbling off of the edge, how long would it take for you to be pulled into the abyss?  If you walked into work today and the boss greeted you with a cardboard box, saying that the firm was downsizing, how long would it be before you missed a car payment?  Or a mortgage payment?  How long until you would need to start selling things?  How long until the bank would repossess the car and evict you from your home?

On the flip side, what will your retirement life be like, given your current trajectory?  Are you going to have all the money you need to do the things you want to do?  Will you not really care is Social Security is there or will you be waiting for that meager check to come so that you can buy food for the week?  (My guess is it will not be there, unless the current system is scrapped and accounts privatized, given our demographics and $20T in debt.)  Will you only be able to go to places with a senior discount, or will you be treating everyone at top restaurants?  Will you need to move back in with the kids, or be able to stay independent?  Will you leave your children a pile of cash, or even start a family scholarship fund or another legacy, or will you leave with a pile of debt?

Thomas Stanley developed a measure to determine which people were likely to become multi-millionaires and which people had large incomes, but very little financially security.  He wrote about his system and his findings in his books, The Millionaire Next Door and  The Millionaire Mind, books that everyone should read.  He said the place to look was net worth, not income.  He found that those with a net worth greater than one-tenth of the product of their salary and their age were exceptional wealth builders and likely to become multi-millionaires if they weren’t already.   For those who have forgotten your mathematic jargon, that criterion is:

Net Worth > (Income) x (Age)/10

For example, if you are 35 and have an income of $50,000 per year, if you have a net worth (the value of everything you have, including retirement accounts, stock options, bank accounts, things you could sell, properties, home equity, etc…) of more than $175,000, then you are one of the rare individuals who has the potential to become very wealthy and reach a high level of economic security.  Think about it – if you had $175,000 and $50,000 of it was liquid, you could go an entire year without a job without changing your lifestyle a bit.  The chances of not finding a job in that period of time are pretty slim, so you have a high level of economic security.  If you cut back a bit, you could probably go a year and a half.  After that, you could sell your home and move into an apartment to regain your home equity, or tap into retirement savings to sustain yourself.  These aren’t things you would want to do, but it is better than sleeping on the street.  You would have a few years of economic security.

Of course, this criterion doesn’t work well for those just starting a job.  If you’re 25 and just starting a $60,000 per year job, you aren’t going to have $150,000 instantly.  It also doesn’t work well late in life.  For example, if you’re 60 and have a $100,000 per year job, hopefully you’ll have a net worth of a few million dollars since you have retirement in your near future, rather than just $600,000.  It is best applied for people who have been working five to ten years but less than maybe 25 to 30 years.

So what do these people with high net worth look like?  Well, they won’t be the people next to you in the shiny new car.  They will probably be the ones in the older, nondescript car.  They also won’t be the ones in the McMansion in the posh subdivision full of McMansions.  They’ll be in a safe but modest neighborhood, probably in a modest home with a well-kept yard.  You can find many examples on the blog, The Surprise Millionaire.  They often won’t be CEOs or bank presidents.  They may be janitors, teachers, lunch ladies, small business owners, engineers, professors, plumbers, or secretaries.  They will be the ones who seem calm during times of layoffs or turbulence.  They won’t need to be repaid immediately for expenses because they’ll have plenty of money to float the bill.  They’ll be financially secure, which is worth forgoing a big home and a shiny new car every couple of years.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @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.

Getting Health Insurance Out of Healthcare


Garnets

Most everyone loves their healthcare.  Talk to most people and they’ll tell you that they like their doctor.  They like their dentist, too, even though they may not like going to see them.

In the United States, everyone can also get access to healthcare, at least when times are desperate.  Every hospital is required to admit you and at least provide enough treatment to keep you alive.  Note that the same is not true for food, shelter, and clothing – things people need more desperately than healthcare most of the time, yet you don’t hear about a food crisis or a shelter crisis.  It is just that people put their first money towards these things, while healthcare comes after cell phones, cars, and lattes for many people.

Health insurance is another matter.  Most people hate their health insurance company.  Granted, if you talk to people who rarely need more than a yearly physical and a shot now and again, they may say their health insurance is just fine so long as the premium and the copay are low enough, or at least their employer picks up a good portion of the premium.

Talk to people who have had a major operation, however, and have therefore needed to spend time dealing with their insurance company, and you’ll likely get a different story.  You’ll hear about claims that should have flowed right through the system and been paid denied because of an incorrectly entered code.  Because it is the interest of the insurance company to deny the claim — there is no penalty for denying a claim and perhaps they won’t need to pay some valid claims if they deny them at first and then the customer doesn’t fight it — they generally won’t spend much time trying to figure out issues with claims before denying them.  This leaves people who are very sick or who are caring for someone who is very sick fighting with insurance companies and hospitals.

There are really two issues with health insurance as it is today in the US:

  1. Individuals give up control of their medical dollars to an outside entity, then they must convince that entity to release those dollars when the time comes.
  2. There is no incentive for medical providers to operate efficiently and no incentive for customers to look for low-cost options because normal free-enterprise factors that drive down costs and increase efficiency in other markets don’t affect healthcare.

The Affordable Care Act, or “Obamacare” does not solve either of these issues.  In fact, it makes it worse by forcing everyone to buy all-inclusive health insurance and effectively eliminates choice in that health insurance since every insurance package must include the same things.  This means that no matter what the insurance company charges, individuals will keep buying the insurance because they are forced to do so.  If they cannot afford the insurance, or if the penalty for not buying insurance is low compared to the cost or the insurance, some individuals would simply go without any insurance rather than buying a lower-cost, lower value product they could afford.

Note that subsidies have the effect of having insurance prices increase until they consume the entire free income of anyone who does not make a very large salary.  Whether you make $40,000 a year or $100,000 per year, the amount of free money you have available will be the same since you’ll just be putting more of your money to healthcare if you make more.  This means that your ability to pull yourself from the middle class into wealth and self-sufficiently is taken away since you won’t have any extra money to save and invest.

Note you would not want to do this for food – buy “food insurance” and then need to go to the food insurance company to reimburse you for your meals.  You would want the freedom to choose whatever food you wanted to eat and where you wanted to eat it.  Also, you wouldn’t want to be paying for other people who were wasteful with their food spending.  Think of a family that decided to buy every meal at Disneyland because it all cost the same to them anyway.  Given that you were paying the same, you would probably stop worrying about being wasteful as well, which would cause the price that everyone was paying to increase.

So what would work better?  Well, the first requirement is to have most people paying for most of their own healthcare.  This means making sure people are setting aside enough money to pay for regular doctor’s visits, medications, the odd broken bone, and the birth of their children.  You would also want them to be saving up for the higher healthcare costs they would face when they were elderly.  You would want people to be putting this money aside before they used any of their income for luxuries.  For people with a very low income such that they couldn’t even afford to pay for necessities, obviously subsidies or charity would be needed.

The second requirement is to have true insurance – something that few people actually use and therefore pay far less than the cost of the benefit they receive if they should use the insurance.  When you buy home insurance, you pay maybe 1-2% of the value of your house since the chance of a fire happening and destroying the whole home might be 1-in-100 or so.  Because only one person out of 100 has a fire, everyone only needs to chip in a little to know that they’ll be able to rebuild their home should a fire occur.  Health insurance should be the same way where rare but costly things like cancer are covered fully, but common things like dental cleanings are not.  The most important function of the government would be to ensure that the policies are paid out fully as specified without the consumer needing to fight.  The government could levy fines against the insurance company should they not pay a valid claim immediately so that it would be in their best financial interest to pay claims fairly.

The third requirement is to have true competition for healthcare.  This means making the prices more transparent.  Call your doctor today and ask what he charges for a procedure, and he’s unlikely to know.  He might be able to tell you what the rate is on the books, but the actual amount he receives will depend on your insurance and other factors.  There is probably an unpublicized cash rate as well.  You wouldn’t expect to go into a retail store and not know what the price is.  Doctors should be the same way.  Prices need to be publicised so that consumers know what a procedure will cost from different providers.  That would allow them to find the best value for them.  With time, the cost of all procedures would drop as those healthcare providers that provided sufficient quality the most efficiently would survive while those that were inefficient would go out-of-business just as with any other industry.

So, a good health care bill would be as follows:

  1.  Entirely repeal the Affordable Care Act.  It is too complicated to fix, so it would be faster to simply start over.
  2. Require everyone who works to put aside a fixed amount into a healthcare account.  This would be enough to cover routine medical care, plus pay for deductibles for major health events.  It should be set at what the typical mainly-healthy middle-aged person would spend each year.  People who were young would therefore be saving up for when they were older, while those who were middle-aged would be setting aside just enough to pay for their healthcare.
  3. Require everyone buy major medical insurance to pay for unexpected medical events, such as hospital stays and surgeries.  Also, create an enforcement arm that fines insurance companies that deny valid claims and a toll-free number for consumers to call when needed.
  4. Require healthcare providers to publish rates prominently so that consumers will know what they are going to pay before they step through the door.  Sales and special event pricing can be allowed, but those rates should be open to everyone, as opposed to different rates to different people.

Simple – now let’s get to it.

Comments?  Questions? Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get notified of 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 M.U.L.E. Will Make You Wealthy


 

leverage

Does anyone else remember the game M.U.L.E.? The term was an acronym for Multiple Use Labor Unit in an Atari game from 1983.  In the game you would deploy your MULEs, which were robots that would work for you to produce some sort of resource for you – things like food, oil, gold, what have you.  You would then use those resources to build and expand your empire.

Really becoming financially independent is a little like the game of M.U.L.E., where you deploy your money to buy different assets.  A mutual fund here, a money market account there.  A rental property.  A bond fund.  An individual growth stock.

Each of these assets then produces resources for you to use to build and expand.  You may take the revenues from your first rental property and use it to buy a second one.  You then take the rents from the two properties and are able to buy the third property in half the time.  In addition to the rents you’re collecting, the land value under your rental units is going up, so eventually you’ll be able to sell them and use them to pay for your living expenses for several years.

In the game, sometimes you’d have a runaway MULE.   One of the robots that you deployed to do your bidding just goes haywire.  In that case you may lose that production, plus you lose the money you put into buying the MULE.  The same thing happens with assets sometimes. The individual stock that you bought and that was doing great suddenly tanks because the company expands to fast or misses a turn in the markets.  The rental property you have is washed away by a hurricane.

You need to therefore plan for runaway MULEs sometimes, by not putting everything into just one investment.  Just buying things like mutual funds helps, since there are dozens or even hundreds of assets inside each mutual fund, so you won’t see the value go to zero.  There are funds that are cut in half, however, and then perhaps dissolve, locking in your loss.  There are also times when a portion of the market stagnates for a period of time, so your fund doesn’t provide a return for a few years.  You need to have different assets that do different things so that at least one of your assets will be doing well at any given time.

In the game of M.U.L.E., you don’t start out with fifty different MULEs.  You start with one or two and need to build and expand to add more and get all of the resources you need.  Buying assets is the same way where you will only be able to buy one stock, or one mutual fund, or one bond at the start.  You might just buy one rental property – often your starter home when you move to a larger one.  You just keep adding as you have the resources, adding different types of assets as you can.  You also add whatever type of asset is most needed at the time – growth stocks for future income, rental properties for diversification, and bonds or income.

And like buying the MULE, once you have it, you keep it working for you.  If you ever needed to start selling off your MULEs, your empire would quickly crumble.  Likewise, if you start selling off your assets and just spending the money, your portfolio will quickly disappear.  Even children of millionaires will see their fortunes quickly disappear if they spend rather than invest.  You need to live on the money generated by your assets – not sell the assets themselves.

So take on the asset of buying MULEs.  Gather up enough money, then buy an asset that will start to generate resources for you.  Pick one that delivers whatever you need now —  appreciation, a source of income, or what have you.  Then, gather more money and buy a second asset.  The buy a third, each time adding whatever is needed to your portfolio.  As you get enough assets working for you, you can start using resources produced by them to acquire more assets, and the cycle continues.  If you get a runaway MULE, just dust yourself off, recover whatever you can, and replace it.  Before you know it, you’ll rule the planet of Irata.

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.

It’s Time to Insist on More Reasonable College Costs


I always hear about the crushing cost of student loans, and I hear about the need for loan forgiveness, but I never hear anyone wanting to do something about the cause of this crushing debt – the cost of college.  Reading through the top colleges article in Money Magazine this week, I see that the average cost to go to a private school is around $250,000!  Even going to a state school will cost about $100,000.  If you were to invest the state school money instead, you’d have almost $30 M by the time you were ready to retire.  Average $100,000 over your career instead of $60,000 because you went to college, and you’ll only make $2 M more over your working lifetime.  Add maybe another $500,000 for health insurance, but you would still make ten times more investing the money than you would “investing” in a college degree. 

Realize also that college was not always seen as the only way to make a living.  A couple of hundred years ago it was just where the wealthy sent their children so that they could be educated on the finer things in life and be able to make intelligent conversation on arcane subjects at cocktail parties.  People who actually needed to work for a living had better things to do than learn Latin and Greek.  Only with Generation Y  do people think that it is a choice of going to college or sleeping under a bridge.  Now, even musicians and artists think they need to go to college. 

In reality there is a choice if college is not worth the price:  If you can’t get a good paying job without a college degree, you create your own job by starting a business.  It could be something as simple as running errands for busy people, cleaning homes, mowing lawns, or taking care of children.  You could also start as a small vendor at events and work your way up into running a store.  With a little creativity you can create a business to provide a service people don’t even know they need yet – hey, look at bottled water!  Basically anything for which there is a need for where you live.  With a little creativity you can create a business to provide a service people don’t even know they need yet – hey, look at bottled water!  People have done it before and so can you.

That said, certainly there are jobs that you can get only if you go to college.  Things like being a nurse or doctor, an engineer or school teacher, a software designer or architect.  There are rewards that come with these careers that go beyond money.  The issue is that the cost of getting the degrees needed for these careers have skyrocketed.  Yet people are complaining about the size of the loans people have coming out of college, but never try to address the root cause – the cost of college itself.  They believe they are powerless to change anything, yet they never even bother to call their state legislators and complain about the costs.

The reason college costs are getting so high is actually the loans themselves.  If a normal business were to raise its prices by 10% and do this every year, fewer and fewer people would patronize the business.  This would be partly because they felt the product was no longer worth the price, and partly because fewer and fewer people would be able to afford the product at all.  Because college is seen as an absolute necessity, however, people are willing to keep paying more even when tuitions, fees, and costs increase every year. Because they can get student loans, and then complain about them for the rest of their lives, people are able to pay the higher tuition rates even though they don’t have the money to pay cash maybe never will.

And why aren’t the colleges worried about the students not being able to pay back the loans?  Because they aren’t the ones who feel the pain when the loans go into default.  The American taxpayer ends up paying for it, while the colleges get their money upfront.  That’s right – if Suzy decides to go to Harvard and pay $400,000 for a degree in divinity so that she can get a youth minister job that pays $30,000 per year, you and I are the ones who get to pay for it.  Harvard gets its money.

Schools are able to defy economic laws because if they raise costs, parents and students just take out bigger loans.  If they can’t pay the loans back, they just default – or have the loans “forgiven” through the work of politicians trying to buy the student vote, and the taxpayer gets to pay the cost.  Schools – even public schools – continue to have private planes, dozens of administrators with salaries over $200,000, multi-million dollar landscaping budgets, mansion for their highly paid university presidents, and lots of faculty that teach only one class or two and yet take home six figures.  The value is nowhere near the cost, but that doesn’t matter.

There is really little that can be done about private colleges – they can charge what they want.  But there is something that can be done about state schools.  If enough people insisted that college costs were inline with what people could reasonably pay, prices would come down.  Sure, universities would need to do away with a lot of the luxuries they now enjoy, and college life would be a little less posh.  They would need to cut staff, cut salaries, and cut perks.  They would also need to do away with elaborate student exercise facilities and lounges, and they would need to restrict high speed internet use to educational purposes.  But what do you really need but a few classrooms, books, and a professor to get a degree and learn what you need to know to be successful as a professional?

And what about the private schools?  Just cutting the cost of public schools would cause fewer students to go to private schools, forcing them to lower prices or see an exodus.  If public school was $15,000 per year, while private universities were $60,000 per year, few people would be able to justify the higher cost.   Also, if we stopped giving out taxpayer-subsidized student loans for private schools, that would also put pressure on them to cut student tuition and fees, or at least dramatically increase tuition assistance.   Harvard would look mighty empty if only those students who could afford to pay the whole freight attended, and the quality of their students would also decline.  They would still be pricey, but not at the levels seen today.

So if you’re 24 and complaining about your student loans, how about asking your local politicians to cut the cost of state schools instead of looking for loan forgiveness.  In fact, how about asking them to disallow student loans at all for public schools so that they would be forced to cut rates to what parents could pay?  It will be a blink of an eye before you’re ready to send your children to college.  Wouldn’t it be nice if you could afford to just pay cash?

Got an investing question?  Have a personal finance tip?  Please leave a comment or send it to vtsioriginal@yahoo.com .

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.

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.

The Countdown to Freedom Continues, Balance: $600


cropped-smallivy_1x1.jpg

This week I sent in another $300 to my investment account, continuing what I’m calling the Countdown to Freedom.  This is where I’m saving a few hundred dollars each month.  When I get enough, I’ll start to invest.  Eventually, it should grow enough to reach financial freedom (where I can make enough from the returns from  the investments to replace my income.)  This is similar to blogs where people are paying down their debt, but in this case I’m going the other way and growing wealth.  In actuality I’ve already made this journey, but thought people might like to see how it is done to inspire them to make the same journey.  You’re invited (and encouraged) to do same and let everyone know how you’re doing.

 

As AC/DC says, it “ain’t no fun waiting ’round to be a millionaire.”  Combined with the $300 I invested last month, I now have $600 in my freedom fund.  Still, that is $600 more than I had a couple of months ago.  When I get to about $3000 I should be able to either invest it in a mutual fund or find an individual stock to buy.  That will be early next summer.

I’m hoping that others out there are making the same journey.  If you are, please leave a comment and let other know how you are doing.  What are you doing to find the money in your budget?  How far have you come?  How do you think it will change your life to be financially independent?  Let us know!

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.

Is Your Financial Enabling Keeping Your Children from Becoming Fiscal Adults?


 

Are They Growing Up While You're on Your Phone?

Are They Growing Up While You’re on Your Phone?

When we first had children, it was very difficult because we lived an airline flight away from both of our parents.  This meant that we were with the children 24/7.  I think it was about five months before we spent any time without my son, when some friends offered very graciously to watch him for the evening.  After that we had a sitter once in a great while (maybe a couple of times per year), and we’d have relatives who would visit off and on, but in general it was us and our son, and then soon after us and two children. 

Our son as also high maintenance when he was young.  You could put him into a room full of toys and he’d find the electric plug with which to play, so we couldn’t really go off into the other room and watch TV (I gave up prime time shows at that point).   He would also run away from us if we put him down in the mall or other places, so he had to be in your arms or a stroller.  I watched with envy when families had children who would just follow them along.  Our daughter was just the opposite, so  we got a little more piece, but still, we were 24/7 parents. 

I remember going to parties and spending the whole time chasing my son around, trying to keep him from breaking things.  I also remember trying to go to children’s movies, only to find he had no interest in watching.  Even going to restaurants was a challenge since, if I didn’t get him safely strapped into the booster seat within the first five seconds of arriving, I spent the whole dinner trying to get him to sit down.  I had to take him and my daughter outside several times when we were at restaurants when they were infants because they started crying.  (If you’re annoyed by crying children at restaurants, try taking an infant child to a restaurant sometime.  If you are a server at a restaurant and a family asks for crackers, bring the crackers – they don’t care about getting drinks at that point and not getting crackers right away can destroy the whole meal.)  I remember looking at other people just quietly waiting for their food and thinking how wonderful that would be.

Becoming a parent meant I needed to give up worrying about myself.  I remember thinking that I couldn’t go out and listen to music or go to movies because I had small children.  I also realized that by the time my children were old enough to be out on their own, I’d be way to old to go to clubs or concerts anymore.  Frankly, it was difficult to give up independence and freedom, now being tied down, but I did it because I was an adult who had a child who needed me.  At that point getting to cook dinner or mow the lawn was a thrill because it meant a bit of a break from giving constant attention.

An odd thing happened, however.  While at the time I missed things like concerts and going to clubs, and it certainly felt like a sacrifice, I found that being with my family all of the time made me grow closer.  Soon I got used to always being around my children and I started to miss them when I wasn’t.  In fact, when my wife and I went out on a date alone about five years later, having left the children with a sitter, it just felt odd.  We were both rather happy to go home around nine o’clock and back to the children even though we enjoyed the break as well.  While the transition – where I went from taking care of myself and worrying about my needs to taking care of my children and dedicating myself to them –  was difficult, but it has enriched my life where now the things that once seemed important seem silly.

Now that we’re a bit older, we have some friends who have adult children who are beginning to get married and have children of their own.  In many cases our friends – the grandparents now – are taking the infants a lot of the time while their children are continuing with their hobbies and activities as if nothing had happened.  I’ve also see families where the grandparents take the children for a week while the parents go off on vacation.  At first I thought maybe I was jealous because I didn’t have anyone to provide so much support, but now I realize that I actually feel sorry for these parents because they are not growing and maturing the way my wife and I did, and therefore aren’t reaching the same level of closeness with their children that we have with ours.  They will continue to do the things they’ve always done and never totally put their children before themselves, and I find this sad.  While there is certainly nothing wrong with taking the kids for an evening or a weekend, by providing so much support the grandparents are enabling their children to live in a perpetual adolescent/young adult stage and never mature into fully devoted parents.

Many parents also continue to enable their children financially long into their adult years.  While there is still a connection to home while you’re in college, if you’re out of college and working a job, but your parents are still paying for your cell phone and groceries, you have not matured financially.  Certainly this is true if you’re living at home and not paying rent.  They are enabling you to live beyond your means, which means you have not learned to sacrifice and do what is needed to make things work. 

 Parents enable their children because they don’t want them to have any level of suffering.  They don’t want them to live in an old apartment on the bad side of town.  They don’t want them to have a car that isn’t 100% reliable.  They don’t want them to need to live on ramen noodles, or give up their smart phone.  They certainly don’t want them to face having the lights turned off or an eviction notice served.  But this doesn’t allow them to mature and doesn’t help them reach the state of self-sufficiency needed.  Sometimes people need to have the chance to fail before they learn to succeed.   They need to live on their salary to learn how to handle money.

When you are just starting out, you might not have a smart phone.  You might have a flip phone or even a land line.  You might not have cable.  You might not have an apartment with a pool, or you might need to live with a roommate.  Your first home might not be as big as the one you grew up in.  You may have an older car that isn’t the prettiest thing.  You might not go on vacation except to the local park or national forest. 

By making sacrifices and learning to handle your own finances, you grow and mature financially.  You learn that money comes from hard work and that you don’t need all sorts of luxuries to survive.  In fact, you may learn that some of the best times happen when you’re in a small apartment sharing an evening with friends and not when you’re at an all-inclusive resort.

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.