Become An Owner Instead of a Worker


When we’re young, we trade our health for money.  We work long hours.  We lift heavy things and wear down our tendons. We spend hours typing or doing other repetitive motions that cause carpal tunnel syndrome.  We spend hours on our feet and wear down the disks in our backs and develop heel spurs.

We trade this wonderful gift of youth and health that we’ve been given, the ability to keep pushing it for may hours, to bounce back when we fall down and heal fast when we get cut, for cash by working way too many hours.  We go in before dawn and leave after dark, never getting out to see the sun and the woods and the oceans.  We work hard to go on a vacation, which is then rushed and filled with work thoughts and emails back to the office the whole time.  We buy large, beautiful homes that we spend all of our free time maintaining and cleaning when we aren’t working to pay the mortgage.  We buy things on credit and then spend a quarter to half of our time working to pay interest payments.

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While we’re young we can make extra money by just pushing it a little harder.  We can make that car payment if we work overtime on weekends so we can drive that shiny new car to work and have it sit in the parking lot all day, slowly decaying away.   We can take on that second job and get all of the cable packages and five different web streaming services.  We can keep buying clothes to impress people we don’t like and buying all of the latest gadgets to look good for people we don’t even know.

When we get old, we trade our money for health.  Any money we’ve saved up through those long hours of work goes to treatments, surgeries, and drugs to reduce the pain our weary bodies feel.  We spend money to try to have the ability to walk and run and jump and heal like we did so easily while we were young.  We get surgeries to be able to walk after long hours of carrying heavy loads have destroyed our knees.  We buy prescriptions to lower our blood pressure after years of sitting idle at a desk, eating poorly, and letting our health decay.

Stop.  Stop today.  Stop right this minute and change your life.

Become an owner instead of a worker.  Instead of getting that new car, drive your old one for a few more years and send those car payments you would have made into a stock mutual fund and become an owner in a group of companies.  Buy a smaller house for cash and invest the money you save on interest.  Stop buying things to impress people and just buy what you need so that you can spend time with your family who don’t care what the label on your blouse or jeans says.

Start building a portfolio so that you will be getting dividend payments and capital gains instead of paying interest payments and penalties.  Let others work for you so that you don’t need to work those extra hours.  Expand your lifestyle by waiting a little while to buy things, instead investing the money in mutual funds, then using the distributions from those mutual funds to add to your income.  Direct some of that money back into buy more mutual funds, and your income will expand on its own.

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Everybody can become an owner.  You can start a mutual fund account with Schwab for only $1.  You can start investing through Vanguard funds for only $3,000 ($1,000 if you start a retirement account).  Start an account and start sending a little of your paycheck in each month to build your wealth.  Own things.  Build things.  Stop just using all of your effort to generate entropy.  Stop having your money flow into your back account through direct deposit and then back out again to bills through auto pay without your even seeing it.

The next SmallIvy book, Cash Flow Your Way to Wealth, will be coming out in about a month.  It gives the game plan to go from worker to owner.  Subscribe to this blog to make sure you get your copy when the time comes and don’t miss out.

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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.

New to investing? Want to learn how to use investing to supercharge your road to financial freedom?  Get the book: SmallIvy Book of Investing: Book1: Investing to Grow Wealthy

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.

How to Fund Everything without Filling Out Tax Forms


A while back, probably right after I’d finished filling out my income tax forms for 2010, I made a post about a tax idea called the Fair Tax.  The beauty of the Fair Tax is that it would eliminate all of the hassles involved in paying taxes.  Income taxes, Social Security, and other Federal taxes would be replaced by a single sales tax on goods and services when purchased (a national sales tax).  Because taxes would be figured out and charged automatically when you purchased something, you would no longer need to keep track of expenses, have tax-deferred accounts, set up medical savings accounts, 401ks, IRAs, etc… and go through other hassles.

You would simply receive your whole paycheck each month and then spend or save as you choose.  One benefit beyond the simplification of tax compliance is that saving would be rewarded while spending would be penalized.  The current system encourages spending and borrowing, through tax breaks for things like business expenses and the mortgage deduction, and penalizes earning.  This means that under the current system there is a disincentive to grow businesses or work harder because more of your income is taken the more you earn.

The Fair Tax is prevented from being regressive, or level in any case, through the use of a prebate.  In the prebate, a certain amount is refunded to each person each year at the beginning of the year.  For example, if the sales tax is 10%, and $3000 were prefunded to everyone each year, then no one earning less than $30,000 would pay any taxes that year ($30,000*10% = $3000), even if they spent their entire paycheck on taxable goods and services.

One issue with implementing the Fair Tax is the radical change to the tax system.  We have spent so many years having taxes taken from our paychecks and doing things to reduce income taxes that it would be a big shock to the system to see it changed overnight.  Imagine the shock of going to buy a new car and seeing a 20% tax added to the top of it!  Never mind that you have 20% more cash in you pockets – you still see that big tax on the car.  You were paying that big tax before, but it was taken in small increments so you did not see it all at once.  There is a way, however, to implement the tax in a way that will be a smaller shock on the system.

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Currently about 50% of people pay no income tax at all.  In fact, many get cash given to them by the tax system since they receive a refund through the Earned Income Tax Credit.  This means that implementing the Fair Tax to replace the tax payments of the lower 50% of earners would not require a large sales tax since the amount of revenue collected from them is mainly Social Security and Medicare, which aren’t large amounts of money.  Also, implementing the Fair Tax would enable taxes to be collected from those who currently don’t pay taxes – those who get paid under the table and/or have illegal sources of income (drug sales, prostitution, illegal labor) – since they would also be charged the sales tax when they spent the ill-gotten money.

If the Fair Tax were implemented only on people making $60,000 per year or less say, it would only be necessary to have a sales tax of about 5% or less.  This means that everyone would see a prefund each year of $2000 (5% x $40,000) and see their sales taxes increase by about 5%, assuming that it is desirable to continue to see 50% of the people pay no income taxes.

After a few years of seeing those at the low-income levels not need to file taxes and also seeing how the system worked, those in the middle and upper-middle classes would probably want to join the system.  The threshold for the Fair tax could be then be ratcheted upwards as political winds allowed.  The prefund would need to be ratcheted upwards as well since the level of the sales tax would need to increase as the income level of the Fair Tax threshold increased.  This is because in order to generate the same level of revenues the sales tax percentage would need to increase since those at the higher income levels are paying a larger portion of the taxes.  If the Fair Tax were ever to fully replace the income tax, including for those in the top 1% of earners, the rate would be about 23%.  It is thought, however, that the drop in the expenses paid by businesses for tax compliance and tax avoidance would allow them to charge less for the goods and services; therefore, the actual price of the goods might stay about the same.

If you like this idea, please tell a friend – let’s get rid of the IRS!

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.