Slow Motion Lottery

 
powerballI didn’t win the Powerball (I also didn’t play but my wife did) and to make matters worse, my net worth has taken a big hit so far this year as the stock market has cratered. If I were close to retirement I’d  be worried.StockDecline

People, so called experts (you know my feelings on experts), are saying stupid things like sell everything, or sell into any rally. Don’t listen.

On the contrary, buy and keep buying. Don’t take every last penny and invest, that’s just as stupid, but if you buy regularly as the market falls, you’ll have a lot more shares when things turn around. It’s a proven concept called dollar cost averaging. These “experts” make it sound like dollar cost averaging is only a good idea when markets rise but it’s just the opposite. It works best the further the market falls.

The spring is tightening, coiling up for those of us smart and confident enough to stick with a plan, and bold enough to adjust the plan to take advantage of panic.

The lottery is real it’s just not a sudden and unexpected thing. It’s predictable (over long periods of time) and involves some faith but mostly discipline. The slow motion lottery of investing and working hard isn’t found in a convenience store, it’s found in your character.

So what should you do?

Make a plan. Investing blindly is no different than paying money for random numbers you hope will match some other random numbers.

It’s a new year and if you didn’t max out your 401k last year, this is the year to do it. I have calculated the amount I need to invest each paycheck so that I’ll hit the max on my last paycheck. Here’s how you can do the same: Take 18,000 (2016 max) and divide by your salary. This is the percentage you should invest. Take that percentage and multiply by your gross paycheck. For example: if your income is $80,000/year then the percentage you need to save is: 22.5%. Your weekly gross is $1,540 and you should put $347 each paycheck into your 401k.

That alone is good but it’s not lottery worthy. Save more now than you ever have and invest in accounts other than your 401k.

Discipline is hard. Saving when you really want to spend is hard but it’s a winning lottery ticket you just have to have the guts to buy it.

PS: if you read this far I’m impressed but I know you’re probably thinking there is no way you could save and invest that much. You’re wrong. Check out how much I save and stop making excuses.


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Buy, Save, Hold, and Buy

 
I tweeted this Friday as the stock market was poised to fall:

BuyHoldTweet
While it’s true, it’s also a little too simple as tweets often are.
My real strategy is a buy continuously, but buy more when prices fall, and save (and hold) as prices rise.

Buy Continuously
This is your automatic savings and investing such as your 401k, Roth IRA, or 403b. Start young and do your best to max this out. Take full advantage of any matching funds and never, ever, take a loan out against these accounts. The money coming out of your paycheck on a regular basis is dollar cost averaging and captures both the ups and downs of the market and smooths out wild swings like the downside rout we’re having now.

Buy More as Prices Fall
When the market drops, that’s the time to buy. As Warren Buffet said, “be greedy when others are scared, be scared when others are greedy.” Don’t try to wait for the bottom, just dollar cost average more aggressively. Friday I invested less than 5% of the money I’ve been saving over the past year. As prices continue to fall I’ll buy more again.

Save as Prices Rise
Over the past year or so I haven’t been buying stocks (I buy stocks only in low cost index funds) and instead have been saving more aggressively. This doesn’t mean that I haven’t been buying any stocks, just not any above my set investment plan. Now I have more capital to invest and since prices are lower I hope to get better returns. Too many people don’t have the discipline to save like this but if you can then you’ll be prepared like I am.

It Paid Off Before

Do you remember how far the market fell in 2008? In 18 months the Dow Jones Industrial Average lost more than 50%. Many people sold, panicked really, but not me. I continued buying throughout 2008 but still I lost a huge amount of money, with my net worth diving 16.44% (check the chart below). In 2009, however, my plan and my discipline paid off. My net worth rebounded by 24.93%, more than recouping the losses of the previous year.

My net worth percentage change chart

 

 

 

 

 

 

 

So what’s your plan in this tumultuous time for the market? Panic and sell at the worst time or stick with your plan and take advantage of low prices?


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Side Hustle

 
http://www.dreamstime.com/stock-image-hand-displaying-spread-cash-us-one-hundred-dollar-bills-image42507251Make Money Blogging!

Work from Home just Hours a Day!

Turn Your Hobby into Profits!

This all sounds easy and could fit into the definition of what so many entrepreneur cheerleaders call a side hustle. A lot of people post on social media about their side hustles, and Gary Vaynerchuk is a big proponent of hustle in general. The reality, however, is that what many think is a side hustle is really just a time, energy, and money suck.

A side hustle is a way to earn extra money on the side. If you aren’t smart about it and think it will be easy then you will probably fail.

Side hustle isn’t a get rich quick scheme – just ask people who thought flipping houses in the mid 2000s would be easy money.

Most of my side hustles didn’t work out but the difference is that it didn’t cost me much either.

In the appendix of What Next I have a trail map of my career and entrepreneurial side hustles – some are dead ends, some go on for a while, and some have made me lots of money. The point is that I didn’t put all my effort into one thing and I didn’t stop looking for a next hustle. Maybe most important, I was willing to walk away from ones I grew tired of or were becoming a drain rather than an addition to my income, time, or energy.

It’s great to have the motivation to pursue a side hustle but you also have the common sense to know when something is just a pyramid scheme or when an investment could end up costing you more than it makes you. The emphasis should be on the word hustle because these things take work, hard work, and too many people think it will be easy.


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The Good and Bad of 401ks

 
401kHighwayI believe blanket statements are too simplistic and that’s why I flipped out on James Altucher for saying that people in their 20s should not invest in 401k plans. That’s dumb advice, so here’s my reasoning why 401k plans are a good investment, but not the best, and why they should be part of your investing life but not the only part. If you’re a numbers geek then you’ll love this post.

One of the completely idiotic statements James made was that you’ll only get a 1/2 percent return on a 401k so let’s take a look at my experience. A few things: I’m a consistent investor who believes in buy and hold and favors index funds over actively managed funds. Obviously I’m not going to use my actual account balances so instead I’ll use a hypothetical based on about $1,000 invested over 18 or so years which is how long I’ve been in the 401ks I’m using for this example.

Let’s say my current 401k account balance is $4,180. There are four parts that make up this balance:

1. How much I invested over the years

2. My company matching funds – free money

3. Dividends that are reinvested

4. Growth – what James Altucher said would be about 1/2 a percent (I’m shaking my head writing that)

My investments, the money that came out of my paycheck, accounts for 23.4% of that total or $978.12.

The company match, the free money James didn’t even mention, accounts for 5.1% or $213.18.

The dividends were a big part of this and is the reason I have mutual funds that pay higher dividends in my tax deferred retirement accounts, another item James was not impressed with but can be very important. You don’t pay taxes on dividends in a tax deferred account! So the dividends were 18.6% or $777.48.

Add all that up and you only get $1,968.78 far below my balance of $4,180 so where is the rest? The rest is growth over 18 years and accounts for 52.9% of the value of my 401k balance. That’s a lot more than the 1/2 a percent James mentioned is his video. Also of note is that this includes the huge losses in 2008, losses that were quickly recovered because I didn’t panic and stuck with my plan.

But in some small way I do agree with James that 401k plans are not always the best option. I have reduced the amount I’m investing in my 401k plan for a couple of reasons. First because the money is locked up until I’m 59 and a half (not 65 as James said in his video). I want to retire early and need money available before I’m 59.5 so I’ve been investing more in my taxable accounts.

Another reason I’ve reduced my 401k investments is so that I have funds available for other investment options like a business I opened a couple of years ago. If all my money was tied up in retirement accounts I’d be investment rich but cash poor like so many people are house rich and cash poor.

One size does not fit all and blanket statements are useless. The power of compounding, as evidenced here, is incredible! So please do invest in a 401k plan as early as possible and put enough money to at least get the full match your company offers (if they offer a match). After that make decisions that work for your situation.


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James Altucher’s Terrible Advice

 
I’m adding James Altucher to my list of really smart, incredibly successful, fools.

I’m adding him because of this video: http://www.businessinsider.com/james-altucher-401k-strategy-investing-money-2015-4

Watch at your own risk because the advice is so wrong it’s sad, sad that someone so successful and so intelligent would give such bad advice. Sad, because he was allowed by Business Insider to give false information. His blanket statement is so simplistic, it’s an insult. If James gets easily verified information wrong then what does that say about his concern about truth?

In the video James Altucher says that you can’t remove money from a 401k without a huge pentalty until you’re 65. WRONG! Once you’re 59 and a half you can take money from any retirement account penalty free. And that huge penalty he talks about is really just a 10% penalty – not good but not huge either.

James also doesn’t seem to think that tax deferral means much to someone in their 20s which indicates that it probably does mean something to someone older, so what’s the cutoff, 30? 40? 50? Here’s what tax deferral has meant for me: over the years that I have invested in my 401k I have saved over $14,000 in capital gains from sales only (dividends aren’t included but are also huge) thanks to the tax deferral of my 401ks. I also don’t sell often  so that savings could have been much larger. Maybe that doesn’t mean much to someone as wealthy as James Altucher but to a regular person who has a job, that’s a big deal.

Another idiotic statement that James makes is that you have no idea what’s happening to your money in a 401k. That’s just ridiculous. You certainly know what’s happening because you can choose the investments (granted from a pre-selected group of funds) and you can buy and sell as you see fit. I suggest index funds. I have invested in a 401k since I started my current job 18 years ago and my return has been huge.

Add up all the money I’ve invested and compare that to the current value of my 401k and you get a 418% return. I understand that’s hard to believe but it’s true. Part of that is the company match which James conveniently left out of his video. How someone ignores the possibility of FREE money is baffling to me. Without giving you my specific numbers let’s break that down. The period we’re talking about is 18 years so if you invested $1,000 over 18 years you would get $4,180. Think about that – all you had to do was invest $56 a year and at the end of 18 years you’d have $4,180. Make those numbers larger and you really see the benefit: invest $5,000 a year for 18 years for a total of $90,000 and the balance would be $376,200 and you’d still have at least 10-20 years of work for that to grow.

Blanket statements might lead to clicks and bring you publicity but they are rarely correct. Blanket statements are an insult to your intelligence. Investing is somewhat complicated but I believe you’re smart enough to understand.

I’m going to give more detail into my investing and why I think a 401k is just one part of a successful investing plan tomorrow. I hope to see you back.


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Easy or Not? So What!

 
I had a realization today. What seems easy for others probably wasn’t. That’s just the first part.

EasyI look at people, they might be people I know or complete strangers to me, but I look at their success and think why couldn’t that be me? All I see is their success, the end result of whatever it was that got them where they are now. What I didn’t see is the struggle to get there. What seems easy to me, observing from a distance, could have been very difficult for them.

But what if it really was easy for them? What if they didn’t struggle at all? What if they picked the right thing from the start and all their success came without much effort at all? Yeah, what if? The second part of my realization was that even if success came easy for someone else doesn’t mean it will come that easy for me. I could go into the same business they did, invest in the same companies, but for me it’s hard. Maybe I lack an essential skill, maybe I have to work harder, maybe my timing was different.

Whatever the reason, what I can’t do is be upset about it. I just have to concentrate on my work, on my path to success. Whether another person had it easier or harder doesn’t matter. I can learn from them, I can even ask them about their journey (and I might find out it wasn’t as easy as I thought or that it was easier), but then all I can do is take that information and try to make it work for me.


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You Can’t Get Rich Working for Someone Else or Can You?

 
I’m sure you’ve heard or even repeated the expression “You can’t get rich working for someone else.” I’ve said it but I’ve grown to realize it’s not true. I’m not talking about high level executives with huge salaries, stock options and bonuses that make them a millionaire each year. I’m talking about a normal person with a good, but not extraordinary, job.

stacks-of-cash-2The secret (I hate that word because it’s not a secret, it’s common sense) is to save, often aggressively, work, really hard, and invest, wisely. A couple of weeks after writing this I saw a bit of news about a school teacher who left behind an estate worth $10 million when she died. Along with her twin brother they lived by these three “secrets” and it paid off.

SAVE

Wealth is about opportunity but being in the right place at the right time isn’t opportunity, what you’re able to do when you’re in the right place at the right time is. If you meet an inventor with a great new produt who needs investors, you’re at the right place at the right time but if you don’t have the money to invest it doesn’t matter. That’s why aggressive savings is so important. I’m not talking about normal savings like the advice you’ll read in magazines, I’m talking about serious savings. My wife and I have saved, on average, nearly 25% of our gross income each year. It would have been higher if not for item number three on my list, investments (which some will view as savings but read on to discover why I don’t).

Read here about a woman, Leah Manderson, who maxed out her Roth IRA (that’s $5,000) while earning only $28,000. That’s a 17.87% savings rate. Can you say you’ve saved that much? If not then you aren’t saving aggressively.

WORK

A job is a means to an end. We have to work to survive (unless you want to grow a long beard, live in a shack, and kill your own dinner). A job is also a means to security when we’re too old or tired to work.

While I would highly recommend doing something you love, you should also maximize your earning potential by advancing through the ranks and negotiating well. Hard work means being the go-to person, the lynchpin as Seth Godin puts it.

It has been my ability to increase my income and my aggressive savings that allows me to move on to each What Next.

INVEST

You can invest in yourself by working hard and you can invest your money by contributing to your retirement (401k, IRA, etc.) but that’s not the kind of investments I’m talking about.

I’m talking about investments that require active participation like rental real estate, it’s an investment I’ve used throughout my life (I’ve seen a lot of people use it as an investment very badly). It’s also an investment that requires sacrifice. I can’t have a fancy and expensive house for myself if I’m also buying homes for rentals.

I have also had side projects (some would call them businesses but I don’t think many of them rose to that level). What they did do is provide some extra income to invest in other ways. It also allowed me to learn a lot about myself and business in general.

Now than that I’m older, more established, and secure I’ve invested in actual businesses, recently opening a franchise. The key with all of it is that my job, the thing people say won’t make you rich, made all my investments possible. I call it corporate sponsorship. None of these investments can be considered savings since there’s no garuntee that I’ll get a return or how big that return will be. Once I sell an investment, then fine, the proceeds will move over to the savings category.

You can get rich working for someone else if you’re smart about it and are willing to do more than those who say you can’t get rich working for someone else.


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Savings Matter

 
In my last post, I talked about so called financial experts and how often they seem wrong. I’ve also written about these “experts” here and here. At the end of the post I said that I’d show you how my savings and investing strategy has allowed me to be aggressive when I wanted to and cautious when I needed.

piggybankThe key to finances is having options. If you buy a new car every couple of years, go on really expensive vacations, and otherwise live at or above your means, you’re not leaving yourself many options. If, on the other hand, you save aggressively you will have many options when opportunity arises.

Deciding to change

In 2006 I decided to change my career from television to financial planning. I had the option, the ability, to spend the $5,000 for tuition and an additional $2,000 for networking by traveling to financial planning conferences. I saved aggressively in anticipation of the transition knowing that I’d be leaving behind a good salary to start over.

But what does it mean to save aggressively. Well in 2006, the year I decided to go back to school, Julie and I saved 31.71% of our gross, not net, income. In 2007 the middle year of this transition we saved 42.18% of our gross income. And in 2008, the year I passed the CFP® exam, we saved 34.2% of our gross income. Another important aspect of finances is tracking your money. Without tracking my finances I couldn’t tell you with such specifics how much I saved each year.

A New New Course

In 2009, having no luck finding the right fit in financial planning (another option I had was to be picky with my choice of employer), I decided not to pursue this plan any further. What then was I going to do with the money I had saved?

Two things happened that year. First I wanted to renovate a rental property I own on the Jersey Shore. That plan was also abandoned when the local zoning laws were too much to deal with. Once again I had a large amount of savings with no plan for it.

Option 2

That’s when a friend mentioned that her sister owned a rental property in our favorite part of California, The Coachella Valley. That’s when we decided, just after the real estate market had crashed and was continuing its slide, to buy an investment property. The years of saving meant we could explore other options and this one has turned out pretty good. Our savings in 2009 were just 0.47%! That’s less than 1% but it was because we had saved that we had the option for an investment with the possibility of a big return. This investment is part of a long term plan that we are able to add to every few years because we save when we need to and spend when it’s wise.

Maybe we could have had a little more fun and a little more things but It comes down to sacrificing in the short term for long term gains.


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Wealth Builder Carnival #75

CashGathering articles on topics such as Earning, Investing, Living Frugally, and Taxes, Super Saver (who I talked about in this post) presents the Wealth Builder Carnival #75. Super knows a thing or two about building wealth since he set the goal of retiring in his 40s and accomplished it. The articles in each edition of this carnival will educate you about finances and set you on the path to building wealth. You have to take action, click over, and read the articles for any of the advice to work.

The article that Super included from me is called Functional Financial Illiteracy. There are many more excellent posts to read so what are you waiting for?

 


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