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May 02, 2011

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I am curious given the recent shutdown of major online poker sites and the freezing of player's online accounts, if the reader still considers online poker playing to be a viable money-making source.

Kirk...Keep up the good work! You have a very bright future ahead. Travel as much as you, would be an eye opener in many ways.

You have quite a unique background and are obviously very smart where money is concerned to have accumulated as much as you have. I have two grandchildren your age and they seem to be spending their money as fast as they get it and neither one has a clue about investing.
I agree with Venkat that you have a bright future ahead of you. Albert Einstein is purported to have once said "The compounding of money is the eighth wonder of the world" and for a 22 year old to have realized this and followed it is remarkable.

As for travel, Go for it. You will never regret it and it will broaden your outlook in many ways. If you go to third world countries you can travel around very cheaply the way the locals do, buy tasty prepared food from street vendors, and find places to stay for a few dollars/night. There's a TV program on PBS called "Globe Trekker" that features young people travelling to exotic places and having a great time as well as learning a lot about the world. In the Americas, Peru and Ecuador are two great and interesting places to visit. In Indonesia I would recommend Bali, Java, Sulawesi, and Lombok, all of which I have visited. Other very interesting places that I have enjoyed very much are Nepal and Thailand. Forget about Europe until you are older and can afford it.

Kirt,

Sound like you have a pretty solid start but one part struck me...
> I didn’t know much about investing and his pitch went over my head
>I got lucky in that I found a reasonable financial advisor who was willing to help an 18 year old freshman in college.

Now that you are reading FMF and GRS you have far more knowledge about investing. Shouldn't you try to objectively determine: Is your financial advisor really doing a good job for you?

How does he get compensated? A flat fee, from transaction costs, etc? Does his method of compensation create a conflict of interest?

Is he using active management or index funds? I know you are a gambler and it is tempting to try to beat the average, but investing isn't gambling... FMF has talked about index funds a lot but the following game really shows why index funds are the way to go:

http://www.coffeehouseinvestor.com/investing-you-understand/outfox-the-box/

-Rick Francis

First, let me say it's GREAT that you have 28K socked away in retirement at 22. If you can manage to save just $5000 every year and earn 8% on your investments, you'll be a millionaire in your early 50s. And if you make us your mind, you can do much better than that.

I do have some concerns, though.

1. Impulse control. It's great that you're good at gambling. But gamblers sometimes have poor impulse control, and it appears you have some issues with that. There are some emotional/psychological issues that go with that that you'll need to look at. If you can't control your impulses, it can be your undoing. Be careful about buying too much house, too much car, too much stuff, etc. Remind yourself that these once you have a basic house, car, etc. "more" doesn't really add all that much to your happiness.

2. I thought you had to have earned income in order to contribute to a Roth. I didn't think gambling income counted as earned income.

You are off to a great start and I think it is awesome that you have such a great start on saving for retirement at 22. Congratulations on your upcoming graduation as well!

I would also be interested in hearing your thoughts on the online poker site shutdown. My boyfriend using online poker during college as a way to pay off some student loans, but he backed off a lot after some of his money got locked up for a period of time.

Kirk:
It is an excellent idea, as Rick Francis said, to evaluate your financial advisor. Since you have been with him for 4 years there is a very simple way to do that.

The year 2008 was an exceptionally bad year.
The composite of all the stocks on the New York Stock Exchange lost 40.89%.
The composite of all the stocks on the Nasdaq lost 40.54%.
I am a very experienced investor, have never had a losing year since retiring in 1992, and my mid seven figure portfolio gained 2.58% in 2008.
Examine your financial statements for 2008 and you will have a pretty good idea what kind of financial advisor you have and what fees he is charging you.
If you had a loss between 35% and 40% he is probably using a Buy and Hold approach using major index funds.
The other primary rule that goes along with the compounding of money is "Don't Lose Money". A 50% loss requires a doubling of your remaining assets just to get even again - that's hard to do!

Thanks for the responses from everyone. First, I'd like to address the recent shutdown of online poker. Obviously I wrote the above before "Black Friday" as it's known in the Poker world (April 15th). This has drastically changed my future unfortunately. To begin with, I had/still have a lot of money frozen online and who knows how long it will take to gain access to this money (if ever). At this point in time I am kind of pessimistic when it comes to getting this money back, but if I do it will be a nice surprise. Luckily, I will be graduating shortly and will begin work full time at the end of June so all is not lost. Unfortunately I planned on paying the bills with poker money and stashing away the rest. All this means is I have a chance to branch out and find another way to make money on the side or perhaps pursue another hobby (just became SCUBA certified, so maybe follow that up?). My hope is that poker will make it's way back into the US in a regulated form where the government is guaranteed to get their cut (taxes).

@Rick Francis & Old Limey: I agree that I will have to take a look at the costs vs. what I am getting from my adviser. When I first started out I feel like it was well worth the fees for him to help me out. Now that I am 4 years wiser and read plenty of personal finance blogs, I feel as though I could manage this on my own (index funds!). A question for you all, is it possible to just roll over my IRA as well as my Roth IRA into say a Scottrade or Fidelity account easily?

Thanks for the positive replys!

@mysticaltiger: I have argued with many people about why I feel as though poker is not gambling, simply a game of skill with a little luck involved (like almost anything in life). I realize most people lump poker in with games like blackjack, roulette, etc. but I have to disagree. That being said, I see why it can be easy to classify a poker player as a gambler. I have to agree that I have a bit of "impulse control" problem when it comes to smaller, cheaper "stuff". Obviously I could do without these things, but at the same time they are not setting me back an awful lot either. As I stated, I own a 2004 Honda Civic that I paid cash for and plan on driving it for another 5+ years (currently has 70k miles on it). I have a few years before I begin thinking about buying a house, so for now I will be renting in my new city come June (splitting a 3 bedroom townhome on the outskirts of town so reasonably priced). As far as contributing to the Roth only if you have earned income, I report my poker earnings as income on my taxes. I assume this allowed?

Thanks again for the input,
Kirk

@Kirk

>is it possible to just roll over my IRA as well as my Roth IRA >into say a Scottrade or Fidelity account easily?

You can transfer a Roth account from one brokerage to another, generally the receiving brokerage is very helpful. I've done that one there was a transfer fee I think it was $50-$100. Also, you may not be able to transfer some mutual funds. For example I had an E*Trade fund that I couldn't transfer to Ameritrade. So you may need to liquidate some holdings before transferring.

401K is a bit trickier- I believe you can only transfer them after you leave your employer. When you transfer it will be to a standard IRA, so you will end up with two accounts. I would test out the receiving brokerage's customer service- if they are not willing or able to help with a transfer you may not want to trust them with your $.

I would also check out Vanguard and Schwab, I've heard good things about both.

-Rick Francis

@Kirk,

Generally speaking gambling winnings are unearned income. Treating your gambling winnings as earned income can be touchy. There is court precedent for doing so and it does specifically relate to poker but in that case the person was a professional and the court ruled that it could be earned income if it came from the devotion of time, energy, and skill to receive the winnings.

http://en.wikipedia.org/wiki/Baxter_v._United_States

Now if you want to treat income as earned then it is subject to FICA tax as all earned income is. Did you file form SE and pay 15.3% self employed FICA tax for social security and medicare on them? I am guessing not. All earned income requires FICA taxes to be paid on them. You cannot treat it as earned for one purpose and unearned for another.

You may have a problem here in how you classified this income. No one may ever know but if you did not pay FICA tax on this money then your tax returns will make it very easy for the government to determine that you did not have any earned income in the years that you contributed to tax advantaged accounts which required earned income.

At this point I am not sure what you would do about it if you determined it was an illegal contribution. You might be able to reclassify them which would have tax consequences. You would want to seek a tax professionals advice regarding how to deal with the issue if you are concerned about it.

@Kirk...I think Apex addressed the tax issue relating to gambline income qutie well. I would definitely seek professional advice on that one.

You may not consider poker to be gambling...but I do. I understand it's different than roulette...but I see a similar underlying mindset. You don't seem to be too obsessed with the big house and the big car....but the taking friends out thing can also get quite expensive. It seems as though you're an extrovert...which is fine...but extroverts tend to do things for social approval, which is not always a good thing where money is concerned.

In general, I think you're doing great....but I think the tax issue needs to be looked at. And I think you have to be aware of the vulnerabilities of your personality. Yours are different than mine, but we all have them. I was just pointing out the aspects of your own personality that you are going to need to work at to keep in check.

Kirk,
I'm a few years ahead of you (age 29) and consider myself good with money.
The fact alone that you're aware of all of this will set you up for a great future: you'll be as well off as FMF even if you save less because you started earlier.
If you actually manage to stash away your entire salary, that's such a huge sum you'll be a millionnaire in your thirties. And of course poker will be back at some point (with the gov't taking its cut).

I'm planning to submit my own "reader profile" blog post too, for what it's worth.

Kirk, I am also 22 and I would say that I am in a comparable financial situation to you. That's not very common at our age! Best of luck to you with your new job and congratulations on finally finishing university!

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