Tag Archives: Investing

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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Early Retirement: Removing Barriers

Many people dream of reaching early retirement.  Few people, however, are willing to do what it takes to make it a reality.  In most cases, to reach early retirement, a person must live differently from how the masses live.  People generally don’t want to be viewed as being different from their fellows.

The masses are living for the day, spending most of what they earn, landing in debt, and are in denial about their personal finances.  They have high hopes that their financial future will be secure.  Hope, however, is not a strategy.

To reach early retirement, a strategy is needed.  That strategy will require action and more action.  The primary objective of that strategy will be to first reach financial independence.  Financial independence is what enables people to retire early.  If a person is no longer working, the money to sustain their lifestyle needs to come from somewhere.  For most early retirees, that somewhere is their passive investments.

The path to being able to retire early is full of barriers.  Many are external like being able to maintain a budget while marketers are doing everything they can to get you to break your budget and buy whatever it is they are selling.  Some barriers are mental.  The purpose of this post is to identify a few of these barriers and to establish a plan of action to avoid them.

Ignorance

Most people are unaware of what is required when it comes to planning for an early retirement.  That is even true for those who have attended college.  People who hold a 4-year degree or beyond still struggle with doing what is required to escape having to work for a living.

When it comes to establishing a financial plan, many people truly do not understand what is required.  They feel that things will just work out like they have in other areas of their life like landing a good job or getting a mortgage to buy a house.  They are generally in denial about what is required to build a large enough net worth to sustain their desired lifestyle once they are no longer working.

The good news is that once a person decides to learn more about personal finance, there is an abundance of great information.  Once a person takes that first step towards learning about budgeting, saving, and investing, they have removed one barrier.  Once that barrier has been removed, they will discover that the basics can carry a person a long way.  The basics alone might be enough to carry some people to financial independence.

Procrastinating

Procrastinating is another barrier that stands in the way of reaching early retirement.  Not knowing about a topic is one thing.  Knowing and not doing anything is another.  To reach early retirement, it takes many years of earning a salary, saving a large percentage of that income, and investing it wisely.

The longer a person waits to start this process, the harder it becomes.  That is based on compound interest.  Let’s assume that an investor needs to have $1,000,000 saved to declare financial independence.  They also want to reach this milestone by age 50.

Based on an 8% percent return, if an investor starts to save $1,800 per month at age 30, it will take 20 years to reach their goal.   If they wait until age 40 to start saving, they will have to save almost $6,000 per month.  If they started at age 22, however, they would only have to save $900 per month.

When you are young, time is on your side.  The older you get, the harder it becomes.  Don’t procrastinate if your goal is to reach early retirement.

Not investing in stocks

To receive a return close to 8%, an investor will need to have a large percentage of stocks in their asset allocation.  Based on how investments are projected to perform for the next 10 years, an 8% return might not be reasonable.  Large-cap stocks are projected to earn 6.7% threw 2026.  For that same period, investment grade bonds are projected to earn 3.1%.

The average person has the tendency to shy away from stocks.  In the short-term, they are volatile.  Over long periods of time, they are one of the best wealth building investments for individual investors.

Instead of parking your money in a money market that returns 1%, consider adding stocks to your asset allocation.  A good place to start is to look at a balanced portfolio of 60% stocks and 40% in bonds.  This allocation is popular because it provides growth from the stock allocation and the bond allocation reduces volatility when the stock market has a correction.  Another general rule of thumb is to invest (110 minus your age in stocks).  If you are age 25, you might want to consider having around 85% of your asset allocation in stocks.

Lifestyle Creep

Lifestyle creep is a form of inflation.   As a person advances in their career and their earnings increase, it is natural for their spending to increase.  As raises and promotions pile up, people have the tendency to upgrade their lifestyle.  Instead of saving more of their earnings, people buy bigger houses, fancier cars, and go on expensive vacations.

If there is lifestyle creep in your life, it is a major barrier between reaching early retirement and being stuck as a wage earner.  Lifestyle creep inflates how much money you need in your retirement account before you can retire.  In contrast, if you keep your monthly expenses low, the less you will need to be able to retire.

If you plan on withdrawing 4% from your retirement account, have $100,000 in annual expenses, you will need $2,500,000 in retirement savings.  For those who only have $40,000 in annual expenses, they just need to save $1,000,000.  The higher your annual expenses are, the more you need to have in retirement savings.

To avoid lifestyle creep, some management is required.  A solid budget is needed.  A financial plan is also a vital tool.  First, focus on the big expenses.  Keep your housing, transportation, taxes, and education costs low.  For example, live in your starter house forever, buy an economical car, live in an area that does not have high taxes, and take advantage of public schools and state universities.

If you can avoid lifestyle creep on the major expenses, you will have more money for savings.  This will also lead to less financial stress.  Instead of stressing to cover your bills that are always increasing, you will be able to better enjoy your life because there will be less demand for having to earn more and more.

Conclusion

For most people, the road to early retirement takes a long time.  It generally takes a couple decades of solid earnings, a high savings rate, and compound interest.  To achieve this ambitus goal, there are barriers that need to be identified and managed.

To be successful with personal finance, education is required.  The great news is that there is an abundance of good books, blogs, and forums that provide unlimited information.  A good place to start is the Resources page on this blog.

There is no such thing as an overnight success.  Most overnight success stories have been a fifteen-year work in progress.  If you want to be financially successful and retire early, start today.  It is not an overnight endeavor.

Without some risk, there will only be a little return.  Identify the correct mix of stocks and bonds for your situation.  Be sure to take your age and risk tolerance into consideration.

Manage your expenses.  The greater your expenses, the more money you must save and grow.  By keeping your expenses low, the less money you will need in retirement.

There will always be barriers that stand in the way of reaching early retirement.  Once they are identified, they can be managed and overcome.  Keep your eyes open for other barriers that might pop-up.  Be vigilant and stay focused and you will be sure to reach financial independence and retire early.

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Is Investing Like Gambling?

Over the years, I have heard people compare investing to gambling.  It normally occurs during periods when the stock market is experiencing negative returns. People will make comments comparing investing in stocks to casino gaming.  Those who market alternative investment products will use heavy rhetoric and refer to conventional investments as the Wall Street Casino.

There are a few similarities between investing and gambling.  Investing and gambling both require money.  Both can be profitable.  Both can cause you to lose money.  Both require consideration.  Gamblers and speculators who trade frequently will look for favorable odds and try to come up with their own strategy to capitalize on what they think is a sure thing. That is basically where the similarities end.

Gambling is a game of chance.  Gambling is based on greed.  It involves a wager on an uncertain outcome.  Gambling comes in many different forms.  A gambler can bet on a sporting event like a football game or horse race.  Gamblers can play cards, roll dice, spin a roulette wheel, or play other casino games.  Buying lottery tickets is also a form of gambling.

Some forms of gambling are legal and others are not.  Betting on a horse race at a track like Churchill Downs is legal.  Calling up a bookie to place a bet on the big game is illegal.  The major difference between illegal and legal gambling is based on regulation and taxation.

One of the main differences between gambling and investing is that gambling is quite often based on immediate results.  For example, the results from a scratch-off lottery ticket are known as soon it is scratched off.  Some forms of gambling have longer waiting periods to know the outcome based on the results of a future sporting contest.  With all gambling, once the results are in, the outcome is known.

Investing is not a game of chance.  It is not a game of probability.  Investing is based on being prudent.  When you buy a mutual fund, it is not similar to hoping your number will come up when you roll dice.  By the way, you have a 2.778% chance of winning at rolling two dice and the casino has a 97% chance of taking your money.  Those are not favorable odds.

To invest in the stock of a company is to buy ownership in that company.   That company produces a product or service.  It is an entity that has financial statements and records.  Those records generally reflect why the stock price is worth its current value.

A mutual fund or ETF is a basket of different stocks.  By owning more than one stock in a fund, it helps to reduce risk and increase the likelihood of better returns. That is known as diversification and is based on the efficient frontier.

Diversification does not improve the odds when it comes to gambling.  It does not matter how many times you roll the dice.  The odds of rolling a pair of 6 sided dice will always be 2.778%.  The best you can do to improve your odds with games of chance is a switch from rolling dice to flipping a coin.  That would improve your odds to a 50% chance of winning.

Bonds can also be used to improve investment returns.  When stocks go down in price, bonds tend to go in the opposite direction.  Bonds are a loan to the government or corporation.  Some are guaranteed by the government.  They have a quality grade and risk associated with the term length.  Generally speaking, the shorter the term, the less risk.  Bonds are used for offsetting the risks of stocks or for income.

Stocks and bonds are also different from gambling when it comes to time.  Gambling is bound to time.  When the game is over, it is over.  There is just one opportunity to win or lose with gambling.

When an investment such as a stock is purchased, the amount of time that an investor has to earn a profit is based on how long they own the stock.  It can be a profitable investment for many years.  It can also lose money, but recover and become profitable again.  It is a time rewarding activity.  That is why many financial experts suggest a buy and hold approach.

Another key factor that separates investing and gambling are dividends.  Ben Carlson writes about this in his book A Wealth of Common Sense.  By investing in investments that pay a dividend, investors are rewarded for putting their dollars at risk based on market performance.  By holding on to a stock, a company will continue to pay a dividend.  Dividends are a key factor for making money in stocks over long periods of time.  There are not any dividends with gambling.

Investing also uses the power of compound interest.  This is another time rewarding aspect of investing that does not apply to a one-time wager.  For example, if you invest $100 and it has a 10% annual return, the following year the investment is worth $110.  If the investment is held for 25 years and continues to have a 10% annual return, the final amount of money will be $1,205.

Not only are gambling and investing different, they are totally different.  Every form of gambling is a game.  It is a game of probability.  The probability is always in favor of the house because of the vigorish.  It is a one-time chance to place a wager that might have a payout.

Investing in stocks is a business transaction.  It does not matter if you buy stock in a single company or buy hundreds of different stocks in a mutual fund.  It is a business transaction because the investor is buying ownership in a company or group of companies.  It is only a small fraction of ownership, but it is ownership never the less.

With investing, there are ways to improve performance and reduce risk.  An investor can buy stocks that pay dividends.  An investor can hold on to their investments and let compound interest work its mathematical magic.  The short-term market risks of owning stocks can be offset by also owning bonds.  By owning both stocks and bonds, an investor can rebalance their holding and always be buying low and selling high.

With gambling, the odds do not change.  As I explained with the dice example, there will always just be a less than 3% chance of winning.  The odds will always be in favor of the house.

During the next major market correction, you are likely to hear people say that you are better off taking your money to the nearest horse track or gaming parlor than to put it at risk in the stock market.  Yes, in the short-term, investing in stocks can be volatile.  Over the long-term, however, stocks are the greatest wealth building investment for the individual investor.  When they decline in value, look at it as a buying opportunity.  Gambling is based on a one-time event and the odds favor the house.  As long as you invest wisely and have patience, the odds are far greater in your favor than by playing games of chance.

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How we reached a $1,000,000 Net Worth

What does it take to reach a $1,000,000 net worth?  In our case, it took a long time, hard work, saving a large percentage of our income, and putting our money to work for us by investing wisely.  Rob from Mustard Seed Money has a great post on how much you have to save each month to reach a $1,000,000 net worth.

I initially was going to title this post “reaching a $1,000,000 net worth by age 40”, but that would have been misleading.  Even though I was, in fact, age 40 when I reached this financial milestone, I did not do it alone.  Individually, I would not have reached this milestone.  My wife and I worked as a team and did it together, so I must give her the credit she deserves.

When we got married, I had over $100,000 saved up in my investment accounts.  As far as assets go, she brought our current house to the marriage. There was a mortgage on the house, but she had about $100,000 in home equity at that time.  By combining our assets, we started out with about $200,000 based on our investment accounts and home equity.

Career Growth

Over the past 10 years, we managed to double our household salary.  Considering that we both have college degrees, we never earned a large salary.  When we first got married, my salary was only $30,000 per year.  My wife was teaching for a few years and was earning about $50,000 per year.  In the past 10 years, our combined salaries have grown to over $150,000 per year.

Savings

When we first got married, our savings rate was 38% of our gross earnings.  We started by maxing out our Roth IRA accounts, I contributed 15% per year to my 401K, my wife contributed 10% to her 403B, and 8% to her defined contribution pension plan.  We also built up a large emergency fund and invested money in taxable accounts.

Every year, we have tried to increase our savings rate by 1% or more.  Our current savings rate is 50% of our gross earnings.  We still earn under the IRS threshold that allows us to max out our Roth IRA accounts.  I now work at a not-for-profit and max out my 403B.  My wife is close to maxing out her 403B and still contributes 8% to her pension.  We are happy with the size of our emergency fund and now just add to our taxable accounts.

Lifestyle Creep

We are always aware of how much we are spending each month.  While some lifestyle creep has occurred, we manage it well.  We travel, but do not fly first class or stay in 5-star hotels.  We buy reliable new or 1-year old certified used cars and drive them for over 12 years/200,000 miles.  We eat at home during the week and only go out to eat on the weekends.  We closely monitor the cost of monthly subscription expenses such as internet, electricity, Netflix, and other bills.  When we do spend money on needs or wants, we always shop around for the best value.

Investing

Our approach to investing has been very simple.  We have invested primarily in index funds.  Our asset allocation has been 25% in bonds and 75% in stocks for the past 10 years.  In the stock allocation, it was well diversified with large-cap, small-cap, and broad international index funds that included emerging markets. From 2007 until 2017, that asset allocation averaged a return of 10.5% per year.

Asset Breakdown

House (appraised in 2012): $220,000

PSERS Pension (Cash Value): $100,000

Taxable Accounts: $240,000

Combined IRA & 403B Accounts: $480,000

Other assets not included (cars, firearms, collectibles, jewelry, electronics, etc)

Debts

Mortgage Balance: $30,000

Monthly Expenses: $2,800

What’s Next

We have more work to do.  We have ambitious goals.  Our next goal is to reach $1,000,000 in investable assets.  We should be able to reach that in the next 3 years based on savings and historical returns for our asset allocation. We also want to pay off the balance on our small mortgage over the next five years.  Our goal is to have $2,500,000 saved by the end of 2028 (see the countdown to FIRE on the right margin).  To reach that goal, we have to keep up our savings rate and have our investments return an average of 6.5% per year.  That is well within reason with our current asset allocation of 65% invested in stocks and 35% invested in bonds.

Conclusion

The main purpose of this post was to share that it is possible to reach a $1,000,000 net worth by just being average.  My wife and I went to average universities, have average jobs, live an average lifestyle, and accept average market returns.  Yes, our savings rate is above average, but that too is possible for almost anyone to achieve if they create a solid financial plan.

If you want a more comprehensive list of steps to follow, check out The K.I.S.S. Approach to Financial Independence.  That is the foundation of our financial plan.  For more reading on reaching financial independence, please check out the Resources page.  It is full of a collection of great books, blogs, and forums that will provide you with unlimited wealth building information.

Where are you at on your journey toward financial independence?

Please share your financial milestones and what you did to achieve them in the comment section.

How the Mob Influenced My Asset Allocation

“Behind every great fortune there is a crime”.  – Honore de Balzac

I have recently been doing a good amount of research on Peer-to-Peer Lending (P2P) and have written about it in a recent blog post.  Yes, Peer-to-Peer Lending (P2P) is legal in most states, but is it ethical?   While I was researching more about Peer-to-Peer Lending (P2P), I felt a strange nostalgia.  This type of investing caused me to reflect on the town I grew up in and the people I once knew.

I grew up in a small town located in Northeastern, Pennsylvania.  Like myself, most of the population was made up of people who were Irish, Italian, Polish, and from other Western European heritage.  Many of my friends would say that their grandparents were “right off the boat” at Ellis Island.  These were hard-working people, some might say salt-of-the-earth.  Many of those first-generation Americans performed back-breaking labor.  The men worked in coal mines and the women worked in dress factories.

Not everyone in this region shared the Protestant work ethic.  Like my parents, most of my friend’s parents also had square jobs.  Some, however, did not seem to work at all, yet lived very well.

This had me perplexed.  I remember asking my friend Sal what his dad did for a living since he always seemed to be home and never at work.  He told me that he worked as a billiards supply salesman and spent his evenings working at pool halls.

I asked my father if he knew how lucrative being a billiards supply salesman was.  He frowned at me and explained that even though it was socially acceptable in our town, Sal’s dad was not a billiards supply salesman.  He explained that Sal’s dad was a loan shark, bookmaker, and organized illegal high-stakes card games.  It was even rumored that people lost the deed to their house at these card games.

My dad was not being judgmental.  Sal’s dad was a legitimate criminal.  He did time at the Allenwood Federal Prison Camp for racketeering.

My parents raised me with high morals.  Never the less, I was young and impressionable.  I just saw that Sal’s dad seemed to live a great life.  He had a big house with a kidney-shaped swimming pool.  He drove a brand-new black Jaguar.  The whole family had the best of the best.  Plus, they were always nice to me and a very popular family in the community.

It was not until many years later that I realized why my dad was so critical about Sal’s father.  Sure, I understood that he was not paying taxes, but I was in denial about the scale of corruption that infected this region.  I thought that nobody was getting hurt.  Two books and a documentary changed my whole outlook on the area where I grew up and some the people who I grew up with.

The first book that blew my mind was I Heard You Paint Houses by Charles Brandt.  This book is about Frank “The Irishman” Sheeran.  Sheeran was a hitman from Philadelphia who worked for Jimmy Hoffa.  He also worked for the mob boss Russel Bufalino who was from Kingston, Pa.  What was truly shocking about this book was that it states that the plan to murder President Kennedy was hatched at Brutico’s Bar & Grill in Old Forge, Pa.  I have eaten dinner at that restaurant on countless occasions.  This book was adapted into the movie The Irishman that will be released in 2018.  The movie stars Robert De Niro, Al Pacino, Joe Pesci, and is directed by Martin Scorsese.

The second book that was shocking to me was The Quiet Don by Matt Birkbeck. The Quiet Don was about the history of organized crime in Pennsylvania and how powerful Russel Bufalino was with the New York crime families.  What floored me was that people who I knew as a teenager were mentioned in this book.  I used to casually talk to Frank Pavlico at Golds Gym in Scranton, Pa.  I did not know that he was the driver for mob boss William D’Elia.  He told me that he owned a car detailing business.  After William D’Elia was arrested, Frank was identified as an informant.  Shortly after that, Frank was found dead and his death was labeled as a mysterious suicide.

Thirdly, what truly was disturbing was the Kids for Cash Scandal in 2008 that was made into a documentary.  Kids for cash was a scandal involving a real estate developer who was also the owner of a for-profit juvenile correctional facility and two corrupt Luzerne County judges.  Basically, the owner of the for-profit jail was paying off Judge Marc Ciavarella and Judge Michael Conahan to send children to his jail for minor offenses such as not completely stopping at a stop sign or truancy.  The arrangement between the owner of the prison and the two judges was allegedly brokered by William D’Elia.

How does this tie into the ethics of Peer-to-Peer Lending (P2P)?  Maybe I am just not anti-establishment, but I see Peer-to-Peer Lending as being very much like an online loan shark.  It seems as shady as the payday loan stores or cash-for-gold outfits that you see in strip malls.

Some might say that Peer-to-Peer Lending (P2P) helps people who do not have the credit to get a traditional loan from a bank.  Some might even feel that they are sticking it to the man by taking business away from big banks.

In my opinion, it is not altruistic for an individual to loan money to other people and charge them a high-interest rate.  I would not do that to a friend or relative, so why is it alright for me to do in on an anonymous level?  Also, the lending practices of P2P companies are equally as manipulative as big banks based on advertising one rate and offering a higher one.

While I am socially conscious, I do not generally take on a socially conscious approach to investing.  My largest holding is an S&P 500 index fund.  Some of the stocks in the S&P 500 have questionable business ethics.   There are energy companies that pollute the environment and clothing manufactures that pay slave wages to employees in third world countries.  Yes, all of that might be true, but I do not feel like the pawnbroker who Raskolnikov murdered in Crime and Punishment by Fyodor Dostoevsky when I contribute to my Roth IRA.

Don’t get me wrong, I am an investor.  Never the less, I believe that is important to be honest to yourself and have principles.  If a business transaction or investment opportunity does not seem ethical, it should be examined further.

Just because I can use a sterile online platform to issue loans to people with shaky credit, am I not just shylocking?  Sure, nobody is going to get their finger broken or have the vigorish increased for defaulting and failing to pay back their loan on time.  It still feels like the same basic concept of taking advantage of people who are down on their luck.

For some time, I was considering opening an account and to participate as a lender. Upon further review, I have decided against opening a Peer-to-Peer Lending (P2P) account.  I am comfortable with my balanced-growth portfolio and do not see the need to add alternative investments to my holdings.  There is no need to go beyond a portfolio of a few index funds and to make my investment portfolio more complex.

What is your opinion on Peer-to-Peer Lending (P2P)?

Do you think that this type of investing is ethical?

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.

Next Steps to Take After Paying Down Student Debt

When you have finished paying off student loans, it is time to start building your wealth. It’s also time to achieve some of life’s most important milestones.

But first, I want to talk about the negative effects that student loans can have on your future.

There are many people that go to the bank to buy a home with tens of thousands of dollars of student debt on their shoulders. The loan officer looks at the debt and you can almost see the look of disappointment in their eyes because they are going to have to tell you that the student loans are driving up your debt-to-income ratio.

If you say, “but my loans are deferred” or “my loans are in forbearance,” the loan officer is going to look at you and tell you that it doesn’t matter because the debt has to be paid back eventually. At some point, while owning a home or car, the repayments may begin on your loans. That consumes part of your income. The bank doesn’t want to take the risk of you not having enough income to make your payments to them.

It is devastating, and it happens every day.

To keep this from happening to you, it is best to pay down your student loans as fast as you can so you can enjoy buying a home or new car without receiving bad news while sitting at the loan officer’s desk.

Think About Retirement

Another milestone that student loans can interfere with is investing. When you’re dealing with student loan payments, it’s difficult to put money into anything else. Of course, you can increase your income with a second job or find side gigs like I did. However, I still didn’t have a lot of room for investing until the student debt was gone.

Investing can take many forms. You can invest in stocks, bonds, or mutual funds. You can even invest in real estate crowdfunding, P2P lending, or business ventures. There are many things that you can do with your money when you have the funds to do it. Think about being able to retire early or just retirement in general.

The last thing you want to do is retire and find that you don’t have enough income. There are many senior citizens filing bankruptcy because of pensions that fall short, social security that isn’t enough, and medical benefits that are still too expensive.

Think About Your Family 

With student debt gone, it is also easier to expand your family on the financial end of things. When you don’t bring children into debt, you’re able to focus more on the financial needs of your child.

It is difficult to bring a child into a debt situation because so much of your income has to be put into debt while meeting the needs of your family. Of course, it can be done. But do you want to go through that struggle if you don’t have to?

Of course not!

Regardless of what phase of your life you are in, it is important to pay off your student loans quickly. Those high balances are holding you back in more ways than one. Many good people who went to college to do something meaningful and make a good income are plagued with debt for a while after graduation. They make their minimum payments but still pay the collateral consequences of having the debt.

It can be heart-wrenching to struggle or be told “no” by a bank when all you’re doing is what you’re supposed to do.

The fact is that you need to go above and beyond what you’re supposed to do to get ahead as soon as you possibly can.

Even if you already have a family, a strict budget and some discipline can help you pay down the student debt so you can start working on other milestones in life. It’s best to pay off debt as soon as you can, but don’t ever think you are too late. People thinking that they are too late causes them to not be aggressive with their debt when being aggressive can be one of the best things they ever do for themselves and their family.

Jacob runs Dollar Diligence where he blogs about debt repayment, saving money and side hustles.

 

Financial Independence: A Universal Goal

While reaching early retirement is my goal, it might not be suitable for everyone.  On the other hand, the goal of reaching financial independence should be the focus of everyone during their working years.  Even though most careers seem to drag on forever, the amount of time that we have available to work and save money is truly finite.  Everyone should have the goal of saving enough money to cover at least 25 years of living expenses.  It does not matter if you enjoy your career or not.  This rule applies to everyone.  The sooner you start working towards reaching financial independence, the better off you will be.

Reasons to Achieve Financial Independence

Job Loss

Today, the unemployment rate in the U.S. is around 4.5%.  Most employers are now hiring.  Many jobs are even going unfilled.  Unfortunately, this can change in a flash.  Recessions occur as part of the business cycle.  When business slows down, companies need to reduce expenses to remain profitable.  One of the easiest ways to reduce expenses is to reduce labor costs.  When this transition occurs, hard-to-fill jobs become hard-to-find jobs.

Losing a job is one of the most stressful situations that a person or a family might face.  By being financially independent, the stress can be removed or drastically reduced.  If you have many years of living expenses stashed away in savings, a job loss can be viewed as an opportunity to take an extended vacation from work, start a business, or explore working in a different line of work.  Financial independence affords options.

Defined Benefits

Since the start of the new century, employers who offer defined benefit plans have been on the decline.  Gone are the days when people work for a company for 35 years and receive $40,000 per year for the rest of their life after they retire.  Employers do not want to have to pay the costs or take on the risk of being liable for underfunded pension promises.  Defined benefit plans are even on the decline in government jobs.

This now puts the responsibility of paying for retirement on the employees in the form of a defined contribution benefit (401K).  The individual is now burdened with the responsibility of saving enough money for retirement.  Many people lack the sophistication to correctly determine how much they need to save and do not have the ability to manage this type of investment account.

If managed correctly, defined contribution accounts are great tools for saving money that can contribute to a person’s financial independence.  The money that is invested grows in a tax-deferred account.  Most defined contribution accounts now offer low-cost index funds and target-date retirement funds.  In some cases, employers also match a percentage of their employee’s contributions.

Everyone should start by contributing 15% of their salary to their 401K.  After that, work on increasing contributions by 1% per year.  Increases the contributions every year until you are contributing the maximum amount allowed by the IRS.

Social Security

Social Security is going to run out of money by 2034 unless the government makes some major changes.  That does not mean that Social Security is going to go away.  At that point, Social Security will be funded by payroll taxes.  Based on the current projections, Social Security will be able to pay $0.75 for every $1.

By reaching financial independence, a person does not have to rely solely on Social Security to fund their retirement.  Even if Social Security was fully funded, it does not provide enough in benefits for most people to enjoy a high quality of life.  To ensure a high quality of life in the future, switch your focus from relying on Social Security to cover your future expenses to working towards becoming financially independent.  By doing this, you will be able to view Social Security as a nice supplemental income stream.

Health

Too many people think that they can work forever.  You might be healthy today, but that can and will most likely change with age.  Yes, we can eat right, exercise, and keep up with doctor visits.  In some cases, we can take measures to improve our health.  The gross reality of the situation is that most people cannot keep up the physical and mental pace of a demanding career once they reach a certain age.

By being financially independent, a person has the option of being able to retire on their terms and to enjoy life while they are still young and healthy.  Life is not too much fun without money.  Life is less fun when you are in poor health.  Once your reach financial independence, you will not have to stress about being forced to work because you do not have the resources to sustain your lifestyle without the income from a job.

Family

Not only do we owe it to our self to reach financial independence, but we also owe it to our family.  We only have one shot at life.  By reaching financial independence, we can do so much for our loved ones.

By being financially independent, a parent or grandparent can better provide what their children or grandchildren need to be successful in life.  Financial independence provides security for a spouse and can reduce the financial stress in the relationship.  Also, by being financially independent, you can be present in the lives of those you live with, extended family, and friends.

Conclusion

When you think of financial independence, do not only think of it in terms of being able to retire early or live a luxurious lifestyle.  Look at it as a necessity.  Life happens and we do not know what is around the corner.  By being financially independent, you take more control over your life.  People who are financially independent have options that others who lack resources do not have.

Some say that control is an illusion.  On some levels, it is.  For example, we do not have control from one breath to the next.  However, losing a job and not having money is not an illusion.  By becoming Financial independent, you can take control where it is possible.  You are also able to enjoy a freedom that is available to almost everyone, yet experienced by so few.

How I learned about money

I learned about money from my Grandmother.  I was a precocious kid.  As an only child, I spent a great amount of time with adults.  The adults in my life had the tendency to try to have a dialog with me as if I too were an adult.  Friends from school would come over to my house to play quite often, but I remember spending a great amount of time with my Grandmother.

My Grandmother owned her own small business.  She was a seamstress.  She worked for a few different bridal shops.  She also worked for a men’s clothing store.  Most days, she would pick me up after school and take me to her shop.  She would watch me until my Mother would pick me up on her way home from work.

It did not take me long to catch on to the theory of commerce.  Her customers would drop off clothes to be altered.  She would make the alterations with her sewing machine.  The customers would pick up their clothes and pay her.  When I earned good grades, she would take me to KB Toys and buy me Star Wars action figures.  Even though I was only 5 or 6, I understood this process.

There were also times when I would ask her to buy me a toy and she would say that she could not afford it.  She would explain that business was slow and she did not earn much money that week.  She said that she only had money for food, gas for her car, and other needs.  She taught me at a young age that if you want money, you must work to earn it.

That was a complex theory to comprehend at such a young age.  I was only in first grade.  I do not have a psychology degree.   I can, however, see that my frugal ways and entrepreneurial spirit were shaped by her teaching me how the business worked.

The second lesson that she taught me was equally as profound.  She and I would sit together in her shop.  I would do my school work and she would be sewing.  I would spend about one hour per day with her.  We would have conversations.  She would ask what I learned at school that day?  She would tell me about her work and other stories.  She would talk about her life when she was growing up, her church, and money.

Money was her favorite topic.  She once told me that she invested in CDs that had paid out an interest rate of 13%.  She would double her money in 6 years.  She was so excited.  I am now referring to the early 1980’s when inflation and interest rates were sky high.  She explained that she would let the bank borrow $1000 from her and in 6 years they would give her $2000 back.  I found that fascinating.  Now, remember, I did not understand compound interest.  I was not introduced to multiplication yet.

This first blog post is a tribute to my Grandmother.  Looking back, she truly shaped my view of money.  If you want money, you must work for it.  Also, if you have money, you should invest it.

In case you might be interested, my Grandmother is still alive.  My parents take care of her now.  She is 94 and ran her business until she was in her 80s.  She had to finally give it up because her body was breaking down.  Sewing was her passion.  At the end of her career, she was just doing alternations for her neighbors.  I don’t think she even charged them.  She just liked them coming over to talk with her.

Occasionally, my Grandmother will call my wife and ask her to come over for a visit.  She wants to teach her how to use her sewing machine and pass on her legacy.  Maybe she will also share some investing tips with her too.  We have never consistently earned 13% returns on our portfolio.

How did you learn about money?