August 31

Financial Independence in 5 Simple Steps

Let’s face it. Almost all of us at least thought about reaching a new level of financial freedom – financial independence. It’s not surprising, considering the options it provides you – including the most scarce resource in our lives – time.

While there are many resources available outlining the path to financial independence – they typically overcomplicate or oversimplify what it truly takes. Here, I spell out 5, simple – but quantifiable – steps to ensure you’re moving methodically in the right direction.

Step 1 – Expenses

The first step is to track your expenses. How much do you spend each year?

You’ll want into take into account your essential expenses such as housing, transportation and food consumption costs (which are arguably also some of the highest line-item costs on your annual list of expenses).

You’ll also want to take into account discretionary expenses such as your subscription services, vacation, and all that fun stuff that you may consider leisure.

Now – the following are fictional numbers to illustrate an example but hopefully you’ll get the idea. You may have rent, utilities and associated housing costs that that add up to $2,000 a month.

Let’s also assume you have transportation costs inclusive of car payment, gas, insurance etc at about $400 a month.

Let’s then assume we have Food expenses monthly at a very moderate $150 a month.

This brings our ESSENTIAL expenses to $2,000 each month.

However, we must also take into account our Discretionary expenses. Let’s round up everything under this bucket to about $450 a month.

The total for our current monthly expenses, accounting for both essential and discretionary expenses – now comes to $3,000 a month.

Step 2 – Calculate your Required Nest Egg

Now, we need to calculate what net worth we need to have in investible assets to effectively cover these expenses with just returns. This is when something called the Safe Withdrawal Rate (SWR) comes in handy. Check out my other article on Safe Withdrawal Rate if you’d like to learn more about what it is.

The widely adopted SWR is 4% – meaning that when you retire, it’s safe to assume that you can survive annually off the 4% returns and your invested capital will not deplete to 0 for as long as you’re alive.

Using my example in Step 1, if my monthly expenses are $3,000, that is $36,000 annualized. To calculate what networth I need to be financially independent, Divide 36,000 by 4% or .04 and I get the number 900,000. So now I know that I need $900,000 invested into assets to be financially independent at a SWR of 4%.

Step 3 – Calculate the Difference

In this step, you must calculate the difference. How much MORE assets do you need to reach that $900,000 example “FIRE Number”?

To do that, first calculate your existing net worth.

This should be all your investible assets, such as your checking and savings accounts, brokerage accounts, IRAs, 401Ks, investment properties, among any other assets where you store any type of equity.

For the sake of our example, let’s say I have $120,000 saved up already in the form of investments. Now, I know I need to make $780,000 to reach my FIRE number, since 900,000 – 120,000 is 780,000.

Step 4 – Calculate when you’ll reach FIRE

In this step, we compute how many years it will take from now to reach that FIRE Number, given our current trajectory.

We know we need 780,000 to retire in this example. But how quickly can we reach that number? Let’s we save $50,000 a year (through savings accounts as well as 401k contributions). We divide our “difference” number in the last step by our annual savings number, or 780,000 / 50,000 = 15.6 years.

Comment down below how long it will take you guys! I’m very curious to see what everyone’s horizon looks like.

Step 5 – Work Towards FIRE

Now here’s the kicker, it will actually take you much less time to retire than 15.6 years. Here’s why: you might decide to reduce your expenses now so that you can save money more quickly – especially your discretionary expenses. Additionally, your income may go up in upcoming years as you progress in your career or develop other supplemental streams of income, further enabling you to save more money. Finally, let’s not forget – if you’re putting your savings to work each year, investing it wisely, it will compound and help you grow your net worth much FASTER than initially planned. It’s really that simple…optimize your lifestyle so that your income goes up, your expenses go down and your investments compound.

Once again, this is just an example but pretty much a guaranteed way for anyone to achieve financial independence using quantifiable and very controllable measures. As with any goal in life, the first step is to quantify the what and when which we’ve done here.

I hope you found this helpful and enjoy your path to financial independence.

Category: Income, Investing, Retirement/FIRE | LEAVE A COMMENT
July 31

The Best Dividend Portfolio for Building Wealth

10,973 Dividends Stock Photos | Free & Royalty-free Dividends Images | Depositphotos

I often get asked (by 20 and 30-something old’s) what the optimal dividend portfolio looks like for acquiring wealth.

While this is a matter of personal opinion, this seems like the wrong question to be asking. The reason being is that using a dividend strategy will likely cripple your path to wealth, if anything.

I wrote some other article here on the topic of why dividend stocks can be good or bad.

My Opinion

My answer to those asking me the question above is, none. There is no optimal dividend portfolio I would advocate for if building wealth is the goal. Dividends are taxable events, and by explicitly employing them in your portfolio, you are forcing a taxable event.

By forcing a taxable event, you’re foregoing extra capital you could have used to further propel or compound your returns (in the form of growth stocks, for example). Investing in an Index fund such as the S&P500, for example, will return insignificant dividends but moderate returns in the form of growth (about 7-8%) that will compound. In contrast, by opting for dividend stocks, you lessen the compounding effect since you pay taxes on each year’s dividend returns, and as a result have less capital to invest the following year compared to having invested in the index fund in the first place.

To reiterate, for the “building wealth” stage of your career, employing a dividend portfolio strategy is not recommended as it is not as effective as simply going the growth portfolio route.

However, if you are adamant on using a dividend-only portfolio, I would highly recommend picking only value-based stocks from a diverse variety of industries that have yields, in aggregate, that average out to something close to your Safe Withdrawal Rate (SWR) (probably around 4-5%). To get the most bang for your buck, you’ll likely find your best opportunities when the stock value undergoes temporary market corrections/dips, making it a cheap acquisition with a moderate dividend yield.

This way, you have less to lose and more to gain.

Category: Income, Investing, Retirement/FIRE, Stocks | LEAVE A COMMENT
June 30

The Hidden Dangers of a 9-5 Job

Having a 9-5 job is the millennial standard source of income. It is often seen as the steadiest way to get rich slowly. This is absolutely true, to an extent. Having a job is more stable than starting a business for example, but a job may be at a disadvantage in some aspects:

Risk

Again, a 9-5 job is a great way to build and grow your career in an organized fashion. Unlike a business, there is generally less personal risk involved (from what we’re told). Unless, of course, you consider the possibility of the company going bankrupt, or your position at the company being terminated. Especially if you were the breadwinner of the household or the sole provider and this had happened, it would be extremely devastating. The fate of your financial future and family wellbeing may be strictly at the mercy of your company or team leader. Talk about risk, huh?

Costs

Historically, it has been advised that starting a business is more expensive than just joining the work-force. Though, the tables have turned. A full-time corporate job has higher start-up costs than a business in our modern society. Don’t believe me? How much did that bachelor’s degree qualification cost you again? $60,000 you say? Oh, and it took 4 years to complete? What if you started an e-commerce business? A webhosting service can cost lower than $5 per month to set up. A full-service e-commerce platform with all the bells and whistles can cost $30 per month, and this can be instantly up and running within hours, not years. While you won’t be netting the average $56,000 annual income U.S. from your business as of Day 1, the return on investment and growth prospects can be more rewarding long term.

Impact

Bluntly put, A 9-5 job alone isn’t enough to build wealth optimally. You will likely spend a great portion of your income on living expenses, and those expenses will increase at a faster rate than your income unless you really know how to navigate and climb the income ladder to create a bigger saving surplus. Remember, even then, money is not an asset. You can save all the money you want, but 10 years later you will note that the buying power of the monies has diminished due to inflation. The point to grasp here is that while a 9-5 job certainly serves as a strong foundation to wealth upon, it really should be supplemented by other avenues such as additional income streams (such as a side-gig or business or rental income), or through acquiring appreciating assets such as stocks and real-estate. While your savings or cash do store value, additional income and assets are what will propel you faster through the journey.

Income Ceiling

Not to mention, your annual income from a day job will eventually reach a ceiling. There may be some exceptions such as some positions in tech, or a high-end sales role. In contrast, investment returns are generally calculated and sought as a percentage of the asset value. This causes a snowball effect and actually compounds your income higher rather than constraining you to a ceiling. For example, owning the VOO (Vanguard 500 Index Fund ETF) can yield 7-10% growth, on average, each year. When the stock is worth $300, expect $21 growth. When it’s worth $400, expect $28 growth. Your net worth grows faster over time as a result.

The benefits of a 9-5 job are endless. However, in this day in age, it cannot optimally grow your wealth unless you have a supplementary source or plan of action.

Category: General, Income, Investing, Retirement/FIRE, Stocks | LEAVE A COMMENT
May 31

Tax Deferral – Order of Operations

Have you ever wondered if you’re doing everything possible to maximize your long term financial outlook by taking advantage of tax deferred programs? There are many to choose from, and some are provided by the fed, whereas others are provided by the state and even your employer!

Tax planning and optimization is a huge component to building wealth long term by reducing your current tax liability. Below are several of the most popular such programs that the majority of the working mass-population can employ, and the sequence in which I recommend using them, with corresponding reasoning. I strongly suggest you first read about how each program works through my write-ups and also research on your own which programs work best for your scenario and limitations.

Order of operations:

401k – up to company match only. The company is giving you free money, sometimes dollar for dollar up to a certain percentage. For example, if your company matches 3%, you should certainly elect to at least contribute 3% of your income to the 401k, as, with the company match, your 3% automatically becomes 6% when vested. This is a 100% return on your investment! You can use this account to elect which investment opportunities are best for your goals further grow your contributions. This ranks 1st due to the nature of the 100% return on investment instantaneously.

HSA/FSA – up to annual maximum. I would recommend maximizing this account as a second priority if it is an HSA account, as it is exempt from income taxation. You can make purchases using pre-tax dollars! FSA accounts are a little different since that money may evaporate if you don’t use it In the same year, so I wouldn’t consider maxing out to the annual limit unless you anticipate using it all. You can use this account to elect which investment opportunities are best for your goals to further grow your contributions. This ranks 2nd due to the valuable nature of it being completely tax-free.

401k – up to annual maximum. If you don’t need the extra money right away, consider stashing as much as possible as a 3rd priority, up to the annual maximum, into your 401k. This is especially useful if you are a high income earner and want to reduce your current tax liability while having the belief that your tax liability will be lower when you’re ready to retire and take distributions. You can use this account to elect which investment opportunities are best for your goals to further grow your contributions. This ranks 3rd due to the nature of having the greatest ability to exponentially grow your contributions over time, utilizing the power of compounding with pre-tax dollars ($100 Pre-tax can grow faster than $100-tax post-tax dollars).

529 Plans – up to the annual maximum. Consider this as a 4th priority if your state allows you to. By funding it with after-tax dollars, you can then use this as a brokerage account to grow your contributions. You can then use these funds for educational purposes for yourself or assigned beneficiaries. The returns from the investments are tax-free and penalty-free as long as they are used for approved, educational purposes. This ranks 4th, preceding the Roth IRA as you can use the funds without any age restrictions.

Roth IRA – up to the annual maximum. This should be your 5th priority as it is a powerful way to use your post-tax dollars to invest into stocks or other instruments with tax-free growth. This means regardless of how much money you put in and how much it grows, you will never have to pay any taxes withdrawing the contributions or returns of this account, ever! This ranks 5th because you do need to meet the age criteria to be able to withdraw the “earnings” or profits without a penalty, as it is meant to be a retirement account.

Category: General, Income, Investing, Retirement/FIRE, Stocks | LEAVE A COMMENT
April 30

Why Realized Income is Bad for Building Wealth

Money, Finance, Mortgage, Loan, Real-Estate, Business

Do you like having income?

Let’s face it – we all like income, and more of it is always better.

After all, income is what helps us grow our wealth overtime. This is why we’re often fixated on growing our income. Right…?

Nope

On the contrary, higher income results in diminishing marginal benefit. The sole reason for this is the associated tax liability. The more you earn or realize in income, the more you pay in taxes not just in terms of dollars but in terms of the percentage of that income subject to taxes. In certain states in the United States, an income of $1,000,000 may be subject to over $500,000 (or 50%) in taxes. This is bad for wealth building.

Optimizing wealth building requires that you treat every dollar as an employee, and fully deploy that “workforce” to work for you. The problem with realized income is that in contrast to unrealized income, it is subject to taxes and thus it reduces your net proceeds (take-home pay) and as a result, you now have less available dollars to work for you. This is one of the reasons why the wealthiest folks tend to find ways to reduce tax liability – they grow their unrealized income (such as holding onto invested stocks or real estate that have gained value instead of selling them) and minimize their realized income (which would otherwise be subject to taxes).

What Can I Do?

Much like the wealthy, what are some things you can do to reduce your realized income while maximizing your unrealized income/net worth? Here are just a few ideas, especially if you are employed.

  1. Take advantage of a 401K or equivalent plan if your employer offers it. This will set aside funds in a tax-deferred account for you, so you don’t pay taxes on them now and can let them compound until you are ready to withdraw them.
  2. Take advantage of an HSA (Health Savings Account) or equivalent plan if your employer offers it. This will set aside funds for health related expenses based on your election, and those funds will be contributed to with pre-tax dollars, and still not be subject to taxes while expended.
  3. Hold your investments for the long-haul. Do not sell stocks or real estate investments that have substantial capital gains from growing in value – especially not short term gains which are subject to higher taxation rates.
  4. Minimize Dividend Income. If you hold stocks that pay out dividends, they are usually subject to income taxes even though you still hold the stock itself, and even if you opt to reinvest the dividends. This is because you are being paid distributions. It may be more favorable to hold stocks that grow in value but pay little to no dividends instead.

All of these are some powerful strategies even the average American can utilize to reduce realized income. You may be reducing your take-home checks by doing so, but in the grand scheme of things your net worth is poised to grow much faster as a result.

Remember, this is something most wealthy people do. It is not tax evasion, it is tax planning.

Have you realized all the disadvantages of realized income now?

Category: General, Income, Investing, Retirement/FIRE, Stocks | LEAVE A COMMENT
March 31

Why a Raise is More Powerful Than a Bonus

It’s usually during the beginning of the year when employees have their annual performance reviews.

For those of us who tend to perform well, and based on our employer’s budget, we may be granted a merit increase (raise) and/or a bonus. Often times, I’ve found that many folks are happier with the bonus than with the raise.

It’s important to understand the difference between the two, and also to understand why a raise is likely more powerful. However, this isn’t always true as different industries and companies have varying compensation structures, and in some cases a bonus may be much better than a raise.

The Difference

A raise is typically an increment in your annual base salary. It is your new foundation of compensation moving forward. For example, if your base salary is $50,000 and you get a 5% raise, your new base salary moving forward will be $52,500 .

A bonus is typically a monetary award granted based on your and your employer’s combined performance. The bonus is usually not guaranteed, and does not increase your base salary moving forward. As an example, if you were granted a 10% bonus on your salary of $50,000, you would receive $55,000 total in gross income for that year. Note that your base salary the following year will still be $50,000.

The Winner

The raise is by far the winner, in contrast to the bonus. The primary reason for this is the compounding effect of an annual raise. If your company offers a 401k match, a bonus, and so on, they are usually based on a fixed percentage of your base salary. The sheer notion of a raise indefinitely increasing your base salary means that all of these such benefits mentioned above will also proportionately get that “raise”. And, if you tend to get a raise each year, this will have a compounding effect. For example, year 1 your $50,000 base salary got a raise of 5% and is now $52,500. Year 2, your base salary got a raise of 5% again and is now $55,125. Note that in dollar value, Year 2 income increased by $2,625 versus year 1 where income increased just $2,500. The percentage increase remained the same, but the dollar value went up. This is the power of compounding, and this also translates to derived benefits such as the 401K match and bonus.

What makes all of this possible are two properties of a raise that a bonus does not always boast.

1. The benefit of a “raise” is guaranteed in subsequent years.

2. A “raise” elevates, in perpetuity, the foundation upon which your total compensation is built.

CONCLUSION

While it’s always an exciting time of year to have an awesome performance review, and get a mediocre raise but sizable bonus to splurge on something we otherwise wouldn’t have, it’s important to acknowledge that the raise generally still possesses a stronger compounding effect on your total compensation as your career progresses.

Category: General, Income | LEAVE A COMMENT
February 28

What is Fear of Missing Out (FOMO)?

Fear of Missing Out (FOMO) is a term that was coined to represent the psychology a potential investor may go through for not executing early enough on the investment. In a nutshell, it is anticipation that an investment pay prove profitable and by not investing in it now, we may miss out on significant gains.

As an example, let’s look at bitcoin. Bitcoin has taken the last 12 months by storm. It was under $6,000 at one point last year and peaked well above $50,000 this month. Some of us may think a huge correction (or a reduction/adjustment in price to justify a more disciplined growth) is on its way. Others may feel that based on its current rate of growth, it may grow to as much as $100,000 later this year. The latter group of individuals may be more inclined to invest into bitcoin at the current price-point, due to pressure of FOMO. That is, because they don’t want to miss out on the potential $50,000 upside, they are motivated to purchase now, regardless of the current price and risks that it poses – simply due to the weight they put on its potential.

FOMO Sucks

Let’s be real, losing money is bad. But do you know what’s worse? FOMO. For me personally, it hurts more when I don’t purchase an asset I believe in and it proves to be a worthy investment. It doesn’t hurt as much if I purchase an investment I believe in and it fails. At least I tried – I put in my best faith, and I put my money where my mouth is. Psychologically, we usually don’t regret what we’ve done, but rather we regret what we didn’t do. And this is why FOMO is a thing.

The Solution to FOMO

So we’ve established what FOMO is, and we’ve also highlighted that FOMO is bad. FOMO is something we should address, not suppress. Speaking from my personal experience, the solution to this is Dollar-Cost-Averaging (DCA). I wrote a post on this earlier, and I highly recommend that you read it. By employing DCA, we can mitigate FOMO. Regardless of whether you’re projecting an asset such as a stock to go up or down in the future, if you buy into it gradually over time, you will vest into your conviction gradually. A personal example of this is my strategy with bitcoin. As bitcoin was appreciating in value in recent months, I really wanted to jump on the hype train. However, as most investors warn, never invest into something you don’t understand. And bitcoin is something I didn’t yet fully understand. So I was in a conflicting situation where the wisdom is to not invest in bitcoin, but I was going through FOMO. So what did I do? I bought a little bit of bitcoin, so that I can at least get my foot in the door, and then do more research to formulate my thesis on the longevity of this investment. Ever since then, I have been gradually buying bitcoin via the DCA strategy that I use with stocks.

Conclusion

Losing money is bad, but leaving money on the table can be worse. Don’t let FOMO get the best of you. Dollar-Cost-Average into it, and you will find the right balance between buying too much versus not buying at all.

Category: General, Investing, Stocks | LEAVE A COMMENT
January 31

Dollar Cost Averaging

A buy-and-hold investing strategy that has never served me wrong is the Dollar Cost Averaging (DCA) method. The name implies exactly what it is, a means of averaging out the acquisition price of your stocks.

Buying stocks at once in lump-sum exposes you to greater risk. You might buy 10 shares of a stock worth $100 each in January. A few months later, the stock drops to $55 each. Since your total cost-basis was $1,000, and the value of stocks after those few months was $550, you have an unrealized loss of $450.

Conversely, let’s suppose you buy 1 share of the stock each month, for 10 months. It’s valued at $100 in January, but drops $5 each month. Your cost-basis each month is as follows:

January – 100

February – 95

March – 90

April – 85

May – 80

June – 75

July – 70

August – 65

September – 60

October – 55

You now own 10 shares, at a total cost basis of $775. Since the stock kept going down, your position is now worth $550, but you’re only down $225 as opposed to the $450 in the former method. This is the value of dollar cost averaging. While you may argue that if the stock had went up instead of down, you would have been better off lump-sum investing rather than the DCA method, it is the ideal strategy for the “better safe than sorry” mindset. Since timing the market usually rarely works in our favor, the DCA strategy is your best bet to reap in rewards while mitigating volatility exposure.

Another way to visualize DCA is to imagine how a 401K plan works, if you have one. Funds of your choice are purchased with relatively the same contribution rate each pay cycle (deducted from your gross income). So in effect, by purchasing funds at market price every 2 weeks with the same dollar amount contribution, you are dollar cost averaging your investment elections throughout the year. When stocks do well, your portfolio value is higher. When stocks do poorly, your portfolio value may decline but you also get the opportunity to purchase your next round of funds/stocks at a lower price as a result. There is always an upside with DCA, as long as you train your psychology to acknowledge this.

Have you ever used DCA, or do you use a 401k? What are your thoughts on this strategy?

Category: General, Investing | LEAVE A COMMENT
December 31

The Safe Withdrawal Rate (SWR)

Let’s just get right to it. The SWR is a theoretical, projected percentage of your investments that you can safely withdraw each year (based on the rate of return of your investments) with the peace of mind that your portfolio will maintain its value.

In layman’s terms, let’s assume you have $1,000,000 saved. The standard, conservative SWR assumed in the FIRE community is 4%. What this means is that on average, your portfolio will return 4% or $40,000 a year, and so you can safely assume that you can withdraw and use that $40,000 while your portfolio remains around that $1,000,000 mark, in perpetuity. Your portfolio basically becomes this machine that spits out 4% a year (SWR) to you while it keeps its value.

This is why the SWR is so important. This is typically one of the key metrics used to determine the investment portfolio at which an individual can retire and live off of returns. I recommend you reverse calculate by starting with your expected annual expenses in retirement, figuring out what SWR you expect (since it doesn’t have to be 4%. It could be more or less but is just used as a guideline of your expectations. The stock market has returned 7-8% on average annually, so you might be able to get away with 7%, but 4% is recommended to avoid bad surprises and to remain conservative), and then finally dividing those expenses by the rate of return to figure out what investment is required to achieve that SWR.

As an example, perhaps you want to live a comfortable life, and in the area you expect to live, a comfortable life costs about $80,000. You don’t like surprises, so you conservatively assume you’ll get about a 4% return on your investments. Now, compute $80,000/.04 and you should get $2,000,000. That is your FIRE number with a SWR of 4%.

Alternatively, if your average rate of return was 8% instead, and you were comfortable with 8% being your SWR, you’d compute $80,000/.08 to see that you would need $1,000,000 of assets invested to retire.

In a nutshell, that is SWR. I hope you found this little blurb on SWR helpful!

But this poses another question. Using your SWR and expected returns, what is your FIRE number? Let me know your thoughts.

Category: General, Investing, Retirement/FIRE | LEAVE A COMMENT
November 30

3 Reasons why Limit Orders can be your Best Friend

What are limit orders?

To give you some background, in the stock trading world, a limit order is an order you can place in advance to sell a security at a certain – or better – price. For example, if you own a stock and you set a limit-sell order at a particular price, the order will execute as soon as the stock price is equal to or greater than the particular price. Conversely, if there is a stock you’d like to purchase at a certain entry point, you can place a limit-buy order at a particular price, which will execute that order if and when the stock price is equal to or less than the particular price. Example: TSLA stock is currently $567 and you want to buy it only if it can be had for $500 or less. You should set a limit buy order for TSLA at $500. If and when TSLA drops from $567 to $500 or less, your order will automatically execute.

1. Autonomy


One of the most advantageous highlights of limit orders is the ability to not have to babysit your portfolio. For this exact reason, many investors opt to purchase index funds as a “set-it-and-forget-it” strategy. However, some investors do elect to pick individual stocks and manage their own customized portfolio. Maybe you are the first or latter type of investor, and don’t necessarily monitor the live market price of your stock all day, every day when the market is open and want to minimize any chance of you missing the right opportunity to purchase or sell a particular stock. Limit orders can solve for this by serving as an avenue for you to dictate a future transaction based on a stock’s price. It’s like having your own assistant whom you’ve instructed to execute orders based on your price requirements.

2. exact price execution


Perhaps you wish to execute your trade at a particular price based on a mathematical analysis. Maybe you’ve computed the perfect price for a stock to be worthwhile selling at to lock in a profit, or a perfect round number to purchase a stock for. The market prices move very quickly, so sometimes the best way to make such a trade at a fixed price is a limit order trade.

3. Remove Emotion from the Game

A third benefit of limit orders is being able to trade in isolation from your emotions. When you see a stock or your portfolio going up or down or just being outright overly volatile, you may be likely to make impulse decisions. Rather than allowing these emotions and impulses influence your decision, a limit order can be a means of executing the trade based solely on your planned analytical, mathematical agenda.

I hope you found this helpful. As an exercise, why don’t you go ahead and try placing a limit-order for your very next transaction?

Category: General, Investing, Stocks | LEAVE A COMMENT
October 31

The Rule of 72

The last post talked about the effects of compounding. That got me thinking. Have you ever wondered how long it would take you to double your money? Or, maybe you knew how long you anticipate doubling your money, but wanted to know the rate of return that would allow you to do so.

Luckily, there’s a handy math trick to help you compute just that. Let’s say I want to double my money, and have various investment options with a rate of return of 4%, 6% and 9% respectively. Obviously, 9% would be favorable and common sense would help infer that it would be the quickest route of the 3 to double your investment.

But how long would each Rate of Return take to double your money?

The Trick

If you divide the rate of returns (as whole numbers, not percentages) by 72, the result would be the number of years it would take to double your money.

72/4 = 18

72/6 = 12

72/9 = 8

It would take 18 years, 12 years and 8 years, to double your money at a rate of return of 4%, 6% and 8%, respectively.

Conversely, let’s say we have $10,000 and want to double it to $20,000 within about 3 years. What would our annual rate of return consistently have to be to achieve this?

The same calculation applies

Except this time, we can divide the number of years by 72 to get the required rate of return.

72/3 =24

You would have to invest $10,000, at an annual rate of return of at least 24% to grow this amount to $20,000 within 3 years.

I hope this cool little trick was helpful, and that it has compounding benefits for you in the future.

Category: General, Investing | LEAVE A COMMENT
September 30

The Power of Compounding

If I asked you, how long would it take to double your money, assuming that you invested $1,000 with an average annual rate of return of 10%, what would be your answer?

10 Years?

The natural thought process may determine, that since 10% of $1,000 is $100, it would require that return 10 times – or over the course of 10 years to double that $1,000 and achieve $2,000.

Now if I was to ask you how long it would take to 10X your initial investment, what would your answer be? Using the same logic above, you might guess 100 Years.

Actually…

In reality, this couldn’t be farther from the truth. And that’s the beauty of compounding! To actually achieve 2x at an annual rate of return at 10%, it would only take about 7.5 years. This is because each subsequent year would have a 10% yield on the principal as well as all the returns of the prior years. The formula we can use to verify this is 1.10^7.5, which is just over 2.0. The formula is taking 110% and multiplying it by itself 7.5 times (or over 7.5 years).

Let’s take a more consecutive approach…the rule of thumb for investing in an index fund such as the S&P500 in U.S.A is said to yield around 7% on average, annually. How long would it take then, realistically, to double your money at this rate? About 10 years. 1.07^10 = ~2.

How about 10X?

Now, how many years do you think it would take to 10X your initial capital? Probably just under 100 years right?

Nope. It would only take 34 years to 10x your capital. 1.07^34=~10.

While it may seem like a lot of years to double or 10X your investment, consider the size of the investment. Let’s assume you save $100,000 by the age of 30 and invest it with the 7% average rate of return. By the age of 64, that $100,000 would compound to $1,000,000 and you would achieve millionaire status, just by having saved $100,000 by the age of 30.

That is the power of compounding. Time and Savings will be your best friends, for years to come.

Category: Investing | LEAVE A COMMENT
August 31

5 Reasons to Avoid Dividend Stocks

As highlighted in an earlier write-up, dividend stock/portfolio or dividend income investing can be a great means of building an income stream or growing your portfolio. However, one should be aware of the potential risks or disadvantages of doing so as well.

Opportunity Cost

One obvious disadvantage of dividends is the opportunity cost. Sometimes, while you, as the investor are being awarded part of the excess cash flow from the business’s operations, you have to wonder, could this cash have been put to better use? Rather than paying us 7% as an annual dividend payout, what would be the outcome of the business (and in turn, me as the investor), if this 7% is instead reinvested into the operations or growth of the business?

forcing a taxable event

The moment you receive a dividend, you will realize income. And by law, you will be required to report this income next time you file your taxes. These proceeds will be tacked on to your ordinary income, and ultimately you’ll be subject to pay income taxes based on your overall income. Why put yourself in a situation where you’re forced to pay taxes? (Versus perhaps investing in a growth stock that pays virtually no dividend but appreciates and is only taxed if you sell the stock)

Dividends are an Illusion

The problem with many dividends is that they aren’t truly income. There may be a psychological factor associated with dividend stocks and dividend portfolios based on prospects and historical performance. However, the fact of the matter is, when you receive a dividend, your net worth doesn’t necessarily increase. If a $30 stock is set to payout $0.50 in the form of a dividend, for example, your balance during the event of the payout isn’t $30.50. It remains $30, because prior to you receiving $0.50 in the form of a dividend, the price of that $30.00 stock essentially diminishes to $29.50. So while you may be under the impression that you will have 1 stock worth $30, and a cash balance of $0.50 following the dividend payout ($30.50), you will actually have 1 stock worth $29.50 and a cash balance of $0.50 ($30.00). This, in connection to the above point about forcing a taxable event, makes many investors shy away from dividend stocks. Why receive dividends, which you later have to pay taxes on, especially when your portfolio value doesn’t really appreciate? (Unless the stock outperforms the dividend payouts)

Dividends are not Promised

Although many investors and retirees opt to use dividends as a means or psychological avenue of income security (to ultimately replace their jobs or live off of), the unfortunate news is that they aren’t always guaranteed. Although past performance and payouts may be a good indicator of future prospects, companies are not obliged to guarantee future payouts. In fact, many companies can and have eliminated, postponed or cut dividends for reasons such as poor company performance. During the Coronavirus Pandemic of 2020, for example, we witnessed some of the biggest companies cut dividends, such as Wells Fargo, Dick’s Sporting Goods and Estee Lauder. Still, if you prefer to invest in dividend stocks, it may be an option to shortlist those that are considered Dividend Aristocrats.

under-performance

One other disadvantage of dividend-based portfolios is that the market may outperform them. Especially for portfolios that do not employ Dividend Re-Investment Plan (DRIP) plans, you will tend to have stagnant cash from dividends in your portfolio rather than maximizing and fully allocating the capital to work for you at all times. This may prove to be a significant opportunity cost over a long period of time.

Ultimately, there is no right or wrong answer as far as whether or not one should employ a dividend investing portfolio strategy. Hopefully these write-ups equipped you to weigh the pros and cons yourself based on your specific needs and scenario. Thank you for your time and for

…paying…

attention.

Category: Stocks | LEAVE A COMMENT
July 31

I Have a Confession

We all have strengths. We all have weaknesses. The combination of the two make us who we are as people.

As you may already know, one of my strengths is financial literacy. I am financially competent and able to make decisions suitable for my goals. Don’t get me wrong, this doesn’t mean I always make the right decisions. We all make mistakes and sometimes what we intend to accomplish with our decisions doesn’t always translate to reality.

My Weakness

So I have a confession…

Despite having a sound understanding of personal finance, one of my biggest weaknesses cripples my progress and adds resistance to my journey to financial freedom and wealth building strategy. And this weakness is…

Nice Cars.

That’s right. If you know anything about personal finance, hopefully it’s that the biggest expenses for us as average consumers is shelter, transportation and food. So already, this means having a car – any car is already a big portion of my expenses. Turn that “any car” into a “nice car” – even an entry level german sedan, and you have yourself an exponentially higher expense for that transportation category of your expenses. Premium fuel, higher insurance and higher maintenance costs to list a few.

But there’s nothing I can do. Luxury cars are just as important to me as is frugality (first world problems, I know). I cannot change that, no matter how responsible I want to be, because it’s just a part of me. It is my passion. I’m sure many of you can relate to that in one form another, whether it be nice cars or traveling the world.

Why It’s OK

There’s nothing wrong with having expensive passions if you can find a balance. Yes, I tend to splurge a large sum of money on cars. But I do not spend money on extravagant vacations, expensive meals and fancy clothing. I don’t intend to purchase a mansion or to travel the world in a short period of time. All those cost savings can be reallocated to MY passion instead. As an example, the amount of money the average consumer spends on dining out alone can be exceed $2,500 a year. I would rather just eat at home for a fraction of that, and spend it on my passion instead!

The Lesson

The lesson to learn here is, while personal finance and expensive hobbies (nice cars) don’t mix, we can do our part in making the ends meet by balancing out the opposing forces. We can sacrifice areas of our budget that are less important to us, in order to care for areas of our budget that are more important, without causing as much harm to our financial wellbeing.

Category: General | LEAVE A COMMENT
June 30

5 Reasons Dividend Stocks are Awesome

There are various preferences among investors on what type of stocks they choose to invest in, and each have their pro’s and cons. Here, I will list out 5 advantages of dividend paying stocks:

Passive Income

Dividend stocks are literally passive income. You make an initial investment of stock(s), and reap in the rewards on a periodic basis. Watch those companies simply send you a cut of their profits while you sit back and relax.

Protection from market losses

One of the primary benefits of dividend paying stocks is that if you find yourself in the middle of a market correction (that is, stocks are losing value), in most cases you can still count on earning the dividends, so it is not all bad and the dividends may one day help recoup any market loss.

sense of stable income

Piggybacking on the last note, dividends are a form of somewhat stable income. If you choose your stocks wisely, such as those with a track record of sustaining and growing dividends for many consecutive years, you will maintain a sense of stable income.

You can reinvest (DRIP)

Dividend Reinvestment Plans are the icing on the cake. They really help add the compounded effect to your dividends. What I mean exactly is, say your $50 stock pays a $2 dividend. With DRIP enabled, that $2 you received will automatically be reinvested into the same stock, so instead of owning 1 share you will now own 1.04 shares, and so your next dividend payment will be more than the initial $2 dividend. The income will continue to grow as a result.

Retirement Strategy by many individuals

The great thing about dividend stocks is that many retirees opt to have them as a large portion of their portfolio to offset some risk and have a consistent income stream. For all of the reasons listed above, it certainly helps to diversify your risk and income by dedicating a part of your retirement portfolio to dividend paying stocks.

Category: Stocks | LEAVE A COMMENT
May 31

How much are you REALLY taxed throughout the year?

If I had asked you, what percent of your annual income do you pay in total taxes, what would your answer be?

10%? 15%? 20%?

Don’t be surprised if you’re totally off by the time you finish reading this.

This topic came about as I once purchased a brand new luxury car that was equivalent in purchase price to my gross salary at the time. I was (and still am) such a car fanatic that I figured spending my entire year’s compensation on a vehicle I would love was worth it. What I didn’t consider, however, is that consumer goods are purchased using my net income, not gross income.

What I mean exactly is that my $45k gross income was not an apples-to-apples comparison to my $45k vehicle, as the vehicle would be purchased with my net income (closer to $35K or so after taxes), and so it turned out my justification to be able to afford it with a year’s pay was a mere illusion.

This sparked a new question in my head.

How much do we pay in taxes?

The truth is, we pay taxes throughout the year without even realizing it in some cases. Here are a few examples:

Income Tax

Your annual income is likely taxed at a federal, state and local level in most cases. This is typically deducted from your gross income, per pay period, and adjusted when you do your annual taxes. Additional types of taxes under this bucket would be Capital gains taxes and Estate taxes (i.e. stock and real estate profit realization, inheritance, gifts, etc).

Property Tax

If you own a home, you likely pay a recurring tax on a monthly, quarterly or annual basis to your local government. The taxes due are based on a set percentage of the value of your home. These taxes may also be applicable to automobiles and recreational vehicles such as boats and airplanes.

Goods and Services Tax

At the retail level, sales taxes are almost always imposed by state and local governments to grow revenue. You will find yourself paying sales taxes for gas, groceries, misc. consumer goods, dining, entertainment, services and installations, etc. In most cases, these taxes are imposed based on the value of the good or service, while in some cases, such as purchasing gasoline, it is based on the number of gallons rather than the dollar value of gallons.

Sin and Luxury Goods Tax

Purchase of items such as alcohol, cigarettes, jewelry and exotic vehicles are subject to their own taxation guidelines.

Usage Charges & Fees

Without even realizing it, many of you may now acknowledge that the use of many services are subject to a tax/fee/service-charge as well, such as those for financial transactions, utilities (i.e. cell phones), licensing, hotel rooms, airline tickets, rental vehicles, toll roads etc. Take a good look at your prior or next bill for any of these services and you will quickly find these additional forms of taxes that are billed to you.

After compiling all these forms of taxes, and tallying-up your income taxes against your consumer spending taxes, you’ll quickly find yourself having paid a significantly higher percentage of your gross income in taxes than you thought. Not to mention, you will have to adjust/convert the spent taxes to account for pre-tax funds. In other words, if you paid $7 (or 7%) in taxes for a $100 good/service, be mindful of the fact that the $7 you paid was from your net income, and is likely closer to $9 (pre-tax or gross income) if you are comparing it to gross income.

I am hopeful that this write-up encourages you to train yourself to understand all the taxes imposed when it comes to incoming cashflows or when making purchases.

Hopefully you’ve found reading this write-up more valuable rather than…taxing.

Category: General | LEAVE A COMMENT
April 29

Buying Good Deals: My two cents

Have you ever witnessed an amazing deal online, or in the store and immediately jumped on it to save a lot of money? You might think you saved a lot of money on that seemingly rare and once in a lifetime opportunity – but chances are, you actually lost money.

Let Me Explain…

As humans, we are emotional beings and often make impulse decisions. Even as a responsible, financially literate person, you may believe you are making the right move and saving tons of money by purchasing that new Elite-book with an i7 processor, $500 off retail price – or making a killing by cashing in on that Buy-One Get-One (BOGO) pizza deal.

This, however, is usually an illusion. It is an illusion because your impulse emotions get the best of you, and you fail to isolate your needs from your wants. These so called deals only save you money if they are needs – that is, if you were planning on purchasing the same product and quantity ANYWAY. If not, then you are forcing an unwarranted event and purchasing something you otherwise wouldn’t be – just because it makes you feel that you’re getting a good deal.

For example, back to our BOGO pizza deal. You’re hungry and want to purchase a large pie of cheese pizza from your local Mom & Pop Italian restaurant. A large pie here typically costs $10. But, you notice it’s Wednesday and on Wednesdays, there’s a buy 2, get 1 free deal. This would mean you can purchase 2 large pies, for $20 and get a 3rd pie for free, effectively costing around $6.66 per pie. What a killer deal! Right?

Not exactly

Though the economies of scale look attractive, the economies of…needs…is not! You were hungry, and spending $10 would have satisfied the need. But now, you’ve spent $20, which is double what you actually needed to spend. Yes, you have 2 extra pies now; but those were not needs. In fact, they’re left overs now and you’ll find yourself forcing yourself to eat them later on, or giving them away unless you leave them to spoil. The bottom line here is, you spent twice as much as you needed to and thus, you didn’t save money – rather, you SPENT money.

The same principal applies to any other impulse buys. Next time you see a new laptop or the latest sneakers on sale, please try to really ask yourself – were you going to purchase it ANYWAY in the very near future? If not, you’re becoming victim to the big marketing ploy that is slowing down your pace to financial freedom by tricking you into buying wants. Just my two cents.

Category: General | LEAVE A COMMENT
March 31

Spend less or Make more?

Does achieving financial independence come from significantly limiting one’s expenses? Or, does it come from significantly increasing income? Does one method outweigh the other? As with everything else in life, the answer is: it depends. Although – for the most part, it is a healthy mix of both.

I’ll try to break it down.

reducing Expenses

When it comes to saving money, there are two overarching expense segments to consider: Fixed Spending, and Discretionary Spending. Fixed spending is your set of essential expenses that you need to live, such as housing, eating, transportation, etc. Discretionary spending is your set of non-essential expenses such as entertainment, travel, restaurant dining, hobbies, etc.

Now that we have that covered – let’s think about reducing expenses. While it is wise and doable to reduce expenses, you can only reduce expenses so much. Yes, you can mostly get rid of or reduce a lot of that discretionary spending, because those aren’t entirely necessities. But your fixed spending cannot be reduced beyond a reasonable level. You’ll always need housing, food and a means to get to work (if you have an on-site job). While you can relocate, shave utilities a bit, and opt for cheaper groceries to cook at home, you’ll reach a point where you just can’t cut costs down any further.

Increasing income

This is when increasing your income starts to look more appealing. By increasing your income, you won’t have to cut those discretionary costs as much. You’ll no longer be “just getting by”. In fact, you may have more to spend on that discretionary spending bucket and opt to buy flashier and more luxurious products. The problem with this, however, is that just like you have an imaginary “floor” for expenses that you cannot dig below, in most cases, your income potential also has a “ceiling” that you may not be able to break out of.

But let’s assume the sky is the limit. Let’s say you’ve landed your dream job and have a bunch of investments or started a great business and things are just looking up in the future. How do you achieve financial independence, if you wanted to?

Well, you’d still need to control and shave those discretionary expenses as much as possible. And here is why: Financial Independence is not achieved solely by reducing expenses or increasing income. It is a byproduct of your effort to do both. If you don’t do both, you’re setting up a recipe for disaster.

Rant

This may be a generalization, but if you look around, it’s usually not the people with the six-figure jobs and big houses and Porsche Caymans that achieve financial independence under their 50’s. It’s typically those, who may or may not have a six-figure income but certainly do not have to flashy houses and cars and Gucci bags. Why?

Because those who are truly serious about financial independence do not increase their expenses relative to their income.

This is the problem with conventional society. We go through high-school, then university, and then we land our first job. With that first job, we blow all our money on the things we’ve always wanted: Moving out of the parents’ house, buying that nice german car, eating out with friends, and traveling the world. By the way, there is nothing wrong with any of this. But, a few years later, we land another job with a nice bump in salary. Then another one, and another one. And all along with these income boosts, we’ve also continuously upgraded our lifestyles. We went from the cheap rental apartment to a luxury condo, or a big house. We went from that entry level Audi A4 to a much more expensive Audi S5. We bought a bunch of designer apparel we didn’t need. So what’s wrong with this picture? We have no damn savings! Every incremental dollar earned, we spent on things we didn’t need. The problem with this picture is that this lifestyle is not sustainable. If we lose our job – our only source of income, all those bills still need to be paid and we have no strategy to carry forward this lifestyle.

best of both worlds

To prevent these unanticipated challenges, my best advice to you would be to gradually increase your income, all while keeping those discretionary costs low and stagnant. Getting a raise, or bonus, or any form of added income should not be looked at as a ticket to buy more nice-to-have things. Instead, look at it as your ticket to achieving financial independence even SOONER, by means of saving and investing that residual income, and having it work for you in a compounded fashion!

Thus – as obvious as it may already be – in order to achieve financial independence, it is advisable to minimize discretionary spending and increase income simultaneously.

Category: General | LEAVE A COMMENT
February 29

Why I use Ally Bank

I don’t always preach the importance of choosing the right bank for a savings account, but when I do, it’s Ally Bank.

Take that with a grain of salt, because everyone’s financial situation and preference is different. You should always have an emergency fund to live off of for several months seamlessly.

Below are some of the primary decision factors that helped me decide which bank was right for me.

Interest Rate

I needed a bank where I didn’t feel like my wealth was depreciating. For those of you that aren’t aware, the annual rate of inflation is usually 1.5-2.5%. This means each year, every dollar in your name loses purchasing power by this percentage. Most savings accounts I’ve owned prior to Ally Bank generally didn’t have an interest yield beyond 0.1%. This meant keeping money in a savings account would actually devalue my wealth each year (0.1% profit but ~2.0% devuation is no bueno!).

This defeats the purpose of a savings account. Yes, your $1,000 savings balance doesn’t go down with time and is virtually 0 risk compared to alternative investment options. But guess what, that $1,000 is worth about $980 next year in real value.

This is where Ally Bank really shined. When I first signed up for my first savings account at Ally, the interest rate was 2.0% and higher, with no minimum balance requirements and no fees. That’s INSANE! Ally was a clear winner with this attribute, so I went with it.

Budgeting

I’m big on budgeting. I like to estimate and set, in advance, what my budgets will be for various buckets (especially discretionary ones) such as Food, Travel, Cars, Emergency Fund, Gifts, etc. On an excel sheet, this is easy. In the real world, not so much – unless you own a business and use one of those fancy budgeting services.

In the real world, wouldn’t it be nice to just set aside money for each of those buckets separately, so you can quickly glance at what each of those numbers are without having to open a spreadsheet? The problem is, many banks gave me a hard time if I wanted to open more than 1 or 2 savings accounts. They wanted a good reason and it was a lengthy, annoying process.

Ally bank, on the other hand, lets you open multiple accounts seamlessly. Not only that, but you can give them nicknames so one can quickly get an idea of what each dollar amount is allocated to.

As of early 2020, they actually just launched a new feature for creating actual buckets. So let’s say I had an account for each of the categories listed above – Food, Travel, Cars, Emergency Fund, Gifts. With the new buckets feature, I can actually create buckets within “Cars”, to further distinguish various allocations under Cars. For example, I can create a bucket for Insurance, Maintenance, Modifications, etc!

Accessibility

As an investor and a millennial, I need a quick and painless means of accessing my money when I need it. Transferring money in and out of Ally Bank is seamless, and can take 3-5 business days as with most other banks. This is not problematic. Moreover, their app is very seamless and with fingerprint login set up, I am just a tap away from seeing a breakdown of all of my savings accounts instantly.

Recommendation

For me, Ally bank was a clear winner. Again, it depends on your specific situation for you to determine which bank(s) are best aligned with your scenario.

Overall, I would highly recommend anyone who is either budget-savy or is seeking a reasonable interest rate to at least try Ally Bank. What have you got to lose? It’s a win-win!

Category: General | LEAVE A COMMENT
January 31

The Importance of Personal Finance

Personal finance is a critical component to achieving any monetary goal. The primary reason being that your monetary goal, such as accumulating a certain milestone of net-worth, is the byproduct of a two-part equation.

{Income – Expenses = Savings}

{Savings^Time = Net worth}

It’s about Your Expenses

We all appear to be obsessed with building our income for a higher net-worth, but more often than not, place less emphasis on the expense aspect of it. You can have a house-hold income of $50,000, or that of $150,000; but what you actually get to save depends entirely upon your personal finance spending habits. The average household’s 3 largest expense categories, accounting for 40-50% of total expenses, are housing, transportation and food, respectively. Choosing to live in a 5 Bedroom, 4 Bathroom house (that you may not utilize fully) versus a 2 Bedroom 2 Bathroom house (that may fit your needs) would make a significant difference in your finances, before even accounting for the perpetual and proportional increased costs associated with the ongoing maintenance costs and upkeep of the larger home. The same goes for transportation, when deciding between purchasing a brand new german luxury vehicle versus a lightly used japanese vehicle. Sometimes, one may be able to justify this seemingly financially irresponsible behavior if it’s something they value or are passionate about. I have to admit, I am a performance car enthusiast myself and would hate to downgrade to a more economical vehicle. However, it’s decisions like this that can ultimately make or break financial goals. The earlier on in your career you make these decisions, the stronger they will compound throughout your life.

It’s about your Lifestyle Choices

Personal finance goes beyond the scope of just minimizing your biggest expenses. It is a lifestyle choice that develops and compounds overtime and ultimately influences your saving and spending habits across all areas of your lifestyle. Choosing to regularly eat at restaurants versus cooking at home, or buying groceries at their regular price versus on sale may not immediately yield a large chunk of change, but believe me when I say this; IT ADDS UP.

It’s about YOU

Ultimately, your personal finance is a reflection of you. It is a reflection of your priorities, your planning, your goals. You can better understand yourself once you assess and analyze your finances. At that point, you can differentiate and rebalance your wants, needs and long-term goals accordingly.

Category: General | LEAVE A COMMENT
April 21

My First Blog!

Welcome to my first blog. I am STOKED to have finally decided to start one to write my thoughts in the Personal Finance and Financial Independence space. I have a busy schedule so bare with me but please sit back, relax and enjoy the upcoming posts as I work to refine everything and structure my content. Please read the ABOUT and DISCLAIMER pages in the mean time to get an overview.

Category: General | 1 Comment on My First Blog!