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.

Click here to view the Cover.

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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.

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.

(Never read The Millionaire Next Door?  It is a must for anyone wanting to actually become a millionaire.)

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.

How to Live Like a Millionaire


Many would love to live the millionaire lifestyle.  Spending each day at the beach, on the golf course, or in exotic resorts around the world.  Each night would be parties and galas.  Perhaps a random trip to the office to check on things and grab some cash from the safe.

Sadly, that is not the normal lifestyle of the typical millionaire.  As chronicled in The Millionaire Next Door, the flashy lifestyles seen are those of people who have a large income, but probably would be on the streets within six months of losing that income.  Most millionaires work a lot harder than most other people.  They forego a flashy lifestyle, instead saving religiously and judiciously buying things that will increase in value rather than drop.

(Never read The Millionaire Next Door?  It is a must for anyone wanting to actually become a millionaire.)

Millionaires could afford to buy new cars every few years, but they choose not to because they know they are a wasting asset.  Likewise they could buy big, flashy mansions in new subdivisions, but instead they chose to buy modest houses in older neighborhoods since they cost less to maintain and the rate of appreciation for the neighborhood can be judged from its history.  Whenever they make a big purchase, it is something that will grow in value such as fine furniture, works of art, or properties.  They minimize the amount of money they put into things that go down in value (such as cars).Millionaires also tend to own their own businesses.  It is much easier to become wealthy when doing something that allows each of your hours spent at work to be multiplied.  For example, if you work for someone, you may get paid $30 per hour.  You can earn more by working more hours, but you still only get $30 per hour.   If you work for yourself and use the time to design and market a product, you can get paid each time someone then buys the product.  If you write a novel, you get paid each time someone buys a copy of the novel.  If you own a movie theater, you get paid more if more customers attend the movies and buy popcorn.

Having people working for you also multiplies your time since for each hour you spend supervising, several other people are working to increase the money your business earns.  If you hire effective people and manage well (eventually hiring other effective managers), the more people who work for you the more money you can make for each hour of your time.  Note that even doctors and lawyers don’t make a lot of money because of their salaries.  They make a lot of money because most of them own a practice or are partners in a law firm with people working under them.   They are business owners.

      

So, if you wish to become a millionaire, here are some tips:

1) Spend less than you make, and religiously put money away into assets – things that grow in value and eventually provide an income.  Note that investing in your own business can be an asset.

2) Start your own business, or find something to do that multiplies the value of your time.  This is a tough step for many to take and requires a certain type of personality, but it definitely makes becoming rich a lot easier.

3) Cut down on expenses and payments as much as possible – it is easier to invest and save if you do not have every dollar spoken for before you earn it.

4) Live below your means.  Have a smaller house, older cars, and take less exotic vacations than your level of wealth and income will allow.

5) Make smart purchasing choices.  Bring in drinks from home rather than hitting the vending machine every day.  Bring a lunch in rather than eating out all the time.   When you do eat out, have a water and save $2.50 plus taxes per meal.

(Save money by bringing your own water bottle and skipping the vending machines. Shown: CamelBak Eddy Water Bottle, 0.75-Liter, Cardinal.)

6) Plan your success.  Don’t simply hope your investments will grow.  Make a budget, plan how much you will invest each month, then stick to that plan.  Good luck generally comes to those who have set themselves up for success.

7) Work hard.  Whether you own your own business or work for someone else, you can plan on working harder than most other people if you want to become wealthy.  Additional money earned generally is available for investments since other expenses have been taken care of.

8.) Hire people to perform tasks you are not skilled at doing.  Most millionaires would not work on their own cars, repair their own sinks, or cut their own grass unless it was a leisure activity for them.   Millionaires would rather spend the time doing what they do best or with their families than doing tasks that they can hire someone to do who will do a better, faster job.  If you will take 8 hours to fix a sink and could make $400 in those eight hours at work, it makes sense to hire a plumber at $150 and instead work the extra hours.  Even if it only takes him 1 hour because of his experience and tools, you come out ahead.

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.

Hedging Strategies to Protect Yourself Against a Market Drop


With the big run-up in stocks this year and many people expecting a pull-back or an outright bear market, perhaps you’re getting nervous and looking for ways to protect the gains you’ve made.  Hedging refers to taking positions that will reduce your loss should the market drop while still allowing for gains should the markets continue to perform well.  Today I thought I’d discuss some hedging strategies for those who are looking for a little protection.  Understand, however, that any hedging strategy you employ will reduce gains in the future.

In speaking about hedging we’ll assume that the investor is primarily long to start with, meaning that the investor will make money if the stocks he/she owns go up in price.  (When you buy a stock, bond, or mutual fund, you are “long.”  When you sell short or buy an option that goes up in price when a stock goes down, you’re “short.”)  Most people are long most of the time and this makes sense because the market’s long-term tendency is always up.  Being short for a long period of time would be like entering a turbulent river and expecting to travel mostly upstream.  Hedging a short position can also be done just by doing the compliment of the trades I describe.  For example, buying a call option instead of a put option.  (If you are not familiar with options, check out Options Trading: QuickStart Guide – The Simplified Beginner’s Guide To Options Trading or a similar book.)

One often associates hedging with risk, largely because of the term, “hedge fund” applied to the high risk/high return funds purchased by wealthy individuals.  These funds get their names because they can take long or short positions, but often these funds are not hedging.  Instead they are using large amounts of leverage to make large gains from relatively small movements in the markets.  This causes a substantial risk of losing money.  True hedging actually reduces risk.

To hedge is to take up positions that are designed to offset long positions, such that the investor will be less susceptible to losses due to falls in the market.  For those who play roulette, you would be hedging a bet of $100 on red by putting $50 on black as well.  You would be reducing the amount you would win if red were rolled since you would lose the bet on black, but you would also be reducing your loss should black be rolled since your small win on the black bet would reduce the loss on the red bet.   If an investor is perfectly hedged, he/she will not lose money no matter what the market does.  But by taking up these positions, one also limits or eliminates the possibility for making gains while the hedges are in effect.  The following are ways to hedge a long position:

Selling shares of the same stock short-  This is also called “selling short-against-the-box” and forms a perfect hedge provided that equal numbers of the shares are sold short as are held.  No matter the movements in the stock, no money will be gained or lost.  (Note that if the stock price goes up an investor would need to add cash to the account or pay margin fees, since this would result in  negative cash balances in the account).  Selling short-against-the-box has little purpose other than delaying gains from one year into the next for taxes.

Selling shares of other complimentary companies short-  In this strategy, the investor sells short shares of a company that he/she expects to decline if shares of the company he/she owns fall in price.  For example, if he owns McDonald’s, he might sell shares of Wendy’s short, figuring that is the market turns against fast food companies shares of both companies will fall.

Buying put options- A put option is a legal contract by which someone agrees to buy shares of a stock for a predefined price before a certain date.  This can be though of as an insurance contract on the shares of the stock.  In exchange for this agreement the owner of the shares gives the seller (called the writer) of the put a certain amount of money, called the “premium”.  For example, a put option for selling 100 shares of XYZ stock at 50, good for three months, might cost $300 when the price of XYZ was at $51 per share.

Writing covered calls on the stock–  Here a contract is written that allows another individual to purchase your shares for a fixed price.  This limits the amount the investor can make on the shares (since if they go up above the agreed to sales price they will be purchased for the sales price) but reduces losses somewhat if the shares decline in price due to the premium collected.

Buying short ETFs– This involves buying short exchange traded funds (ETF).  These are financial instruments that are designed to go in the opposite direction of a particular market segment or index.  For example, an owner of several mining companies might buy a short basic materials ETF as a hedge against a fall in commodities prices or a slowdown in goods production.

Selling a portion of the position The simplest way to guard against losses in a position is to simply sell some or all off the position, and is probably the best thing to do if you really need the money in the short-term since it is the most cost-effective way to be safe.  This, of course, reduces the possibility of future gains, however.

If you’re interested in individual stock buying and this strategy, I go into far more detail in my book, SmallIvy Book of Investing: Book1: Investing to Grow Wealthy.  Check it out at the link below if interested.

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.

Buying a New Used Car


Avalon

It’s not easy being SmallIvy.  Last weekend we were in a car dealer in the next town, looking for a car to replace our main vehicle.  I had found an 2013 Toyota Avalon on TrueCar and we were in the dealership to see that car and also look at other Avalons to see if that is a model that we like.

My son was absolutely aghast, asking how I could be at a car dealer and why I was thinking about spending so much on a car.  I was SmallIvy, after all.  I was supposed to only buy cars from private parties and then always inexpensive cars.  He then started asking how he was going to be able to go to college with us blowing all of this money.  I guess that all of those lessons on budgeting and managing your money must have sunk in.

I’m not sure, however, that he quite got the point.  The point of budgeting and saving is not to never have anything and surprise everyone when you die with tens of millions of dollars in the bank.  It is to get yourself into the position where you are financially sound, at which point you can start to expand your spending a bit and start getting some of the nicer things that others have been getting using credit, except you’re actually buying them with cash and owning them.  Where others have a facade of wealth, you actually own what you have and aren’t subject to a financial calamity should you lose your job or have some other sort of fiscal setback.

And even once you’ve reached that point, you still put critical items before luxuries.  You make sure you have enough for retirement so you won’t be a burden on others.  You have life insurance so that your family is taken care of should you or your spouse die unexpectedly.  You also have important luxuries such as college savings for your children set aside or well in progress.

Once you have done all this, and after you have been saving and investing such that you have an income stream beyond your job from your investments, you can start to expand your lifestyle.  If you have done things right, your investments will replenish the cash you spend on luxuries while still allowing you to grow your wealth.  You also save up money for big expenses like new cars and home improvements, rather than putting everything on credit as others are prone to do.

Other than making the stupid purchase of a new Jeep Cherokee when I was in my last year of school and before I had “seen the light,” my wife and I have been very thrifty with cars.  When I started working, we bought a six-year old Toyota Camry with 150,000 miles on it for about $4,000.  I’m sure we could have qualified for another 6-year loan like we had on the Jeep, but we chose to not have another payment.  We drove that car for about eight years and sold it for $1500 with 300,000 miles on it.  Cost per year for depreciation, about $300.  We then bought a four-year old Camry for about $8,000 from another private individual and have driven that car for 8 years as well.  At worse, we spent about $800 per year for that car, which now has 250,000 miles on it.

Compare this with buying a new car, as many people would do, and losing $6,000 per year or more in depreciation and interest payments.  While we put a little money into repairs, on the order of $800 per year during the last few years, we came out well ahead of where we would be with a new car and new car payments.  (Actually, I’ve been very pleased by just how little we’ve had to do in repairs with these Toyotas.)   We’ve been able to use that money to do things like put money in college funds, put the money away for retirement, and invest the money for the next car so that we’d have the cash available.  That is where we are today.

Now that we have reached this point, paid off our home (saving about $800 per month), advanced in career, saved up to the point that we have extra income from investments, and have enough in savings to weather several years of unemployment if needed, we can start to move up in car.  The 3-year old Avalon we’re looking at would cost about $26,000 with tax.  Compare that to about $35,000 we’d pay for a new Avalon with tax.  We’ll be losing about $3,000 per year in depreciation for the first four years and $1500 per year for the four years after that.  That is compared to the $4500 or so we’d be losing on depreciation for a new car, not counting payments.

We will probably never buy a new car again (we paid the Jeep off three years early and I still drive it today although it is 18 years old), but we can continue to trade up in cars each time since our investments and investment income will be growing.  We’ll stick to newer used cars to reduce the loss to depreciation – in three years we’d be in the same place and be several thousand dollars poorer if we bought new. Maybe we’ll decide instead that we’re happy with Avalons (or maybe go back to Camry’s) in eight years and instead spend more money on trips and home improvements.

The point is that there is nothing wrong with spending within your means so long as you’ve put first-things-first.  The other point is that your means will increase with time as long as you keep saving and investing.  So don’t think if you’re staring out and decide not to use credit that you’ll never be able to keep up with the Joneses.  In fact you’ll pass the Joneses someday, and you’ll always sleep better at night.

 

Your investing questions are wanted. Please 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 Tax Day – Thank your Boss


 

Coffee money

In a speech in New York Hillary Clinton slammed the Sanders “free college for all” plan because it would mean that even Donald Trump’s children would have their college costs covered.  How terrible that these evil, sinful, malevolent people might have their college costs paid for.  Their crime?  Their parents make too much money.

I am not one of the top 1% of income earners, but I think this tax day we should give those who are a huge, “Thank you.”  I am sick of seeing the people who create the engines that create most of the products we use and who provide jobs for the majority of people be demonized.  I am equally tired of seeing the people who pay for most of the government services we enjoy being scorned.  “How dare they get to have their children go to college using some of the money they paid in taxes.  They must be punished for their deeds.”

I’m in the process of filing my taxes.  I’m only in the 25% bracket, but I hate to seeing $250 taken from each additional $1,000 I earn.  If I work over and earn some extra money, I need to work a quarter of the time for free.  I can’t imagine seeing 40% of my time spent working to pay taxes and only seeing 60% of my time result in additional income.

I can understand how Ronald Reagan said that if he had already made a movie or two during a year, he might pass up the chance to do the next one.  This was when rates were extremely high for the top earners – approaching 90% –   so it really didn’t make sense for him to leave the poolside and spend several weeks working long hours to make another movie.  He would only get paid for 10% of his time.  Would you make a third movie if you got paid $100,000 for that one but got paid $1,000,000 for each of the first two?   And when he didn’t make the movie, it meant all of the supporting actors, crew, and caterers didn’t work either.   This is why the economy took off after he cut back the top tax rates – productive people were spending more of their time working, which in turn meant other people were working as well.

So before you complain that the rich aren’t paying “their fair share,” imagine writing a check for $400,000 to the government for your taxes this year.  Think about the home they could have bought with that money.  Think of the early mornings they arrived at the office and the late hours they spent finishing up the work needed to build the company at which you now work.  Think of the years they spent without a paycheck and borrowing from relatives to get their company off of the ground.  Sure, there are a few trust fund babies that live off of record royalties or the work of their parents, but most of the people paying those top rates spent a lot of time and effort building the machine needed to make that income, and they probably lifted a lot of other people up with them along the way.

So this tax day, thank a high earner.  Thank her for your job.  Thank him for paying for the train you ride.  Thank her for the school your children attend.  Thank him for helping to pay to keep your family safe.  If you aren’t thankful, then send in more in taxes until you pay out 30-35% of your income.  I guarantee the IRS will accept the extra money.  There’s even a space on the form.

Your investing questions are wanted. Please send tovtsioriginal@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.

 

 

Get Some Plastic Out of your Life to Improve Your Finances


Fountain

 

You’re probably thinking this is a post explaining how using your credit cards less will cause you to save more money.  Certainly using credit less (or not at all) is a great move to help you stick to your budget and avoid nasty surprised like fees and interest, but this post is actually about plastic, like plastic bottles.

In our bathroom I have a small plastic “dixie” cup.  These are disposable – I have a sleeve of like 30 of them, but I have used the same one for weeks.  We used to have paper ones that were good for maybe a few uses, but now these cups seem to last forever.  Especially since it is durable enough that I could wash it periodically.

Plastic bottles for water used to be the same way.  They had plastic similar to that used for 2 liter sodas and a full-sized lid.  You could refill these bottles for weeks and they would remain about the same.  Bottled water manufacturers say that they made the bottles thinner and the caps smaller to save the environment, but I think they actually wanted to make the bottles as flimsy as possible so that people wouldn’t refill them as much.

Now, I certainly wouldn’t call myself “green,” because I think people in the Green movement tend to be green behind the ears and ready to fall for anything.  They tend to get some idea fed to them and then charge off after it without any basic analysis.  A prime example is the push for electric cars, which have about 10% efficiency if you count the losses all the way from the power station to the wheels of the car, versus about 20% efficiency for gas-powered cars.  Mix in some diesel cars and plug-in electrics really look sad.   Unless you plan to drive them indoors, why would anyone drive an electric car?  Because power mainly comes from coal, by pushing people to buy electric vehicles to “save the planet from climate change,” greenies are ironically actually adding more CO2 into the air.  (Note they should rationally be pushing for more nuclear power if they really want to reduce the amount of CO2 being created, but who said those in the Green movement were rational.)

So what does this have to do with personal finance?  Well, while I’m not “green,” I do hate to see waste, especially when it is a waste of money.  Money is time you spent away from your family.  Money is what you did during a given day using the precious hours you were given.  Money invested wisely is what will keep you from starving in your old age when you can no longer work.  When you buy a product with an expensive plastic container, use the container once, then throw it away without having a really good reason for needing to do so, you are wasting money.  Any most people who regularly pay 160 times the necessary price for a drink of water because they buy it in a bottle rather than filling up a cup from the sink will then tell you that they would like to invest but don’t have the money to do so.

Now companies love to sell us stuff in small plastic packages and have us buy it all again the next time.  They can get bottles for maybe $0.10 each then charge $0.25 cents extra per little container.  They love it when you buy drinks for the sports team in little bottles rather than filling up a big container with a powdered drink mix and water.  They love it when each person coming through line in a cafeteria buys a drink in a little plastic bottle instead of getting a paper cup and filling up at the fountain.  And the movie theater I was at last night loves to have people buy a bottle of water for $5.00 rather than using the drinking fountains.  (One theater I was in actually removed the drinking fountains – I won’t be going there again.)

It is in your best interest to start cutting down on the amount of packaging you buy and to start using containers over and over again.  Buy a water bottle or two and refill it rather than buying bottles of water all day.  At home keep a cold pitcher of water int he refrigerator and fill up glasses or just use ice instead of pulling out a little bottle each time you want a drink.  Where you can, buy the expensive plastic container just once and then buy refills in larger quantities and cheaper packaging.  You can do this for liquid hand soap, sugar, salt and spices, and other household items.  The more you do this, the more of these options companies will start to offer.

It may not seem like much, but if you can save a few dollars per day by reducing the amount of plastic packaging you’re using, that’s maybe $100 per month or $1200 per year or enough to fund over half of a college IRA.  If everyone in your family does it, you’ll have enough to buy a new pre-owned $15,000 car every three years for cash, or enough to almost entirely fund an IRA or Roth IRA account each year.  That’s powerful.

It isn’t huge changes in habits that mean the difference between being financially independent during one’s lifetime or needing to work your whole adult life and well into retirement age just to pay for things.  Most people who become financially independent don’t live on soup and crackers and separate the plies on their toilet paper.  They just make little changes that allow them to save and invest some of what they make.  Getting rid of waste in your life is a good way to do this.  How about starting with plastic?

Your investing questions are wanted. Please send tovtsioriginal@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 Manage Your Cash Flow in Your Twenties


(This is the third post in a series on cash flow.  The first post in the series is located here.)

Cash Flow Diagram for Couple in their Twenties

Cash Flow Diagram for Couple in their Twenties

In the last post we looked at the cash flow of the typical middle class family, which is a cash flow that will put them into debt despite having a good income.  Today let’s look at what the cash flow diagram of a couple in their twenties should be if they want to become financially independent.  This is the best time to get your cash flow right so that you’ll never go into debt in the first place.

Let’s assume our couple has no kids yet and have a couple of student loans.  While getting the student loans was probably not a great idea, sometimes it is a necessary evil.  If they make just a few other good choices, they can still turn their finances around and be debt free quickly.

The diagram above shows the cash flow for our twenty-something couple.  (Click on the diagram for a better view if needed).  Note the following:

Box A, Income:  Our couple has two jobs, with a $20,000 and a $40,000 income.  One person seems to have gotten something from his/her college degree, where the other just took what he/she could find.  This happens fairly often, but even taking a job that may not pay so great can help you financially when combined with another income that can carry most of the load, plus it is better to be working and getting experience since that is how you get a better job later.  If you look at the total expenses at the bottom, you’ll see that the couple spends $40,600 per year, so most of the second person’s salary can be used to retire debt, save up for bigger expenses like a home, and invest.

Box B, Cash-On-Hand:  Our couple used their initial salaries to build up an emergency fund of $9,000.  That should be enough to cover things that come up like medical co-pays and car repairs.  This money keeps them from putting these expenses on a credit card and starting into the debt cycle.  It is also money that will be there if one of the two lose their job and it takes a few months to find another one.  They keep most of the money in savings that earns more interest.

Box C, Obligated Expenses:  Our couple has chosen to rent an apartment for $600 per month.  They are saving up for a down payment on a house, so they are taking an apartment that is safe and clean, but without all kinds of extras.  They will have plenty of time in their lives to have luxuries – right now they just need somewhere to live.  Note that they have also chosen to live somewhere that makes sense for their salaries.  Beyond rent, their only obligated expenses are some taxes on their cars and their student loans.  Note that there are no car payments since they used some of their initial paychecks to buy a couple of used cars for $3,000 each.  They have about 1/3 of their income obligated before the month starts.

Box D, Necessary Expenses:  In this box we have the things that they need to buy but that they have some flexibility in the amount paid.  Here they are working to keep expenses down.  They eat in most meals with perhaps $50 per month for a couple of modest meals out.  They spend a couple of hundred dollars in clothing, just replacing what needs to be replaced.  They are young, so they only have $1000 per year in medical expenses for normal care and the occasional flu.  Their necessary expenses are about 1/6 of their take-home pay.

Box E, Optional Expenses (Luxuries):  Here are the luxuries that they choose to enjoy.  Note that they keep these small relative to their income – around 10%.  This leaves money for investing and saving.  They chose an inexpensive hobby – backpacking.  Other choices would be running, camping, card games, biking, shore fishing, reading, disk golf, and gardening.  Things like golfing can come later when they have higher incomes and more money in investments.

Otherwise they have a small amount of spending cash each month to spend however they choose, some money for movies and going to hear live music at coffee shops.  They also have a little money for special occasions like birthdays and festivals.  They take a modest vacation each year, costing $2,000, maybe to visit parents.  Because they are keeping their luxuries low for now, they have money to invest to generate an income for luxuries later.

Box F: Required Investments:  The don’t have any children yet, so they don’t have any college expenses to save for, but they will want to retire some day.  They put away 15% of their income into retirement accounts, with 8% going into 401k’s to get the company match, then the rest going into individual IRAs where they have more investment choices.  By investing early for retirement, they’ll have no problem reaching their goals and having plenty of money to live on in retirement.

Box G: Saving and Investing:  After paying for everything else, they still have $10,400 left over.  Note that despite only having a $60,000 income, they are able to free up over $10,000 per year by 1) buying used cars so they have no car payments, 2) limiting things like meals out and expensive entertainment, and 3) taking modest vacations until their income increases.  They put $5,000 away each year for a home, allowing them to put down a down payment of about $30,000 in six years, or 20% for a $150,000 home.  They might decide to put this money on the student loans instead, then use the money they free up from the loans to build up a down payment more quickly.  They also put away $1500 per year into a car fund so that they’ll have the money to buy new used cars in four or five years.

That leaves $3,900 to put into investments each year.  This is the money that will allow them to become financially independent in their mid-forties.  It also gives them more security since they have resources to tap into beyond their emergency funds if needed.  Over time, these investments will add to their yearly income, increasing their cash flow.  After just five years, they might be able to generate a yearly income of around $2,000 from investments.

Looking at the upper right, we see that they have $17,400 in free cash flow. which includes their luxuries and their savings/investments.  This is cash that would be available to cover things that come up if needed since they have flexibility.  Because they have limited obligations, they have a great deal of control over their income.  Compare this with most people who have everything obligated before the month even starts.   Note that if they wanted they could choose to cut way back on luxuries and savings for a year or so and knock about $15,000 off of their student loans, maybe paying one off.  This would free up more cash flow that they could then direct towards saving up for a home or investing more.  Just killing off the smaller one would add $5,000 to their free cash flow.

Your investing questions are wanted. Please send tovtsioriginal@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 your Cash Flow Keeps You in Debt


Cash Flow Diagram of Debtors

Cash Flow Diagram of Debtors

(This is the second post in a series on cash flow.  The first post in the series is located here.)

A very important step in personal financial planning is to create a cash-flow diagram as seen above, and as described in the previous post, to understand where your money is going.  The one above is a yearly diagram, in that it has income and expenses for the year listed.  That is the best first diagram to make since it smooths out the odd months with extra paychecks or big expenses.  It also can become the basis for your yearly and monthly budgets.  Today we’ll look at one cash flow diagram that is typical of an American middle-class family.

The yearly cash flow diagram shown in the figure above is typical for many middle-class families (click the figure to get a better look), and also shows why many families go into debt despite seeing millions of dollars pass through their bank accounts during their lifetimes.  Note that they have a good household income, totaling $100,000 per year after taxes, since they have two middle-class workers in the household.  Still, because of they way they have their cash flow setup, they will perpetually go deeper and deeper into debt.  To understand why, let’s see where the money goes after it comes into their home as it flows through their cash flow diagram.

First it stops in their bank account, which usually has about $3,000 in it, giving them some piece of mind that they have some emergency cash on hand.  A bunch of their money then flows over to their Obligated Expenses in Box C, which are things they must pay for each month or face fees, fines, and foreclosures.  Here they have a $14,400 per year mortgage, which really isn’t bad considering they have a $100,000 per year income, so they didn’t overspend on the home.  (A good rule is to keep your mortgage payment at less than 25% of your take-home pay.)  They also have student loan payments totaling $13,000 per year, however, and  two car loans totaling over $14,000 per year.  The total for their obligated expenses, which are things they must pay or face fines and penalties, is $45,800, taking almost half of their income.  They would be in better financial shape if they had paid off the student loans before buying a house.  Another smart move would have been to put $5000 into a couple of old but reliable used cars and saved the car payment.  Even if they put $2,000 in repairs into the cars each year, they would be way ahead of the game.  They would also be growing their wealth instead of going into debt.

Moving onto Box D, Necessary Expenses, we see that they spend quite a bit on food each year ($12,000).  While this may seem excessive, this is just due to a $200 per month grocery bill and five meals out per week at $40 per meal.  Many families easily exceed this since they often eat out and $40 for a family is really cheap.  They could cut back on eating out to maybe once per week and cut this bill to under $5,000 per year, however.  They also spend a healthy amount on clothing, cell phones under “utilities,” and an “other” category that covers all of the stuff they buy for the home, car, work, and yard throughout the year.  This results in necessary expenses of  $40,700 per year, which combined with obligated expenses eats up about 86% of their income.   If they were to cut back on some of these categories by making some better choices, they would have more left over to save and invest.

We now move to the luxuries in Box E, Optional Expenses, which is what pushes them over the top into debt since they buy extras without watching their budget.  Here we see that they don’t scrimp on vacations – gotta live while you’re young – at $10,000 per year for a couple of resort visits with airfare.  They also spend a lot of money on ball games, movies, and other forms of entertainment during the year, resulting in an entertainment cost of $6,000 per year or about $500 per month.  They also spend about $300 per month on lattes and other things they can’t quite remember in their “Spending Cash” category.  In total, luxuries total almost $25,000 per year when though they only have $14,000 to spend after obligated and necessary expenses.

So, while they make a great income, they still spend over $11,000 per year more than they make.  This means that they would go into debt this first year, then go deeper and deeper into debt as they go unless they cut back on spending.  This might start as credit cards and then be refinanced into a home equity loan, which would become a new obligated expense.  As their debt grows, they would start paying interest payments, which would be cause their obligated expenses to increase even more than just repaying the debt would, making their cash flow situation worse.  It is possible that they may be able to stop the growth of their debt if they can get their income up during these early years (they still have college loans outstanding, so I’m assuming that maybe they just got out of college and are just starting new jobs) enough to offset their spending and make their budget balance, but even then any emergency like a needed home or car repair or trip to the emergency room would upset the balance and send them deeper into debt because they don’t have enough of a surplus at the end of most months to build up their cash-in-hand in Box B that they could then use for unexpected expenses.  Without having a cash cushion, they would need to use debt and without any surplus income it would be difficult to pay that debt back.

Note also that there is no money going into Required Investing, Box  F, meaning that they will not have any money for college for their children, retirement, or even home repairs and their next new car.  There certainly is no money going into Box G, Saving and Investing.  In fact, they are pulling money out of investments that they don’t have to cover their over spending.  This means that they will never generate any investment income to increase their income in Box A.  In fact, they will create interest payments that will add to their obligated expenses in Box C as previously noted.

Sadly, this is a cash flow diagram typical of middle class families.  They have a great income, but they spend a little more than they have, causing themselves to go into debt over time.  As the interest on that debt grows, the amount of overspending also grows since now they must also pay the interest on the debt.  Before long, the debt becomes unbearable, resulting in bankruptcy.  Even if it never gets to that extreme, it still takes away a lot of the income the family makes.

Your investing questions are wanted. Please send tovtsioriginal@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.

 

 

Setting Up a Cash Flow to Grow Wealthy – The Boxes


CashFlow Diagram

How you handle your cash flow is the key to whether you will work all of your life and retire with nothing or you’ll be financially independent years before you retire and have no worries financially for the rest of your life.  For this reason I’ve started a new series of posts on cash flow and how you create a wealthy cash flow that builds wealth instead of a middle class cash flow that never causes any real gains in your wealth.  To find all posts in this series, simply choose the cash flow category from the list in the sidebar to the right.

In this inaugural post I’ll discuss the cash flow diagram and the several boxes that make it up.  Additional details are included in the book, The SmallIvy Book of Investing, Book 1:  Investing to Grow Wealthy.  The backbone of the cash flow diagram is the budget, which is the start of any financial plan.  The cash flow plan, however goes further than a budget.  Where a budget just shows how money flows in from work and then is allocated to different expenses, a cash flow plan shows how money flows through your bank account, into various investments, and then back into income to add to the money coming in.  It is this recirculation of money, building on itself with each cycle, that allows you to become financially independent within your lifetime.

I recently created a cash flow diagram in a spreadsheet, as shown in the figure above.  This allows me to total the different boxes and determine my family’s free cash flow, which is the money that is left over after expenses I cannot avoid and required investments are made.  (Note that the cash flow diagram includes “required investments” for things like retirement and college since these are expenses that will come due and simply hoping things will work out when the time comes is not a good plan.)  I’ll now go through each of the boxes in the diagram:

A. Income:  Obviously this is your income for the month or the year.  This includes income from work and other activities, along with investment income.  The goal is to grow investment income to the point where work income is no longer needed since that will be point where you become financially independent.

B. Cash on Hand:  This box includes bank accounts and other liquid assets.  This is where money rests until being spent or invested.

C. Obligated Expenses:  These are expenses that you must pay or you pay a fee or get thrown in jail.

D. Necessary Expenses:  These are expenses that you need to pay to survive, like food, but you have some flexibility on the amount and how you cover a given category.

E.  Optional Expenses:  These are things you really don’t need, but which make life better, like movie tickets.

F. Required Investments;  These are investments you should be making for big expenses that you’ll face eventually, like retirement.

G.  Saving and Investing:  This is the money you put away to generate an income and become financially independent.  It is also the saving you do for big expenses like your next car to keep you out of debt.

So there you have it – the basic cash flow diagram.  Note that money flows in through the top into your bank accounts, and then whatever doesn’t stay in your bank account flows out to expenses and investments.  Because most people don’t see their regular bank accounts grow each month, they have formed an equilibrium where money flowing in equals money flowing out.  People who spend more than they make will have debt instead of savings, which will act like a big suck on their ability to create wealth.

Your free cash flow calculation, which is shown in the upper right, is the money left over after you pay required expenses and investments.  This is the money you have available to become financially independent.  The bigger your free cash flow, the more quickly you can build wealth.

In the posts that follow in this series we’ll talk about how to use a cash flow diagram to understand your finances and put yourself onto the path to become wealthy.

Your investing questions are wanted. Please send tovtsioriginal@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.