Free Money Finance

Reader Profile: PI

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

Next in the series is FMF reader PI. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am 38 yr old male in a happy marriage with 36 yr old wife & 7 yr old son. I work in a small IT outsourcing firm in India handling multiple responsibilities, mostly reporting to #1 or #2. We live in a tier-2 city, which allows us a decent work-life balance & helps reduce 'aspirational' expenses to a great extent.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

I am the primary earning member. I have an annual pay of about 20500 USD, with a profit sharing option that gave about 9000 USD last year. My pay is structured to ensure maximum contribution to provident fund (tax deduction at entry, tax free growth, tax free withdrawal at retirement), such that take home pay is around 1200 per month.

My wife works as a part-time teacher at my son's school & gets about 100 USD per month, enough to cover their transport expenses. Next year, she'll join full-time, which would result in some reduction in school fees and an expected income of about 300 USD per month.

We have an apartment in our city (bought it without a loan), where my retired parents reside. We live in a rental apartment nearby paying about 250 USD per month. Our house is valued at about 100,000 USD, but I see that as a sunk cost & do not include it in my assets.

My sister with 2 kids moved in with my parents after her husband's business went sour. She works here, while he is working in another city. We are providing lifeline support to her by way of food & shelter.

Our prorated monthly expenses are:

• Rent: 250 USD
• School: 60 USD
• Car: 100 USD
• Groceries: 150 USD
• Maid service: 30 USD
• Eating Out: 25 USD
• Vacation Travel (twice a year): 125 USD
• Parents' Expenses: 275 USD
• Other Shopping: 100 USD

Most of the savings are sporadically moved into liquid MFs which gradually move to some of the equity funds (index & non-index) over time.

I hit the ESOP lottery in my previous job & thus managed to create a decent cushion, allowing me the choice of accepting a lesser paying but more enjoyable work life.

My current assets (including those in the name of wife & son) amount to around 525,000 USD, spread across equity/debt, locked/liquid, public/private options.

What are the current financial issues you're facing (saving, paying off debt, etc.)?

As of now we do not have any debt & have enough liquid savings to tide over any potential crisis in near-term.

Long term concerns are related to growing the asset base in a way that allows for adequate security of inflation-adjusted principal for perpetuity.

Our son is diagnosed with ASD, but developing fine in terms of intelligence, though lagging in social skills, despite significant improvement over last few years. We would like to be in a position to provide him basic support in case things do not work out financially well for him in future.

Writing a will has been put off for quite some time, mainly because of lack of expertise around on how to word the transfer of our son's custody to my wife's brother if neither of us are around.

I am most likely to buy a new car within this year (previous one is almost 10 yrs old), but am struggling to choose between something I need (small hatchback for 5500 usd) v/s something I want (a luxury sedan for 40000 usd).

As we do not have credible insurance options, we are mostly self-insured, which could hit our savings hard if multiple failures occur.

A major part of our net worth is still tied up in my previous employer's stock, but I'm unable to find the courage & rationale to diversify effectively.

My wife is extremely reluctant to take up basic understanding of our financial situation or manage finances besides paying the regular household expenses.

My parents have adequate assets, but if they do something stupid & get duped by my sister & her husband, I will need to handle that contingency.

What are your plans for the future (retire early, build your career, etc.)?

I would like to retire by 45. As of now, the withdrawal rates in terms of growth & inflation seems to be in favor, but I'm not able to have enough guts to take a firm decision.

I would like to work with my wife to showcase her innovative teaching capabilities using the online medium, so that might be an area to work upon after retirement.

I would like to put more effort into developing my son's potential, with an aim of overcoming his current challenges to help him become an independent adult.

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

Just say NO to debt, not matter how bad the situation looks.

If it is not related to basic needs of food, clothing & shelter, it can always wait.

Do not get swayed by the tax benefits of housing loans - always do your own math.

Second-Act Career: Teacher/Trainer

The following excerpt is reprinted with permission from Second-Act Careers: 50+ Ways to Profit from Your Passions During Semi-Retirement by Nancy Collamer, MS, copyright © 2013. Published by Ten Speed Press, an imprint of the Crown Publishing Group.

This book is a great resource for those looking to earn a second income, potentially in a new field, during retirement or early semi-retirement. Today's post is about how to make money teaching, an idea I've listed previously as one of the best ways to earn extra cash.

Are you a natural teacher? Do you enjoy explaining concepts, theories, and the mechanics of how to do things? Would you like to share the wealth of experiences you’ve accumulated with others and pass on your knowledge to future generations?

If the prospect of empowering people with the skills, resources, and expertise needed for success in both their personal and professional lives excites you, then you might want to consider sharing your expertise either as a classroom teacher or a “how-to” trainer who instructs via webinars, workshops, or seminars. For people who are outgoing and enjoy an audience, teaching can be a great way to earn an income. Here are some interesting options to consider:

• Adjunct professor. Adjunct-level professors are hired on a contractual, nontenured basis to teach at universities, community colleges, vocational schools, and colleges. Some institutions require that their adjuncts meet the same degree requirements as their full-time faculty (meaning you may need a doctorate degree to be hired), whereas at other schools a bachelor’s or master’s degree is sufficient. Prior teaching experience is always advantageous, but the combination of an advanced degree plus work experience is often sufficient to make you an attractive teaching candidate, especially if you want to teach at a community college or smaller school. Adjuncts don’t earn a lot (typically anywhere from a few hundred to a few thousand per course), but adding the word “professor” to your resume or bio can be a great way to enhance your reputation, reach, and marketability.


• Online instructor. The world of online education is rapidly gaining traction, credibility, and prestige. Although brick-and-mortar universities tend to use their in-house faculty for online assignments, online institutions hire outside applicants who offer strong subject-related work experience. A master’s degree can make you more marketable, but schools will consider applicants who hold a bachelor’s degree along with relevant work experience. To find an online teaching position, apply directly to the online institution, or search on one of the many online job boards—for example, Simplyhired.com, Indeed.com, or the jobs listed on the Chronicle of Higher Education site (chronicle.com), using keywords such as “online teacher” or “virtual instructor.”


• Corporate trainer. Few companies still maintain in-house training departments, and as a result, many have increased their use of outside vendors to train their employees on topics ranging from sales to business etiquette to leadership. To learn more about these opportunities, and to find vendors who might be interested in contracting with you as a freelance trainer, consult the website of the American Society for Training and Development (www.astd.org).


• Adult education instructor. Continuing education programs are always in need of new programs, workshops, and classes to fill their catalogs. Although most programs will pay only a small stipend for your services, teaching in one of these programs is an easy and cost-effective way to market and advertise your services. In addition to teaching opportunities at local community colleges, vocational programs, or town continuing education programs, you can teach at privately run adult education programs such as the Learning Annex (www.learningannex.com) or the Gotham Writers’ Workshop (www.writingclasses.com).


• Online trainer. Thousands of entrepreneurs are generating significant income by creating their own brand of online training programs, formatted as videos, webinars, and multisession “universities.” Although many online courses focus on teaching business development and internet marketing, the possibilities for packaging your expertise into your own program to deliver a virtual learning experience are limited only by your imagination. And once you develop a course, you can sell it in multiple formats (downloadable manual, video, podcast, and so on) for as long as the information remains relevant and timely. You can learn more about this option in the next chapter.


• School owner-director. As a child, I attended a ballet school taught by one of the neighborhood moms in the attic of her home. It was a simple studio that catered to the needs of the local tutu-lovers while providing a steady income stream for my neighbor while she stayed home to raise her children. This spirit of homegrown entrepreneurship is still alive and well, in the form of home-based cooking schools, language programs for toddlers, and acting classes. Of course, before opening any school in your home, be sure to check with your town and state government for applicable zoning and licensing requirements, especially since your neighbors might protest if your business increases traffic in the neighborhood.


• One-to-one tutor. The demand for tutors is always strong, especially for people who can help children improve their grades, study habits, and SAT scores (tutors in affluent neighborhoods can command upward of $150 per hour for their services). If you’d prefer working with adults, consider offering your expertise as a computer and technology tutor. Although most tutors run their own businesses, you can opt to work for one of the big tutoring services, such as Kaplan or Kumon, if you don’t want to go it alone.


• Private teacher. Would you like to teach people on a one-to-one basis or in a small group setting? The opportunities to profit as a private instructor are limited only by your imagination—people will gladly pay for personalized instruction in any number of interest areas, including yoga, painting, video-editing, and photography.

To learn more about teaching jobs and the training field, consult:

• Chronicle of Higher Education (chronicle.com). An online resource for jobs and information related to colleges and universities.


• American Society for Training and Development (www.astd.org). The professional organization for people involved in corporate and business-related training and development. Their website is an excellent resource for people interested in all aspects of the training world.


• HigherEdJobs (www.higheredjobs.com). Lists openings in academia.

Help a Reader: Withdraw 401k to Pay off Debts?

Here's an email I recently received from a reader:

My budget is really tight and despite slashing costs as much as possible, I still find myself gradually seeping further and further into debt each month by a couple $100s. Which of course is bad in itself but if there is a large unexpected expense, it will put me further in the hole.

My current debt situation:

• Lending Club - Monthly Payment: $368, Interest Rate: 7%, Outstanding Balance: $5,019
• Credit Card - Monthly Payment: $100-$200, Interest Rate: 16%, Outstanding Balance: $3,500
• Student Loan - Monthly Payment: $272, Interest Rate: 7%, Outstanding Balance: $23,049
• Car Loan - Monthly Payment: $1834, Interest Rate: 2%, Outstanding Balance: $5,500
• Total - Monthly Payment: $924-1,024, Outstanding Balance: $37,069

I changed jobs last year so I don't see myself getting a new job (and a raise) anytime soon, have tried starting a side business for the last two years (with not much success yet) and am starting to grasp at straws. I have considered taking out the 401k money from my previous job ($21,000) to pay off some of the debts and increase my cash flow. After taxes and the penalty the amount would be around $12,500-$13,000. I could pay off the credit card debt, lending club loans, and almost all of the car loan, and be left with an additional $650-750 cash flow per month for wiggle room.

What do you think? Is this a good strategy?

Some more information about me:

• I am in my early 30s and live in a suburb of Washington, DC. I rent a two bedroom apartment with my wife and daughter. Our rent includes utilities ($1,655) and is on the mid-to-low end for the DC area...
• I work full-time and my wife works part-time watching another child in addition to our daughter.

Below is what we have earned and spent on a monthly basis in 2012. One thing that will probably jump out to you is the $1,000 a month for church donations. That is tithing and other donations. Right now that is not on the table for possible cuts.

Thanks for your help!

MONTHLY INCOME - $6,200

FIXED EXPENSES

• Rent & Utilities - $1,655
• Auto Insurance - $61
• Internet - $38
• Phones - $125
• Debt Repayment - $824
• Interest Payments (when credit cards get out of hand) - $35
• Donations to Church - $1,000
• Daughter's College fund - $50
• Gym & Fitness (2 adults+childcare+random races) - $120

TOTAL FIXED EXPENSES - $3,908

VARIABLE EXPENSES

• Food - Groceries - $680
• Food - Eating Out - $165
• Gas - $180
• Car (oil changes/repairs) - $144
• Business (web design, video production - $230
• Entertainment/Dates - $85
• Gifts - $155
• Clothing - $235
• Travel/Transportation - $74
• Parking/Tickets/Tolls - $54
• Home Supplies - $260
• Shopping/Target - $440
• Personal Care - $40
• Medical - $5
• Crafts - $40
• Postage - $25
• Misc - $135

TOTAL VARIABLE EXPENSES - $2,947

TOTAL EXPENSES - $6,855

NET - $-655

What's your advice for him?

Reader Profile: SM

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

Next in the series is FMF reader SM. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am 30 years old. I completed my MS+PhD in Engineering stream in east coast (~7 years) and I started working over a year now in MidWest. I got married in early 2012. We do not have kids.

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

Since I was a student from 2004-2011, I have not racked up much during my student years (< 7k savings in the bank). Only recently, I started making upper five figure mark before tax. My wife does not work, so I am the only income earner in the family. Currently I have roughly $18k savings of which $10k is for emergency funds. No CDs.

In 2012, I contributed 8% towards 401k till October and then 30%. It is 93% Stock fund and 7% bond fund investments. Company contribution is 3%. I have a HSA account and I maxed out that contribution for 2013. No Roth IRA. I am not too familiar to investing and I haven’t yet invested in mutual funds etc. although I invested 100% in the target retirement funds from company.

I rent an apartment, own one car and I would like to think we lead a simple life. Our monthly expenses are:

• Rent  - $900
• Utilities - $150 - $200 (water, current bills)
• Internet - $30
• Phone - $40 (for international calls)
• Cell phone - $60
• Gas - $100
• Car insurance - $50
• Entertainment - $40 - $100
• Groceries - $150
• Shopping (misc) - $100

After taxes, 401k deductions etc., I receive $1500-$2000 bimonthly pay check.  In 2011, I had many expenses like moving to new place, new house, new furniture etc. Wedding expenses were in the early part of 2012. I don’t have cable now but I used to have it until middle of 2012, which I felt was not worth it.

My credit cards (and my ignorance):

• Had Amex Blue for Students for 6 years now. Switched that to Amex blue everyday few months ago for rewards.
• Chase Freedom for last 5 years. Hardly used it until this year. Never utilized bonus categories until recently.
• Local branch credit card – one of the oldest now. Hardly any transactions with it. But still there for my credit history.
• Fidelity Amex – only recently applied; this is after learning about rewards etc.
• Chase Sapphire Preferred – applied few months ago. Will cancel it before fee kicks in. Or should I scale it down to just Sapphire?

What are the current financial issues you're facing (saving, paying off debt, etc.)?

• My wife is not inclined to work and would prefer being a home maker. I support her decision and let her choose what she likes. For myself, I don’t foresee any bonuses etc. from my company and the pay might remain steady with 2% increase every year. Can I survive in this setting for the next 5 years with a second car, 2 kids along the way and stay-home wife?


• I have been renting apartment for the last 8 years now (7 yrs as student). I do not have any loans or debts at the moment as I survived on a stipend as a student. I pay my credit card bills in full and on time. I don’t plan to buy a new house yet. My parents or my wife’s parents may take turns visiting us from overseas. Their air tickets, stay, sightseeing etc will cost me $10k per year per either parent. Also, we may visit them overseas every other year and that will be another $10k for our trip. In other words, I need to set aside $10k every year for this affair. These would be one of the main expenses in the year. No honeymoon trips or cruises so far. Do you see a risk?


• What should be my retirement savings goal starting real-world job at 30? I foresee I will be the only source of income in the family in the future.


• I could have been an ignorant towards investing, stocks etc. I wanted to start exploring that avenue and research on it. The free financial adviser from local bank gave me some information on mutual funds etc. Should I start from S&P 500 by investing $100 - $500 per month in it? Also, I haven’t touched Roth IRA. I contribute to HSA account and I can use part of it for investing? Any thoughts? I heard saving medical bills for many years can help claim HSA funds tax-free. True?


• As a student from 2004 – 2011, I didn’t heed to some specifics when I was filing for my taxes. For example, I could have got exemptions for paying tuition fees by myself; paid health bills from out of pocket in 2006 when I was sick etc.  Is there anything I can do about it now?


• I am beginning to spend wisely (too late compared to some smart guys in their 20s) and be frugal where required. However, my wife is on the other end of the spectrum and thinks I am too stingy. I try to be very calculated in my spending and try to apply reason and logic, which doesn’t always go very well with her. Right now I don’t see it as a big deal as I would like her to realize it eventually, but will this be a problem in the long run?


• Important question is - How does my retirement planning and financial investment plans change if I have to move outside US for good in the next 3-5 years? What should I watch for if this transition should happen? What happens to the 401k, social security, medicare etc. tax that I am paying now?

What are your plans for the future (retire early, build your career, etc.)?

I would like to work as long as I can and wherever I am. The goal is to build solid career and maintain a family. Sometimes work/life balance can be challenging and life and people around you can be very unpredictable.  At some point moving back to my wife’s country is a possibility, so I need to be watchful about my assets and commitments here. Any financial insights for people with scenarios of moving to Australia, Europe or Asia after few years can help. In the after work-hours, I do some voluntary work.

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

Not much of an adviser myself. I have been a student for the most part. It is better to teach yourself the many very ways to be financially smart. Temptations can harm your growth. Think like a saint and you won’t miss what you crave for. I think doing away with instant gratification is your saving grace.

Nobody told me to pay credit card bills in full. I just did as I would become insecure if I don’t. My credit score is well above 720. On the downside, I never realized the difference between reward points and cashback rewards, partly because of my ignorance in this subject. I am glad I explored it even though it’s late.  Living within our means is a practice to be followed religiously.

Are Christians Fat?

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Here's a piece from Fox News that says church goers are heavier than the population in general. Some highlights:

Nearly one-half of the American population will be obese by 2030 according to a 2012 study published in the American Journal of Preventive Medicine. The researchers estimate that this will result in an additional $66 billion dollars in health care expenditures, 7.8 million new cases of diabetes, 6.8 million new cases of stroke and heart disease, and 539,000 new cancer diagnoses. This epidemic of obesity and commonly associated diseases creates a gash in the fabric of our country that threatens the future of individuals, families, and our nation.
 
A 2006 Purdue study found that the fundamental Christians are by far the heaviest of all religious groups led by the Baptists with a 30% obesity rate compared with Jews at 1%, Buddhists and Hindus at 0.7%.
 
Similarly, a 2011 Northwestern University study tracking 3,433 men and women for 18 years found that young adults who attend church or a bible study once a week are 50% more likely to be obese.
 
The Pawtucket Heart Health Program found that people who attended church were more likely than non-church members to be 20 percent overweight and have higher cholesterol and blood pressure numbers.
 
Finally, a 2001 Pulpit and Pew study of 2,500 clergy found that 76% were overweight or obese compare to 61% of the general population at the time of the study.

Ugh.

The piece goes on to say that the church can address being overweight (and thus, unhealthy) by setting up support groups -- something the church is usually pretty good at.

As for me, this whole issue brought to mind 1 Corinthians 6:19:

Do you not know that your bodies are temples of the Holy Spirit, who is in you, whom you have received from God? (NIV)

Or if you prefer a verse that deals with money (since this is a money blog), consider Proverbs 23:20-21:

Do not join those who drink too much wine or gorge themselves on meat, for drunkards and gluttons become poor, and drowsiness clothes them in rags. (NIV)

I know there are those who have genetic issues that make them heavier. But these people are the exception, not the rule. We need to face facts as a culture: we are eating ourselves to death. Not only that, look how much it's costing us -- all because we can't control our mouths. And leading the way is the church. Shame on us.

I am not sure what the solution will be. Perhaps a Dave Ramsey-like person will develop a series for the church to tackle weight issues like Dave helped everyone tackle debt. I certainly hope so. And I hope it spreads to the mainstream like Dave's teachings did. I think we all know America could use a good dose of healthy eating, limited portions, exercise, and "good living."

How Will You Invest in 2013?

Money Magazine asked its readers how they will invest in 2013 and received the following responses:

• 33% will put more in stocks
• 12% will put more in bonds
• 21% will keep more in cash
• 34% won't change anything

As most of you know, I don't pay much attention to the markets, trying to predict whether they will be up or down this year/month/day. I simply keep on investing no matter what, using time as my main weapon for investment growth.

So put me down for the "won't change anything" group.

My investments are pretty automatic at this point and work as follows:

• Money is deducted from my paycheck and put into my 401k.


• This money is invested in a "decent" mutual fund -- the best choice I have for our plan -- and is matched in part by my employer (I put in the max amount and my employer matches the first 3% dollar for dollar)


• After other deductions, the remainder of my check is deposited into my checking account.


• Each month money is automatically sent to Vanguard from my checking account.


• This money is then automatically invested for me. I'm still in the same Vanguard funds that I have been in for some time -- haven't changed in a looooooog time.

One thing that has changed a bit is that I used to have a Vanguard REIT fund. I sold those shares last year as well as a few index fund shares to pay for my rental properties. As my properties get up and running fully, I'll use the income from them (along with a couple CDs I have maturing) to buy any new properties this year. At most, I see another $200k in rental property purchases in 2012.

So how about you? How would you have answered the question from Money Magazine?

Reader Profile: JP

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

Next in the series is FMF reader JP. He emailed me his financial story as follows:

My wife is 29 and I am 33.  We rent in a relatively low-cost western US town.  She works in the medical field and I work in law.  We have been married for four years, and are expecting our first child this summer.  Our hope is that when the baby comes, my wife will be able to stay home full-time for a few years, and we may even try to have another child during that time.

We starting dating in college (her in undergrad and me in graduate school) and often joke that but for taking out enormous student loans, we would have never met…laughing about the loans keeps us from crying about them.  When we got married, we had approximately $130K in student loan debt.  We’ve managed to pay off about half of that in the last four years, leaving us with one consolidated federal loan of $64K at 6% remaining.  We also purchased a new car this year because my old car (our only car) finally gave out.  For the purchase, we plunked down 80% of the total purchase price from our savings, and financed the remaining $6K at 0% over three years.  We have no other debt, and our credit scores are very solid.

Together we grossed about $110K this year, but I earned about 80% of that income.  My wife contributes 6% of her income to an employer sponsored 401K, and her employer provides a 150% match (up to 6%), as well as a profit sharing contribution.  I contribute about $10-12K annually to my 401K.  We both would rather be paying off the student loan as opposed contributing to retirement, but reducing our taxable income through 401K contributions is really the only tax deduction we can get right now. After payroll deductions and taxes, we bring home approximately $6K/month.  My firm has an excellent benefit program and helps cover a sizable portion of our health insurance premium.  They also provide me with excellent vision, dental, ST and LT disability and life insurance. 

Our monthly budget is a follows:

$1200/month in rent and utilities (water, heat, electric, and garbage);
$527/month in minimum student loan payment (again, $64K remaining at fixed 6% rate);
$350/month in groceries (we cook most all of our meals);
$200/month in auto loan (again, $5K remaining at 0%);
$130/month in insurance premium (car, renters, liability);
$120/month in gas;
$100-150/month on miscellaneous expenses (household items, medical co-pays, oil changes, etc.)

$800/month is individual money ($400 each for things like clothes, entertainment, gifts, recreation, etc.) 

After several starts and fits, we set up our budget and finances by first tracking our spending for several months.  We then opened a joint checking account, a joint savings account, and two individual checking accounts (one for each of us), and two individual saving accounts (again, one for each of us.)  We now direct deposit our paychecks into the joint checking account.  Immediately after each of our respective payroll deposit (we each get paid twice a month), we have automatic transfers set up to move money from our joint checking to our joint savings account ($520 following each of my paycheck deposits, and $170 following each of my wife’s paycheck deposits.)  In our journey to become financially independent, we learned that you have to PAY YOURSELF FIRST.  We then have automatic transfers to our individual checking accounts (again, $200 to each of our individual checking accounts after each pay period.)  Our budgeted expenses come out of what is left in our joint checking. 

The money that we transfer to our individual checking accounts each month is our “own” money.  In other words, I can spend, save or give away my $400/month on anything I like, and my wife can spend, save, or give away her $400/month on anything she likes.  This seems to work for us.  It gives us both some autonomy and discretion, and we don’t feel like we are micromanaging each other.

After all of our bills are paid, and our transfers come out, there is almost always money left over in our checking account.  We call this our “slush fund.”  We skim it off every couple months or so and put it into savings, pay down debt, use it to cover unexpected costs, take a vacation or donate  We generally make good decisions with our “slush”, but sometimes we fritter it away— lifestyle inflation is a very real thing and something that we need to constantly guard against.

Our overall financial picture is much better than it was a few years back.  We finally have a positive net worth, and feel that we are starting to get some control over our financial situation.  We have approximately $75K invested in growth stocks between our two 401Ks, and have about $25K cash in the bank.  We have paid off nearly $70K in student loan debt in the last three years, but I am disappointed to admit that we have lost momentum on that front.  Plus, with a baby on the way, I am particularly nervous and frustrated about our debt load, and the prospect of being the only income earner for the foreseeable future scares the crap out of me.

We also keep thinking that maybe we should buy a home since we are going to have a child.  We have been tracking local real estate prices and interest rates pretty religiously for the past three years, and have probably looked at 50 houses over that time.  We can get a house that suits us for approximately $150K, and with 20% down, we would be paying approximately the same as what we are now for our housing expenses.  We haven’t purchased anything yet because: 1) we felt we had too much debt to justify buying a house; 2) prices and rates have just kept falling; and 3) we are not 100% certain we want to stay here forever.

With regard to that last point, we live in a vibrant community with low crime, low taxes and good schools, and we are surrounded by nature and great recreational opportunities--some of the best in the world in my opinion.  We also have a great network for friends here and are involved in the community.  Despite these qualities, our respective families live far away, and there is very little diversity of opinion and culture here.  We are an interracial couple, and we really want our children to grow up knowing a lot of different kinds of people and having various cultural experiences.  We are concerned that if we plant roots here (i.e., buy a house), our children will struggle being bi-racial in a relatively homogenous locale. 

Finally, we know there is room to cut in our budget, and know that buying brand new car was not a great financial move from most perspectives given our huge debt burden (it is a cool car though and gets GREAT gas mileage.)  Our particular hope, however, is that all of the great readers on this site can offer us some feedback and different perspectives so that we can re-evaluate our situation and keep moving forward—being a lawyer, I have thick skin so feel free to be candid.  Also, thanks for the opportunity to tell our financial story.

How Much Umbrella Insurance Do You Need?

A Money Magazine reader asked in their January/February issue how much umbrella insurance he needed. Money's response, in part, was as follows:

Base your umbrella policy on the value of your assets. In a lawsuit, lawyers will aim for your available assets but probably settle for a comparable insurance amount.

They also suggest "adding $1 million for peace of mind."

I recently bumped up my umbrella insurance to $4 million for the following reasons:

• To cover my assets (not that I have $4 million, but I have a sizeable amount).


• Extra "peace of mind" as they note above. I now have rental properties (which have their own $1 million liability policies) and will soon have a teenage driver -- so I'm looking for a bit more peace of mind wherever I can find it. :)


• Umbrella insurance is really affordable. The difference for an extra $1 million in coverage was $60.

How about you? Do you have umbrella insurance? If so, how much and why that amount? If not, why not?

Build a Dividend Growth Stock Portfolio in 4 Easy Steps

This is a guest post from Mike, MBA and author of The Dividend Guy Blog where he writes about dividend investing. He is also the author of the book Dividend Growth: Freedom Through Passive Income US Edition.

In my previous guest post, I wrote about the reasons why successful investors choose dividend investing as their core strategy. Unfortunately, picking just any dividend stocks is not enough to guarantee that you will make money on the stock market. In order to avoid the dividend traps, it’s important to have a sound investing strategy. Here’s how you can do it in 4 easy steps.

Step #1: Screen The Right Stocks With The Right Metrics

A good dividend stock in your portfolio is one that you will keep for several years. You must be careful to not to fall for a high dividend yield stock or buy a company with inconsistent sales.

The power of dividend growth investing resides in companies that double their dividend at least every 10 years. This is how you can retire with a dividend portfolio yielding over 10%. In order to find this lucky lady, you can start your research by filtering the stock market with the following ratios:

• Dividend Yield >3% (I’m going after yield after all)
• 5 Year Dividend Growth >1% (I want this yield to grow over time)
• Dividend Payout Ratio < 75% (I want sustainable dividend growth)
• 5 Year Annual Income Growth >1% (I want potential for more dividend growth)
• ROE > 10% (I want companies making great investment returns)
• P/E Ratio <20 (I don’t want to pay too much for the stock)

There is a great free stock screener called FIN VIZ Stock Screener. I use it personally for 3 reasons:

#1 You have the ability to add several filters;

#2 You can go back to your original search and modify 1 or more filters and see the new results;

#3 You can export your search into Excel and play with them as you want.

This is how you find stocks paying healthy and sustainable dividends. This won’t lead you to the flavor of the month but sound investments.

Step #2: Don’t Buy The Same Stocks Twice

After pulling out your search results, you will be tempted to pick from this list since they are all supposed to be solid dividend growth stocks. Think again, your research process has just begun! You can continue your investment journey by making a list of 20 potential stocks. Then, a good reading of financial statements is required. You must make sure that the metrics you are looking at in your screener are not showing due to exceptional events and the business is sustainable.

You can also accelerate your process by considering a good diversification among your stock selections. If you have selected 4 stocks operating in the same sector, you might not want to pick all of them. They might be great stocks individually but if their sector is affected by economic events, you will have 4 stocks dropping at the same time. This is why it’s important not to buy the same stock twice. 

For example, if you are looking at consumer staple stocks, you will probably find stocks like Clorox (CLX), Colgate-Palmolive (CL), Kimberly-Clark (KMB), Procter & Gamble (PG) and Johnson & Johnson (JNJ). Each company is not exactly the same but they share several points in their business models and operations. If you look at the graph for the past five years, you will notice that they follow a similar pattern but some have performed a lot better than others (click image to enlarge):

This is why it is important to select the “best” stocks for each sector instead of buying the whole industry. Someone who had many banks and financial services stocks in 2008 probably cried a lot!

The US stock market has many great dividend stocks in several different sectors. For example, you won’t have a hard time finding what you are looking for within financials, techno, or consumers. While I just showed you how your portfolio could fluctuate in a short period of time if you have invested in the financial, the energy sector is no different. In fact, the reason why you don’t want to concentrate too much in a specific sector is that you can’t know for sure if it’s a good move or not. You think you are smarter than the average bear and that you can’t go wrong? Well that’s only true if you are already a multimillionaire trader and have made your money through stock trading. You’re not? Then you are not likely smarter than me or the average investor. Just stick with good sector diversification instead of gambling ;-).

Step #3: DRIP IT!

It’s not always easy to build a diversified stock portfolio when you start investing. Chances are that you don’t have a lot of money to invest and this will limit the number of stocks you can hold in your account. By diversifying your holdings, you will have small positions in several stocks. A great way to increase each holding is by using the stock Dividend Reinvestment Plan also called DRIP.

Each time that a dividend payout is made by a company, the investor has two options:

1)    Receive the dividend payout in cash in his brokerage account
2)    Buy new shares under the DRIP program with no transaction fees

Here’s how a DRIP can be setup:

Assume you own 400 shares of Clorox (CLX). The stock price is trading at $75 and the quarterly dividend paid is $0.64 per share. This means that upon the dividend date, you will receive $256 in dividends (400 * $0.64). The amount can be deposited in your brokerage account and you will have to wait until you have more money to buy another stock. Or, you can setup a DRIP. Upon the dividend date, your number of shares will increase by 3 or 3.41 if your DRIP broker allows fractional shares. If you can’t hold fractional shares, you total shares will jump to 403 and you will receive $31 in cash ($256 - $225 of share purchase).

The interesting part is that your dividend payout will increase each quarter since you buy more shares. Following the above mentioned example, you will receive $257.92 in dividend the following quarter instead of $256. This magic results in a dividend payout increase of 0.75%. After a year, now show 412 shares and receive $263.68 per quarter, a dividend payment increase of 3%. Imagine what happen if you DRIP a stock for 10-15 years. You just get a small preview of the power of compounding interest!

Step #4: Don’t Blindly Follow Your Lover

Don’t we say that love is blind? Well I know that it’s true if you fall in love with your stocks! I’m sure you have seen investors keeping a blind faith in companies that have lost money and pushed their stock value down the hill. They keep saying that the company will come back and that they can’t sell right now. Falling in love with your stocks is probably the best way to lose a lot of money.

Instead, I suggest you follow your stocks through their quarterly results. You will be in a better position to see if the company keeps the reasons why you have selected it in the first place. Don’t give your stocks “chances” to be better in the future. If the dividend payout ratio is too high (over 80%) or if the company announces a dividend cut, you should pull the trigger early and sell it.

Here’s a quick tip: You can run your ratio analysis four times a year (about a month after each quarter… so on February 28th, May 30th, August 30th, November 30th). Why wait so long after the financial quarter finishes? Because companies usually don’t disclose their results until 4-5 weeks AFTER the end of the quarter.

Time Will Become Your Best Friend

Dividend investing is for patient investors. It’s only over the long run that you will benefit from the compounding of dividend growth and that you will clearly see the power of dividend investing. It’s important to establish your own set of rules and follow them. Most of the time, a sound investing strategy is boring but it pays in the end!

Disclaimer: I hold shares of JNJ.

4 Reasons Why Successful Investors Choose Dividend Investing

The following is a guest post from Mike, MBA and author of The Dividend Guy Blog where he writes about dividend investing. He is also the author of the book Dividend Growth: Freedom Through Passive Income US Edition.

“You can make a lot of money from the stock market.”

I’m sure you’ve heard something similar to this in your lifetime. You probably got all excited, opened a brokerage account and started investing. You were already thinking about the nice house you will build from your investing profits or the vacation to Hawaii that would be paid for by selling a few good stocks. This was until you received your first statement showing that you were losing 10% of your cash. Your dreams faded away and you then realized that making money off the stock market is not that simple. So… can you really make money from the stock market?

I’ve been investing for several years and meet with investors regularly as part of my work. The most successful investors I have met over the past 10 years all have their own investing strategies and their little trading secrets. But they share one thing in common: their love for dividends. After reading another guest post on FMF called “Dividend Investing is Not the Perfect Solution for Yield”, I wanted to share with you the reasons why successful investors choose dividend investing to build their core portfolio.

How About Making Double Digit Returns with Your Investment?

Would you believe me if I told you buying Coca-Cola (KO) will lead to a double digit return year after year? This is the case of several dividend paying stocks as they use the power of dividend growth to reward their investors. Let’s take a look at the KO example and you’ll understand. Let’s start with the KO dividend graph over the past 10 years (dividend payout is adjusted considering 2:1 split in August 2012). (Click image to enlarge.)

Since 1971 Coca-Cola has increased its dividend yield at an annualized rate of almost 10%. This means you double your dividend yield every 7 years or so. Back in 2003, the stock was trading around $22.00 (price value adjusted with the 2:1 split in 2012). The dividend yield back then was about 2%. Today, KO is now paying a quarterly dividend of $0.255 or $1.02 per year compared to a $0.11 per quarter back in 2002. The $1 dividend currently paid on an original investment of $22 per share represents a 4.64% yield.

If you had bought 1000 shares of KO back in 2003, you would have paid $22,000.

The share is now trading around $37.00.

Your investment is now worth $37,000. That’s a 68% investment return.

In the meantime, you have also received a total of $7,220 in dividends (or 32.81% total dividend return).

So in 10 years, you would have made a total profit of $22,220 on an investment of $22,000. That’s a 101% investment return for an average (not annualized) return per year of 10.1%.

The interesting part is that a third of your return is coming from the dividend. On top of that, you are now holding an investment paying a 4.64% dividend yield based on your cost of purchase. In another 10 years, chances are that you will be showing a 10% dividend yield if you keep holding this stock.

The Best Sign of a Solid Business Model

Besides the power of dividend growth, the fact of paying a steady dividend is a great sign of a solid business model for investors. When you find a company that has been paying a dividend for the past 10, 20 or even 50 years, you have a great indication (while not being a certitude) that the company business model is sustainable.

Since dividends are paid from after tax revenues, the company must ensure that it constantly generates a higher profit per share (followed with the Earning Per Share ratio) to be able to increase its dividend accordingly. A long dividend increase history shows you a responsible management team and a business model being based on solid assumptions.

As an investor, you can also easily follow what the company is doing with its profits as a part of them are returned back to you. It ensures that they don’t “waste” their money on irrelevant projects. By looking at the Dividend Aristocrats or Dividend Champion lists, you find solid and sustainable businesses that will continue to be in business for several years to come.

The Best Protection against Yourself

Do you remember how you went through 2008? What happened when you saw your stock portfolio drop by 30%? Did you panic? I can tell a big part of you did since everyone was selling on the market to go back into cash and bonds. Then you woke-up in 2013 and found that most of your losses had been recovered… but this is all on paper since you sold your stocks in 2008 and you will never see this money again.

Dividend stocks are usually less affected by major drops in the stock market. For example, I pulled-out five dividend growth stocks and compared them with the S&P 500 from Jan 1st 2007 to Dec 31st 2009:

• Chevron (CVX): +6.92%
• Procter & Gamble (PG): -2.29%
• Coca-Cola (KO): +22.71%
• Johnson & Johnson (JNJ): -1.21%
• McDonald’s (MCD): +40.24%
• S&P 500: -21.57%

(Click image to enlarge.)

This is a great example to show you that if you had held a dividend portfolio in 2008, you would have probably lost money but a lot less than by holding the S&P 500 index for example. During a stock market crisis dividend stocks usually:

#1 Continue to pay their dividend which reduces your loss

#2 Hold more investors on board which avoids massive stock value losses

#3 Prove their business models are among the most solid on the market

Think About Retiring With a Smile

In my opinion, I think the two major challenges we will face regarding retirement planning in the future is inflation combined with an aging population. Back in the 60s, we didn’t expect to live past 70 or so. Today, we retire around 60-65 and expect to live at least to 85. This means that you need a lot more money on the side to keep up with your lifestyle.

The problem is that once we retire, we don’t want to take risks anymore. We usually turn to CDs and bonds. Now that those investments don't even cover inflation, how can you expect to live 15 years longer with a portfolio that loses purchasing power each year?

By choosing stocks growing their dividend payout faster than the rate of inflation year after year, you can build a solid portfolio and live from your dividend payouts almost indefinitely. Your lifestyle won’t be affected by inflation since your dividends will increase every year to cover the rate of inflation.

Dividend Investing is the Way

On top of these 4 reasons why dividend investors are sucessful, I personally favor dividend investing for 3 other reasons:

#1 Dividend Investing is Easy to Understand – A prestigious financial background is not required if you follow simple and time-tested investing principles.

#2 Dividend Investing is Perfect for Lazy People – Not much time is required once you learn the basic principles of how to select your stocks.

#3 Dividend Investing, if done right, equals Receiving Money Monthly! – Dividend payouts are regular.
 
It’s obvious that simply buying dividend stocks is not enough to guarantee a good investment return from your portfolio, but I truly believe that this is the right place to start if you want to make money from the stock market.

Disclaimer: I own shares of KO, JNJ & CVX

Reader Profile: Mom and Dad

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

Next in the series is from an FMF reader submitting a profile for his parents as follows:

I’m a long time lurker on FMF and highly value the widely varied topics and reader feedback. Our family has recently gone through a substantial personal finance turnaround, but that is a topic for another day.

My Mom and Dad are the focus for this reader profile. We have been talking quite a bit about their financial situation and they agreed to me posting their profile. I wrote it up for them, they proofed it and agreed that inputs from FMF readers might be helpful.

They are near the other end of the work spectrum from most reader profiles, but could use feedback and insights. Mom and Dad have been married for 17 years and are the epitome of a young couple in love. Mom is 76 and Dad is 88. Both were previously widowed/widower, and knew each other as our families grew up in the same neighborhood. Their marriage brought together a large, loving extended family. They have 14 grandkids and 3 great-grandkids.

Dad has been working in the service industry since he was 15 and knows just about everybody in town. He recently retired at age 84 (yes, your math is right, that's 69 years of work), but only because of vision problems. If he could still see, he would still be working today. To stay in touch with the old crew, he writes articles for industry publications and is authoring a book (Dad dictates and Mom writes for him on the computer). He continues to serve those around him through occasional volunteering, but he is not able to do as much he would like.

Mom works full time and is a leader in her industry. She is highly regarded by her colleagues, who are concerned she may retire in a few years when she turns 65 (if only they knew!). Mom attributes her success to building close personal relationships and focusing on customer needs.

Today, Mom’s income covers all of their monthly needs including money for traveling to see their family who are scattered about the country. But Mom would like to reduce her work hours to spend even more time with Dad and family. Dad and I don’t think she will ever fully retire, she enjoys what she does too much.

Here's their rough financial overview:

Gross Income: $75k/y, bonuses up to $26k/y

• SS, pensions, RMDs - $46k/y
• All RMDs re-invested in after-tax accounts
• Total of ~$12k/mo

Monthly Expenses: Mortgage: $1,200 (balance $213k @3.3%)

• HOA - $315
• Car - $408 (balance $16k @0.9%)
• Transportation - $220 (gas, insurance)
• Donations - $75
• Utilities - $501 (includes water, sewer, gas, electric, cable, internet, phone, cells)
• Medical/Ins - $785 (includes LT Care Ins)
• Home Cleaning - $180Food - $1,000
• Life Insurance for Mom - $35 (not sure on term, $35k policy)
• Savings - $800
• Taxes - $3,000 (high side conservative estimate @25%)
• “Other” - $3,600

Assets:

• Liquid Assets (mix of retirement/taxable accounts) - $150k
• Home Value - $335k

Net Worth: $250k

They have a fairly large gap in the “other” category that they use for extras, family and travel.

Current financial issues/challenges/concerns/questions:

Mom & Dad have recently paid off all their consumer credit accounts to reduce their monthly expenses.

So the main issue we are working through with them: how to cut back on Mom’s hours, continue to meet monthly obligations, and continue to have the money to travel and treat themselves and the family. Her current employer won’t let her reduce hours and doesn’t pay her what she deserves. She has several offers from other companies, but is worried that changing now would increase her hours rather than decrease them. Their savings would not allow them to continue their current lifestyle without working.

The next issue is the car. Mom would like to pay if off and be done with the expense, but Dad would be more comfortable having the cash on hand in case of unforeseen issues. Right now, they are “making extra payments” into a savings account and will decide how/when to pay off the car when it is fully funded. They both like this approach - any other thoughts on this?

Liquid assets – all of my research and focus has been on savings rates/vehicles, asset allocation and investing with a long time horizon. I have no clue how to set up a plan for this stage of life. Any suggestions, pointers, links, books, wisdom, etc… for Mom & Dad would be greatly appreciated. I'm not sure the professional advice they have received is all that great.

Our family business is growing rapidly, has a great spot for Mom and we could be extremely flexible. Mom really likes the idea of mentoring us and helping us grow. We have worked well together in the past (we’ve not always been so lucky with other family ventures). We could likely cover her current salary at reduced effort in the not-to-distant future, but it may be a struggle to match her salary in the near term. We would have similar entry barriers/ramp up she would experience at other companies, and of course fewer hours means longer ramp up. We are really focused on and sensitive to what’s right for Mom & Dad rather than exploiting Mom’s expertise for our gain, so we are pursuing this as an option, but not pushing real hard.

Other issues/questions that may come up – They are not real interested in trimming down expenses, they want to enjoy the time they have with each other and the family. Mom has a small life policy and a long term care policy to help Dad out if needed. Yes, it sounds like there may be some tough decisions or tradeoffs. We’re looking for the middle ground so they might be able to have their cake and eat it too.

We look forward to constructive criticism, insights and lessons from FMF readers!

Take Time to Smell the Roses

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

I don't know about you, but the recent Reader Profile by FMF reader JL hit a nerve for me. You can read the whole post if you like, but the part that made an impact on me was that she and her husband saved their whole lives for retirement and just as they were ready to enjoy it, he died. It was a sobering reminder that life often does not go how we plan it.

It was also a reminder for me to enjoy life while living it. It's something that I struggle with as a fairly good saver and someone who is focused on a "good" retirement. It's easy for me to save and save and save and be so focused on 20 years from now that I forget to enjoy the 20 years of living!

Though not exactly right for this situation, Luke 9:25 regularly pops up to me and reinforces the notion that life is not all about accumulating as much as we can. It says:

And what do you benefit if you gain the whole world but are yourself lost or destroyed?

A paraphrase of this might be, "What good is it to gain great wealth and not enjoy life in the meantime."

As such, I have resolved to stop and smell the roses a bit. We are taking more family vacations, I have revised my thinking on when to be frugal and when not to be, and, most importantly, I have become better at simply enjoying life as it comes.

It's still a struggle much of the time, but when all is said and done, I don't want to have a few million in the bank and yet have wasted 50 years getting it. Yes, I want a good, fully-funded retirement, but I also want to take time and smell the roses along the way.

Reader Profile: KA

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Also, please leave constructive comments, questions, and so forth. Simply telling someone what a mess they have, how they have made poor decisions, and so forth is not helpful. There is a way to say, "That was a mistake, but here's what you can do to correct it" that both acknowledges the problem and offers a solution. It's this sort of feedback that this series is intended to solicit.

Next in the series is FMF reader KA. She answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I am a 42 year old single woman who managed a group home until I was injured at work for a second time and am permanently disabled. I had to leave my job in April. I am not collecting social security disability, my legs might not work well, but my brain isn't broken. I have been living off workers compensation payments (70% of my previous income) and savings for the last year, my benefits will expire at the end of this month. (Jan) 

I have sent out hundreds of resumes, but when it comes time for the interview, they see me hobbling in on my cane and I never get a call back. It doesn't help that I am also overweight. I did finally manage to find a seasonal job as a certified tax preparer which I am starting January 10.

I have also been doing some freelance writing, making jewelry, and selling things on Ebay to supplement my income. I am in the process of write a couple of e-books, and I just created a blog on frugal living that I am hoping will generate some ad revenue. I also have been going to classes, took my test, and just applied to get my license for selling life insurance. I have a Masters Degree in Project Management and a Bachelors Degree in History. 
 
Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

Current income is $1,500 a month, I have spent most of my savings, only have $1000 left.  I have $7,000 in credit card debt, two student loans, one currently deferred for $64,000 and a private loan that I owe $3,200 - $52 a month  I have a 6 year old car, I have 7 more payments on before its paid off, but 1/3 of my credit card debt has been spent trying to keep it on the road. Another 1/3 has gone to getting medical care as I no longer have health insurance.   My living expenses are $550 rent $340 car pmt  $87 car/renters insurance, $70 to $90 utilities, $100 phone/internet $300 credit card payments.   My credit score was 715 until a medical bill ended up in collection.  Thats pretty much my income -  I have had to use what little extra I make on the side and my savings for groceries, laundry, and gas for my car which is about $220 a month if I am careful. 

What are the current financial issues you're facing (saving, paying off debt, etc.)?
 
I'm about to hit desperation mode once my workers compensation is gone, and this seasonal job ends in April.  I am doing everything I can to generate income, but I'm afraid it won't be enough. 

What are your plans for the future (retire early, build your career, etc.)?

I would like to start my own business, I even have a unique idea, but because of my disability, I couldn't physically do it by myself, nor could I afford to pay someone to help me until things get off the ground.  I don't even want to think about retirement

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?
 
Up until the time I got hurt, I was always paying more than my minimum balance on my credit cards, kept my balances less than 50% of my credit limits,  set money aside in my savings account every month, and was contributing to my pension plan and buying savings bonds with my income tax returns.

Top 10 Free Money Finance Excerpts of 2012

I run quite a few book excerpts here at Free Money Finance. I like them because they are basically well-written guest posts. I work with authors and/or publishers to select pieces I think FMF readers will like, share what they have to say, and then you all decide whether or not you want to buy the book or pick it up at the library. While I've had tons of great pieces to choose from this year, here are my top 10 in countdown order, along with key quotes from each:

#10 - Making a Great Resume, Writing Powerful Accomplishments - "Describe each accomplishment in a simple, powerful action statement that emphasizes results that benefited your employer."

#9 - Case Studies Of People Who Have Successfully Quit - "Two examples of people who have successfully quit their jobs with a severance package."

#8 - How Much Income Do I Need For Retirement? - "So will you spend more or less in retirement than you do today? That is a judgment call that only you can answer. Here are some useful guidelines."

#7 - The Importance of Accomplishments - "The resume is not a story about your responsibilities or duties. It is not just a job description. It is about the facts: What did you do? What did you accomplish? In today’s job market competencies supported by accomplishments are the focus. Simply listing a bunch of competencies on a resume without any supporting accomplishments just does not cut it."

#6 - LinkedIn Best Practices - "LinkedIn is to business networking what Google is to Internet search. If your profile is not on LinkedIn, then you do not exist as a professional." 

#5 - Answer These Six Essential Questions To Determine Your Retirement Number - "The first step in determining how much money you will need to save for retirement is to answer a few basic questions about your future. If you can answer these six questions accurately then your retirement savings number will also be accurate."

#4 - Spend Like You Want to Grow Rich - "If we’re interested in building wealth, perhaps we should all make a pledge to ourselves much like a doctor’s Hippocratic oath: above all, DO NO HARM. We’re living in an era of instant gratification. If we want to communicate with someone half a world away, we can do that immediately with a text message or a phone call. If we want to purchase something and have it delivered to our door, it’s possible to do that with a mobile phone and a credit-card number— even if we don’t have the money to pay for it."

#3 - Make the Best of Your Investment in College - "College should prepare you for finding a good job and a rewarding career. Your college years can be a training period in which you develop your general skills in order both to get a great job right out of college or graduate school and to succeed in the workplace. By taking advantage of the opportunities that college offers, you can build the base of skills you need not only to land your first job but also to excel at it. Once that happens, you will be on your way to a lifetime of rewarding work."

#2 - “Do What You Love” Is Bad Advice - "We all get told at some point (if not over and over again), 'Do what you love and the money will follow,' and it’s just plain bad advice. The number of people who make a lot of money doing what they love is so insignificantly small that it’s an unrealistic and useless thing to model. The most unfortunate thing about this is that it makes people feel like they are failing when they don’t achieve it."

#1 - Creative Life Planning Solutions For Retirement - "You want to focus your retirement planning energy on what really matters: your assumptions."

Enjoy!

Rediscover Your Various Income Streams & Save Like Crazy!

The following is an excerpt from How to Engineer Your Layoff. If you're interested in quitting your job and profiting from it, this book is for you! Today's post gives ideas on how to save and create income so you can quit your job.

“The creation of a thousand forests is in one acorn.” – Ralph Waldo Emerson

For most of us, our day job income is our primary income source. No wonder we are so reluctant to leave our jobs in the first place. If only we had enough side income to make up for our day job income loss, we’d be out of there faster than our manager can say, “Need you to stay the weekend to finish the project by Monday!”

You’ll be surprised to find a whole host of other income generating assets at your disposal other than your day job income. You just have spend the time to look.

Ask yourself the following questions:

• What is something I’m good at that I can teach someone else to do?
• What is my annual interest income from savings and CDs?
• What are my income producing assets?
• What are my spouse’s income producing assets?
• Which of my hobbies are in the highest demand?
• How are my investments positioned in the current economy i.e. aggressive, defensive, diversified?
• Is there a common problem your skills to solve?
• Do I have extra time in the day to hatch a business?
• If my day job income went to zero, what income streams are left?

I’m confident every one of you has something you are good at that can be put to commercial use. More concerning is the accumulation of passive income producing assets. In an environment of low interest rates, generating income is proving to be quite difficult.

It is vital that you have a runway of at least 6 months worth of savings, excluding your severance package before you decide to take off. Your runway will help you make rational decisions that will lead to better long-term outcomes. If you have created a perpetual runway with recurring passive income, all the better. If not, there is no time like the present to start saving aggressively.

In “Achieving Financial Freedom One Income Slice At A Time,” I highlight three of my passive income sources totaling around $6,800 a month plus up to eight other sources of other income.

It was only after I sat down and redid my budget that I realized what kind of income stream I was actually earning. For the past decade, I had no idea how much I was actually earning outside of my former day job since all of the proceeds were either automatically reinvested into the funds or saved. The power of time really makes a big difference.

Summary Of My Various Income Sources:

Passive Income Sources

• CD Interest Income
• Dividend Income
• Rental Property Income

Active Income Sources

• Tennis Instructor Income
• Online Advertising Income
• Online or Offline Consulting Income
• Trading Portfolio Income

Potential Bonus Income Sources

• Private Equity Investment Payout
• Private Real Estate Investments
• Primary House Rental
• A Working Spouse

Details Of My Various Income Sources

The first step towards financial security is to save aggressively. I’ve been saving 50%-75% of my after tax income every year for the past 13 years. I try not to be a miser by spending on things I enjoy, e.g. vacations, food, a home, and tennis. Where I did “sacrifice” was avoiding higher-end new cars (all but one were secondhand and under $20K) and exotic vacations.

I’ve predominantly invested my savings in long-term CDs that return 5% all the way down to 1.7%. Currently, my risk free return is averaging about 3.75% a year. These aren’t sexy returns by any means, but I sleep well at night and have also never lost money in this portion of my wealth for the past 13 years. A small portion of my savings goes into my trading account.

Passive Income

• CD Interest Income: ~$2,800/month. CD interest income will keep coming automatically for another 4-5 years and I don’t have to do anything except renew come expiration. It’s a sad fact that interest income has come down so drastically over the past 10 years however, nothing operates in a vacuum. Low interest rates also means low borrowing rates, and everybody who is able to refinance their mortgage should. For example, I refinanced in April 2012 for 2.625% from 3.125% for a 5/1 ARM, which helps make up for my declining interest income.


• Dividend Income: ~$1,200/month. Dividend income is mercurial at best. I have not focused on dividend income because: 1) the underlying values of dividend stocks have fluctuated so much over the past five years, and 2) I never withdraw any of the proceeds because I don’t need the income right now. Instead, I’ve focused more on capital preservation and growth. To preserve cash, companies have been cutting their dividends aggressively since 2008. Only now in 2012 are we seeing signs of companies raising their dividends, e.g., Wal-Mart and American Express. To be clear, all of my dividend income comes from active investments. None of my dividend income comes from my 401K because it can’t be touched until age 59.5.


• Rental Property Income: ~$1,500-$3,500/month after expenses. The range in income property has to do with a vacation rental, which has huge upswings during the summer and winter months, and fades during the months of May, October, and November. My city rental income is fixed every year and is very reliable given its location and the fact that there is another internet boom in San Francisco.

Active Income

• Tennis Teacher: I can teach tennis for about $40/hour. In fact, I’ve often toyed with starting my own tennis instruction website and supplement my passive income with 80 hours of teaching a month ($3,200). I’ve also fantasized about being a tennis instructor at the Four Seasons Resort in Bora Bora, but that’s just a dream right now as I establish my business. Tennis lessons at private clubs are around $80-100 an hour, so in a way, I feel like I’m doing a public service.


• Trading Portfolio: I have a $50,000 trading portfolio that I like to play around with on Etrade. Investing is in my blood and I’ve been doing it for the past 15 years when Ameritrade and Charles Schwab first went online. In the beginning, I had some major successes and epic failures. Nowadays, I’m more conservative, because I can still just as easily lose money as I can make money. Keeping up with the markets helps keep your mind present with what’s going on in the world.


• Online: Online income could potentially become one of my largest income sources now that I am no longer employed. Up until now and for the foreseeable future all income has been either donated or retained by Kansei incorporated. Given the low overhead costs, online income is by far the most efficient of all income streams. Online income can be broken down into affiliate income, banner advertisement, contextual advertisement, and product promotions.


• Consulting: In the spring of 2012, I launched Financial Samurai Consulting Services (FSOS) to help bloggers “Get On The Map.” Over the past three years, I’ve spent 30+ hours a week amassing over 5,000 hours worth of online knowledge. Financial Samurai has grown into one of the most widely read blogs in the personal finance space with ~170,000 pageviews a month and growing. I leverage my platform and help other bloggers get noticed and build their readership, authority, links, and long-term viability. Furthermore, I offer financial, career, and MBA admissions consulting.

Potential Bonus Income Sources

• Sugar Mama: One of the secrets to early retirement is having a working spouse. The secret to a happier early retirement is to therefore find a hot, rich spouse! You can do jack doo doo and tell the world how you retired early, so long as your spouse continues to come home with the bacon, pay the rent, and provide for healthcare. I’ve yet to find my sugar mama, so in the meantime, I’ll be working like a mad man!


• Private Equity: I’ve written off my one and only private equity invest to zero because so rarely do these private equity companies exit with a profit. At times, I really wish I had that $75,000 invested back! However, the company has been around for six years and survived the financial crisis. Hence, perhaps there is a chance I will not only get my money back, but also get a solid rate of return down the road. I’m not holding my breath!


• Private Real Estate: During the financial vomiting period of 2008-2009, I invested $50,000 into a distressed global real estate fund that was buying property at 15-30 cents on the dollar. The fund was a private offering made to a certain group of accredited investors. It is up about 120% in three years and spits out a reasonable 4-6% dividend yield. Once the fund is liquidated in several years, I calculate a roughly 25% internal rate of return. Looking back, of course I wish I had invested more. It’s just hard to drop dimes when things are blowing up left and right. This is a potential bonus income source I’m counting on.


• The Federal Reserve: If the economy really starts growing gangbusters again, the Fed could start raising interest rates sometime after 2013. This would cause a commensurate jump in US treasury yields, which would lead to higher savings interest, CD interest, and dividend yield payout ratios. The problem with this scenario is that the price for goods and services will have also gone up, offsetting increased interest/dividend income. Those who save more than they consume will still be net winners. In a rising economic environment you want to own real assets.


• Book Writing: Everybody should know that writing a book is not a lucrative business. After you account for your time spent writing and the money used to hire an editor, agent, and publicist to help make your book a success, you aren’t left with much! There’s a reason why you see so many writers wait tables and live with multiple roommates in dingy apartments. Even so, I plan to write a series of books because I love to write. There are so many books about how to get a job, but there are no books about how to profitably quit a job. I plan to fill these anomalies with my writing.

Adding up all forms of income, potentially leads to $25,000 a month in non day job income streams of which, $6,800 is guaranteed. With $6,800 a month, I knew I wouldn’t be starving on the streets, even in an expensive city like San Francisco.

Given my conservative nature, I only calculated my base case scenario of $6,800 when I engineered my layoff to become an entrepreneur. I didn’t want to spend money I might not have, because that is the root of all bad personal finance decisions. As a result, I constructed a budget around $6,800/month with the escape hatch of moving to a cheaper location if money started feeling tight. It feels good knowing that $25,000 a month is a possibility if everything falls into place.

I bet you can find additional income sources that you either forgot, or had no idea you could generate if you spend the time to analyze. When your back is against the wall, you will find ways to generate more income. Calculate your upper and lower income limits of additional income sources and be conservative.

More On Starting A Business

After starting an online business, I cannot fathom ever starting a traditional bricks and mortar business with commensurate high overhead costs. A top of the line dedicated server costs $250 a month whereas my favorite cupcake store has to pay $7,000 a month in rent. Talk about a huge operating cost differential!

It is very common for online businesses to have 60%+ operating profit margins and 35%+ net profit margins. According to a January 2012 study of 5,891 companies of all industries conducted by Aswath Damodaron of NYU, the average operating margin and net profit margin is 17.24% and 8.32%, respectively.

If you are going to start a business, think online business first. The potential demand is practically unlimited with the growth of internet penetration. Over 2.1 billion people are using the internet, up from just 1.3 billion six years ago. With a world population of 7 billion, all you need is 1/10th of 1% to get 7 million customers! Whenever you think about starting a business, think about scale and operating leverage.

My Personal Finance Blog

I never started Financial Samurai, my personal blog to make money. It is but an unexpected consequence of consistent writing and connecting with the community that I’m able to support my life solely from my site three years later. The main purpose of starting Financial Samurai was to keep in touch with friends, family, and colleagues. My immediate family lives 3,000 miles away and my friends in Asia and Europe are even farther. Sure, there is Facebook and LinkedIn to keep in touch. However, these platforms aren’t your own and have a limited ability to showcase who you are.

After leaving your job, you should spend a whole day connecting with all your professional contacts through LinkedIn and decide whether or not to include your closest relationships on Facebook. So long as you have a repository for where your contacts are held, even if you go for a year without speaking to them, you’ll always be connected online. The better way is to reach out to your business contacts once a month however, to make sure these relationships don’t go stale.

I recommend everybody start a personal blog on Blogger or Wordpress with their name as the URL e.g. johndoe.blogspot.com. Once you’ve set up your free blog, make sure to include a feature where readers can subscribe via e-mail or RSS. Then send a blast e-mail to your old contact list highlighting your blog to keep in touch. Those who care about you will sign up, and those who don’t have time will at least know that they can go to your blog to see what you’re up to. Just remember to abide by the rules in your separation agreement before you publish anything so you don’t blow yourself up.

If you are out of sight, you are out of mind. Your updates should be professional and non offensive. Make sure you are aware that anybody can read your blog, unless you adjust the settings to keep all or some of it private, so always review your posts before hitting publish. Use your blog to share your interests, personality, and your strengths. And think of it as a running resume. The easier you make it for people to reach you, the higher your chances are to make an impression.

It All Starts With Saving

In order to get money to work for you, you’ve got to accumulate money first! Thanks to a rough first job on Wall Street, I swore to always save at least 50% of my after-tax income if I ever wanted a chance to be free. I didn’t want to be somebody’s whipping boy forever!

It was painful to save such a large percentage in an expensive city like New York. However, I knew that all good things come with sacrifice. Instead of spending my year-end bonus on fancy toys or luxurious vacations, I either invested the proceeds in the stock market or in conservative Certificate of Deposits. By the time my third year of work came around, I was saving 100% of every other paycheck and 100% of my year-end bonus which sometimes accounted for up to 50% of my total income.

When you pay yourself first, you protect yourself from going overboard with your spending habits. If you always deposit 20% of your after tax income into a savings account before doing anything else, even if you spend the rest of your income, you will still have saved 20%. The key is to make reaching your savings somewhat difficult. By investing in CDs, I realized there would be an early withdrawal penalty. As a result, I have never touched my savings in 13 years.

Go Broke To Win Big Strategy

The key is to protect yourself, from yourself, and create that renewed sense of urgency to forge ahead and stay disciplined in your finances. You may laugh at the concept of protecting yourself from yourself, but everyone of us has the means of blowing ourselves up financially every single day. We are bombarded with temptations and we have collectively taken down the economy with overspending in recent years.

My advice is to open three separate bank accounts with the following labels:

1) The Go Broke Bank. The first bank account is for working capital needs, namely where your paycheck goes, and where you pay all your bills. This bank is your operationally efficient bank which has the best tools for bill pay with the most branches for accessibility. Citibank is a good example, a ubiquitous bank with good online tools, but provides ridiculously low savings rates and horrible credit card rates. Bank #1 is where you are constantly “Going Broke.” Your paycheck must be managed so that it lasts to cover all your expenses. But before you pay all you expenses, you must pay yourself first by transferring your target savings automatically to a Bank #2.

2) The Freedom Bank. The second bank is strictly for long term savings via money markets and CDs. This bank may not have as big of a footprint, but it doesn’t matter because you don’t need to access money from this bank. That’s what bank #1 is for. Due to lower overhead, Bank #2 provides better long term savings rates. Online banks such as Ally Bank, and boutique banks such as First Republic provide fantastic rates, often 500-100bps higher than the competition. Do not tempt yourself by creating a checking account. You want money to easily come in (ever notice tellers don’t require IDs when depositing?), but be very difficult to go out.

3) The Lockdown Bank. The third and final bank is for your debt, namely mortgages, personal loans, and car loans (horror!). By loading the majority of your debt with one bank, you compartmentalize your debt which may relieve you of any mental stress related to this debt. It’s easier to tackle your debt at one bank and employ the “Snowball Method.” Furthermore, from the bank’s point of view, you may get better rates given you are such a good debtor customer. You’re buying debt in bulk from Costco if you will, and in normal times, they want your business and will give you discounts. During crisis times, it’s also good to have all your debt in one place because your bank doesn’t want you to cause a default cascade and will do their best to work with you.

If the amount you’re saving doesn’t hurt a little, then you aren’t saving enough. Gradually increase your savings percentage so that you’ve got to make adjustments to your life. You’ll discover that after a while, you’ll become used to living within your more streamlined budget and will revert to your normal happiness level.

Savings Rates

If you save only 10% of your after tax income a year, you have to work roughly five years to accumulate one year of retirement savings equaling 50% of after tax income! Hence, after 25 years of savings you will only have 5 years left before your savings go to zero!

If you save 50% of your after tax income a year, you only have to work one year to accumulate a year of retirement savings. If you keep saving at this rate for 15 years, you will logically accumulate 15 years of retirement savings.

If you save 70% of your after tax income a year for 20 years, you will have at least 28 years of savings to likely last for the rest of your life!

Example. Use a simple $100,000 after tax disposable income figure, and a $50,000 yearly living expense target for retirement to work the math yourself. Save half of $100,000 = $50,000 = one year of retirement. Save only 10% of $100,000 = $10,000. You need to save $10,000 for five years to accumulate your $50,000 annual living expense!

The base case assumption is that one can live off 50% of after-tax income, whatever your income is. Some can certainly live off less, but for how long, and at what sacrifice? You can save 90% of your after tax income by eating cereal all day and live in a trailer, but who wants that lifestyle for the next nine years? You’ve got to figure out your own healthy balance between saving and spending.

If possible, I recommend everybody max out their 401K AND save 20% or more of your after-tax income after 401K contribution. It will be hard to do in the first several years of your career, but once again, nothing good comes easy.

Key Points

• Generate a list of your current and potential income sources.
• If you want to start your own business, think about scale and costs.
• Consider starting your own blog to keep in touch with old colleagues and clients.
• Pay yourself first and utilize separate bank accounts.
• If the amount you’re saving doesn’t hurt a little, then you aren’t saving enough.
• Aim to max out your 401K and save 20% or more of your after-tax income
• Create a budget based on your lower end of income estimates.

The Role of Thankfulness

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Recently the Christian Financial Alliance asked several bloggers the following question:

“What is the role of ‘thankfulness’ in Biblical finance?”

Here was my response:

“I think thankfulness keeps us grounded. When we know our provision is from Someone else and not ourselves (Deut. 8:18), it keeps us humble and, in my opinion, more diligent and conservative in how we handle our finances. As a result we tend to do things that contribute to wealth creation: work harder, watch how we spend our money, avoid debt, and so forth.”

What do you think of my response?

How Much Did You Spend on the Holidays?

Now that the holidays are over and many of us are looking over our 2012 spending while planning for 2013, I thought I'd ask the following:

How much did you spend this year on holiday presents?

Personally, our budget was $700 for the year and we spent about $850. We always go a bit over, so we might as well recognize the fact and increase the budget! :)

That said, $150 over budget isn't going to break the bank for us, so it's all good.

Most of the money was spent on our direct family (me, my wife, and kids) and my parents (my wife's parents are deceased.) There were other amounts for friends, a handful of extended family members, the postman (and similar people), and people I volunteer with at various organizations, but that's about it.

How about you? How much did you spend this year on holiday presents?

Real Estate 101: Summary

The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series based on his experiences.  (To read the series from the beginning, start here.) The series is designed to give prospective investors the basic tools they need to succeed.

This is the last post in the series. I know it has been a lot of work for Apex and I know how much all of us have learned and benefitted from it. So please join me in thanking him for this great effort.

Throughout the Real Estate 101 Series my goal has been to introduce prospective and beginning investors to the world of real estate investing.  Specifically I have tried to answer some basic questions, dispel some myths and misconceptions, and give actionable advice that can be used to move towards becoming a successful investor.  As I finish the series I hope that the information provided here has mostly met that goal. 
 
This final column will act as a short summary of each of the previous columns with a link back to the original column for the full details.  Hopefully this summary column can become a quick reference tool and an overview that helps to pull all the elements together into a comprehensive story line.  Below is a summary of each column.
 
Column 1: Why You Should NOT Invest in Real Estate
 
Some people might mistakenly believe that anyone can invest in real estate.  It’s a much more involved investment than typical investments like stocks or bonds.  It’s more like running a business than it is an investment.  There are a number of aspects to investing in real estate that you need to be aware of before you decide to enter the business.  I listed 6 reasons why you may not want to invest in real estate.  They were: (1) It takes work, (2) It consumes time, (3) It requires management, (4) It demands capital, (5) It needs debt, and (6) It grows slowly.  Before you invest in real estate, make sure you know what you are signing up for.
 
Column 2: The Benefits of Investing in Real Estate
 
Since investing in real estate requires more work than investments like stocks, one would expect there to be some extra benefits.  Indeed there are a number of them and in this column I outlined 6 of them.  They were: (1) stable income stream, (2) partially passive income stream, (3) property appreciation in addition to income, (4) tax benefits, (5) significant cash flow, (6) returns are significantly compounded by leverage.  I spend considerable time in this column on benefits 5 & 6.  The first four benefits are valuable but the most important benefit is the significant cash flow and the most powerful benefit is the compounding of returns through the use of leverage.
 
Column 3: Where to Start
 
Real estate investing is not something you just decide to do.  It requires a little planning and there are a few hurdles that prevent many people from getting any farther than thinking about it.  In this column I outline 8 steps to getting started as a real estate investor.  They are: (1) Start by taking action, (2) Get a real estate agent who specializes in investment real estate, (3) Get access to capital, (4) Think about the type of property you want to invest in, (5) Start looking at many properties, (6) Determine if you need a management company, (7) Find out what reasonable rental rates are, (8) Buy something!  One of the key concepts I try to get across in this column is that you do not have to do this perfectly.  You will make some mistakes and that is OK.  There are no perfect deals.
 
Column 4: Running the Numbers
 
As with any investment it is important to make sure the numbers work.  The returns have to be worth the effort and the risks have to be manageable.  In this column I go over 4 ratios that I believe will give a good assessment of any real estate investment.  They are: (1) cap rate (2) cash on cash return (3) return on investment, and (4) cash flow margin.  I show how to easily calculate each of these ratios.  I also discuss some other metrics that are used to calculate these ratios but have assessment value in and of themselves.  Those metrics are: (1) cash flow (2) net income, and (3) net operating income.  Finally I discuss what I consider to be a minimum guideline for two important ratios.  Those are cash flow margin of at least 10% and ROI that is also 10% or perhaps very high single digits if the deal was all cash.
 
Column 5: Making an Offer
 
Many people think the key to successful real estate investing is getting a steal on the price of a property.  Obviously the less you pay for a property the better, but in general properties will sell for what their market price is.  You will be competing with other buyers for the same properties.  The market price of a property is simply what other buyers are willing to pay.  Market prices for some kinds of properties make for much more attractive investments than others.  The largest determinant of the price of a property is the type and quality of the property.  The most important thing when buying a property is to understand what the true market price for that property is and to know if that property is a good investment at that price. 
 
Column 6: Finding Your Niche
 
There are many different ways to invest in real estate.  You cannot be successful at all of them.  As you start investing it will be a learning experience.  The most important thing you can do throughout this process is listen to yourself and determine which type of investing fits best with who you are.  You will be most successful when you are able to focus on the niche that best fits with your skills and your personality.  It may take some time and it’s ok if there are some missteps along the way.  Finding your niche will be one of the most important things you do as a real estate investor.
 
Column 7: Getting It Rented
 
Tenants pay your bills.  If you don’t have tenants you have losses.  That’s why vacancy should be the number one thing a landlord tries to minimize.  Too many landlords are complacent about getting a property rented when it is vacant.  This is a serious financial loss to the business.  A vacant property should be aggressively marketed with the intent to rent it as soon as possible.  One common mistake is holding to a rent that is higher than the market is willing to pay.  It is far better to lower the rent and get it rented than it is to hold out for higher rent leading to months of vacancy.  Vacancy will happen, but a diligent landlord will do everything they can to keep their vacancy rates as low as possible.
 
Column 8: Finding Good Tenants
 
While a vacant unit is a problem, a bad tenant is a far worse problem.  There are many good tenants to be found but it is your responsibility as a landlord to find them.  To do this you need to advertise your property appropriately to attract good tenants.  More importantly you need to do careful screening on all applicants to find good tenants.  This includes background checks, credit checks and most importantly previous rental history and income verification.  Good tenants tend to have a history of paying their rent and making sufficient income to do so.  If you are not careful about whom you rent to, your tenant quality will likely suffer.
 
Column 9: Keeping Good Tenants
 
Once you find a good tenant it’s far easier to keep them than it is to find another one.  Turnover costs you time, effort, and money.  There are a few basic things that will help you keep good tenants.  It starts with treating your tenants fairly and with respect.  You want to keep your properties in good condition and respond to your tenants needs.  Do not gouge them on rent or fees, and if possible try to use leases that have longer terms to keep both you and them committed to the property on a longer term basis.
 
Column 10: Managing the Property
 
One of the biggest concerns for prospective landlords is how to handle the daily management operations of a property.  Areas of concern often center around issues of how to deal with tenants that are not paying rent, tenants that are violating the lease, and how to deal with the maintenance issues of the property.  Most money issues with tenants can be resolve with a few simple steps.  Eviction is rarely required if you have screened your tenants well but even if required there are services that can help you complete it.  Repairs can also be handled by management services for anything beyond your comfort level.  You can manage the property to whatever level you feel comfortable and simply hire others to manage what you do not.
 
Column 11: The Lease
 
Your lease is a contract between you and your tenant.  Your ability to set the rules and retain control over what happens in your property depends on the quality of your lease.  Your lease should not be something you just throw together or download from a generic lease site on the Internet.  It is very important that it follow local statutes so that it is legal in your state.  It also needs to state very clearly what will happen when terms are violated and under what terms it can be terminated.  In addition you want to use the lease to communicate any rules or expectations with your tenants.  A good lease makes your job easier and resolves conflicts before they happen.
 
Column 12: Financing
 
Real Estate is a capital intensive business.  You will need significant capital if you intend to get very many properties.  You will need both your money and other people’s money.  You likely cannot get very far with just your money but you also cannot get other people’s money if you don’t have any of your own.  There are various means of acquiring financings from conventional financing, to home equity loans, to private and commercial financing.  It is important to always be exploring your financing options because the more debt you have financed the harder it becomes to get more.
 
Column 13: Taxes
 
Real estate investing provides certain tax benefits that are somewhat unique to real estate.  However some people put more emphasis on tax benefits than they deserve.  The major benefits include depreciation of the non-land value of a property, 1031 tax exchanges to transfer taxable gains to different real estate entities without incurring taxes, and deduction of all expenses associated with the business.  These benefits are actually common to a number of businesses but what makes real estate unique is that you are able to take a depreciation allowance on an asset that actually appreciates in value.  Because of that there are special recapture rules that attempt to tax the depreciated value at a future sale date.  It is important to understand how these tax benefits work.  They have significant benefits in the near term but they also come with future drawbacks.  Real estate investing is not about tax benefits, it’s about running a profitable business.  Tax benefits alone are never enough to justify an investment.
 
Conclusion:
 
Real estate investing like any business is a journey and a process.  It takes time to get things started and even more time to begin to get comfortable with your business.  With enough time and experience you can settle into a process that works well for you and which you can be successful at.  I hope this series has been helpful as a starters guide for some and perhaps as a refresher for others.  This series, however, won’t make you a good real estate investor.  Only you can do that.

Carnivals for the Week of Jan 7 and 14

Here are some of the carnivals Free Money Finance was in this week:

• Festival of Frugality
• Carnival of Wealth Management
• Nerdy Finance Carnival
• Carnival of Personal Finance
• Festival of Frugality

Enjoy!

P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my weekly roundup.

Bank or Credit Union?

MSN Money asks if a credit union is a better alternative to a bank. They don't really give an opinion one way or the other, but simply talk about the (often unknown) advantages of a credit union.

I have a relationship with both a bank (Chase) and a credit union and they both have their plusses and minuses. Here's how I add them up:

• The credit union gives me a high interest checking account where I can earn 3% back on $15k each month. I have to have direct deposit, check the account four times a month via the web, and use their debit card 10 times a month to get it, but that's no big deal.


• The credit union doesn’t have an easy way for me to transfer money into and out of my accounts there. Chase, on the other hand, easily hooks to Vanguard and other accounts I have, making it very easy to move money from one place to another.


• Chase has been very, very friendly. When I go in I have several people say hello and I've struck up a chatting friendship with a couple of them (who happen to be interested in rental real estate). They've also waived a $16  cashier's check fee twice (once they offered and the second time I asked and they agreed). They also don't charge me for my LLC account based on my "overall banking relationship" (i.e. how much money I have deposited) with them. The credit union wanted to charge me $12 a month for an LLC checking account even if I had $1 million deposited with them. (I don't have that much of course, but they wouldn't waive the fee no matter the amount -- I asked.)

Given the above, I keep most of my money at Chase and enough at the credit union to get the 3% interest on the $15k.

BTW, some of you may ask about ATM usage. I haven't used an ATM in YEARS. The reason: my son and I get paid in cash for soccer refereeing. Since we use very little cash (we charge as much as possible for the credit card rewards), we get all the cash we need in a year through the soccer payments.

How about you? Do you prefer a credit union or a bank? Why do you like the one that you do?

Reader Profile: OR

The following is the latest post in my "Reader Profiles" series. Each post in this series details the financial situation and challenges of an FMF reader. The purpose of this series is to help us all identify with people like us (in similar situations -- not all will be, of course, but eventually I'm sure you will find someone like you here), get to know the frequent commenters on the site, and hear some financial wisdom/challenges from people other than me.

If you're interested in contributing to this series, then drop me an email. The series seems to be very popular with readers and I need a steady stream of new ones to keep it going.

Next in the series is FMF reader OR. He answered my questions (in red below) as follows:

Please tell us a bit about yourself.

I’m a 27-year-old man, and have been happily married for eight years.   My wife and I relocated from upstate NY to central NJ this past January when the company I work for decided I should move.  

Describe your financial situation (who works in your family, how your income is (general), how your expenses are, etc.).

We have no children, and both work full time.  After our annual raises take effect in January, our joint income will be just over 90k.  We both contribute to our 401(k) accounts up to our companies’ match limits. I kick in a bit more to reach an even 10%, plus 2% to purchase my company’s stock at a sweet 15% discount.  As that money vests, I will keep an eye on its total value and dump as necessary to preserve diversification in my portfolio.  My company also has a pension “kicker” of 2.5% that they throw in because they’re nice people.

Witness the power of company matching / pension / discounted stock:  that 12% I put in is instantly worth almost 20%...before any capital gains! BOOYAH!

We also have rollover IRA’s from our previous employment worth a total of about $16k. Both of those accounts and our 401(k)’s are invested in low-expense mutual/index funds.

Short and medium-term we don’t look quite so good.  We live in an expensive area. To illustrate: we're currently moving again because our landlord tried to raise the rent to $1,451…for a one bedroom.   Our apartment is now listed for prospective tenants on our landlord’s site…at $1,675.  Wow. We managed to find a crappier place for $1,242, which is still highway robbery for what it is.   

We have massive student loan debt – about $120K between us.  We both changed schools and majors too much. 

When the company we both worked for went out of business in 2010, we blew through our emergency fund in two months and then had to start charging everything to our credit card.  Consequently, by the time we both found work again, we had close to $10k in revolving debt.  The only silver lining there is that I have a wonderful card from before the recession; it’s a Citi MasterCard and it’s FIXED at 9.99% APR.  At present, we still have about $6k on that card and are trying to pay it down by throwing $1,000/month at it.

Our savings account just reached $2,000 recently for the first time since 2010. 

What are the current financial issues you're facing (saving, paying off debt, etc.)?
 
1. That thrice-accursed card.  With the crazy expenses around here and our student loan payments of nearly $900/month (and that’s with my $300 consolidation loan on deferment…), we’re still charging large unexpected expenses to that card, even as we fight to pay it down.  

2. That $1,200/month in student loan debt (once my consolidation loan comes off deferment in 2015) is nasty.

3. We are not saving as fast as we should, because we’re focusing on paying down the card.  Our savings plan at this point is just putting any windfalls (random checks, leftover weekly money, tax refund, etc) in there.
 
What are your plans for the future (retire early; build your career, etc.)?

I am currently in a professional MBA program at Rutgers which ends in May of 2014 (my company is paying for half of it).  The additional Federal loans I take on for my half will amount to much less than I expect to get out of the degree.

At that time, we will be moving again – hopefully somewhere with better living expenses and fewer people.   Not only are we fed up with the population density here in New Jersey; my job will certainly be moving us anyway for the next stage of my training.

We would love to save up and buy a house, and have a kid, but we’re stretched financially so it’s going to be a struggle to come up with the 20% down payment.  I am hesitant to put less than 20% down on my primary residence. If I ever dabble in real estate, I’ll look into different leverage options for those properties, but I really want to stay right-side-up in any non-income-generating property. 

It’s always been a dream of mine to retire early, but I fear that’s just pie in the sky.  Breaking into real estate investing (rental properties) seems to be the best way to make that happen, but unless I experience a dramatic salary jump from the MBA that isn’t likely. 

What's your best piece(s) of financial advice and/or your general philosophy on personal finances?

Here are some pointers that would have saved me some bucks had I known them earlier:

1. Don’t have all your income coming from the same company.  If it goes bust, you’ll be screwed (diversification is as important to income as it is to investments).

2. Reliable transportation can be had for less than $10,000 if you negotiate aggressively for a two to five year old domestic certified used car.  I could easily write a whole post on financial strategies for buying a car, since I used to sell them for a living; however, I'll just say "trust me" for now. 

3. The golden rule: minimize your fixed expenses. 

I’ll leave you with a quote I heard on an otherwise awful radio program:  “Gold is the currency of kings. Silver is the currency of gentlemen. Barter is the currency of peasants. Debt is the currency of slaves.”   Obviously, I didn’t follow that advice (and still don’t…MBA…) but that doesn’t make it less true.

Reasons Why You Should Engineer Your Layoff

The following is an excerpt from How to Engineer Your Layoff. If you're interested in quitting your job and profiting from it, this book is for you! Today's post gives several reasons you should consider quitting your job.

“Opportunity is missed by most people because it is dressed in overalls and looks like work.” – Thomas Edison

If the previous chapter scared you out of engineering your layoff, let me give you some reasons why engineering your layoff is a brilliant plan.

• You’re Financially Secure. If you’ve saved up at least six months of living expenses, have a regular stream of side income to hold you over, and a good business idea, then you’re probably ready to make the jump. Of course it doesn’t hurt if you’ve got rich parents. By saving 50-75% of my after tax income for 13 years, I was able to save 15-18 years worth of living expenses if I did nothing to change my living standard. If I sold my primary residence and moved back to Hawaii, I could probably live off my savings and investments for the rest of my life and do nothing.


• You Have A Tested Business Model. You’ve introduced your business model to the world and have shown a profit after 12 consecutive months. You’ve carefully surveyed the competition and strongly believe your business has staying power. I “tested” my business model for three years and didn’t take the leap until it started generating at least $100,000 in revenue and $75,000 in operating profits across all my income streams. I figured if I could dedicate 100% of my time on my side businesses instead of just 20% of my time, because of my day job, I could increase profits. So far, so good as I’ve introduced a consulting service and financial products such as this book.


• You’ve Got No Dependents. If your financial safety net is in order and you have no dependents, now is the best time to take some risks--before the little ones arrive. I’ve interview about a hundred parents who’ve all said either, 1) Take risks before you have kids because once they come your mindset changes completely, or 2) I wish I took more risks before parenthood. I don’t have kids at the moment, and therefore don’t have anybody depending on me to survive. I would like to have kids someday soon, but only if I know with absolute certainty that I can take care of them. With over 140 million orphans in the world today, it would be irresponsible for me not to have the time and financial means to take care of them before going forward. Don’t have kids if you can’t take care of yourself dear readers!


• You Believe You Can Always Come Back. If you are able to keep in touch with your colleagues, competitors, and clients, you should be able to go back to the industry you left within two years of departure. Every year beyond two years gets harder given managers will have a choice of selecting those with the most up-to-date skills. One of the best ways to keep in touch is through LinkedIn and Facebook. Connect with everybody you can and send them regular updates once a quarter. An even better way to keep touch is to start your own personal blog where your industry friends can subscribe. It’s now easier than ever to stay in touch, but you still have to make the effort. At age 35, I strongly believe that if I want to go back to the financial services industry at 37, I can.


• You Don’t Want To Have Any Regrets. Time whizzed by for me from ages 21 to 35, and I know that time will continue to accelerate. In a moving post by a palliative nurse who took care of the dying in their last moments, I learned that the number one regret her patients gave was the following: "I wish I'd had the courage to live a life true to myself, not the life others expected of me.” To live a life true to oneself means different things to different people. For many, a truer life doesn’t mean working harder at a job just for the paycheck. If you happen to be so fortunate as to live in a developed country such as the United States, Canada, Australia, and many countries in Europe, life is a comparative cakewalk to the lives of those in India, Somalia, or Ethiopia. In the developed world, it doesn’t take much to survive and be happy. Most of our fears are blown out of proportion. Look at my example of having 15-18 years worth of living expenses saved and a rent-free home in Hawaii, yet I still have fears. But I am gradually overcoming my fears through doing.


• The Ability To Double Dip or Triple Dip Your Income. If you engineer your layoff, you may have the ability to double dip your income by finding a job soon after your negotiated severance runs out as long as you don’t violate the terms of your gardening leave. For example, let’s say you negotiate a six month severance package. If you are focused on finding another job, there is a good chance you will be able to find one by month three, thereby double dipping your income for three months! Meanwhile, if you were able to negotiate deferred compensation, a common form of compensation for higher ranking employees to prevent them from leaving, you can triple dip your income by collecting severance, collecting a new day job income, and collecting your unemployment income! That’s right. If your separation package includes receiving your deferred income over a number of years, you are still allowed to collect unemployment benefits because 1) The deferred income is part of your severance, and 2) You are unemployed!

Harness Your Fears

Everything always seems scarier than it really is. Remember when you turned 20, 30, 40, or 50? I had a serious case of depression for a few days before my 30th birthday. I couldn’t believe I would no longer frolic in my 20s! I feared I would get gray hair, no longer be able to move as nimbly on the tennis courts, and be perceived as an old man to friends and family. When my birthday came, it wasn’t so bad at all. My mind was just playing tricks on me. In fact, I’ve lost 10 pounds and am the same weight I was in high school.

For all the reasons I stated above, I decided to take a leap of faith and go out on my own. My biggest fear was looking back and regretting not making the jump.

Regret is one of the worst feelings and learning how to harness your fears will help you avoid disappointments in life.

Here are some of my regrets and optimisms:

• “Why didn’t I ask that girl out?” – Thank goodness I didn’t ask her out or else I might never have met the love of my life.


• “Why didn’t I just study harder and get better grades and SAT scores so I could go to a better school?” - I’m proud of my alma mater and happy I didn’t pay a small fortune to attend.


• “Why didn’t I invest all my money in Google during its IPO?” – At least I invested in my career.


• “Why didn’t I start Financial Samurai in 2003 when my father first suggested the idea?” – Better late than never.


• “Why didn’t I negotiate my separation package and dedicate all my effort to my online business in my 30s?” – I’m going for it now!

There are always ways to make money. However, there won’t always be time when we’ll have the energy to execute on our dreams. I know that if things don’t work out for me as an entrepreneur, at the very worst, I can sell my house in San Francisco and move to Hawaii and live off my passive income.

There are plenty of legitimate and oftentimes lucrative reasons why you should engineer your own layoff. One of the greatest misconceptions is that working for someone is more stable. Don’t get lulled into complacency!

The biggest regrets will be the things you don’t do rather than the things you do.

Key Points

Reasons why you should engineer your layoff

• You’re financially secure.
• You have a tested business model.
• You don’t have any dependents.
• You believe you can always go back.
• You don’t want to have any regrets.
• The ability to double dip or triple dip your income.

Reasons Why You Should Not Engineer Your Own Layoff

The following is an excerpt from How to Engineer Your Layoff. If you're interested in quitting your job and profiting from it, this book is for you! Today's post gives reasons you should NOT quit your job. Tomorrow's post will tell why you should.

“If you fail to prepare, you're prepared to fail.” – Mark Spitz

Before getting too excited about jumping off the deep end, it’s always good to play devil’s advocate and study what’s in the water below. There might be a large boulder just underneath the water’s surface, ready to break your bones upon landing. Patience is a virtue under such circumstances as you wait for the tide to recede.

It took me two years (from 2010) to muster up the courage to jump off my cliff because of the following reasons:

• Didn’t Hate My Job. What other job in the world allows you to talk to bright people everyday about what’s going on in the world? Not a day went by that something interesting didn’t happen. It might be a large IPO like Facebook, or a Greece recall election, or an earthquake in a manufacturing hub in China. Something always affects something else. I still enjoyed my job when I left. I just didn’t love my job like I once did when I first started and needed to take a break. Interests always fade after a while and I was fortunate enough to stay motivated for my 13 years.


• Not Enough Viable Income. Making several thousand a month in passive/side income is nice, but it was still way less than what I was making at my day job. I needed time to aggressively build my various income streams up to at least 30% of my day job income before I could feel comfortable leaving. I used 30% as a target because for the past three years I’ve been saving 70% of my after-tax income. Replicating 30% of my day job income would allow me to at least maintain my current living standards.


• Responsibility. I felt it was my duty to work for as long and as hard as possible to maximize my savings, because goodness knows not everybody gets the chance to make six figures. To quit so soon would be to take my opportunity for granted, which is something I never want to do.


• Tremendous Energy. When I first started my career in New York City, I regularly worked 14 hour days and 80 hour weeks. Even after taking on more responsibility, during my last four years of work, I “only” worked 50 hour weeks, with perhaps 10 of those hours spent entertaining clients, e.g., tennis, golf, meals, concerts, sporting events. As a result, spending an extra 4-5 hours a day after work writing blog posts was a piece of cake. There was no need to quit my job in order to dedicate more hours to my hobby. Only as time went on did I discover I was turning down things I would have preferred doing.


• Unforeseen Expenses. There will always be unforeseen expenses that arise when least expected. My car died the other week and cost $400 to repair due to a faulty alternator. My water heater exploded last year, taking a nice $1,200 bite out of my savings. And what if I have children? College tuition now costs $15,000-$40,000 a year depending on whether one attends a public or private institution. It’s scary to forecast what tuition will be in 20 years and it’s better to have more money saved than less.

Many people have asked me whether or not they should quit their jobs. Most of the time, I tell them “no” because their plan for what to do next is so poorly laid out. When I ask them to go through their finances, they are embarrassed. When I ask them if they’ve created a budget for the decline in income, they have not. When I ask them what they plan to do next, they aren’t even sure! Don’t wake up one day and just decide to quit your job. You need a solid plan first!

Reasons Why You Shouldn’t Quit Your Job

• You think being an entrepreneur is easy.
• You have no savings.
• You have no experience.
• You think getting rich is easy.
• You still live in your mom’s basement.
• You don’t want to die alone.
• You don’t understand the significance of taxes.

You Think Being An Entrepreneur Is Easy

There’s probably no harder thing to do than be a successful entrepreneur. Sure, anybody can say he is an entrepreneur, but real entrepreneurs are successful. If after three years you aren’t making at least the per capita income of your state, then you are not a real entrepreneur. You are just a hobbyist.

Being an entrepreneur means not only coming up with an idea, it means being the secretary, accountant, marketer, salesman, HR manager, and engineer. Nobody is good at everything, which means that you will surely have weaknesses in some or many parts of your business. If you don’t have the discipline to focus on your work for hours at a time, then you will not succeed. If you do not have the patience to see things through from start to finish, you will not succeed. If you are used to only working 40 hours a week at your day job and think that’s hard, then I suggest you keep on working at your day job.

There are too many fantasies floating around about the benefits of being your own boss. They are all true, but only for those who have made it! The good thing about being your own boss is you will care less about all the hours you work, because you are working solely for yourself. Just don’t kid yourself into thinking entrepreneurship is easy, because it is not. For three consecutive days, I worked from 7:30 am to 1 am nonstop without food or water because I had so much to do.

The lack of sustenance did not phase me until I tried to get up and couldn’t. I was exhausted and needed a break.

You Have No Savings

If you have no savings, you better have some financial backing from family and friends if you are planning to leave your day job. If you have neither, then you are shit out of luck and need to start saving like a mad person before taking the leap of faith.

I suggest savings of at least one year of annual operating expenses before you make your move. A year buffer should give you enough time to figure out whether your idea will be a success or a complete failure. You might point to the fabulous success stories of people like Bill Gates and Mark Zuckerberg who started Microsoft and Facebook respectively without any savings, but you’d be wrong. Mark Zuckerberg’s father was a dentist, and his mother was a psychiatrist. Bill Gates’ father, William H. Gates, Senior was a prominent lawyer, while Bill’s mother served on the board of First Interstate BancSystem. Yes, Mark and Bill both came from wealthy families who could support their sons for the rest of their lives!

Sure, there are many examples of people who somehow strike it rich without any safety net, but guess what? There are even more who fail and end up with nothing. You can say you don’t care about your safety net, but if you fail, you will have nothing. If rich people fail, they get to go home to filet mignon and caviar and try again!

You Have No Experience

One of the most perplexing things I see time and time again are inexperienced people telling others what to do. It’s as if every one of these quacks stayed at The Holiday Inn Express one evening and woke up the next day as gurus!

Can you imagine getting advice on how to buy property from someone who has been a renter all his life? Or getting financial advice on how to be a millionaire from someone who has a negative net worth? This kind of crap happens all the time online, and I implore you not to join the ranks of fakers.

There’s a growing saying that in order to become an expert you need 10,000 hours of practice. If you practice 40 hours a week, you can become an expert in five years. As such, try and put in at least several years of time in the workforce before going out on your own. During this time, you’ll build your savings, learn how to play nice with others, and most of all, mature as a person. Nobody is going to give you any respect as a 25-year-old CEO with no experience unless you are incredibly intelligent and have a deep Rolodex thanks to mommy and daddy.

Spending five years in the work force, ideally with the same employer, also makes you a prime candidate for engineering your own layoff.

The things you think you know, but don’t actually know are dangerous. If you jump too soon, you’ll end up leading a life of delusion, wondering why things don’t work the way they are supposed to. With five or more years of hands-on work experience, you’ll gain perspective and begin to see things differently. And you’ll also realize how little you really knew when you graduated from college.

You Think Getting Rich Is Easy

I know a woman who kept telling me, “I’m going to build a $100 million dollar company.” She was 24 years old and just started a business connecting virtual assistants with busy people who needed to get things done on the cheap. When I asked her how she planned to get to the $100 million valuation mark, she shrugged and said with great determination, “I will find a way.” As a financial guy, I cringed, but I enjoyed her company and didn’t want to spoil her mood.

In order to sell her company for $100 million dollars, she’d need at least $10 million a year in net profits and another company willing to pay a 10X multiple. During this time frame, she would also need to survive amongst well-funded competitors and vicious economic down cycles. Could she make it? Absolutely. But chances are, she will fall far short of her goal. Good looks alone aren’t enough to create an empire.

We’ve kept in touch for years and I’m proud to say that she has built her business into a profitable company. She told me recently she’s “no longer seeking to sell for $100 million.” Instead, she’s looking to create as much value as possible, presumably, because she’s run the numbers, and realized $100 million is not as easy as it once seemed.

It took me six years to amass my first million dollars. I worked 70-80 hour weeks and saved 50-75% of my after tax income while taking some big risks in stocks and the real estate market. I could have very easily lost several hundred thousand dollars if my timing was off. In fact, I did lose several hundred thousand dollars in the 2008-2010 downturn! But by this time, I had accumulated another million dollars in net worth to weather the onslaught.

Getting rich is not easy. It takes congruent thinking, discipline, and persistence. I believe everybody will become rich if they have the right personal finance fundamentals and are given enough time. It’s delusional people who think getting rich is easy who are most unlikely to ever get rich themselves.

You Still Live In Your Mom’s Basement

It’s become cliché to start a company in your garage or mom’s basement. Unfortunately, these Hewlett Packard success stories are few and far between. If you still live at home with mom and dad and are over the age of 21, you need to shape up and get the hell out!

Your parents didn’t raise you for 21 years to be a deadbeat. At 21, you’re old enough to drive, drink, smoke, copulate, and run for Congress. Give your parents a break and get out of their hair, unless they really, really want you to stay with them.

Sure, you can save money for a down payment by staying at home for a couple of years after college. However, just make sure the two years don’t become five years, or goodness forbid 10 years. If you can’t make it on your own, how on earth can you run a successful business on your own?

At some point, you’ve got to take a leap of faith and do your own laundry. Cooking your mom’s meatloaf isn’t that hard. Your meatloaf might taste like urine soaked rubber tires, but at least you’ve learned the recipe and are eating your own poison.

Besides, if you want a love life, you’re never going to get any if you have to tell the girl you are wooing that you’ve got to sneak her in through the window. If you are a girl who lives at home with her parents, your challenge is less daunting because guys don’t really care, unless you have an overprotective father who has you on 24 hour surveillance.

You Don’t Want To Die Alone

There’s nothing worse than being alone. It doesn’t matter how much money you have. If you don’t have someone to share your wealth with, you might as well be poor. In the financial services industry, I see many women who are at the top of their game. They are high-powered executives making hundreds of thousands, if not millions of dollars a year. Unfortunately, a good majority of them have nobody to go home to. I’m not sure whether it’s because they’ve dedicated so much time to their careers, or men are just wussies for not wanting to be with high powered women. Whichever the case may be, deep down, I suspect these women would give up everything if they had someone to share their lives with.

If you quit your job with no financial safety net and an untested model, you will likely end up alone. After all, if there’s a choice between a good looking, funny, rich guy and a good looking, funny, but poor guy, the rich guy will always win. It’s all about survival of the species!

It is likely that during your time of occupational transition, you will feel nervous and insecure. Being nervous and insecure is not conducive to finding a soulmate. With your back against the wall, you might lock yourself in a room and go into overdrive, working on your business or finding a new job. Again, your laserlike focus will also cut into your chances of meeting someone special.

To overcome this potential relationship downfall, you must plan and plan some more. Better yet, you might consider finding your mate and develop a strong relationship before you leave your job because you will need the moral support.

You Don’t Understand Taxes

If you go the entrepreneur route, you will start to see exactly how much you are paying in taxes thanks to the quarterly taxation payment system. Unlike paying taxes with your steady W2 job, an entrepreneur must cut four separate estimated tax checks to the government a year. Because each tax bill is for three months worth of estimated taxes, the bill is large. The act of sending such a large payment to Big Brother becomes excruciatingly painful.

You know the sickening feeling you get when you do your taxes once a year as a W2 employee? Just multiply that feeling by four times. Count on taxes taking up around 30% of your revenue. If you need $5,000 a month to survive, you must make around $7,150 in revenue! Whatever your monthly net income requirement is, multiply it by 1.5X to get your operating income hurdle.

Not all is bad when running a business. You get to deduct a long list of things that go into making your business work. These are your operating expenses, such as your computer, monthly phone bill, and so forth. Each operating expense lowers your operating income, which therefore lowers your tax bill. Just be careful not to go overboard and use your business as your personal party vehicle.

A list of small business taxes:

• Franchise Tax
• Self-Employment Tax
• Payroll Tax
• Property Tax
• Sales Tax
• Business Income Tax
• Excise Tax
• Gross Receipts Tax

Looking at the list of taxes makes you wonder whether the government wants you to succeed at all. Any person who is in favor of tax increases should try and start his/her own business. Only then, when he is cutting checks for so many different taxes will he realize how much red tape and pain there is in running a company and paying taxes.

Take the time to learn basic accounting definitions and statements. The US SEC even has a beginner’s guide to financial statements. It’s important to compare your day job gross income to your own business’s operating income. Operating income is income after cost of goods sold, and operating expenses are everything that goes into running your business except for taxes. Do not make the mistake of comparing your day job’s gross income to your business’s revenue. Unless you have 100% net profit margins, you will be in for the financial shock of your life.

Recap Key Points

You shouldn’t give up your day job if:

• You think being an entrepreneur is easy.
• You have no savings.
• You have no experience.
• You have no plans for what to do next.
• You think getting rich is easy.
• You live in your mom’s basement.
• You are still under a mountain of debt.
• You don’t want to die alone.
• You underestimate the cost of taxes and don’t understand accounting.

Fighting the Love of Money

For those of you new to Free Money Finance, I post on The Bible and Money every Sunday. Here's why.

Recently the Christian Financial Alliance asked several bloggers the following question:

“How should a Christian fight against ‘the love of money’ so heavily condemned in scripture?”

The verse they are referring to is 1 Timothy 6:10 which says (NIV):

For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs.

Here was my response:

“I think that giving is the greatest weapon against the love of money. Giving takes the focus off of “me” and “more for me” and puts it on others — the exact opposite of what the love of money does to a person’s life.”

Many people will mis-quote the verse above and say that "money is the root of all evil." But the actual teaching says that it's the "love of money" that's the problem. And IMO, giving is the answer to combat this evil.

What do you think of my response?

Top 10 Free Money Finance Guest Posts of 2012

As regular readers know, I feature a lot of guest posts throughout a year (though not as many this year as in past years). I like to get a variety of perspectives on money issues, hear from others in different life stages than I'm in, and let readers get money thoughts from someone other than me. Each year I highlight what I consider to be the top 10 guest posts from the previous year, and here they are for 2012:

#10 - Why You Don’t Need Long Term Care Insurance - We debated this back and forth all year. Does a person need LTC insurance or not? This CFP says "no."

#9 - How to Save Money While Getting Fit - Two things I love: saving money and keeping fit!

#8 - Fund a Teenager's Million-Dollar Retirement - We have Roth IRAs for our kids that should be worth about $20k or so by the time they leave college.

#7 - Real-Life Stories of How People are Making Side Incomes - Who doesn't like to hear ways of making extra money from people who are actually doing it?

#6 - Some Side Hustles to Ramp up Your Retirement Savings - More money making ideas!

#5 - Squirrel Away Money While You Can - A good, basic "save as much as you can as soon as you can" post.

#4 - What the Heck is Early Semi Retirement? - I love the concept of early semi-retirement and this post, written by someone who's done it, gives details on it.

#3 - Active Investing Success is Rare - This isn't a guest post, but I included it since the majority of the content comes from someone else. And how could I exclude a post featuring Old Limey's wisdom from my list? :)

#2 - FMF Reader Profiles - Not a true guest post, but that's essentially what these articles are -- a guest post written by a reader answering questions. The series has been so popular that I had to include it in this list.

#1 - Real Estate 101 - The winner hands down. This series by Apex has been awesome! I know I have appreciated the time and effort he put into it and I am sure FMF readers have as well.

Enjoy!

Top 15 Free Money Finance Posts of 2012

Each year I list what I think were my best posts from the previous year (posts written by me -- not guest posts or excerpts). Here's this year's summary of what I consider the "best" of FMF out of the 700+ posts here last year:

#15 - A Simple Way to Calculate Your Retirement Number - Figuring out how much to save for retirement is a tricky and complicated process. This post provides a simple way to get close to your retirement number without having to spend three days of calculations in the effort.

#14 - Combining Multiple Savings Offers to Maximize Savings - The theme of saving money by stacking various discounts on top of each other was clear not only in this post but also in Stacking Multiple Discounts to Rack Up Big Savings, Real-Life Examples of How I Score at Outlet Malls, and How to Get Great Deals on Outlet Purchases. I hope to do more of this type of saving in the years to come. :)

#13 - Income to Wealth to Income - Money flows in different ways during different times in our lives, and this post highlights the changes from one period to the next.

#12 - FMF Cruise Review - We took our first cruise last January and this multi-part series detailed what we did and how much it cost. It also has some great pictures of our time in the sun. I also like Our Trip to DC (And a Few Ways to Save) for the same reasons.

#11 - Small Choices Can Lead to Big Gains - This has been a big theme here at FMF from day 1 -- that little things matter, so pay attention to them.

#10 - Spend Less than You Earn - Details the fact that there are two sides to this coin -- spending less and earning more. It goes well with my post titled Making More Versus Spending Less.

#9 - Moderate and Selective Frugality - We can't save all the time, right? We have to have some fun things to spend money on or what is life worth? That's why I practice what I call moderate and selective frugality.

#8 - The Two Ways To Track Financial Success - How much cash you free up and how you turn it into wealth are two key measures that tell you how you are doing financially.

#7 - My Road to Becoming a Landlord - The biggest change in my finances this year is that I've entered the rental real estate market. This post was my announcement of these efforts.

#6 - The 52 Best Money Saving Tips - I have thousands of money saving tips hare at FMF, but too many choices are too overwhelming for people. That's why I write this series -- to focus on the handful of ideas that can save the most people the most money.

#5 - What Are You Doing to Make Millions More? - A key thought for 2012: that your career is your biggest financial asset and what you do to grow it can have HUGE implications over your lifetime. This post goes well with Make Millions More: The Difference 1% Can Make and The Power of 1% All the Way Around.

#4 - Becoming Wealthy May Be Simple, But It’s Not Easy - There's a difference between "simple" and "easy" and it's the reason some can accumulate wealth and others can't.

#3 - The Safest Retirement - What I hope to achieve -- a retirement where I don't have to spend any principal from my savings, I can just live off the earnings my assets generate.

#2 - 80-20 Your Finances - I like to get the most bang for my buck whether that involves money, time, effort, or whatever. That's why I like this piece -- it gives me 80% of the results for 20% of the effort. It goes well with 80-20 Your Career and 80-20 Your Investments.

#1 - 30 Steps to Great Finances - If you want to get your finances in the best shape possible, these 30 steps will get you there. They are designed to take you from knowing very little about personal finances to being a master in just a few, simple steps!

Enjoy!!

Star Money Articles and Carnivals for the Week of Dec 31

To start, a couple notes:

• If you're a blogger, you can get some free publicity by competing in the FMF March Money Madness event. Details here.


• My $25k Red Kettle Challenge is over. We ended just under $40k. Thanks to all of you who gave!

Here are some pieces I found especially worthwhile and some of the carnivals Free Money Finance was in this week:

• Money Wise Pastor wonders if we may lose our rights to sell stuff.


• Carnival of Personal Finance


• Wise Bread tells how to deal with unwanted gifts.


• The Simple Dollar finds frugality in common routines.


• Carnival of Wealth

Enjoy!

P.S. Carnival Hosts -- If my post is in your carnival in a given week, please send me the URL to the carnival and I will include it in my weekly roundup.

Did You Get a Bonus Last Year?

Now that 2012 is completely over and businesses/organizations all across the country have had the chance to calculate annual bonuses, I wanted to ask you all:

Did you get a bonus from work for your efforts last year? And if so, what did you do with it?

I received a bonus and did two things with it:

1. We gave away a portion of it to a couple of our favorite charities.

2. Saved/invested the rest of it. Specifically I put it into my real estate LLC's account to cover some expenses as well as prepare for the next purchase.

How about you? Did you happen to get a bonus (or do you expect to get one) and what did (will) you do with it?

2013 Financial Resolutions

Just like last year, I would like to share my financial resolutions for the new year. Here's what I hope to accomplish financially in 2013:

• Keep investing in real estate. I need to move the two places we have from "start-up" mode to "on-going" mode. This means getting them fixed up and rented. As for new places, I'd like to do two more transactions this year and at that point, I'll probably be set for a bit. Since I now have a good start on my portfolio, I can be even pickier regarding what I buy.


• Develop extra income streams. I have a couple of money making ideas related to FMF that I would like to implement as well as a couple other ideas in the works. I'd like to get at least one of them to the point where it brings in an extra few thousand dollars in 2013.


• Re-work our estate plan. It's been a few years since our estate plan was done so I think it's time to review.


• Complete a "death file". I have been working on a document that lists where all our assets are, online passwords, credit card and insurance info, etc. for my wife in case something should happen to me. This is the year I'm resolving to complete the job!!!


• Consider a landscape investment. We have several trees that may or may not be dead in our back "woods" (not true woods where you can let trees die and go on your way, but really a clump of trees in a neighborhood.) We're not sure about their condition because of the thaw/bloom/freeze cycle we had last spring. They could be dead or just stunted a bit by the weather. So we need to evaluate and if they are dead, we will need some landscaping upgrades.


• Take a family trip. We want to go on another cruise/warm weather vacation as well as plan another trip similar to the DC vacation we took this year. Our kids are getting older and will only be in the house a few more years, so we want to do as much with them as possible while we're all together.


• Review retirement plan. As my real estate investments become more stable (earning income and not in "fix-up" stage), I will adjust my retirement calculations to make them more accurate.


• Review other investments. I need to do a complete evaluation of my stock/bond holdings to be sure they are where I want them to be, accomplishing my objectives, etc.


• Get free financial advice. Both Chase and Vanguard have offered me the opportunity for a free financial overview. I'm wary that they will simply turn into a sales pitch, but their thoughts may be worth something, so it could be worth the risk -- especially if they have "special opportunities" for accredited investors.


• Keep up the networking. My career-focused objectives for 2013 are centered on networking. I want to keep up and expand my in-person network as well as (finally) get set up on LinkedIn and do some online networking. As they say, there's never a better time to set up a strong network than when you don't need it.

There may be a few other goals that come in over the course of the year, but I think these are the highlights.

How about you? What are your key financial resolutions for 2013?

2013 FMF March Money Madness Tournament

Yes, it's that time of year again -- Free Money Finance March Money Madness is upon us!

For those of you who don't know what I'm talking about, it's our annual "tournament" of the best personal finance articles of the past year. They face each other in an NCAA-style bracket system, FMF readers vote for the winner, and at the end of it all, the best post is left standing. Here are some details from last year:

• My announcement post
• An example of a "round"
• Last Year's Champion

This year I'm collecting the submissions early, though the tournament won't begin until the first week in February. We may go beyond the end of the actual March Madness basketball tournament this year, but if so, it won't be by much.

64 posts in total will be allowed in the 2012 competition. Each one will be assigned randomly in a bracket set of "games" similar to the one used for the Men's NCAA basketball tournament. (If you want to see what one looks like, go here to download last year's bracket.) Here are more details:

How to Enter

If you're a blogger and have money-related posts you want to include you can email the following to me:

1. The name of the post you're submitting (must be from the calendar year 2012 or early 2013)

2. The URL of the post you're submitting

3. Two to five sentences on what makes this post so great (I'll be using this wording in the competition, though I reserve the right to edit it, so really "sell" your posts).

NOTE: IF ANY OF THESE ARE MISSING, YOUR ENTRY WILL NOT BE CONSIDERED. AND I MAY NOT GET BACK TO YOU TO REMIND YOU THAT YOU SUBMITTED INCORRECTLY. I WILL GET BACK TO YOU IF I RECEIVE A CORRECT ENTRY.

Entries are on a first-come, first-served basis and all 64 spots usually fill up in a few days. So if you wait, it's possible you're not going to get a spot.

You can submit one post per site. If you have more than one blog, you can submit posts for each blog, though your posts will face each other in the early rounds so only one will ultimately get very far. This ensures that we don't have one blogger who's great at promotion facing himself or herself in the finals. :)

How Posts Compete

The posts will "play" each other with the winner advancing and the loser being bumped. They'll "play" in this manner:

1. I'll post the competing posts, listing who's playing who

2. Readers can leave comments on which they like better

3. The post with the most votes wins -- I'll break any ties

4. The winner will advance in the bracket to "play" again. Ultimately, there will be only one post left -- the "champion" for this season.

Criteria for great articles are as follows:

1. Practicality of the post

2. How interesting/provocative/unique it is

3. The "personal-ness" of it

4. Its impact on net worth.

What the Winners Receive

I eliminated the charity component from past efforts because 1) no one seemed to care about it and 2) I ended up on random lists of all sorts of charities that are now sending tons of mail to my home. So this year all participants will receive is tons of traffic, links to their posts, and bragging rights for the winner.

Why Readers Should Care

As readers, you get the chance to read some great pieces and help decide who wins this year's championship. It should be great fun and full of the best personal finance posts of the past year. Good stuff all the way around!

Happy New Year

Here's wishing you all the best in 2013! May your net worth climb to the sky!!!!

Happy New Year!!