Author Archives: thefinancialjourneyman

About thefinancialjourneyman

Deciding to be free: My Journey toward financial independence

Visiting the Emerald Isle

In July, my wife and I went to Ireland on vacation.  It was our first time in Ireland.  Last summer, we went to London on vacation.  We tried to combine England and Ireland into one trip but decided against it.  We wanted more time to explore both countries on separate trips.

Naturally, I was excited about going to visit Ireland.  What made the trip a little more exciting was that it was my first attempt at travel hacking.  We were able to fly to Dublin from Newark, New Jersey for free.

Hotel

While in Dublin, we stayed at the Albany House located on Harcourt Street.  This hotel came recommended by a friend of mine who stayed there while traveling in the past.  The hotel itself was fine.  The rooms were clean and spacious.  The staff was friendly.  Every morning, the hotel provided a traditional European continental breakfast including toast, cheese, fresh fruit, and coffee or tea.

The hotel was located a block away from St Stephen’s Green.  St Stephen’s Green is a lovely park.  It is located in the heart of the financial district.  Every afternoon, the park was filled with employees from KPMG and Indeed.  They are truly fortunate to be able to take their lunch break in such a nice park.

The complaint that I have about the hotel is not the fault of the Albany House.  Across the street from the hotel is a nightclub.  Every night, from 11 pm until 5 am there was loud screaming, fighting, and broken glass?  As the result of that racket, we did not have one decent night of sound sleep.

Touring

This trip was not booked as a group tour.  We do not enjoy traveling with large groups of people.  My wife and I like to be free to plan our days and not be rushed when we travel.

However, the benefit of touring is that you have a guide to show you all of the major attractions.  For this trip, we planned 3 separate day trips with a tour company. We also had 4 days to explore the city independently.

The company that we used for our three days of touring was Paddy Wagon Tours.  They are the biggest touring company in Ireland.  The cost of the tours was reasonable.  The Tour Guides were knowledgeable and truly entertaining.  We had a great time learning about the history of Ireland and laughing at their jokes.  They were all wonderful.

The Cliffs of Moher

The first trip that we took was to The Cliffs of Moher.  The Cliffs of Moher is located on the west coast of Ireland.  When we arrived at the Cliffs, it was cloudy, but we were able to see them and get a few nice photos.  After we were there for about 20 minutes, the fog rolled in.  Because of the fog, the cliffs were no longer visible.  We are grateful that we were able to enjoy the scenery before the weather changed.

Northern Ireland  

Our second tour was to Northern Ireland.  Like most people who grew up in the 1980’s, when I think of Northern Ireland, I think about The Troubles.  There has been a period of peace in Northern Ireland since 1998.  Since the Brexit decision, tensions have been elevated in Northern Ireland.  The night before our tour there was a small political scuffle that included throwing Molotov Cocktails.

While it was scary, Belfast seemed like a nice city.  We actually toured the neighborhoods where much of the past troubles took place.  The tour guide took us to see the Bobby Sands Memorial.  Just two blocks from the Bobby Sands Memorial sands the Peace Lines that separate the Republican and Nationalist Catholic neighborhoods.

The second stop in Northern Ireland was at The Dark Hedges.  For those of you who are Game of Thrones fans, The Dark Hedges was featured in the second season.  I am a Game of Thrones fan and honestly, do not remember The Dark Hedges.  I am going to have to re-watch the series and keep my eye out for them.

Following lunch, we went to see Giant’s Causeway and the North Atlantic Coast.  Both were truly breathtaking.  The views were panoramic and unlike any coastline that I have ever been to in the past.  It will be unfortunate if these tours are no longer available in the future because of the hard border that will most likely be put in place after Brexit officially goes into effect.

Blarney Castle & Cork

Our third and final tour was to Blarney Castle and Cork.  Prior to taking this trip, my friends and colleagues kept asking me if I was going to kiss the Blarney Stone.  I said no because I do not like high places and because I heard that the locals pee on it.

My wife, on the other hand, was all about kissing the Blarney Stone.  Prior to us climbing to the top of the castle, the tour guide reiterated that the locals do not pee on the Blarney Stone and that it is cleaned throughout the day.  Even though I did watch the workers clean it, I still was not going to kiss it based on the height.

Our last stop on our final tour was to visit Cork.  We only had two hours to take in the city.  Next time, we visit Ireland, we might consider staying in Cork for a few days. It seems like another wonderful city, but we just did not have enough time to take much of it in.  Plus, at this point we were tired.

Dublin

We spent the rest of our vacation in Dublin.  The remaining days were spent leisurely walking around the city and taking in all of the major attractions.  Dublin is a nice city for walking because it is mostly flat.  It was a good thing that we brought comfortable trainers because we walked about 10 miles per day.  Some of the major attractions that we took in were Trinity University and the Book of Kells.  We went to St Patrick’s Cathedral.  We also simply enjoyed seeing some of the historic monuments including Molly Malone, Spire of Dublin, and the Hugh Lane Gallery.

Conclusion

My wife and I had a great time visiting Ireland.  I was in need of a vacation.  I have been busy at work and this blog takes up the rest of my mental energy.

We were only in Ireland for seven days and were able to cover a good portion of the country.  We would have liked to visit Galway but ran out of time.  Next time we visit we might spend half the trip in Cork and the remainder of our time in Galway.

I highly recommend taking a trip to Ireland.  It is a lush county that is full of rich history.  It might not be for a few years because we are planning on visiting other locations, but we will defiantly be back to see the rest of the Emerald Isle.

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Financial Planning for New College Graduates

You did it.  You earned your college degree.  Congratulations on this major life accomplishment.

Hopefully, you have a job lined-up in your field of study.  If not, don’t get overwhelmed.  Start applying and interviewing.   Before you know it, you will be working, growing your career, and earning a paycheck.

The good times are not over, but it is time to enter the real world.  By starting this next chapter of your life on the right track, you will be able to better ensure a sound financial future.  Right now, time is on your side.

As a new college graduate, I am sure the last thing on your mind is retirement.  Retirement might be many decades away, but the actions you take in the coming years will shape your financial future.  Below are the key steps that will help you to establish a plan that will guild you on your journey toward financial independence.

Step 1 – Save 15% of your salary.  Start this process of saving with your first paycheck.  It might sound like a high percentage, but this is just the first step.

Step 2 – Sign up for your employer’s retirement savings plan.  If you work in the for-profit universe, it is called know as a 401K.  If you work at a not-for-profit organization, it is called a 403B.  If you work for the Federal Government, it is a Thrift Savings Plan (TSP).  On your first day of work, go to the Human Resources office and sign up to contribute 15% of your salary to their retirement savings plan.  Increase the amount that you contribute to your retirement plan by 1% every year.

Step 3 – If possible, only Invest using low-cost mutual funds and index funds.  Avoid trying to pick individual stocks or trying to time the market.  Identify an asset allocation that best matches your age and risk tolerance.  Historically stocks have produced higher returns than bonds. Stocks, however, are more volatile.  On the other hand, bonds are less volatile but do not keep up well with inflation.  Establish a plan that uses both stocks for growing your wealth and bonds to retain your wealth during bad economic times.

Step 4 – Establish a plan to pay off your student loan debt.  Don’t fall victim to the mindset of the masses when it comes to student loans.  You attended college and earned a degree.  Hopefully, you paid attention in class and are ready to put your degree to work for you as an employee.  You attended class, possibly lived in a dorm, and most likely ate your meals in the cafeteria.  It is time to pay back what you owe.  Avoid self-pity and feelings of entitlement.  Those ill feelings will just hold you back on many levels.

Step 5 – Get a part-time job.  For those who have the entrepreneurial spirit, start a side business.  You are young and full of energy.  Now is the time for you to be working and building a solid financial foundation.  Getting a part-time job will allow you to earn extra money.  Working a couple of evenings during the week and picking up some hours on the weekend will greatly help to increase your earnings. That extra money can be used to pay off your student loans, establish an emergency fund, or open a Roth IRA.

Step 6 – Put off attending graduate school.  Unless you work in an industry that requires a graduate degree to obtain entry-level employment, put off attending for a couple of years.  Find an employer who offers tuition assistance as part of their compensation package.  That will allow you to work in the day and take graduate classes in the evening or on the weekend.

Step 7 – Write a financial plan.  A financial plan is a map.  It allows you to identify where you are at from a financial standpoint.  A financial plan is also a map that can be used as a guide to where you want to be in the future.  It helps to have a guide than to go it alone.  Financial planning is too important of a topic to not have a plan and just fly by the seat of your pants.  A financial plan is a living document that needs to be reviewed annually.  The great feature of a financial plan is that it can be amended as your plans and goals change.

Step 8 – Establish a budget.  Calculate how much you will earn every month from your job.  Write out your budget based on percentages.  Know how much of your salary will go towards housing, food, entertainment, and every other expense.  Be sure to write a budget that is practical in terms of expenses and prudent in terms of savings. In other words, always try to reduce expenses and to increase savings.

Step 9 – Keep your transportation costs low.  Transportation costs are simply an expense in your budget.  Use your budget as a guide to determine how much you can afford to spend on a car.  Keep your transportation costs at 11% of your budget.  Your budget will determine if you can afford a fancy new car or a used economy model.  Try to keep in mind that a car does not determine your identity.  It is just what enables you to travel from Point A to Point B in a timely manner.

Step 10 – Keep your housing costs as low as possible.  If you are renting, try to find a roommate or two.  Having a few roommates greatly reduces the amount you will have to pay for rent every month.  As you advance in your career and if you have a family, you might consider buying a house.  Use your budget as a guide to determine how much house you can afford.

Step 11 – Be sure that you are properly insured.  If you are under the age of 26, you should be able to remain on your parent’s health insurance.  If not, ask your employer about when you are eligible for coverage under their plan.  You are young and most likely healthy, but one trip to the emergency room could ruin you financially if you do not have proper health insurance.  Also, be sure that you have the proper amount of insurance for your car, home or apartment, and life insurance if you have a spouse or children.

Step 12 – Avoid Debt. Keep your debt to a minimum.  Avoid payday loans and credit card debt at all costs.  Having a high credit score is important because it will allow you to get the most favorable interest rates if you do have to borrow money.  To ensure you do not take on too much debt, monitor your debt with the Debt-To-Income Ratio.  Always try to keep your DTI under 16% and never exceed 36%.  In life, sometimes debt is unavoidable.  Most people will have to take out a mortgage to purchase a house.  Some people will have to take out a car loan in order to have a means of transportation.  When doing so, use both your budget and DTI to determine how much you can safely afford.

Conclusion

There you have it.  You are finished with college and ready to take on the world.  Don’t put off applying these steps.  You can start implementing some of these steps on your first day of employment.  If you start out with a well-established plan, you will be well ahead of your peers.  Use these steps as a guide and you will surely become a financial success story.

Do you agree with these suggestions?  Do you think that anything is missing from this plan?  What would you add or do differently?

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Investing in Your 20s – It’s the Chance of Your Lifetime

No matter how old you are, it is never too early to start investing. Whether you are in high school, college or just finished school now is the time to start putting money toward securing your financial future. The good news is that it is easy to start investing no matter how much you have to invest, what your risk tolerance is or what your goals may be.

How Do You Start Investing?

The first step to becoming an investor is to find a broker to trade with. Most brokers allow you to make your own trades online in a matter of seconds. They will also have access to charts, analysis and news to help you make informed trading decisions.

Some brokers also offer training courses that help new investors learn the basics of investing as well as how to use the charts and tools that they offer. The broker that you choose depends partially on how much help that you want or need making investment decisions as well as how much that you have to invest at the moment.

How Much Do You Need to Start Investing?

Some brokers such as Charles Schwab will allow you to start investing with no minimum balance. Therefore, you can start contributing to an index fund with as little as $1 if that is all you had to invest or all that you wanted to put in for now.

Newer brokers such as Betterment or Motif require anywhere from $100 to $300 to get started whereas some mobile investing apps have no limits. If you invest in Fidelity, Vanguard, or similar brokers, expect to need at least $1,000 to gain access to their stock or mutual fund offerings.

Why Should I Start Investing Today?

Compound interest is one of the most exciting concepts that you will ever learn. It is also the reason why you need to start putting money into the market today no matter how much or how little you have to get started with.

Let’s say that you bought stock worth $100 at age 30 and earned the historical average return of 11 percent per year. When you were 60, that $100 would be worth $2,289. However, if you put that $100 into the market when you were 20, you would have $6,500 by age 60 assuming an average 11 percent return.

What Should I Know About Broker Fees and Capital Gains Taxes?

It is important that you account for taxes and fees whenever you make an investment decision. When you first start investing, you will likely look to buy and hold a stock or index fund for many years. This is because most brokers charge a fee of $5 to $8 for each trade that you make. If you only have $100 in an account, that $8 may represent your return for an entire year.

When it comes to taxes, it is important to note that you only pay tax on the profit that is made on a given investment. Your profit is any gains above your cost basis, which is the price of the security plus any fees paid to buy or sell it. Therefore, if you bought a stock for $10 and paid $5 to buy it, your cost basis is $15. If you sold the stock for $20, you would pay capital gains taxes on $5.

If you are in the 10 percent tax bracket, you pay nothing in federal capital gains taxes. However, you may be required to pay state taxes on all capital gains. If the money is held in a traditional IRA, you don’t pay capital gains taxes while securities are in your account. Instead, you pay ordinary income taxes on any money that you withdraw when the withdrawal takes place.

Should I Open a Roth IRA or 401k Instead of a Traditional?

When you invest in a traditional IRA or 401k, you get a tax deduction in the year that the contribution is made. However, if you choose to open a Roth account, you use after-tax dollars to contribute to your account.

The benefit is that the money in your account grows free from capital gains taxes. Furthermore, it is not subject to income taxes when it is withdrawn because the money was already taxed.

Ideally, a person will invest in both a traditional and Roth IRA or 401k to reduce their tax burden both today and in the future. As a Roth IRA is subject to income limits, it may be best to contribute to a Roth 401k as there are no income limits and contribution limits are higher. A 401k is a retirement account provided by an employer, and those who are self-employed may open one on their own.

If you are serious about reaching financial independence, you should start investing as soon as you have a few extra dollars to do so. Those who aren’t sure what their financial goals or timelines are may benefit from speaking with a financial adviser. This person may be able to help you create short and long-term goals as well as different investment strategies to make it easier to meet them.

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Debt: Reaching Step Zero

The first step in correcting a problem is to admit that there is a problem.  Prior to admitting that there is a problem, there is another step.  That is when a person reaches their breaking point and cannot go on living the way that they are living.  That is often referred to as step zero.  Step zero is when a person says to themselves “this crap has to stop”.  It is the breaking point.  It is the point where a person becomes willing to take corrective action.  They become willing to try a different approach of living because of a psychic change.

Have you reached the point where you realized that your way of managing money is not working?  Are you spending more than you earn?  Does all of your earnings go towards paying bills?  Do you have creditors calling you who want to be paid?  Do you have to borrow money when an emergency occurs?  Do you find yourself spending money that you do not have in order to keep up with your friends, neighbors, or relatives?  Do you feel broke even though you work hard and earn a good income?  Do you contribute any money to your retirement savings accounts?

Have you reached step zero? Do you want to change how you manage your finances?  Do you want to take control of your life?  Do you want to break away from the bondage of debt?  Are you at a point where you are totally dissatisfied with how you are living because of debt?

The good news is that there is hope.  It can get better.  It is all up to you.  It is based on your willingness to change.

Now that you have admitted that your way of managing your finances does not work, how should you start the mending process?

Measuring the Damage

Start by measuring the damage that you created.  Before you can move forward, do an analysis of what you owe.  My favorite tool to assess debt is the debt-to-income ratio.

To calculate your Debt-to-Income Ratio, see the formula below:

Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100

Example: $1000 in Monthly Debt Payments/$3000 in Monthly Income x 100 = DTI of 33%

What is considered a bad DTI Ratio?

If your DTI Ratio is higher than 36%, you are in the danger zone.  The higher your DTI Ratio is, the less money you have to cover your living expenses.  A healthy DTI Ratio is less than 16%.

Where to Start

After you know your DTI Ratio, it is time to start paying down that debt.  Start with paying off all of your bad debt.  Pay off all of your payday loans, credit cards, and auto loans.  Next, start to pay down your student loans, mortgage, and business loans if they exist.

Stop the Bleeding

Stop buying stuff you do not need on credit.  Identify what you need and only pay cash for those needs.  A few examples of needs are food, clothing, medical supplies, transportation costs, and housing expenses. Wants are fancy cell phones, cable TV, designer clothes, eating at restaurants, or any other expense that is not required to live.

Income

If you are part of a dual-income household, learn to live off of one salary.  Use the higher of the two salaries to pay for all of the household living expenses.  Use the lower of the two salaries to pay down debt.  After your debt is paid off, you can start to focus on saving money.

Get a second job.  Find a side gig to earn money to pay down debt.  If you spend your free time working, you will be less likely to spend money on stuff you do not need.

Create a budget.  A budget is a plan that allows you to break down where your earnings will be allocated based on a percentage.  For example, 25% for housing, 11% for transportation, 20% to pay off bad debts.  Once you have a budget established, all you need to do is follow it.

Recreation

Even though you have debt, you still have to live your life and have fun.  Find ways to enjoy what your local community has to offer.  Instead of going to high priced movies or amusement parks, go to local parks or free museums.  Instead of going to a high priced gym, exercise outside by walking.  Instead of going on a luxurious vacation, take a staycation.

Guilt & Shame

There is no use in feeling bad about having debt.  You have identified the problem.  Now is the time to move ahead and to make positive changes.  Having ill feelings is not a solution.

Focus on the positive and on everything that is possible once your debt is under control.  Try to take small steps and to monitor your progress.  Don’t strive for perfection.  If you have a slip, don’t beat yourself up.  Pick yourself back up and keep striving for progress.

Conclusion

Debt is similar to hiking.  Once you walk 5 miles into the woods, you have to walk 5 miles to get out.  Now that you have decided that a change is needed, it is up to you.  At this point, there is no use in looking for someone or something to blame for your debt.  You cannot change the past.  You can just pick up what is left and apply a solution.  If you learn from the situation, it was not a waste.  As you move forward, you can also use it to help other people who are struggling with their own financial issues.

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The Roth IRA is 20 Years Old

The Roth IRA has now been around for 20 years.  Where does the time go?  Time sure does seem to fly when you are having fun.  It seems to go faster when you are dollar-cost-averaging and building wealth.

That is exactly what the Roth IRA has done over the past 20 years.  It has been a great wealth building tool for many individual investors.  Since it was created, I have been depositing money into my Roth IRA in the form of dollar-cost-averaging with almost every paycheck for the past 20 years.

The Roth IRA has come a long way in 20 years.  The Roth IRA is named after William Roth a Senator from the state of Delaware and was part of the Taxpayer Relief Act of 1997.  What makes the Roth IRA different from a Traditional IRA is that unlike the Traditional IRA, there are not any immediate tax deductions.  The Roth IRA is funded with after-tax earnings and when the money is withdrawn at retirement, it is tax-free.

When I first started investing, the Roth IRA was not available.  It did not become available until I was investing for about 1-year.  As soon as I learned about the Roth IRA, it sounded like a great wealth building tool.

When the Roth IRA was first introduced, the annual contribution limits were only $2,000 per year for an individual who qualified. From 1998 until 2001, the contribution limits were $2,000. The contributions limits have slowly been increasing over the past 20 years.  In 2002, people over 50 have been allowed to contribute more in the form of a catch-up contribution as they got closer to retirement age.  In 2018, individual under the age of 50 can contribute $5,500 per year and people who are over age 50 can contribute $6,500 per year.

There are income limits on who can take advantage of the Roth IRA.  Single filers who earn less than $120,000 qualify for a full contribution.  Single filers who earn between $120,000 and $135,000 are eligible for a partial contribution.  Joint filers who earn up to $189,000 can take advantage of the full contribution.  Joint filers who earn between $189,000 and $199,000 are eligible for a partial contribution.

Since my wife and I earn less than $189,000 we are able to better diversify out retirement tax strategy.  We contribute to our Traditional 403B accounts to reduce our annual taxable income. We also contribute to our Roth IRA accounts to have money that can be withdrawn tax-free later on in retirement.

What if you want to contribute to a Roth IRA account, but do not qualify.  For those folks, there is a Backdoor Roth IRA method that could be used to convert a traditional IRA into a Roth.  That approach is more complicated based on taxation.  It might be wise to check with a CPA before trying to implement this strategy.

Unlike a Traditional IRA or 401K, there are not any Required Minimum Distributions (RMDs) with a Roth IRA.  In a Traditional IRA account, the money has to start to be withdrawn at age 70 ½. That is not the case with a Roth IRA.  The money never has to be withdrawn.  It can remain in the Roth IRA and the money can keep growing.

Since the money never has to be withdrawn, it is recommended by many financial professionals to drawdown Roth IRA accounts last.  We have added that strategy to our retirement drawdown plan.  Based on our age and different types of investment accounts, we will be following a Buckets Approach to funding our retirement.

We will first drawdown our taxable accounts.  The second source of retirement income will come from our Traditional IRAs based on the RMD schedule.  If we live long enough, the last source that we plan on drawing down is our Roth IRA accounts.

There are many benefits with passing on a Roth IRA to a surviving spouse.  They are not forced to take RMDs. They can roll the inherited Roth IRA over into their own Roth IRA.  They can also continue to contribute to the Roth IRA with new earnings.  These benefits do not apply to someone who inherits a Roth IRA who is not the spouse.

Another benefit of a Roth IRA is that you can withdraw money from the account prior to being age 59 ½.  With a Traditional IRA, there is a penalty for early withdrawals.  The money that a person withdraws early is taxed as ordinary income.  There is also a 10% penalty unless it is considered a special circumstance.  With a Roth IRA, there are not any penalties if the money that is taken out is limited to contributions.

Over the past 20 years, the Roth IRA has become a very popular type of retirement account.  According to the Employee Benefit Research Institute, more than 29% of all individuals have a Roth IRA account.  That is an amazing statistic since so many Americans struggle with saving money for retirement.

There are few things in life that most people agree on.  In the world of personal finance, I cannot think of anyone in the financial independence community who does not like the benefits of investing in a Roth IRA account.  It is hard to not see and embrace the ability to build wealth in an account that allows people to have tax-free income at retirement.

Do you invest in a Roth IRA account?

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Travel Hacking: Round Two

Travel hacking is a great way to travel for free.  Travel Hacking is the practice of opening premium rewards credit cards to capture the generous initial bonus points that these credit cards offer to new cardholders.  The hack is based on getting the bonus points, closing the card before the annual fee is due, and never paying interest or carrying a monthly balance.

I first learned about travel hacking from reading The Millionaire Educator.  It sounded interesting.  It was not until I attended a Rockstar Finance Meet-Up in New York City that I really got turned on to this practice of traveling for free.

In my post Travel Hacking: Round One, I wrote about my first experience with Travel Hacking.  The first card that my wife and I opened was the Chase Sapphire Preferred Card.  We used the bonus points from this card to buy two round-trip tickets from Newark, NJ to Dublin, Ireland.

As the result of my first experience, I have decided that travel hacking will be a major part of my financial plan.  My wife and I take at least two vacations per year.  Even though I am frugal, we still have the monthly household spending to earn enough points to pay for two trips per year.

The second card that I opened was the Chase Preferred Ink Business Card.  Unlike the Chase Sapphire, the Chase Preferred Ink Business Card is a business card.  In order to qualify, having a small business like a blog or an Etsy store would qualify.  For sole proprietors who do not have a tax id, they could use their Social Security number when signing up for business credit cards.

Another benefit that the Chase Preferred Ink Business Card offers is that it does not count against the  Chase 5/24 rule that Chase has for opening new cards.  Chase only allows individuals to open 5 cards in a 24 month period from any issuing bank, you will not be approved for new Chase credit card.  That also applies for anyone who is an authorized user.  Since it is a business card, it is not counted as being part of the 5/24 rule.

The Chase Preferred Ink Business card offers a very rich benefits program.  After the cardholder spends $5,000 in 3 months, they receive 80,000 bonus points.  When you redeem those points through Chase Ultimate Rewards, 80,000 points are equal to about $1,000 towards travel.

When you open the Chase Preferred Ink Business Card, there is a $95 annual fee.  Unlike the Chase Sapphire Preferred card, that fee is not waved for the first year.  Based on the value of those 80,000 travel points, it is easy to justify the $95 for one year.

On additional spend, cardholders earn 3 points for every $1 in spending.  The 3 points for every $1 in money spent is good for up to the first $150,000 charged.  After that, cardholders earn 1 point for every $1 in spending.

My wife and I used this card for all of our monthly expenses.  We try to put all of our monthly reoccurring bills on the card.  We also use it when we go out to eat at a restaurant or fill up our car at the gas station.  It took us two months to reach the $5,000 in spend to equal the 80,000 points.

So, how did we use these points?  My wife’s birthday is in December.  She does not know it, but I booked a Western Caribbean Cruise.  While going on a cruise is exciting by itself, this cruise departs on December 23rd.  What makes that exciting is that winter is in full swing in Pennsylvania at that point, so we will even appreciate the cruise more.

I wish that I was able to report that I was able to book the cruise for free.  Unfortunately, that was not the case.  Hopefully, I will be able to share a post about taking a free cruise with you in the future.  I have not reached that level of travel hacking success yet.

What I did apply the points towards was our flight.  I have never booked a flight from Pennsylvania to Florida in December.  When I went to book this trip, I was shocked to find out how inflated the prices are this time of year.  After giving it a little bit of thought, it makes sense due to the holiday traffic and snowbirds who are flying south for winter.

The normal cost for a ticket from the Scranton International Airport to Tampa is around $300.  This flight cost $625 per person.  Our flight to Ireland was less expensive.

The total amount of points that were required to cover our two tickets were 112,000 in Chase Points.  At this point, I had 88,000 in chase points from the Chase Preferred Ink Business Card.  My wife and I also had 30,000 in points from our spending on the Chase Sapphire Preferred Card.  By combining the points from the two cards we were able to cover the airfare.

With the remainder of our points, we booked our hotel.  The cruise departs on Sunday, December 23.  We are flying down the day before.  I was surprised, but we were able to pay for one night at a 3-star hotel for only 6,000 points.  That was the only value that I have found so far on this trip.

Even though the flight was expensive, it ended up being free for us since we took advantage of our points from the Chase Preferred Ink Business Card.  Otherwise, we would have had to shell out over $1,200 for a 3-hour flight from Pennsylvania to Tampa, Florida.  It might seem expensive, but I am sure that I will be happy to be cruising the Western Caribbean instead of dealing with at best a wintery mix at home in Pennsylvania.

I am excited about the money that I will be saving on travel as the result of travel hacking.  Even though it sounds fun, be warned that travel hacking is not for everyone.  Travel hacking is only for those who are ridged and hyper-focused when it comes to managing their personal finances.

If you struggle with paying off your credit card bills every month, travel hacking is not for you.  If you do not have enough in normal monthly spend, travel hacking is not for you.  If you have to try to generate artificial spend to try to earn points, travel hacking is not for you.

Please keep your eye out for my next post in this series on travel hacking.  The next post will be about the Chase Southwest Rapid Rewards Premier Business Card.  I look forward to sharing about how I am getting free flights and to share with you about where we are planning on visiting next.

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Measuring Wealth: UAW, PAW, & AAW

How do you measure wealth?  There are many different approaches.  Do you have $1,000,000 in the bank?  Some would say that makes you wealthy.  It might unless you have excessive spending habits and spend $1,000,000 or more per year.

Another way to measure wealth is based on years of annual living expenses that you have in savings.  I once read that if you have 10 years of living expenses in the bank, you can consider yourself rich.  If you have 25 years of living expenses in the bank, you are financially independent.  Any dollar amount beyond 25 years of living expenses would make you wealthy.  That scale is logical to me.

One of my favorite ways to measure wealth was created by the late Dr. Thomas J. Stanley.  In his book The Millionaire Next Door, he introduced three categories for people to measure how they stack up as creators of wealth.  Dr. Thomas J. Stanley refers to these three different groups as UAWs, PAWs, and AAWs.

Under Accumulator of Wealth (UAW)

An Under Accumulator of Wealth or UAW is a person who has a low net worth in relation to their income.  A person who is 45 years old, earns $200,000, and does not have a net worth of $900,000 would be considered a UAW.  That formula is based on (Age * Income * 10%).

Most Americans fall into this category based on their low savings rate.  Contrary to popular belief, however, many high-earners tend to fall into this category.  Based on Dr. Stanley’s research, many Physicians are not good at building wealth and are classified as Under Accumulators of Wealth.

You might be thinking, that is nonsense, Medical Doctors are rolling in dough.  How could they not be wealthy?  Yes, doctors earn a high salary.  General Practice Physicians earn around $200,000 per year and specialists earn over $400,000 per year.  How could they not be wealthy?

Doctors come out of school with large student loans.  On average, new Doctors come out of medical school with $167,000 in student loans.  I know of one who owes over $300,000 in student loans.  Doctors are faced with social pressures that members of other professions do not face.  They are pressured to look the part.  That requires living in a fancy housing development, driving luxury automobiles, sending their children to private schools, and joining exclusive country clubs.

I am not picking on this noble profession.  Not all Doctors fall victim to those social pressures.  There are many in the financial community who buck those trends including DocG who blogs at diversefi.com.

Average Accumulator of Wealth (AAW)

An Average Accumulator of wealth would be someone who has a net worth equal to the sum described above.  A person who is 55, has a salary of $150,000 plus $50,000 in investment income, would have to have a net worth of $1,100,000 to be considered an Average Accumulator of Wealth (AAW).  If they have a net worth less than that amount, they would fall into the UAW category.

Prodigious Accumulator of Wealth (PAW)

To be considered a Prodigious Accumulator of Wealth (PAW), you would follow the same formula, but multiply it by two.  From the example above, the formula would be (Age 55 * Total Income of $200,000 * 10% * 2).  In order to be considered a PAW, this person would have to have a net worth of $2,200,000.

Age is a Factor

This formula is better suited for people who are more mature in age.  I read The Millionaire Next door when I was age 26.  At that time, I was a student but had a full-time job.  My net worth at that time was $60,000.  Based on this formula, I was an Under Accumulator of Wealth.  In order to be classified as an Average Accumulator of Wealth, I would have had to have a net worth of $78,000.

This aspect of the formula has led it to be criticized.  In its defense, not many people who are in their 20s are focused on building wealth.  Most are in college racking up debt or trying to pay off debt after they enter the workforce.

In my opinion, a person should not focus on these calculations until they are at least 15 years into their career.  It takes time to build wealth as an investor or entrepreneur.  This calculation is more about where you finish the race as opposed to where you start out.

How to Become a (PAW)

There are plenty of steps that you can take to become a Prodigious Accumulator of Wealth (PAW).  Dr. Stanley has provided a complete outline in The Millionaire Next Door.  Below are some suggestions that will help you to reach these financial heights:

–        Spend less than you earn

–        Save 15-20% of your earnings

–        Invest in equities, bonds, real estate, private businesses

–        Don’t speculate on getting rich quick schemes

–        Invest in yourself by getting a good education and keeping your skills current

–        Avoid luxury items

–        Focus on building wealth for your children

Conclusion

I am a fan of the late Dr. Thomas J. Stanley.  I remember reading about him passing away as the result of an unfortunate car accident the day after it occurred.  His research has helped to spread a message that just about anybody can build wealth if they follow some basic principles and practices.

The UAW, PAW, and AAW classifications do receive some criticism.  It takes hard work to become an AAW and very hard work to become a PAW.  As many of my readers know, I am transparent about my income, net worth, and approach to investing.  With that, we are firmly planted in the Average Accumulators of Wealth (AAW) category.  We will not be in the (PAW) category for some time.  Being an Average Accumulator of Wealth (AAW) at this point in our life has allowed us to reach financial independence and one day retire early.

Are you a UAW, PAW, or AAW?  Use this calculator to find out.

What is your opinion of the formula that determines these classifications of wealth?

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The Rule of 72

 

Do you want to know how long it will take to double your money?  Most investors do.  Are you interested in the expediential growth of your money?  Have you ever tried to calculate the rule of 72?

When I first started to read personal finance and investing books, I learned about the math behind what makes investing work.  The big driver behind what causes your money to grow is compound interest. While I was studying, the one theory that I kept coming across was the rule of 72.

The rule of 72 is just a basic mathematical formula.  It is used as a tool to help investors determine when they should expect to double the money they currently have invested.  The rule of 72 allows an investor to know when they should expect to double their money based on a forecasted rate of return.

Start by taking the projected rate that you expect your investment to return every year.  Divide that interest rate by 72. That will give you the number of years that it will take for you to double your money.

Example:

72 / 6% expected rate of return = 12 years to double your principal

72 / 8% expected rate of return = 9 years to double your principal

72 / 10% expected rate of return = 7.2 years to double your principal

The rule of 72 is what makes stocks a more attractive option than bonds or other fixed-income investments.  For example, the Vanguard 500 (VFINX) has returned 10.97% per year between the years 1976 and 2016.  Currently, the average interest rate on an FDIC insured savings account is slightly higher than1.15%. What is the difference between these two investments based on the rule of 72:

Vanguard 500 – 72 / 10.97 = 6.56 years to double your principal

Saving account (national average) – 72 / 1.15 = 62 years to double your principal

Over the coming decade, stocks are not expected to return 10% per year.  Currently, stocks are expensive investments and there is not much value to be found.  Jack Bogle who founded Vanguard and the first S&P 500 index fund that was available to individual investors predicts a more modest return of 6 or 7 percent for the coming decade.  Based on that forecast and the rule of 72, how long would it take to double an investment of $3K in the Vanguard S&P 500 fund:

Vanguard 500 – 72 / 6.5% = 11 years to double your principal

Time is on Your Side

When I started investing, I received a brochure from the investment company that provided me with a few charts on compound interest.  The chart showed how the rule of 72 worked with different interest rates. The brochure explained the wealth-building power of stocks vs more conservative investments based on the difference in long-term performance.  It also showed how it benefited an investor who had a few decades to take advantage of this powerful wealth building formula.

For example, a one-time investment of $10K to grow in value to $40K based on different interest rates:

  • If an investor received a return of 3%, it would take 48 years for that $10K to grow to $40K
  • If an investor received a return of 6%, the time would be reduced to 24 years to grow to $40K
  • If an investor received 12%, however, it would only take 12 years to grow $10K to $40K

What to do Now

What can investors do now to follow the rule of 72?  What are some alternatives since the S&P 500 is projected to underperform its historical average?  Is it possible to try to reduce the time it takes to double your money without taking on too much risk?  Here are some options that might help in doubling your money quicker:

Save more money.  By increasing your savings, you will double your money at a faster pace.  Try to increase your savings by 2-3% per year.

Go beyond the S&P 500.  Add a small-cap blend or extended market index fund that includes mid-cap stocks to your asset allocation.  Small-cap stocks have historically outperformed large-cap stocks. If you go with a 4:1 Ratio, you will emulate the total stock market.

Go beyond the United States for investing opportunities.  Add some international stocks to your portfolio. Add both developed nations and emerging markets for their growth potential.

Remember to keep some bonds in your portfolio.  Many experts are telling investors to stay away from bonds because of their current low yield and the raising interest rates.  Bonds have an opposite correlation than stocks. When stocks go down in value, bonds go up. By owning some bonds, you can buy stocks at a lower price when there is a stock market correction.

Conclusion  

As an investor, you should keep the rule of 72 in the front of your mind.  You do not need to know the exact date as to when you will double your money.  From time-to-time, look at how your portfolio performed over the past 5 or 10 years to identify what your average rate of return is.  Apply the rule of 72 to know where you stand. If you are not satisfied with how long it is taking, look for ways to increase your returns that are within your risk tolerance.   

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Be Intentional

I recently attended a leadership training seminar at a local college.  This seminar was about managing the multi-generational workforce.  The facilitator covered many topics and I am not going to get into any of those details in this post.  He said many interesting things, but the one statement that made me think was that he said that we should always be intentional.

Everything we do should be with intent.  Our actions should have an intended outcome.  Our words should have an intended message.  Even our thoughts should be focused and have a purpose.

The purpose of this training was meant for workforce development.  The message can easily be applied into everyday life.  It is ideal for managing money.

Too many people just coast in life.  They walk around making noise and bumping into things.  By not having a plan, they will just land at a random destination.  What could possibly go wrong with that approach?

To be successful in all your affairs, practice being more intentional.  A great place to start is with how you manage your personal finances.  You should know the why behind everything that you do.

Savings

Do you know what your savings rate is?  You should be able to answer this question without giving it any thought.  Is it 10%, 20%, or more than 30%?  Your savings rate is the most important factor that will determine if you will reach financial independence or not.  It is also one of the rare aspects that you have control over.  Nobody can control what the S&P 500 will return this year, what direction interest rates are headed, or if there will be a spike inflation.  Everyone, however, can control what their saving rate is.

Spending

Your savings rate is directly impacted by your spending.  Do you just spend money without thinking?  Do you go to the mall, outlets, or online and buy things that you do not need?  If you want to change this trend, become intentional with your spending.  Before you buy something, ask yourself if you need it or truly want it?  If you must spend the money, did you shop around for the best price?  Is there a low-cost alternative to making the purchase?  Even if there isn’t a better alternative, at least you did your due diligence and gave thought to the purchase.

Debt

Does your credit card bill arrive, and you cringe when you look at your balance due?  Do you make late payments or just pay the minimum balance on your credit cards?  Do you know what your credit score is?  Do you know what your debt-to-income ratio is and what a healthy ratio should be?  Do you know how to calculate your debt-to-income ratio?  If you want to improve how you manage debt, take a more intentional approach.  Learn what your credit score is, identify if you have too much debt for what your income is, and ultimately establish a plan to get out of debt.

Earnings

I bet you know what your annual salary or hourly wage is?  You get a paycheck every week or bi-weekly, so you are reminded frequently about that rate.  Do you feel that you are underpaid?  Doesn’t everyone?  Maybe you are underpaid or maybe you are overpaid.  Before you ask for a meeting with your supervisor demanding a raise, you should do your homework.  Be intentional and research what the market rate for your position is based on your location and level of experience.  If you are under market rate, you might have a case.  If you are over market rate, but not satisfied, you might need to develop more skills or ask for a more challenging assignment.

Investing

If someone asked you what type of investor you are, could you answer them?  Are you a market timer?  Do you buy and hold equities?  Are you a passive investor who invests in a few different mutual funds?  Do you simply try to capture what the market returns with a total stock market fund?  Do you use value tilts?  Do you buy dividend stocks?  Are you trying to get rich by investing in Bitcoin?  You are free to decide how you invest your money, but you should know the why behind your plan.  Your approach to investing should be intentional.  Nobody knows what the future market returns will be, but you should at least know what you are intending to accomplish with your asset allocation.

Financial Independence

Do you know how much money you need to have in savings to reach financial independence?  To declare financial independence, the general rule is to have 25 years worth of living expenses in savings.  That is based on a 4% withdrawal rate that most financial professionals consider to be acceptable.  Do you know if you have obtained this milestone or how close you are?  Most people who reach financial independence do not get there by accident.  They live intentionally for many years.

Early Retirement

Do you have a target-date as to when you want to retire?  It might be next week, or it might be in 10 years.  If you have an established early retirement date, what are you doing to make that goal a reality?  Are you doing everything you can to maximize your salary and taking on side gigs?  Are you saving until it hurts?  Do you have the right mix of investments to both reach your goal and sleep comfortably at night?  If you do, you are acting in an intentional way.

Conclusion

The nice thing about being intentional is that you can start this process now.  Start by reviewing your current financial situation.  Can you answer why for all your financial decisions?

If you have a financial plan, use it as a guide.  If you do not have a written plan, write one.  That is a good starting point if you want to become intentional.  Review your plan for areas of your financial situation that might need to be amended.

Some fixes are quick, and others require time to implement change.  Moving forward, wherever money is concerned, ask yourself why before you make a final decision.  If you cannot answer why you are doing something, give it some thought and find out what your true intentions are.

This is just another example of how to improve your financial situation.  It provides a pause before you act.  Sometimes giving a decision an additional few seconds of thought can turn a bad decision into a good decision or a good decision into a better decision.

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Defining Your Investment Style

There are many different approaches an investor can take in managing their money.  Some approaches are hands-off and require little effort to maintain the desired asset allocation.  Other approaches are more time intensive and might require daily or weekly management.  There are other approaches that fall somewhere in-between.

No matter how you decide to invest, you need to have an investment philosophy.  It should be part of your financial plan.  Without having direction, there is just too much noise to misdirect you on a daily basis.  Every hot investment tip will sound like a good idea.  That will lead an investor to try to chase performance.

It is up to you to decide how you want to invest your money.  Some approaches are considered more favorable than others because they are tax efficient, cost very little, and allow investors to capture average market returns.  There are approaches that rely on investment professionals to try to beat the market.  Some investors feel confident that they can manage their own selection of individual securities and want to pick their own stocks.  There are also Robo-Advisors that investors can use to manage their investments.

When it comes to trying to invest to build wealth, there are countless avenues for investors to explore.  There is passive investing, active investing, crowdfunding, and countless other forms of ventures to invest in.  The purpose of this post is to cover some of the most common forms of investing where the transactions can occur with the click of a mouse.

Index Funds

Index funds are what their name implies.  An index fund is a mutual fund that is composed of stocks that track a specific index.  For example, if you buy a share of an S&P 500 index fund, you are buying an investment that is made up of the largest publicly traded U.S. corporations.

There is little actual management and turnover with index funds.  That is what makes them cheap and tax-efficient.  A management team is not required.  There is very little trading and turnover within most index funds.

There are index funds that track large-cap stocks, small-cap stocks, international stocks, and bonds.  There are index funds that hold every publicly traded stock in the world.  There are also index funds that track individual sectors or sub-asset classes such as consumer stables, natural resources, technology stocks, and other sectors.

An investor can keep it simple and buy three index funds like the total U.S. stock fund, total international stock fund, and total bond market fund that would allow them to own every publicly traded stock in the world.  An investor can slice and dice and break it down into many different funds and build a custom portfolio with different tilts.  There truly are limitless possibilities.

Managed Funds

Managed funds are like index funds.  They invest in a basket of different stocks or bonds.  The major difference is that they do not track an index.  They have a fund manager or team of managers who try to beat a benchmark.  For example, a managed large-cap growth stock fund would try to beat the S&P 500 index.

Compared to index funds, managed funds have higher fees.  The average expense ratio for a managed large-cap stock fund is 0.99%.  The expense ratio for the Vanguard S&P 500 is 0.04%.  That is almost one whole basis point.

The goal of the fund manager is to outperform its benchmark.  Based on the difference in fees, the fund manager must outperform the S&P 500 by almost 1% per year to just break even.  That is very difficult to do.  It is getting even harder as the result of the shrinking alpha.

For the fund manager to try to beat their respective benchmark, they need to make trades.  They are paid to buy stocks within the fund that they think will outperform.  They also must identify the stocks that they think will underperform and sell them.

All of that buying and selling is called turnover.  Some managed funds have a turnover ratio of 90% or more of their portfolio annually.  If a managed fund is held in a taxable account, all those trades trigger capital gains that are passed on to the investor.

Most managed funds do not beat their benchmark.  In 2016, only 34% of large-cap mutual funds beat the S&P 500.  It gets worse with time.  Only 10% of large-cap mutual funds beat the S&P 500 over the last 15 years.

What happens to the underperformers?  Usually, a new manager is brought in to right the ship.  If its performance does not improve, it normally merges with another fund.

Individual Stocks

Investing in individual stocks can be rewarding.  If you select the right stock, you will outperform the major indexes.  Just look at Google, Amazon, or even Apple.

The problem with investing in individual stocks is that it is hard.  Most active mutual fund managers who have unlimited resources cannot consistently do it.  It is not likely that an individual investor will outperform the S&P 500 for a decade or longer.

Can an investor get lucky when they buy a few stocks?  Sure, they can.  That, however, is speculation.  Investing is not gambling.

When an investor buys an individual stock, it is a vote of confidence in a company.  It is a vote that they know the stock is undervalued compared to its market price.  They are making a statement that says they know more about the fundamental business operations of the company and they are positive that it is sure to appreciate.

They do not know any of those details.  The individual investor receives their information from the financial media or a stock screener.  They are the last to know anything about the value of a stock.  The professionals, analysists, and insiders know before the media.  They provide the information to the media.  The media informs the individual investor.

Robo Advisors

Robo-Advisors are the new frontier for individual investors.  Robo-Advisors are financial management platforms that allow investors to manage their investments based on algorithm-based variables.  An investor plugs in their goals, risk profile, and other survey data and Robo-Adviser does the rest.

The technology used by Robo-Advisors is not new.  The investment industry has been using it to rebalance accounts since the early 2000’s.  It is new, however, for individual investors to have access to this type of asset management technology.

Even though it has been around for some time, it is fascinating technology.  Since it is automated and based off an algorithm, there is not much room for human error.  Not only can it be used for investment selection, but it can also be used for more sophisticated processes like tax-loss harvesting.

There are some nice benefits to using a Robo-Advisor.  They are a much more affordable option than having to hire a human Financial Advisor.  The annual fee to use a Robo-Advisor is between 0.2% to 0.5%.  That is much more affordable than must shell out up to 2% for a human financial advisor.  The minimum amount that is required to invest with a Robo-Advisor is much lower than the standard six-figure minimum that many traditional human financial advisors require.

Conclusion

The above investment styles are just a few of the more popular methods for individual investors.  Over the years, my portfolio has become primarily made up of a few index funds.  I have invested in a few managed funds but sold off all except one.  As far as individual stocks, I have only bought and sold five individual stocks since I started investing.  I have not owned any individual stocks since 2004.  Many investors in the financial independence community use individual stocks as part of their dividend strategy.  As for the Rob-Advisors, I have invested using that technology, but do see its value for tax-loss-harvesting in a retirement account.

What is your approach to investing?

Do you follow any of the methods that I covered or a blend of a few different approaches?

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